To what extent should society tolerate people using expensive and inefficient payment mechanisms when more cost-effective (to society as a whole) alternatives are readily available?
Suppose someone wants to carry on using a product or service that suits their needs but imposes a general level of harm on everyone else? I might decide that I want to use depleted uranium for my dustbin and it’s hard luck if it causes metal poisoning in my neighbours. Or I might decide that I want to use leaded petrol. Or cash. Should I be allowed to carry on regardless? I used this argument today in a discussion about carrots and sticks around payments, and it reminded me of something I read last year.
A prepaid card means she has to change completely her behavior — and while it makes the government more efficient, it makes my mom less so. That simple thing, which seems perfectly logical, creates a problem rather than solving one for her. At 78, she just says thanks, but no thanks.
How do you stop people from using the wrong kind of payments? You’d think that price would be the obvious mechanism, but I do have to say that this is not always true. The nice people from the Government Banking Service (GBS) very kindly invited me along to give a talk at a seminar they organised at Her Majesty’s Treasury a while back. The seminar audience was made up from central and local government, and I may not have been sensitive to all of the nuance of their questions, since I’m not terribly familiar with the sector, but the essence of the day was that the British government is about to begin the re-procurement of banking services and since they currently handle about £900 billion in payments per per annum, that’s quite a big deal. (The current contract is split between RBS and Citi, by the way.) One of the examples given to illustrate the scope for improvement in the sector was that of a government department that had instructed 150 CHAPS transfers last year. Analysis showed that 125 of these were for less than £10,000 (the average CHAPS transfer is £2m) and could have gone via FPS at a tiny fraction of the costs. But they didn’t. The people in the departments, just like the above commentator’s mom, want to carry on doing what they’ve always done and since they don’t see the price, why shouldn’t they?
You could frame this issue in another way: to what extent should taxpayers subsidise people who want to use expensive alternatives? There was an interesting comment early in the day from a GPS speaker who said that he didn’t want the public sector to end up as the last users of cheques and have to bear the whole cost of the infrastructure. Indeed. But shouldn’t this be true for cash as well? Shouldn’t the last people who want to carry on using it be paying for it?
This isn’t UK problem, it’s a general problem. I noticed this comment from Olivier Denecker at the management consultancy McKinsey. He says that
Even though Europe has a fairly advanced banking infrastructure, its payments products boast inherent cross-subsidies between products.
Indeed. And the cross-subsidy is from the more efficient payment products to the least efficient ones, which cannot make sense in the longer term. It is time for action, although I’m not really sure what that action might be, other than to pass a law requiring all merchants to include the cost of “debit” transactions in advertised prices and allow them to surcharge for all other choices.