Friday, April 10, 2009
Some U.S. communities are printing their own brands of paper currency to boost consumer spending, a practice that payments industry veterans say might be done better with plastic.
"Like a gift certificate, this is prepaid money and it's set aside by individual companies or retailers or businesses in that particular community and they all contribute in one way or another," said Steve Eazell, Director, National Sales and Marketing, for Secure Payment Systems, a Calif.-based ISO.
The use of local currency is nothing new – communities did it during the Great Depression of the 1930's – but the practice is beginning to take hold in the United States on a broad scale. Examples of local paper currencies include Ithaca Hours in New York, Detroit Cheers in Michigan and BerkShares in Massachusetts.
The local monies are often given favorable exchange rates against the dollar to make them more attractive. In Massachusettes, the BerkShare (introduced in 2006) had been trading at one BerkShare for $0.90 until recently, when the price was raised to one BerkShare for $0.95 to encourage more merchants to accept the money.
"[The new exchange rate] really provided an incentive for the business community to get on board," said Sarah Hearn, Office Manager for the E.F. Schumacher Society, a nonprofit group in Great Barrington, Mass. that promotes the local economy and started the BerkShare program. "Some that were on the fence are signing up."
However, industry insiders warned that alternative currencies face certain pitfalls. Paul Martaus, President of payments industry consulting firm Martaus and Associates, said the currencies were vulnerable to fraud.
"I'm not quite sure whether or not the city fathers have really realized the advent of the color copier yet, and I suspect if they're not careful, they're going to find out what a color copier can do," Martaus said.
"Everybody knows what a dollar bill feels like – it's tactile – and even knowing how a dollar feels, there are still people that try to replicate American currency. I would have to suggest that a lot of these cities would try and find a vendor that would make them something that is unique and has a feel to it, but then, how does a merchant know?"
Martaus, who called the use of local currency "an incredibly powerful loyalty program," added, "I assume the reason they're not going with a plastic-oriented medium is the cost involved." He compared the practice to the use of "mall cards" – gift cards that can be used at any number of participating stores within a larger shopping center.
"A really entrepreneurial ISO or acquirer could very easily go into city hall and say, 'we will let you buy these smart cards or regular prepaid cards with your phony bucks, and you can put it on a safe, secure transaction system," he said. "The problem is there are discounts associated with that and transaction fees and things of that sort, making it a little bit less attractive."
Donna Embry, Senior Vice President at Payment Alliance International, pointed out that with paper currency, "the good thing about it is it works without having to change any real equipment." But Eazell echoed Martaus' suggestion that there were business opportunities for the use of a plastic-based local currency, adding that he knew sales reps trying to sell that very idea.
"It's an idea taken on by quite a number of sales reps that I know, and they're trying to do this in different communities across the U.S., and they've had limited amounts of success," he said. "As far as getting the whole town involved, that's their biggest challenge … but generally it's a peer pressure situation – you get to the point where there's enough retailers or businesses to accept this, then it's almost silly for you not to."
Carolyn Palmer, Mayor of Ithaca, N.Y., said Ithaca Hours were introduced in 1992 and that "I don't think [counterfeiting] has ever happened in all the years it's been in operation." She said the economic downturn had spurred wider use of Ithaca Hours, and that about $100,000 worth of the money was now in circulation across Tompkins County, where Ithaca is located.
Hearn said BerkShares, which are handed out by local banks, contain colored threads similar to those found in U.S. dollars and drawings of celebrated figures from the Great Barrington area in place of U.S. presidents – including W.E.B. Du Bois, Norman Rockwell and Herman Melville.
"They're really high quality and printed on special security paper," she said, adding that alternative currencies are legal so long as they don't "closely mimic" the dollar.
Hearn said the E.F. Schumacher Society wanted to create a program of BerkShare grants and loans that would ensure various projects drew only from the local economy. For example, a building project funded with BerkShares would have to hire workers and buy supplies with BerkShares, which would keep the project local and compound the benefits of using special currency.
While Martaus said he couldn't foresee local currency programs ever becoming "so wildly successful that [they] would dislodge or even put a blip on the radar" of existing payments industry institutions, Eazell said credit card providers and ISOs could be threatened.
"Do I think that credit cards are threatened at this point of time? Not really," Eazell said. "But do I think potentially they could be? …. Yeah, I think that everything is going to cut into credit cards in this day and age. I think that this is an alternative to credit cards for a lot of folks because we're returning to a place where cash and other remunerations is more important than buying on credit."
He added, "I think [local currency] is a brilliant idea, I really do. It will generate a buzz, there's no question, and it will generate some definite interest in the acquiring business."
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