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Coins to Electronic Payments

May 5, 2012

Finally, the Bank of Canada has discontinued the one cent coin.  I’ve been waiting for years for them to do this.  They also have plans to phase out other small coins.  More interesting though, is the report that they plan to replace these coins with an electronic payments system.  These will be for micro-payments, less than one dollar, and mini-payments, less than ten dollars.

Now, when did I last walk into a store and purchase something for less than a dollar?  I couldn’t think of a single instance, at least in recent years.  I know that micro-payments are used for clicks on web links, but is that all?  Ah yes, on my telephone bill.  If I call directory assistance, I will find a small charge on my bill at the end of the month.  Mini-payments are clearer.  Every time I get coffee or lunch at Tim Hortons, it’s less than ten dollars.  I have lots of examples at retail stores too.

So, how would electronic payments work?  I have a Tim Hortons card that seems to do that already.  I use it to pay for small purchases at their restaurants.  It behaves as if the card itself contained cash, but this is an illusion.  The cash is actually stored in my account that resides on a server computer at a data centre.  Every time I swipe my card in Tims, their card reader must connect to the server in order to perform the financial transaction against my account.  There’s a great deal of overhead and infrastructure associated with this transaction.  Still, this is a good model for a genuine electronic payment card.  It’s not ideal, though.  My Tims card is only accepted at their restaurants.  I can only reload my card at their restaurants or their web site.

So, how would the genuine article work?  First of all, the cash would have to be stored in memory on the card.  This means that the restaurant or store would only need to make a deduction from the amount stored on the card.  There’s no need for a connection to a server.  In fact, there’s no need for the server at all.  It would have to be accepted at all stores and restaurants, just like cash is now.  You would be able to reload your card at an ATM, just like you obtain cash from an ATM now.  With a limit of ten dollars, perhaps you would obtain larger bills at the same time as you reload your payment card.  Finally, there should be no cost to the store or the customer for using this card, just like there’s no cost for using cash now.

What’s needed to introduce electronic payments in place of coins and small bills?  The card itself would have to be convenient and secure.  Merchants would need a well-designed point-of-sale terminal that’s integrated with their cash register system.  ATMs would need to have a mechanism for reloading cards.  The most important point is standardization, so that all cards would work at all stores and restaurants and with all ATMs.  The Bank of Canada is in a good position to maintain this standard, but individual companies could do this too, as long as they agreed to cooperate.  It would be terrible to have three different cash cards that were only accepted by some merchants and could only be reloaded at certain ATMs.

Addendum:  Reloading the card only at an ATM is not sufficient and perhaps not even necessary.  If the card is supposed to replace coins and small bills, the reload has to be done at the merchant’s site, so that you can receive your change on the card.  This change also requires a display on the card that shows how much money it contains.  Otherwise, you would soon forget the amount.

Payments from mobile devices like telephones have been in the news recently.  This scheme is somewhat different because it’s a replacement for credit and debit cards, not for small amounts of cash.  It’s also a high cost solution because the back-end infrastructure used for credit and debit cards would still be needed.  Undoubtedly, the fee structure would also be retained.  Storing the cash directly on the card eliminates all this.  The cost to the mint of stamping coins and printing bills would also be eliminated.  There will still be some costs, of course, but they should be low enough to make handling cash this way both cheap and convenient.

 

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  1. The End of Cash | jgmills

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