Tea and payments
[Dave Birch] A very enjoyable afternoon out at the Payments Forward Afternoon Tea Debate last week where there were tea and scones, a great many payment industry luminaries and a few hangers-on like me who had come along to listen to them. A great job by Dinah and her team! I hope no-one will mind me paraphrasing the main points of the debate on "this house believes that emerging and mobile payments technology will mark the decline of cash".
(Left to Right) Neil Lover, Ron Kalifa, David Yates, Richard Braham and Peter McNamara.
The debate was chaired by David Yates, the CEO of VocaLink, who tried to be scrupulously fair in his opening remarks by pointing out that, for example, Sweden's shift from cash to cards has seen a fall in armed robberies but a rise in skimming and that the American Psychology Association say that people who use electronic payments are frivolous and impulsive. He also made an important point about shifting government attitudes with Spain, Italy and Greece all taking action against cash because of the tax gap and pressure on budgets. He also made three key points about the UK market as it stands today.
- In the UK last year, 55% of all retails payments cash (although only 21% by value);
- There are currently six million adults in the UK who use only cash for retail payments;
- The statistics show that both electronic payments and cash withdrawals from ATMs are growing in the UK (from which I drew the only reasonable conclusion, which is that the cash is heading into the black economy).
The "for" side of the debate was handled by Neil Lover from O2 and Ron Kalifa, the CEO of WorldPay. They took slightly different approaches to the topic. Neil focused on the big picture narrative, saying that
- Cash is bad for Britain (an argument founded on tax avoidance);
- Cash is bad for society (an argument about social and financial inclusion);
- Cash is bad for banks (an argument based on costs);
- Cash is bad for retailers (an argument mainly about shrinkage);
- Cash is bad for customers (an argument around flexibility);
Ron made some more detailed observations about the UK marketplace. While noting that "it's when and who, not if" cash will vanish and that cash usage in UK is falling by 1% CAGR (£2 billion per annum), he was realistic about what it will take to displace it. Noting that cash is excluded from the fastest growing retail sectors (e-commerce and m-commerce), and talking about FPS and PayPal as examples of new entrants in retail he said that cash "appears to be cheap" and immediate and finished by saying that for cash alternatives to succeed they needed:
- Economic incentives (already in place);
- Reliable technology (already in place: mobile);
- Ubiquitous solution has yet to emerge.
He seemed to imply that once this ubiquitous solution (which, later in the debate, he said would be a new scheme, not a new version of the old schemes) was in place then the replacement of cash would begin. I don't want to read Ron's runes, but I rather assumed he was talking about new direct-to-account "debit like" instruments, either pushed e-billing through FPS or merchant-led decoupled debate. Perhaps we could explore the pros and cons of these alternatives at another event.
The "against" side of the debate was handled by Peter McNamara of NoteMachine and Richard Braham from the British Retail Consortium (BRC). Peter opened by transporting us back to the days of King Croesus (the chap who gave us the phrase "as rich as the person who controls the money supply" or something along those lines) and said that he came up with the idea of money because barter didn't work terribly well. So far, so double coincidence of wants. Rise in the amount of cash dispensed from ATM is because people need to budget in difficult times. Cash is difficult for criminals because it is expensive to transport and inconvenient. Improbable that the impact of mobile will be to reduce cash usage. He had some robust observations on contactless and said that he had been speaking to a retailer with 4,000 contactless terminals installed who had told him that they were "virtually unused".
Last but certainly not least, Richard (who is Head of Payment Strategy for the BRC) gave what I thought was quite a measured response, avoiding the usual rants about the iniquities of interchange (well, until the end). He said that mobile payment may cause cash to decline in the future, but it isn't now, and that the BRC has "no payment agenda" and is "agnostic" toward means of exchange. He was kind enough to save the moaning about interchange until the end and although I didn't for one moment believe the claim that the average debit transaction costs the retailer ten times as much as the average cash transaction (10p or so vs. 1p or so) I thought he was pretty reasonable.
There was a question and answer session at the end. David was kind enough to invite a question from me, so I asked about the distribution of costs and whether the panelists might suggest what a fair distribution of costs might be. I said something along the lines that the issue of the poor had been raised several times but wrongly. The poor are _worse_ off - if I nip out to buy cocaine in the middle of the night I don't care that gas station charges 2.50 but if poor persons nips out for some fags that's a significant charge. I pointed out that the average family that uses only cash is about £900 per annum worse off in the UK. The retailers don't pay for that, so of course cash is cheaper for the retailers to accept. But to what extent can businesses be allowed to minimise their private costs? No-one really answered the question, although the BRC did have the best non-answer: Richard said "I don't know what is fair, but I do know what is unfair".
All in all, a lovely way to end a long day.
P.S. The Kansas City Fed put out a good report in February of this year. It was called "Measuring the Costs of Retail Payment Methods" (by F. Hayashi and W. Keeton). In this report they said that
Policymakers need to understand four key cost concepts to compare the costs of payment instruments. These are social costs vs private costs, total social costs vs. variable social costs, transaction costs per unit of payment value and constant versus increasing returns to scale.
I think it might be a really interesting idea for a future roundtable to bring along a relevant economist to explain these concepts in details and then invite the participants back to answer that final question again because I think it is the key question to be answered if we are going to formulate a sound, evidence-based payment strategy for UK plc. It will not be possible to come up with a strategy that simultaneously minimises the private costs of all stakeholders, so a principal goal of a national strategy should be to establish the principles by which the costs should be distributed. This will be the central argument in my response to the Treasury's consultation paper on payment strategy that I will blog soon.
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