UC Berkeley [School of Information Management and Systems]

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[Info Sys 204]

December, 1997

Exploring Digital Cash

Effect on Financial Institutions

What effect will digital cash have on financial institutions? The customer will witness a change in the nature of services provided by institutions, such as check cashing, teller services, loan processing, notary services, and draft writing. Remotely processed transactions are more monetarily profitable than face-to-face assistance. The resources to finance new products that emphasize remote access and flexibility will come from elimination of line employees. As with the introduction of the Automatic Teller Machine, institutions planned to minimize the costs associated with human tellers by offerring ATMs as an alternative. In both cases, customers with preferences for interacting directly with an employee and handling currency will find fewer resources available for their use.

What effect will digital cash have on the customer?
A lack of consumer confidence, with the value of the money uncertain, and concerns regarding the reliability of form. Loss of customer business because of reduced resources available, such as long teller lines, part-time tellers, reduced hours of operation, checking accounts carrying limits and fees, Retailer point of sale acceptance and authentication. Is it universally accepted as payment, will everyone take it?

Security concerns:
Currency safeguards: The money must be encrypted to protect its reliability, and the unit value must be verifiable. Authentication: Stolen funds or fraud are difficult to investigate without some identification of the parties involved. Operating policies and hardware must be adapted to monitor data transfer and detect misappropriation.

If embraced, the institution's close relationship with individual customers and their transactions changes. Financial data is no longer warehoused in bank servers. Records pertaining to the spending and borrowing habits of customers can no longer be traced. This anonymity encourages the commission of crimes that rely on faulty currency authentication, such as money laundering and counterfeiting.

Regulation and interchangeability:
Thus far, no regulation has been enacted to standardize digital money or its use; it is sorely needed, for faith in its value depends greatly upon the number of retailers. This regulation would establish business practices and address the "worth" of a unit. Until one form is used for the industry standard, a currency exchange of a type will occur. While multiple producers of digital money circumvent the Treasury Department's monopoly on production of legal tender, their products have no mutual acceptibility nor foundation of value.

Many participants using Digicash use it as a processing agent for credit card payments, and eliminate that function within the institution itself. It is much the same as the outsourcing their security guards to Brinks.

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