LEGACY PAYMENTS SYSTEMS
Chris Daniel
Co-Chair, Global Payment Systems Group
Paul Hastings LLP
www.paulhastings.com
©2014 Paul Hastings LLP
Conference of State Bank Supervisors
Emerging Payments Task Force
Public Hearing
May 16, 2014
Confidential – not for redistribution
Overview
I.
A History of Currency in the United States
II.
The M1 Money Supply
III. Modern Payments Systems
• Overview
• Open System
• Four Party Card Network
• The Federal Reserve Payments Study
IV. Shared Attributes of Successful Payments Systems
V.
Payments Systems – Examples
VI. Currency and Technology
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©2014 Paul Hastings LLP
Confidential – not for redistribution
A History of Currency in the United States
“For the first five generations of America’s independent
history – from 1776 till the eve of World War I – a single
question has vexed American politics and the American
economy more persistently than any other. Political
careers were made and broken on this question; political
parties rose and fell. Great wealth rewarded those who
answered it correctly; bankruptcy claimed those who got it
wrong. No question touched more livelihoods and more
lives more consistently, more intimately, more portentously.
The question was the money question. In simplest form it
asked: What constitutes money in the United States?”
-David Wolman, THE END OF MONEY: COUNTERFEITERS PREACHERS, TECHIES,
DREAMERS – AND THE COMING CASHLESS SOCIETY (2012).
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A History of Currency in the United States
Colonial Currency
(1565-1792)
Civil War-Era Greenbacks
(1862)
Bretton Woods System
(1944-1971)
Gold Standard Act
(1900)
State Bank-Issued Notes
(1836-1863)
Bi-Metallism
(Gold/Silver)
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The M1 Money Supply
• M1 Money Supply on October 13, 2008: $1,466.7 (billions)
• M1 Money Supply on April 28, 2014: $2,776.7 (billions)
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Modern Payments Systems
Overview
•
Payments transfer value from one end party to another. A payments system defines how these value
transfers are done and provides a framework of rules for users of the system.
•
There are six core payments systems in the United States. Almost all other methods of payment (e.g.,
mobile telephone payments or online bill payments) rely on one or more of these core payments systems to
actually transfer value between parties. These core payments systems are:
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The various uses of payments can generally be categorized into six categories:
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Cash;
The checking system;
The credit card and charge card systems;
The debit card systems;
The Automated Clearing House system; and
The wire transfers systems.
Point of sale;
Remote commerce;
Bill payment;
Person-to-person payment;
Business-to-business payment; and
Income payment (e.g. payroll).
Often, the various core payments systems will compete for market share within the six payment categories.
•
For example, the use of checking for business-to-business payments is currently in decline. All of the electronic
payments systems are now competing for the volumes in this category of payments.
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Modern Payments Systems Cont.
Open System
Bank
Bank
Bank
Customer
Merchant
Clearing
Mechanism
Bank
Bank
Merchant
Customer
Bank
Bank
Bank
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Modern Payments Systems Cont.
Four Party Card Network
Acquiring Bank
Visa/MasterCard
Issuing Bank
Data
$
Merchant
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Cardholder
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Modern Payments Systems Cont.
Results from the 2013 Federal Reserve Payments Study
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Total number of non-cash payments in 2012: 122.8 billion, which is a 4.4 percent increase
from 2009.
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Cards continue to increase their share of total non-cash payments.
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Debit card payments continue to outpace credit card payments in number of transactions.
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Cards significantly increased their share of total non-cash payments, from 43 percent in 2003 to 67
percent in 2012.
The use of ACH grew more modestly during the same period (from 11 percent to 18 percent), while
the use of checks fell sharply (from 46 percent to 15 percent).
In 2012, there were 47 billion debit card payments and only 26.2 billion credit card payments.
Compared with credit, debit, ACH and check, prepaid card payments increased at the
fastest rate from 2009 to 2012 – 15.8 percent annually.
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Shared Attributes of Successful Payments
Systems
• Common Principles:
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Price stability;
Thoughtful design with consideration of a nation’s monetary regime;
Technical efficiency;
Designed with access to credit in mind;
Legal framework;
Official oversight and supervision; and
Central bank serving as the final settlement authority.
– Bruce J. Summers, The Payment System in a Market Economy, in THE PAYMENT
SYSTEM: DESIGN, MANAGEMENT, AND SUPERVISION 1 (Bruce J. Summers ed.,
1994).
• Two additional attributes:
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Trust
Regulation of both the settlement system and end participants
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Payments Systems - Examples
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The Euro is the single currency currently shared by 18 of the European Union’s Member
States.
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Initially introduced on January 1, 1999.
The following countries have replaced their national currencies with the Euro:
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Belgium (Belgian franc)
Germany (Deutsche mark)
Ireland (Irish pound)
Spain (peseta)
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Portugal (escudo)
Finland (markka)
Greece (drachma)
Slovenia (tolar)
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France (franc)
Italy (lira)
Luxembourg (Luxembourgish franc)
The Netherlands (guilder)
Austria (schilling)
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Cyprus (Cypriot pound)
Malta (Maltese lira)
Slovakia (koruna)
Estonia (kroon)
Latvia (lats)
Special Drawing Rights (“SDRs”) serve as a means of payment within the International
Monetary Fund (“IMF”)
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SDRs are not currency or claims on the IMF. They are potential claims that can be exchanged for
“freely usable currency” of IMF members. Freely usable currency is “a member’s currency that
the IMF determines is widely used to make payments for international transactions and is widely
traded in principal exchange markets.”
SDRs may be used to repay loans to the IMF or as a payment of interest within the SDR
department.
Members may also voluntarily exchange their SDR holdings for freely useable currencies with
other IMF members.
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Currency and Technology
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