Digital Money

M-PESA update

[Dave Birch] M-PESA, one of our favourite payment systems, is going from strength to strength and now has an international dimension.

Kenyans can now receive remittances from family and friends in the United Kingdom via their mobile phones through a service called M-PESA. This follows a successful pilot project with selected outlets in the UK over the last three months.

[From AfricaNews - Kenya: Forex remittances via mobile phones - Articles]

It's amazing how the scheme has developed since we were first asked by Vodafone to help with a feasibility study on a money transfer scheme for microfinance loans and remittances. Just take a look at the current figures below, assembled with the help of Forum friend Igancio Mas from the Gates Foundation.

emerging markets, mobile, money transfer

Are mobile payments a "terrorist dream" or not?

[Dave Birch] A couple of years ago, I expressed some scepticism as to whether the tight know-your-customer and anti-money laundering rules would actually achieve anything and suggested that the net welfare attending a more relaxed structure might be significantly greater. In particular, I commented on the potential for mobile payments to help or hinder.

The use of mobiles to make payments is clearly a boon to terrorists (or, at least, terrorists who have never heard of 500 euro notes) as Rachel Ehrenfeld, founder of the Terror Finance Blog has noted. She calls the hook-up between the GSMA and MasterCard a “terrorist dream”. David Nordell, another finance terror blogger, says, “Person-to-person transfers via mobile phones will be almost anonymous, and completely uncontrollable unless the regulators intervene and block these new services until ways are devised to track the flow of funds.”

[From Digital Money Forum: The prepaid backlash]

A year ago, I expanded on this discussion in an article for the Journal of Internet Banking and Commerce. David Nordell was kind enough to read the whole article and recently provided a considered response. I asked him for his permission to excerpt part of it and he agreed, and I think it's worth quoting a few passages in full. David says...

I’m afraid that you have reached entirely the wrong conclusions. For all that I agree that there is indeed an element of ‘security theatre’ in the regulatory regime for anti-money laundering and counter-terror finance there is also a great deal of genuine value in the at least some of the regulations, and they are not there just to oppress the general public. The amounts of money that are needed to actually carry out terrorist operations of the kind we saw in London in July 2005 or that planned against the airliners two years ago are small, in the order of a few thousand pounds, and therefore well within the range of a dozen e- or m-payments.

This is a point well taken. Suspicious Activity Reports (SARs) that focus on transactions above £10,000 will not, under any regime, actually catch any more than mildly unintelligent criminal, terrorists, corrupt politicians or child pornographers. According to the Serious Organised Crime Agency (SOCA) here in the UK, there were 228,834 SARs filed last year and of these 703 were referred on to the terrorist finance investigation. Naturally, the report can't say how many of these 703 (0.3% of the SARs filed) were actually related to terrorist activity (although it does note that one of the terrorist SARs was filed by a charity and one by an estate agent, just to indicate the spread). So far as money laundering goes, and financial crime, I can't find any figures that show whether the money spent on SARs is a good investment or not. In the Royal Society of Arts debate on white collar crime, one of the researchers put total fraud in the UK last year at about £60 billion so it doesn't look as if SARs are making much of a dent in that, although hopefully they are deterring some major crimes. David continues...

No financial intelligence unit or police force that I know supports the idea of monitoring every possible financial transaction, whether through conventional banking or technology-enabled services; and all the professionals I know in this field understand perfectly well that the SAR regime, which is based on arbitrary reporting limits, will inevitably produce far more noise than signal. However, there is a lot of value in carrying out KYC checks, in e-money services just as much as in conventional banking: these can help to provide predictive intelligence about people who may be planning to carry out financial fraud, launder money from other criminal activity, or finance terrorist operations in planning.

I wasn't not arguing that we should have no KYC checks, but what I was arguing for was a sensible floor below which KYC checks are not needed. I happened to be in a local branch of national financial services organisation a few weeks ago when, for dreary reasons, I had to get into a queue. The person in front of me in the queue was trying to send fifty pounds to a relative in Liverpool. The clerk told him that couldn't, because he didn't have a passport and a utility bill. The chap complained that he had been sending this birthday money every year for decades. The clerk was unmoved. So who benefits from this? I didn't stop the 911 terrorists (who used credit cards in their own names) or the crotchbomber (who paid for one-way air ticket in cash) or the tube bombers (who were carrying identity documents). My argument was, and is, that we should decide where the balance should be in order to get the best result for society as a whole.

My suggestion is that we fix on 500 euros as the breakpoint. People should be allowed prepaid cards, prepaid accounts, money transfer accounts or whatever with no identification provided that the maximum balance is limited to 500 euros (it is currently 150 euros) and a maximum annual turnover over 10,000 euros (it is currently 2,500 euros). This will lower costs and ease accessibility -- I might even go and get an O2 Money card -- thus achieving a variety of goals including social inclusion and reduced transaction costs for the poor.

The problem, of course, is that the existing system makes it extremely difficult to cope with forged identity papers and stolen identities, which are used in the majority of cases of serious financial crime. I certainly agree with you that AML regulations do make access to the conventional financial system more difficult for people, such as recent immigrants, who don’t have the right papers to satisfy what are basically unintelligent regulatory requirements. I’ve actually witnessed an example of the stupidity of these requirements while waiting at a counter at Lloyds Bank – stupidity that the bank official himself didn’t agree with but left the prospective customer unable to open an account. Is there a better way? Yes, but I don’t agree that it should be based on just dropping KYC requirements, because this will just encourage the growth of fraud. On the contrary, I believe it should be based on making KYC more rigorous in order to exclude as many fake and stolen IDs as possible, and then as easy as possible to use in order to make the financial system inclusive.

This is a very different approach. I didn't suggest dropping KYC requirements completely, to be fair, but I did suggest raising the requirements for the financial products that need KYC. Specifically, I suggested that there should be no KYC prepaid card or mobile money transfer accounts that have a maximum allowable balance of €500. But David's approach suggests that pursuing the "identity is the new money" meme further might be

banking and finance, crime and fraud, mobile, prepaid, social and community

Calling payment startups who want a bit of attention

[Dave Birch] You know we like to try something new every year at the Digital Money Forum. As part of the 13th Forum in London on 10th-11th March 2010, we're going to have a kind of talent show for entrepreneurs and inventors with new ideas in the retail electronic payments field. It will be called "The Dragon's Factor's Got Talent" and will involve a number of people making "elevator pitches" of 10 minutes each with no slides, sprinkled throughout the two days. At the end of the Forum they will then be "judged" by a panel comprising an entrepreneur, a VC, a business person and a payment expert. The panel will award a prize to the pitch they think most likely to succeed as a business, the audience will award a prize for the best pitch. The attraction, (I hope) for the contestants is that if their ideas are any good, they will get attention from people who can make them happen. So we'll have fun, we'll see some new ideas and perhaps see a new business launched.

We've already had our first contestant confirm, and that was after a mere mention of the idea in passing, so I think we may end up having too many contestants. Hence, if you're going to be in London on 11th March 2009 and you'd like to present your idea for a new retail e-payment product or service to a distinguished panel, get your "application" to me as soon as possible and we'll choose a somewhere in the region of six to eight shortlisted pitches. If you're chosen for the shortlist, we'll even cover a room for the night at the conference hotel so that you can stay and join in the fun.

innovation

Black whole

[Dave Birch] Why is the amount of cash going up? Surely with the economy shrinking, and the rise of electronic payments, it should be going down. But that's not what the figures say. Take a look at the US.

The currency in circulation outside the U.S. Treasury, Federal Reserve banks and the vaults of depository institution has grown by 13.3 percent in the last two years, while real nominal (not inflation-adjusted) GDP has not grown at all, and real (inflation-adjusted) GDP incomes have fallen by more than 3 percent. With the growth of electronic means of payment and financial service providers, it would be expected that the currency component of GDP would fall, not rise.

[From New underground economy - Washington Times]

Now, as I've mentioned before more than once, the US money supply is unlike other countries money supplies because such a large fraction of US notes are outside the US and unlikely to ever return. Rather than serving predominantly as a circulating medium of exchange, hundreds of billions of US bills are stuffed under mattresses in Latin America, Africa and Asia, acting as a massive interest-free loan from the rest of the world to the US. In other places, such as the UK, a much higher proportion of the currency is actually in use. Or at least it was.

According to the Bank of England, the value of notes in circulation has been on the rise, despite the fact that less are being passed around the High Street where cash transactions now account for only 4% of purchases, by value. Compared to two years ago, there are 40 million more £50 notes in circulation, some of which are likely to be stashed in secret hoards around the UK’s homes.

[From Britons opt for savings stashed in cash]

The Bank of England (somewhat implausibly, to my mind) think that this reflects a "lack of confidence" in the banking system. But only truly stupid consumers would hold non-interest bearing cash at home instead of in a state-subsidised and 100% underwritten interest-bearing bank accounts at RBS or Northern Rock. No, the explanation is both obvious and prosaic: times are hard, taxes are going up, so the black economy is booming.

Between April and October, the amount the Treasury received in income tax fell by 16 per cent – more than £17 billion – compared with the same period in 2008.

[From Pay cut for two million Britons causes collapse in tax revenue - Telegraph]

The economy has fallen by 4% but income tax revenues have fallen by four times as much. Is the treasury right to blame this on workers (outside of the public sector, naturally) accepting lower wages rather than losing their jobs in the recession? That must be partly true, but the figure looks huge to me. Surely it's more likely that some workers have either lost their jobs and moved into less-regulated parts of the economy or have given up highly-taxed and therefore unprofitable jobs and accepted unemployment benefits plus all of the other benefits that go with it -- like having your Council Tax paid and that sort of thing -- then taken up jobs for cash.

cash and cashlessness, costs and interchange, notes and coins

Claire Featherstone, Maxis Communications

[Dave Birch] Claire Featherstone is the head of m-commerce at Maxis Communications, the largest mobile operator in Malaysia. Her remit includes electronic money service, mobile international remittance & NFC products. In this podcast she shares some early lessons from Maxis' live "Fast Tap" NFC service.

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

emerging markets, mobile, podcast

Over seas fraud

[Dave Birch] Strange. I had an odd phone call from my (UK high street bank) card issuer. My wife had tried to buy a kitchen appliance online and the transaction had been declined. I got an automated call from the issuer: essentially it read me details of some transactions and then said something along the lines of "press 1 if these are really you, press 2 if you suspect fraud". I pressed "1" but called the bank anyway because I was curious.

I could understand why an online transaction for a grand to a merchant that we'd never purchased from before would set off an alarm bell. The very polite lady at the call centre apologise for the inconvenience. I told her that I didn't mind in the least and was happy that they were looking out for me. I suggested that they update their neural network fraud detection software, since if my wife's card were stolen by an Eastern European criminal gang, the system would note an immediate drop in spending (boom! boom! -- the old ones are the best aren't they) but not a titter. Their call centre staff are clearly not well-versed in the more traditional aspects of English humour.

But there were two rather odd things about this call. First of all, the bank told me that in future if I expect to make a purchase in excess of £500, I should call them in advance to help them to manage the account. What a hassle. Maybe I could help them further by going to a bank branch and drawing out the cash then driving to the shops and buying everything in person, but whatever.

So I call the bank to alert them that I’m off to Moscow and the bank says: “calling us makes no odds I’m afraid. The fraud alert may still occur. It’s built into the system.”

[From The Financial Services Club's Blog: From Russia with Love]

Secondly, two of the transactions that I was asked to verify were card-present, chip and PIN transactions at UK chain retailers (Tesco and Waitrose). Why on earth would the neural network supercomputer suspect that chip and PIN transactions -- with the correct card in the terminal and the correct PIN entered -- might be fraudulent?

banking and finance, crime and fraud

No accounting for folks

[Dave Birch] There are a few different groups currently advancing plans for the Post Office in the UK to have some sort of "people's bank" added to it. One reason for this is that people who are trapped in the cash economy pay higher transaction costs than people who have bank accounts -- they pay to acquire cash and they are not afforded the discounts available for direct debit customers of utilities, and so on -- and there are good financial inclusion reasons for choosing the Post Office (there are more than 20,000 post offices in the UK) as a channel to reach the unbanked. There is a problem though, which is that bank accounts cost too much money, which is why the previous attempt to create a universal basic bank account (through retail banks) failed. Many of the unbanked (and, for that matter, many of the banked) don't actually want a bank account (with overdrafts, statements, access to branches etc etc) but a simple account that allows them to accept and make payments. A prepaid account with a card attached to it, basically.

This sounds a bit like an M-PESA account or a PayPal pre-paid card. One point to note is that these accounts are for transaction use: consumers' shouldn't keep money there because they don't earn interest and the maximum balance tends to be limited. In practice, for schemes such as M-PESA or G-Cash, banks have entered the market to provide microsavings opportunities on top of the payment accounts. These microsavings accounts are actual bank accounts, but they can be provided cost-effectively because there are no branches or statements.

To some people, this kind of payment account sounds a lot like a bank account, which is why it is tempting for regulators to treat them that they. But they are not bank accounts, and they differ from them in two crucial ways:

1. No overdraft.

2. No protection.

These are good things. If these payment accounts, or whatever we want to call them (I'm trying to avoid calling them e-money accounts), are going to be delivered to the mass market at low cost, then clearly the regulators must not impose a regulatory burden. This means a more flexible, more multi-layered regime. One size doesn't fit all.

Different layers of compliance should be the basis (the foundation) of thinking about banking regulations applied to the marginally banked. It stands to reason that it does not make sense to apply the same rigour to an account for low value simple transactions, compared to a high value, sophisticated bank account.

[From Mobile Banking: Mobile banking regulations should be tiered more]

I would like to see this become of the payment industry's key messages for 2010. Social inclusion depends on financial inclusion, but financial inclusion does not mean banking. The payments industry could deliver financial inclusion, and therefore improve social inclusion, without the complexities, overheads and (frankly) baggage of banking.

banking and finance, crime and fraud, social and community

Supercollider

[Dave Birch] As I said on Twitter, Australia is the Large Hadron Collider (LHC) of the payments world, where an expensive experiment is underway to smash payment card companies and retailers together at high energy. At the LHC, physicists have a number of competing ideas about how the universe might work and they are looking at the results of collisions to find evidence for one theory or another. In Australia, there are no ideas about the system should work. No-one knows what the correct level of interchange should be. But what is the experiment telling us? Well, for one thing (and this is a message that needs to be transmitted around the European Commission) it is telling us that the results of the collisions tend to be the unexpected.

Perhaps more vexing, Australian merchants, including retailers, restaurants and airlines, are imposing surcharges for each credit card transaction, even though fees the merchants pay card companies have fallen.

[From U.S. Looks to Australia on Curbing Credit Card Fees - Series - NYTimes.com]

Well, well. Now this can't be because all Australian merchants are corrupt and are trying to get paid in cash in order to avoid taxes, so there must be something else going in and if I were to ask an economist about this, I suspect the answer might be something to do with the imperfect nature of the competition between payment choices at the point of sale and an information asymmetry between retailers and consumers.

costs and interchange, payment cards, retail

Colin Henderson, Bankwatch

[Dave Birch] Colin Henderson has spent many years in banking in the UK, Canada, and the US. He is well-known as the writer on the BankWatch blog -- which, like the Digital Money Forum, is one of American Banker's blogs to watch -- and co-founded CommunityLend a social lending company in Canada.

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

cash and cashlessness, processing, podcast, social and community

Be alert

[Dave Birch] Simple text message alerts are an easy way to integrate the mobile phone into the payments environment. A long way away from NFC handsets and such like, but simple and practical and of high utility. If you are walking down the street and you suddenly get a text message telling you that your card has been used to buy a TV in Khazakstan, then you will know much more accurately than any neural network as to whether this is a valid use of your card or not.

Incidentally, in the modern business environment, these services also provide an excellent feedback mechanism. If you know what alerts customers are setting, then you can use that information to tailor better products for them. It's a simple example, I think, of how a new channel can help customers to design new services on behalf of the business just by providing more interaction (and therefore more information). So if you discover that customers are setting alerts for overseas transactions but not for domestic transactions, then why not sell them a "domestic only" card or whatever.

But back to text. It's got a lot going for it. It's ubiquitous, it's inexpensive, it's flexible.

crime and fraud, mobile, security