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The Origins of Modern Banking


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r f the debt which the


banking companies
owe be a blessing to
anybody, it is to
themselves alone, who
are realizing a solid
interest of eight or ten
per cent on it. As to
the public, these
companies have
banished all our gold
and silver medium,
which, before their
institution, we had
without interest,
which never could
have perished in our hands, and would have been our salvation now in the hour
of war; instead of which they have given us two hundred million of froth and
bubble, on which we are to pay them heavy interest, until it shall vanish into
air... We are warranted, then, in affirming that this parody on the principle of 'a
public debt being a public blessing,' and its mutation into the blessing of private
instead of public debts, is as ridiculous as the original principle itself. n both
cases, the truth is, that capital may be produced by industry, and accumulated by
economy; but jugglers only will propose to create it by legerdemain tricks with
paper.r
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rThe modern banking system manufactures money out of nothing. The


process is perhaps the most astounding piece of sleight of hand that was ever
invented. Banking was conceived in iniquity and born in sin. Bankers own the
Earth. Take it away from them, but leave them the power to create money, and
with the flick of the pen they will create enough money to buy it back
again...Take this great power away from them and all great fortunes like mine
will disappear, and they ought to disappear, for then this would be a better and
happier world to live in. But if you want to continue to be slaves of the banks and
pay the cost of your own slavery, then let bankers continue to create money and
control credit'.r
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There are no hard international or government-compiled numbers totaling the complete


number of ATMs in use worldwide. Estimates developed by ATMIA place the number of
ATMs in use currently at over 1.8 million.[18]

For the purpose of analyzing ATM usage around the world, financial institutions
generally divide the world into seven regions, due to the penetration rates, usage
statistics, and features deployed. Four regions (USA, Canada, Europe, and Japan) have
high numbers of ATMs per million people.[19] and generally slowing growth
rates.[20] Despite the large number of ATMs, there is additional demand for machines in
the Asia/Pacific area as well as in Latin America.[21][22] ATMs have yet to reach high
numbers in the Near East/Africa.[23]

While ATMs are ubiquitous on modern cruise ships, ATMs can also be found on
some US Navy ships.[29]
c


cc

Although ATMs were originally developed as just cash dispensers, they have evolved to
include many other bank-related functions. In some countries, especially those which
benefit from a fully integrated cross-bank ATM network (e.g.: Multibanco in Portugal),
ATMs include many functions which are not directly related to the management of one's
own bank account, such as:

È Deposit currency recognition, acceptance, and recycling[60][61]


È Paying routine bills, fees, and taxes (utilities, phone bills, social security, legal fees,
taxes, etc.)
È Printing bank statements
È Updating passbooks
È Loading monetary value into stored value cards
È Purchasing
È Postage stamps.
È Lottery tickets
È Train tickets
È Concert tickets
È Movie tickets
È Shopping mall gift certificates.
È Games and promotional features[62]
È Donating to charities[63]
È Cheque Processing Module
È Adding pre-paid cell phone / mobile phone credit.
È Paying (in full or partially) the credit balance on a card linked to a specific current
account.
Increasingly banks are seeking to use the ATM as a sales device to deliver pre
approved loans and targeted advertising using products such as ITM (the Intelligent
Teller Machine) from CR2 or Aptra Relate from NCR. ATMs can also act as an
advertising channel for companies to advertise their own products or third-party
products and services.[

customer security

º   


Dunbar Armored ATM Techs watching over ATMs that have been installed in a van.

In some countries, multiple security cameras and security guards are a common
feature.[50] In the United States, The New York State Comptroller's Office has criticized
the New York State Department of Banking for not following through on safety
inspections of ATMs in high crime areas.[51]
Critics of ATM operators assert that the issue of customer security appears to have
been abandoned by the banking industry;[52] it has been suggested that efforts are now
more concentrated on deterrent legislation than on solving the problem of forced
withdrawals.[53]

At least as far back as July 30, 1986, critics of the industry have called for the adoption
of an emergency PIN system for ATMs, where the user is able to send a silent alarm in
response to a threat.[54] Legislative efforts to require an emergency PIN system have
appeared in Illinois,[55]Kansas[56] and Georgia,[57] but none have succeeded as of yet. In
January 2009, Senate Bill 1355 was proposed in the Illinois Senate that revisits the
issue of the reverse emergency PIN system.[58] The bill is again resisted by the banking
lobby and supported by the police.[59] In 1998 three towns outside of Cleveland Ohio, in
response to an ATM crime wave, adopted ATM Consumer Security Legislation requiring
that a 9-1-1 switch be installed at all outside ATMs within their jurisdiction. Since the
passing of these laws 11 years ago, there have been no repeat crimes. In the wake of
an ATM Murder in Sharon Hill, Pennsylvania, The City Council of Sharon Hill passed an
ATM Consumer Security Bill as well, with the same result. As of July 2009, ATM
Consumer Security Legislation is currently pending in New York, New Jersey, and
Washington D.C. In China, many efforts to promote security have been made. On-
premises ATMs are often located inside the bank's lobby which may be accessible 24
hours a day. These lobbies have extensive CCTV coverage, an emergency telephone
and a security guard on the premises. Bank lobbies that aren't guarded 24 hours a day
may also have secure doors that can only be opened from outside by swiping your bank
card against a wall-mounted scanner, allowing the bank to identify who enters the
building. Most ATMs will also display on-screen safety warnings and may also be fitted
with convex mirrors above the display allowing the user to see what is happening
behind them.

Cards
  

A    is a small plastic card issued to users as a system of payment. It allows
its holder to buy goods and services based on the holder's promise to pay for these
goods and services.[1] The issuer of the card creates a revolving account and grants
a line of credit to the consumer (or the user) from which the user can borrow money for
payment to a merchant or as a cash advance to the user.
A credit card is different from a charge card: a charge card requires the balance to be
paid in full each month. In contrast, credit cards allow the consumers a continuing
balance of debt, subject to interest being charged. Most credit cards are issued
by banks or credit unions

a   
The main benefit to each customer is convenience. Compared to debit cards and
cheques, a credit card allows small short-term loans to be quickly made to a customer
who need not calculate a balance remaining before every transaction, provided the total
charges do not exceed the maximum credit line for the card. Credit cards also provide
more fraud protection than debit cards. In the UK for example, the bank is jointly liable
with the merchant for purchases of defective products over £100.[4]

Many credit cards offer rewards and benefits packages, such as offering enhanced
product warranties at no cost, free loss/damage coverage on new purchases, and
points which may be redeemed for cash, products, or airline tickets. Additionally,
carrying a credit card may be a convenience to some customers as it eliminates the
need to carry any cash for most purposes.
   
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"#  

$a"  
A    (also known as a    or    ) is a plastic card that provides
an alternative payment method to cash when making purchases. Functionally, it can be
called an electronic check, as the funds are withdrawn directly from either the bank
account, or from the remaining balance on the card. In some cases, the cards are
designed exclusively for use on the Internet, and so there is no physical card.[1][2]
In many countries the use of debit cards has become so widespread that their volume of
use has overtaken or entirely replaced the check and, in some instances, cash
transactions. Like credit cards, debit cards are used widely for telephone and Internet
purchases and, unlike credit cards, the funds are transferred immediately from the
bearer's bank account instead of having the bearer pay back the money at a later date.

Debit cards may also allow for instant withdrawal of cash, acting as the ATM card for
withdrawing cash and as a check guarantee card. Merchants may also
offer cashback facilities to customers, where a customer can withdraw cash along with
their purchase.

Advantages and Disadvantages

Debit and check cards, as they have become widespread, have revealed numerous
advantages and disadvantages to the consumer and retailer alike.
The following allegations seem to be based  
on the current situation within the
U.S.A. Please read with caution as they may not apply to any other countries.

Advantages are as follows:

È A consumer who is not credit worthy and may find it difficult or impossible to obtain a
credit card can more easily obtain a debit card, allowing him/her to make plastic
transactions.

È For most transactions, a check card can be used to avoid check writing altogether.
Check cards debit funds from the user's account on the spot, thereby finalizing the
transaction at the time of purchase, and bypassing the requirement to pay a credit
card bill at a later date, or to write an insecure check containing the account holder's
personal information.
È Like credit cards, debit cards are accepted by merchants with less identification and
scrutiny than personal checks, thereby making transactions quicker and less
intrusive. Unlike personal checks, merchants generally do not believe that a
payment via a debit card may be later dishonored.
È Unlike a credit card, which charges higher fees and interest rates when a cash
advance is obtained, a debit card may be used to obtain cash from an ATM or a
PIN-based transaction at no extra charge, other than a foreign ATM fee.
The Debit card has many disadvantages as opposed to cash or credit:
È Use of a debit card is not usually limited to the existing funds in the account to which
it is linked, most banks allow a certain threshold over the available bank balance
which can cause overdraft fees if the customer does not depend on their own
records of spending.
È Many banks are now charging over-limit fees or non-sufficient funds fees based
upon pre-authorizations, and even attempted but refused transactions by the
merchant (some of which may not even be known by the client).
È Many merchants mistakenly believe that amounts owed can be "taken" from a
customer's account after a debit card (or number) has been presented, without
agreement as to date, payee name, amount and currency, thus causing penalty fees
for overdrafts, over-the-limit, amounts not available causing further rejections or
overdrafts, and rejected transactions by some banks.
È In some countries debit cards offer lower levels of security protection than credit
cards[9]. Theft of the users PIN using skimming devices can be accomplished much
easier with a PIN input than with a signature-based credit transaction. However, theft
of users' PIN codes using skimming devices can be equally easily accomplished with
a debit transaction PIN input, as with a credit transaction PIN input, and theft using a
signature-based credit transaction is equally easy as theft using a signature-based
debit transaction.
È In many places, laws protect the consumer from fraud much less than with a credit
card. While the holder of a credit card is legally responsible for only a minimal
amount of a fraudulent transaction made with a credit card, which is often waived by
the bank, the consumer may be held liable for hundreds of dollars, or even the entire
value of fraudulent debit transactions. The consumer also has a shorter time (usually
just two days) to report such fraud to the bank in order to be eligible for such a
waiver with a debit card[9], whereas with a credit card, this time may be up to 60
days. A thief who obtains or clones a debit card along with its PIN may be able to
clean out the consumer's bank account, and the consumer will have no recourse.

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Mobile banking
#   (also known as M-Banking, mbanking, SMS Banking etc.) is a term
used for performing balance checks, account transactions, payments etc. via a mobile
device such as a mobile phone or Personal Digital Assistant (PDA). Mobile banking
today (2007) is most often performed via SMS or the Mobile Internet but can also use
special programs, called clients, downloaded to the mobile device.

Mobile Banking Services

Mobile banking can offer services such as the following:


[edit]     

1. Mini-statements and checking of account history


2. Alerts on account activity or passing of set thresholds
3. Monitoring of term deposits
4. Access to loan statements
5. Access to card statements
6. Mutual funds / equity statements
7. Insurance policy management
8. Pension plan management
9. Status on cheque, stop payment on cheque
10. Ordering cheque books
11. Balance checking in the account
12. Recent transactions
13. Due date of payment (functionality for stop, change and deleting of payments)
14. PIN provision, Change of PIN and reminder over the Internet
15. Blocking of (lost, stolen) cards
[edit]
  %   &  " 

1. Domestic and international fund transfers


2. Micro-payment handling
3. Mobile recharging
4. Commercial payment processing
5. Bill payment processing
6. Peer to Peer payments
7. Withdrawal at banking agent
8. Deposit at banking agent
A specific sequence of SMS messages will enable the system to verify if the client has
sufficient funds in his or her wallet and authorize a deposit or withdrawal transaction at
the agent. When depositing money, the merchant receives cash and the system credits
the client's bank account or mobile wallet. In the same way the client can also withdraw
money at the merchant: through exchanging sms to provide authorization, the merchant
hands the client cash and debits the merchant's account.
[edit]  

1. Portfolio management services


2. Real-time stock quotes
3. Personalized alerts and notifications on security prices
4. mobile banking

 

1. Status of requests for credit, including mortgage approval, and insurance


coverage
2. Check (cheque) book and card requests
3. Exchange of data messages and email, including complaint submission and
tracking
4. ATM Location
[edit]º  ' 

1. General information such as weather updates, news


2. Loyalty-related offers
3. Location-based services
Based on a survey conducted by Forrester, mobile banking will be attractive mainly to
the younger, more "tech-savvy" customer segment. A third of mobile phone users say
that they may consider performing some kind of financial transaction through their
mobile phone. But most of the users are interested in performing basic transactions
such as querying for account balance and making bill payment.

'  

Security of financial transactions, being executed from some remote location and
transmission of financial information over the air, are the most complicated challenges
that need to be addressed jointly by mobile application developers, wireless network
service providers and the banks' IT departments.

The following aspects need to be addressed to offer a secure infrastructure for financial
transaction over wireless network :

1. Physical part of the hand-held device. If the bank is offering smart-card based
security, the physical security of the device is more important.
2. Security of any thick-client application running on the device. In case the device
is stolen, the hacker should require at least an ID/Password to access the
application.
3. Authentication of the device with service provider before initiating a transaction.
This would ensure that unauthorized devices are not connected to perform
financial transactions.
4. User ID / Password authentication of bank¶s customer.
5. Encryption of the data being transmitted over the air.
6. Encryption of the data that will be stored in device for later / off-line analysis by
the customer.
One-time password (OTPs) are the latest tool used by financial and banking service
providers in the fight against cyber fraud [5]. Instead of relying on traditional memorized
passwords, OTPs are requested by consumers each time they want to perform
transactions using the online or mobile banking interface. When the request is received
the password is sent to the consumer¶s phone via SMS. The password is expired once it
has been used or once its scheduled life-cycle has expired.

Because of the concerns made explicit above, it is extremely important that SMS
gateway providers can provide a decent quality of service for banks and financial
institutions in regards to SMS services. Therefore, the provision of service level
agreements (SLAs) is a requirement for this industry; it is necessary to give the bank
customer delivery guarantees of all messages, as well as measurements on the speed
of delivery, throughput, etc. SLAs give the service parameters in which a messaging
solution is guaranteed to perform.
[edit]'    
()   

Another challenge for the CIOs and CTOs of the banks is to scale-up the mobile
banking infrastructure to handle exponential growth of the customer base. With mobile
banking, the customer may be sitting in any part of the world (true anytime, anywhere
banking) and hence banks need to ensure that the systems are up and running in a true
24 x 7 fashion. As customers will find mobile banking more and more useful, their
expectations from the solution will increase. Banks unable to meet the performance and
reliability expectations may lose customer confidence. There are systems such
as Mobile Transaction Platform which allow quick and secure mobile enabling of various
banking services. Recently in India there has been a phenomenal growth in the use of
Mobile Banking applications, with leading banks adopting Mobile Transaction Platform
and the Central Bank publishing guidelines for mobile banking operations.


"*$#+$),,º),"+,+--).
What happens when you or I, or for that matter the government, borrow money from the
bank? Prepare yourself for a surprise.

Let's say we want to borrow a £100,000 mortgage on a house. The bank or building
society does what the goldsmith did and creates £100,000 out of thin air. Instead of
handing us a paper certificate, it simply credits our bank account with the £100,000 and
registers that £100,000 as a debt, with (say) a further £100,000 interest over 25 years.
The money is simply penned into our account without any account anywhere being
debited the loaned money. New money is therefore created. Alongside it a debt (in this
case £100,000 plus the roughly £100,000 of interest) is created. When we repay the
debt, the interest is accounted as income for the bank. The £100,000 we originally
borrowed is withdrawn from circulation and is accounted as collateral for further lending,
loaned back into circulation when someone else borrows.

Our house is held as security so if we fail to keep up our repayments, the creditor takes
possession of it. The repayments themselves can vary through no fault of our own,
according to interest rates set by the banking industry.

After 25 years of blood sweat and tears we finally pay back the last installment of the
£200,000 capital-plus-interest we owed and the house in finally ours. It is not ours until
that point.

The lender, who loaned us money which did not exist until the moment he created it out
of nothing, winds up with £100,000 of interest on the loan: that is real, spendable
income that comes courtesy of our real work and real wealth creation. The numbers
have been simplified to highlight the nature of the fraud and in practise the process is
hidden under a great deal of complexity but this in essence is the process of money
creation.

Each time the banks create money they create a debt that is greater than the spending
power they create. One can see too that each time they are creating a debt for the
borrower, they are ultimately creating debt free money for themselves.

Before the goldsmiths' scam began, the money in circulation was hard currency -
usually gold or silver minted into coins which then circulated as the tokens used to
represent goods and services. That minting and circulation of coinage was usually
administered by the government or king.

However as soon as the goldsmiths' certificates became used in lieu of gold, paper
money had made an appearance. As soon as the goldsmiths began issuing paper notes
for gold they did not actually have, the goldsmiths were themselves creating new money
and lending it into circulation.

One can see that this establishes debt as the basis of our currency. Where once, long
ago, the British pound represented something -so much gold or silver - it now
represents so much debt, which is not only nothing it is less than nothing.

Extracted from: Your Business Under Siege«and the reasons why. Published   
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Online banking (or Internet banking) allows customers to conduct financial transactions
on a secure website operated by their retail or virtual bank, credit union or building
society.

-  

Online banking solutions have many features and capabilities in common, but
traditionally also have some that are application specific.

"     


    

* Transactional (e.g., performing a financial transaction such as an account to


account transfer, paying a bill, wire transfer... and applications... apply for a loan, new
account, etc.)
o Electronic bill presentment and payment - EBPP
o Funds transfer between a customer's own checking and savings accounts, or to
another customer's account
o Investment purchase or sale
o Loan applications and transactions, such as repayments

* Non-transactional (e.g., online statements, check links, cobrowsing, chat)


o Bank statements
* Financial Institution Administration -
* Support of multiple users having varying levels of authority
* Transaction approval process
* Wire transfer

-   
 2      

* Personal financial management support, such as importing data into personal


accounting software. Some online banking platforms support account aggregation to
allow the customers to monitor all of their accounts in one place whether they are with
their main bank or with other institutions.

* 

The precursor for the modern home online banking services were the distance banking
services over electronic media from the early '80s. The term online became popular in
the late '80s and referred to the use of a terminal, keyboard and TV (or monitor) to
access the banking system using a phone line. µHome banking¶ can also refer to the use
of a numeric keypad to send tones down a phone line with instructions to the bank.
Online services started in New York in 1981 when four of the city¶s major banks
(Citibank, Chase Manhattan, Chemical and Manufacturers Hanover) offered home
banking services[1] using the videotex system. Because of the commercial failure of
videotex these banking services never became popular except in France where the use
of videotex (Minitel) was subsidised by the telecom provider and the UK, where the
Prestel system was used.

The UK¶s first home online banking services[2] was set up by the Nottingham Building
Society (NBS) in 1983 ("History of the Nottingham".
http://www.thenottingham.com/main.asp?p=1710. Retrieved 2007-12-14. ). The system
used was based on the UK's Prestel system and used a computer, such as the BBC
Micro, or keyboard (Tandata Td1400) connected to the telephone system and television
set. The system (known as 'Homelink') allowed on-line viewing of statements, bank
transfers and bill payments. In order to make bank transfers and bill payments, a written
instruction giving details of the intended recipient had to be sent to the NBS who set the
details up on the Homelink system. Typical recipients were gas, electricity and
telephone companies and accounts with other banks. Details of payments to be made
were input into the NBS system by the account holder via Prestel. A cheque was then
sent by NBS to the payee and an advice giving details of the payment was sent to the
account holder. BACS was later used to transfer the payment directly.

Stanford Federal Credit Union was the first financial institution to offer online internet
banking services to all of its members in Oct, 1994.

'  

Protection through single password authentication, as is the case in most secure


Internet shopping sites, is not considered secure enough for personal online banking
applications in some countries. Basically there exist two different security methods for
online banking.

* The PIN/TAN system where the PIN represents a password, used for the login and
TANs representing one-time passwords to authenticate transactions. TANs can be
distributed in different ways, the most popular one is to send a list of TANs to the online
banking user by postal letter. The most secure way of using TANs is to generate them
by need using a security token. These token generated TANs depend on the time and a
unique secret, stored in the security token (this is called two-factor authentication or
2FA). Usually online banking with PIN/TAN is done via a web browser using SSL
secured connections, so that there is no additional encryption needed.
* Signature based online banking where all transactions are signed and encrypted
digitally. The Keys for the signature generation and encryption can be stored on
smartcards or any memory medium, depending on the concrete implementation.

  
Most of the attacks on online banking used today are based on deceiving the user to
steal login data and valid TANs. Two well known examples for those attacks are
phishing and pharming. Cross-site scripting and keylogger/Trojan horses can also be
used to steal login information.

A method to attack signature based online banking methods is to manipulate the used
software in a way, that correct transactions are shown on the screen and faked
transactions are signed in the background.

A recent FDIC Technology Incident Report, compiled from suspicious activity reports
banks file quarterly, lists 536 cases of computer intrusion, with an average loss per
incident of $30,000. That adds up to a nearly $16-million loss in the second quarter of
2007. Computer intrusions increased by 150 percent between the first quarter of 2007
and the second. In 80 percent of the cases, the source of the intrusion is unknown but it
occurred during online banking, the report states.[4]

The most recent kind of attack is the so-called Man in the Browser attack, where a
Trojan horses permits a remote attacker to modify the destination account number and
also the amount.

º   

There exist several countermeasures which try to avoid attacks. Digital certificates are
used against phishing and pharming, the use of class-3 card readers is a measure to
avoid manipulation of transactions by the software in signature based online banking
variants. To protect their systems against Trojan horses, users should use virus
scanners and be careful with downloaded software or e-mail attachments.

In 2001 the FFIEC issued guidance for multifactor authentication (MFA) and then
required to be in place by the end of 2006.


"*$-.".)$+-a,3'
One could imagine that all these changes strengthened banks by making them faster,
smarter, broader, and more global. But this is not so. Even though banks have become
bigger, they have been weakened. One of the major reasons is that the new
technologies have accelerated the entry of rival institutions that were more adept in
utilizing them. Today, American banks' share in borrowing has dropped from 36% in
1974 to less than 20%. For thrift institutions, it dropped from 21% in 1976 to less than
8% in 2004. Commercial banks' share of total financial intermediary assets dropped
from a steady 40% in the 60s through 80s to below 30% in the latter half of the 1990s,
the first time that deposits in non-banks were greater than in banks.
One major reason for the decline was the growth of alternative sources of funds.
Information technology enabled investors to evaluate securities and to be reached
directly by borrowers. Thus, commercial paper outstanding as a percentage of business
loans rose from around 5% in the 1970s to above 35% in the 2000s. Computers could
be used to evaluate credit risk by using various quantitative methods, and this made it
possible for non-banks to transform loans into marketable securities. This technique of
securitization by non-banks is now also moving to small business loans.
In response, banks increased non-lending activities. The share of their non-interest
income rose, their commercial real estate loans; as a percentage of assets doubled.
And they began to be heavily active in financial derivatives. Widespread derivatives
markets were not possible without information technology; their complexity makes
controls difficult, and this increased riskiness. It helped bring down the Baring and
Daiwa banks, demonstrating the global nature of the problem. In non-lending activities,
too, banks fell behind institutions without banking charters but with superior operational
or technological ability. In credit card processing, banks lost all but 20% of the market to
non-banks. Banks were slow in offering Electronic Data Interchange (EDI) services that
standardized invoicing and payments for transactions. When EDI emerged outside of
banks it reduced the need for bank intermediaries.
-3-
ATMs, too, proved a mixed blessing. The linkage of ATMs to banks declined: physically,
over 45% of American ATMs are not located at banks anymore. As this reduction in
physical presence continued, the banks' advantage of proximity declined. Customers
deal with machines that are now interlinked by vast ATM networks, and care little about
who is behind them -- a bank, a near-bank, a non-bank, or a distant bank. Institutionally,
over 20,000 ATMs are operated by non-banks, and their share is increasing. ATMs led
to a reduction in branches.
This retreat from brick-and-mortar has long-term effects on banks as organizations. In
the past, the work process was organized such that the employees would come to the
place where the information relevant to the business was present, physically or in the
knowledge of their co-workers, and the customers would come to the employees. But
this flow is being reversed as it is becoming much cheaper to move information than
people. Therefore, data is moving to the employees, wherever they are; customers, too,
are now everywhere. In the process, banks are gradually become virtual organizations -
- networks of specialists sharing information, decentralized boutique operations
interacting, and customers distributed around the globe, often equally virtual as the
banks. Many employees are working at home or at far-away locations. Indeed, the
concept of stable employment itself is changing to ad-hoc arrangements and to
independent contractors working for multiple employers. For many tasks, these
employees are now located at the lowest cost locations -- not Tokyo and New York but
Manila and Bangalore.
By focusing on ATMs as teller-less branches, banks lost sight that these were merely
one electronic form of customer interface, and a fairly inconvenient one at that. Thus,
banks were unprepared for the emergence of terminals and network relations outside
their control, as the Internet emerged as a locus of commercial activity in which vast
numbers of customers are connected to a vast number of businesses, transacting with
each other in increasingly secure and authenticated ways.
"*$,$4"$,$)"+,+-#+,$5
Even more radical will be the change in the nature of money, the banks' life-blood.
Technology is leading to new types of money -- e-money, digital cash, cyber-dollars.
Money has metamorphosed from store of value like a gold coin, to a physical token like
a bank note, to a variety of payment vehicles, to a string of digital signals that are
recognized as valid claims. Now, "smart" stored-value cards can receive, contain, and
dispense these signals easily and securely, using one of several systems for encryption
and authentication. These cards would be replenishable electronically from distance,
even by wireless communication. They would create, in effect, a mobile, shirt pocket
ATM. Old-fashioned money will still be around. But soon, "digital wallets" will become
prevalent that permit electronic money, as well as specialized money -- cash that earns
interest, cash that is conditional, i.e., usable only on certain items or in certain locations,
or "closed cash" that functions only within certain institutions. Who would dispense e-
cash, and in what currencies? Various financial institutions are likely to issue their own
money or near-money. Some of these currencies would be pegged to real resources
such as oil, while others might be fixed to some official currency, and still others would
be based on the issuers' reputation. In such a fashion, parallel private currencies would
emerge.
Private e-money raises many questions.
‡ Is e-money a "natural" monopoly? Or will there be competing monies? Should
governments issue e-money? Will it license issuers and/or standardize the terms
of e-cash?

‡ How can one deal with the tax fraud, money laundering, and criminal activities that
are facilitated by untraceable and ubiquitous e-cash? Even in legitimate
transactions, to who are taxes owed?

-4-
‡ How does one protect individual accounts (and indeed the entire system) against
attack, loss, crash, intrusion, counterfeiting, unauthorized use, or default ? Could
or should risky users be excluded? What is the nature of liability?

‡ How does the emergence of private e-money affect the stability of the monetary
system? If it creates "open money" of stateless currencies that may be accepted
around the globe but are responsible to no one, governments could lose control
over the money supply and monetary policy. Even where some countries set
rules, such as by licensing who could issue e-money, there would be incentives
for others to become e-money havens.

‡ Similarly, how would one deal with inflation? Or, more accurately, with the multiple
inflation rates of the various monies? Most likely, different people could pick the
particular currency that best reflects their preferred inflation rate.

Perhaps the main question for banks is: Who will supply electronic money and
authenticate it to its recipients? Will it be banks or non-banks? Would they be licensed
and regulated? So far, a variety of entrants into electronic money have emerged
proposing various techniques. One first observation is that many of the companies
involved are not banks. Banks taking an initiative are less than a handful of big banks,
from among the thousands of American banks, or they are the banking industry's credit-
card organizations, whose interests may well not be to make cash transactions
convenient relative to the profitable credit-card operations.
Still more critical for banks' long term role is an important fact: with e-cash one can
bypass banks. Individuals and firms can pay directly into each others' e-money wallets
or stored-value smart cards. Such transactions would be like handing over cash among
individuals. Why then have a middleman, the bank, for such transactions? And, why
have transfer intermediaries among banks, such as correspondent banks, and clearing
networks such as SWIFT, or central banks?
Banks have no obvious advantages in the e-money business over other providers, such
as network operators or over computer network platforms. It was for related reasons
that Citicorp furiously dropped AT&T as a telephone service provider when it entered
the credit card business, and that many banks strongly opposed the planned acquisition
by Microsoft, of Intuit, whose Quicken software could have helped divert transactions to
Microsoft's new MSN network.

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