Digital Money Forum

The Swedish experiment

[Dave Birch]Within the narrow confines of this blog, Sweden is one of the favourite geographies, partly because it is struggling with cash and partly because it is more transparent than some other banking systems.

The Swedish central bank published some detailed figures on the cost of payments and they provide useful input to the debate on the future of payments. They show that on average the variable cost of an ATM cash withdrawal to the issuing bank is around 1.3 SKr

[From Digital Money Forum: Cost dynamics, again]

Well, that doesn't sound like very much. But in Sweden, it multiplies up to a big fraction of the economy because the Swedes are heavy ATM users.

Stefan Ingves (the Governor of said Central Bank) said that Sweden has “many more” cash transport robberies than its neighbours because, essentially, cash withdrawals from all ATMs are free (despite the large costs entailed in cash handling). This means, in turn, that Swedes use cash far more than Finns, Danes, Norwegians and (especially) Icelanders.

[From Digital Money Forum: The Cash Menace up North]

Mr. Ingves also notes (in the speech referred to above) that Sweden has far more cash-in-transit robberies than its neighbours and suggests an alignment of the private and social costs: the cost of armed robberies, he said, should be accounted in the cost of cash. This means that far from being free at ATMs, cash in Sweden should be expensive. He is, of course, completely correct.

Bottom of the pyramid schemes

[Paul Makin] Earlier this week, I attended an interesting and enjoyable round table session, hosted by the CSFI, entitled 'Credit and the emerging consumer: The developing world of African lending'. The discussion   was led by Jason Shedden (Blue Financial Services), Mark Napier (the newly-appointed Citi/DfID Fellow at the CSFI) and Malcolm Harper (BASIX). The discussion highlighted the fact that, despite high expectations of their effectiveness in reducing poverty, none of the existing microfinance institution (MFI) lenders actually reach the so-called "Bottom of the Pyramid" (BoP). Instead, not unreasonably, they are all lending to those that they have a reasonable expectation of being able to make repayments; those in employment, and self-employed businessmen wishing to expand their businesses.

This excellent event was the first in a series of roundtables that Mark will be running as part of his fellowship programme at the CSFI and we'll be asking him along to next year's Digital Money Forum as well so you can meet him there if not before.

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

Defending cash

[Dave Birch] I was listening to a recent episode of Skepticality, about the TV show "Numb3rs". The presenters were interviewing one of the writers about the making the show and they made a comment that caught my money-obsessed ear. The writers said that they had been researching a show about counterfeiting and during the course of this research they had copied a $20 bill on a photocopier to see how well it came out. Shortly thereafter they got a phone call from the US Treasury! The photocopier was online, and phones home when someone tries to copy money! (Incidentally, the Treasury guys weren't very happy to hear the proposed plotline about the FBI investigating some counterfeiters because it's the Secret Service -- until 2002 part of the Treasury -- who take care of that.) I thought they might be exaggerating, but it turns out that not only do some photocopiers have this feature built in to them, there are many printer drivers that won't print scanned bills!!. Ever-vigilant for the cause of monetary trivia, I tried it out myself. I scanned a fiver and tried to print it, and I got this error message.

Clear goals

[Dave Birch] I mentioned before that I happened to be at the recent Financial Services Club dinner with Charlie McCreavy, the EU Commissioner for the Internal Market and the man behind initiatives including MiFID, SEPA and the PSD. I can't report what he said, because the dinner was under Chatham House rules and we were asked to seek permission to use any quotes, but what I will say is that it meant that I had the opportunity to think about the general direction of regulation since it's likely that one of the outcomes of the current crisis in the financial sector will be more regulation of all financial services. If this is the case, I hope the regulation will have more concrete and explicit targets to that we can measure whether it is working or not. Suppose, to pick an obvious example, that the purpose of SEPA was to reduce the total social cost of payments in the eurozone from the current 0.5% to, say, 0.25% in a decade. Then we could decide for ourselves whether the costs incurred (which in this case are substantial) are, in the long run, justifiable. Not regulation for political purposes but regulation to increase the net welfare, which is how it should be.

We're from the government and we're here to help

[Dave Birch] Even if you don't understand the intricacies of the credit crunch or the precise mechanism by which investment bankers have greatly enriched themselves while beggaring the rest of us, you must be wondering why on earth we spend so much money on regulators and regulations, directives and directors if they couldn't prevent (or apparently even mitigate) a calamity on this scale. As Chris Skinner asks

With SEPA, the PSD and MiFID all paling into relative insignificance as the major banking markets explode globally, there are questions about whether the European plan will succeed or is even needed now

[From The FinanSer: Are Europe's plans for Banking, MiFID and the PSD irrelevant?]

This is a very good point. If regulation serves only to hamper innovation but fails to deliver any commensurate benefits in stability of security, then what's the point of it? Right now, it looks as if European initiatives in the finance sector have been a waste of time and money. They certainly haven't worked as intended, either through a process of watering down (as in the case of the Single Cards Framework, the SCF) or through irrelevance in other cases. The Banker, more charitably, says that the EU is undergoing massive regulatory upheaval and while the goal of a single market in financial services may in principle be worthwhile...

As with all regulatory initiatives, not all the outcomes are exactly what the policymakers intended and The Banker has reported faithfully on a number of significant deviations. There are lessons to be learned from these failures as, no doubt, other parts of the world are planning to adapt the European model for their own uses.

[From The world can learn from EU’s regulatory shake-up mistakes - The Banker]

Still, as The Banker notes, we should take comfort from the fact that some scraps of usefulness might accidentally be left behind as many regulatory initiatives are swept away, saying that

Some of it will eventually come out right and Europe will be left with a half-fixed system.

[From The world can learn from EU’s regulatory shake-up mistakes - The Banker]

Frankly, given the costs of SEPA et al (which are several billions of euros), I think we ought to expect a little more than an almost coincidentally "half-fixed" system. When it comes to payment systems, I'm certain that a further separation between banking and payments is a way to move forward. It's a combination of inactivity and accident that has led to payments being regulated, managed and delivered within banking and the goals of initiatives such as the Payment Services Directive are hardly coincident with the goals of banks

We have not sold any sugar in months

[Dave Birch] OK, so that's one of the more unusual testaments to the continuing success of the M-PESA scheme. You can see it in context in an article about some ethnographic research around M-PESA. Im afraid I can't resist an extended quote...

It is early morning in Bukura, a small village in Western Kenya. The shop-keeper and his wife are preparing to open their small store, which sells household commodities such as flour and cooking oil. They also offer M-PESA services. There is already a queue outside. A group of about twenty villagers are crowding the entrance. “It is always like this,” the shop-keeper complains while pointing to the crowd. “Since we have become M-PESA agents we have no time to rest. This thing has even over-run our other business”. He then holds up a packet of sugar. “We have not sold any sugar in months. They only want M-PESA”.

[From Why has M-PESA become so popular in Kenya?]

This is only one of many, many similar stories that keep cropping up.

...the majority of customers in both the urban and rural areas assert that they prefer M-PESA over other money transfer services. This means that M-PESA must be offering them some kind of substantial benefit. In Bukura, this benefit comes in the form of savings on transport. Customers do not need to travel into Kakamega, the nearest town, to access the service. One elderly farmer commented that “I can just walk from my shamba (farm) and get money. I don’t have to spend and go into town. If the agent does not have cash today, then I will come back tomorrow. It is cheaper to wait”.

[From Why has M-PESA become so popular in Kenya?]

It just goes to show what can happen when the right digital money implementation comes along at the right time: real transformation.

Retail not-banking

[Dave Birch] The relationship between payments and banking is, generally speaking, under some pressure from both developments in technology and wider cultural and business changes. Although these pressures exist in the developed world, they are most visible in the developing world where the lack of existing infrastructure means that technology and business change come together unencumbered. The result is called by some "branchless banking", although in the payments space "bankless banking" might be more appropriate. Anyway, the essence of the concept is access for the financial excluded through non-bank distribution channels. Why? Well, in many (if not most) countries, most people don't have bank accounts:

Statistics from the Central Bank shows that banks currently hold less than 3 million accounts, both current and savings across the country. The present development which is not healthy for the economy means that less than 15 percent of the about 22 million population in the country saves with the banks. According to the data, while the economy is cash based, 80 percent of cash is outside the universal banks.

[From 18m Ghanaians Shun Banks - ModernGhana.com]

Look at the example of Brazil to see how the technology, business and social factors can co-evolve: In Brazil, payments account for nearly four-fifths of bankless banking transactions. In other words, transactions that are performed over electronic channels (in countries like Brazil, this almost always means mobile, not the internet) are overwhelmingly payments transactions. Again in Brazil, 90% of the people who use some form of branchless banking, use it to make utility payments and other non-interpersonal payments. And of those people, only 5% have a bank account. This market shape is unlikely to change because the cost of providing these people with bank accounts that have the potential to deliver a wide range of financial services, but the cost base to go with that is simply too high. In fact, I would go further and say that it seems to me entirely likely that of the small number of people who do have bank accounts, many of them only really want payments accounts (if we can them that). Therefore if technology makes it cost-effective to deliver payment accounts into mass markets, then the demand for bank accounts at the low end will fall further.

The role of the mobile phone in all of this is critical. Mobile banking providers have now both the products and the implementation experiences needed to open up much wider markets. They are held back or constrained in one rather obvious way, which is that they depend on the handset manufacturers and mobile operators to provide the platform for the functionality that they need, and this often constrains the customer experience, but nevertheless they are taking transactions to the masses.

SEPA update

[Dave Birch] Unlike many of you, I am very fortunate to have access to a) a euro bank account and b) someone that I can ask to waste their time on payment-related lunacy. Put these two things together and a SEPA experiment was born: I decided to celebrate the birth of the SEPA zone and send some euros to one of our Forum friends in the Netherlands, thus becoming (I hope) the first blogger to originate a SEPA Credit Transfer (SCT).

Euros centric

[Dave Birch] I went along to a seminar, kindly hosted by Barclays, to take part in a discussion organised by the Centre for European Reform on the future of retail banking in Europe. David Shirreff, the Frankfurt business correspondent for The Economist, has written a pamphlet for the Centre called "European Retail Banking: Will there ever be a single market?" [PDF]. David's key points are that in smaller countries markets have opened up, but in larger countries (eg, Germany) there has been resistance to change; that the Commission should use competition powers to take on vested interests but stick with a light touch; and, most controversially, that regulators should create a framework in which each business within a bank (and I guess this would include payments) should have its own capital and profit and loss account to increase the scope for cross-border mergers and acquisitions below the mega-merger level. I am absolutely not qualified to comment on whether this makes sense or not, but I thought that Digital Money Devotees might be interested in the discussions that followed (I've not attributed any of the comments, in case I misunderstood them in some way, and I've tried to focus down on relevant part of the discussion).