Digital Money

Whispers

[Dave Birch] I think I've spotted a meme. The second serious story in a month talking about the economic benefits of getting rid of cash. First Willem Buiter, a former chief economist of the European Bank for Reconstruction and Development and former external member of the Bank of England's Monetary Policy Committee said that we should

Abolish currency. This is easy and would have many other benefits. The main drawbacks would be the loss of seigniorage income to the central bank... Advanced industrial countries can move to electronic and bank-account-based means of payment and media of exchange without like problem. [From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

I discussed Willem's article in more detail over at Kashklash, but suffice to say that it seems a plausible strategy. And now I read in The Times that

Japan may start mulling the most radical monetary policy of all — the abolition of cash... Several MPs in the ruling Liberal Democratic Party believe the abolition of cash, though politically radioactive, might be technically feasible.

[From To fight deflation, abolish cash.]

I agree with both sets of commentators that new technology means that we could move whollly to e-payments without a problem, because of technological advances made in the last couple of decades. I've written before about the situation in Japan, where the introduction of contactless payments and phones had led to a decline in the use of coins, but it's also important to point out that cash use in Japan remains high. Nevertheless...

A significant milestone in the penetration of electronic cash within Japanese society has been reached, with this survey conducted by goo Research and reported on by japan.internet.com into electronic cash showing that now over half the population (of internet users) carry some form of credit-card form-factor electronic cash.

[From e-money » 世論 What Japan Thinks]

Let's imagine that Willem's version of the future of money is adopted. What would the retail payments landscape look like? Well, not entirely unfamiliar, because he suggests not getting rid of all cash entirely.

As a concession to the poor, we could keep a limited number of 1$ and 5$ bills (1€ and 2€ coins and 5€ bills) in circulation.

[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

I don't think I agree with him here, as cash isn't a concession to the poor: it forces them to pay higher transaction costs than their better off neighbours. And if the amount of cash falls, then the cost of the whole infrastructure of ATMs and cash registers, armoured vans and night safes will fall on the poor, thus further raising their transaction costs. Surely it makes more sense to simply switch off cash. Willem summarises thus:

Do we really want to retain cash just because it (1) allows us to hide some of our legitimate financial transactions from the government (as insurance against government abuse of the information), and (2) is a source of revenue to the central bank? These arguments pro are surely dominated by the two arguments against currency, (1) that, as currently construed [...] currency imposes a zero lower bound on nominal interest rates and (2) that it subsidises the grey and black economies and makes life easier for the global criminal and terrorist fraternity.[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

Do we really want to retain cash?

cash and cashlessness, legal and regulatory, mobile, notes and coins, security

Roy Vella, RBS

[Dave Birch] Roy Vella is the Director of Group Mobile at RBS, with a global role in helping RBS to exploit mobile across all areas of retail bank business. Prior to this he was head of mobile for PayPal in Europe. The first person to be interviewed twice in this series (!), in this podcast he explains the importance of mobile to a global retail bank.

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

banking and finance, mobile

Heavy weather

[Dave Birch] One of the very first projects that Consult Hyperion worked on was the Bank of England Central Gilts Office (CGO), way back in the days of "Big Bang". We were subsequently chosen by the Bank of England to work on the Central Moneymarkets Office (CMO) and then CREST, the equity settlement system that they created when the Stock Exchange's TAURUS project collapsed. These are now part of Euroclear, which makes the card scheme networks look like loose change: it currently handles an average of HALF-A-TRILLION pounds per day in gilt, equity and money market trades. At times of stress, these systems are critical to the economy.

There’s also the interesting fact that on separate occasions during September and October 2008, the UK’s Continuous Linked Settlement system broke its previous record daily volume by over 35 per cent; ‘Crest’ saw a 33 per cent increase in the highest value settled before September 2008; and ‘Swift’ saw new record volume days on four occasions. Essentially, a lot of people moving a lot of money in a very short period of time. [From FT Alphaville » Blog Archive » Financial crisis, UK payment system edition]

All of the systems stayed up, which is a testament to the designers. These systems generate a huge amount of data as a by-product of their operations and I wonder if this data is captured and used effectively? I mentioned before about using the data from payment systems to create a kind of weather map for regulators and supervisors so that they can pick out major "fronts" and see storms brewing. Perhaps the web 2.0 way forward is to anonymise the data in some way and then just put it out on the Internet so that people can see (and mash up) the financial weather for themselves: a picture of where the moving is moving through Europe in real-time might be fun. By the way, we talked about the money forecast, but here's a money map of Europe that I just love.

legal and regulatory

Payment revolution needs identity revolution

[Anthony Pickup] To get an up-to-date understanding of the context for m-payments, I went along to the Mobile Retail Show at the Institute of Engineers (which reminds us what the UK engineers have done for the world) and Monetising the Mobile Internet at the Royal Statistical Society covered similar issues around how to extract value from users of the mobile internet, from advertising, m-commerce and so on. They both had some discussion of the payment methods available.

Let's look at the mobile internet – shall we start by thinking about the device interface. Well there is the size, the variability of functionality from text-only through to near full colour and functionality with all being in use. I do remember devices that were non-colour but I am old and the majority of these devices were the human interfaces into large computer systems – indeed the computer workers of the world may still use ‘TSO’ screens to access ‘REAL’ computers. Interesting there are now similar band width issues on the communications channel from GPRS through to HSDPA. (This is not quite as bad as dial-up / PSTN through to broadband / ADSL and beyond.)

So what, you may ask. I see this as the creation of another digital divide created by market forces and the speed of mobile technology development. I ask you who changes their laptop or desktop computer more often than their mobile phone? We will create a market where some people are able to access information and services on the move and others that can not. One area where the opposite is occurring is mobile network delivered internet access (the world of dongles). This technology is reaching a tipping point where it is easier, quicker to get working and for some users cheaper to access the Internet this way than over the classic ADSL (fixed line) technologies. I have had my dongle now for 15 months, during which time it has gone from a niche ‘3’ product to a core service for all operators, and now I think I will pass my device up to my mother-in-law to replace her dial-up access. It took my wife four years to teach her to text and boy does she text now - even though severely disabled with arthritis. I doubt it will take that long to get her on Skype messaging, voice and then video calls with her daughter – who does not know what Skype is yet. This I believe will be cheaper easier to use and probably more reliable that here current dial-up even though she is North of Stirling.

costs, innovation, mobile

Help! I can't stop posting about SEPA

[Dave Birch] I saw a very good talk by Gerard Hartsink, Chairman of the European Payments Council. He was talking about SEPA and the evolution of the European payments sector. The context isn't important, but I did want to highlight one comment he made -- which caused some passionate discussion -- about the future of payment cards. He said that he could see a situation in 2011 or 2012 when magnetic stripe transactions would be banned in SEPA and only chip transactions would be allowed at ATM and POS. Now, before we launch into a debate on this, let me point out that he is not the only person of influence who is thinking this way.

Tony Chew, head of the technology risk supervision division of the Monetary Authority of Singapore, is advocating for a concerted global effort to phase out magnetic stripe technology entirely. “We can all go chip and PIN which will be a more effective method of combating counterfeit card fraud,” says Chew.

[From Vendor Articles: 12/6/2009 Credit card fraud rising]

It's the rise in fraud that is causing this kind of thinking. Far from shrinking card fraud, the introduction of chip & PIN in the UK has multiplied a thousandfold the number of places where people use PINs and therefore where PINs can be stolen from. So long as there are places where easy-to-copy magnetic stripes can be used, the incentive for criminals is clear. Things are getting worse.

It is my belief - and feel free to come back and tell me that it's me that is the idiot - that after a number of years of declining card present fraud (magnetic stripe cloning is so much easier, and a gift from the card issuers), we are now going to see a dramatic increase, and there is nothing we can do about it!

[From 2009 - is that the year we all went online?]

I happened to be reading this month's Fraud Watch, and one of the front page stories is "ATM fraud threatens global acceptance". The story says that "several issuers are considering blocking major cities and possibly whole countries where international card fraud is high, because there is no chance for reimbursement for those losses even though the original cards are EMV chip and PIN compliant". (There are, as I understand, no plans for a liability shift to rectify this, particularly in the USA.) Oh dear. Incidentally, the top three destinations for ATM fraud on UK-issued cards last month were.... 1. Canada, 2. Italy and 3. the USA.

Suppose Gerrard is right? What will happen in 2012 when travellers from the USA arrive in Paris and discover the shops, hotels and ticket machines won't accept their cards any more?

EMV, legal and regulatory, SEPA and PSD

Not a template, but some inspiration

[Dave Birch] I've been reading a report on "Recent Developments in Electronic Money in Japan" from the Payment & Settlement Systems Department of the Bank of Japan. (The report, from last October, says essentially that electronic money in Japan is small but growing quickly.) The reason I'd picked it up again though was because wanted to check on something I'd told one of our clients about the fall in coins in circulation in Japan because of e-money. I'd remembered correctly: the volume of small coins in circulation has been falling in absolute terms since 2003 and the fall has been accelerating in the last two years, the volume of all coins started falling in 2005, then grew slightly in 2006 but has been falling since. The fall is still only at the rate of 0.5% per annum, but it is a real and noticeable effect. E-money in circulation is Japan accounts for only 0.1% the total value of the notes and coins in circulation but it is already 2% of the value of coins in circulation, in an economy that is less plastic-oriented than, for instance, the UK.

Statistics from Nomura Research Institute show that the amount of electronic money transactions in fiscal 2007 reached 844.4 billion yen, about five times the previous year's figure. In fiscal 2012, that amount is expected to balloon to 3.3 trillion yen. Most of the transactions are handled by railways, supermarkets and convenience stores, but e-money functionality is also starting to be added to student and company ID cards. As a result, the number of users looks likely to increase.

But in spite of the major growth of electronic money, the service is predominantly used for small transactions, with the total transaction amount reaching only about 2 percent of the figure for credit-card transactions.

[From E-money use growing rapidly in Japan - Mainichi Daily News]

Small, but growing. And not driven by, or under the control of, retail banks.

cash and cashlessness, contactless and nfc, mobile, notes and coins

Camp community

[Dave Birch] There was another thought-provoking BarCampBank in London last month. Many thanks indeed to Frederic and the gang for pulling it together and a special mention for Sun's super hospitality. As well as catching up with friends and meeting new people, I got to sit in on a series of fascinating discussions. Some of the ideas being kicked around were fairly mainstream, but some were really out of the box (I particularly liked the lunar phase model for hedge fund investment). All I ask from such an event is to go away with more ideas than I came in with, and once again the format and the audience delivered. But what I've been reflecting on since the event is one specific thread: community. During the day there were some excellent discussions about community banking, community currencies and community enterprise. Now, obviously, I tend to look at these through a very narrow prism -- which is: how can my customers make money from this? -- but I'm also aware and in many cases enthusiastic about the link between the business case and the social case.

In Canada, there's a branch of CIBC that already sells "Toronto Dollars". I'm going to be in Toronto next month so I'll see if I can check them out report back. What I'm curious about is the relationship between "conventional" banking and "unconventional" money. Although it's hard to put a finger on it, there's clearly an opportunity for the mainstream to take advantage of a number of trends but is it as a distributing and marketing channel or is it at a more fundamental level? There are clearly opportunities for banks to integrate with alternative payment mechanisms, although that's not to say that the opportunity will come to them automatically.

All these alternative payment methods are showing huge growth, according to Javelin’s consumer surveys, and they present the opportunity to link with specific merchants and generate revenue from business-to-business services, ranging from acquiring to deposits and cash management. But banks must fight harder to make sure these opportunities do not migrate to other companies, and to ensure that the payment alternatives remain bank products.

[From Javelin Strategy and Research » New Opportunities for Banks in Alternative Payment Tools]

What I'm thinking about here, though, is that the Totnes Pound and the Toronto Dollar are not simply an alternative, local payment mechanism that banks (and other businesses, of course) can use as part of broader strategies implemented at local levels. These currencies mean more than that, so banks need more sophisticated strategies to deal with. I'm not a psychologist or ethnographer, but even I can see that alternative currencies have meaning beyond the medium of exchange.

banking and finance, currency, social and community

Larry H. White, UMSL

[Dave Birch] Lawrence White is the F. A. Hayek Professor of Economic History at the University of Missouri–St. Louis and an adjunct scholar at the Cato Institute. He is the author of, amongst other things, “Currency and Competition” and “Free Banking in Britain 1800-1845”, books that had a great influence on my views of both the history and future of payments. An expert on "free banking" and the history of monetary institutions, in this podcast he talks about the Scottish free banking experience and what we might learn about the future of money from it.

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

banking and finance, history and future, money

Anti-anti money laundering

[Dave Birch] I was involved in a discussion about the relationship between the cost of customer acquisition for simple payment services and KYC/AML/terrorist finance legislation and, once again, I said that I was not sure that keeping people out of the "system" was the best strategy (because if the terrorists, drug dealers and bank robbers on the run stay in the cash economy, then they can't be tracked, traced or monitored in any way). I made a similar point when I was in the City at a round table on financial regulation. I really didn't expect my views to be particularly controversial, but they were. What I was arguing for was a relaxation in the controls around small payments -- and in particular, getting away from quite strict identity checks, which I think hold back the development of low cost, competitive mobile and Internet payment systems -- in order to shift the inclusion vs. exclusion balance that we've spoked about before.

I'll play by Chatham House rules and not attribute what was said by anyone (except me, of course) about money laundering. I said -- with poetic exaggeration -- that the huge amount of time, money and effort that goes into the AML industry never catches any criminals, and I was given a suitablly hard time by someone from part of Her Majesty's Revenue and Customs (HMRC) who said that they did indeed use Suspicious Activity Reports (SARs) to detect crime and used the example of last year's major prosecution of criminals who had been using bureau de change as a front for money laundering. OK, I shouldn't have said "any" criminals. What I should have said was "almost no" criminals.

cash and cashlessness, innovation

I hope regulators get real

[Dave Birch] Competition is a good thing. Competition in financial services is a good. If society wants a better payments system (which it should, for many reasons) then the way to get it is by creating a regulatory infrastructure that fosters, encourages and perhaps even demands competition in the provision of payment services. This is why the Payment Services Directive (PSD) has a chance of making life better for European consumers. Should that competitive environment embrace banks and non-banks? Yes, it should. If banks and non-banks are to make progress together, then it is not clear that simply leaving them to get on with it is good enough. For one thing, banks in many countries don't really want to compete, so if there is no explicit regulation to create a competitive landscape then there is a temptation to fall back on the old kind of competition in banking, which means competing and the regulatory level. This is the kind of situation that we see in Africa. Nigeria is a case in point.

Indications have emerged that Nigerian banks have moved against the quest of MTN Nigeria and Zain to obtain M-Banking license operations from the Central Bank of Nigeria (CBN). The regulatory body has only issued one mobile banking operating license to MoneyBoxAfrica to deplore branchless banking services across the country... the refusal of the apex bank to grant the [m-banking] license is as a result of Nigerian banks antagonistic to the idea.

[From ftr-africa.com - Financial Technology Report, Africa]

In Kenya, where the M-PESA mobile payment scheme is massive, the regulator had wisely decided to allow Safaricom to go ahead and launch that service despite bank pressure. The result has been a fantastically successful scheme that has transformed for the better the lives of million of Kenyans. But someone told me that the Kenyan regulator has now decided to revisit the situation and perhaps "tighten up" rules, inspired no doubt by the banks' genuine concerns for customer protection and the soundness of the in-country remittance market. Incidentally, you may not be aware that M-PESA has been launched in other countries. Afghanistan, for example.

Take Afghan GSM operator Roshan; they recently licensed Safaricom’s hugely successful M-PESA system, and one of the first applications for it is paying the Afghan army.

[From Telco 2.0: March 2009 Archives]

When the alternative is transporting tons of cash through some of the most dangerous highways and byways in the world, the mobile phone offers a millionfold improvement whatever the regulators' concerns might be. Mobile money is unstoppable.

emerging markets, legal and regulatory, mobile