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« The Cash Menace up North | Main | No more fraud »

Fair trade

By davebirch posted Jun 2 2006 at 5:26 AM

[Dave Birch] I've been thinking some more about the competition between cash and electronic payments. Leo Van Hove from the Free University of Brussels has been a good friend of the Digital Money Forum for many years. He made a presentation at the 7th Forum talking about the state of the e-purse in Europe, and made the point that in many ways the purse faces unfair competition from cash, because cash is cross-subsidised. If customers who wanted to use cash were made to pay the full price for it (setting aside the obvious social concern that the poor would see their transaction costs rise), then the electronic alternatives would become more attractive.

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In a post about the remarks by the Governor of the Bank of Sweden, I alluded to some research (commissioned by MasterCard) from Dr Laura Rinaldi from the Centre for Economic Studies at Leuven University. She found that it is indeed true that not only do customers see cash as being “almost free”, but that proper cost-based pricing would shift debit cards from being 4% of retail transactions in Europe to a quarter as I mentioned. But she goes on to say that this shift would add 19 basis points to the European economy. That's good news for most people, surely. Not for the people I was chatting to about it a couple of days ago, because I was speaking at a conference about ATMs. I'm not sure if they're going to support my campaign to end the menace of cash as the first opportunity.

What's also interesting about Dr. Rinaldi's research is that she says that the European economy would grow by an additional 9 basis points because moving to e-payments would reduce the “shadow economy” which is, naturally, based on cash. When Proton was launched in Belgium -- Proton is the most successful of the European e-purse schemes to date (ie, not terribly successfull) -- I do recall a number of people at the time saying that one of the reasons for the poor usage figures was the size of the informal economy in Belgium. I wonder to what extent the evolution of digital money will be influenced by the debate about the “legality” of the transactions?


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I still think that the most powerful way to boost plastic usage is the old fashioned way, by making cards more valuable. And since merchants pay for plastic through interchage fees and are complaining loudly, cards should be made much more valuable to merchants. Lobbying to get governments to subsidize or de-subsidize payment methods feels so old fashioned. People living in other parts of the world might even call it very "European-ish" :) Just joking about that last comment, of course.

On the issue of the informal economy - it is probably fair to say that in many countries it is a very strong force, ranging from 10-30%. But one has to take this in the context that this is how people eat and live and pay rent - mucking around with that is not a thing to be treated lightly. Dr. Rinaldi's profit of 9 basis points might quickly turn to net loss if it comes at the cost of 18 basis points from the informal economy.

It's interesting to speculate on how this attitude effected the roll out of smart card money in Europe over the last 15 years. One thing that the banks got a failing grade on was the "video factor," something that the non-european software based systems have not failed in. Without the utter faith in privacy from an early thought-leadership community, new monies have little chance.

It is true that cash is subsidised. But so is the purse. This is like the arguments between rail and roads, they both point at each other's subsidies and forget their own. With cash, specifically, people forget the seignorage that holders pay without thinking; with bank purse systems, people forget the overall banking subsidy.

All large scale hardware-based payment systems suffer from an inordinate amount of cross-subsidisation, and it takes some serious investigation to be able to unravel those. So much so that I wonder if there is any point, all it seems to do is stoke up the fires of fingerpointing.

A far better way forward for Europe is to look at what counts for competition in the US: Paypal versus Google versus Yahoo versus Microsoft. There, we have the best chance of seeing payment systems develop without subsidies from the government in one form or another (although there are obviously in-conglomerate transfers going on).

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