Economics Update (April-June 1997)

Are New Forms of Retail Payments Really New?

T o most American consumers, the word "payment" is synonymous with "cash, check, or charge." This familiar triad is now being augmented, however, with a variety of alternative payment methods, including debit cards, remote banking, stored-value or "smart" cards, and "electronic cash."

William Roberds, a research officer and senior economist in charge of basic research at the Atlanta Fed, explores this topic in an article in a recent issue of the Atlanta Fed's Economic Review.

There is much that is new about these alternative methods of payment, which have come about through the widespread availability of technologies that were unavailable even a decade ago. The apparent novelty of some of these new forms of payment has led some observers to conclude that the new forms will be different from the old not only in a technological but also in an economic sense.

The new types of payments are better described as evolutionary adaptations of some older forms of payment — checks and banknotes — to modern communications technology.
While such a prediction may hold true in some limited respects, in Roberds' view it would be difficult to believe that the costly lessons of economic history are not relevant for electronic payments. Roberds examines the question of whether, from the standpoint of economic theory, there is or will likely be anything new about these new forms of payment.

The advent of various new electronic forms of payment cannot be described as revolutionary. The new types of payments are better described as evolutionary adaptations of some older forms of payment—checks and banknotes—to modern communications technology.

Since the new forms of payment do not really represent anything particularly new from the standpoint of economic theory, Roberds maintains, it seems likely that the same policy issues that apply to the creation of checkable deposits and to the issue of banknotes will apply to the creation of the new forms of payment liabilities. Among the most critical open policy questions are the following:

Should institutions not regulated as banks be able to offer the same types of transaction services as banks—that is, should there be "free" electronic banking?

Second, if the answer to the first question is yes, what are the rights and responsibilities of nonbank providers of transactions services? In particular, to what extent should existing banking laws apply to these nonbank providers? And what should be the responsibility of the public sector toward these nonbank providers, particularly in the case of a failure of a provider or a more widespread liquidity crisis?

Third, should banks and other providers of transactions services be allowed to create electronic liabilities with some characteristics of circulating banknotes? And what restrictions, if any, should apply to these liabilities?

Fourth, is it necessary to impose a non-interest-bearing reserve requirement on all transaction liabilities in order to maintain a stable overall level of prices?

Aside from the occasional interjection of the word "electronic," these are classical questions of monetary economics, Roberds points out. These questions were widely debated in the 19th and early 20th centuries, but by the mid-20th century they had been resolved, at least in a policy sense, in favor of the regulated form of banking that we are familiar with today. If the new types of payments become popular enough to force these same questions to be asked again, he concludes, it will be interesting to see if the same answers emerge.

Return to Index