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September 26, 2012

What It Takes To Make Electronic Payments Better Than Cash

By Timothy Ogden

I attended the Better than Cash Alliance launch this week at the Ford Foundation. The alliance’s goal is to accelerate the transition from cash to electronic payments in developing countries. For a good overview of the process, benefits and challenges of the transition, see this white paper from Bankable Frontier Associates (which is one of our partners in the US Financial Diaries project). For an in-depth discussion of the alliance, see David Roodman’s post.

At the launch, and in general when people talk about moving to electronic payments from cash, some of the key benefits cited are transparency and transaction records. But on my way back to the office from the event I had an unpleasant experience that reminded me that while these benefits are possible with electronic payments, they are by no means guaranteed.

Entering the New York City subway, I realized that none of the 3 Metrocards (the electronic payment card necessary for riding public transport in the city) I was carrying had enough remaining stored value to get me to where I was going. I purchased a new Metrocard worth $50 using a credit card at an automated machine and walked up to the window to have the station agent transfer the small remaining balances from my old cards onto the new card (which can’t be done on the machines). The station agent took my existing cards and zeroed out the balance, then took my new card to add this balance to it. But instead of adding to the card, she zeroed it out as well. All told, she managed to destroy just under $60.00 of electronic value.

When I pointed this out to her, the agent angrily denied her mistake. Her response to my (somewhat impolite) incredulity was to count the cash in her drawer so she could deny that she had extra funds (even though the entire transaction was electronic and didn’t involve any cash). She dismissively told me that I would have to take up my complaint with the transit authority’s central office. Of course, the central office was closed and a recording told me to call back in the morning. I ended up purchasing another $50 Metrocard so I could complete my journey.

When I finally reached the transit authority’s central office in the morning I was told that I would have to travel an hour and a half (round trip) and spend who knows how long waiting in line to make a complaint in person or mail in my four Metrocards with a description of the incident—and wait for a response. The “customer service” person made a point to tell me that the transit authority specifically disavows any responsibility if the cards are lost or damaged in the post (or presumably once they arrive at the transit authority). Helpfully, the operator gave me a different mailing address than the one on the form I have to mail in as well.

So, while there are (I certainly hope) electronic records of the various transactions, I am still entirely at the mercy of the transit authority. The fact that these were electronic transactions didn’t have any impact on the station agent I dealt with, the speed with which my issue could be resolved, or whether I have access to any of the transaction records.

I have no idea how this will ultimately play out—perhaps I will eventually get my money back. The larger point is that the benefits of electronic transactions are not automatic. The benefits are dependent on the parties that manage the transactions to be transparent and fair. In other words the benefits of electronic transactions still depend on people and institutions, on regulations and incentives. The existing institutions, regulations and incentives in developing countries are not generally pro-poor. The transition to electronic payments will not necessarily have any effect on these important parts of the puzzle. And that means that the benefits of electronic payments may not accrue to poor households.

I’m lucky. Not only could I buy a new card but losing $60 simply won’t make a difference to me. And I can dispute the $50 charge for the first new Metrocard with my credit card company (of course, the only proof I have that the balance was zeroed out is the card I have to mail to the transit authority). But for poor households, losing even a single transit fare can impose large costs. Anyone in my situation who didn’t have enough money to buy a new card would have had to walk the 2 miles back to the office. Losing access to a significant amount of value while a dispute is processed would be even more painful.

This isn’t an argument in favor of cash (though in my case, the immediate physical evidence may have led to a faster resolution in the moment). Cash transactions are easily abused.

The point is that all financial systems are systems, not technologies. Making electronic payments better than cash for the poor will require attention to making these systems more responsive to the needs of poor households.

Update: I decided to visit the Metrocard customer service center rather than risking the mail. The staff at the center were efficient and professional. But though they were able to verify the major details of my story, they did not have the authority to resolve the issue. For that I have to wait three weeks for an "investigation," the results of which will be mailed to me. 

Update II: Metrocard customer service sent me a terse letter explaining that their investigation revealed that I had not been overcharged. Which is technically true, since having my card voided isn't "overcharging." My last recourse is with the credit card company. 

 

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