Digital Money

Fairy tales

[Dave Birch] In a recent edition of European Card Review, Malte Krueger of Paysys noted that a cashless society is some way away (in fact he calls it a "fairy tale"), not because cash is more efficient but rather because the law ensures unfair competition. This is not because legal tender laws force people to use cash, as is sometimes claimed, because they do not. But there are some laws that do discriminate in favour of it. In Germany, for example, banks are simply not allowed to charge private customers for withdrawing cash. Similar laws would undoubtedly be enacted in other countries should banks try to recover any costs on this side.

Professor Lawrence H. White to kick-off the 2009 Digital Money Forum

[Dave Birch] Lawrence White is the F. A. Hayek Professor of Economic History and the University of Missouri–St. Louis and the author of, amongst other things, “Currency and Competition” and “Free Banking in Britain 1800-1845”, books that changed my view of both the history and future of payments, so I am utterly delighted to be able to announce that Larry will be in London to give the kick-off talk at this year's 12th annual Digital Money Forum on 31st March and 1st April 2009. You can view the full agenda online over at the Digital Money Forum or you can download it here (248.3K).

The Forum is now in its twelfth year, and once again promises the combination of discussion and debate, learning and fun, that has earned it the reputation as the place to be for people interested in the future of retail electronic payments. It continues to be a unique event, where interaction and invention replace product announcements and “death by Powerpoint” sales pitches. This year we are moving the agenda forwards again to look at some of the issues and drivers around the evolution of technology the electronic payments world.

As you may know, this is a not-for-profit event that supports a variety of charities. This year we are supporting BUFFER (which provides specialist diagnostic equipment for breast cancer), Action Medical Research and Jubilee Action which helps children worldwide. This years Forum is made possible by the kindness of our sponsors Visa Europe, Monetise, WebMoney and VoicePay with support from our charity tournament sponsor ACI Worldwide.

Once again we have decided to structure the Forum around four sessions followed by a variety of expert panels.

• Session one recognises that the future of payments is linked to the future of money. if cash goes away, the cost of new entrants falls. What might they be? Private or public? Commodity or community?
• Session two looks at the specific issue of security to see if biometrics and other technologies might be moving into position to make a significant impact on the payments world in the coming year.
• Session three examines how successful payment schemes change societies and marketplaces, and takes an ethnographic perspective to help us to learn more about introducing new payment systems.
• Session four looks at innovation in different ways: new processes, new technology and new frameworks. How can the payments sector take all of these imminent changes on board and make real innovation work.

Some come and join our experts from the World Bank, Financial Services Authority, The Economist, European Payments Council, Transport for London, Nationwide, Barclays, Royal Bank of Scotland, Sidley & Austin, O2, The Guardian, Innovaro, Masabi, EAT, ABI, Finextra, Disruptive Analysis and the Free University of Brussels at the 12th annual Digital Money Forum in London on 31st March and 1st April at the Guoman Charing Cross hotel and come away with the kinds of new concepts, new friends and new business ideas that many of you have come to expect from this unique event. All delegates will receive a copy of our popular Digital Money Blook (the most interesting posts from this blog over the last year) along with "The Nudge Factor".

You can't get away from interchange

[Dave Birch] At least as far as retailers are concerned. The ECB and the Commission's "Action Plan" for SEPA was issued back in November and EuroCommerce (which represents wholesale and retail commerce across Europe) immediately highlighted the fact that there was still no (as they call it) "satisfactory" solution to the issue of interchange fees for either the SEPA Cards Framework (SCF) or the SEPA Direct Debit (SDD). I think we can all see what that "satisfactory" solution will be, irrespective of the economic or business case. The medium term plans for businesses in the European payments market must include a reduction in interchange. There's no way to navigate around the reduced interchange environment, so the only option is to come up with better roadmaps through it.

Helping out bankers

[Dave Birch] Well, Consult Hyperion have done their bit to help the banking system get back on its feet: we sponsored dinner for a group of bankers and some of their suppliers -- through the good offices of Financial Sector Technology magazine -- at Level 42 (the NatWest Tower, for older readers). The dinner, which was chaired by Forum friend Paul Smee from the Payments Council, was an opportunity to share a range of views about the world of payments and exchange ideas about trends in the European payments sector.

On a roll

[Dave Birch] The roll-out of contactless payment cards in the UK got a big boost when Barclayss announced that it would be converting several million cards this year.

From March, most Barclays debit cards that are issued or reissued will have contactless technology built in as standard. More than 3 million customers are expected to be using contactless debit cards by the end of the year.

[From Barclays to roll out contactless debit cards to all customers | 6 Jan 2009 | ComputerWeekly.com]

I'm still not seeing too many terminals out there, though, and I'm still concerned that I'm not seeing terminals in the places where cash replacement makes the most sense (car parks, that kind of thing). Still, where contactless is being used already, both at retail POS and in transport, it does seem to deliver the claimed benefits -- speed and convenience -- so we should be seeing more terminals soon. Actually, I've already seen lots more terminals: I've noticed that many of the ticket machines on South West Trains in England now have contactless interfaces installed. They don't actually work yet, but let's not run before we can walk!

Direct to debit

[Dave Birch] One impact of the credit crunch, or whatever you want to call it, is that consumers are shifting their spending from credit cards to debit cards. Or, more accurately, consumers are shifting their spending from credit cards to debit cards even more quickly than they were before. This is hardly news, as it has been recognised for some time that debit volumes are growing substantially faster than debit transactions.

debit purchases are expected to climb 13% in 2008, to $1.2 trillion, according to The Nilson Report, an industry newsletter—compared with a 3% rise, to $1.9 trillion, for credit-card transactions. At Visa (V), the No. 1 card company, debit spending could surpass credit this year.

[From The Steady Ascent of the Debit Card - BusinessWeek]

Debit is clearly a product that consumers like. The debit space is not only attracting issuers and consumers, but others as well, with innovative products extending the reach. An example that caught my eye last year, illustrating an area where there is considerable growth potential for 2009, was the use of the debit infrastructure for welfare payments.

Under the five-year agreement, unemployment insurance benefits will be available on a MasterCard-branded debit card that can be used to access funds at banks and ATMs, and to pay for goods and services. Through a partnership with Bank of Oklahoma, cardholders will receive special opportunities for fee-free ATM and teller withdrawals.

[From Finextra: ACS provides debit cards for unemployment benefits in Oklahoma]

This kind of scheme shows that it is new applications, as well as new merchants and new customers, that will drive debit (and, I am convinced, pre-paid) in the near future.

Murdo Munro, Paytekh

[Dave Birch] Murdo Munro of Paytekh is an experienced payment systems product / program director with a track record in successfully identifying, developing and deploying chip, mobile and internet based propositions for MasterCard. In this podcast, he shares some of his ideas formed while working on PayPass and raises some issues around contactless and prepaid.

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

Pieces of eight bits to the byte

[Dave Birch] There's apparently another SEPA out there. It's the Somali-Ethiopian Payments Area. I see that they appear to have launched a new cross-border high-value payment scheme with real-time settlement. Sort of like Western Union, but with a minimum transaction value of $3 million and no pesky anti-money launder or know-your-customer stuff to get in the way.

On the ascent

[Dave Birch] We were chatting in the office earlier about something I saw on the Niall Ferguson series on the "Ascent of Money" on Channel 4. Well, actually I watched it on Virgin V+ "Catch Up TV", but you know what I mean. It's not bad. In one of the episodes (about property) he said in passing something like "it's always happened before". In the business of money, unlike the in technology of money, no-one ever learns. I made this point over on Kashklash recently, using the story of Northern Rock and the Goldsmid brothers to illustrate the point.

Note that this case of the Goldsmids is not “similar” to that of the Crock, nor is it “analagous” to it, nor is it a “metaphor” for it. It was exactly the same. In every respect.

[From kashklash:: exchanging the future » Blog Archive » Technology is progressive, finance is cyclical]

Anyway, with my current focus on innovation -- I'm helping the CSFI to plan the first round table in the Visa Europe Research Fellowship series for 22nd January -- it set me thing (again) about the cyclical nature of the finance business. Is there something I need to take account of here: I haven't quite put my finger on it yet, but is there a connection between the stepwise march of technology and where it intersects with the circle of financial services evolution? Perhaps there are some points on the circle where the new technology gains purchase, and some where it is flung away. I need to work on my analogies!!

Paying for innovation

[Dave Birch] So who, exactly, is going to pay for innovation in the payments field? Should individual stakeholders incrementally innovate or shoudl we make co-ordinated attempt to improve the payment system and share the cost? Should we regulate and let the market sort things out or should we try to constrain some of the paths through the roadmap. Hhhmmm. In this, as in so many things, Australia proves a useful case study. They had one of the first and best-developed EFT-POS systems in the world, but of late it has been looking a little antiquated.

Australia's central bank has criticised the nation's four largest commercial banks for shirking on investments in payment systems technology, resulting in a lack of innovation and neglect of systems like EFTPOS.

[From RBA criticises payments innovation: News - Hardware - ZDNet Australia]

This is, of course, the very same Australia that capped interchange fees, so reducing banks income from cards and therefore reducing their incentive to invest. The results are not surprising. If we use online payments market share as a proxy for innovative new products, then the result has been a steady loss of market to more innovative competitors.

Research from Nielsen Online has tagged PayPal as the most preferred online payment method in Australia and the UK. There are more than 141 million PayPal accounts worldwide. In 2007 more than $47 billion in payments were processed by the service.

[From The Better Banking Blog: PayPal vs Credit Cards]

In Australia, it was the merchants who were the winners. They obtained reduced merchant services charges because of reduced interchange and, broadly speaking, pocketed the difference. Was this what the regulators wanted? It's hard to imagine that this is the case, so the lesson to be learned here is (surely) that we need a clearer vision of what we want before we set off, if you see what I mean. If we want some real innovation, then simply focusing on interchange isn't going to deliver anything.