Felix Salmon has responded to my concerns about whether or not the proposed financial regulation will reduce the likelihood that future disruptive technologies will emerge and present a competitive challenge to the Visa/Mastercard duopoly. I don’t find his case particularly convincing, and certainly not convincing enough to overcome the substantial burden of proof that should be required when we’re discussing regulation that could impede innovation and competition.
Felix has several disagreements with me. First, he says, we don’t necessarily want a competitive or innovative solution to high interchange rates if that means injecting a lot more instability into the financial system. Agreed. Not every competitive solution would be a good solution.
He sees the best possible innovative solution to be mobile payments, but sees them as unlikely because a) they’re mostly used in under-banked developing economies, b) phone companies won’t want to do it, and c) regulatory barriers would prevent it.
To points a) and b) I would point to the examples of Japan, South Korea, and Finland, all of which have significant mobile payment systems in place. The Japanese mobile payment industry evolved mostly at the work of the telecoms, none of which are monopolies. In South Korea, the telecoms were first movers but financial institutions soon took over. This paper from the Kansas City Fed has more history and details. Given this evidence, I’m not sure how one could conclude with any degree of confidence that the future development of U.S. mobile payments is unlikely or predictable.
To point c), if he’s correct and regulation is what would prevent mobile payments, then shouldn’t we be pushing to eliminate whatever barriers are in the way? Does Felix really think mobile payment systems present such a threat to the financial system that they should be prevented? And aren’t the minor odds there worth the tradeoff of potentially weakening the Visa/Mastercard duopoly?
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Wednesday ~ July 14th, 2010 at 4:04 pm
DLaw
Mr. Ozimek,
On the one hand, I think your championing of mobile payments as a lower-cost alternative to present systems of transferring and administering *prepaid* payments is laudable and should be encouraged. On the other hand – and I hate to say it – I’m not absolutely sure you understand how banking works and why it works that way.
In that essentially all businesses today are telecommunications customers themselves, it just makes common sense for customers with *positive* balances with the same vendor to be able to transfer some of their positive balance to other customers’ balances with the same vendor. And of course this is the essence of payments intermediation. For many, many people this would be a better, cheaper, faster way to pay.
The telecom companies that engaged in this intermediation could simply align their billing cycles (say, every 30 days) with the maturity of the instruments into which they put customers’ positive balances – with a healthy reserve requirement to make sure that when both the investments and the bills clear every 30 days there will be a positive balance. This would require a strict separation of positive-balance accounts and negative-balance accounts, with a heavy penalty for “breaking the buck”, but it could be done.
The problem is that all this implies a banking system in the first place. The genius of Visa and Mastercard is not that they are a payments system, but that they are credit instruments. The genius of credit is making a system work where – to some extent – when you deposit your paycheck in the bank, you pay somebody else’s bills. Yes, you do this in anticipation of his getting paid (and paying you back), but you also accept default risk. Credit relies on your willingness to accept a safe bet in lieu of cash and without this willingness to accept default risk, the economy seizes up and goes back to the Dark Ages, where the payments system becomes a net drag on proper valorization rather than a boon to it.