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« Information rules OK | Main | More than a blip »

Complacent or short-sighted?

By Dave Birch posted Mar 19 2010 at 8:35 PM

[Dave Birch] I was in a "Chatham House" session recently (naturally, I can't say where or why) when one of the regulators present said that he thought that banks were being complacent about their future in retail payments because the Payment Services Directive (PSD) was opening the market up to other kinds of organisations (he specifically flagged up the technology-driven service providers) whereas banks' strategic plans are still founded on inter-bank competition over essentially unchanging basic services. This is why the European approach to regulation looks good: precisely because it opens up the market by bringing non-banks on board with light touch regulation around payments. We discussed this sort of thing a few times at the Visa/CSFI roundtables and I was excited to see that one of the companies that I'd invited along, VoiceCommerce, has already obtained a Payment Institution licence.

London-based payments group Voice Commerce has become one of the first fully authorized Payment Institutions (PIs) under the EU's new Payment Services Directive (PSD)... The license also means Voice Commerce can apply for Visa and MasterCard card scheme membership to start providing its own branded payment services including issuing cards to businesses and consumers and acquiring payment transactions.

[From Voice Commerce Receives Payment Institution License by Bank Systems & Technology]

In fact they have already gone on to become a full member of Visa Europe. The point is that you don't get competition by having unregulated non-banks, so it is in everyone's interest (including the non-banks) that there is a good regulatory framework. I think Europe has led the way here. The US will follow, I'm sure. There continuing calls for more harmonised regulation of the non-bank financial services sector and I honestly think that a model that opens up payment services while tightening up banking services is well worth considering.

The federal government spends at least 15 times more on consumer compliance and enforcement for banks and credit unions than for nonbanks — even though there are at least five times as many nonbanks as there are banks and credit unions,”

[From Consumer Groups Urge Regulation of Nonbank Financial Institutions - NYTimes.com]

Of course, you might ask why non-banks should be regulated at all if they are only providing payment services, but I would have thought it clear that a payments "wild west" doesn't help anyone, least of all those actually in the wild west, because businesses need regulatory certainty in order to invest in a field, and if there is no regulation there is no certainty..

The Federal Deposit Insurance Corp. (FDIC) released a report last week concluding that 7.7 percent of U.S. households, containing at least 17 million adults, are unbanked (i.e. those who do not have bank accounts), and an "estimated 17.9 percent of U.S. households, roughly 21 million, are underbanked" (i.e., those who rely heavily on nonbank institutions, such as check cashing and money transmitting services).

[From New underground economy - Washington Times]

Are all these people really going to be served by new banking services, especially at a time when the regulatory burden on banks is going to increase and make low-margin low-end products even more unattractive? Surely a better alternative is to provide basic payment services to them in a regulated fashion but with a very light touch and low entry barriers. Other developed markets are going in this direction. Taiwan has also decided to bring non-banks in.

The law, which took effect Jan. 23, allows companies with a capital investment over NT$300 million (US$9 million) to issue smart cards for cross-industry applications. This means a single card may soon be all consumers need to pay for most small purchases islandwide. Under the previous rule, businesses in non-banking sectors could issue prepaid cards for transactions at their own points of sales only. Dozens of such cards have been issued on the island, including President Chain Store Corp.'s icash cards that can be used at 7-Eleven convenience stores, and the ETC cards launched by Far Eastern Electronic Toll Collection Co. Ltd. for drivers traveling on the country's highways.

[From Taiwan Journal]

Now all of these cards launched into separate sectors can be used across sectors (as in Singapore, where you can now use EZ-Link in shops and Nets on the MTA). So in many places, non-bank competitors are coming in to payment services and providing so great new products. What bank, or group of banks, would ever introduce something like the PayPal Bump integration that we're all having fun with at the moment?

PayPal, which made its initial splash in 1999 by letting Palm Pilot owners beam each other money — only to abruptly drop the feature — has returned to its roots. The latest upgrade to the PayPal iPhone app lets you pay (and be paid) by bumping fists.

[From PayPal Fist Bumps Square | Epicenter | Wired.com]

If you look at this short video "The Bank of Facebook" from Thomas Power, you can see how more of this kind of thinking. I don't agree with Thomas about Facebook becoming a bank -- that is, a heavily regulated credit institution -- but I do agree that it can become a payment institution and, as Thomas point out, a facilitator of peer-to-peer finance. You can see, for example, that it might make sense for Facebook to buy Zopa. But getting a banking licence? What's the point. Apart from anything else buying a bank is cheaper than employing lawyers to get you a banking licence.

Virgin Money is acquiring private bank, Church House Trust, for £12.3 million plus an injection of capital into the business of £37.3 million.

[From Virgin Money acquires private bank]

I think it is entirely plausible to imagine a Facebook payment system that people find convenient and easy to use gaining instant scale, and I think it is entirely plausible that Facebook might put together some group-based finance plays (buying Blippy, who knows?) and I think all of this is really exciting. Is it fair to call incumbent banks "complacent" though? I truly don't want to annoy our customers, but I know they appreciate honesty, so I'll point out that one the other panelists called them short-sighted, which I think is a better description because it's a more accurate representation of the institutional business model involved in retail banking.

The regulator also said that the scope for a non-bank to offer a "clean, M-PESA-style solution" for the UK was great. What he meant by "clean" was that a non-bank moving into the traditionally bank-controlled payment space would be seen by consumers as untainted by the general opprobrium around banking, which I thought was a really interesting point. Since I don't know anything about marketing or brand, it wasn't clear to me whether consumers actually do hate banks or just say they do, so whether they would be prepared to abandon banking services for non-bank alternatives I can't say. It's worth thinking about though. And if they are going to abandon banking services, then I can see that competitors that exploit the mobile channel will be at an advantage. Again, I'm only referring to payment services here. Some months ago, I wrote about Nokia's launch of Nokia Money and pointed to a related tract.

Nokia should take several hundred million euros and invest in creating a wireless payment infrastructure across western and northern Europe and then spread through the rest of the world gradually.

[From An open letter to Nokia from a former employee: kill Ovi, spin off the hardware unit, become a bank]

As I pointed out, there is no need for Nokia to become a bank to do this. Credit institutions and payment institutions are different beasts. Nokia can simply apply to become a PI under the provisions of the PSD. This would allow it operate a payment system as described in the article, without having to shoulder the burden of complying with banking regulations. If that sounds a little too innovative, note that Nokia Money would be unlikely to offer a retail service. As a consumers, you'd be using O2 Money Plus or Tesco Mobile Money or whatever. I imagine the customer choice here would be very brand sensitive (irrespective of whether they hate banks or not).

But would this be enough to disrupt the market? It might be if it resonates with waves of pressure coming from another directions. The European Central Bank (ECB) and the European Commission (EC) both want to see more competition in the pan-European payment space so if I wonder if we someone might be able to persuade them to stop thinking about 1980s-style debit cards and instead think about stimulating a pan-European "clean, M-PESA-style" solution instead. The advantage of this approach is that it would bring a new service to unbanked and the underbanked, while the banked remain well-served by existing bank-issued electronic payment services. This is a big enough pie for incumbents and new entrants.

In Poland, where some 40% of the adult population does not have a bank account but where nearly 100% has a mobile phone, the rewards are potentially great.

[From Polish Market Online .:. Polish Market Online .:. Will you be ready for the Payment Revolution?]

Everyone's happy with an M-PESA third scheme: existing players can continue to offer services to the expanding numbers of the banked, whereas new players can come in and offer services to the substantial underbanked population. We get competition, within Europe, to solve a real problem.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


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I have said this elsewhere before, but when Tesco launch their retail bank with client activity linked to the clubcard and strong mobile phone support, they could very well upset the current "club" of sub-standard UK retail banks who have used and abused their customer base for far too long.

I for one can't wait...


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