The pandemic of mindless contactless payments

I saw something just after the end of the second Melbourne Covid lockdown that struck me as a sign of the times. But before I go on, great work Melbourne on eliminating the virus entirely, super glad this is now sorted as I think a draconian lockdown like that is only reasonable with an aim for full elimination (provided of course this is possible, which it was in Australia) as this gets life back to normal quickest.

While I was waiting to pick something up at a store I was standing outside watching people come and go from the cafe right next to it. It was interesting because of the very close proximity of these stores you could see how people were interacting with the staff at the counter. Very much in COVID fashion the counters for these places were facing the street to allow people to pick stuff up without needing to go inside, and due to the pandemic people were far less inclined to go inside.

It was with this backdrop that I witnessed something that I found surprisingly unsettling. This young guy comes by and rather loudly asks "I'd like to get a bottle of water, whatever one is cheapest". The guy at the store pulls one out of the fridge and the young guy already has a credit card in hand hovering over the payment screen waiting to tap it as quickly as possible. No utterance was made in this transaction of what the cost was, perhaps he would have pulled out were the numbers on the terminal different to what he expected but I'm fairly sure he never even looked at what he was being charged because his credit card was covering the screen before any amount was ever entered.

Then moments later he goes into the convenience store I was waiting at and purchases another really small item that was less than a few dollars. Similar lack of any attention paid to any of the details of transaction, not once in either of these transactions was an actual numeric amount mentioned.

I couldn't help but think, if he'd bought both the water and the other items at the same time how much would have been saved on transaction fees?

The unsettling part was that he expressed a clear sentiment towards wanting the cheapest item but had not considered how he was paying for these items. There's been people who have done research that shows that people will spend more on the same items when paying using credit compared to cash.

On the way home I was struck by a deeper and more disturbing thought, maybe this guy hadn't expressed even a moment of thought about the money he was spending. It could have been that he was a regular customer of those stores and knew exactly what everything cost ahead of time. But did he know anything about the monetary system in which he is living his life?

After this day I asked around to try to get a sense of if people knew what the deal with these payment processing systems were and the amount of ignorance was staggering. The most disturbing thing I realized is that a number of vendors had no idea what the different payment options cost them. Given that this could be a difference of a few percent this seemed like a staggering oversight from a business perspective. How did we end up here?

Contactless payments fees

When you go and tap on a point of sale machine with your phone/credit/debit card what actually happens?

When you tap your card or phone on one of these terminals there's a system of electronics that allows the payment details of your account to be verified and a transaction to be made that will move money from your account and to the account of the merchant. Depending on the way in which you use your card different systems for payment will be used. For example when I was travelling for business in Canada I noticed that my business bank card would always work if I used a contactless payment but if I inserted the chip it would never work. This is because the contactless payment is processed on a different payment processing network to the chip.

This is all tremendously convenient but all this convenience comes at a cost, what is debited from your account isn't the same amount that's credited to the merchants account. So you might be wondering, how much does this cost exactly?

Something you'll quickly notice when you try to find out is just how hidden the costs are. The costs of these transactions are very deliberately buried and the whole system is actively structured to discourage consumers to think about these costs on any level. While researching for this post I read articles about card security, retailers legal obligations to accept or not accept cash, payment limits, statistics on the percentage of payments made contactless, and various articles about digital wallets without coming across a single mention of fee structures for using any of this in Australia¹. I did find this article that talked about how card fees had risen substantially for some vendors in the last few years in the USA.

I even came across an article talking about a potential backlash against contactless payments which talks about a lot of the problems of society going completely cashless but yet even this article doesn't mention the fees. I think a completely cashless society is very troubling and has some extremely negative consequences that people don't think about anywhere near enough, I'm covering a couple of those themes here but there are bigger picture problems with a completely cashless society that really require an article of their own to do justice to. Specifically in a cashless society people who do not having access to banking are completely and utterly fucked. There's more of these people out there than you'd think too, it's not just the population of homeless people (which has been steadily growing lately) but a whole variety of people who are currently not covered by the banking system for a various reasons.

Coming back to the fees question again though, it's surprisingly hard to get data about what the different payment options cost. What information you do find tends to go out of date because companies like Visa and Mastercard tweak their card fees on a continuing basis. As a result a surprisingly large portion of vendors don't even know exactly what they are being charged in transaction fees, which absolutely blows my mind. At the beginning of the adoption of electronic payments at the point of sale a lot of vendors knew exactly how much it all cost, the technology was new so people did due diligence and got an accurate assessment of the costs. Because electronic payments back then many store owners wanted to charge extra for card payments so in response a lot of the card providers very deliberately tried to coerce store owners to charge the same amount for the card payments as cash payments as a condition of being able to use their services at all. This was a critical step in the uptake of card payments, the customers had to get used to paying the same amount for the card as cash since these new card technologies would simply have not got over the inertia of change if each transaction visibly cost more money than using cash. It was also crucial because a cost difference between cash and card payments would have brought customers direct attention to the fact that card payments come with fees. Over time people have got more accustomed to these payment methods and now think about them less. Interestingly you'll see vendor resistance to new payment processing methods that introduce additional charges, like what we saw with Apple pay and its high fees for merchants because the high fees are again unavoidably front of mind.

You may have noticed that a lot of merchants really dislike many of these payment methods if they have to deal with a lot of transactions of small dollar amounts. When people have actually run the numbers they know that the card fees are especially brutal on small purchases because the fees are usually some flat cost plus a percentage, you'll see how brutal in just a moment when we run the numbers from my anecdote. He had 2 contactless purchases:

• a $2 bottle of water
• a $1.50 snack

(note these are all 2020 Australian dollar prices²)

I've been told that with the brand of card he had there's a 30cent fee plus 4% for using the contactless payment! (It's interesting to note that the fees for the exact same card can be different for different payment methods, as in contactless vs chip can use entirely different payment clearing systems and have different fee structures to the vendor) So in this case the following in fees were paid:

74 cents is a huge amount of fees on a $3.50 total. This comes to 21% ! People would be livid if they had say a hidden 21% fee on say something like their electricity bill or, god forbid, their petrol/gas bills. These would be the sorts of things where people would get angry enough to put large pressure on changing the laws, as they did with the fuel docket discounting that used to be displayed on signage at petrol stations (note for international readers of this blog, in Australia there was this scheme for a while where if you spent more than a certain amount at stores that were connected to the fuel companies you got a 4cents per liter discount on your fuel. Some stores started putting the discounted rate on the street signage and a large number of people thought this was a dishonest business practice, the law later got changed.). But people just have no idea what they are actually paying this this case.

Something else that I came across in researching this is that apparently a $5 note in Australia can circulate 110 times in a year. Making the assumption that a $5 note only lasts one year and costs $5 to produce, both overly conservative estimates we can get an estimate on the cost of the transaction using cash. If we were to apply this same fee structure to the movements of this note:

So this is 4.5 cents per transaction if the $5 was "lost" at the end of each year. This might have cost 9 cents in fees as a cash transaction using this structure. However it costs a lot less than $5 to print a $5 note at the mint. The topic of cash getting lost or destroyed is quite interesting overall, the difference between how much the face value of money is and the production costs is known as Seigniorage. This is obviously a crude estimation of the costs of cash transactions as there's a number of other factors like extra handling costs of cash for the vendor but you can see that it's an order of magnitude cheaper than using the card payments for these small items.

On top of all this the merchants often have to pay fees just to have the payments processing terminals in their stores. Off the record many store owners will tell you that the fees they have to pay just to be able to have a cashless terminal are quite large. Recently I had a conversation with an owner of a local store, he has to pay $1200 a month just to have the payments terminal in his store and this doesn't cover any of the costs of certain types of card transactions. That's a rather large amount of money for a small business to have to pay each and every month. Or in other words this merchant has to pay $14.4k per year each and every year so that his customers can keep tapping their cards in his store. He openly encourages customers to use cash and many people just blankly stare at him because they don't even know what they are paying for things. I won't mention this business because it might be a breach of contract discussion the fees with me, but this particular business owner is very knowledgeable about how the banking system really works. We both find it disturbing that we have such a widespread and important aspect of modern commerce where the fees are so hidden by design and funneled to 3rd parties. The productive members of society are once again burdened by a system that props up the rentier classes, in this case from skimming a significant percentage of each and every transaction ever made and charging the merchants for the privilege of having a machine that will make them pay more fees.

Perhaps all these fees have incentivized bankers to venture far outside their areas of expertise in banking and finance into epidemiology. They sure do seem to have some strong opinions on how viruses can spread on cash but not bank cards. This all seems to be part of a broader Dunning-Kruger effect pandemic where people who have no idea about epidemiology have come to suddenly think of themselves as expert epidemiologists and sometimes go a step further to tell the world about it via social media. I suspect some of the deliberate fear mongering around claims the virus spreads on cash has worked in pushing more people to use electronic payments. Unfortunately I've seen people who have been scared of cash mindlessly use pin pads that have been touched by who knows how many people without a second thought.

The psychology of the cashless tap payment

It struck me watching the young guy how contactless payments allow people to think considerably less about money which then makes it far easier for people to mindlessly spend their money. This mindlessness in consumption just isn't a good think long term for our society and country.

The next time you are making a contactless payment make sure you are actually mindful of what you are spending.

While in the extreme short term getting people to spend more might get some economic activity moving there's a lot of long term damage that occurs from encouraging economic activity just for activities sake. Measures like GDP aren't good ones for tracking the health of a country and aren't even that great for looking at the strength of an economy because they are more a proxy for the amount of energy expended rather than the outcomes achieved. If simply expending more energy was the best approach we could just smash windows to then spend money on fixing them, such an approach might spectacularly prop up GDP and would probably be sold as some great policy to ensure "full employment" (whatever that now means) but it would be terrible for the environment and terrible for people who might actually want to engage in productive business who just want their windows to not be always either broken or being repaired while they work.

I definitely think there's a place for electronic payments, I just find the nature of the hidden fees and the extreme efforts that are being made to keep these fees hidden highly objectionable. I suspect that properly decentralized finance might make instant payments possible without large portions being skimmed by third parties.