The concept has far reaching implications involving fundamental changes to our existing banking infrastructure. Putting aside macro economic implications, let’s take a brief look at how this new environment might work, and at the forces slowing it progress.
Firstly we’ll need a new global currency. Let’s call it the TOKE (rather than show any allegiance to either dollar or ECU). TOKE has a rather comfortable Tolkiensian ring to it. Alternatively it might stand for ‘Token Of Keynesian Exchange’. The meaning will become more apparent as we see how governments will be able to administer extraordinary monetary control in this new environment, the likes of which have never been possible before. As with the ECU, units will initially be issued, and administered by Central or Reserve Banks (subsequently a single Central Bank). In this new era, there will no longer be a need for retail banking facilities as we know them today – they will become redundant – replaced by processing hubs and central banking support agents. Relationship banking will cease, being reconfigured by the Internet. Companies will use technology to reach customers directly and, increasingly circumvent traditional financial relationships for reasons of efficiency and cost. Business-to-business commerce will rely upon electronic networks that reduce costs and rearrange traditional commercial and legal relationships. Where todays excess returns are being made – in stable retail banking products likes mortgages, savings, and credit cards – competition will be at its fiercest and new Internet savvy players will increasingly be able to enter and compete effectively in the market. The arguments for depositing surplus funds in low yielding bank deposit accounts will no longer be attractive as Internet brokers will offer swift, efficient and secure access to a vast range of previously inaccessible investment products on a global scale.
In this brave new world, we will be able to maximise use of the point-to-point international connectivity with a currency designed as an adjunct to world trade. The TOKE will be a discrete, digitally signed electronic unit of currency. Denomination could be dynamic, set and dismantled to suit each transaction. Each base unit might contain details of country of issue, date, denomination, record of use etc. With this information available, national Central Banks would be able to monitor money flow and supply to an extraordinary level of detail. International monitoring of money movements would be via gateway mechanisms, similar to existing Internet gateways. At these and other transit points, selective details of each transaction could be monitored. As TOKE’s pass through each national gateway, transaction histories could be read, and expired historical data removed. Even using present data warehousing techniques, the extent of analysis available to government agencies would be considerable. On the consumer front, employers would be able to transfer salary payments directly into an employee’s SmartCard account, or nominated brokers account. The recipient effectively becoming their own treasurer, deciding the best global investment opportunities for their funds.
Progress however will be slow. Central Banks are still to grapple with the macro economic effects of free international monetary flow, and retail banks stand to loose business on almost every front. Perhaps that is why they were quick to take up the franchises of SmartCards – to secure control over the rate of change. No one would question that the survival of retailing banking is at stake. The move towards E-Com alone will severely erode service fee income to the banking sector. According to Statistics Canada, bank income from service fees in that country is now more than half of their income from interest. In 1996, deposit-accepting institutions made $11.1 billion from service charges, mostly in retail banking operations, against $21.6 billion in interest earnings. The highest percentages of profit coming from ATMs, debit cards, and similar electronic banking transactions. Down under, DigiCash might complain that the actions of the banks in forming a consortium to take up the Mondex SmartCard franchise in Australia and New Zealand is collusive and excludes DigiCash’s ‘eCash’ product from any online micro-payments market in these areas. And they would be right. The consortium has also stalled implementation of the Mondex SmartCard. Banks are still in a state of shock following the arrival of the Internet, E-Com, and the SmartCard. European banks will also be counting the cost of lost foreign exchange revenue between ECU partners and the effects on correspondent banking relationships. Banks will not relinquish Credit Card earnings in favour of the SmartCard, although they will eventually be driven down this course by customer preference. Not that the SmartCard is without income potential for issuing banks. They can expect to earn interest from the ‘float’, or loaded balance, on the card. However, eventually a more aware public will object to this practice. We also should remember that cash (physical notes and coins) is still a major factor in commerce. In the UK cash accounts for 46% of transactions, with retailers handing out Stg446m weekly in change alone. This percentage figure is pretty much representative of cash levels internationally.
The brave new world of the TOKE may well prove as illusive and distant as Middle Earth.