Why Electronic Cash Never Worked

Pablo Valerio, International Business & IT Consultant | 11/9/2011 | 26 comments

Pablo Valerio
In the second half of the 90s, Visa International and other financial institutions attempted several pilot programs in multiple countries to introduce the idea of electronic purses (EPs), or cash cards. The idea involved a “chip” card, similar to the ones used in Europe for pay phones. Customers would “load” a fixed amount of money on the card at an ATM and use it at participating merchants for small transactions.

In 1996, Bank of America forecasted the explosion of smart cards that would be used as electronic purses to replace actual cash. "As consumers begin using stored value cards to make smaller purchases such as fast food and petroleum, retail merchants will be able to create loyalty programs that can easily track their customers' preferences," said Sharif Bayyari, executive vice president in charge of the merchant services division at Bank of America. "This will allow merchants to offer better services that meet consumers' evolving needs."

The pilot programs ran in many countries and cities from several months to a few years, but they finally were abandoned in most places. At the end of 1998, for example, the test of Mondex and Visa Cash EPs in Manhattan's Upper West Side -- the most important US pilot to date -- drew to a close after a 15-month run. There were no technical issues, and most of the programs were declared successful on the technical side, but commercially they were a failure. In the New York program, the merchants received free countertop terminals, and there were no handling fees, but the merchants dropped one by one. Of the original 675 participants, only a quarter remained until the end.

Many factors were involved in the failure, most of them related to consumer confidence and lack of interest. People like the feeling of actual cash and want to be able to look at their wallets and see how much money they have to spend at any moment. Customers don’t want to keep records, make calculations in their heads, or plug a card into a reader to check the balance stored on it.

There are many “stored value” cards in use today, mostly for repeated-use services such as local transportation. People got used to the cards, and the only inconvenience is not knowing how much they have on the card before boarding a bus or taking the metro. But going to a store and trying to pay a small amount, only to discover an insufficient balance, is another story.

Also, merchants were reluctant to participate, because of upcoming fees. The initial pilot was free of fees for the participant merchants, but they feared that -- after the trial period was over -- banks would start collecting fees from them for using the terminals, and they were probably right.

Now the trend is to use cellphones for small transactions, such as parking fees and vending machine purchases. I find those systems convenient, but many people fear the possibility of their phones being stolen by people who want to use their credit to pay for gas and other expensive services.

Some experts argue that the consumer demand for stored value will come from the desire to make payments over the Internet, not the more traditional channels, where there are an abundance of payment methods that work well today. One of the uses of cash cards is to pay for small Internet transactions. In that way, customers know that giving the card number to a merchant is secure, since it can charge them only as much as the maximum cash held in the card. Some banks allow customers to create a credit card number to be used only once for a transaction.

Technology has to be easy to use, and customers need to feel confident with it, after a significant amount of time to adjust. Banks and credit card companies are looking for ways to collect more fees -- even in very small amounts -- for every transaction, and that worries customers and merchants alike. Today the only “legal tender” is the actual bank note issued from a central bank, and with that we have the guarantee that it must be accepted for payment of goods and services. There will be a significant amount of time until electronic forms of cash can be accepted in the same way.

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The_Phil   Why Electronic Cash Never Worked   11/29/2011 12:27:21 PM
Re: Upgrades?
Also, cash has been and is the standard and easy to pay for goods/services. Not to mention, cash is accepted every where for purchasing.
However, we could do different things with E-cash but we're only able to use it where there is a terminal, such as PayPal, debit or credit cards. I also think that e-cash did not help people to do something that they couldn't do with cash anyway. I believe that's why people didn't ever support e-cash since it doesn't really replace much.
The_Phil   Why Electronic Cash Never Worked   11/18/2011 1:06:28 AM
Electronic Cash failed only beacause no upgrades were made using recent technologies. If the electronic cash is replaced with electronic purse which can display available cash, I think it will be really successful on the customer side. But regarding trust over this electronic cash, it really takes a lot of time but in time, it should prove to be secure.
Broadway   Why Electronic Cash Never Worked   11/16/2011 2:36:45 PM
Re: No Fan of Electronic Cash
@catalyst, we can go the biometrics route as an alternative way for banks to identify people vs. numbers, but then we get into science fiction scenarios where thieves are sawing off people's thumbs and carrying around a keychain of eyeballs. Actually, perhaps some of this has already happened in real life ...
catalyst   Why Electronic Cash Never Worked   11/15/2011 10:05:20 PM
Re: No Fan of Electronic Cash
@Broadway: I here ya. With more things crammed into our smartphones the impact of losing them gets bigger. But I'm glad to see apps that locate your phone. Maybe there'll be a service that automatically puts everything on hold the moment you report that your phone is lost.

Sorry to hear about getting your credit card numbers ripped off. I think credit card numbers are a big security risk. We need to get beyond using a set of numbers to securely identify ourselves to our banks or financial institutions. I don't know what that might be but I'm sure there are some smart folks out there figuring out just the thing.
Broadway   Why Electronic Cash Never Worked   11/15/2011 9:01:29 PM
Re: No Fan of Electronic Cash
I'd hate to lose a phone with all my e-pay cards on it! It's bad enough losing all my contacts. Seriously, this sounds like too good to be true for the hacks who've stolen my credit card numbers twice in the past 12 months.
catalyst   Why Electronic Cash Never Worked   11/14/2011 4:42:04 PM
Re: No Fan of Electronic Cash

I'd like to see a simple solution for basic payments, like public transportation, phone calls, buying coffee and newspapers, etc, all on a simple card not issued by a bank.

Mmm... you mean phone calls at public phone booths? I think a quarter is a pretty good solution. And aside from a few people that I know who have been reading newspapers for at least six or so decades, I don't know of anyone who actually buys newspapers. And don't we already have the Starbucks app for coffee? Just kidding. I buy coffee from McDonald's from time to time... which reminds me: McD's need to make an iPhone app to pay for purchases.

I think the 'card' we're thinking of will end up being our phones, with multiple e-cards we can access depending on what we're buying where. And there'll be an app that tells us exactly which e-card to use to maximize rewards.
nasimson   Why Electronic Cash Never Worked   11/12/2011 6:29:02 AM
Re: VISA & the ATM debit cards
@Broadway: In the long run, the commission is always absorbed by the Customer as all supply chain costs (including financial costs) are borne by the end user of the service.
nimanthad   Why Electronic Cash Never Worked   11/12/2011 4:57:14 AM
Re: No Fan of Electronic Cash
Yes at Late 90s there wernt any serious security issues like what we have right now but dont you think its because there were very few people useing this kind of technology ?

Broadway   Why Electronic Cash Never Worked   11/11/2011 2:43:55 PM
Re: VISA & the ATM debit cards
@nasimson, I'd wait to see how much of those fees get passed onto consumers before deciding if visa's expansion is a good thing.
Pablo Valerio   Why Electronic Cash Never Worked   11/11/2011 8:16:48 AM
Re: No Fan of Electronic Cash
@nimanthat, Technically worked! at the time, late 90's, there were no serious security concerns using chip cards. They are still in use for many "stored value" cards around the world.

Thinking more about about it I have the feeling that people don't want to have cash stored in one card for multiple purposes, but don't mind to use them for specific services.
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