The Transformation of Money from Physical to Electronic

Transcription

1 The Transformation of Money from Physical to Electronic Scott Schuh Consumer Payments Research Center P r e s e n t e d t o A G A P D T C o n f e r e n c e, O r l a n d o F L J u l y 1 5,

2 Overview History of money Money and payments today Electronic money and virtual currencies Future of money, payments, and banking 2

3 History of Money 3

4 Transition #1 From Robinson Crusoe economy to exchange??? Producer = consumer Exchange (barter) = double coincidence of wants 4

5 Transition #2 From barter to monetary economy Walmart 5

6 Three main functions of money Unit of account $0.01, $0.05, $0.10, $0.25, $1, $2, $5, $10, $20, $50, $100, Medium of exchange Coins, bills, checks, debit cards,. Store of value 6

7 History of money as medium of exchange Innovations to reduce transaction costs: Smaller in size Lighter to carry More durable to last longer Cheaper and easier to store Safer from theft and fraud Faster to authorize, clear, and settle Lower fees for payer and payee 7

8 Private versus public money 8 Private Emerges from market Has intrinsic value Metals, commodities, etc. Backed by owner(s) Not legal tender Value susceptible to private motives (profit, market pricing, fraud) Public Created by govt. fiat Maybe intrinsic value E.g., gold standard Debt (government IOU) Backed by tax authority Legal tender (pays tax) Value susceptible to govt. motives (inflation tax, exchange rates)

9 Money and Payments Today 9

10 Transition #3 From physical to electronic money 10 Yesterday Will that be Today or or

11 The U.S. money supply M2 = M1 + Time Deposits + Savings Deposits + MMM Funds M1 = Currency + Demand Deposits Currency Demand Deposits 11 11

12 Money and payment instruments Asset or Liability Basic Money or Debt Instrument (derivative media) Physical trait Currency in circulation Currency Travelers check Travelers check Checks (Personal, Certified, Cashiers) Paper / metal Money order Money (M1) Demand deposit accounts Online banking bill pay (OBBP) & Other checkable deposits Bank account number payment (BANP) Direct deduction from income Electronic Debit Revolving Prepaid Credit Card Credit Non-revolving Charge Text/SMS Electronic Unknown/unspecified??? Nonbank money order or prepaid card; virtual currencies Mixed 12

13 Billions per year Transformation of U.S. noncash payments: From paper to electronics (#) Number of US payments by all sectors (household, business, government) Checks + Debit + ACH ($873) Checks ($1,420) Credit ($95) Debit ($39) ACH ($2,186) Prepaid ($24) Source: Federal Reserve Payment Study (FRPS) 13 13

14 Percentage share of annual payments Transformation of U.S. noncash payments: From paper to electronics (shares of #) 90 Share of US payments by all sectors (household, business, government) Checks ($1,420) Checks + Debit + ACH ($873) Debit ($39) Credit ($95) ACH ($2,186) 10 Prepaid ($24) Source: Federal Reserve Payment Study (FRPS) 14 14

15 Consumer cash holdings and withdrawals Source: Survey of Consumer Payment Choice 15

16 Amount per Withdrawal Number of Withdrawals Sources of consumer cash withdrawals $600 $500 (2%) (4%) $400 (3%) 7 6 $300 $200 (50%) (24%) (13%) (5%) $ $0 ATM Bank teller Check cashing store Retail or grocery store Employer Most Frequent Location Family or friend Other 0 Source: 2012 Survey of Consumer Payment Choice Average Withdrawal Amount (left axis) Number of Withdrawals in a Month (right axis) (--) Percentage of consumers that indicated location was most frequent location 16

17 Percentage share of monthly payments Consumer payments (from Survey) Debit Cash Credit Check BANP Prepaid Money order Travelers check OBBP Source: Survey of Consumer Payment Choice 17

18 Consumer payments, 2012 (from Diary) Number Cash ($21) Value Check or money order ($171) Payment cards ($48) Electronic payments ($216) Other 0% 20% 40% 60% 80% 100% Source: 2012 Diary of Consumer Payment Choice (DCPC), preliminary results 18

19 Payment instruments available to consumers Charge Cash Checks Money Order Travelers Checks Prepaid Paper (closed-loop) 7 Credit 8 Debit BANP Prepaid Cards (closed-loop) 14 Mobile text/sms Virtual Currency OBBP Prepaid Cards (open-loop) 19

20 Number of instruments Instruments held by average consumer Solid Line = SCPC Dashed Line = SCF Number held out of 9 (SCPC) Number held out of 4 means of payment (Check, CC, DC, and Automatic ACH bills) Source: Survey of Consumer Payment Choice ; Survey of Consumer Finance 20

21 Percent of Consumers Consumer adoption of payment instruments 100 Cash Checking Account Blank Check Credit Solid Line = SCPC Dashed Line = SCF BANP OBBP Prepaid Debit Money order Travelers check Source: Survey of Consumer Payment Choice; Survey of Consumer Finance 21

22 Distribution of instruments held by consumers 22 Source: 2012 Survey of Consumer Payment Choice

23 Percent of Transactions Average Value (in USD) Consumer use of payment cards by type % Transactions Volume Shares 92.3% 91.8% Average Transactions Value % 4.4% 2.0% 5.0% 2.7% 3.8% Debit Credit Prepaid Primary Card Type, by Volume Debit Use Credit Use Prepaid Use Debit Credit Prepaid Primary Card Type, by Volume Primary cards (3-day period) as defined by highest number of transactions. Left: Transaction volume shares of the three cards. Right: Average transaction value of each card type, by primary card. Source: Shy, Oz, "How many cards do you use?," Working Papers 13-13, Federal Reserve Bank of Boston. 23

24 Number of Units Percent of Consumers Diffusion of payment technology #1: ATM/POS and debit cards 600, , , , , , # of ATMs # of PIN Terminals (tens) Debit Adoption (Right Axis) 24 Source: BIS Redbook; Survey of Consumer Finances; Survey of Consumer Payment Choice

25 Diffusion of payment technology #2: Mobile banking and payments Mobile phone adoption Smart phone adoption Mobile banking adoption 10 Mobile payments use Source: Survey of Consumer Payment Choice; Consumers and Mobile Financial Services, Federal Reserve Board. 25

26 MPESA system (Kenya, Africa) Source: Jack, William, Tavneet Suri, and Robert Townsend. "Monetary Theory and Electronic Money: Reflections on the Kenyan Experience." Economic Quarterly 96.1 (First Quarter 2010) pp

27 Electronic Money and Virtual Currencies 27

28 Definitions Electronic money (e-money) is broadly defined as an electronic store of monetary value [sovereign currency issued and controlled by the government] on a technical device that may be widely used for making payments to entities other than the e- money issuer. The device acts as a prepaid bearer instrument which does not necessarily involve bank accounts in transactions. E-money products can be hardware-based or software-based, depending on the technology used to store the monetary value. (European Central Bank) Virtual currency (VC) is a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. (European Central Bank) 28 28

29 Modern classification of money and checks! 29 29

30 Comparison of e-money and VC 30 30

31 Payments with Bitcoin & virtual currencies? 31 Technology/payments Bitcoin is a payment system Acceptance is low but growing Cost is nearly zero for each transaction Bitcoin is open source/standards based, nearly anonymous exchange, very secure, and ubiquitous (Internet) There are more than 300 virtual currencies, e-money, and digital payment technologies Canadian MintChip experiment uses similar technology for smallvalue Canadian payments Money/banking bitcoin is money collaborative, private, and electronic ( virtual ); called currency but NOT legally (yet) bitcoin/vc payments are low-cost but offer new revenue opportunity Money has value and risk of theft so new banks are emerging to store and manage bitcoins/vcs Traditional banks are constrained in holding VCs by BSA/AML regs If VCs take hold, they will provide new incentives to create money (despite promises not to)

32 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Market Price (USD) Market Cap (Billions) STD (%) Data on Bitcoin price and quantity $1, Standardized price volatility $1,200 $1, Mt. Gox Shutdown $800 China Crackdown 8 $600 Mt. Gox Lag China and IRS 6 $400 4 $200 $0 Cypress Banks Closure Market Price Market Cap 2 0 Source: ECB Source: 32

33 The Future of Money, Payments, and Banking 33

34 Policy issues for money and payments Checks should continue trend decline Check 21 legislation may have slowed use by consumers Much motivation to encourage reduction of B2B checks Currency demand should be relatively stable A2A & P2P payments should improve Payment card markets are in the spotlight Traditional banking is at a crossroad 34

35 U.S. consumer demand for cash depends on interest rates (monetary policy) Source: Briglevics, Tamas and Scott Schuh. U.S. Consumer Demand for Cash in the Era of Low Interest Rates and Electronic Payments, Federal Reserve Bank of Boston Working Paper

36 Federal Reserve strategic plan: Improvements to U.S. payment system Faster reductions in ACS and notification times To legacy payment systems? And/or a new system like U.K. Faster Payment Service? Safer reductions in fraud, loss, and data breaches EMV finally implemented? Improved cyber security? Federal Reserve more attentive to preferences of end users (consumers, business) 36

37 Revenues in a payment card network 37 37

38 New public policies affecting payment cards Opt-in overdraft protection (Fed) Debit interchange fee capped at 25 cents (Fed) Discounting and card fee disclosure (DoJ) Propose fees on debit cards (some banks) Proposed rulemaking, prepaid cards (CFPB) Proposed rulemaking, student cards/accounts (CFPB) Credit card surcharging (District Court ruling) 38

39 Traditional banking faces strong competition Market for Payment Services Market for Lending Services Non-bank services TRADITIONAL BANKS PayPal, NetSpend, Bluebird, Google Wallet, Amazon Payments, Square Take Deposits (fractional reserve) Make Loans Peer-to-peer brokers Prosper, Kiva, etc. Narrow Banks Payment Card Networks and Processors Green Dot, Moven Bank (full reserve)??? PUBLIC MONEY ($) PRIVATE MONEY VC DI s VC payment networks (Bitcoin, etc.) Ripple, Circle, Coinbase, etc.??? 39 39