Understanding intermediaries in Payment Systems — Constructs of Liquidity and Certainty
In my previous post on intermediaries, I talked about introducing liquidity to students and rules enhancing liquidity and certainty. In talking about payment systems we often talk about the policies of creating liquidity and certainty, and then talk about other things, like confidence and efficiency. One of the troubling things that I think the scholarship surrounding payments systems has not really discussed is the ways in which liquidity and certainty are related to by-products of transactional goals. I think at times, we talk about the goals of liquidity and certainty, and policies of efficiency, confidence building and (one I’ll add) longevity, without really parsing out how these things come about. What it produces is a bramble bush where we recognize lots of contributing roots, but little discussion of how those roots work together.
One reason that these things create problems is that they clearly live in symbiotic relationships to each other, but it is unclear which is the feeder and which is the fed. Does liquidity and certainty create systems that are efficient, that create confidence, and that innure longevity into the payments markets. A model that looks like this perhaps, where these policy constructs are created by systems that innure towards liquid systems with substaintial certainty.
Or perhaps liquidity and certainty are created through efficient, trust-worthy, systems that have the capacity for substantial longevity. Something like this perhaps. Some might argue compellingly that this doesn’t really matter — whether liquidity and certainty are byproducts or instigators for further policy constructs matters little except in ivory towers.
I argue that it does matter, at least from the standpoint of understanding how these individual constructs affect consumer and merchant choices to engage in the payments market. I will offer one example and then save the rest for my last post on this particular project.
Consider the role that credit cards have played in the impacting consumer choices. In the last several years, as noted by a study conducted by the Philadelphia Federal Reserve [the Visa Payment Panel Study], not only has consumer choice in medium of payment moved towards more plastic mediums, but the type of plastic medium has changed, with merchants moving away from private label cards and towards general use cards with enhanced benefits when the general use card is used with that merchant (i.e., your Shell MasterCard in which you receive .20 rebate on gasoline purchases at Shell). Why consumers move towards general use cards versus private label cards implicates the policies and constructs described above. The more the card may be used with multiple merchants (liquidity & certainty) the more the card’s effectiveness is built up by the market-life of the payment and its outgrowths (including accounts which can be leveraged by the bank supporting the card (longevity); consumer convenience in reducing the number of bills they must pay at the end of the month lead to more use (efficiency); and the greater impact of the payment’s reach, the better terms inure themselves to the consumer creating greater confidence in the payment. Moreover, the more the card is used by the consumer, the greater the efficiency and confidence in the medium.
The result is that we may have different policy constructs that reveal themselves as more powerful factors depending on the manner of payment. So perhaps with credit cards and other networked payment intermediaries, we are in a model in which longevity becomes the instigator producing the policy aims we seek — a model that looks like this, where longevity becomes the catalyst for greater efficiency and confidence which renders the effect of the payment being medium being accessible in more places (approaching liquidity) and the certainty that it will be accepted when using the card [though it does not happen often, many of us can recall when a restaurant did not accept one of our preferred payment partners].
How consumers and merchants sort through these questions will be considered next.
P.S. Traveling down Route 66 creates certain problems of access to technology. So, I’ll end my post today with a plug for the hotel we stayed at in Holbrook Arizona — The WigWam. The picture to the right says it all, though I will add we met two charming families from London who had read about the Wigwam before coming to America for “holiday.” One of the Englishman even let me pose with his cowboy hat in front of our Tee-pee Style hotel room. [English people are so quaint]. Who knew Holbrook was that diverse!