Vol.18, No.1 / May 2000
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Forum on the Development of Electronic Payment Technologies
and Its Implications for Monetary Policy: Interim Report

Executive Summary
In December 1997, the Bank of Japan established the Forum on the Development of Electronic Payment Technologies and Its Implications for Monetary Policy. The objectives of the forum were to analyze the emergence of electronic means of payment including electronic money and its implications for monetary policy. The forum has met eight times and discussed a number of issues. This report summarizes the main findings of the forum.

* Definition and Development of Electronic Means of Payment The term "electronic means of payment" is defined, in this report, as payment services that utilize information and communications technologies including integrated circuit (IC) cards, cryptography, and
telecommunications networks. For the purposes of this report, electronic means of payment are categorized into either stored-value products or access products. Stored-value products are the instruments of effecting payments electronically by storing the record of funds in an electronic device in the consumer's possession such as an IC card or a personal computer together with appropriate software. The amount of stored value is increased when cash or deposits are received, and it is reduced when goods or services are purchased. By contrast, access products are instruments of effecting payment electronically by accessing conventional payment services including electronic fund transfers via computer networks such as the Internet.
While electronic means of payment are undoubtedly suited for electronic commerce transactions over computer networks, it is difficult to tell whether they will be widely used also for face-to-face transactions. Stored-value products have been developed primarily for micro-payments. Since there is no interest paid on the stored value, the higher the
transaction amount the greater the loss of interest (opportunity cost) that should be accruing during the period after converting cash and deposits into electronic value stored but before making payments for transactions. As such, stored-value products are likely to be used only for small-value transactions in the foreseeable future. In the meantime, access products will probably be used for transactions involving relatively larger amounts.
There are several possible scenarios describing how electronic means of payment could develop. For example, if so-called digital goods such as news, books, and music-the value of which lies in the information rather than the physical medium-come to account for a greater part of the overall economy, the use of electronic means of payment may increase. If the function of stored-value products as payment instruments were supplemented with interest payments, it would have a greater potential to become a substitute for deposits. Many factors impinge on the development of electronic means of payment, including unexpected technological advances, and this makes it difficult to theoretically anticipate its
future direction. Therefore, these developments should be monitored closely.

* The Development of Electronic Payment Technologies and Its Implications for Monetary Policy Using economic theory, the forum participants examined the issues that the development of electronic payment technologies-including the emergence of both stored-value products and access products-would raise for the central bank in mplementing monetary policy. A relatively prevalent view among the forum participants was that the new electronic means of payment could be regarded as a new form of private bank debt that could be used as a payment instrument and, if further simplified, as a new type of deposit.
Based on a simple monetary multiplier model, if electronic means of payment were substituted for cash and deposits but were not subject to reserve requirements, the development of electronic means of payment would increase the money multiplier. However, several remarks should be noted in this respect. First, it is highly likely that, in the process of the development of electronic means of payment, the money multiplier will be destabilized and therefore will become harder to predict. Second, the simple money multiplier model makes no distinction between lending by banks and lending by issuers of electronic means of payment, and such a premise would be inappropriate if the latter were subject to prudential regulation. Third, even if the issuers create credit, it is unrealistic to conclude that the credit will be created infinitely.
With regard to the demand for money, the development of electronic payment technologies would reduce the cost for consumers to convert deposits to cash (the cost of visiting banks), would have the effect of saving non-interest-bearing cash outstanding, and thus would reduce the demand for money. It should be noted that, in the process of the development of electronic means of payment, various shocks unanticipated by the central bank could occur both from the money supply side and the money demand side. Applying Poole's classical theory, it would be generally desirable for central banks to adopt interest rate stabilization policies if the widespread use of electronic means of payment were to cause frequent and unanticipated shocks to the monetary sector (the LM curve).
Most central banks set targets for short-term interest rates. In considering how the development of electronic payment technologies affects central banks' ability to control short-term interest rates, it would be necessary to study the possible impact of such a development on reserve demand and on the reserve requirement system. It is likely that reserve demand would decrease, because the spread of electronic means of payment would encourage a shift from deposits that are subject to statutory reserve requirements to electronic payment instruments that are not. However, in controlling short-term interest rates, the size of the reserve demand would not be so critical as the stability and predictability thereof. In other words, what is important would be for the issuers of electronic payment instruments to make payments final through current accounts at the central bank in a stable and predictable manner. Therefore, it is necessary to study, from a wide range of perspectives, the impact that the development of electronic payment technologies would have on the existing payment systems.
It is important to keep reserve demand stable for the implementation of monetary policy. To achieve it, possible policy responses might be to apply the same reserve requirements to all payment-oriented financial obligations, to pay interest on reserve deposits, or to abolish reserve requirements altogether. The participants in the forum did not agree on whether electronic means of payment had the potential to become a substitute for central bank
money in the future. This issue will require further research.

* Electronic Payment Technologies and Cross-Border Transactions The development of electronic payment technologies might increase cross-border electronic commerce transactions, together with such other factors as the liberalization of foreign exchange controls. As cross-border transactions become more prevalent, they might encourage consumers to hold more foreign currencies for payment purposes in order to reduce foreign
exchange risks, and to hold more foreign currencies for savings purposes through Internet banking.
In short, holding foreign currencies could be either for payment purposes or for savings purposes. These two should be distinguished when considering the implications of the increased use of foreign currencies for monetary policy.
When foreign currencies are used for payment purposes, a part of domestic economic activities would be settled in foreign currencies and therefore the capability of domestic currency interest rates to influence the domestic economy would be impaired. When foreign currencies are held for savings purposes, there would be a stronger arbitrage of the domestic long-term real interest rate against those in other countries. In either case, the central bank would be able to maintain its ability to control domestic short-term interest rates by providing base money in the domestic currency. However, under such circumstances, the central bank would be required to pay closer attention to foreign economies and foreign exchange markets when implementing its domestic monetary policy.

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Views expressed in Monetary and Economic Studies are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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