Moving Money: The Future of Consumer Payments

Introduction

Money is one of those words with multiple meanings. Economists tell us that it serves as a medium of exchange, or the way in which actors in an economy pay for goods and services. It also is a unit of account, or the device by which prices of those goods and services (think dollars and cents) are determined. It is a store of value, a way in which actors can hold their wealth, though in modern financial systems there are typically more productive ways to hold wealth, such as financial instruments or hard assets such as real estate (in which case the value of those assets is expressed in the chosen monetary units). This book is about money and its use, primarily by consumers in the first sense of the term, as a medium of exchange. More precisely, the chapters in this volume attempt to answer the following questions: Over time what forms has money taken? How are these means of payment likely to change in the years ahead? What, if anything, should policymakers do to facilitate those changes or, at a minimum, to avoid holding them back? Why do answers to these questions matter? For one thing, the payments industry—governments and the firms that enable payments—is large and important in our economy. As noted in chapter 2, in the United States alone, private sector payments providers generate approximately 1 Introduction robert e. litan and martin neil baily 1 We wish to thank Adriane Fresh for outstanding research assistance. 01-0277-1 CH 01:01-0277-1 CH 01 5/23/12 5:05 PM Page 1 $280 billion a year in revenue. This number does not include the substantial governmental resources that go into making money (coins and printing money) or moving it (checks and various electronic transfers). Second, it turns out that how we pay for things influences what and how much we buy, and when. As we note below, and as a later chapter discusses in much greater detail, there is a significant psychological aspect to how we pay for things. Other things being equal, people tend to buy more goods or services, and to be willing to pay more for them, under certain circumstances, for instance, if they can pay by credit (credit cards) than with cash or its equivalents (debit cards). How the means of payment evolve, therefore, can influence how economies themselves evolve. Third, the technology of money and means of payment is fascinating in its own right. Continuing advances in technology—communications and the digital revolution in particular—have shaped and will continue to influence what means of payment are devised. At the same time, however, consumers ultimately will determine which of these technologies they will actually use. Fourth, the payments landscape is likely to be very much affected by public policies toward payments. Any form of payment requires trust on the part of both the seller and the buyer. No one wants to be the victim of fraud or theft. Government is required to enforce laws against such outcomes. Historically, governments also have had monopolies on the manufacture of money and on the means of its transfer (other than in face-to-face transactions). More contentious is whether, and to what extent, government is also needed to protect the market in private sector payments systems. The chapters that follow address these and other issues associated with consumer payments. The authors are recognized experts, from both the academic and the private sectors, on payments issues. Initial drafts of these chapters were presented at a conference at the Brookings Institution on September 16, 2008. We set the stage in this introduction by providing a brief history of money and consumer payments and discussing some of the economic characteristics of payments systems. We then outline some of the broad 2 Robert E. Litan and Martin Neil Baily 01-0277-1 CH 01:01-0277-1 CH 01 5/23/12 5:05 PM Page 2 themes that run through the chapters. In doing so, we concentrate, as most of the chapters do, on payments technologies in use in the United States. Where relevant, however, we draw on experiences from other countries. Money: A Brief History until the Age of Plastic For thousands of years, people have used different things as money, replacing perhaps an even longer history of a system of barter, the exchange of different goods or services between buyer...