IP: "CyberCash can't oust credit cards"

[Ryan Lackey]

Bob Hettinga wrote:
> At 6:41 AM -0400 on 7/8/98, Ryan Lackey wrote:
> You probably can't bootstrap things on seignorage alone, I don't
> think<double negative?>, but if you did, again, you would kill your digital
> cash issue anyway, because of lack of merchant acceptance, especailly in
> the early phases.
> 
I think you can bootstrap things on "value-add" to a bank, and on seignorage,
taken together.  It is *good business* for a bank to provide a service like
this.  It is one of those services, like online banking, ATMs, ubiquitous
branch locations (mmm, BankBoston...), private banking personnel, etc. which
make customers happier.  It is a good business case for a bank.

> Note, in my canonical example, cash, that people already pay a fee for
> "foreign" ATM withdrawls anyway, and people are used to doing things that
> way. That's great, because I expect that margins on a net.ATM withdrawl
> through an underwriter would be significantly higher than what a bank makes
> on their non-customer ATM transactions. Three orders of magnitude cheaper?
> I wouldn't be surprised.

My banks eat the foreign ATM costs as a customer value-add expense.
For the cash example, banks don't generally charge users to withdraw or
deposit money at a teller window, or at their own ATMs.  I think an online
bank dealing with electronic cash is more dealing with "internal" transactions
than with "foreign" transactions -- AFAIK, a lot of the foreign ATM charges
are charged by the foreign bank, which has no real interest in the user
doing anything but switching banks, anyway.
> 
> > Certainly, at first order, the fee *should* be on removing money from the
> > system, from a selfish point of view on the part of Ivan the Issuer -- if
> > you're making money on seignorage, you're making money when people add money
> > to the system *and leave it there*.  Thus, you want to provide incentives
> > for
> > people to buy money and leave it there -- charging no "on" fees and minimal
> > "off" fees would do it.
> 
> Yup. But, oddly enough, that was Mark Twain's (final) fee structure, too.
> Didn't save them in the end, though.

I argue that they had already shot their feet full of holes to the extent that
nothing they did would have saved them by that point, but Mark Twain is a 
complex enough example that it might be worth just ignoring.  I don't know
if their experiment will even be a footnote to the footnote to history that
is DigiCash.
> 
> I just think that if merchants are the key to acceptance of digital bearer
> cash, much less fully anonymous blinded digital bearer cash :-), then you
> shouldn't charge merchants anything to accept the stuff. If a merchant can
> download a wallet or registerware free or very cheap, and instantly start
> taking cash payments for whatever they sell over the net, and, when it came
> time to take that cash and put it into their own bank it didn't cost them
> anything to do it, then they would probably accept the stuff a heartbeat.
> The cost of anything is the foregone alternative, three orders of
> magnitude, and all that and "free" comes pretty close to three orders of
> magnitude in cost reduction from merchant credit card fees in my book. :-).

I've already shown why it is in the best interest of the issuer to participate.
The next step is to convince merchants it is worth doing.  Merchants, I 
believe,
are willing to accept a percentage redemption fee for a new payment system
if their customers demand it.  They fundamentally want to make their customers
happy.  If a lot of customers request a new payment scheme, or they are 
convinced customers want to use it, they will happily use a new payment scheme.

I think resistance to new payment schemes on the part of a merchant is in 
cost and effort to set up.  Having a free apache commerce plugin which handles
a variety of payment systems, including electronic cash, so the systems
integration costs for adding electronic cash to an operation are zero, and
they end up being cheaper than credit cards to process -- a 1% primary market
fee, or a going-to-zero percent secondary market fee.  Or, provide non-fee
incentives for merchants to accept the system -- loyalty points, tax-free 
accounting in offshore bank accounts, the Amex approach of marketing merchants
who accept the system to their client base directly, etc.

For a directed payment system, going from customer to merchant to bank, then
you definitely need merchants before you can get customers, which turns this
on its head. *However*, a good electronic cash system is user-to-user, the
Mondex model, rather than DigiCash's model.  This means the system can 
bootstrap
as soon as a single pair of people want to exchange money.  People already
want to exchange money user-to-user on the net -- there's a huge unsatisfied
demand.  That's more than enough to get it in place.  Making it anonymous
adds even more incentive.
> 
> I see seignorage as a tasty long-view source of income, certainly, but I
> expect the half-life of a given dollar of digital cash to be measured in
> days, if not hours, in the early stages. Frankly, I don't see seignorage
> showing up significantly on the income statement of an underwriter until
> there are other bearer instruments (stocks, bonds, and especially mutual
> fund shares) to invest that cash in, keeping it on the net.

The half-life of a given dollar of digital cash will be *infinite* if there
is an expanding base of users, a cheaper secondary market for getting 
electronic
cash than the cash out and cash back in system, and there is never a big panic.
The holding time for a particular user might be pretty short, but I think 
from the beginning a large amount of money will just be left on the net, since
it's far cheaper for a consumer to buy cash from a merchant directly than
for the merchant to cash out and the user to buy them on the primary market.
> 
> I think that that's one of the reasons that the Fed, among other people,
> aren't too worried about the immediate macroeconomic effects of digital
> cash. That and that the Fed's seignorage income, in the overall scheme of
> Fed revenues, is pretty small, and probably dwarfed by other things like
> printing and handling costs, etc. Greenspan himself is/was a free banking
> advocate, certainly, and has said publically (see last September's Official
> Cypherpunk Forbes issue :-)) that he thinks that private electronic
> banknote issue is not a scary proposition at all.

I thought seignorage was a net profit for the Fed, after printing/handling.
They *do* give the Treasury a kickback for this, and I'm not sure how the 
budget
actually works, but I think they pay all distribution/printing/etc. costs
themselves, and thus this is actually spare money.

It doesn't really apply here, since many of those costs are fundamentally 
different in the electronic cash world than in the printed cash world.

Greenspan is/was a libertarian, and would probably be ok with private 
electronic
banknotes putting him out of business, as long as it was better for the economy
and people as a whole.
-- 
Ryan Lackey
rdl at mit.edu
http://sof.mit.edu/rdl/