The e-Euro technology and monetary union

Citation

Birch, D. (1999), "The e-Euro technology and monetary union", European Business Review, Vol. 99 No. 3. https://doi.org/10.1108/ebr.1999.05499cab.006

The e-Euro technology and monetary union

The e-Euro technology and monetary union

Dave BirchDavid Birch is Director of Consult Hyperion, an IT management consultancy company, editorial board member of the Financial Times Virtual Conference Report and a correspondent for the Online Journal of Internet Banking and Commerce

Last year, European Union (EU) finance ministers rejected a call by the European Parliament for the introduction of an electronic Euro (the e-Euro, or e?) as part of the preparation for the single currency (Financial Times Virtual Finance Report, 1998). If, however, we view the preparation for EMU from a technological perspective ­ and emphatically not a political one ­ then a bigger question springs to mind. Never mind the e-Euro as a precursor to Euro notes and coins: does the Euro need to physically exist at all?

Is there really any need to spend enormous sums of money on replacing the 17 billion banknotes and 76 billion coins in circulation in the EU? In Europe today there are more than 100 million stored-value smart cards in use, of which around two-thirds carry electronic cash (Birch, 1998) of some description (these are known as electronic purses, or e-purses), and most European countries will be moving their plastic "dumb" magnetic stripe payment cards to smart cards in the short to medium term: surely it makes sense to exploit Europe's advanced use of this technology in the context of the forthcoming major change in the EU countries' means of exchange? In a country such as Germany, where there are already more than 40 million e-purses deployed, the natural way to manage the shift to the Euro would be to introduce the world's first wholly virtual currency: a currency that is as real as any other but only ever exists in electronic form.

Smart solution

Europeans are becoming increasingly familiar with the smart card. Credit and debit cards are migrating to smart cards in most countries (in France they have all been smart for some years). More and more loyalty schemes are moving over to smart cards (in the UK, there are more than 9 million Boots Advantage cards and Smart consortium cards out there). As phonecards, as pay television cards, inside digital mobile phones, and in many other applications, smart cards are becoming ubiquitous and consumers seem happy with them. No wonder that in the UK alone there will be some 200 million in use in the year 2000 and some 2 billion will be in use Europe-wide in 2002 at the end of the Euro transition period (Penrose, 1997), during which the Euro and national currencies will be in parallel circulation.

Suppose, then, that the decision were taken to issue the Euro in electronic purses only. Would this impose a severe penalty on retailers and banks? I do not think so: across the continent automated teller machines (ATMs), cash registers and telephones are being converted to handle smart cards anyway (Birch, 1997). As things stand, in the next year or two these devices (as well as vending machines, parking meters and so on) may well have to be converted twice: once to handle stored-value smart cards and then a second time to handle the Euro. One might expect suppliers and customers alike to opt for one change only ­ either to Euros or to smart cards ­ and since in the long term the use of smart cards will minimise costs, a single transition to support electronic purses would make life easier for all concerned (Kouwenhoven, 1998). Since the rapidly increasing number of smart cards in use inevitably means a rapidly increasing number of smart card interfaces: in TV set-top boxes, in PCs, in payphones, in vending machines and (of course) at retail point of sale (POS), the smart card interface will become universal. So, if consumers have the cards and the retailers (real and virtual) have the interfaces, why bother with paper and metal? It is not just about cash cost savings: the issuing of an e-Euro would have additional benefits, including the issuers of e-purses having more incentive to work towards interoperability and cross-border acceptance (Pettit, 1998) which would hopefully mean that consumers would be able to use their cards throughout the EU (whether in retail shops or on the Net), thus stimulating trade.

Ready for change

Consumers seem to be expecting such a change anyway. A recent Gallup poll (Hunter and Madden, 1998) found that almost two-thirds of the UK population thought that notes and coins would vanish in the future and almost half of those interviewed thought that physical cash would disappear within a decade. In light of this, one might even take the discussion further and say that if there are sections of the population who want to continue to use notes and coins, then they should pay for them. This could be achieved easily and painlessly by allowing financial institutions to price differentially physical and electronic value. This might be achieved transparently, so that withdrawing e-cash from your bank account is free whereas withdrawing banknotes costs a fee, or it might be achieved through "back door" differential pricing so that consumers withdrawing e-cash get Air Miles or Sainsbury's Rewards and customers withdrawing banknotes do not. If this kind of incentivisation (perhaps seen in embryo in the Barclays' Progress loyalty scheme (Loyalty, 1998) which has been running in pilots since October and rewards customers for banking activity including the use of debit cards, direct debits, standing orders and loans) is successful in weaning people away from notes and coins, then we could just let the existing stock die a natural death after joining the single currency. People would get used to loading up their e-purses with Euros, seeing their bank account in Euros and paying their credit card bill in Euros, even if they were never actually to see a Euro.

There might still be a role for the profitable (from the perspective of central banks) issuing of Euro notes and coins in the e-cash world, and that is as commemorative or souvenir issues. In the same way that you can, today, purchase a mint set of sterling coins in a nice presentation case, so people might like to purchase sets of Euro notes and coins to hang on their wall, give to children as presents or stash away in vaults as some kind of investment. This vision, of an e-Euro with purely ceremonial physical notes and coins, seems to me to be an eminently sensible balance between practicality and symbolism.

The realisation of this practical and symbolic implementation of the e-Euro would require a certain amount of co-operation and effort, but certainly no more than is required for EMU without e-cash (Brown, 1998). It is not as if money already spent will be wasted, since almost two-thirds of UK companies have yet to start preparing their IT systems for EMU and, to give an idea of the costs that will be involved, Phillips (the Dutch electronics company) has estimated the cost of upgrading its systems to conform with the problems of a single currency at more than three times the cost of millennium compliance (Bannerjee and Ferscht, 1997).

Many bodies

The e-cash world might then develop in even more interesting ways. Suppose the Euro is legal tender in the sense that Europeans would be required to pay their taxes in Euros. Actually, this is a headache at present. Many tax authorities are not planning to accept the Euro in payment until the end of the transition period in 2002, which means that businesses will have to keep two sets of accounts because their customers will be using Euros but their governments will not (Copper, 1998). Anyway, suppose the Euro is legal tender, Euros are in circulation, and a market exists because people will need them to pay the government, even if no-one else wants them. Does this necessarily mean that all transactions would then be conducted in Euros? I would argue that it does not, and the technological platform used to ease the transition to the e-Euro may have wider consequences because just as smart cards reduce the cost to the European Central Bank of creating a new currency, they would similarly reduce the cost to anyone else of creating a new currency (Birch and McEvoy, 1997). Two categories of potential entrants into the money business, who might want to take advantage of the reduced cost of issuing, spring to mind: these are geographic regions and multinational companies.

Local exchange

While politics and economics are not the subject of this article, it is worth noting that one of the common objections to EMU is that it is not easy to operate monetary policy on averages across a currency area. It is difficult enough running a country like the UK under a single currency, even though it has relatively well-integrated regions (Minford, 1998). How do you set interest rates: according to conditions in Reading or in Runcorn? Why not allow regions to issue their own money and set their own monetary policy? Once consumers have their smart cards, the cost of creating "Wessex Shillings" or "Yorkshire Brass" is trivial. I have no figures to hand, but I would have thought that the overwhelming majority of personal transactions are local. Therefore, as a consumer I would have to consider the long-term value of "Surrey Snobs" in relation to paying for my mortgage or buying a car, but I would not have to calculate exchange rates in my head every time I park the car at Woking BR station because the prices there would be quoted in Snobs. Thus, the dreams of the local exchange trading system (LETS) enthusiasts could be realised, but in a more practical and efficient way than any of the hundreds of schemes operating in the UK have been able to create so far.

Company cash

This is not the time or place to go into the subject of privatised money in huge detail, but it is worth observing that the steady evolution of corporate loyalty schemes has already introduced new forms of "money lite" that consumers show no sign of rejecting. If my employer were to propose paying part of my salary in Sainsbury's Rewards, because he or she were able to buy Rewards in bulk at a discount (part of which would, of course, be given to employees) that would be fine by me since we go to Sainsbury's every week and spend lots of money there. If the Rewards were held on stored-value cards instead of being pieces of paper and there was a reasonably liquid market for them on the Net, I might well find them preferable to Euros! Perhaps Sainsbury's Bank could stimulate competition by allowing, from 1 January 1999, consumers to open accounts in sterling, Euros or Rewards.

It is not just about retailers and banks, of course. Britain's biggest stored-value issuer is BT, which sells some 25 million phonecards every year and has a ready made retail network of more than 60,000 cardphones in place to handle transactions (Phillips, 1997). Suppose they decide to issue phonecards denominated in BT Talking Points or Disney Euros? What evidence is there that consumers would refuse to handle alternative units of account (created by non-bank) if they were easy to understand and convenient to use?

(An edited version of this article appeared as "European multiple currencies" in the DEMOS Collection, 1998, Vol. 13, pp. 23-4.)