Eugene A. Ludwig, as comptroller of the currency, oversees the supervision of 3,300 federally chartered commercial banks. With the advent of electronic money has come an additional assignment - as federal regulatory point man for researching and studying the implications of the new technology. That role was the subject of a recent interview with American Banker executive editor Jeffrey Kutler.

Mr. Ludwig, previously with the Washington law firm Covington & Burling, has been comptroller since 1993. Known for his advocacy of broader bank powers, he raised eyebrows in a speech in January when he said the industry's obsession with reforming the Glass-Steagall Act diverted attention "from other, more central" financial modernization issues, such as E-money.


How did this new assignment fall to you?

You have to realize that we had been looking at electronic money issues anyway. You almost can't be involved in bank supervision and not be aware that this is an important developing area.

I didn't seek this assignment. (Treasury Secretary Robert) Rubin asked me to do it. To a great degree this was his brainchild. It makes a lot of sense when you realize that the original function at OCC was to worry about the currency of the United States. You might say the chickens are coming home to roost.

How do you carry out this electronic money role, vis-a-vis your agency and other parts of the government?

As I mentioned, our agency was studying this before and continues to study it. We have banks involved in the Internet, banks looking at issuing smart cards. So we have had discussions with outside parties on issues of encryption, the payment system, financial stability.

Separately, we are looking at the whole Treasury Department, which provides a wonderful opportunity to study this situation because of its functions. In financial crimes, it has Secret Service, Bureau of Alcohol, Tobacco, and Firearms, and Financial Crimes Enforcement Network.

Secondly, Treasury is the largest payer and collector in the country, through the Financial Management Service and Internal Revenue Service. Electronic money and payments are very significant.

Third is the financial stability area - us, the Office of Thrift Supervision, and Treasury's general concerns on behalf of the executive branch.

We have a group that meets periodically that includes the senior people in all the relevant Treasury agencies, bureaus, and offices. At those meetings, and more frequently among the staffs, we share information, ideas about what policy should and shouldn't be, etc.

Additionally, that group and some less senior people meet in a forum - it doesn't have a formal name - that has had visits from many private- sector interests in this area, who have been very cooperative. It's very hard to discuss policy in this area without knowing what's going on, and knowing it pretty darn well. You can't learn it from a book, and it's changing all the time.

As the coordinator, I and a number of others at OCC have done more than a little independent study, including visits to people actually doing these things.

You have done some traveling to view those programs in action?

I go to meetings of the Basel Committee bank supervisors in Switzerland every quarter. I will tag onto the end of the trip a half-day here or there.

Have you figured out what made some countries take to electronic money or chip cards so much more quickly than ours?

We had in this country the benefit of a telecommunications system that made it cheaper to get credit card approvals than it is in Europe. Chip cards were attractive because they allowed for batching of the information off-line.

More importantly, the countries that have gotten out ahead of us are fairly homogeneous societies that have a relatively small number of very large banks - or, in the case of Denmark, banks and telecommunications companies. In Portugal, there was a very sophisticated group of banks that did a joint ATM effort. Their initial objective was defensive. They wanted to keep nonbanks out of the payment system, and making money was not the prime consideration.

Belgium is very different. The banks got together and thought they could make a profitable business out of a smart card payment system that they see as the coming wave. Finland is a more peculiar case. In Helsinki, the government is located right next to the university. Students dreamed it up. The central bank decided it was not a function it wanted to take on and sold it to the banking sector.

Is the U.S. banking structure holding this technology back?

If you have a small number of issuers and a relatively small number of vending machines, it's easier to roll this out than in a more complex environment. Most U.S. banks are in a limited geographical area, and the technology costs money. I'd be surprised if one institution or even a small group could handle this. It's more likely to succeed with a larger group of entities.

You seem convinced we will see some form of digital revolution in the way we transact payments.

This is not like what we saw in comic books when we were kids - the car that flew you to work, the real Dick Tracy watch - which never came about. I analogize these new payment technologies, both the card and the Internet, to a steam engine that you can see and hear coming down the tracks.

But I'll also say it isn't coming tomorrow. I view this as a three- to five-year proposition.

I wish I was smart enough to say this first, but I wasn't: There is a tendency in technological revolutions to get so excited about great changes in the near term that we overlook or forget about the tremendously powerful, longer-term implications. That's the picture here - a lot of excitement, headlines - but we're not going to see too much in the next year. Then again, the longer term we are talking about is not so far off.

What makes the environment for future technology different that it was in the 1980s, when home banking was left for dead?

One factor is the technology itself. The cost halves every 18 months. The power of technology you can buy with the same dollar doubles in that time. That's not particularly dramatic when you're going from one to two, two to four, or four to eight. But going from a 200-megahertz Pentium Pro with two-gigabyte hard disk, as in my own personal computer, and doubling that in 18 months, is awe-inspiring. The little home computer I just bought has more power than a Cray supercomputer you could have bought in the mid- 1960s to operate the Social Security system. That's an astounding change, and there is no indication it is slowing down.

We also have a consumer population that is more and more comfortable with technology. The demographics are changing.

Third, the focus on home banking is on just one payment technology that didn't develop as rapidly as some had proposed. People forget to draw an analogy to other technologies in the payments arena. In 1954, there were essentially no credit cards. Visa didn't come together until the early 1970s. That market is still expanding. It's a technologically based payments change that over 30 or 40 years has revolutionized the way we do business.

How technology-literate were you before taking this project on?

I am no great whiz at the PC, but I was an early user in the law firm. A lot of young people were coming out of college and talking computerese. I figured I couldn't supervise people who were talking a language I didn't understand, so I started playing with the technology. I genuinely like it and I think it offers us great opportunities.

I don't think you can do these supervisory jobs competently today - or understand the modern world - without an understanding of the power curve of this technology. Some people in Congress worried so much about the risks of banks selling insurance. But we have banks that are going up on the Internet, a highly technological environment with all kinds of complex risks. How can you supervise them if you don't understand that?

Have you reached any conclusions about the need for regulation of the new technology?

If we came in with a meat-ax now, then we wouldn't know where the technology is going and we would likely chill promising technologies. That said, it is absolutely responsible that the government keep up with what is going on, and in a very aggressive way. As we see it develop and as problems arise, we could then enter with a scalpel, not a meat-ax.

Saying, "Let's sit back and let the market develop, there is no room for regulation," is just as wrong as, "We have to regulate everything."

There are indeed a variety of questions. In financial crimes they have to do with money laundering, fraud, counterfeiting, plain old theft. For the payment system, there are concerns about risk management, about the stability and well-being of the banks getting involved. There is an analogy to how we responded in the derivatives area: management should understand the risks well - theft, counterfeiting, people breaking into their systems, risks to reputation, operational risks.

In the consumer area, we may not absolutely need new rules or legislation, but the issue of disclosure has to be discussed. Access by lower-income individuals is also an issue, but I've said this is a promising technology for them. Personal computers create the opportunity for a branch in the home - if not immediately in the home, then through churches or community groups. The home telephone is already a very big delivery mechanism.

In the Internet environment, where is the transaction taking place? Whose rules or what rules apply? What does "concluded transaction" mean?

And there is the very fundamental question, Who should be the issuers of electronic money and how should they be regulated?

Is this a rare case where the regulatory and legislative bodies have been appropriately proactive?

I think this is a good story about government. I have a lot of respect for Mike Castle (the Delaware congressman who presided over a series of "educational" hearings on electronic money), and they are approaching it in a similar way on the Senate side. There is an important role for supervision and regulation. The trick is to confine it to the narrow area where it is really needed and let the market work as much as possible.

Is there a difference in your intellectual approach to researching electronic money versus your conventional supervisory tasks?

The approach is pretty much the same: We want to regulate where we really need it. But a body of bank regulation already exists. In the E- money area, the questions I ask are very much the same, but there is no body of regulation.

Where are the legitimate risks that are appropriate for government to address? Where there aren't, we shouldn't. Where there are, we should work with market forces rather than against them.

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