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Not For Free

by Timothy Ogden of the Financial Access Initiative

Two weeks ago I attended a Payments Bootcamp put on by Glenbrook Partners (a 2-day class they hold several times a year) to learn more about how the payments industry works behind the scenes. There is a lot to learn. Two days allows more than just scratching the surface, but not much more. While the class is focused on the payments infrastructure in the United States particularly, the material illuminates the evolution of mobile money and digital payments in the developing world.

A better understanding of the economics of the payments industry provided the foundation for a new longer-term research project on the future of digital payments innovation in developing countries. But one thing that immediately grabbed my attention was a conversation from the first day about why the payments system in the United States is so complicated and opaque (for instance, it is now virtually impossible for a small merchant to know what fees they will pay for a credit card transaction). According to Carol Coye Benson, a Glenbrook partner teaching the course, the root cause is the stubborn refusal of consumers to be overtly charged for payments. The attitude seems to be that no one should be charged for using “their own money.”

As I wrote last year this isn’t just the case in the United States. It’s a big problem for the development of financial services, like payments, that are useful and beneficial to poor consumers. The consequence of a refusal to explicitly pay for payments services, as Benson notes, is that it forces those providing such services to develop opaque business models and hide costs and fees. That’s an enabling environment for bad behavior, like gaming overdraft fees as FAI’s Julie Siwicki has been writing about recently.

Payments services deliver huge value to payers and payees when compared to the cost of cash. Poor consumers disproportionately bear the costs of dealing in cash—mostly because they don’t make large enough transactions to hide the cost of payments services and therefore don’t fit the business model of payments services providers in the developed world. When business models that make those costs explicit emerge, the companies are often accused of being predatory—even though poor households seem to prefer, for good reason, high explicit costs to uncertain hidden costs. It’s encouraging that most mobile money services in the developing world are more explicit and transparent about the costs (and the value) of the services they provide. Unfortunately there is still some knee-jerk reaction to charging poor customers fair rates for financial services. There are certainly cases of predatory providers and poor consumers being gouged, but from what I see, more often than not, those are the result of hidden costs and fees.

Two poorly thought-out assumptions underlie discussion on the topic of payments for the poor: that payment services should be free, and that there is no justification for charging poor customers more than rich ones. This thinking doesn’t match up with reality, and it doesn’t serve the poor.

This post was written by Timothy Ogden of the Financial Access Initiative. The views expressed therein are those of the author, and not necessarily of the USFD project or its funders.