CSFI Innovation in Payments

Signing off

[Dave Birch] We had the last of the lunchtime round tables in the Innovation in Payment series at the Armourer's Hall with Sandra Alzetta from Visa Europe, Ruth Wandhofer from Citi and Chris Skinner of Balatro on the panel and a terrific delegate turn out. I thought I'd better arm myself in case of hostile feedback.

Fortunately the assembled crowd were unarmed, generally friendly and their honest and constructive criticism was genuinely welcomed.

It was with some sadness that I present this final roundtable report, since the programme has been wonderful, educational and interesting. I am very happy to be able to report that the CSFI and Visa Europe are to continue their collaboration and as of today I am the Visa Europe CSFI Research Fellow for the coming year. The topic for the coming year's programme will be "Identity in Financial Services" and I hope that you will join us at the new blog of the same name. The first roundtable, scheduled for 16th December, will be announced there later today.

round table, security, technology

Lunchtime round table, 23rd November 2010

[Dave Birch] The last of the lunchtime round tables in the Innovation in Payment series will be held at the Armourer's Hall, 81 Coleman Street, London EC2R 5BT from 12.30pm-2.15pm on 11th February 2010. Sandra Alzetta from Visa Europe, Ruth Wandhofer from Citi and Chris Skinner of Balatro will be on the panel and we will be discussing some scenarios for the evolution of payments in Europe: Download VISA-Nov23a.pdf (114.6K).

round table, security, technology

Emerging solutions

[Dave Birch] The reaction of the lunchtime roundtable about learning from emerging markets has been surprising. Not only was the session very well-attended, with 70 people registered, but I've just bumped into a couple of people, a week later, still talking about it and asking when we might run another one. We had great speakers -- many thanks again to Rachel Bale from Visa CEMEA, Prateek Shrivastra from Monitise and Paul Makin from Consult Hyperion.

The huge turnout was surprising. I'm not sure what it means, but it means something. The idea that financial inclusion products developed for emerging markets, largely based around the mobile phone and often provided by non-banks, might be an effective mechanism for tackling financial and social exclusion in developed markets would have been seen as outlandish a couple of years ago, but the continuing success of schemes such as M-PESA in Kenya and G-Cash in the Philippines have led many to reevaluate the relationship between developing and developed world financial services.

For one thing, there is clear evidence that many of the less well off don't need bank accounts. In the Philippines, a sixth of G-Cash customers have given up their bank accounts and in Kenya I imagine most of the M-PESA users will never bother to get them. Meanwhile, new kinds of financial service providers are springing up on top of the mobile money transfer systems to provide financial services ranging from savings and loans to insurance and investments.

Some of these, I think, do point toward a more radical set of changes in the provision of financial services than might be immediately apparent. A particularly fascinating recent development around M-PESA is that

Equity Bank and Safaricom have launched a bank account that lets customers transfer money to and from accounts of the mobile operator's money transfer service M-Pesa via their mobile handsets as well as enjoy other benefits that come with a bank account. The new service will target customers who are looking for the convenience of a bank account that uses M-Pesa as the tool to deposit money into their accounts. Customers will not have to go to the bank to check their account balances. The mobile system will allow the customer to check their last five transactions on their linked account. With the M-Kesho Account, customers will be able to get pre-qualified personal accident insurance, access to short-term loan facilities ranging from KES 100, and interest on the mobile account from as little as KES 1. The application is built with the ability to score a customer's credit rating using a six-month history of his M-Pesa balances. The customer can request the facility through his phone, and the bank will respond if approved by loading the money into his M-Kesho Account.

[From Safaricom, Equity Bank launch M-Pesa bank account - Telecompaper]

The poor and excluded find it difficult to develop a credit history, so the idea of using transaction data as the basis for a credit decision opens up the market. You can't do this with cash, which once again illustrate the key point that the transition away from cash and toward e-payments means many new opportunities for products and services.

mobile

Context and capital

[Dave Birch] In my review of James Gardner's Innovation and the Future Proof Bank, I focused on James' core observation about transforming innovation from a function into a process. The payment sector is no difference and payment organisations must somehow develop along these lines, whether by building an internal process or by combining or connecting to some other one. Within the incumbents, though, there is a still a long way to go.

Half of banks will still lack a formal innovation programme and budget in three years time, severely restricting their growth potential, according to research from Gartner.

[From Finextra: Cost-cutting banks wide open to disruptive IT innovation - Gartner ]

If there is an innovation programme, what should it do? It has to create some backdrop and shared language for thinking about the future (I rather like James' "futurecasting" approach), it has to try and understand the big picture, and it has to look for new ways to make money (frankly). It also has to develop a fruitful mutual relationship with strategy. Looking from the outside, I can see that in some organisations the boundary between strategy and innovation is hazy and they become confused.

In many ways this is because innovation and strategy share much common territory; they both look into the future, look outside the business, try to make sense of the confluence of known trends and anticipate the emerging ones. Where they most obviously separate is that part of the company's strategy that looks as maintaining "business as usual", though even here there is often an assumption of product/ service evolution.

[From Innovaro Blog - Future of Innovation]

Actually, James has also observed another problem (from the inside: he was Lloyds TSB) in the specific relationship between innovation and IT.

CIOs have such vastly different priorities to innovators that they are fundamentally unable to embrace innovation and keep on keeping on.

[From BankerVision: Future leaders, and IT contradicts]

It's undeniable in the case of banking: the majority of IT budgets are swallowed up in the "business as usual" integration, migration, compliance and other basic functions. There's not always the money to deliver the great new Internet identity management system, the new micropayment system or the experimental social lending platform. But there's something else that has occurred to me listening to stories and case studies in and around the CSFI's roundtable lunches, and that is that the role of chance in turning innovation into

banks, business case, innovation

Investment priorities

[Dave Birch] I've been in a couple of meetings recently where customers have been talking about the need to cut costs in the card business. Obviously, times are tough here and there. But as I've tried to point out, short-term cost cutting is not always the best response to a challenging environment. I wonder if it's a reflection of the organisational dynamics (senior managers tend not to come from an IT background), which means that IT is seen through a particular lens. I noticed that Gartner have been drawing attention to this point.

"The predominant view of IT is that it is only useful for cutting costs so tactical thinking about automation and rationalisation overwhelms longer-term decision and strategic plans and goals,"

[From Finextra: Cost-cutting banks wide open to disruptive IT innovation - Gartner ]

So do we invest in IT across the board? Obviously not: there's no blank cheque. But we might decide whether we are going for the underserved or overserved. This is Warren Buffet, an investor in American Express for decades, talking about Amex's success in the payment market. Bear in mind that they were orginally building a defensive strategy, because they were worried about their traveller's cheque business, you might have expected a constrained strategic response that used cards are lower-cost traveller's cheques. But this isn't what happened, instead

They actually took over the field by establishing themselves not as the low‑priced competitor but, but as the class competitor. It was a great marketing arrangement. Then it swept the country. The card I carry in my pocket says, “Member Since 1964.”

[From Transcript: Warren Buffett on What's Next in the Payments Industry - pymnts.com]

Traveller's cheques were costly, Diner's Club was expensive, so Amex countered by making an even more expensive product!

cash

URGENT Lunchtime round table, 11th September 2009 CANCELLED

[Dave Birch] I'm sorry to say that due to an unfortunate accident involving one of our key speakers, Mr. Jean Allix of the European Commission, the lunchtime roundtable for 11th September has been cancelled and will be rescheduled. I am very sorry for this late notice, but we have been trying very hard to find an appropriately qualified substitute from the Commission but this proved impossible at such short notice and a roundtable about the Internal Market without a Commission perspective did not seem ideal.

Europe, innovation, round table, SCF, SEPA

Calls for a war against cash

[Dave Birch] In the recent thread concerning the views of economist Willem Buiter ("Immoral earnings"), I mentioned in passing the idea of some kind of "analogue switch off" of physical notes and coins, somewhat analagous to the analogue switch off of TV. This may seem implausible at first, but the fate of the cheque in Europe would seem to indicate that it is possible for payment mechanism to be withdrawn in favour of digital alternatives. Even in the UK, cheques may have less than a decade to run, and another small step on the path to extinction is imminent, with the end of the cheque guarantee card. I suspect no-one under 21 has actually written a cheque and wouldn't know what a cheque guarantee card was for. The use of cheques continues to shrink and cards are making inroads into all areas. For example, when I called our repair guy to fix the dishwasher (an absolutely A1 guy, by the way, if anyone's looking for a repair guy in the Woking area) even I was slightly taken aback when, after fixing it, I said "I'll go and find the cheque book" and he whipped out a chip and PIN terminal. So surprised that I took a picture.

He said cheques are a pain because they might bounce (perhaps there are fewer people with cheque guarantee cards than I imagine) but mostly because he has to collect them up and go and pay them in when he could be doing something more useful, like earning a living or hanging out with his family. Anyway, Several million people still do use cheque guarantee cards, but we're still getting rid of them.

Last year, of the 1,400 million cheque transactions, just under 7% were supported by a cheque guarantee card and although around four million consumers still guaranteed cheques regularly, in many cases the guarantee function is not an essential part of the transaction.

[From Cheque guarantee scheme to go in 2011]

The issue here is about having a reasonable alternative, isn't it? We don't have to wait for all cheques or all cash to go away, we just need to ensure that there is a reasonable alternative and then once we're down to the last quarter or fifth of the population using an old and inefficient mechanism then we can starting think about a switchover.

cash, cheques

Lunchtime round table, 3rd June 2009

[Dave Birch] The fifth of the lunchtime round tables in the Innovation in Payment series will be held at at the City Club, 19 Old Broad Street, London, EC2N 1DS, from 12:30-2:15pm on 3rd June 2009. James Gardner (Lloyds Banking Group), Tobias Rooney (Innovaro) and Carsten Sorensen (LSE) will be on the panel and we will discussing what technological innovation might mean in the financial services sector and how it might it change in the future. We'll be focussing on the innovation process, not the technology, and you can download the full invitation here: 05_Jun09_Roundtable.pdf (105.5K).

Learning from the public sector

[Dave Birch] Patrick Dunleavy of the LSE gave a keynote on innovation in the delivery of public services at the LSE's SSIT 09 conference and I thought that some of his thinking about how the government responds to "web 2.0" has implications for how we in the banking and payments sector also innovate in response to this new generation of connection technlogy. He began by explaining that the web 1.0 manifesto for government in response to the arrival of the Internet was broadly

• Disaggregation, or breaking big dinosaur departments into smaller more nimble departments co-ordinated by new technology;
• Competition and finding alternative suppliers (and, I imagine, relying on competition between suppliers to bring
• Incentivisation (potentially via privatisation) so that decision-makers would take advantage of the opportunities.

In practice, this didn't deliver. Some of the reasons are specific to the world of government -- particularly the apparently ingrained attitude that "old-fashioned" means easy to use because citizens won't understand (eg) text message -- but some apply to the world of banking too, in particular

• No integration into society's networks, and
• No recognition of intermediaries (even other government departments) which makes it hard for value networks to emerge. In other words, you can't log in to the DVLA using your HMRC "identity" and such like.

The implementations never delivered what was promised. Centralisation and a variety of disastrous "big bang" schemes, a disastrous under-investment in everything you need for successful systems (eg, training, support, storage etc) and a reliance on text (in a YouTube world) has basically led down a dead end. And Patrick made a point that I have often reflected on given my own experiences with the public sector here but have been reluctant to mention in a public forum: a great many of these initiatives came from people who didn't know anything about the technology. Here, I like to think, banks have done a little. The arrival of the web may not have done as much to reduce costs as might have been hoped (because the web ended up as an additional rather than replacement channel) but it has delivered better service to customers.

Anyway, in the public sector the end result has been that e-government hasn't delivered and Prof. Dunleavy used some detailed case studies (such as the Department of Work and Pensions utterly hopeless online communications strategy, where a third of phone calls were never answered and each civil servant on average sends a "customer" e-mail once every four months, resulting in a huge increase in the number of paper interactions!) to explain why this first wave of e-enablement hasn't reduced costs or delivered new services. His summary, if I interpreted correctly, was that government does, essentially, the same as it did before despite Google Maps and mash-ups, World of Warcraft and web 2.0 in all its glory.

Lunchtime round table, 23rd April 2009

[Dave Birch] The fourth of the lunchtime round tables in the Innovation in Payment series will be held at the Intercontinental Hotel in Berlin on 23rd April 2009. All are welcome, but as space is limited please reserve a place with the CSFI before coming along. This fourth seminar looks at the roles of banks and non-banks in the European payments landscape of the near future. You can download the full invitation Download 04_Apr09_Roundtable.pdf (89.9K).