Digital Money

One of these days, this sort of thing will get me into trouble

[Dave Birch] I very much enjoyed my day chairing the Next Generation Cards and Payments conference (tag #ngcp) in Brussels. I have to say that our friends at Clarion did a fantastic job: the speaker line-up was outstanding and the room was packed (mainly with banks but there were telcos, retailers and others too).

Tom Chatfield, Fun Inc.

[Dave Birch] Tom Chatfield is an author, editor, essayist, game theorist and sometime thinker; his book on the culture of video games, "Fun Inc.", is published by Virgin Books in the UK and Pegasus in the US. Tom has done design, writing and creative consultancy work for a number of online games and media companies, including Mind Candy, Grex, Red Glasses and Intervox, and speaks regularly on technology, media and gaming. His latest project involves writing and design work on a new game for the award-winning British games company Preloaded.

He is currently the arts and books editor at Prospect magazine, and writes widely in the national press, including for the Observer, Independent, Sunday Times, Wired, New Statesman, Times Literary Supplement and Prospect.

By the way, I apologise unreservedly for my appalling hiccoughs during the interview - I tried everything to get rid of them!.

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

Form and function

[Dave Birch] Money has several different functions in society.

All of these functions are bundled together into a single (for lack of a better word) asset: currency. Sometimes, these functions are complementary [and sometimes the] functions of money conflict with one another.

[From Umair Haque / Bubblegeneration]

Umair is spot on, and to back him up I thought I'd blog an extract from some pieces I wrote a few years ago to try to explain to a business audience why the digitisation of money might lead to these functions being implemented very differently in the future. The beginning of the extract comes from a paper call "E-Cash, So What?" that I presented at "Digital Cash and Micropayments, Unicom (London: February 1997)", the second part is from a paper that Neil McEvoy and I wrote called "Electronic Cash - Technology will denationalise money" that I presented at "Financial Cryptography (Anguilla: February 1997)" and the more detailed final section comes from an unpublished chapter of a book I'm working on.

Why?

[Dave Birch] Why do you pay the way you pay? Why do you choose certain cards and why do you choose the subset of those cards that you carry around? What is in your wallet? I saw this, and began thinking...

So I polled the Credit Slipsters, and a few other people who teach payments law (some of whose responses will appear in comments to this post), and here is what they said about what they carry and how they pay.

[From What's in Our Wallets? - Credit Slips]

It was very illuminating to see the answers and to reflect on the combination of marketing, economics, psychology and technology that drove the choices, so I thought it might be fun to repeat the experiment in the Digital Money playhouse and see if anyone would join in (please comment) below. I'll go first.

I actually have three wallets: I call these my travel wallet, my main wallet and my "London" wallet. My main wallet contains four cards:

• A British Airways American Express card, which is my default business card. I travel a lot and this card gives me BA miles. But more importantly, if you spend more than £10,000 per annum, it gives you a free BA complimentary flight: since I have so many miles, this means that last year (and this year) I will get a free first class flight anywhere in the world. For a humble salaryman such as myself, this is a wonderful perk.
• A John Lewis MasterCard, which is my default non-business card. It has 1% cashback in John Lewis vouchers: last month, this meant a nice surprise in the post: £80 off our weekly shop in Waitrose. Actually, as I write, it isn't in my wallet because John Lewis called me up a couple of days ago and said that my card details had been used to buy something on Yahoo in a transaction I didn't recognise, so they've cancelled our cards and are sending us replacements.
• A Barclays Visa debit card, which I only ever use at the ATM. I never, ever, buy anything with my debit card and I have the slightest idea why anyone else does either.
• A Visa prepaid card. It's always useful to have a prepaid card to hand. Now and then the kids will need to go to the shops to get something -- the Bluetack, folder and card for the school project to be handed in the next morning -- and it's convenient to be able to give them a card instead of rummaging for cash or going to the desktop to FPS money to their accounts.

I don't always take this wallet with me. If I only going into London for meetings, I have a small cardholder that I call my London wallet and carry in my back pocket. This only contains loyalty cards for the main coffee chains and my Barclaycard OnePulse contactless Visa card with Oyster built-in. This is a brilliant card: tubes and buses and it auto-reloads from my Barclaycard account.

My travel wallet changes every time I travel: I use it to carry foreign cash, plus prepaid cards. So, if I'm in the US or elsewhere, it will have my stripe Travelex Visa US$ prepaid, if I'm in Europe, it will have my chip Thomas Cook MasterCard € prepaid card. If I'm going somewhere that I have transit card for (eg, SF, Singapore) then I put the transit card in it. I had my main wallet stolen in Brussels a few years ago, so now I leave my main wallet locked up in the hotel and I'll only take one of the cards out that and put it in my travel wallet if I know I'm going to buy something expensive, such as dinner for one of our valued clients.

None of the above are my favourite though: that's still my MasterCard PayPass prepaid contactless sticker on the back of my iPhone. So far, I have twice forgotten my wallet when I go to the office (because I cycle to the office, so I sometimes forgot to put the wallet in my cycling rucksack) but remained smugly indifferent, because I can pop out for coffee and a sandwich in Guildford and pay with my sticker. I never forget my phone, and if I did, I'd go back home and get it.

My payment choices are, I think, pretty mercenary. I'll go with the best rewards deal or the best cashback, generally speaking. The two cards that I use all the time where this isn't true are the OnePulse card, because it's so convenient to go around with just the one card for travel, for QSR contactless and for regular chip & PIN purchases, and the PayPass sticker because it's always on my mobile and therefore always on my phone (and, frankly, because it's fun and cool to astonish other shopppers by paying with your iPhone). OK, I've been honest and open. Your turn.

Deepak Jain, Device Fidelity

[Dave Birch] Deepak Jain has a background in the smart card industry having worked for many years for Axalto and then Gemalto, but he is currently leading a start-up, DeviceFidelity, that has obtained multiple millions of dollars in funding to deliver an portfolio of products in the financial services ecosystem, especially focused towards enablement of NFC and contactless on mobile devices. In this podcast, he discusses their microSD NFC product and explains why it might be wrong to think of it as "bridging" technology to NFC handsets.

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

It's a card Jim, but not as we know it

[Dave Birch] The issue about EMV migration continues to attract attention and discussion as the US and EU become two regions divided by a common standard, as one might say. The problems with using US-issued magnetic stripe cards (dynamic or otherwise) elsewhere are becoming more common and more serious. Take this representative tale of woe from Business Week, concerning an American stuck in Europe following volcanic misbehaviour in the North Atlantic.

Burke stood in line for more than seven hours at an Amsterdam train station in April as he sought passage to Belgium. He watched European travelers, also grounded by the eruption, buy tickets at automated kiosks that accepted microchip-embedded credit cards. Burke's Bank of America (BAC)-issued Visa (V) card, with the standard magnetic stripe on the back, was useless. When the 64-year-old retired economist from Bandon, Ore., returned home, he called Bank of America to ask whether he could get a chip card. The answer disappointed him: "They have basically said, 'Sorry, but you're out of luck.' "

[From Why U.S. Credit Cards May Not Work Abroad - BusinessWeek]

How they resisted the temptation to say "it's card Jim, but not as we know it" I'll never know. But there's a serious point to all this: the end of the universal acceptance. It's always been a pretty fundamental consumer characteristic of the international card schemes that customers expect to be able to use the cards wherever they see the acceptance mark, but how much longer can this last? I mean, I know it's my business to mess around with different, new cards (and near-cards) all the time, but I do find it slightly worrying that I can no longer tell when going to buy something whether my cards will be accepted or not. It's worse for our American friends, because the transition to chip and PIN makes it more attractive to have unattended POS for higher-value transactions.

The problem is particularly acute at automated kiosks in Europe, such as the vending machines at regional rail stations and bicycle rental racks in Paris, parking meters in parts of London, toll roads and gas stations, all of which accept only chip-and-PIN cards. And the problem could get worse. More unattended pay stations are appearing in Europe.

[From Americans abroad run into trouble using credit cards - USATODAY.com]

I don't know what proportion of US cardholders travel to Europe, or indeed anywhere else, but I imagine it's quite low. So, we're soon going to see a situation where unless US issuers provide chip and PIN cards to those cardholders, they will start to find their cards useless. At which point, they might be vulnerable to an assault from Bling or Isis or whoever.

In line with Europol’s stance on the future of the magnetic stripe and in support of the industry’s efforts to enhance the security of cards transactions by migrating from the “magnetic stripe” to “EMV chip” cards, the Eurosystem considers that, to ensure a gradual migration, from 2012 onwards, all newly issued SEPA cards should be issued, by default, as “chip-only” cards.

[From The end for the magnetic stripe on payment cards?]

Of course, the reverse will also be true. Persons such as myself who travel to the US will have to obtain magnetic stripe cards from their banks. I already have a Travelex $ Cash Passport stripe-only prepaid card that I take to the US with me, and I really wouldn't have a problem with paying a couple of quid to my issuer to get a stripe-only limited-time card for use in the US when I travel there. I would also like the ability to limit my Barclays Visa debit card to ATM-only use in the US. I'm not alone in thinking about this sort of thing.

In the first poll 60% of the respondents felt that European EMV cards should not hold sensitive cardholder data as standard in a magnetic stripe, and in the second poll 28% indicated that they would be happy to contact their bank to activate the stripe on their card before travelling outside of Europe, 12% were happy to carry a Chip only card, and to apply for a separate stripe card should they need to travel outside Europe, and 20% were in favour of both.

[From The end for the magnetic stripe on payment cards?]

How do we balance this out? What is the appropriate strategy in the US? We might categorise the broad options as migrate to EMV (very expensive), keep stripe and issue EMV to international travellers (very inexpensive) or forget about stripe and chip and (via contactless) let them fade away as we move to NFC, mobile, biometrics and other forms of 21st-century payment (costs utterly unknown).

Innovate and innovation

[Dave Birch] One thing that struck me about PayPal's "Innovate 2010" conference in San Francisco, in (I have to say) fairly stark contrast to many of the events I attend in the more traditional banking world is just how much innovation was actually going on. Too often I'm tempted into a presentation on radical innovation in international payments only to find that the radical innovation being discussed is changing field 27 of message type 94 from two bits to three bits. At Innovate, though, the innovation was real: entirely new products and services that depend on the existence of the new payment platform underneath them.

Some of the stuff on show was fabulous: the stuff on augmented reality (with Layar), the digital TV commerce button, the digital goods purchasing. I enjoyed looking round what the developers were doing and I even wandered into the hackathon to see if I could understand what they were doing. What they were doing was writing code to create new applications there and then. And they did.

Over 300 people hacked for 15 hours and we’re pleased to announce the winners of our Hackalicious Hackathon! Congratulations to PayTEL, Affiliation APP, Tweet Engine for PayPal Docs and Buddy Beers social gift-giving for creating the most innovative demonstrations of how to “change the way people pay” using PayPal X’s tools, services and products

[From PayPal X Developer Network: Naveed Anwar's Blog: Winners of Second PayPal X Developer Challenge and Hackathon Revealed! Innovate 2010 Comes to a Close.]

It's funny though, but I thought that one of the most significant announcement was one of the dullest. While the stuff about television buy buttons and digital goods purchases and super-cool augmented reality will grab most people's attention, I thought that it was the announcement of PayPal Business Payments that seemed to me to be something that will mean real industry change. By coincidence, I happened to be chatting in the break to a developer who works on real-estate management software and he surprised my by saying that he works on commercial projects (for shopping malls and so forth) where the tenants want to use PayPal to pay bills. This, and a couple of other conversations I was involved in, leads mean to think that Russ Jones from Glenbrook is surely right to say that

We expect PayPal Business Payments to find a good reception in B2B payments, rent payments, healthcare payments, and other similar commercial markets. Learn more about PayPal X for business payment

[From PayPal X Innovate 2010 – Day 1 — Payments Views from Glenbrook Partners]

This is why I ended up spending more time looking at what the folks from Freshbooks and Bill.com were doing, because it seems to me that these kinds of solutions will be transformational: they will make a big difference to small businesses, which are most businesses. Freshbooks provides an outsourced invoicing service for small businesses, so that if you are (say) a small architect practice or law firm then you sign up and they generate invoices for you and automate collections. Bill.com works on the other end of the problem, which is to take your bills and automate their payment: when you get a paper bill you scan it in or fax it to them, and they turn it into an electronic item that you can process online (and pay using PayPal, naturally). If you think about the processes in a typical small business, the automation of the payment by itself just does not mean a massive cost saving: you have to get rid of the paper documents that go with it too.

We might summarise the sector as "e-invoicing" and, believe me, no matter how dull that sounds, the companies that crack it are going to make a lot of money.

Russian regulation

[Dave Birch] As many people have noted, the Russia e-payments landscape is really

According to Victor Dostov

There are 25 million active "e-purses" (web wallets containing pre-paid value) and the market is growing at 20%.

The market is now going to be shaped by regulation. It's a difficult problem for regulators, to take a rapidly growing market and add prudent regulation without disrupting

The government has approved a bill to regulate e-payments, a market that is growing at 40% per annum.

Viktor Dostov, the chairman of the Russian E-Money Association, says that the bill is a reasonable compromise, requiring operators such as WebMoney and Yandex.Dengi to obtain a Central Bank licence for "non-banking credit organisations". The law requires such organisations to have a minimum equity of 18m roubles ($600,000), which may be a little high for innovative startups.

It is very tempting for regulators to demand rigorous identification Here's an example. The current "Draft law on the National Payment System" has the concept of "proportionate identification" which is important.. The law also contains a sensible balance on KYC, so no identification is needed for payment accounts with a maximum balance of 15,000 roubles.

Under current framework, there is no equivalent of the European "Payment Institution" or "Electronic Money Institution". One of the key aspects of European regulation is that it has allowed non-banks to bring innovation to the sector

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Yota, Russia's leading 4G networks operator (offering WiMax, battling for LTE frequencies and thinking about brand-name handset), launched a partnership with Mobi. Dengi (a mobile money transfer scheme working closely with Beeline, a Russian MNO) and Tavrichesky Bank - to allow its subscribers to use the money they have topped up to their prepaid account - to pay for other services like utility bills, TV, mobile top-up.

[From Retail Banking in Russia: Innovation Unfolded: Each decent Internet service provider strives to create its own payments wallet]

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A channel challenge

[Dave Birch] Writing in E-Finance & Payments Law & Policy (volume 4, number 9), Dan Schutzer (the Executive Director of the Financial Services Technology Consortium, FSTC) writes on "Challenges of the US banking and finance channels". He notes that innovation in the US seems to be centred on the mobile phone and can be divided into three categories: innovations that mean new payment networks, innovations that use existing networks but bypass banks (note that both Visa and MasterCard have followed PayPal in opening up their APIs) and innovations (often targeted at merchants) that use existing networks and issuers.

If mobile is the key new channel (and I'm sure Dan's right about that), then it's reasonable to ask to what extent innovation is possible in the latter case: that is, given the well-known provisions of the "innovator's dilemma", how can (in the specific example of mobile) banks and schemes develop great propositions? Patrick Gauthier highlights three key roadblocks.

1. The economic buyers – i.e. the Mobile Operators and Issuers – have not solved their rivalry: Behind the scene a furious battle has raged on the ownership of the secure element used to secure transactions, a proxy for the question of who will own the customer relationship.
2. Consumers have good enough methods of payments as it is: Without prejudice for the vision behind NFC, the need for a new method of payment delivery based on handsets is tenuous... Absent a reason for consumers to want it and a business case for Issuers to support, standalone payments is an unlikely "killer application."
3. No good path has been proposed to reach a critical mass of users: If I had a penny for every time I have heard about "the-chicken-and-egg" problem, I would be retired by now.

[From NFC: Past, Present and Future - pymnts.com]

Patrick's analysis explains the paralysis in the operator-handset-bank domain. Yet the truth is that customers like NFC and they want it: hence the action is shifting from a consensual evolution at the interface between the mobile industry and the financial industry to a "screw you" revolution where more aggresive service providers (not only in payments) are using stickers (Bling Nation), microSD (Visa) and other technologies (China Mobile) to simply bypass Nokia and Telefonica, Apple and AT&T, RIM and Vodafone.

Kei Shimada, Infinita

[Dave Birch] Kei is the Founder and CEO of Infinita Inc, a multinational mobile research, consulting and development firm located in the heart of Tokyo. He was born in New York and moved to Japan in the late 80's. After graduation, he has worked for Panasonic, Lucent Technologies and Cybird, all leading companies in their respective industries. Infinita clients include IBM, Adobe, Cybird, Dentsu, Deutsche Telekom, Docomo.com, Softbank Mobile, Gameloft, Itochu, Orange, Qualcomm, Swisscom, Turkcell and the Embassies of Canada and Denmark in Japan. In this podcast he helps us to understand why the Japanese mobile payment market is the way it is.

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