World travellers of the nineteenth century took it for granted that their wallets were stuffed with bank notes which came not only from different countries but from different private banks within those countries. Banks not only had the power to create money ­ they were also allowed to print it.

By the end of the twentieth century most of us take the central bank monopoly to print the money for granted. But once again new developments in electronic technology are about to recreate the practises of the past. Your Telecom card is the early sign of a move towards privately 'printed' currencies, a move which will take place without any of the fuss which would surely accompany a new array of 'privatised' bank-notes in the purses and wallets of the nation.

There are essentially three types of card-based alternatives to cash.

Most of us first became aware of the credit card when the Diners Card proided a useful solution to the problem of paying hotel and restaurant expenses in different countries; a problem which developed with the rapid increase in business and tourist travel. Wide-bodied jets and computer reservation technology drove the Diners Card into the global market place. Other cards soon followed and American Express, Visa Mastercard and others are now recognised and accepted world wide. These are true credit cards in that they allow the card-holder to 'spend now' and 'pay later'.

More recently, as electronic cash registers became connected to central computers through the telephone lines, the transfer of electronic funds at the point of sale (EFTPOS) became widely available. These systems introduced new cards to the market-place or allowed existing credit cards to be used to make payment by directly and immediately debiting from the card-holder's bank account. EFTPOS cards are true debit cards ­ the user 'pays now'. Debit cards always, and credit cards frequently, require verification of the availability of funds or credit before the transaction will be completed. This transfer of information and the time required is expensive.

The third and most recent means of making a non-cash payment is the stored-value card.While such cards can be quite dumb or very smart, they all demand that the user 'pays before'. All stored-value cards carry some form of electronic memory (a magnetic strip or electronic chip) which stores pre-paid value which can be drawn down at will by the user when making purchases. The telephone card is a stored-value card and like most simple magnetic strip cards is limited to a single loading and to serving a single function ­ in this case making phone calls. Once the 'stored value' has been used up, the card can be thrown away; or collected as late twentieth century artifacts.

Truly smart-cards contain an embedded electronic chip which allows them to be loaded and re-loaded at any time and with any desired amount ­ small, middling or large. Such smart-cards can be used for host of daily transactions such as parking meters, buses, taxis, Lotto tickets and indeed any of the purchases for which we presently use small change and notes. They can also be used to pay for more expensive services such as restaurant meals or hotel bills, and in any currency, at the exchange rate of the day.

As with EFTPOS, the use of smart-cards will be limited only by the willingness of traders to provide a card-reading facility at the point of sale. Because there is no need to verify the status of the owners' accounts these have much lower capital and operating costs than the EFTPOS systems and hence can be expected to become ubiquitous, especially if they provide genuine benefits to the users. Estimates of the comparative costs of credit debit and smart card transactions indicate that stored-value card transactions are at least 70% cheaper than the nearest card-based alternative.

Smart-cards can be designed so as to require no physical contact with the card-reader. Feeding the parking meter will require no more than swiping the card across the scanner plate similar to the one at your supermarket check-out. Hence they can provide a real benefits in areas where speed is the key ­ such as public transport or taxis. They must also be a boon for those who are blind, deaf, arthritic or otherwise physically handicapped. In such environments smart cards are not just a substitute for notes and coins ­ they will provide a definite improvement in service.

Those who reject predictions of the cash-less society argue normally that we shall always need to carry loose change to deal with newspaper purchases, parking meters and similar low value high volume transactions. Pre-paid, 'proximity read-out' smart-cards diminish the weight of such arguments.

How likely is is that such 'cashless' systems will finally displace notes and coins in the near future? After all, notes and coins remain alive and well in the developed world. Notes and coins continue to account for about 80 - 90 percent of the total transactions, with a further 5 - 8 percent using electronic transfers, and the balance by cheque and other paper based methods. These figures suggest that the cards have a long way to go. However, cash-based transactions account for only about 10 percent of the total value of transactions in modern economies and that there is a strong move away from cheques towards credit cards. For example, in Australia there were 30,466 EFTPOS terminals in place in 1993. This represented a 16% increase in the number of terminals over the previous year; but the number of debit card transactions rose by 46% over the same period.

In June 1994 both Mastercard International and Visa International announced their agreement to establish a global standard for International Credit cards to be used in financial transactions. Many of these existing terminals can be readily modified to process genuine smart cards.

Telecommunication companies have taken an early lead toward issuing private currency with their phone cards, and they are now gearing up to expand the scope of their cards to deal with public transport and other transactions. The end result is that such communications companies will soon be taking on the same role as the private banks of the 19th century who printed their own bank notes; the difference is that the Telecoms of the world will be printing plastic cards which have a tiny chip which 'promises to pay on demand'. It makes sense. If the telecommunications companies are going to lose the cash flows associated with card transactions over the phone lines they may as well replace the lost revenues by issuing their own currency.

Major airlines and international hotel chains will soon be printing their own smart currency ­ so that travellers will no longer need travellers cheques or have to pay high margins to exchange money at government owned bank counters in airports around the world.

Alliance party members should read no further because of the risk of damaging their health. Telecom is not only making profits from our calls ­ it is beginning to make profits out of money!

These changes may sound like a major revolution but in reality it does not matter much in the greater scheme of things.Private smart-cards will certainly have no effect on the powers of the major central banks of the world as they no longer depend on the control of currency to control the money supply. On the other hand those quaint governments who continue to depend on holding a proportion of wealth in the form of deposits with the central bank will become quite agitated, as will those politicians who wish to reinstate such regimes. 'Light-handed' regulators such as our own Reserve Bank have no such requirement for central deposits and depend on the issue of Treasury Bills and the like to soak up surplus money from the market.

Central banks presently monopolise the production of notes and coins and make a profit by issuing currency which pays no interest while purchasing interest bearing assets with the proceeds. These profits - known as seigniorage, are added to the general tax base and help to fund public expenditure. One implication of the move to a cash-less society is the loss of these funds to Treasuries around the world. Most of these central banks have been remarkably silent on the potential of smart cards to break their monopoly over currency ­ which is doubly remarkable given the way they have jealously guarded this monopoly over most of this century.

An exception to this silence is the Reserve Bank of New Zealand which published an article on pre-paid cards in its Reserve Bank Bulletin, Vol 57, No 4, 1994. This article pointed out that debit cards have few of the attributes of the present 'currency of the realm' although they meet the test of being standard and anonymous. (See INTRODUCTION) Private electronic purses may meet the tests of negotiability, anonymity and convenience but probably not the test of being risk-free, universally negotiable and standardised. But modern printing technology is increasing the risk of forgery and hence is undermining the comparative benefit of valid consideration.

These collective attributes of the currency of the realm explain why our notes and coins continue to be so widely accepted. However, we have already seen that currency is no longer always the preferred means of payment ­ especially in high value transactions.

A key distinction between privately issued smart-cards and the currency of the realm is that currency liabilities reside on the books of the central bank and effectively carry its guarantee. It is not clear where the liability for different private pre-paid cards will rest, but they will obviously not carry any government guarantee. The public will need to be aware of this and not become beguiled by claims that their smart cards are fully equivalent to cash. The value on the card is only as solid as the organisation standing behind it. BCI was neither the first nor the last bank to fold.

So it seems probably that private smart-cards are likely to remain more like debit cards than currency; but the Reserve Bank of New Zealand has already pointed out that a smart card issued by a central bank could be set up so to pass all the above tests. Was the bank dropping a hint?

The conceptual case for public provision of currency is reasonably strong and is based on the public benefit of having available a standard, reliable and efficient method for making certain payments. However the Reserve Bank article concedes that the argument for a statutory monopoly rests more on the seigniorage arguments because currency issue has been highly profitable and monarchs and governments have been keen to keep such a useful source of revenue to themselves.

But it is conceivable that in a low inflation, low interest rate environment the profit on the currency issue may be insufficient to covert the production and administrative costs involved. The Reserve Bank article emphasises that maximising seigniorage should not be its prime policy, when it concludes:

Rather, the Bank's role is to facilitate and encourage overall payment system efficiency by continuing to offer currency as just one payment technology amongst several. Alternative payment technologies and innovations can be freely allowed within this framework and users can be allowed to choose freely amongst those competing technologies.

The Reserve Bank of New Zealand, at least, sees no threat from such pre-paid cards and even if it did so, the article suggests that:

The appropriate response would not be to seek to control or prevent such developments but that it is much better to adapt the monetary policy operational framework to the realities of the marketplace than to seek to do the opposite.

The Reserve Bank of New Zealand appears to have taken the position that that the independent status of the Bank and New Zealand's light-handed regulatory environment add up to an environment which is conducive to innovation in the market-place and allows the Bank to take a relaxed attitude to change.

In many countries, however, the public debate will surely move to the front page once Chancellors and Ministers of Finance notice that their seigniorage is slipping away or when the next major bank or airline to collapse drags a trail of valueless cards behind them. In New Zealand we may well be able to watch such goings on with a suitable measure of disinterest.

But when a future Treasurer sees revenues from income tax melting away, what then?

Income tax is a comparatively recent invention. Indeed many countries first introduced it to fund WW I. The management of the income tax system was made possible by late nineteenth century techniques of administration and accounting. In earlier times an income tax was simply impossible to administer. The irony is that it now seems likely that more recent developments in the internet, banking and monetary management may be about to make it unworkable once more.

Owen McShane

Owen McShane, Rangiora Road, R.D. 2, Kaiwaka, Northland 1240 Phone: 64 9 431 2775 Fax: 64 9 431 2772