What's a payment worth to you?
by Matthew Cherry, Chief Economist, PSR
What’s a payment worth to you? One trite answer is the amount of the payment: but that is actually the value of what is being paid for. When buying a coffee the £2 it costs is something which reflects the enjoyment of drinking (and smelling) the coffee; not because we get enjoyment from making the transfer of £2 from our account to the coffee shop’s account.
So how does choice of how we make that transfer matter?
A payment is a very particular type of service which gains its value from facilitating transactions (that is, allowing us to be more sophisticated than relying on a simple barter economy). Payments have huge social value in facilitating the exchange of stuff: by making it feasible to levy a price for goods and services and pay a wage or salary for providing our labour and skills. Without those goods, services, labour and skills, the payment does not have a use. Which is another way of saying that there is no point in paying for nothing or paying for payments sake.
Of course, everything exchanged in a market economy is a mix of different inputs whether they be raw materials, experience, skills, the locational value of a particular venue and so on. These can be combined in different ways and demand and supply interact in a market (at least when it is effectively competitive and there are no other distortions to the market) to provide buyers with the quality and price mix they want. Can the way something is paid for just be seen as another aspect of quality of a product i.e. the payment is part of the bundle purchased? So, the way we pay for a car is part of the overall bundle including the chassis, engine, seats, tyres etc. as well as the brand, the showroom services, and so on. Or a sandwich consists of the bread, the filling, the skill of the chef, the location of the shop – and the way we pay for it.
I think payments are a bit different to the other elements of different goods and services. Like with a coffee, the inherent enjoyment I get from my lunchtime sandwich (in times when that is something I can purchase from a shop) is not impacted by whether I pay for it in cash, by tapping a card or a smartphone or other contactless device. The payment type used does not (and is not allowed to), in the vast majority of cases, impact on how much I pay. Rarely will buyers decide what to buy based on payment method. Rather, having decided what they want, the payment method is chosen on the basis of factors such as different elements of convenience, the amount of protection available, the credit options bundled with it and so on.
With high value purchases this might be quite a considered decision. Indeed, those living on a tight budget in vulnerable circumstances might need to consider these issues carefully with even small purchases. But - when things go right - it is probably fair to say that the vast majority of day to day transactions are made without significant agonising being made over what type of payment is used. I generally see people spending a lot more time trying to choose which sandwich to have than they spend deciding which payment type to pull out at the till.
It is often the case that nobody really notices the payment – until it goes wrong.
This means that in many settings, the seller wants to offer lots of different ways to pay (what economists call multi-homing on different payment platforms), while in that particular setting a consumer will have a strong preference for a particular type of payment (which is single homing). Even that is not quite so clear cut as many, possibly even the vast majority, of buyers have alternative options if pressed. Something that has been made very obvious in relation to the choice between cash and cards by events of the last few months.
So what is the role of choice in payments?
Generally, the above discussion suggests it is about enabling convenience or credit or consumer protection options for customers. For every payment which is made, a payment is received. In this sense, those retailers receiving a payment have less choice as they generally need to provide the options their customers want to make a sale. In many settings we do not always see a huge variation in the quality metrics either. Who would want to pay by a really risky payment method? The speed of making different payments does not, in practice, vary hugely for different digital payment types. For choice in these settings to matter to competition - to enable greater competition - customers need to have a real benefit from choice.
Innovation – as discussed in an earlier theme in our strategy work – could provide such benefits. Different options need to provide different consumers with something they value such as saving time or convenience. But sometimes there is also value to having everyone on the same platform in a way which is efficient, well understood and stable. Paying salaries through the BACS system may be an example here. If firms had a choice of systems by which to pay their employees, this could just create costs for the employees in setting things up differently every time they moved bank account or employer. If employees had a choice, firms costs would likely increase from having to deal with multiple systems in their payrolls. Having a choice here would need to provide benefits which overcame these potential costs to those making and receiving payments.
It is important to remember that there can also be other reasons where choice of payment is valuable or needed. When something goes wrong either at a system level or for the individual customer or seller, having an alternative way to pay can make the difference between being able to make the transaction or not. Ensuring that there is a choice of ways to pay available can also ensure that those who have no choice in how they pay are still able to do so. The combined work of the different authorities to make sure cash remains an option is – in part - about protecting those who would otherwise be left behind – for a range of reasons not everyone will always have access to digital payment methods. Retailers offering a choice of ways to pay, ensures that those who are dependent on cash still have an option they can use.
Having choice in the way we pay for stuff. At first glance, such a simple idea.
In practice, though, the role of choice needs careful thought. We need to think about the role of choice, what we mean by it and how it is providing benefits to those making and receiving payments. Choice in itself is not a good thing. The benefits which choice provides those making transactions are the good things.
Where do you think there is a need for choice – or greater choice – in the way we pay for things? What benefits are provided by meeting those needs for choice? Are there types of payment where choice does not provide benefit? What type of choice is important and how is it best promoted?
Matthew Cherry is the Chief Economist at the Payment Systems Regulator. The views, thoughts and opinions expressed in this blog are his own and do not necessarily represent those of the Payment Systems Regulator.