Cashless payments have been around for quite a while in the form of checks and credit cards. But even while physical cards are being re-issued with chips, there is huge innovation going on to bypass checks and cards, and go all-electronic. There is Apple Pay, remote sensing, QR codes and more. Lots of people are excited about a new wave of consumer convenience, most of it based on credit card technology. It's all good!
Is it really ALL good? You never seem to hear about the downside of all this new technology. But there's actually lots of downside. Payments are a huge field. So I'm going to just point out a couple issues with credit cards, the basis of most cashless payments by consumers.
The Volumes
Let's start by getting a sense of how much money we're talking about. Look at this:
That's more than $5 TRILLION dollars in 2016 just in the US. How much is that? Well, for starters, it's more than the entire US Federal budget!! In fact, it's over a quarter of the US GDP.
Merchant Discount rates
This is an incredibly important subject -- of which most consumers are blissfully unaware. The concept is simple. Suppose you buy something from a merchant for $100. When you pay cash, the merchant ends up with ... $100! what a shocking concept! Well, it is shocking when you realize that when you pay with a credit card, the merchant will end up with less than $98, and often less than $97.
That may not sound like a big deal. But what if you're running on thin margins, like many merchants, and are under intense competitive pressure to cut prices, have sale prices, etc. You can be doing well to end up with an overall margin of 10% on your business. This means that collecting $97 instead of the full $100 amounts to a margin reduction of ... 30 percent!
Merchants grit their teeth and take it. They have no choice. The giants don't care. But next time you go to a small shop or farmer's market and see a sign that says "cash only, please," you'll understand.
This is a complicated subject, since the discount rate includes more than a dozen charges for various things, the largest of which is called "interchange." But it easy to boil it down. Consumers put about $5 trillion on their cards, which they have to pay -- undiscounted. The discount is about 2-3%, which is between $100 and $150 BILLION dollars. A year.
Some combination of issuing banks, acquiring banks and networks (like VISA) are splitting that money.
Credit card debt
Leading thinkers in payments love to talk about how consumer-centric they are, and how they're investing heavily to make using cards even more convenient for consumers. Aren't they just wonderful people?
The magic of credit cards is that when you want to buy something, and you use a card to buy it, you can get what you want even if you can't afford it. Great concept, huh?
Consumers in the US alone are burdened with about $1 TRILLION dollars of credit card debt. And it's not rich people who have the debt. It is overwhelmingly people with little to no net worth.
What's worse is what they pay. Today's average of interest rates is around 19%. It hasn't been less than 15% in quite a while. So that means that consumers have to pay well over $150 BILLION dollars a year just to keep the debt current, not counting paying it off. Almost all that money goes to the banks that issue the cards, though various lawyers and collection agencies get their cut.
What cards are worth
None of the institutions involved with cards care a whit about whether the card is physical or electronic. What they care about is protecting and preserving their more than $250 BILLION dollars a year in revenue. How much is that? Here is an excerpt of a list of the world's governments' revenue:
As you can see, the revenue up for grabs with today's credit cards in the US is about the same as the revenues of the government of Sweden, 15th out of more than 190 countries. Card revenues are worth, well, quite a bit...
What this means
What all this means is simple: the companies involved are living high on this revenue, and will go to great lengths to protect it. They will spend big on fancy consumer features -- so long as those features are based on the card infrastructure.
Why this matters is that there are incredibly inexpensive and fast methods of transferring money that are not based on the card infrastructure. Some of these are in widespread use outside the US. In the US, the least expensive such infrastructure in wide use is ACH, which is a government-run electronic form of checks.
There is no technical barrier to upgrading this network to be near-instantaneous. Technically, it could have been near-instant 20 years ago! But no one involved felt like doing it somehow, and even today, it's getting faster at an incredibly slow pace.
There are a couple modern peer-to-peer payment systems that are based on this technology. While they're growing, they are tiny compared to card volumes, and the card insiders are working madly to control and contain this threat to their massive revenues.
Conclusion
I'm strongly in favor of consumer convenience. My goal here is simply to point out that the convenience comes at an astounding cost that is hidden from consumers who don't carry a balance on their cards, and is a constant temptation and on-going burden to those who can't afford debt, particularly the expensive kind you get with revolving credit cards.
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