Digital Money Forum

A bear market for cash

[Dave Birch] WebMoney is an electronic money and online payment system (transactions are conducted through WebMoney Transfer). WM Transfer Ltd, the owner and administrator of WebMoney Transfer Online Payment System, was founded in 1998 and is a legal corporate entity of Belize, Central America. Originally targeted mainly at Russian clients, it is now used by more than four million customers world-wide. Over on DGC there was a case study on Webmoney that was well worth reading. Their service, WebMoney Transfer, is now a global system, handling billions of Dollars, Euros and of course Rubles. They recently launched a fully-backed gold currency as well, 1 "WMG" equals 1 gram of Gold. Now, as is frequently observed, the difficult part of this kind of system is getting money into it, not moving money around it. Here they have executed a physical strategy that has resulted in 120,000 locations across Russia having electronic kiosks which allow anyone to pay cash and fund a Webmoney Transfer account. More than 25% of the total Webmoney account funding comes from these ‘cash-in’ kiosks.

Technorati Tags: cashless, e-purse, internet, money, p2p

Joe Divanna, Maris Strategies

[Dave Birch] Joseph Divanna is an independent author, consultant and global public speaker. He is the Managing Director of Maris Strategies Limited, a financial services, global business and innovation think-tank providing research and advisory services. He recently wrote a book about Islamic finance, "Understanding Islamic Banking: The Value Proposition That Transcends Cultures" , a topic of growing interest, so I thought it might be useful to get him to introduce the topic to the Digital Money world. In this podcast, I talk to Joe about his book and ask him to help us to see where the electronic and Islamic worlds may be going.

Technorati Tags: banking, islamic

Sub-prime

[Dave Birch] Credit card issuers aren't very popular in the U.S. and they're getting a torrid time from some quarters, includingmCongressional hearings this spring held by Senator Carl Levin. According to testimony, one witness exceeded his charge card’s $3,000 limit by $200 — triggering what eventually amounted to $7,500 in penalties and interest. After paying an average of $1,000 a year for six years, the man still owed $4,400. That experience has become all too common as the credit card industry has stealthily adopted methods designed to maximize burdensome penalties and fees, while ratcheting up interest rates as high as 30 percent. Companies bombard unwary consumers with teaser packages that promise very low interest rates to start, while reserving for themselves the right to raise rates whenever they choose. The details are buried in deliberately arcane contracts that run 30 pages long and that even lawyers have trouble understanding. What this means in practice, as with all payment systems, is that the costs fall on the people least able to afford them. One-third of U.S. cardholders are paying interest rates in excess of 20 percent. About a third of credit card accounts with balances pay little or no interest each month, which essentially amounts to a free or very low- cost loan. More than a third (36 percent) of accounts pay the regular interest rate. The final third of accounts -- which are presumably the "sub prime" customers -- pay interest rates that range from more than 20 percent to as high as 41 percent. What this kinds of press reports seem to show is that neither credit cards nor debit cards (ie, bank accounts) are good solutions for people with little or no money. What they need is cheap, simple, prepaid solutions.

Technorati Tags: credit cards, debit cards, payments, prepaid

It's easy running money, isn't it

[Dave Birch] Running a retail payment system is pretty easy, which is why new entrants are attracted to it despite the thin margins, as we've discussed before. But it isn't easy when things go wrong. Take a look at what's been going on in Hong Kong, where there are currently 15 million Octopus cards in circulation and the company handles 10 million transactions totaling more than HK$78 million (about five million quid) every day. Octopus has been found to have takenan average of HK$240 from six cardholders every day for the past seven years (amounting to HK$3.7 million) because of faulty transactions. Octopus are, of course, going to refund the money to the 15,270 people affected going back to 2000. There are no records before 2000, so the additional HK$300K overcharged during that period is going to be donated to charity. The fault meant that about six in every 10,000 top-ups went wrong: the money was deducted from the cardholder's bank account but not credited to their Octopus account. Octopus Holdings chief executive Prudence Chan Bik-wah said the main cause of the failed transactions was a malfunction of an electronic funds transfer module in the add-value machines at transit stations and that all top-up transactions from the machines will remain suspended until the problem is completely fixed. She also pointed out that since 90% of the customers are anonymous, it's complicated to sort out refunds so customers are being encouraged to use personalised cards free of charge for the next 12 months.

Technorati Tags: contactless, payments, transit

Contactless update

[Dave Birch] The arrival of contactless cards in the mass market continues to attract attention. As the first flush of enthusiasm passes, however, the coverage is beginning to fracture into two rather predictable perspectives. On the one hand, speed and convenience. This is particularly attractive to certain merchant categories (eg, fast food) and customers. So, for merchants like Arby's, where speed is important, the faster transaction time is the dominant factor. American Express say that ExpressPay-enabled transactions can be completed in about one-third the time of a cash transaction and about half the time of a swipe-card transaction, and figures from Visa and MasterCard show similar gains. If anything, the merchants in the U.S.A. are upset that the contactless roll-out is too slow. Less than 2 percent of Visa's cardholders in the U.S. currently have the technology. MasterCard has distributed 13 million PayPass cards and claims that 46,000 merchants now accept them. The pharmacy chain CVS/Caremark, which has had contactless readers in operation since 2005, says that less than 1 percent of its card transactions are contactless. McDonald's has been prepared for contactless payment for two years. David Grooms, vice president of IT at McDonald's USA says

We're deployed in all of our restaurants in the U.S.

The installation of contactless terminals at merchant is clearly going to grow -- and is one of the reasons that the forecasts for mobile payments are so bullish, with Juniper Research predicting that P2P fund transfers and mobile payments in the developing world, together with the commercialisation of NFC based mPayments will generate transactions worth approximately $22bn in 2011 -- even in the U.K., where merchants have just been through the process of replacing all of their terminals for chip & PIN. Now, chip & PIN was of course extremely costly to card issuing companies, merchant companies and retail outlets. Indeed, some observers think that the U.S.A. will simply bypass it, moving via contactless to NFC and the next generation of retail payment devices. But even in the U.K., where the roll-out of the first contactless cards is imminent, merchant terminals are appearing. Barclaycard has signed its first 1,000 retail outlets for contactless and will launch its OnePulse combo chip, contactless and Oyster card next month. Elizabeth Chambers, chief marketing officer, Barclaycard, says

Cashless payments are starting to become a reality.

The retail outlets signed for contactless already include Coffee Republic, Threshers, Books Etc, YO! Sushi, Eat and Krispy Kreme. Once again the quick-serve retail (QSR) category is predictably dominant. In the U.S., Arby's won't discuss actual numbers, although they do say that the trend is positive, but rather interestingly say that they put the technology in because it was a convenient time to do so, not because it expected to see an immediate benefit. In other words, they were upgrading the company's in-store point-of-sale (POS) system and decided to add contactless as part of the process. I'm sure this will be the general picture in the mass market outside certain very special cases. U.K. merchant won't upgrade because of contactless, but when they do upgrade then contactless will be part of the new specification.

Technorati Tags: contactless, EMV, payments, retail, security

Money 3.0

[Dave Birch] Well I suppose I should get with on with some work, but I've been distracted by thinking about something else and could use some feedback. I'm preparing a presentation on the history of the technology of money, and I've come up with a caegorisation which seems to work, but because I made it up I'm not sure if it has any resonance. Essentially, I need to divide the history of the technology of money in three (because things always get divided into three for this sort of thing) and make some points about the dynamics with each "segment". So here goes.

Technorati Tags: money, payments

International e-finance

[Dave Birch] I'm going to be chairing the E-Finance & Payments Law & Policy two day E-Finance Intensive on 5th and 6th November 2007 at the Grange City Hotel, 8-14 Coopers Row, London, EC3N 2BD (some of you may remember this as the fine hotel we used for the Digital Money Forum earlier this year). The event will look at the key regulatory, policy and legal challenges facing today's payment professionals and will focus on all sorts of areas of interest ranging from prepaid and money transfer to SEPA and the PSD. Speakers include Lady Olga Maitland from IAMTN, Robert Caplehorn from PayPal, William Long from Sidley Austin LLP (editor of the fine E-Finance & Payments Law & Policy newsletter), Chris Reddish from Mastercard, Michael Salmony from EQUENS and many more. I'm very much looking forward to it, both because I think it's useful for technologists and business persons to get a better picture of the regulatory landscape (especially because of SEPA) but also because I want to help the lawyers and regulators to get a better picture of the technological realities in the payments world. See you there.

Technorati Tags: prepaid, regulation, remittances, SEPA

Jon Levenson, Trafford Centre

[Dave Birch] This week's podcast features Jon Levenson. Jon is Director of Commercial Partnerships at The Trafford Centre in Manchester , one of Europe's largest shopping and leisure destinations which welcomed over 30 million visitors through its doors in 2006. Prior to Jon's current role he spent many years in the music and British film industry before moving into Outdoor poster advertising, working with Mills and Allen ( now JC Decaux ) and More O'Ferrall (now Clearchannel) before joining the Peel Group of companies in 1998. Peel Group own and operate The Trafford Centre, three regional airports, ports and commercial properties employing 4,000 people. Jon oversees media , sponsorship , promotions and financial services. Working with Visa , MBNA , and eFunds Jon introduced gift cards in 2005 to The Trafford Centre , pioneering pre-paid products in UK shopping centre environment, so his experiences provide some useful lessons.

Technorati Tags: podcast, prepaid, retail

Cash on the net

[Dave Birch] Back in March 2006, BT Click and Buy became ClickandBuy. ClickandBuy Europe is wholly owned by FirstGate Holding which is why some people still call it FirstGate, the name of the original German payment service, rather than ClickandBuy but anyway. You'll remember that ClickandBuy was a sort of virtual chargecard, letting consumers choose whether to pay using their bank account, credit card or a BT phone bill. ClickandBuy was awarded an FSA e-money licence in November 2006. They then added an e-money service around the end of last year so that consumers could load their wallets with stored value, funding it from other cards. As of today, customers can now load their e-money wallet using cash. Next year they plan to introduce stored value person-to-person. Why bother with capturing cash? Well, ClickandBuy quote some pretty recent research showing that almost half of UK consumers (15+) don’t have a credit card and a third don’t have a debit card, which means that there are plenty of people out there unable to take advantage of the convenience and lower prices of buying online. You can load your ClickandBuy wallet with cash by going to any retailer that has payzone, the wholly-owned Alphyra retail payment network, which has nearly 30,000 locations in the U.K. I'll give it a try and report back.

Technorati Tags: cashless, internet, p2p, prepaid

Online payments

[Dave Birch] I was involved in a discussion yesterday about young persons' use of financial services. Thinking about payments, I remembered that our good friends at Payments News ran a Facebook poll on online payment choices amongst young persons. It basically came down to around a third credit card, a third debit card and a third Paypal (within the bounds of statistical error). They point out that it's no surprise that the debit card is most favored among this age group, but also remark on how PayPal's showing is also especially strong. New entrant Google Checkout barely moves the needle in this particular survey and almost no one likes to pay by providing their checking account details (also known as eCheck).

Technorati Tags: credit cards, debit cards, internet, payments

Some central issues

[Dave Birch] A number of people are pointing at an article (published by IDATE, Institut de l'Audiovisuel et des Télécommunications en Europe) by Forum friend and leading European payments scholar Leo van Hove. In essence, the article states that central banks should place greater emphasis on improving the efficiency of retail payments and less on protecting their own self interest. I've been fortunate enough to have had sometime over the weekend to read Leo's article. I focused on the first section about the social cost of cash and some associated issues. If you're the sort of person who reads blogs on digital money (!) you really should read it all.

Technorati Tags: cashless, regulation, SEPA

Cash is a stealth tax

[Dave Birch] If you have a look at the Bank of England's annual report for the year to 28th February 2007 (available as a PDF), you'll find a section called "Issue Department". Last year, they had an income of £1.7 billion and costs of £57 million. What a business! The most profitable nationalised industry in history, they didn't get to spend the profits themselves. Under the various Bank Acts in the United Kingdom, since 1844 they have had to hand over the lot to Her Majesty's Treasury, a whopping £1.65 billion straight into the Chancellor's pockets. If I'm doing the maths right -- I may not be -- that's the equivalent of 2p on the standard rate of income tax. Banknotes are, in effect, a stealth tax: each British banknote you have in your pocket is an interest-free loan to the Bank of England, and the interest they get on the money (they use it to by government bonds) goes to the government.

Technorati Tags: cashless, costs, government

Pre-paid growth

[Dave Birch] The forecasts for the prepaid market have been bullish for a while. One recent survey put prepaid card spending at $64 billion in 2004, $113 billion this year and predicts $178 billion by 2010, although the rate of growth that is predicted is lower. But it's a big business. As previously discussed, it's steadily shifting to the big networks. Aite's survey says that Visa/MC/etc cards will have 44% of the prepaid market by 2010 compared with only 20% in 2004. About two-thirds of their volume comes through cards issued on behalf of government agencies and corporate clients. This is in contrast with private-label cards (eg, the iTunes card I gave to my son last week) which are predominantly issued by retailers. Note that while the survey predicts the total number of prepaid cards in the U.S. will be 7 billion in 2010 (compared with 4.3 billion this year) they will still account for only 1.6% of personal consumption expenditures (PCE).

Technorati Tags: prepaid

Who will pay? And how?

[Dave Birch] It's all very well for informed observers such as myself to call for a more efficient payment system, but the economics have to work out as well. Given that merchants already feel that they pay too much (whether it's true or not, that's what they feel) then finding ways to deliver more value to them has to be a priority in the design of new systems and services. In America, the Merchant Payments Coalition (MPC) have been complaining that the collective setting of interchange fees by Visa and MasterCard is a violation of federal antitrust laws and saying that they favour a payment system that is transparent and open to competition. Well, you might think, what's stopping them? You can't help but observe that a decade of growing complaints from merchants, and the ready availability of the core technologies required to create viable alternatives (ie, chip cards, mobile phones and the Internet) no large-scale rivals have emerged. Perhaps the truth is that merchants are happy with the bank-centric payments model and the complaints about interchange ARE just posturing for lower prices after all. Having been at a recent meeting between a bank and some large U.K. merchants, however, I think there's more to it. It's not just the size of the interchange fee that annoys merchants, it's what it's for. U.S. merchants paid $56 billion in interchange fees last year and small retailers have seen interchange costs jump by 16 per cent a year on average since 2000 but a good chunk of those fees don't go to cover the cost of the payment plus a profit, they go to pay for frequent flyer miles, cashback and other issuer incentives. In fact, in the U.S., almost half of the interchange goes to pay for issuer rewards.

Technorati Tags: credit cards, debit cards, ID cards, retail