Published by Australian Financial Review on Tuesday 16 January
Australia can eliminate the use of cash in its economy, Richard Holden has argued in these pages this week. He mainly focused on the benefits in terms of reducing illegal activities, in reducing tax avoidance etc. He even discussed how school tuckshops might operate. Unfortunately he did not deal with the bigger issues.
There is at present little except complex regulation to stop payments companies ripping off customers. This will need to be fixed for us to reach Holden’s promised land.
The biggest concern is how to ensure the new system operates with reasonable efficiency. If we all go around paying each other with Visa and Mastercards, or eftpos cards, can we be confident that efficiency benefits will actually flow through to the consumers? Yes, there may be new entrants who challenge them, but given the incumbents’ massive networks and universal acceptance, this is unlikely to act as a significant form of market discipline. Fintechs are hopeful but likely to remain niche players at best.
The New Payments Platform (NPP) doesn’t solve this problem. It is owned by the banks and will become the new eftpos platform. The NPP may allow real-time bank-to-bank transfers, but it is an upgrade of an existing competitor, not a new competitive force.
Ironically, cash actually acts a discipline on the payments providers. Asked to pay surcharges on the use of cards, customers have the option to pay with cash and avoid the fee. If the RBA eliminates cash, then the weak competitive pressure will open up purchasers to further exploitation. Getting rid of cash actually reduces competition.
Regulators have thought about the lack of competition and imposed a cumbersome range of rules to try to limit market power. The most obvious of these are the limits on how much merchants can surcharge.
This involves the Reserve Bank guessing about a reasonable price to charge to deliver the particular payment service. In the background, however, there are a series of other rules and regulations designed to stop price gouging in payments. To make a payment, money has to move between the customer’s bank and the merchant’s bank. Banks charge an interchange fee for this. That is also subject to RBA regulation. Some groups tried to bypass this regulation by acting as intermediaries between the two banks, and new regulations were introduced to limit that as well.
There are obviously other sets of fees as well. We pay for our credit cards and debit cards, either directly or through bank charges. Merchants also have to pay for terminals and potentially pay other fees to their banks. So while cash can be expensive to collect and keep safe, other forms of payment are not necessarily cheaper.
Customers need choice
The second major problem with a cashless economy is that paying a bill with a credit card may well be more expensive than paying with cash. While the card may be more convenient, its higher costs could make our economy less efficient. Different countries have tried to evaluate the cost of different forms of payment. Most find that there are ranges in which cash is the cheapest from a social point of view.
Why would people prefer to use a more expensive form of payment? The fundamental reason is that you, as a purchaser, do not know what the cost of making the payment is.
Even with cash you have the cost of obtaining it from (say) an ATM, the foregone interest, the protection from theft, the time to transact, errors made, the cost of cash storage and collection for the merchant and so on. With a credit or debit card you have even less idea, with banks charging each other fees, and merchants paying as well, on top of your annual card fee and any interest. Few if any readers will know whether it is cheaper to pay for a cup of coffee by tapping or by using cash.
Fixing this solves many of the basic problems with payments. If you knew it cost a dollar if you pay by card, but only 50¢ if you pay with cash, the choice would be simpler. It might be only 20¢ if you paid using some new fintech product. Making the cost of payment transparent to the customer would let customers put downward pressure on prices.
Competition at the customer end has two big advantages. It lets customers (and not regulators) impose cost discipline on payments entities. New entrants can then compete on price against the big established networks. It also provides a direct benefit to customers. Being fully informed, customers will not make expensive payments choices by accident. If it is worth the extra 50¢ to them to tap a card rather than use cash, they can do that, but as a deliberate choice.
The regulation needed to achieve this is also much simpler than the current complex, opaque and somewhat arbitrary system imposed by the RBA.