27th January 2012

Digital cash for the digital wallet

Interview

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Digital wallets / mobile wallets / electronic wallets received extensive coverage during the last year - but not electronic cash. Most electronic wallets under development or already launched use credit card, debit card, or prepaid card accounts, or just directly link to your bank account - they do not use electronic cash, or to give it a more precise definition, ‘ a digital representation of physical cash’. This is defined as an electronic item that can be transferred directly from one person’s wallet to another.

Banking Newslink recently spoke to Dr. Walter Ochynski, President of Treasury Management Services and involved in developing MySmartEMoney, a company planning to enter the electronic money market. The company currently has a proof of concept web site demonstrating how the system can work. Walter argued that a real electronic wallet should use electronic cash and have no type of bank account associated with it or fees for that matter. A much better alternative to these pseudo wallets is electronic cash. The electronic cash transaction does not have to go through networks that incur fees for the payer, payee, or both just like when you use physical cash. It can be used at POS at a retailer, for Person to Person (P2P) payment, via the internet or deposited at a bank. Also, it can be received from another person, from your employer, from your own account by internet, from an ATM, or even from a teller at a bank. All this is accomplished without ever having to create or link a new bank account.

Walter added, “Electronic cash is real. Just like how every dollar bill has a unique serial number so the FED knows it’s not counterfeit, electronic cash works the exact same way. Except now instead of printing the serial number on an expensive piece of paper, it is stored virtually on a server somewhere.”

The idea is not new. Bill Gates tried unsuccessfully to invest in Digicash, a pioneer in this field during the 1990s and planned to add the service to Windows 95. What is different now is that the technology exists to make it all work much better, faster, and more efficiently. Moreover, with the widespread use of mobile devices, the potential market for this service has grown exponentially larger.

Walter explained why banks would wish to become involved with such a service which may at first appear cannibalistic. First, there are the savings from less physical cash handling. ATMs could simply give out the necessary electronic cash instead of physical bills for example. However, the more significant and subtle point he went on to explain was:
“For banks, electronic cash would lead to an increase in profits. When you take cash out of the bank, it stops working for the bank. It generates no further profit. Electronic cash would generate further float until redemption for hard cash is demanded, this could mean that float would last forever or at least a very long time. The money never stops working for the bank as long as it remains electronic cash.”

In Walter’s view, the biggest winner would be the merchant, “If somebody pays with electronic cash there will be no fees like with credit or debit cards. Therefore merchants should promote payment with electronic cash to reduce their dependence on credit or debit card payments. Electronic cash would also make life easier for merchants because no change is required, as is the case when payment with hard cash is processed.”

The customer gains the advantage of a payment system that can be used in a wide range of situations at a fraction of current costs without needing details of the recipient’s bank or even the recipient having a bank account. In this day of ‘big brother’ and concerns over individual freedoms such transactions are private with no message sent via third parties. The very same privacy may at the same time be an issue for governments concerned with criminal and terrorist activity, though it is no greater problem than with regular, paper cash.

Would the central banks be the future issuers of electronic money to the banks who would then distribute the money, just like the current system we have for physical cash? That is certainly one scenario. Another is that banks would use electronic money for payments among themselves creating round-the–clock, real-time settlement in central bank money, which could make current systems obsolete.

Walter summarized the case for electronic money like this:

“To summarize: Banks will back the right electronic solution when it emerges, because it is more beneficial to them than to handle hard cash. Banks will gain float and they do not need armed guards to handle electronic cash. Electronic cash is more of an alternative to hard cash than to credit or debit cards. Cards offer consumers credit, the ability to spend beyond their means, transaction details, etc. Electronic cash will be promoted by merchants, who would save costs involved in handling hard cash and card fees when consumers would use electronic cash instead of cards. Governments and central banks would save a lot of money when consumers use more electronic cash and smart cards by not having to mint physical cash. Central banks would provide liquidity directly to banks instead of hauling and guarding hard cash. Hard cash is very expensive for central banks (printing and distribution costs). They would neither lose nor gain control if consumers would use electronic cash instead of hard cash.”


To experiment for yourself with electronic money you can visit the MySmartEMoney site at

http://www.mysmartemoney.com