Digital Cash as the New Payment Medium

A digital representation of physical cash has existed now for quite some time, at least as a concept. One of its biggest promoters was Dr David Chaum, founder of DigiCash. When Microsoft offered to buy DigiCash for US$75m, Chaum declined and later the most prominent early developer of digital cash filed for bankruptcy.

Bill Gates wanted to include DigiCash’s representation of electronic cash (e-cash) in Windows 95. If DigiCash had become a part of Windows, we all might be using e-cash on a daily basis by now. However, the e-cash enthusiasm of the 1990s is gone.

Today no one seems to think that digital cash could have the power to change our financial lives and shake the foundations of the global financial system. No one is afraid that global brand names, such as Coca-Cola, Microsoft, IBM, Amazon, Apple, General Electric and P&G, would be in the enviable position to capitalise on their global name recognition and become the new digital cash providers. However, PayPal’s recent ‘end of the normal wallet’ declaration, claiming that we all will use digital wallets by 2015, should give us food for thought. Google also unveiled its mobile wallet (m-wallet) offering last year and Isis has its m-wallet offering too. The smartphone has an important role to play, alongside stored value cards, etc.

Beyond Smart Cards

In recent years the market has developed in the direction of contactless smart cards. Cards with stored value can be used for shopping and the payment is deducted automatically using for example near-field communication (NFC) technology. One example is the Girogo card that will soon be introduced in Germany. Up to €200 can be stored on the Girogo card and payments up to €20, which represent 80% of cash payments (according to volume), will be deducted from the card without any further authorisation. According to the Deutsche Bundesbank, 97% of payments up to €5 are paid in cash.

Another example is the Octopus card in Hong Kong, which has more than 20 million cards in circulation, which is nearly three times the population of Hong Kong. In the UK, Londoners use of the Oyster transport card has further reduced the usage of cash.

E-cash in the form of a smart card could be easily implemented regardless of region. If official ID cards (such as the driver’s license in the US) contained a chip, it would be quite easy and convenient to add an e-money feature to the card. In this case the Federal Reserve (a central bank) would have to provide more liquidity directly to banks and be less involved in the costly activities of printing and distributing hard cash.

But what are the obstacles? Credit card companies promote smart cards because they do not change their current business model. The e-wallet which uses credit, debit or prepaid cards also does not change the current business model – it just facilitates and extends the use of cards. Even online payment providers such as PayPal do not replace cards, but they do add a layer of security between buyer and seller.

As far as e-money systems are concerned, they are most likely more difficult to implement than stored value card systems because they do not rely on a card to provide authentication for the transaction. Instead, the authentication is based on electronic packets that the consumer sends to merchants. However, they could also be offered much cheaper because they do not rely on current payment infrastructures. They only use the internet and now with the ubiquity of smart phones, e-money can be used anywhere and anytime by everyone. While the invention of the touch tone phone created voicemail, automated ordering and instant banking, the internet has made exchanging information easier and faster than ever. Smartphones might now spawn e-cash.

Furthering E-cash Adoption

In general, the issue seems to be that consumers have not been sufficiently encouraged to use e-cash. Consumers ‘like’ their card products. They have a float of at least 30 days and later if they only pay the interest. If someone steals your credit card, you are only held liable for a very small amount. If someone fraudently uses a card on the net, the consumer is not responsible at all.

For banks, e-cash would lead to an increase in profits. When cash is taken out of the bank, it stops working for the bank as it does not generate further profit. E-cash, on the other hand, would generate further float until the customer demands hard cash – this means the float could last a very long time. The money never stops working for the bank as long as it remains in electronic form.

However, the biggest winner of e-cash adoption could potentially be the merchant. If someone pays with e-cash, there are no fees compared with credit or debit cards. Therefore, merchants should promote payment with e-cash to reduce their dependence on credit and debit card payments. E-cash would also make life easier for merchants because no change is required, as is the case when paying with hard cash.

E-cash Solutions

Digital cash comes in a variety of forms and implementations: DigiCash, Mondex, CyberCash, First Virtual, Bitcoin, MySmartEMoney, etc. CyberCash, Mondex and First Virtual are essentially misnomers: they facilitate payment with credit cards and enhance security in principle, similar to PayPal.

DigiCash’s eCash was designed as an electronic payment system modelled after the paper cash system. Each person using it had to have a digital bank account to withdraw and deposit e-cash. The security was based on RSA principles, where every participant has a pair of keys: private and public key. When the payer sent an encrypted coin to payee, the payee had to contact the bank immediately to determine if the coin was valid and to credit their account at the bank. Each coin was used only once. After one payment the bank invalidated the coin and for further payment a new coin had to be issued. The system was not transferrable in the sense that paper cash is where bills are used again and again.

Bitcoins can be used more than once but they grow in size, and for security reasons each transaction is recorded on every participating computer specifically to avoid double spending. As long as the group of users is small, the computing requirements are manageable, but they grow exponentially with the number of users.

Only MySmartEMoney does not require authentication of the data packets sent to the merchant. It also does not require a public/private key protocol. It does not require any active account or smart card and everyone can participate. In addition, the computing requirements of the system are very modest. MySmartEMoney offers the combination of quality, convenience, speed and fair pricing – it is free.

MySmartEMoney is an account free transfer system that has electronic bills (e-bills) and resembles payment with physical cash. It is a bearer digital cash system, meaning that someone who holds an e-bill is considered to be its lawful owner. The issuer of MySmartEMoney does not create more e-bills than the amount of cash deposited. The owner’s wallet application keeps record of electronic bills and handles the receipt and spending of e- bills.

Figure 1: Example of MySmartEMoney Webpage

Source: MySmartEMoney

 

Conclusion

Cash is the last barrier to the paperless community. Consumers can buy and sell goods online, or apply for loans and mortgages without leaving their office, but they have to go to an ATM to get cash. Adopting e-cash is the future. Banks will back the right electronic solution when it emerges because it is more beneficial to them than to handle hard cash. They will want to gain float and do not need armed guards to handle e-cash. Merchants, who want to save costs involved in handling hard cash and card fees, will be e-cash promoters.

E-cash is more of an alternative to hard cash than to credit or debit cards. Governments and central banks will save a lot of money when consumers use more e-cash and smart cards – whether on the mobile phone or not – instead of hard cash. Hard cash is very expensive for central banks due to the printing and distribution costs.

The smartphone is driving the e-cash revolution. Europe is a smartphone superpower: 48% of Spaniards own a smartphone, as do nearly as many Britons and Italians. This creates a huge potential for a payment system that operates on the go, which can be used anytime, with anyone, from anywhere.

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