Digital Money Forum

A single currency? Illogical, Captain!

[Dave Birch] In science fiction, the subject of money is rarely handled well. I've just looked up, something about this but couldn't find what I was looking for. I have a vague memory, which may well be wrong, that the author Brian Aldiss is his Billion Year Spree, a history of science fiction that I can't find online to search, said that it's because science fiction and heroic fantasy are written for teenage boys and the one commodity that certainly do not have is money. This may well be part of the explanation, but it seems to me just a likely that it's because many people don't really understand what money is or how it works, so speculating on where it might go is just too far outside their envelope. I'm the other way round: I find it hard to imagine time travel (if it does get invented in the future, where are they?) but easy to imagine Google issuing its own currency.

I've been jotting down some notes on this for a couple of reasons: first of all because of my talk at the London Futures Symposium (and I've been invited to talk OpenTech in London in July on a similar topic) and second of all because when I was pottering around the World Bank bookshop in Washington I came across The Future of Money by Benjamin Cohen of University of California, Santa Barbara. I've been reading through it over the last few days and reflecting on some of the key issues around currency areas that he sets out very clearly. One of the key questions that the book addresses is whether the dynamic of monetary evolution is a tendency to one currency (the galactic credit beloved of science fiction authors) because the minimisation of global transaction costs is driving factor or an explosion of currencies because new technology minimises transaction costs in other ways? He concludes that "the power of scale economies notwithstanding, monetary geography is set to become more, not less, complex" and he compares the future to the "heterogenous, multiform mosaic that existed prior to the era of territorial money". Setting to one side the fact that he knows fantastically more about the topic than I do, I disagree slightly with his conclusion here. As a technologist, I suspect that there will be more different kinds of money, not just more currencies, than ever before. At the end of the transition to e-money, the marginal cost of introducing another currency will be approximately zero. So we will be in the "let a thousand flowers bloom" mode and might reasonably expect a rash of experimentation. At the end of this period, who knows whether dollar bills or Bill's dollars (an old joke, beloved of us e-cash types) will be more successful?

There are a couple of other things I disagree with him about. One is the issue of anonymity: Cohen says that one of factors that may make it difficult for e-money to substitute for physical notes and coins ("p-money") is that e-money cannot reproduce the anonymity of p-money. I think I'll set that aside for a future post, but suffice to say that I think that technology can offer more than he thinks in that area. The other is geography, which I'll go into below.

Stars and stripes

[Dave Birch] As part of my campaign to deliver first-hand reports on contactless use and interoperability, I went into a McDonald's in the U.S. and bought a very delicious meal. The line was quite long, so I'm sure they appreciated my attempt to pay in 500 milliseconds using my spendid Barclays OnePulse card featuring the excellent PayWave interface. I have my OnePulse in an outside pocket of my wallet for optimal tap action when I'm going on the underground or buses in London. So here we go...

Unfortunately, it didn't work. So I had to take the card out of my wallet and pull it through the stripe reader, the way that POS terminals used to work in the old days. How quaint. There's a bit of a pattern emerging in my interoperability tests, I'm afraid. If I try to buy a contactless coffee in Singapore, no problem, in the U.S., no chance.

Mobile security modality

[Dave Birch] No, I'm not sure what it means either, but we have a project helping a customer in the field of security, so I've been looking at the issue of perception and reality. In particular, I've been looking at the way that consumers see mobile (in the context of activities that require security, such as banking). I came across this:

Security concerns were found to be a major hindrance to take-up of mobile services, with just five per cent considering mobile handsets offer a "very secure modality".

[From Finextra: UK consumers shunning m-payments]

I doubt that 0.5 percent of U.K. consumers know what a "very secure modality" is -- I know I don't: my dictionary says that "modality" means "a particular mode in which something exists or is experienced or expressed" -- so we probably shouldn't read too much into the absolute figures. But, nevertheless, there is concern about security in the mobile world (not just for payments) and we need to address the issue if we want to see a growth in m-transactions. Pointing out to people that mobile phone transactions are more secure than, say, credit card transactions on the web, isn't the right way forward. The people interviewed are not carrying out a detailed risk analysis and coming to an informed view of countermeasures, they are reacting to their perceptions. By this reasoning, perhaps we should be developing some "security theatre" to make mobile deliver the right feedback, the right image, the right modality. I don't think a little picture of a padlock is going to do it. I rather like the old proxmity payment demo we had on the original Nokia 3220s: the lights flash green when it's ready for a transaction, the light flashes as it's making a transaction and the lights go green or red depending on the outcome.

Towards the (other) third way

[Dave Birch] Forum friend Peter Jones of Payment Systems Europe wrote an excellent piece for European Card Review last year in which he argued that a viable way to create a third payment network in Europe under SEPA pressures might be to start with existing ATM networks rather than to create new networks. He even gave a specific example (as one of the scenarios to be explored) linking together EUFISERV with First Data. Now comes news from Brussels that inter-bank switch EUFISERV (which was owned by retail banks and savings banks in Europe) has spun out its ATM card business. This is because of SEPA, as is the announcement that First Data acquiring a 50% stake in the switch business. This will create a new entity that connects 74,000 ATMs, 1.5m POS and 165 million debit and credit cards in Europe. Well, well.

Awards and ceremonies

[Dave Birch] Not really anything to do with Digital Money, but I'm one of the judges for this year's CNET UK Business Technology Awards and they are looking for nominations in a variety of categories (see below) so I was wondering if any Digital Identity Denizens had any suggestions for payment-related products and services. If any of you have other suggestions then do scoot over to the web site and fill out a nomination form.

Peter Comben, Vivotech

[Dave Birch] As is often discussed on this blog, there is a new ecosystem emerging around the combination of mobile and contactless technology. NFC is of limited use as a standalone: we need to be able to get applications into the phone and manage them when they're there. There are a number of suppliers and service providers looking to support this over-the-air (OTA) market, and one of them is Vivotech. Peter Comben in this Business Development Director for Vivotech in the EMEA region. In this podcast, he talks about how he see the contactless payment market evolving and then how new proposition mights come together in the mobile Trusted Service Manager (TSM) space, where service providers use the OTA platform to intermediate banks and other organisations to mobile operators.

Red, yellow and green alert

[Dave Birch] I saw a post about Celent's current payment advisory:

Celent expects some major shake-ups to occur in the payments industry in the near future. A new report, Disruption in the Payments World, examines the storms brewing that could have dire consequences for many issuers and offers insight into strategies that could help them weather these storms.

[From CELENT :: Strategy Consulting for Financial Institutions]

Just for "fun", I thought I'd compare my view of the advisories with theirs so I spent some time on the train putting it all together in the same format. Here's the combined result:

More mobile chat

[Dave Birch] I was talking to a client yesterday when the subject of mobile payment security came up. I was explaining some ideas for bringing some new ways to pay to the mobile phone, and one of the client team asked about security and so we went through some high-level risk analysis. The concerns expressed were perfectly reasonable and widespread, as consumer surveys confirm:

Convenience is the most compelling feature of both mobile banking and mobile payment at the point-of-sale. Participants cited the ability to perform banking functions, such as check balances and pay bills, from anywhere without the need of a computer as the major convenience of mobile banking, and the prospect of no longer carrying a wallet as the major convenience of mobile payment at the point-of-sale. Conversely, participants indicated security and fraud were their main concerns regarding these mobile applications, wondering what would happen if their mobile devices were lost or stolen.

[From Consumer Interest in Mobile Commerce Extends Beyond Banking]

As it happens, I had a ready-to-roll Powerpoint presentation on security in mobile payments so I was able to walk through it show the client how we would deal with these concerns and manage the risk down. Afterwards, I was thinking that we (ie, people who are bullish about mobile proximity payments, in this case) should be more upfront about security, because the truth is that there is more security overall in a mobile payment than a card payment.

“There’s a whole lot of upside and security advantages to mobile devices,” says James Van Dyke, president of Javelin Strategy and Research,

[From Javelin Strategy and Research » Safest way to bank online? Your cell phone]

Apart from the often-repeated point about noticing a missing phone much sooner than you notice a missing card, there's also the issue of communications. You know where phones are and you can communicate with them, which greatly changes the risk and countermeasure situation when compared with cards. I think the question should be the other way around: from a security point of view, does it make sense to carry on with cards?

Wise during the event

[Dave Birch] The CSFI has just published its Banking Banana Skins survey. This a survey they conduct from time to time. It involves talking to bankers, regulators and observers (eg, consultants, analysts etc) to find out what should be keeping bank bosses awake at night. The no. 1 risk this year is "Liquidity" (which, incidentally, didn't even make it into the top 30 last time) followed by "Credit Risk". As I know nothing about banking, I can't comment except to note that these seem like reasonable choices for the top two places. So why was I reading it.? Well, I always like to look and see where payment systems are in the list. After all, they're what keeps me awake at night (some of the time) and I'm curious to see if the bankers share my obsession. Well, the headline is that whereas payment systems were 29th in 2006, they have moved up two places and are now 27th, so we can expect more management attention (and resources?) in the future. Not at lot more -- the resource allocation does not follow the risk curve, but the risk/reward curve -- but more.

It puts a spring in my step to know that tomorrow I'm going to see bank to pitch for some work in their 27th most important area of concern. Oh well.

Start off your reading list for the beach this summer

[Dave Birch] I'll admit that my summer reading is probably a few standard deviations from the mean, in that I'm currently half way through Tim Park's accessible story of the Medicis and will then move on to "Money Tales". Not for me the guilty pleasure of thumbing Jackie Collins while sipping pina coladas by the pool. If it's not about money or identity, then I'm not interested: if you don't find the evolution of early European bills of exchange into near-money substitutes (to avoid church rulings against usury) thrilling, then I don't know what a thriller is!

So, bearing my deranged perspective in mind, here are three recommendations for you. They are papers from CHI 2008, held on April 5 – April 10 2008 in Florence, Italy (ACM 978-1-60558-012-8/08/04). Each makes excellent beach reading for Digital Money Denizens and, in my case anyway, will generate half-a-dozen ideas per pages as you read through. You can download them individually from the ACM and they are well worth the $10 each in my opinion.

Low-tech loyalty

[Dave Birch] I've been sitting in a workshop on high technology solutions in the payments world but I've spent the whole time thinking about low technology paper receipts. It's first of all because Aneace pointed out how Boots were doing a great job on using till receipts to deliver special promotions to shoppers. He goes on to make an excellent suggestion...

Imagine if the same type of offer appeared at the bottom of the customer’s credit or debit card receipt, triggered based on whatever criteria Boots chooses, using payment data managed by Boots’ acquirer.

[From Aneace's Blog: Boots till receipt promotions]

His general point -- the receipts are an opportunity to deliver to some extra value in the payments value chain -- is certainly correct, but it of course led me to think about the additional possibilities that will arise when paper receipts are replaced by electronic ones. I think electronic receipts are an excellent service: when I buy things in the Apple Store, their system automatically recognises my credit card and the assistant asks me if I want a paper receipt (in a tone of voice that suggests that she may then ask me if I have a butter churn). I say no, and the receipt is automatically e-mailed to me: great service. Now move forward to the situation where there are no paper receipts any more...

The Federal Reserve Board recently requested public comment on a proposal to exempt transactions of $15 or less from the "Reg E" requirement that consumers receive paper receipts for all electronic transactions.

[From Digital Money Forum: Where's the Walmart?]

Apart from saving lots of trees, one might expect banks, retailers and others to come up with some interesting new services around the management and processing of receipts. If there's the slightest prospect of the bank filling out my expenses claim for me at the end of every month, I will batter down their door to sign up.

I don't use debit, but...

[Dave Birch] I've no idea why anyone uses a debit card, decoupled or otherwise, for anything, but I hear they're very popular. That's one of the reasons why I found Capital One's decoupled debit experiment so interesting. In fact, I went on the record as saying that I thought it was the most interesting new product last year. But now Capital One have terminated the experiment after only a few months. So was I wrong to focus on the product? Well, I don't think so. For one thing, while Capital One won't say why they are stopping, it's not because of the people who count: merchants. According to American Banker, Rich Steckroth, who is Director of Business Development for Sheetz, said clearly "We like the program".

So who didn't? One of the analysts quoted says, rather plausibly, that it's more to do with Capital One not having the money necessary to really launch the project than a verdict on the concept itself, and I agree. Other people think that they will simply offer the facility to their own credit cards holders (as some other issuers are going to do, I'm sure). Customer and merchant proposition apart, though, you may also recall something else lurking in the background. If I were a competitor, particularly a smaller bank sensitive to the loss of interchange revenue, I might be very tempted to take the traditional banking approach to competition in the payment sector and ask the relevant regulators for clarification about the new entrant. As it happens, just such a clarification took place earlier in the year...

There was an excellent post by Carol Coye Benson over at Payments News the other day. She highlights the new rules interpretation around decoupled debit in the US. The three key points are:

First, the transactions must be classified as “POS” transactions, rather than using other ACH transaction codes.

Second, the transactions cannot represent an aggregation of underlying consumer purchases - e.g. three separate purchases at one (or more) merchants on a given day cannot be combined into a single ACH debit transaction.

Third, the “payee” in the ACH transaction, which is carried through to the consumer’s bank (and therefore appears on the consumer’s statement or online transaction listing) must be the underlying merchant, and not the card issuer: in other words, “Capital One” could not be the payee shown on the consumer’s statement.

[From Digital Money Forum: Decoupling the small print]

There's no doubt that the ban on aggregation increased costs for Capital One, but who knows whether they increased them enough to make the program uneconomic. I'm sure that wasn't the goal of the clarification anyway, which was wholly to do with safety and soundness of the U.S. banking system and nothing to do with raising barriers to new entrants. I'm sure we haven't heard the last of the decoupling concept. I can certainly imagine decoupled debit operating through any secure token to provide maximum customer convenience. Why shouldn't I pay with my Tesco Clubcard, digital certificate on my PC, fingerprint, employee badge or (rather obviously) mobile phone -- as they do in Germany -- and have the transaction routed via ACH?

Cashlessness experiment (not what you think)

[Dave Birch] I gave a talk on cashlessness to the London Futures Symposium a couple of weeks ago so I thought I'd do an experiment and put the presentation on to to Slideshare to see if anyone is even vaguely interested in looking at it. Let me stress -- once again -- that these are my personal opinions so I have taken the Consult Hyperion background out and put another one in! Anyway, if you like to take a look, I'd love to have your feeback...

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A few coppers

[Dave Birch] There's no doubt that "green" is a business pressure now. There are plenty of ways in which payments could use new technology more effectively to deliver more environmentally-friendly products: there's plenty of low-hanging fruit around the elimination of paper that's a "win win", as they say.

The good news about the elimination of paper in our paper intensive industry is that any move to reduce the amount of paper in a customer’s relationship improves the profitability of that account for the bank.

[From Banking on Customers: Green is good…as far as it goes]

I'm all favour of this kind of thinking, but I also always really appreciate a spurious green veneer on a press release: it shows deference to zeitgeist as well a spin skills on show. Very modern. A particularly impressive case in point is in Business Week. In a story called "How to turn pennies green", which I imagine is based on a press release from Coinstar (a company I have always liked, and still do, not that it matters), we are reminded that mining copper uses lots of power and water. What do you make out of copper? Well, coins for one thing. So, Coinstar estimate that there are 150 billion "unused" coins around in the U.S. at present, and they add up to about $90 per household. They reckon that if people were to take just 10% of these coins down to their local supermarket and chuck them in the Coinstar machine then they would generate hundreds of millions of dollars in revenue for Coinstar but also, more importantly, stop the U.S. Mint from wasting loads of money (the Mint loses money on every coin it makes, remember: nickels now cost 7.7. cents each) and reduce the demand for copper thus saving the energy used by 4m light bulbs. No sure if the logic stands up to really detailed scrutiny, but it's a fun story anyway.

Giles Andrews, Zopa

[Dave Birch] There's no doubt that something very interesting is going on in the place where social networks, P2P and banking begin to overlap. The idea of directly connecting, for example, lenders and borrowers subverts one of the core functions of banking in a modern economy -- but that's no reason not to do it. In fact, a few people are having a go. As John Clipplinger observes, in many ways it's rather surprising that these guys didn't get off the ground earlier and that there aren't more of them, but they are certainly attracting attention:

Social banking platforms - such as peer-to-peer (P2P) lending networks like Zopa and Prosper - will grow to control 10% of the worldwide market for retail lending and financial planning by 2010, according to research by consultancy Gartner.

[From Finextra: Banks facing increasing competition from social networks - Gartner]

This seems a bit far-fetched to me, but anyway I decided to go and talk to Giles Andrews to find out some more about the generally important area of social lending. Giles is the UK Managing Director of Zopa. Before helping to set up the social lending company, he spent 10 years in the motor industry, co-founding Godfrey Davis Motor Group. Then set up his own consultancy practice where clients included Tesco and Tesco Personal Finance. In this podcast he explains what Zopa is and where it may be going, and in passing introduced me to the utterly splendid idea of the personal bond market.