E-Cash No Substitute for the Real Thing Yet

During the New York smart card trial that ended early this year, it was not unusual for customers to be greeted by merchants with visible signs of annoyance. Some were even told not to use these cards during busy times.

That, in a nutshell, describes the problem with electronic cash schemes. Electronic cash was designed to compete against coins, and it has failed miserably. It was marketed as a speedier alternative and it isn't. Admittedly, the New York experience was just a pilot, undertaken to test the waters. But it was not an even match. Coins delivered a first-round knockout.

So what is the problem? Is electronic cash a before-its-time technology looking for a market that will just fizzle away because it failed to find any acceptance? Or are there other hurdles that impede its acceptance as a viable alternative to currency and coins, although the technology is sound?

The answer is a bit of both. To be sure, more money and cooperation are needed among financial institutions to make a really serious effort to make electronic cash a success both from infrastructure-deployment and resource-allocation perspectives. But certain critical issues will have to be considered and resolved if an electronic cash scheme can be successfully rolled out.

First, a clarification. Electronic cash and smart cards are not synonymous. Smart cards generally refer to payment cards that carry an embedded microprocessor that is capable of storing and processing many times more information than the magnetic stripes that most payment cards carry today. Smart cards can carry electronic cash on them, but they are a technology, not a payment scheme.

Small-value payments, generally defined as those under $10, are almost exclusively the domain of physical cash. You pay for a newspaper with coins and not cards because you don't want to spend too much time buying an item that small in value. And merchants prefer cash because they do not pay fees as they do on cards. Electronic cash schemes are designed to capture the small-value payments market.

A number of great technologies have not succeeded in the marketplace simply because their value propositions are not strong enough. In the case of electronic cash schemes, there is an overarching drawback. They are designed to be substitutes for cash but fall short on some crucial points.

Terminal trouble. Lack of speed translates to lack of convenience for consumers and merchants. This is primarily due to the current state of terminal technology. In New York, the small toaster-type stand-alone terminals were not integrated with cash registers and took a bit too long to process a transaction. Merchants, afraid of losing business due to slow transaction times, showed an unabashed preference for cash. During peak hours many retailers intentionally did not display the terminals next to the cash registers because they did not want to be distracted by a customer trying to use an electronic cash card. It is clear that no electronic cash scheme can be successful until terminals are devised that take no more than three or four seconds to complete a transaction and are integrated with cash registers.

Unattended terminals. Cash transactions take a long time wherever there are unattended terminals. How many times have you fumbled for exact change at a machine or sat counting and recounting coins or looking for one more quarter? Unattended terminals, including automated newspaper kiosks or similar devices that sell small-value items, generally have short lines or none at all. They are good candidates for electronic cash, which can be quicker than real cash at these terminals. In our opinion, unattended terminals should be included in the first phase of any electronic cash rollout.

Consumer acceptance. This is key because it is ultimately the consumer who controls how a purchase is actually paid for. Two types of incentives are commonly used in financial services products: incentives that reward to the customer to acquire the card and those that encourage continued use of electronic cash. Issuers must monitor consumer interest and transaction volumes and continuously develop incentives to accelerate card usage.

Merchant acceptance. Second in importance only to consumer acceptance, the decision by a merchant to accept a payment type is usually based on the fees charged. In the case of electronic cash, merchants can be educated to positively discriminate against currency and coins. Merchants know they cannot make significant savings on cash handling by accepting cards, as they would still have to hold cash and make trips to the bank. The likelihood that cash will be completely eliminated in our lifetimes is very slim. Merchants should be offered significant incentives in the initial stages of a rollout. If the card can speed customer lines, merchants may also be encouraged to have separate checkouts for electronic cash users. All this requires commitment of additional funds by the issuers but in the initial stages this will be money well spent.

In addition to the discussion about barriers to consumer and merchant acceptance, there has been a lot of debate over the real value to electronic cash issuers. The economic viability of electronic cash is in doubt. Other than possible float earned in the process of making payouts to the merchant, there are no substantial, immediate revenue sources that customers and merchants will be happy to supply. Revenue opportunities are longer-term in nature.

In all the hoopla about electronic cash schemes, it is easy to lose sight of the original objective of capturing small-value payments. It would not be out of place to suggest taking a technological step back to determine how existing technology can help the small-value market.

Using the old business model for off-line automated teller machine and debit cards -- in very fast terminals and without signature verification for small-value transactions -- might help get customers accustomed to using these cards where they generally pay by cash. Transaction costs may initially be higher but will fall with volume.

This business model, where transactions below a certain value were not authorized, may work in automating the small-value payments market. Once consumers begin to prefer ATM and debit cards, they may be gradually upgraded to more sophisticated electronic cash schemes.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER