lessons from (Dutch) payment history

Simon Lelieveldt

Money and Trade considered.......

Edinburgh, 23/24 June 2000

The Netherlands

• Capital: Amsterdam• Area: 34.000 square km• Population of 16 million inhabitants• Currency: Dutch guilder (NLG)• GDP: 775 bln NLG• Inflation: 2 %• 170 banks and 7000 branches

1 - Payment techniques travel along with trade

• From Italy to Belgium to Netherlands to UK• Concepts:

– girosystem (deposit taking)– arithmetic coin– multilateral compensation– assignations, bills obligatory, prom. notes

1400 - 1800

2 - as did John Law:

• From Scotland to England to Amsterdam to France to England to Italy

• Concepts:– Bank notes (Land bank) – Circulation bank (France) & Mississipi System– (Bank of England & East India Company)

1671 - 1729

3 - The most efficient model is the centralised (giro) model . .

• First build trust on 100 % convertability and 100 % reserve

• Enlarge operations (build user base) and make more payments inhouse-payments

• Lower reserve percentage in time and use excess funds (wisely)

1600 - 2000

4 - but religion/legal rules determine local specifics of instrument use

• Typical general infrastructure models– giro-based, cheque-based, cash-based or hybrid (cheque/giro)

• Due to:– prohibitions on charging interest (the Pope)– taxes or more direct government intervention– consumer / bank regulation (Reg E, Glass-Steagal)

1300 - 2000

5 - Kings and governments always want a piece of the action

• Corn giro in Egypt• Privilege of minting coin • Amsterdam Exchange Bank (monopoly)• Central banks:

– lending machine for government– profitable issuance of bank notes

Always

6 - Country specific instruments only work with a fair deal of trust

• Good legal system, trustworthy government and stable society are conditions for the use of currency and deposits– if not: use of other countries’ currency or more

general goods, such as gold and silver

• Reflected in indicator of cash as % of M1

Always

Cash as % of M-1

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1900 1915 1930 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1995

7 - Security must be learnt - the Dutch banknotes

1814-2000

• exclusive feature (1814 - 1850)• security by artistic engraving (1850 - 1900)• combination of technologies (1910-)• security before design (1921)• sufficient security is enough (1941)• integration and contingency plans (1960)

8 - Convertability into ‘real value’ is essential but not essential

• Money itself is an abstraction and rational product of the mind, which for theoretic reasons does not need to have value itself or be redeemable somehow,

• yet as a part of an evolution path to build confidence, some form of redeemability against ‘real value’ is necessary

Simmel, 1900

9 - Accepted because confidence inability to respend it

• Concept of legal tender is irrelevant• Concept of instrument having a ‘real value’

(gold coin) is also irrelevant• Any object will function as money, given the

user expectation that the instrument received can be spent again

Frijda, 1916

10 - Any payment is in itself quite uninteresting to the user

• Payments are endresult of something else• If that something else is important (or force is

used), users will do anything which is needed in the payment domain

• Don’t misunderstand the ‘cooperation’ of the user!

1915-2000

11 - The payment product is a hygiene factor

• If it works no extra satisfaction; if it doesn’t users get annoyed

• Users don’t repeatedly search for new payment mechanisms but stick to their choices

• Users criteria are control, risk, ease of use and sometimes cost

1950-2000

12 - User risk depends on more than technical security

• law: giro funds not part of assets in failure• cheque convention Geneva (1930s)• credit card liability in case of fraud higher

when using PIN as well (100 FL vs 300 FL)• debit card liability limited by contract to 500

FL (200 $ more than Reg E equivalent)

1900 - 2000

13 - Operating a payment system can be very profitable

• Official profitmakers (public records):– Amsterdam Municipal Giro– Postal Services Giro (now Postbank)

• Unofficial profitmakers: – all other banks denying profit in payments– reap profit in treasury function and make costs in

payment operations

1900 - 2000

14 - Respect existing deeply rooted traumas and successes

• Amsterdam Exchange Bank and Municipal Giro• Cashiers notes against central bank• Postal services operations trauma 1923• Central banks gold standard trauma 1930s

1600 - 2000

15 - Interoperability has never been a major problem for end-user

• Large diversity gives rise to separate (commercial) enterprises, which make money out of reducing burden to end-users– Amsterdam’s cashiers and exchange offices,– Central bank, -Bankgiro system– CCV van der Velden (card payment integrator)– Bibit (Internet payment integrator)

1600 - 2000

16 - Reduce the number of messages in payment protocols

• Cash - Giro - Cheque• ATM protocol can be done in three messages

instead of four• Don’t use a logical but the 90 % standard

transaction flow to speed up the process

1900 - 2000

17 - Don’t overvalue anonimity

• Also with cash, anonimity is relative– disguised bank robbers still get caught

• Positioning with anonimity gets more suspicious everyday– Swiss bank secret...

1900 - 2000

18 - Multifunctionality won’t work with more than 1 organisation

• Don’t add college card, bus card and copy card on to one chip!

• Multifunctionality within user domain might work

• Shared chipcard use accross a number of organisations (or 2) creates complex organisational / legal issues

Sipman, 1988

19 - Critical role for government and the large retailers

• Large user base allows profitable investment in technology development

• Government may additionally impose instruments through legislation or de facto market power

1900 - 2000

20- How to make new payment mechanisms work ?

• Improve cost/benefit/burden ratio and grow from existing customer behaviour

• Targeted at a small and specific user base and profitable on that scale

• Enforce it as the only mechanism (campus solutions)

• Make them part of overall irresistable deal

1900 - 2000

Caveat

“I have not had time to put my Thoughts in that Order they ought to have been, and am forc’t to leave out Anfwers I defign’d to have given to fome Objections I have heard made againft this Propofal.”

John Law, 1705