Back on track

Well it seems teaching is over and the Autumn term was too much for Dave and I to keep feeding this blog.

We also had a very interesting and thought provoking meeting at UC Irvine entitled “Payment Technologies: Past, Present and Future” (read an excellent summary by Irving Wladawsky-Berger&lt) and I also had a couple of presentations at industry conferences (I am serialising the summaries underCurrent issues in payments within the Light Blue Touchpaper blog).

So rather than boast about our travels, I wanted to restart our thoughts on cashlessness through a provocation and with the help of an apparently unrelated article that caught my attention. Entitled “How Memes Are Orchestrated by the Man“, Kevin Ashton of The Atlantic, tells a very detailed and well documented story of how commercial interest rather than a new Internet culture that which propelled the Harlem Shuffle to stardom. Interestingly, it says the meme died in February, but I still find big references to it, chief among them this one in the Mexican football classic a couple of days ago – and my football blind, eldest son immediately knew what this was about.

But what is relevant to this forum is the following extract:

Google regards clicks and views as a “currency,” and take pains to get the numbers right, but unlike most other mass media, its figures are not verified by anyone who does not profit from higher numbers.

and goes on to conclude

The technology may have changed, but the money still flows the same way: to creators of contracts not creators of content.

And that got me thinking of Jon Matonis and other supporters of cryptocurrencies (see for instance Bitcoin Prevents Monetary Tyranny) or mobile wallets for that matter. Why? Because more often than not, the proponents of digital payments are focusing their discussion on content and are naive of institutional change.

The Responsibility of Mobile Money Intellectuals

The narrative for the underlying adoption of cashless payments in developing countries is that of financial inclusion: mobile phones are a widespread and thus, with a little push, more people would escape the tyranny of the cash and join the financial system heaven (with the alleged benefits this entails such as greater liquidity, possibilities for greater indebtedness and of course, the privilege of paying charges and fees to financial institutions). For 30 years or so the likes of the World Bank and the Bill & Melinda Gates Foundation have supported mobile banking initiatives as well as their predecessors, namely microfinance institutions.

But as Kevin Donovan reminds us in his brief paper, a long term review of microfinance and mobile payments questions whether outside of specific examples, either has had an impact on development. Moreover, there is a lack of critical evidence to support the millions of dollars provided to these initiatives during the last 30 years. He also reminds us of the term Mobile Money Intellectuals (coined by Bill Maurer at UC Irvine’s Institute for Money, Technology, and Financial Inclusion) or the “community of scholars and practitioners from academia, business, government, and philanthropy” that should be the base of a critical discussion around micro finance and the cash free economy.

This is not, lets us emphasise, a negation of financial inclusion or mobile payments but a call for a balanced assessment of the way forward (including different technological solutions). A case in point is PayPal, the online payments intermediary owned by eBay Inc., who has prevailed through adaption: by copying Square’s white dongle with a blue triangle; establishing a strategic alliance with Discover whilst foregoing a mobile wallet application. PayPal retains a major market share of electronic payments (as poignantly noted in this article by mashable.com).

Donovan’s view is that:

There are certainly developmental benefits to technologically enabled finance, but it would be a shame to ignore the downside or fail to address the type of foundational questions that challenge and advance our understanding of innovations such as microfinance and mobile money.

Indeed we need a conceptual and empirical body of knowledge that looks beyond fads and into what works better for society. This is what this blog and indeed, our cashless society project is all about. We are happy to count Kevin as one of the key members of our growing network.

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?

Myths and realities of the cashless society

People *think* that technology moves fast and culture moves slowly. I mean, the Rolling Stones are still one of the world’s most popular bands, right? But that’s not always true. If you look at futurists’ takes from the middle of the last century, their biggest misses were not just technological (jetpacks instead of iPhones) but cultural .. [such as failing to] anticipate the rise of the natural and organic food movements. Alexis C. Madrigal – The Atlantic

A panel named as above took place at the European Business History Association annual conference (#ebha2012) in Paris (August 30th to 1st September, 2012). The panel was chaired by Carles Maixe (@carlesmaixe) from University of La Coruña (Spain), who introduced the audience to the authors as well as the idea behind this blog/forum. A common theme was looking at the practical implications of delivering on the idea of a cashless society by not for profit deposit taking financial institutions.

The panel was composed of:

The comments by Mark Billings (Exeter, UK) and the discussion that ensued included contributions from of Patrice Beaubeau (Paris Ouest Nanterre, France), Steve Toms (Leeds, UK), Chris Colvin (Queens Belfast, UK) and Osamu Uda (Nihon, Japan), among others. Points raised included (included, in no particular order):

  • This panel and indeed a good attendance, reflects a growing literature and interest to look at the impact of technology in financial services from an historical perspective, which is challenged to provide a true comparative history of automation (rather than individual case studies sitting side by side).
  • For the foreseable future we are likely to talk about “the less cash society” (see recent article in Gadget Lab — www.wired.com about generalise mobile payments needed at least another 10 years).
  • There is a need to look at the impact of cashless (and indeed deeper analysis of ATMs) into bank employees and banking practices.
  • Provide a comprehensive survey of how the idea of a cashless society has been dealt with, at least conceptually (including contributions to economics, social costs of different payments, anthropology, etc).
  • It is still not clear the importance of differences in the institutional setting to promote financial inclusion and aid (or hamper) a cashless society.
  • The 1960s sees the birth of the modern monetary economy, which in large part is based on applications of computer technology.
  • The discussion on the cashless society (and particularly contemporary narratives) tends to emphasise the artifacts (such as mobile phones or chips) as opposed to what is money and its economic and social uses.

The discussion continued during the evening (see photo below). An idea here emerged following last week’s post on transparency, as it was considered that surcharges on cash withdrawals were similar to a regressive tax: a fixed value regardless of amount withdrawn is more punitive on lower income individuals as the total payment of surcharging fees is a greater proportion of their income than for high-income individuals. An empirical issue is which of the two groups observes greater frequency of withdrawals and keeps a higher balance of cash and coins. Gustavo del Angel baptised this effect as “feeding the gander”, in a loose symil to the large tubes commonly used in the creation of fois gra, replicating the payments pipeline giving no option but to “eat” the surcharge.

(L 2 R): Gustavo del Angel, Carles Maixé-Altés and Bernardo Bátiz-Lazo, Paris (Sep, 2012)

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.