[Dave Birch] I had a fun time in London the other day. I took my son to the Forbidden Planet London Megastore and when I got to the cash register I was genuinely shocked to see a Barclays Business contactless terminal there. I couldn’t use it, of course, because my purchase was over ten quid, as I imagine most of their purchases are. Yet when we went to the Cafe Nero down the road, and our coffee and hot chocolate came to less than a fiver, they didn’t take cards at all, let alone contactless ones. So we couldn’t buy the pastries we wanted (I only had a five pound note in cash on me). Their ridiculous cash-only restriction meant that I didn’t get the goods that I wanted and they didn’t get the money that they wanted. Afterwards, I was still consumed with curiousity — a genetic flaw, I imagine — so we went back to Forbidden Planet and I bought a Pirates pack for my son just so I could use my OnePulse card: it worked great, and I estimate that it was about thirty times quicker than using my chip and PIN card.

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I hope this isn’t going to be Mondex all over again, where the shops that take cards take contactless but the shops (and vending machines and buses etc) that take cash carry on taking cash. I’m sure the lessons have been learned from the last decade, from the days when you could buy a coat in Bloomingdale’s using VisaCash but had to use cash in the parking meter outside. The rather odd distribution of points of use came down to banks driving a new product through their existing channels into the marketplace. Please let’s not let this happen again: I think I’ll pop into Cafe Nero again and ask the boss why they don’t take contactless cards. I strongly suspect that it will be because he’d be happy to take contactless cards but doesn’t want to take contact cards and at the moment (as I understand scheme rules) that’s not allowed.

At the very least, we should hope that the industry can get to a degree of penetration (on the acquiring side) to give consumers a real choice between cards and cash in different environment. I wonder how the statistics might evolve? There was a fascinating take on this in a Working Paper (no.212, September 2007) from the Swedish Central Bank. They were trying estimate the probability that different groups will pay with a card. They found that for “typical” consumers, once a transaction reached about 17 euros then consumers were 50 per cent likely to use a card rather than cash. For older consumers, the limit goes up to around 50 euros. But guess what: a 20 year-old male is more than 50 per cent likely to use a card no matter how small the purchase value. They also discovered that people who are University-educated are more likely to pay with cards whereas people with “little formal schooling” are more likely to pay with cash. Their detailed model (you can read it for yourself here) seemed to show that gender, income and household size are, by comparison, insignificant.

I cannot highlight one of their other conclusions strongly enough, so I will quote it in full:

Our study shows that even when not paying explicit fees for payments, consumers do incur substantial costs and that these costs are higher for cash than for card payments.

The lack of proper price information is one of the key reasons why the market for payment instruments is broken. In particular, variable costs are poorly reflected in transaction fees and cash gets a big subsidy (primarily from cards). But I guess we all knew that anyway. So am I right to use the word “broken”? Well, as the very careful study of the Swedish economy shows, the consumer’s choice of payment instrument is based on their private cost, not the total social cost (ie, people choose what’s best for them, not what’s best for society as a whole). The fix is simple: price cash correctly so that consumers can make informed choices about payment instruments. How should this be achieved? The authors tell us that as well:

Consumers pay too little for cash… merchants, on the other hand, pay too much for credit card payments… Swedish banks use their profit from card payments to cross-subsidise cash handling. This situation could be improved if ATM withdrawal fees were introduced and interchange fees were lowered.

Sensible policies for a better Sweden.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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