A Payments Revolution In The Making

Nowhere is the advent of the personal computer more evident than in the world of financial services, where technology is beginning to alter--sometimes quite radically--the way we pay for things. Last October, cyberbanking took a giant leap forward in this country when a Missouri bank became the nation's first bank to offer electronic cash accounts. Another bank in Kentucky became the nation's first "virtual bank," with plans to offer an array of Internet banking services--accepting deposits, issuing ATM cards, selling certificates of deposit, paying bills.

If you own a PC, a modem and the proper software, you can have the bank in your home, and it's open 24 hours a day. In its first two weeks of operation, this bank opened 750 accounts from people in 32 states. Meanwhile, more than 550 banks and credit unions around the globe have established "home pages" on the World Wide Web, providing Internet users with informational services about their account offerings and more. At the same time, state governments are beginning to employ another emerging payments technology--the smart card--requiring food stamp and welfare recipients to access their monthly benefit allotments using such cards. At the upcoming summer Olympics, banks are banding together to demonstrate a similar card. Olympic visitors will be able to purchase the card and use it at any of about 5,000 locations throughout Atlanta--from fast food restaurants and gas stations to souvenir stands and ticket booths in the Olympic village.

Such cards are nothing new in Europe. France alone has more than 20 million of them in use, primarily for mass transit and public telephones. Portugal just introduced an "electronic purse" that can be used to pay for any service anywhere in the country. The electronic purse integrates smart card technology with the country's nationwide network for debit and credit cards. Each card stores up to $250 and can be recharged from the holder's bank account through any of Portugal's 3,500 ATM locations. Small retailers, from newspaper kiosks to coffee bars, have installed portable terminals about the size of a telephone handset to accept payments made with these cards. Public telephones, as well as ticket-issuing and vending machines, are being adapted so that the cards can be used for an almost unlimited range of automated payments, from car washes to public transport to postage stamps. A few hundred miles away, in Great Britain, a new international card is being marketed that can load up to five different currencies at one time from a hand-held telephone unit!

Even traditional forms of payment like the checking account are undergoing transformation. Only 10 years ago, for example, a check could routinely take more than a week to clear. Soon, advances in high-speed electronic communications technology will make it conceivable for check-writing and clearing to occur on the same day. Many check processors have already figured out a way to dramatically reduce their handling of checks. Using imaging technology, they are now providing financial institutions with computer images of checks instead of the real things, eliminating multiple rounds of manual paper processing and huge delivery charges for moving checks from processor to bank to customer.

Clearly, when we talk about the nation's payments system today, we are talking about mushrooming choices. In essence, the payments system encompasses any mechanism that allows parties in an economic exchange to transfer value. These mechanisms range from the simple--you hand over 50 cents in coin at the soda fountain and get a soft drink in return--to the complex--Corporation X transfers $1 billion via computer network to 15 different financial institutions in five different countries . . . almost instantaneously.

At their core, many new types of payment are electronic delivery vehicles for tried and true methods of payment. Some versions of electronic currency are connected with your bank account; others are not. Many new payment methods are initiated on PCs; others involve the use of telephones or interactive TV.

The daily hoopla in the press about new developments in payments technology makes it hard to keep up. No doubt, many of us know little more about our nation's payments system than this:   It works. Indeed, public confidence in the payments system is one of the primary reasons the U.S. economy is strong and resilient. As payment methods evolve in futuristic fashion, their success or failure may well hinge on whether individuals think they will work as well as--or better than--what they are using now.