“5 Crazy Payment Practices We Accept As Totally Normal” | Writing Sample

2014/10/22 in Journal

Finance is littered with brilliant innovation, but also puzzling anachronisms that are better suited to history books than our wallets. In this essay I wrote for Ripple Labs, I discuss 5 such curious cases of old tech. (This post blew up and was featured in Business Insider and the San Francisco Gate).

5 Crazy Payment Practices We Accept As Totally Normal

Humans are a curious lot, with our incredible ability to adapt to nearly any situation—good or bad. It’s a useful trait most of the time—such as when you have a mysterious stench emanating from your apartment. No big deal—it’s only a matter of time before you’ll stop noticing it completely. By design, our brains will numb us to even the most pungent odors in the name of comfort. But this persistent capacity to ignore signs of potentially deeper issues can just as well breed complacency. Because whether or not you’re aware of it, your apartment still stinks.

This rings particularly true in the payments space—where we’ve been conditioned to believe that everything’s just dandy when, in fact, the status quo sort of, well, stinks. In today’s world of instant access and on demand, money always seems to require three business days or more to reach its destination. And some of the stuff we do and accept isn’t merely inconvenient or nonsensical, it’s downright reckless, exposing us to pervasive fraud that costs the industry hundreds of billions of dollars every year (and rising).

With the rest of the world—from media all the way to commerce—accelerates into the future, isn’t it time we re-calibrated our expectations for consumer finance within the context of the digital age? As always, the road to recovery begins by acknowledging the existence of a problem. Here’s a list to get you started. Go ahead, take a whiff.

1. Why isn’t there an app for that? 

We live in an age where our most prevalent personal accessories—from our cameras to our iPods—have been assimilated by that always-connected computer in your pocket. But while you can beam freshly recorded 4K video to the cloud and digitally hail a cab as you trade your equity account on-the-go, our smartphones are glaringly inadequate at serving our daily payment needs. There’s an app for just about everything—except paying for your morning cup of joe.

Even as our phones get smarter, our wallets are still pretty dumb, carrying our cash and, more often than not, an assortment of cards—the debit card, the SkyMiles card, and the ol’ American Express, for when you feel like showing off or relaxing at that exclusive airport lounge. Shopping with the girls? Better bring your Gap card (and probably the Macy’s card, too) to get 10 percent off your entire purchase. In all, we carry around 1.5 billion credit cards in the US alone—reminiscent of the days we lugged around binders full of compact discs, in case you want to play your second favorite jam of all time. Actually, scratch that—you left it in the car stereo.

Indeed, apps and services are beginning to pop up to address our mobile payment woes. San Francisco-based Coin, for instance, promises to consolidate all your plastic into a single device, and apps like LevelUp do support real-life payments for goods and services (including coffee)—but only at participating retailers. As in-development or still developing products, we’re a long way off from having an all-encompassing solution that would free up a pocket and allow us to sit more comfortably in chairs. Until then, we’re stuck with our wallets, our cards, and our cash—that is, if you happen have cash handy. If not, there’s always the ATM. Enjoy the fee.

2. Why are we still signing so many receipts?

Everyone has one of those friends, the one who audaciously signed a receipt with a smiley face instead of their John Hancock, reprimanded, at worst, with a patronizing glance—if the rebellious act is noticed at all. It’s an overused bit of performance art with a simple message: “Come on people, what’s the point of it all?”

You might surmise that your carelessly scribbled autographs somehow pertain to your personal benefit or financial protection—maybe to verify the authenticity of your latest Starbucks run. It’s a good guess, but you’d be well off the mark. In reality, it has nothing to do with you at all and everything to do with who picks up the tab in the case of fraud. If a restaurant can’t produce a signed receipt, then they’re on the hook. Otherwise, the credit card company foots the bill.

For all intents and purposes, it’s a system that’s ineffective and arbitrary—not to mention wasteful, ensuring the senseless demise of 10 million trees.

With respect to both security and the environment, Europe transitioned to smarter cards a decade ago by integrating chip-and-PIN verification. These chips are more difficult than magnetic strips to clone, and the PIN adds another hurdle for potential fraudsters, unlike the paper receipts merchants and banks rarely subject to any kind of scrutiny. Fortunately, signed receipts will officially become obsolete in 2015, when the same tech is adopted stateside. Which begs the question: “What took so long?”

3. Why is money so darn slow (and why can’t we bank on Sunday)?

Spiffy services like PayPal and Venmo provide users with the illusion of instant payments, but in reality, your account balance is essentially a meaningless number until you actually withdraw your funds—which can still take a week. What gives? Lacking a universal, standardized protocol for money transfers, financial institutions rely on centralized networks, like Automated Clearing House (ACH) in the US, which typically settles transfers in 1-2 days—a window that allows for things like transaction reversals and general risk mitigation.

While undeniably reliable, ACH is, in theory, slower than the centuries-old technology it was meant to replace when the electronic network was conceived back in the 70s. Thanks to secure image-processing techniques, paper checks can be delivered instantaneously and, in many cases, processed by banks the very same day. Operating only during regular banking hours, ACH acts as an industry-wide bottleneck. No matter how state-of-the-art a company’s own platform is, the level of service and kinds of products they can offer is ultimately constrained by the system’s underlying plumbing.

Other countries have their own proprietary networks, like England, which offers same-day service, and Mexico, where payments can be settled in minutes. ACH, too, has plans for an eventual real-time platform. But on a global scale, the closed nature of each country’s respective network means that financial intermediaries and workarounds are required to connect these fragmented markets.

Internationally, interbank transactions are predominantly communicated via the SWIFT network. But SWIFT is merely a messaging service—meaning that if the banks don’t hold matching accounts in both regions, settlement time can exceed 2-3 business days (also taking into account varying time zones and regulatory policies). This is especially problematic for lesser-developed markets with poorly-defined payment pathways, necessitating convoluted routes and middlemen, further adding to time and cost.

4. Why do we voluntarily provide complete strangers access to our personal finances?

Whether it’s dining out or shopping online, we are, according to Andreessen, frolicking with total strangers without a condom—and without a hint of hesitation. In bitcoin terms, it’s the equivalent of giving out your private key. We’ve been conditioned to accept as normal what’s wildly unsafe—both for the sake of convenience and the lack of a better option. While your waiter will happily accept cash, your favorite Amazon retailer isn’t nearly as flexible.

That we don’t explicitly see the cost of fraud likely adds to our nonchalance. But while consumers feel protected, merchants take a hardy beating—about $190 billion a year and growing. Far from irrelevant, those losses are implicitly accounted for in the MSRP of our goods and services.

Invented decades before the Web, credit cards weren’t designed with digital in mind. To accommodate their technological limitations, we expose ourselves to a persistent vulnerability. As fundamentally flawed solution, their ubiquitous use isn’t just questionable, it’s downright reckless. The recent Target hack that exposed 40 million credit card numbers was yet another extravagant reminder of this fact—our ongoing love affair with plastic is easy, profitable pickings for even moderately resourceful scammers.

5. Why do we still use cash (and coins)? 

Whether for its tradition and history, properties of anonymity, or that classic, visceral feeling of security and ownership that a stack of fresh Benjamins elicits—cash is still king, responsible for 85 percent of retail transactions globally.

But our preference for paper (and semi-precious metals) comes with a price. Both pennies and nickels cost $100 million more to make than they’re worth, and the US could save $150 billion every year if we bucked cash entirely. (Incidentally, a digital solution would also provide central bankers a more efficient and robust toolkit regarding monetary policy—without having to worry about issues like zero or negative interest rates).

Plus, money in the classic sense readily enables criminal activity—whether it’s money laundering or counterfeiting (one of North Korea’s more profitable pastimes). And from a practical perspective, it’s incompatible with cyberspace—where 92 percent of money now lives worldwide. By most accounts, cash is better suited in our history books than our wallets.