Digital Money

David Evans, Market Platform Dynamics

[Dave Birch] David S. Evans is the founder of Market Platform Dynamics and the head of the global competition policy practice at LECG, LLC. He teaches at the University College London where he is the co-executive director of the Jevons Institute for Competition Law and Economics and at the University of Chicago Law School. Dr. Evans focuses on business strategy and competition policy particularly in high-technology and multi-sided platform businesses, such as payments, software, and digital media. His most recent book is Catalyst Code (with Richard L. Schmalensee), which deals with the management problems faced by multi-sided businesses. In this podcast, he talks about some of the challenges in the payment cards industry and the future of interchange.

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

TV times

[Dave Birch] We spend a lot of our time looking at technology roadmaps for customers in different sectors, and these roadmaps have a lot of different technologies on them. Obviously one of the key ones is contactless and one of the challenging aspects of turning a technology timeline into a technology roadmap for particular markets is trying to understand the relationship between technology decisions and the business "layer". Its natural to look around the world for similar examples, to help understand this relationship, but we have to be careful they are not misleading. So, for example, while we may look at (say) the Japanese market and obtain interesting ideas from it, it's not a template for the (say) the European market. Apart from anything else, it is based on a different contactless standard. It happens, though, that some people think the standard may be coming our way.

The Japanese government’s Ministry of Internal Affairs and Communications has announced plans to work with mobile phone makers worldwide to increase the use of Sony’s FeliCa chip in handsets, according to an Associated Press report. The ministry’s work may help speed the adoption of phone-based payments options in western countries.

[From NFCNews | Government boost for global FeliCa adoption]

Personally, I'm not sure that is the trajectory. There is already a join venture (Moversa) to make NFC chips that work with both ISO and Felica standards, so I think that will do more to spread phone-based payments than the wider adoption of Felica. So, if you look at the phone we are using for the Orange / Barclaycard NFC product, the 6212, it can't currently interface with Felica. This makes it unattractive in Asian markets where Felica is used for payments and transit, or even just transit. But in Europe it's no problem, because payments and transit all use the ISO interface.

mobile, smart cards, transit, tv

Does contactless change the landscape?

[Dave Birch] One of the Consult Hyperion projects that I'm working on at the moment involves looking at ways to take simple financial services (in particular, payments) out to the less well-off. These people are dependent on cash, and therefore pay much higher transaction costs than the more comfortable members of society. Part of this work rests on the availability of products, specifically pre-paid products, and part of it depends on technology. Unless technology can make payments as easy as cash, it will be difficult to persuade people to give them a try even though they might be financially better off using the new technology. We all understand that customers value convenience. This is one of the reasons why contactless "touch and go" technology in general and the combination of contactless technology with mobile has so much to offer. We have a way of making electronic payments as convenient as cash.

Actually, it seems to me the given certain bounds, contactless technologies can exceed this expectation and deliver an experience that is much better than cash. Paying with an offline contactless product (such as a prepaid card) is quicker than paying with notes and coins (even without having to wait for change) and the fact that a mobile phone can manage "cash" for you is transformational, since we know that one of the key factors in driving up the adoption of prepaid products is the ready availability of balance information.

I tend to think, therefore, that bringing contactless technology into the payments space will do more than make credit and debit card use more convenient. It may well have much more of an impact by driving a wider range of prepaid products into the market and and driving a more significant displacement of cash than either magnetic stripe or chip & PIN have achieved.

contactless and nfc, prize

Michael Linton, Open Money

[Dave Birch] Michael Linton has been active in community currency development since 1982 when he designed and began the first LETSystem in the Comox Valley, in western Canada. Previously, and briefly, he was a physicist, chemical engineer, computer programmer, business school graduate (MBA), research psychologist, truck-driver, ski instructor, school teacher, builder, fisherman, logger and retailer. He is now a systems designer, working primarily on systems for open society. For his most recent work, and links to earlier publications see www.openmoney.org. In this podcast he explains what community currencies are and why they are revitalised in the age of the mobile phone.

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

There have been worse ideas, surely?

[Dave Birch] As people view government money (known as "fiat currency", from the Latin meaning "let there be") as more and more unstable, so they begin to look around for alternatives and when a discussion of alternatives arises, one idea always gets debated: gold. Not necessarily as a Ron Paul-style return to a full gold standard, but as a way of giving citizens a choice. So what about the idea of having digital gold of some form circulating as a medium of exchange? Some people who understand economics call this "the worst idea ever":

You can not have two competing currencies, one backed by gold and one backed by faith in the American government. As long there exists even a trivial probability of a dollar collapse, everyone would simply hold the gold backed currency, which would necessarily precipitate a dollar collapse.

[From The worst idea ever | Free exchange | Economist.com]

Now, "worst idea ever" sounds a little over the top, especially to anyone who has ever watched "Britain's Got Talent", but you can see the reasoning. If the average person in the street thinks that their government is printing money round the clock so that it will inevitably lose its value, then they would naturally want to hold gold or some other asset that might hold value against inflation. Does that mean we would go back to using gold doubloons in Tesco? No: using gold as a hedge against inflation means using gold as money that is a store of value, not as a medium of exchange. I could envisage, for example, having a gold account. But I couldn't imagine going to an ATM and drawing out gold: I'd still be drawing out Sterling, but I'd only be drawing enough to support transactions and I wouldn't be stuffing it under the bed. That would reduce the demand for Sterling, but not eradicate it: currency is partly a means of exchange and partly a store of value (in less inflationary times). The world's most attractive currency for criminals is the euro: if criminals abandoned the euro for gold, then perhaps half of the euros out there would disappear (substantially reducing the seigniorage income to the central banks of the euro zone). But I digress. Is digital gold the future?

cash and cashlessness, future, money

Risk and lack of reward

[Dave Birch] One of our chaps was at a seminar concerning developing countries recently, and overheard an interesting conversation. Someone from the telecommunications world said that financial service regulators in developing countries were concerned mainly with risk, whereas telecommunications regulators were more concerned with competition. The effect of this is that mobile operators are raring to go with more services along the lines of G-Cash or M-PESA but they are being blocked by regulators who see payments as a financial service rather than as some kind of utility.

This is why I'm so worried that knee-jerk additional regulation of financial services in response to the current crisis will end up holding back the development of the payment sector, with really negative consequences in developing countries. A better payment system is an unalloyed good and it would be bad for lots of people if the evolution of new payment systems, especially in the developing world, were to be held back by inappropriate regulation. Payments are not banking, and while banking regulation may well need to be toughened up in many countries (as subject on which I am not qualified to comment), payment regulation may not.

mobile, social and community

The unready

[Dave Birch] I've been to a couple of meetings this week, for one reason or another, were the topic of SEPA has loomed large in the discussions. Then I remembered Chris Skinner's typically pithy (and typically accurate) summary of the current situation.

SEPA Credit Transfers are picking up a pace, but it's slow. Only 2% of all credit transfers use the SCT structure today. E-invoicing is taking off as a specialist interest area, but nothing has yet been agreed or is in place, and it is unlikely to be until 2012 or later. The Payment Services Directive (PSD) is agreed and is being transposed by most nations, except Sweden. Even with transposition, each country has its own PSD flavour so we have 27 flavours of harmonisation. That's not a standard. Meanwhile, the SEPA Direct Debit program will start this year. Hopefully it starts in November, when the PSD gets transposed, but it's not guaranteed. This is to be determined at an EPC meeting on 31st March where the banks will agree whether November is do-able or not. Finally, there's no migration or end-date mandate for any of the above and, until there is, this program is a road to nowhere.

[From The Financial Services Club's Blog: SEPA and the PSD: broken but not dead]

It's certainly a slow burn. But I'm mildly hopeful that the PSD, unlike SEPA, will lead to some actual change in the marketplace that might be discernible to the average consumer. Other people don't think so. The BCG annual survey of payments forecasts much lower growth in payment revenues in the SEPA zone through to 2016 (which would seem to imply downward pressure on bank pricing, and therefore some success for SEPA) than in the Americas or Asia-Pacific, but goes on to say that "other SEPA objectives may never be realised [including] improved payment services". There's clearly a difference of opinion between organisations that sell hardware, software, outsourcing and implementation and those who don't (eg, BCG) because they go on to say "the benefits of further implementation of SEPA are limited and investments required for achieving full SEPA are prohibitive".

SEPA and PSD

Time for the Borat

[Dave Birch] It's not clear to me why people think that creating a new world currency would improve the global economic outlook any more than creating a new European currency has helped the European economic outlook, but there's been yet another call for a single currency for the globe, and this time it's come from central Asia.

Nursultan Nazarbayev, Kazakhstan's leader [called] for every member of the United Nations to adopt the "acmetal". "A new global currency should serve as the foundation for a new harmonious system. The president said the name of his proposed currency was an amalgamation of the Greek work "acme", meaning "the best", and capital. So confident is he in the success of his new currency that Mr Nazarbayev predicted that the world would soon be talking of "acmetalism" instead of "capitalism" and that Kazakhstan could play a vital role in the implementation of the new currency because it had long been at the forefront of the global economy.

[From Global currency 'could save world economy' - Telegraph]

Personally, I don't like acmetal as it reminds me too much of cartoons, so I think something more modern, more relevant in contemporary culture would be better. I propose "the Borat". The proposal has some heavyweight support from someone who knows much more about economics than I do, by the way.

KAZAKH President Nursultan Nazarbayev has won backing for his plan for a single world currency from an intellectual architect of the euro currency, Nobel-prize winner Professor Robert Mundell. "I must say that I agree with President Nazarbayev on his statement and many of the things he said in his plan, the project he made for the world currency, and I believe I'm right on track with what he's saying,'' Prof Mundell said, adding the idea held "great promise''. Mr Nazarbayev and Prof Mundell urged the Group of 20 leading developed and developing economies to form a working group on the proposal at their summit on the global economic crisis in London on April 2.

[From Nobel-prize winner backs world currency | Herald Sun]

I wonder if I can persuade them to come along to next year's Digital Money Forum? `After all, the delegates seemed to really enjoy the session kicked off by Larry H. White which included a great talk on the Lewes Pound. The global, act local?

currency, money

Technology and a dilemma

[Dave Birch] I've got into a bit of trouble with a couple of our customers for saying that stickers are the future of mobile proximity payment, at least for the next couple of years. I'm not the only person who thinks this.

MasterCard Inc. is trying to prime the market for mobile financial services by offering contactless payments stickers that consumers can attach to their wireless handsets.

[From MasterCard's NFC 'Interim Solution' - 03.31.2009 - U.S. Banker Article]

Coincidentally, thanks to my good friends at Garanti Bank in Turkey, my splendid new MasterCard PayPass sticker for my iPhone arrived today. Naturally, I went upstairs to the lab to try it out in a couple of POS terminals (it worked perfectly) and have a play with it.

Cool. Now, the reason why I said that the sticker would prosper is that

it's a simple and inexpensive way of piggybacking on the mobile without have to actually integrate anything into the phone, which I predict will bring some new and innovative solutions into the space.

[From Digital Money Forum: Stickers are the future, I'm telling you]

And this is true. But it wasn't that visionary a prediction. Consult Hyperion were also (this was two years ago, remember) already working on some NFC projects for real banks and real operators and I was already able to observe first-hand the problems that were under the surface. So one of the reasons that I was so enthusiastic about stickers wasn't the technology per se but the dynamic around the initial bank-operator efforts. What is that dynamic? Surely, a reasonable person might say, it's better to have NFC integrated into the handset so that you can do all sorts of terrific value-added services around the payment and, indeed, that is exactly what we are doing in our work for Barclaycard. Getting a bank to do something with an issuer, though, is much easier than getting all banks to do things with all issuers. For one thing, there are simply no handsets out there for the operators to choose from. For another thing, it's taken far longer than anticipated for the operators and others to agree on the standards. The most important thing, though, may be much less tangible. It's just that it's taking a long time for banks and operators, payment schemes and the GSMA, to learn to work together. They are just different beasts. It takes a lot of time, and a lot of money, for harmonise technology, business and vision.

mobile, stickers

Tom Standage, The Economist

[Dave Birch] Tom Standage is business editor at The Economist, where he oversees the magazine’s business and technology coverage. He is also the author of five history books, including “An Edible History of Humanity” (2009), “A History of the World in Six Glasses” (2005), a New York Times bestseller, and “The Victorian Internet” (1998), described by the Wall Street Journal as a “dot-com cult classic”. In this podcast, he discusses the subject of paleo-futures (ie, how people used to look at the future) and looks at one or two implications for payments and banking.

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

future, innovation, internet, podcast