Digital Money Forum

What's the alternative?

[Dave Birch] There are plenty of extinct "alternative" payment mechanisms already: c2it, Yahoo PayDirect, Billpoint, eMailMoney and so on. And there are a few that survive. But where does the label come from? I saw the comedian/musician Tim Minchin tell an excellent joke when I went to see him earlier this year. I paraphrase, but the joke was essentially:

Q. What do you call an alternative medicine that he been tested and shown to work in double-blind clinical trials?

A. Medicine.

Quite. So when we call something an "alternative" payment method, what do we mean? What is it the alternative to? I made a note to ask a couple of people about this last year, when I read that

During this year’s holiday shopping season we project $7.8 billion will come from alternative payments versus $35 billion from traditional online payment methods.

[From Payments News: Javelin's 2008 Online Retail Payments Forecast - November 10, 2008]

The forecasts for the coming holiday season will be out soon, and they'll be even bigger despite the recession, and I never got round to asking the question then, so I'm going to ask it now. How are payment methods that account for more than 20% of the market "alternative" in any sense?

"I Know Nick Hughes"

[Paul Makin] I went to a very enjoyable event yesterday evening, held to launch a joint DFID/CGAP report, entitled "Scenarios for Branchless Banking in 2020". There were presentations by two of the report's authors, Mark Pickens and David Porteous, describing two of the four scenarios mapped out in the report:

• "Bharatia", which explores how a new market entrant can succeed in a saturated market by adding extra value and innovative products;
• 
  
• "Telmar", exploring the potential for development in a post-conflict country, using a mobile money solution developed in part using funds from international donors to distribute government aid directly to recipients.

These were followed by a valuable discussion amongst panellists, my only complaint being that an extra couple of hours would have been useful.

I strongly recommend you download the report. But then I would, wouldn't I, since I was one of the contributors. It's available from the CGAP site, at:

http://www.cgap.org/p/site/c/template.rc/1.26.12247/

Nick Hughes of M-PESA fame was there, and the most amusing part of the evening was one of the presenters mentioning how many people in the field of mobile money seek to give themselves some credibility by mentioning that they know Nick. There was then a Spartacus moment, as the next speaker stood up and began with "I know Nick Hughes", making Nick visibly squirm.

And, just for the record - I know Nick Hughes.

banking, economic development, emerging markets, mobile, money, payments

Regulation isn't a bad thing

[Dave Birch] One of the areas of great interest for this blog is the evolution of "alternative" payments in different environments. As a consequence, I am always very interested to see how alternative payment system differ between markets. For example, the Russian market for alternative payments is very different from the European market. This year, broadly speaking, it will break down into

• About 14 billion Roubles spent via the leading e-wallet schemes Webmoney and Yandex.
• About 9 billion Roubles spent via mobiles for digital content.
• About 10 billion Roubles spent via the near-ubiquitous "terminals", the reverse ATMs that are on every street corner in Moscow (more on these below), some of which goes into loading e-wallets and mobile prepay accounts.

So a big chunk of the alternative payments market in Russia is taken up by a payment system that simply doesn't exist in Europe (or, in fact, anywhere else so far as I can see), which is the near-ubiquitous "cash in" terminals or, as we tend to cal them, "reverse ATMs".

In the last ten years, a rapidly growing shadow banking system has sprouted up in Russia to service these small payments by turning cash into electronic currency, or e-money. And now that this sector has reached the $1 billion mark – and this in a crisis – and has expanded to include 10 million customers, e-money business owners are getting antsy about government regulation.

[From Crashing Russia's all-cash culture - Fortune Brainstorm Tech]

Estimates vary, but there are somewhere in the region of 400,000 of these terminals in use right now. On literally every street corner is a terminal that Russians feed with banknotes to top up their mobile phone, pay utility bills, obtain pre-paid virtual credit cards (I did this: you feed the cash in and the Visa card number, expiration date and CVV are sent by text to your mobile phone). You can see from this screenshot the wide range of services available:

It seems like a bizarre market arrangement, one that the laws of economics should mitigate against. As Evgeniya Zavalishina, the General Manager of Yandex Money put it rather neatly, people are taking money out of an iron box, walking a metre and then putting the money back in another iron box. Incidentally, Evgeniya will be joining an excellent line-up of speakers at the Electronic Money Association's 3rd annual conference in London on 24th November so if you are interested in learning more about the evolution of e-money regulation around the word, head on over to the EMA web site and sign up. But back to the iron boxes. By astonishing coincidence, the restaurant where I went to dinner with Evgeniya and other members of the Russian E-Money Association (set up by a good friend of the Digital Money Forum, Victor Dostov) had precisely such an arrangement!

How can this be economic? Surely you would expect banks to incentivise the terminals to take chip cards so that people could pay their bills with a debit card. Come to that, why can't they do that from a bank ATM in the first place instead of going to a terminal at all?

Well, one reason might be a lack of regulation. At the excellent Russian E-Money conference I attended, one of the speakers placed Russian banks as the 53rd most efficient in the world, but the Russian non-banks as the 4th most efficient in the world (for payment services). Yet both the banks and the non-banks would benefit from a better regulatory infrastructure. The problem that was discussed at the event was that everyone knows that regulation needs to come, but no-one is sure what that regulation might look like (and some of it, such as impending regulation on data protection) simply won't work technologically. Nevertheless, a good infrastructure for electronic payments would, I'm convinced, help both the alternative payment providers (ie, the terminal networks) to invest further and develop new services while at the same time enable banks to invest in their own terminal and enhanced ATM services. Everyone would benefit.

This reinforces something that has been said before on this blog: no regulation is not a way forward. We want to see digital money deliver real solutions to real problems all around the world and a good regulatory framework helps in this enterprise.

Not on the money

[Dave Birch] I'm always keen to try out innovative new payment products. And I'm an O2 Premium Customer, or whatever it's called. So when I was idling around in London yesterday and happened past an O2 outlet offering the new "O2 Money" prepaid card, I thought I'd pop in a get one. Since it's a prepaid card, I assumed it would be a bit like getting one at the newsagent or supermarket. I wandered in, expecting to hand over £50 and walk out with a card with £50 on it. But it turns out that despite the big advertising poster in the shop window, the doesn't actually sell them. The guy told me I had to go home and apply on the interweb. Oh well. One night I was bored enough at home to try and do this, so I went to the O2 Money web site. I thought I'd get a card for my son to use. The web site asks you to put the mobile number in and sends you a code. I did this, and got the code. I typed it in expecting to see a screen saying "congratulations" but instead I got another form asking me to top up the phone using one of my other cards. Naturally I couldn't be bothered to do this, so I still don't have a card and nor does my son.

Since O2 already know my address, phone number and bank account details, and have a decade-long credit history on me, Wouldn't it have been cheaper and simpler to have a "text 'yes' to XXXXX and we'll post you a card" option? Why no integration?

Because that's where the money is

[Dave Birch] The electronification, virtualising and dematerialising of money means the electronification, virtualising and dematerialising of crime, because (naturally) criminals go where the money is.

FBI officials say a mix of banking Trojans and phishing attacks has plagued victims - mainly public institutions and small and midsize businesses - to the tune of $100 million in attempted losses as of October.

[From FBI: Online Banking Attacks Reach $100 Million Mark]

Note, by way of comparison, that about $60m was stolen in physical bank robberies throughout the USA in the whole of 2008. How stupid do you have to be to walk into a bank with a gun when you could just stay at home and send out some e-mails? We must find a way to accelerate the transition to e-payments and at the same time make e-money more crime-resistant than cash.

Janine Firpo, IFC

[Dave Birch] Janine Firpo is President of Sevak Solutions, a nonprofit company that she co-founded to promote inclusive systems for the delivery of financial services to the world’s 1.7 billion urban and rural poor. Janine is based in Jakarta, Indonesia, where she is working with International Finance Corporation (IFC), a member of the World Bank Group, helping regional advisory teams to accelerate the development and large-scale roll-out of mobile money solutions. In this podcast, she talks about mobile money in developing markets and the practicalities of managing and regulating agent networks.

Listen here in either [Podcast MPEG4] or [Sound-only MP3] format.

Viking expedition

[Dave Birch] I was in Copenhagen recently, so naturally I went along to the national museum to see their notes and coins exhibition (galleries 141 to 146, if you're interested). It was really good, and I particularly enjoyed the display of Swedish copper money from the 17th century. Sweden had lots of copper, so that's what it used for coins. But copper isn't worth very much, so the coins were huge -- the one thaler "coin" was a block of copper weighing a couple of kilograms.

While pottering around between the 10th century Islamic coins found in Viking treasure hoards, the short-lived Norwegian privately-issued banknotes that preceeded Denmark's first paper currency and the English gold nobles from the time of Henry II, I happened across some other long-forgotten artefacts from the story of the evolution of the means of exchange in the world's oldest kingdom...

Danmont cards! I have to admit to a moment of melancholy while gazing at the cards, notes and coins. Some of them were ugly, some of them were beautiful, and all of them tell a story. Such as, for example, you've been cheated.

A one euro coin has turned up in Spain bearing the face of cartoon couch potato Homer Simpson instead of that of the country's king

[From Spanish shopkeeper finds Homer Simpson euro | U.S. | Reuters]

So when cash disappears, and there are no more portraits of heroic characters or Latin inscriptions, what will take over the narrative? Facebook, I suppose. But wiping away the tears, I remembered that there are a great many people around the world who can't wait to replace coins with mobile phones. The truth is, coins today are as much hassle as the Swedish copper currency from the days of the Carl Gustav wars.

Mr. Zhang of Shenyang carried two bags of coins to a bank outlet in the city, having accumulated 37,000 coins, more than 600 yuan, over the past decade. According to the rules of the bank, there is a one-yuan service fee for counting every 50 coins. If he were to hand the money over to the bank, the service fee would amount to more than the total value of his 37,000 coins... Shenzhen, Shanghai and Beijing banks have charged counting fees since 2005... the most affected were bus companies. In order to save counting fees, the Shenyang Bus Company handed out change to its employees as their wages.

[From China sees change scarcity -- china.org.cn]

Enough is enough.

Jeff Slawsky, Slawsky & Associates

[Dave Birch] Jeff Slawsky has spent thirty years in the US financial services industry and wrote the book on developing and managing a successful payment cards business. Literally: it's called "Developing and Managing a Successful Payment Cards Business" and he wrote it with Forum friend Samee Zafar back in 2005. In this podcast, Jeff reflects on the seismic shifts in the US payment card business and speculates about the longer-term impact on regulatory, social and business changes in the American market.

Listen here in either [Podcast MPEG4] or [Sound-only MP3] format.

For all you utter bankers

[Dave Birch] Wow, that was excellent fun. Nothing really to do with electronic payments, but I've been playing a fantastic new card game called "Crunch: The Game for Utter Bankers" with the kids and some friends.

Crunch is a satirical card game for 2 to 4 players that places you at the head of the boardroom as a CEO of a global bank juggling the conflicting demands of your ailing bank and your future retirement fund. An average game sees you bribing your way out of government investigations, fending off aggressive takeovers and forcing debt onto the unsuspecting public. Meanwhile, reward your hard work by taking inappropriate bonuses and - when no one's looking - brazenly embezzling your bank's own funds and hiding them about your person.

[From Crunch - the game for utter bankers | BoardGameGeek | BoardGameGeek]

The game served a dual purpose, both of which left me delighted with it. First of all, it was fun to play. Basically, you build up your bank's lending against assets (ranging from shares in listed companies to Nazi gold) and then when a crunch comes you trade in trust for government bailouts. It didn't take long to learn, and both the kids and adults enjoyed it. It had an unexpected second purpose, though. I bought it for fun, but in playing it the kids asked a lot of questions about the credit crunch, about the relationship between assets and debt, and about the idea of deliberately growing your workforce and assets to become too big to fail (adding "workforce" cards also gains you "trust" cards).

Run, don't walk, to your nearest games shop -- I got mine from Playin' Games in Museum Street opposite the British Museum -- and pick up a copy of this super game.

Federal Trade Commission disclosure. I have no affiliation with Terrorbull Games, the creators of "Crunch", and have received no payments nor any other form of remuneration related to this endorsement. No animals were harmed during the writing of this blog post.

The price of everything

[Dave Birch] I've just read a couple of pieces about pricing: the Chicago Fed's Letter 266a (September 2009) "Payments Pricing: Who Bears the Cost?" and the SPEED piece by the Deputy Governor of the Bank of Finland, Pentii Hakkarainen, "The future of retail banking: more competition needed". Pentii says that one challenge (to retail banks) is the "dependence of banks on cross-subsidisation, especially of payment services". I agree and I'm not sure that the magnitude of the cross-subsidy from efficient e-payment methods that (because of SEPA) are going to deliver less margin to the least efficient paper and metal methods is appreciated. So the regulators are pushing down the amount of money available for subsidy but will (of course) go beserk if any attempt is made to remove the subsidy.

One way in which they are reducing the amount available to subsidise cash is by pushing interchange fees down. Setting aside whether that's a good thing or a bad thing, it's certainly a thing. Earlier in the year, there was a Federal Reserve Board report "Interchange Fees and Payment Card Networks: Economics, Industry Developments and Policy Issues" that looked at the situation (in the US at least) in some detail. Amongst other observations, it noted that with respect to interchange fees:

1. In general, an efficient interchange fee is not solely dependent on the cost of producing a card-based transaction nor is it equal to zero.
2. An efficient interchange fee may yield prices for card services to each side of the market that are “unbalanced” in the sense that one side pays a higher price than the other.
3. The efficient interchange fee for a particular card network is difficult to determine empirically.

I think the last point is worth emphasising. There doesn't seem to be any reason to suspect that regulators should inherently know what the correct level of interchange should be. It follows, I think, that if the regulators believe that interchange is too high (for whatever reason) then the appropriate path to correction is increased competition.