About David Stearns

I am a historian and sociologist of technology (PhD, Edinburgh), and a former software developer. My academic research has so far centered around money and payment systems, and my first book, Electronic Value Exchange: Origins of the VISA Electronic Payment System, is now available from Springer. I also teach in the Information School at the University of Washington. You can follow me on Twitter at @DaveStearns or send me email at dave.stearns@gmail.com.

New Working Paper: Mobile Payments in Turkey

One of our primary activities here at the Cashless Society Project is to develop working papers that examine the idea of a cashless society from historical, contemporary, and international perspectives. In keeping with that, I’m thrilled to announce that we’ve recently posted a new working paper on Mobile Payment Systems in Turkey, written by Nurdilek Dalziel and Can Ali Avunduk. Both Nurdilek and Can Ali have spent time working in the Turkish banking sector, so their paper provides a insider perspective on how the Turkish banks and mobile telephony providers are currently approaching electronic payment services.

The paper opens with a brief overview of Turkish electronic payments in general, but then quickly dives into what they refer to as “direct carrier billing (DCB).” DCB is an approach to mobile payments where the mobile network operator (e.g., Turkcell, Vodafone, etc) manages the accounts and plays the central clearing role instead of a bank or bank-owned service organization. With this approach, anyone with a mobile phone can send and receive electronic payments, even if that person doesn’t have a bank account. The authors estimate that of Turkey’s 74 million inhabitants, 27 million (37%) do not currently have bank accounts, but most of those do own some kind of mobile phone. Thus, DCB could be one method by which this “unbanked” section of the population can gain access to electronic payments.

Of course, DCB also has the potential to cut the Turkish banks out of the payments game if they are not careful. So far, the authors report, the growth of DCB schemes is quite small, their networks are limited, many consumers don’t seem to be aware of their existence, and the overall payment volumes are actually restricted by the system for fear of fraud. Thus, DCB systems do not yet pose any kind of serious threat to the Turkish banks, and the authors see them more as supplements to the existing banking system rather than substitutes.

The Multiple Meanings of “Cashless”

One of the interesting aspects of the “cashless society” concept is that it is essentially a negative vision for the future. Like the “paperless office” (which was another hot topic in the 1960s and 70s), the “cashless society” vision focused on what it would remove instead of what it would add in its place. It said much more about what it would not be, and very little about what it would actually look like once it arrived.

In many ways, this lack of positive definition was actually a good thing. It enabled several different groups and firms to all pursue a common goal, even though they disagreed, sometimes vehemently, about the specific details. Amongst the bankers of the 1960s, the goal was relatively clear: replace paper checks, notes, and coins with some kind of electronic funds transfer system. But how that system should be structured, who should govern it, who should pay for it, who should operate it, and how consumers and business should access it, were all open questions. For each of these questions, there was money to be made and lost, so not surprisingly, different groups had very different opinions about the potential answers (for more details, see our working paper, “How the Future Shaped the Past“). A general meaning of “the cashless society” might have been shared, but the specifics were hotly contested.

Despite these disagreements about the specifics, however, US bankers in the 1960s assumed that these new electronic transactions, as well as the accounts they accessed, would still be denominated in US Dollars. In other words, the cashless society might eliminate paper bank notes and checks, but it wouldn’t eliminate money altogether, nor would it replace the centralized, state-issued fiat currency with a host of privately-issued ones. “Cashless” was really just a synonym for “electronic transactions.” The cashless society promised to automate the mechanisms of monetary exchange, but it would leave the existing state-issued fiat currencies firmly in place.

This time around, however, I’ve noticed a broadening of the meaning of “cashless” to include such things as privately-issued electronic currencies (e.g., BitCoin), as well as the dream of a completely moneyless society. When most contemporary bankers, journalists, and academics use the phrase “cashless society,” they still mean something similar to what the 1960s bankers meant: the replacement of paper checks, notes, and coins with electronic transactions—except that this time, those transactions are initiated with a mobile phone instead of a plastic card. But several reactions we have recently received to our working papers indicate that at least some people consider “cashless” to also mean “dollar-less” or even “completely moneyless.”

The cashless solutions that seem to get the most attention from the press these days (e.g., Square) are really just making it easier for more people to access the existing electronic payment networks owned and operated by Visa and MasterCard, both of which settle using existing state-issued currencies. But BitCoin and other electronic currencies are quite different. BitCoins are not issued by a state or a central bank. BitCoin is an alternative currency, one that is parallel to the dollar, pound, euro, yen, etc., and can be exchanged for these central-bank currencies according to market-based, variable exchange rates. The BitCoin system is certainly “cashless”—all their accounts and transactions are processed electronically—but it is also more than that.

As historians and social scientists, we should of course strive to let actors define their own categories, and avoid layering our own meanings upon them. Actors in the 1960s seem to have had a more restrictive definition of “cashless,” but that definition may be broadening today to include alternative currencies, as well as moneyless barter societies. As we investigate the discourse or the actual systems from a given era, we must pay special attention not only to what is said, but also what is left unsaid, what is simply assumed.

But as analysts and authors, we should also make clear what we mean by our key terms so that our readers know how to interpret our work. I have so far been using the term “cashless” in the more restrictive sense, and will use terms like “alternative currencies” or “moneyless” to describe the other categories.

What meanings have you been assigning to the term “cashless?” And what terminology do you prefer?

Transparent Pricing of Payment Services?

Bernardo recently sent me a link to a blog post that advocated for transparent pricing of payment services. The post is a bit of a rant about unnecessarily high interchange fees, which is the fee the merchant’s bank pays to the card-issuing bank for a credit or debit card transaction. These fees are set by the system as a whole, and they naturally set the floor for what a merchant pays to accept credit or debit cards. The trouble, the author argues, is that these fees are much higher than they need to be, and because consumers are generally unaware of these fees, they continue to use the most expensive, least efficient payment instruments, ultimately resulting in higher prices for goods and services.

The solution, the author contends, is to make these fees transparent and visible to the consumer. The author reasons that if the fees charged by the payment networks are passed on explicitly to consumers, they will naturally choose less expensive payment instruments, and probably exert pressure on the payment networks to lower their fees across the board.

VISA and Mastercard have traditionally prohibited such surcharges via their merchant agreements, but various lawsuits might soon give merchants in the USA the right to pass on their merchant discounts more explicitly (merchants in Australia and New Zealand have been able to do this for a while now). Although very focused merchants such as gasoline stations are allowed to offer a “discount” for cash transactions, they are not allowed to impose any kind of “surcharge” for transactions involving cards. In real terms, these are just two different ways of looking at the same thing, but the card networks, which have always been very savvy at marketing, know that consumers don’t see these as equivalent. A “discount” is a reward, something you might want to take advantage of, but not something that will really hurt you if you pass it up; a “surcharge” is a penalty, something you should do everything you can to avoid.

Psychologists refer to this phenomenon as “loss aversion,” noting that most people are motivated more by the threat of a potential loss than the promise of a potential gain, even if the net result is the same. Thus, if you were offered a discount to pay in cash, you might take advantage of it, but wouldn’t be as motivated to do so as you would if you were told that you would have to pay a surcharge if you wanted to use your credit card. Theoretically, a surcharge would motivate more people to choose less expensive payment instruments, forcing the card networks to lower their fees.

All of this sounds great in theory, but the trouble is that surcharges would be only one of many considerations that ultimately influences a consumer’s choice of payment instruments. Human beings are complex creatures; we are motivated not only by prices, but also by convenience, the status something might afford us, the extrinsic rewards it might provide us, the desire to be treated fairly and with respect, and expectations formed by years of prior experience.

Imagine if the next time you went to the grocery store, you were told at the checkout that you could pay one of four different amounts depending on which kind of payment instrument you used. Would you be happy that transaction pricing was finally transparent, or would you just be confused and angry that you had to pay 3-4% more because you wanted to use your air miles credit card? If you are reading this blog, you are probably already more aware of these issues than others, so imagine how someone who has no idea these fees even exist would feel.

Historically, consumers have tended to react very negatively to this kind of unbundling and pass-through of fees, especially when they’ve been conditioned for many years to assume that the service should be provided for free. For example, when most of the airlines in the USA started charging for checked bags a few years ago, consumers responded with outrage, and tried to carry on enormous bags, delaying boarding, which made everyone even more frustrated. In Seattle (my hometown), the city council just passed a law requiring stores to charge their customer 5 cents for a paper bag; the intent was to incentivize consumers to bring reusable bags for environmental reasons, but it has resulted mostly in anger towards the city council.

Although these kinds of moves are intended to draw consumer’s attention to the real costs of providing a good or service, they instead tend to focus consumer’s dissatisfaction and anger towards the organizations imposing the change. This provides a good opportunity for competitors to jump in and steal customers, as Southwest Airlines is attempting to do with their “bags fly free” policy.

Banks in the USA have been playing this game of chicken for many years with regards to checking and debit/ATM card fees. Traditionally, American banks have offered checking, ATM, and debit card services for free in order to lure more and more consumer deposits. These services, of course, have real costs that are not being passed on transparently to consumers. At various points in history, a few banks have tried to unbundle these costs and pass them on explicitly to their customers, but they have almost always reversed their course in response to customer backlash. The most recent example was Bank of America’s attempt to impose a $5 fee to use their debit cards; after a large number of customers left the bank, they were forced to abandon their plans.

My point is that imposing surcharges might not achieve the results the blog author expects. As opposed to directing attention and indignation to the card networks and their interchange fee, it may instead direct that anger towards the merchants themselves, especially if their competition starts advertising a “no surcharges” policy. In that scenario, consumers may see the surcharge as something capriciously imposed by the merchant, and not something that is being passed on from the card networks.

The larger question here, however, is how we should think about transaction pricing in general. How much “should” it cost to process an electronic transaction, and how much of that should be paid by the merchant vs the consumer? That depends in many ways on what you think a payment card network like VISA or MasterCard actually is. Are they like public utilities, whose fees should closely resemble their underlying costs, or are they for-profit businesses, whose fees should be set according to market conditions? Many people seem to think of them as the former, but the card networks are neither structured nor financed as public utilities, and they certainly don’t think of themselves as such.

But we are now heading into another, very complicated topic, so I will leave that to another post. For now, what do you think about the idea of making card transaction pricing transparent via surcharges? Do you live in a country where this is already happening, and if so, what has been the general reaction?

New Working Paper: Pre-1900 Utopian Visions of the Cashless Society

One of goals for this project is to contribute some historical perspective to the current discussions of the cashless society, and to that end, I’m happy to announce that we have added a rather intriguing new paper to our Working Papers section: Pre-1900 utopian visions of the ‘cashless society’ by Matthew Hollow.

Although one might initially wonder what utopian literature has to do with current discussions of the cashless society, Hollow reminds us that “Historically, one of the most prominent mediums through which new ideas about monetary systems have been presented and debated is the utopian treatise.” As they describe their perfect society, utopian writers naturally have to re-imagine the economic life of that society, and decide what role, if any, money should play in it. Many utopian thinkers sought to do away with private property, trade, and money altogether, resulting in a completely moneyless society. Others, however, recognized that doing so would require a wholesale reorganization of society that was perhaps not entirely realistic, and thus offered suggestions for alterative money and payment systems that did away with precious metals, coins, and paper bank notes.

Current discussions about the cashless society often seem to imply that it is a relatively new idea, one that was introduced by the adoption of credit cards and now mobile payment systems, but Hollow shows that the idea of cashless society is actually quite an old one. The technologies may have changed significantly over the centuries, but the social implications are still largely the same, and utopian thinkers offer some valuable insights that could inform our contemporary discussions. Utopian literature also reminds us that simply introducing a new payment method may not be enough to effect a truly cashless society; it may also require larger social changes, which naturally take generations to accomplish.

Starbucks and Square

Last week, Starbucks made the announcement that they have decided to invest in the San Francisco payments company Square, and will soon allow customers in their US stores to pay with Square’s mobile payment application “Pay with Square.” This was a great vote of confidence for Square, but a somewhat surprising move for Starbucks.

Square is a really interesting company. It was founded by Jack Dorsey (of Twitter fame) in order to help small merchants accept payment cards. Square removed the friction for small merchants by doing three things: they radically simplified the merchant sign-up process; they offered consistent, transparent, and reasonably affordable pricing; and they enabled just about anyone with a smartphone to accept cards by creating a little magstripe reader and application that communicates with their servers over the phone’s data connection.

I first became aware of Square at my local farmers’ market; the guy who sells handmade pasta pulled out his iPhone, swiped my card through a little square-shaped device plugged into the headphone jack, and handed me the phone to sign my name. Since it was a farmers’ market, the merchant had no phone line or power source, but he didn’t need either; the card was read by Square’s app on his phone, which then communicated to Square’s servers over the mobile phone network. As I walked off with my purchase, I received a receipt for the charge via email. It was unbelievably cool. It felt like the future of cashless payments.

Since then, I have run across several other mobile phone-based payment systems that work in similar ways, but Square has continued to expand their offerings into a set of coordinated products. They now offer a point of sale (POS) app for the iPad, which is probably more than adequate for a small merchant, and a related “Pay with Square” application for consumers. Pay with Square is like a digital wallet, in that consumers can register their credit or debit card account, along with a picture and name, and then make charges against their card at any Square merchant.

Instead of using Near Field Communication (NFC) like Google Wallet, Square relies on the GPS functionality built into most smartphones. When a Pay with Square consumer enters a Square merchant, the consumer app knows this by virtue of its current GPS coordinates. The consumer is then asked if he or she would like to “open a tab” with the merchant, and if so, the consumer app notifies the merchant’s terminal via Square’s servers. The merchant can then tap the customer’s picture and name to initiate a new transaction. Square likes to point out that using a picture and name makes the transaction more “personal,” but the real advantage, at least for the time being, is that the consumer doesn’t need an NFC-enabled phone (only about 1% of phones sold today are NFC-enabled). Pretty much any smartphone with a GPS will do.

Pay with Square also seems to skip the signature step, which raises some interesting questions. When you sign a traditional transaction slip, you are legally authorizing the merchant to charge your account. The card networks have relaxed this requirement for transactions under certain amounts at certain high-volume/low-risk merchants, but it is unclear to me if Pay with Square transactions are also subject to these same rules, or if they have negotiated a general suspension of the signature requirement with the card networks. If the latter, this introduces a sticky issue with regards to fraud and transaction disputes. If you dispute a transaction, the merchant is required to produce a copy of the signed receipt, but if there is no signed receipt, Square will have to provide some kind of evidence that you, and not someone who stole your phone, authorized the transaction. The merchant can verify your picture and name, but what stops the thief from updating the picture before making fraudulent purchases? Perhaps Square uses picture analysis algorithms to detect significant changes to the registered picture, triggering a review?

By capturing both the consumer and the merchant, Square is also able to do some interesting things related to loyalty programs. Merchants can establish various schemes, such as every 10th coffee is free, and Square does all the work of tracking the purchase history and notifying the consumer and merchant when various goals have been met. Think of all those little punch cards you carry around in your wallet today, and how those could just become automatic and seamless in the future.

I would suspect that Square, being founded by the former CEO of Twitter, is also thinking about tapping into the social networks of their customers, though I haven’t seen any announcements related to that yet. For example, Square could easily send you offers to your favorite merchants and let you forward those to friends on your various social networks. Or they could notice that you and some of your friends often frequent the same restaurant or bar, and extend an offer to your entire group.

Of course, the real chore facing Square right now is expanding their merchant and consumer network, which is why the Starbuck’s announcement is so important to them. More than anything, Square needs visibility, and soon every customer who walks into a Starbuck’s store will see their name and hear about their products.

The Starbuck’s announcement also helps to legitimize the very idea of mobile payments, and will most likely help to increase adoption of schemes like Square. Historically, consumers have always had troubles developing trust in new payment systems, and are typically unwilling to use something that seems “experimental” or “cutting-edge” when it comes to their money. But one of the ways in which consumers establish trust more easily is if some business or organization they already trust introduces them to the new system. Think of when you meet a new person via a trusted friend; if you trust your friend and your friend trusts the new person, its becomes much easier for you to trust that new person as well. It works the same way with organizations and systems; if you trust the organization, and the organization vouches for the system, you tend to feel less apprehensive about giving it a try.

One thing is certain though: it will take quite a while for mobile payment systems like Square to displace cash and plastic cards. In fact, the use of cash in the United States and the UK seems to have increased during the recent recession, and the use of credit and debit cards continues to increase as well. The idea of using your mobile phone instead of a pastic card is still a bit too “exotic” for most people over 30, and it will likely take a generation before it becomes commonplace and normalized.

Welcome to the Cashless Society Project

Recent developments in mobile payments have re-ignited popular interest in a cash free economy, but the popular narrative surrounding all this seems generally unaware of its rather long and tumultuous history. This historical myopia has led many contemporary journalists and futurists to make the same kind of predictions about the imminent “death of cash” that were made in the 1960s, and those are as likely to be incorrect this time as they were half a century ago. Clearly, the technological infrastructure is much more advanced now, but it takes much more than technical engineering to build a cashless society; one must also “engineer” the relevant social dynamics, and that has always been the far more difficult part.

Thus, our primary goal for this project is to inform and influence both the popular and the academic discussion surrounding cashless payments. We want to help journalists add historical and international perspectives to their stories on mobile and electronic payments. We want to help the general reading public make better sense of the rapid changes happening within banking and payments. We want to give banking and payments practitioners a better understanding of their own history. And we want to connect academics from various disciplines through the common thread of money and payments.