[Dave Birch] More than one person has pointed me towards Harry Leinonen’s monumental study on Payment habits and trends in the changing e-landscape 2010+, which is a required download for anyone interested in the future of European payments. Harry’s long experience and wide range of expertise makes his input very valuable, so I took the time — I’ve been flying a lot recently — to look through the whole study and I found several useful new perspectives on some of the key issues. In fact, I’ve already pulled out a few key takeaways and included them in a couple of presentations that I’m working on.

I was particularly interested in the chapter on costs and structures, in which Harry notes the consequences of current pricing structures, namely that:

– all payment methods seem equally efficient to the users, as there are no visible price differences and users can therefore not select the more efficient methods;

– users have no incentives to economise on seemingly free services;

– users have no economic incentive to change their payment behaviour;

– it is difficult to introduce new payment instruments to the market when there will not be any direct chargeable returns;

– it is difficult for new competitors to enter the market with new services, as there is little opportunity to compete with seemingly free services;

– customers begin to view free-of-charge services as customer benefits and strongly oppose any pricing attempts, leading to a stalemate situation where no bank can risk making the first move to reduce cross-subsidisation and increase transparent charges;

– service providers start to increase cross-subsidises by introducing bonus points, free bundled services or other positive incentives for customers in order to encourage the use of favoured payment methods, which further hides the true cost relationships.

The “stalemate” is a real problem. Just pick one subset to discuss, ATMs. Clearly, if any bank decides to charge a lot more for cash dispensing, customers will desert in droves to other banks. Therefore, it must be an industry move to make any sense. Suppose all U.S. banks decided, for example, to charge the full cost of ATM services. As I think I’ve mentioned before, the economics of this business are changing, so it’s reasonable to begin thinking about this kind of move.

last year the number of ATMs in the United States fell 9 percent, the first big drop since the devices were introduced in the 1970s. The percentage of cash-payment transactions in the United States also is falling.

[From Withdrawing from the ATM habit – The Boston Globe]

We’ve talked about the fall in cash transactions before, so let’s just focus on the ATM economics. Charging is a much better idea than getting rid of ATMs, simply because there are other non-cash things that ATMs could do:

ATM manufacturer NCR Corporation said its next generation machine would enable people to top-up travel cards and contactless payment cards, as well as pay their utility bills and deposit cash and cheques.

[From The Press Association: New ATM allows more bill payments]

If I didn’t have my Barclays excellent OnePulse card with Oyster auto-load from my Barclaycard account, then I might be quite tempted to top up my card at an ATM. I wouldn’t go so far as to say this will save ATMs (since, likely any normal person, I’d much rather top up my Oyster card using my mobile phone), but let’s say that it makes them worth keeping. If instead the banks start removing ATMs, then instead of lauding the introduction of a functioning market in the payment space, the government would launch a competition enquiry, consumer groups would be outraged and eventually the banks would be forced to back down and continue subsidies. So getting rid of the ATMs (which hits poorer members of the community disproportionately) is an outcome that benefits nobody. Charging, by contrast, keeps the ATMs but begins to shift consumer habits in the right direction.

Is it fair to charge poor consumers for getting money out of an ATM? Well that’s not an issue that we can address here: It seems to me, though, that if the government decides that the activity should be subsidised then they should subsidise it explicitly.

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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