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lessons from (Dutch) payment history

Money and Trade considered. lessons from (Dutch) payment history. Simon Lelieveldt. 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

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lessons from (Dutch) payment history

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  1. Money and Trade considered....... lessons from (Dutch) payment history Simon Lelieveldt Edinburgh, 23/24 June 2000

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. Cash as % of M-1

  10. 7 - Security must be learnt - the Dutch banknotes • 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) 1814-2000

  11. 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

  12. 9 - Accepted because confidence in ability 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

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