More discussion about the use of cash

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[Dave Birch] In their report on “Payments Innovation and the Use of Cash“, the Market Platform Dynamics team pull together some very useful data and structure an even more useful background for discussing the use of cash. It is well worth a read, and I say that not because it is in broad agreement with the report that Consult Hyperion were commissioned to prepare for an international cash-based business a couple of years ago (phew!) but because anything that encourages more detailed analysis of the relationship between cash and electronic payments is very helpful in the strategic planning process for many of our clients (sorry to be so selfish!). I very much liked the way that report categorises a variety of influencers and uses them to consider market trajectories. I will remark only the first two of them here:

  • Governments and their interest in and need to sustain cash, which will differ country by country. For instance, there could be efforts undertaken in countries to clamp down on the shadow economy thru tax policies that make it harder to shield cash from the taxing authorises, like is being done in several European countries today.
  • Banks and their interest in and cost to support cash. For instance, banks may make it easier or harder for customers to access cash based on their cost of handling it; some countries have also made it harder to access cash by eliminating the ability to get cash over the counter or by consolidating ATM networks.

Later in the report, they talk about another influencer…

One influencer that bodes well in favour of cash in the UK is the economy.

This reflects the British Retail Consortium (BRC) annual survey figures that were available to the authors.

Cash was used in 5.7 per cent more transactions in 2011, accounting for 58 per cent of all transactions. But the cost of the average shopping basket fell to £10.45 in 2011 from £12.93 in 2010.

[From Cash Use Up In Tough Times - BRC Publishes Annual Payments Survey ]

It looked as if consumers were shunning cards and returning to cash in difficult economic times. I never understood why this would be the case, since it is much harder to track your cash spending than your debit card spending. However, the new figures have just been released, and they show a different picture.

The BRC’s Cost of Payment Collection Survey 2012 shows that, while over half of transactions (54.4 per cent) are paid in cash, use has declined as a percentage both of number of transactions (down 6.7 per cent) and money spent (down 9.7 per cent). This is the first time in the survey’s 13 year history that both measures have seen a decline.

[From British Retail Consortium - Policies & Issues Content ]

I went off to the Bank of England and had a look at the the latest figures for notes and coin and reserve balances where you can see that while the use of cash fell 10% at retailers last year, the amount of cash in circulation rose another 6%. This is a consistent pattern. On the one hand, we hear that “cash is king” because the amount of cash in circulation keeps increasing but on the other hand its use to support commerce keeps falling. So what is all that cash being used for? If you look at the UK figures, you will see (as with comparable European figures) that the bulk of the growth in cash in circulation is in large denomination notes. These are not used in retail transactions (indeed, a great many retailers will not accept them) but they are used in a variety of underground transactions: money laundering, corruption, tax evasion and so forth. The figures look clear to me: cash is a subsidy from the law-abiding to the criminal.

As an aside, I was thinking of dropping David and the team a note to ask if they might include another factor in the pro-cash column: life expectancy…

The software also detects obscure correlations. People who frequent ATMs so they can make cash payments tend to live longer than those who prefer writing cheques or paying with credit cards, it turns out.

[From Insurance data: Very personal finance | The Economist]

I find this utterly astonishing, particularly since cash usage correlates strongly with income level, but what do I know. There must be underlying causation since the mere correlation seems implausible. I wonder if they have it the wrong way round though. Maybe it is older people, who have already lived longer, who are more likely to go to ATMs? Either way, I hope the MPD team will add life expectancy to one of their columns in the next version of the report!

These are personal opinions and should not be misunderstood as representing the opinions of�
Consult Hyperion or any of its clients or suppliers

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

Tesco in the frontline war on… what?

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[Dave Birch] I travel a lot for work at the moment. Normally, when visiting a technologically-advanced nation (such as the Netherlands or the USA) I don’t bother with cash any more. I just use cards. In America I used to use a pre-paid US dollar card for incidentals, but now I have a Simple account so I just use my Simple sort-of-debit-card. I have a pre-paid euro card for use on the continent. These suffice. However, when I had recent occasion to visit the south of France I thought I’d better get some cash in advance since there, in the heartland of the NFC payment revolution, you can’t even use a card in a taxi, let alone a mobile phone.

For unusual reasons, we happened to pop into a Tesco superstore the day before I was off on my trip and on the way out I noticed the Tesco Currency Exchange. This jogged my memory so I said to the family “hold on, I’ll just nip and get some euros”. I presented my chip and PIN card to the cashier and asked for a hundred euros. The friendly lady clerk offered 120 euros for £105, a bargain was struck and I went to put my card in the terminal. At which point I was asked for ID. I couldn’t help but ask why, even though I knew perfectly well what the answer would be: “it’s the rules”. So I showed my driving licence. But she asked me to hand it over, so I took it out of my wallet and gave her both the chip and PIN card and the licence and then watched while she copied (by hand) my driving licence details on to her copy of the till receipt. What on Earth for?

If I’d gone to an ATM at Heathrow and drawn out a hundred euros, I wouldn’t have had to show my ID or fill out a form or whatever else. I’m genuinely baffled as to why the government should waste my time and Tesco’s money on the nonsense of ID “verification” (it wasn’t verified of course, since the clerk had no way of checking whether driving licence was mine – or even whether it was real at all) for a transaction this small. Does anyone have any theories about this? Is there something in the psychology of international money launderers that means that they are known to avoid ATMs and are therefore vulnerable to clever traps set for them at in-store exchanges? Is there a government policy against in-store currency exchanges?

At first I thought that international gangs of terrorist drug-dealing money-launderers might have targeted Tesco and that by sending out hundreds of smurfs to obtain €100 in each branch of Tesco in the United Kingdom, over a period of some months, they might amass a suitcase full of €500 notes to ship abroad in furtherance of their nefarious plans. But I think, on reflection, that it was a pointless and money-wasting irrelevance, because it turns out that the drug-dealing money-laundering terrorists will always find a cheaper and quicker mechanism for transferring funds across international borders.

One law enforcement official told The New York Times that Liberty Reserve (*), which allowed users to transfer large sums money without ever identifying themselves, was “really PayPal for criminals”.

[From Founders of ‘PayPal for criminals’ Liberty Reserve are charged with money laundering - Americas - World - The Independent]

So. It’s ridiculous to make me jump through hoops to get €100 at Tesco and it’s ridiculous that people can send arbitrarily large amounts of money anonymously. Hence there must be a balance somewhere. But what is the right balance? Since €500 is the largest denomination banknote printed by the European Central Bank (ECB) it is probably a good psychological breakpoint. If you want less than €500 in cash, whether in Tesco or at an ATM you should be able to use your ATM card to get it. If you want more than €500 in cash, then you should have to produce identity documents and have the details recorded. If you want more than €10,000 in cash… well, you can’t. Over €10,000 should be electronic-only.

By the way: if I were an international law enforcement officer, I might have been very tempted to take over Liberty Reserve rather than shut it down, because the ability to monitor criminal flows — irrespective of whether you know the “real” identity of the counterparties — might be rather valuable. Forcing the bad guys back into cash may not be the optimal law enforcement strategy. Instead of encouraging me to blow off Tesco and use the ATM in Nice instead, surely the forces of law and order should be looking at making it easier for me to get one of those prepaid Euro cards.

Finally, prepaid cards leave records. They allow transactions be traced. Most criminals want to be able to take their money and disappear off the radar, not leave tracks across several countries.

[From Scanning Prepaid Cards At The Border Won’t Stop Money Laundering - PaymentsJournal]

This is a critical point. As I’ve consistently argued across a spectrum of new cash-replacement technology options, and especially in the case of mobile payments, law enforcement agencies should be doing what they can, working in partnership with the central banks, to reduce the amount of cash in circulation and persuade criminals to switch away from cash. Erecting high KYC/AML barriers to low-value prepaid accounts, or to getting a miserable €100 from the in-store currency exchange, raises everyone’s cost, reinforces social exclusion, does not affect criminals in the slightest and has no law enforcement benefits. If anyone has some figures from a reputable source to demonstrate the contrary, I would be more than happy to link to them.

These are personal opinions and should not be misunderstood as representing the opinions of�
Consult Hyperion or any of its clients or suppliers

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

Even if we could police some kinds of spending, we shouldn’t

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[Dave Birch] A couple of the projects that we are involved in at the moment are at the intersection of financial and social inclusion, which is a topic that interests me greatly. One of the aspects of the technological changes afoot at the boundary (between financial inclusion and the beneficial social infusion that it facilitates that deserves more discussion) is that of control. Where should we set the “dial”? Remember this?

Birmingham council, which represents around 1 million people, said that from 1 April Monday it would give out crisis welfare payments in the form of prepaid cards that could be redeemed only in Asda supermarkets. The Labour authority said the cards – which Asda said were similar to their gift cards – would restrict spending to a list of predetermined goods, which would exclude tobacco, alcohol, phone-related expenditure and fuel.

[From Asda welfare cards to be given to Birmingham's poor | Society | The Guardian]

You see the dynamics around this. If I were Asda, or any other retailer, I would be happy to cut a deal like this. I don’t want to deal with cash, and I don’t want to pay merchant services charges to banks, so running my own payment card suits me just fine. And better still, cutting a deal with a state agency to drive welfare recipients in through my door with money to spend is a win-win. This subject of control did come up a couple of times at the Tomorrow’s Transactions Forum this year because we had an excellent presentation from Claudia Wood, the deputy director of think-tank DEMOS. Claudia was discussing her excellent report for DEMOS on the use of prepaid cards in public services.

A particularly important thread in the report is the once concerning this issue of monitoring and control of card spending. The authors note that there might be benefits to using prepaid cards to deliver financial services to vulnerable groups and that we should begin a debate on balancing the complexities and ethics of safeguarding spending balanced against “nanny state” interference.

[From Prepaid and social payments make a genuine win-win]

Round about the same time that Claudia’s report was published, the Conservative MP for Elmet and Rothwell (no, I don’t know where that is either) had proposed a “ten-minute rule” bill in Parliament under which UK welfare claimants would be issued with a card instead of receiving their benefits in cash.

Benefits claimants should be banned from spending welfare handouts on alcohol and cigarettes, a Conservative MP has said. Alec Shelbrooke wants to prohibit benefits being spent on luxury items by introducing electronic cash cards which could only be used for essential items such as food and clothing. The cards would be similar to a chip and pin debit card but with a blocking function for non-essential items, the MP for Elmet and Rothwell told the House of Commons.

[From Tory MP calls for law change to prohibit state welfare being spent on non-essentials | Mail Online]

As I said at the time, you can’t do this with open-loop debit cards and basic bank accounts (“four-party schemes”) because the bank doesn’t know what you are buying. In the case of the Asda example, above, however, the retailer’s own three-party payment card has access to data that the four-party schemes do not: specifically, the “Level 3″ POS data on what you’ve actually bought. So while Barclays could block my debit card by MCC and (potentially) by location based on Terminal IDs (TIDs), they can’t block by item. They can see that I’m shopping at Tesco not whether I’m buying own-brand value tea bags (which might be allowed under Mr. Shelbrooke’s stringent governance of benefit expenditure) or Duchy of Cornwall luxury leaf tea (which might be allowed under the wife of the Governor of the Bank of England’s stern governance of nature’s bounty). Even if it were possible, I’m not clear how the payment system would maintain and resolve these complex rules and interactions. Who would have precedence? The Health Czar might want people to buy gooseberries but the Benefits Czar might insist on blackberries and the Foreign Office might insist that Egyptian soft fruit is left to rot while Syrian soft fruit is pukka.

Untitled

I am allowed Duchy of Cornwall luxury leaf tea because I am not on welfare benefits.

I’m not advocating this blocking even when it is feasible. Just because we can do something, as in so many walks of like, it does not mean that we should do something. As reactionary a bastion of the establishment as I am, I still think it’s a bad idea to attempt to police the spending of benefit recipients in this way. It may well pander to our sense of moral rectitude but it would be ineffective at best.

All it means is that benefit recipients will have to trade (inefficiently and at a discount) to get the booze, fags and weed. Given the entrepreneurial nature of the criminal underclass, a likely outcome would be the invention of an intermediate currency for the black economy (e.g., detergent bottles).

[From Welfare dependence]

What this story is about, to me, is not the restriction of welfare recipient’s spending but yet another confirmation of some of my long-held views about the future of retail payments being more about a multiplicity of retailers apps that can provide more functionality in-store and the related drivers for multiple three-party payment schemes. Having half a dozen different retailer cards (that you have to manually load in the case of pre-pay) in your wallet is a pain, but having half a dozen different retailer apps using bank APIs to auto-load as required is not. And better still a retailer app that makes a noise when your welfare arrives and helps you to budget your spending and plan meals and spread the cost of school clothing and .. and.. and for double loyalty points, I’m in.

These are personal opinions and should not be misunderstood as representing the opinions of�
Consult Hyperion or any of its clients or suppliers

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

Space cadets

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[Dave Birch] There was some fun press coverage around PayPal's space payments event last week and since I rather like talking about the future of payments, which will inevitably include payments in space, I couldn't help but pay attention.

PayPal said very little of substance during this event. There were no details on timeframe, consumer expectations, how it will work, or any other pertinent details that would-be space travelers would surely want to know.

[From PayPal Galactic Press Event - Business Insider]

What oddly po-faced reporting from Business Insider! This was a PR event not the launch of an actual product. Of course no-one has any idea how an online payment system will work on Jupiter with an eight-minute packet round trip delay and PayPal are no different. I really don't think this was the point. It was a stunt, and an excellent one. But it's not the first payments-in-space stunt. I remember a good one by Travelex six years ago.

The Quasi Universal Intergalactic Denomination – or Quid for short – is the world's first currency that can be used in space. Quids — plastic disks with pictures of the planets — are supposedly safe for use in zero-gravity.

[From Digital Money: Not a lot of people know that, no. 94]

So… digital wallets or hard-to-counterfeit plastic coins? Who knows how space payments will work. I don't have the imagination to see how when I'm shopping at the Weiland-Yutani company store on LV-426 they will be able to clear and settle a transaction against my Barclays account, when it will take 37 years for the authorisation request to reach the host and another 37 years for the authorisation to reach the POS. Hhmmmm.

Perhaps the future will be more like medieval times, with merchant networks and bills of exchange at the core. Bills of exchange didn't eradicate bullion transport, but they did make trade more efficient. In Peter Spufford's magnificent "The Merchant in Medieval Europe" he talks about "the specie point" where it became cheaper to transport bullion — which was expensive, as you needed guards and logistics — rather than bills of exchange. So perhaps one imaginable possibility is that I will arrive on LV-426 with a bill of exchange instructing the Barclays agent on LV-426 to pay 1,000 London Crowns into the company store account for me to draw against, but when it comes time to pay the contractors for the atmosphere processor (which has a substantial dollar value) then I will open up my lead-lined box and take out some unobtainium.

I can see how the digital bill of exchange might work — I once heard public key cryptography described as the only product of human endeavour that could be successfully exported to intelligent aliens on Jupiter! — so once the Barclays agent on LV-426 has used Barclays' public key to verify the digital signature on my bill of exchange and then topped up my account (with the appropriate discounting for risk factors, such as Earth might having been destroyed), I can see how I might spend from it using PayPal!

Incidentally, I have written before about how many science fiction views of the future of money seem implausible to me, but then that is true of many non-fictional works as well. I think I'll stick to my basic prediction: no single currency, no single means of exchange, no single store of value. And no single payment system. Think local, act global, as they say.

Cohen's cogent analysis of direction forced me to reassess some of my own fairly superficial thoughts on the topic, with the result that I firmed up on one axis of the projection. I think his view of geography is wrong: perhaps in the future, all money will be local, it just that local will mean something different in the connected world.

[From Digital Money: A single currency? Illogical, Captain!]

On the other hand, if you don't believe me and you think that science fiction movies really do tell us about the future of payments, then you'll probably find the splendid Science Fiction Currency Converter very useful before the next transit of Uranus.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.