Digital Money Forum

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.

Prime directive

[Dave Birch] Thanks to the generosity of our sponsor, the StoLPan project, Consult Hyperion and city lawyers Sidley Austin will be running an free afternoon seminar on the Payment Services Directive (PSD) at the Guoman Charing Cross Hotel in London on 30th March 2009.

The seminar will comprise three sessions:

• An overview of the PSD by William Long from Sidley Austin
• National implementations in members states by William Long from Sidley Austin, and then after tea
• A roundtable discussion (led by me) on the business impact featuring a couple of companies in the field.

Some observers think that for banks, the PSD represents cost with little benefit, but for some non-banks, the PSD represents an opportunity to get into the payment business. Why not come along and make up your own mind by discussing the directive with other experts in the field?

Paying for innovation

[Dave Birch] So who, exactly, is going to pay for innovation in the payments field? Should individual stakeholders incrementally innovate or shoudl we make co-ordinated attempt to improve the payment system and share the cost? Should we regulate and let the market sort things out or should we try to constrain some of the paths through the roadmap. Hhhmmm. In this, as in so many things, Australia proves a useful case study. They had one of the first and best-developed EFT-POS systems in the world, but of late it has been looking a little antiquated.

Australia's central bank has criticised the nation's four largest commercial banks for shirking on investments in payment systems technology, resulting in a lack of innovation and neglect of systems like EFTPOS.

[From RBA criticises payments innovation: News - Hardware - ZDNet Australia]

This is, of course, the very same Australia that capped interchange fees, so reducing banks income from cards and therefore reducing their incentive to invest. The results are not surprising. If we use online payments market share as a proxy for innovative new products, then the result has been a steady loss of market to more innovative competitors.

Research from Nielsen Online has tagged PayPal as the most preferred online payment method in Australia and the UK. There are more than 141 million PayPal accounts worldwide. In 2007 more than $47 billion in payments were processed by the service.

[From The Better Banking Blog: PayPal vs Credit Cards]

In Australia, it was the merchants who were the winners. They obtained reduced merchant services charges because of reduced interchange and, broadly speaking, pocketed the difference. Was this what the regulators wanted? It's hard to imagine that this is the case, so the lesson to be learned here is (surely) that we need a clearer vision of what we want before we set off, if you see what I mean. If we want some real innovation, then simply focusing on interchange isn't going to deliver anything.

Greater utility

[Dave Birch] The economist John Kay wrote an excellent, excellent piece in Prospect magazine at the turn of the year. In it, he says, amongst other things, that

The modern financial services industry is a casino attached to a utility. The utility is the payment system, which enables individuals and companies to manage their daily affairs... Modest levels of speculative activity may improve the operation of the utility

[From Essays: 'Making banks boring again' by John Kay | Prospect Magazine January 2009 issue 154]

His imagery is not only, as always, accurate and thought-provoking but also valuable because it gives us a context for thinking about the way to take the payment system forward.