Digital Money

Cleaning up

[Dave Birch] I opened my first bank account, with Bank X, when I went to university. I walked in to my local branch on the second or third day after arriving in Southampton and opened an account. When I started work, I transferred that account to Cobham in Surrey, near where I was working. A couple of decades ago, that branch was closed and the accounts transferred to Walton-on-Thames, which is where my relationship banker was based when they were first invented about 15 years ago. I've probably been to that branch three times since then, about once every five years. I'm a premium customer and pay a few quid per month for my account, so my personal banker would periodically ring up me to see if they could sell me insurance or whatever. I quite liked my first personal banker and probably met him three or four times over the decade. A few days ago I got a letter from my new personal banker, who is based in Leicester. (A note for foreign readers: I live in the south of England, southwest of London, and Leicester is in the midlands, about 150 miles away.)

I'm note sure how "personal" this relationship will be. In any case, the last time I called (in order to get a bank loan to cover some building work we were having done) I had to go through half an hour of questions about name, address, salary, monthly outgoings etc, so having a personal banker (and having had the account for 33 years) didn't really seem to help. They still wanted to know (as my mother would always say) "the ins and outs of a cows behind" before giving me the money. To be fair to the banks, in this case, they don't want to annoy and inconvenience customers in this way, they are being made to by the government, because they have to comply with "Know Your Customer" (KYC) and "Anti Money Laundering" (AML) rules. Generally speaking, the banks do not suffer too greatly because of this as everyone has to just grin and bear it. Had I hung up in annoyance and called Bank Y (who don't know me from Adam) instead, I would still have had to answer the same questions. But there are cases where the implementation of KYC and AML rules may end up costing banks more than customers' opprobrium.

In the case of Shah and another v HSBC Private Bank (UK) Ltd, the Court of Appeal has ruled that Jayesh Shah and Shaleetha Mahabeer have the right to challenge HSBC Private Bank for having delayed a $28 million transfer... the bank asserted that it had suspected that the transaction constituted money-laundering for the purposes of the Proceeds of Crime Act 2002, meaning that the transfer had to be delayed while reported to the Serious Organised Crime Agency.

Eventually, the transaction was completed and Mr Shah claimed the delay cost him over $300 million. The claimants subsequently challenged the grounds on which the bank’s suspicions were raised but a case brought by Mr Shah for compensation was thrown out at an earlier court hearing. However, last week’s Court of Appeal ruling means that Mr Shah can now pursue HSBC for his losses.

[From HSBC customer claims for anti money-laundering delay]

Interesting. As the article notes, the plaintiffs are questioning the basis on which the bank determined that the transfer was suspicious. But what I'm curious about is the cost/benefit analysis that underlays this whole raft of e-payment regulation.

According to an IFA I spoke to recently, there is not a single case of any would-be launderer being caught by this system. As you'd kinda guess, real launderers are quite capable of cobbling together the necessary fake docs, and ticking all the right boxes.

[From Burning our money: A Problem With The Laundry]

So inconveniencing everyone from billionaire businessmen to peasant farmers has not caught a single money launderer? This seems statistically unlikely, doesn't it? Surely they would catch the odd one or two by accident given the enormous size of the money laundering market. The latest figure I could find (given only a quick Google, since I couldn't be bothered to go downstairs to the bookcases) shows that it's a huge and growing business.

The NCIS ‘United Kingdom Threat Assessment of Serious and Organized Crime’ in 2003 stated that the overall size of criminal proceeds in the country – and the amount that is laundered is unknown. However, customs authorities had estimated that the annual proceeds from crime in the UK were anywhere between £19 billion and £48 billion – with £25 billion being a realistic figure for the amount that is laundered each year.

[From : : Money Laundering Statistics : :]

£25 billion! This is certainly an underestimate and it comes despite all of the rules imposed on the industry.

Brett King

[Dave Birch] Brett King, Author of BANK 2.0, is also the founder of the International Academy of Financial Management, one of the fastest growing professional associations and training institutes in the world. A regular speaker at the top global conferences for financial services, King is an acknowledged expert on wealth management, customer experience and retail channel distribution strategy. He publishes regularly in his role as industry advisor on Huffington Post (Business News), Internet Evolution and his own personal blog at www.Banking4Tomorrow.com.

King also runs User Strategy, a boutique consultancy focused on improving customer interaction for leading financial services companies and businesses. King previously ran the Asia division of Modem Media and the E-Business service line for Deloitte. His clients include HSBC, Citigroup, UBS, Standard Chartered, Abu Dhabi Commercial Bank, EmiratesNBD, RBS, CSFB, BNP Paribas and many more.

You can order his new book BANK 2.0 -- the subject of this podcast -- on Amazon UK , Amazon US or direct from the publisher Marshall Cavendish.

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

Morals Guv'nor?

[Dave Birch] Is it immoral to pay someone in cash? At Mobile Money Services in Africa in Johannesburg, Brian Richardson from Wizzit said that he refuses to pay anyone in cash, from employees to domestic staff. This reminded me of a conversation at a bank a few weeks ago. I was talking about Faster Payment Service (FPS) and I mentioned that I'd found it an excellent service for paying builders who were working on my house. On of the other attendees told me that he'd been going down to his local bank branch and drawing out £50 notes in bundles of £2,000 at a time and paying his builders in cash, for which he got a substantial discount. I said, partly just to spark a discussion, but partly because it does bother me, that he should be reported to the police and prosecuted for conspiring to evade VAT and income tax (since that is why the builders want cash).

My objection is that by helping other people to evade tax, the person in question was making me pay more tax: the use of cash facilitates the transfer of wealth from the law-abiding (eg, me) to the law-breaking (eg, his builders). This seems immoral to me. So I can't resist posing it as a general question.

Lolly Dolly

[Dave Birch] I was leafing through the English newspapers on the plane the other day -- the usual kinds of thing, you know, men out on charity walk attacked and hospitalised by drunken yobs, public worker gets £80,000 payoff because new chairs cause backache, 18,000 Facebook tributes to murdering nutter and so on -- but it was the story of the thieving Air France stewardess that caught my eye. The light-fingered trolly dolly was arrested for stealing from sleeping first-class passengers. Her preferred pilfering plane route was Paris-Tokyo, apparently because Japanese tourists carry huge wads of cash around with them and, like any self-respecting criminal, she wanted cash.

Police have arrested French air stewardess Lucie R. (her identity is protected) in Tokyo on suspicion of stealing from First Class Air France passengers while they slept.

[From France24 - Air France stewardess stole from passengers while they slept]

Incidentally, I loved Air France's comment on this story, which was to say that only checked baggage is their responsibility and that theft from the cabin was a matter for travel insurance. Or, in English, "tough".

Bent Bentsen, DnB Nor Bank

[Dave Birch] Bent Bentsen is a Senior Advisor at DnB NOR Bank ASA in Norway and has spent many years in the banking sector there. In this podcast has talks about the shape of the Norwegian payments sector and some of its use of new technology. DnB NOR is Norway’s largest financial services group and consists of strong brands such as DnB NOR, Vital, Nordlandsbanken, Cresco, Postbanken, DnB NORD and Carlson.

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

Deputy dogs

[Dave Birch] The considerable regulatory burden imposed in the US (the Patriot Act, the Bank Secrecy Act, Money Laundering, Terrorist Financing, Fraud Enforcement and Recovery, etc, etc etc -- all a bit rich coming from the people who print $100 bills) raises the cost floor on e- and m-payments considerably, thereby excluding people. We need a rational and informed debate to decide where to go on this. Are we going to trace and track every single transaction? If not, then what is going to be the threshold and why?

But this is only the beginning. The March issue of the Journal of Payment Strategy and Systems (volume 4, number 1) has an article by David Teitelbaum and Gretchen Lamberg of Sidley Austin called "The Deputisation of the US Payments Industry" which talks about the extent to which different interest groups want to the payment system to police other non-payment laws (think about the recent Norwegian ban on using Visa and MasterCard for offshore gambling transactions). And the issue has just made the headlines in the UK, because a Member of Parliament wants to fine card companies for allowing people to buy child pornography (although not other illegal material, but I don't know why).

Geraint Davies, Labour MP for Swansea West, is set to put his case in the House today in a Ten minute rule Motion which says: "That leave be given to bring in a Bill to impose penalties on credit and debit card providers for the facilitation of the downloading of child pornography from the internet; and for connected purposes."

Davis told the BBC's Today programme... "This is the means of thousands of perverts viewing abusive pictures and we need to stop that. One way to do that is to identify them, and if the credit card companies facilitate this abuse they should also be penalised," he told the programme.

[From Finextra: MP calls for penalties for card schemes over prepaid card abuse]

"One way to do that is to identify them". Indeed. In fact, that's the only way to do it, because unless you know who they are, you can't prosecute them. And I would have thought that if the plod turn up at Barclaycard with a warrant that says "this card was used to commit a crime, please tell us who it belongs to", then Barclaycard will tell them. (The pre-paid card thing is a red herring, because you can't use them online without registering and because criminal don't use them anyway because the "unregistered" balance limits are low, they use stolen cards.)

So what is the MP going on about? How does Barclaycard know that the $9.95 that I've just spent on my card at a web retailer in Uzbekistan is for a shareware game of dominoes or for child porn? How is Visa supposed to know whether a web site with foreign-text like this one is about legitimate political discussion or the trafficking of children for sex? You may as well pass a law to fine the Bank of England for allowing perverts to buy their computers using £50 notes in the first place or better still fine banks for letting people withdraw money from ATMs to pay for prostitution (or drugs, or whatever).

There's a real problem with making payment systems into policemen, especially when the decision about what is or isn't allowed is not black and white, or varies from country to country or even between constituencies within a country. Look at (just one) of the arguments going on in the PayPal community, this time about what is or isn't "hate speech".

It's clear that there are some people who want to constrain peoples' spending, and sometimes for a very good reason, but is it right to expect the payment system itself to do this. Suppose you don't want minors to buy cigarettes, for example.

Times review finds that in more than half of the state's casinos and gaming rooms, welfare recipients can get cash from state-issued EBT cards. Officials say they're moving to block such transactions.

[From California welfare cards can be used in many casino ATMs - latimes.com]

This won't make the slightest difference, naturally, because the gambling-crazed welfare recipients will just remember to go to the ATM before they get to the casino. They may even have to pay for an extra bus ride to get to the ATM (rich people won't, so once again the poor will get the higher transactions fees).

What is happening here is that the payment system is being used as an imperfect proxy for an identity management system, and that's why it's being used to stop welfare scroungers, gamblers and so on. But this means that the costs of detection, filtering and prevention are all falling on the payment system (in other words, on law-abiding customers) which doesn't seem right. If there were a proper identity management system in place -- so that a customer could prove that they are 18 or a UK resident or legally sane -- then the issue of payment and the issue of identity (ie, credentials) would be properly separate.

Of course, if the government want to pay the banks to provide these proxy identity management services, within an explicit framework of liabilities, then that would be a useful conversation to get under way.

Mad stripe

[Dave Birch] Back in 2007, I wrote that

When even Canadian and Mexican migration is complete, will the U.S. then be forced to issue EMV? Probably not, because of on-line authorisation. Besides, who knows what new technologies will be dominating the retail payments space by then?

[From Digital Money: EMV USA]

Is this still true? Now that the first EMV card has been issued by a US bank, the discussion about migrating the world's largest card market away from trivially-counterfeitable 40-year old magnetic stripe technology and on to hard-to-counterfeit 30-year old smart card technology is starting up again.

Because of the way our payment system is set up, the cost of switching to chip-and-PIN cards would have a huge impact on merchants, who would have to bear the expense of purchasing new terminals to accommodate the cards.

[From U.S. magnetic stripe credit cards on brink of extinction?]

So it's merchants who are the block here? Well, not all of them.

Wal-Mart is calling for the U.S. to move to European-style payments card security, including smart cards that use chip-and-pin technology. "It's time for chip-and-pin in the U.S," Jamie Henry, Wal-Mart's Payment Services Director, told attendees at a Smart Card Alliance event in Scottsdale, Ariz., recently.

[From Wal-Mart Touts EMV Card Security. Would it Work Here?]

You can hear Jamie discussing this is in more detail in a podcast from SecureID News. I suspect that many large retailers like Walmart have POS replacement cycles and the addition of EMV to the replacement specification isn't that big of a deal. Yes, it would cost a big retailer millions of dollars to install EMV terminals, but if they're installing EMV terminals anyway the marginal costs are not that great.

Wal-Mart are themselves no strangers to EMV – for example their ASDA stores in Britain have accepted Chip and PIN cards for years – and they are therefore in a good position to understand the issues involved with EMV migration in the USA.

[From EMV Migration - Wal-Mart calls for Chip & PIN Technology | EMVX Blog]

So perhaps EMV migration in the US is getting a little closer, although I suspect that not many retail chains will follow Walmart's lead. You can see the reluctance to invest in a technology that, while it works, is already pretty old. Perhaps it's time to take a deep breath and starting working on the next generation of payment systems -- beyond EMV -- and invest in that instead? Which means, as far as most observers are concerned, moving toward mobile (potentially via contactless).

Kavita Datta, Queen Mary College

[Dave Birch] Dr. Kavita Datta is a Senior Lecturer in Geography at Queen Mary, University of London. Her most recent research focuses upon the role and experiences of low paid migrant workers in London and is detailed in the new book Global Cities at Work. Kavita is also interested in geographies of finance, and specifically financial exclusion among low paid migrant workers. These interests are being developed in a project, Migrants and their Money, which adopts a holistic focus on migrant workers financial lives; links financial histories to practises and identifies the key challenges that diverse migrant communities in London face in accessing financial services. In this podcast, she talks about the migrant workers' use of financial services and, in particular, money transfer.

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

Is this the iDEAL third scheme?

[Dave Birch] Banks have begun to deliver account-centric rather than card-centric e-commerce solutions and there are three such solutions operational in Europe today: Giropay in Germany (currently less than 5% of e-commerce payments, accepted by 15% of online merchants), iDEAL in Netherlands (currently has a 50% market share, accepted by 80% of online merchants) and EPS in Austria (currently has a 10% market share, accepted by 20% of online merchants) but these are all domestic solutions.

The Netherlands provides a particularly interesting example. Half of all online shoppers in the Netherlands use IDEAL, a bank-oriented payment system that started in 2005. To effect an IDEAL payment, the consumer is directed back to their own bank where they log in using bank authentication and authorize the payment. Then are then seamlessly directed back to the merchant. The system is popular with merchants because it delivers immediate payment (customers cannot charge back the payment) with bank security, and customers like it because they do not need another secure, two-factor or other complex log in. To date, there has been no reported fraud through the system.

As of March 2010, the scheme had 5.8m users and 15,000 participating merchants. More Dutch web merchants (88%) accept iDEAL than credit cards (about half) or PayPal (about a fifth). Approximately half of all Dutch e-commerce transactions go through iDEAL only four years after launch, which I think is a remarkable success. This leads me to wonder whether the much-vaunted "third scheme" in European payments might be an online-only interconnection between national account-centric systems rather than yet another card scheme? I shall test this idea out on a few people.

Contactless update

[Dave Birch] OK, I've been thinking about contactless again, following some more discussions that I got caught up in today after I mentioned that yet another person in a shop in London had asked me where I got my iPhone sticker from. This led me to think back a couple of week, because I'd thoroughly enjoyed SMi's Contactless Cards and Payments 2010 held in London. They had a really good range of speakers (including me) looking at different aspects of the European contactless landscape, and a number of different European perspectives.

First of all, let's just reinforce the link between contactless and cash replacement. MasterCard's figures show that only 4% of PayPass "taps" in Europe are for transactions above $50 and the average transaction value varies by country from around $5 to around $14. At the conference, they also gave a good case study on Carrefour and I recently saw an updated version of this case study from someone else. Carrefour have just issued three million contactless credit cards in eight months and upgraded 22,000 terminals take contactless payments. At the time of writing, they are seeing that over a third of their under €20 euro transactions are already contactless (displacing mainly cash) and that they have migrated 6% of transactions from debit to credit (which is, presumably, more profitable for them since it's their own credit cards). Having said all that, and noted the Visa figures for the UK,

Several payments executives say consumer interest in the technology is falling off, and they blame the banks' and card networks' apathy.

[From Has 'Tap and Go' Lost Its Touch? - Bank Technology News Article]

I'm not sure I would agree: the "blame" must be more widespread because it seems to me that contactless as POS as it stands is not that exciting. In many of the places where cash replacement would be very attractive (eg, vending machines) there are no contactless terminals and in many of the places where there are contactless terminals (eg, my dry cleaners) they will never be used. In other words, there could be a much better alignment between the terminal deployment strategy and the cash replacement strategy. Other people, though, are suggesting other remedies.

Banks making a concerted push to promote contactless payment technology are focusing on the wrong target and should switch their short-term focus to mobile commerce.

[From Analyst Labels M-Commerce Renaissance a Priority by Bank Systems & Technology]

I draw a slightly different conclusion: banks should invest in contactless payments and in mobile payments on the same roadmap, so that in the time the investments are not wasted. What this means in practice is that the banks (and the retailers) should be planning for a new generation of value-added services that will be enabled by the combination of the mobile phone and the contactless interface.