Implications of E-commerce for the Banking and Monetary System
Speeches
24 Mar 2000
Implications of E-commerce for the Banking and Monetary System
Tony Latter, Deputy Chief Executive, Hong Kong Monetary Authority
(Speech at China and the New Millennium: WTO, Entrepreneurs and New Technology for Global Trade, Nansha, Guangdong Province)
- The internet has quite suddenly multiplied by a remarkable
degree the number of potential suppliers and customers with whom we
can do business, and the number of avenues through which we can
perform financial transactions. This opens up all sorts of
opportunities, but it also attracts all sorts of warnings - about
needing to know the identity of those with whom we are dealing;
about needing somehow to satisfy ourselves, remotely, as to the
quality of the products or services on offer; about needing to be
sure of the financial standing of counterparties, be it their
ability to pay or to provide credit which concerns us; and so
on.
- Speaking as a central banker, I begin to have a specific
interest in the development of e-commerce at the point where
payment has to be made for the goods or services that are traded
via the internet, or where people deposit money into internet
accounts. But I also have a broader interest relating to the
overall stablity and integrity of the financial system. The
internet undoubtedly brings us the prospect of greater choice and
efficiency in financial deals, but it also sparks certain concerns.
These fall under two headings: consumer protection, with worries
about scams, transparency, security, accountability, legal
recourse, and so on; and systemic stability, with questions as to
whether the financial system might become more vulnerable to crisis
as a result, for example, of a major technical failure or of a
massive herd movement of money in a particular direction.
- This is a vast subject, so I need to narrow down my focus
today. I want to discuss some of the issues which businesses or
individual members of the public may face in relation to electronic
money on the internet. And I then want to discuss some points which
a central bank has to address in the monetary policy context when
confronted with electronic money.
- In fact there are two types of electronic money: that which is
held on the internet and that which is held in stored-value cards.
Multi-purpose stored-value card schemes have been slow to become
established, despite quite lengthy pilot projects in a number of
countries. Hong Kong was nevertheless one of the first places to
introduce regulations governing the issuance of such cards.
Meanwhile, limited-purpose cards have proved more successful; we
have a particular example in Hong Kong with the Octopus card, used
to pay for public transport, which is hugely popular. Today,
however, I want to devote the limited time available to talking
about electronic money within the internet itself, so I shall not
be discussing card-based money any further.
- Many people speak of the arrival of the internet era as a
revolution in business practice. From the particular viewpoint of
making payments, I prefer to regard it as a step along an
evolutionary path rather than as something revolutionary. Our
distant forefathers were sceptical about the introduction of
banknotes in place of metallic tokens and coins; and our more
recent forefathers were worried as to the reliability of cheques as
a substitute for cash when they first appeared. Even during the
span of my own working life I can recall initial resistance by some
to credit cards and debit cards on suspicions about the security of
the arrangements, as well as opposition to autopay and direct debit
schemes for fear of granting to a third party too general an
authority to debit one's bank account.
- But each of these innovations has, in the event, been
assimilated and has taken its place in the range of accepted
payment instruments. I would expect e-banking to follow suit, as
just another step along the evolutionary path. But it is perhaps
worth pausing to consider whether there is anything intrinsically
different about e-banking which demands special attention from the
central bank.
- Let me begin by examining the question from the central bank's
stance as guardian of the integrity of the payments system and as
banking supervisor. I believe there are perhaps two characteristics
of e-banking which may deserve some vigilance here.
- The first is the technical security of access
and messaging. This is a matter of accuracy, safety and secrecy. If
we use the internet to move our money, or to hold our money, we
expect messages to arrive at their destination without error or
interception; we expect the system to be safe from fraudulent or
unauthorised access; and we expect to enjoy the same degree of
customer confidentiality as with conventional banking arrangements.
We want to be assured not only that the execution process is
reliable and secure, but also that there are adequate controls on
any "read only" access facilities.
- How can we obtain these assurances? Perhaps some of you mirror
my own feeling of personal inadequacy in matters of electronic
technology. Inevitably we are dependent on the experts. They have
devised sophisticated methods of electronic signatures, encryption,
certification, firewalls and the like. One way or another, by
obtaining appropriate professional advice, by applying rigorous
standards of compliance and computer audit, and so on, those within
an organisation should be able to deliver the necessary assurances
to customers, and the regulatory or supervisory authorities will
need to satisfy themselves as to the dependability of such
assurances. The financial authorities within countries, and on a
collective basis internationally, may also have a role to play in
developing recognised common standards in these arenas of
technology and security.
- The second characteristic deserving our special attention is
the nature of the person or company which is
offering us banking or payment services over the internet. If we
are merely using electronic services provided by our usual bank,
which we know to be sound and to be supervised by an acknowledged
regulator in a known jurisdiction, then we should be in no more
danger of losing our money than we would be by banking with the
same bank in the conventional manner, provided of course that both
the bank and the regulator have kept pace with the requirements of
internet banking, such as in respect of the security aspects
discussed already.
- But it is quite a different story if we are tempted to part
with money to some organisation masquerading as a bank, or which
actually is a bank but is registered in a jurisdiction with lower
supervisory standards than those to which we are accustomed. In
Hong Kong, in order to protect the public we already have
legislation governing usage of the word "bank", and governing the
advertising for deposits within our boundaries by anyone not
authorised to take deposits in Hong Kong. But we cannot protect
people from the possible consequences of clicking onto a website in
a far-off place which is luring them to part with their money. The
message is clear: make sure that you know and trust your
banker.
- In Hong Kong there has been some talk of new banks being
established for the sole purpose of conducting internet banking. In
deciding whether to authorise such a bank, the Monetary Authority
would expect to apply very much the same criteria as for a
conventional bank, but would need to pay particular attention to
the business plan in order to ensure that it reflected realistic
assumptions and prudent banking principles. We intend in the near
future to issue guidelines for any such applications.
- Already, as the supervisory body for existing banks, the
Monetary Authority needs to take account of any particular risks
that pertain to internet banking and to be sure that banks who
conduct such business do themselves properly appreciate and allow
for such risks. I would mention in particular the strategic risk,
in that venturing into a new business arena may not always be
assured of success; the operational risk, of dependence on IT
networks, and the associated security considerations to which I
have already referred; and any additional banking risks which may
arise if internet transactions are deemed to be potentially more
volatile or unpredictable, or customers less reliable, than in
normal banking business.
- The need to be confident about the intermediaries with which
you are dealing is also very relevant when we examine schemes for
so-called digital cash or a cyberpurse. There have been some false
starts and business failures in this field, but some potentially
more durable systems are now emerging in a number of countries,
albeit still mostly in only embryonic form. The concept is of a
storage location - or account - somewhere in cyberspace, into which
you transfer funds from your bank account or credit card, just as
you would draw cash from the bank and store it in your wallet. The
schemes are designed essentially for the retail shopper, who can
then make payments from the purse for items purchased over the
internet: the purse operator responds to your instructions by
transferring funds from your purse to an account of the
seller.
- You may wonder what the advantage of such schemes is supposed
to be. Why not simply pay for each transaction by an electronic
instruction to your bank or, more typically in the case of most
retail internet purchases, by credit card? The answer is that
digital cash purports to offer three advantages. First, it may be
cheaper than other means for a series of relatively low value
retail transactions. Second, it can be used by those who cannot or
do not have a credit card - for instance teenagers. Third, it
offers a degree of anonymity and perhaps a stronger feeling of
security, in comparison to using a bank account or credit card,
since account-related personal data need not be passed on to the
individual sellers of the goods or services.
- However, people should exercise some caution before utilising
such cyberpurse facilities. Regardless of how the system may be
presented, the purse operator is in effect acting very much as a
bank, in particular by holding your money in a sort of deposit.
Even if you initially acquired the digital cash or credit for free
(through a loyalty or bonus point scheme, for example), the
accumulated "savings" represent value which you would doubtless
wish to protect. Customers will want to be assured that the money
or credit points are in safe hands. Regulators, too, may desire to
verify that no banking activity is taking place that is unlawful,
although they will first need to ascertain the location of this
virtual operation (a task which is itself almost a contradiction in
terms) so as to identify what is the applicable jurisdiction.
Although in most of these schemes the maximum sum which anyone may
hold in a purse may, for the moment, be quite modest, and so the
scale of potential losses limited, we need to establish the
foundations of prudent behaviour and regulation in preparation for
the time when the sums may be much larger.
- Thus far I have been looking at the phenomenon of e-banking and
e-payments largely from the regulatory point of view. I would like
to turn now to examine whether there are any noteworthy
implications for the key central bank responsibility of
monetary policy.
- I want first to consider possible implications for the physical
currency. Central banks or their government shareholders enjoy a
steady stream of profit from the issue of currency in the form of
notes and coin - the so-called seignorage. It is noteworthy that
the public's demand for currency has been much less affected over
the years than one might have expected by the emergence of
successive new forms of non-cash payment such as cheques and cards.
And personally I would doubt whether the development of
cyberpurses, cybercash and cyberpayments would have much impact on
cash in circulation, at any rate in the near term. But suppose I am
wrong. Suppose there is a complete revolution such that cybercash,
including electronic stored-value cards, substantially displaces
physical currency within a few years. How should central banks
react?
- In such circumstances, central banks would lose an important
source of income and would have to find ways of replacing it.
Perhaps some central banks would lose their financial independence
and become dependent - or more so than hitherto - on subvention
from the government budget. But in a broader sense they should
welcome the development because it would be evidence that the
economy as a whole was enjoying a more efficient and less expensive
means of money holding and transmission.
- With regard to operational aspects of monetary policy in
pursuit of the general macroeconomic objective of stability in the
value of the currency, the advent of this new means of payment
would, if it caught on to a significant extent, have some impact on
the public's allocation of money holdings as between physical
currency, various forms of deposit and, now, electronic forms. This
in turn might affect the monetary statistics and their
interpretation. However, any changes would only occur gradually.
Besides, nowadays there are scarcely any central banks which rely
single-mindedly and exclusively upon measures of money supply to
guide their monetary policy decisions. Therefore I do not believe
that there is anything much to worry about on this front.
- Next, it has been suggested that internet banking in its
various manifestations could introduce additional and unpredictable
volatility into world financial markets by enabling millions of
people to switch funds between investments or between currencies at
the click of a mouse. In general I am sceptical about such worries.
Global financial markets have already been exploiting the IT age
with its immediacy of information and electronic dealing for some
years. Capital is already hugely mobile in both scale and speed. I
doubt whether the inclusion of new players at the retail level
would have much of an additional impact.
- In particular cases where monetary policy is supported by
capital controls, however, internet banking may make enforcement of
such controls more difficult, since it would be operationally
easier for those wishing to evade regulations to maintain offshore
bank accounts. Of course, every bank in reputable jurisdictions has
in place rigorous procedures to combat money-laundering, but these
procedures do not normally result in customers being turned away if
they are merely trying to escape capital controls or the tax regime
in their home countries.
- Similar considerations lead some observers to enquire whether
the internet might encourage substitution out of the national
currency, resulting in dollarisation and also perhaps weakening the
central bank's influence over domestic monetary conditions. If
internet facilities enable or encourage people either to economise
on the usage of money (for example by netting payments due among
two or more parties or by practising barter) or to reduce the
frequency of movements of money (for example by leaving export
receipts in an internet account in order to pay for imports, rather
than repatriating them first), then there may be a prospect of a
general reduction in transactions traffic in all currencies. The
usage of some may fall more than others. I do not, however, see
anything particularly sinister in such developments, except to the
extent that the internet might facilitate avoidance of rules on
remittances. The survival of the national currency and its
acceptability to the public will continue to depend on the central
bank carrying out a responsible monetary policy which protects the
value of the currency. Discharge of this duty should not be
materially affected or impeded by technological developments in
payment methods. The central bank's ability to influence interest
rates or the exchange rate through its market operations will not
be diminished.
- I conclude that, all in all, there are few concerns for the
central bank in its monetary policy role that arise from the
development of e-commerce; where there is an impact it is likely to
be gradual and central banks should be able to adapt to it as
readily as they have to other structural changes in the financial
sector over the years. For the reasons discussed earlier, however,
the challenge to the banking regulatory side of the central bank is
likely to be rather greater.
