Re: marginal cost of ecash transaction

["Frank O. Trotter, III" <fotiii@crl.com>]

Ecash Marginal Costs

Ecash transaction costs are a cost-accountants brain tease.  Here's
my take on the topic (this will likely display why I trade currency
and bonds and market payment systems and don't do cost accounting,
but since I do have overall responsibility for the cost and 
revenue of ecash it does matter quite a lot to me directly).

Hardware - We own and have paid for boxes to run the system.  Once
we run out of space or CPU power we have to buy more.  Thus we have
a step function that could be allocated across the transactions
being done  at a particular time,  but is in fact not really
marginal.  Our experience suggests that the steps are quite high.

Telco - Same as above to a degree - we pay for telco and a variety 
of connection "items".  If the volume goes off scale we have to 
upgrade, making this another step function.  It is a periodic bill, 
and can change, so it is not strictly a "sunk" cost like hardware.

People - Here is the likely marginal cost.  Bryce correctly notes 
that when we have to hire a variety of people to take care of more 
volume we have what can look like a marginal cost.  But this is not 
marginal by transaction, it is marginal by manual or semi-manual item 
like account set up, money transfer, email or phone conversations, 
etc.   It is entirely concievable that the one penny transactions
described in previous posts create no need for additional people,
and conversely a high dollar corporate transaction book might
suggest a lot of hand holding and manual costs.

You should look at most of this cost / benefit stuff on an account
basis, not on a transaction basis.  The regular banking costs of
mailing statements (still required), collecting desposits, 
producing payments outside of ecash, etc are in fact the bigger
parts of the cost.  There are also asssociated costs on accounts
of holding reserves with the Fed, paying FDIC insurance where
appropriate, and explaining the system and its implications to
our own executive staff, regulators, and accountants.

In all the system and the attending transactions are not considered 
marginal at this time by me.  In time, interbank clearing and 
currency stuff will generate genuine marginal costs.

We have sunk and ongoing hard costs, and perhaps someday some revenue 
and balances to offset the costs.  To my analysis the marginal costs 
revolve around the manual functions that could become a huge factor 
depending on the profile of customer that becomes the main user.  If 
they are substantially inactive in manual operations, we may have low 
marginal costs, if they all need a lot of handholding and manual 
transactions then each account will cost a lot to handle.

Hardware needs, of course, vary with the style of transaction.  
Marcel made a quick pass at this in a recent post to the ecash list.

Just a start off the top of my head.

FOT
Frank O. Trotter, III  -   fotiii@crl.com
www.marktwain.com  - Fax: +1 314 569-4906
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