Daniel A. Rivetti and Gary P. Schneider, University of San Diego

The course of human affairs has yielded a variety of mechanisms for storage and transfer of wealth. After many years of crude barter systems that were encumbered by divisibility and durability constraints, we replaced those systems with the use of measured precious things. The inaccuracies of weight and purity predicated the introduction of a political economy charged with the minting of standardized coinage. The introduction of coins freed societies from the difficulties of reckoning wealth. The ability to tally greatly facilitated commerce. Synthetic monies, from paper to smart plastic, have overwhelmed hard forms of cash money. Today, the vast majority of monetary transactions in terms of dollars occur in electronic forms. The U.S. federal government plans to implement full electronic payments for social security taxes paid by employers before the end of the decade. Multinational corporations maintain a complex system of collections and payments that do not use paper. The largest number of consumer transactions, however, use cash. Consumers are moving their transactions away from paper and toward electronic means. This paper begins with a review of the current status of electronic cash products in the U.S. and around the world. Many foreign nations have moved to electronic cash more rapidly than the U.S. Using a framework of financial product innovation and acceptance, the paper charts the future prospects for electronic cash in the U.S. consumer market.

The Development of Electronic Money

The emergence of metallic money occurred in the Kingdom of Lydia nearly 2700 years ago. The first coin was struck out of a naturally occurring alloy of gold and silver called an electrum. The pale yellow color evidently reminded the Lydians of a beaming sun. Perhaps prophetic, today's electronic money and electrum share the same Greek root name, elektor. It took over 100,000 years for society to evolve from livestock money, otherwise known as pecu, to money forms that we now categorize as pecuniary. It took significantly less time for the simple department store charge cards introduced in the 1930s to become the binary money of 1974. Moreno developed the first memory card for smaller French banks in that year. The programmable imbedded chip provided protection superior to the magnetic strip. In the early eighties, the French consumer had numerous options for making routine purchases. Paper checks became unnecessary and expensive to process. The Moreno patent is now held by Bull. Bull licenses the smart card, which now includes a microprocessor along with its memory, to gasoline retailers, military personnel, health maintenance organizations, universities, governments, and banks.

The burden of translating a worker's paycheck into usable cash is expensive for banks. The enormous popularity of automatic teller machines for banks relieved the teller to depositor ratio. Imagine the further cost savings when a bank customer can use a touch tone telephone connected to a smart card reader to easily download cash from their interest-bearing money market account to their smart wallet. This smart-purse is already a reality in Europe. Electronic payments may generate $40 billion per year in cost savings in the U.S. if banks use them with maximum efficiencies (Mayer, 1997). The creation of money itself may pass from governments and authorized institutions, such as regulated banks to existing credit card companies and card processors. Currently smart cards in the U.S. with a face value under $100 do not require the issuer to provide printed monthly statements. The emergence of federal regulation will severely hamper the widespread adoption of these new value in exchange devices (Foremski, 1996). The threat of regulation has driven the initial research and development efforts abroad.

Markets Spur New Money Schemes

Currently, at least seven competing electronic settlement systems exist. Ecash and CyberCoin are two commercially available products. David Chuam's patented Ecash, the product of the company DigiCash affords the same privacy as typical cash money. The recipient cannot determine the identity of the purchaser unless the purchaser so desires. Ecash will prevent a government from tracing the purchases of its citizens and thus will enable potential criminals, law breakers, and tax evaders to avoid self-incrimination through their electronic tracks.

The Ecash system is currently available yet has been plagued with difficult inauguration requirements (Furger, 1998). The process requires a potential user to complete an on-line questionnaire. Then the potential user must print out the application and send a signed copy to a participating bank. The bank then delivers a password either by mail or fax. Next, the customer must wire or send money to the bank to credit the account. CyberCash's product, CyberCoin, is easy to engage and operates with Netscape Communicator 4.0 and Internet Explorer 4.0 (Furger, 1998). The consumer can easily receive CyberCoins instantly by filling out an on line application and charging their credit card. Barclays Bank of the United Kingdom has leaped into retailing using BarclayCoin technology developed by CyberCash. Today, BarclaySquare is the UK's most popular shopping environment with over 1.5 million visitors (BarclaySquare, 1997). Shoppers receive smart statements along with "digital coupons" from "Toy-'R'-Us" and Victoria Wines etc. In addition, CyberCash has developed CashRegister to assist cyber merchants to seamlessly utilize Microsoft Commerce Server, V2.1.2 (CyberCash, 1977).

Competition for digital cash is gathering momentum around the smart card. Visa Cash, Milicent and Mondex are planning for smart card readers to be the next accessory for the home PC. The card will be like cash in the event of loss. If you lose your dumb wallet or your smart wallet, you are equally out of luck. This may force people to only load up sufficient cash for the amount of time away from a smart reader. It becomes more disturbing if the consumer has more important information on the smart card such as secure employee identification and medical files etc. The vast majority of global usage of smart cards (90%) occurs in Europe (Egan, 1997). Despite the low US penetration, it is expected that 600 million smart cards will be in play by the year 2000 (Egan, 1997). Both Microsoft and Netscape browsers come programmed for smart cards and Hewlett-Packard has computer models which include smart card readers. New York and Paris based Schumberger has invested heavily in smart card manufacturing and development (Egan, 1997).

The world will not realize the full potential of the Internet until the financial products industry creates a safe and convenient way to process small transactions. The Internet and World Wide Web (WWW) offer vendors a new marketplace in which to sell goods and services to both existing and new customers (Panurach, 1996). Online security is an increasing concern for firms hoping to do business on the Internet as is the lack of an easy way to exchange money for services offered through the new medium (Spar and Bussgang, 1996). Any method that is proposed to solve this problem must be easily integrated into vendor firms' catalog databases (Jones, 1997; Newing, 1996).

A key factor in the development of the Internet as a viable mode for retail transactions is the method of payment (Kalakota and Whinston, 1996). Although many Internet-based merchants currently accept payment by credit card using the Secure Electronic Transaction (SET) standard (Kerstetter, 1997), a large number of consumers are reluctant to enter their credit card number into a vendor's WWW page form (Singleton, 1995). Another option, to send a faxed purchase order and handle the payment transaction with a paper check, is not particularly attractive for consumer transactions (Sullivan, 1996). One possible solution for consumers is to use some form of electronic cash (Achstatter, 1996; Economist, 1997b; Jones, 1997; Templin, 1996). Humphrey, et al. (1996) note that the proportion of all transactions that use cash is between 80% and 90% in the U.S. and other developed countries. Even though 90% of total dollar amounts are exchanged in non-cash forms (Fox, 1996), the number of transactions that use cash is still significant.

Electronic cash is a general term that encompasses a variety of techniques for providing the utility of cash without the risk of carrying cash and without the need for a government body to issue it (Negroponte, 1996). A number of early launches of electronic cash outside the U.S. have occurred. In Belgium, a consortium of 60 banks offered consumers an "electronic purse" with transactions processed at a central location that has been highly successful (Economist, 1997a). A similar function offered by Unisource, an AT&T European telecommunications operator in the United Kingdom and the Netherlands has also tested well with consumers (Fletcher, 1997). Reports of digital cash successes in South Africa (Ashurst, 1997), Australia (Cochrane, 1997), Zambia (Krantz, 1996), and Hong Kong (BusinessWorld, 1997) have also recently appeared in the business press. (Stewart, 1997) notes that the demand for electronic cash exists outside the U.S. for transactions other than Internet transactions. The combination of privacy and security is highly prized in many economies that are less developed than the U.S. economy.

Motorola estimates that over 800 million credit cards are in current world-wide use and concludes that a smart card including a credit card or multi-card capability would have tremendous possibilities (Foremski, 1996). Electronic cash products arose in response to the high cost that banks face in processing paper checks and the failure of debit cards to displace a significant component of consumer check-writing activity (Santomero, et al., 1996). Most electronic cash products (see DigiCash, b.v., 1997; for examples) are designed to ensure the anonymity of the payer. The DigiCash system, for example, uses a blind signature technique to certify the validity of each payment element, called a token. A person buys tokens from a bank or other electronic cash vendor. These tokens, which are a form of bearer certificate, carry the bank's electronic signature. When the bank places its electronic signature on the tokens, it debits the customer's account for the amount of the tokens. The effect is similar to having a customer make a cash withdrawal from his or her account. The tokens do not, however, have a specific physical existence. Therefore, it is easy for a customer to make duplicates of them. Since this system does not provide control on the issuing end of the transaction, it must enforce control on the redemption end of the transaction. When a customer presents the tokens to a merchant for payment, the merchant must verify the validity of the tokens with a token redemption file with the issuing bank.

A key feature of this type of product is that it preserves the anonymity of the user. According to some writers, this high level of privacy does not appear to present great appeal to the U.S. consumer market at the present time (Fox, 1996; Nash, 1996). In contrast, other writers note the potential appeal of electronic cash to those elements of society that desire privacy to cloak illegal activities (Achstatter, 1996; Nash, 1996). Templin (1996) reports that the U.S. government has formed a task force to study the money laundering and tax evasion potentials of electronic cash.

Mondex (1997) was one of the first firms to develop electronic cash in a smart card format. A smart card is a card that contains an integrated circuit (IC), in Mondex's case it is an ISO 7816 card. The IC can store information about the value with which it has been loaded, then records the uses of that value when its holder uses it to purchase goods or services. The loaded value can be transferred to another Mondex card by using a card reader/writer. The loaded value can be locked with a personal code to prevent someone other than the card's owner from using the card to conduct transactions. These chips-on-a-card are durable and are not affected by most environmental risks such as X-rays and spurious electrical fields.

Since the Mondex card's introduction in 1994, it has become accepted by a number of merchants around the world. The barrier to proliferation of these devices is that same as that faced by credit cards when they were introduced in the 1960s. A critical mass of consumers must desire to use the cards and a critical mass of merchants must invest in the card readers and connections that allow them to accept the cards. The future of such cards in the U.S. is still a matter of debate, although prospects in the rest of the world appear strong (BusinessWorld, 1997). MasterCard purchased a controlling interest in Mondex to establish a position with an electronic cash product. Visa (1997) has also developed a competing electronic cash product, Visa Cash.

Electronic Cash in Internet Transactions

Although most electronic cash products arose to meet the demands of consumers for non-Internet transactions, an increasing number of electronic cash products are currently being developed and introduced with features tailored to Internet markets. The most common feature in such products is the ability to handle extremely small-denomination transactions.

The CyberCoin model of electronic cash (Cybercash, 1997) is specifically designed for use in small-denomination transactions on the Internet. One of the most pressing needs of vendors selling information or services on the Internet has been to devise a way to charge and collect from customers very small amounts of money. On-line news services that wish to charge for access to their stories need a way to charge cents or fractions of cents for access. Music distributors that would like to charge a pay-per-listen fee must have similar abilities. The CyberCoin service and similar services such as DEC's (1997) Millicent offer exactly these abilities to vendors.

Consumer Acclimation to Electronic Cash Products

Koprowski (1996) states that the killer application required to ignite internet commerce beyond the current 6% penetration will be electronic banking. Stewart (1997) argues that most consumer Internet transactions will eventually be completed using a credit card. He does, however, project a $24 billion role for electronic cash transactions on the Internet by 2005. Small-denomination purchases such as video games, Internet phone services, and gambling will combine with news and commercial information services to create this demand. Despite Roberds (1997) analysis in which he argues that new forms of electronic cash will not alter how consumers and businesses interact, we believe that a number of significant changes will occur. In their comparative analysis across countries, Humphrey, et al. (1996) note significant differences in the forms of non-cash transaction modes. We believe that these results, which show that differences in spending patterns are correlated with the availability of different types of non-cash transaction options in various countries, can be extended to suggest the kinds of differences that will emerge as electronic cash becomes more frequently used in the U.S.

One example of the behavior-changing potential of electronic cash is that consumer acceptance of tolls on roads might very well increase as the transaction costs of exacting those tolls decreases. Electronic cash offers a way of decreasing such transaction costs. For example, DigiCash's (1997) comprehensive toll and public transportation project for the Dutch Ministry of Transportation and Infrastructure (Rijkswaterstaat) has been approved by the Dutch national testing laboratory for use.

IBM's (1997) Cryptolope object technology has recently become available in a Java implementation. This technology allows firms to sell, deliver, and collect fees for a variety of software and other digital goods such as audio files, video files, photo image files, and combinations thereof. These are businesses that currently exist but that will be enhanced by having an efficient means of Internet delivery, billing, and payment in place.

The long-range future of electronic cash will depend on how well merchants can identify new products and services that become possible as transaction costs shrink. The behavior of consumers will also be an interesting factor. A number of studies on how humans perform mental accounting on their resource stores suggest that people are not the rational actors that economists are fond of modeling (Arkes and Blumer, 1985; Cachon and Camerer, 1996; Heath, et al., 1995; Russo and Schoemaker, 1989). This research, conducted by decision researchers, has shown that people tend to assign meaning to arbitrary resource storage modes. By providing an additional resource storage mode, consumers may alter their spending and saving behaviors. We also expect that continued differences across countries will provide fertile ground for future research. The economic environment that prevails in various countries will offer different utilities to consumers in those countries for electronic delivery and payment systems. For example, the wide geographic area in which the U.S. dollar is legal or acceptable tender is not matched by currencies of developing countries. An electronic replacement for a less-developed country's currency might be most welcome by consumers in that country.

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