TMCnet News
Extending Legal Tender(Business & Finance Via Thomson Dialog NewsEdge) Ireland must move beyond its reliance on cash and cheques as the dominant means of payment, argues Dr Ronnie O'Toole. Ireland's continued use of high volumes of cash and cheques is a highly expensive habit, and is costing our economy around Eur 750m a year. Take cash. The average annual cash withdrawal per consumer at Irish ATMs is well above the European average, while the number of ATM terminals more than doubled in the three years from 2003 to 2005. Unlike many countries, Ireland shows little signs of moving to more efficient payment mechanisms. The incidence of cheque use in Ireland is also high, and the problem is not going away. Half of all households still pay their electricity bills by cash or cheque, despite the fact that the ESB has been offering sweeteners for years to promote the use of direct debit. A number of years of slow decline were reversed in 2005, with a sharp rise in the number of transactions by cheque. In fact, cheque usage in Ireland was running at 32 cheques per capita in 2005, up from 31 in 1996. In contrast, in other European countries, cheque usage accounts for less than I% of all transactions. Take Denmark. As recently as 1996, Danes used 16 cheques per capita every year. By 2005, this had declined to fewer than five. The prevalence of payment by cash and cheque creates a hidden cost to households, government and business. Studies estimate that migration to an electronic system could save Ireland around Eur 750m annually. These savings would not only accrue to businesses and consumers, but also the Government notes and coins are expensive to mint, and make black-market activity easier. There are a number of other reasons for which the payments strategy has slowed to a crawl. The first is simple economics - a payment system is a "network good" and as such its attractiveness rises proportionally faster than the number of people using it. Only when a system exceeds a critical mass will it have a chance of establishing itself in the market in the long term. This gives the incumbent method of payment (cash) a strong advantage. Cash also has the legal buttress of having "legal tender" status. Until electronic payment reaches a critical mass of usage, progress in extending it will be very slow and incremental. Another problem is that the most important consumer of cheques - the Government - has been very reluctant to move away from them. The Government makes millions of payments every year, whether to social welfare recipients, suppliers, public servants, farmers or other governmental departments. Government agencies also receive a large number of payments, whether from other Government departments, tax payments from businesses and private citizens or payment for services. While isolated departments and agencies have been pushing e-payments, the Government has shied away from demanding the most modern form of payments. The main reason for this is a fear that epayments would leave the more vulnerable members of society exposed. It is interesting that the Government departments in which progress has been strongest are those that deal with segments of the population which would not normally be associated with ecommerce. By the end of 2008, the Department of Agriculture, Fisheries and Food will be making all direct farm payments electronically. Further, the Department of Social and Family Affairs now accommodates any social welfare recipient to be paid electronically at the financial institution or post office of their choice. By the end of June 2007, 57% of all social welfare customers were paid electronically. The continued reforms at An Post and the credit unions will help facilitate this movement. In National Irish Bank's pre-Budget submission, we argue that the incremental approach to e-payments is unlikely to succeed, and is unnecessarily costly and difficult for early implementing bodies. What is needed is a move across many elements of our social and economic life towards e-payments within a relatively short space of time. This would revolve around an "E-Day" in November 2008. After E-Day, the Government would stop issuing or accepting cheques. All taxis would have to accept debit and credit cards, and the taxation system would be reformed to promote efficient payment mechanisms. More ambitiously, Ireland could become a world leader in this area, and give epayments the status of legal tender. The current legal status of money would not be changed - we would extend the definition of what constitutes money. It is imperative we look at every sector of our economy and cut out the fat. A reform of our payment system would be an excellent place to start. Dr Ronnie O'Toole is chief economist at National Irish Bank. Copyright 2007 Moranna Ltd, Source: The Financial Times Limited |