And now, time for the money forecast

[Dave Birch] One of the functions of banks has already been changed forever by the Internet, and that’s what economists call the information function. People used to rely on banks to provide certain kinds of information into the market (eg, credit ratings) but a combination of technology-enabled business change and vanishing delivery costs has meant that they are themselves consumers of exactly the same information as non-banks. (This is not the same point as the current debates about the privledged role of “agents” and information asymmetry which focuses on the knowledge gap between bank shareholders and bank managers as a contributory factors in the financial crisis.)

This is hardly new thinking — I can remember discussions a decade ago pointing out that some kinds of information were out of bank’s hands and that (given all sorts of constraints to do with data protection, competition law and so on) the operators of payment networks could use the “data exhaust” from their transaction networks to create information to “turbocharge” other businesses (it was the 1990s, remember). Indeed, I worked on a project for SWIFT to look at his kind of thing in (if I remember correctly) the late 1980s.

Now, advances in “web 2.0” technology mean that this turbocharging is both technically trivial and incredibly powerful, providing ways to create new kinds of information that would never have been generated by banks internally nor made available to the market as a whole. A favourite example of mine, that I originally found thanks to our friends at Payments News, is that courtesy of the New York Fed you can see U.S. bank card delinquency by county, and thus get yourself a real-time map of the credit crunch sweeping across the nation, like bad weather.

The ability of the new technologies to “mash up” data sources must be one of the routes to genuine innovation. Visa and MasterCard must have “weather maps” just like the NY Feds: perhaps the Chancellor of the Exchequer should wake up each morning to a weather forecast from the processors instead of Claire Nasir. I say processors because, looking forward, they are the ones who will actually know how money is moving around the economy at the retail level. They may be facing squeezes on margins, but they are responding with volume plays, so that the information that they will have can only get better and better.

But the bigger change in the acquiring side of the business is the move down-market to smaller merchants. One processor estimates that merchants other than the Top 200 generate only one in four transactions, but nearly two-thirds of the industry’s margins!

This is also the market segment served by independent sales organizations (ISOs), which for years have been able to mark up point-of-sale interchange and processor fees an additional 25% to 30% on qualified transactions, and 50% to 100% on non-qualified transactions (those with throughput problems and those rewards and business cards bearing higher interchange)… By moving down-market, the bigger processors like First Data and Paymentech can simply squeeze the ISO out of the food chain, or force it to serve at lower margins

[From News]

The consolidation of processors, in Europe as well as in the US, together with the steady shift from cash to e-payments means that some organisations will be in possession of pretty valuable information that simply didn’t exist before. It reminds me of one of my favourite case studies in contactless, Manchester City’s installation of the UK’s first all-contactless ticketing system at their Eastlands (now universally known as Middle Eastlands) ground. When paper went away, one of the major and unexpected benefits of the new system was that it produced information that did not exist before and this information translated directly into increased revenue (as Duncan Martin, head of retail at Manchester City, explains in the noted tome Digital Identity Management).

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