Payments – why should the efficient means subsidise the inefficient ones?

To what extent should society tolerate people using expensive and inefficient payment mechanisms when more cost-effective (to society as a whole) alternatives are readily available? Suppose someone wants to carry on using a product or service that suits their needs but imposes a general level of harm on everyone else? I might decide that I want to use depleted uranium for my dustbin and it's hard luck if it causes metal poisoning in my neighbours. Or I might decide that I want to use leaded petrol. Or smoke in the pub. Or cash. Should I be allowed to carry on regardless, asks Dave Birch

To what extent should society tolerate people using expensive and inefficient payment mechanisms when more cost-effective (to society as a whole) alternatives are readily available? Suppose someone wants to carry on using a product or service that suits their needs but imposes a general level of harm on everyone else? I might decide that I want to use depleted uranium for my dustbin and it’s hard luck if it causes metal poisoning in my neighbours. Or I might decide that I want to use leaded petrol. Or smoke in the pub. Or cash. Should I be allowed to carry on regardless, asks Dave Birch

Clearly the answer is no. Society applies utilitarian calculations to radio-active dustbins and secondary smoking – so why not to the cash menace? However, how do you stop people from using the wrong kind of payments? You’d think that price would be the obvious mechanism, but I do have to say that this is not always true, because it isn’t always clear what the price is. I am reminded that I recently learnt that the UK government is about to start the re-procurement of banking services and since they currently handle about £900 billion in payments per annum, that’s quite a big deal. (The current contract is split between RBS and Citi, by the way.)

One example that illustrates the scope for improvement in the sector is that of a government department that had instructed 150 CHAPS transfers last year. Analysis showed that 125 of these were for less than £10,000 (the average CHAPS transfer is £2m) and could have gone via FPS at a tiny fraction of the costs. But they didn’t. The people in the departments want to carry on doing what they’ve always done and since they don’t see the price, why wouldn’t they?

You could frame this issue in another way: to what extent should taxpayers subsidise people who want to use expensive alternatives? For example if the public sector ends up as the last users of cheques should they have to bear the whole cost of the infrastructure? But shouldn’t this be true for cash as well? Shouldn’t the last people who want to carry on using it be paying for it?
This isn’t an UK problem, it’s a general problem. McKinsey has recently pointed out that the European payments sector is riddled with cross subsidies.

Indeed. And the cross-subsidy is from the more efficient payment products to the least efficient ones, which cannot make sense in the longer term. It is time for action, although I’m not really sure what that action might be, other than to pass a law requiring all merchants to include the cost of "debit" transactions in advertised prices and allow them to surcharge for all other choices.