Digital Money

Reporting from behind enemy lines

Back on 27th October 2010, while reflecting on the EFMA "Future of Cash" conference in Paris, I reported on the talk of Mr. Benjamin Angel, who is Head of Unit for Economic Aspects of Regulatory Policy, DG ECFIN at the European Commission [PDF Directory]. In part of his presentation, he referred to the Commssion's instruction on legal tender, which requires retailers to accept low value coins (which some had stopped doing) and high value euro notes (which some had stopped doing). In fact, the recommendation, as I'm sure you'll recall, says that (amongst other things)

* It should be the rule to accept high denomination banknotes
* No surcharges should be imposed on payments in cash
* Member States should not adopt new rounding rules to the nearest five cent

[From Paying with euro cash in the euro area: Commission recommendation on legal tender of the euro - ECFIN - European Commission]

This is, of course, a bad idea: it raises the costs for retailers and consumers for no net welfare gain and has only come about because of the euro currency's symbolic status. Retailers should be entirely free to reject high denomination banknotes (which should not really exist anyway) and low value coins, pointless shrapnel that are value-destroying (because they cost more to make and distribute than they add to the economy). Rather flippantly...

I decided to try and bring the system down from within, so I spoke up and called for immediate action agains the Netherlands, where some shops in Amsterdam are to cease accepting cash from next week: let's see what happens.

[From Digital Money: Behind enemy lines]

Today I am informed -- via a wholly reputable source -- that Mr. Angel has indeed sent a formal letter to the Dutch Consumer Authority (part of the Competition Authority) complaining that the Saturday organic farmers' market in Amsterdam doesn't take cash. This was covered here back in February, when I noted that the

Dutch Consumers' Association are predicting cashless retailing within five years.

[From Digital Money: Only five more years?]

The DCA has, so I am told, replied to Mr. Angel that it feels there is no problem. Will Mr. Angel now starting proceedings against the Netherlands for defying a Commission recommendation? Stay tuned...

My old Dutch

The Netherlands seems to be a front line in the European war on cash and it is the retailers who are leading the charge. Here, for example, is a pharmacy that no longer accepts cash: Twitter crowdsourced translation of the sign is that "From 1 Oct 2010 onwards, payments can only be made using debit cards - this for the security of our employees". This is an interesting new development: a skirmish between cash and cards that is based on something other than merchant costs. I understand that the local government wants to make one of the major shopping streets in Amsterdam "Ferdinand Bolstraat" cash free. In the south of the country is Almere, which the mayor would like to see as Europe's first cash-free town. I see that

Pinnen en winnen is een actie van Cashless Almere, een samenwerkingsverband van winkeliers- en ondernemersverenigingen, banken, Currence (merkeigenaar PIN), Koninklijke Horeca Nederland afdeling Almere, politie en gemeente. Deze partijen werken samen aan het verminderen van contant geld in de winkels en horeca. Dit verkleint de kans op overvallen.

[From Burgemeester van Almere]

According to Google, this means that "PINs and winning is an action of Cashless Almere, an association of retailers and trade associations, Currence (brand owner PIN), Koninklijke Horeca Netherlands Almere department, police and council". It says that they are working together "to reduce cash in the shops and restaurants" because this reduces the risk of robbery. Something that may help them in this goal is the arrival of mobile payments, because there are probably the most significant step on the road to cashlessness.

Rabobank, ING and ABN Amro; and telcos: KPN, Vodafone Netherlands and Rabo Mobiel; are considering offering customers contactless payment, loaded onto SIM cards in NFC phones.

[From Dutch Banks and Telcos Consider NFC Mobile-Payment Launch | NFC Times – Near Field Communication and all contactless technology.]

There are many unique aspects to the Dutch electronic payments landscape: they still use an electronic purse (but only for parking) and they have the iDEAL internet payment scheme, which has been wildly successful in replacing the cards for online purchases.

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.

[From Digital Money: Is this the iDEAL third scheme?]

Another unique aspect of the Dutch market is that the banks and the operators co-operate with each. In September, this agreement to "consider" NFC payments had firmed up to the announcement that the "six pack" (as they have rather bizarrely been called) are going to go ahead and launch a service.

T-Mobile, Vodafone, KPN, ABN Amro, ING and Rabobank have signed a letter of intent to jointly introduce NFC across the Netherlands from 2012.

[From Dutch banks and mobile operators to launch national NFC service • NFC World]

As an aside, I can't resist noting that there is also a peculiarly Dutch answer to another question: which retailers won't be accepting mobile, contactless, EMV or any other electronic payments? The answer is Amsterdam's famous coffee shops, where bankers gather to develop new financial services products. These coffee shops are being pressured to start accepting cards so that more of their operations are on the books. This is, of course, a good idea. People like me wouldn't feel so bad about paying their taxes if they felt that everyone else was paying theirs. But the coffee shops, tolerated under the Dutch system, have a supply chain chain that is not. The wholesalers, so to speak, have expressed a marked reluctance to be paid by SEPA credit transfer.

It's this sort of thing that makes me love my job.

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

What is cash actually for?

[Dave Birch] Cash has some unpleasant side-effects and these really ought to be factored into the big picture when it comes to examining the transition to digital money.

In terms of public safety and national security, the sooner the world moves to a digital cashless economy, the better.

[From Turn In Your Bin Ladens - NYTimes.com]

Most of the cash "in circulation" (I use the quotes because it is not, of course, actually in circulation at all but being hoarded in various places) is used only for criminal purposes: tax evasion, money laundering, drug dealing and so forth.

Somali pirates are reported to have received a total of $12.3m (£7.6m) in ransom money to release two ships. They are believed to have been paid a record $9.5m (£5.8m) for Samho Dream, a South Korean oil tanker, and nearly $2.8m (£1.7m) for the Golden Blessing, a Singaporean flagged ship.

"We are now counting our cash," a pirate who gave his name as Hussein told Reuters news agency.

[From BBC News - Somali pirates receive record ransom for ships' release]

Once again, these miscreants aren't looking for prepaid mobile phones, gift cards or PayPal accounts: they are after cash, and I'll lay a pound to a penny that they didn't want Yuan or Roubles or Kenyan Shillings and an M-PESA account in a false name: they wanted dollars, and in $100 bills. The cash was dropped from a helicopter on to the ship. Now, I've heard some people -- including some people from banks -- say that this is fair enough, because the seigniorage on the cash represents a tax on criminal activity and it's better to collect this stealth tax from the bad guys that impose more taxation on honest, hard-pressed taxpayers. But I have two objections to this line of thinking:

1. First of all, it is not at all clear to me that the state should live off of criminal earnings. If something is legal and taxed, fine. But if it's illegal, it's illegal.
2. Secondly, the revenues that accrue to the central bank from this enterprise are small compared to the revenues denied to other parts of government. So in the central bank books, life looks good. But over at the treasury, there's a black hole where the revenues from honest enterprise should be.

Perhaps the non-central bank parts of government might look to the central bank to use some of seigniorage revenues to subsidise the introduction of electronic payments to parts of the economy dominated by cash. But what kind of electronic payments? I suppose the government could start developing its own form of e-cash, but I'm not sure that's the best way forward. Maybe there's another way. Perhaps we need a new form of e-cash (that we haven't seen yet) for the new economy because we are trapped using money developed in a previous age for the commerce of the next. In his excellent book "The Birmingham Button Makers", Professor George Selgin explains how the British economy faced that same problem during the industrial revolution.

Today, the big problem of small change is no longer such a big problem, although shortages of wanted coin continue to occur sporadically around the world (e.g. here and here) as well as surpluses of unwanted coin. Nevertheless, the basic problems of private coinage were trust and credibility. Modern issuers of digital cash face the same problems and thus Selgin's history is a valuable reminder about the scope and potential of alternative monetary institutions.

[From Marginal Revolution: Good Money]

Indeed, and apart from a general interest in the history of money, this is precisely why I found George's work so interesting. Could we see a similar trajectory in the post-industrial economy? This would suggest that private operators might step in to the market to fill the void and then when the competition had run its course and the "best" coinage had been established, then the government would step in and provide it as a public good. Perhaps the Bank of England should run its own version of PayPal and the government should insist that everyone has an account if they want to receive state payments of any kind: welfare, pensions, wages and so on! Once all of money is digital, as opposed to the current 96.3% (in the UK), who knows where that will take us.

As money becomes completely digitized, infinitely transferable, and friction-free, it will again revolutionize how we think about our economy.

[From The Future of Money: It’s Flexible, Frictionless and (Almost) Free | Magazine]

I think this is true. You'll have a chance to kick around these kinds of ideas if you come along to the 14th annual Consult Hyperion Digital Money Forum in London on 2nd/3rd March 2011, where George Selgin will be along in person to give a keynote talk.

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

iPown

To understand why the fuss, and why this is of relevance to the digital money world, you need to understand a couple of technical architectures relating to mobile phones and the role of the Secure Element (SE). The SE doesn't exist in phones yet, but it's important because if we want to implement anything important (such as payments) inside a phone, we need somewhere to store cryptographic keys, and that somewhere needs to be tamper-resistant to a great degree. Thus we need a handset to have an SE. Ah! You might say: but handsets already have a tamper-resistant thingumy inside them, why not use that?

That's a good point. In the modern way of things, the tamper-resistant chip thingumy the handset is more properly called the UICC:

The UICC (Universal Integrated Circuit Card) is the smart card used in mobile terminals in GSM and UMTS networks. The UICC ensures the integrity and security of all kinds of personal data, and it typically holds a few hundred kilobytes. With the advent of more services, the storage space will need to be larger.

[From UICC - Wikipedia, the free encyclopedia]

Historically, we've tended to associate the UICC (in the form of a removable smart card) with one application only, and that application is the Subscriber Identification Module (SIM) that allows the phone to connect to a mobile network and refer to the combination as "the SIM". But...

A UICC may contain several applications, making it possible for the same smart card to give access to both GSM and UMTS networks, and also provide storage of a phone book and other applications

[From UICC - Wikipedia, the free encyclopedia]

It can also contain more than one of each. Thus, you could have multiple "soft SIMS" inside one UICC (that special case where the UICC contains only one application, and that is a SIM, we will refer to henceforth as the "hard SIM"). Now let's consider what happens when Apple add an NFC interface to their devices and therefore need an SE.

The filing also points to the inclusion of near-field communication (NFC) technology in upcoming iPhones — and, for that matter, in Macs and media devices such as the Apple TV.

[From Apple patent seeks to reinvent retail • The Register]

Where can the SE that makes the NFC interface useful go? Either we can plug in an SE (eg, a DeviceFidelity microSD) or we can add an SE to the UICC (the e GSM Association, GSMA, preferred option) or we can build an SE into the device by adding it to the motherboard. The GSMA want to put the applications that control the NFC interfaces to be on the UICC, which kind of makes sense because if you take your UICC out of one phone and put it in another, then you'd want your SE applications (eg, your MasterCard, Oyster etc) to go with it. But not everyone thinks that the SIM is the key to this picture.

Suppose that instead of adding an SE, Apple add a UICC and put the SE in that? What this means in practice is that the UICC will be inside the iPhone or iPad or Mac, on the motherboard. But the SE need not be the only contents of the UICC. Why not put soft SIMs in there as well and do away with fiddly microSIMs? If I walk into the Apple Store in London and buy a 3G iPad, say, then the UICC could come with a default SIM application. Let's say this is O2. When I take the iPad to France, instead of paying outrageous 3G roaming charges (and therefore leaving my iPad at home), my iPad will download a French operator's SIM application and start using that. I won't choose the operator -- in fact I won't even know this is going on, because Apple will simply negotiate with mobile operators to provide commodity service.

In other words, perhaps we move to a world in which the operators' SIM connectivity function becomes just software running on someone else's physical card.

[From Dean Bubley's Disruptive Wireless: Apple, embedded SIMs, NFC and mobile payments - some speculation]

Dean is spot on. And you can see plenty of positives in this architecture. If you're not a mobile operator, that is. If you're a mobile operator, this is another step towards being nothing more than a pipe. As a customer, I think I'd be quite happy with the mobile operators as a pipe, selected purely on a cost/QoS basis (and competing with each other on that basis). After all, they haven't (in Europe) got very far with "smart pipe" services such as, just to name two examples, digital money and digital identity. So the Apple UICC containing soft SIMs and an SE may not be such a bad architectural option for consumers. But...

The operators are privately saying they could refuse to subsidise the iPhone if Apple inserts an embedded subscriber identity module, or Sim card.

[From FT.com / Telecoms - Apple warned over built-in Sim cards]

There are other people in this value chain too, such as smart card manufacturer Gemalto who were rumoured to be making the Apple UICC.

Gemalto explained to us why such a deal, which involved a significant amount of devolution from the mobile phone operators to the mobile phone manufacturers, is unlikely to happen without the tacit approval of network carriers themselves.

Gemalto has been a strategic partner for mobile phone operators for more than a decade now (the company is the biggest SIM manufacturer in the world) and gets the majority of its revenue (more than 60 per cent of last year's 1.654 billion Euros).

[From Gemalto : No Apple iPhone 5 Deal On The Table Yet | ITProPortal.com]

Quite. But let's just go back over another main point: in order to provide payments, or other useful services, via NFC it is not necessary to have the co-operation of the carriers.

Visa's approach "shows that basically there's nothing that the carriers can do that the [payment] networks can't do without them," McPherson said.

[From Mobile Payments Set for Surge, But Who ll Set the Pace? - American Banker Article]

The mobile operators have no acceptance at retail POS so they have to work with payment scheme partners to reach scale, but other payments players don't need the operators. They can put stickers on the back of phones, plug microSD into handsets or use the NFC interfaces that will be built in by Google, Apple and RIM. Since customers will come to expect these services, they will eventually get built in to all handsets. Unless the operators can launch highly functional NFC platforms quickly (which they probably should have started doing a couple of years ago) then they will be out of the loop.

Issuing hard SIMs is expensive, so if the operator's connection with the customer is downgraded, there is no point in doing it and the operators would save money by providing soft SIMs to any UICC that they can bill to. So I think the situation is this: in the future, many devices will a UICC built-in. This UICC will function as an SE for NFC interfaces. The UICC will store a number of soft SIMs, not only for mobile phone communications but for future 4G and 5G communications. The UICC will also hold standard digital money and digital identity applications. And instead of Vodafone and Telefonica controlling the matrix, Apple and Google will.

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

James Turk, Goldmoney

[Dave Birch] James Turk is the Founder of GoldMoney, a new electronic currency for use in e-commerce, which is the result of United States patents awarded to him in September 1997 and June 1999. At the end of October 2010, GoldMoney had $1.29 billion under management.

James has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a B.A. degree in International Economics. He began his business career with The Chase Manhattan Bank, with whom he worked for eleven years, principally in the International Department, which included assignments in Thailand, Hong Kong and the Philippines. From 1980 to 1983, Mr. Turk was with RTB, Inc., the private investment and trading company of a prominent precious metals trader based in Greenwich, Connecticut. He moved to the Middle East in December 1983 to be appointed Manager of the Commodity Department of the Abu Dhabi Investment Authority. In this position, Mr. Turk was responsible for developing and implementing the investment strategies of that organization's portfolios of precious metals. Mr. Turk held this position until March 1987. Since then Mr. Turk has acted as Chief Executive of Greenfield Associates, a firm he established in 1985 to publish his work and to provide investment research and trading advice, principally to investment managers, hedge funds and commodity trading advisors in the United States and Europe.

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

Dry

[Dave Birch] Having said that I couldn't see any circumstances in which I'd use a contactless card at my dry cleaners, I just did.

I went in with some dry cleaning which came to £11 or so. I took out my MasterCard and put it in the terminal, punched in my PIN and then waited a while for it to dial up and authorise. While this was going on, I noticed that the terminal was a new Ingenico i-series terminal with contactless interface. So, as an experiment, I bought £7 of shoe polish: the chap keyed in the transaction and sure enough the contactless interface lit up: I paid with my Visa contactless card which, since it was offline DDA, was instant. Excellent.

London buses show us the way

[Dave Birch] The Mayor of London, Boris Johnson, has been talking about the next major revolution to come in London transit ticketing.

Public transport travellers will be able to swipe credit or debit cards in the same way as Oyster cards by 2012, Boris Johnson revealed. The Mayor said the phased scheme will start on buses in the run-up to the Olympics and then move on to the Tube. Prices will be the same as with Oyster. Mr Johnson has also pledged that a "next generation" Oyster card will be released by 2014.

[From Commuters will soon be able to use credit cards like Oyster by 2012 | News]

What this all means is that visitors to London -- and, indeed, Londoners -- will no longer need to get prepaid Oyster cards. They will be able to use their bank cards (such as, for example, the one of the ten million cards that Barclays has already issued with contactless interfaces) to tap-and-go their way around town.

Playing the Treasury game

[Dave Birch] Like many of you, I imagine, I've been reading through the H.M. Treasury document on "Laying of regulations to implement the new E-Money Directive" (October 2010). It's written for lawyers, not for normal people, but as far as I can make out, the issues that are worth thinking about are things like the "ring-fencing" of electronic money funds -- discussed by John Casanova and William Long from Sidley & Austin in the September issue of E-Finance & Payments Law & Policy -- as well as the exemption for small issuers, the meaning of the "limited network" exemption. I rather liked the mention of the idea of introducing the test for "fit and proper" persons to run electronic money schemes, the same definition that has proved so successful for banks, football clubs and so forth.

Jeff Miles, NXP

[Dave Birch] Jeff is the director for Mobile Transactions at NXP. Mr. Miles has over 18 years of international and US experience as a key executive with VeriFone, ARCO and TNT Express Worldwide. He has spent over 10 years in the payments industry and played a key role in bringing contactless payments to the quick serve industry through a partnership with VeriFone and MasterCard that led to the largest retail roll-out of contactless readers to date. Mr. Miles also has extensive international experience successfully rolling out global systems to over 72 countries. Mr. Miles has held key management positions in numerous start-up and Fortune 500 companies. He graduated from Pepperdine University in 1990 with a B.A. in Political Science.

In this podcast, he talks about NFC technology and it's potential use beyond mobile handsets.

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

Virtual, like dollars

[Dave Birch] I keep coming back to the topic of virtual worlds, because I'm convinced that they contain some pointers about the future of our "real" economy, even thought the real/virtual boundary is getting rather blurred. Why are US Dollars called "real" when they are backed by nothing, whereas World of Warcraft gold pieces are called "virtual" because they are backed by nothing?