There exists an unusual characteristic of transactions; the cost as a percentage of transaction value increases as the value of the transaction decreases. The cost increase is dramatic making smaller amounts extremely expensive as the pie chart indicates.
The same phenomenon exists for non-cash tender types; merchants will refuse non-cash tenders under a floor value. Interestingly, the same condition exists for payment systems generally and large value movement costs next to nothing for parties conducting transactions, whereas needs-based payment systems force merchants to incur extraordinary charges for acceptance of these tender types.
Current virtual payment systems such as bitcoin do not allow tenders of odd values and so transaction costs for low value items are cost prohibitive. This friction for low value payments taxes most consumers and creates high percentage transaction costs for most ordinary transactions. Cash eliminates this tax, however cash drawbacks such as low accountability, and security risks make cash tenders rare in the US.
Money Modules (MM) issued by the Fed will reduce transaction friction considerably for the following reasons:
· There are no constraints on value
· Security in the form of insurance is a low transactional cost
· Elimination of acquirers and forwarders increases speed
· Electronic wallets are a one-time cost and are available with current technology
· Bank profitability will increase because of regular high demand for the currency
Changing the banking status quo requires financial institution leadership and imagination sadly not present today. The costs of transactions for everyday consumers remains staggeringly high while banks focus on large value transactions or high fees at the expense of ordinary consumers. FI profitability will increase after the Fed issues MM. FI eventually will support this obvious profitable service, but only when the Fed recognizes that it must issue digital fiat currency.
Now that large financial institutions jumped on the issuance of digital currency, the Fed shirks its responsibilities by claiming FI have met the market demands, so Fed interference recklessly imperils a nascent service in the making. The Fed serves FI, not the consumers dependent on them. The Fed exists to “to provide the nation with a safer, more flexible, and more stable monetary and financial system.” It also apparently exists to create excessive friction to the unwashed masses making mundane transactions.
It is time for Fed leadership, not an incestuous relationship with FI they theoretically oversee. Since this call likely will go unheeded, government branches must issue digital currency for specific purposes so at least government agencies do not pay for excessive friction in their low value transactions.