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.