Electronic Funds Transfers and Payments: The Public Policy Issues

Electronic Funds Transfers and Payments: The Public Policy Issues

Electronic Funds Transfers and Payments: The Public Policy Issues edited by Elinor Harris Solomon The George Washington University... '' Springer-Science+Business Media, B.V.

Ubrary oi Congress Cataloging-in-Publication Data Electronic funds transfers and payments Includes bibliographies and index. 1. Electronic funds transfers. 2. Electronic funds transfers-government policy. 1. Solomon, Elinar Harris. HG1710.E45 1986 332.1'028 86-10416 ISBN 978-94-015-7740-3 ISBN 978-94-015-7738-0 (ebook) DOI 10.1007/978-94-015-7738-0 1987 by Springer Science+Business Media Dordrecht Orginally published by Kluwer Nijhoff Publishing. Boston in 1987 Softcover reprint of the hardcover 1 st edition 1987 AII rights reserved. No part of Ihis publicatien may be reproduced, stared in a retrieval system. ar transmiued in any larm ar by any means, mechanical, photocopying. recarding, or otherwise. witheut the prior written penmission oi the publishers, Springer-Science+Business Media, B.v.

Contents Contributing Authors vii Preface ix Introduction I Money, Now and Future 13 1 Modern Money 17 Paul B. Henderson, Jr. 2 Payments and the Economic Transactions Chain 39 Linda K. S. Moore 3 Telecommunications Policy Issues: The New Money Delivery Modes 63 Henry Geller II Electronic Payments Systems Links and Risks 79 4 Payments System Risk, Market Failure, and Public Policy David Burras Humphrey 5 International Payments and EFT Links Allen B. Frankel and Jeffrey C. Marquardt 83 111 v

vi ELECTRONIC FUNDS TRANSFERS AND THE PAYMENTS REVOLUTION Ill Macroeconomic Policy Updated 6 Monetary Rules and Control in Brave New World James Tobin 7 Monetary Modeling in a World of Financial Innovation Thomas Havrilesky IV Microeconomic Issues: Banks and Consumers 8 The New Money and the Old Monopoly Problem Almarin Phillips 9 EFT: A Consumer's View Elinor Harris Solomon Index 131 137 159 189 193 211 239

Contributing Authors Allen B. Frankel, Chief, International Banking Section, Division of International Finance, Board of Governors of the Federal Reserve System, Washington, D.C. 20551 Henry Geller, Director, Washington Center for Public Policy Research (Duke University), 1776 K Street, N.W. (Suite 900), Washington, D.C. 20006 Thomas M. Havrilesky, Professor of Economics, Duke University, Department of Economics, Durham, North Carolina 27706 Paul B. Henderson, Jr., Operations Consultant; Senior Vice President for Operations, Federal Reserve Bank of New York (1978-84), Box4589 525 Spencer Way Incline Village Nevada,89450 David Burras Humphrey, Vice President and Payments System Advisor, Federal Reserve Bank of Richmond, P.O. Box 27622, Richmond, Virginia 23261 Jeffrey C. Marquardt, Economist, Bank for International Settlements (Basle, Switzerland) and Division of International Finance; Board of Governors of the Federal Reserve System, Washington, D.C. 20551 vii

viii ELECTRONIC FUNDS TRANSFERS AND THE PAYMENTS REVOLUTION Linda K. S. Moore, Editor-in-Chief, Electronic Banking Abroad, Research Company of America, 654 Madison Avenue, New York, New York 10021 Almarin Phillips, Hower Professor of Public Policy and Professor of Economics and Law, University of Pennsylvania, Philadelphia, Pennsylvania 19104 Elinor Harris Solomon, Professor of Economics, The Department of Economics, The George Washington University, Washington, D.C. 20052 James Tobin, Sterling Professor of Economics, Yale University, P.O. Box 2125 Yale Station, New Haven, Connecticut 06520-2125

Preface The developing new financial technology is changing our concepts of money, banks, and the payments media. The 1980-1982legislation enables financial institutions to take advantage of the electronic funds transfer (EFT) opportunities. Other legislation is being considered by Congress and the states. However, important public policy questions remain. Their identification demands a multidisciplinary synthesis. This the book attempts to accomplish by drawing on unique skills of distinguished academic and Federal Reserve economists, lawyers, and other experts in the new financial technology. It is hoped that our combined efforts in the chapters that follow will help identify potential directions of change and illuminate some major public policy issues for further investigation and resolution. The areas we explore from diverse backgrounds are fourfold. First, part I examines the updated character of money, the transformed processes of money transmission around the world. Part II looks at the evolving payments and settlement arrangements, both national and international, and the risks that are beginning to surface. Part III addresses the monetary policy issues and the kinds of rethinking which macroeconomic theory and modeling may require in this brave new world. Part IV, finally, analyzes the role of the market, deregulation, and antitrust policy in EFT development. Consumer issues and trade-offs come here also to the forefront. How to use this book. We have attempted to provide coverage of many issues. We have also sought diversity of viewpoints and skills. This book is designed for use, therefore, by all practitioners of the new money technology, be they banks, financial institutions, nonbank suppliers, or legislators. Emphasis is on international as well as national questions. We have also pitched the volume for researchers in the new money technology, the ix

x ELECTRONIC FUNDS TRANSFERS AND THE PAYMENTS REVOLUTION economists, lawyers, and operational engineers who can put their best skills to use jointly in developing practical solutions. This book is planned for classroom use as well. In order to aid the professor, the introduction sets forth the format of the book and the recurrent themes one finds throughout the individual chapter discussions. It also presents questions toward which the individual chapters have been directed. In addition, each of the four parts is preceded by background discussion and integration of the individual papers. Money and Banking students can most profitably study parts I and II for an updated view of money and payments mechanisms, now and future. Monetary Theory and Macroeconomics classes may focus on part III, then supplement the macro theory with earlier operational and descriptive portions of the book according to interest. Students of antitrust and industrial organization economics may find part IV useful for microeconomic and legal analysis. Consumer users and students of banking law should also start with part IV, then turn to the operational realities highlighted in earlier papers. This volume is, however, not a textbook in any standard sense of the term. It is designed for all of us since all are users of the new payments technology and its elusive supermoney. Each part meshes with the chapters preceding and adds fuller coloration to the story. The book is designed to elicit discussion; research into new, uncharted areas; a rethinking of our traditional central banking concepts; and, yes, controversy. Acknowledgments. I wish to express appreciation to the distinguished and dedicated contributors for their penetrating original analyses of the many complex issues. I also admire very much their courage in expressing openly their reservations as well as praise for the new technology. They have patiently and skillfully answered my many questions and provided, for me surely, an intellectually exciting and often consuming experience. I owe a debt of gratitude to Professors Robert Goldfarb, John Kwoka, Michael Bradley, Robert Dunn, James Barth, Lisa Pittman, and other Economics Department colleagues and students at The George Washington University. I wish also to thank Stephen Rhoades, Steven Felgran, Robert Gemmill, Penelope Hartland-Thunberg, Eleanor Hadley, Phillip Ruppell, Spencer Nilson, William Curran, and Federal Reserve Board Governor Henry Wallich for valuable suggestions and help. The vast expertise of the Electronic Banking Economist Society (THEBES) has been much appreciated. Catherine Forman has provided outstanding secretarial assistance in preparation of my portions of this volume. Zachary Rolnik and David Marshall have been supportive in every way in guiding this project to completion, and I am especially grateful for Kluwer-Ni jhoff 's strong encouragement and enthusiasm.

PREFACE xi Finally, I thank my wonderful husband and family for moral and tangible support, criticisms, and comments. They, like my students, have been willing to listen patiently to the day-to-day rundown on an amazing story of technology change which promises to revolutionize money and payments modes throughout the world.