Bankers warned UK-based companies last week to be ready to deal in Euros on 1 January 1999, even if the UK stays out of the European Monetary Union (EMU).
Officials of the Association for Payment Clearing Services (Apacs), whcih runs the UK's inter-bank payment operations, warned last week that major firms in the UK will begin operating in Euros whether or not the government joins the EMU.
The European Union plans to introduce the Euro in EMU countries on 1 January 1999. The currency will co-exist with national currencies in a 'transition period' until 1 January 2002, when it will replace national currencies.
Stewart MacKinnon, head of European affairs and single currency at Apacs, said the association is drawing up dual contigency plans for both an 'in-scenario' and an 'out-scenario' to cope with UK government ambiguity over whether the UK will join EMU.
But whatever happens, he warned, the UK's clearing house services must be able to deal with Euros. "The government has to make a decision by the end of 1997, but we have got to make investment decisions now," he said.
"UK-based multinationals and other large companies - like Marks and Spencer - will move their operations over to the Euro fairly quickly and this wll have a 'multiplier effect' on their employees and the firms they deal with. We believe that many large companies will switch their accounting and treasury functions to the Euro on 1 January 1999," MacKinnon continued.
A decision is "imminent" on whether to clone Apacs' high value payment network, Clearing House Automated Payment (Chaps) in order to deal with the Euro, he added. Chaps handles #500 billion a week, with an average transaction value of #2 million.
MacKinnon said that a report on the implications of the Euro for Apacs' lower value payment network, the Bankers' Automated Clearing Services (Bacs) is expected early in the new year. Bacs, which handles transactions such as salaries and direct debits, must be able to deal in Euros because some Chaps transactions have spill-over effects into Bacs, and because many large UK-based corporations are expected to start paying staff in Euros in 1999.
The Cheque and Credit Clearing Company, which handles the bulk of cheques and paper credits in England and Wales, "should have an infrastructure in place by 1 January 1999 to process both sterling and Euros," MacKinnon said.
Plastic cards, many of them with embedded microprocessors, will be "crucial" to a seamless changeover, MacKinnon said, since the association expects a major shortage of Euro notes adn coins in early 2002. "The 1 January is the worst possible date, since the preceding three months are the busiest period of the year for retailers," he commented. "It might be much better to bring the date back to February in order not to have IT systems updated during the busiest trading period of the year."
Electronic purses - stored value cards based on microprocessors - could account for almost three billion payment transactions by 2005, representing up to a quarter of all plastic-based payments, according to Andrew Malecki, head of strategy and planning at Apacs. "The electronic purse is being marketed as a substitute for cash and is therefore going to be competing with people's habits. The take up of electronic purses will be largely determined by the supply of machines that accept them - for example, parking metres and ticket machines," he said.
But Internet-based payments are not expected to make a huge dent in the total payments market over the next few years, Malecki said. "I don't expect PCs to have a huge impact on the payments market over the next five years. Telephone banking is having a greater impact than the Internet on payments."
Payment by cheque and other paper-based instruments - still the dominant form of payment - is forecast to decline steadily in absolute terms over the next 10 years. Cheques will be overtaken first by debit and credit cards and by automated methods such as direct debits, and later by electronic purses.
Biometric computer technology is not yet sophisticated enough to provide an acceptable security mechanism for commercial transactions, according to Eryl Thomas, head of clearing services at Apacs. Thomas warned that the technologies currently proposed for verifying the identity of ATM users and payment card users - such as retina scans or vein scans of fingerprints - reject too many genuine users.
"The need to be able to identify people using ATMs and cards is absolutely fundamental and we are very keen to see something on the lines of biometrics being introduced, but we have got to make sure that what is being offered will work," Thomas said. The false rejection rate is absolutely critical and we don't see anything on the market that fulfils our criteria."
"If people say that their product has 99.7 per cent accuracy, then that sounds pretty good, but in reality that would mean that each day in the UK we would have 15,000 cardholders who are going to be embarrassed and extremely unhappy when they are wrongly rejected by a machine," Thomas said. Apacs considers the acceptable false rejection rate, also called the 'insult rate', to be one in 100,000. "Even then, that still means you are going to upset quite a few customers," he added.
Apacs also released details of its proposed trials of technology based on its Integrated Circuit Card (ICC) standard, which is part of an attempt to set a single international standard for chip-based credit, debit and ATM cards and their reader machines.
ICC prototypes have already been created, and cards are to be tested within banks during the first quarter of 1997. Bilateral testing between banks will begin during the second quarter, with private trials involving customers starting in the third quarter, and full scale public trials beginning in the fourth quarter.
Public trials will be in Bristol, Edinburgh and Northampton. "By early 1998 a sufficient level of results should be coming through for member banks to make a judgement about the success of the trials," Thomas said.
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