Cash gives users a high level of privacy when making payments, but the use of cash to make payments is declining. People increasingly use debit cards, credit cards or other methods to pay. These payment methods do not provide the same level of privacy as cash. Meanwhile, providers of such payment methods are increasingly seeking ways to earn money from the payments data of their clients.
We identify an economic mechanism that explains why people may choose too little privacy when considering how to pay. People do not bear the full costs of failing to protect their privacy. Data revealed by one person when they do not protect their privacy can be used to make inferences about the purchasing habits of another individual, even if that individual has taken steps to protect their own data. Economists call this mechanism an externality.
It is easy to imagine a scenario where, because of this externality, people have very little privacy when making payments, even though privacy is highly valued in society. When left to market forces, this externality could also result in a faster decline in the use of cash than what would be optimal. Is it possible to reverse the trend toward less privacy in payments? Perhaps introducing a widely accepted electronic cash that offers the convenience of digital payments and the privacy of cash could help.