The hype around Bitcoin, the rise of contactless debit cards and the excitement about mobile banking, with the launch of mobile payments and the rumoured entry of Apple among others, might suggest that how we pay for things is changing very fast.
We looked at these trends in our report Branching Out earlier this year. But today’s figures from the British Retail Consortium (BRC) suggest that industry chatter is a long way ahead of what’s currently going on.
Cheques have almost vanished, that much is clear. The BRC estimates they are now used in 0.001% of retail transactions. But cash persists. It is still used to settle over half of all transactions. The use of debit cards has increased softly, to just over 30% of transactions. And the use of credit cards has decreased. That switch from credit to debit cards is likely to be at least in part the impact of contactless payment. However, other innovations seem to be having very little impact. As the BRC notes, “the only significant development in respect of new payment methods being introduced by survey respondents has been confined to the deployment of non card payment methods (dominated by the expansion of PayPal) for internet sales.” This suggests innovation in payments is struggling to take hold in the UK. Pay-M, for example, the new system for making payments linked to a mobile phone number is not yet available to retailers.
By contrast in the US, Starbucks for example took in $1.3bn in the last quarter of 2013 in pre-payments, much of which came through apps such as the one contained in Apple’s Passbook feature. The advantages of this are considerable. Some estimate that Starbucks is currently sitting on in excess of $1bn in coffee that has been paid for but not yet drunk. This transformation in cash flow for a business should allow it to fund lots of additional benefits for consumers. It also reduces costs. The BRC study suggests that retailers have to spend over £830m in collection costs. Technology should allow massive reductions in those costs. Yet curiously, cash is the cheapest way to take payments for the moment, costing 1.29p per transaction compared to over 40p for a credit or charge card. We as consumers have to carry around heavy and insecure cash and retailers have to run systems to take it in, provide us with change and then transport it to a bank for deposit; it shouldn’t be the cheapest form of payment, but it is and by a massive margin.
Changing this will be the key to transforming how we pay for things. Unless there is a strong incentive for consumers and ideally retailers too to use something other than cash, then the role of cash in payments will persist, with all the disadvantages it carries. It is insecure (not only can it be stolen, it can be lost). It enables tax evasion and illegality. And it is costly, for consumers who sometimes have to pay a fee to remove it from an ATM (especially those in areas poorly served by bank branches) and for retailers, which ultimately means the price of the things we buy is higher than it could be otherwise.
The BRC suggests that a cap on the credit card fees charged by banks to retailers is what is needed. But that will just prevent future increases in costs. The point is to drive them down. A more open regulatory approach that hastens the arrival of innovators in payments to the market will make a bigger difference. As our report argued, for example, it’s not obvious why someone running a technology company that provides a way of making payments should have to be a ‘qualified person’ under the FCA’s rules. That company is providing a mode of payment, it isn’t providing credit; and yet the effect of the rule may be to keep payments locked up for the incumbents.