What Is an “Internet Based Payment System?
|March 26, 2012||Filled under Uncategorized|
Interview with the CEO of E-Dinar Dr. Dahinden
In the following interview we have spoken with the CEO of E-Dinar Dr. Dahinden about the role of payment systems in the future. ‘Is there an alternative to Banking?’ was one of our most important questions.
Question: Often the call to return to gold based currencies is considered to be not “modern” or “old fashioned” – how do you respond to such arguments?
Dr. Dahinden: Up to the time of Napoleon Bonaparte who created the ‘Banque de France’ and, through it, the first fiat or paper currency in our civilization, people considered gold and silver coins as the only trusted means of exchange. You might call this ‘old fashioned’, I call it ‘common sense’. While fiat currencies are great for governments and banks because they allow money to be created from ‘thin air’ and to collect interest on nothing, gold and silver currencies are great for people precisely for the fact that they cannot be created from ‘thin air’ and do not carry interest. Quite the contrary to fiat currencies, bi-metallic currencies have an intrinsic value which derives from their rarity and the hard labour it takes to extract them from the earth, purify them and mint them into coins. This intrinsic value does not depend on a promise by somebody else as is the case with fiat currencies.
Question: The funny thing is that so many people trust banks even though we are facing this crisis – is it time now for alternatives?
Dr. Dahinden: in my opinion, one of the ‘good things’ that came out of the financial crisis is a growing perception that banks cannot be trusted because they were at the root of the recent financial crisis which was caused by their greed, their reckless trading activities (often for their own benefit and not the benefit of their customers) and their excessive risk taking through the use of complex ‘structured’ products mixing bad with good credit. Not only did many people lose a lot of money through the banks, but also we and future generations now have to pay for the banks’ recklessness through government-prescribed ‘bailouts’. As a result, many people have lost their trust in banks and are increasingly willing to explore alternatives such as keeping precious metals in safety deposit boxes and investing with companies holding precious metals as physical collateral.
Question: Do you believe that the internet opens up a new freedom in the realm of trade and financial transactions? Are we fully aware yet of these new options?
Dr. Dahinden: The internet has definitely changed the rules of the game and has evened the playing field not just for financial services but for trade in general. It has allowed small players to enter the big boys’ game and compete successfully with established banks and large financial institutions. Through its global reach, the internet enables the creation of virtual trading networks and can attract customers based on merit and reputation rather than through the costly ‘palaces’ used by traditional banks for the attraction and retention of their customers.
Today, we are still at the beginning of the ‘internet revolution’ and have a long way to go. For financial service providers, one of the key risks is the rapidly growing abuse by criminals and fraudsters which makes it increasingly difficult for honest players to gain the trust of customers. Only once we are able to fight cyber-crime effectively and have established mechanisms to identify trusted sources (through virtual rating agencies), will the Internet be able to attain its full potential in global trade.
Question: Can you explain to us briefly please, what is an “internet based payment system”? Why do customers really need it?
Dr. Dahinden: An internet-based payment system enables online payments for goods and services. Such payments can either occur via e-banking transfers of fiat currencies between different financial service providers or via payments of alternative currencies within the same system and/or between trusted systems. Alternative currencies are typically based on gold or silver (e.g. GoldMoney; e-dinar) but can use any other payment unit that buyers and sellers agree to accept in exchange for services and goods. In addition, some barter systems use electronic units tied to fiat currencies (e.g. the Chiemgauer) and others are based on work hours or services exchanged between members (e.g. exchange of a haircut for a baby-sitting session).
While gold and silver-based systems have seen a large increase in holdings over the past years, this increase has not been mirrored in the way how digital gold and silver systems are used in merchant commerce. In other words, these systems have become popular ‘savings’ vehicles but have made no or minimal inroads as commercial payment systems.
Internet payments have greatly increased the speed and transparency of money transfers from several weeks down to a few days (in the case of banks) and even seconds in the case of alternative systems. The higher speed of fund transfers has had a tremendous impact on global trade increasing trade turnover several fold as compared to 20 years ago.
Question: In your opinion, honestly speaking, why have gold- and silver-based systems not been successful in commercial trading?
Dr. Dahinden: you are touching on an intriguing phenomenon. While most of the original players like e-dinar and GoldMoney were convinced that we could introduce a superior electronic currency with intrinsic value which would eventually replace other e-payment systems based on fiat money, this has at least for e-dinar never materialized. During a recent discussion with James Turk at the Utah Monetary Summit in 2011, James Turk confirmed to me that the situation in GoldMoney is similar to what we observe in e-dinar. The vast majority of customers use the system for savings and only a minute part of all transactions are commercial in nature.
To date, the majority of customers either buys bullion for long-term storage as a means of savings or redeems bullion in the form of investment bars or gold and silver medallions. E-commerce activities continue to remain marginal. In e-dinar, we recently started to work with our Malaysian partners on the integration of a new form of e-commerce using SMS payments to support the payment of bills, car rentals and everyday purchases one would normally use a credit or debit card for. We see a real opportunity for e-payment systems such as e-dinar to support this new kind of e-commerce since SMS payments have gained broad acceptance throughout South-East Asia and are today the number one means of on-the-go payments because of their superior convenience.
We are in negotiations with the state government company ‘Kelantan Golden Trade (KGT) Sdn’ which is our core customer in South East Asia to add an electronic payment system as a supplement to the physical gold dinars and silver dirhams we have been supplying to them over the last two years. The e-dinar system would for obvious reasons fit the bill very well.
Part of the expected functionality would be the electronic equivalent of dinars and dirhams (with 100% physical coin backing as we guarantee today) that can be used to pay utility bills (e.g. electricity, water etc.), phone bills and make other payments as required.
Question: What is the real advantage in using such systems, taking in consideration that banks now provide very quick international transfers?
Dr. Dahinden: To be honest with you – in terms of convenience, ease of use and functionality, these systems hold no advantage over conventional banking systems. Quite on the contrary, they do not have the equivalent functionality of a current account used for everyday purchases and bill payments. They represent however an ideal alternative to paper savings by offering a low cost means to hold a percentage of one’s savings in gold and silver as advised by a growing majority of portfolio managers today.
This does not imply that I am a fan of Western banking – quite the contrary. While I appreciate the convenience of modern banking and its ease of fund transfers, I cannot accept its ceaseless creation of money from nothing and its uninhibited risk taking for the sake of profit and fat executive bonuses (e.g. Credit Suisse just paid out 3 billion in additional bonuses to 300 executives on top of their regular year-end bonuses!).
Western banking has brought the world to the brink of collapse and does not seem to have learnt anything from the near catastrophe. ‘Funny’ money creation is at all-time highs, none of the dangerous and destructive securisation practices have been halted or reversed and the seeds for the next (and probably final) financial catastrophe are been sown right under our eyes.
Question: What will be future of e-dinar? Is there a market?
Dr. Dahinden: a growing number of our customers prefer to have the metal in their hands rather than store it with third party providers (please note: e-dinar both stores bullion on behalf of customers and also physically delivers bullion products to customers). My personal belief is that the production and immediate redemption of gold and silver products is the most honest and gratifying way to bring gold and silver to the people. Only once somebody has touched gold and silver bars and coins, do they begin to understand the unique quality of these metals.
In addition, physical redemption makes people independent of third-party risks through insolvency of custodian companies (unlikely if 100% of the physical metal is indeed held in storage as is the case with e-dinar) or forced government closure (more likely) as we have witnessed with e-bullion and e-gold.
As recent history has demonstrated, the risk of government interference is more pronounced in Western countries where financial regulators tend to be more wary of private operators than in the Middle East where the private sector business with gold is persuasive and wide spread.
There is definitely a key role that systems such as e-dinar or GoldMoney can and should play in the realm of e-payments and commercial transactions. However, before this can happen in a serious way, some of the issues below need to be first addressed and resolved:
- Gold-based e-payments (if one includes the in- and out-exchange processes) are less convenient and take longer than credit and debit card payments
- ATM-based gold payments using debit cards are less competitive because all card-based systems involve an issuing bank. The cumulative spreads of the issuing bank and the gold provider are in all cases known to be higher than conventional credit and debit card fees
- If you go in and out of gold to/from cash as many merchants would do, you are exposed to currency fluctuations combined with bullion volatility which might necessitate hedging and would result in additional costs
- The cumulative time delays in sending funds to and from the gold provider’s bank account (i.e. what we call in- and out-exchange) and the resultant exposure to exchange risks during these delays increase exposure
- And finally, existing gold-based e-payment systems are probably still a little bit too exotic for use in daily transactions
Question: Do you permit third party exchange agents to buy and sell your products and services?
Dr. Dahinden: Yes, we do and indeed encourage intermediaries to become our business partners. As a matter of fact, we work more and more through intermediaries for two reasons:
- It lets us do what we do best – to produce, store and redeem gold and silver products
- It allows us to grow market share more rapidly than if we had to build our own distribution network.
We provide our intermediaries with logos, top quality photos of our products and website layouts to help them get started with little initial investment. In some cases, we provide them with satellite SW applications and even integrate their sales systems into our order management.
In that process, we broaden the appeal and customer base for our brand and products. Since we own comprehensive trade mark protection on several key aspects of our products, we enjoy product exclusivity – several companies which entered the market with similar products have learnt this the hard way.
In other words, our business increasingly builds on and depends on reliable intermediaries. For us, the advantage is clear: we deal with a manageable number of strategic business partners and our average order size has increased from approximately 5’000 to 80’000 USD per order.
Question: What is the target group of such kind of services? Do you see the “Halal Market” getting interested in such systems?
Dr. Dahinden: For day-to-day e-payment services which we plan to launch in a concerted effort later this year, our target groups are current and future gold dinar and silver dirham customers in Malaysia and Indonesia who have already been buying the physical coins and who have expressed an interest in e-payments based on the gold dinar and silver dirham.
To provide a perspective to our initial target group, we have sold more than 50’000 gold dinars and close to half a million silver dirhams in South-East Asia alone during the last two years. The potential customer base therefore is significant and well established.
Religiously motivated customers (most of our customers in South East Asia are Muslims and therefore religiously motivated) buy our products (i.e. gold dinars and silver dirhams) among other reasons because they are 100% halal. The answer therefore is yes, the ‘halal’ market is increasingly interested in our products.
Question: There is growing doubt in Islamic Banking also between Muslims, do you see alternatives or will the Muslims hold on to such banking?
Dr. Dahinden: First, we need to clearly state that there is no substantial difference between ‘Islamic’ banking and ‘Western-style’ banking. While Islamic banking has tried to transform lending into non-usurious forms of profit making, they still ’lend’ money and make profit from interest, albeit better hidden than in traditional banking activities. Let us face it: the core business of banks is lending money for interest, be they Western or Islamic banks.
Second, all banks, whether Western or Islamic banks, work with fiat money (i.e. money made out of nothing) which is intrinsically usurious because it carries interest, destroys purchasing power and causes inflation.
It is therefore not surprising that Muslims as well as non-Muslims have growing doubts about banking, whether Islamic or not, it does not really matter.
Question: Is there a serious alternative to banking?
Dr. Dahinden: Today, my answer is no. Banking unfortunately still is a necessity and will remain so for the near future. In the future, I hope very much that systems such as e-dinar or GoldMoney will become a viable alternative to banking and will be increasingly used by people for traditional banking needs.
Thank you for the interview.
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