The Future of Payments
Consumers and retailers shying away from cash may have broader implications on economic markets
—By Zain Arfi
Have you ever taken a moment to consider how far your wallet takes you? In previous generations, one might never leave their house without a wallet; however, nowadays what do you need your wallet for? While many people still keep cash around, and various physical cards, carrying around a wallet is slowly becoming less of a necessity and more of a safety measure. This broader trend I am speaking of goes beyond the fad of phone wallets which give a consumer one less thing to carry, it speaks to an evolution of the way consumers actually pay for their goods.
Big shift at the Big House
Saturdays during fall in Ann Arbor are quite the spectacle. The entire town lights up as over one hundred thousand of the University of Michigan’s biggest fans pack into the largest stadium in North America to watch football. During the game, fans are met with a wide array of concessions from hot dogs to tacos. More recently, however, despite the hundreds of thousands of dollars transacted, no cash is used at all. Michigan Stadium has switched all vendors from normal cashier counters to Clover Payment systems which allow for credit/debit transactions and tap-to-pay. The concept of getting rid of cash is a common thread in Ann Arbor and other college towns with a lower median age. Years ago, students may have gone through a long checklist of items before heading to watch a game at Michigan Stadium, ensuring they have their wallets, tickets, and other items. Today, fans need one thing—their phones. Within a mobile wallet, consumers can hold their ticket for the game, along with multiple debit and credit cards to buy concessions.
The switch from cash to mobile payment methods has been a gradual process. When I asked Miles Macklin, a current senior at the University of Michigan about his experiences in Ann Arbor on the preferred spending habits he mentioned, “the way I spend now is pretty different from the way I spent in freshman year. It wasn’t immediate, but looking back it definitely changed.” Macklin reflected on simple changes from swiping his card, to using Apple Pay for nearly every transaction nowadays. “I still remember when I was a kid and my parents would give me cash at the beginning of the week to spend, I doubt anyone does that today.” It seemed that Macklin had never truly realized how big of a shift his payment methods had gone through during his life. While it may have seemed like a natural shift, the implications of this trend is quite large, as millions across the country have shifted from exchanging goods and services with a government-issued paper to exchanging those same goods and services for a phone tap.
A different “going out” experience
From an economic lens, the emergence of ePayment systems has completely changed the way consumers and sellers interact with money. An important part of this transformation is understanding why this is taking place. On the consumer side, Macklin’s experience seems to tell the story of how convenience sparks the shift to different payment methods. “When I go out now, I really don’t need to carry much…it’s my phone, ID, and that’s pretty much it.” Macklin recounts his experiences going to a popular bar, Rick’s American Cafe, which many upperclassmen flock to on the weekends. Rick’s is one of the many bars across the country that has partnered with LineLeap, a startup based in Ann Arbor, whose app offers a mobile payment method for drinks and cover charges, and even allows consumers to buy “Line-skips” to avoid the massive lines outside Rick’s. From entering the bar to leaving, LineLeap has found a way to monetize every portion of the going out experience. Rithik Aggarwal, a senior at the University of Michigan, is one of many avid users of LineLeap.
“I know it costs a bit more, but the fact that everything is right there on my phone makes it worth it in my opinion.” What Aggarwal is truly paying for is the convenience of never having to take out his wallet once inside the bar. For him and the hundreds of other students who flock to Rick’s on the weekend, the fifty-cent service charge is a negligible cost in comparison to the added convenience of not having to carry around cash for cover. Once inside the bar, consumers can use LineLeap to view the entire drink menu and buy directly on the app instead of having to flash a card at the bar hoping the bartender will see it. “It is so much easier to just hold my phone up at the bar than to track down a bartender, and even then it’s honestly 50/50 if they will hear me well enough to get my order right.” With LineLeap, Aggarwal’s drink is only a few taps away. In a manner of seconds, he can pull out his phone, order a drink, have the bartender claim it, and go back to the dancefloor without having to wait for his card or his change to come back.
The vendor’s side of the equation
Apps like LineLeap which are slowly taking over the nightlife world do not just benefit the customers, they also have huge benefits to the bars and clubs themselves. One of the biggest benefits of LineLeap comes from its name and one of its first-ever product offerings, the LineSkip. Rick’s on any given Thursday may boast a line that is anywhere from thirty minutes to two hours long. LineLeap gives customers the ability to skip that line and walk right in for $35. While this may seem like a pretty basic product offering, what LineLeap is really allowing for Rick’s and other bars across the country to do is practice price discrimination. The basic principle of price discrimination is that all customers have a different willingness to pay for entry into the bar. Before LineLeap, all customers were charged the same $5 cover despite what their willingness to pay was. With the addition of the LineSkip feature, Rick’s can now charge customers with a higher willingness to pay a higher price, resulting in added profits.
On top of the added benefit of discriminating on prices, the convenience that customers feel with buying drinks on LineLeap adds to the number of drinks sold on any given night. Without LineLeap, getting drinks at the bar is a three-step process: a customer orders, the bartender takes their card, the bartender comes back with the card and drink, and the customer signs and completes the transaction. Anders Song, a bartender at Rick’s for the past year noted that this process, especially based on the level of experience of the bartender can take a lot of time. “I feel like I am constantly running a marathon between the bar and the point of sales (POS) system” Song notes.
Every time he takes a drink order Song has to wait as the POS system registers the card and then has to manually input the charge and drink before even making the drink. “The entire process seemed fine until we started selling drinks on LineLeap.” When customers buy a drink on LineLeap, Song can stay at his bartender station and simply prepare the drink and move on to the next customer. With such an expedited process, Song and the rest of the bartenders at Ricks easily prepare more and more drinks, one of the highest-yielding product offerings at any college bar. This increased efficiency on the side of the seller is one of the many reasons why hundreds of bars across the country have decided to partner with LineLeap and contributed to the 2016 startup’s multi-million dollar valuation in only a few years.
Convenience is king
Payment systems such as Clover and LineLeap are only the tip of the iceberg as creative new financial technology service providers enter this hot marketplace to capitalize on the shift away from cash and monetize the added convenience of ePayments. Economists have been documenting this trend for quite some time, and have a positive outlook on the future of ePayments. Maciej Dudek, a professor of economics at the University of Michigan looks fondly upon this trend, “As economists, we really care deeply about convenience and efficiency”. Dudek notes that any trend that adds convenience to either the seller or buyer in a transaction is one that will remain.
When dealing with issues such as price discrimination, and introducing more third parties within a transaction, Dudek notes it is important to track the money and see if anyone might be worse off through the shift without really knowing. “When dealing with third parties like this, the burden generally falls on whoever is getting more convenience”. While ePayment systems such as LineLeap seem to benefit both the consumer and seller, at first glance, systems like Clover and other tap-to-pay point-of-sale (POS) systems seem to only benefit the consumer. This is where the issue lies within the conveniences of switching away from cash payments; the more parties involved within a transaction, the more the money must get spread out.
Rationally speaking, companies like Clover must make money somehow, and if all the benefits of the system are on the consumer’s side, they will likely bear the burden on the monetary side as well. Professor Dudek pushes back on this idea, however, bringing to light a hidden angle from the seller’s point of view. “Every time you transact with cash, the cash is now the liability of the seller. Think about Michigan Stadium, the vendors must be accountable for hundreds of thousands of dollars in cash, that much money is quite costly to move.” Tracking the true cost to consumers and sellers for using different POS systems is nearly impossible, however, according to Dudek’s strategy of tracking the benefits, it seems that neither party in the transaction is bearing an unfair burden in comparison to their added convenience.
The true costs of ePayments
While the movement away from cash may not be causing any egregious hidden costs on either side of the transaction, Dudek claims there are still hidden costs to consumers. One of the first concerns he brings up is that of privacy: “Many kids want to go buy alcohol; however, if they use anything apart from cash, they are committing a crime with a documented electronic trail”. Whether it is a minor hiding payment from parents, criminals hiding payments from the police, or even just a consumer not wanting an electronic trial of their transaction, Dudek’s point remains; any transaction done without cash has an increased security risk every time a consumer chooses to swipe or tap their card. While these privacy concerns may seem farfetched, the story of protestors in Canada earlier this year proved a key example of the backlash from payment tracking. In early February of this year, hundreds of protestors gathered in the capital city of Ottawa, blocking various main roads for weeks to protest new Covid vaccination requirements. In an attempt to clear out the protestor, authorities tracked the finances of the organization staging the event and froze over 219 accounts tied to the protest. With this action, protestors were both identified and easily charged with various crimes and could not afford bail for their hearings in many cases. This type of government intervention may be something the world sees more and more as cash becomes increasingly irrelevant and consumers are forced to transact solely electronically for payments.
It seems with the addition of ePayment systems, convenience on the side of the seller and buyer in transactions across the country has increased. In a quickly changing economic landscape, it is possible for many “fads” to arise and go, however, it seems that the future of payments is not one of these fads. Over time, consumers have slowly changed the manner in which they pay for goods and services to add convenience to every single transaction. In terms of how far this convenience will take ePayments is yet to be determined. With the concerns of issues such as privacy and increased costs as payment systems become further integrated it is difficult to chart the exact trajectory of this trend. Additionally, all ePayment systems are liable to failure due to connectivity issues, or a flurry of other technical difficulties which may render them completely useless. Given these concerns, in the various mysteries surrounding the future of payments, one thing remains certain – cash is not going anywhere anytime soon.
Feature photo credit: Christiann Koepke via Unsplash