Digital Money Forum

Gershon and Parquet, AFFE

[Dave Birch] Edward Gershon, the CEO of Amalgamated Finance For Erurope (AFFE) and his Compliance Officer Arnold Parquet have written an book about the banking crisis from the inside. The book, an excellent present for stockings of all size, helps the rest of us to learn lessons and plan more effectively for the future. In this podcast they reflect on some of the key lessons from the crisis.

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

It isn't black and white

[Dave Birch] A couple of days ago I made a presentation on the mobile payments market for one of our customers -- the purpose to and details of which are naturally not germane to this post -- and I mentioned in passing some of the dynamics of the Japanese market. At the time I made a mental note to make reference to this on the blog. First of all, let me set some context by noting that a model of the marketplace that simply divides the globe into developed and emerging markets, while widely used, is not sophisticated enough to help with strategic perspectives.

The mobile payment services market, while stagnating in the developed markets amid the abundance of alternatives, is accelerating rapidly in the emerging markets because of the lack of alternatives.

[From Pricing the key to success of mobile payments | Telecom Asia]

I don't think it's that straightforward. If it were simply a matter of alternatives, then no developed markets would be using mobile payments, and this is obviously not the case. Perhaps people who talk about stagnation might be thinking of Japan, where the proliferation of mobile and e-money schemes means that e-cash transactions only grew 197% in the last two years. Oh wait... What's the explanation? Japan and Korea have plenty of alternatives yet mobile, e-money and mobile e-money are already in the mass market. Maybe it's because in Japan and Korea it's MNOs, transit operators and retailers who are pushing e-money that interesting things are happening?

In the twelvth regular survey into electronic cash... it is now not just credit card electronic cash that has passed the 50% penetration mark, but also mobile phones have reached that milestone, although the majority of the mobile phone contactless IC chips are lying idle.

[From Majority of mobile phones now have IC chips | What Japan Thinks]

In fact, if you read the actual survey it shows that while the penetration of e-purse cards has continued to climb, the penetration of mobile e-purses appears to have got stuck about a sixth of mobile phone users. The use of all e-purses is still rising, however. The statistics show that 3% of e-purse users in Japan are spending more than $1,000 per month on them, an astonishingly high figure for Europe and the US but Japan remains a cash-oriented society and this prediliction extends to the virtual.

Note also that while the survey data shows that the penetration of mobile phones for proximity payments appears to have plateaued over the last year, the penetration of mobile proximity for other applications, particularly ticketing, is still rising.

Koichi Tagawa, Sony

[Dave Birch] Koichi Tagawa is the General Manager of Global Standards and Industry Relations Department that is in charge of technology standards and technology industry relations of the FeliCa Business. Since 2002, he has supported the popularization of NFC and FeliCa from the standardization point of view. He actively contributed to the establishment of the NFC Forum, holding the position of Vice-Chairman from the start of the Forum in 2004 until becoming Chairman in September 2008. He enthusiastically continues to contribute to the enhancement of the NFC ecosystem throughout the contactless application industry.

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

Regulation isn't a bad thing

[Dave Birch] One of the areas of great interest for this blog is the evolution of "alternative" payments in different environments. As a consequence, I am always very interested to see how alternative payment system differ between markets. For example, the Russian market for alternative payments is very different from the European market. This year, broadly speaking, it will break down into

• About 14 billion Roubles spent via the leading e-wallet schemes Webmoney and Yandex.
• About 9 billion Roubles spent via mobiles for digital content.
• About 10 billion Roubles spent via the near-ubiquitous "terminals", the reverse ATMs that are on every street corner in Moscow (more on these below), some of which goes into loading e-wallets and mobile prepay accounts.

So a big chunk of the alternative payments market in Russia is taken up by a payment system that simply doesn't exist in Europe (or, in fact, anywhere else so far as I can see), which is the near-ubiquitous "cash in" terminals or, as we tend to cal them, "reverse ATMs".

In the last ten years, a rapidly growing shadow banking system has sprouted up in Russia to service these small payments by turning cash into electronic currency, or e-money. And now that this sector has reached the $1 billion mark – and this in a crisis – and has expanded to include 10 million customers, e-money business owners are getting antsy about government regulation.

[From Crashing Russia's all-cash culture - Fortune Brainstorm Tech]

Estimates vary, but there are somewhere in the region of 400,000 of these terminals in use right now. On literally every street corner is a terminal that Russians feed with banknotes to top up their mobile phone, pay utility bills, obtain pre-paid virtual credit cards (I did this: you feed the cash in and the Visa card number, expiration date and CVV are sent by text to your mobile phone). You can see from this screenshot the wide range of services available:

It seems like a bizarre market arrangement, one that the laws of economics should mitigate against. As Evgeniya Zavalishina, the General Manager of Yandex Money put it rather neatly, people are taking money out of an iron box, walking a metre and then putting the money back in another iron box. Incidentally, Evgeniya will be joining an excellent line-up of speakers at the Electronic Money Association's 3rd annual conference in London on 24th November so if you are interested in learning more about the evolution of e-money regulation around the word, head on over to the EMA web site and sign up. But back to the iron boxes. By astonishing coincidence, the restaurant where I went to dinner with Evgeniya and other members of the Russian E-Money Association (set up by a good friend of the Digital Money Forum, Victor Dostov) had precisely such an arrangement!

How can this be economic? Surely you would expect banks to incentivise the terminals to take chip cards so that people could pay their bills with a debit card. Come to that, why can't they do that from a bank ATM in the first place instead of going to a terminal at all?

Well, one reason might be a lack of regulation. At the excellent Russian E-Money conference I attended, one of the speakers placed Russian banks as the 53rd most efficient in the world, but the Russian non-banks as the 4th most efficient in the world (for payment services). Yet both the banks and the non-banks would benefit from a better regulatory infrastructure. The problem that was discussed at the event was that everyone knows that regulation needs to come, but no-one is sure what that regulation might look like (and some of it, such as impending regulation on data protection) simply won't work technologically. Nevertheless, a good infrastructure for electronic payments would, I'm convinced, help both the alternative payment providers (ie, the terminal networks) to invest further and develop new services while at the same time enable banks to invest in their own terminal and enhanced ATM services. Everyone would benefit.

This reinforces something that has been said before on this blog: no regulation is not a way forward. We want to see digital money deliver real solutions to real problems all around the world and a good regulatory framework helps in this enterprise.

Janine Firpo, IFC

[Dave Birch] Janine Firpo is President of Sevak Solutions, a nonprofit company that she co-founded to promote inclusive systems for the delivery of financial services to the world’s 1.7 billion urban and rural poor. Janine is based in Jakarta, Indonesia, where she is working with International Finance Corporation (IFC), a member of the World Bank Group, helping regional advisory teams to accelerate the development and large-scale roll-out of mobile money solutions. In this podcast, she talks about mobile money in developing markets and the practicalities of managing and regulating agent networks.

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

Karin Huber, Mobilkom

[Dave Birch] Karin Huber is a Senior Product Manager at Mobilkom Austria and is responsible for marketing mobile payments. Vienna is one of the very few places in the world where real customers are walking into real shops and buying real NFC handsets, which makes Karin's experience almost unique. In this podcast, she explains some of Mobilkoms thinking -- in particular, why they decided to obtain their own banking licence rather than partner with a retail bank -- and some of their very innovative products.

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

Bear market

[Dave Birch] Russia is looking like a pretty interesting market for e-payments. The management consultants keep telling us to focus on the BRIC (Brazil, Russia, India and China) for our next growth markets, but it's important to understand that their mass, retail, e-payment markets are just not going to be like ours, partly because of industry structures, partly because of government direction and partly because of the technology starting point.

Russian central authorities are reportedly considering plans to set up an electronic payments network... The main objective of the prospective electronic payment system would be to challenge the dominance of established brands such as MasterCard and Visa, which currently hold around 85 percent of the Russian cards market. The plans for a Russian-operated electronic payment network come after in June 2008, Russia’s two largest banks – Sberbank and VTB Group – have teamed up to create the United Russian Payment System (URPS).

[From The Paypers. Insights in payments.]

What might the Russian "third scheme" look like, compared to a European "third scheme" (eg, PayFair)? Well, one reasonable prediction might be that the lack of infrastructure in Russia (Russia is a very big place) means that their third scheme might well jump ahead of the European third scheme in terms of its technology platform. Indeed, there are already strong indications that mobile and contactless technologies will be moving ahead quite quickly in that environment.

The head of Russia's largest bank briefed the country's President Dmitry Medvedev on the concept of mobile contactless payments last week — and explained that he is looking to launch a non-contact mobile payments system by 2011/12.

[From Russia looks to introduce mobile contactless in two to three years • Near Field Communications World]

A national contactless purse (perhaps a bit like NETS in Singapore or Touch n'Go in Malaysia) in a country the size of Russia would be a really interesting development. Singapore has shown that some judicious government steering can help to migrate to a contactless environment that is convenient for consumers who will...

...now have two payment cards to choose from to use on buses and trains, to pay for road tolls and carparks, and to make purchases from stores, eateries and entertainment outlets. On Friday, Nets (the Network For Electronic Transfers) launched its long-awaited multi-purpose contactless card... EZ-Link launched a similar contactless multi-purpose card in January.

[From Nets, more uses than one]

Transit is the vanguard, as always, but the point here is that competition to provide interoperable e-purses is at least a good step forwards.

Coin star

[Dave Birch] Pottering along the M4 (otherwise known, but not by the inheritors of Queen Boudicca's robust policies on European integration, as the E30) the other day, I really enjoyed an edition of Moneybox on BBC Radio 4. It had everything: plastic card fraud, card charges and the cost of cash in a bizarre context. Which was that they had a story about a chap who blogs about what he finds discarded by the Coinstar machine in his local supermarket. Frankly, the Internet was made for this.

It's amazing what people leave behind on the Coinstar change counter machine in my local Sainsbury's...

[From The Copper Counter Blog]

There was a serious side to the story though, which was about the cost of converting cash into other forms. The machines currently charge 7.9% and this about to rise to something like 9.5%.

Supermarket coin-changing machines are popular, even though they charge a fee. Banks change money for free - but it is not always so convenient an option.

[From BBC NEWS | Programmes | Moneybox | Have your say: Pin fraud and coins]

Judging by the interviewees, and other previous discussions I've been involved in, people seemed quite happy to pay the massive transaction charge of heading towards a tenth in order to use up coins in the supermarket. You put in ten quids-worth of coins and you get back a voucher for £9.21 to use at the checkout. As the Copper Counter blogger pointed out on the show, this is odd, since if you pour the coins into the self-checkout machine then you pay no transaction charge at all. Anyway, the point is that coins are so much of a pain that customers will pay a high fee to get rid of them.

The way to a mans heart

[Dave Birch] One of the most basic dynamics in the retail electronic payments world is the cost of transactions and the comparison of costs from the retailers perspective. If we assume honest retailers (ie, they are accounting all cash transactions and not using them to avoid taxes, enable money laundering and so on) then what is the real picture? It's honestly hard to say, clearly one factor is that type of retailer and their average transaction size. Another is whether we account the retailers private costs or the total social costs. I think it's a mistake for regulators to account for the retailers private costs only, especially given my pro-electronic payments perspective! If we only account those private costs then for many retailers, electronic payments will always seem more expensive and therefore it appears that (for example) card users are getting a good deal.

This is clearly unfair to consumers who use cash. They face a higher cost for goods or services through no fault of their own. In a user-pays society, those using a service should expect to pay its full cost.

[From Editorial: User-pays for credit cards fairer for all - Personal Finance - NZ Herald News]

Indeed. I don't use cash except when I am forced to. So I don't want to pay for ATMs, police escorts to ATMs, security vans, police escorts, tax evasion and all the rest of it. Surely merchants accepting cash should be required to pay a special tax that goes to the police, the revenue and the customs?

OK, perhaps not. But retailers do complain about the cost of electronic payments, claiming that cash is less expensive. There are, however, businesses that have started to refuse cash. One New York restaurant "Commerce" has looked at the bigger picture and come down firmly on the e- side. The owner Tony Zazula, hereby declared a Hero of the Order of Digital Money (my newly-created elite secret society), takes a robust line. Has has stopped accepting cash altogether and is clear about his strategy.

"If you don't have a credit card, you can use a debit card," said the restaurant's co-owner, Tony Zazula. "If you don't have a debit card, you probably don't have a checking account. And if you don't have a checking account, you probably shouldn't be eating at Commerce to begin with."

[From New York Restaurant Loses Its Appetite for Cash - WSJ.com]

Now that's what I call KYC (Knowing Your Customer). And the abandoning of cash helps with Anti-Money Laundering (AML) as well I should imagine. While Tony's firm line on the folding stuff may inconvenience the occasional drug dealer or corrupt politician (which might be a reasonable fraction of the customer base in that area!!) it seems to me that both the restaurant and society benefit: the private and social costs fall together.

cashless, costs, notes and coins, retail

Sarah Rotman, CGAP

[Dave Birch] Sarah Rotman works on the project and research agenda of the CGAP Technology Program, designing innovative projects in branchless banking that deliver financial services to low-income customers. Her research projects include the business case for agents and future scenarios of branchless banking. Prior to joining CGAP in 2008, she interned with Urwego Opportunity Microfinance Bank in Kigali, Rwanda. She was a Peace Corps volunteer in Benin and later worked for a development nonprofit on education projects in Haiti and Africa. Rotman has a master's degree in International Relations from Johns Hopkins University. In this podcast she shares some of her conclusions about e-money cash replacement schemes (including Mondex, Simpay and Movilpago) from the CGAP report on Going Cashless at Point of Sale which she co-wrote with Ignacio Mas.

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

cashless, history, podcast