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How much friction is there is the US retail payments system? And what should we be doing about it?


In his keynote at the Early Warning Summit 2014, David Pogue said that conference slogan should have included “reducing the friction in payments”. That’s a great slogan. So where is the “friction” in the US payment system? As far as many people are concerned (apart from the retailers who have massive lawsuits against the card schemes, naturally) it’s all tickety-boo. Sucharita Mulpuru, a Forrester Research VP, is of this mind:

We don’t fundamentally have friction in payments in the U.S. People who want to use cash are using cash for a reason: They prefer to or they don’t want to be traced. As for credit cards, there is not something fundamentally inconvenient about them. They’re fast, they’re reliable, our networks are good

[From Quote About Why E-Wallets Have All Been A Total Disaster – Business Insider]

I think this represents rather a narrow perspective. Yes, OK, there are drug dealers and corrupt politicians and tax evaders using cash, but as for the rest of us there’s nothing fundamentally inconvenient about cards? That depends on how you measure the costs and benefits, doesn’t it?

Because our payment system is broken and does not have real security in place because the credit card companies that control the system can push the costs of fraud onto retailers.

[From Broken Payment System Guarantees Another Breach Like Target – Bank Think Article – American Banker]

This may be a harsh phrasing, but it makes a valid point. Just as an engine loses energy because of friction, so the economy loses energy because of payments friction. Effort that should be spent on developing new products instead goes on papering over the cracks, effort that should be spent on helping customers gets diverted into annoying them and effort that should be going into creating fantastic new services instead goes into PCI-DSS certifications and sending out breach letters.

And so one way to think about credit card fraud, is credit card fraud is a two-to-three percent drag on the entire economy.

[From Freakonomics » Why Everybody Who Doesn’t Hate Bitcoin Loves It: Full Transcript]

I enjoy credit card fraud as much as the next man, but this is something of an exaggeration. I’m pretty sure the cost of the US payment system as a whole isn’t two or three percent of the entire economy. Credit card fraud as measured by the issuers is around seven basis points. That’s still a few billion dollars, but it’s a tiny fraction of the volume of charges running through the system.

That’s not the end of the story. To these fraud losses have to be added the cost of trying to prevent the losses due to the hello-1949 infrastructure. When you add in the costs of CNP fraud born by merchants, fraud written off as bad debt, the cost of PCI-DSS and everything else, it’s still less than one percent. But it’s still way too much and the root cause is, as Marc Andreessen points out in his piece, the system was never designed for use in the modern economy.

The US leads the world in card fraud, at least in part because it has lagged in the adoption of the EMV (Europay, MasterCard and Visa) Chip & PIN standard, and continues to use signatures for verification. One result, said Carolyn Balfany, group head for US product delivery at MasterCard Worldwide… is that the US leads in card fraud with 47% of local fraudulent transactions although it does only 23% of the transactions globally.

[From Lack of EMV means US leads the world in card fraud » Banking Technology]

I do remember, as an aside, that the question that was nagging me throughout the Money 2020 session last year on EMV migration in the USA was about the roadmap. If the payments industry, regulators and other stakeholders had some sort of roadmap for the evolution of retail payments (they don’t) so that EMV was a step rather than the goal, then what is

  • a) the goal, and
  • b) the plan B to take the industry forwards to that goal in case the US decides to ignore EMV and move on to the next big thing?

We’ve got a few ideas in both cases. The status quo is unsustainable.


  1. I agree wholly with the diagnosis–the system is severely strained if not broken– but it is not to date broken enough for participants of any size to what to change it.

    You point out yourself how the fraud dollars are bit, they are very small relative to payments volume. If issuing banks see anything as broken, it is their acquisition tools. Consumers don’t see anything a broken. And merchants of any size see the cost of payment as what is broken–hence MCX– rather then the larger system.

    Which is why the only places to see significant changes to payment systems are those where the dominant preceding system was cash [correct me if you you’ve got example to the contrary]

    Those of use who see it as fundamentally broken are on the fringe– consultants, technologist, analysts– not those really in a position to change it.

    In the EU there are governmental bodies positioned to push changes; in the US we are almost pathologically opposed to anything related to government telling us what to do (in these political times, at least), so even the EU-type solution, f(which hasn’t done anything revolutionary yet in payments) would not work in the home of the brave.

    What will drive change? I have some ideas as well, but that’s for another conversation.

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