Time for the “Thistle”

Now that Canada has put MintChip to one side, let Scotland drive a technological stake into the high ground and become the world’s first electronic currency state. As I said in this article from 13 years ago.

Time for The Thistle?

Electronic money may have interesting ramifications

by

Dave Birch
Consult Hyperion

17th September 2001

Legal E–Tender

A couple of weeks ago, Singapore became the first country to announce that it was going to be moving away from boring old–fashioned paper and metal money. The commitment to make digital money legal tender was driven by a desire stimulate the e–economy and take costs out of the old one. It’s not going to happen overnight—the Board of Commissioners of Currency for Singapore has set 2008 as the start date to give merchants and banks around the country the time to prepare [1]—but it is nevertheless another significant milestone on the road to new money for the new millennium.

Singapore is far from the world’s most cashless economy now: that distinction belongs to Iceland, where cash accounts for less than a sixth of retail transactions (in the UK, more than four–fifths of all transactions are cash), this efficient state of affairs having been reached by adding a digital money chip (known as Klink) to everyones’ bank cards. In fact, good old–fashioned paper cheques still dominate the Singaporean payments market, although they are gradually losing market share to new electronic and card–based instruments [2].

Table Omitted: Payment Statistics for 2000 (Source: Monetary of Authority of Singapore).

While the Board of Commissioners of Currency Singapore (BCCS)—which is driving the effort—has given industry a few years to plan the move to e–legal tender, things are already moving along. The dominant electronic money scheme in Singapore is the NETS CashCard (5 million in circulation in a population of 3 million). As in other countries, use at retail POS is limited: it is mostly used in vending machines, payphones and car parking. The real killer application, however, is road tolls. CashCard was processing about 5000 transactions per day until it became (with the additional of a contactless dashboard unit) the only mechanism for road tolls, at which point usage leapt to 400,000 transactions per day [3]. It’s now accepted at some 16,000 retail points of sale, ranging from libraries and supermarkets to car parks and petrol stations.

By comparison in the EU’s most cashless society (Finland), the national electronic purse scheme (Avant) has had a slow start and even though retail banks offer online “real time” electronic payments there are no interbank systems in place, so consumers and merchants have to have accounts with several different banks if they want to transact this way [4].

Why does Singapore want to make the transition to a cashless economy? One reason is to make its economy more efficient. We don’t think much about the cost of money: because the cost of notes and coins is spread so thinly, we assume it to be free. But someone, somewhere is paying for the printing presses at the Bank of England, armoured cars transporting sacks of cash from supermarket to bank, thugs raiding building society branches with shotguns and commuters having to put £4.50 instead of £4.20 into the parking ticket machine at the train station through not having the correct change.

There is, then, some pressure for change and (although it may not seem so here in the UK) the technology of money is changing. It’s not the traditional payment system owners (banks) who are in the vanguard. Look at the US, as an example, where McDonalds’ customers in the Chicago area can pay by waving their Mobil Speedpass in the vicinity of a cash register. McDonalds’ customers at some locations in Southern California can do the same by going through the drive through lane with the transponder that they use to pay tolls on the motorways. McDonald’s is also n talks with Massachusetts officials about a similar deal on the Massachusetts turnpike, which has just hired the fast-food chain to run the concessions along the roadway [5]. Exxon Mobil says 4.3 million customers carry the Speedpass, which they can use at 3,500 Mobil outlets. Later this year, the program will expand to Exxon stations and stores. Besides McDonald’s, Exxon hopes to supply the system to drug, video, and grocery stores.

Eastern Promise

Singapore aside, the Far East is already home to considerable innovation in payment technology. The Hong Kong mass transit smart card, Octopus has around 7 million cards in circulation and was introduced to, among other reasons, remove 25 tonnes of coins per day from the transit system (and make life easier for customers). Transactions take less than one–third of a second and the contactless cards can be read up to 10cm from the reader (so you don’t even have to take them out of your wallet). The cards can be used in phone booths, vending machines (Octopus–enabling vending machines led to an immediate 15% increase in sales), snack bars and even Maxim’s pastry shops in addition to the subway. Travellers can load the cards at convenience stores or in the stations and the under–18’s can have their Octopus card in the form of a groovy watch rather than a boring old card if they so desire. Meanwhile, I have to rummage around in the bottom of my briefcase to try and find the 10p piece I know is in there when I want to take the tube.

In Japan, Sony and its partners (including NTT DoCoMo and Sakura Bank) have just completed the trial of another contactless payment card in Tokyo and have decided to launch it nationwide. The electronic purse, known as Edy, is based on Sony’s Felicia system. Consumers will be able to load their purse with electronic value at ATMs or convenience stores and then spend it in a variety of places, including on line: Sony says it will launch a PC interface so customers can spend cash over the internet just by sitting by next to their computers!. Meanwhile, I have to type in a credit card number, address, expiry date and fill out ten other fields in order to buy a $5 item of shareware over the Internet.

The Thistle

Back in the UK we’re much more conservative about the technology of money. E–cash schemes such as Mondex and VisaCash have been cancelled and the banks and retailers have only just agreed to switch to smart cards with PINs at point–of–sale (as have been used in France for more than a decade) in the next couple of years.

So what is Scotland going to do? Scotland, after all, has an enviable track record of innovation in the finance and banking sector (see Table 2). When a previous wave of innovation (paper money) swept through the economy, Scotland was far more successful than England in exploiting technological change to make the economy more efficient (and more stable). By 1850, in fact, when 90% of all commercial transactions in France were still being settled in gold or silver (as were a third of those in England), 90% of all commercial transactions in Scotland were being settled with paper [6].

When	What
1695	Britain’s first joint stock clearing bank, the Bank of Scotland, created by the Scots parliament.
1728	The first overdraft is granted by the Royal Bank of Scotland
1750	The British Linen Bank (Scottish, despite the name) starts to build the world’s first branch network.
1777	World’s first multi–coloured bank notes printed by the Royal Bank.
1810	First savings bank established in Ruthwell.
1826	Royal Bank of Scotland launches banknotes printed on both sides.
1845	Westminster, despite Scottish protests, legislates against private note issue. Since this date no major commercial banks have been formed in Scotland.

Table 2. Scottish Banking Innovations.

Is it possible to envisage Scotland embracing the next wave of change in the technology of money (electronic cash) and generating yet more innovation? We think it is. The regulatory environment is changing to encourage competition in Europe. The European Commission’s Directive on Electronic Money has created a new regulatory construct, the Electronic Money Institution (EMI). The EMI, whose only business is issuing and redeeming electronic money, has much lower capital requirements (500k euros) than credit institutions (5m euros) although they must operate within much stricter investment guidelines than banks do [7].

The EMI is important because it provides an institutional mechanism for competition in the field of cash transactions. It is entirely possible to imagine heavily branded non–bank EMIs competing to make their digital money to currency of choice for Net payments, and there is no evidence that consumers would refuse to use it. While most people have envisaged EMI’s as being banks, or banks and telecommunications operators, or banks and retailers and so on, there are other possibilities. It may be, for example, that EMIs (or the equivalent of EMIs in other jurisdictions) could become a vehicle for private currencies at the national level. In some countries (eg, Argentina [8]), the reappearance of private currency could make a significant contribution to financial stability. It is wrong to think that the lessons of the “free banking” era is negative.

Scotland

Having traded the tyranny of London–based monetary policy for Brussels–based monetary policy, one could envisage the Scottish Parliament setting up its own EMI and creating its own electronic currency (the Thistle?) that is legal tender (in Scotland). It might thereby stimulate a major cycle of innovation in Scotland: in many ways, the only appropriate goal of further public intervention in the payment systems [9].

All of which goes to show that while electronic cash, digital money and virtual currencies may seem like nerd topics of interest only to cryptographers and smart card manufacturers, they are actually rather interesting: and they are likely to long term ramifications beyond anything currently anticipated.

Resources

History of the Scottish clearing banks.

History of Scottish banks and banknotes.

Pictures of Scottish banknotes and coins.

References

1. Singapore to Make E-Money Legal Tender at Newsbytes (on 27th Dec. 2000).
2. O’Brien, A. Singapore’s superhighway conversion in Electronic Payments Intl. (162): p. 14–15 (Dec. 2000).
3. Lomax, V. A step into the unknown in Banking Technology. 18(6): p. 45–48 (Jul. 2001).
4. Leinonen, H. Efficient electronification of payment systems: the Finnish case in proc. of Trends in Payments Systems: Technology & Legal Infrastructure, Central Banking Pubs. (Cambridge: Sep. 2001)
5. Rosen, C. Fast Food Gets Faster in Information Week Daily. (9th Jan. 2001).
6. Ferguson, N. The Money Printers in The Cash Nexus. p. 137–162, Basic (New York: 2001).
7. Edgar, L. Regulating Digital Money in proc. of Digital Money Forum, Consult Hyperion (London: Apr. 2000)
8. Selgin, G. Let Private Money Spark A Recovery in Argentina in Wall Street Journal section) (17th Aug. 2001).
9. Ganguly, B. and A. Milne. Do we need public policy intervention in UK retail payment systems. City University Business School, Report (London: Mar. 2001).