Current
Transaction
The simple exchnage of cash between two people may be about to change. Here, we examine how transfers of money from person-to-person may be affected by electronic payment systems and the resulting impact on banks.
Current
Transaction
Currently, the typical transfer of money between individuals involves the use of cash or checks. A common example of this behavior follows: Individual A carries cash in his wallet. Individual B meets Individual A and asks to borrow some money. Individual A fiddles around in his wallet until he pulls out a $10 bill and some loose coins, and then gives it to Individual B. In this scenario, banks have an important, if somewhat minimal, presence. With cash, there is no official record that an exchange of money occurred. However, Individual A may have withdrawn the money from an ATM, an action which is logged by his bank and may involve a transaction fee. In an alternate scenario, if Individual A had written a $10 check, the check would eventually be recognized by the bank and would incur a transaction fee imposed by the bank as well.
Future
TransactionWith the development of electronic cash smartcard products, digging around in one's pocket for loose change may be a thing of the past. Today, Mondex is the leader in the transition from cash to electronic payments for transfers of money between individuals. In fact, Mondex is considered the most cash-like of the current array of electronic cash smart cards that are currently being tested because it allows for person-to-person transfer of electronic cash without reporting the transaction to a central computer system. Thus future exchanges of "cash" between individu als might occur as follows: Individual A is 300 miles away from Individual B. Individual B calls Individual A on a Mondex-equipped telephone and asks to borrow some money. Individual A downloads exactly $10.45 over his Mondex phone and transfers it to Individual B's Mondex card at the other end of the line, all of which is done in real time.
Impact
on BanksFor the customer, Mondex-type transfers will help surpass the limitations of time and dis tance which can make exchange of cash between individuals difficult or impossible. However, in the future (according to Mondex), electronic payment systems such as smartcards will diminish the already minimal role of banks in person-to-person transfers. The Mondex system of elec tronic payments is not affiliated with a bank, nor does it report such transactions to a central com puter system. The end result for banks is if customers adopt the Mondex technology, they will not be writing as many checks or withdrawing money from ATMs. Therefore, banks will lose the opportunity to charge typical transaction fees to customers (a major source of revenue) or monitor its customers financial behavior as well. In addition, this situation would put banks in a precari ous position since the Fed relies on the information which the banks provide concerning fees and customer behavior to set its rates. Also, banks are losing transaction fees in one area of their busi ness, they will more than likely have to look at other business functions where they can collect more fees and make up for lost revenue.
IssuesThe major issues for banks are dependent on the rate at which consumers begin to adopt electronic cash smartcard products like Mondex for their person-to-person transactions and the strength of the consumer-bank relationship. Possibly, consumers are not willing to replace their reliance on physical cash with electronic payments. Banks should take advantage of consumer hesitation by discouraging the use of Mondex smartcards by emphasizing the personal benefits which a bank provides to its customers. However, if the market indicates that customers are anx ious to adapt the Mondex technology, banks should push to find a viable way to become affiliated with the Mondex system. For example, in Hong Kong, the Hongkong and Shanghai Banking Cor poration Limited has announced a joint venture with MasterCard to develop Mondex for Asia. This venture will manage for the implementation of the Mondex technology which will allow financial instituations in Asia to issue Mondex chip cards to consumers. Other banks worldwide may want to consider similar ventures in order to stay competitive in the future.
