Thursday, September 11, 2014

Apple Pay and the future of shopping

Ten years down, historians may look at the launch of Apple Pay this week as a giant step in the direction of digital wallet. An iPhone equipped with Apple Pay software can potentially become a platform to undertake friction-less transactions using all kinds of virtual assets - money, loyalty and reward points, airline miles, cellphone minutes and so on. Times has this peek into the future of such exchange transactions,
Let’s say you want to buy an audiobook from Best Buy. It costs $16, or 1,000 My Best Buy points, or M.B.B.P.s. Your wallet contains several hundred dollars and 200 Best Buy points. The wallet software automatically determines that, at the current exchange rate between M.B.B.P.s and dollars, it is better to buy using the points. But then let’s say you only have 50 M.B.B.P.s. The wallet system searches its clients and finds someone - call her Hannah - with enough M.B.B.P.s for the transaction. It buys the audiobook with her points and sends it to you, and sends Hannah dollars from your account. Following Bitcoin’s protocol, the wallet software broadcasts these transactions to the network, and every wallet in the world updates the M.B.B.P.-to-dollar exchange rate. The idea is that you can buy anything, with anything. The wallet will find the best deal and execute it. In so doing, it will ignore the historical and cultural differences between dollars, points, coins and virtual property. 
Such transactions pose a big challenge to regulators. In particular, such seamless transactions, carried out without any intermediaries (like banks), leaves regulators with limited enforcement power. Who would be responsible for stopping a transaction? There are likely to be many other emergent problems that regulators will have to grapple with when mobile wallets take hold.

Another thing of interest will be its effect on consumer behavior. As Cass Sunstein highlights, Apple Pay could end up exploiting people's cognitive biases and leaving them poorer. There is enough evidence from research in behavioral psychology that credit card and other non-cash transactions, by reducing the cognitive salience of the transaction, nudge people into spending more than would have been the case with cash transactions. A highly versatile application like Apple Pay is a fertile ground for businesses to manipulate these cognitive biases and exacerbate the hidden social and economic costs associated with such less salient transactions. 


Pratik Datta said...

For regulators, Apple Pay should not be as revolutionary as bitcoins. Bitcoins dont require a central bank (thanks to bitcoin mining) and therefore, its outside the zone of monetary policy transmission. But Apple Pay wont hamper monpol trasmission as long as the underlying is traditional currency. Moreover, for tax purposes also its not as elusive as bitcoins and more like today's credit cards. So dont think its a major problem for regulators.

Gulzar Natarajan said...

Thanks Pratik for the comments. I agree with you that Apple Pay will not hamper monpol transmission "as long as the underlying is traditional currency". But what if the underlying is increasingly non-currency stores of value? How about a scenario (as outlined in the NYT article) where all the major shopping chains, airlines, petrol retailers, hotels etc expand their reward points program and also allow it to be tradeable? And Apply Pay could facilitate these transactions.

These alternative stores of value would have taken a significant share of the market from traditional currency. While still far away, the challenge from this for regulators will be immense.

Pratik Datta said...

Point taken. I have often wondered what the Government will do (tax, monpol) if Sodexo transaction volumes exploded. Now, thinking of it, there is a hack under the current laws.

The moment a financial interest is tradeable, it becomes a `security'. Assuming, any such non-traditional underlying currency becomes a very commonly traded instrument in India sometime in the future, then the Central Government can issue a notification under section 2(h)(iia) of the Securities (Contracts) Regulations Act, 1956, and bring it within the jurisdiction of SEBI. So if the underlying is now a `security', Apple Pay would come within SEBI's jurisdiction.

Sorry if that sounded boringly technical!

Gulzar Natarajan said...

Thanks much for that very interesting nugget.

But it still leaves us with the problem unresolved. How will the treatment of it as a security address the monetary policy transmission problem? Assume multiple suppliers of such securities. Then the regulator would end up regulating (for example, volumes issued by each provider) more than would be desirable to ensure effective mon pol transmission, in which case, its incentive distortions are likely to far outweigh its benefits.