Digital Money Forum

Innovation that matters for the majority

[Dave Birch] That there is an interplay between the technology and monetary policy is obvious. Look what is going on in Africa. People who aren't allowed to hold dollar bank account hold dollar-denominated mobile top-up vouchers instead. Ugandans without an effective electronic payment system are using M-PESA from Kenya to execute local transactions in Kenyan shillings. Congolese without access to any banking network use mobile money instead (and may never, ever, want or need a bank account as a result). In India and elsewhere the banks have managed put a regulatory finger in the dyke but the pressure is building and money is already leaking away from conventional institutions and networks into newer, mobile-centric, customer-facing organisations. The dam will, at some point, burst. How will governments be able to "manage" the money supply when it is being zipped across borders by mobile phones, global handset hyper-hawala.

At the very first Digital Money Forum, the late Professor Glyn Davies (author of the magnificent "A History of Money") said that every technology revolution in money led to less centralised control. That's a good thing, but it also explains why the conservative nature of governments and regulators comes to the fore in questions concerning money. If anyone anywhere in the world can transact in any currency, then the weak will go to the wall very, very quickly. Gresham's Law on a global scale.

banking, currency, mobile, payments

The raid in Spain

[Dave Birch] Police investigating a drugs ring in Spain busted a counterfeiting operation. The counterfeiters were, naturally, producing their own versions of the drug smugglers' best friend, the 500 euro note.

Spanish police have seized fake banknotes worth eight million euros (£7 million) in the biggest single haul of counterfeit money ever recorded in Europe.

[From Spanish police seize largest haul of forged banknotes in European history - Telegraph]

The article goes on to say that Spainiards call the 500 euro notes "bin Ladens" because, like the world's most wanted man, everyone knows what they look like, but no-one has ever seen them. The newspaper points out that the notes are frequently used in "black money" transactions and it is thought that Spain has more in circulation than anywhere else in the Eurozone. Frequently? I'd be curious to hear from anyone who has ever used one in a legitimate transaction! The haul, incidentally, easily beat the previous record set only a few months ago.

Italian police conducted an early- morning dragnet across the country to round up more than 100 people in what they described as the largest bust of a euro counterfeiting ring ever... Four laboratories for printing fake euro bills and minting phony coins were discovered, and 1.2 million euros ($1.6 million) was sequestered during the investigation

[From costa confidential: largest bust of a euro counterfeiting ring ever. Euros were tracked out of Italy to Spain]

It's not surprising that the records are falling, because the counterfeiting of euro notes is steadily and, it appears, inexorably increasing.

The number of seized counterfeit euro notes jumped by 17 percent in the first six months of 2009, the European Central Bank said on Monday, marking two years of constant increases. In January the central bank had reported a six-month increase of 13 percent while stressing that the scale of counterfeiting remained small, a comment it did not repeat this time.

[From Fake euro seizures climb by 17 pct: ECB — EUbusiness.com - business, legal and economic news and information from the European Union]

Oddly, given these newspaper stories of police raids, fraud factories and international fake note smuggling, the ECB says that no "new" sources of counterfeits were discovered.

The ECB said however that the fake notes seized in 2009 had the same origin as previously discovered notes, meaning that no new sources of counterfeit money had been found.

[From Fake euro seizures climb by 17 pct: ECB — EUbusiness.com - business, legal and economic news and information from the European Union]

So who cares if there's some counterfeit cash out there? Well, by itself it has an almost undetectable impact on the money supply (especially compared to the current "quantitative easing") but it does provide a kind of venture capital for the bad guys. Criminals use the counterfeit money for all sorts of things. One gang was found with a large stock of cannabis for distribution, but

Some of the forged money was used to buy more than 16,000 € worth of jamones in Guijelo, (prized ham from the Iberian pigs, traditionally fed on acorns for their flavour) in Salamanca province.

[From Spanish Police uncover 'ham-loving' counterfeit criminals]

Well, even counterfeiters have to eat.

Window pain

[Dave Birch] In "Tough Guy", the autobiography of mafia criminal Louis Ferrante -- which is an excellent book, by the way, even for someone like me who doesn't normally care for crime books -- I came across a poetic description of card fraud in an early incarnation. Louis' enterprising confederates in the New York mob had discovered that you didn't need to be able to forge cards terribly well to enter the counterfeiting business, provided you have collaborators.

For years I made big wood with Sonny's "dupes", phony credit cards with real numbers. He sold them to me for a hundred bucks a piece. Sonny had salespeople in retail stores on the take, boosting charge card receipts... I'd visit a jeweller who was in on the scam and buy a Rolex. If the watch retailed for five grand, I'd tell him to hit the card for ten. I'd leave with the watch. He'd made money. Both of us happy.

What the wise guys, as I believe they are know, really wanted though, rather than Rolex watches and the like, was cash. Card fraud was also a means to that end.

If I knew a guy who sold stuff I didn't want, like Paulie Flowers, I'd work out a cash split. I'd show up and tell him "hit my card for four grand, keep two and give me two when you get paid". He'd tell the card company he'd delivered arrangements to a wedding, and send them a phony bill of sale, and that was that.

Things have changed since then. That kind of card fraud was a sort of cottage industry, almost quaint. Today the fraudsters have followed the banks and the rest of the business world and globalised. It's no longer about getting a Rolex and a few thousand to spend, it's about investment and return on investment. Moises Naim's book "Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy" talks about the new cross-border, enterprise-scale organised crime. Card fraud is part of this, and that's a big problem. From being a minor branch of mafia robbery, it's become easy money for funding drug dealing, trafficking and even terrorism. This is why, even though the business case for the transition to chip and PIN was marginal from the bank point of view, the government were keen to see it go ahead.

Today card fraud is a cost of doing business, a few basis points. In the UK, that's more than six hundred million pounds, which isn't that much compared with total card spending, so it's not surprising that it may not be the banks absolute no.1 priority at a time when chargeoffs are running at a hundred times the rate of chargebacks. I'm not bad mouthing the UK card industry: card fraud is a global problem.

Australian Payments Clearing Association data for last year shows fraud remains a fraction of overall payments: 44.5 cents in every $1000 of transactions in the case of credit and charge card fraud, 7.1 cents in every $1000 for debit cards and less than one cent in every $1000 for cheques. However, while cheque and debit card fraud are falling, credit and charge card fraud are rising - up from 36.9 cents the previous year. About 70 per cent of that increase relates to cardholders making purchases overseas via the internet and telephone.

[From Card crime jumps, so don't get caught - Banking - Money - Business - Home]

A few basis points of turnover is a tiny fraction of the money spent on cards, but a big income for organised crime. So even though the crime is tolerated by the payment industry, it shouldn't be. As Scott Loftesness said on Twitter when we were discussing this, we need to remember the "broken window" theory of policing. Tolerating crime that we can tolerate because it doesn't stop us from doing business is a bad policy.

credit cards, debit cards, EMV, future, SEPA

Anti-anti money laundering

[Dave Birch] I was involved in a discussion about the relationship between the cost of customer acquisition for simple payment services and KYC/AML/terrorist finance legislation and, once again, I said that I was not sure that keeping people out of the "system" was the best strategy (because if the terrorists, drug dealers and bank robbers on the run stay in the cash economy, then they can't be tracked, traced or monitored in any way). I made a similar point when I was in the City at a round table on financial regulation. I really didn't expect my views to be particularly controversial, but they were. What I was arguing for was a relaxation in the controls around small payments -- and in particular, getting away from quite strict identity checks, which I think hold back the development of low cost, competitive mobile and Internet payment systems -- in order to shift the inclusion vs. exclusion balance that we've spoked about before.

I'll play by Chatham House rules and not attribute what was said by anyone (except me, of course) about money laundering. I said -- with poetic exaggeration -- that the huge amount of time, money and effort that goes into the AML industry never catches any criminals, and I was given a suitablly hard time by someone from part of Her Majesty's Revenue and Customs (HMRC) who said that they did indeed use Suspicious Activity Reports (SARs) to detect crime and used the example of last year's major prosecution of criminals who had been using bureau de change as a front for money laundering. OK, I shouldn't have said "any" criminals. What I should have said was "almost no" criminals.

I hope regulators get real

[Dave Birch] Competition is a good thing. Competition in financial services is a good. If society wants a better payments system (which it should, for many reasons) then the way to get it is by creating a regulatory infrastructure that fosters, encourages and perhaps even demands competition in the provision of payment services. This is why the Payment Services Directive (PSD) has a chance of making life better for European consumers. Should that competitive environment embrace banks and non-banks? Yes, it should. If banks and non-banks are to make progress together, then it is not clear that simply leaving them to get on with it is good enough. For one thing, banks in many countries don't really want to compete, so if there is no explicit regulation to create a competitive landscape then there is a temptation to fall back on the old kind of competition in banking, which means competing and the regulatory level. This is the kind of situation that we see in Africa. Nigeria is a case in point.

Indications have emerged that Nigerian banks have moved against the quest of MTN Nigeria and Zain to obtain M-Banking license operations from the Central Bank of Nigeria (CBN). The regulatory body has only issued one mobile banking operating license to MoneyBoxAfrica to deplore branchless banking services across the country... the refusal of the apex bank to grant the [m-banking] license is as a result of Nigerian banks antagonistic to the idea.

[From ftr-africa.com - Financial Technology Report, Africa]

In Kenya, where the M-PESA mobile payment scheme is massive, the regulator had wisely decided to allow Safaricom to go ahead and launch that service despite bank pressure. The result has been a fantastically successful scheme that has transformed for the better the lives of million of Kenyans. But someone told me that the Kenyan regulator has now decided to revisit the situation and perhaps "tighten up" rules, inspired no doubt by the banks' genuine concerns for customer protection and the soundness of the in-country remittance market. Incidentally, you may not be aware that M-PESA has been launched in other countries. Afghanistan, for example.

Take Afghan GSM operator Roshan; they recently licensed Safaricom’s hugely successful M-PESA system, and one of the first applications for it is paying the Afghan army.

[From Telco 2.0: March 2009 Archives]

When the alternative is transporting tons of cash through some of the most dangerous highways and byways in the world, the mobile phone offers a millionfold improvement whatever the regulators' concerns might be. Mobile money is unstoppable.

mobile, reguation

Balancing act

[Dave Birch] There was a great kick-off talk from Blums Pineda at the Mobile FInancial Services conference in Singapore. Now with Exicon, he was previously with Globe Telecom, home of GCash. Blums chose to focus on the balance between consumer protection and business opportunity, building on his experiences with G-Cash. He was essentially optimistic that regulators are embracing new models. As he pointed out, it's the transaction space that is driving growth in the financial services market. In the mobile transaction space, we need regulatory certainty to encourage investment and no regulation at all is not the right kind of certainty. In the Philippines, the regulators did not over-react and use inappropriate banking regulation to constrain the evolution of payments business.

There are good reasons, as we have discussed before, why we actively want regulators in the m-payment space. That's because while no regulation at all might minimise compliance costs for the provider, it does not minimise costs for society as a whole: consumers carry on using more inefficient forms of payment (cash, in the countries being discussed) because they have regulatory certainty. So there are great benefits to having regulation. Blums summarised these as benefits to consumers, providers and the common good. I thought he was dead right to include the common good as a separate and distinct beneficiary, serving to remind . Surprisingly, to some people, he said that one of the benefits of regulation was to encourage innovation.

The idea of regulators balancing prescriptive vs. principles-based

He gave a useful case study of the Philippine regulatory response to the development of G-Cash and Smart Money, showing how the regulators allowed the market to develop new solutions by working with the new entrants to find ways to make the regulations work. As an aside, later in the day a chap from Ernst & Young (who began by saying that, with admirable candour, that the "big four" have come "a little late" to m-payments) was drawing some lessons from the launch of Smart Money (in 2000), GCash (in 2004) and Citi (In 2008) in the Philippines. Smart Money has seven million registered users and 700K retailers, GCash two million registered users and over 600K retailers (and GCash customers have access to 6,000 ATMs) but these systems could be bigger still with bigger networks of agent, consumers and merchants. The barriers to entry are too high.

GCash need to make it easier for new members (consumers or merchants) to join system. But they also need to do something with the agent network. There is an onerous process for new agents to join the GCash network and since agents only get 1% commission for cash loads compared to 10% commission for airtime top-up, there's not much of an incentive for them. These factors have limited the growth of the agent network which has, in turn, limited the growth of the scheme. As an aside, here's a useful data point: Blums reckons that the shift to m-payments has eliminated nearly 80% of microfinance provider costs in the Philippines. Now, the environment there is most conducive to m-payment -- 95% of Philippine towns have mobile coverage, only 60% have a bank branch. There are 10,000 ATMs but a million airtime resellers -- but so the cost savings may be at high end of possibility, but the opportunity to significant cost reduction in many markets is clear.

Looking forward, he reiterated the growing need to regulate the agent networks in the m-payments space (Globe has something like 1,800 accredited partners for the GCash service), something that we have been thinking about with some of our customers and something that we will be sure to return to on the Digital Money Blog. Finally, he noted that a key element of the future platform is some form of mobile identity infrastructure. GCash has over-the-air registration, but if you use it at POS you have to present an ID card, which makes it less convenient than it might be. I couldn't agree more, which is why I was so keen to have a mobile eID panel session at the recent Identity and Privacy Forum and I'll be talking on this subject in Session C European eIdentity Management, the 22nd eema conference, on 25th June in London.

More anecdotes

[Dave Birch] Erik van Winkel from our friends at Edgar Dunn as a nice piece in the current Journal of Payment Strategy and Systems (vol. 3, no. 2) looking at the potential for new entrants in the European payments sector in response to the arrival of the Payment Services Directive (PSD). At our seminar on this topic earlier in the year, I asked the panelists about the likely categories of new entrants, and we spent some time discussing whether telcos and retailers might be prime candidates. Erik sets out his own thoughtful classification of potential new entrants as follows:

• International organisations already providing processing spaces for acquirers;
• Large pan-European retailers who might immediately benefit from self-acquiring and synergies with loyalty and CRM schemes;
• E-commerce businesses such as PayPal, Google and Amazon who might be able to offer European consumers some modern, customer-friendly options;
• Mobile operators. Erik thinks that if banks and telcos cannot agree on common business models then telcos may well decide to launch their own initiatives. Some operators (eg, Vodafone) already have successful m-payment systems running outside Europe and may decide to try them out inside Europe given the right conditions.

An excellent analysis. I think Erik's point about mobile operators is a particularly good one. We've been told over and over again that "mobile operators don't want to be banks" and I'm sure they don't. But a Payment Institution (PI) isn't a bank. The point of setting up a PI is not to compete on banking services to run payment services more efficiently. Saying the mobile operators don't want to be banks is one thing, saying that they don't want to get into the payments business quite another.

David Evans, Market Platform Dynamics

[Dave Birch] David S. Evans is the founder of Market Platform Dynamics and the head of the global competition policy practice at LECG, LLC. He teaches at the University College London where he is the co-executive director of the Jevons Institute for Competition Law and Economics and at the University of Chicago Law School. Dr. Evans focuses on business strategy and competition policy particularly in high-technology and multi-sided platform businesses, such as payments, software, and digital media. His most recent book is Catalyst Code (with Richard L. Schmalensee), which deals with the management problems faced by multi-sided businesses. In this podcast, he talks about some of the challenges in the payment cards industry and the future of interchange.

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

Risk and lack of reward

[Dave Birch] One of our chaps was at a seminar concerning developing countries recently, and overheard an interesting conversation. Someone from the telecommunications world said that financial service regulators in developing countries were concerned mainly with risk, whereas telecommunications regulators were more concerned with competition. The effect of this is that mobile operators are raring to go with more services along the lines of G-Cash or M-PESA but they are being blocked by regulators who see payments as a financial service rather than as some kind of utility.

This is why I'm so worried that knee-jerk additional regulation of financial services in response to the current crisis will end up holding back the development of the payment sector, with really negative consequences in developing countries. A better payment system is an unalloyed good and it would be bad for lots of people if the evolution of new payment systems, especially in the developing world, were to be held back by inappropriate regulation. Payments are not banking, and while banking regulation may well need to be toughened up in many countries (as subject on which I am not qualified to comment), payment regulation may not.

Free!

[Dave Birch] Well, now I've got your attention here's a quick reminder that next week is the 12th annual Digital Money Forum and we still have a few places left. They're not free, but they're well worth the almost insignificant delegate fee considering the incredible range of expertise and experience on offer. You can view the full agenda online over at the Digital Money Forum or you can download it here (248.3K). The Forum is now in its twelfth year, and once again promises the combination of discussion and debate, learning and fun, that has earned it the reputation as the place to be for people interested in the future of retail electronic payments. It continues to be a unique event, where interaction and invention replace product announcements and “death by Powerpoint” sales pitches.   As you may know, this is a not-for-profit event that supports a variety of charities. This year we are supporting BUFFER (which provides specialist diagnostic equipment for breast cancer), Action Medical Research and Jubilee Action which helps children worldwide. This years Forum is made possible by the kindness of our sponsors Visa Europe, Monetise, WebMoney and VoicePay with support from our charity tournament sponsor ACI Worldwide.

Some come and join our experts from the World Bank, Financial Services Authority, The Economist, European Payments Council, Transport for London, Nationwide, Barclays, Royal Bank of Scotland, Sidley & Austin, O2, The Guardian, Innovaro, Masabi, EAT, ABI, Finextra, Disruptive Analysis and the Free University of Brussels at the 12th annual Digital Money Forum in London on 31st March and 1st April at the Guoman Charing Cross hotel and come away with the kinds of new concepts, new friends and new business ideas that many of you have come to expect from this unique event. All delegates will receive a copy of our popular Digital Money Blook (the most interesting posts from this blog over the last year) and Larry H. White's "Free Banking in Britain" along with "The Nudge Factor".

Thanks for reading that. Now for the details of two terrific -- and absolutely FREE -- events on Monday 30th March in London. If you are interested in the future of electronic payments, you have the opportunity the spend a relaxing lunchtime and afternoon in the company of an assembly experts rare on these shores.