Wednesday, January 5, 2011

Italian Banks Wage 'War on Cash' as Consumers Pass on Plastic

Jan. 4 (Bloomberg) -- Cash is king in Italy, a lesson Massimiliano Romano learned when he tried to pay for a cab with a credit card at Rome's main train station.

"I thought my cards would be enough," said Romano, head of research at brokerage Concentric Italy in Milan. "But I had to let 10 people go in front of me in the line before I found a driver who would accept a credit card."

The Italian Banking Association has declared "war on cash" in a country where credit-card usage is less than half the European Union average, according to the Bank of Italy. The association, known by its Italian acronym ABI, says it costs banks and companies as much as 10 billion euros ($13.3 billion) a year to process cash payments, mainly in increased security and labor. Rome-based ABI aims to cut those expenses by promoting electronic payments with credit and debit cards and wire transfers in both the public and private sectors.

"Italy urgently needs these changes to catch up with other countries like France, which has allowed non-cash payments for public services for more than two decades," said Rita Camporeale, head of payment systems and services at ABI.

Italy's culture of cash is deeply rooted. Italians are the euro-region's least-indebted consumers and among its biggest savers, according to 2009 Eurostat data. Companies often pay salaries in cash to evade taxes, particularly in Italy's southern region, where organized crime is prevalent.

Lost Revenue

Italy loses about 100 billion euros of revenue a year from untaxed transactions in the so-called underground economy, which amounts to about 22 percent of gross domestic product, according to government statistics. The Finance Ministry agrees with ABI proposals to make public offices accept electronic payments and install point-of-sale terminals, Camporeale said in a Dec. 21 interview. Banks also want a ban on cash salaries, she said.

Consumers and merchants are skeptical. "The banks only want to multiply the transactions they handle to increase their profits," said Carlo Rienzi, head of consumer-rights group Codacons in Rome. "Replacing cash with electronic money is correct from a security standpoint, but should be done for free, which won't happen."

ABI hasn't said how much banks stand to profit from commissions tied to an increase in electronic payments.

The average Italian makes 26 credit-card transactions a year, according to the latest Bank of Italy annual report in May. That's five times less than in the U.K., which leads the ranking with 125 annual transactions, the report shows.

Taxi Drivers

Charges on card payments discourage retailers and small businesses from accepting them. "We have to pay fees from 3 percent to 4 percent for every card transaction," said Efrem Abramo Goi, a Milan taxi driver.

It's the customer though who often gets stuck with the bill. "When I finally got to my destination, as a final surprise the taxi driver rounded up the fare to cover the card commission," said analyst Romano, who arrived 30 minutes late to his meeting in Rome.

Visa Europe Ltd., operator of the largest payment-card network in the 27-nation EU, will reduce debit-card transaction fees paid by retailers as part of a deal announced on Dec. 8 to end EU antitrust action. Visa Europe agreed to cut fees to 0.2 percent per debit-card purchase. MasterCard settled a similar case with the commission last year, agreeing to trim fees to 0.3 percent for transactions with credit cards and 0.2 percent for debit cards.

The 0.2 percent rate is "the level where merchants have no preference whether consumers pay with a Visa debit card or with cash," Joaquin Almunia, the EU's competition commissioner, said Dec. 8 in Brussels.

Tax Burden

With surcharges decreasing in Italy, the price of using plastic is almost in line with the hidden costs of managing cash, said Davide Steffanini, general manager of the Italian unit of Visa Europe. "Merchants only notice the costs of cards because they have to pay a fixed fee," he said. "But cash also has costs related to handling, transport and security."

Many companies accept those costs in the face of some of Europe's highest payroll taxes. An employee at a nougat plant near Naples, who declined to be identified because of concern she might lose her job, said the company pays staff in cash to evade taxes and sells about 20 percent of its products without issuing any receipts.

Increased use of cards and wire transfers would allow authorities to track payments now outside their control, said Steffanini. ABI says it also would help Italy, Europe's most indebted nation in nominal terms, recoup billions of euros in lost tax revenue.

Winning over cash-loving Italians won't be easy, said Carlo Alberto Carnevale-Maffe, a professor of business strategy at Milan's Bocconi University. "Italians have a strong family tradition that leads them to avoid debt and save a lot to ensure their kids a future," he said by phone.

"They like solid investments such as houses. And for renovations or purchases made under the table, what better way than cash?"

--Editors: Dan Liefgreen, James Hertling

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