[Dave Birch] Throwing out some old papers, I came across a Datamonitor report from 1996. It was projecting the use of online payments through to 2002 and suggested that credit cards would account for about half of the market (a small decrease) whereas digital cash would account for something like a quarter of the market. Now, as we all know, this didn’t happen. But like many other people at the time I thought it would. Why were we so wrong? In my case the reason for the utterly wrong prediction was transaction cost calculations. Like many other people I sat down with a spreadsheet and worked out that it would be a lot cheaper to pay for things on the Internet using e-cash rather than conventional banking infrastructure. For example…
- Conventional means to pay gas bill. Phone up with credit card (3%), debit card (10p) or direct debit (4p).
- New means to pay gas bill. Insert Mondex card in reader. Click to download UKP23.45 from bank account to Mondex card. Go to British Gas web site. Click to transfer UKP23.45 from Mondex card to British Gas. Total transaction cost: zero.
Of course, the cost of issuing Mondex cards and smart card readers is amortised to near-zero here. But it doesn’t matter, since none of it ever happened. It turned out that the transaction costs were irrelevant, because getting people to plug a smart card reader into a PC was a huge barrier on the acceptance side and getting banks to put a Mondex application on a smart card was a huge barrier on the issuing side. Customers, however, rather liked the idea of e-cash, and many would still prefer to pay this way.
Research this week from Prepaid Services (that operates Cash-ticket) found that around a third of shoppers would prefer to use cash rather than a credit card when paying for goods online.
It has to be easy, and it has to work. But it’s an interesting point to consider with hindsight: why did we make systems such as Danmont, Mondex, VisaCash and use them to compete with cash in the physical world rather than use them in the virtual world where there was no cash? I suppose at the time the world of the Internet was considered a novelty, not central to the world of banking and payments, so the idea of creating an e-cash system specifically for the Internet was considered the province of technology startups rather than banks. That’s not to say that people didn’t try: DigiCash, remember, and there were a variety of other ideas floating around such as Millicent, Hashcash and all the others. At the time, I was on the hardware side of the debate: that is, I couldn’t see how such a system would work in software and assumed that it would be the bank who would provide the tamper-resistant hardware (correct: the chip card) and the interface to the PC. These interfaces never materialised in the mass market, so that they never got a foothold before the falling cost of chips and telecommunications combined with massive economies of scale to give debit cards and unassailable lead at retail POS.
So who might provide the online notes and coins, the true e-cash that we have all been waiting for? Well, some viable options might be Facebook, where Facebook credits are mutating into an embryonic global payment system even as we blog, or perhaps PayPal or some other new entrant. I can’t help feeling, however, that it’s the mobile phone that is the key to this. I’ve been reading George Selgin’s “Good Money“, which explains how private industry stepped in to provide the coinage demanded by the economy during the industrial revolution.
At the dawn of the industrial revolution as workers left the fields and moved to industrial employment the demand for a means of payment increased dramatically. Workers, once paid in kind, needed to be paid in a medium they could use to buy the necessities of life. Small-tender bank notes, however, were illegal and in Great Britain the production of coin was monopolized by the Royal Mint which failed to provide enough high quality coin to meet the demands of workers and business. Silver coin, despite the efforts of Sir Isaac Newton, was overvalued and fled the country. Gold was too expensive to make coins suitable for workingmen and the Mint could not or would not produce high-quality copper coins.
Good Money is George Selgin’s explanation of how enterprising button makers solved what Sargent and Velde called The Big Problem of Small Change thereby making the industrial revolution possible.
You can see the parallel: a paradigm shift that transforms the way that wealth is created is hampered by the money of the previous era so private enterprise steps in to find a new and more efficient means of exchange, which scales, until we get to the point where the government steps in to provide the public good and minimise transaction costs. Perhaps it’s only a matter of time before the European Central Bank provides a sort of PayPal-like account for everybody and that’s the end of the matter!
A universal public e-purse mightn’t be such a bad idea. An online pre-paid account with a maximum balance of €500, one-click authorisation via token (a mobile phone, perhaps) and “legal tender” status. Why not? In fact, it’s possible to see (in Europe) how this might come about: not through the government usurping bank payment schemes but by allowing other purse providers to provide general purpose services. This is what’s happening in Asia. For example, Taiwan is following Hong Kong and Singapore in allowing the transit e-purse to be extended out into retail.
The EasyCard, a contactless smartcard system for use on the Taipei MRT system, will soon become an electronic purse that can be used to purchase small-value items… The new payment system, which will allow up to NT$10,000 (US$312.50) to be stored in the card, will be put in place a year after the Legislative Yuan passed an amendment to the Act Governing the Issuance of Electronic Stored Value Cards that paved the way for the new payment vehicle.
It’s clear that, as we all know, transit applications are disproportionately important in the low-value payments and cash replacement strategy. If banks can persuade the transit operators to accept contactless EMV on trains and buses, then you’d have to suspect that contactless EMV debit will become the “e-purse” of the next generation. But, on the other hand, if the transit guys have ambition, it’s perfectly possible that they might (with basic interoperability in place) become the “third scheme”: not another bank-centric debit scheme but a genuine competitor to the same.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]