Academic journal article ABA Banking Journal

Could E-Cash Threaten Payment Integrity? Should There Be Some Rules Imposed to Avoid Consumer Uncertainty? Two Payment System Veterans Debate the Case

Academic journal article ABA Banking Journal

Could E-Cash Threaten Payment Integrity? Should There Be Some Rules Imposed to Avoid Consumer Uncertainty? Two Payment System Veterans Debate the Case

Article excerpt

Should there be some rules imposed to avoid consumer uncertainty? Two payment system veterans debate the case

The prospect of being able to use electronic cash to make purchases on the Internet, or to use a smart card to buy everything from a cup of coffee to a new PC has fired the imaginations of countless journalists and techno-savants. Not surprisingly, electronic payments have also generated a great deal of commercial interest among technology companies and financial institutions. A currency surrogate from which it would be possible to garner business revenue has tremendous appeal.

Electronic payments also involve potential pitfalls or risks, some of which have tended to be overlooked in the general excitement over the possibilities. Concerns about such risks and implications have prompted congressional hearings and convocations among regulatory bodies and industry groups. In general, the concerns center around three issues: consumer protection and privacy, the integrity of the payment system, and the potential for crime (money laundering in particular).

The American Bankers Association convened a task force in December 1995 to explore the policy issues raised by the evolving retail electronic payments systems and their impact on the banking industry. The task force issued its final report in September of 1996.

As a follow-up effort, ABA sought comments from knowledgeable sources on several of the areas studied by the task force--privacy and integrity in particular. Views were solicited from eight high-level people in the regulatory agencies, academia, and in banking. The resulting dialogues were collected into a compendium on the subject and published by ABA last month. The views split roughly into two camps: those who agreed with the task force conclusion that only regulated depository institutions should issue third-party payment instruments, and those who did not agree, or that felt it was too soon to make such a decision. By "third-party instruments," the task force meant any payment device that could be used in commerce generally (e.g., the Mondex card versus a prepaid transit card).

Two of the interviews (conducted by ABA Banking Journal Editor-in-Chief William Streeter) represented the essence of these two views. Former Shawmut Bank CEO and Federal Reserve Governor John LaWare made the case for imposing some caution sooner rather than later. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, argued that less control is better for now. The interviews, which were edited for clarity, and reviewed by the participants, follow--first LaWare, then Hoenig.

A free copy of the summary report of the ABA Payment System Task Force can be obtained on the ABA's Web site ( or by contacting Mike ter Maat at (phone: 202-663-5354; fax: 202-828-4547; email Copies of the compendium are free to association members.

ABABJ: From your perspective, what are the key developments that make payment system integrity an issue now?

LaWare: The increased use of the Inter net for commerce is part of it. Part of it is the sometimes questionable success of smart card experiments (I don't think it was a howling success in Atlanta, for example).

When smart card use is unilateral, as it is with most of the transportation cards there's not a lot of risk involved because in effect the person using the card purchases the value that's stored in it and then uses it only with the issuer of the card.

Elements of risk increase as a smart card becomes used with more than one vendor. That's because the additional vendors are subject to whatever financial risks are involved with the issuer of the card, as is the holder of the card, of course.

The question that arises around all of these new types of electronic payments is are we extending the federal safety net to this type of transaction?

If, for example, a value that someone has purchased from, let's say, Microsoft or Blockbuster, is considered to be a deposit of some kind, are we in effect extending the federal safety net for bank deposits to these kinds of entities? …

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