A MOUNTAIN OF TROUBLE

STASHING THE CASH

The debate about doing business with chips, instead of old-fashioned money

WARREN CARAGATA December 26 1994
A MOUNTAIN OF TROUBLE

STASHING THE CASH

The debate about doing business with chips, instead of old-fashioned money

WARREN CARAGATA December 26 1994

STASHING THE CASH

The debate about doing business with chips, instead of old-fashioned money

WARREN CARAGATA

BUSINESS

It is like one of those ads for American Express—only better. A man wearing tattered clothing and a week’s stubble walks across the endless broadloom to the jewelry counter of an obviously upscale store. He is greeted distantly by a diffident sales clerk. “I want the Rolex,” he says. His demand activates a voice-scanning device. A small green light begins to flash and, a moment later, turns a steady green. “Your value has been assessed,” a disembodied computer-generated voice intones. “The Rolex is yours. The price will be deducted from your net worth.” The man puts it on his wrist and walks away, the transaction completed without a penny changing hands, with not even a payment card offered.

This scenario may still be a bit of science fiction, but not by much. Increasingly, it is apparent that the next frontier of high-technology is the pocketbook. To their delight, bankers and merchants are gradually replacing the cumbersome pennies and two-dollar bills that clog up their tills with so-called smart cards—computer chips embedded in plastic. In the near future, consumers will be able to download digital money onto a card and use it to pay for everything from bus rides to a morning coffee. This marriage of plastic and silicon could also be used to replace house keys and identification cards, to make payments over the phone and via computer networks; they could even be used to provide social benefits. “Coins and cash will have to go away sometime,” says Craigg Ballance, assistant manager of electronic banking at the Royal Bank of Canada. “It’s not a matter of if, but a matter of when.”

For many transactions, the use of cash has already been diminished by debit cards, credit cards and such services as telephone banking. While Canadians still use cheques and cash more than consumers in other industrialized countries—partly because the system is so fast and efficient—paper transactions are steadily declining. An indication of the pace of change comes from the Canadian Payments Association, which represents domestic financial institutions. It estimates that by the year 2000, about half of all payments through its national clearing system will be entirely electronic, compared with about 25 per cent now. The Interac direct payment service, which instantly transfers payments to a merchant from a customer’s bank account, is now accepted by 85,000 retailers, and 50 per cent of Canadians with debit cards are now using them for store payments. Initial forecasts suggested that debit cards would account for about 18 million transactions a month by mid-1995. But, according to Interac president Joanne De Laurentiis, that level has already been exceeded, with about 21 million sales now being rung up a month. “Canadians like plastic and they like to use it,” says De Laurentiis.

So far, smart cards that can complete ly replace cash have not yet been intre duced for general use in Canada. But next fall, 34,000 homes in the Chicoutimi region of Quebec will go on-line in a test of interactive television and smart cards known as the UBI project, a partnership of the National Bank, Le Groupe Vidéotron liée, Hydro Quebec, Canada Post, Hearst Corp. and LotoQuébec. The UBI venture will allow people to order TV movies, pay utility bills, shop from home with more than 100 merchants, or arrange and pay for an order of St. Hubert chicken. In effect, with the ability to pay for purchases and download digital cash from the holder’s bank accounts, UBI will turn each TV and its accompanying black box into a personal banking machine.

The UBI smart card will only work at home. But, in 1995, the Bank of Montreal plans to set up a more general trial of a smart card or “electronic purse” that can be filled with electronic money at a banking machine or bank branch and then used to make purchases at participating merchants, says Mamie Kinsley, vice-president of corporate electronic banking. The transit system in Ajax,

Ont., is already using a smart card for passenger fares, and GO Transit in southern Ontario also plans to start using a rechargeable, electronic fare card. “We see a big future for smart cards,” said AÍ Cormier, vice-president of the Canadian Urban Transit Association. The governments of Ontario and New Bmnswick, Kinsley said, are also examining whether to handle welfare payments via smart card to help recipients—who often do not have bank accounts—budget their spending and avoid the risk of theft.

For their part, banks and tmst companies are among the strongest proponents of the move to substitute smart cards for cash. For one thing, cash is an expensive commodity to maintain—it has to be sorted, counted, transported, stored and constantly guarded against theft. Some banks now charge commercial clients a currency handling fee of up to two dollars for every $1,000 bundle of bills. “It’s not just cash, it’s all your cheque clearing, it’s all your bill stubs,” says Colin Davies, the banking specialist at Andersen Consulting in Toronto. “If you digitize the flow of currency, you can take that all away.”

Certainly for the federal government, which is responsible, through the Bank of Canada and the Royal Canadian Mint, for coins and notes, cash can also be a drain on the treasury. To keep enough pennies in circulation, for example, the mint must produce ever more of them: 752,034,000 in 1993, and 21 billion since the first Canadian penny was minted in 1858. And because it is made of pure copper, a penny is a relatively expensive item to produce, says Denis Cudahy, the mint’s vice-president of manufacturing. A coin worth one cent currently costs about two cents to produce. Ottawa is also studying a recommendation from the Bank of Canada to replace the two-dollar bill with a coin to save on the cost of printing the heavily used bill.

Still, the trend towards digital money is not altogether unprecedented. In fact, once consumers have an electronic purse in their hands, they will only be catching up to the business world where money has long been replaced by computer codes. “Tie idea of transferring money internationally has been virtual for years,” says Ballance. Big money rarely changes hands physically—only the notations on electronic ledgers are altered. “The worth of the country is virtual today,” he said. At the end of 1993, according to statistics from the Bank of Canada, there were $2.46 billion in coins circulating, plus $27.22 billion in bank notes. The total money supply, however, stood at $579 billion.

But the big question remains whether Canadians are ready to relinquish cash in favor of smart cards. The fact that the technology makes smart cards possible means relatively little, according to Canadian bankers. Tom Mellish, vice-president of self-service banking at the CIBC notes: ‘The smart card has been a technology looking for an application.” The fact is that people like cash, says Dan Otchere, an economics professor at Concordia University in Montreal, who has studied the issue. And observers note that getting rid of it entirely may be difficult for a number of reasons, one of them being the effect of a completely cashless society on the poor, many of whom do not even have bank accounts, let alone credit and debit cards. “People using cash tend to be poorer,” Cudahy said, because poor people rely on it more than wealthier people. In part, the banks have reinforced the use of cash by putting ATMs on nearly every comer and making sure that anyone with a bank card can use it, re gardless of which bank actually issued the card. As the Bank of Canada noted recently: “The proliferation of banking machines ... undoubtedly encouraged many consumers to use cash more often.”

Certainly cash continues to dominate the niche of relatively small transactions: it is often quicker than a card, and for consumers, cheaper to use. That makes some consumer advocates leery about the advent of smart cards. “The only thing high-tech banking will do is save the banks money,” says Duff Conacher of Ottawa-based Democracy Watch, a citizen advocacy group that focuses on government and corporate accountability. Furthermore, the growth of the underground economy has also perpetuated the use of cash, says Otchere. That is because unlike some smart cards, he notes, cash is anonymous: “It leaves no paper trail.”

In fact, it is the anonymity of cash that may make it hard for people to give up. And it is the potential loss of anonymity that has also raised the issue of privacy. The Bank of Montreal’s Kinsley says that customers are unlikely to let the banks set up a truly anonymous electronic banking system be cause they still demand the convenience of transaction records. One of the chief adve cates of a private system of smart cards is David Chaum, an American mathematician living in Amsterdam, where he runs a company called Digicash. Chaum has developed a system that would make smart cards even more anonymous than cash, using a central computer to authenticate transactions without identifying the user. Chaum, who is also promoting a variation for commerce on the Internet computer network, says society is now at a crossroads in terms of technologies that will be chosen, and that privacy considerations must be given priority.

Another advantage of cash is that it can actually be touched. ‘Today, it becomes more popular to actually feel and touch money because, with a lot of things we do, we don’t ever see it,” says Cudahy. So, while cash may have lost market share, people may never let it disappear completely, keeping it as proof that some things, at least, have real value.