Monday, May 21, 2007

No Signature Required: It's the New Cash

Banks, credit card companies, startups, mobile phone companies, and whole bunch of other folks have jumped onto "future payment systems" in recent years -- focusing mostly on how to make small day-to-day payments more frictionless. So we've seen a dozen wireless phone wallets that, in the U.S. anyway, aren't very useful. RFID payment experiments at Mobile or McDonalds, and credit cards with chips of dubious value embedded in them.

When I recently found myself hoarding cash because it made certain purchases easier than using a credit card, I thought a little bit about the ease-of-payment problem. I came up with the following equation:

>= Ease(LoyaltyCard)
>= Ease(CashWithNoChange)
>= Ease(CreditCardWithSignatureOrPIN)
>= Ease(CashWithChange)

In English? The easiest game in town is swiping your card (or handing it over) and walking away (well hopefully you get it back). No signature, no PIN, no touchpad. Where does this happen? Starbucks and 7-Eleven are among the merchants supporting the Visa No Signature Required program for amounts under $25. It's a beautiful thing -- I can't imagine any easier way to pay, and I used to work on some of those RFID systems. At best they match this experience, but they can be much worse. The credit card gives me near perfect fraud protection, an itemized bill, and a short-term zero-interest loan.

A lot of businesses (Peets, Subway, etc.) haven't hopped on the bandwagon though, I suspect because the fine print is higher pricing on the back end. They'd love to avoid and card fees if they can, and they're happiest when they carry your cash for you. So they sell you a stored-value card and in exchange for letting them keep your interest and unspent funds, you get a swipe-and-run experience. This approach also has the drawback of requiring an extra card for each vendor, more of a hassle than pulling out a single Visa card.

After this, a cash transaction where no change is involved is fast and painless. You can pay and run, and cashiers love not having to count or give out change. Pricing in round numbers (think parking garages or ballparks) eliminates most change. Much is made of the supposed "anonymity" of cash. But that argument applies only to illicit transactions. Any transaction you do in person with an established business is bound to be on camera and timestamped these days, so you can be tracked even if you pay in cash.

Then you have credit card purchases with a signature or PIN -- my principal method of payment. This sounds easy until you're handed a card and a receipt to sign and return at a parking garage on a windy day. Aaaargh.

Lastly there's old fashioned cash with change: pain for all involved.

The big opportunity here is for banks and other credit-card issuers to cement their lead in the payment industry by pushing hard to expand the No Signature program. As it is, there is vastly improved data transmission infrastructure compared with what existed when credit card protocols were designed. The Obopays and Speedpasses, not to mention alternative credit card entrepreneurs are all over it. But the same data infrastructure could let Visa vastly extend No Signature without the fraud risk this would once have entailed.


Jason Untulis said...

[Just discovered your blog, playing catch up...]

You say that cash's "anonymity" is overvalued because that only matters for "illicit" transactions and that those are being tracked anyway.

For the "illicit"-ness, it may be just be transactions that one is embarassed or wants to hide, not necessarily your smack habit. We already know that people are willing to pay a little more for privacy of certain transactions.

While you do bring up a good point that there are records of even cash transactions, those records are much more likely to be distributed and not available to aggregators. The less likelihood that folks like Equifax and Experian have that data, the happier I am. Maybe that' naive, but it is certainly a view shared by a lot of folks.

My rule of thumb tends to be <$20 = cash, >$20 = card as far as convenience.

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