Yves here. Please thank reader Clive for providing a detailed explainer on how card systems work and what the impact of a drachma re-introduction would be for them.
By Clive, a payments system professional
Perhaps the main reason well intentioned laypeople suggest what to them are obvious, simple solutions to implementing either a new drachma in Greece, or some sort of parallel running of both a new drachma and the euro, or a new cryptocurrency which somehow can be like a drachma or even both a euro and a drachma at the same time and so on (there’s been many other ideas proposed) which are nevertheless unfortunately completely impractical in terms of allowing a functional, reliable, robust, high volume payment system is that so much of the financial system’s complexity is transparent to the end user.
We’re lulled into a false sense of understanding by the ubiquity and apparent simplicity of the modern retail non-cash payments system which operates in most countries (we’ll concentrate on the retail system here, the sorts of things we as joe public use in our everyday transactions; commercial, business-to-business payments systems and “treasury” systems used by large banks and the central banks are different but no less complex, perhaps even more so but outside the scope of what we’ll discuss here).
We hand over our card, sign the ticket (or enter our PIN, or even just wave our NFC card over the reader) and know that in a couple of days at most, usually a couple of hours, our bank accounts will be deducted the relevant amount. We even use our credit and debit cards overseas, and as if by magic the correct local currency amount is converted into the currency in which our “native” bank account is denominated in and away the money goes.
The card payments system has evolved over the past 40 or more years to reach its current level of sophistication and automation. Over that time, various parties have carved out particular places in the overall system often at the direction of regulators who have insisted on fragmentation to avoid any one single part of the overall system being allowed to have dominant influence — and so provide an opportunity for rent extraction. While this is laudable action by the regulators the result is systemic complexity.
Let’s start by identifying who the various participants in a card payment transaction are:
1) The customer. That’s you, with your card presented for payment. You are known as The Cardholder in payments industry speak. You want to pay by either credit or debit card and aren’t using cash because either you don’t have the cash and need to use a line of credit or even just for convenience.
2) The retailers (this could be a hotel, a restaurant, supermarket, a bar or whatever) — the place you’re presenting your card for payment to settle a bill. These are known in the industry as the “Merchant” so that is what we will refer to them from hereon.
3) The Merchant Services Provider. Now we’re into the realm of things which end users of payments systems probably don’t think too much about. Who are Merchant Services Providers and what do they do ? Well, the machine you put your card into (or the Merchant uses to swipe you card) wasn’t left there by the tooth fairy. Someone built it, someone owns it, someone has to maintain it, update it such as to apply security patches and even periodically replace it when the hardware it contains doesn’t support new features which are deemed necessary such as Chip and PIN authentication, or “less” (using Near Field Communications) payments etc. This hardware is commonly referred to as an “EPoS” (Electronic Point of Sale) terminal. It costs the Merchant Services Provider money to supply and support the EPoS terminals, so they charge the Merchant a fee. This can be either as a high “one off” cost to buy the EPoS terminal or the Merchant Services Provider can “give away” the terminal for a low nominal cost but then levy a fee on each transaction the Merchant completes using the terminal for taking card payments.
In Europe (and this includes the eurozone, Greece too) the number of Merchant Service Providers who supply of EPoS terminals has grown like topsy over the last decade or so. This is because it can be insanely profitable — the EPoS terminals are fairly cheap to manufacture in bulk, support can be crapified but those transaction fees just keep rolling in. (this one is from PayPal but there are dozens and dozens of Merchant Service Providers offering different EPoS devices, different tariffs and supporting different EPoS features as well as other services like how you are able to manage your account with the Merchant Service Provider).
4) The Card Network. You, the user (or The Cardholder) has a card. That card is produced under licence, the terms of which are specified by the Card Network. Well known Card Networks are Visa, MasterCard, American Express – but there are several others. Some operate just in one locality, most try to offer a good range of international acceptance. But what exactly do the Card Networks do and, perhaps more interestingly, what don’t they do when you present one of their licensed cards for payment ? Firstly, the Card Networks do not remit funds between the Cardholder (you) and the Merchant. Secondly, the Card Networks do not define the currency in which the transaction is to take place. Nor do they transfer the jurisdiction where the payment and settlement takes place from or to any other country.
So what do they do ? Well, when you (the Cardholder) presents your card to the Merchant, the Merchant uses their EPoS terminal to acquire (that is the industry standard wording) the card details and the transaction amount. The EPoS terminal appends some other details such as the location of the transaction and the currency in which the transaction is to be denominated in (such as U.S. dollars, Yen, sterling, euros etc.) using the software built into the EPoS terminal itself. It then sends this information to the Merchant Services Provider. But all any of the parties to the transaction know so far is the above – no one can yet say which bank (your bank, the bank account for you, the Cardholder) is going to have to make the payment from.
Here is where the “magic” (it isn’t actually all that magical) of where the Card Networks comes in. They know, from the card number (called the PAN or Primary Account Number) which is printed on the card (and also stored in the magnetic stripe and also the card’s Chip, if present) exactly which bank issued the card. The Card Issuer – see item 5 below – agrees to provide the Card Network with at least a daily figure (in the currency which the Card Issuer has denominated the account you have with them) for your line of credit on the card. Sometimes the Card Network has the facility to check in real time what your available funds are on that card. Sometimes not. But as a minimum, it knows what you’ve got that day. Assuming you’ve got sufficient funds to cover the transaction, the Card Network then tells the Card Issuer what you’ve just spent on the card and simultaneously tells the Merchant Services Provider to send a message to the Merchant’s EPoS terminal to authorise the transaction. The EPoS terminal then issues a message to the Merchant that the transaction is authorised and triggers receipt printing (or an equivalent action to create a record of the transaction being complete). This, effectively, marks the end of the Card Network’s involvement in the transaction. Then the action moves to…
5) The Card Issuer. This is your bank, the one who gave you the card. The one who just confirmed you were “good” for the money to the Card Network. When a Card Network told the Card Issuer that you’ve just spent some money, the Card Issuer (usually) earmarks your account to say that your available funds have decreased by the corresponding amount.
But what amount exactly ? If this is, for example, a U.S. dollar denominated account and you’ve just been to the supermarket in Scottsdale, AZ, it’s fairly simple. The Card Issuer needs to send U.S. dollars to the supermarket’s Merchant Services Provider who will then send those dollars to the supermarket’s bank account. Note – this is very important so pay attention here – it is the Card Issuer who sends the money to the Merchant Services Provider NOT the Card Network.
But if instead of going to the supermarket in Scottsdale, you’ve been to the supermarket in Woking, England, the supermarket’s Merchant Service Provider wants settlement in pounds sterling. So your bank, the Card Issuer, has to check the transaction information it was sent by the Card Network and analyse it for the currency it was denominated in. The Card Issuer must, if the transaction was denominated in a currency other than that in which your account with them is denominated in, calculate the (in this case) U.S. dollar equivalent of the sterling amount it must send. It can then debit your account in dollars and send sterling to the Merchant Services Provider. The Merchant Services Provider can then credit the correct sterling amount to the supermarket’s bank account.
So, dear long suffering reader, having read and hopefully digested that glossary of the various actors in the card processing and payments systems hopefully you can now begin to understand why, if any single part of the system changes (such as Greece wanting to re-drachma-ise) the entire system has to be considered. You can’t, for instance, simply say that an EPoS terminal in Greece is now no longer presenting transactions denominated in euros but instead is expecting to settle in drachmas.
The Merchant Services Provider whose terminal it is needs to change the transactions its EPoS terminals are sending to the Card Networks from euros to drachma. But both the Card Services Providers and the Merchant are separate commercial entities and supply / utilise services under contract. They may both be in different jurisdictions (under EU law, I can buy that PayPal EPoS terminal in the U.K. — I can buy one that is natively denominated in sterling, euros or even U.S. dollars — and I can take it and use it in any EU country).
Greece could introduce legislation to the effect that its sovereign currency was now the drachma not the euro. But who would actually be liable to make changes to their products and services to abide by that legislation? The Merchants and their banks in Greece would obviously have to then legally denominate their transactions in drachma, but that would not change the configuration of those thousands, more likely hundreds of thousands, of EPoS terminals installed in Greece.
Merchant Services Providers who were domiciled in Greece would have to make changes (ones like PayPay would not be bound by Greek law as they operate in a different, centralised, jurisdiction, which is Luxembourg but would probably start to do so for commercial reasons but it would take time to either produce and distribute new EPoS terminals for use in Greece or upgrade the firmware in existing terminals, if this is even feasible) but it would be no use them starting to fire off transactions to the Card Networks saying “drachma” if the Card Networks (who are definitely not Greek) didn’t also make changes to know what to do with them. And the Card Issuers would have to be prepared to remit funds to the Merchant Services Providers in drachma. But they too would have to change their systems to be able to handle that currency type.
Note too that each of these parties are entirely different and run different sub-systems which interface to each other but are not tightly coupled under a single codebase or managed under a single change management system.
And what of cryptocurrency, dual running of euros and drachma, or other similar bright idea? As readers can deduce from the explanations above, the payments system outside of cash is just that — a SYSTEM. You cannot simply change one component in it in isolation. Either a cryptocurrency is designed to the same specification as a card licensed by a Card Network and so can use the existing infrastructure (in which case it is a proprietary product issued under licence from the Card Network and as such production can only by authorised by them — meaning that a cryptocurrency was really just another version of an existing Card Network’s card) or else it is something new and thus requires new EPoS terminals and Merchant Service Providers capable of handling cryptocurrency payments.
To those who might suggest that Greece could revert to a cash only society for a time until the card payments system was modified it is worth noting that for some industries – notably lodging, rail travel, car hire (all of which are important sectors in Greece because they are part of the tourist industry) – have a very high percentage of settlement via card payments. This is because customers do not carry sufficient cash to cover these larger bills or even, for vacations especially, do not actually have the cash available and need to tap a line of credit. And for car rental, for example, some sectors have evolved to become entirely dependent on card payments. It is very difficult to hire a car without a card being used to pre-authorise the likely bill and to allow the car rental company to get an irrevocable deposit should you damage the car. If you don’t have a card to use, you need a huge cash deposit, often $1000+.
And cash societies are very susceptible to regressing to a black market economy with the predicable implications for a government’s ability to secure tax receipts.