Electronic funds create efficiency

Some students probably have wished that they did not have to deal with bulky dollar bills in their pocket or have to hear the annoying jingle of coins when dealing with money every day.

But the University's School of Information believes it may have the answer to end this discomfort. On Friday, the school welcomed Federal Reserve Gov. Edward Gramlich to address the Symposium on Electronic Payment Systems.

Before becoming a member of the Federal Reserve Board in 1997, Gramlich served as the first dean of the School of Public Policy.

In his keynote address, Gramlich described the past and future of electronic payment systems in the United States and abroad. He said he hopes a system can be developed that either uses a computer chip or another electronic device to record payments and debits automatically.

"There are obvious efficiency advantages in terms of ease of handling and record-keeping for consumers, merchants, the banking system, and the Federal Reserve," he said.

The electronic money would have a prepaid balance of funds that would be recorded on a card or personal computer controlled by the consumer and updated automatically as payments or withdrawals are made.

The Federal Reserve is debating two possible avenues to initiate the electronic payment system - the closed and open systems. "Store-value products can be used in open or closed systems. Closed systems involve a narrowly defined group of consumers, such as the MCards used by the students here," Gramlich explained. "This is narrowed to a relatively small area.

"Open systems would involve many consumers and merchants over an extended geographic area," he said.

Gramlich added that the use and growth of electronic money systems in the United States is sluggish. It is well behind earlier predictions of development, growth of credit and debit card use, and further behind in the growth of other types of electronic commerce. The use of cash and checks is still predominant in the United States.

"A greater problem is that until the store-value system becomes universal, there is a risk that the sellers will not accept the card," he said.

"Payment systems involve a network, money is not truly money unless it becomes universally acceptable and network problems have been a big impediment to the development of any currency system," Gramlich added.

Gramlich suggested a possible government intervention to force or induce merchants, consumers and financial institutions to adopt the new technology. But he said he still believes that the current alternatives to the store-value products are cheap and safe enough that such intervention is both economically unwise and politically unlikely.

The purpose of this symposium is to introduce the community to what we believe to be the future of money, said Prof. Jeff MacKie-Mason, the founding director of the Program for Research on the Information Economy.

The Federal Reserve has an active research program on electronic payments and is seeking ways to making the transition to this type of system more acceptable for people in the future.

09-20-99