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Williamson, O. E. (1985). The Economic Institutions of Capitalism. New York: Free Press.
Williamson, O. E. (1989). Transaction Cost Economics. In R. Schmalensee and R. Willig
(Eds.), Handbook of Industrial Organization, I, Amsterdam: North Holland.
Williamson, O. E. (1990). A Comparison of Alternative Approaches to Economic Orga-
nization. Journal of Institutional and Theoretical Economics (JITE), 146, 61-71.
Williamson, O. E. (1998). The Institutions of Governance. American Economic Review,
88, 75-79.
Windsperger, J. (1983). Transaktionskosten in der Theorie der Firma. Zeitschrift für
Betriebswirtschaftslehre, 53, 889-903.




Appendix

Table 5. Number of commercial banks and inhabitants per commercial Bank in Germany
(From Deutsche Bundesbank, 2002, Monthly Statistics and Reports on Banking, 1980-
2001)

Year Number of Commercial Inhabitants per Commercial
Banks in Germany Bank in Germany

2001 2,696 1,880
2000 2,912 1,777
1999 3,168 1,725
1998 3,404 1,687
1997 3,578 1,620
1996 3,675 1,593
1995 3,785 1,570
1994 3,872 1,548
1993 4,038 1,530
1992 4,191 1,533
1991 4,451 1,617
1990 4,711 1,433
1989 4,297 1,400
1988 4,429 1,385
1987 4,543 1,375
1986 4,662 1,368
1985 4,739 1,365
1984 4,798 1,367
1983 4,848 1,374
1982 4,930 1,374
1981 5,052 1,375
1980 5,355 n.a.



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Reduction of Transaction Costs by Using E-Commerce in Financial Services 81


Table 6. Number of telephone mainlines in Germany (From Eurostat, 2002, Database
NEW CRONOS, Table TEL4)

Year Number of Telephone Number of Telephone Mainlines
Mainlines in Germany per 100 Inhabitants in Germany

2000 50,220,000 61
1999 48,300,000 59
1998 46,530,000 57
1997 45,200,000 55
1996 44,200,000 54
1995 42,000,000 51
1994 39,900,000 49
1993 37,500,000 46
1992 35,800,000 44
1991 33,700,000 42
1990 32,000,000 40
1989 28,847,800 37
1988 27,823,200 36
1987 27,007,100 35
1986 26,189,300 34
1985 25,391,800 33
1984 24,420,600 31
1983 23,385,600 30
1982 22,571,600 29
1981 21,645,900 28
1980 20,535,000 26




Table 7. Number of personal computers in Germany (From Eurostat, 2002, Database
NEW CRONOS, Table PC1)

Year Number of Personal Number of Personal Computers
Computers in Germany per 100 Inhabitants in Germany

2001 29,000,000 35.3
2000 27,640,000 33.6
1999 24,400,000 29.7
1998 22,900,000 27.9
1997 19,600,000 23.9
1996 17,100,000 20.9
1995 14,600,000 17.9
1994 12,300,000 15.1
1993 10,200,000 12.6
1992 8,800,000 11
1991 7,500,000 9.4
1990 6,500,000 8.2




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82 Pfahler & Grebe


Table 8. Number of internet users in Germany (From Eurostat, 2002, Database NEW
CRONOS, Table INTERN2)

Year Number of Internet Number of Internet Users per
Users in Germany 100 Inhabitants in Germany

2001 30,000,000 36.5
2000 24,000,000 29.2
1999 14,400,000 17.6
1998 8,100,000 9.9
1997 5,500,000 6.7
1996 2,500,000 3.1
1995 1,500,000 1.8
1994 750,000 0.9
1993 375,000 0.5
1992 350,000 0.4
1991 200,000 0.3


Table 9. Mobile Phones per 100 Inhabitants in Germany (From Eurostat, 2002, Database
NEW CRONOS, Table TEL4)

Year Mobile Phones per 100
Inhabitants in Germany

2000 59
1999 29
1998 17
1997 10
1996 7
1995 5
1994 3
1993 2
1992 1
1991 1


Table 10. Number of online accounts in Germany (From Homepage of the BDB, 2002,
http://www.bdb.de/pic/artikelpic/062002/19-06-2002-Entwicklung-Onlinekonten
2001.pdf)
Year Number of Online
Accounts in Germany

2001 19,740,000
2000 15,130,000
1999 10,160,000
1998 6,960,000
1997 3,480,000
1996 1,800,000
1995 1,390,000



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Reduction of Transaction Costs by Using E-Commerce in Financial Services 83


Table 11. Number of security accounts in Germany (From Homepage of the BDB, 2002,
http://www.bdb.de/pic/artikelpic/122001/TzZ_Depots.pdf)

Year Number of Security
Accounts in Germany

2000 34,332,000
1999 25,194,000
1998 20,586,000
1997 18,304,000
1996 17,063,000
1995 16,303,000




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84 Kurihara




Chapter V



The Spreading Use
of Digital Cash and
Its Problems
Yutaka Kurihara
Aichi University, Japan




Abstract
It has been several years since the words “digital cash” and other related terms were
introduced. Although e-commerce has been growing, digital cash has not been a focus
of much attention. Digital cash has some problems associated with it that need to be
solved before its use can continue to grow. There are two points the author emphasizes
in this chapter. The first is that the essential characteristics of digital cash, its
advantages and disadvantages, should be carefully examined. The second point is
since financial institutions cannot stop this trend, it would be prudent for them to view
it as a business opportunity. Monetary authorities should pay careful heed to the trend
as well, guiding the “sound” market to maturity, taking care not to exercise excessive
intervention.



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The Spreading Use of Digital Cash and Its Problems 85


Introduction
It has been several years since the words “digital cash,” “e-money,” “e-cash,” and other
related terms were introduced to the modern lexicon. Needless to say, the progress made
in communication and information technology has been very rapid, and the area of digital
cash is no exception. The volume of such transactions is rising, yet there has been little
analysis of this revolution in payment, particularly in academic fields. Investigating the
influence and problems of this trend is an inevitable and important task, not only from
a practical standpoint but from a theoretical one as well.
Although e-commerce has been growing rapidly and attracting much attention, digital
cash has not been a focus of such attention. Digital cash has some problems associated
with it that need to be solved before its use can continue to grow, and the rate of growth
is slowing at present. We can say that digital cash is not used in practice. The logic behind
replacing cash, checks and magnetic credit cards with digital cash is bound to prevail in
the end but there are many barriers that need to be overcome.
In the past, I have classified digital cash into an electronic wallet type and an online type.1
I then proposed that material cost reduction and service price cutting2 were the resultant
factors of the demand for electronic wallet transactions and the means by which digital
cash could spread, the technology of IC card reformation could develop, and price
cutting on the supply side could occur. The popularization of the personal computer and
the Internet has also prevailed, as well as the stabilization in demand of Internet-based
commercial dealings as a key factor of development for online transactions on the demand
side. General price decline for media equipment, typically computers, has been ongoing
as well, helping to promote the online-type transaction at the supply side.
It is said that electronic commerce in the United States more than tripled from 1997 to 1999.
Moreover, it seems that the spread of mobile telecommunications such as cellular phones
contributed to the development of digital cash. In the near future, television, etc., will be
used to make transactions. IT (information technology) has undergone a global revolu-
tion in many fields. Ubiquitous instruments in IT fields appeared recently, allowing for
digital cash to develop much further.
The purpose of this chapter is to analyze the inter-relational characteristics of digital
cash, financial institutions, and financial authorities. Section 2 specifies the definition
of digital cash, including a new payment instrument, the debit card. Section 3 investigates
the advantages and the disadvantages of digital cash. Here I will address the problematic
aspects of digital cash that have been clarified through our ongoing experiments and that
are observable in society at large. Section 4 considers the connection between digital
cash and the financial institution. In section 5, I analyze the relationship of digital cash
to monetary policy and the decision making of the policy authorities. Finally, section 6
is a brief conclusion.




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86 Kurihara


What is Digital Cash?
It is difficult to actually define what “digital cash” is. The classification has traditionally
been either “IC card type (wallet use)” or “Network type (online use).” The IC card type
digital cash has the value in itself, while the network type digital cash is data maintained
on a personal computer or host computer (Figure 1). Recently, however, digital cash as
a combination of both types has appeared. The distinction between the two is murkier
than before.
Pertinent here are two forms of transaction: the “closed loop” and the “open loop.” In
a closed loop transaction, the transfer of the monetary amount is in the form of digital
cash. For instance, a purchaser applies for an issue of funds from a financial institution
(typically a bank), the digital cash is electronically transferred as payment for the
commodity or service purchased, and the seller (vendor, etc.) settles the transaction at
the value paid. This transaction is not transferable to any other users. The tools of the
closed-loop transaction are the IC card and network digital cash.
On the other hand, digital cash issued once is susceptible to being reused for subsequent
settlements in an open loop where revolving liquidity exists. This is a pitfall of the IC card

Figure 1. IC card type and network type


IC Card Type Network Type
Wallet Use; Online Use;




Smart Card or Cyber Money or
Stored Value Card Network Money




The value is encoded The value is maintained on
on the card a personal computer or
host




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The Spreading Use of Digital Cash and Its Problems 87


Figure 2. Closed loop and open loop


Closed Loop Open Loop




Not Transferable Liquidity Exists




The amount is in It can be reduced
digital cash subsequent
settlement




type closed loop transaction that is in the mainstream now (Figure 2). Cash can be reused
and divisible much more immediately while collection of non-cash instruments can be
delayed when drawn on non-local payer institutions (Hancock and Humphrey, 1998).
It would be worth pausing to consider whether digital cash is truly money. Though credit
cards, checks, debit cards, etc., have become remarkably widespread for making pay-
ments in electronic form, the differences between these and digital cash are important
ones (BIS, 1996). A lot of people are using a new batch of credit cards that can be acquired
online (Tringham, 2000). Such financial tools should not be classified as digital cash, and
from the standpoint of monetary policy the distinction is particularly important.
What I am focusing on here is a form of digital cash that builds information on “pseudo-
cash,” in other words the digital cash itself, into the card and the network, and transacts
with it. The entity of digital cash has these facets: a) a concluded settlement; b) non-
specificity (no defined purpose); c) the transfer; d) circulation (freely usable); and e)
anonymity. It is necessary to assign a concrete classification to digital cash as a legal
financial instrument unique and separate from deposit currency, time deposit, certificate
of deposit (CD), trust funds, etc., which must not be classified as digital cash. It follows
that the debit card, the pre-paid card, the credit card, and the check as listed above do
not fall under the digital cash definition in spite of being traded in electronic form.
The non-specificity of digital cash far exceeds that of other electronic monetary
instruments such as pre-paid phone cards. It is inferior to traditional cash and does not
exist in closed-loop transactions. The circulation of digital cash also is low now, and it



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88 Kurihara


is doubtful whether anonymity exists in the form of currency deposits. Also, digital cash
is not under the constraints of the laws governing traditional currency. However, our
stated examples fit within the realm of the above-mentioned definition and thus should
be classified as digital cash.




Advantages and Disadvantages of
Digital Cash
In this section, I analyze the advantages and the disadvantages of digital cash.


Advantages of Digital Cash

It is common knowledge that both types of digital cash have the advantage of reducing
the cost, the time, and the human-error risk of transactions for both the payer and the
payee.
Santomero and Seater (1996) argued that the amount of pre-paid values stored on
(including digital cash) products by households will be functions of the types of
consumer goods that can be purchased using them, the availability of terminals that
accept them, and the compatibility of competing digital cash products with each other.
Furthermore, Kane (1996) reasoned that time-of-day flexibility and the protection from
violent crime provided by electronic banking and TV shopping may be desirable services
that paper cash transactions simply cannot offer. Kwast and Kennickle (1997) have
illustrated that income, financial assets, age, and education all play important roles in
determining household use of digital cash products.
Due to the availability of the IC card, we do not need to carry much cash on our person
or deal with the annoyance of loose change. The IC-type transaction has the additional
merit of transaction privacy.
As for the network type transaction, not having to go to the scene of the purchase is one
key advantage. And there is high security against theft or loss. Furthermore, it allows
sellers to save on handling costs and increase business opportunities even if they
traditionally have a small-scale clientele. Low-cost transactions are highly likely as
cross-border business dealings increase. The cost of handling transactions electroni-
cally is approaching the level that makes even relatively small purchases with electronic
payment means feasible. Such non-paper exchanges can now have a cost advantage over
traditional payments.
Also stemming from this would be the proliferation of related commodities such as
computers and software, and the creation of a specific demand for such network
transaction services.
Banks (2002) defines digital cash as “an electronic currency, created through special
software, that can only be used on the Internet.” He also says that most online B2C



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