A guest post from a CHYP Friend for many years, Leo van Hove, Professor of Economics at the Solvay Business School of the Vrije Universiteit Brussel, looking at the issue of costs and consumer choice in retail payments.
‘Tis the season to take stock of the past year and look ahead to the next. As far as the payments sector is concerned, picking the Technology of the Year is a no-brainer. Or perhaps 2014 will prove to be Bitcoin’s year. Time will tell.
Whatever the outcome, the Bitcoin hype has had one beneficial effect: heightened interest in the hitherto unsexy topic of payments and, in particular, in the efficiency gains that innovation might bring.
For payments in the off-line world, surely with all the QR, RFID, NFC and Bluetooth experimenting going on, a bright and wonderfully efficient future awaits us. That remains to be seen. Under the hood, many of the new mobile payments initiatives look decidedly un-novel. Worse, in the current setting there is no guarantee that the payment instrument with the lowest social cost will prevail.
Take PayPal’s Check-in. In order to be able to use it, you need to download the app to your smartphone and upload a selfie. Once you have the app ready and fired up, you can check-in to a store that accepts PayPal by selecting it from a list and swiping a button from left to right. As soon as you enter the store, your name and picture then appear on whatever touchscreen the shop uses as a point-of-sale system. When you reach the cash register, you simply say you would like to pay with PayPal and the cashier clicks on your photo. The receipt is sent via e-mail. You also get a notification on your phone but during the payment there is no need to pull it out – or perform any other manual operation.
Fascinating stuff, you say? Indeed. Will I give it a try if and when it reaches my favourite shops? Absolutely. But because my PayPal account is linked to my credit card, as is the case with most PayPal users, my seemingly state-of-the-art payment will, behind the scenes, actually be a run-of-the-mill credit card payment – with all the costs that entails.
Indeed, PayPal basically piggybacks on the existing credit card back-ends and has simply added a new front-end: my phone and picture replace my card as the authentication device. The problem is that a longer payments chain, with an extra intermediary, translates into higher social costs – and higher merchant fees.
On the Internet, PayPal has clearly generated added value. It has made it possible for mom-and-pop businesses to accept electronic payments. But in the off-line world, do we, as a society, really want to displace, say, existing debit card payments with more expensive payments of the kind just described?
The problem is obviously not limited to PayPal. The bank-driven scan-to-pay or tap-to-pay solutions are, for example, not necessarily faster than ordinary cards. Especially not if customers end up typing in a PIN or signing a receipt after all. Hence, in stores that already accept cards increased customer throughput may well be illusory. For tap-to-pay to benefit society it would need to be successful in penetrating as yet untapped sectors, and provide a cost-effective alternative to cash there.
This is not to say that m-payment technology does not hold much promise. My point is simply that one should not fall victim to ‘innovation infatuation’ and think that just because a new initiative uses the latest in technology it is by definition more efficient in all circumstances.
Now, why would a merchant in her right mind accept mobile payments if they are so costly and if the additional benefits are limited? The hip factor is part of the explanation. Also, in a competitive marketplace merchants are afraid of losing custom and will therefore tend to accommodate their customers’ preferences.
And this is where the fundamental problem lies: consumers are insufficiently steered in their payment behaviour. This is because in the payments sector pricing is pretty anomalous. Whereas both merchant and customer derive utility from a payment, in most countries only the merchant faces direct, per-transaction fees. Yes, consumers often pay annual fees, and, yes, in the end consumers as a group always foot the bill.
However, the reality is that at the check-out consumers do not worry about whether a specific payment instrument is costly for the merchant or for society; that is, unless the merchant passes on part of the cost. But most of the time consumers are not confronted with the consequences of their choices and do not realise that collectively they will, somehow, somewhere, end up paying for an inefficient payment system. In short, what is missing on the consumer side are cost-based transaction fees, as signals of underlying costs and set in such a way that the instrument that is most costly for society is also most costly for consumers.
So, will m-payment technology prove to be the game changer many pundits think it will be? Quite possibly. But in order to make sure that the future payments landscape is not only technologically advanced but also lower-cost for society, it would be best to first change the rules of the game and give consumers financial incentives to think about their choice of payment instrument. Only then will we have a fair beauty contest