Digital Money

Carthago delenda est

[Dave Birch] Fascinating evening debating the future of money with the members of the Real Time Club. I had a great time, was kept on my toes and forced to think hard and fast by Malcolm Cooper and the assembled throng. I certainly learned that in future I have to think things through a little better, but it is enjoyable being challenged in this kind of informed forum.

My general point was that in the great scheme of things, we are due a change. Once the industrial revolution got under way, the old monetary order of bimetallism was swept away and was replaced by fiat currency, paper and bank credit. As this happened, the unit of account, means of exchange and store of value began to separate. Now that the post-industrial revolution is underway, we will surely see a transition of a similar nature.

Malcolm suggested, taking an even longer sweep of history, that it may actually be currency that is the aberration and that in the future we may return to a form of barter, albeit a turbocharged, computer-mediated barter. This is a subject I've touched on before.

What might the far future really look like? It's hard to say, except that it won't be like the past. There won't, probably, be widespread barter for example despite the ability of networks to reduce the associated transaction costs.

[From Digital Money: A single currency? Illogical, Captain!]

Nevertheless, his point that we mustn't assume that the current monetary arrangement is a law of nature and will continue indefinitely was well-made and thought-provoking.

Unexpected reaction

[Dave Birch] There was a great session at Prepaid 2010 featuring Manchester City Football Club. As you may recall, they were one of the first football clubs in the world to move to an all-contactless stadium with no paper tickets. In passing, it was mentioned that an unexpected consequence of the transition to (fast) contactless transactions was that the fans all turn up five minutes before the game, so Manchester City were thinking of using loyalty points to tempt fans into the ground earlier on (so that they will buy stuff in the ground I suppose).

This echoed something I remember reading about Reading FC, so I went and looked it up.

Reading FC trialled a contactless system for one season but postponed the project due to financial constraints... “We found a few pitfalls by being an early exponent of the technology, which was a huge success ­ despite reservations from fans ­ and reduced queuing times from 13 minutes to about three minutes,” said Garry Hanson, the club’s IT manager.

“This caused newer issues we had not considered: fans used to filter out five to seven minutes before half time for food and drinks, but as their confidence grew, there was a rush at the half-time whistle instead,” he said.

[From Are contactless payments set to go mainstream? - 16 Jul 2009 - Computing]

Interesting, a certainly an unforeseen aspect of the contactless transition that needs to be factored in to the design of new systems. If the English festival scene is going to be transformed, then some of the lessons already learned will be very valuable indeed.

Music festivals that do not accept cash are set to come to the UK from next summer, the BBC has learned.

[From BBC News - Cash to be axed from UK festivals]

Will next year's Glastonbury ticket be a piece of paper, an RFID wristband or a sticker for your mobile phone? When we implement the wristband and NFC phone pilot for O2 at the Wireless Festival, it worked perfectly, so I don't see any reason not to get on with that implementation or a sticker-based implementation as soon as possible.

Exclusion and the war on lunch

[Dave Birch] Plans are afoot in the US to increase financial exclusion by making prepaid products more expensive and less available by forcing non-bank pre-paid card providers to comply with the same rules as banks, presumably treating a $100 pre-paid card to the same degree of scrutiny and reporting as multi-million dollar bank accounts.

FinCEN has applied a limited regulatory framework since 1999 to certain prepaid products as part of the money services businesses regulations applicable to sellers, issuers, and redeemers of stored value. Under FinCEN’s proposal, non-bank providers of prepaid access would be subject to comprehensive Bank Secrecy Act (BSA) regulations similar to depository institutions.

[From FinCen Proposes New Rules for Prepaid Card Programs]

Prepaid cards are already under attack from ill-thought through regulation of the payments industry anyway. This is a bad thing, because prepaid cards -- or, more generally, pre-paid transaction accounts of one form or another -- are a key tool for increasing participation in financial networks. We should be looking for ways to increase financial inclusion, not reduce it.

The Center for Financial Services Innovation (CFSI) has written to Rep. Barney Frank and Senator Chris Dodd asking that prepaid cards – including government benefits cards, general purpose prepaid cards, payroll cards – be exempt from the fee determination set by the Federal Reserve Board under pending legislation.

[From Center for Financial Services Innovation Asks for Prepaid Card Exclusions]

Encouraging people to remain the cash economy does not help in the "war on terror", or the war on tax evasion, the war on corrupt politicians or anything else. There is a net social benefit to getting people to use cards instead of cash, and we should be making it is a simple and inexpensive as possible for the excluded to participate. We should be easing the regulatory burden on non-bank prepaid schemes with a maximum balance of, say under $500 or so.

Optimistic, but why?

[Dave Birch] In a good article in the June 2010 "Digital Transactions", John Stewart says that "optimism about NFC is starting to spread "despite the "deadlock" between banks and mobile operators. This deadlock, which Mohammed Khan of Vivotech says has "wasted three years", means that mobile operators never specified NFC in their device profiles and handset manufacturers never added it to their device roadmaps. The result: no handsets in the shops at all and, at the time of writing, not a single NFC device in the Nokia product catalogue. What's more, Javelin Strategy & Research say that fewer consumers are interested in mobile proximity payments than they were a year ago! (Although, as regular readers will know, I am sceptical of consumer research about this kind of thing.)

What has changed in the US to trigger optimism? One thing is the positive response to the "bridging technology" of stickers. First Data shipped half-a-million "Go-Tag" pre-paid stickers last year and the statistics are mildly encouraging. The average user is paying with the sticker 2.5 times per month and the average reload is $93. In addition, Bling as been shipping stickers to community banks for local payment schemes and Citi has just announced a large scale launch of stickers as well. Customers clearly like waving and paying with their phones. And stickers are also being used by merchants, an indication of their acceptibilty.

At the Rochester, Ind., Dairy Queen, more than 350 customers can wave special stickers fixed to the backs of their cell phones at a scanner in the store, thereby banking loyalty points and qualifying for free cones and Blizzard sundaes. Customers have come back to the store more frequently as a result, helping sale rise more than 3 percent in the past year, says co-owner Dave Reasner. "It's something that's working," he says.

[From Shoppers Check Out of Stores Via Cell Phone - BusinessWeek]

As far as they, and many others, are concerned, stickers are the future. If one day they come built in to the phones then great, but in the meantime they'll do just fine as they are.

French children's clothing retailer Tape à l'oeil has rolled out a contactless sticker-based loyalty programme across all its stores and its website.

[From French children’s fashion retailer issues 300,000 NFC loyalty stickers • Near Field Communications World]

Another factor is the shift to smartphones (55m shipped worldwide in 1Q10), seen as more effective carriers for mobile wallets. Nokia's recent announcement that it would NFC to all of its smartphones announced in 2011 will further fuel this renewed optimism, because surveys show that smartphone users are much more likely to use mobile financial services than non-smartphone users—which may or may not be a guide to mobile payment proclivity—and expect more and more of their services to be delivered on this platform. As I said at the time

Nokia's no.2 showed up to announce that all Nokia smartphones introduced starting in 2011 will have NFC as standard. Up in our little Digital Money treehouse, this is what is officially known as a big deal

[From Digital Money: Big deal]

Is this enough though? Just because Nokia will make these handsets available doesn't mean that operators will order and certainly doesn't mean that operators will order non-SWP version to please other stakeholders who don't want the operators to be gatekeepers. In a recent report on the market, the analysts Ovum say that

If operators are to realize the aforementioned potential and become players in the value chain, this is wholly dependent on the availability of appropriate devices for consumers to actually make mobile payments with. This is a major problem for operators. There is a paucity of NFC-enabled handsets on the market, and those which are capable of using SWP are almost non-existent

[From Telecoms and Software News]

Well, yes. But the availability of NFC handsets isn't something like the weather, which the operators just have to put up with. They are part of this ecosystem: they could have gone to the handset manufacturers and added NFC to their purchasing roadmap. Had they committed to the extra $1 per handset, then the manufacturers would have a gone ahead. As it is now, it's not at all clear whether the operators have given away their position in the NFC permanently or whether avoiding the SIM and SWP in favour of stickers or SD cards is just a temporary fad. I firmly believe that other handsets manufacturers will produce SWP handsets in 2011: but will the operators order them?

Big deal

[Dave Birch] Well, that was an interesting day. I've been at the Mobey Forum where I was invited to chair a panel on the future of payments with the excellent Bo Harald of Tieto, Gerhard Romen (Nokia), Harry Leinonen (Bank of Finland) and Wim Westerhof (Rabobank). It turned out to be a very good discussion and it's left me with some food for though about "the cloud" that I'll blog about later.

I thought I'd go along because I thought it would be useful to catch up with the mobile transactions buzz and make sure the advice that we give to customers is absolutely up to date. The Forum could hardly have gone any better, because Nokia's no.2 showed up to announce that all Nokia smartphones introduced starting in 2011 will have NFC as standard. Up in our little Digital Money treehouse, this is what is officially known as a big deal, so I wasn't surprised to see phone calls from journalists coming in within minutes of it reaching the twitter sphere. This was good news.

Nokia veteran Anssi Vanjoki, who will head Nokia’s new Mobile Solutions division starting in July, told an audience at the 10th anniversary meeting of the mobile-banking group Mobey Forum in Finland today that Nokia remains committed to NFC.

[From Nokia Announces Symbian Smartphones to Pack NFC in 2011 | NFC Times – Near Field Communication and all contactless technology.]

I had the opportunity to chat with some of the Nokia folks later in the day and at the evening dinner out on one of the beautiful islands around Helsinki [soundtrack] and the feeling seemed to be (and I think I agree with this) that it will be smartphone functions (such as exchanging business cards and so on) that will drive NFC adoption so it makes sense to start with the smartphone range. Having said that, one of the Nokia guys reminded me that "Nokia is all about the mass market", presumably meaning that the intention is to extend from the smartphone range into all phones in time.

Of great relevance to our world is that Nokia would not comment on whether the NFC smartphones would be SWP only, saying only that the device configuration depends on customer requirements, or something like that, which I interpret as meaning that if the operators order SWP-only phones then fine but it's entirely possible that some devices will go out with options for removable secure elements (SEs) such as microSD or an additional secure element within the handset. At the Forum, I expressed a fear that the SWP-only phones under operator control might stifle innovation because the operators would not leave open security domains on the SEs. There needs to be a sandbox where the people who will come up with the next generation of killer applications (ie, kids, generally speaking) can play around and experiment and if they have to register with operators and get GlobalPlatform domain keys to do anything with phones, then they won't.

Nearly men

[Dave Birch] Had an interesting meeting with one of our customers, looking at their new technology strategy. One of the topics was, of course, NFC. NFC is in a funny state at the moment. There are no handsets -- well, there's one, the Samsung -- that implement the new standard Single Wire Protocol (SWP). There are a few systems up and running here and there but they are all small scale and they almost all use the old Nokia 6212, a non-SWP handset released a couple of years ago.

Telefonica O2 aims to be the first operator with fully commercial payment services using the contactless technology, NFC (Near Field Communications). The carrier will launch such offerings, integrated into handsets, in the UK, Spain and the Czech Republic in late 2010 or early 2011, Michiel Van Eldik, Telefónica's group director for new business and innovation, told Reuters. The firm already has a commercial pilot in the Czech city of Pilsen, using Nokia 6212 NFC phones, preloaded for use with local transport services.

[From Nokia looks for successor to RFID tags - Rethink Wireless]

I think Orange might quibble with this, as they hope to have commercial services operational in the UK (with Barclaycard) and in France (as part of Payez-Mobile). But anyway, there still seems to be a commitment to the technology. Partly because, as Liisa Kanniainen of Mobey Forum said in Singapore recently, the customer response has always been overwhelmingly positive and partly because so much effort has been expended.

Let's see what a bona fide innovator has to say about this:

Aaron Greenspan. President & CEO, FaceCash: NFC is... "still not available in any of the SDKs we're using from the major phone manufacturers, so it's kind of irrelevant to us right now."

[From MasterCard Will Open Its Doors to Entrepreneurs and Developers, Inviting Innovation - pymnts.com]

This wasn't in the script. We were supposed to be engaging consumers by now, the handset manufacturers were supposed to have NFC chips in lots of models, the mobile operators were supposed to be ordering them, new services were supposed to be springing up on the NFC infrastructure. But, as of now, NFC is of no interest to innovators.

Jack Morton

[Dave Birch] Jack Morton is a World of Warcraft player and he shares with us a teenage perspective on money and identity that has been forged in the online world.

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

Ignacio Mas, Bill & Melinda Gates Foundation

[Dave Birch] Ignacio Mas is a Deputy Director in Financial Services for the Poor at the Bill & Melinda Gates Foundation. Most recently, he served as a Senior Adviser in the Technology Program at CGAP. Prior to joining CGAP in September 2007, Ignacio was Executive VP of Marketing and Account Management at interTouch (an NTT-DoCoMo Group Company), Director of Global Business Strategy at Vodafone Group, and Senior Manager responsible for telecoms investments in Europe at Intel Capital (Intel Corp’s venture capital arm). He has also been a consultant, and was at the World Bank in the early part of his career, where he worked on financial sector reforms in Latin America as well as in the Treasury department. Ignacio has been a Visiting Professor of International Business at the Graduate School of Business at the University of Chicago. He holds undergraduate degrees in mathematics and economics from MIT and a PhD in economics from Harvard University. In this podcast he talks about the use of mobile technology to promote financial inclusion.

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

Tender moments

[Dave Birch] A bank person mentioned to me that they think the European Commission's recommendation on legal tender (22nd March 2010) is, as he put it, "strange and undesirable". That's actually pretty outspoken for a senior member of staff at at large European retail bank. So what does the recommendation actually say? Well, the key points are as follows:

• Euro notes and coins are legal tender and retailers can only refuse them for reasons of "good faith" (for example, the retailer has no change).
• Retailers should only refuse high-denomination banknotes in "good faith" (for example, if the value of the note is disproportionate to the purchase)
• No surcharges should be imposed on cash payments.
• Banknotes stained by the Intelligent Banknote Neutralisation System (IBNS) remain legal tender but should be returned to national central banks (as they likely come from a robbery).
• Retailers must accept 1 and 2 eurocent coins in payment.

Sensible policies for a better Eurozone, you might think. All it the recommendation is doing is simply enforcing the rather obvious rule that euros are legal tender. Except for the bit about surcharging.

The commission also warned that retailers should not impose surcharges on the use of cash instead of credit cards, a rather unusual option that to this date has not actually been imposed by any shops, but the possibility of doing so does exist in theory and Brussels wants to stamp out the idea before it materialises.

[From EUobserver / Commission frowns on shop signs that say: '€500 notes not accepted']

I don't see why retailers shouldn't surcharge. Above ten euros, say, the marginal cost of debit cards is less than the marginal cost of cash (for legitimate businesses who pay their taxes) so why shouldn't the retailer should be able to direct payment choices? And if they also want to surcharge card payments under €10, let them. The customer can then decide which shop to go to.

Incidentally, the surcharge on €500 notes could be quite high, like €20 or something. Why? Because the people with €500 notes are criminals, so they won't care about the €20 since they already save €400 on taxes.

Making a silk e-purse

[Dave Birch] Throwing out some old papers, I came across a Datamonitor report from 1996. It was projecting the use of online payments through to 2002 and suggested that credit cards would account for about half of the market (a small decrease) whereas digital cash would account for something like a quarter of the market. Now, as we all know, this didn't happen. But like many other people at the time I thought it would. Why were we so wrong? In my case the reason for the utterly wrong prediction was transaction cost calculations. Like many other people I sat down with a spreadsheet and worked out that it would be a lot cheaper to pay for things on the Internet using e-cash rather than conventional banking infrastructure. For example...

• Conventional means to pay gas bill. Phone up with credit card (3%), debit card (10p) or direct debit (4p).
• New means to pay gas bill. Insert Mondex card in reader. Click to download UKP23.45 from bank account to Mondex card. Go to British Gas web site. Click to transfer UKP23.45 from Mondex card to British Gas. Total transaction cost: zero.

Of course, the cost of issuing Mondex cards and smart card readers is amortised to near-zero here. But it doesn't matter, since none of it ever happened. It turned out that the transaction costs were irrelevant, because getting people to plug a smart card reader into a PC was a huge barrier on the acceptance side and getting banks to put a Mondex application on a smart card was a huge barrier on the issuing side. Customers, however, rather liked the idea of e-cash, and many would still prefer to pay this way.

Research this week from Prepaid Services (that operates Cash-ticket) found that around a third of shoppers would prefer to use cash rather than a credit card when paying for goods online.

[From Untitled]

It has to be easy, and it has to work. But it's an interesting point to consider with hindsight: why did we make systems such as Danmont, Mondex, VisaCash and use them to compete with cash in the physical world rather than use them in the virtual world where there was no cash? I suppose at the time the world of the Internet was considered a novelty, not central to the world of banking and payments, so the idea of creating an e-cash system specifically for the Internet was considered the province of technology startups rather than banks. That's not to say that people didn't try: DigiCash, remember, and there were a variety of other ideas floating around such as Millicent, Hashcash and all the others. At the time, I was on the hardware side of the debate: that is, I couldn't see how such a system would work in software and assumed that it would be the bank who would provide the tamper-resistant hardware (correct: the chip card) and the interface to the PC. These interfaces never materialised in the mass market, so that they never got a foothold before the falling cost of chips and telecommunications combined with massive economies of scale to give debit cards and unassailable lead at retail POS.