In celebration of tax season: How alcohol and women’s rights helped create the IRS

Toasting the IRSI’m going to go out on a limb here and suggest that one of government’s brand values is not “up-to-date office equip­ment.” If you don’t believe me, ask if a PDF will do the next time your local government requests a fax. There’s a good chance the answer will be, “What’s a PDF?”

But when it comes to collecting money, the United States government keeps fairly well up with the times. In an age where our best prospects for digital payment adoptions are Millennials and younger, the folks in charge of the Internal Revenue Service introduced electronic filing way back in 1986. (Little known fact: Many working at IRS headquarters back then were not spring chickens.) Though taxpayer convenience may have been a motivator, I would suggest, at the risk of cynicism, that speeding collections and lowering costs may also have played a part.

Of course, you knew the IRS uses direct deposit. Here’s what you may not know:

The curious tale of how alcohol and the women’s movement led to the IRS

In 1933, a scant 73 years before the IRS began accepting direct deposit, the United States ratified the 16th Amendment, permitting Congress to impose an income tax.[i] But the proposal was no simple matter, such that ratification took 24 years. During that time, the “income tax amendment” found a pair of allies who might, at first glance, seem unlikely: the Prohibition Movement and the Woman Suffrage Movement.

It was largely women who championed the Prohibition Movement, at least at first. By the time they started winning over the then all-male Congress, an inevitable, practical question arose. Alcohol taxation, permitted under the Constitution as an indirect tax, accounted to a good 30 to 40 percent of the nation’s revenues. If it was going to pass Prohibition, clearly the government would need a new revenue source. Decades earlier, the Women’s Christian Temperance Union (WCTU) had already suggested an answer. Author Daniel Okrent cites it in his book Last Call: The Rise and Fall of Prohibition:[ii]

… to those in the dry movement who understood political and governmental reality, imposition of an income tax was also an absolutely necessary step if they were going to break the federal addiction to the alcohol excise tax. This had been obvious to the leadership of the WCTU as early as 1883, when the editors of the organization’s official organ, The Union Signal, coyly asked their readers, “How, then, will [we] support the government” if the sale of liquor is prohibited? The editorials had a ready answer for their own question: an income tax, they wrote, was “the most just and equitable arrangement ever made for the equalization of governmental burdens.”

To understand how forces intertwined, it’s important to recall that Amendments 16, 17, 18, and 19 weren’t ratified in order of their numeration. First to win ratification was the 17th Amendment, in 1913. The amendment took the election of the U.S. Senate and House out of the hands of state legislatures and placed it in the hands of voters. It’s important to remember that, at the time, only men could vote.

Next came the 1919 ratification of the 18th Amendment, which banned the manufacture, sale, import, and export of alcohol. It was not lost on members of the U.S. Congress that Prohibition would displease a good deal of men, who now had power to vote them out of office. Hurrying along passage of the 19th Amendment, which gave women the vote, may have been for Congress an act of job retention more than of fairness. The states ratified the it in 1920, which just happened to be the year Prohibition went into effect.

With alcohol banned, the United States took the expected, severe financial hit. In his PBS series Prohibition, Ken Burns says the alcohol ban cost the U.S. government “$11 billion in lost tax revenue” and cost “over $300 million to enforce.” This loss added impetus to creating an income tax. Congress dusted off the 16th Amendment, which had been proposed 24 years earlier and left to sit. The states ratified it in 1933.

Prohibition, as you surely know, was an abject failure. About 11 months after the 19th Amendment accorded voting rights to women, the newly ratified 21st Amendment repealed the 18th Amendment. Once more, alcohol flowed freely through the land.

The repeal, however, wasn’t a complete reversal. Congress left the federal income tax in place. So it is that the United States Treasury is able to have its tax and drink it, too.

I for one am grateful for the 21st Amendment. The Super Bowl just wouldn’t be the same without the Clydesdales. 

[i] Utah, where I live, is one of six states never to have ratified the 16h Amendment. The other holdouts are Connecticut, Rhode Island, Virginia, Florida, and Pennsylvania. If you happen to live in one of them, I recommend against letting that stop you from paying.

[ii] Okrent, Daniel. Last Call: The Rise and Fall of Prohibition. Scribner, 2011.

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Darwin, cockroaches,
and payments

evolution-2780651_1280Everyone knows that Charles Darwin introduced the phrase survival of the fittest.

Well, almost everyone. It would take Darwin by surprise, however, since in fact he didn’t say it. He didn’t even imply it.

Which is just as well. Survival of the fittest doesn’t quite work. Fittest is a superlative, meaning there can be only one. If only the fittest survived, the world would have only one species of cockroach, not 4500, only one brand of airline, not 5,000, and only one football team, the Denver Broncos.

Survival of the fit-enough is more like it. You can have only one fittest, but you can have untold numbers of fit-enoughs.

I need hardly point out that we are seeing a proliferation of fit-enough payment options. Any list I could produce—Zelle, Google Wallet, Apple Pay, Venmo, Paypal, GoPayment, Square, and others—would not just fail to scratch the surface, but fail even to gently caress it.

I neither presume to know nor venture to guess which is the fittest of them all. But since they’re all still here, it’s safe to assume that they are all fit-enough to continue hanging on and duking it out. At least for a while.

Meanwhile, retailers keep complicating things.

Take Walmart. When the retail giant introduced Walmart Pay in 2015, it made the strategic decision not to play ball with Apple Pay. According to Torrey Kim in a recent article for The Balance, Walmart Pay …

… allowed customers to download the app to their phones and use their own phones as scanning devices.

Trouble was, Kim added,

The program was a terrible failure, with customers complaining about the app and its issues.

But Walmart stuck with it, which, when you’re as fit-enough as Walmart, you can do. Today, the gambit may be paying off. Walmart Pay is now within striking distance of surpassing Apple Pay in U.S. mobile payments.

Not bad for an app that can be used only in one store. Of course, it helps to have 5,412 U.S. locations of that one store.

Walmart recently announced that it is upping its game. A new version of its Scan & Go app is headed for testing in 100 stores. For consumers wary of downloading yet anther app, Walmart tells us that some of its stores …

… have been outfitted with Scan & Go kiosks where customers can pick up easy-to-use handheld devices. This allows them to try out the service before downloading it to their phones.

One reason retailers like having their own payment systems is to track customer purchases, which broader-base payments apps don’t permit them to do. Proprietary apps also relieve customers from having to stuff their wallets with loyalty cards and go through the hassle of presenting them at checkout. What remains to be seen whether consumers will go for trading a walletful of cards for a phoneful of apps.

“Phoneful of apps” is no exaggeration. From McDonald’s to Cinemark to Starbucks to CVS to Bestbuy to … well, and so on … there is no end to the number of retail apps you can stuff into your mobile device.

When will the proliferation end? Beats me, but it is sure sooner or later to at least slow. How soon remains to be seen. Right now, according to Retail Drive’s Chantal Tode, consumers seem to prefer retail payment options to Apple Pay and Google Wallet.

Like all species, payment options are subject to environmental pressures. These will inevitably lead to modified species, hybrid species, new species, and, yes, some extinctions. But since fit-enough is all that’s required to survive, there’s no reason to suppose the environment will ever prune the market entirely of all but one. On the contrary, there is ample reason to suppose that a wide variety, though perhaps not quite as wide, of payment options will persist. On a planet with billions of people holding billions of bank accounts, there are necessarily innumerable niches to fill. Odds are a one-size-fits-all will never be possible.

As for what Darwin never said, he’s not alone. Neither did Winston Churchill ever say, “Madam, if you were my wife I’d drink it.” But I digress. 

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Only 2 months out!
Fiserv Forum
2018 / Las Vegas

Fiserv 2018

Click the image to register now

Here’s great news: Fiserv Forum 2018 is upon us!

It’s your chance to experience experts, visionaries and world-class speakers … the latest fintech innovations … exchange ideas with Fiserv product experts … and engage with other financial services professionals.

While you’re at it, you can explore the latest Fiserv innovations and have hands-on access to our products and solutions.

I urge you to mark your calendar and then click here to register now, while it’s on your mind. I’ll be there. Please grab me and say hello.

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Why loyalty programs
don’t create loyalty

dogs-2222801_1280Financial institutions began catching on to loyalty programs a couple of decades ago. Now they’re so common­place that “loyalty program” is part of everyday speech. Banks can even advertise with headlines like “Join our loyalty program” without fear that consumers will say, “Join your what now?”

But I submit that loyalty programs don’t create loyalty.

Most loyalty programs award points toward freebies and privileges. The digital age has made them a cinch to manage by automating accounting and obviating membership cards. Of course, that’s a two-edged sword. When a program is too effortless, it’s easy to forget you’re  in it.

But that’s not why I said loyalty programs don’t create loyalty. I said it because frequency, which they can create,* isn’t the same thing.

Frequency vs. loyalty

Frequency doesn’t mean loyalty. It’s not even a measure of loyalty. Loyalty is altogether something else.

To illustrate the difference, here’s an experiment you can try on your own, provided you have no regard for your personal safety. Simply do one of the following:

  • Tell a Harley owner that BMW makes a better motorcycle.
  • Tell a Steinway artist that Kawaii grand pianos are just as good.
  • Tell an iOS devotee that AOS is better, or an AOS devotee that iOS is better.
  • Tell a deli owner to substitute generic mayo for Hellman’s.
  • Tell a person in Guess jeans that Wranglers would look better.
  • Tell a Broncos fan to cheer for any other football team.

Chances are you’ll get a reaction that falls somewhere between, if you’re lucky, mocking disdain and, if you’re not, outright violence inflicted upon your person. That’s because there are some brands whose customers you just can’t drag away.

That is loyalty. And it wasn’t created by handing out points.

I must now bring up what isn’t on the above list or any list like it. A financial institution. I have to wonder why the heck not.

Don’t tell me it’s because all financial institutions deal with dollars, and that one dollar is like any other dollar. It is equally true, or nearly so, that a motorcycle is a motorcycle, a smartphone is a smartphone, and jeans are jeans. To be sure, the above are quality products, but building wild-horses-couldn’t-drag-’em-away loyalty takes more. By “more,” I refer to an unbeatable, overall experience. The kind that customers latch onto and cannot find, or believe they cannot find, anywhere else.

Don’t get me wrong. Short of loyalty, frequency is a pretty danged good second best, so I’m all for points programs. It’s just that I am also for not stopping there. The financial institution that delivers an unusual, relevant, substantive, positive experience will do more than increase adoption and frequency. It will produce bona fide loyalty.

The goal isn’t just to be different. That’s why banks haven’t had much luck trying to set themselves apart with contrivances, such as designing lobbies that don’t look like lobbies and calling tellers something cooler than “tellers.”

The goal is to be the kind of different that actually matters to customers.

I’m not saying it’s easy. Even less easy is being the first in your vertical to pull it off. But then, that’s why there’s only one Harley-Davidson.

* It’s not a given that a loyalty program will increase frequency. If you award points for transactions customers would have made anyway, you’re not increasing frequency. You’re increasing cost-per-sale.

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Counterfeiting for
fun and profit

Ink jet currencyAmid talk of changes wrought by digital banking, the media consistently overlook a centuries-old, venerated industry whose demise could put thousands out of work. Will no one speak up for the noble counterfeiter?

Counterfeiting was inevitable from the moment currency was invented. As early as the fourth century BCE, nogoodniks in Mesopotamia were counterfeiting clay tokens. In 17th century England, the Royal Mint employed no less than Isaac Newton—yes, that Isaac Newtonto bust counterfeiters. It appears that chasing down “the most notorious counterfeiter of his day” proved to Newton but a trifling challenge compared with chasing down the laws of motion.

It’s no exaggeration to call counterfeiting an industry. There’s the cottage industry side, where homebodies use ink-jet and laser printers to turn one-dollar bills into ten-dollar bills. Surprisingly, these low-quality forgeries have legs. According to Bloomberg as quoted by The Atlantic, the U.S. Secret Service reported that in 2013 “… nearly 60 percent of the $88.7 million in counterfeit currency recovered in the U.S. was created using inkjet or laser printers.”

There’s the big industry side, too. Take, for example, a not-unusual operation in Peru employing skilled teams of up to twelve at a time to crank out tens of millions in fake U.S. $100 bills. They take pride in their work, using quality presses, expensive paper, and a variety of inks. They even hand-weave polyester threads into the bills. Their product fools most counterfeit detecting equipment, with the fortunate exception of bank-owned sorters.

The occasional bungler provides a degree of comic relief. One fine morning in 1991, employees of Graphic Reproductions, a large Salt Lake City printing company not far from my home, arrived at work to find windows papered over and presses dripping green and black ink. An astute worker called the Secret Service. Owners William A. Schraegle and Ronald P. Miller mounted an interesting defense at trial. Surely, they argued, the state didn’t think they intended to spend the five million in bogus bills they’d printed. They did it merely, they claimed, for the “professional challenge” and had “no plans to actually use the money.” Hard to imagine, but the Secret Service didn’t buy it. Still, U.S. District Judge Bruce Jenkins was lenient. He sentenced Schraegle and Miller to, respectively, 36- and 33-month prison terms and, incredibly, fined them just $5,000 apiece—about a tenth of a percent of what they’d printed.

Given the investment and risk of counterfeiting paper currency, you’d think the bad guys would have a heyday counterfeiting digital currency. Just imagine the reduced overhead—no warehouse, no presses, no paper, no ink, no having to weave in polyester threads, and no smugglers. All you’d need is a laptop and a hacker.

Or so it would seem, until you take a closer look.

One of digital currency’s strengths is that it leaves a trail of credits and debits on myriad computers throughout the world. You might get away with hacking one computer, but hacking all of them is pretty much impossible. Right now, anyhow. Even cryptocurrency the likes of Bitcoin appears impervious.

But take heart, would-be digital forgers. News of Bitcoin’s meteoric rise has spawned a new opportunity, namely, the marriage of cryptocurrency with Ponzi schemes. There is, however, a downside. Folks who try it end up in jail.

It’s getting to the point where earning money the old fashioned way is looking more and more attractive.

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