Digital Money

For all you utter bankers

[Dave Birch] Wow, that was excellent fun. Nothing really to do with electronic payments, but I've been playing a fantastic new card game called "Crunch: The Game for Utter Bankers" with the kids and some friends.

Crunch is a satirical card game for 2 to 4 players that places you at the head of the boardroom as a CEO of a global bank juggling the conflicting demands of your ailing bank and your future retirement fund. An average game sees you bribing your way out of government investigations, fending off aggressive takeovers and forcing debt onto the unsuspecting public. Meanwhile, reward your hard work by taking inappropriate bonuses and - when no one's looking - brazenly embezzling your bank's own funds and hiding them about your person.

[From Crunch - the game for utter bankers | BoardGameGeek | BoardGameGeek]

The game served a dual purpose, both of which left me delighted with it. First of all, it was fun to play. Basically, you build up your bank's lending against assets (ranging from shares in listed companies to Nazi gold) and then when a crunch comes you trade in trust for government bailouts. It didn't take long to learn, and both the kids and adults enjoyed it. It had an unexpected second purpose, though. I bought it for fun, but in playing it the kids asked a lot of questions about the credit crunch, about the relationship between assets and debt, and about the idea of deliberately growing your workforce and assets to become too big to fail (adding "workforce" cards also gains you "trust" cards).

Run, don't walk, to your nearest games shop -- I got mine from Playin' Games in Museum Street opposite the British Museum -- and pick up a copy of this super game.

Federal Trade Commission disclosure. I have no affiliation with Terrorbull Games, the creators of "Crunch", and have received no payments nor any other form of remuneration related to this endorsement. No animals were harmed during the writing of this blog post.

banking and finance, prize

The price of everything

[Dave Birch] I've just read a couple of pieces about pricing: the Chicago Fed's Letter 266a (September 2009) "Payments Pricing: Who Bears the Cost?" and the SPEED piece by the Deputy Governor of the Bank of Finland, Pentii Hakkarainen, "The future of retail banking: more competition needed". Pentii says that one challenge (to retail banks) is the "dependence of banks on cross-subsidisation, especially of payment services". I agree and I'm not sure that the magnitude of the cross-subsidy from efficient e-payment methods that (because of SEPA) are going to deliver less margin to the least efficient paper and metal methods is appreciated. So the regulators are pushing down the amount of money available for subsidy but will (of course) go beserk if any attempt is made to remove the subsidy.

One way in which they are reducing the amount available to subsidise cash is by pushing interchange fees down. Setting aside whether that's a good thing or a bad thing, it's certainly a thing. Earlier in the year, there was a Federal Reserve Board report "Interchange Fees and Payment Card Networks: Economics, Industry Developments and Policy Issues" that looked at the situation (in the US at least) in some detail. Amongst other observations, it noted that with respect to interchange fees:

1. In general, an efficient interchange fee is not solely dependent on the cost of producing a card-based transaction nor is it equal to zero.
2. An efficient interchange fee may yield prices for card services to each side of the market that are “unbalanced” in the sense that one side pays a higher price than the other.
3. The efficient interchange fee for a particular card network is difficult to determine empirically.

I think the last point is worth emphasising. There doesn't seem to be any reason to suspect that regulators should inherently know what the correct level of interchange should be. It follows, I think, that if the regulators believe that interchange is too high (for whatever reason) then the appropriate path to correction is increased competition.

costs and interchange, payment cards, retail

Karin Huber, Mobilkom

[Dave Birch] Karin Huber is a Senior Product Manager at Mobilkom Austria and is responsible for marketing mobile payments. Vienna is one of the very few places in the world where real customers are walking into real shops and buying real NFC handsets, which makes Karin's experience almost unique. In this podcast, she explains some of Mobilkoms thinking -- in particular, why they decided to obtain their own banking licence rather than partner with a retail bank -- and some of their very innovative products.

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

banking and finance, money transfer

Bear market

[Dave Birch] Russia is looking like a pretty interesting market for e-payments. The management consultants keep telling us to focus on the BRIC (Brazil, Russia, India and China) for our next growth markets, but it's important to understand that their mass, retail, e-payment markets are just not going to be like ours, partly because of industry structures, partly because of government direction and partly because of the technology starting point.

Russian central authorities are reportedly considering plans to set up an electronic payments network... The main objective of the prospective electronic payment system would be to challenge the dominance of established brands such as MasterCard and Visa, which currently hold around 85 percent of the Russian cards market. The plans for a Russian-operated electronic payment network come after in June 2008, Russia’s two largest banks – Sberbank and VTB Group – have teamed up to create the United Russian Payment System (URPS).

[From The Paypers. Insights in payments.]

What might the Russian "third scheme" look like, compared to a European "third scheme" (eg, PayFair)? Well, one reasonable prediction might be that the lack of infrastructure in Russia (Russia is a very big place) means that their third scheme might well jump ahead of the European third scheme in terms of its technology platform. Indeed, there are already strong indications that mobile and contactless technologies will be moving ahead quite quickly in that environment.

The head of Russia's largest bank briefed the country's President Dmitry Medvedev on the concept of mobile contactless payments last week — and explained that he is looking to launch a non-contact mobile payments system by 2011/12.

[From Russia looks to introduce mobile contactless in two to three years • Near Field Communications World]

A national contactless purse (perhaps a bit like NETS in Singapore or Touch n'Go in Malaysia) in a country the size of Russia would be a really interesting development. Singapore has shown that some judicious government steering can help to migrate to a contactless environment that is convenient for consumers who will...

...now have two payment cards to choose from to use on buses and trains, to pay for road tolls and carparks, and to make purchases from stores, eateries and entertainment outlets. On Friday, Nets (the Network For Electronic Transfers) launched its long-awaited multi-purpose contactless card... EZ-Link launched a similar contactless multi-purpose card in January.

[From Nets, more uses than one]

Transit is the vanguard, as always, but the point here is that competition to provide interoperable e-purses is at least a good step forwards.

cash and cashlessness, contactless and nfc, debit cards, emerging markets, transit

Faster faster

[Dave Birch] At the Intellect Financial Services group meeting, Paul Smee, the Chief Executive from the Payments Council, gave an excellent summary of Council's goals and objectives as well as making some suggestions for better co-operation between the technology industry and the financial sector, such as creating some kind of vendor forum. He said in passing that much of his focus over the last couple of years has been the Faster Payments Service (FPS). FPS is a little bit of a success story for the UK payments industry, so it's worth talking about.

banking and finance, cash and cashlessness, cheques and checks, SEPA and PSD

Dominique Buysschaert, PayFair

[Dave Birch] Dominique Buysschaert is the man behind PayFair, a candidate for the proposed "third scheme" in European debit and co-founder and CEO of European Payment Solutions, the company set up to deliver it. He was a member of the Brussels bar for 20 years (1978 – 1998), as partner in different major law firms, and then became General Counsel for Carrefour Belgium (1998 – 2006), secretary of the board of directors and member of the management committee. He represented Carrefour at FEDIS, the Belgian federation of large retailers. In this podcast he explains how PayFair works and why retailers might be attracted to it.

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

debit cards, EMV, podcast, retail, SEPA and PSD

The Swedish experiment

[Dave Birch]Within the narrow confines of this blog, Sweden is one of the favourite geographies, partly because it is struggling with cash and partly because it is more transparent than some other banking systems.

The Swedish central bank published some detailed figures on the cost of payments and they provide useful input to the debate on the future of payments. They show that on average the variable cost of an ATM cash withdrawal to the issuing bank is around 1.3 SKr

[From Digital Money Forum: Cost dynamics, again]

Well, that doesn't sound like very much. But in Sweden, it multiplies up to a big fraction of the economy because the Swedes are heavy ATM users.

Stefan Ingves (the Governor of said Central Bank) said that Sweden has “many more” cash transport robberies than its neighbours because, essentially, cash withdrawals from all ATMs are free (despite the large costs entailed in cash handling). This means, in turn, that Swedes use cash far more than Finns, Danes, Norwegians and (especially) Icelanders.

[From Digital Money Forum: The Cash Menace up North]

Mr. Ingves also notes (in the speech referred to above) that Sweden has far more cash-in-transit robberies than its neighbours and suggests an alignment of the private and social costs: the cost of armed robberies, he said, should be accounted in the cost of cash. This means that far from being free at ATMs, cash in Sweden should be expensive. He is, of course, completely correct.

costs and interchange, crime and fraud, notes and coins

What doesn't add up

[Dave Birch] I'm still curious about US debit interchange rates, just as I was a couple of weeks ago when I misunderstood a magazne article on the topic. Remember that in the US, PIN debit (which grew out of regional ATM networks) costs less than signature debit, so you would expect merchants to incentivise the use of PIN debit or you would expect signature debit rates to fall towards PIN debit rates. In fact, since signature debit rates (via Visa and MasterCard) have remained fairly stable, what has happened is that PIN debit rates have moved up towards signature debit rates. Looking for some recent figures....

the average interchange cost for a small retailer on a $50 face-to-face purchase processed on a PIN-debit card with a major electronic funds transfer network logo in 1996 was 9.9 cents. By 2007, that same sale generated 40.1 cents in interchange... In contrast to PIN-debit pricing, signature-debit interchange has been stable since 2005... a small retailer in a $50 card-present sale with a Visa check card would pay interchange of 66.5 cents, and 67.5 cents on an equivalent MasterCard Debit transaction.

[From News]

Now, I reckon that the same retailer in the UK would pay 10p for a transaction that they pay 40 cents (30p) for in the US. So, I'm missing something here. Why does a debit transaction cost a merchant so much more in the US? For $50 transactions, setting the cost at 15 cents or 30 cents is not a make-or-break decision. But, obviously, for many merchants (especially in the cash-replacement potential market sector that I am interested in) the average sale is much smaller and a 40 cent charge on a $4 transaction eats up a lot of the merchant's margin.

The chain’s average ticket is $6, a level at which it’s difficult to make money after deducting interchange, Jones argues. Currently, credit cards account for about half of sales.

[From News]

So unless I'm missing something else about the cost structure, the only interpretation of these figures is that merchants in the US simply pay a much higher fee than merchants in (for example) the UK do. Our friends at Payments News pointed me to a recent report that suggests that that is precisely the right interpretation.

U.S. swipe fees are: more than two times the rates in the UK and New Zealand, four times the rates in Australia, and over six times the cross border rates recently agreed upon by MasterCard and the EU

[From Merchants Publish A Look at Interchange Fees Outside the US]

Why is this gap so big? Surely the US market is just as competitive as the UK market? I read a recent analysis from Peter Jones of Payment Systems Europe -- who put the average merchant fee at 1.8% in the US and 0.8% in Europe -- and he attributed the difference to the competitive issuing market in the US, with card companies competing to attract consumers by offering ever-higher rewards and charging the merchants for them. You can see why merchants object to this: but what should they do? James van Dyke of Javelin has some sage advice.

Merchants have some valid concerns about the payments industry, but they should push back on their advocacy-group partners and lobbyists on the viability of this interchange campaign. The interchange debate is fundamentally an issue between differing camps of business entities, and to position it as a consumer-advocacy issue will ultimately be fruitless for the merchant community in my opinion.

[From Javelin Strategy and Research » The merchant cost-of-interchange debate: what are the facts?]

Yes, the cost of cards needs to come down. But the way to do this is by encouraging competition, not by whining to regulators.

cash and cashlessness, costs and interchange, retail

Bottom of the pyramid schemes

[Paul Makin] Earlier this week, I attended an interesting and enjoyable round table session, hosted by the CSFI, entitled 'Credit and the emerging consumer: The developing world of African lending'. The discussion   was led by Jason Shedden (Blue Financial Services), Mark Napier (the newly-appointed Citi/DfID Fellow at the CSFI) and Malcolm Harper (BASIX). The discussion highlighted the fact that, despite high expectations of their effectiveness in reducing poverty, none of the existing microfinance institution (MFI) lenders actually reach the so-called "Bottom of the Pyramid" (BoP). Instead, not unreasonably, they are all lending to those that they have a reasonable expectation of being able to make repayments; those in employment, and self-employed businessmen wishing to expand their businesses.

This excellent event was the first in a series of roundtables that Mark will be running as part of his fellowship programme at the CSFI and we'll be asking him along to next year's Digital Money Forum as well so you can meet him there if not before.

emerging markets, mobile, money transfer, social and community

Coin star

[Dave Birch] Pottering along the M4 (otherwise known, but not by the inheritors of Queen Boudicca's robust policies on European integration, as the E30) the other day, I really enjoyed an edition of Moneybox on BBC Radio 4. It had everything: plastic card fraud, card charges and the cost of cash in a bizarre context. Which was that they had a story about a chap who blogs about what he finds discarded by the Coinstar machine in his local supermarket. Frankly, the Internet was made for this.

It's amazing what people leave behind on the Coinstar change counter machine in my local Sainsbury's...

[From The Copper Counter Blog]

There was a serious side to the story though, which was about the cost of converting cash into other forms. The machines currently charge 7.9% and this about to rise to something like 9.5%.

Supermarket coin-changing machines are popular, even though they charge a fee. Banks change money for free - but it is not always so convenient an option.

[From BBC NEWS | Programmes | Moneybox | Have your say: Pin fraud and coins]

Judging by the interviewees, and other previous discussions I've been involved in, people seemed quite happy to pay the massive transaction charge of heading towards a tenth in order to use up coins in the supermarket. You put in ten quids-worth of coins and you get back a voucher for £9.21 to use at the checkout. As the Copper Counter blogger pointed out on the show, this is odd, since if you pour the coins into the self-checkout machine then you pay no transaction charge at all. Anyway, the point is that coins are so much of a pain that customers will pay a high fee to get rid of them.

notes and coins, retail