AN ELECTRONIC REVOLUTION against coin and currency is about to begin in Swindon, a smallish community west of London. Swindon will be the test site next year for Mondex, a joint venture of National Westminster Bank and Midland Bank. "Storedvalue" cards will be given to 40,000 residents for use at more than 1,000 merchants.
Mondex is an electronic substitute for cash. It is not designed to replace debit or credit cards or checks and does not have their features.
The Mondex concept is: All users will have a plastic card containing a microchip upon which a cash value can be placed, and users will typically also carry a small device that can display the balance contained in the cards. For cardholders wishing to carry out more complicated functions -- such as moving money from one card to another or reviewing a log of recent transactions- there is an "electronic wallet" device. At the cardholder' s discretion, the card can be electronically locked with a PIN numberand money can be spent from the card only when it is electronically unlocked. The card can also be locked and unlocked at a Mondex-compatible automated teller machine or a computerized telephone.
Mondex tries to mimic cash in as many ways as possible. Stored value is placed on the card after insertion in an appropriately equipped ATM, telephone, or other electronic device. The holder's demand deposit or other account is then debited, exactly as if cash were being withdrawn.
If the Mondex card or electronic wallet is lost, burned, or eaten by the dog, the holder is simply out the stored value. There's a disincentive to thieves, since both the card and electronic wallet can be locked. Mondex is also envisioned to be less susceptible to counterfeiting.
Cash is generally spent at retail locations, deposited in machines, or given to other individuals. Mondex allempts to mimic all these activities. Point-ofsale terminals, AT, and vending machines would be equipped with new Mondex chip-reading capabilities. Person-to-person transfers require that the recipient's "wallet" deduct value from the giver's card and then add that value to the recipient's card. Value could also be transferred long distance by the giver and receiver simultaneously putting their Mondex cards in appropriately equipped telephones. In fact, value could be transferred back and forth between a Mondex card and the bank entirely over the phone, eliminating the need for ATMs as we know them today.
King Cash still rules, even after 30 years of continuous developments in electronic payment systems. In the G10 industrialized countries, the ratio of notes and coin in circnlation per capita ranges from $446 to $2,748. In the United States, there supposedly was about $300 billion of notes and coin in circulation in 1992, excluding the amount held by banks. Moreover, this number has been growing at a surprising 8% per year. While deposits by check were larger in 1992, at about $742 billion, they are only growing by 6% per year. In the United Kingdom, about a quarter of all "spontaneous" payments over 100 pounds sterling are still made with cash. For payments under five pounds sterling, the percentage is 98%.
To really displace cash, the Mondex system has to have some qualifies that credit and debit cards lack. For example, cash is negotiable, meaning it can be given or traded to someone else. Credit and debit cards can't be given away--technically, they are identification cards owned by the issuer and restricted to one user.
But a Mondex card can be given away. Cash is a bearer inslnanent, meaning that possession is prima facie proof of ownership. Of course, credit and debit cards are not bearer instmments. Also, cash can beheld and used by anyone even if they don't have a bank account, and cash places no risk on the part of the accepter that the medium of exchange may not be good. This contrasts with bank cards, which require an account relationship and authorization system. Checks also require either personal knowledge of the payer or a check guarantee system.
Lastly, cash is legal tender, meaning the payee must take it. Cards, of course, are not. (While the Mondex pilot in Swindon won't be legal tender initially, that could change.) Thus, Mondex is extremely ambitious, but, once fully implemented, should be a great boon to consumers. Surely, carrying only one card and a "wallet" would be a lot easier than carrying a ton of musty old paper bills and unwieldy coins, especially in multiple currencies, as is done in Europe and Asia. (Mondex can handle five currencies at once.) Someday electronics must replace paper in all parts of the payment system. It' s already happened in wholesale payments, wire transfers, recurring bill payments, the automated clearing home, electronic draft capture, and electronic check presentment. Can currency remain immune to this trend forever?
Maybe. Maybe not.
Mondex has at least four major challenges to overcome:
* Consumer habits are entrenched, ratcheting up the time/cost of conversion.
* Mondex will cost a lot ofmoney and it's unlikely consumers will pay just to replace cash.
* The banking industry's cost base probably won't be reduced.
* An anonymous electronic payment system without automatic record keeping will be difficult for bankers and govemments to accept.
Consumer payment habits change excruciatingly slowly. Humanity has used coins for thousands of years and paper bills for hundreds. A continued high level of comfort with cash usage could trail on for another hundred years, perhaps coexisting with systems like Mondex. In the long run -- the very long run--the electronics should win. But the time and cost of conversion will be very, very high.
Mondex will require an investment of at least $100-to- 200 per cardholder for cards, wallets, chip-reading terminals and back-office systems. Total U.S. conversion would thus cost at least $25 billion. In the very long run, say over several generations, these costs may be acceptable. To some extent, they replace the cost of the U.S Mint, the armored track, the ATM, and the cash register. But in the intermediate term, while cash and electronics must co-exist, the extra costs of Mondex will be a real barrier. Mondex has stated its intention to charge consumers for the cards and the wallet. But this is very likely not to work. Today consumers pay nothing to hold or Wansfer cash. Experience shows that consumers will not pay for an electronic substitute when they can get the paper for free. For example, home banking experiments have consistently failed to entice many people into paying a monthly fee for simply getting electronic access to their account. People want the kind of extra value they can get from a package, like Quicken, that adds tremendous value by simplifying home finances. For that, millions of people have paid money.
The banking industry's cost base is a pressing issue, yet Mondex is unlikely to have even an intermediate-term effect. Banks' costs of actually counting cash and coin are fairly low, but the costs of operating branches and ATMs may be as high as 40% of total non-interest expense. Yet, subsequent to full Mondex implementation, most branches would still be needed, to sell and service loan and deposit accounts, to do financial advising, to accept check deposits, and to provide customer service. In fact, during a cash-to-Mondex transition period, which could last several decades, branch costs would undoubtedly increase while people were taught how to use Mondex.
The final issue is whether Mondex can happen without an automatic record feature. This is simply an afterthe-fact transcription of what happened, created without any explicit effort (or option) by the parties to the transaction. An automatic record must be:
* Available for permanent storage;
* Accessible and traceable;
* Held within a payment system data base;
* Capable of providing dam to the payment maker, the bank, or monetary authorities.
To date, virtually all electronic payment systems have had automatic records. All wholesale EFT systems have had them -- for obvious reasons. Credit and debit cards have them and, in fact, record keeping is one of the features consumers value the most. Even the paper-based check creates an automatic record. Once information has been captured electronically, it' s easy and cheap to keep -- and it might even cost more to throw it away than to keep it. For example, in many transaction processing systems, old or blocked accounts are never purged and old transaction histories can be kept forever on tapes. Moreover, electronic transactions are intangible by their very nature, so a record is the only way to resolve later disputes. In fact, a general law of payment dynamics and banking technology might be: No electronic data are ever discarded -- ever!
Mondex' s plans seem to be ambivalent on this point. The Mondex concept touts equivalence with cash, but its electronic wallets are designed to hold automatic records of the card's last 20 transactions. A statement function is built in. Obviously, the chipreading terminals, machines, or telephones could all maintain records of all transactions and it' s probable that they ultimately will.
The transaction anonymity of cash is very peculiar. It exists today only because cash is a very old concept, invented long before the computer gave mankind the capability to track everything. While a certain segment of the payment-making public will probably always desire transaction anonymity, we'd argue that it runs counter to the public welfare. There are simply too many tax, smuggling, and/or money laundering possibilities. Regulation E -- coveting consumer protection in eletraonic banking transactions -- might even apply to Mondex, although there is debate on this point. Were the regulation to apply, each transaction would have to be reported, meaning it would appear on an account statement.
Another thorny issue is receipts for cash purchases. They are perhaps unneeded for bus fares or parking meter. But cash is still used for sizable payments where a receipt is desired and required. It stretches creditibility to believe that the world will automate cash, by implementing Mondex, yet continue relying on paper receipts. More reasonable is having the Mondex card or wallet--or both -- contain electronic receipts which could be transferred to the user's permanent records in their home financial software. But, of course, this would imply that the Mondex card would contain an automatic, permanent record keeping feature.
A world without cash, where all payments are known and recorded automatically, would be very different from today' s world. New opportunities would arise for consumers, banks, and others. In theory, consumers could then tally up everything they spent with little or no effort They could do realistic expense analysis and/or negotiation with merchants based on volume.
One of the possible benefits to banks and other firms is that they could better understand the total financial behavior of their customers.
The challenge for the banking industry is to come to the right vision of how electronics will ultimately replace archaic paper payment systems. Then, the challenge is to figure out how to make a profit on that vision. As usual, it won't be easy.