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Frictional arithmetic

"Business models based on friction, as opposed to consumer value-add, will wither and die," Mark Hale, head of payments for KPMG, said at yesterday's Westminster eForum on digital payments. You can see his point: who now has the patience to stand in a long line waiting to pay? Waiting is friction. Answering questions is friction. Online, time-to-delivery is friction, which is why Amazon.com is trying so hard to shrink it.

Is cash friction? That's less clear. There are plenty of people - in the UK, most notably Consult Hyperion's Dave Birch - who will tell you that it is. The British Rail Consortium's policy lead, Richard Braham, on the other hand, pointed out that last year 58 percent of transactions were in cash. "We're more likely heading to the cardless society than the cashless society," he said.

That makes intuitive sense to me: for a quick getaway for small purchases it's hard to beat plunking down exact change. But just as the speed and lower risk of credit cards have abolished paper checks/cheques from in-person transactions, I can see where for many people the speed and convenience of tapping a mobile phone on a reader would kill off the business of carrying plastic credit cards.

We're a long way from there yet, however, and it's as sensible trying to predict the eventual outcome as it is to try to predict which media formats will die. In fact, if the history of media is any guide, most of today's forms of payments will survive in some shape, depending on their cultural context. For most Westerners, with our bank accounts and financial services, digital payments are a luxury, in Kenya they fill such an enormous market gap that M-Pesa has been a huge success and is changing the landscape.

Some support for Braham's position came from Matthew Hudson, the head of business development, fares and ticketing for Transport for London. When it launched Oyster cards in 2003, TfL had no idea it would become the largest contactless card issuer in the UK: 52 million cards issued to date. Oyster is just one step in a series intended to reduce costs. Ticketing started in the 1850s to eliminate the "massive" amounts of fraud involved in accepting cash directly. Recently, London buses began accepting payment via Barclaycard's contactless Wave. By November, anyone with a contactless payment card, native or foreign, will be able to use it throughout TfL's system; eventually, the system will effectively be back to directly accepting cash - albeit digital cash. What's likely ending is the Ticket Era. But Hudson is, he said bluntly, not remotely interested in mobile phone payments as long as consumers have no idea whom to call when the system fails (although he loves the Barclaycard plastic pay tag you can glue to the back of your phone). "Interoperability means nothing to consumers," he said.

It takes a large-scale operation to appreciate that point: uncertainty and confusion about who is responsible for which failures - do you call the mobile phone manufacturer, the mobile network operator, the handset manufacturer, the operating system vendor, the app publisher, or the company you're buying from? - are the app killers. Especially given today's situation with security; earlier in the week, Trustwave launched its 2013 report, which showed that the average length of time from intrusion to containment is 210 days. In 76 percent of the cases Trustwave investigated, organizations did not know they'd been hacked until an outsider told them - regulators, law enforcement, the public. Mobile phones are already targets for malware; so much more so when they are digital wallets.

Hudson's comments make it clear how fast players and methods are proliferating. It's what you expect from an immature industry: an explosion of experiments and options in which unexpected players emerge, usually followed by a shakeout leaving behind a relatively few large, successful winners. Both the UK and the EU are thinking about this progression. In early February, the UK's Chancellor of the Exchequer, George Osborne, talked about opening up payment systems. Last year, the an EU green paper on card, Internet, and mobile payments studied how to remove obstacles and provide effective governance for the new era. The framework for electronic money was created some years back.

Yet things are getting stranger than they may realize. What's a currency? We usually think of the government-backed, state-sponsored variety as the hard stuff. Yet Hudson sees Oyster cards as a "currency" people convert Sterling into. Frequent flyer miles and loyalty points are also obvious currencies, even if what you can buy with them is limited. But what about Amazon gift certificates? On his blog, Birch tells the story of his brief study of payment systems in use among online sex workers. Few take Paypal, which allows chargebacks and freezes accounts unpredictably if it suspects illegal activities. Most customers eschew credit cards as too tightly coupled to their real-world identities. But Amazon gift certificates: set up a new account with a different email address, charge to real credit card. Birch argues it provides a sufficient level of pseudonymity while still giving both sides the ability to trace the other in case of fraud. And it's a whole lot simpler than Bitcoin. In digital payments, complexity is friction.

Wendy M. Grossman's Web site has an extensive archive of her books, articles, and music, and an archive of all the earlier columns in this series.


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