Cash, Credit or Cell Phone? How to Influence Public Preferences about Payment Systems


The paper examines how the government can influence the public’s choice of a particular payment system: not only existing systems like credit and debit cards, but innovative products such as stored value cards, electronic checks and electronic money. The success or failure of a new payment system can have a large economic impact, with shifts toward electronic payment options in particular having the potential to save up to one percent of a nation’s gross domestic product. For the United States, that translates to approximately one hundred billion dollars worth of savings.

Whether a new payment system succeeds or fails depends upon social acceptance; that is, consumers and merchants have to simultaneously embrace the new payment option. Government action, both direct and indirect, can strongly influence consumer and merchant behavior. Whether and how the government affects payment preferences depends on whether the government is acting as fiduciary, seller, or law-maker; its precise goal; and the particular sort of payment system at issue. Depending on the situation, the government may (1) provide information that allows individuals to coordinate behavior, (2) pass legislation or adopt policies aimed at reducing concerns about a particular system, (3) provide incentives to induce individuals to adopt new payment systems, or (4) force change by eliminating or curtailing the older payment form. The paper suggests that in the realm of payments, governmental efforts to influence behavior will be most successful if they force change, not if they gently influence public preferences. This conclusion runs counter to the common wisdom in the social norms literature that law most effectively influences behavior when it promotes incremental advancement, not wholesale change.

Because payment methods are poised to continue the massive evolution that has occurred over the past twenty-five years, advocates of new systems are increasingly likely to attempt to involve government in promoting their fledging payment mechanisms. The paper suggests that government intervention, although often successful, is usually unwise for at least three reasons. First, technology moves quickly and the government usually moves slowly. Second, with a bit of time, new payment systems that are sufficiently advantageous to the public are likely to flourish without governmental intervention. Third and finally, governmental intervention may have the unintended consequence of undermining the incentive to invest in new payment technologies in the first instance.


Commercial Law | Internet Law | Law and Economics | Law and Society

Date of this Version

September 2006