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11 posts from September 2010

Oil and water

By Dave Birch posted Sep 29 2010 at 2:26 PM

[Dave Birch] In the early days of mobile payments, the relationships between banks and operators were a little strained. I can remember the first time we ever won work advising an operator/bank joint venture (which was a surprisingly long time ago -- in the 1990s) and how disappointing it was when they couldn't work together. Yet many commentators still expect things to improve.

Crucially, what this also shows is that it is possible for banks and mobile operators to compete and cooperate at the same time – a phenomenon in academic circles called “coopetition”.

[From Who Says Elephants Can’t Dance? Structuring Win-Win Partnerships Between Banks and MNOs | Mobile Money Exchange]

Compete and co-operate on what? Operators can't compete in banking businesses because these are heavily regulated. Banks can't set up mobile networks without a licence. Surely it would it be more of a win-win for each of them to get on with what they are best at (ie, savings and loans for banks, being a pipe for operators) and have a third-party run the payment service under a separate license?

Here's a case study to think about. I saw a presentation from Thomas Capka of A1 Bank in Austria, explaining why the operator A1 decided to start its own bank. He said (I'm a paraphrasing) that A1 decided to go and get its own banking license and do everything themselves and be "more flexible than the Austrian banks" (some of whom, incidentally, seemed very flexible about who they lent money to!) because they'd got fed up after years of negotiating co-operation with retail banks. But one of the questions that he was asked was about the way that European regulation has changed. So, if A1 were going to launch services today, would they start a bank, as they did a decade ago, or would they use PSD and EMD to obtain a Payment Institution (PI) license and an Electronic Money Institution (ELMI) license? Thomas said that almost all of what they do could now be achieved without banking license, the exceptions relating to the provision of credit on card products (which, quite rightly, remains a banking business).

So there's no need for MNOs to co-operate with banks to provide payment services and no particular reason why banks would want to do a deal with MNOs. In fact, right now banks are doing everything they can to go around MNOs, with stickers, SD cards, handset SE, SIM overlay and whatever else.

Continue reading "Oil and water" »

Long division

By Dave Birch posted Sep 28 2010 at 3:54 PM

[Dave Birch] Scott Lofteness pointed me to a lovely post by Stephen Lubeen over at Credit Slips, talking about the problems of being an American traveller in a Europe that no longer accepts your credit and debit cards.

But it also presents something of a puzzle, since the effect has been to encourage me to bring more cash and not rely on my debit or credit cards when I travel. Other than train stations, this typically fixes the problem, but in a way that seems unlikely to be optimal for credit card issuers.

[From An Aside - Credit Slips]

As we were discussing here recently, this is an unsustainable situation. Something has gone wrong. Even within Europe, we seem to be going backwards while introducing new technology. At Mobile Payment Services in Barcelona, one of the lunchtime discussions was about the various NFC schemes implementing e a nice standardised, EMV-based approach to mobile proximity payments in Europe.

  • In the UK, I tap my phone, enter the PIN on the POS, and then tap my phone again.
  • In France, I enter the PIN on my phone and then tap it at the POS.
  • In Spain, I tap my phone on the POS and then enter the PIN (for online verification).

The thing I love most about standards, as the old saying goes, is that there are so many to choose from! I used to go anywhere in the world with my Visa, MasterCard and Amex and they worked exactly the same way everywhere. My current favourite payment mechanism is the MasterCard prepaid sticker on the back of my iPhone, but maybe in six months it will be an iPhone add-on or a microSD card.

Where can we look for inspiration? How about Turkey. The Turkish payment market is very dynamic, and they have been using all sorts of implementations, mixing US MSD and European EMV, stickers and SD, cards and SIM overlays (the latest):

A launch by Turkcell of mobile payment using SIMs with flexible antennas over the coming weeks would allow it to stay even with competing mobile operator Avea. Avea last month announced with Garanti Bank plans to commercially launch a mobile-payment service in July using SIM cards linked to contactless chips and flexible antennas. Avea said it was targeting 100,000 users the first year.

[From Turkcell Considers Contactless Mobile-Payment Launch | NFC Times – Near Field Communication and all contactless technology.]

Now, one the one hand I love all of this experimentation, because I really do think that we should let a thousand flowers bloom and see what the market wants. On the other hand, this is wasting money for some of our clients, because they are being forced to invest in systems that will not exist further along the roadmap. I should stress, as always, that the problem isn't the demand.

At a Federal Reserve Bank of Chicago payments conference last week, Wences Casares, co-chief executive of the mobile payments company Bling Nation Ltd., said there is pent-up consumer and merchant demand for NFC.

[From Outlook Cloudy for Near-Field Communication Payments - American Banker Article]

I agree with him completely (and not just because he uses stickers). In all of the pilots and trials that we have been involved with, the consumer reaction has been universally and highly positive. Getting together a viable ecosystem to support this demand is, however, a real problem, and I don't see much evidence that the co-operation between banks and MNOs getting much better (although, to be fair, it may do). In the long term, everything may coalesce into a new global set of standards, but it the short term it looks as if we're going to see some interoperability problems (much to the disappointed, I would imagine, of the eSEPA Cards, Internet and Mobile Reflections Group, but more on that in a future post).

Continue reading "Long division" »

Are we bovvered?

By Dave Birch posted Sep 24 2010 at 2:35 PM

[Dave Birch] I was thinking that it might be fun to have a section on fraud at next year's Digital Money Forum, so that led to me to wonder about how card fraud is going at the moment and, more particularly, to wonder about the dynamics. Are consumers put off of e-commerce because they are worried about card fraud? It seems that it's not their priority.

Online consumers care more about convenience than card fraud,

[From Online card fraud not our problem? — Retail Fraud]

This is exactly what I told American Express when they phoned to offer me identity theft insurance yesterday. As I told the chap who called, I love my Amex BA card, but if someone steals the number and starts using it at Bolivian porn sites, I don't care, because it's Amex's problem and not mine. That's the beauty of credit cards. But does it lead to what economists term "perverse incentives" (which are nothing to do with Bolivian porn sites)? In other words, are people like me careless with their card details, thereby leading to more fraud, because we don't bear any responsibility for it? I certainly wouldn't pay for much in the way for fraud protection either.

A security vendor is trying to sell transaction monitoring services directly to consumers, a technology that until now has been offered primarily to banks.

[From service-mobile-phone-fight-fraud-targets-consumers - PaymentsSource Article]

This doesn't work for me, because if fraudsters use my credit card number to buy a car in Kazakhstan while I am in England, I don't care: it's the bank's problem, not mine, which is precisely why I value my credit card so highly and charge everything I possibly can on it.

Continue reading "Are we bovvered?" »

Expected and unexpected

By Dave Birch posted Sep 23 2010 at 2:19 PM

It's uncontroversial to note that mobile money in the developing world is having more of an impact than mobile money in the developed world.

While the UK may have an extremely effective online banking model, the Afghan necessity-is-the-mother-of-invention mobile banking model is certainly more interesting than the UK where banks have finally woken up to the fact that the occasional commercial and putting more five-pound notes in cash machines is not innovative enough for a supposedly technically developed country.

[From Afghanistan shows the UK how mobile banking should be done - Telegraph]

So if you're going to start a cash-replacement technology it makes sense to start it in a place where the use of cash is disastrous as opposed to a place where it's merely inconvenient and expensive. But is it just all about cost? I don't think so, because mobile deliver additional functionality as well: it means new applications as well as lower-cost transactions. This is recognised at the highest levels.

One of the interesting things about new technology is because so many countries in Africa have come late to the development, they've actually leap-frogged and the applications that they've developed for mobile telephony, for one, are far more advanced than many of the things you'll see in this country... We are interested in how we can, as the U.S. Government, tap into those mobile networks to provide information that people can use very directly on their phones, in their communities, whether it's tele-medicine, tele-banking, all of that.

[From Diplomacy Briefing Series - Conference on Sub-Saharan Africa - Poten & Partners]

This is you would expect. In the development world, there is little retail financial services infrastructure so there is a great pull to use new technology to provide that infrastructure. This had led to innovation, and some of that innovation may drive new products in the developed world. But the extent to which the innovation in mobile money is developing has some interesting implications for society, and one of them is that this new infrastructure based on mobile provides a means to deliver social inclusion. Why? Ignacio Mas and Dan Ratcliffe from the Gates Foundation are concise and explicit.

Cash is the main barrier to financial inclusion.

[From Mobile Payments go Viral: M-PESA in Kenya - pymnts.com]

Cash isn't just quaint, it's a drag on development. Professor Njuguna Ndung’u, the gorvenor of the Central Bank of Kenya, speaking at a time when M-PESA volumes had already surpassed Ks 1 billion per day, pointed out that micro-banking, insurance services and mutual funds need low cost delivery channels and the mobile phone is the way to provide them. Quoted in SPEED magazine (Spring 2010), he said that

The Kenyan authorities are creating an enabling legal and regulatory environment comprising: The National Payment System Bill that will strengthen the oversight mandate of the central bank; The Proceeds of Crime and Anti-Money Laundering Bill; and an amendment to the Banking Act to enable banks to use non-bank agents to extend their reach (and these non-bank agents will use mobile technology to reach customers even if the banks do not).

In a relatively short time, M-PESA has become a standard and widely accepted mechanism for exchange and in some circumstances it is already preferred to cash.

I have personally witnessed this at 11:00pm at night when a colleague made a payment recently to a taxi-driver in Nairobi when such a message was received, and the taxi-driver's response was that we did not have to wait 10 mins that we could go, M-Pesa was good for the payment. This is trust.

[From Details | LinkedIn]

I wonder if this was the same taxi driver mentioned in a post over at the GSMA.

A conversation I recently had with a taxi driver in Kenya illustrates why talk of the death of banks is unfounded. He explained that M-PESA is one of a portfolio of financial tools that he uses to manage his money, and that his bank is an indispensible part of that portfolio. In fact, I’ve come to believe that mobile money services can increase, rather than dampen, demand for traditional banking services

[From Mobile Money and the Demand for Banking | Mobile Money Exchange]

I'm sure that this is true, although it may not necessarily mean that traditional banking services should be delivered through traditional bank channels.

Equity Bank Ltd., Kenya’s largest provider of small loans, plans to more than double the number of accountholders this year after forming a partnership with Safaricom Ltd., East Africa’s biggest mobile-network operator... Safaricom and Equity Bank announced on May 18 an initiative where Kenyans will be able to open bank accounts through Safaricom’s mobile money-transfer service known as MPESA.

[From Equity Bank of Kenya Aims to More Than Double Accounts in 2010, CEO Says - Bloomberg]

This service has, at the time of writing, already led to something like 750,000 new accounts being opened, so it's absolutely clear that mobile money provided by non-banks not only does not compete with banking services it can actually turbocharge them. But back to the streets of Nairobi

Last week as I was coming from the office @ about 5.30am (I work late sometime). I noted a group of not so sober men lined up in a M-Pesa retailer, the men had spent the whole night drinking and were making cash withdraws to clear the debt to the pub. The M-Pesa integration allow them to withdrawal from their Bank account. To me saved money should not be this liquid.

[From Details | LinkedIn]

This is a fabulous quote, on so many levels, and I will inevitably use it to make some convoluted "joke" about liquidty in the future. Nevertheless, it is worth using it to flag up the point that even for digital money fanboy such as yours truly, not all of the consequences of spending at the speed of light are positive. But there are other, wider consequences of M-PESA's great success in Kenya.

I’d say that there is at least as much of a lack of innovation in mobile money because MNOs are simply trying to copy M-PESA.

[From Are banks the bad guys in the mobile money innovation debate?]

This is a perspective that I've heard expressed more and more in mobile money circles throughout the year. It has a negative effect, I think, because there were special circumstances and factors around M-PESA.

In any case, from a global perspective, the runaway success of M-PESA is likely to remain the exception, rather than the rule, for mobile money deployments. In most markets, one provider won't be able to get a big enough head-start to generate the powerful network effects enjoyed by Safaricom and the net result will be several modestly-successful mobile money services in each country.

[From Don't be Seduced by the Magic of M-Pesa | Mobile Money Exchange]

I'm sure it's true that M-Pesa will remain the exception. It cannot be replicated in South Africa, because apart from anything else it would be illegal: the rules there require bank involvement so M-PESA there is a different kind of beast. But remember how Visa started as BankAmericard? In some countries this will be the more likely path surely: one provider will launch, get some traction and then competitors will join and compete no longer on the network but on products and services built on the network. Another impact will come in the retail value chain as M-PESA continues to grow at point-of-sale (I'm told on good authority that there are some bars in Nairobi that will only accept M-PESA). It has signed up Kenya's second biggest supermarket chain already. What will happen?

Conrad Sheehan, founder and CEO of mPayy, tells Econsultancy: "If you're going to introduce a mobile carrier into that value chain without raising the price, something's gotta give. You have to lower the price to the merchant."

[From In mobile payments, credit card companies might be a third wheel | Econsultancy]

That simply isn't true, since the mobile carrier might have some alternative source of revenue. In a recent podcast in the Tomorrow's Transactions series, Michael Joseph (CEO of Safaricom when they launched the highly successful M-PESA service) points out that he was interested in profitability through customer acquisition and reduced churn. As with the example of NTT DoCoMo in Japan, there is a suspicion that the carriers could give the payment system away for free if it generated enough other revenue for them and that they'll keep this up their sleeve for when there's is competition. So is M-PESA generating other revenue? Well...

according to Safaricom’s annual financial statements released just a few days ago accounted for 9 percent of company revenues in the last fiscal year, for a total contribution of USD 94.4 mil (Ksh 7.56 bil). M-PESA revenues grew 158% over last year’s figure of USD 36.6 bil (Ksh 2.93 bil).

[From Proof mobile money can make money? M-PESA earns serious shillings for Safaricom]

M-PESA accounts for almost half of all Safaricom's data revenues.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Mobile phones for development

By Dave Birch posted Sep 23 2010 at 1:19 PM

[Dave Birch] I went to the LSE IGC Growth Week 2010 public discussion about "Mobile Phones for Development" with Dr. Jenny Aker of Tufts University, Dawn Haig-Thomas from the GSMA Development Fund and Ken Banks from Frontline SMS.


IMG_0025

It was chaired by Diane Coyle from Enlightenment Economics. She began by pointing out a couple of baseline statistics, such as the sheer number of phones. The panelists then gave short talks:

  • Jenny pointed out that the gains in net welfare have come from private-sector investment but said that it still wasn't clear whether mobile phone-based approaches to developments are better than traditional approaches and said the mobile isn't a sliver bullet that we can use instead of roads and stuff. She also said that IT policy must be part of the development discussion.
  • Ken reminded us that mobile strategies in developing countries should focus on simple systems with low barriers to entry and not get carried away with iPads and broadband and goodness knows what else. He also pointed out that he couldn't go home by cab and pay with his mobile phone in London, but he could in Nairobi.
  • Dawn talked about providing management consultants to help expand the "village phone" business model out of Bangladesh and they have recently been working on village mobile broadband using networks of entrepreneurs. She even talked about witnessing a marriage ceremony by EDGE between a groom in Dubai and bride in Bangladesh! Amazing: there are now 550 of these "Community Information Centres" in Bangladesh. She also made the point about the "poverty penalty".

All of the speakers were excellent, by the way. It's pleasure to hear people who know so much about a subject, and have a genuine passion for it, deliver their insights. The questions from the audience were wide-ranging and fascinating, which made for a very worthwhile evening. One of two the issues raised definitely deserve a further debate of their own: the issue of privacy, KYC and the registration of prepaid phones was touched on once or twice but it really only was the tip of the iceberg, and the relationship between markets and regulators (Ken said that some government structures were "not conducive" to mobile payments everywhere) will continue to stimulate discussion.

A chap from the Rwandan Central Bank was in the audience, and he asked a question that Diane and I both thought deserved way more discussion than there was time for. He said that the Central Bank was very excited about the use of mobile phones for money transfer but he was concerned because the MNOs involved had started talking about cross-border transfers. The regulators had limited experience of cross-border electronic transfers and weren't sure what the impact might be. This was a very reasonable point to make. A couple of our chaps are off to Clarion's excellent Mobile Money Transfer conference in Dubai, so I'll ask them to listen out for any similar discussions there: perhaps this might be a topic for a future event.

Continue reading "Mobile phones for development" »

Machine age

By Dave Birch posted Sep 20 2010 at 1:12 PM

[Dave Birch] I noticed that the ATM at the train station was advertising that it only charges £1.86 per withdrawal, and I was idly wondering why anyone ever used it, when I remembered that I did, because I occasionally turn up at the station with no money and decide to get £20 out in case I need to jump in a taxi or buy a packet of gum during the day. Naturally, being comfortable, I draw out a hundred quid, thus facing at transaction fee of less than 2%. But what about the kid who takes out a twenty, not realising he's paying a tithe? A bit of a rip off. And not the only thing wrong with ATMs.

Eight transactions out of every million ATM withdrawals are found to end with people forgetting their money or their card,

[From Cashpoint cock-ups are hard to comprehend]

I've never once forgotten my card at an ATM but I have, once, forgotten the cash. And one of the bad things about cash is that when you lose it, it's gone. But on the whole ATMs are jolly useful, even if I don't visit them as often as I might have a few years ago. Which, incidentally, appears to be true for everyone else in the UK, where ATM withdrawals are down, despite the increase (in fact, despite the massive increase) in the cash being literally printed by the Bank of England.

Meanwhile, the amount of cash withdrawn from ATMs was £1.6 billion lower than in the second quarter of 2009, a decline of 3.2%.

[From Finextra: Brits continue to turn away from cash and cheques]

This is despite the increase in cash "in circulation". According to the Bank of England, notes and coins "in circulation" grew by 5.1% in the last twelve months. Fair enough, much of the increase was in the form of fifty quid notes that are meant for tax evasion and are never ever used in ATMs, but the numbers do still tell a story. If ATM withdrawals are a reasonable proxy for the use of cash, then clearly more and more is just being stuffed under mattresses. I'm not saying that the British are particularly criminal in evading tax by putting high-value banknotes under the bed instead of in the bank. It's a global phenomenon.

Now that’s one big mattress... China’s households hide as much as 9.3 trillion yuan ($1.4 trillion) of income not reported in official figures -- 80 percent of it by the nation’s wealthiest. This massive pile of stashed cash is equal to about 30 percent of gross domestic product.

[From Beware $1 Trillion Lying Under Chinese Mattress: William Pesek - Bloomberg]

Note to readers under the new full financial disclosure recommendations: the chap is speaking metaphorically, and neither Consult Hyperion nor any of its executive officers actually recommend that you keep savings in your mattress.

A woman in Tel Aviv, Israel, gave her elderly mother a new mattress as a surprise gift, throwing out the old tattered bed her mother had slept on for decades. The gesture ended up bankrupting Annat's mother, who had stuffed her savings of nearly $1 million inside her old bed for decades

[From Tel Aviv search for mattress containing $1M life savings - CNN.com]

See.

Continue reading "Machine age" »

Medical matters

By Dave Birch posted Sep 15 2010 at 3:52 AM

[Dave Birch] In the UK, there's a tradition that when a new government takes office, the new minister for health announces a radical shake-up of the National Health Service (NHS) and so it was recently when Mr. Andrew Lansley presented a strategy called "Liberating the NHS". Now, I wouldn't normally allow medical matters (or politics) to intrude on this blog, but in this particular case, I think it worth reporting on sections 3.17 and 3.18 of the document.

3.17 The absence of an effective payment system in many parts of the NHS severely restricts the ability of commissioners and providers to improve outcomes, increase efficiency and increase patient choice. In future, the structure of payment systems will be the responsibility of the NHS Commissioning Board, and the economic regulator will be responsible for pricing. In the meantime the Department will start designing and implementing a more comprehensive, transparent and sustainable structure of payment for performance so that money follows the patient and reflects quality. Payments and the ‘currencies’ they are based on will be structured in the way that is most relevant to the service being provided, and will be conditional on achieving quality goals.

Whoa. Currencies? Yes, apparently so.

3.18 The previous administration made progress in developing payment by results in acute trusts. The mandatory scope has changed little since 2005/06, and has not incentivised results throughout the system. The Department will:
  • implement a set of currencies for adult mental health services for use from 2012/13, and develop currencies for child and adolescent services;
  • develop payment systems to support the commissioning of talking therapies;
  • mandate in 2011/12 national currencies for adult and neonatal critical care;
  • ...
  • accelerate the development of currencies and tariffs for community services;
  • ...

How interesting. So could it be the NHS that triggers the widespread use of a non-fiat (although not altogether private) currency? I was at a meeting recently where the subject of health currencies was being discussed and I thought that it was a fascinating topic -- especially currencies for long-term health care in old age, currencies that we would need to begin accumulating long before we retire -- but I had no inkling that the ideas were being discussed at such a high level and were so close to becoming government policy.

Continue reading "Medical matters" »

Front line

By Dave Birch posted Sep 14 2010 at 7:58 PM

[Dave Birch] I was been out pounding the beat, trying all sorts of payment experiments during my last few days in California. I have to say that the results were pretty mixed. At the airport, while being harassed by traffic cops, I couldn't find a single UK-issued card that would work in the rip-off $4 cart machines and was reduced to feeding in crumpled dollar bills (it wouldn't take dollar coins), much as my ancestors would have done. At BART, I couldn't get any of my Visa or MasterCard pre-paid cards to work (and I got an odd error message a couple of times: "bank not on file"). I did get my UK prepaid Visa card to work in a couple of shops (I discovered that when asked "credit or debit", always reply "credit" even though it's not a credit card, because if you reply debit it doesn't work). I couldn't use it in one shop because the assistant insisted I present ID, which I didn't have. Later in the day, my wife bought something with her UK MasterCard and was asked for ID so she presented her British driving licence, which was dutifully accepted even though the assistant couldn't possibly have known whether it was real or not. Come to that, they probably wouldn't have been able to tell whether her US driving licence was real or not either.

Interestingly, my prepaid MasterCard contactless sticker worked perfectly in 7-Eleven, and I have an independent witness and photos to prove it (thanks to our good friends at Glenbrook). But my UK contactless Visa cards were not recognised in any US terminals. Why? Because the sticker is MSD and the cards are EMV and the US terminals aren't reading EMV contactless (although terminals here in Singapore do).

The result of all this is, essentially, that when I walked into a shop, I had no idea which cards would work properly or not. The whole system is beginning to annoy customers, and I just can't see how it can continue this way, with US customers having their stripe cards refused in the UK and UK customers having their cards refused in the US. Time for some change.

Continue reading "Front line" »

Is more e-crime actually identity crime?

By Dave Birch posted Sep 7 2010 at 12:44 PM

[Dave Birch] I was kindly invited along to a breakfast briefing on e-crime by the folks at International Business Wales. They are trying to develop the financial services business in Wales by bringing together business, academia and government to create a more effective infrastructure. Obviously, financial e-crime threatens this sort of development, so I can see why they would be interested in finding ways to avoid it. Naturally, I was mainly interested in the payments-related parts aspects of the discussion, but I was generally curious about the topic as a whole. Before I reflect on the presentation, an aside on the topic of financial e-crime. There's no doubt that financial e-crime is on the rise the world over: here is one just one case chosen almost completely at random:

Criminals have stolen more than $479,000 from a Pennsylvania housing development authority after infecting its computer system with the notorious Clampi Trojan. The crime is the latest in a rash of heists from small business banking users in the US, which has led some industry bodies to suggest radical lock-down procedures for companies banking online.

According to local press reports, the Trojan was installed through a fake Web site purporting to belong to Cumberland County Redevelopment Authority's bank, M&T.

Once installed, Clampi stole passcodes which were used to transfer the money to bank accounts set up by the hackers at 11 different financial institutions. About $109,000 has been recovered since the money was taken on 22 September.

[From Finextra: $479,000 heist from small business bank account lends weight to calls for online banking 'lock-down']

This is clearly recognisable e-crime, but there are many other forms. In the UK, the probably biggest single category of business fraud is VAT carousel fraud. Is this an e-crime or not? Even though the crime is perpetrated using computers, I wouldn't call it an e-crime, since exactly the same crime could be carried out in exactly the same way without computers. What about credit card fraud? That clearly needs computers to execute at scale, but again I wouldn't really call cloning magnetic stripes "e-crime". I'd give card fraud its own category.

Police in 12 countries have arrested 178 people accused of involvement in an international credit card cloning ring that is believed to have netted crooks around EUR20 million. According to the Spanish Interior ministry, the arrests come after a two-year investigation that culminated in 84 raids in Spain, Italy, Romania, France, Germany, Ireland, Sweden, Greece, Finland, Hungary, the US and Australia.

The raids turned up 11 cloning 'laboratories' with around 120,000 card numbers and 5000 fake cards found in Spain alone.

[From Finextra: Card cloning raids net 178 arrests]

What? $20m? That's peanuts. Some guy was just indicted for a fraud fifty times bigger than that.

Former South Florida lawyer Scott Rothstein was sentenced to 50 years in prison for using his law firm to run a $1.2 billion Ponzi scheme that financed a lavish lifestyle, bankrolled his firm and bought political influence.

[From Rothstein Gets 50 Years for $1.2 Billion Fraud (Update3) - BusinessWeek]

Card fraud is so last year. But on to the report.

Continue reading "Is more e-crime actually identity crime?" »

Big bills

By Dave Birch posted Sep 6 2010 at 4:44 PM

[Dave Birch] Having started to fill out my online tax return, and having read a lot about tax in the newspapers over the weekend...

HMRC admitted last week that 4.3 million people were in line for tax rebates because they overpaid a total of £1.8 billion in tax between 2008 and April this year. A further 1.4 million face demands for repayment because they paid too little.

[From 10 million in line for rebate after tax fiasco - Telegraph]

..it reminded me that not everyone is paying their share. The European Central Bank (ECB) is making some decent money from cash, but it may be at other peoples' expense.

Gangsters, drug dealers and money launderers appear to be playing their part in helping shore up the financial stability of the euro zone. That's thanks to their demand, according to European authorities, for high-denomination euro bank notes, in particular the €200 and €500 bills. The European Central Bank issues these notes for a hefty profit that is welcome at a time when its response to the financial crisis has called its financial strength into question.

[From Drug Dealer's Bill of Choice Boosts the Euro Zone - WSJ.com]

Well, I suppose in these difficult economic times then every little helps as far as the central bank is concerned, but I wonder if the morality of this operation isn't a tiny bit suspect?

The high-value bills are increasingly "making the euro the currency of choice for underground and black economies, and for all those who value anonymity in their financial transactions and investments," wrote Willem Buiter, chief economist at Citigroup, in a recent research report.

[From Drug Dealer's Bill of Choice Boosts the Euro Zone - WSJ.com]

When I interviewed Willem for our Tomorrow's Transactions podcast series, he said that no €500 has ever been used for an honest transaction! You would think that there would be considerable pressure from cash-strapped European governments to start removing high-value banknotes from circulation in an attempt to reduce crime and fraud, or at least increase its cost. Never mind drug dealing, plain old fraud is a massive problem, and it means that honest taxpayers such as me end up having pay more to cover for the fraudsters.

VAT fraud is a serious problem in the EU; losses in VAT receipts from fraud are estimated to be around 10% every year.

[From Combating tax fraud and harmful tax practices: Commissioner Šemeta welcomes two important agreements in ECOFIN]

The fraudsters, by the way, are having a field day. Any new system introduces new opportunities for fraud, and the EU is not short of new systems.

European authorities believe the EU has lost at least €5bn to carbon-trading VAT fraud in the last 18 months. Europol, the EU's law-­enforcement operation, fears the fraud will be used in other areas, especially gas and electricity trading markets, after criminals found VAT fraud was one of the most lucrative financial frauds... The fraud occurs when carbon credits are bought and imported tax-free from other EU countries, then sold to domestic buyers, charging them VAT... The three Britons allegedly set up a firm in Tournai, in west Belgium, which bought the credits in Britain and sold them on to banks via an intermediary, pocketing the 21% VAT charged in Belgium.

[From Three Britons charged over €3m carbon-trading 'carousel fraud' | Business | guardian.co.uk]

As national treasuries deplete, surely someone is going to eventually start wondering if the cash itself (in the form of high-value notes), rather than the rules about tax, that is the problem. All around the world, monetary authorities issue high-value banknotes to earn seigniorage and then lose far more than that seigniorage to crime and fraud. I understand that in Korea the new 50,000 Won bills introduced last year have made their way out of circulation and are primarily used for gambling, and I'm sure that's not the only example of banknotes that are simply never used as a circulating medium of exchange but only as a store of value outside the formal economy.

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