Digital Money

They're easy, predictions

[Dave Birch] We had a very pleasant evening at Olswang's digtial money event this week, part of their "Plus Technology" series, and they asked me to write a short piece on the next three to five years in payments for their event handout. I thought that if we want to look across that period and make some reasonable predictions that are of value in developing practical strategies for organisations, then we might decide to look at three axes of development: technology, business and social (this is how I organise our annual Digital Money Reader!).

First comes the social axis. Here there seems to me to be a genuine flux. In addition to the growing mood of anti-capitalism and anti-globalisation, taxpayers in many countries are beginning to feel anti-bank as well. One can detect a growing mood in favour of a return to community-based banking and other financial services, a return to a kind of social enterprise. This may spill over into payments as well, and the experiments that we see all around us in local, alternative and community currencies (such as the Brixton pound in London) might transmute through the use of easily accessed technology into a genuinely new phenomenon that will take us into uncharted waters.

On the business axis, banking will of course continue to be dominated by the aftershocks of the crisis. The debate has begun, but has hardly moved forward, on the separation of what the economist John Kay has called the "utility" and the "casino". When this combines with the steady cost pressures on the value chain it reinforces the re-evaluation of the role of banks and nonbanks in that value chain. Just as one might see growing regulatory pressure for some form of narrow banking, I expect to see some pressure for narrower banking that does not include payments. The business of banking will focus more on its core of lending and borrowing and payments will become more of a genuine utility infrastructure. There is no reason to expect that banks will be the best placed providers of that utility infrastructure, although they will benefit greatly from using it.

Finally there is the technology axis and, unusually, I think this is probably the axis that has the clearest short to medium term path and that's because the mobile phone (in an exploding panoply of forms) is going to be the dominant device over this period. This may have seemed a radical prediction a couple of years ago, but now it's mainstream thinking. In a relatively short time, consumers will find it natural to reach for their mobile to pay the plumber, businesses will find it natural to instruct a bank transfer from a mobile and governments will be delivering welfare benefits to the un-banked and excluded directly into mobile accounts.

bugs and mistakes, EMV, retail

Thaer Sabri, Electronic Money Assocation

[Dave Birch] Dr. Thaer Sabri is the Managing Director of Flawless Money and has spent more than a decade in the electronic money industry in a regulatory capacity as well as product management and business development. Thaer worked at Mondex International and beenz.com before founding Flawless Money. He is Chief Executive of the Electronic Money Association, and leads industry regulatory interface with regulators. In this podcast, he reflects on the Payment Services Directive and the upcoming revision to the Electronic Money Directive.

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

cashless, emerging markets, podcast

BarCampBankLondon3 last reminder

Please be advised that the BarCampBankLondon3 event will be taking place on Saturday 30th January 2010 in Richmond, London. 

The aim of BarCampBank is to foster innovations and the creation and innovation of new business models in the world of banking and finance. For further information about this event and to register please follow this link.

Merchants and bankers

[Dave Birch] At SMi's very good Nordic Card Markets conference, I listened to an extremely interesting case study on IKEA, presented by their Manager EU Affairs, Martin Weiderstrand. They are such a good case study because they operate worldwide and, as consequence, have a very accurate and up-to-date picture of the card acceptance market worldwide. So how do they view the European market?

• Merchant service charges (MSCs) account for .45% of IKEA's turnover worldwide: they paid about 100m euros to acquirers last year.
• They reckon that cash costs €0.03 per transaction (with the exception of France, which is higher because of cash handling charges)in direct costs, they don't count costs such as having to build safes in each store and that kind of thing.
• Looking at the European market, IKEA do not see any genuine pan-European internal payments market. The difference in credit card fees between the cheapest and most expensive countries in Europe is 600%, there is no "true" pan-European cross-border acquiring, because central acquiring still applies local fees.
• If there was true cross-border acquiring then IKEA would save 70% of payment costs!

Doesn't sound like whole SEPA thing is really biting yet. In fact, IKEA found that not one of the 80 acquirers that they approached could deliver a genuine pan-European service so they currently use 18 different acquirers and seven different terminal types (each with its own software).

costs and interchange, payment cards, retail

He's losing touch, surely?

[Dave Birch] A couple of people have asked me what on Earth I meant when I said that contactless might lead to the extinction of chip and PIN, a quote that saw me feature in this weekend's "Rapture Ready News". Well, I did say that, but I said it as part of a long and rambling discourse which didn't survive the exigencies of the press.

Birch cites the flexibility of contactless payment, which can be incorporated into watches, phones, and even hats, makes it more appropriate for the “connected world of the future.”

[From ContactlessNews | Report: Contactless payment could wipe out chip and PIN]

I stand by this analysis. As we move to contactless interfaces, we are freed from the tyranny of form fsctor. There's no need to have cards anymore. But why does this, in the long run, move us away from chip and PIN? Surely, you might reason, it doesn't matter whether the chip is in a card or a watch or a phone. That's true, of course, but when I refer to chip and PIN, what I mean is the EMV standard.

Someone (I can't remember who) once told me that in the English legal system, the phrase "since time immemorial" actually means "since the death of Henry II". Henry II, who died in 1189, reformed and unified the English legal system. In our world, "since time immemorial" means "since before the Netscape IPO". The Netscape IPO took place on 9th August 1995. EMV comes from time immemorial.

In the not-too-distant future, the idea of being off line will seem perverse, so I just can't see how chip and PIN can gain traction in the U.S. in time before cards vanish into mobile phones and other devices. Given the years it would take to migrate the U.S. POS infrastructure, I'm sure that what will actually happen is that terminal replacement because of contactless and mobile will be the key factor. Then, in time, the U.S. will have a chip-based infrastructure (since contactless card and mobile phones both have chips in them). But will it be an EMV infrastructure? That's not obvious.

[From Digital Money Forum: Remember "off line"?]

In a longer timeframe, that holds true elsewhere. Come 2015-2016, when retailers are replacing their POS terminals in the next cycle, when phones have contactless interfaces, we'll be making a transition to paying by waving our phones, ID cards, watches and goodness knows what else. If these devices deal with identification and authentication (in other words, the identity problem is "solved") then what is the point of EMV? It makes more sense to move to a different model, where the payment institution confirms payment to retailer and the retailer never deals with payment data at all. It's not their business. EMV takes the physical model of a card (you give the card to the retailer, the retailer gives the card data to the payment system) and electronifies it, which was fine at the time. In another decade, we'll surely want something different? And if the US heads off in a different direction, will the rest of us have to follow anyway? The US perspective on EMV is very different to the European one.

Independent of the political challenges that the issuers face in the US, EMV is not the initiative to bring them together... Old technology (will not last the 10yrs it will take to roll out in US)... Expensive (POS, Card). Costs are not borne equally in network

[From EMV in US? No Way « FinVentures]

With respect to the US, there is another path for EMV that bypasses the POS rollout barrier, which is to use EMV for online card-present transactions, but that's another issue.

bugs and mistakes, EMV, retail

Showcase for new payment ideas

[Dave Birch] As part of the 13th annual Digital Money Forum in London on 10th-11th March 2010, we're going to have a some fun with "The Dragon's Factor's Got Talent". We're inviting new companies in the payment space to come along and showcase their ideas in the form of a competition: they will each get to make a 10 "elevator pitch" to the audience (with no slides or visual aids). At the end of the Forum they will then be "judged" by an expert panel who will award a prize to the pitch they think most likely to succeed as a business. So we'll have fun, we'll see some new ideas and perhaps see a new business get international attention. We've already shortlisted a couple of companies, and we're looking for more.

If you're going to be in London on 10th-11th March 2009 and you'd like to present your idea for a new retail e-payment product or service to a great audience and 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, youll get a free delegate place at the Forum and we'll even cover a room for the night at the conference hotel so that you can stay and join in the fun.

innovation

Salad days

[Dave Birch] I've been in a couple of meetings recently where customers have been talking about the need to cut IT costs in the card business. Obviously, times are tough here and there. But (and I would say this wouldn't I) cutting spending isn't always the best way forward. To some extent, it depends how the organisation views IT: is it a cost, or is it a strategic platform? As Gartner put it, rather nicely,

The predominant view of IT is that it is only useful for cutting costs so tactical thinking about automation and rationalisation overwhelms longer-term decision and strategic plans and goals.

[From Finextra: Cost-cutting banks wide open to disruptive IT innovation - Gartner ]

I remember someone telling me about this, using the behaviour of Sainsbury's and Tesco in the UK in the early 1990s as a case study. Sainsbury's, who were then the no.1 supermarket in the UK, decided that IT was just a cost and decided to outsource it. Tesco decided that IT was a strategic component of the business and set about building new services. One of these was the IT-enabled Clubcard, which enabled Tesco to start working on a new business model.

David Sainsbury dismissed Tesco's clubcard initiative as 'an electronic version of Green Shield Stamps'; the company was soon forced to backtrack, introducing its own Reward Card 18 months later.

[From Sainsbury's - Wikipedia, the free encyclopedia]

Tesco overtook Sainsbury's in 1995 and a decade later Sainsbury's decided to bring IT back in house.

Sainsbury’s is to terminate its IT transformation outsourcing contract with Accenture and bring its IT in-house. The company initially signed a £1.7bn seven-year deal with Accenture in 2000, before renogiating terms in 2003 and extending the contract until 2010.

[From Sainsbury's calls time on IT outsourcing contract - 27 Oct 2005 - Computing]

There is a strategy that businesses can adopt to cut costs to the bone and then attack the overserved customers of rivals, but it really is difficult continue this for the long term, because innovation in technology will inevitably mean that a new lower-cost competitor is on the horizon. There is another strategy that says that coming out of recession is a good time to capture inexpensive resources and invest in infrastructure to enable new business models. You can guess which one I'm in favour of.

cash and cashlessness, costs and interchange, notes and coins, retail

No cash doesn't mean no branches, does it?

[Dave Birch] James Allan spent a year living in London without cash. You may have listened to him on the podcast we made a year ago. If you want to find out more about how he got on, and some of the more surprising recommendations that his experiences deliver to those planning contactless, prepaid, mobile and other cash replacement schemes, you can come along and listen to him at the Digital Money Forum in March. I thought it might be a good time to invite James along

because cash is inexorably becoming redundant.

[From I'm dreaming of a cashless Christmas - Telegraph]

The cashlessness meme appears to be spreading, if our broadsheets are any barometer.

Reports of the death of cash have long been exaggerated... Yet it is slowly edging closer with debit card spending set to overtake cash spending, by value, for the first time in 2010

[From Cash remains king but here comes the new wave - Times Online ]

I thought that debit spending had overtaken cash spending a couple of years ago, but it doesn't matter. But the meme has spread even further. Every morning, the BBC flagship current affairs programme Today (the staple of the middle classes in Britain) has a daily segment called Thought for the Day where they get religious people to reflect on some important issues of the day. This is when most people go and clean their teeth or put the kettle on, but I accidentally heard it this morning and even that was about cashlessness again!!

[£10 note] will have been exchanged for good or ill a thousand times - in itself a promise to pay the bearer, not gold (not since 1931 has it been gold) - but the paper note nevertheless carries the promise that the currency is secure.

[From BBC - Thought for the Day, 5 January 2010]

A thousand times? I doubt it. If it gets used once per day, that's over three years but the life of a £10 is only about 18 months (I'll check with the Bank of England to see if I can find the up-to-date value). Anyway, I digress again. I shouldn't let my e-cash autism derail the narrative.

But it's increasingly rare that our financial transactions are made in cash. We exchange money on paper or with plastic, online and with these easy transactions, we can become detached from the morality of what we are doing when we don't feel the weight of the money ourselves.

[From BBC - Thought for the Day, 5 January 2010]

This is a point that I've heard from time to time in discussions about money, and it is in fact true, in the sense that experiences from around the world show that the average spend on cards is higher than the average spend on cash. I was talking to Rene Batsford from EAT, the UK quick serve retailer and he said clearly that the introduction of contactless led to a measurable increase in average ticket size overcash. But is that a moral issue? I think we're getting to the very edge of the Forum envelope hear, but perhaps for the 2011 Forum we'll have a session on the morality of money if enough people tell me they're interested in it.

cashless, costs, notes and coins, retail

Jim Champy, Dell Perot Systems

[Dave Birch] Jim Champy, Chairman of Dell Perot Systems’ consulting practice, is recognized throughout the world for his work on leadership and management issues and on organizational change and business reengineering. His first book, Reengineering the Corporation: A Manifesto for Business Revolution, sold more than 3 million copies and spent more than a year on The New York Times best seller list. His latest book, Inspire! Why Customers Come Back, includes eight concise case studies that look at how businesses become successful by “inspiring” their customers to be loyal for the long-term. In this podcast, recorded when Jim was in London to address the Financial Services Club, he talks about how some of his ideas apply to the financial services sector.

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

cashless, emerging markets, podcast

Lies, damned lies and my statistics

[Dave Birch] I had a couple of queries from journalists about the up-to-date statistics for payments in the UK, so since I went and looked them up to be exact, I thought I'd share the answers with everyone. Here are the questions I was asked following being quoted in The Telegraph and The Times over the last month.

First of all, how much money is electronic money? Actually, it's almost all of it. According to the Bank of England's latest figures (which at the time of writing are for November 2009), the total amount of notes and coins in circulation (known as "M0") is about UKP 55 billion whereas the total amount of money in circulation (known as "M4") is about UKP 2 trillion. so physical money is less than 3% of all money.

Secondly, what fraction of payments are made in cash? The Payments Council's 2009 annual report (which is for 2008) says that of the 37 billion payment transactions in the UK, 60% are still in cash. But because the cash transactions tend to be small, they account for a much smaller fraction total value. In fact, according to the Chief Cashier of the Bank of England

But as a share of all transactions, the use of cash has been gradually declining, to around 60% in volume terms and 4% in value terms in the UK presently

[From Bank of England|Publications|News|2009|Banknotes in Circulation – Still Rising: What Does This Mean for the Future of Cash? Speech by Andrew Bailey, 6 December 2009]

Thirdly, what proportion of retail payments are cash? Since wholesale transactions are vastly bigger than retail transactions, it's more relevant to ask about the fraction of retail turnover that is in cash. Retail cash turnover has been below debit card turnover since 2006, when cash accounted for about 32% of retail spending by volume, and debit cards are no.1 by far in the retail payments value league. According to the Payment Council's "The Way We Pay 2009", which again covers the 2008 figures, cash payments are now down to 23% of retail payments by value.

Finally, is the use of cash going down? Well, that depends what you mean by "use". If you mean "is the fraction of retail transactions that are in cash going down?" then the answer is yes, slowly and steadily. If you mean "is M0 going down in absolute terms" then the answer is no (in fact, it is going up). This apparent paradox is resolved by the observation that much of the cash going into circulation (for example, the large number of UKP 50 notes being printed at the moment) is not actually being used in retail transactions but as a store of value to avoid tracking and taxation.

So for rough back-of-the-envelope calculations, we can say that cash accounts for two-thirds of all transactions by volume and a quarter of retail transactions by value.

cash and cashlessness, costs and interchange, notes and coins, retail