Transcript Lessons EFCE - Simon Lelieveldt: Regulatory Consultant

Money and Trade
considered....... lessons from (Dutch)
payment history
Simon Lelieveldt
Edinburgh, 23/24 June 2000
The Netherlands
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Capital: Amsterdam
Area: 34.000 square km
Population of 16 million inhabitants
Currency: Dutch guilder (NLG)
GDP: 775 bln NLG
Inflation: 2 %
170 banks and 7000 branches
1 - Payment techniques travel along with
trade
• From Italy to Belgium to Netherlands to UK
• Concepts:
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girosystem (deposit taking)
arithmetic coin
multilateral compensation
assignations, bills obligatory, prom. notes
1400 - 1800
2 - as did John Law:
• From Scotland to England to Amsterdam to
France to England to Italy
• Concepts:
– Bank notes (Land bank)
– Circulation bank (France) & Mississipi System
– (Bank of England & East India Company)
1671 - 1729
3 - The most efficient model is the
centralised (giro) model . .
• First build trust on 100 % convertability and
100 % reserve
• Enlarge operations (build user base) and make
more payments inhouse-payments
• Lower reserve percentage in time and use
excess funds (wisely)
1600 - 2000
4 - but religion/legal rules determine local
specifics of instrument use
• Typical general infrastructure models
– giro-based, cheque-based, cash-based or hybrid
(cheque/giro)
• Due to:
– prohibitions on charging interest (the Pope)
– taxes or more direct government intervention
– consumer / bank regulation (Reg E, Glass-Steagal)
1300 - 2000
5 - Kings and governments always want a
piece of the action
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Corn giro in Egypt
Privilege of minting coin
Amsterdam Exchange Bank (monopoly)
Central banks:
– lending machine for government
– profitable issuance of bank notes
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6 - Country specific instruments only work
with a fair deal of trust
• Good legal system, trustworthy government
and stable society are conditions for the use of
currency and deposits
– if not: use of other countries’ currency or more
general goods, such as gold and silver
• Reflected in indicator of cash as % of M1
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Cash as % of M-1
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1900 1915 1930 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1995
7 - Security must be learnt the Dutch banknotes
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exclusive feature (1814 - 1850)
security by artistic engraving (1850 - 1900)
combination of technologies (1910-)
security before design (1921)
sufficient security is enough (1941)
integration and contingency plans (1960)
1814-2000
8 - Convertability into ‘real value’ is essential
but not essential
• Money itself is an abstraction and rational
product of the mind, which for theoretic
reasons does not need to have value itself or
be redeemable somehow,
• yet as a part of an evolution path to build
confidence, some form of redeemability
against ‘real value’ is necessary
Simmel, 1900
9 - Accepted because confidence in
ability to respend it
• Concept of legal tender is irrelevant
• Concept of instrument having a ‘real value’
(gold coin) is also irrelevant
• Any object will function as money, given the
user expectation that the instrument received
can be spent again
Frijda, 1916
10 - Any payment is in itself quite
uninteresting to the user
• Payments are endresult of something else
• If that something else is important (or force is
used), users will do anything which is needed
in the payment domain
• Don’t misunderstand the ‘cooperation’ of the
user!
1915-2000
11 - The payment product is a hygiene
factor
• If it works no extra satisfaction; if it doesn’t
users get annoyed
• Users don’t repeatedly search for new
payment mechanisms but stick to their choices
• Users criteria are control, risk, ease of use and
sometimes cost
1950-2000
12 - User risk depends on more than
technical security
• law: giro funds not part of assets in failure
• cheque convention Geneva (1930s)
• credit card liability in case of fraud higher
when using PIN as well (100 FL vs 300 FL)
• debit card liability limited by contract to 500
FL (200 $ more than Reg E equivalent)
1900 - 2000
13 - Operating a payment system can be
very profitable
• Official profitmakers (public records):
– Amsterdam Municipal Giro
– Postal Services Giro (now Postbank)
• Unofficial profitmakers:
– all other banks denying profit in payments
– reap profit in treasury function and make costs in
payment operations
1900 - 2000
14 - Respect existing deeply rooted
traumas and successes
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Amsterdam Exchange Bank and Municipal Giro
Cashiers notes against central bank
Postal services operations trauma 1923
Central banks gold standard trauma 1930s
1600 - 2000
15 - Interoperability has never been a major
problem for end-user
• Large diversity gives rise to separate
(commercial) enterprises, which make money
out of reducing burden to end-users
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Amsterdam’s cashiers and exchange offices,
Central bank, -Bankgiro system
CCV van der Velden (card payment integrator)
Bibit (Internet payment integrator)
1600 - 2000
16 - Reduce the number of messages in
payment protocols
• Cash - Giro - Cheque
• ATM protocol can be done in three messages
instead of four
• Don’t use a logical but the 90 % standard
transaction flow to speed up the process
1900 - 2000
17 - Don’t overvalue anonimity
• Also with cash, anonimity is relative
– disguised bank robbers still get caught
• Positioning with anonimity gets more
suspicious everyday
– Swiss bank secret...
1900 - 2000
18 - Multifunctionality won’t work with more
than 1 organisation
• Don’t add college card, bus card and copy card
on to one chip!
• Multifunctionality within user domain might
work
• Shared chipcard use accross a number of
organisations (or 2) creates complex
organisational / legal issues
Sipman, 1988
19 - Critical role for government and
the large retailers
• Large user base allows profitable investment
in technology development
• Government may additionally impose
instruments through legislation or de facto
market power
1900 - 2000
20- How to make new payment
mechanisms work ?
• Improve cost/benefit/burden ratio and grow from
existing customer behaviour
• Targeted at a small and specific user base and
profitable on that scale
• Enforce it as the only mechanism (campus
solutions)
• Make them part of overall irresistable deal
1900 - 2000
Caveat
“I have not had time to put my Thoughts in
that Order they ought to have been, and am
forc’t to leave out Anfwers I defign’d to have
given to fome Objections I have heard made
againft this Propofal.”
John Law, 1705