“Reality Check” was a TV show that aired in 1995 about a couple of kids who moved into a house and found a computer that was left behind by the previous owner. These kids – Samantha and Nick – soon discovered that the computer was not your run-of-the-mill ugly beige Compaq. Stuck inside the computer was the original owner of the house, a guy named Jack Clark. The storyline, of course, seems a bit at odds with the title of the show (which not surprisingly lasted only one season) but it stayed with me.
Samantha and Nick would boot up “Jack” every couple of days. He’d teach them about a variety of things going on in the world – science, math, archaeology, literature. Jack’s idea was to give those kids a “reality check” about the things he thought they needed to know so that they could do better in school.
Little-known fact – Jack Clark was played by Ryan Seacrest, who went on to make a career out of giving budding young talent their own reality checks each week on TV’s “American Idol.”
Reality check though, seems an appropriate theme for several topics of discussion across the payments world, based on a few things that happened (or didn’t) last week that could benefit from such a, shall we say, intervention?
But, instead of Ryan Seacrest, you have me.
Welcome to Payments Reality Check.
Ken Rogoff is an esteemed professor of economics at Harvard University. He’s also the former chief economist of the International Monetary Fund. He’s a pretty smart guy. And he wrote a brilliant book a few years ago on the history of financial crises – “This Time Is Different.” Check it out – it’s worth the read.
For the last two decades, Rogoff has been at war with cash. The guy literally hates the stuff – but not for the same reasons that David Wolman does.
His disdain isn’t because money is germ-laden paper passed from who-knows-who doing who-knows-what with it, but because he says it’s the currency of criminals. In his brand new book, “The Curse of Cash,” Rogoff also devotes a fair number of his pages to Central Banks’ inability to regulate monetary policy because, among other things, there’s too much cash being hoarded by people who are, by and large, engaging in bad behavior with it.
Getting rid of cash, Rogoff writes, would, therefore, put a crimp in all sorts of bad stuff financed by cash, and in particular, cash of the high-denomination variety. He says that the only people who use $100 bills and £500 notes are drug dealers, money launderers and human traffickers. Rogoff also says that cash is used as a tax dodge, as a way to keep illegal immigrants from being paid a respectable wage and for employers to unduly benefit as a result, and for those in European countries as a way to evade the value-added tax and keep the underground economy alive.
In other words, not very much for useful stuff.
Gulp. All of a sudden I feel like a criminal with the $100 bill in my wallet that I got that last time I used a Bank of America ATM, and it’s in the genes since I know that my dad has a hoard of cash at home.
Rogoff has a plan for how to rid the world of the 3,000-year-old artifact that he believes has passed its prime. His plan is to get governments all over the world to, first, stop printing all large-denomination bills, such as $100 bills and £500 notes, immediately. That would stop the supply. Then, to get what’s in circulation off the street, he suggests that governments give consumers incentives to turn in those bills – so bring in a $100 bill and get more than its face value deposited to your bank account. Don’t have a bank account? The government will give you one, subsidized by the government, which Rogoff says would have the double advantage of solving the financial inclusion problem all over the world.
Then, he suggests, governments should, little by little, stop printing $50 bills, then $20 and $10 bills, and replace those smaller-denomination bills with coins. The theory is that people would really have to love cash to use it, since hauling around $100 in dimes would be a real pain for the consumers, merchants and drug dealers of the world.
And foreign governments. Can you imagine how big a plane it would take to send $400M in unmarked pennies?
It’s a given that moving consumers away from physical methods of payment to digital methods is what we should be striving to do. It also happens to be what everyone across payments and commerce is working hard to make that a reality – and that’s a good thing.
But the reality check here is that despite the fact that we’re in the age of smartphones and digital wallets, consumers all over the world still like cash – and even digital savants still carry it around. Maybe not as much as they used to, but consumers still use cash because they still like using it. If they didn’t, they wouldn’t.
Consumers make conscious decisions for their own reasons about what they use and where they use it. Even in Sweden, where the governments and the banks have made it inconvenient to access cash and evade taxes by insisting that merchants hook up little boxes to their cash registers that record every transaction in a shop, people still use some cash.
In developing economies, it may also be the only way to transact. Sending money digitally to someone in a village in India or Kenya still requires that that digital transmission of money – even to a mobile device or a bank account – be converted to cash somewhere so that the receiver can buy stuff where they live. It’s hard to find POS terminals that will take a government-subsidized debit card in local villages in India, where more than 60 percent of the country’s citizens live. And when disasters strike in far-flung places all over the world, cash is what people can spend, even though we all recognize that it’s an open invitation for bribes and graft.
As for the large denominations, it’s not just the neighborhood drug dealer with his trunk filled with suitcases of Benjamins who trade in them. Lots of consumers (like my dad) like having a stack or two of $100 bills under the mattress, so to speak, in the event of an emergency. It’s not the safest thing to do, nor is it the most financially sophisticated, but it makes some people feel secure. And people all around the world put their savings in large-denomination U.S. bills because they think, probably correctly, that it’s safer than all the alternatives.
Using cash for some people is also cheaper and more tangible than digital alternatives, including ones that they have access to and may even be using. The first thing that many people with prepaid payroll cards do when they get a direct deposit on a payroll card is visit an ATM and withdraw all of the deposit in cash. Cash is also how many people budget, since what they see is, literally, what they can spend.
So the reality check here is that cash, for all of its non-technical characteristics, provides a lot of benefits for people. And if that’s what consumers want to use, why shouldn’t we let them? When consumers are ready to give up cash because a better alternative fits their lifestyle, they will.
Governments are cracking down harder and harder on bad guys who use cash for nefarious purposes – and the methods they use to do that are growing in sophistication. Maybe it’s time to get a cash-usage reality check before those who don’t walk in the shoes of consumers decide what’s best for them – and in the process, impose friction where friction doesn’t exist for them today.
And if we got rid of cash, it’s not like it would really put a crimp in the criminals and terrorists lifestyle. They’d figure something out.
In fact, they already have.
If Professor Rogoff wants to know what’s the currency of the big-time criminal today, it’s not cash, it’s bitcoin.
The Wall Street Journal article last week about the rise of ransomware attacks, thanks to bitcoin, is just the latest example of the cryptocurrency’s near-perfect utility for committing cybercrime. Bitcoin is being credited for the rise in the rate of ransomware attacks, which have quadrupled this year. It seems that the virtual currency is a nice and easy way for cybercriminals to make a buck. Hackers take control of computers and then demand bitcoin to unlock them. Why bitcoin? Because it’s untraceable and there’s an infrastructure for them to turn it into their currency of choice to spend.
But that’s not bitcoin’s only use case.
Cybercrime is an increasingly sophisticated global and digital business – just like every other sector that’s riding the digital wave. And, as all of us in payments knows, doing business globally requires an efficient payment method that also goes cross-border. That efficient payment method is bitcoin.
How one buys drugs on the dark web, gets compensated for human trafficking or buys stolen identities is by using a digital form of cash – bitcoin. Bitcoin makes doing business on the dark web frictionless and is fueling this global business. It’s not the use of £500 notes for financing terrorism that the European governments are worried about, it’s bitcoin. These governments are stepping up their processes and procedures to include ways to require identification for anyone who tries to buy it.
The Chinese are all over bitcoin, too, but for a different use case. Ninety percent of bitcoin transactions come out of China, and 70 percent of the mining capacity is there. The Chinese use bitcoin to move money out of China into other countries, including the U.S. The Chinese government can stop the yuan from leaving China, but it can’t do that for bitcoin – yet.
So, the reality check on bitcoin?
It’s DOA as a global currency that regular people and businesses use for transactions. Hardly anyone does this despite all the hype about merchants taking bitcoin a couple of years ago. It hasn’t happened and it isn’t going to happen, so stick a fork in it.
It’s unregulated. It’s leaderless – and what it has for “leaders” are divided on how to govern it or whether it should be governed at all. Its infrastructure is highly concentrated in China – 70 percent of all mining capacity is located there and controlled by four mining companies in China. That sounds safe, doesn’t it?
Bitcoin exchanges get hacked about every six months, and when they do, users lose just about all of their money. (This is where cash is still a lot better for safekeeping, and why criminals might want to use bitcoin for transactions but still keep their wealth in cash.)
Here’s another reality check.
If bitcoin remains the primary method of transport on the blockchain, which is being positioned as the world’s great hope for moving money around the world, then it will end up killing that too. Bitcoin to payments and financial institutions is like garlic to vampires and why no bank will ever embrace blockchain technologies built on top of it.
Even the VCs seem to have gotten a bit of the bitcoin reality check. In Q1 of 2016, total investments in bitcoin and blockchain ventures was $160.7 million. Only 16 percent went into bitcoin investments. I say “only” because nearly $1 billion has gone into bitcoin over the last several years, without much of an ROI for the VCs.
But that 16 percent shows that you can still fool some of the people all of the time.
It’s August 22, 2016, and by most accounts, summer is over.
Apparently, though, it’s not over for the folks at the Consumer Financial Protection Bureau. The prepaid rules that they promised in the spring, after the deadline was pushed from the end of 2015, were promised to drop mid-summer. The first day of summer was June 20. The end of summer is officially September 22. That would make mid-summer, by most accounts, two weeks ago – and we haven’t seen the promised rules.
Currently in CFPB rulemaking limbo-land are the prepaid issuers and payday lenders – two industries whose very future – and the futures of all of those who rely on those products – are hanging in the balance. Among other things that the prepaid ruling advocates is that an overdraft on a prepaid card not be subject to overdraft protections like any other DDA account, but be considered a loan and therefore be underwritten like any other request for credit.
The reality check here is that most consumers use both products, payday loans and prepaid cards, not because they are being tricked into using them, or because they don’t understand how they work or are being abused by solution providers, but because they need them and like using them.
Take one of the biggest issues at stake in the prepaid card rulemaking: how prepaid card overdrafts are treated – as an overdraft (today) or as short-term loan (the CFPB’s preference).
I chatted with CEO of the Network Branded Prepaid Card Association, Brad Fauss, about this issue not long ago. He said that most prepaid card overdrafts are $10 and are repaid within 24 hours, since they simply reflect a mistiming of a direct deposit and, say, an auto-payment of a bill. Requiring that a $10 overdraft for 12 hours be underwritten like a $10,000 line of credit would result in only one thing: that issuers would stop making the service available to consumers.
Which, of course, would leave consumers possibly contending with late payments for those billers – and a big mess to have to clean up.
Who loses? Well, at the end of the day, the consumers who are supposed to be protected (hey, that’s what the P in CFPB stands for).
The other reality check here is that prepaid issuers operate businesses, and businesses need to plan. The longer the rule stays in CFPB rulemaking limbo-land, the more cards the industry may have to pull off the shelves and repackage, since a great deal of the rule requires additional disclosures that require a change in packaging. Since the industry is now geared up to ship cards to stores for the holiday season, a ruling that drops soon has the potential to leave the industry bearing the cost of destroying and redistributing tens of millions of cards – which isn’t cheap. Those costs have to be recouped somehow, since prepaid issuers operate businesses that need to cover their costs and make a profit.
Payday lenders aren’t in much better shape.
The CFPB is making those rules without having talked to the many consumers who, but for a payday loan, would have been in dire straits. Most payday borrowers are middle-class, banked consumers who need a few hundred bucks for a couple of weeks to cover an emergency. More than half pay off their loan entirely before the next payday, and half of the remaining half do so soon after.
The CFPB has put a pox on all the payday lenders’ houses after hearing complaints from a few people who’ve had bad experiences from predatory payday lenders. But not all payday lenders are like that; in fact, the vast majority are not. And the good guys would like nothing more than to rid the industry of the scammers, too, since it gives them all a black eye.
Instead of surgically targeting only those bad dudes, and advocating the use of the software tools in place today that make compliance to state usury laws indisputable, the CFPB would rather take a sledgehammer to the entire industry. Its proposed ruling applies such stringent criteria to lenders that it will make it impossible for them to serve the number of customers they do now, since they simply won’t have enough capital to lend money and make a profit.
Yeah, I know, there’s that “P” word again.
It used to be OK for businesses to make a profit, but apparently not if you happen to be connected to the financial services industry. Unfortunately, not everyone is lucky enough to be able to tap into a huge cash reserve like the Fed’s operating budget to keep the lights on.
So the reality check here is that the big loser won’t be the payday lenders if the ruling passes as it stands, but consumers – who will be forced into other, more expensive and even potentially dangerous alternatives.
Here’s another place where a reality check is needed: the issue of arbitration, and the CFPB’s push to eliminate the arbitration clauses that banks currently include in their credit card and other financial services offers.
Director Cordray says that it’s not right for consumers to sign away their rights to sue as a class when things go wrong, ignoring the fact that arbitration forces banks to be held accountable for things that they may do to harm consumers. Class action lawsuits are generally about plaintiffs’ lawyers getting rich off of consumers’ backs. If the CFPB has its way, banks will be forced to say bye-bye to arbitration and hello – and probably a lot – to the Plaintiff’s Bar.
Here’s how consumers benefit when that happens.
When Bank of America was sued in a class action lawsuit over overdraft fees and forced to pay $27.5 million to settle the case, the plaintiff’s lawyer got $9 million and each consumer got a life-changing $30—assuming they filled out the necessary forms.
When Ticketmaster was sued over “hefty processing fees,” the plaintiff’s attorney got $16.5 million and each Ticketmaster customer got a $1.50 windfall (again, if they filled out the form).
Obviously protecting the consumer is a great thing. It’s what the FTC does and has done a great job with for decades. We all wish it was the case that we didn’t need agencies to catch businesses engaging in behavior intended to harm consumers, but we do. But the reality check here, with the CFPB at least, is whether their intent is to truly protect consumers or simply punish the “fat cat bankers.”
I’d be willing to guess that, after reading this, more than a few people might wish nothing more than to stick me inside an old PC in an empty house to be discovered decades later by kids who, instead of turning it on, would stick it in the trash heap.
Until then …
Oh, and by the way, what do you think needs a big reality check?
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