Digital Money

Cash and machines

In a comment on an article about mobile payments that I was reading, I noticed that someone wrote

I hate it when a retailer tells me they don't accept cards. I feel like I have to remind them what year they're living in. They usually prompt me to use an ATM within their store and accept a 2 dollar or more fee just to get the cash to pay for a candy bar. This results in me leaving the store and finding a 7-11 or some such thing.

[From Paying by phone is insecure and unnecessary. - By Farhad Manjoo - Slate Magazine]

It seems to me that this is the market at work, and I don't see a problem with that. If some retailers and some customers want to carry on using cash, then fine, let them, but don't make me pay for it. So long as they are paying the full cost and I'm not subsidising them, so what? (Actually, there is a so what which is to do with the impact on society, but that's not my point here.) But then I began to wonder why the store would need an ATM at all. Wouldn't costs be reduced for everyone if the customer could use their ATM card to withdraw money from the retailer's cash draw? This is the sort of thing that is going on in India.

As a part of the ambitious Unique Identity (UID) card project, a micro-ATM will be a payment platform that would make use of mobile technology and the customers’ UID will serve the ‘know your customer’ (KYC) norms required by the bank to open an account.

[From Banks take to the shrinking cash machine - dnaindia.com]

The micro-ATM is a POS terminal-with-knobs-on so that customers can make "ATM" withdrawals at agents but also open accounts and carry out other basic functions. Presumably these don't cost the merchants much more (if any more) than regular POS terminals and they must cost less than an ATM, so everyone's better offer, except for ATM manufacturers.

Perhaps we should stop looking at these band-aids to slap over cash's inefficiency though. It's time to get tough. According to recent research by McKinsey and Wincor-Nixdorf (who make, amongst other things, ATMs), cash "in circulation" from the US to Europe through to Asia Pacific is increasing year-on-year,which has resulted in the global cost of handling cash increasing to more than US$300 billion, and retailers bear the brunt of those cash handling costs compared to banks, cash-in-transit operators,cash centers and central banks. As much as 61% is attributed to the cost of handling, transporting and securing cash in the checkout zone and back office of a retail store compared with 32% for a retail bank. Incidentally, I thought I remembered seeing that $300 billion figure a few months ago, and it turns out I did.

Eckard Heidloff, president and CEO of Wincor Nixdorf and Dr. Karsten Ottenburg, chairman of the management board and CEO of Giesecke & Devrient, noted that $300 billion is spent annually on cash processing worldwide. And since the euro’s introduction, the number of banknotes in circulation in euro-member countries has increased 8 percent yearly.

[From Wincor Nixdorf and Giesecke & Devrient form a partnership | ATM Marketplace]

Banknotes "in circulation" going up 8%, while retail sales went up, what, 1% last year? What on Earth are people are these banknotes for? Earlier in the recession, the Bank of England put forward a theory:

As a share of nominal GDP, the value of notes in circulation declined from 6% in 1970 to a low point of 2.4% in the mid-1990s but has since stabilised and then increased, noticeably over the past two years... Rising demand for notes might reflect some loss of confidence in banks and very low interest rates, which reduce the opportunity cost of holding banknotes as a non-interest bearing asset. Andrew Bailey says that is “…pretty good prima facie evidence that there has been an increase in demand for banknotes as a store of value”.

[From Bank of England|Publications|News|2009|Banknotes in Circulation – Still Rising: What Does This Mean for the Future of Cash? Speech by Andrew Bailey, 6 December 2009]

Yes, but a store of value for who? Certainly not for a normal, law-abiding taxpayer like me. Does anyone you know keep cash at home now instead of leaving it in the bank? This isn't a purely European phenomenon, since the amount of cash has been going up in the USA as well.

The quantity of US currency in circulation in the world was $2776 per US resident in April 2009. That's a lot of currency - the stock held at any point in time is about 6% of US annual GDP. In case you think that's all held overseas, a study by the Bank of Canada (in the Bank of Canada Review - look it up) shows that Canadian currency outstanding is about 3% of annual Canadian GDP, and most of that has to be in Canada.

[From Stephen Williamson: New Monetarist Economics: The Use of Currency]

These figures seem about right: the US has far more currency out there per person, because more than half of all US currency isn't in circulation in the US and will never be repatriated, so in the UK, Canada and the US we see approximately the same figure, that M0 is 3% of M4.

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

Innovation is technology-enabled

Around the world, when faced with new products in the payments space, banks naturally crank up their innovation departments and produce super new products and services to wow customers back. I'm joking, of course. What they actually do in many countries is to going whining to the regulator and force competitors to use the banks' legacy infrastructure. This is what just happened in India, which really ought to be a huge and dynamic market for e-, m- and new payments of many kinds.

Consequently, from 1 March, the eBay unit says merchants in India cannot receive payments from abroad of over $500 per transaction. In addition, merchants will no longer be able to use any balance in their PayPal accounts to buy goods or services. Instead all payments must be transferred into Indian bank accounts first.

[From Finextra: RBI forces PayPal to restrict payments to Indian merchants]

Now, I'm not saying that banks are the only people who react to innovation in this way: that is, by trying to stop it. This goes on all the time.

For the last fifty years, hard disks have been increasingly super-charged gramophone records: at their heart, there is still a real disk rotating very fast on a real spindle. That's not the only way to store data, as the memory stick revolution shows, but until now, solid state drives (which have no moving parts) have been too small and expensive to replace traditional hard disks as the main storage device for a computer. Now that's changing, with real advantages for users as a result... Seagate's response is to threaten to sue all the new entrants for patent infringement, while insisting that their existing market is not threatened.

[From Public Strategy: Innovator's irony]

At the dawn of the industrial revolution, the steam engine delivered the fundamental business school case study in this topic, something that I wrote about when I was invited to speak at the European Patent Forum back in 2009.

In his keynote address, the Czech Prime Minister Mirek Topolanek said that we had to find a balance in the intellectual property system, that it was right to let Stevenson patent his steam engine but not the screwdriver he used to build it (he didn’t explain why..).

[From Patent error | 15Mb: yet another blog from Dave Birch]

In fact, as I discussed in this post, history teaches the opposite lesson because the patent system held back the evolution of the steam engine for a generation! But back to our business. What kind of innovation is relevant to the payments industry? This is not clear to me. On the one hand, it seems reasonable to say that...

What would be refreshing is if the focus of innovation could be pegged to the value that it delivers to the entire ecosystem, not just the engineers who get a kick out of building cool new toys.

[From Payment Gadgets at The Catalyst Code]

But is this true? When Apple put together the iPod, it didn't benefit the "entire ecosystem". The disruptive innovations in fact devastate parts of the ecosystem, like forest fires that allow new shoots to grow. I hate to harp on about the M-PESA example, but I think it illustrates this point well. The banks complained about M-PESA and tried to stop it but fortunately failed. Now that M-PESA has 13m customers and 20,000 agents, the banks are able to deliver new services to new customers using the platform. Were they devastated by the forest fire? No: it gave them space for new shoots as well.

Where do we look for the next new shoots then? Not in banks, generally speaking, but elsewhere in the ecosystem. The payment innovations to come will be technology-enabled, which is why it's important for businesses throughout that ecosystem to understand the new technologies relevant to payments and, just as importantly, understand the business model ramifications of seemingly dreary technology architecture decisions being made by nerds right now. While they will be technology-enabled, though, it's the sustainable new business model that is the key. A good example of this is Square.

..if Square can provide just enough added-value with their app to get traction in the small business sector (they are already processing a million dollars a day), then when new payment technologies come along (eg, NFC phones that can accept payments from contactless cards) the merchants will just expect Square to handle them for them. We have long been advising clients that the key disruptive role of mobile phones in the payments world is the ability to take payments, not to make them.

[From Digital Money: Hip to be Square]

And we still do, in fact. I think Square is an interesting innovation case study. It does not compete with existing acquirers, but opens up the market so that more people can accept card payments.

So where is Square seeing the most traction? Without a doubt, small businesses, independent workers and merchants comprise most of Square’s rapidly growing user base. The technology only requires its tiny credit card scanner that fits into your audio jack and Square’s app. The device and the software are free, but Square takes a small percentage of each transaction (2.75% plus 15 cents for swiped transactions).

[From Square Now Processing Millions Of Dollars In Mobile Transactions Every Week | TechGoo]

In a way, this is a real-world PSP and an fascinating niche play in a large volume-driven acquiring market, one that can be seen to adumbrate mobile disruption and our projection that the mobile-phone-as-POS meme will be more revolutionary than the mobile-phone-as-card meme. But there's something else to it as well. Conventional acquirers use conventional methods to assess applications.

Square’s qualification rules are more relaxed than those of standard credit card processors, There are no initiation fees, monthly minimums, and when merchants apply for a reader, Square doesn’t just focus on a credit check, but also takes into account the influence a company holds on Yelp, Twitter or Facebook.

[From Square Now Processing Millions Of Dollars In Mobile Transactions Every Week | TechGoo]

That, it seems to me, is more of a window into the coming economy based on the reputation interweb (or web 3.1, as I propose to call it, to avoid clashing with web 3.0). Can you imagine Barclays Business or Streamline giving you a merchant acquiring account according to the number of twitter followers you have rather than your trading history or bank references?

By the way, I can't remember if I've blogged this before but one of my favourite stories about accepting merchants for acquiring accounts goes back more than a decade to the hazy days before the LastMinute flotation. I was doing some work over at what was then NatWest Capital Markets, who had invested millions in Lastminute, when they went beserk because NatWest Streamline wouldn't give LastMinute a credit card acquiring account because it didn't have two years' trading history!

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

Contactless in chaos

When I was in Singapore a few days ago I went to Starbucks in the conference centre where the Cards Asia and NFC World Asia events were being held, accompanied by senior executive from major international financial services organisation (SEXMIF) to get a coffee. When we got there, I noticed a contactless terminal, proudly advertising that it preferred Citibank cards. We ordered a couple of coffees and the delightful young clerk smiled and cheerfully asked for $8.40 or whatever it was. After a theatrical flourish of my splendid contactless Visa card I triumphantly tapped it against the reader. Nothing. I tapped it again. Nothing. I told the attendant that I wanted to pay with contactless. Ah, he pointed out, you can't because it's not a Citibank card. I politely explained that it was a Visa card, and there was a Visa logo prominently displayed on the reader. He went off to get his supervisor.

The super appeared to see the problem. Ah, he pointed out, the terminal isn't ready. He proceeded to re-key the transaction into another POS terminal (they had three: two for cards, as far as I could see, and one for NETS, the domestic contactless purse.)

Nothing. The terminal still didn't display the invitation to tap and go, although the blue light was on. He told me to tap the card. I told him that it would be pointless, because the terminal wasn't in the correct state. He insisted. I tapped. Nothing happened. SEXMIF, who was videoing all of this on his phone, presumably so that he could show his management the future of consumer payments, was having trouble keeping the camera still while laughing at me.

We cancelled the transaction out and tried again. It still didn't work. I rummaged for my trusty Travelex pre-paid MasterCard and paid by swipe. Remember, I do this so you don't have to.

Not only was using contactless not quicker than paying with cash, it was not quicker than paying with a cheque. Nor, for the matter, was it quicker than walking across the mall to an ATM, drawing out the cash, walking back and paying with a S$50 bill and getting the change in 5-cent coins. What a joke. It's almost as if a double-agent from the cash-in-transit (CIT) industry has gone under deep cover and is now working for the banks, sabotaging the deployment of contactless from the very heart of the industry. After all, what consumer is going to try tapping their phone on this terminal after they've had these experiences with contactless cards?

The next day, on my own, and refusing to accept that contactless deployment had been damaged beyond repair by the combined actions of the acquirers and merchants, I went into another Starbucks to try again. I asked for a Latte (with an extra shot this time) and then asked if I could pay by contactless. The guy told me I needed a "white card" (I think this is what he said). I wasn't sure what he meant, so I confidently pointed to the Visa logo on my UK Barclays debit card and, expressing full confidence in the global brand promise that has made Visa what it is today, I prepared to tap. He rekeyed the transaction, and, ta da!, the terminal lit up. I tapped! The light went amber, then green! He handed me a receipt that confirmed an offline EMV no-CVM debit transaction, and I wheeled away in triumph.

But the clerk called me back. He told me that they have to swipe the card, even when the customer has paid by contactless. I was incredulous. But he was insistent. I asked him why. He said that they had to. I told him I was sure that wasn't the case, but he insisted, and by now my use of contactless had caused a queue to build up. I didn't want to embarrass him -- it's not his fault -- but I was really curious what they needed the swipe for. So I handed over my Travelex MasterCard, and he swiped that. It charged me for the coffee again. I looked at both receipts, astonished. Then I gave him back the Travelex card and had him unwind the transaction, then gave him my debit card and he swiped that, for a reason that wasn't clear to me. When I got home, I logged in to both accounts to see what had transpired. Nothing had been posted to the Barclays account three days after this, and when I tried to log in to Travelex it said "site down for maintenance". Oh well.

For reference, this is what should happen in the retail environment if a retailer wants to cut cash handling, speed up serving times and increase the average spend: I ask for a coffee, the guy rings up S$6.40 and the terminal lights up, clearly displaying "6.40" and then I tap it with my card/phone and the light goes green and that's it done. End of transaction.

Shashi Verma and Will Judge, Transport for London

Shashi Verma is the Director of Fares & Ticketing and Will Judge is the Head of Future Ticketing at Transport for London (TfL) which runs the Oyster scheme, one of the world's most successful contactless transit ticketing schemes. The scheme is about to change significantly. By the end of 2012 card readers across the whole of the London transit network will have been upgraded so that a touch of a contactless bank or credit card will allow passengers to touch in and out for pay as you go travel on the bus, Tube, Docklands Light Railway (DLR), Tram and London Overground network. The new system will be up and running on all of London's 8,000 buses in time for the 2012 Olympic Games. In this podcast, Shashi and Will talk about this ambitious initiative.

You can download this and other podcasts in both podcast (MPEG4) and sound-only (MP3) format from the Consult Hyperion podcast page, where you can also subscribe to the podcast RSS feed. If you have iTunes, you can find the podcasts in the iTunes Store: just search for "Consult Hyperion" in the podcasts area and you can click and subscribe. Alternatively, you can click on this iTunes link.

Including everyone

As a chap named Bill Gates wrote recently,

Technology can be a major force to advance financial inclusion, which can help improve the lives of the poor in the developing world.

[From Untitled]

He's absolutely right, of course. People who are trapped in the cash economy are the ones who are most vulnerable to theft and extortion, most likely to lose their hard-earned notes and coins or have them destroyed by monetary policies, pay the highest transaction costs, lack credit ratings or references and (in an example I heard from Elizabeth Berthe of Grameen at the Digital Money Forum this year) most likely to have their life savings eaten by rats. So what should be done? Well, having governments take the problem seriously and set targets is a good start.

the RBI target of ensuring 100% financial inclusion in villages of 2,000 plus population in the state by March 2010... banks could adopt the RBI's advice of making use of the business correpondent-BF model, as per the guidelines, to extend the banking services.

This was in keeping with the RBI's decision to launch a renewed drive for opening up of no-frills accounts in respect of families who do not have a bank account, on the basis of the data relating to the public distribution system.

[From Banks urged to take steps to ensure 100% financial inclusion - dnaindia.com]

To continue with this specific case, it has proved very difficult to translate these targets into action in the heavily-regulated Indian market.

Adding to their presence, the cost of operating a bank account and the cost of transaction for banking services —which includes deposits, withdrawals, credit and other banking products — is not only high for the consumers but also for the banks. This leads to little penetration and reduced delivery of services in order to bring the large number of potential un-banked/under banked population under the mainstream banking system.

[From Financial Inclusion In India]

As far as I can see, banking is a really expensive and really inflexible way to obtain inclusion, and as we all know, there are better ways to obtain inclusion with new technology. In particular, new technology when combined with the business correspondent model mentioned in connection with the RBI guidelines above ought to be delivering more transformation.

A Wharton School study pegs the cost of a transaction at a bank branch at around $1 (Rs. 45). At an automated teller machine, it goes down to about $0.40. And done through business correspondents, the cost drops even lower to $0.10.

[From Banking on technology to bridge financial inclusion gap - Economy and Politics - livemint.com]

Another way forward might be to treat mobile payments as a first step on the ladder to inclusion and try to find a way to bring mobile payments to the mass market and then use the mobile payment platform to deliver other financial services. Naturally, give our work on the project, I can't resist highlight M-PESA in this context.

This is why, I believe, that the success that Vodafone (through its subsidiary Vodacom) achieved in Tanzania is so important. It was reported that more than a million subscribers have signed up on the service (Read here), but indications at the Congress were that this number has now more than doubled. The fact that Vodafone has demonstrated that they can duplicate the success of mPesa in other countries, is of significant importance. This means that the Kenya experience was not a fluke, and that Vodafone has learned what it takes to make these roll-outs work.

[From Mobile Banking: Vodafone prove mPesa repeatability]

I hate to keep going on about M-PESA, but our experiences advising Vodafone in the early days of this project contain a number of useful lessons, in particular about the relationship between new entrants and regulators. But I wanted to make a different point.

A couple of years ago we were doing some work for a client who was thinking of developing something like M-PESA. I won't name them, obviously, but I hope no-one will mind if I mention one of our recommendations. Our Head of Mobile Money, Paul Makin, who worked on M-PESA when it was still whiteboard scribble, was asked what he would have changed in the original specification if he had had the wisdom of hindsights, and his top priority was APIs for MIS access. This is why I wasn't surprised to see this in a report from the front line.

Data from M-PESA cannot directly be imported into the management information systems (MIS) at MFIs. For KADET, this means all payments made through M-PESA have to be manually input into their MIS, another opportunity for human error to affect the process.

[From Mobile Payments: the Devil is in the Details « Kiva Stories from the Field]

(I strongly urge you to read this short and fascinating article about real experiences linking to M-PESA in the field, by the way.) Taking the mobile payments transactional data and providing corporate access is, I think, a key plank in the inclusion strategy. In Kenya, financial institutions have already started to use M-PESA transaction data as a substitute for a credit rating when looking at providing loans and I'm sure that new opportunities will arise due course: with the wisdom of hindsight, better corporate interfaces would have accelerated this process.

This is the short of thing I expect to discuss more when I'm on the panel on Financial Inclusion at the forthcoming Mobile Money and Migrant Remittances conference in London on 16th-18th May 2011. They've got a great set of speakers, including Forum friend Elizabeth Berthe from Grameen and John Maynard from Vodafone, and I'm really looking forward to it.

In an act of astonishing charity, the wonderful people at ICBI have given me a two-day delegate pass for the conference -- worth an amazing ONE THOUSAND FOUR HUNDRED AND NINETY NINE POUNDS -- to give away on this blog as a competition prize. So if you are going to be in London on those dates and you'd like to come along to meet some of the global leaders in the mobile and remittance space, all you have to do is be the first person to respond to this post telling me when Western Union, the founders of the electronic money business in 1871, finally shut down their telegraph service.

In the traditional fashion, this competition is open to all except for employees of Consult Hyperion and members of my immediate family, is void where prohibited and has been risk-assessed under all relevant guidelines. The prize must be claimed within three months. Oh, and no-one can win more than one of the Digital Money Blog prizes per calendar year.

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

In all conscience

I'm giving a keynote at the Smart Card Alliance conference in Chicago in a couple of weeks. It's going to be about EMV in the USA. I've just been mulling it over, and once again looked at Deborah Baxley's neat summary of the immediate future for the US cards business:

Banks scrambling to replace lost fee revenue will likely shift focus to credit and prepaid, impose DDA and other fees, along with new account services and comprehensive pricing packages.

[From Changing the Game in Cards - pymnts.com]

It's not just banks who have to rethink their strategies because of developments in the payment sector. I note that in the UK, according to the Centre for Economics & Business Research reported in Fraud Watch 6(18), nearly 100,000 people were victims of direct debt fraud last year, a direct consequence of the use of chip and PIN at retail POS. As card fraud has become more difficult, the criminals have shifted their focus. Direct debit fraud was one basis point of identity fraud cases a decade ago, now it is a tenth of all cases. Criminals have to adapt to chip and PIN just as banks and merchants do.

A GROUP of seven postmen intercepted letters containing credit cards, switched the microchips of the cards with fake ones and then delivered them to the applicants... the syndicate also had the help of a National Registration Department (NRD) officer who supplied them with the names of the mothers of the real credit card applicants

[From 7 M'sian postmen nabbed for credit card fraud]

It's interesting to think like a criminal. Well, sometimes. In Chicago, two men were shot by guards while trying to rob a cash transit.

The dead suspect was identified as Jimmy Townsend, 52... a convicted felon and was sentenced to 10 years in prison for two separate armed robbery convictions.

[From 2 suspects shot, one fatally, in armored truck heist - Chicago Breaking News]

Armed robbery is a bizarre crime. I think I'm right in saying that in the UK the average sentence is longer than that for murder. In the US, Mr. Townsend spent years in jail for it, and then got killed doing it again. How dumb did he have to be go back to trying to rob armoured cars. If only he read the Digital Money Blog, he would have known that there are much easier targets.

The heavily-armed gang made off with the tournament jackpot of 242,000 euros ($327,000; £217,000) in early March. Police said a 28-year-old Lebanese man, the fourth arrested in connection with the raid, had been detained on Sunday.

[From BBC News - German police arrest poker tournament heist suspect]

OK, so not all of them got away, but casinos are not a bad idea for enterprising criminals. They do have lots of cash, and often the people in them will not report cash as stolen.

Masked men have stormed a packed casino near the Swiss border city of Basel, making off with hundreds of thousands of francs, prosecutors say.

About 10 raiders pulled up at the Grand Casino in two cars just after 0400 (0200 GMT) and smashed their way in, brandishing machine-guns and pistols. The French-speaking gang ordered the 600 guests and employees to the floor while they emptied registers.

[From BBC News - Switzerland casino is robbed by armed gang]

Criminals follow the path of least resistance. I hope Bankerstuff don't mind me quoting from a marketing e-mail they sent me concerning a forthcoming webinar.

A Former Bank Robber Shares Security Insights During Live Webinar on April 28 from 2:00 - 3:00pm Eastern

Troy Evans pursued a career as a self-employed addict, drug dealer, gambler and thief for more than 15 years. Ultimately, his disregard of values and discipline resulted in a 13 year federal prison sentence. Facing the obstacles, pressures and violence of prison life, he was determined that his time behind bars would not be wasted... Having met and interviewed over 300 bank and credit union robbers he is able to give us a "look into the mind of the enemy". Troy answers questions such as... What can financial institutions do to deter a desperate criminal?

I would have thought than an obvious idea would be to not have any cash since, as another bank robber famously remarked, he went "where the money is"? When it comes to card payments, the money is in getting hold of card details and (because of the switch to chip and PIN) PINs. Here, the criminals soon adapted their strategies to deal with the new instruments.

Victorian Police believe international crime syndicates are bribing shop workers in return for access to EFTPOS terminals as part of an elaborate scam. They believe criminals have stolen as much as $80 million from Australian bank accounts over the past year...

The syndicates install cameras in ceilings to film people entering their identification numbers.

[From EFTPOS scam costs Australians $80m - ABC News (Australian Broadcasting Corporation)]

They're using these PINs (since they can't make counterfeit chip and PIN cards) with the card details to withdraw cash from ATMs. Once all of the cards and ATMs are chip-only, this avenue will be closed to them. Thus while chip and PIN isn't perfect, it's good enough to push criminals into other channels. So: a thought experiment...

Suppose we improve the security of payment systems to the point where they cannot, effectively, be broken. Theft, fraud and hacking are not possible. Where would criminals go next? I think they're spoilt for choice, so relatively small improvements in payment security would send them off to pasture news.

The poll of 533 firms shows that 55% experienced fraud in the last 12 months, with 61% of these hit more than once, a similar picture to the previous year. In total, 75% of the businesses participating in the study experienced online account takeover and/or online fraud.

[From Finextra: Account takeover fraud plaguing US small businesses]

SME account takeover seems much easier than armed robbery and much more profitable. The so-called man-in-the-middle attacks on OTP systems for remote access to baking accounts are an established attack vector.

According to BillingScore, 19.4% of the value of all transactions in the U.K. premium rate sector are fraudulent, or roughly £1 on every £5 spent. "With the premium rate sector in the U.K. mobile industry currently worth in the region of £700 million, this equates to £135.8 million per year being lost to fraud in the U.K. alone," the company said.

[From UK mobile operators 'hide' £136m annual fraud loss]

A fifth? As opposed to a few bp in cards? I predict that any forward-looking criminal in this scenario will be eyeing up the telecommunications opportunities. So let's look at what some forward-looking criminals are doing. I think criminals in eastern Europe are a useful barometer, because they tend to be well-educated and computer-savvy. And they get arrested for time to time so we can see what they get up to. Here's the stash of Romanian hackers arrested last year. You will, of course, note that it does not include low maximum balance prepaid cards or accounts.

77,350 euros, 49,000 U.S. dollars, 64,860 pounds, 60,645 lei, a luxury watch, a rifle, three pistols and 150 grams of gold. 70 laptops, 165 mobile phones, 35 desktop computers, 15 modems, new servers, 10 blank cards, 2425 SIM cards...

[From CyberCrime & Doing Time: Nicolae Popescu, Romanian hacker, at large!]

So not only the usual euros and dollars, but also gold (clearly the hackers were diversifying) and also two-and-a-half thousand SIM cards. Two-and-a-half thousand! Here are people taking the messages of convergence, future-proofing and cloud payments quite seriously. As Eric Schmidt said when still with Google, if you don't have a mobile strategy then you don't have a strategy. Now, if you're like me, you will wonder what on Earth they are going to do with these SIMs. Then I remembered something that I'd read a while ago.

Only days after almost two million Bulgarians registered their SIM cards, the Interior Ministry warns that new forms of abuse are appearing. According to the ministry, two cases had recently been uncovered in which telephone fraudsters had allegedly offered 50 leva to Romas for registered SIM cards, Bulgarian daily Standard reported... the Interior Ministry as saying that it expected a flood of SIM cards, registered to Romas and homeless people, to appear on the market in the coming weeks.

[From Interior Ministry warns of trade in registered pre-paid SIM cards - Bulgaria - The Sofia Echo]

Mystery solved. The answer to why there should be a significant value attached to SIM cards that you can buy for virtually nothing in any shop is, naturally, government policy. After pocketing their windfalls from selling their SIM cards, the homeless and Roma presumably went off to celebrate their good fortune, whereas the criminals went off to figure out how to create a mass supply instead of having to negotiate with individuals.

...only four months into 2010, and organised crime groups already have found ways of beating the system. In fact, there are unsuspecting people right now who are completely unaware that their mobile phones, or names and registration, are being used for serious criminal activities... Radio host Borislav Borissov found out that he was the "proud owner" of about 200 different SIM cards, all registered to his name and personal social security number.

[From Bulgarian criminals 'beating the system' of pre-paid SIM card registration - Bulgaria - The Sofia Echo]

I know where I'd invest my criminal dollars! Mobile is the future! No, of course, I'm just joking to make a point. If I really was going to invest dollars in a criminal enterprise, it would be in Somali pirates, except for one sticking point. I'm afraid my strict ethical position will not allow me to deal with these people.

The al Shabaab group, which professes loyalty to al Qaeda, said mobile money transfers (MMT) helped feed Western capitalism and were turning Somalia's Muslims against Islamic banking practices.

[From Somalia's al Shabaab bans mobile money transfers | Top News | Reuters]

I cannot do sufficient violence to my conscience to support a group who are against mobile payments.

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

Licensed operators

France has been in the forefront of the NFC revolution, with an early commitment to cross-industry co-operation, considerable work on standards and models and an aggressive timetable for getting phones into the market. Remember this?

A dozen French cities plan to launch wide-scale contactless payment and information service on mobile phones with the backing of the ministry of industry, reports Les Echos. The city projects approved under the initiative will receive state assistance for consultancy and engineering, but no other subsidies are planned at this stage.

[From Aid from French Ministry of Industry for mobile contactless cities. « Contactless & NFC City League]

You will undoubtedly recall that a few months later, the French mobile operators decided to get together with a processor and form a mobile payments proposition to launch a serious assault on the banks' retail payment franchise.

Orange, SFR, Bouygues Telecom et Atos Origin créent une société commune pour proposer une plate-forme unique de paiement en ligne, sécurisée par le mobile.

[From Union sacrée des opérateurs mobiles dans le paiement sur Internet - OPERATEUR DE TELECOMMUNICATIONS SERVICES INFORMATIQUES ATOS ORIGIN FRANCE TELECOM SFR BOUYGUES TELECOM]

Well they've made their first assault on the enemy positions and have been granted a PI licence. Why would they bother, you might wonder, when polls show that the majority of consumers don't want to use mobile payments?

The 59% of consumers who were against the idea, meanwhile, gave their reasons as: Security (79%)

[From Most French consumers not in favour of mobile payments • NFC World]

The answer is, of course, that consumers don't know what they are talking about and it's a waste of time asking them about anything new. Whatever they might say a priori, in all of the pilots and trials that we have been involved in, they really, really, liked mobile proximity.

But there are some real issues, and we need to address them.

Dead phone batteries. Wrong merchant terminals. Terminals turned off. Terminals unrepaired. No terminals at all.

These and other, less obvious glitches suggest contactless technology may not be the mobile payments panacea for tattered magnetic stripes and other problems with plastic cards.

[From Mobile Payments Inheriting the Problems of Contactless - American Banker Article]

Well, yes and no. (I am a consultant, after all). Let's have a look at these

Dead phone batteries. NFC is interoperable with the existing contactless payments and ticketing systems. As you may have noticed, your Oyster card doesn't have a battery in it: that's because it is powered through the electromagnetic field of the terminal you touch it to, and the same is true for the NFC interfaces in phones: if the phone has no battery you may not be able to access your m-wallet to check your transactions, redeem coupons and so on, but you will be able to to use it pay in a shop and ride the subway.

Wrong merchant terminals. I don't think this will an issue. Right now there are some problems with some cards not being accepted in some terminals, but this is the result of standards problems three or four years ago. The contactless EMV standard should interoperate seamlessly. Some of the terminals are certainly "wrong" from the point of view of consumer experience, but that's a different thing.

Terminals turned off. Fair enough, I do see this from time-to-time. But it's a teething problem. There is a problem with terminals being turned off after the merchant has rung up the purchase and then having press some more buttons to turn it on, but that's an implementation issue.

Terminals unrepaired. I don't think this is a long term problem. Contactless terminals (since they have no slot or contacts) are considerable more reliable in practice than contact or stripe terminals. Experience from other sectors suggests to me tha tthe cost of maintaining an estate of contactless terminals is less than half the cost of maintaining an estate of conventional terminals.

No terminals at all. This, I think, is the real problem. When I was last in the US, I saw contactless terminals in places where they didn't really have much impact, like in CVS. But in the places where contactless would have really helped and speeded things up -- BART machines, airport carts, Coke machines and so on -- nothing.

The point is, that those are real issues that do need dealing with, whereas what the public says are their concerns, such as about the security are, in my opinion, not real issues and it should be handled through marketing communications. Oh, wait...

85% of users said they considered the protocols for operating with the NFC system to be sufficiently secure.

[From Sitges trial results: Consumers pay more often and spend more with NFC phones than with cards • NFC World]

This must be a translation from Spanish, because I'm not sure that "protocols for operating with the NFC system" translates properly in English, but it's good news all the same. I'm not saying that everything is perfect in the NFC world. Even in France, where progress has been slow despite the commitment of major banks and operators. It's still a new technology.

The problems are one of the main reasons bank Crédit Mutuel-CIC has held back on launching its m-payment service, according to Patrice Hertzog, payment systems manager for Crédit Mutuel-CIC. He said it has been difficult for the bank’s trusted service manager, Gemalto, to set up and manage the bank’s PayPass application on SIM cards produced by other vendors, such as Oberthur Technologies.

The problems have occurred despite much standards work by the French Association Française du Sans Contact Mobile, or AFSCM, and prior trials involving multiple French banks, mobile operators and vendors.

[From ‘Open’ Battles Break Out Among NFC Vendors Over Android | NFC Times – Near Field Communication and all contactless technology.]

To be honest, this suggests that vendors are not building TSMs from scratch based on the new standards but are putting wrappers around their existing card personalisation systems. That sort of thing is, to me, more of a real issue than incorrectly worrying about what the public think, but whatever. Things are moving. Even in the US, the new technology is getting a foothold and there will soon be TSMs there too.

The joint venture formed by U.S. mobile carriers to launch NFC-based mobile payment... has selected France-based Gemalto to download and manage payment and other secure applications on NFC phones to be used in pilots expected to be held in three to four cities during the second half of 2011

[From U.S. Carrier Joint Venture Chooses a Trusted Service Manager | NFC Times – Near Field Communication and all contactless technology.]

There's plenty of activity in the US as elsewhere, and since I've been looking at the US for clients recently I was interested to read about the work done by the Federal Reserve Banks of Atlanta and Boston. This work suggests that the success factors for the US will rest on the evolution of an open eco system for NFC.

The mobile infrastructure would likely be based on Near Field Communications (NFC) contactless technology resident in a smart phone and merchant terminals.

Ubiquitous platforms for mobile should leverage existing rails, including the ACH network for non-card payments, and support new payment types that meet emerging needs.
Some form of dynamic data authentication would be at the heart of a layered mobile payments security and fraud mitigation program.

Standards would be designed, adopted, and complied with through an industry certification program to ensure both domestic and global interoperability, including a standard to ensure that devices used to facilitate mobile payments do not create any electronic interference problems.

A better understanding of a regulatory oversight model should be developed in concert with bank and non-bank regulators early in the effort to clarify compliance responsibilities.

Trusted Service Managers should oversee the provision of interoperable and shared security elements used in the mobile phone.

[From Mobile Payments in the United States Mapping Out the Road Ahead - Boston Fed]

On that final point, things are already moving.

The joint venture formed by U.S. mobile carriers to launch NFC-based mobile payment... has selected France-based Gemalto to download and manage payment and other secure applications on NFC phones to be used in pilots expected to be held in three to four cities during the second half of 2011

[From U.S. Carrier Joint Venture Chooses a Trusted Service Manager | NFC Times – Near Field Communication and all contactless technology.]

So there's plenty of activity in the US as elsewhere and plenty of organisations are looking at how the move to mobile proximity may impact their businesses.

A white paper that outlines the survey findings, including how the most forward-thinking financial institutions are building a business case for mobile payments, is available at www.fiserv.com/mobilestrategy.

[From Forward-Looking Financial Institutions Focused on Mobile Payments Business Case, Says Fiserv Survey - pymnts.com]

I couldn't help but think, as I read this, that the very act of building a business case for something like this is fundamentally backward-looking, trying to shoehorn something that is the basis of a new value network into the existing business models. The report says that the factors that the FIs evaluated across these business lines included customer retention and profitability, cost reduction, revenue generation and retention, increased customer engagement and competitive parity. When I looked at the revenue generation part of it, though, it only referred to revenue generation in terms of debit card transactions and keeping the connection to the DDA. This isn't how forward-looking organisations are thinking about revenue generation from mobile payments, they are thinking about delivering entirely new products and services that are simply not possible in conventional (ie, card) environments, generating revenue from things that banks don't do.

Google is to run tests of mobile payments at stores in New York and San Francisco in the summer, according to anonymous sources cited by Bloomberg. The search engine giant will pay for installation of thousands of NFC cash-register systems from VeriFone Systems at merchant locations, one source told the wire.

[From Finextra: Google to run commercial trials of NFC at the POS - Bloomberg]

Well, well. So while financial institutions are agonising over the business case, Google is giving out the terminals for free. It's not hard to see why: they don't care about the miniscule margins on the payment transaction and arguing about how to slide and dice the merchant fee, they care about building new business around knowing who is buying what and where. So leadership in the NFC space is may well shift away from the payment incumbents. Perhaps the answer to the age-old question about whether banks or operators would control the mobile payments space is... neither.

Black Wednesday

They called April 6th "Black Wednesday" in the UK. Well, I heard someone say that on the BBC. It's because it was the start of the new tax year, and since the government maxed out the credit card, the payments are going up. There's going to be some pressure to collect to more tax, because there's a limit to how much you can put the rates up before avoidance (and emigration) reduces the total amount collected. I wonder if we will soon be going down the Greek route.

The Greek government announced Thursday it is shutting down bars and nightclubs... that fail to offer receipts. So far, six bars and clubs have been shut down as par of a broader sweep where two-thirds of all inspected businesses were fined. The absence of receipts allows businesses to avoid value added tax, or consumption tax, the Ministry of Finance said in a press release.

[From Euro Debt Crisis - Cash-Strapped Greece Cracks Down on Fun - CNBC]

Now this could be good for the e-payments industry, because the easiest away to avoid receipts and therefore evade tax is to pay in cash. Here, in the birthplace of income tax, the government are apparently going to have something of a crackdown on tax evasion.

HMRC has targeted so-called ‘ash cash’ or payments to doctors for signing death certificates before bodies can be cremated and also undeclared cash payments to dentists.

[From HMRC targets middle class tax evaders – Telegraph Blogs]

This seems on the margin to me: I shouldn't think the amount of tax being evaded by doctors writing death certificates will amount to one payoff of a local government official and I have to say that none of my dentists has ever asked me for a cash payment for anything.

It could even be argued that agreeing to pay your builder in cash might be seen as a conspiracy to defraud the Revenue

[From HMRC targets middle class tax evaders – Telegraph Blogs]

Now you're talking! Agreeing to pay your builder in cash is precisely engaging in a conspiracy to evade tax, and people who do it should be prosecuted. If they paid their share, mine wouldn't be so much.

And it’s not just that carrying around cash is inconvenient and time consuming. These days, one of its main functions is to finance the black economy: drug deals, counterfeiting, under-the-table employment and other nefarious activities. Because cash is anonymous, people can easily opt out of the taxable economy – leaving the rest of us to pick up the tab for their use of public services.

[From I'm dreaming of a cashless Christmas - Telegraph]

Getting rid of cash won't eradicate tax evasion, but it will make it more difficult, and hopefully more expensive, thus shifting otherwise black commerce back into the formal economy. And since the scale of tax evasion in Europe is so colossal, small improvements will deliver significant sums to the treasuries. I couldn't find a reasonable estimate for this in the most recent tax year, but I did find this estimate for VAT alone.

The current collection model brings with it a VAT Gap due to e.g. VAT fraud, insolvencies, mistakes by the taxable persons in the VAT return and VAT avoidance schemes. Desk research shows that the VAT Gap for 2009 can be cautiously estimated at 6,9% of GDP and 12% of total VAT liability in the EU-27. This means that, in the EU-27, a total of EUR 118,8 billion has according to those estimates not been collected by the tax authorities in 2009.

[From 118,8bn euros lost in 2009]

Let's say that 20 billion of this is in the UK, and that getting rid of cash would cut it by a quarter. That's an instant five billion bonus to the exchequer. I look forward to my rebate.

Waiting for ages

A few years ago, I was thinking about how to relate the changing technology of money to changes in money, and I thought it would be useful to have some rough categorisation to organise thoughts. At the time, I wrote this:

The era of Money 3.0 is just beginning. Its central dynamic is no longer connectivity (since everything is connected to everything else) but community.

[From Digital Money: Money 3.0]

After a while, I realised that my initial categorisation was insufficiently granular to organise all of the thoughts I had on the topic and all of the information I had gathered on the topic. (I'm thinking of writing a book about it, which is why I have been gathering a lot of material on the specific topic of the technology of money.) A little while ago I posted a more sophisticated idea for a categorisation of the ages of money, or money eras. This extended the framework from three to five "eras".

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.

[From Digital Money: Another go at categorising money technologies]

This led me to describe the future as a new age of money, Money 5.0 I suppose, where the abstraction becomes complete and there are wholly new kinds of money that are not based on debt (or, indeed, anything else ultimately tangible) or secured in some conventional way but on relationships. Having had a bit of feedback on this, I think it serves its purpose. Obviously, some aspects are a little arbitrary -- starting the information revolution in 1871 -- but I think I can support the dating of the communications revolution to 1971, since this is roughly when company size peaked in the UK (actually it was in 1973), and anyway it fits nicely with the narrative of the 100 year interlude that I contend still constrains our mental models of what money is and how it works.

This categorisation leads me to think that we should be looking for Money 5.0 where we see private bits, not bits about anything, becoming a means of exchange. Why private bits? Well, at this year's Digital Money Forum, we had a wonderful session on private currency, chaired by the economist Diane Coyle.

This morning I had the privilege of chairing a fascinating session at the Digital Money Forum run each year by Dave Birch of Consult Hyperion. The speakers were Professor George Selgin of the University of Georgia, and James Turk of the Gold Money Foundation. Both were arguing, from different perspectives, for private money as a competitor to government money.

[From The Enlightened Economist :: Good money, digital or analogue]

George gave a superb talk on the way in which the industrial revolution in England was hampered by a lack of circulating means of exchange, so private companies stepped in to develop new forms of industrial means of exchange (copper tokens) that help commerce and trade to grow to the great benefit of the nation. It strikes me that we are now in a similar position: we have had the post-industrial revolution but we are still using industrial money and it is holding us back. This is why the virtual empires, such as Facebook, have gone on to produce wholly private currencies -- everything from the Everquest Platinum Pieces of old to the Facebook Credits of today -- just as the giants of the industrial revolution (eg, Boulton's Factory) did 200 years ago. If you think that sounds fanciful, remember that the wholly virtual economy -- that has no industrial analogue -- is already of significant size and growing strongly.

more than 100,000 people in countries such as China and India earn a living by performing 'micro-tasks' in the virtual economy. Jobs include categorising products in online shops, moderating content posted to social media sites, or even playing online games on behalf of wealthier players who are too busy to tend to their characters themselves.

[From Finextra: Three billion dollar virtual economy to fuel developed world - World Bank]

As the World Bank report notes, this economy is already worth several billion dollars. With better money, it could be worth several billion more.

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

Bid and offer

There was an involved discussion about convergence of transaction platforms on a project that I am involved with and it set me thinking about what convergence actually means in this space and what the impact of that convergence might be. I started by remembering something that I'd read at Payments Views.

A couple of weeks ago, eBay held an Analyst Day where eBay senior management shared their thinking about the future of the changing commerce landscape – and how they’re thinking about taking the “e” out of eCommerce... What’s this taking out the “e” business all about? It’s about the influence of mobile on integrating online and offline commerce together.

[From The PayPal Juggernaut — Payments Views from Glenbrook Partners]

Scott is typically accurate with his comments hereafter. The strategic direction is convergence. Not the simplistic kind of convergence, where our mobile phones become watches, cameras, wallets and devices for getting stones out of horses hooves. This simply hasn't happened. Sometimes I use my iPhone, sometime my iPhone, sometimes my MacBook Pro, sometimes my MacBook Air, sometimes my Apple TV (spot a bit of a theme here?) and sometimes I still walk into a store to buy things. The point is that the strategic direction of transactions is convergence so that whichever of these channels I use, I use the same digital money and digital identity infrastructure. It's the transactions that become integrated, not the devices. And by integrating across channels, the transaction systems give me a better service, whether in terms of loyalty, fraud protection, price or whatever. I then continued by remembering a good report on e-payments that I'd read a couple of months ago.

A new O'Reilly/PayPal report on web-native payment platforms, "ePayments: Emerging Platforms, Embracing Mobile and Confronting Identity," is now available for download. Among the topics covered in the report are the rise of payment platforms, the mobilization of money, and the advent of contactless payment in mobile commerce.

[From 3 mobile payment products hint at the future - O'Reilly Radar]

The thought experiment in the O’Reilly Radar "report about auctioning payments set me thinking. The idea is that, rather as advertising networks such as DoubleClick auction page impressions to advertisers in real-time (when you click on a page, the advertising network sends the details to advertisers who get 20 milliseconds to respond with a bid, and then the advertisement from the highest bidder is displayed) so when you click on "pay", the payment platform might bundle together some facts about the transaction and auction them to processors. Presumably, one of the key elements in the bid decision would be related to fraud, especially if the pricing for the fraud management is unbundled from the pricing for the transaction itself and any other value-added services.

If this analysis is correct, then there will be a premium on identity and authentication because the higher the standard of identification that can be provided to the processors, the lower the bid! This would mean - to continue the thought experiment - that we would have a very accurate means of pricing identities. I imagine that this accurate pricing would reveal at least two interesting things. First of all, whether an identity is "real" or not is immaterial to the price, because the price will be based mainly on reputation (ie, transaction history). Secondly, the strength of the authentication will be directly reflected in price but for smaller transactions the price increments from 2FA to 3FA will be minimal. Thus, pricing will point towards pseudonymous 2FA as the "sweet spot" for transactional identities. So far, so good. Can we use this analysis to make some predictions about who might be best-placed to take advantage of this converged platform then? Well, last year I read that (all other things being equal) then it really should be the mobile operators. Qualcomm call these "horizontal models" for mobile operator value-added services - what I would call the "smart pipe" future of the mobile operator - and say that if operators do make a play in delivering intelligent services now, the potential upsides are great because...

• They will strategically position themselves as a valued service provider to their subscribers - getting the retail experience right on mobile will be critical to capturing value;
• They can act as an honest broker - trusted, secure, in their interests to protect and cater to their users' needs;
• They stand to gain from the uptick in usage as well as providing services using their billing platforms and the knowledge of their subscribers;
• The potential of data analytics to turn digital footprints into value for consumers, MNOs and other players that have been cited in the two sided business model begins to emerge.

Vertical models may have created the marketplace, but Qualcomm believes a retailing experience that is not tied to any one operating system or technology is necessary for the industry to scale.

[From Mobile Internet: Horizontal Platforms Needed (Guest Post, Qualcomm) - Convergence Conversation]

I think this is broadly correct -- especially the part about the honest broker, protecting the "real" identity of the consumers -- and I think it means that operators must be more aggressive about their digital identity infrastructure as well as their digital money infrastructure. After all, who has this "retailing experience that is not tied to any one operating system"? The mobile operators do, but so does Apple. On the other hand, the mobile operators have a direct billing relationship with customers (and they know where they are). It's time for the operators to start talking to processors about creating the mobile transaction auction house.