Why Has Stored Value Not Caught On?

Advances in computing power, electronics, and telecommunications have improved the way we live. Now such advances have started to change the way we pay. Technological advancements now make it possible for consumers to purchase goods with electronic bits of information representing money, commonly referred to as stored value. The value may be stored on microchips embedded in plastic cards that look similar to credit cards. This type of stored value device is called a smart card. According to an article seven years ago, ‘Smart cards are set to revolutionize payment systems and provide a plethora of new opportunities’ [Talmor and Timewell (1997)]. Another article in the popular press stated that ‘Cash is dirty, inefficient, and obsolete. Smart cards, digital cash and a host of electronic currencies will soon replace pocket money’ [Gleick (1996)]. This article asks the question: Why have general-purpose stored-value cards not been widely adopted as some analysts had expected? Chakravorti compares the credit card industry’s success in meeting three conditions necessary for widespread adoption with the stored value issuers’ failure in meeting these conditions to date in the United States.

Financial analysts have predicted the death of cash and other paper-based payment instruments for many years. Cash usage has started to decline. According to an American Bankers Association/Dove Consulting Study, cash usage has declined from 39 percent to 32 percent for in-store payments [Sapsford (2004)]. Part of this decline results from greater acceptance of payment cards, such as credit and debit cards, at merchant locations that traditionally had not accepted them. In the United States and most parts of the world, limited-use stored-value cards have been successful as cash substitutes for some niche markets, such as transportation systems, university campuses, and military bases.

Smart card issuers along with producers of the technology have made sizeable investments to establish smart cards as a viable payment instrument. The migration to chip cards from magnetic stripe ones have been aided by the reduction in the cost of producing smart cards. Payment card organizations, such as MasterCard and Visa, along with banking and nonfinancial institutions have invested significant amounts of money into stored-value technology in an effort to provide electronic substitutes for government-issued physical cash. MasterCard reportedly had invested over US$150 million to purchase 51 percent of Mondex International, an electronic cash system developed in the United Kingdom by National Westminster Bank [Hansell (1998)]. National Westminster spent more than US$100 million developing Mondex [Stouffer (1996)].

Stored-value issuers hope to earn interest from outstanding stored-value balances, earn fees from merchants, and possibly revenues from advertising on the physical card. However, issuers will have to convince consumers and merchants why they should use stored value. Issuers argue that their product would be more convenient for consumers and reduce costs of processing payment for merchants.

Most analysts agree that the two largest U.S. stored-value trials, the Atlanta Olympic Games and the Upper West Side of Manhattan, failed in convincing consumers and merchants of the benefits of using stored value over existing payment alternatives. The Economist (1998, 73) concluded that, ‘Electronic money has thus turned out to be a solution in search of a problem.’ While general-purpose stored-value has not been successful in the United States, many European countries have implemented such payment instruments with varying degrees of success. This article will address some factors that have lead to adoption of stored-value payment instruments in some countries but not others.