Digital Money Forum

Towards the (other) third way

[Dave Birch] Forum friend Peter Jones of Payment Systems Europe wrote an excellent piece for European Card Review last year in which he argued that a viable way to create a third payment network in Europe under SEPA pressures might be to start with existing ATM networks rather than to create new networks. He even gave a specific example (as one of the scenarios to be explored) linking together EUFISERV with First Data. Now comes news from Brussels that inter-bank switch EUFISERV (which was owned by retail banks and savings banks in Europe) has spun out its ATM card business. This is because of SEPA, as is the announcement that First Data acquiring a 50% stake in the switch business. This will create a new entity that connects 74,000 ATMs, 1.5m POS and 165 million debit and credit cards in Europe. Well, well.

I don't use debit, but...

[Dave Birch] I've no idea why anyone uses a debit card, decoupled or otherwise, for anything, but I hear they're very popular. That's one of the reasons why I found Capital One's decoupled debit experiment so interesting. In fact, I went on the record as saying that I thought it was the most interesting new product last year. But now Capital One have terminated the experiment after only a few months. So was I wrong to focus on the product? Well, I don't think so. For one thing, while Capital One won't say why they are stopping, it's not because of the people who count: merchants. According to American Banker, Rich Steckroth, who is Director of Business Development for Sheetz, said clearly "We like the program".

So who didn't? One of the analysts quoted says, rather plausibly, that it's more to do with Capital One not having the money necessary to really launch the project than a verdict on the concept itself, and I agree. Other people think that they will simply offer the facility to their own credit cards holders (as some other issuers are going to do, I'm sure). Customer and merchant proposition apart, though, you may also recall something else lurking in the background. If I were a competitor, particularly a smaller bank sensitive to the loss of interchange revenue, I might be very tempted to take the traditional banking approach to competition in the payment sector and ask the relevant regulators for clarification about the new entrant. As it happens, just such a clarification took place earlier in the year...

There was an excellent post by Carol Coye Benson over at Payments News the other day. She highlights the new rules interpretation around decoupled debit in the US. The three key points are:

First, the transactions must be classified as “POS” transactions, rather than using other ACH transaction codes.

Second, the transactions cannot represent an aggregation of underlying consumer purchases - e.g. three separate purchases at one (or more) merchants on a given day cannot be combined into a single ACH debit transaction.

Third, the “payee” in the ACH transaction, which is carried through to the consumer’s bank (and therefore appears on the consumer’s statement or online transaction listing) must be the underlying merchant, and not the card issuer: in other words, “Capital One” could not be the payee shown on the consumer’s statement.

[From Digital Money Forum: Decoupling the small print]

There's no doubt that the ban on aggregation increased costs for Capital One, but who knows whether they increased them enough to make the program uneconomic. I'm sure that wasn't the goal of the clarification anyway, which was wholly to do with safety and soundness of the U.S. banking system and nothing to do with raising barriers to new entrants. I'm sure we haven't heard the last of the decoupling concept. I can certainly imagine decoupled debit operating through any secure token to provide maximum customer convenience. Why shouldn't I pay with my Tesco Clubcard, digital certificate on my PC, fingerprint, employee badge or (rather obviously) mobile phone -- as they do in Germany -- and have the transaction routed via ACH?

Connecting debit

[Dave Birch] I was interviewed in connection with next week's Digital Money Forum and asked to highlight a significant change in the payments world since last year. I chose to highlight disconnected debit. I'm certainly not the only one who thinks the concept of disconnecting the bank card from the bank account may well cause big changes:

A January 2008 survey by Aite found a sizeable potential market for decoupled debit cards in the United States, with about a third of cardholders expressing interest.

[From Aite Group, LLC Report #200803101]

Debit card use as a whole continues to grow (although it hasn't reached anything like the level that some of us think it should do) and in the U.K. there are already a minority of people who find debit cards more convenient than cash.

According to the survey, 19% of people use cash and cards interchangeably, while 16% say debit cards are the most convenient way to pay. About one in ten say they use plastic to help keep tabs on spending.

[From Finextra: Cash is no longer king - survey]

It seems to me that the addition of contactless interfaces should up this fraction further, but I wonder if there isn't more of a potential for disconnected debit to drive it up further still because of the potential to use other technologies, not merely other cards, to front the debit account?

Decoupling the small print

[Dave Birch] I went to Germany for a couple of days. Amongst other things, I saw a presentation from of Vodafone Germany, talking about the new retail payment scheme that they are launching in partnership with O2...

The new payment system combines the direct debiting system (German: Lastschriftverfahren) with SMS payment confirmation through mobile phones. That means:

1. you order a product on a mobile portal or web shop
2. then you type in your mobile phone number and password
3. following you will receive a text message (SMS), which you have to confirm in order to debit the amount from your bank account via direct debiting system.

[From PavingWays - web applications on (mobile) devices : O2 and Vodafone starting new payment system]

The system is open to all mobile phone users and anyone can register but of course the registration is much simplified for Vodaone and O2 subscribers who already have bank details filed with their operators ready for direct debiting (because there existing phone subscription works that way). I spoke to Vodafone about it and they said that they anticipated two revenue streams: additional text messaging for one, a merchant service charge for the other. I got the impression that the MSC would be pitched around the same as for credit card acceptance. As for the future, they said that

We hope to have more NFC-enabled POS-Systems in the future to combine both technologies.

and furthermore

Security is the key requirement in germany

This might well be the way in for mobile phones: yes, they are more functional than cards but they are potentially far more secure as well. Look at Japan again: remote application locking, 24/7 shutdown, location services. These are all security capabilities that come with the mobile environment to deliver a level of security far above the card platform. It's 9am, do you know where your cards are?

Horses for courses

[Dave Birch] I wonder if 2008 will be the year of the contactless card? Trevor Pavey, Contactless Payments Manager at Texas Instruments has a nice turn of phrase: he says that contactless payments this year will be about three Ms: merchants, mobile payments and multi-applications. That sounds plausible, but I'm sure that in the immediate future it is the merchant take-up that is the dominant driver. While the roll-out of contactless payment cards around the world has been steady, it hasn't been a tsunami. One reason might be that lack of customer awareness is impeding the usage and adoption of contactless payment systems. According to the research cited (by Aberdeen), 63% of Best-in-Class companies that have already adopted contactless payments at retail locations are responding to the challenge of customer awareness by defining a set of return-on-investment (ROI) objectives and goals surrounding contactless implementation. I'm not entirely sure what that means, but I think I understand the big picture they outline: two-fifths of the Best-in-Class companies have implemented a contactless solution, and another two-fifths are considering implementation, which means that only a fifth are not looking at it for the time being. Of those who have implemented contactless technology, 91% have improved their total number of transactions, and ALL (my emphasis) have 80% or more of their customers extremely satisfied. Those seem like encouraging figures to me even if there is a lack of awareness.

Technorati Tags: contactless, credit cards, debit cards, EMV, payments

Changes to the card payments landscape in Europe

[Dave Birch] I've been chairing the International E-Payments Intensive in the City, which is how come I saw a typically excellent presentation by John Chaplin of First Data. I've known John since his Visa days and I've always found his experienced and measured perspective on the payments landscape of immense value. Once again, he really made me think. John was talking about the impact of the Payment Services Directive (PSD) on the European payments card landscape. One key point that he made, which I've been reflecting on, is that that landscape just hasn't changed that much in the last couple of decades. The market is not that open, particularly because the rules of the club favour the existing members. But all this is going to change because of the PSD. Isn't it? Well, there are plenty of major pressures for change that are nothing to do with the PSD. Banking consolidation in the Scandinavian and Benelux regions is showing how thinking might change from national to regional and subregional organisation and then to pan-European organisation at the time when the IT infrastructure (built in the 1980s) is up for renewal and SEPA is pressuring them to change. There are commercial pressures that are nothing to do with regulation. There are technology developments. All of these combine with PSD to create the potential for change. But might there be disruptive change?

Technorati Tags: credit cards, debit cards, regulation, SEPA

Changes to the card payments landscape in Europe

[Dave Birch] I've been chairing the International E-Payments Intensive in the City, which is how come I saw a typically excellent presentation by John Chaplin of First Data. I've known John since his Visa days and I've always found his experienced and measured perspective on the payments landscape of immense value. Once again, he really made me think. John was talking about the impact of the Payment Services Directive (PSD) on the European payments card landscape. One key point that he made, which I've been reflecting on, is that that landscape just hasn't changed that much in the last couple of decades. The market is not that open, particularly because the rules of the club favour the existing members. But all this is going to change because of the PSD. Isn't it? Well, there are plenty of major pressures for change that are nothing to do with the PSD. Banking consolidation in the Scandinavian and Benelux regions is showing how thinking might change from national to regional and subregional organisation and then to pan-European organisation at the time when the IT infrastructure (built in the 1980s) is up for renewal and SEPA is pressuring them to change. There are commercial pressures that are nothing to do with regulation. There are technology developments. All of these combine with PSD to create the potential for change. But might there be disruptive change?

Technorati Tags: credit cards, debit cards, regulation, SEPA

Cards and costs

[Dave Birch] Retailers just won't let it lay about the cost of cards and there are new articles about this every day. In the U.S., gas stations are a particular focus of discontent (as they have been for some time, in fact). What bothers the owners is that on a petrol sale, the the card companies make more money than they do. For example, on a $30 sale with petrol at $2.89 per gallon (that's approximately zero per Imperial gallon, for British readers), the retailer will get 39 cents but (as the retailer sees it) the bank gets 69 cents. I saw a quote from another retailer recently that if a customer wants to buy a pack of gum with a card, he'd prefer them to just steal it because he loses less money that way. Not exactly a devoted customer base. It's not just in the U.S. though. In Dubai, all petrol stations have banned cards and all Emarat, Enoc and Eppco stations accept only cash or own-brand cards. Denzil Lawson, the General Manager of MasterCard Middle East & Levant, said

We continue to consult with all parties concerned towards finding an effective solution... MasterCard is disappointed with the announcement by the fuel companies in Dubai that they will stop accepting payment cards, denying their customers the convenience and safety of using payment cards.

Technorati Tags: costs, credit cards, debit cards, retail

Who will pay? And how?

[Dave Birch] It's all very well for informed observers such as myself to call for a more efficient payment system, but the economics have to work out as well. Given that merchants already feel that they pay too much (whether it's true or not, that's what they feel) then finding ways to deliver more value to them has to be a priority in the design of new systems and services. In America, the Merchant Payments Coalition (MPC) have been complaining that the collective setting of interchange fees by Visa and MasterCard is a violation of federal antitrust laws and saying that they favour a payment system that is transparent and open to competition. Well, you might think, what's stopping them? You can't help but observe that a decade of growing complaints from merchants, and the ready availability of the core technologies required to create viable alternatives (ie, chip cards, mobile phones and the Internet) no large-scale rivals have emerged. Perhaps the truth is that merchants are happy with the bank-centric payments model and the complaints about interchange ARE just posturing for lower prices after all. Having been at a recent meeting between a bank and some large U.K. merchants, however, I think there's more to it. It's not just the size of the interchange fee that annoys merchants, it's what it's for. U.S. merchants paid $56 billion in interchange fees last year and small retailers have seen interchange costs jump by 16 per cent a year on average since 2000 but a good chunk of those fees don't go to cover the cost of the payment plus a profit, they go to pay for frequent flyer miles, cashback and other issuer incentives. In fact, in the U.S., almost half of the interchange goes to pay for issuer rewards.

Technorati Tags: credit cards, debit cards, ID cards, retail

"Bank" "accounts"

[Dave Birch] A couple of months ago, the British Department for International Development (DFID) set out an "action plan" to try and find a way to get one billion of the poorest people in the world to open their own bank account for the first time. Having just helped my thirteen year-old son to open his first bank account, I estimate that this will take about 700 years: let's hope Tuareg tribesmen have their electricity bills and passports out and ready for inspection, otherwise the queues will stretch all the way round the Sahara. Anyway, we have a connection with this effort because mobile phones are seen as the only viable way to achieve anything like this goal and it was DFID’s Financial Deepening Challenge Fund (FDCF) that in 2003 provided a one-off grant to Safaricom to pilot and launch the M-PESA mobile banking solution in Kenya. So I wholeheartedly support the drive to provide payment services to the poorest people using the mobile handset. But bank accounts?

Technorati Tags: banking, debit cards, prepaid

Once and future debit

[Dave Birch] I noticed there have been a few stories about debit cards in the press recently, primarily because it is the 20th anniversary of the introduction of the debit card in the U.K. (the Barclays' Connect Visa-branded debit card in 1987). APACS put together a nice collection of debit facts, including:

• There are 41 million debit card holders in the UK today (84 per cent of the adult population) compared with 27.8 million in 1996;
• There are 68 million debit cards in circulation today, compared with just 19 million debit cards in 1990, three years after their launch;
• Britons made 4.5 billion purchases in 2006 – the equivalent of 143 purchases every second – and spent £194.9 billion on their debit cards, five times the amount we spent in 1996;
• In 2006, each of us with a debit card used it 166 times on average – making £4,799 worth of purchases and acquiring £3,848 in cash;
• In 1987 only 38 per cent of UK adults had a plastic card – and this would have been a credit card. Today, 84 per cent (41 million) of UK adults have a debit card;
• By 2011 personal spending on debit cards will have overtaken cash;
• By 2016, spending on debit cards will have doubled to over £400 billion.

Technorati Tags: contactless, debit cards, internet, mobile

Education policy

[Dave Birch] As was discussed here absolutely ages ago, something has gone fundamentally wrong with the payment schemes efforts to cut card-not-present (CNP) fraud on the Internet by introducing 3D Secure (in the form of Verified by Visa and MasterCard SecureCode) to the masses. It's this: reasonably intelligent customers who are concerned about the security of their internet payment transactions find it impossible to distinguish 3D Secure dialogues from phishing attacks. They can't tell whether the request they get when shopping to register their card with Visa or MasterCard is a scam, or for real! So what are consumers to do? They can't tell the difference between a site that's doing what it should and a phishing attack, they see crashes when they visit financial services organisations web sites (which must undermine confidence) and even if they take the trouble to understand SSL and certificates, they are presented with meaningless gibberish from companies they have never heard of (what does "Verisign" mean to my Dad?).

Technorati Tags: credit cards, debit cards, internet, security

More on Moore's Law

[Dave Birch]  Money used to be stuff, now it's data.  Some people are sad about this, nostalgic for the good old days of the Gold Standard: As John Maynard Keynes once lamented, when "it appears that value is inherent in money as such", governments are able steal from the populace by inflation, which is sort of a bad thing.  On the other hand, when money is minted from silicon, the economics of handling cash (which today involves armoured vans and security guards) are driven by Moore’s law.  As that commentator notes, electronic information is instantaneous, weightless and exact. No longer the fumbling through coat pockets while a line of waiting customers quietly fumes.  He goes on to point out that retailers get rid of both cash floats and cash frauds such as charging $4.99 so that the $5 bill most people hand over has to pass through the till for one cent change rather than being trousered by a shop assistant (my italics).  I have to say, given the discussion about 99p coins, this had never occurred to me until I read it in this article, which I came across while searching for something else entirely.  Is it really true?  I had always thought that the origin of this irritating practice was to make goods appear cheaper, because 4.99 somehow sounds a lot less than 5.  But the anti-trousering theory sounds, frankly, more plausible.  Does anyone out there know?

Technorati Tags: cashless, coins, fraud

Extending debit

[Dave Birch] Our good friends at Edgar Dunn have produced a study showing that more consumers prefer debit cards than any other type of payment for point of sale purchases for the first time.  So it looks as if the march of debit at POS continues.  It may well continue beyond POS as well now that the the Star EFT network plans to start testing PIN-less online debit payments. The test will run about four months and involves Solana Corp., which will act as an aggregator of $25-and-under transactions generated by the online merchants.  The idea is that customers can buy digital junk like ring tones or cartoon subscriptions from PCs.  Through Solana, participating merchants will be required to register and authenticate consumers for the payments and bear the risk in disputed transactions.  If they are happy to do this, then presumably the consumer preference for debit will begin to extend into cyberpsace. It looks as if debit cards are set to displace cash even further, with PINless transactions to eat into virtual cash transactions and contactless interfaces to eat into real world cash transactions.

Technorati Tags: cashless, debit cards, coins

Credit, debit, prepaid

[Dave Birch] I often find myself using "credit card" as a generic term for payment card.  It's a reflection of my age, I suppose, and a deep-seated response to the first payment card I ever had: a Barclaycard that I rather unwisely obtained as a student.  But credit cards are in retreat online and shunned elsewhere, mostly in favor of debit cards.  Visa says that about 55% of its e-commerce transactions are now debit cards rather than credit cards.  This is more than double the proportion of just two or three years ago!  Now, I don't get this.  I use my credit card for absolutely everything, but clearly I'm in the minority.  In the U.S., debit card transactions grew nearly a fifth last year issuers expect continued strong growth this year.  Bizarrely (to Europeans), signature debit grew 20%, PIN debit only 16% and active cardholders performed about 11 signature debit transactions and 5 PIN debit transactions.  Anyway, I was wondering if in a decade or so, we might be seeing debit cards becoming the minority as prepaid products come to dominate globally.Visa debit card. “The platform is designed to instantly send (SMS) text alerts to the FaithFone handset anytime the accountholders VISA Debit card is used for purchases.Visa debit card. “The platform is designed to instantly send (SMS) text alerts to the FaithFone handset anytime the accountholders VISA Debit card is used for purchases.

Technorati Tags: banking, credit cards, debit cards, e-purse, prepaid

Payments, profits, competition

[Dave Birch] It's a bit of a paradox. Lots of people want to get into payments. It seems as if a new scheme (especially around mobile) is announced every week. This is presumably because they think they will make money -- as, in fact, Paypal have done with net income of $281 million last quarter -- and can grow a business. Yet people who are in payments (eg, banks) don't find it such a great business. Here are some rough figures for the spreadsheet: in Europe, payments account for a about a quarter of bank revenues and about a third of bank costs, contributing less than a tenth of bank income (in the US, payments account for a slightly bigger proportion of both revenues and costs and the contribution to income is slightly higher). The scale of the business is so huge, though, that this small net income is still in the region of 10 billion euros for EU-25 banks.

Technorati Tags: banking, cash, costs, debit cards, payments, SEPA

Tim Jones

This week, the first part of a two-part podcast with Tim Jones, drawing out key lessons from Mondex and Simpay.

Technorati Tags: banking, cash, debit cards, payments

Cash is still king

[Dave Birch] According to an Alliance & Leicester Commercial Banks Cash Survey published recently, nearly half of all UK retailers (actually 42%) say that cash is their preferred payment mechanisms. Perhaps I'm not reading it right, but the survey has some other surprising results: it claims that 12% of retailers prefer cheques, presumably for big ticket items, when I cannot understand why anyone in their right mind (or at least with any familiarity with the Consumer Credit Act 2006) would use anything other than a credit card. Even more surprisingly, only one in four retailers say that they prefer debit cards, which I would have thought were much more appealing than credit cards. The survey also notes that nearly two-thirds of small- to medium-sized retail businesses think that both cheques and credit cards are too expensive. In this group an even higher proportion (49%) prefer legacy wonga.

Technorati Tags: business, cash, costs, retail

Monopoly e-money

[Dave Birch] I suppose it had to happen. A new version of Monopoly has been released by Hasbro. Instead of paper money: electronic "debit" cards. Interestingly, newspapers are as bad at reporting on play e-money as they are on real e-money: one article says that the game comes with a "little machine that transfers money from one player's bank card to another." I wondered what had happened to these.

Technorati Tags: banking, games, p2p

Divided by a common standard

No-one (at least no-one reading this blog) can have failed to have noticed the story that's been running in US on the apparently industrial scale card-skimming that's been going on there. It's so bad that Citibank has blocked ATM withdrawals from some MasterCard accounts after a series of fraudulent cash withdrawals in the UK, Russia and Canada. Wells Fargo, similarly, blocked ATM withdrawals in the UK. Gartner say that this is the “largest PIN theft to date”. While it's difficult to determine exactly what has gone wrong, the general opinion seems to be that it is not bank systems but third-party systems (a processor or a retailer) that have been compromised (yet again), enabling criminals to manufacture counterfeit cards on an large scale and then distribute them for use at ATMs.

Technorati Tags: credit cards, debit cards

Direct debit top up

Digital Payments, the company set up by Voca, Retail Decisions and Mi-pay, has just signed its first customer for direct debit funded mobile top-ups - Carphone Warehouse.

1886 and all that

I’m very interested in the history of the card business, because I can’t help but feel that an understanding of how it got to where it is should provide some insight into where it is going next, so I am always on the lookout for old references to non-cash retail payments. In particular, I’m always curious about the first reference to the credit card in literature. The oldest I've found so far is in a long-forgotten text from 1886 called “Looking Backward, 2000-1887” by one Edward Bellamy. I picked up a 1947 edition from the Amazon marketplace, which suggests it must have been reprinted a few times. Indeed, the dust jacket claims it to be one of the best selling utopian fantasies of all time.

Technorati Tags: credit cards, debit cards, predictions