Chapter 4: Electronic money and the possibility of a cashless society

Working Paper 18.02.2007,

Georgios Papadopoulos1, EIPE.
Electronic money projected to take over from physical cash for most if not all small-value payments
continues to evoke considerable interest both among the public and the various authorities concerned
including central banks
Survey of Electronic Money Developments (2001)
Committee on Payment and Settlement Systems Bank of International Settlements

Abstract:
The falling use of cash and the advent of digital technologies support the possibility of reconfiguration
of monetary transactions without any intermediation of physical monetary tokens. The introduction of
electronic money, especially in the guise card-based technologies but also as pre-charged software
enhanced the optimism for a quick passage to a cashless, even a moneyless society. Nonetheless the
prognoses for the elimination of cash have proved wrong so far and it is rather electronic money that
struggles for survival. This paper explains why the initial enthusiasm about electronic money is running
of steam. After defining what electronic money is and analyzing the data about its penetration in
different countries a series of reasons for its failure are offered; even in the case where e-money is
considered a success, the success story is contested. The small importance of e-money in retail
payments today suggests the possibility of a society with minimal use of cash but without e-money.
This is a more appropriate context for engaging with the projects of Singapores Electronic Legal
Tender and of the Single Euro Payment Area.
1

Correspondence address: Georgios Papadopoulos, EIPE (H 5 10), P.O. Box 1738, 3000 DR, Rotterdam. Or email
g.papadopulos-alumni@lse.ac.uk .

4.1 Introduction
The revolution in information and communication technologies facilitated the expansion of the
electronic payment systems and the organization of new types of payment instruments.
Communications became not only faster, easier and safer but also considerably cheaper. Much more
efficient fund transfers systems emerged and as a result direct debits and credit transfers expanded
considerably. Cards payments have been developing by providing added value services to consumers
that rely on application of novel network technologies. Electronic money, the latest offspring of the
electronic revolution in payment, is introduced for the facilitation of ecommerce and for low value
transactions in general. This is considered of great importance for limiting the use of cash and it has
been suggested that it could lay the foundations for a cashless society.
With increasing competition from all these new payment media the use of cash is confined only to a
fraction of the total value of monetary transactions as the recent editions of the Blue and the Red Book
indicate2. Before the introduction of the Euro (in 2000) cash in circulation amounted only to 1.9% of
the GDP in Luxembourg (the lowest in the union), 2.1% in Finland, 6% in Italy, 6.2% in Germany and
8.9% in Spain3. In the same year cash in circulation as a share of narrow money (M1) was 0.8% in
Luxembourg, 6.5% in Finland, 14.3% in Italy, 21.9% in Germany and 17% in Spain4. These figures
imply that most of the economic value is transferred through other payment media, but cash still
remains dominant in retail. In the Netherlands 70% of all retail payments in 2001 were made in cash,
despite the availability and sophistication of electronic payment instruments available5, in the UK the
same figure was 74%6.
The emergence and the expansion of different payment instruments manifest the trend towards
specialization in different types of transaction. Actually different payment media have been developed,
at least initially, as a response to particular characteristics of specific types of transactions, while
specific transactions often employ a particular type of payment medium, the one that serves better their
special attributes. Transactions are not only defined by their frequency and their value, but also by the
identity of transacting parties, their relation, the information that they posses on each other, their
proximity, the market in the confines of which they transact (if any), and their ability to acquire, use,
process and store different sorts of payment media. Some work is already been done in economics to
provide a theoretical framework in the analysis of the relative attractiveness of different payment media
for different transaction types7.
Electronic money is introduced as a cost effective alternative to cash for small value transactions and as
a convenient medium to pay over the internet. Store value cards equipped with contactless technology
is cheaper than debit and credit cards (cost pro transaction not including the set up costs), and precharged software provides an efficient and safe payment instrument for use in the internet. The
introduction of e-money raised mixed feelings of enthusiasm and concern. Indicative was the reaction
of the deputy Governor of the Bank of England Mervyn King who in 1999 contemplated on the
2

ECB, Blue Book addendum incorporating 2005 figures (2006) and CPSS, Red Book (2003).
CPSS, Red Book, (2003 p. 84). Similar figures are provided for 1999 in the Blue Book p. 27 that is published by the ECB
in 2001. Nonetheless all these figures are just indirect estimates since cash cannot be directly traced.
4
ECB, Blue Book Addendum including 2001 figures (2003, p. 9).
5
Data for 2001, expressing total volume in retail CPSS, Red Book, (2003, p. 298).
6
The Association for Payment Clearing Services (APACS) suggested that cash payments amount to 74% of all
transactions by volume in 2000, down from around 86% in 1984. CPSS, Red Book (2003, p. 403).
7
Whitesell (1992), W.C., Deposit Banking and the Market for Payments, Journal of Money, Credit and Banking, Vol. 21,
pp 483-498.
3

possibility of the disappearance of central banks8. At the same time some economists foretold the
complete replacement of conventional cash by electronic money9 and the possibility of a moneyless
society10. Such reactions may seem exaggerated today, but they give a good impression of the
widespread assumption about the imminent dominance of electronic money in the turn of the
Millennium. Today, only few years later, the picture looks quite different. The level of penetration of
electronic money remains low and in many cases is shrinking. Many electronic money projects have
been abandoned and others have been delayed. Electronic money has lost much of its prominence and
is disappearing from public discourse as the recent publication of the Red Book and the discussion of
SEPA in the EU forums manifest. Finally, the introduction of the first state sponsored electronic legal
tender in Singapore, the first attempt to establish a cashless society by using electronic money is not
progressing according to the initial plans11.
This paper will start by presenting and defining electronic money. Its performance in different
countries will be presented through the recent data provided by the European Central Bank (ECB) and
by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International
Settlements (BIS). The differences among countries will as well as the low penetration rates will be
analysed and explained. The payment system and the importance of all payment instruments as well as
cash will be discussed and the possibility of a payment system that does not rely of e-money but is
efficient will be entertained. In this context the challenges of the cashless society and the advantages
and disadvantages of cash will be proposed. A special mention will be made on the case of
Singapores electronic legal tender project and on the Single Euro Payment Area initiative by the
European Commision.

4.2 Defining Electronic Money

Electronic money (e-money) is defined by the European Central Bank as an electronic store of
monetary value on a technical device that may be widely used for making payments to undertakings
other than the issuer without necessarily involving bank accounts in the transaction, but acting as a
prepaid bearer instrument12. The technical devices upon which electronic money is stored and
through which it operates are either card based (electronic purses, pre-charged cards, chip cards,
cotanctless cards) or software based products. These interfaces give rise to important difference both to
the character of the e-money and to the transactions where electronic money can be used. Software
based electronic money is often operated by non-banking institutions13, while card based e-money is
offered by the banking sector14. Card based systems are usually organized in a national level as
8

Ingham (2005, p. 178)

The world is becoming increasingly addicted to doing business in cyberspace, across the Internet and the World Wide
Web. As electronic commerce (e-commerce) expands, it seems only a matter of time before various innovative forms of
money, based on digital data and issued by private market actors, begin to substitute in one way or another for state
sanctioned banknotes and checking accounts as customary means of payment. The era of electronic money will soon be
upon us. Cohen (2001, p. 198).
10
For example Kurtzman (1993).
11
Van Hove (2003) provides an overview of the project of Singapores Electronic Legal Tender (SELT) project.
12
ECB, Blue Book (2001, p. 735), emphasis added. The definition provided by the BIS is similar: electronic money
continues to be defined as a stored value or prepaid product that allows consumers to make small-value transactions using a
chip or smart card (card-based product or electronic purse) or over computer networks such as the Internet (network-based
or software-based schemes). A record of the funds or value available to the consumer for multipurpose use is stored on an
electronic device in the consumers possession. CPSS (2001, p. 1 2).
13
A vast majority of the participating central banks have indicated that there are no plans to introduce network based
money products. CPSS (2001, p. 2).
14
This may change as single purpose payment cards like Londons Oyster expand their use in other low value payments.
9

extensions of the existing infrastructure of the banking system (ATMs, EFTPOS15, inter-bank networks
etc). A substantial investment is necessary for the establishment of card based electronic money;
terminals both at POS (point of sale) as well as for loading the cards need to be installed. Software
based products require only a fraction of the initial investment and a software platform is sufficient for
their use. They can be used through the internet and so they are not constrained by national boundaries.
Electronic money should be kept separate from other single-purpose prepaid instruments that use
similar technical devices, like phone cards, travel cards or frequent flyer miles, since e-money is (more)
widely acceptable. In principle electronic money can be used for any transaction, given that the parties
involved have the appropriate infrastructure and have agreed to accept this medium of payment, in the
same way as, credit or debit card payments. In practice it is designed for small-value transactions and
its use requires specific infrastructure for the payer and the payee. Since electronic money is not (yet)
legal tender, it is up to the consumers to use it and in the discretion of the merchants to accept it or not,
but where operative e-money is designed for widespread use and is actively promoted by its issuers to
payers and payees. E-money is different from online products that give access to other payment media
through the internet, e.g. e-banking platforms, software for online credit card payments etc and is also
different from electronic fund transfers (credit transfers). A further clarification has to do with the
difference between electronic money, as a circulating medium, and the technical device, as an interface,
on which electronic money resides and through which it can be used; i.e. the card or the software based
technologies. The later are of course not to be confused with e-money and the same goes also for the
networks through which electronic money circulates, be it the banking system or the internet.
Electronic money is not instantiated in the technical devices or networks that facilitate its circulation.
It is rather the electronic pulses if anything that gives to e-money a physical identity16.
A further important distinction is between electronic money and money proper. Money is an
institution, a set of rules that produces the dominant means of accounting economic value and means of
payment in the confines of a market. This institution constitutes specific tokens, like paper money, or
commodity money that facilitate the fulfillment of the aforementioned functions of unit of account and
means of payment. Money proper is realized in these tokens, but these tokens do not exhaust the
identity of money. Electronic money can be token money. This distinction between money proper and
monetary tokens contradicts the intuition behind the commodity theory of money, which identifies
money with the tokens that serve the specific functions of money (primarily means of exchange, but
also unit of account and store of value). Being the dominant theory of money, commodity theory
informs the debate about the identity of electronic money as well as its significance for the economy.
In the early stage of its development electronic money was not only though of as a more convenient
medium of payment that would eventually substitute cash. E-money signaled for some the obsolesce or
at least the radical transformation of the conception of money. Claims like this: Money has been
transmogrified. It is no longer a thing, it is a system. Money is a network that comprises of hundreds
of thousands of computers of every type wired together in places as lofty as the Federal Reserve.17
And this: Money is a phantom from the past, an anachronism. In its place, traveling the world
incessantly without rest and nearly at the speed of light, is an entirely new form of money based not on
metal or paper but on technology, mathematics and science 18 did not only convey a general
euphoria about e-money but also a confusion about its identity and its relation to money proper. The
15

EFTPOS: electronic fund transfer at the point of sale.

It is not necessary for money to be actually instantiated in a physical object. Being an institutional structure it can give
rise to causal powers, powers that are used by individuals and make possible both payment and account keeping in the
market.
17
Kurtzman (1993, p. 1).
18
Henderson (1987, p. 15).
16

advent of e-money raised some issues about the relation between moneyness (the property of being
money) and the material identity of monetary tokens as well as some questions about the character of a
system of cashless payments (barter exchange or electronic circulation of claims and liabilities
enumerated in money).
It is easy to dismiss the claims about the end of money as a fundamental confusion between tokens of
money and the concept or the institution of money. This confusion is produced by the fundamental
precepts of the commodity theory of money. According to this theory money is an important sense a
thing, a tangible commodity whose economic value, or utility, is dependent on this commodity identity.
In the absence of a double coincidence of wants a commodity is used as a medium of exchange because
of it higher saleableness19 (marketability). A different expression of the identification of money with
commodities is the 19th century definition of money as pre-weighted pieces of precious metal and of its
value as the value of this metal. This description may seem dated today, but nonetheless the
conception of money as commodity which has a value or a utility because of its commodity identity
and not due to its social significance is pervasive in neoclassical economics. This attitude suggests that
the disappearance of cash by electronic money may lead to the substitution of money by an electronic
network of direct exchange (electronic barter). Still, if one understands that monetary tokens operate as
money due to social rules and collective intentionality, she will acknowledge that the disappearance of
these tokens does not entail the disappearance of the social structure that underlies it. The dependence
relation follows the opposite course; it is the social rules that constitute the monetary tokens, material
or electronic.
The identity of electronic money is also defined by its issuer. There are three types of potential issuers,
either the official monetary authority (usually the central bank), like in the case of the proposed
electronic legal tender in Singapore (SELT), or commercial banks usually forming a cooperative and
operating under the supervision of the monetary authority, like in most of the projects of card based
electronic money, or just a private firm as it was the case with most of the attempts of software based emoney20. State sanctioned electronic money it is a token money that does not differ from paper money
or commodity money. This type of money can be classified also as high powered money or M0.
Electronic money created by commercial banks and connected with sight accounts is equivalent with
the money created conventionally by banks in their operations of financial intermediation21. It is
directly convertible to cash, risk free and protected by the same body of banking legislation as sight
deposits. This type of e-money should be classified as narrow money (M1). Electronic money issued
by firms that are not banking institutions, i.e. which do not receive deposits, is something completely
different both economically and legally. Privately issued electronic money being not directly
convertible to money is just an asset that can be used for payment, which is neither risk free nor
guaranteed by the banking system. So, it cannot finalize a payment but it is rather an intermediate
claim/ asset in the process of completing a transaction and not a payment instrument22. The emission
of this electronic money is not creation of money, but a sale of issuers liabilities. In the EU a special
attention is given to privately issued electronic money. European regulation requires that issuer of e19

Menger (1892, p. 243).

In some countries only banking (deposit-taking) institutions are allowed to issue electronic money. Such examples are
Singapore, India, and Taiwan. CPSS (2001, p. 4).
21
In economic terms it is clear that the money received by the issuer of an electronic purse is a bank deposit. It is indeed a
claim which the cardholder (or the account holder) has on a third party. Working Group on Electronic Money (1994).
22
Goodhart distinguishes, between media of transaction, i.e. assets that can be used in transactions, and media of payment,
i.e. assets that can finalize transactions, i.e. can fully satisfy claims and dissolve liabilities. Money being risk free, is a
medium of transaction, while assets that do not dissolve the claim of the seller against the payee, until the former receives a
risk free asset. Goodhart (1989, p. 26 27).
20

money should keep reserves equal to the amount of e-money emitted, while the European Central Bank
as well as its pre-cursor, the European Monetary Institute have been very protective of their prerogative
to issue electronic money themselves23. In the US legislation is somehow more liberal in order not to
interfere with the competitiveness of ecommerce24.
The use of electronic money is still limited. In the survey on electronic money published in November
2001 by of the Bank of International Settlements less than thirty countries have reported a running
program of e-money, either card or electronic based25. Half of these are pilot programmes constrained
both in terms of the areas covered and the number of cards issued. The most advanced programmes in
terms of number of cards issued, merchant terminals, volume of transactions and outstanding float, are
Belgiums Proton, the Dutch Chipknip, Austrias Quick, the German GeldKarte, the Swedish Cash
Card, Luxemburgs miniCASH, Octopus issued in Hong Cong and Singapores CashCard. Mondex
(set up by MasterCard) and VisaCash are the only ones who operate internationally and have small
scale operations in many different countries including Canada and the US. In North America card
based electronic money is still confined solely in pilot programmes, even though these date already
from the 1980s (VisaCash and Mondex) 26. Software based electronic money even less developed
than card based products. The Spanish Virtual C@sh+ is the most prominent network based electronic
money27, issued by a banking institution, while PayPal, which is issued by a non-bank institution, is the
dominant product on the internet28.
Card based products employ a contactless technology that is chosen in order to keep the costs per
transaction low in comparison with debit or credit card payments, but also to a level that could compete
with cash. The two most successful projects in Europe in terms of penetration are the Proton in
Belgium and the Chipknip in the Netherlands29. The average total cost in 2002 for cash payments at
POS (point of sale) was 0.30 (NL) and 0.53 (BEL), the equivalent cost for debit cards was 0.489
(NL) and 0.55 (BEL), and for card base electronic money 0.931(NL) and 0.54 (BEL)30. Proton
and Chipknip have reached a satisfactory level of maturity suggest the costs of e-money payment are
representative. What should be noted here is that electronic money is not only more expensive than
23

..., in the long run, it can not be excluded that circumstances might develop which could lead EU central banks to issue
prepaid cards themselves (Working Group on EU Payment Systems, 1994). The ECB will continue to monitor
developments in the field of electronic money and to reassess its effects on monetary policy and the integrity of payment
systems, and may have to define new policy conclusions, including, if necessary, the issuance of electronic money by
the ESCB itself (ECB, 1998, p. 3). Both references due to Van Hove (2003). There are two European Parliament and
Council directives relating with electronic money; 2000/46/EC and 200/28/EC which is amending the 200/12/EC.
24
In the United states the Federal reserve currently has no statutory authority requiring non-depository institutions to report
on the e-money balances issued . CPSS (2001), p. 3.
25
CPSS (2001). The survey was conducted through questionnaires send to national central banks and does not include
electronic money issued by non-banks.
26
The only current US Visa Cash programmes involve several military bases as well as Visa USAs corporate campus and
corporate campuses at several Visa member banks. Although Mondex e-money programmes exist outside the United
States, no e-money projects are currently in operation within the United States. CPSS (2001, p. 99). There are no largescale, fully implemented stored value (also called e-money or electronic purse) arrangements operating in Canada. Only
two major e-money schemes have been running pilot projects over the past year: Visa Cash and Mondex. While the Visa
Cash pilot continues, Mondex stopped issuing value on 31 May 2001. CPSS, Red Book (2003, p. 52).
27
According to the data from CPSS, Survey of Electronic Money Developments (2001).
28
PayPal is owned by eBay Inc. PayPal now has more than 120m accounts with people in over 100 countries and
claims a fraud rate lower than a typical credit card firm. The Economist, February 17th 2007, p. 70.
29
Proton active cards, i.e. cards used in the last six months amount to 20% of the population and Chipknip to 15%. Data for
2004 from Van Hove (2006, p. 5). Luxemburgs miniCash is also a success, but no data on the cost of payment were
available to me.
30
The estimates are for fixed plus variable cost for POS transactions. Data from Brits (2005) table 4.3 and Quaden (2006),
table 3. Reference due to Bolt (2006), p. 3.

cash, but also that debit card payments may provide a better substitute to e-money for small value
transactions.
Software based products are designed mainly for ecommerce and can be used only through the internet,
where conventional cash is not available as an alternative. The aspiration of software based electronic
money was to monopolize or at least dominate ecommerce and its main competitors on the web were
credit and to a lesser extend debit cards. The comparative advantage to card payments was not only the
lower cost but also the higher security and the relative anonymity. Thanks to a double encryption
technology pioneered by DigiCash, the software based electronic money was more secure than credit
and debit cards and in addition anonymous31. Despite its lower cost software based electronic money,
today mainly issued by PayPal, fell short of the initial expectations. Only 5% of all transaction made in
the internet are served by electronic money, representing only 1% of the total value of these
transactions32. It is interesting to note also that as in the case of card based also the software based
electronic money is today confined to small value transactions, and so it can be seen as an equivalent of
cash in the internet.
E-money is a complex project with varied manifestations. Different devices are used by different
issuers and different strategies of marketing the new payment instrument are used in different contexts.
Still, the introduction of electronic money was always underlined by the expectation that it could
substitute for cash, an expectation that was later contradicted by the facts as we will see in the
following section.

4.3 Failures and successes for electronic money

Electronic money is relatively new. As suggested, it has been tried in a few countries in pilots while
only a handful have established a nationwide programme and undergone the substantial investment
necessary to make electronic money a widely acceptable medium of payment at POS using a card
based technology. There e-money exhibits low levels of penetration (see chart/ table 4.1) and its use is
very small compared with the other cashless payment media (see chart/table 4.4). There may be some
reasons for optimism as well as some voices that suggest that electronic money can fare better in the
future. A recent issue of The Economist celebrates in its cover the end of the cash era (February 17th
2007) and according to the magazine electronic money is expected to take soon the place of coins and
bank notes. Proton card in Belgium and Chipknip in the Netherlands have been established and the
necessary infrastructure for widespread use is already in place33. The Octopus card in Hong Cong and
the CashCard in Singapore have safeguarded a strong foothold in specific niches of payment. Oyster
the payment card issued by the transport authority in London shows impressive results only a few years
after each launch. In the US where electronic money is still very small but credit cards go
downmarket to take on the last domain on cash34.
31

More on DigiCash and the double encryption signature technology in Chaum (1996).
Evans (2005, p. ???).
33
Van Hove (2006, p. 6) for Belgium and Red Book (2003, p. 301) for the Netherlands.
34
The Economist, November 18th 2006, p. 77. There are plans by VISA, MasterCard and Discover to set up prepaid card
reload networks through Blackhawk, Incomm and Green Dot. The Nilson Report, January 2007, p. 10.
32

Chart 4.1: Transactions per year for E-money

Millions of Transactions

450
400
350
300
250

Euro Area

200

EU

150
100
50
0
1998 1999 2000 2001 2002 2003 2004 2005

Table 4.1: E-money purchases per year in the EU and the Euro-area (millions of Transactions)35
1998 1999 2000 2001
2002
2003
2004
2005
E-money EU
77
110
125 144.19 294.35
305.64 340.78
399.74
E-money Euro
71
98
114 134.89 286.05
298,34 322.83
350.78
Electronic money in European Union shows signs of growth despite (or maybe exactly because) the
relatively low volumes of transactions (see comparative chart/ table 4.1). Especially in the year 2002
the increase in the volume of transaction was substantial. Nonetheless, a closer look in the data does
not allow much space for optimism. Already from its introduction e-money depended on the support of
the state. The volumes of transaction exhibited are mainly due to mandated use imposed by
government decisions to accept only electronic money for some payments (parking meters in Holland
is an example). In other contexts, like public transport, public phones or road pricing, electronic money
was included as one of the possibilities of payment, in an effort to boost transaction volumes and carduser base36. The rationale behind the governmental support is manifold. The invisible, but
nonetheless substantial social cost of using cash (estimated at least 50 billion per year in the
Eurosystem37) is the main reason for supporting the introduction of electronic money in the first place.
E-money payments are considered to be most efficient for small value transactions, but for e-money to
compete on a level ground with cash the first mover advantages of the later need to be offset. Data from
various European countries (Chart/ Table 4.2) indicate that such support was not enough for electronic
money to establish itself as a real alternative to cash in none of the markets where it was tried.
35

Data for the years 1998 to 2001 from the Blue Book addendum incorporating 2002 figures (2004, p. 17 & 18) and for the
years 2001 to 2005 from the Blue Book addendum incorporating 2005 figures (2006, p. 30 & 31).
36
This is especially the case of Chipknip and Chipper in the Netherlands. Proton and miniCASH have enjoyed similar
encouragement from their respective governments and so did Moneo in France.
37
The Economist, 17th February 2007, p. 11.

Chart 4.2: E-money purchase transactions

Millions of transactions

160
140

Belgium
Germany
Netherlands
Luxemburg
Austria
Denmark
France
Italy

120
100
80
60
40
20
0
1998

1999

2000

2001

2002

2003

2004

2005

Table 4.2: E-money purchases in million of transactions38

1998 1999
2000
2001
2002
2003
2004
2005
Belgium (Proton)
28
45
51
60.46 120.83
107.06
106.9 102.02
Germany (Geldkarte)
14
21
27
29.35
35.85
37.37
38.31
37.78
Netherlands (Chipknip)
17
22
25
30.90
87.4
109.16 127.27 146.93
Luxemburg (miniCASH)
0
0
1
1.25
2.82
3,02
3.31
3.17
Austria (Quick)
1
2
3
5.08
17.20
17.66
19.35
22.08
Denmark (Danmnt)
7
8
8
7.80
7.60
7.10
6.46
3.68
France (Moneo)
0
0
0
2.80
18.40
18.1
16.00
17.03
Italy (Minipay)
0
0
0
0
1.03
2.74
9.33
20.38
There is an impressive performance in the year 2002, when e-money doubled its transactions volume.
The rapid growth was mainly caused by the introduction of the Euro39. In this transitional period,
consumers unfamiliar with the newly introduced Euro avoided using cash and opted instead for the
available cashless alternatives, including electronic money. Nonetheless, as the public became
increasingly comfortable with the new currency it stopped favoring electronic money over cash. A
look in the individual countries (table/ chart 4.2) suggests that the expansion after 2002 was retarded
and sometimes even reversed. The already established systems of electronic money either contracted
or showed stable volumes of transactions (with the exception of the Netherlands). Proton, probably
the most successful of al European project has been contracting since the transition to the Euro.
Austria, France, Germany have a stable performance, but without showing satisfactory volumes or any
prospects for quick improvement. In addition some of the oldest electronic card schemes are heading to
a showdown (Sweden, Denmark, Finland) 40. In two countries electronic money has shown consistent
38

Data for the years 1998 to 2001 from the Blue Book addendum incorporating 2002 figures (2004, p. 18) and for the years
2001 to 2005 from the Blue Book addendum incorporating 2005 figures (2006, p. 27).
39
This Euro effect was pointed out in Van Hove (2006, p. 3).
40
The Belgian Proton E-Purse is generally seen as the most successful European scheme, but in a 2004 interview
Banksys CEO Dirk Syx nevertheless called it a commercial disappointment as transaction volume remains significantly
below targets. Worse still, in the meantime several European E-Purses have been discontinued because they have failed to
catch on. The most recent victims are all Scandinavian. The Swedish banks closed down their CASH scheme in the fall of

growth; Italy and the Netherlands. In the case of Italy the project is fairly new and growth even though
consistent is not spectacular. The pattern of penetration is similar to other European schemes, where
the moderate growth of the first years after the introduction was followed by stagnation and even
decline. In the Netherlands the high and growing volumes of transaction can be explained by the large
base of e-money cards in circulation that amount to 65% (2004)41 of the population. Still if one looks
at the number of transactions per card per month, Holland fares much worse than most of the other
schemes around. It can be argued that the performance of Chipknip is even more discouraging if one
considers the capacity of the Dutch electronic money and the costs of setting it up.
The Oyster Card developed for paying for public transport in London is a supposed success story. The
issuer is not a banking institution but rather the Transport for London (TfL) authority and strictly
speaking Oyster is not a device for electronic money but rather a single purpose payment card. Oyster
is more technologically up-to-date than the more traditional card based e-money. It is equipped with
near field communication (NFC) technology that makes payment quicker, the cards are protected when
registered and there is a possibility of automatic top up that saves the user from the hassle of recharging
her Oyster card. These are important improvements to the older standard model of card based lectronic
money that dominates the European market. In addition to the ease of use Oyster fares are substantially
reduced (or passenger who do not use Oyster are penalized with higher fares)42. With three out of four
journeys paid with it only three years after its introduction43 Oyster is a success and this success may
well expand to other low value payments. Already some train companies have agreed to accept it for
payments and there are plans to make Oyster useable for kiosks and for other small value payments44.
The enthusiasm about Oyster is that it may provide a formula for solving the start-up problem that
haunted electronic money so far. Still, despite its impressive penetration as a single payment card
Oyster has to prove that it can expand in other domains. Its popularity for payment of transport fares
does not guarantee its success as a vehicle for electronic money. As we will see in the case of the
Octopus and CashCard payment a head start by supported or even mandated use in one domain does
not guarantee penetration in other retail payments niches.
Outside Europe, card based electronic money looks more like Oyster rather than Proton or Chipknip.
The Octopus Card that is used in Hong Cong was established as a payment instrument for public
transports and then its use expanded to other low value transactions. Octopus has proved to be quite
successful device for electronic money with penetration rates that reached 100% in the first three years
of issue. As a result the issuing company, Octopus Cards Limited (today Creative Star Limited)
decided to move to retail payments and after receiving the permission from the monetary authority to
receive also deposits it issued a card based electronic money: Octopus Retail. Already from the
second month after it was launched as a card for retail payments, the Octopus card was owned by 96%
of residents and used by 66%45. This head start did not materialize in higher use or quicker
development for Octopus Retail than other e-money projects elsewhere. Such a development provides
a note of caution also for the expansion of Oyster; it maybe easy to expand as single payment medium
in a protected environment, where the issuer is also creating and controlling the demand of its product
2004. In Denmark, the pioneering Danmnt card which was launched as early as March 1993 will disappear at the end
of this year. In Finland, beginning in 2006 no new Avant cards will be issued and the system will be closed down in 2009.
Van Hove (2006, p. 1).
41
Van Hove (2006, p. 4).
42
More on Oyster in the website of TfL. http://www.tfl.gov.uk/tfl/fares-tickets/oyster/general.asp
43
The Economist, February 17th 2007, p. 68.
44
http://www.tfl.gov.uk/tfl/press-centre/press-releases/press-releases-content.asp?prID=1051
45
Van Hove (2006, p. 15).

10

and is a completely different challenge to compete in unequal terms against the established used of cash
in retail.
Singapores CashCard followed a parallel course and faced similar problems. It was initially mandated
for road pricing and then expanded to other low value transactions. The level initial success was
similar, but the CashCard faced similar expanding its use in retail. Despite these problems the
Singaporean authorities contemplated on the establishment of an electronic legal tender that will use
the same card based interface and operating scheme. Singapores Electronic Legal Tender (SELT) was
a plan to substitute cash completely and in all transactions. If SELT gets established, Singapore will be
the first economy where electronic money would be the official monetary token. This project was
made public in a Conference of the OECD Forum for the Future held in Luxemburg between the 11th
and the 13th of July 2001 addressing the issue of the future of money. There Low Siang Kok, a director
of the Board of the Commissioners of Currency in Singapore, introduced the concept of SELT and
describe the general principles on its implementation in the country46. Obviously the establishment of a
cashless society is a very challenging project and SELT became naturally part of the agenda of the
discussion on the electronic money. SELT did not develop according to the initial planning, even today
its not clear if and when will be implemented. Singapores cashless society should be included in the
list of disappointments that card base electronic money has suffered throughout the world.

Chart 4.3: Frequency of use, all cards (transactions per card, per month)47

As the Chart 4.3 suggests card based electronic money, wherever tried, did not provide a payment
medium nearly as popular as money. The fact that with the exception of the CashCard none did
succeeded in achieving even one transaction per issued card per month is a clear indication that card
based electronic money did not meat the initial expectations.

46
47

Low (2002).
Van Hove (2006, p. 8).

11

4.4 Explaining the low penetration of electronic money

The data just presented seem to contradict the enthusiasm for electronic money, at least the tried
version, organized by the banking system, supported by the state, using card based (offline) devices and
tried for the most part in Europe. It may be too early to claim that electronic money has failed, but
some of the most ambitious predictions about the imminent end of the cash era48 seem to be
contradicted by the available evidence. There is a series of reasons that electronic money, as developed
so far, exhibits such low levels of penetration. E-money remained until now more expensive and often
less user friendly than cash. In addition it had to compete in an environment where cash has
considerable advantages as a first mover, and where the double sided character of the payment system
poses considerable start up problems.
The establishment of electronic money was supported as a way to save on the social costs of issuing
and using cash. The contactless technology used in the electronic purses was chosen in order to
provide payment services at a fraction of the cost of credit and debit cards and in levels comparable to
the use of cash. Still, even in the most developed systems of electronic money, Belgium and the
Netherlands49, e-money payments cannot compete in terms of lower costs. The average fixed cost, i.e.
the costs of setting and operating the system of e-money payments, and the average total cost pro
transaction for e-money fares worse than cash and surprisingly also worse than debit cards50. The hope
that the development of a widespread network of terminals and the large base of e-money users will
lead to economies of scale that would lower the average fixed costs did not materialize. Maybe this
could change if the volumes of transaction and the consumer basis increase further, but if the current
trends persist (table 4.2) the necessary volumes may never be reached in most e-money projects. A
common European system may supply the necessary volumes if a common electronic money system is
to be organized. The establishment of a Single Euro Payment Area that is encouraged by the European
Commission and the ECB aims at creating an integrated retail payment market. In this wider context
economies of scale may eschew (this is one of the stated reasons for the support of SEPA), but
nonetheless a common framework for electronic money is not directly mentioned as an area of action51.
It is anyone guess why this is so, but when some of the e-money projects in Europe are shutting down
while the rest do not have to show a platform for success, it seems reasonable that the banking system
is reluctant to engage with the reorganization of the electronic money in the Euro area.
The mention to the high social cost of cash is all too general. The costs and the benefits for cash as
well as for electronic money are not distributed evenly. The cost of issuing cash is paid by the state
and financed by taxation. Most of the infrastructure for e-money is paid by the issuer, which in turn is
charging the user for this payment instrument, even though the distribution of the costs between the
consumers and the merchants is uneven. Consumers may pay a fee for the card (either directly or as a
part of their checking account), while merchants have to pay a fee to the issuing bank(s) either pro
transaction or as a percentage of the total value of the transactions and in addition carry the cost for the
48

The end of the cash era was the cover story of the Economist, February 17th 2007. cash, after millennia as one of
mankinds most versatile and enduring technologies, looks set over the next 15 year or so to finally melt away into an
electronic system of ones and zeros. If an era is represented by its money, the information age is at hand. (p. 11).
49
In the beginning of 2004 the Netherlands the number of e-money active cards (either Chipknip or Chipper) amount to
65% of the population, of which around 13% were used for a transaction the last six months. In Belgium Proton cards are
even more popular with the number of active cards (used at least once in the last six months) in early 2004 amounting to
25% of the population. Van Hove (2006, p 4 & 5)
50
The estimates are for fixed plus variable cost for POS transactions. Data from Brits (2005) table 4.3 and Quaden (2006),
table 3. Reference due to Bolt (2006, p. 3).
51
ECB (2006), SEPA.

12

infrastructure necessary for accepting electronic money as well as. Cash is a public good, while
electronic money is a service usually connected to a bank account and the bank can and does exclude
people from that service. Cash and e-money are both pre-paid media, since a share of ones income is
exchanged for these payment instruments which remain idle until cash or e-money are used in
purchase. Consumers keeping funds in cash or in a pre-charged card bare the same opportunity cost.
The issuing institutions can benefit by floating on the balance held in e-money. In the case of cash
this float is the seigniorage that goes to the state.
Supposedly e-money is an attractive instrument for of low value payments and economizes on the
transaction costs involved in the use of cash. Merchants have more to earn than consumers, in terms of
acquiring, processing and storing cash as well as in smaller time required for making a payment. This
can translated to fewer employees and lower operating costs. Similar are the benefits of banks that can
reduce their cash operations as a result in the reduction of the use of cash by the clientele. More
importantly banks benefit from the float on unused value in electronic purses, which in itself is a an
important incentive in engaging in e-money projetcs. Consumers are also supposed to be on the
winning side: less time necessary for the paying and no losses due to mistakes in the transactions or lost
small change. Still, electronic money proved to be more expensive than cash (in terms of total average
cost of transactions at POS) and in some respects less convenient, at least not for consumers.
Electronic purses need to be refilled in a terminal, usually an ATM, where also cash could be
obtained52. Secondly, card based e-money is not protected by a PIN (Personal Identification Number)
and when lost or stolen could not be retrieved, exactly like cash. In addition and unlike cash is hard to
keep track with the remaining balance on the card. Often the consumers are reluctant to use electronic
money being unsure if the value remaining on the card is sufficient to cover the purchase. A further
drawback of this type of electronic money is that there is no possibility of transfer among end users, an
important feature if cash is to be completely replaced by electronic money53. These problems can
explain the reluctance of the consumers to use e-money that is manifested by the available data (chart/
table 4.3) and indicate that the development of electronic money may not have been guided by
consumer demand.
Still, the handicaps of the first generation of electronic money may be treated by using new hybrid
technologies (both off and online). The cost of telecommunication has been greatly reduced and the
use of contactless cards does not make much sense anymore. Online payments devices are more
efficient without being more expensive than offline electronic money. Near field communication
(NFC) cards aspire to make payments easier, faster and maybe cheaper. Mobile phones may resolve
the issues of recharging and keeping track of the balance of electronic money and may even allow
transfers among end users. New platforms for e-money like Oyster in London or Edy in Tokyo
combine all these features and manage to offer a more convenient interface for payments. These
developments signal that convenience is the main aim of the new generation of e-money devices, while
cost considerations are fading into the background54. The new generation of e-money devices is
marketed now as better and more convenient rather than as more cost effective than cash. Still the
challenge remains to provide a payment instrument that is at least as convenient as cash at a cost that
makes sense for small value transactions.
Cash has considerable first mover advantages to other payment media, advantages that make difficult
52

As Richard Rolfe, editor of European Card Review, puts it: [], you have to go to an ATM or reload station to put
value on them. Whats the big deal with that? You might as well draw the cash. Van Hove (2006, p. 19).
53
In the Survey of Electronic money developments conducted by the CPSS, none of the systems in operation could provide
for transfers among end users.
54
A cash call, The Economist, February 17th 2007.

13

to convince the users to switch to a different instrument. There are migration costs from one system of
payments to the other, costs that include investment in new infrastructure as well as time and effort of
familiarizing with the new system. These may become a deterrent to change and may even lead to a
lock in the status quo. As transaction costs rise with the increase in the number of payment media emoney needs to find a niche where its special attributes serve transactions best and where it can
dominate the market. Network effects suggest that users will tend to opt for the payment instrument
that most others use, creating a further entry barrier. Even worse payment is a two sided system; both
consumers and merchants should be convinced to adopt a new technology like electronic money for
making and receiving payments. This creates a substantial start-up problem; consumers would not opt
for electronic money if they can not use it for purchases and merchants will not undergo the investment
necessary to accept payments in e-money unless a sufficient percentage of their clientele already uses
this payment instrument. The low penetration of electronic money can be partly explained as a result
of the inability to resolve this start up problem. The two strategies that were tried to safeguard a
consumer basis, namely massive roll out of (unsolicited) electronic purses by commercial banks to their
costumers and government mandate (or near mandate) to use these cards for some payments did not
lead to satisfactory use of electronic money. On the other side of the market, merchants were often
reluctant to undergo the investment necessary for accepting e-money and the organization of merchant
base was made with mixed results55.
Electronic money projects are in trouble. The main reasons for the low penetration of e-money are its
failure to compete with cash either in terms of convenience or in terms of costs, a failure that was made
graver by the double sided structure of the payment market and the established position of cash. In the
aftermath of the electronic money experiment it seems that the expectations about its impact in the
monetary system were greatly inflated. E-money may have looked like a good idea few years ago but
today cash proved more resilient than initially thought. Still the monetary system is in process of
transformation under the influence of new technologies. It is conceivable that the road to a more
efficient payment system and even to a cashless society does not necessary pass through the
establishment of electronic money.

4.5 A Cashless society without electronic money?

Much of the discussion on the possibility of the cashless society revolves around electronic money. A
look in the frequency of use of the various cashless payment media suggests that the importance of
electronic money is exaggerated. In 2003 electronic money amounted to only 0.69% of all the
transactions in the Euro area, while for the EU the percentage was even lower 0.53%56. At the same
time the use of cash is falling is steadily. In the EU it is debit and to lesser extend credit cards that
substitute cash and not electronic money. In the US credit cards are constantly increasing their
transaction volume in the expense of cash and cheques57. The insistence on the importance of
electronic money is not due to its performance so far but because of its ability to compete against cash
in low level transactions where other payment instruments are supposedly too expensive to make sense.
55

By 2001 the number of merchant terminals was 45,860 in Austria (launched 1995) 70,000 in Belgium (launched 1995),
1,954 in Denmark (launched 1993), 70,000 in Germany (launched 1996), 16,000 in Hong Cong for Octopus (launched
1997), 163,000 in the Netherlands (launched in 1996), 16,270 in Singapore (launched 1996). CPSS (2001, Table B, p 100
102).
56
ECB, Blue Book addendum incorporating 2005 data (2006, p. 31). Data are for the volume rather than the value of
transactions. In terms of value the use of e-money is obviously much smaller since it is used for small value transactions.
57
Credit cards are the most frequently used electronic payment instrument in the United States. A 1998 survey of
consumers indicated that 68% of US households have at least one general purpose credit card, a 21% increase since 1989.
CPSS, Red Book, (2003 p. 440).

14

As it is already shown e-money has failed to compete with cash and its use remains marginal. Still,
debit cards have acquire substantial volumes and in some instances they are as economical as cash and
more convenient than electronic money. A society with little or no cash but without electronic money
can be conceived.
Money as a percentage of GDP and as share of M1 (narrow money) is comparatively small, 6.10 % and
14.01% respectively for EU in the year 200558. This has been only the case recently; for example in
Belgium the share of cash in M1 was 43.7% in 1980 only to fall to 22.95% at the end of 2000 when it
joined the Eurosystem (the figure for 2005 must be even lower than the EU average 14.01% if one
takes in account the development of cashless payment system in the country). Still cash remains
dominant in retail (70% of all retail transactions in EU countries for 2000 is rough estimate)59, even
though most of the high and medium value transactions are made today without the intermediation of
cash. Business to business payments and large purchases are made through credit transfers and
sometimes through cheques. Recurring payments like salaries and rents are being paid through direct
debits. Credit and debit card payments exhibit increasing penetration in retail, especially in the
transactions of higher value.
There are reasons that can explain the persistence of cash in retail in addition to its first mover
advantages. Cash payments are direct, cheap and anonymous. In addition cash is the most egalitarian
medium of payment and everybody despite its position in the society can have access to it. A payment
using money is direct in comparison to the other payment instruments where additional infrastructure
and one or more financial intermediaries are necessary to mediate between the payer and payee. The
directness of cash payment has considerable cost advantages, but not only. Since the services of
financial intermediaries are required for cashless payments, these intermediaries may refuse their
services to some users if they think there is not enough room for profit. On the contrary money (the
institution of money that is and not the tokens) is a public good and nobody is excluded from using it.
The term cash ghetto refers to people that have not access to the banking system and are able to use
only cash. They have to resort to third parties in order to process simple transactions, like cashing a
check or making a funds transfer. In addition they have to pay higher prices. This is not an optimal
situation, but in a society without cash, these people will be even worse off. Now they only have to
resort to intermediaries for some purposes. In case cash is abolished, it is conceivable that they may
not have any direct access to electronic money and they will have to resort to a third party for any
monetary transaction. The numbers of people without access to the banking system are not as small as
with 80 million in the US and one quarter of the residents (including unregistered immigrants) in the
UK60. Cash is anonymous. This is a safeguard for the privacy of their users, a privacy that can be a
benefit but also a hazard to the society. This anonymity is used both by criminals, but also by illegal
immigrants and tax payers. A society where all transactions are recorded will be a society with less
crime but also less freedom. Abolishing cash altogether may not result to a more efficient system, but
it will possibly increase social exclusion and will constrain further the private sphere.
58

Blue Book Statistical Blue Book addendum incorporating 2005 data, (2006, p. 18).
CPSS, Red Book (2003), data from Germany, Netherlands and the UK.
60
Data from the Economist and the Guardian.
59

15

Millions of Transactions

Chart 4.4: Number of transactions per type of

payment instrument in the EU
25,000
20,000

Cheques EU
Credit Trabsfers EU

15,000

Direct Debit EU
10,000

Card Payments EU
E-money EU

5,000

19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05

Cheques
Credit
Transfers
Direct
Debits
Card
Payments

Table 4.4: Number of transactions per type of payment instrument in the EU61
1998
1999
2000
2001
2002
2003
2004
2005
9,797
9,285
8,953
8,482.65
8,029.46
7,739.35
7,463.89
7,077.61
13,812 14,284 14,699 15,278.51 15,392.43 16,502.64
n.a.
n.a.
10,073

10,953

12,034

12,354.99

12,576.00

14,423.83

9,546

11,161

12,971

14,146.34

17,022.43

18,615.29

77

110

125

144.19

294.35

305.64

n.a.

n.a.

21,139.45 23,127.0162

(excl. e-money)

E-money

340.78

399.74

In chart 4.4 card payments are showing a constant trajectory of growth. Part of the increase can be
explained as a substitution of cheques and part should be attributed to the replacement of cash. This
trend is not only European: card payments are increasing both in volume and in value also in most parts
of the world. As communication costs fall and as the volumes of card payments increase, the total
average cost at POS of debit card payments is falling to levels that are comparable with that of cash and
e-money. The average total cost in 2002 for cash payments were 0.30 (NL) and 0.53 (BEL), for
debit cards 0.489 (NL) and 0.55 (BEL)63. The endorsement by consumers and merchants suggests
that debit cards rather than e-money card payments may provide an alternative to the use of cash.
Debit cards have already achieved satisfactory levels of use. In addition debit cards have all the
positive characteristics of e-money but they do not suffer from the same inconveniences. There is no
need to recharge them, they are secured by PIN numbers and there is no real need to keep track of the
61

Data for the years 1998 to 2001 from the Blue Book addendum incorporating 2002 figures (2004, p. 17 & 18) and for the
years 2001 to 2005 from the ECB, Blue Book addendum incorporating 2005 figures (2006, p. 26 & 27).
62
13,385.98 million transactions are made with cards with a debit function and 2,967.85 million with cards having a debit
function. Blue Book addendum incorporating 2005 data (2006. p. 28 & 29).
63
Data from Brits (2005) table 4.3 and Quaden (2006), table 3. Reference due to Bolt (2006).

16

balance, which in any case can be easily accessed in the ATM terminals and through e-banking. In
addition the infrastructure is already in place, while both the consumers and the merchants are
relatively familiar with their use. Still debit cards are in some respects inferior to cash. Debit cards are
connected with bank accounts and this may exclude some parts of the population from using them.
There is still no possibility of (direct) transfer among end users, while transactions are not anonymous.
Debit cards can only be compared favorably to electronic money. In the face of falling communication
costs contactless technologies like the ones employed by card based electronic money do not make
sense anymore. They are not cheaper and they have limited functionality compared with online
technologies used by debit cards.
Two important conclusions should be drawn from this section. Electronic money is not the only
instrument that can compete with cash in small value transactions. In the face of decreasing
communication costs, also debit cards have comparable costs with e-money, while they enjoy higher
penetration rates and features as more convenient and safe payment mediums. Furthermore, cash is not
just beset with disadvantages; it is anonymous, does not exclude anyone from using it and still remains
relatively inexpensive.

4.5 Different approaches to improving the payment system; SEPA or SELT

The recent expansion of new payment media as well as the introduction of electronic money created
new possibilities for the reconfiguration of the structure of the monetary system. In most countries an
ad hoc approach is chosen and the different payment media are developed independently. Financial
intermediaries, for the most part commercial banks, are responsible for their operation, under the
supervision of the central bank and according to specific regulation. The government can also
intervene by the action of the legislative and the executive branch. The operation of new payment
instruments presupposes some type of legislation. In addition state institutions can be either
encouraging or hindering of the operation of new payment technologies. Accepting a specific type of
payment, say credit cards for taxes, or even mandating its use for a specific payment (parking meters)
provides important support by increasing transaction volumes and encouraging consumer participation.
There are two examples where the monetary authorities assume an active role in the payment system.
In Singapore the Board of Commissioners of Currency (BCCS) has expressed its intention to replace
cash with electronic pulses by establishing an electronic legal tender. In the Euro area, the
introduction of the common currency has set the basis for an integrated retail payments market. The
European Commission and the ECB have taken initiatives to establish a Single Euro Payments Area
(SEPA). These two examples can be illuminating on the role of e-money in a wider framework. In
Singapore the reconfiguration of the monetary system around electronic money provides insights on the
possibility of a cashless society. SEPA is an example of restructuring the payments systems by
adopting the most efficient practices in the Union, an area where electronic money has been already
tried for more than a decade.
Singapore may become the first cashless society, and by all means it is the only country so far where
the authorities were explicit about their intention of supplementing currency with an electronic legal
tender64. In numerous occasions the BCCS has expressed its commitment to this goal, but an address
64

In an story run by the local press already from 1999, the authorities were contemplating the complete abolition of cash by
an electronic legal tender. Already in the website of the BCCS and in the annual report of 2000 in page 3, there was
explicitly stated in the section our Vision that the board aimed: To be the premier currency issuing authority that provides a
world-class currency service, and to establish an electronic legal tender system by 2008, Van Hove (2003, p. 3),

17

by Siang Kok Low one of the directors of BCCS in a conference held by the OECD in Luxemburg with
the general theme The Future of Money65 is the most comprehensive and official statement of the
project of Singapore Electronic Legal Tender66. This address will be used as the main source of
information about SELT. SELT would be electronic money emitted by the government in an
analogous fashion as the issue of conventional cash. SELT would be generated in the form of
electronic pulses and issued as Singapore dollars67. SELT will use the established card based devices
that are employed by CashCard, the existing platform for e-money in the country. The use of other
devices like PDAs (Personal Digital Assistant), mobile phones, cars, that can operate like electronic
purses is also considered. For the circulation of the new medium the established infrastructure for the
electronic fund transfers (NETS) that supports the CashCard will be used augmented in order to
facilitate the circulation of SELT.

Figure 4.5: SELT Concept68

The main argument expressed for the introduction of SELT is efficiency. BCCSs quest for an
alternative form of legal tender to physical currency notes is driven by the high rising costs of handling
notes and coins. BCCS envisages that an electronic legal tender system would reduce the cost of
handling physical cash, improve the efficiency of business transactions and boost the cashless business
environment for Singapore.69 The cost of processing, handling and issuing coins (1 billion Singapore
dollars according to estimates of the Asian Bankers Journal for the year 200670) would be eliminated
by the introduction of a cashless system of payments, which will require only a fraction of these
recourses for its operation. The benefits will also be felt by banks and retailers, who will also be
relieved from the cash processing costs, while the consumers will benefit from faster, easier, safer and
possibly cheaper payment alternatives71. Estimates for the set up costs for SELT as well as for the
average cost of payment are lacking. The costs involved with the operation of the CashCard in
emphasis in the original. Nonetheless in a parliamentary discussion (22.02.2001) the Deputy Prime Minister of Singapore
did not provided a specific timeframe for the legislation necessary for electronic legal tender.
http://www.mas.gov.sg/masmcm/bin/pt1Reply_to_PQ_on_legislation_to_facilitate_electronic_payments__22_Feb_2001.htm
65

OECD (2002).
Low (2002).
67
Low (2002, p. 150).
68
Low (2002, p. 151).
69
Low (2002, p. 148).
70
Low (2002, p. 148).
71
Low (2002, p. 148 149).
66

18

Singapore are also not known. It is anybodys guess if the new system will be an improvement form in
terms of costs. Maybe the development of country wide system will give rise to economies of scale
that will make SELT cheaper that cash, but as we have seen, it is not self evident that cash payments
are more expensive or that electronic money is the only alternative.
A further argument by BCCS is that SELT is preferable to a system of electronic money sponsored by
commercial banks for reasons of stability. The possibility of electronically organized system of free
banking is to be avoided due to the instability of the arrangements, an instability that is supposedly
proved both historically and theoretically. Still, government intervention is not without its own
problems. The introduction of a sub-optimal system is possible due to the government monopoly over
the system and the lack of an outside check from the forces of the market. An inefficient configuration
of the cashless economy not only would be damaging to the market, but it will crowd-out any private
initiatives that can contribute positively. Cashless payment technologies are available in Singapore
since 1996, and somebody could argue like Van Hove (2003) that the appropriate configuration for
cashless payments is already tested (the CashCard) and in that sense the governmental intervention,
rather than a premature intervention that will hamper innovation, will be just an adoption of the
existing standards in the area, that will also give electronic money a momentum. Government
intervention can also be argued for as a necessary to offset the first mover advantage of cash and to
resolve the start up problem that beset the payment market. Still, this may have been accurate if
CashCard was successful. In the face of the failure of the e-money in retail, the intervention of the
government is not an adoption of a mature technology.
The main challenge for the Singaporean authorities concerning SELT is that of acceptability. The
popularity of the new form of money will rely not only on its supposed comparative advantages to
conventional cash, but also in the ability of the users of all walks of life to be familiar and
comfortable with its use72. SELT was contemplated in 2001, at the time where the CashCard was
successful as a payment medium for road pricing but not yet tested in retail. The initial success
through mandated use and with a captive consumer base may have misguided the monetary
authorities into believing that SELT will be easy to implement. The optimism of the BCCS about the
advent of electronic legal tender is refuted today. CashCard is not anymore such a success story. The
popularity of card based electronic money is falling worldwide. As a result the initial plans for the full
establishment of the system by 2008, will not materialize. The Board itself has moderated the
expectations by suggesting that a system where both cash and SELT coexist may be operational by
201073. The ambivalence of the authorities, the unclarities and the delays of the SELT project should
be seen under the light of the failure of the CashCard. In the face of the low penetration of electronic
money as well as because of the resistance of the public in the mandated abolishment of cash the
government did not feel confident enough to legislate the SELT as the single legal tender in the
country. It is uncertain if Singapore switches to an electronic legal tender, but the deficiencies of
electronic money as well as the concerns of the public must be addressed beforehand.
SEPA is different than SELT in many respects. It is a more comprehensive attempt that addresses all
retail payment structures, both electronic and cash based, and engages business, merchants and
72

[The] system must reach every level and every strata of society. Otherwise, the electronic money will not be legal
tender. Low quoted in Van Hove (2003, p. 15). BCCS has considered the impact of SELT on households, small
business, hawkers, professional, students, the visually impaired, and people from other walks of life, Low (2002, p. 152),
in the section of Social and Cultural Implications.
73
Dave Birch of Channelnewsasia.com reports on a project of BCCS together with industry players like the Land Transport
Authority, NETS and EZ Link to produce a national e-purse.
http://digitaldebateblogs.typepad.com/digital_money/2006/07/cashless_countr.html

19

consumers. The decision making process is much more complex since it involves the European
Commission, central banks and the governments of the Eurosystem, the EU as well as other European
countries that have stakes in the Euro payment area. Self regulation by the commercial banks is
encouraged and the European Payment Council (EPC) is organized by the interested parties in the
private sector as a forum of design and implementation of the SEPA. Most importantly SEPA is
negotiated in a period where electronic money is in crisis and by countries that have a substantial
experience. As a result electronic money in SEPA does not enjoy the prominence of SELT. Actually
in the issue of the ECB on SEPA, e-money is not directly mentioned, even though electronic money
features in the official statistics of the European Central Bank as one of the five main categories of
cashless payments instruments. Cash on the other hand is explicitly addressed: The smooth operation
of payment systems requires a mix of instruments including cash74.
The backbone of the Euro payment system is TARGET, a real time gross settlement system for large
value payments among banks that was established on the 1st of January 1999. SEPA aims at
integrating payment systems also for small and medium value transactions by the implementation of
common standards in the Euro area. There are four payment instruments directly mentioned: credit
transfers, direct debits, card payments (which exclude e-money) and cash75. In the area card payments
SEPA has set 2008 as a deadline for the issuers to make uniform their products features and prices in
the Euro area. This integration process has encouraged competition. Visa has introduced a SEPA
compliant debit card payment system V PAY and MasterCard has also organized a Euro-wide debit
card payment structure through Maestro. The implementation of SEPA standards has challenged
national monopolies in the area of debit card payments and in many cases in the integration of the
national systems of debit card payments into either MasterCard or VISA systems. Maestro is already
used in some European countries (Austria, Belgium, Germany, and the Netherlands) and subsequently
its operation will expand to the whole of the Euro area as will VISAs V PAY. As a result of SEPA
also electronic money will require an integrated platform. It is unclear so far how this will materialize,
but it is conceivable that Maestro and V PAY cards will be equipped with a chip and would operate
both as debit as store value cards. The expansion of VISA and Maestro on the realm of electronic
money in SEPA is part of their world operations, which include pilot programmes, e-money in some
EU countries (UK, France) as well as the recent attempts to expand the e-money operations in the
Americas. Still, electronic money will remain a small side project set up for specific payments (public
transports, parking meters, public phones etc). Small value payments will remain the prerogative of
cash with debit cards being the main competitor for retail.
The implementation of SEPA suggests that cash will remain important at least in the medium term. In
addition the debit card seems to be the favored technology for small value retail payments. Electronic
money will only be a secondary platform for specific types of payment. The plans of completely
replacing cash as in the Singaporean SELT project are still premature.

4.6 Conclusions
Electronic money did not meet the initial expectations and is not bound to replace cash anytime soon.
Most of the established projects seem to be in crisis. There are of course examples where card based emoney achieved satisfactory penetration and high volumes of transactions as with CashCard, Octopus
or recently Oyster. This initial success was due to mandated or near mandated use in a specific area of
payments and did not materialize to substantial development when the use of these devices expanded in
74
75

ECB, SEPA (2006, p. 23).

ECB, SEPA (2006, p. 7).

20

retail. Cash remains important because it has an established position it is anonymous, non-exclusive
and still the cheapest medium for small value transactions. If there is possibility for cash to be
substituted in some small value transactions debit cards should also be considered as an alternative to
coins and banknotes. Debit cards have already secured a substantial base and have been proven to be
more convenient and in some cases more efficient than card based electronic money. To suggest that
electronic money is a failed project is equally premature. Electronic money is an ongoing scheme and
new technologies may provide novel solutions, increase convenience and reduce costs. Mobile phones
may prove a very important platform in the development of e-money payments. The introduction of
hybrid debit cards with an e-money interface and the transformation of the debit card terminals into
accepting also electronic money may improve the prospects of e-money. Nonetheless, electronic
money today remains marginal and unable to compete either with cash or with debit cards.

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