Banknotes and coins enable payments between consumers, businesses and other economic agents and are not dependant on infrastructure. Most alternative payment instruments rely on some form of technology. A card transaction, for instance, requires a cardholder with an active card and a merchant with a compatible payment terminal, as well as a back-office infrastructure to process the transaction. This has several implications.
Cash payments work anywhere, at any time and with all economic agents. The technology is embedded in the notes and coins. The world is increasingly connected and internet access continues to make significant progress. The International Telecommunication Union estimated17
that, at the end of 2013, 2.7 billion people worldwide used the internet. This means that 4.4 billion people are not online. Figures are even more striking with mobile phones: 6.8 billion mobile cellular subscriptions existed in 2013, or almost one per person! However, in 2012, only half of the world’s population was covered by a 3G network, which qualifies as mobile broadband. Even in those countries which have good coverage, there are areas of limited access such as mountain regions or on trains.
There is inevitably a cost in adopting a payment system, partly related to the infrastructure. A merchant willing to accept payment cards needs to purchase or rent a payment terminal. For large merchants, these costs are easily depreciated over the high volume of transactions but the business case is far more complex for small merchants and start-ups. New businesses can begin operations by accepting cash only, for which no prior investment is required, and only at a later stage, depending on customer demand, choose which other payment options to adopt.
The development of payment infrastructure is largely dependent on network externalities. This means that the value of a payment card to its holder depends on the number of merchants who accept it and the value of the card to a merchant depends on the number of cardholders. As the range of payment instruments grows wider, the network effect increases and makes the launch of new instruments more challenging.
Apple launched Apple Pay in the US at the end of 2014; it enables iPhone 6 users to make payments in stores using NFC (near field communication) technology. Shortly after, a consortium of leading retail companies such as Walmart, 7-eleven, Sears and Shell announced the launch of CurrentC, a mobile payment app based on QR codes. The competition between the two products has been described as the “clash of the titans. It’s Betamax vs VHS”18
according to Forbes journalist Clare O’Connor.
Lastly, no technology is exempt from breakdown or failure. At the London Olympics in 2012, the payment systems failed during football events at Wembley19
despite Visa being one of the global sponsors of the games. Spectators had no option but to pay in cash as payment terminals stopped working. On 24 December 2013, the Belgian card network failed leaving millions of Belgians unable to pay in stores or online or to withdraw cash from ATMs20
at the peak of Christmas shopping. In June 2008, the Bank for International Settlements published a report21
, which concluded that the risk of failure within the world’s payment and settlement systems is growing because they are becoming more interconnected. The report recommended that banks and payments operators provide better protection against a failure of the financial systems in their stress tests, risk controls, funding requirements and crisis-management plans. However, the global financial crisis, which erupted in October 2008, has likely delayed the achievement of these objectives.