Do you take cash? The technology of money isn't neutral
Do you take cash? The technology of money isn't neutral
Dave Birch
Director of Consult Hyperion, an IT management consultancy company, editorial board member of the Financial Times Virtual Conference Report and a correspondent for the Online Journal of Internet Banking and Commerce
Keywords Banking, Electronic funds transfer
The technology of electronic money, spurred on by the Internet, is developing rapidly and while some forms of electronic money have been around for a long time since Western Union introduced electronic funds transfer in 1871 it is the burgeoning field of electronic cash (e-cash) that is attracting attention right now. Surveying e-cash schemes around the world can tell us how the technology platforms are likely to work, so the technological aspects are (in a sense) no longer interesting. The focus of attention is now shifting from how e-cash will work to what e-cash will mean for banks, retailers and consumers and, of course,governments. This is no longer a marginal issue, which is why it was under discussion at the 1997 World Economic Forum in Davos (Kobrin, 1997).
e-cash in e-purses
The electronic purse (a smartcard capable of storing some kind of e-cash) is becoming a familiar sight in Europe. Most countries have electronic purse (e-purse) schemes in operation,or at least in pilot service. In the UK, Mondex is already in operation in Swindon and on a number of university campuses. Later this year, VisaCash will go into operation in Leeds. These purse schemes are, however, on a small scale compared to those going into service on the continent. In Germany, some 20 million Geld Kartes are already in circulation, with 50 million projected for the end of the year. Proton, the Belgian-based purse, boasts over 14 million purses in circulation worldwide (Smart Card News, 1997). The Netherlands will have several million purses in circulation by the end of this year. Even Portugal has a purse scheme in widespread use. On the Internet, too, new money schemes are proliferating. Companies such as DigiCash and CyberCash may have few users at present, but the numbers are increasing steadily.
The e-purse has certain advantages over traditional cash. Cash is dirty the New Jersey Turnpike tried to punish toll collectors recently for wearing latex gloves (thus giving the driving clientele a "bad impression"), but who can blame them? Cash is heavy $1 million in $20 bills weighs more than you can lift, and drug dealers have been disconcerted to note that their powdered merchandise is handier for smuggling than the equivalent money. Cash is inequitable if you are one of the unbanked, you pay extortionate fees for cheque cashing. Cash is quaint,unless you're impressed by paper with embedded strips. Cash is expensive the cost of printing, distribution, safekeeping, vending, collecting, counting,guarding and general care and feeding of currency is significant. Cash is dying(Gleick, 1996). Most importantly, in the information economy, £5 notes don't go down phone lines.
A key point is that e-cash and e-purse technologies lower the cost of entering the money business. Forget expensive clerks, armoured cars, cash machines and night safes: anyone can use smartcards and the Internet to issue their own money. But should anyone be allowed to? There are two broad camps: those who think that e-cash should be issued by banks or non-bank financial institutions (NBFIs) only, and those who think that e-cash could be issued by anyone. Alan Greenspan (1996) has already said:
We could envisage proposals in the near future for issuers of electronic payment obligations, such as stored-value cards or digital cash, to set up specialised issuing corporations with strong balance sheets and public credit ratings. Such structures have been common in other areas, for example, in the derivatives and commercial paper markets.
Contrast this with the remarks of Bundesbank Director Edgar Meister (1996), who said that in Germany the issuing of e-cash should be restricted to commercial banks and has major implications for monetary stability and control. Personally I believe that the UK will eventually adopt a position more akin to Greenspan's.
Supply and demand
When Gordon Brown gave the Bank of England qualified independence in fixing interest rates, it was widely reported as being a significant event in British central banking. Earlier this year, however, another event that may in the long term turn out to be just as important didn't attract anything like as much attention. This was the announcement of the Smart consortium, involving Shell, Commercial Union, Dixons and others. The consortium takes the Shell Smart loyalty programme, which had more than four million of its smartcards in the hands of UK consumers, into new territory as it moves from being a simple scheme related to purchasing at petrol stations into a comprehensive multi-retailer "virtual currency"; that's what Gary Anderton, the CEO of the Smart consortium, said when he was describing the scheme in March of this year. The consortium will make its money in the spread between the price at which it sells points to its members and the price at which it buys them back. As Anderton said, "We act as the bank". The consortium is not, though, merely acting as the bank: it is acting as the central bank, which is altogether more interesting. It is in control of its own money supply.
If the primary use of e-cash technologies becomes the monetisation of new kinds of value private currencies, in other words it would make it difficult for governments and central banks to define (let alone control) monetary aggregates. Even if e-cash were only used to replace national currency, governments will still lose out (Birch, 1997). Since cash in circulation represents non-interest bearing central bank liabilities, a substitution by e-cash would lead to a decline in the interest earned from those assets, known as seigniorage. Seigniorage was originally the profit taken from the minting of coins usually the difference between the value of the bullion used and the face value of the coins but has come to mean the profits made on notes and coins in circulation and remitted to central government. (Every £5 note in circulation is an interest-free loan to the Bank of England.) The US Treasury estimated that seigniorage amounted to $773 million in 1994 and the Basle-based Bank for International Settlements (BIS) in 1996 has calculated that if e-cash replaces only low-value notes and coins it will still cost the British government some £1.4 billion per annum (BIS, 1996). This seigniorage loss comes about either through commercial banks issuing e-cash, thus reducing the demand for government-issued notes and coins, or through the use of monetary substitutes reducing the demand for national currency as a whole at the retail level. What kind of monetary substitutes? Frequent-flyer miles are an often-used candidate for a money substitute (and not just by me (see McHugh, 1997)). Oldham NHS Trust, to pick just one example, would not be planning to pay nurses'bonuses in air miles unless they thought nurses would find air miles a desirable alternative to the folding stuff (Leakeand and Brennan, 1997).
How far away is the"cashless society"? In the UK, notes and coins are already a small fraction of the money supply and even then the Bank of England estimates that more than 5 per cent of notes in circulation are unredeemed old issues[1] and some 1 per cent of all £50 notes are counterfeit. In some countries, the use of physical cash is already becoming problematical. In Norway, which has the highest number of electronic point-of-sale (ePOS) terminals per head in Europe(Retail Banking Research, 1997), the national Consumer Affairs Board has been complaining that some organisations (including telephony, utilities, hospitals and even some city governments) are either refusing to accept cash or demanding fees to accept it (one travel agency charges almost $5 for handling a cash payment). The policy is spreading across retail businesses (Associated Press,1996). In Finland which has the highest per capita use of ATMs (4.5 million ATM cards held by a population of only 5.1 million), 60 per cent of the population accessing the Internet regularly (twice the per capita rate of the USA) and the world's highest per capita use of cellphones there will be some 500,000 electronic purse cards in circulation at the end of this year and the quantity of cash in circulation may be halved by the millennium (and Finland already has one of the developed world's lowest ratios of cash in circulation). Conducting business in paper money is already a bit passé. Cheques are not used at all. At the demand of trade unions, all salaries are paid directly into workers' bank accounts. Social benefits are made by electronic transfer and so are most bills (Sachs, 1997).
The pressures here are unstoppable, so governments might as well plan on seigniorage revenues going away. It doesn't necessarily mean that taxes will have to go, however, since there is one obvious way that governments can use e-cash to recoup lost seigniorage: money saved in the disbursement of state benefits.
Consumers and providers
Participation in the e-cash-powered new economy will require infrastructure and knowledge, factors which might be more readily available to the better-off than to the poor. Is it socially acceptable to envisage economic structures that lower transaction costs for the e-cash users (the rich) while raising them for the e-cash disenfranchised (the poor)? While it's early days in the e-cash world, it's clear to me that different sections of society respond to e-cash in different ways. Compare the progress of Mondex in Swindon with the campus scheme at Exeter. In Swindon, less than a quarter of the expected number of cardholders has been achieved after a couple of years and in many retailers tendering the card gets you a blank stare. In Exeter, by comparison, Mondex has already entered the language (Fildes, 1997): to "dex" meaning to purchase something using e-cash, as in "Can you dex me a beer, please?" The young and techno-hip will eventually tire of subsidising automated teller machines (ATMs), armoured cars and night safes for their less well-off brethren. As part of a pilot project we are involved in, I have already seen someone use a Nokia 9000 GSM Communicator[2] to connect to their bank and download money onto a Mondex card. Who would't rather do this than trudge to an ATM in the rain?
If the current landscape of pilots and trials evolves to an operational environment where the (broadly)middle classes use e-cash to shop around for the cheapest banking services (and a lot of other things as well) on the Net, then the (broadly) working classes will find themselves having to bear the entire cost of the physical cash infrastructure. Everything from the distribution of notes and coins to the upkeep of ATMs will have to be paid for by a smaller and smaller proportion of the population. This would mean a potentially unacceptable increase in transaction costs for the poor. Indeed, as Bill Melton of Cybercash has pointed out, if you are one of the millions of American employees who have to convert salary cheques to notes and coins at cheque cashing operations, your transaction costs are already high. The Consumer Federation of America found that cashing fees ranged from 1-6 per cent and fees for personal cheques from 2-16 per cent(averaging over 9 per cent). Some operations also make loans to consumers on postdated personal cheques to tide them over until their next pay day, at interest rates equal to 261-913 per cent per annum (Gordon, 1997). Some 12 million American families, forced by rising bank fees, can't afford to maintain regular bank accounts (according to the Treasury Department) so it's not surprising they turn to less regulated businesses that can make short-term loans, pay utility bills, distribute welfare cheques and food stamps, sell money transfers, phone cards, stamps and lottery tickets.
0800 benefit
If everyone used e-cash,then transaction costs for society as a whole would be lowered, simply because it's cheaper to handle than notes and coins. If state benefits could be paid by telephone, direct to the recipient's e-purse ("Your benefit account holds £27.90:press 1 to make a withdrawal or 2 to make a transfer"), the savings could run into hundreds of millions. But who is going to tell pensioners that as from 1 January 2001 there will be no benefit books, notes or coins? (And therefore,likely as not, no post offices either.)
How could the benefits of e-cash be extended across a society in which one in five adults has no current account and four million households pay all of their bills in cash (Farbrother,1997)? It's important to remember that the deployment is not about PCs and the Internet, which are together only one of the ways in which the superhighway will come to the mass market. Over the next couple of years in the UK, people will be accessing the Internet using PCs, PDAs and mobile phones, cable modems and cable TV, digital and satellite TV. In fact, Cable companies, the British Interactive Broadcasting satellite consortium (BSkyB, BT, Midland Bank and Matsushita) and the British Digital Broadcasting terrestrial consortium (Carlton and Granada)will be competing with each other to offer new interactive digital TV services to every household in the UK. The set-top boxes required for these new TV services will have smartcard interfaces in them. The mass use of online services will come not through the Internet but the TV, which will penetrate almost every household in the country. So the access devices the smartcard interfaces required for the e-cash economy are going to be deployed. Will there be any reluctance to use them? I doubt it, since the UK already has a thriving TV-based online economy (Glyn-Jones, 1997): QVC has a million customers and 40 per cent of late-booked holidays are booked through teletext.
So the platform is coming along nicely, and without some vision to manage the transition to an e-cash world it will happen by default. People like me will use PCs and mobile phones to zip e-cash (whether sterling, air miles or Sainsbury's Rewards) around,getting the best possible service at the lowest possible price. This does not translate to the mass market, however, and what we probably don't want is a society where e-cash becomes the demarcation line in a two-tier society. What about those who can't or won't move to e-cash? There are, essentially, three options:
- 1.
people should be allowed to continue to use notes and coins at their own expense; or
- 2.
people should be allowed to continue but at someone else's expense; or
- 3.
people should not be allowed to continue to use physical cash.
While options 1 or 2 might intuitively seem to fit with people's conservative nature, and while certain lobby groups (for the aged, the poor and so forth) might prefer option 2 over option 1, it might well be that taking the apparently extreme step of dumping notes and coins altogether is the only realistic future[3]. This option implies the use of some form of regulation or, at least, firm government policy to open up the benefits to society as a whole.
Managing transition
There is a clear implication here that some sort of regulation of purse issuers is on the horizon and that, perhaps, banks will become subject to some kind of universal service legislation. The idea of universal service is well-established in the telecommunications world and in fact last year's US Telecommunications Act expanded the concept beyond its historical context of providing a telephone in every home to cover telecommunications services (including the Internet) to schools, libraries and health care providers.
Universal service in the e-cash context might mean that certain classes of financial institutions, for example, could be obliged to provide a new form of service to everyone over 16,comprising an interest-bearing account and an e-purse: no statements, no cheque book, no debit card, nothing but a place to pay e-cash in and draw e-cash out. This basic account could be provided free of charge, paid for with the money saved by turning bank branches into video game arcades and melting down ATMs for scrap metal. Since every telephone and TV set might become a bank branch, people in depressed or remote areas would actually have better access to banking services than they do now.
(David Birch can be contacted at daveb@hypenon.co.uk)
Notes
- 1.
Including £56 million in defunct £1 notes that were last issued in 1984 and £625 million in old £50 notes.
- 2.
A mobile phone that opens up to reveal a keyboard and screen.
- 3.
It might be a good idea to do this as part of the transition to EMU and therefore avoid all the costs associated with physical transition. Hence there is a window of opportunity coming up.
Smart Card News(1997), "Proton takes world lead in electronic purse market", Smart Card News, March, pp. 42-3.
