[Dave Birch] I had a lovely day out in London at The Economist’s Digital Money Summit. We had a really good set of speakers coming at the subject from a number of different directions, and I thought that the combination of speakers that they had chosen (me included, of course) worked together very well. I found the case studies provided by the transit operators to be particularly interesting, so I thought I would pick on them to pass on what I thought were a few key points from the day. I came away thinking that the fact that digital money is on the Economist‘s agenda together with the excellent feedback I received from the event means that, despite the credit crunch, improvements in retail and electronic payment systems are of interest to a variety of businesses and personally I’m looking forward to helping some of them innovate their way through recession.

The case studies were provided by Hong Kong and London. In both cases the particular angles chosen illustrated different useful lessons to the rest of us. What is important to remember about both of these projects is that in the great scheme of things they only came into existence because the banking sector was unable to provide an appropriate payment solution so the transit operators had to do it themselves, with London kicking off its ticketing system back in Victorian times (with the London General Omnibus Company tickets) and Hong Kong following somewhat later.

If we look at the Hong Kong case study given by Brian Chambers of Octopus International first, we have to first understand the scale and reach of the Octopus system, the contactless transit card used there. It has replaced about 3% of the cash in circulation in Hong Kong and there are now more than 2700 merchants who accept Octopus payments. Just to pick one random figure to show what this means, the Kowloon Motor Bus company used to handle 20 tonnes of coins per day, that is now down to one tonne with associated huge cost savings. However, because of a continuing universal service obligation, cash is still allowed on the buses so the final element of cost saving — removing the cash handling equipment from buses totally — is still some way away.

Currently about two thirds of Octopus’ transactions are transit and about one third retail and there have been a number of recent developments, on the retail side and combining the transit and retail sides, that are worth studying. The addition of loyalty and promotional schemes has opened up a variety of new opportunities. One that sounded quite innovative to me is the “ride early and get a free breakfast” promotion with a well-known international fast food restaurant that aimed to get people to spread their journey times in the morning peak rush-hour. Another is the Citibank cashback credit card that combines an octopus card with a Citibank Visa credit card.

The card not only has both credit card and contactless smartcard payment functions, but also offers Citibank’s cashback in addition to the existing Octopus Rewards scheme that allows customers to make every reward count.

[From Citibank and Octopus unveil multi-function credit card – Banking Business Review]

This means that customers only need to carry the one card during the day, but more interestingly the cashback component of the credit card proposition is Octopus travel value not Hong Kong Dollars. So, as you go around spending on the credit card your cashback is automatically credited to the Octopus account. The product includes auto reload of the Octopus account from the Visa account so customers never have to think about reloading their octopus card. Apparently it’s been rather successful, and I can see why a similar product would be my top of wallet in London without a doubt.

Octopus works everywhere in Hong Kong. It has total penetration and has already spread beyond transit and retail into school attendance management, office entrance systems and beyond. The one notable exception to this almost universal acceptability is the taxi network. Taxi drivers, as Brian rather charmingly put it, are not big fans of data trails.

While the system currently only accepts Octopus’ own cards, they would in principle be happy to accept bank payment cards once those cards can do transactions in under 150 ms, which seems like quite a hard target to me. That leads us into the Transport for London (TfL) case study, where the goal of getting rid of ticketing and using payment cards instead was made more explicit. Shashi Verma gave the study and provided excellent insight into the interplay between technology and the complex requirements of payments in the London system which, for all sorts of reasons, has developed the Oyster scheme in a different direction to the Hong Kong Octopus scheme (no-one, incidentally, was able to explain the preponderance of sea creatures in the contactless card world: Octopus, Oyster, Squid…).

Shashi showed a chart I hadn’t seen before which gave the number of journeys per ticket purchase transaction. It used to be one in four, now it’s one in 10. In other words, there’s been a big reduction in the overall number of transactions which means a big cost saving. On the revenue side there has been a big increase in bus riding over the last few years and the Oyster system has made big contribution to this by speeding up the boarding of buses which in turn makes more effective use of the investment in buses.

I think what struck most delegates, and made them think about the issue in a new way, was the way that Shashi described Oyster as an alternative system of currency and pointed out just how expensive running your own system of currency is. It’s Transport for London that has to provide, in essence, the “bureau de change” between Sterling (etc) and Oyster value, and they have no choice but to do this because the alternatives are more expensive. Looking forward, both Hong Kong and TfL said that they thought that their customers would find the idea of using mobile phones very attractive — in fact TfL said that they are “itching” to put phone-based solutions into the market once the right solution is available (not surprising given the results of the O2/Barclays/TfL trial) — but as TfL pointed out, while mobile phones are more attractive, they are also more challenging because of the boundary between the payment industry and the mobile operators. This was another phrasing of a commonly expressed concern during the day about the apparent lack of progress across this boundary. I won’t comment on this here because it’s not the subject of this post but it’s obviously an area where we going to be seeing continuing discussions and, frankly, some tension.

Finally, TfL said that the major source of fraud (and all other sources of fraud are effectively noise compared to this) is impersonation, not payment fraud, card cloning or anything more sophisticated. It’s primarily not a digital money problem but a digital identity problem which stems from people misusing concessionary fare tickets. Children and old people, for example, travel free on the network so the temptation for people to get an Oyster card in an elderly parent’s name and then use it to travel without paying is very high and results in significant revenue loss.

Two great case studies and it was really good to be able to compare and contrast them..

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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