Electronic money and banking: what should government's role be?

USA Today (Society for the Advancement of Education), May, 1997 by Michael N. Castle

Such activity easily can keep a large staff fully employed in adjusting, fine-tuning, and explaining the new regulations while planning for their expansion or replacement with the next set. The process attracts and provides job security for legions of lawyers, lobbyists, and Beltway bandits.

The foregoing is not to deny that there are valid consumer and systemic concerns with regard to the application of all this technology. Nevertheless, it is just possible that, this time, the market may apply technology to solve and even anticipate many of these problems before they arise. This can happen in the very areas that are likely to occupy the Banking Committee in the near future. These include consumer concerns of privacy, security, convenience, and cost. Basic security of the monetary system and other law enforcement concerns of countering fraud, counterfeiting, and high-tech theft also will find places on this agenda. Each of these issues has the germ of its solution within the technology.

The general rule is that consumer privacy rights should be respected. Individuals should be able to opt out of electronic marketing easily as an extension of their right to be removed from junk-mail lists and repeated telephone solicitation. The industry should not find it too difficult to attract the interest and attention of target markets as long as it is willing to negotiate and pay for each intrusion on privacy.

This payment can occur in many forms beyond actual cash. Loyalty programs for using specific credit cards already are rewarding consumers successfully with frequent flier miles and other valuable premiums. Couponing can operate electronically even more efficiently than it does via print media, and targeted consumers can be given first crack at sales or other limited opportunities as a reward for allowing their purchasing profiles to be compiled and accessed.

An ingenious technique currently is being tested by an innovative pay phone operator. After the coin has been deposited and the number dialed, the caller is invited to listen to a 20-second commercial message in return for a free call and refund of the money. This system can be geographically specific, inviting the caller to patronize a business in the immediate vicinity of the pay phone. The creatively harnessed power of the microprocessor undoubtedly will produce additional scenarios for consumers selectively to trade access for valuable consideration.

The security of such devices as stored value cards is another valid consumer concern. New goods and product enhancements that will add as much security as the market demands are available now or exist in an advanced state of development. These include cryptographic applications and biometric profiling that can render a card or other personal device useless to anyone except the rightful owner.

One paradigm treats smart cards as a cash equivalent that, when lost or stolen, is not replaced by the issuer. However, this is not the only possible model. If the ultimate version of the Fed's Regulation E will allow it, one company is prepared to test and issue stored value that can be replaced if lost or stolen in the same manner that travelers checks are replaced. This might be valued by consumers and could provide a competitive advantage vis-a-vis a product that is simply a cash equivalent. In any event, it would seem premature for regulations to pick winners and losers before the market is allowed to test these contrasting features.