Who will pay?

[Dave Birch] I was on BBC Radio 5 yesterday in a brief debate about cashlessness between me and a representative of the European Security Transport Association, who are complaining that cash is being marginalised in Europe. I've been thinking about quite a bit recently because of some projects I'm involved in but also because last month, Aneace had set me thinking about the cost of cash again. He correctly noted that merchants truly believe cash is cheaper than plastic (as was confirmed by the UK survey we discussed before). He makes the point that until there is no cash, a reduction in cash doesn't save merchants much money. But what if it goes the way of digital TV, and there's an “analogue switch-off” when the legacy wonga becomes worthless? Who should pay to complete the transition? What about the last few people who still want to use notes and coins, and therefore waste everyone else's money on cash registers and ATMs, security transport and jammed vending machines. Back in 1997, I wrote (in an e-cash fanboy piece for the New Labour think-tank DEMOS) about this issue.

Technorati Tags: costs, e-purse

What I was asking back then was, in essence, how could the benefits of digital money be extended across a country in which one in five adults has no current account and four million people still rely on cash to pay their bills (a figure that appears to have remained steady for a decade) ?

This question still stands, and answering it now has added impetus in a SEPA context, since one of the key hopes of SEPA is to boost cashlessness in Europe (Getrude Tumpel-Gugerell, who is in charge of such things at the European Central Bank, is already talking about eSEPA as the next step on this path). The dynamics of payments within SEPA were neatly summarised in a paper by McKinsey: cash is subsidised by electronic payments, businesses subsidise consumers and interest margins provide most of the revenues. With these dynamics, where do we go?

So, to restate my 1997 question in a 2007 context, what should the European Commission do about those who can't or won't move to digital money? There are, essentially, three options as far as I can see:

1. People should be allowed to continue to use notes and coins at their own expense (which ought to be the Anglo-Saxon option), or
2. People should be allowed to continue using physical cash but at someone else's expense (which we might call the French option although it is the regime in the UK as well, where taxpayers fund the post office network so that people who don't want bank accounts can muck around with cash at the taxpayer's expense not their own), or
3. People should not be allowed to continue to use physical cash. I'd be tempted to label this the North Korean option, although a similar money technology rollover policy was once in place in China. According to Marco Polo, Kublai Khan made all travellers to China exchange their technology implementing the means of exchange (ie, gold and silver) for his (ie, paper). As was the general approach, he took a more robust line on the cut-off: if you tried to use bullion in a transaction, your head would be cut off. I don't think the European Court of Human Rights would endorse such a policy, even for something as important as eSEPA.

While options 1 or 2 may intuitively seem to fit with people's conservative nature and while certain lobby groups (for the aged, the poor and so forth) might prefer option 2 over option 1, it may well be that taking the apparently extreme step of dumping notes and coins altogether is the only realistic option for the future. This implies some form of regulation or, at least, firm government policy to open up the benefits to society as a whole. Let's pretend. How about a carrot-and-stick approach: the ECB announces that from 1st January 2011 (SEPA day) notes and coins are no longer legal tender and public authorities can no longer accept them in payment, even for taxes. Throughout 2010, anyone who deposits cash to fund a SEPA-compliant payment-capable account (including prepaid cards) is paid a 1% bonus by the government up to a limit of, say, 10K euros or something. That way, they get to share in the savings made to the economy by getting rid of notes and coins and European GDP grows 0.5% percent in return for an one-off bribe of 1% of Euro-M0.

Comments

[Iang]

Option #4 is strangely absent: Deregulate the payments market and let the private sector move to replace cash.

There are very good reasons why the fundamental advances in digital cash occurred in the USA, notwithstanding the efforts of DigiCash and others:

Payment markets were not formally regulated in the USA.

Things like Paypal and e-gold and their many competitors were able to experiment and deliver their product without being told what doesn't work.

This merry state of affairs is now over, perhaps marked by the departure of Sir Alan Greenspan. European regulators will perhaps breath a sigh of relief, as the pressure of a clear comparison will fade in time.

It may become easier now for the ECB to run a command economy in payments, but the people always pay the cost (look no further than SEPA for the canonical example of the cost). The non-anglo countries in the EU seem to have around 10-30% of the economy on a pure cash basis, partly because these sectors are excluded from the formal economy and partly because cash *is* cheaper for them.

Removing payment options reduces the opportunity to trade -- it's the economy the ECB is playing with, in other words. In the cash economy, it's often more basic still: people use the cash to buy things to eat. Fiddle with that at your peril.