Retail weak

[Dave Birch] The drive by UK banks to “replace cash usage with cards” came under heavy attack from the British Retail Consortium (BRC). In a strongly worded statement toward the end of last year, the trade association accused card companies of exaggerating the extent to which cards have replaced cash. A BRC survey of 10,000 stores, which together account for a third of U.K. retail sales, showed that cash is still the most popular payment method, accounting for 54 percent of all UK transactions by volume and 32 per cent by value. Their spokesperson said

The card companies, in their publicity campaigns for their products, are giving the impression that cash is on the way out… For example, they are trying to present contactless cards as the ‘new cash,’ because contactless transactions below £10 do not require a PIN.

Well, whether card companies are giving the impression that cash is on the way out or not, European cash payments are declining. They now account for only a third of total European household expenditure, according Datamonitor. The value of cash payments in Europe was €1,787 billion (US$2,651 billion) in 2006, accounting for 34 percent of total household expenditure, down from 38 percent in 2002. And, as APACS pointed out at the time, the vast majority of cash transactions are under £5, whilst the average credit card transaction at a retailer is over £50 for credit. Anyway, the BRC’s point is that cash costs retailers less than cards. Their figures are that on average, a £20 cash transaction costs a retailer less than four UK pence, while a £20 credit card transaction costs at least 17 pence. I’m sure these are accurate: the costs of cash fall on consumers (and society) rather than retailers, so naturally retailers are in favour of it. There’s nothing wrong with that, but it seemed a little a over the top for the BRC director general Kevin Hawkins to say that

Banks have long abused their position by imposing much higher charges on retailers for processing card payments than cash… Clearly, the banks have spotted that replacing cash with cards would mean a further boost to their profits.

The BRC says it is asking the Office of Fair Trading (OFT) “to force the banks to reduce their (card processing) charges.” Surely the way to make a market work properly isn’t to ask regulators to fix prices but to increase competition. If retailers feel that cards cost too much, then they should develop alternatives, shouldn’t they? All they have to do is call…

How much would it cost to create an infrastructure capable of replacing cash? Both e-payment mechanisms need infrastructure, and that costs money. But let’s forget the mechanism for a moment: let’s just suppose that every mobile comes with e-payments built in somehow and focus on the rest of the infrastructure. Who should pay? The dynamics behind this specific debate are not limited to the U.K. in the example above. Just like consumers in countries in Western Europe and East Asia, Americans are also abandoning paper-based forms of payment (i.e., cash and checks) for various kinds of electronic and plastic payment models. The result is overloaded networks and processing systems. According to Chase Paymentech Pulse Index, 1.9 million online shoppers made purchases worth $104.8 million at 10 major online retailers on “Cyber Monday” 2007. Cyber Monday is the first Monday. Those numbers are up 32.5% and 40.6%, respectively, over the same day last year. Network traffic is growing the same way. Visa USA, the world’s largest credit card network, is seeing 15% per annum transaction growth. This is not only in credit cards but debit cards and prepaid instruments. Debit and prepaid cards represented 56% of the volume of non-cash payments in 2006, and are growing at 19% a year. It is reasonable to assume that as contactless begins to eat into cash, the volume of low-value transactions will begin to climb as well. Visa, which has seen its traffic volume rise to nearly 7,000 messages per second (a “message” can include 10 or more individual transactions), expect that volume to reach 30,000 or 40,000 in coming years, which I think is both truly astounding figure and also a testament to the technology.

It makes you wonder what kind of volumes the systems would have to deal with in order to make serious inroads into cash. At first, it would seem like a lot, because the volumes would go up tenfold at least (except in Iceland, where more than 90% of retail payments are already electronic) but when you factor in Moore’s Law and the typical replacement cycles for retailer and back-office systems, it doesn’t seem such a mountain to climb. In fact, I’d go further. The time when e-payment infrastructure can handle the replacement of cash is not even a generation away.

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