Costs and benefits of alias use in the payment system

Publication: 2020-02
Authors: Johannes Hers, Ward Rougoor & Marilou Vlaanderen
Commissioned by: DNB
Publisher: SEO Economisch Onderzoek

The research
One of the measures that can contribute to lowering switching costs in payment services that has been discussed for a long time is payment account number portability (being able to transfer the payment account number to the new provider). Alias ??usage is an alternative to number portability that can make switching between payment account providers easier and thus potentially increase the threat of switching. With alias use, an alias (for example a telephone number or e-mail address) is linked to the IBAN. Switching from a payment account provider becomes easier because account holders do not have to inform their contacts about their new IBAN, at least insofar as these contacts already have the alias. The alias remains unchanged and is used in payment transactions. Because the costs of implementation may be lower, the cost-benefit analysis for alias use could be more favorable than for number portability. As part of a broader investigation by DNB into various forms of alias use, this report provides insight into the costs and benefits of alias use.

Methods used
We start with the central project alternative of a new, mandatory, robust alias. We calculate the costs and benefits of this mandatory, robust alias. We then score the other existing aliases in relation to this central project alternative: telephone number, e-mail address, citizen service number (BSN), Chamber of Commerce number, Chamber of Commerce number, VAT ID and Legal Entity Identifier (LEI). In all cases, we use the current situation as a zero alternative, i.e. including the existence of the Switching Service in its current form.

The costs and benefits have been mapped using existing literature and documentation. The calculations have been validated with statements of the costs of various banks and other players in the market for payment services, a number of large payers, and the Dutch Payments Association (manager of the Switching Service). These statements were discussed in interviews and incorporated into a cost model designed in consultation with DNB and the Dutch Payments Association.

The direct benefits are benefits from lower switching costs (administrative actions) of payment account holders (private individuals and SMEs) and collectors after the alias has been introduced. In addition, indirect benefits arise because lower switching costs lead to more competition in the market for current accounts, with downward pressure on market prices and profit margins. A lower market price reduces the producer surplus in favor of the consumer surplus. This shift has no effect on the total social benefits and is therefore not included in the total benefits. Total benefits do increase if increased competition leads to a decrease in inefficiency.

The government and DNB incur incidental costs for the introduction of the alias. For payment account providers, payees and parties that supply bulk SCT files, there are high incidental (system) costs of the transition to a robust alias, because all parties must make adjustments in their administrations and systems to implement the robust alias: system changes, lookup costs and conversion costs. The one-off costs of all private individuals and SMEs are added to this. In addition, there are structural costs for the government and for payment account providers and others, because systems become more complex, for example because two payment data fields (IBAN and Alias) have to be maintained structurally. Structurally, an extra check with the alias register is also required to determine which payment account provider the alias is currently linked to. On balance, a negative balance of nearly € 600 million was generated over a 10-year period. This balance becomes more favorable as the amount is calculated over a longer period because the structural benefits are higher than the structural costs.

In a second step, we scored the (existing) aliases: telephone number, e-mail address, citizen service number (BSN), Chamber of Commerce number, Chamber of Commerce number, VAT ID and Legal Entity Identifier (LEI) compared to the central project alternative. This comparison shows that the existing aliases are expected to have a less favorable cost-benefit balance than the robust alias.

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Category: 2020, Johannes Hers, Ward Rougoor, Financial Markets & Finance