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U.S. House of Representatives,
Subcommittee on Domestic and International Monetary Policy,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. Spencer T. Bachus, [chairman of the subcommittee], presiding.

    Present: Chairman Bachus; Representatives Biggert, Sherman, Inslee, Schakowsky, Moore, and Lee.

    Chairman BACHUS. The hearing will come to order.

    We are here today to examine and discuss some astonishing technological advances that offer Americans huge financial savings and convenience in paying their bills. What we're discussing today involves advances and improvements in our way of handling our personal finances. In fact, we are told from one of our panelists today, Deutsche Bank Technologies, our technology analyst, Gary Craft, who's on the second panel, that the average electronic transaction could save up to 75 cents per transaction over using paper checks. It will be interesting to pursue that.
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    Taking the Federal Reserve's estimate of 68 billion annual paper checking transactions, this could result in a cost savings to American consumers of $51 billion. That's billion with a B. Even conservatively, estimating a savings of 50 cents per transaction, the total savings could equal $34 billion. Americans can put this $30 billion to $50 billion in annual savings to work more productively than using it to maintain antiquated payment methods. So these new systems must be made more readily available. That truth is the bottom line of these hearings.

    The path to such savings requires little more than technological changes in how we do our personal business. We are here today to specifically examine two very important issues for consumers. Why have the new technologies for payment systems not been more widely adopted, and what developments could occur in the next five years, so that consumers more readily embrace these new technologies. And third, actually another one, what could Congress do to speed this process.

    Over the last fifty years, the primary methods of retail payments included cash, check, credit card or automated clearinghouse transactions. These traditional services served customers well, and the Federal Reserve has been very successful in keeping down the cost of processing checks and settling transactions.

    But in the last ten years, new payment systems have proliferated, including electronic checks, payment by e-mail, smart cards and a host of other variations. These new technologies have great potential and could offer consumers greater convenience, choice and substantial savings.

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    Most retail payments in the United States, however, still rely on technology that was developed in the 1970's or before. Ironically, consumers' confidence and trust in the traditional payment system has made customers less likely to adopt new technologies. In any matter that involves the handling and security of people's money, there are three important concerns each technology must address: privacy, security and convenience. No technology will dominate the market until customers are confident that their privacy will be protected, and no one wants to place their money at undue risk, so assurances of security must be guaranteed. New technology always requires the test of time in order to earn the confidence of the people, even if it is easier to use and costs less than older methods.

    Since old habits are hard to break and most of us are accustomed to writing checks, it will take time for consumers to become accustomed to the new methods. As a result, paper checks remain by far the most commonly used mechanism to pay bills. The most alluring aspect of the new technologies is their potential for huge savings. As mentioned earlier, that savings could amount to tens of billions of dollars annually.

    Despite the obvious cost savings, however, consumers are very conservative when it comes to their money. Many obstacles must be overcome to make sure the new technologies are both convenient and safe. And today I hope our witnesses will shed some light on these issues.

    Some changes are already occurring which will allow consumers to realize the savings offered by these new technologies. Just last week, the Federal Reserve announced they were making a number of changes in their regulations to facilitate electronic processing of checks. The subcommittee welcomes this initiative and looks forward to working with the Federal Reserve as they prepare to make more substantial changes in the near future.
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    A gradual increase in electronic payments has occurred in the last five years, especially in automated clearinghouse—or ACH—transactions. These electronic payments increased from 1.5 billion in 1990 to over 6 billion in 1999. There's no question that tens of millions of dollars were saved as a result of lower processing costs for ACH transactions.

    But there's much more room for improvement, and consumers could save even more money with new electronic payment technologies.

    The first panel will explore why electronic payment systems have developed relatively slowly over the last ten years. They will also present their views on what changes in laws, marketplace or in consumer privacy or security protections are necessary to make the new technologies more widely available.

    Professor Vartanian will provide an introduction and focus on the legal obstacles to the development of new payment systems. Mr. McEntee will address what technological changes need to be taken, and Mr. Van Dyke will provide analysis, including the threat to financial institutions of non-banks making inroads into these new markets.

    The second panel will talk about which advances in electronic payment systems are most likely to become widely adopted in the next five to ten years. They will also give their opinions of what steps could be taken to facilitate the adoption of these new advances. Mr. Craft, a Wall Street analyst, will focus on the changes in the market, and Professor Winn will discuss legal and regulatory changes. Dr. Richard Rahn will explore the implications of the new payment systems on monetary policy, and Jacki Snyder will discuss the concerns of retailers. Ms. Snyder will demonstrate one of the new technologies being tested by the Food Marketing Institute, to speed up electronic transactions at the supermarket counter.
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    It is the consumer who stands to benefit the most from the widespread use of these new electronic payment systems. Therefore, I look forward to hearing from each of our distinguished panelists regarding the challenges now facing electronic payment systems and how Congress can foster an environment conducive to their widespread utilization.

    Do any Members wish to make opening statements? If not, we will proceed with our first panel.

    Our first panel includes three gentlemen, the first is Professor Tom Vartanian. He is Chairman of the Commerce and Technology Transactions Group in Fried, Frank, Harris, Shriver and Jacobson's Washington, DC. office. He is co-author of the book, ''Twenty-First Century Money, Banking and Commerce.''

    He is Professor of Law at Georgetown University Law Center, Adjunct Professor of Law at Georgetown University Law Center and Boston University's Law School, where he teaches a course on electronic banking. He's also Chairman of the ABA's Committee on Cyberspace Law and on the ABA's Transnational Jurisdiction in Cyberspace Project, which released a 200-page report on global jurisdiction in July, 2000, with 120 attorneys and 20 countries contributing.

    James Van Dyke is Senior Analyst at Jupiter Communications. He specializes in the financial services area of banking, payments and consumer financial content sites where he focuses on enabling financial transactions and the aggregation of assets for web initiatives. Prior to joining Jupiter, he was the principal of a consulting company that provided strategic marketing services for internet ventures.
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    In addition, he was a Silicon Valley editor for Online Banking Report, the first publication devoted to online financial topics. He has presented at numerous conferences, seminars and industry events and has been quoted in The Economist, New York Times, Business Week, Forbes, Wired, Wall Street Journal, ZDTV, Time, American Banker, CD Market Watch, ABC News.com, and so forth.

    Mr. Van Dyke holds a B.S. in Management and a MBA, and resides in the San Francisco Bay Area. He probably ought to be a multi-millionaire, too, if you invested there at ground zero.

    Elliott C. McEntee is President and CEO of the National Automated Clearinghouse Association, located in Herndon, Virginia. The National Automated Clearinghouse is a not-for-profit trade association that develops operating rules and business practices for the automated clearinghouse network and for other areas of electronic payments. It represents more than 12,000 financial institutions.

    Prior to joining NACHA in November, 1998, Mr. McEntee was an associate director on the staff of the Board of Governors of the Federal Reserve System. He was responsible for managing a function that oversees the Nation's payment mechanisms, and financial services the Federal Reserve provides to banks, thrifts and institutions of the United States Government.

    Welcome to the first panel, it's a distinguished group and I look forward to your testimony. We'll just proceed, starting with you, Professor Vartanian.

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    Mr. VARTANIAN. Thank you, Mr. Chairman, ladies and gentlemen of the subcommittee. I appreciate the opportunity to be here.

    Let me start by congratulating you, Mr. Chairman, and the subcommittee for taking on this very important issue at this particular moment.

    In March of 1996, I experienced first-hand the Mondex smart card pilot program in Swindon, England. I thought at that time it would revolutionize payment systems and would be immediately embraced by the consuming public. Four years later, neither of those two things have happened. There are significant traditional reasons, in my view, for the relatively glacial evolution of electronic payment instruments and systems in a world that seems very eager to adopt any new technological product that comes along.

    First, the current money and payments infrastructure is well established, reliable and businesses and consumers understand it and are comfortable with it. Two, new products and systems usually require the creation or adoption of standards, so that every machine and every network can speak the same language. Three, businesses and consumers are slow to change their financial habits without compelling reasons.

    Four, the value proposition for businesses and consumers to shift to new electronic value systems is not yet clear. Five, the online movement of money may not yet be reliable, convenient and safe enough for businesses and consumers. Six, unfamiliarity with new payment instruments and systems, concerns over the potential loss of funds in accounts, increasing apprehensiveness about the loss of privacy, and the temptation to offer new payment products before they are really ready for the market creates an environment that makes businesses and consumers wary.
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    Seven, there is significant market competition and controversy concerning what entities can control the point of customer entry for these products. And eight, current laws are often ill-suited to or incompatible with the way electronic payment instruments and systems work.

    In my view, there are really about four factors that will affect the way payment systems evolve. The first is the comfort factor. Examples of this are numerous in the financial services history. For example, in September of 1958, the Bank of America introduced the BankAmericard. It printed and mailed 60,000 credit cards to every customer in the Fresno, California market. This event, known as the ''Fresno Drop,'' primed the credit card pump.

    You might think that the pioneers of the credit card business would have their names enshrined in the financial services hall of fame. That is hardly the case. At Bank America, many were reassigned or quietly left their jobs because of the enormous losses the bank suffered at first, since it distributed the card indiscriminately without underwriting the creditworthiness of its users, trying to get the credit card system to work. Initially, the BankAmericard was considered a failure.

    Second, costs. The cost of dipping a smart card, which requires no closed proprietary or open network to transmit its electrons from chip to chip, is less than a penny. An ATM transaction costs 27 cents, while a teller assisted transaction costs $1.07. The average cost of swiping a credit card ranges from 8 cents to 15 cents.

    So the opportunity to squeeze $1.06 out of trillions of financial services transactions that occur each year is a meaningful reason why electronic payment instruments and systems will eventually change.
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    Convenience. Geoffery Moore, in ''Crossing the Chasm,'' refers to this issue often, drawing distinctions between what he calls ''discontinuous innovations,'' changes that require the consumer to change a behavioral pattern, and ''continuous innovations.'' For example, it doesn't require a disruption of one's traditional behavioral patterns to buy the new and improved Tide. It's on the same place on the shelf as it always was. But it may require a shift in consumer behavior to begin banking online and paying bills electronically.

    Next—and most importantly in some respects—is confidence. No payment instrument or system can work without the trust and confidence of its users. The money we have in our pockets is no more and no less than a symbol of a trusted system that works. Green dollars could easily be replaced by pink pineapples as long as people trusted the underlying value of those pineapples.

    Money and payment systems therefore require a unique blend of governmental, business and consumer participation in order for them to succeed.

    Let me close by mentioning a few legal considerations that I think need to be clarified so that electronic payment systems can proliferate and develop. There are a variety of policy, operational, and legal considerations confronting any entrepreneur who attempts to tackle the challenge of creating a new form of value or a new way to transmit it.

    First, jurisdictional considerations. The creation of new global electronic payment systems raises a threshold issue: whose laws apply? While today there is a well-worn path of understanding regarding the application of check clearing, ACH, credit card, Fed Wire and other traditional payment system rules, the development of new forms of money and new payment systems that are based in cyberspace necessarily raise jurisdictional issues.
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    Second, State banking laws. To the extent a non-bank creates a payment product that is linked to an account, that entity may be engaged in the business of banking without a license under one of the 50 State laws. When Florida State University issued a smart card to its students, which could be used in a variety of ways and places, it probably did not anticipate that it would be considered to be improperly engaging in the business of banking under Florida law. But the State of Florida thought so.

    Third, State money transmitter laws. Most of the States have money transmitter laws and regulations that require licenses and impose regulatory burdens, obligations and rights upon non-banking entities that are involved in the movement, distribution or clearing of payments. State regulators are currently seeking a uniform law that establishes a consistent nationwide approach for dealing with such payment mechanisms.

    Fourth, FDIC insurance. The extent to which funds are insured is generally a question of whether they are a deposit as that term is used by the Federal Deposit Insurance Act.

    Fifth, Regulation E. A significant issue presented in connection with electronic money and payment systems is how the Electronic Funds Transfer Act is to be implemented with respect to all new payment systems and payment instruments. In many areas of electronic financial services, the application of Regulation E remains unresolved and open to dispute.

    Next, State escheat laws. The application of such abandoned property laws to electronic assets raises perplexing questions, such as how one knows when a non-traceable electronic asset like electronic dollars are subject to escheat when it is not possible to tell where they are, where they've been or how they've been abandoned.
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    Law enforcement. One of the most difficult decisions that Congress and the agencies responsible for combating money laundering and different kinds of crime, will have to make is how to balance the interests of the private sector in developing more efficient money and payment systems and the interests of law enforcement agencies charged with protecting the public.

    Next, who should facilitate electronic payments. There are intriguing legal, regulatory and policy questions that must be answered when it comes to the question of who may mint, distribute, circulate and transmit electronic payments. Do electronic payment products alter the money supply? Should non-regulated companies be permitted to mint, distribute, circulate and transmit electronic money or electronic payments? What protections should be constructed to deal with the failure of companies that create, distribute or clear electronic money and the liquidity crisis that could result from their failure? How should new electronic payments systems be protected, regulated and made safe and secure? And lastly, who provides the ultimate liquidity and stability that makes these new money and payment systems work?

    The Stamp Payments Act of 1862 provides another interesting legal conundrum. The Stamp Payments Act of 1862 declares it to be a felony for anyone to create or circulate any coin, token or obligation in a denomination of less than $1 if it is meant to circulate as money. That statute is still on the books.

    To the extent that the statute raises questions, as others may, that may discourage the development of electronic payment instruments and systems, its status and application should be considered and clarified.

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    Let me close with several recommendations. First, governmental agencies and instrumentalities should do whatever they can to facilitate and encourage the private sector to develop cost-effective electronic payment systems and instruments that correlate to the movement of financial services onto the internet. Two, regulators should seek to clarify the law and create greater predictability regarding the application of financial services laws to new financial products. Three, financial regulators should be encouraged to meet with their counterparts around the world and agree upon the manner in which jurisdiction will be determined.

    Four, laws and regulations should enable the development of electronic payment instruments and systems rather than establish regulatory bureaucracies before there is an industry to regulate or an accepted product to regulate. And fifthly, governments and regulators should thoroughly explore the new risks and security challenges that electronic payment instruments and systems create and address the economic, political and legal risks that are suggested.

    I appreciate the opportunity to present my remarks, and I submit my longer statement for the record.

    Chairman BACHUS. Before we proceed to Mr. Van Dyke, Mr. Vartanian, what we did, we turned on the clock inadvertently, and I wanted to give you all as much time as you need on these statements. We're going to have less cross examination since there are not as many Members.

    You started, I know you flipped over about two or three pages. You mentioned, first of all, comfort factor and then convenience. I think you had two other items that you were going to mention and I know the light came on. What were the other two? Do you want to go back and give that testimony?
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    Mr. VARTANIAN. Mr. Chairman, I think I summarized them, but I would appreciate more time to add a little commentary.

    Chairman BACHUS. And the other two panelists, don't worry about, I'd rather us get a thorough presentation and not rush. And I apologize, I forgot to tell them not to turn on the clock. It's hard to really give a statement on this subject matter in less than ten minutes, and you only have five before the lights started coming on.

    Mr. VARTANIAN. Well, thank you. Let me try to fill in a little bit of what I skipped over. There really are four elements, it seems to me, that everyone has to deal with in terms of trying to make customers and businesses want to use these new electronic payment systems. And the four I refer to are the comfort factor, cost, convenience and confidence. The comfort factor is very simple, and that is, every human being on this planet has an emotional relationship with their money. And that means that they usually make changes in the way they handle their money very slowly. Therefore, the things they do with that money, after time, become very comfortable and ingrained.

    Look at the BankAmericard experiment, and what's happened over the last fifty years in financial services. There's a wonderful book written by Joe Noscera called ''A Piece of the Action,'' which details the history of financial services as it has developed in the 20th Century. What you find is that every time a new product is inaugurated, there's an instant blip of acceptance by early adapters. Then all of a sudden, it sort of slows down. That's because the majority of users aren't that anxious to change that quickly.

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    Look, for example, how long the passbook account hung on with savers in financial institutions. They're just not that willing to move their money from place to place and change the behavior as quickly as possible. So comfort is a very important part of it.

    Interestingly enough, on the comfort side of this is, the Government plays a large role. The Government underwrites and underpins most of the things, most of the ways that money moves in this country, either through the FDIC or some other forums. Therefore, it seems to me the Government plays a large role in providing some of the comfort here. For example, there are thirty million Americans in this country who get some form of Federal assistance. To the extent that the Government says that assistance will be distributed electronically or on smart cards, that will do two things. It will convince the business and consuming public that it's time to use products, and second of all, they'll feel more comfortable about them, because a large entity, such as the Government, is supporting them.

    With respect to costs, I think it's clear, if you look at the numbers, that these new, innovative products, although they may happen in an evolutionary rather than an revolutionary manner, are going to have to be adopted simply because of the enormous cost savings, as you mentioned in your opening statement. It is just a tremendous cost savings. I'm sure Mr. McEntee from NACHA, which has been instrumental in doing an enormous number of very productive and profitable pilot programs, can talk about that.

    With respect to convenience, I think that that issue really boils down to one fundamental factor, and that is, as technology becomes ingrained and inculcated into our lives, they seem to get more complicated rather than less complicated. I find, in practicing law, the more I use technology, the busier I get, the more facts I get before me, the quicker information comes to me, the more e-mails I get.
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    So, all the new payment systems have to be convenient. They have to play a role that says to the consumer or the business involved, ''this is going to save you, not only money, it's going to save you time.'' In that respect, I believe that a number of the business-to-business exchanges that are being established, the B2B commerce side of things, is going to have a great effect on payments systems. They will require financial services instruments and systems to change more rapidly than the retail consumer would.

    And lastly, in terms of confidence, that is perhaps from the consumer's point of view the most critical. And you mentioned the privacy issue in your opening statement. Privacy, security, confidentiality. But there's something else. There's the question of, does the system work? Will it work? Because you know what? The system everybody uses today works. And it works very well, and people are very confident in it.

    So, when you look at the movement of money and we say to a consumer or to a business, ''we've got a new, quicker and faster way,'' the one thing that has to happen is that it has to work, and work better. Let me give you an example that I often give to my students on which I ask them to write essays, because it does, I think, punctuate the point. If, for example, we are capable and able, which we are right now, of using new electronic forms of money, say a smart card form of money, and let's say for example it catches on and everybody uses that smart card form of money.

    So, people download from their ATMs or from their banks hundreds of dollars onto smart cards. And at any one time there may be $50 billion worth of electronic money on those smart cards.
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    Now, the question of whether it's money or not is an interesting legal question, which I won't go into right now. But, just consider for a second the confidence in the system. Should the people who own those smart cards or run those smart card businesses be banks? And if they're not banks, which they are not today, what happens when all this money goes on the system?

    What I mean by that, for example, is if all this money is on smart cards, it's a little different from a credit card. With a credit card, you're accessing credit. But, with a smart card, you've got the money on the card, theoretically.

    If someone who owns one of those systems goes out of business for one of a number of reasons, you have an interesting problem, particularly if that form of currency has really caught on and everybody's using it. You have a crisis in the confidence of that currency.

    And that's not a problem we're used to dealing with in this country because the payment systems are all either well-ingrained or they're governmental based somewhere, someplace. Or the money that's being moved around, for example, in the checking system, really is insured at all times because it's always in an account somewhere.

    So questions like that really relate to the confidence in the system. Is it going to work? Are people going to have confidence in it? And what happens the first time it doesn't work? It's great to have very glitzy products that are fast, convenient and cost-effective. But one of the things we have to do, and my former regulatory side tells me, is we've got to make sure that when the system is up and working, it will always work. And if there's a problem, it won't bring down the system.
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    Today in this country, we've been through twenty years of ups and downs in the banking system where 1,500 banks and savings and loans were closed. We know how to deal with failing financial institutions. We know how to close them without a blip in the market, without a consumer being hurt, without a check being stopped. We have to be able to do that with electronic payment systems that are coming into effect.

    That I think provides a little more color commentary on my comments, and I'd be glad to answer any other questions you may have.

    Chairman BACHUS. We appreciate that very much.

    Mr. Van Dyke.


    Mr. VAN DYKE. Thank you, Mr. Chairman and Members of the Subcommittee. Thanks for the invitation to be here today.

    I'd like to keep my focus on the revolution of the World Wide Web, an internet focus, primarily what's happening on the web today. But building on the previous presenter, I will talk about some of the past failures of electronic payment mechanisms, because there are some pertinent lessons inside of that.

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    So, I'll keep a three bullet point outline. First, what about the failures? Why have we seen so many disappointments in the area of electronic commerce? There certainly is a string of them. Second, what is the future of electronic payments? And third, what significant developments are unfolding right now, what are some things we're seeing strong evidence of?

    So starting with the failures, and I'll go quickly on this, internet financial service offerings typically underachieve, period. They are launched with high expectations set to the public, to investors, to businesses. And they're dismal failures out of the chute.

    Some of those remain failures, while some eventually succeed after some tweaking. Failing examples include DigiCash, Mondex USA, IBM's launch of stored-value cash cards at last year's Olympics, micropayments offerings and more. And most of these have the funding, a large marketing budget and so forth.

    Even Microsoft hasn't been able to figure out online finance. If you look at their tax products, their billing service, which they sold off early this year, their wallet service and more, they've had a string of failures.

    Since 1996, I've had a sign up in my office, just for a dose of reality. It says, ''Internet billing will take off next year.'' So I look at that every now and then, I've never taken it down. But to totally undermine my credibility, I do think that it will take off next year, and I'll tell you why in a moment.

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    Mr. VAN DYKE. If you look at stored-value technology, the ability to store cash value on a card, as you previously mentioned, that's virtually non-existent in the U.S. today in the form where you can take stored-value currency and use that at multiple vendors. There are proprietary implementations, but that's not really something significant in the long-term development of internet commerce.

    Internet banking and brokerage were both slow to get started, but it's important to look at those as areas where the news of the failure has started to die down and we're starting to see some very loyal usage by online consumers. And we're starting to move into mainstream users, that is, the internet population that's using banking and brokerage services, are no longer early adopters.

    And one of important developments happening also is this: demographics are changing dramatically. This year, for the first time, the number of online female users has overtaken that of the male population. And it's true that more females than males tend to manage the household finances. So I think we'll see some interesting trends unfold there.

    Looking at bankers for a moment, they've been very eager to profit from internet payments, naturally. But they sometimes struggle to advance in areas that have required great agility or risk-taking. You might say it's not in their nature, due to their fiduciary position.

    But in their defense, basic financial services are somewhat like oxygen. It's not a minor part of our life, and they are something that we absolutely rely on. And the form of switching to a new form of so-called oxygen, naturally brings with it lots of fear. But the amount of positive change that it will bring just can't be overstated.
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    There's a huge need for scale, that is, an ability to raise your capacity over time, and raise it at whim of the market. One thing we've learned about electronic commerce on the payment side is that you really can't make exact predictions about what form it will eventually take. So you need to have a great deal of flexibility in operating scale.

    So you simply can't anticipate everything that's required. And worst of all, since we at Jupiter Communications keep a very heavy focus on adoption at the consumer or the business end-user level, we've found that you can't survey the people that you hope will be your first audience to adopt. They are simply not good at telling you what they'll be using in the future.

    Moving on to internet payments and how they'll evolve over the longer term, it's important to remember that money is nothing but a virtual commodity. Paper and coin is merely a holder for the form or substance of the money itself. Major changes in portable, connected and secure computing platforms will eventually allow money to move from physical to virtual form. But we're not there yet.

    The functionality of the mobile phone and handheld computer is already beginning to merge, and will occur far more quickly than we would expect. It will have with it something like biometric security, where it reads your fingerprint or voice scan to prove that you are who you say you are. Everything that's in your physical wallet, from the family pictures to money to notes to forms of payment can be in this device. And furthermore, lots of other things can be in that device as well that you wish you had room to put in your wallet, but you simply can't.
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    When that happens, we'll each have our own personal portal, if you will, that connects to our bank as well as any other merchant. And the kinds of pilots that are occurring around the world will start to break out of pilot mode and become ubiquitous. For example, there are places around the world today where, rather than dig for pocket change to buy a soda, you take our your mobile phone, dial the number that's on the outside of the soda machine and the soda pops out and another dollar or so ends up on your mobile phone bill. It's a great idea, it requires huge infrastructure, but it's something that already exists in certain places.

    There's a bank in Texas and another one in the U.K. where they actually have live implementations of biometric security for recognizing the user. That is, you don't need your ATM card, you walk up to a line on the sidewalk and there's a machine that scans your eyes, finds your iris as part of your eye, recognizes you as being the only person that can possibly be the person you claim to be, gives you an audible or a visual recognition, and then without asking for a password, gives you complete account access.

    So these methods are already here, it's just a matter of bringing all the pieces together.

    Something that we'll also see the end of is non-real-time payment systems. That is, payment systems at some point in the future will be real-time, bringing an end to things like currency float and the balancing of the checkbook that most people wish they'd do, but really don't do.

    Once we have this wireless financial device, it will have much more capability than today's wallet, but will be completely connected, can be recalled instantly, and will connect with real-time banking and merchant systems, where records are always in synch with one another. We'll have increases in efficiency that will be simply profound.
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    But, while it's easy to talk about, it's very difficult to actually get there. It's a longer term change.

    While the internet will bring wave after wave of massive changes, history of electronic payments technology and marketing launches tells us that these changes will not occur overnight. The short-term changes will appear within highly defined market boundaries. It was mentioned a moment ago that most of this is evolutionary rather than revolutionary. But looking inside certain markets, it looks like there's a revolution going on, a pitched battle for territory within a small defined area.

    I would tell you that the volume of commerce generated by technology because it's cool or fascinating won't ever be significant. And those that are the first to use new electronic payment solutions will do so, because they can immediately cut costs or gain speed. So my focus is always on, ''what's the benefit to the end user?'' And you can never expect someone to give up their security, or privacy, along the way.

    What's interesting is to see the role of such trusted organizations as the FDIC. We did a survey attached this to the back of my statement here, and we asked over 2,200 U.S. consumers what factors would make it most likely for them to begin moving their electronic payment and commerce methods online. So think of people going from being bank browsers to bank transactors, someone that simply looks at Schwab or E-Trade online versus someone that actually manages their accounts online.

    You'll see on page 3 that the number one answer was that their accounts are federally-insured via FDIC. Most consumers don't realize that just about any bank has FDIC insurance, nevertheless, the availability of that was something that would make it most likely for them to move online.
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    My point there is, trusted institutions have a great deal of sway with consumers. So the trick is not deciding that insurance or procedures are necessarily required, it's deciding where they're most potentially valuable and how should they be shaped.

    Let me shift my focus to near-term examples of up and coming payment technologies. This is where we keep a lot of focus. One I'd like to use is a case study of P2P payments, which is an acronym for person to person, that is, me transacting with you, both of us being consumers. And this relates to the second attachment that's in the black and white copy that's at the back of my statement.

    These payments are used by individuals to transfer funds from one person to another, typically by e-mail, with the accompaniment of credit card or checking account access. The idea is, I send you an e-mail and you open up that e-mail and the funds go directly into your banking account, coming out of my checking account or credit card balance. This capability was basically unheard of last year, and now, over 3.5 million consumers are using this capability to transfer $5 million of funds daily.

    That's a huge number when you consider that there are not any corporate payments going on inside the definitional boundaries I just gave you. Many of these transactions are $1, $5, $10, $20. They're things like beanie babies and war memorabilia or whatever else is on e-bay.

    P2P providers exemplify the new breed of financial services companies that pose a significant threat to today's financial institution. On the same token, they could also be an opportunity for the fast moving financial institution to keep or gain ground. But for those financial companies that lack internet speed and strategy, the threat is huge.
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    The case study of how P2P has grown overnight is a pertinent lesson for how internet finance can evolve very quickly. Here's what happened. You had a form of commerce that previously was unheard of, the ability for individuals to do online auctions at places like e-bay. That didn't really exist in the past, because you couldn't bring two individuals out of the U.S. population that had like interests and could keep their anonymity in place, because all they knew about each other was an e-mail and possibly a buyer or seller rating.

    You had this new problem that was solved over the internet, that is, the ability for people to get rid of or acquire merchandise. But at the same time, that new solution created its own set of problems. How can individuals that know nothing more about each other than their e-mail address, or possibly buyer-seller rating exchange funds? Checks simply don't work. The mail is too slow, and people don't want to risk losing a buyer, because they have to wait for the check to clear before they find out the funds are good.

    So out of that frustration, friction or challenge, you had an explosion where a new payment method grew with incredible speed. And that's how P2P evolved.

    It's important to note, too, that consumer-to-consumer commerce right now is at over 9 percent of the total consumer commerce. That's generally not known, that almost one out of ten internet consumer transactions are made from consumers dealing with consumers. And this method, person-to-person payments, is becoming the payment method of choice for consumer-to-consumer commerce.

    The other example I'd like to point out is internet billing. Let me point out, though, that while this has been talked about for a long time and people have asked ''do consumers really want this, because after all, hardly anybody's using it?'' The fact is, there really haven't been any bills for consumers to access until now. Check-Free has nearly 100 billers in place and these are generally large U.S. billers, telcos, credit card companies, utilities and so forth, in place now. And they're signing up portal sites like Yahoo, the U.S. Postal Service, banks and so forth. Naturally they have a number of competitors in place, including bank coalitions and so on.
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    With their acquisition by B of A, there's a $45 million war chest, which once this merger is completed later this year is ready to spend. I bring out the internet billing example because it is very significant. The convenience available to consumers would be so strong, and people will find this application simply irresistible. Once that happens, those consumers that haven't moved their finance connections online will simply find themselves forced to do so. They won't turn down the opportunity for the gains and convenience. And what you'll do is have more people connect their online financial instruments.

    It's important, though, to look at the ramifications to even groups like the U.S. Postal Service, where 18.2 percent of all U.S. mail, first-class mail, that is, is comprised of bills and statements, not to count all the checks that people send in response to those bills and statements. So the impacts to things like these two examples will be huge, as we see electronic payments growing.

    In closing, it won't be long before internet payment becomes the norm, and things like coin and paper currency and mailboxes, and even ATMs, are but antique vestiges of a bygone era. Thank you.

    Chairman BACHUS. I have to make one comment. I love your chart, because one of the categories is 16 percent of the people said ''nothing would influence my decision.'' I think you don't see that on every survey. I know that guy, too.

    Mr. VAN DYKE. If I may, I think that goes back to the fear of one's disconnecting their so-called oxygen supply of the money.
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    Chairman BACHUS. Mr. McEntee.


    Mr. MCENTEE. Mr. Chairman and distinguished Members of the Subcommittee, thank you for this opportunity to testify on the history and the future of electronic payments in the United States.

    I'm going to cover three areas in my remarks today: developments in electronic payments over the past ten years, including both successes and shortcomings; developments that will affect the adoption of electronic payments, focusing on areas where checks are still widely used, and suggestions about what could be done to promote the use of electronic payments.

    Although we certainly have not achieved a checkless society, nor are we likely to do that in the near term, the use of electronic payments has grown quite rapidly over the past ten years. For example, in 1990, electronic payments of all forms, ACH, credit and debit card transactions and wire transfers, accounted for about 18 percent of all non-cash payments. By 1999, that figure had increased to 32 percent of all non-cash payments. Last year, about 35 billion electronic payment transactions were made.

    Let me give you some examples of some of the success stories. The direct deposit of payroll participation rate in the private sector has gone from 10 percent to about 56 percent of all employees. Ninety-six percent of all Federal Government payroll payments and 76 percent of Social Security benefits are now made by direct deposit. More than $1.3 trillion are collected through the electronic Federal tax payment system.
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    Almost all large dollar financial market transactions today are made electronically. And over $2 trillion a day are transferred over the wire transfer systems.

    Despite these and other successes, more progress needs to be made in moving consumers and businesses to electronic payments. To some degree, we are dealing with the expectations created by the famous and incorrect predictions of the 1970's that we would have a checkless society by now. There are several reasons why this has not happened.

    In one respect, we are the victims of our own success. We have created a very efficient check collection system. For example, a check deposited today here in Washington drawn on a bank in San Francisco will be in San Francisco tomorrow morning for payment. One of the reasons that paper checks are still popular with consumers is the way they are priced. Although account and minimum balance fees are common, most consumers do not pay an explicit fee to write a check. Checks are also nearly universally accepted and many consumers understand the float benefits of paying bills by check.

    Finally, and as was said by our two prior speakers, both consumers and businesses are fundamentally conservative when it comes to managing and transferring their money. If it's not easy to use and if they don't understand it, they don't use it.

    I'd like to now describe how we believe electronic payments in the United States will fare in the future in the areas of consumer bill payment and retail purchases. I will also discuss the relationship between the internet and electronic payments. With internet initiated electronic bill payment, consumers retain the same control over the timing and amount of the payment as they do when they write checks. But they and their billing companies receive the benefits of electronic processing rather than paper processing.
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    Electronic bill payment has developed more slowly than we have expected. One reason is that until recently, the bill itself was not presented electronically to the consumer. This is changing, as companies are beginning to offer electronic delivery of bills over the internet.

    This development should substantially increase the growth in electronic bill payment. But I'm not going to go out on a limb like the gentleman to my right and predict that this will all happen next year. I think the time horizon for this development will go on longer than just one year.

    At retail locations, payment cards now rival checks for supremacy. But no one is expecting checks to disappear any time soon. NACHA has led an industry effort that allows retailers to achieve the cost efficiency of electronic payments while still allowing consumers to use checks. This is called check conversion. It involves reading the account and routing numbers off a check to create an electronic ACH debit. We're now testing with several companies this same concept for checks that consumers use to pay bills.

    The movement of commerce to the internet provides both a challenge and an opportunity for payment systems. Early attempts to create new payment systems that were exclusive to the internet have largely failed, because they were not convenient to use and consumers did not understand how they worked.

    Rather, the internet has become a medium for new uses of existing payment systems. An example that Mr. Van Dyke gave on P2P—or person-to-person transfers—is certainly an example of this point. Today, the P2P systems are basically using both the credit card networks and the ACH network to move the money from one party to another party. So basically, it's the internet taking advantage of existing payment systems to move money between one party and the next.
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    Studies have shown that many consumers are reluctant to buy online due to concerns about privacy and security. Ultimately, we believe that these concerns will be alleviated. NACHA is developing a new payment method that addresses these concerns. Consumers using this new payment method would, at the end of checkout on a website, electronically link to their financial institution's website or their credit card issuer's website. The financial institution would confirm the details of the purchase, authenticate the consumer, and the consumer would then select a payment option. This makes it unnecessary for the consumer to supply the merchant with any financial or payment information.

    Although this payment method is in the early stages of development, it promises a way to address consumer concerns about privacy and security as well as reduce merchant concerns about exposure to fraud. And we also think that this payment method, if it is successful, will largely address some of the concerns that were expressed in an article that is in today's Wall Street Journal on the tremendous amount of chargebacks that e-tailers experience when cardholders indicate that the transaction was an unauthorized credit card transaction.

    But what can we do to promote electronic payments? Many companies, particularly small businesses, do not offer direct deposit because they would have to maintain two dual systems, one for direct deposit and one for checks. Most States prohibit companies from requiring employees to use direct deposit. Congress could consider Federal legislation that would allow companies to mandate the use of direct deposit by their employees. This would increase the direct deposit participation rate from 56 percent to close to 100 percent.

    Many consumers are not aware of the benefits of paying bills electronically. NACHA is looking into creating a non-profit foundation specifically dedicated to this type of consumer education. Currently we are examining the level of interest among various parties and identifying sources of funding to determine whether such a foundation is feasible.
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    Earlier in my testimony, I mentioned several reasons why electronic payments have not replaced checks. There is one other reason that is unique to ACH payments. The amount of resources devoted to marketing ACH payments has been relatively modest. The credit and debit card networks fund their marketing programs through transaction fees that they charge when they process payments, and their marketing programs have been far more effective than the ACH marketing programs.

    ACH marketing programs are not funded this way, because NACHA does not process payments. Instead, the Federal Reserve and three private sector operators process ACH payments. These operators have all agreed in principle to fund a more aggressive nationwide marketing program through volume based funding. The private sector operators, however, will not implement this arrangement until the Federal Reserve modifies certain policies that they believe place them at a disadvantage in competing with the Fed.

    The Fed has proposed to modify these policies. The private sector operators believe that these changes are a step in the right direction. However, they have proposed additional changes that the Federal Reserve is now considering. We are hopeful that these differences are resolved so that we will be able to implement a more effective marketing program that would accelerate the growth of ACH payments in this country.

    According to a Federal Reserve study, the U.S. economy saves more than $1 for each check that is converted to an electronic payment. If just half of the check volume in this country is converted to electronic payments, the U.S. economy could save over $30 billion a year. At NACHA, we are working with financial institutions, companies and consumers to help this potential cost savings become a reality.
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    We would be glad to also work with the Subcommittee and with Congress to help us in this endeavor.

    That concludes my formal remarks, and I'll be glad to try to answer any questions that you may have. Thank you.

    Chairman BACHUS. All right, I appreciate that.

    Ms. Biggert, do you have any questions?

    Mr. Inslee.

    Mr. Sherman.

    Mr. SHERMAN. Thank you, Mr. Chairman, I do have a couple of questions.

    First off, I appreciate this opportunity for this hearing. There's tremendous potential here, and it is happening in my neck of the woods. I was just walking down the street the other day and met a fellow who's running an E-Charge company, which you may have heard of, which has really got an exciting new product called Net Account out, which is really a virtual credit card. So this is happening out in the real world, so I'm very excited about it.

    But I want to ask a question of Mr. McEntee. You talked about this dollar savings for each check. How does that break out? What are the efficiencies there?
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    Mr. MCENTEE. Well, there's a whole series of efficiencies. It depends upon the particular application. Let's take consumer bill payment as one application. If the bill is presented over the internet and the consumer pays the bill electronically, we can look at several steps that cost billers and consumers money that would be eliminated.

    For example, today the biller has to print a bill, has to mail the bill to the consumer and that costs the biller on average probably about 50 cents a transaction. The consumer then has to take the bill and then they prepare a check, write a check, then they mail that check in to the biller. And that's going to cost the consumer, well, 33 cents for the stamp, a few pennies for the check, and now you're talking about probably 40 cents. So you're up to 90 cents.

    And now the biller, the banking industry and the Federal Reserve have to process that paper check. So you're talking about another 10 cents at least in transaction costs.

    If you replace that with a pure electronic transaction it would cost probably less than 10 cents to process that transaction. Clearly a savings of at least 90 cents for that.

    So just in electronic bill transaction alone, and there's probably about 15 to 17 billion of these bill payment transactions made every year. If they were converted on the round trip to electronic transaction, you're talking about, I would say conservatively, saving $1 a transaction.

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    Mr. SHERMAN. Great, thank you.

    Mr. Van Dyke, I was talking to the folks at E-Charge about the dual challenges for the consumer, the challenge of privacy and security, and they think they've got a good way to approach that. To the merchant, the challenge of fraud. They think they have a good way to approach that as well.

    What do you think are the biggest hurdles right now on both of those issues as far as overcoming those twin concerns? Right now.

    Mr. VAN DYKE. I think at this moment actually the biggest hurdle is misinformation more than anything else: the lack of clear and concise information about what the problems are and lack of a common set of language used by merchants and the industry. When you look at the relative risk to any one individual conducting a transaction, it generally is pretty low. However, there's much information and hyperbole around the whole industry. There isn't enough mainstream population online so people can talk to others that are using it to assuage their fears.

    Mr. SHERMAN. So is there any role Federal agencies can to take to help surmount that issue? Forums, common nomenclatures, common standards? Is there any role that Federal agencies should be playing to sort of having common terminology, at least?

    Mr. VAN DYKE. Forums could be helpful, as well as a voluntary, but strict, ''seal of approval.'' If you look at something like the FDIC, that's something non-trivial to sign up for, for obvious reasons. It's valued because there is significant recourse involved for a person who has had a loss of funds.
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    However, a very specific set of standards for compliance that was issued by the Government, equal across all 50 States, and communicated widely, could do a lot to make sure we stay at the forefront of electronic commerce adoption.

    Mr. SHERMAN. Has anyone in the industry seriously proposed that at all, do you know?

    Mr. VAN DYKE. There have been some industry efforts, like E-Trustee and Better Business Bureau and others. The problem is they haven't been pervasive enough, and I really see these as an all or nothing proposition.

    Mr. SHERMAN. Thank you.

    Chairman BACHUS. Ms. Biggert.

    Ms. BIGGERT. Thank you, Mr. Chairman.

    As Mr. Van Dyke was talking about the Palm Pilot and everything being as heavy as a brick, I'm embarrassed to show this, but this is my wallet. It weighs almost as much as a brick and it doesn't even have room for hard cash in it. So I would be delighted with what we could find to alleviate having to carry all that around. It gets pretty heavy on your shoulder.

    But we do use electronic banking. Whenever people ask me, or we start talking about it, they say, ''Well, I'm really afraid to do that, because then people have access—it's so much easier for people to get on the internet and have access to your account.'' And I guess this is either for Mr. Van Dyke or Mr. Vartanian. With the hearing that we had last week, I believe it was on privacy of identity, we saw where you could actually go on the internet and find a service that actually sells information on people's bank accounts, and the amount of money in them.
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    So would electronic commerce increase the risk of that, or is it already here, so that we need to look at developing better safeguards and security on the internet?

    Mr. VARTANIAN. Well, let me start. I may be more or less informed than most consumers, but let me give you my view on that issue. I think that the movement toward electronic commerce and the use of electronic payment systems inevitably leads us to a more secure system, or one at least that can be as secure.

    As a consumer, and maybe I know enough about the technology to be comfortable, but as a consumer, I'm not any more concerned about my information being taken, my accounts being stolen or my money going to the wrong place than I am in the current system that is largely based on paper. The example often given is the fact that over the phone we will give out our credit card number, we'll walk into a restaurant and give our credit card to someone we don't know. Those are all risks in the system. And there are inevitable risks in the electronic financial services system, too.

    But, to the extent that consumers begin using electronic signatures, and when that's highly encrypted at 128 bit encryption, I feel pretty secure, because I think no one's going to bother trying to decrypt my signature or steal my information, because the time and the effort and the money it will take to do it just isn't worth it to them. The real touch points, it seems to me, the real security points, are the servers back in the financial service systems, or the servers in companies where all of the information is.

    So I think that eventually we will be at a place in time where the security is the same, if not better. The problem is twofold. One is the scale at which we're now dealing. Now everything's out there, everything's moveable at the touch of a keystroke. And I think that raises interesting implications for the marketing and selling of information. Most of the information that's out there, I believe, has been sold voluntarily and in some cases legally. So most of the information consumers are worried about has been out there for twenty-five years. Cyberspace and the internet hasn't changed that. It changes the way it can move, the speed at which it can move, and the scale of the problem.
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    But the issue really is, what kind of information do we want to be out there in the system and free and open to everybody, and what information don't we want out there. If you think about it, it's a very interesting problem. As a lawyer, I sit here and I say to myself, it's intriguing that in the year 2000 there is no legal answer to the question of, when I give information to somebody, whose information is it? What I'm really saying as a lawyer is, is that information a commodity to which property rights attach? And if it does, whose property rights are they?

    It's interesting to me that in the year 2000, we don't have an answer to that question. Without an answer to that question, a business can say, ''that's our information,'' and you can say, it's your information, but without having any statutes, rules, laws or common law or cases, there's a lot of confusion out there. So it seems to me we have to establish some basic informational rules before we can tackle the larger problems.

    Ms. BIGGERT. Mr. Van Dyke, do you have anything to add to that?

    Mr. VAN DYKE. Sure. My thoughts on that are the following: depending on what you read, you can imagine that the problems are rampant, and that you take a more significant risk by moving your funds online. I would say that's not always the case. Personally I've paid my bills online for six years, purchased all of my groceries online for more than a year and done many other online activities. I've never had a single problem.

    So while you can always read about certain individuals having problems, there are other cases like mine, which often go unreported.
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    Here's the issue at a business level: Much of what we see starts as trial and error. Organizations like NACHA are designed to minimize the trial and error, and that's the way it should be. But sometimes you'll see cases such as a recent break-in of one major payment provider in a relatively new service last weekend. They went public and did the honorable thing and admitted there was a procedural error that caused the problem.

    But they contained the issue and there was no fraud actually reported from the release of information that should not have gone out.

    Many problems online have risk that is the same as their offline equivalent. It's like the waiter in the restaurant stealing your credit card number. The same can happen online, and that's really not a new set of problems. It's just reported as something new.

    I would add that sometimes the online solution is more secure than its' offline equivalent. The example of that that I mentioned earlier was P2P payments. If you compare the ability to transfer funds from one person to another for these online auctions growing so rapidly right now, the internet exchange of payment is actually more secure than the offline counterpart of waiting for a check to arrive or accepting that payment, because you know you'll probably lose a transaction if you don't.

    So, education is critical.

    Ms. BIGGERT. Just one question, and it's something that I'm always wondering with paying online. Some of the transactions show up as being electronically transferred, and others show that the company actually writes the check and sends it. Is that the decision of the company that's receiving the payment, or is that the decision of, let's say, the bank or the service that's providing that?
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    Mr. MCENTEE. It will depend upon the arrangement set up between the biller and the company that's providing the bill payment service to the consumer. Today, probably about 50 percent of those payments that the consumer creates over their PC and sends to their bank or to some other company, is now sent electronically directly to the biller. In the other cases, the other 50 percent, there's still a problem. There's no arrangement to move that money electronically between the company that's providing the service and the biller.

    So what happens is the company or the bank that's providing the bill payment services prepares a check or a demand draft or a check-and-list, and they send it off to the biller and the biller then has to post the payment from that paper information, which unfortunately creates delays and also leads to mistakes. And that's probably the main reason why electronic bill payment has not grown more rapidly, because of some of the mistakes associated with that.

    But as we said before in our testimony, the internet, to a large extent, should solve that problem. Because if the bill is presented electronically by the biller, then you don't have to worry about anyone cutting a paper check or preparing a computer listing and sending it in to the biller. Everything is going to be done electronically. So the delays and the mistakes will be eliminated.

    Ms. BIGGERT. Thank you very much.

    Thank you, Mr. Chairman.

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    Chairman BACHUS. I thank the gentlewoman from Illinois.

    I'm going to read something for the record, which makes us able to introduce your statements. Without objection, I would like for the written statements and any attachments of both the first and second panel to be entered into the record. Without objection, I hear no objection, so your statements and any attachments you wish to enter will be made a part of the record.

    Sitting here hearing the testimony, I was struck by, we think that there isn't a lot of progress, but then when we talk about how much progress there's been, we realize that there's been a real change that we're not even, we don't really comprehend on a conscious basis of how we pay our bills. A lot of it is going on and it's changing and we just don't really, I don't think we appreciate it.

    And as you gentlemen were talking about the methods of making payments and what, I was struck sort of by the generational approach. With each generation, there's a real change in making payments. I'll give you an example. My father is 83 years old, and he continues to be disturbed by the fact that when we go places, I don't have gas credit cards. I only have a MasterCard. And he continues to say to me, ''You really need a Texaco card or a Chevron card.'' Because, that's how he thinks—if you want to buy gas, you need a gas card.

    They have a Parisian's card, and they keep saying to me, my mother and father, ''Do you want to get a Parisian's card?'' That's a department store in Birmingham. I have a MasterCard, I use it everywhere.

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    They don't have an ATM card, which I didn't have ten years ago. But I would say, the percentage of people with ATM cards, I don't know whether it's 50 percent or 60 percent, but now, that's something that ten years ago, very few people had. And that's a tremendous change. And I was struck a few days ago by when I went to my bank during banking hours and there was no line at the tellers, but there were three people waiting at the ATM machine. And I did not want to go inside to use a teller. I felt more comfortable using my ATM card.

    And a third example is this, and this was just from this hearing, it really sort of gets your mind thinking. When we talk about security online is more secure now, what we consider more secure, there was a time, probably not eight or ten years ago, when we'd pull up to pay for gas, this idea of swiping a card, I think the first time I did that, ''Do I have enough record here? I'm not signing anything.''

    Recently, I stopped at a gas station and I wasn't able to swipe my card, I had to go inside. And I really had an uneasy feeling about signing and leaving a carbon copy with the merchant. Because I felt like that was not very secure. Five years ago, or ten years ago, we would have probably thought just the opposite. So it has been incredible.

    So, I do think next year we will find, we will get there. But I guess my question is, what do you predict the ATM card, ten years ago, would have predicted that, or even twenty years ago when people were using, or thirty years ago, they used gas credit cards, department store cards, looking out there five or ten years from now, what do you think we'll do? How will we transact? How will we pay our bills? How will we do this?

    Mr. VARTANIAN. Well, let me start, I'll give the other two panelists some time to think. I've thought about this a little. I agree that there's a lot of generational evolution involved here. We are going to do things the way we do them as long as we live, and then our kids may do them differently. I don't know that my children have ever been in a bank branch, and I'm not sure that they ever want to be in a bank branch. So I think that that evolution is going to occur.
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    But, over the next ten to fifteen years, I think what we're going to see is a few very important changes. Number one, and Mr. Van Dyke referred to this, I think you'll see our payment systems moving to real-time finance. That is an extraordinarily revolutionary concept. Because, if you think about it, all of our payment systems today are four-party payment systems: buyer, consumer, consumer's bank, buyer's bank, generally. And they involve, somewhere, someplace, the movement of something that takes more than a day to process.

    And so our systems are all built around batch processing and netting. And sometime in the middle of the night while we're sleeping, everything gets worked out, and the next day the account is credited or debited.

    Well, to the extent that we can do that in real-time, there are enormous cost efficiencies and benefits to the system. To the extent that some form of electronic money or some form of electronic payment system operates in real-time, that is an enormous difference. And I think that's going to happen because of the cost benefits.

    The second thing that will happen is that eventually, someone will win the battle for electronic bill presentment. Somehow, someplace, all the stars will come into alignment and we will decide as consumers and businesses where we want to go to get our bills and we'll pay them from that point, so that we won't have to confront the internet as this enormous octopus of various places. We'll go to one or two places, and from there, those will be our financial portals or our entertainment portals.

    That is a critical development that will occur, because one of the problems with using the internet for financial services, is that there's too much now available. There are too many things, too many distractions, too many ways to do things. So I think the battle that's going on between financial services companies, non-financial services companies and others for the electronic bill presentment space is a very important battle.
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    I think those two things will overtake our financial services systems, some sort of real-time finance system and electronic bill presentment.

    Mr. VAN DYKE. So I'll go next. One of the things that I think will be a further evolution as finance becomes more remote or virtual is, we're talking about the change from bank branches to ATMs. I think another equivalent change, or possibly even more severe in its impact, will be as that ATM moves to the desktop, or to any computer connection, which will require a lot of infrastructure. It will be great for our economy, when you look at the amount of security technology and other forms of technology and services that we require to help us get there. And it will be good for our position as a Nation in terms of economic strength.

    But the impact of being able to have essentially any computer port be an ATM, that can download stored-value cash or not even need to use stored-value, but simply transfer funds, eliminate that immediate step, will be significant.

    Sort of a wild card scenario that I'm not sure how comfortable I feel about predicting it by any stretch, but it actually could occur, depending on how difficult it is to achieve, the ATM anywhere kind of concept, could actually be the idea that the last mile deliveries, like the truck that brings my groceries to my home, and I used to be the only one that gets that, now I see him driving up and down the streets around Silicon Valley all the time.

    And they don't bring just groceries, but everything else, which is that company's strategy, you know, designed to become something you can't live without, is the idea that actually the global satellite positioning, and with high physical security, you could have a roving ATM in safe neighborhoods, where the ATM goes on four wheels. And that truck that brings everything from your dry cleaning to your groceries to you name it, more than just a certain set of supplies, is actually the roving ATM on wheels.
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    Now, it's important that if that wild card scenario comes true to realize there won't be a need for that in the long term. Because eventually again, that computer port can be the ATM. It's an intermediate step, but it could be an interesting one.

    And the idea also, looking at financial services company, of aggregation. Aggregation is kind of a hot topic right now in financial services. Most people think of the idea that I could go to, what's been announced, CitiBank or Wells Fargo, I could see information from any major bank at my one single bank, information about my checking, savings, not just at that financial institution, but from anywhere else.

    But aggregation is occurring everywhere in financial services. The idea that I can go to Pay Pal and pay with my Visa card, MasterCard, American Express, checking account, whatever, any payment company, see all my bank account information at one bank, your brokerage, insurance, banking and everything from any financial institution.

    So aggregation is huge, and it's the thing that will be like the magnet pulling consumers online.

    Chairman BACHUS. Mr. McEntee, I've been called to a vote in Judiciary. Ms. Biggert is going to chair the hearing. But we will get a transcript of the testimony, and I will hopefully be back in a few minutes.

    Ms. BIGGERT. [Presiding]. I guess I win by default.

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    Mrs. Lee, do you have any questions? OK. Well, then, thank you very much. We really appreciate all that you've contributed in your testimony from this panel. As we move along in considering the electronic payment, this will certainly be a big help to us.

    So, thank you all for coming.

    We have a second panel, if they would come up.

    On our second panel, we have four members. The first one is Gary Craft, who joined Deutsche Banc Alexander Brown as Managing Director of their equity research department. He heads research and electronic finance, with coverage including internet banking, internet brokerage, internet insurance and internet payment companies. Prior to joining Deutsche Banc Alexander Brown, Craft spent six years on Wall Street as a research analyst working with many industry leaders in all segments of e-finance sectors.

    Next on our panel is Mrs. Jane Kaufman Winn, who's a Professor at Southern Methodist University School of Law in Dallas, Texas. Prior to this, she practiced law with the firm of Sherman and Sterling in New York. She is knowledgeable in the area of payment systems law and the law of electronic commerce, and has had several books published, including ''The Law of Electronic Commerce.'' Good night reading, I'm sure. And numerous articles and papers, such as ''Clash of the Titans: Regulating the Competition Between Established and Emerging Electronic Payment Systems.''

    Dr. Richard Rahn is an economist, entrepreneur, and the author of the book entitled ''The End of Money and The Struggle for Financial Privacy,'' published in 1999. He's a frequent speaker on tax and economics. He has appeared in major newspapers and on noted television programs. He is the Chairman of Novecon Financial Limited, a member of the board of Novecopter SVL, and founding Chairman of Novecon Technologies Corporation.
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    Ms. Jacki Snyder is Chairman of the Food Marketing Institute's Electronic Payment Systems Committee, and is Manager of Electronic Payments and Electronic Marketing for Supervalu, Inc. Supervalu is one of the Nation's largest food distributors and is the largest wholesaler. Supervalu also owns and operates more than 300 supermarkets under a variety of names and formats.

    So, this is our second panel. I think we'll hear from each of you and then take questions following your discussions of the issue. We'll start with Mr. Craft, please.


    Mr. CRAFT. Yes, thank you, Madam Chairwoman.

    In 1997, we wrote a report entitled ''The Sleeping Bear Awakens,'' in which we made some predictions on the future of the electronic payments industry. Now, in 1997, the internet was relatively new. But we felt that payments would by necessity really have to follow suit with much of the activity that we were seeing in consumer internet transactions.

    We did make some predictions and some prognostications in that report. Some of these actually have proven to be quite correct, the others not so correct. The most important correction that we made in that report actually has emerged into a very vibrant part of the technology of private economy. And that is that the payment networks today, where settlement actually takes place, would be ill prepared to actually move the messages about payment information. And this is really the essence of our point today.
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    Today, if we move information about payment, we can generate as much as $1 per transaction. If we move just the actual debits and the credits on the settlement networks, we're talking a nickel, a dime, maybe a quarter on some of the more large value dollar payments, like the Fed Wire.

    But the real activity is in the information about payment. And so indeed, we see today over 100 companies that are trying to innovate around the payments industry. Most of these are really focused on what we call virtual message managements. These are companies that will actually split off the payment from the message about the payment, and collect a much higher transaction fee.

    We realized that in an electronic economy, one unquestionably subsuming the physical economy by the day would by necessity require an efficient electronic payment network. This would have to be very efficient, and not only settlement, but the message management, the information about payment. And in effect, we think the information about payment is about control over the payment system in this country.

    At the same time, we also felt that the current payment networks, particularly the ACH, the ATM, credit card and the Fed Wire networks, would experience very rapid transaction growth. In other words, we would see settlement activity moving through those networks. But the information that accompanies that data or that actual settlement would be split off. It might move some place else.

    Stepping back, and with some additional three years of insight into the industry, and particularly talking to the innovators, our business really is to figure out who the innovators are, what they're focused on, does it make sense, is it in regulatory compliance, is this a company that can grow and thrive, we've learned a couple of additional points.
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    We take the credit card industry really as an example here, and the reasons why the credit card industry is not suitable for internet commerce. Some of the real weaknesses that we see today, as highlighted in the Wall Street Journal today.

    Historically, the focus was on consumer fraud. But as we know, consumers have protection from credit card fraud. The merchants do not. And the merchants really have a big difficulty today on the internet accepting credit payments. And let me give you the example, some of the details as to why. First and foremost is cost. So if I'm an internet merchant and I'm operating on 2 to 3 percent profit margins, all of that would be paid out to my payment provider. It's very, very cost prohibitive today for most internet merchants to accept a credit card payment.

    Second, the credit card network rules are very draconian, and they're biased against the merchant. I am completely uninsured if a consumer does a credit card transaction with me and disputes it. And most of the things that are moving today on the internet are information goods. So it could be software, it could be some type of service that's information based, where the consumer gets his monthly statement and says, ''I did not authorize that payment.''

    So chargeback rates in certain industries, legitimate industries, not gaming, not the adult industries, but software, other industries, are as much as 30 percent. That means if I make $100, I have to give $30 back. It comes out of my pocket. So it's credited to me, but I have to give it back.

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    So merchants find these rules, the card network rules, are very draconian, very much biased against the merchant.

    Third, if I'm a merchant, the information flows, the way I collect information, how quickly I know what my settlement activity will be, they're very disconnected and they're very loose and they're very slow. Now, this was fine in the physical world. But in the internet world, it just will not work. I need to know what will settle, what is not settled, what's being charged back, what is not. And the credit card networks just are not capable of accommodating these particular needs.

    Fourth, there are really too many redundant steps in the whole way in which we clear and set on the credit card networks today. So not only is it costly and unwieldy, but there are just wy too many steps involved.

    And fifth, and probably most importantly, and where the banking industry really has a duty, we believe, is there's no proper authentication system. So if I go to do business on the internet, there's no way to authenticate that I am who I say I am.

    Now, we've tried many, many ways to approach this. But none of them are economic. And let me just talk about that in a broader sense.

    So the challenges that the credit card networks face today are really a stepping stone to the challenges all the existing payment networks face in moving from a physical based economy to the internet economy. First is regulatory adaptation. If the payment networks can adapt to the current environment, then it's possible to not only survive, but thrive. That means get more transaction activity through your networks and to be able to justify your existence and to be able to build and invest.
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    The credit card networks have not really adapted terribly well. And let me give you an example why. First, we talked about how a merchant is completely uninsured. Somebody says, I did not buy that software from you, Mr. ABC software company, and the credit card companies side with the cardholder.

    Now, we're a consumer population. That makes terrible sense. But if cardholders know they can do this, they will egregiously take advantage of such loopholes. And indeed, we're seeing that kind of exploitation of this card network rules.

    Second, any kind of payment network has to really encourage economic alternative arrangements that are apart from the existing arrangements that exist today. When the internet came into being, Visa and MasterCard attempted to foist the whole process in which a credit card transaction is approved onto the internet. And it just didn't make any sense.

    They tried to do it through an architecture called secure electronic transactions, or SET. What this did was, it took all the different links in the chain and put them onto the internet and allowed each of them to take their pound of flesh as the transaction flowed through the internet. But it was very unwieldy and it just could not be implemented because of some of the technological hurdles.

    What we really need in an internet transaction on the internet is not multiple parties in the chain, but one settlement bank and one front end customer service, one front end information reporting entity. And Visa and MasterCard have been against that, because it would damage some of the economics to the established players and to the established process.
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    So hence, this has given rise to perhaps the biggest potential efficiency trend as well as the biggest threat to monetary policy on the internet, and that's called self clearing organizations. Earlier, it was mentioned that a company called E-Charge was in a Congressperson's district. And this is a potential self clearing organization.

    Now, they work in close harmony with the banking industry today. But their approach to the game is to offer an alternative to a Visa or a MasterCard clearing and settlement network. It's cheaper, it's faster, it's much more efficient. And the issues on chargeback, uninsured, the whole bias or the balance between the consumer and the merchant, is more even.

    In sum, we think that the developments that are taking place, particularly in this very important area of self clearing, in other words, one settlement bank representing both parties to trade, providing real time information flows, making it cheap, making it so that the merchant is not staying in business to pay the payments companies, that the innovation here is in close harmony with the banking system. We're not creating new funds, we're tying it into the established payment networks and to the established monetary supply, and working close with bank partners.

    But this is a natural evolution in the payment networks, so that we will see new alternative payment networks arise. Because as we've seen with the credit card industry, they have not adapted, and they have not allowed alternative economic arrangements to occur.

    With that, I thank you for your time.

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    Ms. BIGGERT. Thank you. I'll turn the chair back to the Chairman, and Ms. Kaufman Winn, if you'd like to proceed.


    Ms. WINN. Mr. Chairman, Members of the subcommittee, thank you very much for inviting me to come here today to discuss electronic payments regulations issues with you today.

    I think that the speakers that have come here today have been tremendously informative. I've learned a lot. So I'm going to summarize some of my comments that have been made redundant by the earlier presentations.

    I think that the earlier presentations have made it clear that in the United States today, we're using yesterday's technology to process payments. And the reason we're doing that is that a lot of individual actors are making rational choices about how they should spend their money. Those systems operate very cheaply. They're extremely stable, extremely reliable.

    And so the decision between sticking with what works today and making a leap into the dark is one that an awful lot of businesses are unwilling to make. Part of the risk in switching to a new payments technology is not just the inherent risk in the technology itself, that it may not function as warranted by the vendor, there's also the problem in a networked economy that you have to pick the winner, you have to choose the one who will ultimately become the next market standard.
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    Businesses today are locked into a standardized technology that works very well, and they're waiting to see what the next standard is going to be. We're in a sort of let a hundred flowers bloom phase, in which there's dozens and hundreds of different competing technology vendors and merchants are quite rationally making the decision to remain on the sidelines.

    With regard to consumer protection regulations, I think that the shortcomings of existing regulations from the point of view of merchants have been made clear, but I think somebody needs to emphasize that we've got a really phenomenal package of consumer protections in this country that in my opinion are working extremely well, I'm talking about Regulation Z and Regulation E, on balance for dealing with the problems that consumers face in using technologies that individual consumers can't possibly hope to understand.

    Consumers are protected from the risk of malfunction in the system, and I think that that's a principle that needs to be preserved going forward. I think that there is a very serious market failure problem that putting the risk on merchants when the technology hasn't yet been developed and standardized for the risks that have emerged in the internet is a serious problem, and I think that the marketplace is working to find a solution to that right now.

    A lot of the speakers have been asked or have commented on possible future developments over the next five to ten years. I'm a law professor, I'm not in business, I'm not representing a client today. So these are my academic guesses.

    I would guess that simply processing payments alone is not enough to justify the cost of switching. That businesses will make the decision to switch when they're offered a technology that integrates payments into other services. You can think of it as a sort of payments plus option. I think that Mr. Craft just touched on that when he said, the message that goes with the payment is essential in e-business applications.
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    A lot of what's driving the move to electronic commerce and e-business applications is not just cost savings. It's more powerful marketing and research tools that become available when you can see what's going on inside your operation and you can see what's going on inside the marketplace, because you can analyze data flows. Converting information from paper to electronic form gives businesses more powerful competitive tools to anticipate changes in the marketplace and respond to them quickly.

    When payment applications are integrated into other business applications, then there's a business case for making the investment and switching. So I would suggest that when electronic payments applications are effectively integrated into new e-commerce applications generally, businesses will begin to make the switch.

    Consumers are going to continue resisting a switch until like businesses, they can be offered something else, not just payment services, but something else, enhanced values that are concrete and real and meaningful to consumers. I think there's a real disconnect between what people in business who are driven by shareholder value maximization think consumers want and what actual individual human consumers want.

    When you think about the hype associated with one to one marketing, in the business world, everybody thought that was the greatest thing since sliced bread. If you convert one-to-one marketing to a consumer perspective, what it means is, an overwhelming invasion of your privacy. So I think that there's a real problem in allowing businesses to understand what consumers want as opposed to working with consumers directly.

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    Right now, we're watching the development of a whole new generation of e-commerce applications. One way to think about it is middleware. The integration of different disparate functions like payments on the one hand, inventory control on the other. In order to make middleware applications work, we need technical standards. The technical standards are being developed today. The next generation of e-commerce will implement those technical standards in new software and hardware solutions that businesses will buy.

    I think that the focus of regulators' attention needs to be not just on products coming into the marketplace and the use that consumers make of those, but regulators need to be looking at the standard developing processes themselves. Because the standards that are being developed today will be implemented in five years, in ten years. And if there's something missing in a standard, it's entirely possible that it will not be economic to change it five to ten years from now, that regulatory decisions will be foreclosed in the future if there isn't an engaged dialogue today between technical standard developing and regulators, speaking on behalf of consumers.

    I have a few examples in my paper of the kinds of things that, if you really got focus groups of consumers and you really got them to puzzle through the new potentials of technology and what that might mean to them, the kinds of things that consumers might ask for that I could predict standard developing organizations today would overlook.

    For example, an electronic bill payment and presentment environment, if I send off my payment electronically to my utility company, you know what I'd like? I'd like an e-mail coming back to me that says, thank you very much for your payment, Mrs. Winn, we've credited it to your account and we're pleased to report to you that your account is now current and paid in full.
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    Wouldn't that be nice? You know, at the same time I make the payment to me that they confirm back to me not just that they got my money, but that I don't owe them anything until next month. That's a piece of information that's useful to me that middleware could deliver if the standard developers think to write it into the standard now.

    Another issue that I've noticed, I speak a lot at conferences and I talk a lot to people about e-commerce, remarkably sophisticated people, CPAs, business managers, don't understand that if you use a Visa branded debit card, you don't have a dispute resolution function the same way you do if you use a Visa branded credit card in making an internet purchase. There's a complete difference in the package of consumer rights under Reg E for debit cards and Reg Z for credit cards.

    And even people who should know better don't seem to understand that. So I think if I go onto an internet merchant and make a purchase, and I get out my Visa branded debit card and I'm going to pay out of my checking account, a little screen should pop up and say, you know, if you do this, you can't dispute the purchase later, the payment is final right now.

    Now, I don't think anybody has an incentive to make sure that that pop-up screen shows up right now. I've never noticed it in any interface that I've used.

    There's a trick that you can use under existing check law which is, if you have a dispute with a merchant, you can write on the memo line of your check, payment in full of all amounts owed. When the merchant gets that check, they have two choices. They can mail the check back to you and continue to dispute the amount, or they can deposit the check and the dispute is over, it's been settled on your terms. That's called a full payment check and it works today.
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    How about writing that into electronic payment standards, so that if I'm in a dispute mode with a merchant and I want to send in a payment, I can turn on a switch that says, if you process this payment, the dispute has been resolved on my terms. And then let the merchant make the decision that they don't want the money, the bird in the hand, they're going to send that money back to me and they're going to continue to dispute it and try to get a higher amount later.

    Those are the kinds of hard choices that merchants can impose on consumers today, and I'd like the ability to impose it on merchants. I don't think those are being written into technical standards.

    There are some other examples that I didn't put into my paper. But I think that the kind of standardization that's becoming possible in e-commerce is going to facilitate greater use of electronic agents on behalf of consumers. I'm going to be able to sit down at my leisure and I'm going to be able to program my browser or program a software agent to say, these are my priorities. Go out on the internet and look for merchants that respect my priorities.

    And when I say I want to buy a new CD, you can come back to me and you can say, if you buy this CD that you want from CD NOW, they won't respect your privacy preferences and they'll give you a lower price. But you can pay $1 extra and you can go to this merchant, and they won't release your personal information to marketers.

    So that kind of empowerment is possible with standards, but it isn't possible if the standards aren't written to reflect those interests today.
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    So I would suggest the kinds of issues that we're talking about are forward looking. I would suggest that most of the efforts put forward in the electronic payments and electronic commerce arena by consumer organizations today has unfortunately been focused on fighting the battles of the 1970's over again. If the Members of the subcommittee are familiar with the consumer protections in E-Sign, which was recently passed, I think that that represents a pure victory on behalf of consumers. It was a hard-fought battle, very substantial consumer protections were put in, and I think that it's a backward looking solution that doesn't actually empower any consumers.

    Consumer protection groups today are busy building imaginary lines to fight last year's war. And I don't notice any Consumer Protection Agency or advocacy group today speaking out about the question of technical standard development and the representation of consumers in the development of standards. If consumer organizations like the Consumers Union or the National Consumer Law Center were to try and get involved in standard developing, I think that their already very limited resources would quickly be overwhelmed.

    The Gartner Group estimates that there are literally dozens, if not hundreds, of standard-setting projects currently underway. There's going to be a kind of primordial battle of the survival of the fittest, and five years year from now, two or three of those projects will emerge triumphant. They'll become the new industry standards.

    There are no consumer groups today that have the resources to follow all the dozens and hundreds of efforts most of which will ultimately fail. I think that the only institution that's available in the marketplace today to represent consumer interests and monitor standard developing are the traditional consumer protection regulatory agencies. I don't think that they've accepted this mandate yet, but I think there are a lot of people in organizations like the Federal Reserve Board and the Federal Trade Commission that could develop the expertise to monitor standard developing efforts and to find ways to motivate the people in industry who are developing standards to convene focus groups with consumers, to let consumers have some substantial input today before the standards become finalized and the software developers and the hardware developers start to work on the next generation of applications.
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    So in conclusion, I'd like to say that I think that the marketplace will move to new electronic payments technologies when payments technologies are combined with other services. This creates a window of opportunity for consumer empowerment. I think that the window of opportunity is open now and it's going to close, and there's a risk that consumer preferences won't be taken seriously. And I think that the Members of Congress can work with the regulatory agencies to provide some substantial consumer input now, while it's still possible to affect the next generation of electronic payments technologies.

    Thank you very much.


    Mr. RAHN. Mr. Chairman and Members of the subcommittee, I thank you for giving me this opportunity to testify here today on the impact of emerging and digital payment systems on monetary policy and financial policy.

    I am an Adjunct Scholar at the Cato Institute and a Senior Fellow at the Discovery Institute, and I'm wearing that hat today as opposed to my business hat. I will focus my comments today on the emerging digital money-like products, which I believe will supplant most conventional Government-issued money and existing payment systems over the next decade. I will also focus on the global aspects and not repeat many of the fine comments made by the previous panelists.
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    Financial transactions can be settled in real-time though the contracting parties may be thousands of miles apart. Money and other assets can be moved at almost the speed of light to almost any point on the globe at minuscule cost. Easy to use encryption programs enable almost anyone to move money or data around the globe with almost complete security.

    Digital money and financial products are disruptive technologies, in that their creation upsets the existing legal and public policy order as to how money and financial products and institutions are regulated and organized. National borders are ceasing to have the relevancy they once did. Both businesses and governments need to build the appropriate legal order for the digital age and understand how it should be managed.

    The challenge will be to create a new set of rules and procedures that bring the necessary order without impinging on the rights of privacy of individuals and institutions or destroying the economic efficiencies that the new technology is bringing. Many legal issues will arise as digital money becomes more prevalent. Given that most digital money will be global in the sense that the internet will facilitate its movement or use outside its issuing jurisdiction.

    The lack of legal uniformity between countries raises many policy issues. For instance, who has the liability if a failure does occur in a particular digital monetary system because of fraud or some other reason. When digital money payments are made across national borders, who has jurisdiction?

    Does digital money violate the monopoly rights of central banks to issue money? May a central bank issue digital money? Do non-bank issuers of digital money need to be regulated? And if so, who should the regulator be? Who is going to determine if the clearing organizations have sufficient robust and fraud-proof systems?
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    Given the various digital money systems that are now being developed and offered, the answers to the above questions will probably evolve slowly over the next few years, as problems emerge. To the extent people use privately issued digital money for transactions, the demand for Government money is reduced. If people are willing to hold liquid balances in the form of digital money, the quantity of demand deposits, like checking accounts, that people need or desire is smaller, thus reducing the central bank's supply of money.

    In general, electronic and digital money systems increase the efficiency by which the existing money supply can make payments thus reducing the demand for money. These improvements tend to take place gradually over time and are observed as an increase in the velocity of money, which requires a compensating adjustment in base money by the Federal Reserve.

    In sum, I see no reason for great concerns in terms of monetary policy management by the central banks as a result of these new technological innovations. These changes will be gradual and obvious, giving plenty of time to make policy adjustments to prevent inflation.

    One effect of the decrease in demand for central bank money will be the disappearance of central bank seigniorage revenue. With the efficiency gains from the economy from digital money swamp any negative effects on Government revenue as a result of the loss of this seigniorage revenue, which has been in effect a tax on the banking system. As more and more transactions are settled on a real-time basis, the risk of non-payment and fraud decline. And hence the need for regulation and monitoring also declines.

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    The role of the central bank may ultimately shrink to being little more than defining the numerary for the national money. The definition is likely to be a modern version of the gold standard. Specifically, a national currency in the future may well be defined as a monetary unit that is equal to a basket of specified commodities with a one world price, such as gold, crude oil and even some services.

    In fact, the Fed, over the last fifteen or twenty years, has often targeted sensitive commodity prices. And I think there is a slow evolution in that direction.

    Any good or service having a one world that is set on organized market, again, international commodity exchanges, could be a candidate for a currency basket that would be used to define the value of the money. Some central banks may also continue to serve as a lender of last resort to large financial institutions by using off balance sheet transactions. The need for such a lender of last resort would seem to diminish in a world of instant information on almost all activities and institutions, and real-time settlements.

    In the new century, the kind of financial shocks and surprises experienced in the past ought to be increasingly rare unless financial regulators interfere too much with market adjustments that will naturally occur in a world of increasingly perfect information. The rapidity of adoption of digital money systems by consumers depends on their cost, convenience and anonymity is perceived in relation to paper currency and coin. The question of anonymity will remain an impediment until policymakers understand that the fundamental desire and right to personal privacy must be accommodated with the new technologies to an extent no less than people now have with cash.

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    Law enforcement officials around the world have been concerned about the potential abuse of digital money systems for the purposes of money laundering and therefore, some are trying to restrict or ban them. The benefits of digital money greatly outweigh the potential criminal abuses, and hence measures to restrict the use of digital money ought be resisted.

    The existing efforts against money laundering, primarily in the U.S. and by major European governments, have not proven to be the least bit cost effective. For instance, in the U.S., in 1998, only 932 people were convicted of money laundering. Yet, the cost to the private and public sectors of the anti-money laundering efforts exceeded $10 billion, which comes out to more than $10 million per conviction. People were upset about Ken Starr spending $44 million for 17 convictions, and if you really look at the money laundering data, you can say, ''Well, if Ken Starr was spending too much, we're way spending too much on money laundering.''

    Distinguished British law professor, Barry Rider, has calculated that the British state has been able to take out only 0.004 percent of the criminal money that has flowed through London. There is no evidence that the authorities in the U.S. are having much more success. Money launderers do not have a statistically significant chance of being caught and losing the profits from their misdeeds, and therefore, the deterrent effect of such laws is negligible.

    The money laundering laws have propelled the U.S. to adopt attitudes insensitive to foreign countries' rights to self-determination and to violate the sovereignly of foreign states. The U.S. tries to impose policies on foreign states and businesses the U.S. would never accept if the situation were reversed. The U.S. and European Union have no business telling smaller developing nations they are involved in harmful tax competition, or they should abolish bank and corporate secrecy laws. Small nations have a need and a right to attract foreign capital. It is perfectly legitimate for them to compete against harmful tax, regulatory and privacy policies that larger nations impose on their own citizens.
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    And I'm quite sympathetic with some of the Caribbean island nations and others who are trying to build a financial services sector and when I hear that U.S. and European countries often say, ''Well, why don't you just devote yourself to tourism?'' That's chauvinistic, to put it mildly.

    Anti-money laundering legislation has not only proven to be ineffective and counterproductive, but greatly undermines the financial privacy rights of individuals. Such laws require widespread reporting on the financial activities of bank customers by bank employees to the governments, thus undermining the separation of business from law enforcement and ultimately the financial privacy necessary for a civil society.

    The fact is that new technologies of various forms of encrypted e-payments will make the task of enforcing the money laundering laws even greater unless governments are permitted a level of financial privacy intrusion that most civilized people will find unacceptable. However, the widespread adoption of digital money will greatly reduce the numbers of crimes that most people care about, such as murders, thefts and robberies.

    In 1998, there were approximately 18,000 murders in the U.S. A substantial number involved people trying to take somebody else's physical money. A move to digital money would reduce the murders, theft and robberies. Stealing digital money is a much more complex undertaking than stealing paper currency and will be beyond the capabilities of most common criminals. If there's no physical money to steal, the incentive for criminals to steal and kill people for money will be greatly reduced.

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    Abolishing the anti-money laundering laws is likely to speed up the use of digital money, resulting in less total crime, less wasted money by governments, even though it will make money easier for some money launderers. Eventually, knowledgeable people are likely to conclude the war on money laundering is going to be no more successful than was the liquor prohibition in the United States in the 1920's. It will become increasingly obvious that the resources utilized in the war on money laundering could better be spent attacking the underlying crime.

    Digital payments and monetary systems are coming of age and will replace most existing money and payment systems over the next couple of decades. These changes will bring about enormous benefits, greatly increasing the efficiency and reducing the cost of our payment system. In addition, the absence of paper currency and coin, which is readily subject to theft or loss, should reduce crime.

    The following recommendations, I expect, will seem radical and maybe even frightening to those who do not understand the new technologies, and where we are headed. However, I expect that those who do understand the new technologies and desire a civil society, that provides for liberty, privacy and economic opportunity, will see these recommendations as desirable and necessary.

    First, remove all restrictions on issuing digital bearer financial instruments, including stocks and bonds. There was a conference in which I participated a few months ago. A number of financial cryptographers were there, and I found out they had already figured out how to use digital bearer instruments in cyberspace. Most of these folks were quite young, and they didn't feel they needed Government permission to do such things. I argued that we ought to focus on trying to change the laws to meet the new technologies, rather than just ignore the law. But the fact is, they're out there doing things already. And rather than create a new class of cybercriminals, the Government should recognize the reality and do something that's both good for the economy and supports civil liberties.
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    Second, remove the capital gains tax from trading in commodities and private currencies, in order to allow the full development of commodity backed digital currencies, such as gold and other digital currencies. The capital gains tax on commodities does not bring any revenue into the Federal Government over the long run, given that losses and gains balance each other out.

    For twenty years, I've been arguing we ought to get rid of this tax, because again, it brings in no revenue. Since you can deduct your commodity losses which offset your gains, there is no long-term tax revenue. It's a silly tax.

    Three, remove all restrictions on anonymous digital money and payment systems. The restrictions on anonymous systems are almost impossible to enforce. Privacy is a basic human right protected by our Fourth Amendment and the U.N. Declaration of Human Rights. And people are not going to give up the use of paper currency and coin, which is desirable, unless they're assured that they can do anonymous payments if they so choose.

    Fourth, repeal the Bank Secrecy Act and subsequent related anti-money laundering legislation. The existing legislation and implementation is not cost effective, it's subject to abuse, interferes with basic civil liberties to an unacceptable degree, and actually results in higher levels of crime.

    Thank you, Mr. Chairman. I would be pleased to answer any questions.

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    Ms. SNYDER. Thank you. Mr. Chairman and Members of the subcommittee, good afternoon. My name is Jacki Snyder and I'm the Manager of Electronic Payments for Supervalu, Inc. I also chair the Food Marketing Institute's Electronic Payments Committee, and I'm a member of the National Automated Clearinghouse Association's EBT council.

    Thank you for the opportunity to testify on behalf of the 21,000 supermarkets represented by FMI. We very much appreciate the work that this Committee has done in the area of electronic payments.

    Briefly, before I proceed, I'd like to take a moment to tell you about my company, Supervalu. Supervalu is based in Minneapolis, Minnesota, and is the Nation's largest food distributor. We supply approximately 3,300 independently owned, small, retail food stores in about 48 States. We also own nearly 500 retail supermarkets operating under a variety of names and formats. This makes us the tenth largest food retailer in the United States.

    I've been listening today to a wealth of knowledge, and feel quite honored to be here amongst the other speakers today. I'm going to take a moment to just talk about how important the technologies that we've heard about today are to retail supermarkets and how they impact our consumers. Bankers, quite honestly, are often perplexed about the supermarket operator's interest in financial services. More than once, I've been asked the question, why do you care about electronic payments? What does the cost of emerging payments have to do with the price of a dozen eggs?

    My answer is always, quite a bit. Because of the razor thin 1 percent profit margins in our industry, and the importance of maintaining low costs for consumers, we have to focus on reducing inefficiencies and eliminating unnecessary expenses. At Supervalu, this is a very sensitive issue, from our CEO on down. In fact, a few years ago, industry-wide, CEOs started to focus on a new, previously unknown cost to supermarket operators. That new cost was the fees that retailers must pay to banks each time the consumers use certain types of credit cards or offline debit cards in our stores.
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    In some cases, the fees on one grocery order exceeds $1. This is more than a supermarket operator's profit on the same order. In other words, the bank makes more money than the supermarkets on these transactions.

    Inevitably, these costs will have to be reflected in the price of eggs, milk or a loaf of bread. Since it's important to keep the cost of goods low, and we want to keep our customers happy, additionally, competition has never been stronger, we recognize that our industry must play a role in the future of electronic payments.

    FMI has conducted several surveys over the last five years, and currently has engaged an outside firm, PriceWaterhouseCoopers, to conduct a comprehensive study to identify the costs that go into accepting various forms of payments. From cash to credit cards to the new Government EBT cards to electronic checks, identifying costly payments and working to reduce those costs is really our first step. Identifying and promoting consumer friendly, low cost emerging technologies and operational standards for payments of the future are the next steps and ones that are very exciting for us.

    And I would like to stress the operational standards that have been mentioned by several other speakers here today as well.

    You may have received complaints from consumers, your State government or even grocers, about the new EBT cards being used to deliver Government benefits. And perhaps you've heard that those cards don't always work properly. Those cards should work properly every time, but they do not. Some of the problems being experienced with the EBT cards are caused by the lack of operational standards that are so important to new technologies.
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    One new technology that several FMI members have been looking at is smart cards. And we have recognized the need for national and international standards before that technology can be fully embraced. A smart card or chip card should work the same in Eden Prairie, Minnesota as it does in Washington, DC. or Beijing, China. Standardization has ensured that credit cards or ATM cards work in all of these areas and really have caused their usage to soar.

    Radio frequency is another technology that supermarkets are already using in a number of places throughout the store. We now envision a day where consumers will walk into a store, select products whose packages are embedded with small radio frequency UPC codes, and exit the store without ever going through a checkout line or signing their name on a dotted line.

    At this time, I'd like to just take about 30 seconds and show you a commercial that the IBM e-business folks have put together to show this potential technology in action in a supermarket.

    [Demonstration given.]

    Ms. SNYDER. Kind of fun.

    Chairman BACHUS. [Presiding]. I have seen that commercial on CNBC. It was very effective. It was as good as a commercial as I have ever seen. I had no idea that I was going to walk in here and see it.

    So that is a commercial that's actually been airing on TV?
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    Ms. SNYDER. Right. And the technology is being perfected by MIT, and we are really closely watching that with a lot of interest. They're talking three to five years out. So it's very interesting to us to make things that much easier for consumers and us as well.

    For something that's maybe not quite so distant in the future, FMI has joined with Concord EFS to conduct the first multi-lane, retail check conversion pilots. This pilot involves converting a paper check to an ACH transaction, very similar to direct deposit of a payroll check. The paper check is voided and returned to the customer in a checkout lane without the customer ever even having to fill it out. While this transaction carries some risks, it also has benefits to both the merchant and the banking communities. Reduced handling, improved speed and lower costs are just a few of these mutual benefits.

    Another project that we are conducting in conjunction with Concord also uses the ACH systems for what we like to call ACH debit. The customer signs up in advance to use this type of payment which, once authorized, routes through the ACH system and is deducted from their checking account. The transaction is initiated when the consumer swipes the card, such as a store loyalty card, a bar coded key tag or a radio frequency wand like the Mobil Speed Pass.

    I'd like to ask Derek Love from Concorde EFS to demonstrate for us how an ACH debit transaction works in a grocery store.

    Mr. LOVE. Thank you. I have a bar tag here much as the one that Ms. Snyder talked about, and I can use it to purchase my groceries, because I've opted to participate in the ACH debit program.
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    Quite simply, what happens in the store—is demos never work.

    [Demonstration given.]

    Mr. LOVE. In the interest of time, I'll show you this after the presentation.

    Ms. SNYDER. And I'll just summarize very simply. In the store, you can scan a bar code. The customer can enter their PIN number, and the transaction then is authorized and goes out through the ACH network and settles electronically into the merchant's account. Certainly I appreciate, Derek, your attempts to get this wonderful cash register working.

    I think you'd all agree that this is a very simple transaction and should be very easily accepted by consumers. However, that is one of our greatest challenges, and that is, incenting the consumers or influencing their payment choices at the point of sale.

    There are really several reasons that supermarket operators may offer a good snapshot of the future of electronic payments. First, our business is consumer focused. We are constantly looking for ways to make the shopping experience more convenient for customers. Second, our business is incredibly competitive. A technology successfully operated by one supermarket chain will no doubt catch on with others very quickly. We believe that those merchants that are able to control costs and offer convenient, secure payment options for consumers will be those that are successful in the long run.

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    Finally, the cost of accepting certain types of electronic payments is rapidly rising. I mentioned earlier in some cases the amount of profits that banks and credit card associations make on a customer's order exceeds that of a grocer's. Some companies report, in fact, that the fees that they must pay for certain electronic payments are their second highest expense only to labor. Predictions suggest that this amount will only continue to rise over the next five to ten years.

    What does this mean for the consumer? Well, it's quite simple. These costs will ultimately be seen by all consumers, not just those who use expensive forms of payment. And these costs will be seen in the price of a bunch of bananas, a gallon of milk and a dozen eggs. Even Government payments like EBT for food stamps or checks for the WIC program pose significant costs for food retailers.

    So why do we supermarket operators care about electronic payments? What does the cost of emerging payments have to do with the price of a dozen eggs? Potentially quite a bit.

    Thank you very much for the opportunity to testify today. I'd be happy to answer any questions.

    Chairman BACHUS. Thank you.

    Ms. Lee, do you have any questions?

    Ms. LEE. Thank you, Mr. Chairman.
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    It's been a very enlightening and interesting panel. Basically one question I have, it's a very general question, so it's directed to anyone who would like to respond to it. And that has to do with—well, maybe Ms. Winn may want to deal with this, with regard to technical standards.

    As we move into a paperless world, a payment by technology, new payment technologies, as we move into this new era, how do we factor in those individuals who may be low-income or in minority communities in terms of standards? Because there are going to be people who have not, who don't have access to technology. And this digital divide issue is not only with regard to education or the involvement of minority and women-owned businesses and new technologies. But it also, it's very expansive.

    And in listening to you, I'm thinking now, what happens to those individuals if we do end up in an almost paperless society who have not benefited from the economic recovery and who don't have access to technology and who still have to survive?

    Ms. SNYDER. I would make one comment on that. Everyone needs to eat. And we supermarket operators have operational standards at the forefront of our interests. I could suggest that we look at the recent implementation of electronic benefits that is there to benefit and make things easier for some of the low-income people in this country. And we have certainly put forth a great deal of effort toward assuring that those folks will be able to use their cards across State borders, that there will be standards in place so the systems——

    Ms. LEE. Use what cards?
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    Ms. SNYDER. EBT cards.

    Ms. LEE. OK. What if they don't have an EBT card?

    Ms. SNYDER. I believe that the systems in place in supermarkets, anyway, do follow standards across the country and we should continue to follow those forward.

    Ms. WINN. I can make a few responses. With regard to EBT, I live in Texas, and so if you're on State assistance in Texas, it's called the Lone Star card. And all the grocery stores do accept it. And I think that's a very interesting example of taking a mature technology, which is basically the existing electronic funds transfer system, that was developed in the 1970's, and migrating it to a new application.

    I read a story in the New York Times that I think came out about a year ago. I would guess, if Elliott McEntee is still here, he would probably dispute the facts as the New York Times reporter found them. But what the New York Times reporter found was that the representatives of New York State who had negotiated the contract for the electronic benefits transfer card in New York State negotiated a very bad deal for people on public assistance. As a result, they were paying higher charges than they had when they had received a paper check, and they had dramatically fewer options, because relatively few people signed up for the service.

    So I think that the digital divide issues will appear over and over again, even if you take a mature, extremely convenient, extremely well established product like ATM cards or debit cards and apply it to a new population. There is a real need for effective representation of groups that don't have the market power to command the attention of companies themselves directly.
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    I think that in the next generation of electronic commerce, there's going to be tremendous new opportunities that are hard to understand today if you don't live in Silicon Valley and you don't work for a high tech company. If you look at the work that's being done by the people working on the platform for privacy preferences, it's an XML standard that will allow greater communication about privacy standards in internet commerce.

    The people who are trying to develop those standards have been holding focus groups to find out how consumers feel about privacy so that they can standardize it and write it into the standards. It's really difficult. It's really difficult to get people to articulate feelings about stuff they've never done before. And so there's a very high overhead associated with talking to people who aren't participating today, and getting them to articulate what their expectations are for something they've never used.

    In an economy where quarterly profits drive the business model of most companies developing technology, that effort is just going to go by the wayside. The focus groups aren't going to be convened, the effort's not going to be made. And that's why I'm saying, regulators could play a really constructive role in providing incentives for people to do that hard work and evoke those responses from people who aren't currently in the marketplace today.

    Ms. LEE. Thank you very much.

    Chairman BACHUS. Thank you.

    One thing, I was struck by your question. If in fact, as Mr. Craft has said, and others have said, that the cost of a traditional check payment can be 75 cents or more, you would go to the grocery store, a lot of people on limited incomes, if they say, have forty transactions a month, they've got bank charges, they probably don't have free checking. But when you count up the cost of those transactions, you could be talking about $30 a month.
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    It actually is more significant, the savings would be more significant to them than someone who is making $5,000 a month and where $30 is not going to make any difference. So really, I would think the lower your income, the more benefit you could receive from some of these new technologies. Particularly from the grocery store, I would also say, and I don't know about studies, but I would think people on lower income probably have to go to the store more often, I bet you find that they go more often and they have large families.

    So my first question would be this. We've talked about people having incentives for using this new technology. And we've also said that there's obviously incentives, if you can create an incentive for the customer, and you said that the merchants have every incentive, I think I've heard that loud and clear, that merchants have every incentive for these new technologies, because they're being charged lots by the traditional payment system. I mean, as much as, you said, as much as their profit margin sometimes.

    Is there an consideration over sort of a two-tiered, and Ms. Winn talked about pay this amount if you want this level of protection, if you want this, pay more, a two-tiered payment system where you go to the grocery store line, if you participate in the store's program of ACH or whatever payments, ACH or what you've described here, that you get, say, 1 percent discount. I think you could really attract, I think that's how you're going to maybe break through this.

    Once people start using this, they get comfortable with it, at some point, you might not even need that once you have that incentive. But I would ask you about that.

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    Ms. SNYDER. Certainly tying potential new payment options to a consumer incentive is something that would need to be done. We are not allowed to charge higher fees to consumers who use certain credit cards, because it's in violation of the operating rules of the Visa and MasterCard folks. But we would be allowed to do cash discounts, similar to what the gas stations did several years ago, for consumers that paid cash for things.

    So that is one thing that is considered as part of this. But it does take a lot to change consumer habits. There's the co-branded credit cards out there that offer a lot of benefit to consumers and it's a lot to change those habits.

    Chairman BACHUS. Mr. Craft, did you want to respond to Ms. Lee's earlier question?

    Mr. CRAFT. Yes. I thought it would be appropriate to respond. I think in the general population of the U.S., there's an unbanked population that measures as much as 30 million folks. And we're seeing a lot of innovation, actually, in that sector, that is accelerating the adoption of electronic types of applications. One would be a check. Many of the folks in the unbanked population have bad credit, they have low incomes, in some cases they're living from check to check.

    There are firms that are creating electronic types of rendering devices that convert one payment type to another, a check to cash, could be a check to a card. Now the issue becomes, do they actually use it on the internet. So it could be that we take your check and we convert it into units that can be used for other types of shopping.

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    Now, to the extent, as many people believe, that browsers, these ideas, these windows into the internet, go on our telephone, they're at phone booths, they could be here as we sit, then the unbanked population, the lower income or those with poor credit histories, we think will have the opportunity to participate here.

    The other point I would make, too, is that much of the innovation that's taking place, particularly where standards are being set by populations, in technology we say, whoever controls the people sets the standard. And in effect, what we're seeing is those parties that are getting all these new folks to come in, they're creating a network of new players that are moving money around. They work in close conjunction with banks. And those banks are subject to the CRA, Community Reinvestment Act, other types of banking regulations. So they are adhering to much of the responsibility that anyone in the banking industry in this country has.

    But I think the unbanked population is a very attractive population to many of the service providers. And one could argue that the behavior there has moved faster than the general population. And that's in converting from whatever type of money they're accustomed to, a check, into other types of currency.

    So we could see good innovation there.

    Ms. LEE. Mr. Chairman, could I just say one thing on that? I think we could, and we call them the unbanked population, right? These are individuals who live in communities where banks have left and who use the check cashing vendors and who are really oftentimes the victims of predatory lenders. And so in this instance, in moving toward this new technology, we've got to be careful that this new industry that's going to service this population of individuals, this industry does not take advantage of them by once again developing a system that charges excessive fees just to be able to transfer the check to whatever card is necessary.
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    So we've got to really be very careful and we've got to factor the bankless population into the equation, I think, as we move into this new paperless world. So they'll be treated fairly, like everyone else.

    Mr. CRAFT. I would agree that there is a cost tradeoff here. And certain of these vendors have somewhat seedy reputations, serving the unbanked population and charging very excessive rates. Others are legitimate. And they offer a value proposition that's very appropriate for the unbanked population and they do it without predatory types of lending practices.

    And I think within that industry there's obviously segments that are very—they do very inappropriate things. But there are other very legitimate vendors that see this as an opportunity to serve a need, to earn a reasonable profit, and to bring this sector, a very large sector, into the 21st Century.

    Ms. LEE. Who's responsible for regulating this new industry?

    Mr. CRAFT. I think this is on a State-by-State basis. As far as what the type of fees that can be charged, for converting a payment, let's say a check, to cash, or to a smart card, that could be reloaded every time that the consumer comes to whatever type of attendant, it could be a physical attendant, it could be an ATM machine. But in effect, it's a State-by-State banking regulation as I understand it.

    Ms. WINN. I could add a few things. The National Conference of Commissioners on Uniform State Laws, the Uniform Law Commission, has just come up with a uniform law on money services, in part because States are really struggling with this. This is a very rapidly expanding sector, and 50 States can't all be experts in it.
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    An example from the privacy realm of the kind of unequal bargaining power problems that you might see in this industry segment and that might become more acute as the technology becomes more sophisticated, there is a strong impulse toward using biometric forms of identification, when you're bringing people who are historically unbanked into the banking population.

    Right now, today, in the United States, there are inadequate protections on the use of biometric IDs for privacy rights. You talk about a two-tiered system, I think that if you're concerned about the rights of the unbanked and their lack of market power and bargaining power in the development of these technologies, it would be very appealing for people targeting this market to build into their technology a strong biometric identification.

    And then you would have a lifetime profile of every transaction that people in that segment of the population had entered into, which would be more invasive than the kind of profiling that's done of upper income people who use their personal computer who do transactions pseudononomously. So that's an example of a technological standards issue that regulators need to be asked to monitor to make sure that the outcome is equitable and fair.

    Ms. LEE. Thank you very much.

    Chairman BACHUS. One thing I think we have to bear in mind about lower income individuals in the traditional check paying system that they use now, not only is it expensive, but it also is very rigid in that if they do write a check with insufficient funds, it's a criminal violation. There's a $20 or $25 charge for a returned check, even if they make it good. So you're talking about a tremendous cost to someone.
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    Their only alternative is cash. And many times from a security standpoint, that's not a real option for them. Because they are lower income, oftentimes their skills aren't fully developed in balancing and appreciating the income and outgo. I think almost a real-time card would be a tremendous opportunity for many of them to have really a more practical approach to purchasing goods and services, particularly if there were some incentive. I think there has to be that carrot there.

    Ms. LEE. Mr. Chairman, let me just ask then, and it makes a lot of sense, I guess then the next step or the next logical step would be to somehow see these cards or this technology as being a phase or a step in the process to becoming creditworthy, to being able to actually qualify for a credit card. You know, people who live in low-income communities who utilize check cashing machines and who have no access to financial services need to have this financial base. So I guess I'm asking, could this possibly be the beginning of establishing creditworthiness to move into mainstream America as a consumer.

    Mr. CRAFT. I would first like to see the elimination of the middleman, quite frankly. If we move to a completely electronic environment, wherever the low-income or the non-creditworthy individual generates their economic well-being, there's no reason why we can't transfer from part A to part B without a lot of skin being taken out by the middleman. And I think that's the beauty of the environment we're moving into.

    So they have more in their own pocket. And if we're talking 2 percent or 3 percent or 6 percent—whatever is charged today—on $100, that's six extra dollars.

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    Second, does it impose discipline, a financial discipline, perhaps, on the individual? Perhaps that could have some implications.

    And third, responsible use of that card could increase the credit profile of the individual. So yes, I think these things could move along. But first, like we've learned with the credit card network, let's not all be greedy as we move to a much more efficient environment. Let's leave more, as we say in the investment business, skin in the game for the two parties that are transacting, the consumer and the merchant, particularly with the lower income classes, that are not creditworthy. Let's leave them more money to spend, more discretionary money. Because they do tend to get, the risk profile is higher there. Either they can't get credit or the fees tend to be even higher.

    So if I'm a benefit agent, a governmental benefit agency that is providing livelihood of that individual, give me a system, Mr. Technology Company, that I can load from my account into your account. All we're talking about is debits and credits with a notification, it can be in mail. We've put this amount of money into your system. Perhaps use a third party processor in the middle, but that doesn't gouge the two parties to the transaction.

    And I think that's the first step in how technology over the next five years will improve the livelihoods of all of us.

    Mr. RAHN. We already have some of the model, with some of the smart card systems that are being put in university towns. The Florida State University system, which is a very extensive system, was mentioned. There, all the students are given a smart card, and they use this for their tuition payments, they use it for getting their grades from kiosks around campus, and many of the merchants in Tallahassee, Florida, where Florida State is located, also have gone on the smart card system. Here you have a case where parents quite often will credit the smart card with X number of dollars at the beginning of the year, and they can put certain limitations on it, for the food plans, and so forth.
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    You can have either anonymous systems or systems that fully track all your income and expenditures. And there's no reason why we cannot starting getting it to the lower income groups who may not be using banks to start using smart cards, in places where you already have a good number of merchants accepting them, such as, again, Tallahassee, Florida.

    Getting people used to using the card rather than cash, it's far more secure, you're not dumping money out on the street corners, or fumbling around in your pockets trying to find the right amount of change for a parking meter or so forth. Many places already accept smart cards for parking meters, vending machines. And this is a way of starting to think about your financial plans in a more disciplined way.

    A person may want to go ahead and have a smart card which has a full record of all their income and transactions, which can lead them into working with a bank and starting to move into normal credit providing financial type of situation.

    Ms. LEE. So financial literacy services or some form of consumer information with regard to the potential possibilities, pitfalls, of this I think would make a lot of sense.

    Ms. SNYDER. I think it's important to remember on the lines of smart cards that there are no national or international standards that have been fully adopted by everyone, and the different systems that are out there today are stand-alone, closed systems. One of the things that we would encourage is some form of standards being adopted. And another thing that I think we all need to be cautious about as we move forward into this potential new technology is that the costs associated with this are not borne unfairly by the merchants and ultimately by the consumers. Because one of the things that certainly could happen is, we could all end up paying significant fees on what used to be just simple cash transactions.
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    So that is an area that we need to be very cautious about as we move forward into this.

    Chairman BACHUS. I will tell you that I'm very impressed with both panels. I think if anything was driven home today it's the benefit and the promise that these new technologies bring to the payment system. And the cost of the traditional payment system to all consumers.

    But also probably the fly in the ointment is that so many people have vested interests and are making tremendous amounts of money on the present payment system and have a vested interest in keeping that system alive, even a percentage of it for a few years means billions of dollars of profits, even slowing it down, they benefit tremendously.

    Obviously, in ACH's dealing with the Federal Reserve, who are they listening to? What interests are they listening to?

    There's tremendous, and I'm not sure that I realized it until today, but as you talk about that we've gone to ATM machines, that we've gone to, say, one credit card as opposed to ten credit cards, one for each merchant, the savings of time and expense we've seen there, and really a more secure system, how much more we can move in the future.

    I will throw this out for the panel, and I'll give you two examples. I think maybe I've figured out one. I have often wondered why banks weren't more aggressive in getting people to abandon the check system and go to e-commerce. Even I've been amazed that they don't even encourage when you get a car loan for you go to on a monthly payment thing, or direct deposit. And now I think the reason is maybe they make money off the present system.
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    So I think that question has sort of been answered, why the banks haven't been more aggressive in going to this technology.

    But my second question, I'll just let you answer this, or sort of pick and choose which one of these, is I have my insurance with a company that's very aggressive on giving good rates over the internet. They're at the forefront of you being able to go on the internet and get a competitive rate, which is where I went. But I'm amazed that when, and I'm not going to call the company, but they're one of the two or three leading companies in automobile insurance over the internet. When you do that, they do not allow direct deposit. They do not allow you to pay your premium with direct deposit, which is amazing.

    Now, I understand they're going to start that in November. But that's not available now. Why would that be? Is there some benefit to them?

    Ms. WINN. If you send in over the internet information about your checking account and an authorization to debit your checking account, there are not just Regulation E requirements, but ACH rules about how the financial institution has to receive your authorization to pull money from your account. That's an inherently very risky authorization for you to give. And this is related to the problem that we were saying, there is no strong authentication technology in the marketplace today that's universally acceptable. They can't just say, make sure you have this form of digital i.d. before you come to our website, so that the ACH system and Reg E will accept that electronic message from you as equivalent to a signed piece of paper.

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    So my guess is that they are only phasing that in slowly, because they want to make sure they meet their regulatory requirements. And as a business model, they don't want you, their customer, to be at greater risk of finding your checking account emptied out.

    Mr. CRAFT. In the e-finance area, one of the largest hurdles or barriers today for some of the innovators that are offering better services, better prices, is the lock-in, we call it lock-in in an economic sense. But it's really that you have an existing relationship with your insurance company, you have an existing relationship with your bank. And they can penalize you for leaving. In the insurance world, there's something called a short rate that if you cancel your premium, they penalize you. They don't give you back 180 out of 365 days worth of your premium. They give you a shorter amount back.

    Or the issue of transferring the money becomes such a nuisance that consumers oftentimes think, if I can't do it simply on the internet, so I can get the quote for the insurance, I can get the rate for the banking account, but trying to move the funds is an administrative nightmare.

    Now, the first innovation that's really happened here is the ability to authorize a transfer of funds through the ACH and certain vendors now are doing this, particularly in the brokerage industry, where you can actually transfer funds from point A to point B. If you think about it, and that can be electronic and it can be done fairly seamlessly, as I understand it. I'm not sure how it's done on the authentication, the compliance with the ACH rules. But in effect, vendors are doing this now.

    And this is very good for all of us, because it means that we can switch from one account to another and force people to earn our business much more aggressively than they've done historically.
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    A second point I would offer to you is, we wrote a report about a year ago called ''The Paper Dragon.'' What we figured was that if we stacked up all the paper checks in this country that are processed each year, it would be 41,000 miles high. That's how many checks run through the banking system. And just like to a Chinese individual, as my wife tells me, at least, the Chinese dragon has two meanings. It's both positive and negative. It's negative to the banks, because it's a nightmare to process all that paperwork. But it's very positive, because it's a very big economic earning component of their business.

    So there is a great deal of resistance, I believe, to the movement to an electronic world by the incumbents today. We would all be better off, because one of the largest risks to society is really fraud. Fraud perpetrated on paper checks amounts to about 30 cents per check and it's skyrocketing. And it's getting easier to perpetrate it. And we can combat that type of fraud on the internet. We think we have better techniques, better policing capabilities, than in the paper check based world.

    So it would be advantageous for us to move completely to an electronic world from that standpoint alone. However, there is a great deal of resistance, consumers as well as the intermediaries themselves.

    Chairman BACHUS. Mr. Rahn.

    Mr. RAHN. Very quickly. One of the problems has been verifying who is making the authorization. We mentioned various types of bionic types of indicators. I've recently seen a technology where they give you a little key that you put in your computer port. With a PIN code or with a fingerprint or handprint, you authorize the transaction from your bank account to the brokerage firm or Sears or whoever the merchant is.
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    That problem seems to be very close to being solved. The Government had been an impediment by its restrictions on cryptography, but those are now being lessened, and they ought to be totally removed. Because it's a way of protecting people and protecting merchants from unauthorized access.

    Chairman BACHUS. Thank you.

    Chick-Fil-A will be here at 1:15 to demonstrate, and Ms. Snyder, do you know, you could describe that, at 1:15, if anyone wants to stay.

    Ms. SNYDER. Yes, if anyone would like to stay, Chick-Fil-A will be brought in, and Derek Love will be here to provide some further demonstrations with a working system of the ACH transactions that we spoke about earlier.

    Chairman BACHUS. And that's the Food Marketing Institute?

    Ms. SNYDER. Correct. We'd invite everyone to stay for that.

    Chairman BACHUS. Thank you.

    This will conclude our hearing. I would invite the panelists on both panels to, if they want to write a letter making further suggestions to us, highlighting, you know, be aware of this. Or if three months from now, or six months from now, something occurs to you that you think would be to our benefit as we try to encourage these new technologies and make sure the Government isn't a hindrance to them, but at the same time, in the transition safeguard the consumer and be a watchdog, then please alert us to these things. We would like you to be a resource to us, because your expertise far exceeds ours.
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    You've really, I think, given us a great benefit. Your remarks will be reduced to writing and made available to all the Committee Members, particularly those that will be participating in this effort will read those remarks. So I very much appreciate your testimony.

    Ms. Winn, you traveled all the way from Dallas, and you from San Francisco, Mr. Craft, so we appreciate your traveling to be here today.

    This concludes our hearing. I do apologize, we had three very close votes in Judiciary. So I had to go down there for a minute and cast uninformed votes. So thank you very much, this concludes our hearing.

    [Whereupon, at 12:56 p.m., the hearing was adjourned.]