Digital Money

Developing new ideas

[Dave Birch] For those of us looking at the future of retail electronic payments, an increasing amount of our time is spent looking at the developing world, because it is in the developing world where some of the most innovative new payment systems are to be found. Ken Chenault, the CEO of American Express is explicit about this.

I think some of the so-called emerging markets are going to lead the way in some of the payments and technology advancements, because they're going to skip the existing infrastructures that have been in place. They're going to leapfrog them.

[From Transcript: Captains of the Industry - Ken Chenault on What's Next with American Express - pymnts.com]

Most people would agree, but I think that there is more going on here. It isn't just a question of new technologies (mobile, biometrics, e-ink and so on) being used to leapfrog what we regards as "traditional" infrastructures. The impact of the potentially disruptive technologies coming from the developing markets will not be limited to those developing markets. This week's New Scientist magazine has a double-page spread concerning M-PESA, the mobile payment system in Kenya. Consult Hyperion's role as Vodafone's consultants on the fantastically interesting project is well-known, and I won't bore you all by repeating it. Oh, OK then.

For the last couple of years, Consult Hyperion has been working on a mobile payments and microfinance project for Vodafone. It's called M-PESA, and it highlights the way in which digital money can really make a difference.

[From Digital Money Forum: Mobile Payments and Microfinance]

The article is well worth reading. It notes that Kenya is approaching a significant point.

According to the Central Bank of Kenya, payments worth around 1 billion Kenyan shillings ($13 million) per day were transferred through Kenya's mobile money systems in 2009, equalling the country's credit card transactions. The bank expects mobile money transfers to overtake credit cards in 2010.

[From Who needs banks if you have a mobile phone? - tech - 19 February 2010 - New Scientist]

So this year, more money will move through new payment schemes created specifically for the mobile channel than through the payment card networks. That's an interesting cusp. Is this phenomenon only of interest to the developing world? Some people think not.

Mobile money could also have a future in richer nations, though it faces competition from the established network of ATMs, bank branches and internet banking. "I see mobile banking as a key way that people will bank in five years' time," says Christopher Brearley, who investigates innovative banking technologies at the UK-based bank HSBC. "There is the potential for small transactions and person-to-person payments to move through the kind of mobile banking systems we see in East Africa."

[From Who needs banks if you have a mobile phone? - tech - 19 February 2010 - New Scientist]

I think Christopher is right (which is why I think it puzzling and disappointing that mobile appears to have vanished from the Payments Council's agenda). The markets in developing countries are obviously different from the markets in developed countries, but those of us working on strategies for organisations in developed countries might still find a lot to learn from the way in which new technology is being used to deliver payments.

banking, currency, mobile, payments

Innovate or not?

[Dave Birch] Having agreed that Consult Hyperion would organise the third BarCampBank London, I was naturally rather nervous about whether it would work or not, having it on a Saturday and slightly out of town (in Richmond). But we had a great turn out, the folks at PayPal did a fantastic job of hosting the event (I really can't thank them enough) and it was a super day out. We ended up with six streams split across two sessions and I made a point of visiting all of them: to be honest, I would have liked to have attended all of them, as they were so interesting and the variety of perspectives was so illuminating. In case anyone is interested, here are all of the discussion points that went up on the initial wall o'postits...

Security/anonymity/KYC/AML; Security of electronic – virtual money/currencies; Voluntary identification, legal agreements, financial reconciliation representation; Anti-money laundering on a shoe string; Alternative payment tokens and holder’s identification methods; OAuth, banks and open data; Personal interaction in a digital age; Identity verification; Money go round; Micropayments; Open coin: An open source framework; Open transact; Open token, open source, digital currencies; New payment methods to replace cheques; Branch design and futures; Role and future of social media in FS; New business models for media and journalists i.e. newspapers; Designing and implementing community currency systems + front and back end IT system to support them across currencies; Using payment cards as a means to introduce local currency systems; Non-fiat currency; Localisation in a global market; Local currencies Is all forms of emoney a con and restrictive; P2P payment plus social money; P2P foreign exchange; Beyond wesabe – mirroring data back to consumers; Visualising exactly how much I spend and earn over time; Data visualisation; Group money management/group checking accounts; Commenting on purchasing buying experiences (reputation); Electronic receipts; Better collection of payment metadata e.g. for automated regulatory, tax business reporting; Digitising receipts/proof of purchase; Instant credit / LOC purchase; Payment service – utility functions; Is customer satisfaction worth investing in; Cash in/out of telecoms; The cusp between financial services for mobile, domestic and cross border; Banks as MVNOs; Role of banking staff in a deeply changing banking environment: quality of work, requalification needs etc; No frills banking; What to do with the post office; New roles of non-banks: retailers, post offices; Retailers replace banks; Community banking; Should we bother to try to restore the reputation of banks; Banking software as a service; Alternatives for traditional banks; Banks and corporate social responsibility (CSR) issues; Attempts to bring back reputation of financial sector in complicated environment; Family finance: closed/high trust social networks; Servicing the financially excluded; Alternative credit rating: renters credit, A-level based student loans; Micro finance and micro insurance; Innovating the remittance market; Mobile money for unbanked; Regulatory environment and changes i.e. banking; Worst case scenario – insurance for women; Are government regulations impeding online payment systems; Finding payment applications.

After some discussion these were grouped into the six streams of

• Financial exclusion, how can new technology help?
• New entrants in banking;
• Open standards for payments;
• Authentication and identification (I've had some feedback from a couple of people asking if we might consider organising a BarCamp only around these topics, so let me know if you would be interested in this);
• Community currencies;
• Value-added services around payments.

I made a point of twittering, but not identifying (Chatham House rules), some of the comments I heard during the day, and I hope that they were thought-provoking, but I didn't bother to tweet one of the points that I heard several times (and probably could have predicted on the way in), which is that banks aren't innovative. Now, on the one hand this clearly isn't true, because banks do, after all, take some inventions (eg, the ATM and the self-certified mortgage) and use them to change their businesses. But there is a general sense that we need better products and services, more attuned to current requirements.

WInd power

[Dave Birch] I wonder if this means something. In the last couple of months I've been invited to a couple of meetings where the topic of alternative currencies and wind power (and other renewables) has come up. I'm starting to think there might be something in this. One of the problems that windpersons have to deal with is that they need lots of money to build windmills, but because the electricity produced costs more than electricity produced by, say, coal then no power company will invest unless bribed. We might decide that the wind is better for us overall, but we need a mechanism to align social costs with private costs.

How can the future of money have anything to do with this? Well, there is a neo-Bono, neo-Hayek compass that might point us in an interesting direction and there was a discussion about it at a New Economic Foundation seminar that I was invited to.

The first rung

[Dave Birch] I suppose one of the reasons why I get so excited about digital momey is because I see them as having a real purpose, not just as a business, but as a social force that makes life better for people. So how can it contribute to sum total of human welfare? Well, making it easier for me to buy stuff on eBay is one thing, but bringing efficiency to the international remittance market is quite another. I was invited along to HM Treasury's seminar on "Remittances and Financial Inclusion" recently and I heard a number of interesting perspectives on the issues.

Gareth Thomas, Minister for DFID, gave the keynote, making the point that remittances to developing countries are far more than aid. There are about £6 billion in annual remittances from the UK (£4 billion through "formal" channels and another £2 billion through "informal" channels). At the destination, remittances are incredibly important -- in a country like Ghana, remittances are more than half of household income -- so improvements in the system have a major impact. Gareth said that he hoped for improvements from a number of directions.

1. Technology (he highlighted M-PESA) as an obvious driver;
2. Regulation (I was very happy to hear him say that it musn't have a "perverse impact" on small transactions);
3. Partnerships between banks so create more efficient and accessible remittance corridors (eg, Barclays corridor from UK to India);
4. Learning from EU PSD, creating a single set of rules in regions and eventually global. I thought this was a lot to hope for, but the sentiment is correct, obviously.
5. Better information for consumers, many of whom get ripped off because they simply don't understand the terms, conditions and costs.

The Exchequer Secretary at HM Treasury, Sarah McCarthy-Fry, made the point that people on low incomes are those most likely to affected by financial exclusion. Fair enough. But she called this evidence of "market failure", which I think is more questionable (because I think it may be more to do with regulatory failure), and said that widening access to banking is the cornerstone of financial inclusion which I think is simply wrong because, as Sarah herself mentioned later in her speech, pre-paid cards can serve as alternatives to bank accounts.

cashless, costs, notes and coins, retail

Unexplained? I like the neutral word

[Dave Birch] Harry Leinonen from the Bank of Finland was kind enough to point me to a paper that their research department published in 2002. The paper, called "Cash usage in Finland", examines the circulation of cash and attempts to measure the amount of cash that is "unexplained". By "unexplained" they mean "surplus to requirements as a circulating means of exchange". There's a lot of it. Finland has a high card penetration and usage, yet, surprisingly it also seems to have a lot of cash out there too.

The value of the largest denomination notes totalled over 50% of the value of notes in circulation at end 2000. The proportion of large value notes has been steadily increasing during the estimation period. In addition, hoarding is assumed to be at a low level.

Note that the value of the highest denomination euro notes accounts for 58% of the value of euros in circulation at the time of writing, so is broadly comparable. The Bank of Finland say, rather blandly, that the proportion of unexplained transactions that are used for illegal purposes cannot be determined. But it's quite high.

I'm sure we find a better estimate. Let's look at another Scandinavian country, Norway. After Iceland, Norway is the second most cashless country in the world (ie, it has the second highest proportion of non-cash retail transactions). Not only does it have a high card penetration but the number of card transactions per household, already high, is still going up. You couldn't get more electronic. Yet according to a study from one of the Norwegian banks that I was told about, the amount of cash "in circulation" is still going up as well. This is apparently inexplicable.

It's not, of course, and here's why. The authors of the study go on to compare the situation in Finland with not only Norway but also Sweden, and they refer to another study that showed that over the study period (1999-2005) the amount of unexplained cash went from two-thirds of all cash in circulation up to four-fifths. How much of this used for illegal purposes? In Norway, where 71% of cash was unexplained, the estimate was 67%. In other words, almost all of it.

The truth is that in the most cashless economies, most of the remaining cash isn't circulating anywhere: it is vanishing into the grey and black economies.

costs and interchange, payment cards, retail

Ron Delnevo, Bank Machines

[Dave Birch] Ron Delnevo is the Managing Director of Bank Machines, the independent ATM operator in the UK. Ron has seen the ATM business grow and change over the last decade and in this podcast he reflects on those changes and speculates where the UK ATM business might go in the future.

Edited 24th January 2010.  

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

cashless, emerging markets, podcast

Only five more years?

[Dave Birch] As far as I can make out (via Babelfish), the Dutch Consumers' Association are predicting cashless retailing within five years. That may seem an aggressive forecast, but some parts of the Dutch retail environment have already gone in that direction.

When I entered what I saw was perhaps the nicest selection and quality of food I had ever seen in the city of Amsterdam, excepting one organic open market (only open Saturdays.) I proceeded to do my shopping with great joy, looking forward to sampling the beautiful organic products on sale. Awaiting me at the counter however was a shock, cash is not accepted at this store.

[From OpEdNews - Article: Cashless Society, Coming Soon to a Store Near You!]

If this is a rare sight in the Netherlands now, it's going to become considerably more common over the next five years.

Dutch supermarkets are hoping to phase out the use of cash by 2014, the Financieele Dagblad reports on Thursday, quoting the retail board CBL.

[From DutchNews.nl - 'Supermarkets set to refuse cash']

France is taking its first steps in the same direction with the successful NFC pilots about to move into national roll-out.

Reactions among 1,000 technophile consumers who signed up for the Payez Mobile trial were encouraging. Contactless mobile payments proved popular with both sexes, and all ages... Nine out of 10 users said they would recommend mobile payments, and 70 per cent of retailers said they would want a terminal if they were commercially available.

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

To the Brits, NFC may be French letters and it is the Dutch who are planning to cap the use of cash, but one day we will surely follow in their footsteps.

cashless, costs, notes and coins, retail

Vote for "Zits"

[Dave Birch] In 1660, the English Parliament passed an act forbidding the export of gold or sliver, mistakenly thinking that exporting bullion made the nation poorer. After six months, His Majesties Council of Trade were petitioning the KIng and parliament to revoke the law, since not exporting bullion had, far from making the nation richer, made the nation considerably poorer. Such is the law of unintended consequences when it comes to politicians mucking up commerce. The effect of the law had been to persuade international trade to abandon London for various continental destinations: no merchants wanted to bring gold and silver into England if they couldn't get it out again, so there was no gold or silver around to settle transactions, so trade went where there was a working means of exchange. It always does.

Money is an enabler for trade. Whether in seventeenth century England, 21st century Zimbabwe or in the World of Warcraft. If there is a means of exchange, then trade will spring up on the back of it make everyone better off. What would we need to do to bring a new means of exchange into a new space like, for example, the Internet?

Victor Dostov, Russian Electronic Money Association

[Dave Birch] Victor Dostov is the Director for Retail Payment Services at Tavricnesky Bank in St. Petersburg and is also Chair of the Russian Electronic Money Association. In this podcast, he draws on his long background in the developing Russian e-money marketplace to explain some of the unique aspects of their market and the mission of the recently-founded Association.

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

cashless, emerging markets, podcast

Taking a Long View

[Dave Birch] The always interesting Michael Mainelli of Z/Yen invited me along to the Long Finance Institute "do" in the City, where a number of people were talking about the long view of finance, another perspective on the "Long Now". I have to say first of all that it was a thoroughly enjoyable event. The basic question behind the long finance agenda is "how will we know when the financial system is working?". I know this sounds a bit vague, but the conversation, discussion and debate that it enables are very valuable, and it caused me to think about a number of the innovation-related discussions that I'm involved in. Some new thinking is always welcome.

I was particularly interested in the "eternal coin". An eternal coin? Here's the schtick. Would it be possible to design a coin that never loses it value? Could such a thing exist? If it could exist, what would it be made of? Thought provoking. They have a logo made from a Moebius strip, which I'm not sure about to be honest (although I treasure the souvenir one that they gave us), so rather than critcise I thought I'd try and come up with another one sometime. Sadly, I'm not terribly artistic, but I'm sure Brian Eno (that chap from "Question Time" -- turns out he used to play piano in a popular beat combo) must know some, so perhaps it would be better to leave it to them. Michael said that the "eternal coin" is the iconic focus of the Long Finance project, analagous to the eternal clock of the Long Now Foundation, which I thought was a good description.

But back to Long Finance. They have mapped out eight themes within what they call a "meta commerce" structure:

1. Long-term versus short-term, an obvious theme for finance, one I'll comment on later.
2. Fiscal versus monetary.
3. Free versus regulated. No-one believes that totally free markets are desireable (look at Somalia) but
4. Selfish versus selfless. I am somewhat on the "greed is good" side of things, but clearly we act in ways that contribute to the long-term good.
5. Mutual versus public-sector versus private-sector. I think this is quite a hot topic because of the banking crisis and I'm keen to hear to different opinions.
6. Rational versus emotional. Financial markets may want to see themselves as entirely rational, but they have a herd mentality.
7. Sustainability versus robustness versus resilience. For a long time, we lived sustainable lives in balance with nature. Of course, we only lived to 25 and had an infant mortality rate of 90%, but you can't have everything. What does long term sustainability even mean? In the long term the universe isn't sustainable. But I digress.
8. Theory versus practice. It's not clear to me that we have a theory of finance for the next 10,000 years so we probably have to build on what we've got and try use the practical lessons learned so far.

Some of things that were discussed (such as "retirement cohorts") were genuinely fascinating, although I am absolutely not qualified to comment on whether they are mad or not. As I'm obsessed with thinking about the future of money and payments, this was a wonderful day out.

P.S. I loved the affectation of showing the date everywhere with five digits as 1st February 02010.

P.P.S. Would have loved to twitter, blog and otherwise big up the event from inside, but the wifi wasn't open. Tut tut.

P.P.P.S I thought the idea of having audience singalongs between the sessions was great, but I don't think we'll be bringng this innovation to the Digital Money Forum.