I’ve got a pocket full of the future.
For most of this year, I’ve been collecting stored
value cards. I have a Telefonkarte issued by the Deutsche
Bahn, good for DM12 of phone calls in Germany. A similar
Taxcard from Swiss Telecom is good for CHF10 of payphone
calls there. At Comiskey Park, I grabbed a $20 card good at
all concession and souvenir stands. A visit to an El
station in the Chicago Loop yielded a CTA Transit Card,
I’ve got several low-value paper BART cards and D.C.
Metro cards stashed in various drawers, and like any good
New Yorker, I’ve got my Metrocard, good for rides on
all subways and buses in the storied Five Boros.
And most interestingly, I’ve got VISA Cash and Mondex
cards – the first true electronic cash for the
masses.
VISA and Mondex (which is majority owned by MasterCard), in
cooperation with Citibank and Chase, respectively, are
testing whether people are willing to abandon traditional
cash for electronic cash. Unlike most trial runs, which
happen out of town and out of the media glare, the banks
have elected to run the biggest test of electronic commerce
quite literally on Broadway, in the same neighborhood as
the ABC network and the $9 movie ticket.
The banks, the two biggest consumer financial institutions
in New York, sent new ATM cards to all their customers in
the tony Upper West Side neighborhood of Manhattan, home to
Zabar’s and Lincoln Center. The new cards would
function both as ATM cards and as e-cash cards.
Stored value cards are only big news in the United States.
They’ve been familiar sights in Europe for some time,
where expensive telecommunications charges drive the price
of credit card authorizations to uncomfortable levels. But
of all the cards in use, only the VISA and Mondex cash
cards can both be refilled and can be used at a wide range
of stores. All the others are either single-purpose (like a
phone or transit card) or can’t be refilled (like the
Comiskey card), or both.
Electronic cash exists at a fifth level of remove from
reality.
0. Barter. You give me a chair, I give you a melon.
1. Exchange Medium. You give me a chair, I give you a piece
of gold.
2. Hard Currency. You give me a chair, I give you a piece
of paper redeemable for gold.
3. Soft Currency. You give me a chair, I give you a piece
of paper that everyone agrees can be exchanged for other
goods, like a melon.
4. Check/Credit. You give me a chair, I give you a
bank’s promise to pay you. My arrangement with the
bank is my own business.
5. Electronic cash. You give me a chair, I give you bits
that you can store and spend like soft currency.
People have learned to understand models zero through four,
though step four took some considerable getting used to. It
was about 40 years between the time the Bank of America
developed the BankAmericard (precursor to the VISA card)
and the time that your local supermarket accepted it.
Earlier trials – one in England, another in Canada,
and a third at the Atlanta Olympics – were not
notable successes, although all parties (with the notable
exception of the public) professed satisfaction with the
results. The New York trial is already starting with a huge
strike against it. By placing the chip on a card that
already has another function – even though that other
function is well-established – there was no better
way to confuse the issue of cash that resides on the card
and money that’s held safely in a bank. For the sake
of clarity alone, the banks should have kept the cards
separate.
To use an e-cash card, you dip your card into a reader,
which locks your card in place. The merchant punches in the
amount of the sale. A small display tells you how much you
have on the card and the sale amount. If you want to pay,
you press a big green YES key. If you don’t, you
press a smaller red NO key. There’s a pause of
perhaps two or three seconds, and the bits are moved from
your card into the store’s computer. At the end of
the day, the merchant uploads the bits into the
store’s bank account.
Let’s look at the ways people actually use their bank
cards:
Paying with a cash card, users are asked to dip their
cards, see the amount they’re paying, and press a big
green YES key.
Paying with an ATM card, users are asked to swipe and enter
a PIN code.
Paying with a credit card, users typically give their cards
to someone else to swipe, and then sign their names to a
receipt.
These three sets of actions are close enough to each other
to cause tremendous confusion. If you hand someone your ATM
card, it may well seem academic whether the money comes out
of your bank account or out of some store of bits
you’ve already withdrawn and placed on the
card’s chip. Unless, of course, you object to
per-transaction ATM fees or you don’t have enough
money either in the bank or on your card.
A payment system that requires its users to understand and
pay attention to such subtleties is probably doomed.
“Let’s see. If I lose my ATM chip card, the
cash on the chip is gone, but the money in the bank is
safe. I can get a replacement card, and the card will have
a chip, but the chip won’t have the cash I
lost?” Otherwise intelligent friends of mine have
trouble with this, and reasonably so.
The local newspapers trumpeted the fact that Zabar’s,
that Platonic ideal of a delicatessen, accepts e-cash. As
wonderful as Zabar’s is, that’s not the true
test of whether e-cash will work. People don’t use
cash at Zabar’s; they use (and abuse) credit cards.
The real test is about five blocks south, where a small
sidewalk shed sells candy bars and newspapers. No credit
cards there, just the best the Federal Reserve Bank has to
offer. And yes, that shed takes e-cash.
Not everyplace does. Starbucks doesn’t. Papaya King,
home of the world’s best 50-cent hot dog and right
across the street from the neighborhood’s biggest
Citibank, doesn’t, either. Both report, however, that
customers have been asking about e-cash, and both
acknowledge that they may have to enter the 21st Century.
(What electronic cash means for the buskers and homeless
who roam the neighborhood is probably an important
question, but one that’s more subject to local
politics than international monetary policy.)
So what’s wrong with cash, anyway? It’s not
particularly convenient, to start with. It’s easy to
counterfeit, difficult to store, costly to track, expensive
to maintain, a pain to obtain, and exchangeable only in
person. Electronic cash is (to the extent anyone’s
been able to determine so far) impossible to fake, easy to
store, trivial to count and maintain, and downloadable. All
of those are big wins for banks and for individuals.
More interesting, though, is the possibility that
electronic cash can take central banks out of the currency
loop. Cash, it turns out, is not a government function. It
is produced and backed by central banks—private
institutions with strong links to governments, but not
governments or parts of governments themselves. Cash
produced and backed by central banks works because those
central banks are strong enough that everyone trusts that
the money is a valid exchange medium. (When that changes
and faith erodes, financial panics ensue and governments
have the nasty habit of falling.)
But when you download cash onto a Mondex card, the Federal
Reserve Bank hasn’t done a thing. It hasn’t
turned a printing press, or fed a sheet of paper, or
spilled a drop of ink. The guaranteeing authority behind
the electronic cash is VISA or Mastercard –
essentially turning them in to central banks, but without
the attendant size or strength. Then again, VISA and
Mastercard are international institutions, unlike central
banks, which control only one nation’s economy.
So what happens if Mondex fails? Will the electronic cash
on a Mondex card still good? Who will accept it as payment?
Who will guarantee that the bits on the chip are
exchangeable for a chair or a melon? Are we ready to put a
significant number of financial eggs in such an untested
basket?
These are not questions that are being debated in the
public press. Newspaper coverage has been of the gee-whiz
variety. Nonetheless, the Federal Reserve Bank is keeping a
close watch on the Upper West Side these days, and is under
Congressional mandate not to do anything to discourage
electronic commerce. That’s probably a good thing.
But it would be better if the mandate included the
obligation to assure the financial safety of the American
– and world – public.