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10 posts from January 2011

How d'ya like them Apples?

By Dave Birch posted Jan 30 2011 at 5:27 PM

WIth Apple's domination of media mindshare almost total, the fact that you can already buy other handsets with NFC in them (eg, the Google Nexus S and the Nokia C7, although both are currently software-limited) and that the first Blackberry handsets are imminent has been overlooked. All press comment (I know, because I contributed to some of it) has been about the iPhone. One of the questions that I was asked, repeatedly, was about iTunes morphing into a new payment scheme.

“They have 160 million users with digital wallets in iTunes accounts. They don’t have to do anything other than to NFC-enable their phones,” Litan said.

[From Analysts: Apple could disrupt mobile payment industry | BappProducts | iOS Central | Macworld]

They do have numbers on their side, that's true. But as we all know, payments is a two-sided market, so there has to be a reason for the merchants to get on board too.

For merchants, an Apple payment system could prove attractive. Many merchants are raring for alternative payment systems, to avoid having to pay the hefty fees that credit card companies charge for every transaction.

[From Analysts: Apple could disrupt mobile payment industry | BappProducts | iOS Central | Macworld]

Yes, but how will Apple avoid them? Everything I buy on iTunes goes to my MasterCard. Sure, Apple aggregates the payments, but the banks don't provide this service for free, even for Steve Jobs. In order to avoid having to pay credit card fees, Apple would have to do what PayPal does and start persuading people to sign up with their bank account details, which would in turn mean building the kind of anti-fraud platform that PayPal have been building for a decade. And why would they do that? It seems like a lot of non-core investment to commit to.

This investment is needed because the biggest problem will be security. So long as my iTunes password only allows you to buy music tracks for my iPod or games for my iPad or note-taking applications for my Macintosh, to risk is manageable. But if my iTunes password allows you to walk out of a store with a pair of shoes or a telly, then my iTunes password will become valuable. Microseconds after extending iTunes payments to retail stores, Apple would be dealing with millions of customers calling up because their passwords had been phished, copied, guessed.

Japanese police have arrested two people suspected of stealing virtual goods from players of online game Lineage II. The pair tricked victims via a booby-trapped program that claimed to help people play the game. Instead of boosting a character's abilities the program stole account names and passwords.

[From BBC News - Lineage II pair arrested for stealing virtual goods]

I'm sure Apple are perfectly well aware of this kind of crime and know that were iTunes to become a general payment paltform, then it would become widespread. This is hardly wild projection, since the phishing of iTunes accounts is already widespread.

It least one group of scammers has found a way to charge thousands of dollars to iTunes accounts through PayPal. One targeted customer told us, “My account was charged over $4700. I called security at PayPal and was told a large number of iTunes store accounts were compromised.”

[From Fraudsters Drain PayPal Accounts Through iTunes]

I'm sure Apple already has lots of people working on this problem but ultimately it's very difficult to stop people from giving away their passwords and I'm sure the phishers will soon learn to send out the right kind of e-mail messages.

Roughly 50,000 Apple iTunes accounts stolen by hackers are said to be for sale on China's largest auction site.

[From 50,000 Stolen iTunes Accounts On China Auction Site -- Apple iTunes -- InformationWeek]

The underlying problem is, of course, that passwords are not security and no-one should be allowed to use the phrase "password security" in any serious context. So long as the cost of phishing, guessing or actually breaking passwords is fantastically less than the value of the account that they give access to, there is no solution.

Thomas Roth of Cologne, Germany told Reuters he used custom software running on Amazon's Elastic Compute Cloud service to break into a WPA-PSK protected network in about 20 minutes. With refinements to his program, he said he could shave the time to about six minutes. With EC2 computers available for 28 cents per minute, the cost of the crack came to just $1.68.

[From Researcher cracks Wi-Fi passwords with Amazon cloud • The Register]

Ah, you might say, but suppose Apple implements a Secure Element (SE) for NFC and that SE uses standard PKI applications on industry-standard Global Platform in an industry-standard JavaCard. Then a thief would have to steal the iPhone as well as the password, and this indeed true. Apple could implement an identity-based payment mechanism and persuade merchants to install the contactless terminals, implement the new scheme and pay Apple instead of paying the banks (whose fees have just been capped by the Durbin amendment.

Again, why bother. You may as well do a deal with a bank to put a contactless EMV application in the SE. But suppose you are not going to care about anything at retail POS -- except in your own stores -- but instead want to improve security and convenience for customers in general? Imagine this scenario a year from now: I log in to iTunes and it gives me the option of switching to two-factor authentication. (Apple wouldn't call it that, they have better marketing people - suppose they call it Apple Passport or something like that, maybe iMe or whatever.) I accept. From then on, when I log in to iTunes on my iPhone, I don't noticed anything different, but under the hood iTunes is sending a digitally-signed challenge to a digital signature application in the SE. It's decoded using Apple's public key, and signed using my public key (which, of course, Apple know) and sent back. Sorted. Now with this strong authentication, Apple can have higher-priced items for sale via iTunes. When I log in on my PC, a message pops up on my iPhone and I have to enter my passcode. Under the hood, the same process. Now you have to steal my passcode and my iPhone.

A little later, I'll be given the option of making my OSX login "iMe only" and so on.

If anyone can bring PKI to the masses, Apple can. Soon, other companies will negotiate with Apple to join "iMe Connect" and because it is more secure than a password, they will pay to use it. There are payments applications for this (it means that mobile payments can be lifted beyond ringtones and music tracks, and at a lower margin than operators) but I don't see them as being central to the business proposition, because people will be using their iPhone to log in to everything (internet banking, shopping, government) and then, because of the NFC interface, they will begin to use it to "log in" in Apple retail stores and then, soon, enough, other places. Meanwhile, credit cards and Bling, Amex and PIN debit will all be loaded into the SE anyway, so customers will find themselves using their iPhones to get on BART and pay in CVS. This will save the issuers money, because they don't need to issue the plastic, so they can offer a good deal. Andrew Johnson was surely right to point this out in American Banker.

In the end, banks have a lot to gain by being willing to give pricing concessions to Apple in exchange for getting their payment card information directly located in Apple's mobile wallet service. Doing so could give those banks a first-mover advantage.

[From In Apple Mobile Pay Plans, a Possible Opening for Banks - American Banker Article]

Apple doing the identification and micropayments, leaving larger payments to the finance sector who will in turn pay Apple. Now we can see the real play, and a first-rate strategy for the next phase of online evolution: own identity and authentication. ITunes as a payment scheme to rival cards, PayPal, iDeal? No. iTunes as a payment scheme to get people used to logging into things with their iPhones? Plausible. iTunes as something that delivers a variety of customer communication and management option of real value to merchants (a cross between Barclaycard Freedom, Bling and Taggo)? Yes. Why? Because knowing who someone is is so much more valuable than a small slice of their payments, a fact that informed industry observers have pointed to since the Apple/NFC rumourmongering began.

the real revenue streams to Apple will not be from “interchange” but from advertising as iAD provides the “Yang” to the NFC’s “Ying”. Creating a new payment ecosystem means having incented partners. The timing on Apple’s iAD and NFC developments are not accidental, my belief is that they are part of a very solid mCommerce expansion strategy.

[From Apple’s NEW NFC Patent « New Ventures in Financial Services]

Look, I don't know what Apple's strategy is any more than you do, but from the perspective of helping clients to formulate their own broad strategies for NFC, payments, value-added payment services and identity, this is a reasonable strawman, which is why we've been using it.

If you don't like cards, don't take them

By Dave Birch posted Jan 25 2011 at 7:24 PM

The cases of debit interchange in the US and cross-border interchange in Europe will, in the longer-term, serve to illustrate a general point: price controls don't work, a fact well-known since the days of Diocletian:

Despite the fact that the death penalty applied to violations of the price controls, they were a total failure. Lactantius, a contemporary of Diocletian's, tells us that much blood was shed over "small and cheap items" and that goods disappeared from sale. Yet, "the rise in price got much worse." Finally, "after many had met their deaths, sheer necessity led to the repeal of the law."

[From How Excessive Government Killed Ancient Rome]

OK, so the Durbin amendment probably wont lead to rioting in the streets, but it's still price control, and it will have unfortunate consequences (not for me, since I never use a debit in the US anyway). There's a good article in the January issue of Digital Transactions by Lauri Giesen examining the US card market. She's specifically looking at the strategy of retailers with respect to cards. Having won lower debit card fees, retailers are going to go after the credit card business. Trixi Wexler, a spokeperson for the Washington DC-based Electronic Payments Coalition, says that retailers didn't spend $10 million in lobbying "just to walk away with lower debit card fees". I'm sure that's true, but even if it isn't, that $10 million represents pretty good value for money, since it will result in considerable savings for retailers.

The big retailers and other merchants -- who are the real winners -- claim they are going to help consumers from their end by passing their savings on in the form of lower prices... But those claims are spurious at best. In countries where these types of interchange rules have been adopted, like Australia, consumers have seen no benefit.

[From Bill Cheney: New Interchange Rules for Debit Cards: A Perceived 'Win' Is Really a Loss]

Retailers in the UK make the same claim.

The BRC claim that if charges for every payment method were as low as they are for cash, its members could pass on £480 million in cost savings to their customers.

[From Retailers concerned over 'unjustified' fees]

Yes, I'm sure they *could*, but they won't. The evidence from Australia shows that the retailers managed to persuade the regulator to cap bank fees (for no real economic reason) and then simply kept the loot. That's exactly what I'd do if I was them: it's called "regulatory capture" by economists, because market participants are using regulation rather than competition to obtain a larger share of market rent. This all left me wondering, once again, what exactly the lobbyees (is that a word?) think that they are achieving by transferring this share of market rent from banks to retailers. Why, for example, are retailers more deserving of 0.1% of my supermarket purchase than banks? It's not even as if it's all retailers anyway.

Cooper said 80% of the projected debit card interchange revenues banks stand to lose will go to 1% of merchants.

[From Untitled]

This, to me, looks less and less like Durbin striking a blow for the little guy and more and more like regulatory capture by some of America's biggest businesses, the culmination of a well-managed campaign.

Retailers have begged Congress for years, in vain, to limit the fees they must pay to banks when customers swipe credit or debit cards.

[From Debit Fee Cut Is Rare Loss for Largest U.S. Banks - NYTimes.com]

I imagine consumers have begged Congress for years, in vain, to limit the fees they must pay to retailers for food or to gas stations for fuel, so what's the difference? Why has Congress intervened in order to transfer wealth from one group within society (consumers) to another group (retailers)? The answer, of course, is lobbying.

But retailers mounted an unusually effective yearlong campaign to frame the issue as a chance for Congress to help small business. A leading trade group for chain retailers worked with small-business groups to make sure that every time a senator held a town hall meeting back home, a local business owner showed up to ask about card fees.

[From Debit Fee Cut Is Rare Loss for Largest U.S. Banks - NYTimes.com]

Lobbying on behalf of banks is a bit of a lost cause at the moment, so you can't blame the retailers for striking while the iron is hot, but if Congress wants to reduce the fees paid by retailers for payments, then it should create a regulatory environment that allows new entrants to come in and provide (non-bank, if necessary) solutions to the marketplace. Are they going to do this? (It's not a rhetorical question - I genuinely don't know, and look forward to hearing from some of our US readers to tell me.)

In short, then, if banks had gone up the hill asking regulators to cap the price of food, on the perfectly reasonable grounds that employee salaries are a big part of their costs and that employees spend a lot of their money on food, they would have got short shrift. But given the general hatred of banks, retailers spotted a good opportunity to transfer some of their costs away.

MasterCard said... This provision stands to benefit some of the largest retailers in the world and will harm not only consumers, but also community banks, credit unions, and government benefits administrators. Currently, merchants pay their fair share of debit acceptance; in the future, consumers will be responsible for bearing this cost.

[From Consumers to Pay More for Merchants’ Debit Card Benefits | MasterCard®]

I don't want to be accused of being MasterCard shill [full disclosure: my employer Consult Hyperion has provided paid professional services to MasterCard within the last year] but there is a valid point here: what's best for society is to have payment systems that have the lowest total social cost. Speaking in very general terms, this means debit cards (and in particular, PIN debit). So if that's best for society, how should society apportion the costs? Unless we think we can do better than the market, then we should leave the market alone. Since neither I, nor retailers, nor banks, nor regulators know what the interchange fee should be, they should focus on competition to set them at the right level.

There's another point that the Digital Transactions article makes that I found interesting. Trixi says that the money from card fees goes to pay for innovation and that without the income, issuers will stop innovating. This may be correct, although innovation is more about non-banks than banks and it is not only Durbin that is hampering payment innovation.

Rich started his address with the assertion that the “Payments system is under attack,” from a regulatory barrage – the CARD ACT, NSF/OD regulation, forthcoming rulings under the Durbin Amendment and the newly formed Consumer Financial Protection Bureau (CFPB) all are paralyzing innovation in the financial services sector. At the same time, innovations from outside the financial services industry are happening at an incredible pace.

[From Payment System Under Attack? Solutions Found in Georgia! - pymnts.com]

I think that in the US case it also means that the retail payments business will slide down the priority list. The lost income from debit interchange, which should have been reduced by competition (ie, the regulators should have told the big retailers "if you don't like cards, don't take them" or "if you think you can do it cheaper, go right ahead") rather than by regulation, will be replaced by fee income from consumers and the marketing, management and retention of checking accounts will surely become more of a priority than debit card activation.

If retailers think that payment systems are too expensive, then why don't they start one? Or why don't they invest in payment startups? Starbucks seems to have done quite well by running its own prepaid card scheme and its own mobile payment service, and has been exploiting the benefits of integrated mobile so successfully that it has now decided to go for an immediate national roll-out with barcodes, switching to NFC when the handsets are out there.

However, Starbucks Corp., one of the few stores with a mobile payments program in place, says these transactions are little different from other card purchases, and the real benefit to the merchant comes when people use its app to reload their accounts while waiting in line instead of at the register.

[From Upside For Mobile Payments Comes Before The Payment - PaymentsSource Article]

Perhaps it will be the innovative retailers, working in partnership with technology companies, who will make the breakthroughs while the biggest retailers still find it more cost-effective to spend the money on lobbying.

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

Another go at categorising money technologies

By Dave Birch posted Jan 24 2011 at 1:58 PM

The idea of the talk is to reflect on the impact of technology on the various functions of money: that is, as a unit of account, mechanism for exchange, store of value and means of deferred payment. We tend to jumble these functions together, but if we want to understand how money might develop in the future, we need to pull them apart and then look at what technology might do to each of them. I'll therefore look at how the evolution technology has changed these in the past, leading to the evolution of money.

For the purposes of the talk, I will having another go at categorising money technologies, this time by dividing the evolution of the technology of money into four eras:

Money 1.0 was atoms: grain, gold, stone discs, wampun, whatever. Guildford had a mint making silver pennies (the only coin of the day) by the time Edward the Martyr (975-979) so I like to think that at Consult Hyperion we are part of a tradition of new money technology by the River Wey!

Money 2.0 was atoms about atoms. From the tally sticks of Norman England to the private "tokens" (ie, coins worth more than their base metal content), these items were convenient than the commodities they represented.

Money 3.0 was bits about atoms: that is, fiat currency banknotes, electronic transfers and accounts. Once these bits could move faster than a galloping horse, our relationship with money changed.

Our current era, Money 4.0, can be dated in retrospect to 1971 when Richard Nixon finally ended the gold standard and Visa introduced the Base 1 network for authenticating card payments based on the magnetic stripe. Money 4.0 is bits about bits, but we still apply the wrong mental model, and imagine it to be bits about atoms.

So what does this mean for the future? Well, we can look at three distinct sources of pressure for change:

The first of all there are the technology pressures. These are actually the easiest to understand, at least in the short to medium term. All of the technologies that will impact the world of money, payments and banking over the next generation already exist, it's just a question of looking around the world to see which of them will have disruptive impact. We don't need to look much beyond the mobile phone to understand the key platform, since the mobile phone (or, I suppose, more properly, the device formerly known as the mobile phone) will be the most disruptive technology across many sectors. The addition of the short range, zero configuration, medium-speed wireless Near Field Communication (NFC) interface to the mobile handset changes the handset from being the very edge of the network to a pivot between local and global environments that it can integrate in a secure uncontrolled way. A credit card replaces cash if you want to pay a shop, the mobile phone replaces cash if you want to get paid.

Next there are the business pressures. It's interesting to reflect within the UK, cash accounts for less than 3% of the “money" in use but still accounts for nearly 2/3 of retail transactions by volume, which makes for cost, cost, cost. And when it comes to the dynamic new channels for online business, we've got by shoehorning the cards and so forth into the new technology, but we haven't yet seen the new money for the Internet emerge: perhaps Facebook Credits will take over! Over the coming generation, the payment business and the banking business will become more distinct and as a result more dynamic and efficient payment businesses will find new ways to replace cash. Cheque clearing is scheduled to end in the UK in 2018, so Internet and mobile phone-based alternatives will need to be operational fairly soon.

Finally and most importantly, there are the social pressures. Right now, the retail payments sector is a deadweight of around half a percent of GDP (in Europe). This is largely due to the continuing high use of cash and cheques rather than more efficient electronic alternatives. Clearly, replacing cash would reduce this total social cost and make the economy more efficient but this by itself won't be enough to trigger action. However, there are growing pressures for governments to reduce the use of cash because it is used to facilitate crime and tax evasion more than because it is inefficient. In if we just focus on Europe we can see that these pressures take different forms in different regions. There are streets in Amsterdam but no longer take cash because the city council has subsidised the retailers electronic terminals in order to reduce crime and lower the costs for smaller retailers. In Sweden, a broad alliance of retail and banking trade unions wants to see the use of cash reduced in order to protect their staff. Post-crunch, these pressures will grow as governments and citizens alike demand action. And since no-one other than tax evaders or drug dealers actually wants the stuff, perhaps change will be quicker than many people think.

I'll be reflecting on these issues, and more, in my talk and looking forward to being put on the spot in an informed question and answer session afterwards.

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 challenges to the financial sector

By Dave Birch posted Jan 20 2011 at 2:24 PM

What's big in payments right now? I don't think we have to guess. Our good friends at PaymentsNews have already pointed out that

Two payment-related themes are emerging from NRF conference being held this week in New York: POS encryption/tokenization and mobile payments acceptance.

[From Payments News from National Retail Federation BIG Show 2011]

One of these themes is all about reducing costs (the costs of PCI-DSS compliance are very high, but I don't want to talk about them in this post), the other about creating new opportunities. It's hard to argue with this prioritisation: mobile has to be the no.1 strategic issue. But new opportunities for who? The mobile operators? The international payment schemes? The banks? Chetan Sharma's survey says that it will be the schemes. I'm not so sure, because it would mean that current value networks will be substantially unchanged through the transition, which doesn't seem right to me.

Can the current payments landscape of banks issuing cards being accepted at merchants being acquired by other banks translate into the mobile environment? We (the industry) used to think that banks and mobile operators would eventually get around to being pals and would sort things out to set the new value network in motion. Will they? Who knows: but the barbarians are at the gate. Eric Schmidt, the Google CEO, writing in the Harvard Business Review, set out Google's strategic priorities for the coming year:

Second, we must attend to the development of mobile money.

[From Preparing for the Big Mobile Revolution - HBR Agenda 2011 - Harvard Business Review]

Wow. Mobile money is Google's second-highest priority. In fact, as Eric notes, Google top three strategic priorities are all about mobile. They are going to be a big part of the mobile marketspace from now on.

In last year’s survey, Google/Android narrowly missed out to be the biggest story of the year but this year, the verdict was clear that Google will continue to dominate the headlines with Android devices and new updates and apps.

[From Always On Real-Time Access » 2011 Mobile Predictions Survey Results]

There's a particular interest there for those of us who have long thought that NFC is going to be a gamechanger because customers find the convenience of contactless so attractive: it energises all sorts of applications, not only payments (actually, payments are rather dull - probably not the application that drives people into the stores to get NFC handsets).

Google is building a mobile wallet nicknamed "Cream," which it plans to integrate with Android NFC phones that consumers could tap to pay in stores

[From Google Building an NFC Mobile Wallet; U.S. Banks Are Interested | NFC Times – Near Field Communication and all contactless technology.]

You can see where this is going. Banks will be offered a choice of loading their payment applications to the operator-controlled UICC or to the embedded secure element in Android phone, iPhones (rumoured to have NFC soon) and Blackberries (the first Blackberry devices with NFC are about to launch). Not only will these not be controlled by the bank, they won't be controlled by the operator either. If the infrastructure for accepting NFC payments is simply more mobile phones, even mobile phones with knobs on, there's no barrier to new types of payments sitting in those secure elements.

Anyway, back to the competitive landscape. If you were being negative about mobile operators, you might conclude that they've blown it: a couple of years ago they had the chance to get NFC moving on their terms, but they wouldn't order the handsets. Now they're going to have to work hard to get back into the value network. And a particular issue will be the basis of competition: what are they going to offer on their NFC platforms? I've mentioned before that I think identity is an area where innovation might generate something new for them, so perhaps the operators are developing new propositions around digital identity (the mobile passport or whatever), or couponing and loyalty, or sports, or event ticketing and management.

And so it is that accountants, banks and mobile phone companies see themselves as engaged in intense competition while customers think they are all the same. Competition as businesses perceive it is not at all the same as competition as consumers perceive it.

[From John Kay - Radical innovation rarely comes from within]

John is typically thought provoking, and surely correct. In the specific case of mobile, though, there's another aspect: the operators ability to innovate, even if they wanted to, is being constrained.

The Verizon iPhone is exactly the same as the AT&T iPhone, just on a different network — and not even on Verizon’s fastest, latest network, which could have showcased Verizon’s strengths.

[From Why Verizon’s iPhone spells the end of the golden age for carriers | VentureBeat]

There's a difficult line to tread when blogging: after all, we provide consultancy services to the industry and I have to try to balance the display of corporate expertise and depth of understanding with sensitivity to clients plans. I hope I won't get in to trouble for saying that I think it is a real problem for some of our clients that their strategy people think about competition in conventional terms: operators, banks, schemes. These aren't the people who will put them out of business -- or, more likely, reduce them to pipes (for bits, money, data), which could still be a good business if they are operationally efficient -- if they do nothing to respond to the challenge coming from the outsiders. Its going to be a fun year in mobile.

If you're interested in learning more about this kind of thing, Consult Hyperion's Head of Mobile Money, Paul Makin, will be presenting on the challenges that mobile presents to the financial services sector at Mobile Financial Services in London on March 15th-16th 2011. Do come along and join in the discussion.

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

The nuclear options

By Dave Birch posted Jan 17 2011 at 5:16 PM

Nuclear power is scary, because of the fear of radiation (radiation itself doesn't seem to be as bad for you as you might think) escaping and contaminating all around. But is it as scary as banking? There was an absolutely fascinating piece by Tim Harford in the Financial Times last weekend. It was called "What a nuclear reactor can teach us about the economy", and it draws parallels between the way engineers build safety systems for nuclear reactors (broadly speaking, by applying science and learning from mistakes) and the way that regulators build safety systems for the banking system (broadly speaking, by making things up and not learning from mistakes). The key observation is that the banking system is complex:

It might seem obvious that the way to make a complex system safer is to install some safety measures. Engineers have long known that life is not so simple.

[From What a nuclear reactor can teach us about the economy]

What Tim is saying is that financial products such as Collateralised Debt Obligations (CDOs) and Credit Default Swaps (CDSs) appeared as safety systems (for spreading risk) and then, just like the coolant filter that got dislodged and jammed the coolant flow thus causing a partial meltdown of the Fermi reactor in Detroit, they blew up the system they were supposed to stabilise.

So what can the financial sector learn from the nuclear reactor sector, given this analogy? Well, using the example of Three Mile Island, Tim explains that one of the key reasons that the reactor came close to meltdown was that the operators couldn't understand all of the dials, lights, warnings and other signals. As a consequence

since Three Mile Island, much attention has been lavished on the problem of telling the operators what they need to know in a format they can understand.

When the financial system started to melt down, regulators were faced with the same problem: given all of the warning lights flashing, given all of the alarms sounding, what was actually going on?

Andrew Haldane, director for financial stability at the Bank of England... argues that the same technologies now used to check the health of an electricity grid could be applied to a financial net- work map, highlighting critical connections, over-stressed nodes and unexpected interactions.

This analogy is imperfect in a couple of ways, of course, because banks can create money from nothing whereas electricity costs money to create and because electricity substations don't lie to the national grid in order to get a bigger bonus, but you can see his point.

There's one aspect of this that Tim didn't explain though. Engineers don't forget things, but financiers do. Once engineers have learned, for example, how not to build a bridge, then they stop building bad bridges. But bankers don't work that way. They would stop building bridges that way for a short time, and then simply go back round and starting building collapsing bridges again a few years later.

What does this have to do with payment systems? I'd like to highlight two points: complexity and decoupling. We need to beware of complexity, to treat it as an enemy (the current case study of EMV illustrates this perfectly), and we need to decouple so that parts of complex systems can fail without bringing down to whole of the system. It seems to me that this prescription provides a pretty clear manifesto for payments: separate the payments systems from the banking system and have a lots of simple payment systems instead of a small number of complicated ones.

Smart art

By Dave Birch posted Jan 12 2011 at 5:32 PM

As one of the legions of fans of the brilliant BBC / British Museum radio series on "A History of the World in 100 Objects", I was absolutely fascinated by the episode on 14th-century Chinese paper money: follow the link and have a look at the beautiful picture of the Chinese banknote from 1375.

The Chinese writing along the top of this note reads (from right to left): ‘Da Ming tong xing bao chao’ and translates as Great Ming Circulating Treasure Note’

[From Chinese Ming bank note › The British Museum]

I love that name: Bank of England notes really should be inscribed "Circulating Lack of Treasure Note". These notes had pictures of the "cash" (copper coins with holes in the middle, threaded on to a string) that they represented: ours should have a picture of... what? What do they represent?

Things have moved on a little since mulberry bark. Some of you may remember Paul Makin's super presentation about "E-ink and smart banknotes" at the 13th Digital Money Forum in London back in March 2010. The presentation was based on some work that Consult Hyperion had been doing with the Bill & Melinda Gates Foundation. Less than a year on, it's fascinating to see how the smart banknote technologies have evolved. Display technology, in particular, is advancing apace.

Quantum dot light emitting diodes (QLEDs) are an advanced technology currently in development that will deliver the ultimate solution for displays and lighting applications... QLEDs are only a couple hundred nanometers thick making them virtually transparent and flexible, and highly suitable for integration onto plastic or metal foil substrates as well as other surfaces[From QLED Technology]

Displays aren't the only technology of interest here. I think we can focus down and think of a smart banknote as comprising four main technological components:

  • The note itself, made out of a plastic polymer rather than paper. This makes it durable and waterproof, important if it is to contain electronics. Some countries (eg, Australia) have already switched from paper to plastic for their banknotes and others (eg, Canada) are planning to follow. Plastic banknotes last much longer than paper ones, so the additional cost of production doesn't stop them from being cost-effective.
  • The electronic ink display on the note. Electronic ink, as you'll recall, only uses power when it is changing, so once the banknote display has been written then it will stay displaying the same thing until it changed.
  • The chip inside the banknote. Why do we need a chip inside the banknote? Well, we want the banknote to be secure: we don't want it to be counterfeited or altered. And we need the banknote to be able to communicate intelligently with terminals.
  • The antenna connected to the chip. We want our smart banknote to work like an Oyster card, so that you only need to tap it to some form of terminal for it to work.

How would such a note be used? Well, imagine that you have a banknote that says "£10" on it. You to the coffee shop and spend £1.50 on a coffee. You tap the note on the till to pay, and the display now changes to say "£8.50". When you get to work, your friend reminds you that you owe him £8 from the pub. You give him the note and he gives you a 50p coin in change. Your friend can absolutely trust that the value represented by the note is indeed £8.50 because the tamper-resistant chip and the cryptography it deploys make it impossible to counterfeit.

It's hard to imagine the implications so a technology combination so radical in everyday use. Take just one aspect: the expense and complexity of engraving plates, adding holograms, printing fine detail and everything else that is needed to make notes hard to counterfeit

Modern banknotes contain up to 50 anti-counterfeiting features, but adding electronic circuits programmed to confirm the note's authenticity is perhaps the ultimate deterrent, and would also help to simplify banknote tracking.

[From Banknotes go electric to outwit counterfeiters - tech - 21 December 2010 - New Scientist]

A smart banknote needs none of these, because its security depends on cryptography and the chip tamper-resistance. The state-of-the-art here is already more than adequate for purpose. There are other differences too: since the smart banknote works using contactless communications, there's no reason for it to be a rectangle. The best smart banknote might be a ball, or a strip or a disc.

What would a banknote look like without security printing, freed from the tyranny of form factor and with a display that changes? That's an interesting question. Since it's about technology, it's easy for people like me to imagine how a smart banknote might work. It's much harder to imagine what it might look like, and that's why Consult Hyperion have a launched a competition for artists to design a smart banknote. It's going to work like this: the competition will run for a month from 21st January 2011 to 21st February 2011. During that time, artists are invited to submit a picture, sketch, diagram, draft, model or any other means of communicating their vision to art (at) chyp.com for consideration. All of the entries will be displayed at the Digital Money Forum website.

The artist Austin Houldsworth, who presented at the 12th Digital Money Forum in 2009, has been commissioned to review the entries and create a shortlist. The shortlisted candidates will be informed by 25th February 2011 and invited to come along to the Digital Money Forum on Thursday 3rd March to present their concept to our judging panel and you, the delegates. The panel will then select the winning entry and present them with a prize: in this case, an Apple iPad (although naturally the prestige associated with award outweighs the value of this base material prize).

As an aside, the Curator of Modern Money at the British Museum, Catherine Eagleton, will be speaking at the 14th annual Digital Money Forum in London in March, so if you would like to ask anything about the money objects featured in the radio series, don't miss the opportunity to come along and meet a genuine expert.

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

Benjamin 3D

By Dave Birch posted Jan 11 2011 at 10:27 PM

[Dave Birch] The US is soon to release a new $100 bill. But why? What do they do with $100 bills? They're not, as you might imagine, needed to support commerce and trade.

In 2001 the Federal Reserve estimated that 90 percent of the $100 bills ordered by the Federal Reserve (which accounts for the overwhelming majority of C-notes ordered nationwide) were paid out to foreign banks

[From Hundred-dollar bills are for criminals and sociopaths. Why do we still print them? - By Timothy Noah - Slate Magazine]

Around two-thirds of all of the US dollars in "circulation" are not in the US at all and are unlikely to be repatriated. This represents a tremendous interest-free loan from the rest of the world to Uncle Sam. But is this income sufficient to outweigh the negative effects of cash?

So why do we keep printing $100 bills? As with any valuable export, we worry that if the C-note ceased to be available to foreign criminals and dictators, another paper currency would take its place. The leading candidate would be the 500 euro note,

[From Hundred-dollar bills are for criminals and sociopaths. Why do we still print them? - By Timothy Noah - Slate Magazine]

Well, that's true, and the conspiracy theory that the European Central Bank (ECB) only had the 500 euro note printed in order to replace the $100 bill in the stashes of drug dealers and tax evaders is widely recirculated. But that's a reason to scrap 500 euro notes, not to print more $100 bills, especially when the $100 bills have to be completely re-designed anyway.

But the biggest upgrade is a blue "3D Security Ribbon"... The strip contains a series of images of bells and digits; tip the note, and the images come into 3D relief. "It only takes a few seconds to check the new $100 note and know it's real," says Larry R. Felix, Director of the Treasury's Bureau of Engraving and Printing.

[From US Treasury: New 100 dollar bill needs 3D tech - CSMonitor.com]

Sounds exciting. But why bother? Why not just forget about the $100 (and, for that matter, the $50 bill)? After all, high-denomination notes have been withdrawn before, and for much the same reason. We have to weigh up the overall impact on society and try to make the right decision, and sometimes that decision might mean a radical change.

In 1969, the Treasury stopped issuing $500, $1,000, $5,000 and $10,000 bills specifically to impede crime syndicates — the only entities that were still using such large bills after the introduction of electronic money transfers.

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

And before I get deluged with e-mails calling me a New World Order stooge intent on introducing the Mark of the Beast across the USA, let me merely point out that if the public were to desire anonymity for payments (they don't, by the way) then it's possible to create anonymous electronic money: this is an implementation choice, not any sort of technological constraint. Of course, the fact that the US government stops producing high-denomination notes doesn't necessarily mean that they will disappear...

Malaysian police have arrested a Lebanese man allegedly carrying fake currency with a face value of $66 million after he tipped a hotel staff with a $500 note, an official said Friday.

The largest U.S. note currently in wide circulation is a $100 bill. But police found bundles of $1 million, $100,000 and $500 notes in the man's hotel room in Kuala Lumpur on Sunday, said Izany Abdul Ghany, head of the city's commercial crime unit.

[From $500 Tip Leads Police to $66 Million in Fake Bills - ABC News]

If only all counterfeiters were that good!

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

Resolution no.1: stop making predictions

By Dave Birch posted Jan 7 2011 at 11:03 AM

Osama Bedier, VP of Platform, Mobile and New Ventures at PayPal, joins the tradition of making predictions for the coming year. I'm always loath to do this, for two reasons:

  1. because it's a dangerous game as a consultant. Consult Hyperion are working on plenty of client projects that are confidential and relate to new products and services that will be announced during the year and I don't want to mess up and accidentally "leak" any of these;

  2. because it's really difficult and wrong predictions come back to haunt you.

In Osama's case, however, I think at least four of his five key trends are spot on and the fifth is probably right. Let's join in the New Year fun and have a look at what he said.

Mobile, mobile, mobile. Wallet in the cloud. The digital wallet. Call it what you want, but mobile devices are poised to become a primary form of payment for millions of people around the world... Consider that PayPal saw a 310 percent increase in mobile payment volume on Black Friday 2010 compared to the previous year, and a 292 percent increase in mobile payment volume on Cyber Monday 2010 compared to Cyber Monday 2009. Without a doubt, mobile payments are here to stay and will see significant innovation in the coming year.

[From Five payment trends to watch in 2011 | VentureBeat]

This is impossible to contradict and anyone who doesn't think that mobile is central to the evolution of the entire payments market this coming year is absolutely 100% wrong. I've consistently said -- for a decade -- that mobile payments will be more important than web payments and I absolutely stand by this. I think I might go further and say that the biggest mobile payments story of the year will be the arrival of Android phones with NFC interfaces, and these will transform the payments landscape.

T-commerce. TV will go from a passive (viewing-only) experience to a highly interactive activity as more and more apps are developed specifically for the platform.

[From Five payment trends to watch in 2011 | VentureBeat]

One of the very first reports that I ever wrote about payments and the new media said the companies should focus on t-commerce as well as m-commerce because in the medium term these would become the key channels. I was wrong about the TV side of things: it has take much longer to develop than I thought, probably because the sector remains focused on "traditional" business models around subscription and advertising. Surely it's going to change this year.

Appification’. IDC issued a new report that says, among other things, over the past three years the mobile apps space has seen an “appification” of “broad categories of interactions and functions in both the physical and the digital worlds.” And this only stands to continue — in fact, the same IDC report projects mobile app revenue to grow from $4.9 billion in 2010 to $35 billion by 2014.

[From Five payment trends to watch in 2011 | VentureBeat]

In the smartphone world, payment apps are going to be big, but I think we all recognise that they are one part of a new value-adding ecosystem that involves vouchers, coupons, loyalty and so on as well as the basic payment itself. This is why I suspect that simply porting exiting payment mechanisms (eg, credit cards) to the mobile platform will not be sufficient to obtain competitive advantage.

A Cashless Society. Now let’s not go crazy here, I’m not suggesting that by this time next year we’ll be living in a cashless society. Far from it. That said, 2011 will undoubtedly see several significant steps that will take us closer to such a world.

[From Five payment trends to watch in 2011 | VentureBeat]

I think he's right about this, even though plenty of other people are sceptical. In many places, these first steps have already been taken and I think the pressure to reduce the amount of cash in circulation over the coming year will come not from the electronic payments industry but from governments, law enforcement agencies, trade unions and others who want to make a start on reducing crime and tax evasion. The trigger, however, is mobile. It is the arrival of mobile payments that makes cashlessness a realistic possibility and means that the industry can respond to these pressures.

Social shopping is clearly poised for significant growth... Among the key drivers of this trend are micropayments and digital goods. Along the same lines of merging physical world experiences with digital activity, the ability to make quick, small purchases for online content represents a huge opportunity for both content producers and providers.

[From Five payment trends to watch in 2011 | VentureBeat]
This is the one I'm not sure about, and that's because while we tend to focus on what's happening at Facebook and the like, I think we're still in the very early stages of social media and I don't think we really understand how the sector is going to develop. The role of mobile, NFC and other connectivity technologies in the evolution of social media is still changing and the disconnection technologies are still awaiting standardisation and mass deployment. So while I agree that social shopping will continue to grow, I'm not sure whether it will change the payments space or simply use the products coming from the payments space (or, to put it another way, will Facebook credits break out into new markets?). Perhaps there's another possibility for this fifth spot. Over at the Financial Services Club, someone whose opinions I always takes seriously highlights something else:

Major investments in creating agile infrastructures and platforms to respond to regulatory requirements.

[From The Financial Services Club's Blog: Six key technology developments for banks in 2011]

I'm sure Chris is right. The changing regulatory environment is bound to be a big influence on the technology spend for the coming year. New platforms that help to make compliance, in particular, easier to manage will be very attractive to financial institutions. You only have to look at what's been happening in the cards world to see this.

He noted that PCI compliance has been a significant burden, costing an average of $20,000 for merchants that average only $32,000 in pretax profits; they will gravitate to solutions that reduce PCI scope (tokenization, point-to-point encryption, etc.).

[From Tidbits and Sound Bites from the 2010 Chicago Fed Payments Conference — Payments Views from Glenbrook Partners]

Scatchamagowza! Compared to the cost of renting the terminal, merchant fees and other costs associated with accepting cards payments, this is huge. Shaving a tiny amount off of fees won't tip a business model anything like as much as making a significant cut to compliance costs, so this must be a priority area for investment and new services that can help will find a ready market.

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

Announcing London BarCampBank4

By Dave Birch posted Jan 5 2011 at 9:15 PM

I'm a big fan of the unconference format, where the agenda is set on the day by the participants, so I'm very excited to announce that the 4th BarCampBankLondon "Unconference" will be held on 31st January 2011. The facilities will be provided by NESTA at their offices at 1 Plough Place, London EC4A 1DE with support from Consult Hyperion and BullionVault. Look forward to seeing you there!

This year, there will be a special focus on the role of financial services and institutions and their potential to help local communities unlock currently underutilised capacity to meet currently unmet needs. Why? Well, the new coalition government in the UK has an initiative called "The Big Society": The Big Society is about helping people to come together to improve their own lives and putting more power in peoples hands. There is real interest - both within and outside of government - around the potential of 'people helping people' models such as complementary currencies and timebanking. The recent "giving" green paper consultation launched by the Cabinet Office makes particular reference to the potential of complementary currencies and raises questions around scaling local timebanks on a national scale.

New complementary currencies mean new institutions and my particular interest at the event will be to explore potential institutional arrangements. What would it mean to make complementary currencies part of the financial services landscape? What new kinds of financial institutions are need for the new economy? Questions like these deserve examination from a range of perspectives and I hope that we can exploit the opportunity to explore decentralisation, locality, community in financial services. New technologies -- everything from mobile phones and smart cards to Facebook and Twitter -- have a key role to play here, both in terms of stimulating new organisational models and and scaling up working alternative models to regional and national scale.

The number of tracks running in each session naturally depends on the number of participants and what they want to talk about but for BarCampBankLondon4 we hope to run 3-4 parallel sessions both before and after lunch. The topics to be covered in each track depend on you, the audience, but I expect them to range across new ideas for financial services businesses, ways to use new technology (with a big focus on social media), banking regulation and industry structure, community banking and a wide range of related issues.

The proposed agenda for the day is simple:

10am Welcome and introductions

10.30am Agenda-setting and ice-breaking

11am - 12.15pm First Session

12..15-12.30pm Report and review

12.30pm-1.30pm Lunch and networking

1.30-2.30pm Second Session

2.15-2.30pm Report and Review

2.30-3.30pm Third Session

3.30-4pm Report and Review, Closing Discussion.

See you at at NESTA on 31st January 2011. We hope to see 50-60 people there but space is limited, so please register right away here via MeetUp. There is a nominal booking charge of £10 and all delegates will receive copies of the latest Digital Money Reader with the compliments of Consult Hyperion and When Money Dies with compliments of BullionVault.

No more cheque puns, please

By Dave Birch posted Jan 4 2011 at 12:28 PM

The UK Payments Council is currently carrying out a series of workshops around the UK, talking to clubs, charities and societies about the future of cheques. Communique, the Council's new newsletter, says that these are to explore the organisation's needs and the alternative to cheques. As far as I can see, though, cheques are already more of a pain than the alternatives. My wife recently had to collect a number of cheques from people in connection with a charity and it was a total hassle: it would have been so much easier if people had just PayPal'd the money to her. Keeping track of the cheques, one of which got lost in a pile of paperwork on my desk, and then depositing them, took time and effort that e-mail doesn't. I couldn't care less if I never see another cheque again, but the general public will need some time to get used to this. By way of example, a chap on Finextra asked:

Should the Payment Council have the right to change the method by which I bought my last car or might want to buy a conservatory in the future? Ford wouldn't take the whole purchase on Credit card.

[From Details | LinkedIn]

Ford is not obliged to take cards at all, that's got nothing to do with the Payments Council, it's a matter of private contract. Ford could require you pay in cowrie shells or gold bars if they wanted to.

What if my Debit card had gone faulty or the phone connection had failed on the swipey box?

[From Details | LinkedIn]

What if your cheque book went soggy in the washing machine? What if you are illiterate?

Should the government make it a prerequisite to have a chequeing facility for a bank to be a bank?

[From Details | LinkedIn]

Interesting last point. The answer is no, of course, because bank regulation shouldn't be anything to with payments. And payments regulation shouldn't be anything to do with banks. Ever since the Payments Council announced its plan to end cheque clearing in 2018, there have been demands to keep them, and not just from charities, dentists, pressure groups representing the elderly, MPs and various other conservative groups.

The Federation of Small Businesses said it will 'strongly oppose' any move to get rid of cheques.

[From End of the cheque book: Traditional paper payment could be abolished by 2018 | Mail Online]

Fine. Let them pay for them then. Remember, it is not cheques that are being abolished in 2018 but cheque clearing. If your bank wants to offer you a cheque service, that is up to them. It will cost a fair bit more than debit cards, funds transfer or any other new-fangled payment mechanism though, because it involves messing around with bits of paper. If you are happy to pay for that, knock yourself out, I don't have problem with that. But I don't want to pay for you to do it, if you see what I mean. If some enterprising payments entrepreneur wants to set up a new cheque-clearing system that is paid for by its users, I'm all for competition. But the truth is that they could never make it work.

The price of a first class stamp for a standard letter will rise by 5p to 46p, while second class will go up by 4p to 36p. The rise for larger letters, such as some Christmas and birthday cards, is even more, with first class going up 9p to 75p.

[From Royal Mail: First class stamps to cost an extra 5p in record price rise | Mail Online]

I can't even post a cheque for less than P2P transaction would cost me, so why on earth people want to keep them I've no idea. As it is, they are only used for 11% of such transactions and there are plenty of alternatives available.

P2P Methods 2010

So nearly two-thirds of P2P transactions are still cash and cheques. What a fantastic opportunity for the e-payments industry and what a massive potential cost-saving for society. And this isn't some hopeful projection: we already know that moving from cash and cheques to card leads to substantial savings.

The London Borough of Havering has appointed Citi to supply pre-paid cards to replace cash and cheque payments.
Potential uses for the pre-paid cards include, payments for social care budgets, asylum benefits, and housing benefits. Havering Council says the move will enable it to more than halve its existing processing costs for cash and cheque payments.

[From Finextra: London council halves cash processing costs by moving to pre-paid cards]

This seems reasonable: cards cost half of cash and cheques. Hopefully, come 2018, there will be a substantial fall in overall cost of payments to society. Who knows what the exact system, or systems, that replace cheques will be, but I think that we can already see that some combination of mobile, TV, cards and so on will do it. There are plenty of other countries where there are no cheques already and society doesn't seem to have collapsed, so we can do the same.

This very morning I got a letter from my dentist reminding me to pay an outstanding invoice for £100 and asking me to send a cheque. As I could not be bothered to go and find the cheque book, write it out, put it in an envelope, address it and find a stamp., I thought I was just do by bank transfer next time I'm online. Oddly, the payment request did not either give bank account details or a PayPal address, so i sent them a message to ask. It turns out that they can take credit cards (with a 2.5% surcharge), debit cards and cheques only. Oh well. Since I had to log on this morning to pay a couple of bills, they would have had their money via FPS by now. As it is, I'll pay with a cheque when I pop in for a check up in a few days time.