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Alternative monies and the demand for media of exchange

  • Anthony M. Santomero
  • John J. Seater

Prepaid cards, cash cards, electronic purses, smart cards these are but a few of the elements inthe revolution now taking place in monetary systems around the world. At that movement's heart is the emergence of a new value transfer system where alternative monies are offered toconsumers through the miracle of electronics. There are many stories in the business press about the general enthusiasm for these new forms of money. According to the hyperbole from marketing reps from this side of the financial community, currency and demand deposits soon will be endangered species. Consumer acceptance is alleged to be high, and cost efficiency associated with the new technology is expected to be substantial. Yet, as Wenninger and Laster (1995) suggest, "to succeed, an electronic purse system will need to offer enough features of value to its three constituencies consumers, merchants, and issuers to induce them to bear the cost." Most arguments in favorof these media of exchange can be viewed as a reaction to the rising costs associated with current check clearing and on-line credit systems. Data are scare. However, the cost advantages to the banking system of a movement from paper check to debit cards is alleged to be in the range of 50%. Off-line pre-paid cards are expected to reduce the cost of clearing transactions, handling cash and reducing fraud for merchants. To read the press, the consumer is equally enthusiastic. However, the economic rationale for this consumer enthusiasm is a bit unclear. Each application of the emerging electronic technology has been different in important ways. The universal receptivity to alternative monies may be more a good marketing ploy than good economics. To understand consumer reaction requires a careful analysis of the desirability of any one of these alternative technologies in terms of its impact on consumer cash management costs through changes in transaction patterns, average money holdings, and total transaction costs. Th

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Article provided by Board of Governors of the Federal Reserve System (U.S.) in its journal Proceedings.

Volume (Year): (1996)
Issue (Month): ()
Pages: 942-964

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Handle: RePEc:fip:fedgpr:y:1996:p:942-964
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  1. David B. Humphrey & Lawrence B. Pulley & Jukka M. Vesala, 1996. "Cash, paper, and electronic payments: a cross-country analysis," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 914-941.
  2. John Wenninger & David Laster, 1995. "The electronic purse," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(Apr).
  3. Romer, David, 1987. "The monetary transmission mechanism in a general equilibrium version of the baumol-tobin model," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 105-122, July.
  4. Barro, Robert J, 1976. "Integral Constraints and Aggregation in an Inventory Model of Money Demand," Journal of Finance, American Finance Association, vol. 31(1), pages 77-88, March.
  5. Humphrey, David B & Pulley, Lawrence B & Vesala, Jukka M, 1996. "Cash, Paper, and Electronic Payments: A Cross-Country Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 914-39, November.
  6. John P. Caskey & Gordon H. Sellon, Jr., 1994. "Is the debit card revolution finally here?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 79-95.
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