Digital Money

Another BRIC in the wall

[Dave Birch] So far as the commonly-discussed "next billion" consumers are concerned, the idea of some kind of universal payment card is vanishing. We've spent the last 50 years trying to make Visa, MasterCard, Amex and others into globally-accepted brands and I, like many other consumers, get off the plane anywhere on Earth and expect my UK-issued Visa debit, MasterCard credit and Amex credit cards to work without let or hinderance (except in the US, of course). But will this be true for the rest of the world? Isn't there a "balkanization" of payments underway?

The examples to study are, it goes without saying, Brazil, Russia, China and India. China, with China Unionpay, already has its own payment card (if you live in China, you cannot get a MasterCard, a Visa card or an Amex card), but that does at least share technical interfaces with the rest of the world. However, China's newest venture in payments does not.

China Mobile has confirmed that it plans to continue to "vigorously promote" its 2.4GHz RF SIM technology both in Shanghai and in other Chinese cities.

[From China Mobile will continue to ‘vigorously promote’ RF SIM • NFC World]

The 2.4GHz technology referred to here is a longer-range RFID standard (I think it's the same as in the Hitachi Mu-chip) that is entirely unrelated to the short-range NFC standard being adopted everywhere else for payments, including in China by rival China Unicom.

The new service will enable China Unicom subscribers to store a prepaid card account on their mobile phones. They will then be able to top up the prepaid account by transferring funds over-the-air from their Bank of Communications bank account.

[From China Unicom and Bank of Communications announce commercial NFC payments launch • NFC World]

Bit of a niche, really. They've only got a few hundred million subscribers. Anyway, the Chinese model of having a national payment scheme is admired elsewhere.

To promote the use of plastic money, the Reserve Bank of India is set to launch an IndiaPay card modelled on the China UnionPay card.

[From The Telegraph - Calcutta (Kolkata) | Business | China model to promote plastic]

Given India's desire to develop more financial services for the its population, financial services that will have to be configured to meet the specific needs of their population, you can see the desire to integrate a national payment scheme more closely with a number of other specifically Indian initiatives, such as the Universal ID (UID) scheme.

The Bank of Maharashtra (BoM) on Thursday announced its plans to launch a number of new biometric ATMs, which will enable elderly citizens to use the facility without having to commit their PINs to memory.

[From Forget the PIN: banking now at tip of senior citizens’ fingers]

These aren't the only examples. As I understand it, Russia is considering a law to insist on domestic transaction processing and perhaps a government-subsidised "RussiaPay" and there are plenty of other countries where the international card schemes have been caught up in an anti-globalisation backlash.

Bradesco and Banco do Brasil have announced signing a Memorandum of Understanding "regarding the launch of a Brazilian brand and integration of part of their credit cards operations." Specifically, they have entered into a non-binding memorandum of understanding for the preparation of a business model, involving:

* The integration of part of their card operations;
* The launch of a Brazilian brand ("Elo") of credit, debit and pre-paid cards for account-holders and non-account-holders;

[From Bradesco, Banco do Brasil Agree to Launch New Brazilian Card Brand]

Some banks in Brazil already have their own EMV debit schemes that are not linked to international brands, so you can see why it would make sense to bring them together into a national scheme. They might then, perhaps, issue a Visa/MC/Amex application on to the same cards for international travellers: the ability to load multiple payment applications to the same card is an under-utilised capability of EMV, although there are a few banks around the world already issuing such cards (POSB in Singapore being the latest).

Does this mean we are moving away from universal schemes? It seems to me that we are already losing them. When I was in SF last week, I did my usual round of experiments so that I could see for myself what the situation is. I found a very mixed bag. For example: none of my UK-issued contactless cards worked in the contactless terminals in SF although my UK-issued contactless sticker did (it's obvious why: although the sticker is issued in the UK it implements MSD as do the US terminals, and the US terminals don't implement EMV). As an aside, there were several places where my UK cards were refused in unattended environments: BART machines, CalTrain machines (once with an interesting "bank not on file" error message), SFO cart machines. I wonder if the UK issuers are declining unattended transactions when tney are not chip and PIN? If so, it's an odd decision, because in many retailers I was never asked for a signature for transactions under $25 and for transactions over $25 when I was asked for a signature I signed as "Carlos Tevez". In a couple of retailers I was asked to provide picture ID, so I produced my English driving licence, which none of the retailers could possibly have verified, and everyone was happy. In one retailer, my son was using the prepaid card I had given him for his holiday and the retailer asked him for picture ID (which he didn't have with him) so I just told the clerk "this is a prepaid card so he doesn't need picture ID" and the clerk said OK and ran the card anyway. In a restaurant one UK prepaid card was declined but the other was accepted: I've no idea why. A decade ago, I knew I could go pretty much anywhere in the world with my Barclaycard and it would work. A decade from now...

Depends what you mean by...

[Dave Birch] Over at the GSMA's Mobile Money Exchange they've created a wiki for mobile money in an attempt to facilitate communication by pulling together a common set of definitions for the space, which is a laudable goal. If you're interested in the topic, it's definitely worth popping in and adding to the sum total of human knowledge. I'm sure that won't mind a little vigorous debate either! If their efforts go any way to stopping people from talking about mobile banking when they mean mobile money transfer or mobile money transfer when they mean mobile payments, it will be a job well done.

Prepaid preconceptions

[Dave Birch] I've been involved in a few discussions about prepaid cards over the last couple of weeks. One of those discussions was about whether some prepaid products would remain viable under stricter regulatory conditions. Why would regulators want to increase the regulatory burden, and therefore cost, of products aimed at the unbanked? Well, in the US, prepaid cards are the focus on attention because of their supposed criminal use.

The "Stored Value Device Registration and Reporting Act of 2010" will close a loophole that has treated stored value cards differently than cash, money orders and traveler's checks..

• Money stored in electronic devices would be considered the same as currency for regulatory purposes. Prepaid cards, cell phone chips and other electronic devices would be covered.
• Stored value devices loaded with more than $10,000 would have to be registered with the Treasury Department.
• The flow of money via stored value devices would be tracked. "There's no current data on how stored value devices are currently used" to smuggle funds, said Giffords.

[From Bills aims to snip cash-card money smuggling | Border]

Well, I'm sure there's lots of data on how stored-value is used, but it is of course private and the issuing banks would of course need a warrant to give it up. But I'm still curious to know whether criminal masterminds really are using prepaid cards instead of cash. My O2 Money card, for example, has a maximum balance of five hundred pounds unless you go through KYC/AML in which case it goes up to ten grand. So what criminal mastermind would want twenty O2 Money cards rather than a hundred $100 bills or twenty €500 notes? The article specifically mentions drug cartels, but when the police bust the Mr. Bigs, they don't find prepaid cards, they find cash.

"Don't trivialize this by calling these gift cards," Goddard said. "These devices can hold hundreds of thousands, if not millions of dollars."

[From Bills aims to snip cash-card money smuggling | Border]

No, they can't. The maximum you can put on a typical US prepaid card with going through KYC is $500-$1,000. But a drug-running master criminal might decide to get a hundred card and put $1,000 on each of them I suppose. Let's take a look at what we find in their treasure hoards.

The arrest of more than 2,200 persons and seizure of 74 tons of illicit drugs in 18 states in a massive nationwide undercover investigation by federal, state and local authorities has revealed that Mexican drug smuggling organizations are well entrenched in the United States... the operation accounted for $154 million in cash, 1,262 pounds of methamphetamine, 2.5 tons of cocaine, 1,410 pounds of heroin, 69 tons of marijuana, 501 weapons and 527 vehicles.

[From Massive bust nets suspects, drugs in 18 states - Washington Times]

But not, apparently, prepaid cards. Similarly, these ice men clearly prefer greenbacks to Starbucks' cards.

Authorities confiscated more than $200 million in U.S. currency from methamphetamine producers in one of this city's ritziest neighborhoods, they said Friday, calling it the largest drug cash seizure in history... Mexican officials said the cash seized was mostly in U.S. $100 bills and weighed at least 4,500 pounds.

[From Mexico meth raid yields $205 million in U.S. cash - latimes.com]

That's TWO TONS OF CASH. I suggest that the Senate turns its attention to the abolition of the $100 bill rather than imposing cost and inconvenience on my kids US$ "Cash Passport" cards that they have with them on vacation in California. Some more people who don't read my blog about the benefits of electronic payments over cash were uncovered last year.

Federal agents have rounded up more than 750 suspects in a wide-ranging crackdown on Mexican drug cartels operating inside the United States... The DEA seized more than 23 tons of marijuana, cocaine, heroin and methamphetamines; plus dozens of planes, boats and cars; more than $63 million in cash; and scores of weapons in the operation.

[From Feds Bust 750 In Mexico Cartel Crackdown - CBS News]

No mention again of their Sears gift cards or Walmoney. And, as an aside, the guy who owned the house that had the $200m in cash in it? He actually had $340m, most of which he spent in Las Vegas apparently, where the casinos assumed that he was legitimate businessman -- his mistress paid a million dollars in cash for an apartment, shouldn't that ring some alarm bells? -- unlike those Canadian casinos where the real criminals go to launder money.

Money laundering by organized crime groups is rampant at Canadian casinos but police are essentially doing nothing to combat it... "Since 2003, FINTRAC (the Financial Transactions and Reports Analysis Centre of Canada) has sent several disclosure reports to the RCMP on suspicious transactions involving casinos throughout Canada, with amounts totalling over $40 million," the 2009 report states.

[From Money laundering thrives at casinos: Report]

Come on. Prepaid cards don't make the slightest difference to criminals, tax evaders, drug smugglers or executive expense chats. But making them more expensive and more inconvenient does make a difference to people who are excluded from the financial system.

Fluttering

[Dave Birch] I happened to be at a seminar about online payments for gaming and gambling and sat in on a fascinating talk by Jim Noakes, the Head of Payments at Gala Coral Remote Gambling, on the challenges that he is facing at the moment. It was fascinating because his list of challenges could easily serve at the basis of a requirement specification for a next-generation payment system. Setting aside the challenges of compliance, I thought there were two key challenges that we (ie, the payment industry) might be able to help with. The first is reducing the cost of cash in, and the second is reducing the cost of cash out (ie, winnings). The latter is often where the fraudsters attack, particularly when they get payouts directed to stolen cards. And because the online gambling companies are specific targets for the fraudsters, any solutions must have a high level of security built-in from the very beginning.

The kind of fraud they are subject to is that a criminal will spent several thousand pounds on a bent card and get back half in winnings, which are then paid out as "clean" money -- exactly the same way that criminals launder money through physical casinos -- and off they go. Sometimes the game operator may suspect that there is a scam underway, but there's not much they can do to stop it. I suppose they could hold all winnings for 181 days until all of the chargebacks have been through but I don't suppose that would be a popular approach! As an aside, let's just remember that not all criminals target online gambling though!

State gaming officials said the theft of money from a high-stakes slots machine at The Meadows Racetrack and Casino went unnoticed for several weeks because the false jackpots that the machine was paying out to a trio of suspects were not recorded internally by the machine. State Gaming Control Board spokesman Doug Harbach said that detecting the theft of more than $430,000 would have been easier if the winnings displayed on the machine matched its internal records.

[From Gaming security failed to record slots theft]

A couple of other points of note: first of all, Jim said that customers like 3DS once they get used to it, and after a while they will actually call up when it is missing (because the directory server has failed or whatever) and said that, and I do quote, "there is a business case for 3DS any day of the week". He also mentioned that they don't store card numbers (PCI-DSS and all that), but actually it would be useful to because then they could spot card use across multiple accounts, and this would help to fight fraud. I wonder if there are other examples where attempts to crack down on card fraud in one area lead to more fraud in other areas?

Incidentally, with reference to the recent fuss about the exclusive use of Visa at the Olympics, Jim said that Gala Coral wouldn't take MasterCard for a while -- I'm not sure why -- but that it "didn't matter as most customers to seem to have Visa and MasterCard".

By "cash", we mean "cash and not cash"

[Dave Birch] A correspondent writes to point me to the new report from Federal Reserve Bank of Boston called "Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations", hoping to infuriate me by quoting from the abstract, which says

On average, each cash-­‐‑using household pays $151 to card-­‐‑using households and each card-­‐‑using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-­‐‑income to high-­‐‑income households in general.

So people who use cash subsidise people who use cards? Well, yes, if you take the same definition as this report does...

For simplicity, we refer to consumers who do not pay by credit card as cash payers, where “cash” represents all payment instruments other than credit cards: cash, checks, debit and prepaid cards, etc

Ah... now I understand. So what the report is saying is that without price discrimination at point of sale, people who don't use credit cards subsidise people who do (this is correct) and that because the people who use credit cards tend to be richer, so the poor are subsidising the rich because of the payment systems in place in the US (also correct). Yet another argument for abolishing cash, if you ask me, since cash is the payment method that imposes the highest transaction costs on the poor.

Walk a mile with my shoehorn

[Dave Birch] There's a wonderful variety of new payment systems out there, one of the reasons why I love this business so much. A good example is FaceCash: the payment is made using a barcode on a mobile screen (yet another case of innovators not waiting for operators to get their NFC act together) and the POS displays the picture of the payer so that the merchant can authenticate them. And it's cheap.

That was enough for the Indochine restaurant in Palo Alto to adopt FaceCash. Owner Don Stewart told me he was fed up with credit-card processing fees, and that he was willing to try out FaceCash even if it means he has to install a second payment system in addition to the one he already uses.

[From Will FaceCash, the mobile payment application, kill the credit card? | VentureBeat]

I wouldn't necessarily say that this is the perfect implementation: apart from anything else, studies show that pictures aren't that helpful in authenticating shoppers and automatic face recognition is nowhere near sophisticated enough to make the system without relying on retail staff to make the decision. And, as an aside, if it was made to work automatically, unless it is military grade then Im sure people will figure out how to spoof the algorithm.

Using off-the-shelf makeup and accessories such as glasses, veils, and artificial hair, Adam Harvey's master's thesis combines hipster fashion aesthetics with hardcore reverse engineering of face detection software. The goal: to give individuals a low-cost and visually stimulating means to prevent their likenesses from being detected and cataloged by face-recognition monitors.

[From Reverse-engineering artist busts face detection tech • The Register]

Whether FaceCash is the way forward or not isn't the point, but it illustrates a point: it is not trying use the existing retail payment infrastructure, but bypassing it because it is cheap to do so.

Michael Joseph, Safaricom

[Dave Birch] Michael Joseph will soon be retiring from the position of CEO of Safaricom Limited after a decade leading the joint venture between Vodafone and Telkom Kenya. Since the re-launch of Safaricom in October 2000 he has guided the company from a subscriber base of fewer than 20,000 to more than ten million and has presided over the launch of many innovative products and services such as M-PESA, the subject of this podcast. Michael has been the recipient of many awards, including CEO of the Year and Company of the Year. Mr. Joseph has a B. Sc. (cum laude) in Electrical Engineering from the University of Cape Town and is a member of the I.E.E.E. and I.E.E. (U.K.).

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

Points should mean prizes

[Dave Birch] I was in another conversation about mobile payments yesterday -- pitching for work with a company that is looking to extend their payment services through the use of mobile phones -- and shortly afterwards I got a note from a journalist asking me why there was so much attention on the topic. In both cases, my focus was not on using mobile phones as card substitutes but as using them as both card and POS substitutes. In other words, payment devices.

"Because 30% to 50% of new phones being sold are smart phones, why not use them as a payment device?"

[From Considering Mobile Payments? Some Hard And Soft Answers - American Banker Article]

Absolutely. And this is one of the key reasons why I think the mobile payment market here in Europe will follow a different trajectory to Japan, where there are sixty million phones capable of mobile proximity payments in circulation already and more than a million retail outlets capable of accepting them.

Celent’s Gillen estimates there are 28 million registered mobile-payment accounts in Japan. Of those, roughly 20 million are “active,” which Gillen loosely defines as an account the subscriber uses at least once a month. A single subscriber could have multiple payment accounts on his phone.

[From Report: Japan’s M-Payment Players Discover That Points Count | NFC Times – Near Field Communication and all contactless technology.]

But all of these millions of phones are used to make payments, none to take payments. And it is the ability to accept payments that makes mobile phones disruptive in the e-payments world. Back to Japan though: as I've mentioned before, most of the Japanese mobile proximity phones are live with pre-paid "e-money" accounts, but NTT DoCoMo have been very active in growing the credit account business as well.

As of March, there were 14.2 million subscribers registered for iD, of which 11.3 million were DCMX customers. And most of those were DCMX mini subscribers, who only require a quick opt-in to sign up for the service. They can then spend up to 10,000 yen (US$109) per month tapping their phones at iD terminals, with the transactions appearing on their phone bills.

[From Report: Japan’s M-Payment Players Discover That Points Count | NFC Times – Near Field Communication and all contactless technology.]

Even though customers can extend the line of credit beyond the initial 10,000 Yen, they are still using mobile "tap and go" for the smaller purchases, which tends to reinforce the view and the speed and convenience of contactless makes it a cash replacement technology, whether on a card or a phone.

DoCoMo’s Tamano told NFC Times the telco’s payment service is capturing enough low-value transactions, including purchases at the scores of convenience stores that accept iD and other contactless-payment brands. But mid- to high-value transactions were lagging. “It’s not the number of transactions; the amount used for each transaction is not up to our expectations,” he said.

[From Report: Japan’s M-Payment Players Discover That Points Count | NFC Times – Near Field Communication and all contactless technology.]

The main point of that article is that it is the value-added applications around payments, such as loyalty points and coupons, that seem to be driving the market rather than the payments themselves, which is to be expected because payments are commodity. The most interesting new thing to happen around the actual payments themselves is the agreement between Japan and Korea to work on interoperability. Japanese mobile proximity payments are to be accepted at Korean merchants and vice versa.

When the NFC- based payment system roll-out is completed, NFC phone users in Korea and Japan will be able to make mobile transactions after a simple downloading of a mobile payment application to their phones. As of late May, 3.3 million SK Telecom customers are using handsets equipped with the financial USIM.

[From SK Telecom-KDDI-SOFTBANK MOBILE Agree to cooperate on Mobile NFC Service | Korea IT Times]

What makes this interesting is that it is an agreement between telecommunications operators to deliver regional interoperability in a financial service. Will Asia lead the way in extending the use of mobile proximity payments through cross-border interoperability? Not necessarily. In China, there may not even be interoperability between the country's two main operators, let alone with other regional operators.

China’s No. 2 mobile operator, China Unicom, and the country’s large bank-card network, China UnionPay, will launch a mobile-payment project with NFC phones at the world Expo 2010 in Shanghai–a direct challenge to plans by China Mobile to debut its RF-SIM technology at the Expo... In a not-so-subtle jab at China Mobile’s approach to mobile payment, which cuts out banks, UnionPay in its announcement said it will “adhere to the concept of “cooperative innovation” and “win-win results.” The bank-card network also said it will follow principles of “open-platform diversified technology and standardized development”.

[From China Unicom and UnionPay Take NFC Battle to Rival’s RF-SIM Turf | NFC Times – Near Field Communication and all contactless technology.]

Who knows how this will pan out. What is clear, though, is that

competition between telecom operators and banks for a dominant role in the new industry may also thwart the development of mobile payments in China.

[From Mobile payment market hurt by weak demand - People's Daily Online]

Just as it appears to have done in Europe. Where there isn't such competition -- because the mobile operators have just done it themselves (eg, Korea, Kenya, Japan) -- mobile payments seem to be developing nicely.

Feza Tarhan, BKM

[Dave Birch] Feza Tarhan is the Business Development, Rules and Regulations Director of the Turkish Interbank Card Center (BKM), which aims to improve the card payment system infrastructure for the benefit of all Turkish banks. She has built and led Interbank Card Center’s Trusted Service Manager role in the NFC Ecosystem in the past two years. She works proactively with card payment system players, and consistently looks for opportunities to improve the payment system infrastructure by developing new services, facilitating card/payment market governance, making sector level policy and setting domestic rules and regulations for the card payment sector. She specialises in helping card payment sector players to develop new services utilizing the benefits of new technologies and products. She has over fifteen years of experience in the banking, finance and IT sectors. Mrs. Tarhan holds a BSc and MSc degree in Electronics & Telecommunication Engineering from the Istanbul Technical University. She is married with two children and cinema is her most passionate hobby.

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

Contactless experiences

[Dave Birch] Well, I've been using my contactless products for a while now. In practice, most of my transactions have been using my splendid Barclays OnePulse Visa PayWave product (I don't understand why you don't see more of these in London, since they include Oyster functionality and will auto-topup your Oyster stored-value from your Barclaycard) and my splendid pre-paid MasterCard PayPass sticker that is on the back of my iPhone. I do see more contactless terminals beginning to appear, which is good, but I'm getting more and more frustrated with the customer experience because of the way that these terminals have been configured and connected to the POS.

Here's why.

Consider the example of (and I'm not picking on them: they're just the last place I used contactless) Pret a Manger, which has forward-facing contactless readers conveniently located at a comfortable height in front of each POS. The payment experience is this...

• Thirsty Coffee Addict Desperate for a Latte (eg, me), or TCA for short: "Large latte please".
• Helpful Pret a Manger Serving Assistant, or PMS for short: "£1.99 please".
• TCA taps contactless card against reader. Nothing happens.
• TCA: "Can I pay with the new fast contactless technology please?"
• PMS: "Yes of course".
• PMS goes back to POS and presses a button or two.
• A few seconds later, the terminal display comes to life and the screen displays "£1.99".
• TCA taps contactless card against reader and it beeps and flashes green lights.
• Payment is instant, but it takes another 30 seconds to print out a paper receipt that I don't want.

Here's how it should work.

• TCA: "Large coffee please".
• PMS: "£1.99 please".
• TCA taps contactless card on terminal and it beeps and flashes green lights.
• Receipt is e-mailed to me.

Simple.