Bankir.ru published analytical material in which, based on an analysis of foreign experience, domestic economists attempted to forecast possible scenarios for the development of electronic money in Russia.
Based on the analysis of the opinions of various domestic and foreign economists and practitioners regarding the possibility of expanding the use of electronic money in payment for goods and services, we can formulate three main scenarios for the development of the situation: 1. Scenario one: electronic money will not become widespread or will completely disappear from circulation. 2. Scenario two: E-money will be widely used as a payment instrument and circulate along with traditional cash. 3. Scenario three: e-money will completely displace traditional cash from circulation.
Despite a quarter-century of experience with the introduction of electronic money in industrialized countries, cash still accounts for the vast majority of settlements in retail trade and services. The rapid development of e-money systems in the mid-1990s, when several hundred pilot projects emerged within a few years, came to an end. Many projects, having failed to attract a sufficient number of consumers, were forced to end their existence, including DigiCash’s e-money system project, which was headed by the ideologist of e-money development D. Chowm.
The financial failures of some e-money issuers and insufficient interest in e-money on the part of the public and merchants have led some domestic and foreign scientists to assume that e-money will not be able to compete with traditional cash and will function only within some closed systems in the future (the first scenario). Such a conclusion seems hasty. Today, electronic money is at one of the first stages of its development, which is reflected in its relatively low degree of compliance with the desirable monetary properties.
Modern electronic money is a monetary surrogate; it acts only as a medium of exchange that provides for subsequent settlement, rather than a new form of credit money. However, it is a temporary phenomenon. Information and financial technologies are constantly improving, many countries are developing new or amending the old legislation regulating the process of issue, circulation and repayment of electronic money, telecommunication infrastructure is developing, and the volume of e-commerce is increasing. All this should contribute to the formation of new e-money systems, which will be really reliable, effective and low-risk, and hence attractive for consumers. In other words, electronic money will function and be used by entities in the future, though not in the form it exists today.
According to a number of economists, including Harvard University professor B. Friedman and Bank of England deputy governor M. King, in the future hardware-based electronic money will completely replace traditional cash and cheques, while software-based electronic money will replace credit cards (the third scenario). The authors of the research consider this scenario to be probable. The point is that traditional cash is the easiest payment instrument to use. No special programs or technical devices are required to use cash, as in case of e-money, payment is effected by simple transfer of a physical object (money sign) to the beneficiary. The likelihood of such a scenario materializing becomes even less if e-money never gets the status of legal tender in the territory of the state. This would mean that any recipient of payment could, at its discretion, refuse to accept electronic money in payment for its goods and services.
In other words, the owner of electronic money could, in theory, find himself with no means of livelihood at all. In addition, traditional cash issued by the central bank has zero credit risk, while e-money, being liabilities of private credit institutions, has a much higher degree of credit risk. Therefore, traditional cash will already initially have a significant competitive advantage over e-money. Electronic money is most likely to develop in the second scenario.
In this case, electronic money will compete with other payment instruments for the right to be used as a means of payment for goods and services. It should be noted that as early as in the mid-1970s some scholars suggested the emergence of a new trend – the replacement of non-cash paper credit money (cheques, settlement money in the form of giro accounts, bank deposits, etc.) with non-paper credit money (plastic cards, electronic wholesale payment systems, electronic money, etc.), created due to the intensive introduction of electronic computing machines (ECM).
Analysts have identified the following trend. E-money is growing successfully in countries with a relatively low use of checks. In countries with a high use of checks, however, the popularity of e-money as a payment instrument is extremely low. When comparing non-cash payment instruments in terms of payment volumes, the authors of the research noted that bank transfers account for the lion’s share, over 90%. The share of check payments decreased significantly. The share of payment volumes by plastic cards and e-money during the whole analyzed period remains extremely insignificant. Insignificant shares of the payment volumes by plastic cards and e-money can be explained by the fact that both of these instruments are designed for use in the retail trade, where the amounts of transactions are relatively small: in the economically developed countries, the average payment amount is in the range of USD 1.5-11. USD
Bank transfers are used in settlements between businesses for goods sold, services rendered or work performed, with financial authorities in connection with the payment of taxes, etc. And the amounts of payments here are much higher than in retail trade. Electronic money and plastic cards have the same mechanism from the consumers’ point of view: the monetary value or information is kept on a technical device, and payments are made by means of special terminals with the use of protective codes, ciphers and keys. However, electronic money has at least two significant advantages: lower transaction costs and anonymity. These two circumstances should allow to increase in the future the share of transactions made by electronic money, with a corresponding decrease in the share of plastic card payments.
[The cost of a transaction involving a plastic card is estimated to be between $0.08 and $2.6. In fact, it is extremely unprofitable to incur transaction costs of $0.08 to $2.6, which are variously estimated to be the cost of a transaction involving a plastic card for a small amount of money. At the same time, e-money transaction costs do not usually exceed $0.15. AT THE SAME TIME, E-MONEY TRANSACTION COSTS DO NOT USUALLY EXCEED $0.15. Maintaining anonymity in payment transactions is one of the main factors behind the high popularity of traditional cash.
Forecast of electronic money development in Russia
In forecasting the development of electronic money in Russia, it is necessary to emphasize the following. The lion’s share of payments, according to some estimates – over 90% – in retail trade is made in cash. The level of development of non-cash payment instruments is extremely low. Despite a more than ten-year history of development and use of plastic cards in the country, their share in the total number of non-cash transactions was only 4.5% at the beginning of 2002. Bank transfers are the main non-cash payment instrument – their share in the total number of non-cash transactions was 95.2% at the end of 2001. Electronic money systems have not seen any significant development.
In order to expand the use of e-money in Russia and to regulate e-money transactions, the following measures should be implemented. First of all, it is necessary to provide a clear definition of “e-money” at the legislative level, to determine the list of possible e-money transactions, and the composition of e-money system participants. At the same time, it is proposed to limit the composition of e-money issuers only to credit institutions licensed by the Bank of Russia to conduct banking operations, including e-money. It is necessary to prohibit participation in any capacity in e-money systems by financial organizations registered in an offshore zone.
Second, it is necessary to develop and legislate a procedure for the issue, circulation and redemption of e-money. Electronic money should be issued into circulation by the issuer on the basis of the contracts concluded with the bearer. Pursuant to the contract, the issuer is obliged to redeem the issued electronic money to the bearer at the first request by means of exchange for cash or by transferring non-cash funds to the current (settlement) account of the bearer in the amount and currency of the liabilities presented.
Thirdly, the following requirements are required for the activities of e-money issuers: 1) initial capital and own funds (the initial capital must be at least 5 million euros; the amount of own funds must not be below 20% of liabilities on the issued e-money). 2) economic regulations and reserve requirements (banks issuing e-money must comply with economic regulations and meet reserve requirements set
by the Bank of Russia in accordance with current legislation. At the same time, it is necessary to give the Bank of Russia the right to increase the amount of funds contributed to the mandatory reserves fund by banks issuing electronic money.
Fourth, to increase the transparency of credit institutions – issuers of e-money, including the openness of the ownership structure and financial position. Fifth, requirements for quality of risk management in credit institutions engaged in e-money transactions should be increased. Banks participating in e-money systems should have adequate technical, organizational and procedural safeguards to prevent, contain and detect system risks.
Sixth, develop uniform e-money standards and rules for converting e-money from one type to another. Seventh, in order to increase the guarantee of return to consumers of money to establish reserve requirements at the level of 100% of the amount of e-money issuance. The implementation of the proposed measures, in conjunction with the economic growth of the country, the increase in the welfare of the population, the development of the payment infrastructure will create favorable conditions for the development and use of e-money in Russia. The growth in the use of e-money should lead to a reduction in the share of banknotes and coins in the narrow money supply, as well as a reduction in the use of bank transfers.
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