Felix Salmon

This is a chart of the value of bitcoin yesterday, Wednesday. It’s hardly a secret that bitcoins are a highly volatile asset class, so relatively few eyebrows were raised when the price soared from an opening level of $230 all the way to a high of $266. An intraday swing of more than 15% is pretty much par for the bitcoin course, these days. But then came the crash: within a few hours, bitcoins the world over had lost well over half their value, and were trading as low as $107 apiece. That’s not normal — and it just goes to underline how bad bitcoin is at doing everything it’s meant to do.

Bitcoin is clearly not an effective store of wealth — just look at how quickly that wealth can be evaporated. Neither is it a useful payments mechanism, given how fast its value can fluctuate. Currently, it can take an hour for a bitcoin transaction to clear, which means that the value of the transaction when it clears can be radically different from its value at inception. Bitcoin only works for payments if you can be reasonably sure that its value will remain reasonably steady for at least the next hour or so.

At the end of my big piece on bitcoin, I conclude that we need “a universal payments system with no friction or interchange costs”, which can learn from bitcoin’s mistakes. And this morning, the company responsible for one possible such system — OpenCoin, which is responsible for developing Ripple — announced that it has closed its angel funding round, with support from the likes of Andreessen Horowitz, Lightspeed, and Founders Fund.

I’ve been playing around a bit with Ripple, and I think it’s extremely promising. It’s very early days yet, but Ripple already has clear advantages over bitcoin, and if various merchants and developers start to converge on the Ripple ecosystem — which, like bitcoin, is all open-source — then I think it could genuinely become the first real way for anybody in the world to pay anybody else in the world, immediately and about as frictionlessly as possible.

Ripple was founded by geeks, including Prosper founder Chris Larsen and Mt Gox’s Jed McCaleb. As a result, right now it has a bit too much functionality with too little ease of use. It supports an effectively infinite number of different currencies, for instance, including bitcoin; and although it’s easier to use than bitcoin, it’s still not particularly user-friendly. But that will come, with time — and in fact I would be happier if the people developing the easy-to-use front ends for Ripple were not OpenCoin. OpenCoin is a for-profit company, which will make good money if Ripple takes off; I’ll come to that bit in a minute. So it’s very important that a lot of the rest of the Ripple ecosystem not be built by OpenCoin: so long as OpenCoin is the only company to really buy into Ripple, the whole scheme will go nowhere.

Ripple has a lot of resources on its website which explain how it works in various levels of detail; I won’t attempt to duplicate that effort. But the end result feels a bit like bitcoin in many ways. Users are anonymous (or, technically, pseudonymous), for instance: if you want to send me money via Ripple, right now you have to pay racoLWuh2GtC72i1gV7ib14Jqgx3SLmwKc rather than just Felix, or my email address, or my Twitter handle. It’s all open-source, too: OpenCoin has no privileged access to the way in which people pay each other. The fees are de minimis, just enough to prevent DDoS attacks and the like. There’s even a built-in crypto-currency, the Ripple, with a fixed money supply. But the great thing about the Ripple system is that individuals don’t have to pay each other in Ripples. Instead, they can pay each other in pretty much any currency in the world: Ripples, yes, or dollars, or yen, or euros, or even bitcoins.

Here, for instance, is a screenshot of my Ripple wallet: it shows that I own, 3,052 Ripples, 13 dollars, and 0.0284 bitcoins. If I want to send a payment in any one of those three currencies, I can do so pretty much cost-free; if I want to send a payment in some other currency, then the system will select for me the best exchange rate, based on various companies which are offering currency-conversion services on the Ripple platform.

Any time you deal in currencies other than Ripples — which, in practice, is going to be all of the time — you have to go through “gateways” to the Ripple system. Eventually, those gateways could be PayPal, or Citibank, or Western Union, but that might take a while; for the time being, they’re smaller institutions, and you probably don’t want to be moving large amounts of money through them.

Everybody using a Ripple account will have some Ripples in their account, just to get them on the system, and there will always be people making a market, converting Ripples to real currency and back again. The good news, however, is that Ripples are not (fingers crossed) going to become speculative investment vehicles, in the way that bitcoins are. That’s because all the Ripples in existence — 100 billion of them — have already been created, and, to a first approximation, they’re all owned by OpenCoin, which is essentially the central bank of the Ripple economy. OpenCoin is going to be giving away billions of Ripples for free, to anybody opening an account, just to get the system seeded and get people transacting with each other. There’s little reason to hoard a few thousand Ripples if there are 100 billion of them just waiting to flood the market at any time.

It’s in OpenCoin’s interest, then, to carefully calibrate the rate at which it’s introducing Ripples into the active money supply, and to keep the value of a Ripple relatively stable. Right now, there are about 750 Ripples to the dollar, which means that theoretically OpenCoin’s 100 billion Ripples are worth something over $100 million. OpenCoin is going to want to see that number rise, slowly, as Ripple becomes more popular — but it doesn’t want to encourage hoarding: quite the opposite. It wants as many transactions to happen over its network as possible, so that it can really become, in Larsen’s words, “http for money”.

Given the Andreessen Horowitz connection, and a lot of shared interests between the two companies, the first place I’ll be looking for third-party ratification of the Ripple idea is the hot payments startup Stripe. I’ve had long conversations with Stripe CEO Patrick Collison about bitcoin and international payments and frictionlessness, and in theory there’s no reason why he shouldn’t build a pay-with-Ripple option into Stripe alongside its more conventional credit-card and debit-card payments.

As with all such things, there’s a first-mover problem here: there’s no point in building Ripple-based infrastructure if no one is using Ripple, and no one’s going to use Ripple if there isn’t any infrastructure. OpenCoin’s solution to the problem, which I like a lot, is to simply give away billions of Ripples for free, all of which are worth real money, thereby giving people an incentive to use it. I hope it works, and I hope that the number of gateways into the system will soon expand from the current list of relatively obscure sites like Bitstamp. Ripple hasn’t succeeded yet. But at least — unlike bitcoin — it has a genuine hope of doing so.

Here’s a reminder, from Stephanie Clifford, of just how two-tier the US economy has become:

Walmart says the majority of in-store purchases are made with cash or debit cards, and that about 15 percent are made with credit cards.

I wrote on Monday about the downside of painless payments, which is that they make it too easy to spend money. And customers at Walmart, it seems, are acutely aware of that particular syndrome.

Megan McArdle moved to a no-debts, no-credit-cards personal-finance system in 2009, where you set up a detailed budget and put cash in different envelopes. “It sounds unbearably tedious,” she wrote. “But it’s actually incredibly freeing. I have never before felt like I had total control over my money”.

This is the downside of any payments revolution: the easier and cheaper it is to spend money, the less control we have over our own spending. Which in turn means that ultra-convenient payments, probably using your phone in some way or another, are realistically going to be a luxury for the middle classes and a cause of stress and danger for families living paycheck-to-paycheck.

Such families, it turns out, are very good — by necessity — at budgeting. Being forced to pay for everything with cash, or with its plastic equivalent, the prepaid debit card, is not an inconvenience so much as a helpful discipline. There are debt instruments out there, for emergencies — but credit cards aren’t used as a payments technology, because they make it far too easy to get into expensive debt without even realizing you’re doing so.

Clifford’s story, about the increasing number of people paying for things online and then picking them up in person, talks a lot about convenience: a Sears spokesman, for instance, is quoted talking about customers’ “need for immediacy”, while a chap from the Container Store conjures up a mom running errands with kids in the car, who just wants to pick stuff up and move on.

But it seems to me that the convenience here runs just as much the other way. Yes, there are people who are shopping online, who want whatever they just bought, and who want it now. These are people who would be shopping online anyway, and who just don’t want to wait to get their goods.

But there are many more people, I think — in number if not in purchasing power — who limit themselves to cash or its functional equivalents, and who welcome the idea of being able to browse and shop online. Shopping at Walmart is never exactly fun, and if you can just punch in an order online — especially if you can simply re-enter your family’s regular weekly shopping list — that saves time in the store and also makes it less likely that you’ll be tempted by some impulse purchase. This kind of customer isn’t using a different fulfillment channel for what would otherwise be a regular online order; instead, they’re basically just using a more convenient way of picking out the stuff they want at a store they’d visit anyway.

At Walmart, clicking the “pay with cash” option doesn’t literally mean you’re going to pay with cash:

In the first weeks of the cash option, Walmart noticed that a different set of customers also found the service appealing. About 40 percent of the customers who paid with cash when ordering online ended up using noncash options, like a credit card or check, when they arrived at the store. They simply had not wanted to provide that financial information online. “There’s still a large segment of people out there afraid of identity theft or just plain putting their credit card online,” Mr. Anderson said.

My gut feeling here is that although fear of identity theft might be part of what’s going on, another part is simply good financial self-discipline. If you want to keep track of where your money is, and if you want to minimize temptation, a “never buy anything online” rule is simple and effective. If you can enter a card number online to pick goods up at a store, then you can enter the same card number online to buy things from just about any website in the world. And many people simply can’t afford to open themselves up to those kind of opportunities.

Brian Chen has the news today that Uber is rolling out a cheaper version of its service:

Uber’s convenience comes with a cost. People are paying not just for the service, but also the gas used by the big sedans. That’s where hybrid vehicles will help bring down the price: drivers will spend less time and money fueling up…

In San Francisco, for example, the hybrid cars will cost $5 for the base fee, and then $3.25 a mile after that. By contrast, the town cars cost $8 for the base fee and then $4.95 a mile.

A quick back-of-the-envelope calculation shows that this has very little to do with the amount of money that drivers spend fueling up. Compare a Prius (51 miles per gallon) to an Escalade (10 miles per gallon): if gas is $3.78 per gallon, that puts the cost of gas per mile at 7.4 cents for the Prius and 37.8 cents for the Escalade — a difference of 30 cents per mile. Whereas Uber’s price for the Escalade is a premium of $1.70 per mile.

What’s more, since the drivers of these cars can’t pick up hails on the street, they have a lot of downtime waiting for the next gig. As a result, it doesn’t really cost the Escalade driver extra money if she ends up having to refuel once a day rather than once a week. Obviously, the fuel costs are higher — but the opportunity cost of her time is negligible.

Here’s Chen:

The company convinced its car-service partners to buy a total of 50 hybrids just for customers coming through Uber — a sign that drivers are making money with the start-up.

But of course it’s more complicated than that. If drivers were happy with the money they were making with Uber, then they’d stick happily with what they’ve got. In order to be persuaded to switch over, they have to believe that they’ll make more money in a hybrid than they would in a sedan. And that’s despite the fact that “in general”, according to Uber’s Scott Munro, “hybrids will cost 30 to 40 percent less than Uber’s black town cars”.

If that’s the case, then if you compare a sedan driver and a hybrid driver, the hybrid driver will need to be making three trips for every two the sedan driver makes, just to end up with the same amount of money. In order for the hybrid to be more attractive than the sedan, and taking into account the fact that at the margin you’d rather make fewer trips than more trips, a typical driver would realistically be hoping to double the number of fares she was getting before she was happy switching to the cheaper car.

But I suspect that the real relationship here is not between Uber and its drivers, so much as it is between Uber and car-service companies. Any given driver might well prefer to continue driving a sedan, rather than being moved over to a hybrid. But the car-service companies make money on every fare, and so their best interest is served just by increasing the total number of fares, rather than the average income received per driver per day.

As a result, I suspect that this move is going to decrease Uber drivers’ take-home income, on average, rather than increase it. As you might expect, when prices drop. But it will increase income for both the car-service companies and for Uber itself — and it will increase the total number of Uber drivers.

It’s easy to sign up with Uber if you’re a company; much harder if you’re a single driver. The Uber model is that Uber contracts with the owners of capital, who then employ the labor needed to provide the service. And once again, the rich will end up making more, the not-rich will end up making less, and the rich will present the whole thing as a victory for all concerned.

But there’s something else going on here, too, which is the way that companies love to push the idea that we’re paying for extra costs, even when we’re not. Uber sedans are more expensive than Uber hybrids because Uber reckons that’s the way it can best maximize its revenues and profits — not because the sedans are significantly more expensive to drive. Another example of this? Gas stations which offer different prices for cash and credit.

I like this idea, in theory, because gas prices are the most salient prices in America: we’re much more conscious of how much gas costs than we are of how much anything else costs. And if the price for gas on credit is significantly more than the price for cash, then that will help drive home just how big those credit interchange fees are.

Except, gas stations have no particular reason to charge just the interchange fee as a premium. Is the difference 10 cents a gallon? That’s about 3%, which is at the high end of credit interchange fees. After that, it’s all just pure profit for the gas station — and sometimes the difference can be as much as 2 dollars a gallon.

That isn’t a condign surcharge; it’s price gouging. And even a relatively common 20-cent surcharge is basically a convenience or ignorance fee, a way of extracting extra money from people who don’t have the cash or who don’t realize how much extra they’re paying. The rate of paying-with-plastic ranges between 60% and 100%, which means that realistically what we’re talking about here is essentially a bait-and-switch: attract customers with a low headline price, and then charge them a higher one.

Part of modern life is the way in which we naturally gravitate towards easy and automatic ways of paying. If you give Uber your card number once, you never really need to pay at all; you just find the charge on your credit-card statement. It’s certainly convenient — but it also allows Uber to charge quite enormous sums for what they provide. And similarly, at the gas pump, we just want to swipe our cards and get out of there, rather than faffing about with cash. And so there’s an incentive for companies like Uber and gas stations to inexorably increase the implied convenience fee we get charged for using easy payments methods — even if those payments work out cheaper for them. (After all, it would cost Uber a fortune if we paid our drivers in cash and then Uber had to try to reclaim its share from those drivers.)

My radical new universal payments system would help a little bit here, since it would make it impossible for vendors to claim that the more convenient payments method was somehow more expensive for them. But it wouldn’t solve the deeper problem, which is that the more painless payments are, the less we feel the pain. And so merchants will always find ways to charge us more now, if we’re not going to really feel how much we paid until much later. And then, when customers start revolting at the high prices they’re paying, the merchants will act like they’re doing us a favor by offering an inferior and cheaper option.

I was sad that I had to miss Bruce Summers’s presentation at the Kansas City Fed’s payment conference this morning; I was a couple of miles down the road, at the Kauffman Foundation. But I did manage to grab five minutes to summarize his argument for the assembled econobloggers: it’s an important one, which deserves a lot more attention than it’s likely to get.

Summers’s paper is here. It’s a dense 32 pages long, which is positively laconic in comparison to his upcoming book, Payment Systems: Design, Governance and Oversight, which features contributions from no fewer than 23 famous-in-the-payments-world grandees. But the message of the paper is a very simple one. America desperately needs immediate funds transfer, or IFT. And we’re not going to get it.

Summers’s new paper is a longer and more detailed version of the paper I blogged back in August. That paper was co-written with Kristin Wells, of the Chicago Fed, and was published under the Chicago Fed’s auspices. At the time, I wrote:

What Summers and Wells don’t say, perhaps because they work for the Federal Reserve, is that it’s downright idiotic that the Fed doesn’t step up to the plate and take on its natural role as guardian of the national payment system. Why doesn’t it? I’m not sure, but I suspect it’s something to do with the fact that the Fed doesn’t really exist as a unified body: there’s just a network of regional federal reserve banks, with a board of governors in Washington.

In the new paper, Summers is speaking for himself, and makes explicit what was only implicit before. The regional Reserve Banks have the ability to implement IFT; the Federal Reserve Board has the authority to implement it. But somehow the two seem incapable of joining forces to actually do it.

IFT — the ability for me to pay you, and for you to receive the funds within minutes, rather than having to wait until the following business day — is already a fact of life in many countries around the world, from India to the UK. Where it doesn’t already exist, you can be pretty sure that someone is working hard on a plan to make it happen. Except in the US, where no one seems to have even started the process yet.

Summers explains that as economic connections between individuals, businesses, and government entities are being multiplied at an astonishing pace, and that the payments system is doing an atrocious job of keeping up. The problem is compounded by the fact that no one has introduced a new universal payments mechanism since the check, which clears slowly — and sometimes doesn’t clear at all — but which is extremely versatile and pretty much universally accepted. He writes:

The U.S. payment system does not currently support immediate completion of payments, and there are no plans for doing so despite long-standing evidence of the need for such a capability and development of these capabilities elsewhere around the globe. While there is innovation in immediate payments, it is limited to small closed systems operated by non-banks, or to small closed systems operated by individual banks or consortia of a handful of banks…

Effectiveness is influenced by speed, versatility, and universal coverage. The effectiveness of a particular method of payment depends on how well it meets the convenience and needs of individual and business consumers in the digital economy. Among the payment attributes that consumers look for, speed in completing transactions, versatility in the use of a given method of payment, and universal connectivity to accounts held in banks are of special importance in the digital economy.

Speed is an especially important consideration for payments in the digital economy. Consumers expect virtually immediate completion of their digital transactions. The idea that money in transit is digital information which can be processed immediately has not been readily accepted by the banking industry. Most bank-sponsored payment schemes depend on clearing and settlement systems that are designed around batch processing and delayed settlement, and these clearing and settlement arrangements are being nurtured as opposed to being re-designed around continuous, real-time processing.

The problem, he explains, is that there’s essentially no one in a position to implement a new architecture along these lines. There’s no real national governance of the payments system in the US; while it has historically been overseen by the Federal Reserve Banks, newer developments like the Durbin amendment capping debit interchange fees gave all the regulatory power to the Federal Reserve Board in Washington. If debit transactions had been governed by the regional banks all along, he writes, “arguably, the Reserve Banks would never have allowed non-par clearing and settlement for inter-bank debit card payments.”

But there’s a strong deregulatory impetus within the Federal Reserve system, and most governors have been quite enthusiastic about the idea of getting the Fed out of the business of clearing and settlement and payments regulation. The banks innovated credit and debit cards, which are very popular, so what’s the need? Summers concludes:

The Federal Reserve Board is not interested in leading or guiding the development of clearing and settlement capabilities for payments in the digital economy. Moreover, the Federal Reserve Board is satisfied to give up the Reserve Banks’ operational leverage as providers of inter-bank clearing and settlement services.

And if the Fed won’t do it, there’s no realistic way that the private sector is going to get its act together and implement something as ambitious as IFT on its own — the collective-action problems make such a cooperative endeavor effectively impossible.

Which means that the only possible way that we’re going to get IFT in this country is if Congress acts, and passes an act mandating that the Fed build an IFT system.

Congress has done this kind of thing before: in 1974, it created the National Commission of Electronic Fund Transfers, which in turn guided the development of the US payments system for decades. It needs to do so again — with the Fed playing a central role in drafting the legislation. In the meantime, says Summers, the least that the Fed can do is to just start taking payments innovation seriously, including non-bank players who are building platforms which might revolutionize the way we all send money to each other.

The Federal Reserve Board should develop a special-purpose bank charter for providers of specialized payment services, allowing in particular for the inclusion of non-banks that are payment system innovators and payment method providers in the nation’s money and banking system for payments.

This kind of invisible plumbing is rarely sexy, and it certainly doesn’t get a lot of votes, but it’s crucially important, and could easily create tens if not hundreds of billions of dollars in value for the economy every year. The fact that the market hasn’t done it is a very clear market failure; and where there’s a very clear market failure, the government — in the form of Congress and the Federal Reserve — should step in.

Should, but won’t. More’s the pity.

I’m mostly offline today, since I’m attending a payments conference at the Kansas City Fed. (And tomorrow I’m attending an econobloggers’ conference at the Kauffman Foundation: how jealous are you?) There’s a lot to digest here, but one thing already seems clear: if you look at the main players in the payments industry, whether they’re incumbents or new innovators who aspire to disrupting the status quo, everybody seems almost unthinkingly resigned to working on and within the present architecture, where consumers pay with their credit or debit cards, and merchants require some kind of way of accepting those payments.

Exhibit A, in this regard, is “The Credit Card Is The New App Platform“, a piece by Reid Hoffman and his colleagues at Greylock Partners, talking in a very smart way about all the value that can be added to credit cards as we move to a world of mobile apps and payments. The idea, basically, is that right now you have a dumb piece of plastic where all the real value is in that Visa or Mastercard logo; in the future, there’s a lot of opportunity in terms of making that piece of plastic much smarter.

Most of the most exciting innovation in payments, including companies like LevelUp, not to mention the iTunes store, is built on credit or debit card accounts: the first thing you do, when you download one of those apps, is type in your card number, and when you pay, the payment is ultimately made on your card — which means that it necessarily involves making substantial payments to those payments networks. iTunes, the conference was told this morning, has some 150 million card numbers on file, which is one reason why it’s so attractive to people looking to sell content or apps or music. Similarly, one of the great attractions of the Amazon Marketplace, for both buyers and sellers, is that Amazon already has the buyer’s card information on file. Other innovators, like Square and Stripe, are also innovating around credit and debit cards, specifically by making it much easier for the payee to accept those payments.

Visa and Mastercard, of course (and American Express, too) are very happy with this. They can work on innovations themselves, or they can outsource innovation to the likes of Reid Hoffman; either way, they get paid, because they’re the default payments architecture. But what we’re missing here is any kind of threat to their dominance. And that’s a great shame, because these dominant companies have an enormous amount of pricing power. The interchange fees that they charge merchants only ever go up; it took an unbelievably hard-fought act of Congress to bring those fees down just for bank debit cards. (Which is one reason why the number of prepaid debit cards is rising fast: they’re exempt from Durbin rules, and can charge very high interchange fees.)

The keynote speech at the payments conference today came from Joseph Farrell, the director of the bureau of economics at the Federal Trade Commission. He talked at great length about the importance of lowering the transaction cost of payments, and the way that would benefit both consumers and society; he also suggested that this was a key aspect of what the conference was about.

He’s right about the first: transaction costs are too high, and should come down, and there would be large positive externalities were that to happen. He’s wrong about the second, however: there’s actually precious little discussion at the conference about how transaction costs might come down. There’s much more talk about the way in which they go up far too easily: Visa and Mastercard have enormous pricing power, and can raise their prices as much as 30% without noticeably losing any customers at all. Merchants feel forced to accept such cards, no matter what the cost, while the costs to consumers, in the form of higher prices, are extremely well hidden. Visa and Mastercard essentially levy a non-negligible tax on a huge percentage of retail payments, and do so in a largely invisible manner; they then rebate some of that tax revenue back to consumers, bribing those consumers to force the merchants to pay the tax.

At one point last year, I got very excited about a new payments service called clearXchange, which promised the ability for people to pay each other without going through the Visa or Mastercard networks. And because it is backed by giant banks — Wells Fargo, Chase, and Bank of America — it has the potential to be really huge.

The problem is, it doesn’t actually work: it hasn’t taken off, for technical reasons I don’t pretend to understand. All I know is that when I meet executives from those three banks and bring up clearXchange, they tend to change the subject very quickly. It’s certainly not something which they seem to think is going to revolutionize anything, any time soon.

There is some innovation around payments which doesn’t involve Visa and Mastercard in some way. One peer-to-peer payments app I was shown today, which isn’t publicly available yet, is built on the EFT network, the one you use when you withdraw money from an ATM. And another delegate told me that fully 26% of revenue at Starbucks comes from its mobile app, which can be (and often is) funded directly from your bank account, without having to go through Visa or Mastercard.

But that kind of thing is laborious and expensive for startups: one of PayPal’s big competitive advantages, for instance, was the fact that it found a way to link PayPal accounts to individual members’ accounts at thousands of banks around the country. That’s non-trivial, and it’s much easier to deal with just two or three payments networks.

So color me pessimistic, here, at least in the US. There really is a huge public interest in bringing down transaction costs, and moving the locus of payments-related innovation away from the Visa and Mastercard networks, and towards cheaper and more direct bank-account connections. But I see no indication that’s going to happen. In that sense, I have the same view now that I had in 2010, when I said that there wasn’t much prospect of real competition in payments. It would be great were that to happen. But I’m not holding my breath.

As a consequence, the government really has to get involved here, lest the payments networks simply continue to raise their interchange fees and extract ever-higher rents from everybody else. But the obvious entity to do that is the Federal Reserve, and, at least judging by this morning’s remarks from Kansas City Fed president Esther George, that’s not going to happen any time soon. No one really wants new regulation. Which is surely music to the ears of Visa and Mastercard.

Update: One other intriguing idea I was given at the end of the conference: what about using the check-clearing architecture as a payments mechanism? With Check 21, in theory everything could be electronic, you don’t actually need paper checks. (Although some lawyers apparently say you do.) The problem, I think, would be ensuring funds were available. But if you can do that, it could work very well — and much more cheaply than the Visa and Mastercard systems.

I spent Wednesday night in Silicon Valley, at a very geeky discussion of Bitcoin, the unregulated digital currency which managed to get a lot of anarcho-utopians very excited. But Bitcoin fever seems to be on the wane right now, and the number of real-world places where Bitcoins can be spent is still, to a first approximation, zero.

One of the subjects we spent a fair amount of time discussing was the question of chargebacks and reversibility of transactions. Bitcoin was designed to be as cashlike as possible: once it’s spent, it’s gone. As one user discovered in spectacular fashion.

There are good reasons for setting payments systems up in a non-reversible way: it makes things much simpler and easier, for starters, and there is real demand out there for a digital equivalent of cash. On top of that, many Americans are unaware of the rights they have when money is spent on their credit or debit card, by themselves or others.

But consumer-advocacy organizations like Consumers Union are very aware of those rights. And as we move, very slowly, into a world of mobile payments, Consumers Union is trying its hardest to ensure that such payments are as reversible as possible.

Most cell phone and tablet users can purchase digital goods and charge them to their monthly bill or prepaid phone account. But they may not get the protections they need to limit their financial liability if something goes wrong with the transaction…

“Consumers using mobile payments should get the same strong protections they currently enjoy when they make purchases with a credit card or debit card,” said Michelle Jun, senior attorney for Consumers Union, the nonprofit advocacy arm of Consumer Reports. “But we found that consumer rights can vary widely between wireless carriers and the protections carriers claim to provide are often nowhere to be found in customer contracts.”

Jeremy Quittner wrote up the Consumers Union findings under the headline “Banks More Consumer Friendly than Carriers for Mobile Payment”:

Banks have been much maligned for nickel-and-diming their customers, but in another area — cardholder fraud protections — they are being praised as consumer champions.

A Consumers Union report released Wednesday shows that protections for purchases that consumers make using their mobile phone numbers are much weaker than those consumers get from standard cardholder agreements regulating their credit or debit card purchases.

I suspect that as the world moves increasingly towards digital and mobile forms of payment, these issues are going to be key in determining how popular those forms of payment become. People are naturally resistant to change, and they still worry much more about spending money online than they do about spending money in much less secure real-world transactions. So long as headlines about digital and mobile payments continue to frame the issue as one of “consumer protection,” the payments industry is going to have to take such things very seriously, even if they run counter to the anarcho-utopian leanings of the geeks developing the underlying technologies.

The tension, of course, comes with regard to anonymity: while cash is perfectly anonymous, other forms of payment are not. And it’s pretty much impossible to create a reversible payments system if the users are completely anonymous.

But that’s OK: if I’m making a payment by swiping my phone, I don’t really feel the need to be anonymous at all. In fact, if the payments system knows not only my identity but also my location when the payment is made, there are lots of ways that it can use that information in ways I could find extremely valuable. We’re seeing this already: various payments companies are putting together systems whereby every time I walk into my local coffee shop, say, I can just pick up my regular order and walk out, and the payment will happen automatically. As will the free coffee I get after paying for ten at a regular price. All I need to do is have my phone in my pocket.

The future of payments, then, is likely to be highly personalized and reversible — exactly the opposite of the anonymous and irreversible protocols built into Bitcoin. And that’s one big reason Bitcoin is not going to be a long-term success.

When the financial crisis hit, the smart money went to cash. Literally, in the case of Mohamed El-Erian:

On the Wednesday and Thursday after Lehman filed for Chapter 11, I asked my wife to please go to the ATM and take as much cash as she could. When she asked why, I said it was because I didn’t know whether there was a chance that banks might not open. I remember my wife sort of pausing and saying, “Are you serious?” And I said, “Yes, I am.”

It turns out that this was a worldwide phenomenon. Here’s Ravi Menon, the managing director of the Monetary Authority of Singapore, in a speech last week (HT IK):

Physical cash commands a premium during times of uncertainty. We saw this during the 2008 global financial crisis. Within the first month of the collapse of Lehman Brothers, there was an exceptionally large withdrawal of high denomination notes by banks in Singapore. Typically, 90 per cent or more of the high-denomination notes withdrawn from banks are re- deposited within the month. During the initial months of the 2008 crisis, only 70 per cent of the $100, $1,000 and $10,000 notes withdrawn were returned.

This is understandable. But the fact is that cash is a very expensive payments mechanism:

Handling cash is costly. According to a 2010 study by Retail Banking Research, the cost of distributing, managing, handling, processing and recycling cash in Europe is estimated at €84 billion. This is equal to 0.6 per cent of Europe’s GDP.

For individuals, cash clears at par: if you give me a $100 bill, then I’m $100 richer and you’re $100 poorer. No one’s going to jump in and charge a fee for facilitating the transaction. And if I then deposit the $100 bill into my checking account, once again I see the full amount appear on my statement.

But the fact that most people never get charged for cash transactions is corrosive, in its own way: it helps to impede the inevitable-yet-glacial move away from cash and towards more secure, easier, and cheaper forms of payments.

Which is one reason why Bank of America’s $5 charge for debit transactions is so mindblowingly stupid. The more that people use their debit cards, the less they’ll use cash. And Bank of America spends billions of dollars every year processing heavy, dirty cash flowing in and out of its branches. If banks can persuade people to move to weightless forms of payment like debit, it will save them enormous amounts of money. After all, most of that 0.6%-of-GDP cost of processing cash is borne by retail banks.

And much of the rest is borne by the government. Minting physical currency is expensive! And wasteful! (Menon reveals, in his speech, that those charity-donation buckets in airports are placed there largely at the behest of the monetary authority, to try to stop local coins from leaving the country and having to be re-minted.)

Which means there’s a massive public-interest argument in favor of slowly phasing out cash in favor of other kind of payments. That’s never going to be easy, but it’s going to be pretty much impossible if the alternative payment mechanisms don’t clear at par.

I don’t know what kind of payment mechanism the world will ultimately alight on; I suspect however that it will use NFC technology in cellphones, and that it will be owned and run by a consortium of large retail banks. In the meantime, however, it behooves everybody, from the government to the banks, to do everything they can to wean people slowly off cash. If cash transactions cost the US 0.5% of GDP each year, that’s $70 billion a year at stake — significantly more than all credit and debit interchange fees combined. Don’t any of our greedy banks see the opportunity here?

The US is often so big and lumbering that it lags well behind the rest of the world in terms of adopting new technology. Cellphones were one such; chip-and-pin technology on debit and credit cards is another. And more generally, as a comprehensive new Chicago Fed paper from Bruce Summers and Kirstin Wells shows, the US is and will for the foreseeable future lag most of the rest of the planet when it comes to immediate funds transfer, or IFT.

This is the problem that resulted in the founding of PayPal: the banks were so bad at doing anything about allowing people to send money to each other that they allowed PayPal to rise out of nowhere. And now there are roughly a gazillion startups like Dwolla and Square which also want in on the act. Even though the banks, if they just got their act together and put a basic and universal mechanism together, could put everybody else out of business pretty much overnight.

So, what are the chances of that happening? Slim to none, say Summers and Wells:

Within the last few years, IFT has become a fully functional nationwide means of payment in a number of countries, including four that we have examined in detail in this article. International experience with IFT shows that technology is a necessary but not sufficient condition for innovation in payments and that enabling real-time and universal access to deposit accounts at banks is the key to meeting the public’s needs for more certain, faster, and universal payment services. Perhaps the most critical enabling factor is strong sponsorship by a national body with the responsibility and motivation to stimulate continuous improvement in the national payment system. This body might be a consortium of private banks collaborating through a national payment association, a public authority such as the central bank, or a public–private partnership. It is not clear that such sponsorship can be readily found in the U.S., at least not at the present time, because there is no national body that takes responsibility for the development of the national payment system. As a consequence, IFT and other national payment innovations are likely to progress in a halting and incomplete manner and at a pace that lags innovation that is observable in other countries, such as those examined in this article.

What Summers and Wells don’t say, perhaps because they work for the Federal Reserve, is that it’s downright idiotic that the Fed doesn’t step up to the plate and take on its natural role as guardian of the national payment system. Why doesn’t it? I’m not sure, but I suspect it’s something to do with the fact that the Fed doesn’t really exist as a unified body: there’s just a network of regional federal reserve banks, with a board of governors in Washington.

Still, it’s about time that someone — if not the Chicago Fed, then either the New York Fed or the people in Washington — should take this issue seriously and start dragging America’s thousands of banks into the 21st Century. Because they’re not going to organize themselves. And that just means that the US is going to become more and more behind the times, in a world where everybody else is increasingly capable of transferring money immediately and securely to pretty much anybody they like.

If you go to the Finovate conference in New York next month, or any similar event, you’ll be surrounded by exciting and aggressive young payments companies. They have names like Dwolla and Jwaala and Modo and Square, and most of them are going to fail. That’s as it should be: it’s the Silicon Valley way. There are lots of bright ideas floating around, and eventually one or two of them will really gain traction; at that point they’ll be bought or otherwise co-opted by the broader banking industry and will make their way into the mainstream. Meanwhile, the big banks and card companies are slowly rolling out their own products, and of course PayPal continues to do extremely well, with revenues of more than $1 billion per quarter on payment volume of more than $3,500 per second.

Aaron Greenspan is unlikely to be one of the winners in this space: his payments startup, FaceCash, has yet to get off the ground. But his attempts have at least yielded this very interesting paper, which details the rather crazy network of regulations that any payments company needs to navigate. If your idea of fun is navigating a Kafkaesque bureaucratic maze while spending hundreds of thousands of dollars, then I’d highly recommend setting up a payments company. Here’s some of the wonderful facts about payments regulation that Greenspan has turned up:

• You’ll need to file e-reports with the Financial Crimes Enforcement Network. In order to do this, you’ll need a Windows computer (not a Mac), running Windows 2000 or XP, and Internet Explorer (not any other browser). Plus various unwieldy plug-ins. Secure!
• In order to check whether a given Social Security number belongs to a dead person — a basic security check — the US Department of Commerce will charge you rates starting at $995 per lookup, and rapidly rising to as much as $14,500.
• When companies ask for a driver’s license, they currently have no way of checking online to see whether that license is valid.
• Of the 50 states, not one yet has a web-based license application process.
• None of the major online payments companies has yet managed to get is licensed in Wisconsin.
• None of the major phone companies has got licensed in any state, despite the fact that they all want to move into the space in one way or another.
• Universities’ money-transmission programs, like Harvard’s Crimson Cash and Stanford’s Cardinal Dollars, are also unlicensed. “Consequently,” writes Greenspan, “the presidents, provosts and trustees of every private university in the nation with such programs (which are exceedingly common) are unknowingly committing federal crimes, and could be incarcerated.”
• Maryland’s license fee is $4,000.00 in even-numbered years, but $2,000.00 in odd-numbered years.

Greenspan concludes, sensibly enough:

It is clear that the federal government needs to spearhead an effort to bring money transmission regulation, or non-bank regulation more generally, under one (and only one) roof. Whether that roof is the Department of the Treasury’s or the Consumer Financial Protection Bureau’s remains to be seen.

That roof should be the Consumer Financial Protection Bureau, since payments are at the heart of consumer finance — but also because the CFPB is housed at the Fed. And where I part ways with Greenspan is that I don’t think that the CFPB should necessarily be letting a thousand flowers bloom, here.

Greenspan has a compelling and impassioned case that change and competition is needed, not least because the current system of interchange fees is much more expensive than it should be. Instead, the CFPB, working closely with Treasury and the Fed, should aggressively encourage payment at par. And in turn, that means it’s going to be very difficult for startups to enter this space: if payments all clear at par, the way that cash and checks and even clearXchange do, then there’s no revenue stream for the intermediary.

So yes, let’s have a massive consolidation of payments licensing laws — they’re a mess right now, and they do precious little good for anybody. But at the same time, let’s think seriously about the public-policy aspect of payments regulation: what’s really in the public’s best interest here? The answer isn’t a balkanization of the payments space into dozens of competitors all chasing scale and fee income. Instead, it’s simple and universally-accepted mechanisms for one person or merchant to pay another person or merchant directly, with neither of them paying on a per-transaction basis for the privilege. That’s far from impossible: in fact, it already exists in most countries around the world. It’s time that it existed here, too.

The new Amex prepaid card is a huge improvement, from a consumer perspective, over any prepaid alternative. It’s free to buy, there’s no monthly fee, and there’s no fee for making purchases: compare the competition, things like RushCard’s $9.95 per month, or Walmart MoneyCard’s $3 per month, or BanXcard’s $2.95 per month. And that’s just the beginning of the charges you find with such cards — charges which are increasingly resulting in subpoenas and other attacks on opacity.

The Amex card is so attractive, indeed, that it’s even beginning to start being compared to checking accounts. A checking account is still a better bet than a prepaid card if you’re good at avoiding nasty fees, of course. But the Amex card is never going to surprise you with something nasty and unexpected in the way that checking accounts are prone to doing.

Amex isn’t doing this for love, of course — the idea is that it’ll be able to make enough money on interchange fees to make the product profitable. (For reasons which are a bit obscure, prepaid cards were exempted from the Durbin interchange-fee reduction.) But the fact is that no one has managed to come up with a product this attractive in the past, and none of the other prepaid-card merchants have been able to produce a card with no monthly fee. (Well, there’s the pay-as-you-go RushCard, but that costs $1 per transaction, plus $1.95 per ATM withdrawal.)

It can’t possibly be a coincidence that Amex is launching this product just as Durbin is slashing debit interchange fees. But there’s nothing in Durbin which makes this product any more profitable for Amex — the income that Amex gets will be the same now as it would have been if they launched this a year or two ago. So what’s going on here? Why is Amex launching this now?

My feeling is that Amex is looking at this as a game with an asymmetrical payoff. Amex has been pushing gift cards for a long time; this is basically a glorified reloadable gift card, and as it starts getting adopted by people who would never normally use an Amex card, it increases the pressure on merchants to accept Amex as payment. And there’s always a chance that this product could become hugely popular — if banks start making their current debit cards extremely unattractive in the wake of Durbin.

I don’t believe that banks will start charging for debit cards, or applying fees to debit-card transactions, or the various other horribles which they threatened during the big debate over debit interchange. But it’s possible. And if that happens, people with checking accounts are going to start looking for alternatives to their current debit card, and Amex will be right there waiting for them. The prepaid card is also safer than a debit card, in that it’s easier to contest fraudulent charges and have them refunded.

More generally, we’re entering a world where there’s going to be a lot of disruption in the payments space, with clearXchange going up against PayPal and many other dot-com startups, including Square. No one knows who’s going to win this war. It’s possible that no one will: payments might simply fracture into dozens of different systems with relatively small market share. Given the huge uncertainty in payments, it’s probably a good idea to have as many different products as possible and push them hard during this rare period of upheaval and change. You might not make a lot of money in the short term. But if you’re not aggressively in the game, you’ll never have a hope of winning.

If you want to keep your revolutionary payments system top secret, here’s a piece of advice: launch it in Arizona. That’s what Bank of America and Wells Fargo did in April, with their new clearXchange system; nobody noticed, until they put out a press release today.

ClearXchange really could be a game-changer, though. I spoke to Mike Kennedy, the Wells Fargo executive who’s leading the project, which right now is a joint venture between Wells, BofA, and Chase; he reckons that by this time next year, the program will not only be rolled out nationwide but will also be available to pretty much anybody with a bank account. (For the time being, both the sender and the receiver of the money need to be a customer of one of those three banks, and right now the sender needs to be in Arizona.)

ClearXchange is a clear competitor to the likes of PayPal and Popmoney, but it’s not an existential threat to those companies. Instead, the reason I like it is just that it brings peer-to-peer payments where they belong, to the level of the bank account. And it’s likely to set a new benchmark of $0.00 for the cost that consumers pay for such payments.

Up until now, most payments mechanisms, including PayPal, necessitated opening a new account. PayPal is now moving away from that system, and is trying to do deals with banks where its technology can get integrated directly into the banks’ own software and mobile apps, allowing people to send money to each other even if they don’t have a PayPal account. ClearXchange works much the same way: if I want to use it to send money to you, I just pull up my own bank’s mobile-banking app and use that. I don’t need to go to some separate clearXchange app. The first time you receive money from it, you’ll get a text message or an email telling you that you need to link your email or phone number to your account; after that, the money should just automatically appear in your checking account.

None of these technologies are cost-free, as far as the end-user banks are concerned. But processing checks isn’t cost-free either, and banks do that for free. In general, as a matter of public policy, there’s a strong interest in having the $865 billion which changes hands between Americans every year clear at par: the amount the sender is down should be exactly equal to the amount the receiver is up. That’s one of the reasons why so much of that $865 billion is transacted in cash, and it’s a big annoyance with PayPal and Square and other services which have a tendency to charge money for the service of facilitating payments.

What I’m hoping is that clearXchange will help make that service a basic part of what banks do whenever you open a checking account — that electronic peer-to-peer payments will just get added to the list of free services along with electronic bill payments and fee-free check clearing.

But that doesn’t mean that all banks will encourage their customers to use clearXchange technology instead of PayPal, Square, Popmoney. If those vendors can come up with a way of sending money which is cheaper and easier and safer and more efficient for the banks, then the banks will use those services rather than clearXchange. In any case, it’s all going to be pretty much invisible to the end user, who just sees their own bank’s website or app.

So I hope that the other big payments providers stick around, to provide competition for clearXchange and act as a force preventing the banks from charging for the service once it reaches ubiquity. We want this to be like bill pay, which is generally free at both ends of the transaction, and not like debit-card usage, with its fast-rising interchange fees (until Richard Durbin came along). And now that clearXchange has launched, I’m more optimistic than ever that we might actually achieve that goal.

I’ve known Josh Reich, BankSimple’s CEO, for a while now, but it’s only today that I managed to sit down and have a serious conversation with CFO Shamir Karkal. He’s a very interesting guy — go check out his latest blog entry on the rise of Credits and you’ll see what I mean. Our discussion today was largely about payments, an area where BankSimple stands out starkly from the mass of banks and credit unions by being in favor of lower debit interchange fees.

The debit interchange debate is at full volume right now, as banks try to lobby Congress to weaken the part of the Dodd-Frank law which essentially forces the Fed to bring interchange fees down to a very low level. And both sides — banks vs merchants — are putting a lot of money and effort into noisily pushing their side of the story. It was only when I sat down with Shamir that I finally found someone with a considered middle-ground view. And he makes a lot of sense.

The big picture here starts with the fact that there are very good public-policy reasons for central banks to assiduously regulate payments mechanisms and ensure that they clear at par. Paper checks are very expensive to process, for instance, but if I write you a check, the amount of money that I spend and the amount of money that you receive are identical.

In much of the world, bank transfers work the same way. If you give me your bank account details, I can transfer money straight from my account to yours, and you will receive the exact amount of money that I sent. In Scandinavia, this happens in real time: I can transfer money to you now, and you can see that money appear in your bank account minutes later.

The US is far behind on this front; bank transfers are so cumbersome, time-consuming, and expensive that a huge company called PayPal has grown up to try to make money out of providing an easier way of doing things. But people have a tendency to send money via PayPal by typing in their credit-card number, and in that case the amount of money received is significantly less than the amount of money sent. In other words, PayPal does not always clear at par, and that’s both a weakness of the system and an explanation of how come it was sold for well over a billion dollars.

Right now, debit cards can’t be used for person-to-person payments. There are companies like Square popping up to try to change that, but again they take their cut, with the effect that debit does not clear at par. If you pay me $100 with Square, I’ll receive $97.50.

This is a problem, because it makes payments difficult and inefficient. We’re at a restaurant, and we don’t want to burden the waiter with two different cards. So I pick up the check and you transfer half the total bill directly from your account to mine. That should be easy, but it isn’t. And if one of use has to pay a fee for doing that kind of thing, it’s never going to happen.

The next important realization is that payment mechanisms are fragmenting, but are also subject to enormous network effects. The cash-and-checks duopoly over payments lasted a long time, but is long gone now, and there’s a huge push towards lots of other payments systems, from mobile to debit to things like Facebook Credits. And what all of them want is ubiquity and scale. There’s no point in me signing up for PayPal if you aren’t signed up too. But if everybody’s signed up, it’s great.

Once a payments system gets enormous, it then has the ability to start extracting rents. This is exactly what happened with debit cards: in the beginning, they were very cheap, as banks encouraged merchants to accept them. Once substantially all merchants did start accepting debit cards, the banks then embarked on a process of extracting rents by steadily increasing debit interchange fees. And left to their own devices, they will continue to raise those fees steadily and inexorably. This goes against the public interest, and it’s an abuse of the banks’ monopoly position.

Enter the central bank. In a sensible system, the central bank should constantly be keeping a close eye on what’s happening in the payments space, and trying to maximize the ease with which people can transfer money to one another while at the same time being able to keep an eye on money laundering.

This is not uncommon in much of the world, especially in Scandinavia. Payments systems there don’t make lots of money for the banks, but they do help the economy as a whole run much more smoothly.

In the US, however, this doesn’t happen at all, for two main reasons. Firstly, the banks are far too big, too powerful, and too important to the economy as a whole. As such, they’ve effectively captured their regulators, to the point at which the Fed considers its main job to be to safeguard the health of the financial system rather than to minimize inefficiencies in the economy as a whole.

On top of that, the US has a rigid rules-based system rather than a more flexible principles-based system. As a result, no matter how much the Fed looked into the system of debit interchange, it was effectively powerless to prevent massive fee inflation unless and until Congress gave it a mandate to do so. That mandate arrived with Dodd-Frank, but again the Fed’s pretty powerless to do anything intelligent or inventive: it has no choice but to implement the Durbin amendment exactly as it’s written. So the whole battle is being played out in front of Congress. What should be a matter for technocrats is instead being decided by politicians, and it’s rare that ever results in an improvement.

In a sensible system, we wouldn’t need the Durbin amendment at all, because the Fed would have been on top of the debit interchange situation all along, and would have pushed hard on the banks to ensure that they didn’t start extracting rents from what is at heart an extremely cheap and efficient payments utility. But because of the way the Fed’s set up, they couldn’t or didn’t do that.

What this means is that as payments go mobile, we’re going to have exactly the same problem all over again. The banks will coalesce around some kind of mobile-payments solution, they will support it until it becomes broadly adopted, and then they’ll start extracting as much money from it as they can get away with. And the Fed will look on, powerless, until someone like Durbin comes along to legislate a one-off solution which will almost certainly not be optimal.

All of which is to say, we desperately need the Fed to move to smart principles-based regulation with real teeth, at least when it comes to payments. But I fear there’s precious little chance of that.

Adam Ozimek has a bright idea:

Allow any company to become a bank with a very minimal regulatory barrier if they do 100% reserves on deposits. This means people will know their money is there whenever they want it, which will make the “bank” safe from runs, which will eliminate the need for FDIC insurance or heavy handed regulation.

In principle, I like the idea of non-banks like Google and Wal-Mart being able to conduct banking-style services. It works fine in other countries, like the UK and Mexico, and in principle anything which increases competition in the banking sector should be good for consumers.

On the other hand, I don’t see any reason why these new banks should be less regulated than existing institutions. Indeed, in the first instance — the first two or three years of operation, say, while the model is still untested — I’d want much more regulation, even unto a complete ban on lending. And I’d certainly want these institutions to voluntarily submit to the oversight of the Consumer Financial Protection Bureau, even while they were under $10 billion in size.

It’s also worth asking exactly what Ozimek means by “100% reserves on deposits.” What counts as “reserves”? Would uninsured deposits at banks count? How about money market funds? Would they all need to be available on demand at par? And would the reserves count as the cash reserves of the parent company for accounting purposes? If so, could these banks ramp up against their current cash reserves without having to make any extra reserving actions at all, happily lending out everything they take in as deposits?

Even with strict controls, there are some interesting things which Google might be able to do in the payments space, including building payments functionality right into its Chrome browser and Android OS. Indeed, Google’s already moving in that direction without a banking license.

The reason that Ozimek wants loose regulation when it comes to these new entrants, of course, is that it’s much harder to do any kind of payments innovation when you’re part of a regulated institution. Which is why companies like Visa and Mastercard, even when they were owned by banks, weren’t actually banks themselves. But the problem is that if you want to encourage innovation, you also have to encourage failure. So the question I have for Ozimek is this: do you want to see a payments system fail? And how do you build a system which can cope with such a failure, if you’re not keeping a close regulatory eye on it?

I’m about to head down to DC to appear on an interchange-fees panel sponsored by the libertarian types at GMU. I hope they read Mike Konczal’s blog entry (and mine, of course), but at heart I think the disagreement is simply philosophical.

In my post I wrote that “all the recent increases have been pure gouging, made possible by the Visa/Mastercard duopoly”, and one of the most interesting comments in response came from billyjoerob, who wrote:

Felix Salmon really should write the Critique of Pure Gouging, and draw a distinction between “pure gouging” and other ordinary profit-maximizing activities. Which is not illegal, not so far.

There’s a narrow answer to this, which is that when you have a duopoly it’s important to regulate gouging. But there’s a broader answer, too, which is simply that we’re talking about payments here — and it’s perfectly natural and sensible for the government (or at least the Federal Reserve) to be involved in regulating the payments process, including clearing, settlement, interchange, and everything else. In a world which going increasingly cashless, it’s important to beware the stealth transformation of what has historically been a very low-margin commodity business into a very high-margin profit center for America’s biggest banks.

Electronic payments can and should be cheaper than cash payments, for all manner of reasons. Instead, they’re much more expensive, and interchange fees show no signs of topping out. For the sake of the economy as a whole, let’s try to make the payments system as frictionless as possible. Rather than using it as a way of propping up bank profitability.