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System Down: Dealing With Catastrophic Risks In Payments

The electronic payment system is a technical marvel. Whether you swipe, stick, type a pin, or sign it takes seconds for interconnected computer systems to verify that it’s you, make sure you are good for the money, credit the seller, and debit you. With direct deposit and direct debit much household management is on autopilot. Money comes in and goes out without anyone thinking about. It works great.

Except when it doesn’t. This year we’ve gotten signal flares that the electronic payments system is subject to catastrophic risks that can send the economy into chaos.

Life’s a glitch. That’s how one of the UK newspapers put it when, on June 19, 2012 the Royal Bank of Scotland’s computer systems stopped tracking debits and credits for depository accounts — mainly for NatWest, a bank they owned. Anyone who’s ever gone through the installation of anything involving information technology can sympathize with the RBS plight. They hired a vendor to update their software. Someone made a programming error. All of a sudden people weren’t getting their paychecks deposited, were bouncing checks, and couldn’t get cash out of ATMs. Thousands of customers were affected. Most people were just inconvenienced. Then there was the family that had to figure out another way to keep their daughter on life support and the man who spent an extra weekend in jail because his bail wasn’t posted.

Accidents happen. Criminals plan. They hacked into Global Payments in April 2012 and stole data for around 1.5 million cardholders. Like everyone else in the electronics payments business this company has computers with software and databases. There’s a massive business of crooks around the world figuring out ways to worm their way into these systems to take data, that they can combine with other data, to basically steal money.

Then there are the terrorists. “Cyberwar” is on the tongues of many folks in the defense and intelligence establishment these days. The Iranians are reportedly behind cyber-attacks against a lot of the US financial services institutions including, over this past year, Bank of America, JPMorgan, and Citi. Of course other countries are probably even better equipped than Iran to wreak havoc on the banking system including payments.

Other risks that are more farfetched. But the whole idea of catastrophic risk is that it involves a very tiny probability of a very bad thing happening. If we wanted a complete list of ways that the electronic payments system could be brought down we’d start thing about everything from weapons of mass destruction to sunspots.

Face it: if it’s a computer, if there’s software, it can break. We’ve been amply warned this year. Government and industry need to plan for systemic breakdowns of the payment system, or key parts of it, resulting from glitches, gremlins, hackers, crooks, terrorists, and natural phenomenon.

There’s a payment mechanism that isn’t as vulnerable to these problems. It doesn’t have a chip or software. It so highly decentralized, so diffuse, so no one can attack it. It’s brilliantly simple.

Of course, that’s cash. It isn’t failsafe either. When the ATM system breaks down, as it did in Singapore in 2010, people couldn’t get cash easily either. In one of my favorite Netflix TV shows, The Event, the terrorist aliens (it’s a long story, but watch it) turned cash into a bioweapon by contaminating it with deadly virus at the printing plant.

Yet cash is probably the best backup payment system available to insure against catastrophic risk. It is a payment system that is completely dependent on pre-IT revolution technology. Printing presses, paper, vaults, armored cars, and guards with guns. But so long as the government can print it, distribute it, and make it secure it can keep on chugging in the wake of most catastrophic risks.

That’s one of the reasons I think suggestions that we should eliminate cash are a bad idea. These have gotten more discussion recently as a result of David Wolman’s, The End of Money: Counterfeiters, Preachers, Techies, Dreamers — and the Coming Cashless Society. The earnest Wolman even says cash is yucky with all those people handling it. The Turks are talking about the virtues of a cashless society by 2023. That’s especially ironic since they invented coins. And a particularly bad idea looking at their neighbors.

In fact, we need to go in exactly the opposite direction. We must make sure cash remains a solid payment system. Amazingly, Central Banks don’t really feel like they “own” the cash system. And if they don’t, no one else does. Few Central Banks, or anyone else, for example, collect comprehensive data on the use of cash. They can tell you how many bills they printed but that’s about it. It would be like Visa knowing how many cards get stamped out but not knowing much about where people get the cards or what they use them for.

Cash certainly isn’t going to die on its own. Those who say it will don’t know payments, don’t know history, and don’t know the facts. But all the talk about mobile payments and contactless could delude Central Banks into thinking that they are simply managing a dying product. Why spend resources on the equivalent of the typewriter division of your company? The chatter might persuade them to stop paying attention to the payment system that, according to the recent European Central Bank study, accounted for half of the social cost of payments and the bulk of the number of transactions.

For the electronic payments industry, and for society, cash is the insurance policy against catastrophic risk. Of course, perhaps an innovator could come up with a better way to protect society from the big blue screen of payments. But in 2012, when it comes to the security of electronics payments, we lost our innocence.


David S. Evans is the Founder of Market Platform Dynamics. An economist, he is a business advisor to many firms in the payments business.

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