New Technologies Can Change Payments and the Economy

Formerly the chief economist at the International Monetary Fund and now a professor at MIT’s Sloan School of Management, Simon Johnson has studied and written widely about payments, credit, banking, and monetary policy. He is now watching a variety of “big ideas” that could influence the future of payments and have broad implications for the economy. New methods of transferring money quickly and at low cost could especially benefit the “unbanked” in emerging economies and poor people in the developed world. Johnson spoke to Business Reports editor Nanette Byrnes in his campus office in Cambridge, Massachusetts.

Is the system we use to pay for things today working?

The clearing of a check is very efficient, is done on a massive scale, and has very low costs. That part of making a payment works well. The other part obviously is the question “Is this check going to bounce?” We have become persuaded since the 1950s that it was better to use a credit card, a system in which the transaction is guaranteed by a third party. But that is a very expensive way to make payments. It is run by a cartel with a lot of pricing power. The difference between what it really costs to make a payment and what you are being charged for that is a large amount of money. It’s a huge target for new payment technologies. And some set of technologies is going to find a way to reduce that difference.

There is a payment revolution under way—though maybe we’re not fully aware of it—and the incumbents [such as Visa and MasterCard] are not without some power or ability to respond. It’s difficult because they make so much money on the existing system; why would they cut their prices by too much? But there’s a big opportunity here.

If new technologies and other changes make paying for things less expensive, could that encourage more transactions and boost the economy?

I think the biggest issue is for lower-income people and lower-income countries. These are countries that typically have less well-developed banking systems, where credit cards are typically not as available. Now they can bypass [credit cards]. The financial services offered to relatively poor people in the U.S. are very expensive—including cashing your paycheck, or getting a payday loan, or even cashing a government check, which is crazy. I think change can help people across a range of activities and help less- well-off people more.

But the most discussed new technology in payments, Apple Pay, is not a threat to the existing payment business model. In fact, it runs on the rails of the existing system. Will it help overall costs drop?

I suspect not. They’re divvying up the pie.

Others are too. Starbucks reports that 16 percent of its sales are made through its phone payment app.

What Starbucks cares about is selling coffee. This money thing is just a side issue for them. They’re not going to screw me on that because then I’m not going to go buy cups of coffee from them. Someone who has that kind of consumer trust I think can do well at this.

Consumers need to trust someone who is this kind of payments intermediary. You are giving them money. And maybe letting them draw more money from your account when necessary. They have a lot of data on you. We have to believe they can’t be hacked into, to steal that data or money. So it does suggest you should think about a technology company or a company for whom data security is really key.

I’m surprised the technology companies haven’t made more inroads [in payments] yet. There are some regulatory restrictions in the United States, which I think are going to come under some scrutiny. Regulators like to restrict who can run a bank. They like to keep it to this group of people who’ve run banks before. It’s a very, very old-fashioned idea to think that bankers are somehow more honest or trusted. Who would you trust more? A big brand-name bank, or Google or Apple?

What role will cryptocurrencies play in the future of payments?

There is clearly something about the backbone of those systems that should work, but whether the consumer interface with bitcoins and wallets, whether that wins, I’m not sure. People want to steal your stuff all the time—that’s just a common theme of human history. How much anonymity do you want to have, given that you want some protection against theft? The other issue is, do I want to work through this separate currency that has the fluctuating value of Bitcoin, or would I rather just have a lower-cost way of making payments in dollars? Ultimately money’s going from my bank account to your bank account. I’m not sure I need it to go through an alternative currency. There are people who want to take Bitcoin [valuation] risk, but you’re selling me a cup of coffee. Why do you want to take Bitcoin risk? You don’t. You just want to be paid, and it’s in both our interests to make that payment at very low cost.