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Yet another market failure

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Well this is gratifying, other than getting no credit: According to a story in Bloomberg News,White House, Equifax Agree: Social Security Numbers Must Go” (Nafeesa Syeed and Elizabeth Dexheimer, 10/4/2017).

While I’d rather my vindication came from a more credible pair of sources, I’ll take it where I can get it.

Speaking of revisiting a subject, as regular readers know, one of my hobbies is collecting sources of market failure. Another one has just popped up, and like the others it’s relevant to you: ATM fees are going up, and have been for 11 straight years, this according to a recent story in Bloomberg, “ATM Fees are Out of Control” (Susan Woolley, 10/2/2017).

I know you, as a regular KJR reader, are as astonished as if you’d read “Sun sets in west for 11 straight days” or “Helium balloons continue to rise.” Let me reassure you. The rise has been at roughly three times the overall rate of inflation. It’s real.

Still, inflation is an average — the price of different products rises at different rates. So it isn’t that ATM fees are increasing that’s interesting. It’s why: ATM fees are rising because demand has been steadily falling.

The interrelationships among supply, demand, and price are supposed to be governed by a universal and inviolable law.

But it’s only inviolable until we violate one of its underlying assumptions.

So just as the second law of thermodynamics (entropy, which states the net disorder in a system must always increase) only applies when the total amount of energy in the system remains constant (snowflakes can form when it doesn’t), so the law of supply and demand only works when the cost of supply is variable.

But as much of the cost of banks’ ATM networks is fixed, supply is, in the short and medium term, fixed as well. Demand, on the other hand, changes one consumer purchase at a time. Over the 11-year span in question, consumer purchases have steadily switched from cash to plastic, and, for that matter, from plastic to on-line.

A fixed number of ATM machines divided by fewer cash withdrawals means a higher amortized cost per withdrawal.

Viola! Market failure at its finest.

But it isn’t just that the cost of supply is fixed in this system (or semi-variable for those of you who insist on such matters). There’s another, hidden assumption this system violates: The law of supply and demand assumes whoever is selling a product is competing for customers’ business … not only against those who sell highly similar wares, but also against those who sell equivalent wares.

Which is to say, banks aren’t in the business of selling cash to consumers, so they have no particular reason to make cash a more attractive payment vehicle than credit and debit cards.

So I suppose it’s equally valid to say cash isn’t a product, so there’s no market here to fail.

What do these perspectives have to do with running an IT organization, or, for that matter, any cost center in a large business?

It has to do with how too many executives in large enterprises think about supply and demand: Just as banks, faced with a decreasing demand for cash money, will eventually shrink their ATM networks until the cost of supply is more in line with decreased demand, so large enterprises, when faced with decreasing demand for their products and services, tend to invest far more time and attention to decreasing supply than increasing demand.

That is, they lay people off, diminishing delivery capacity, with far more gusto than figuring out why they aren’t selling enough products and services, and what they can do to fix the problem.

This can and does enter the world of the absurd, where cost-cutting includes shrinking the sales force and reducing the advertising budget.

Not to mention the IT budget, much of which, in this day and age, is devoted to acquiring and retaining customers, and increasing their walletshare.

What can you as an IT leader do to prevent cost-cutting as a way to deal with declining revenues?

If you’re facing this situation, nothing. It’s too late. But if the business isn’t in crisis, here’s what you can and should do.

Businesses can invest in only four areas: Revenue enhancement, cost reduction, risk management, and mission. Your job: Recommend that all strategy discussions start with deciding how to allocate the company’s investment budget among these four bottom-line goods.

It’s a way to make sure the company’s management culture includes a revenue focus. Because it is, after all, always the culture.

Not that I’m going to say I told you so.

But I did.

Comments (16)

  • The only time an ATM saved my bacon was when I was on a flight to Boston and we had been stranded on the runway for 4 hours and didn’t land in Boston until 1 AM. I needed a taxi to go to a hotel to stay overnight (usually had free shuttle service but shut down at 11 PM) and I didn’t have enough money for a taxi. I got in a taxi and asked to be taken to an ATM and I was able to get enough money for that night’s taxi ride). I was not feeling well on top of it. I got to a motel and registered (Thank god everyone takes AMEX). I had a 10 AM flight the next morning and made it on time and not feeling hurried. The short hop lasted all of 30 minutes and I was then on a well-deserved vacation. Thank god for an ATM.

  • Maybe it’s a good idea to first make sure you understand the change you are seeing. Amazon is a general store that developed a qualitatively superior fulfillment system and a sales approach to make it appear that what you buy is delivered for free. But you have to buy with a credit or debit card. It’s more and different than the fact of Internet sales. The demand for cash goes down even though sales go up, because an aspect of the market place, fulfillment, has changed.

    If IT is traditionally involved in analyzing mysterious changes in income flow, IT can also help ensure that company invests in the four areas mentioned, in a timely manner.

    It’s data mining + business sense + common sense.

  • Bob, You’re a smart and savvy guy. I’ve read you for years. Purchased at least two of your books. I like you better when you comment on the interaction of IT and Business, even IT and Government. Not so much when you venture into Political commentary. Definitely not at all when you make snarky asides (“While I’d rather my vindication came from a more credible pair of sources, I’ll take it where I can get it.”) Doesn’t matter which end of the spectrum, it comes across as you trying to get a seat at the “cool kids table”. There are others commentators, on the political side, that are a whole lot more artful. It is hard for me to get past in order to see the actual point. I’ve unsubscribed to your weekly essay. I’ll try to check back online every six months or so and see where you are. In any case, good luck with it.

    • What, you consider Equifax to be a credible source? Not me. Trump? It doesn’t matter what end of the political spectrum you’re on to not consider him a credible source. You just have to respect evidence and logic. Anyway, the occasional snarky aside is the price you pay (well, paid) for a free subscription.

  • Viola? What do stringed instruments have to do with it? Or did you mean “Voila”? 🙂

    Now that I’ve picked the nit, let me also say that the gist of the article seems right on target to me.

  • Not you too! 🙁

    > Viola

    No need to post…

  • Already, for a few months now, I’ve been getting notations on my bank statements that they are closing ATMs at several locations.

  • Regardless of who is supporting the proposal for a more secure form of ID, I thought the article you linked to was informative. As much as I am steamed at Equifax, using that as a springboard for improvement would be a good thing.

  • “Businesses can invest in only four areas: Revenue enhancement, cost reduction, risk management, and mission.” Government, too, for sure. In my experience, government agencies are rarely intentional in evaluating the proper balance, which should vary depending on context.

    • I’m not sure government agencies can do very much about revenue, other than play budget games to win. Aside from that I agree.

      • On the revenue side, we have: competing for grants, modifying fees for services (which typically must be based on a cost study), and making the case with the legislative branch for funding. Yet you are correct, that often adds up to “not much” relative to the scale of the agencies and their programs.

  • Several times over the years, you’ve expanded on three of the four areas in which businesses can invest: revenue enhancement, cost reduction, risk management. Care to elaborate on “mission?” I’m sure it would enlighten us.

  • Thanks, Bob. As a former US Army IT Manager, “mission” automatically strikes a chord with me. However, without a common definition we could be using all the same words without talking about the same thing. 🙂

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