Financial Update (April-June 1996)

No Cash? No Problem
Pilot Programs Spreading
For New Forms of Payments

Is it possible that people will go to Olympic events this summer without a single dollar bill in their pockets? No change jingling and weighing them down? No begging for someone to break a $100 bill for them?

The folks at Visa might like to think so.

For the summer Olympics in Atlanta, First Union, NationsBank, and Wachovia plan to offer customers and vendors the opportunity to use Visa smart cards—the stored-value cards that look like credit cards but act like cash.

No one is predicting that cash will become obsolete any time soon—in fact, Richard Oliver, a senior vice president with the Federal Reserve Bank of Atlanta, contends there is more talk than practice right now. But several pilot programs are being launched for stored-value cards.

Stored-value cards are one type of the new electronic payments systems aimed at low-dollar purchases. Another branch is electronic currency or electronic cash, which involves buying goods through a computer or other home device. Oliver and Fred Herr, a senior vice president and branch manager for the Atlanta Fed's Birmingham Branch, discussed the new types of payments and the Fed's role in their development.

While there are various smart-card approaches, one elaborate system is being offered by an organization called Mondex, which has created a pilot program in an English town. The Mondex card has a computer chip inside with a specific amount stored on it, probably $50 or $100. The customer gives the card to the vendor, who inserts it into a handheld device that looks something like a Gameboy toy. The vendor's card already is in the device. The device takes the purchase amount off the customer's card and stores it on the vendor's card. At the end of the day, the vendor takes his card to the bank and has the payments deposited into his account.

Those using the stored-value cards will have a small tubular device that will tell them how much money is left on their card.

With some versions of the stored-value card, the card user has to punch in an identification number, similar to using debit cards. This adds a level of security that cash doesn't have—making stored-value cards less susceptible to counterfeiting, Oliver said.

Some cards may be reusable. The cardholder would take the card to the bank and have it recharged after the money was used up. Others would simply be discarded after they were spent.

Pilot programs are going on in several countries, including England, Australia, Denmark, and Norway. And pilots are planned for Canada and the United States—in Atlanta for the Olympics.

The smart cards tested during the Olympics most likely will be issued in the amounts of $50 or $100 and will be discarded after they are used.

For now, the forerunners of stored-value cards are dabbling in niche markets and niche applications, Herr said. Some pilots may be simply experimental—allowing the companies to ferret out the kinks and correct problems.

While private companies venture into these new realms, the Fed's role is to determine when and where assistance or regulation may be needed to ensure that the nation has an efficient and effective payments system.
"It's hard to learn unless you get in there and play," Herr said.

While the challenge now may be to work out the details, a future challenge for promoters will be to obtain mass acceptance. Until that critical mass acceptance is built, growth of the stored-value cards will be inhibited, Herr said. Oliver agreed.

"I think there has to be some element of making it worthwhile for the consumer," Oliver said, "and then a very huge, lengthy educational program of trying to get the consumer to use these new devices . . . getting (consumers) over the fear factor, breaking them of their old habits."

In order for smart cards to be useful, customers have to know that vendors everywhere accept them. And interconnectivity will be a challenge. Stored-value cards and the reading devices will have to be standardized so that vendors accept all brands of cards.

Another challenge will be convincing consumers that they should carry three cards—a charge card, debit card, and smart card. The goal for card providers may be to consolidate the three kinds of cards.

If this all doesn't sound high-tech enough, another form of hypercyber payments is emerging as well—electronic currency.

Electronic payments aren't completely new. Direct payments and direct deposits are two examples that have gained great acceptance during the past 20 years. But electronic currency goes beyond such payments and ventures into home banking.

For example, a company called Check Free handles payments initiated via home financial software equipment, such as Quicken. Check Free takes payments transmitted through the software, removes money from the customer's bank account, and pays the butcher, the baker, and the candlestickmaker. Ironically, in perhaps as many as 80 percent of the cases, the butcher, the baker, and the candlestickmaker don't have the capability to receive electronic payments, so Check Free has to write them, of all things, a check.

While still in its infancy, electronic currency has tremendous capacity to expand. One day consumers might jump on the Internet, go shopping there, and send their payments electronically. Or they might be able to shop by telephone or television using new devices to place orders and make payments.

These same customers might want to do their banking on the Internet. One bank that operates solely on the Internet already has opened.

While private companies venture into these new realms, the Fed's role is to determine when and where assistance or regulation may be needed to ensure that the nation has an efficient and effective payments system, Herr said. To that end, the Fed will help foster the kind of environment where electronic alternatives can work, Oliver said. That might mean changing regulations, bringing industry leaders together, and helping to set standards.

"Obviously, building the infrastructure of computer systems, networks, terminals, and devices to support this in a way that could possibly be cost efficient is not a trivial job," Oliver said. "And it's going to take a long time."

The July-September issue of Financial Update will address regulatory and legal concerns that will arise with the new electronic payments.

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