Digital Money

Balancing act

[Dave Birch] There was a great kick-off talk from Blums Pineda at the Mobile FInancial Services conference in Singapore. Now with Exicon, he was previously with Globe Telecom, home of GCash. Blums chose to focus on the balance between consumer protection and business opportunity, building on his experiences with G-Cash. He was essentially optimistic that regulators are embracing new models. As he pointed out, it's the transaction space that is driving growth in the financial services market. In the mobile transaction space, we need regulatory certainty to encourage investment and no regulation at all is not the right kind of certainty. In the Philippines, the regulators did not over-react and use inappropriate banking regulation to constrain the evolution of payments business.

There are good reasons, as we have discussed before, why we actively want regulators in the m-payment space. That's because while no regulation at all might minimise compliance costs for the provider, it does not minimise costs for society as a whole: consumers carry on using more inefficient forms of payment (cash, in the countries being discussed) because they have regulatory certainty. So there are great benefits to having regulation. Blums summarised these as benefits to consumers, providers and the common good. I thought he was dead right to include the common good as a separate and distinct beneficiary, serving to remind . Surprisingly, to some people, he said that one of the benefits of regulation was to encourage innovation.

The idea of regulators balancing prescriptive vs. principles-based

He gave a useful case study of the Philippine regulatory response to the development of G-Cash and Smart Money, showing how the regulators allowed the market to develop new solutions by working with the new entrants to find ways to make the regulations work. As an aside, later in the day a chap from Ernst & Young (who began by saying that, with admirable candour, that the "big four" have come "a little late" to m-payments) was drawing some lessons from the launch of Smart Money (in 2000), GCash (in 2004) and Citi (In 2008) in the Philippines. Smart Money has seven million registered users and 700K retailers, GCash two million registered users and over 600K retailers (and GCash customers have access to 6,000 ATMs) but these systems could be bigger still with bigger networks of agent, consumers and merchants. The barriers to entry are too high.

GCash need to make it easier for new members (consumers or merchants) to join system. But they also need to do something with the agent network. There is an onerous process for new agents to join the GCash network and since agents only get 1% commission for cash loads compared to 10% commission for airtime top-up, there's not much of an incentive for them. These factors have limited the growth of the agent network which has, in turn, limited the growth of the scheme. As an aside, here's a useful data point: Blums reckons that the shift to m-payments has eliminated nearly 80% of microfinance provider costs in the Philippines. Now, the environment there is most conducive to m-payment -- 95% of Philippine towns have mobile coverage, only 60% have a bank branch. There are 10,000 ATMs but a million airtime resellers -- but so the cost savings may be at high end of possibility, but the opportunity to significant cost reduction in many markets is clear.

Looking forward, he reiterated the growing need to regulate the agent networks in the m-payments space (Globe has something like 1,800 accredited partners for the GCash service), something that we have been thinking about with some of our customers and something that we will be sure to return to on the Digital Money Blog. Finally, he noted that a key element of the future platform is some form of mobile identity infrastructure. GCash has over-the-air registration, but if you use it at POS you have to present an ID card, which makes it less convenient than it might be. I couldn't agree more, which is why I was so keen to have a mobile eID panel session at the recent Identity and Privacy Forum and I'll be talking on this subject in Session C European eIdentity Management, the 22nd eema conference, on 25th June in London.

legal and regulatory, mobile, money transfer

Leo van Hove, Free University of Brussels

[Dave Birch] Leo van Hove is Associate Professor of Economics at the Vrije Universiteit Brussel (Free University of Brussels) where he teaches Monetary Economics, European Monetary Policy and Electronic Commerce. His research interests include electronic money, the theory of network externalities (and its application to payment cards) and the so-called "currency enigma" and related subjects (such as the hoarding of currency and the use of currency in the underground economy). He is a noted expert in the field of payments and money in the European Union and a long-time friend of the Digital Money Forum. In this podcast, he talks about the use of cash in Europe, and puts forward some ideas about its continuing popularity and options for reducing it. Note that Leo also runs the E-Purse Database, an invaluable source of information on e-payment cash replacement technology.

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

cash and cashlessness, costs, notes and coins, podcast

The 50 year plan

[Dave Birch] When I took one for the team and went to the SEPA session at the International Payments Summit. I did learn something new, which was that at the current rate of progress it will take about 50 years (the actual estimate was 47 years) to migrate European credit transfers to the SEPA Credit Transfer (SCT), which is not bad I suppose. After all, it takes time to develop and integrate new systems, and banks have other priorities. Neverthless, it is fair to observe that progress is slow.

What I was mainly interested in was the zeitgeist around the Payment Services Directive (PSD) rather than SEPA itself. That's because it will have more of an impact on more of our customers. Selfish, I know. But the thinking is straightforward: for our financial sector customers in the payments business, the PSD introduces new consumer rights and so forth and this will cause them some hassle. One particular impact, which may well be under-emphasised in strategic evaluations of the PSD, is the panoply of new customer rights that come with the PSD. These include transparency. So (under articles 36 and 37) your card issuer has to tell you (when you're buying a meal in a Greek restaurant) the maximum execution time for a payment, all charges payable and a breakdown of those charges and the actual (or reference) exchange rate. Gulp. That sounds like the Greek restaurant will have to give a British cardholder a couple of pages of A4 and make sure that the customers reads them before they punch in their PIN.

You'd think that a key impact of the PSD would be pan-European, but a couple of people I overheard were definitely sceptical. In fact, some people think it is likely to entrench national markets for the time being. I saw Bob Lyddon give a talk about this recently and he made the point that the combination of national "gold plating", the mixed adoption of the rights of derogation and different interpretations of non-negotiable elements after national transcription (ie, the process of turning the directive into national law) means that there is a high likelihood of national markets becoming more different, not more similar. (And one country, Sweden, is opting out of it at the moment.) Thus, although a Payment Institution (PI) can theoretically passport, national differences mean that costs and complexity will not reduce for the time being.

Anyway, the point is that for banks, the PSD comes at an interesting time when transaction banking is becoming more central to strategy. The threats from both new entrants and substitutes are, according to Bob (and I agree with him), high. In these circumstances, regulation is turning from a moat that competitors cannot cross into a millstone around the incumbents necks.

SEPA and PSD

Eckhard Ortwein, Sybase 365

[Dave Birch] Eckhard Ortwein has long experience and wide perspecitve in mobile payment. He has led the Sybase 365 m-commerce sales efforts for Europe, Middle East and Africa since the beginning of 2009. Before this, he was the CEO of paybox up until it was acquired by Sybase. He co-founded paybox in 1999 and acted as the company’s CTO and COO until 2003. He also headed the company’s Sales and Marketing efforts. Between 2003 and 2006, he was Co-Manager Mobile Commerce for mobilkom Austria, making mobilkom the leading provider of mobile commerce services worldwide and building the first national operator consortium for mobile payments. In this podcast, he talks about paybox's trajectory and some of the key lessons learned.

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

mobile, podcast

Thought experiment: cash crash

[Dave Birch] A couple of people mentioned to me that my post about replacing cash is based on the assumption that cash will go away, whereas cash is a very conservative technology. This is true, of course. But the fact that cash is losing market share only very slowly does not mean that it could not see a more rapid drop in the future. Nevertheless, it would appear that the cashless store remains as a common as the paperless office, to repeat a frequently-used analogy. However, as The Economist recently pointed out, while fantasies about the paperless office began in the 1960s and are still derided by lazy commentators as "as likely as the paperless bathroom", the truth is that it takes a generation to effect change. The use of paper in American offices has indeed been falling, but the decline didn't begin until 2001 (paper use per office worker has fallen by about a sixth since then). Perhaps cash will take a generation to go away as well. What then? Suppose all of the cash in Britain went away and was replaced by electronic cash instead. What would happen? Well, let's begin the thought experiment by trying to figure out how much cash there actually is. Narrow money (M0) is the amount of notes and coins in circulation.

The total amount of cash in the UK is just over £50bn, with about £43bn circulating outside the banks and £7bn in banks' safes, tills and cash machines.

[From BBC NEWS | Magazine | Where has all the money gone?]

If that went away, the first thing that would change is tax: the government earns interest on that £50 billion loan that we are granting it in exchange for bits of paper and metal and that interest -- a couple of billion per annum -- would need to be replaced by other tax revenue. Oh well. At the least the cost of government would be made more explicit. But I don't think the government would see a net loss: after all, no cash means less tax evasion so we can reasonably claim that the transition to e-money will be revenue neutral and the economy as a whole will be much better off because of the high social cost of cash (resources would be freed for more productive activity).

A couple of billion! Actually, it's not that bad. Much of the £43 billion outside the banks isn't really circulating: it's under mattresses and in jam jars. The euro has steadily been replacing the dollar and the pound in drug-dealer's stashes though, so let's say that two-thirds of M0 is the circulating medium of exchange, say £30 billion for a round number. If the seigniorage on that is five percent, that means around £1.5 billion per annum remitted to the government (which tallies roughly with the Bank of England's figures I think). Where is that £1.5 billion going to come from? Perhaps the government will cut spending accordingly by reducing waste and getting rid of pointless programmes... no, maybe not.

cash and cashlessness, cheques and checks, future, notes and coins, retail

He was wrong, but so was I

[Dave Birch] Way back in 1995 the then director of the US Mint, Phillip Diel, told a Congressional subcomittee hearing that expected to be issuing legal tender stored-value card before he issued a one dollar coin. To date, they've done neither. And to be honest, the dollar coin looks to be a long way off. But was there something in the Mint's thinking? We don't need to agree that the US Mint -- which makes five cent coins at a cost of 7.7 cents each -- is a model business with a track record of accurate futurism. In fact, as I am constantly whining on about, what they do overall is to waste everyone's money, on quite a large scale.

Central banks agree, putting the cost of printing, issuing and recalling old-fashioned folding notes and coins at between 0.4 per cent and 0.6 per cent of gross domestic product.

[From FT.com / Technology / Digital Business - French take a lead in mobile payments]

So how wrong was the director of the mint? Well, one the one hand I don't think there will ever be a dollar coin, so he was perhaps right to mark stored-value cards as being more likely to occur in a finite timescale. But "legal tender" stored-value cards issued by the government? No, I don't think so.

cash and cashlessness, mobile, notes and coins

What will contactless ubiquity bring?

[Dave Birch] Barclays commitment to convert all UK debit cards to contactless, given that they already have a large number of contactless credit cards out there, means that the penetration of contactless cards will go up substantially over the coming year. So what will happen? We have already learned some key lessons. For example, we know that transit has a powerful role to play.

For contactless issuance—card acceptance at transit is a big motivator for issuers. It’s a market that is both high profile and also potentially lucrative for transaction volume. This could definitely serve to motivate issuers to ramp up contactless issuance.

[From Javelin Strategy and Research » ViVOtech, Cubic, Mobile Payments and Transit]

And, in the UK at least, the combination seems to be working in the sense that cards are being issued in large numbers and transit operators are looking seriously at accepting bank-issued cards in their gates. I should note, of course, that is not only bank-issued cards in this environment: there are some new players as well, including Forum friends sQuidcard.

E-money start-up sQuidcard has struck a deal with the Scottish National Entitlement Card (NEC) programme and council authorities in Dundee to provide residents with pre-paid contactless cards. The NEC programme is designed to offer Scots access to council facilities such as libraries, schools, taxis and leisure through a single card. The card can also be used on public transport as well as to access thousands of rewards and discounts... Following the Squid tie-up, users in Dundee will also be able to load the cards with money and make purchases of under £10 in retail stores by tapping them against specially equipped terminals.

[From Finextra: Dundee council teams with sQuid on pre-paid contactless card]

On the other hand, the retailers are not, it has to be said, rushing to convert. This is for all sorts of reasons that are not interesting to go into here. Nevertheless, step-by-step, contactless acquiring is spreading.

UK high street retailer Boots is teaming with MasterCard and RBS WorldPay to introduce contactless payments at stores in London and Liverpool... Boots is the first high street retailer in the UK to trial contactless technology, which is swiftly gaining popularity in the country.

[From Finextra: UK retailer Boots to trial contactless payments]

There are some real issues that need to be resolved: it's not just conservatism or resistance to new technology. For example, there is the issue of the transaction limit beyond which contact and PIN is required.

Opinions vary as to whether the current limit of £10 is appropriate. Dave Birch, director of the consultants, Consult Hyperion, which has been closely involved in all three of the first contactless payment schemes thinks this is a difficult question. “Certainly there is pressure from merchants who want a much higher limit,” he says. “I think that will take a little while though because the banks need the experience of running the risk management models and anti-fraud systems first.”

[From StorageExpo08 Show Preview: FST]

But I think a bigger problem is that many of the places where contactless cards use would be desirable and convenient are not places where banks currently acquire card transactions, are not places where retail POS terminals are suitable and are not places where telecommunications networks are ubiquitous. So I'd love to pay at Woking rail station car park in the morning by simply tapping my OnePulse card against the machine, but I can't see how it can happen. Meanwhile, the competition is closing in: Woking now has RingGo mobile payments in place, so you can park and then pay on the train on your way to London. Bank-issued ontactless payment cards are going to have to work harder if they want to get into those markets.

prize

More anecdotes

[Dave Birch] Erik van Winkel from our friends at Edgar Dunn as a nice piece in the current Journal of Payment Strategy and Systems (vol. 3, no. 2) looking at the potential for new entrants in the European payments sector in response to the arrival of the Payment Services Directive (PSD). At our seminar on this topic earlier in the year, I asked the panelists about the likely categories of new entrants, and we spent some time discussing whether telcos and retailers might be prime candidates. Erik sets out his own thoughtful classification of potential new entrants as follows:

• International organisations already providing processing spaces for acquirers;
• Large pan-European retailers who might immediately benefit from self-acquiring and synergies with loyalty and CRM schemes;
• E-commerce businesses such as PayPal, Google and Amazon who might be able to offer European consumers some modern, customer-friendly options;
• Mobile operators. Erik thinks that if banks and telcos cannot agree on common business models then telcos may well decide to launch their own initiatives. Some operators (eg, Vodafone) already have successful m-payment systems running outside Europe and may decide to try them out inside Europe given the right conditions.

An excellent analysis. I think Erik's point about mobile operators is a particularly good one. We've been told over and over again that "mobile operators don't want to be banks" and I'm sure they don't. But a Payment Institution (PI) isn't a bank. The point of setting up a PI is not to compete on banking services to run payment services more efficiently. Saying the mobile operators don't want to be banks is one thing, saying that they don't want to get into the payments business quite another.

banking and finance, SEPA and PSD

Police and thieves

[Dave Birch] I don't usually read the newspapers -- in the UK they are full of stories that cause professional satirists to weep with shame and retreat to Hebridean monasteries, no longer able to compete -- but I had a free Daily Mail to hand on a plane this week and found myself gasping in astonishment at the news that police in some parts of London have set up a hotline for people to call when they want to withdraw cash from an ATM. The police will then meet you at the ATM and a uniformed officer will follow you home a "a safe distance to not draw attention".

Warning: I am not making this up. If you are a UK taxpayer, you may wish to seek a doctor's advice before reading any more of this story...

PENSIONERS and shoppers concerned about being mugged after withdrawing cash from the bank are being offered a police escort home in a district of east London. Posters displayed near banks and post offices explain residents can call up and arrange for a uniformed officer to see them safely home.

[From Police escort for elderly ATM users | The Daily Telegraph]

Yet again, the hidden cost of cash rachets upwards. Who is paying for these policemen? Is it the merchants who say that cash is the cheapest form of payment? Is the the customers who use the ATMs? No, of course not, it's the taxpayers. And as long as the social costs of cash remain unaligned with the private costs, we'll carry on paying.

cash and cashlessness, costs, crime and fraud, security

Pounded

[Dave Birch] A few weeks ago at a conference I said in passing that I thought that about 1 in 50 pound coins in the UK is counterfeit but it turned out that I was way off of the mark and the actual figure may be close to 1 in 20! The economics are worth noting. It costs 10p-20p to make a fake coin, and these fakes are bought by criminals for 70p, so the forgers make 50p per pound. Not a bad return. And he's another interesting fact I learned about counterfeiting: it's harder to forge euro coins because they have a magnetised stripe running through them and this makes it easier for machines to spot the fakes.

The reported dynamic is of mass collusion. If you find yourself with a pound coin that you believe to be fake, then you will not report it (because then you are out a pound) but will instead attempt to pass it on to someone else in a Gresham's Law dance. Thus, they stay in circulation. Instead of just scrapping one- and two-pound coins and getting people to use cards or mobile phones instead, the Royal Mint are "working with banks etc" to remove counterfeit coins before they reach members of the public.

cash and cashlessness, crime and fraud, money