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.