[Dave Birch] Linkdump pointed me at McKinsey's "golden rules" for the "war on cash". These are:
- The stakeholders must agree that substituting debit cards for cash is beneficial to society (This consensus will be hard to reach, as the parties involved do not agree on the true costs of cash and the other payment instruments involved).
- The debit product must be enhanced.
- Acceptance of debit cards must be vigorously promoted, both in terms of personal acceptance of cards and in the world of remote commerce (mail and telephone order, e- and m-commerce).
- Banks must develop segmented card offerings.
- Cash needs to be priced appropriately. The fact is that, today, the pricing of cash is not in line with its costs. Consumers and merchants in most countries do not pay the real cost of cash, and so merchants and consumers have no reason to reduce their use of cash. One problem is that there is no clear ownership of cash. Another is that governments often position cash as a public good -- to be offered free by banks -- thereby inhibiting an economic debate on cash versus other instruments.
- Finally, we will need to see significant targeted marketing efforts to promote debit over cash.
If by "debit" they mean debit products, pre-authorised debit products and prepaid products, then I think I agree with all of these points, especially the ones about segmentation and costs.
Even though I agree with all of those obviously sensible points, they do presuppose that it's debit cards that are the means of exchange that will replace cash. It seems to me that there are other possibilities. Mobile phones, for example. Consider the case of the parking meters in Westminster, where cash is being replaced by mobile phone payments. Remember that the local authority there is planning to replace all its parking meters within 12 months following a six trial last year when they introduced cashless parking in the West End and Harrow Road to reduce theft from parking meters as well as to make life easier for motorists. This leads me to think of another "golden rule": take away the cash alternative or price it appropriately. Make motorists who pay in cash cover the cost of the thefts.
When payment services are free, consumers do not just get a bargain, they do not get clear signals about the costs of producing the services. However, as a study of the Norwegian market suggests, the negative consequences are limited if only the most efficient payment services (ie, not cash or cheques) are free. The Norwegian banks that offer free payment services primarily offer electronic services and similarly, most customer retention and loyalty schemes only offer a discount for electronic services. This means that customers are motivated to choose the most cost-effective payment services, which is all to the well and good. There may be a downstream problem looming, though. A lack of profit opportunities in the payment system, particularly under SEPA I would think, may make it less attractive for banks to invest in the development of new payment services. I've decided to call it the non-innovator's dilemma: extensive use of efficient free services such as debit may have negative consequences for the efficiency of the payment system in the long term, while nimble competitors pop up with new services that take away customers.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]