Regulation isn’t a bad thing

[Dave Birch] One of the areas of great interest for this blog is the evolution of “alternative” payments in different environments. As a consequence, I am always very interested to see how alternative payment system differ between markets. For example, the Russian market for alternative payments is very different from the European market. This year, broadly speaking, it will break down into

• About 14 billion Roubles spent via the leading e-wallet schemes Webmoney and Yandex.
• About 9 billion Roubles spent via mobiles for digital content.
• About 10 billion Roubles spent via the near-ubiquitous “terminals”, the reverse ATMs that are on every street corner in Moscow (more on these below), some of which goes into loading e-wallets and mobile prepay accounts.

So a big chunk of the alternative payments market in Russia is taken up by a payment system that simply doesn’t exist in Europe (or, in fact, anywhere else so far as I can see), which is the near-ubiquitous “cash in” terminals or, as we tend to cal them, “reverse ATMs”.

In the last ten years, a rapidly growing shadow banking system has sprouted up in Russia to service these small payments by turning cash into electronic currency, or e-money. And now that this sector has reached the $1 billion mark – and this in a crisis – and has expanded to include 10 million customers, e-money business owners are getting antsy about government regulation.

[From Crashing Russia’s all-cash culture – Fortune Brainstorm Tech]

Estimates vary, but there are somewhere in the region of 400,000 of these terminals in use right now. On literally every street corner is a terminal that Russians feed with banknotes to top up their mobile phone, pay utility bills, obtain pre-paid virtual credit cards (I did this: you feed the cash in and the Visa card number, expiration date and CVV are sent by text to your mobile phone). You can see from this screenshot the wide range of services available:

It seems like a bizarre market arrangement, one that the laws of economics should mitigate against. As Evgeniya Zavalishina, the General Manager of Yandex Money put it rather neatly, people are taking money out of an iron box, walking a metre and then putting the money back in another iron box. Incidentally, Evgeniya will be joining an excellent line-up of speakers at the Electronic Money Association’s 3rd annual conference in London on 24th November so if you are interested in learning more about the evolution of e-money regulation around the word, head on over to the EMA web site and sign up. But back to the iron boxes. By astonishing coincidence, the restaurant where I went to dinner with Evgeniya and other members of the Russian E-Money Association (set up by a good friend of the Digital Money Forum, Victor Dostov) had precisely such an arrangement!

How can this be economic? Surely you would expect banks to incentivise the terminals to take chip cards so that people could pay their bills with a debit card. Come to that, why can’t they do that from a bank ATM in the first place instead of going to a terminal at all?

Well, one reason might be a lack of regulation. At the excellent Russian E-Money conference I attended, one of the speakers placed Russian banks as the 53rd most efficient in the world, but the Russian non-banks as the 4th most efficient in the world (for payment services). Yet both the banks and the non-banks would benefit from a better regulatory infrastructure. The problem that was discussed at the event was that everyone knows that regulation needs to come, but no-one is sure what that regulation might look like (and some of it, such as impending regulation on data protection) simply won’t work technologically. Nevertheless, a good infrastructure for electronic payments would, I’m convinced, help both the alternative payment providers (ie, the terminal networks) to invest further and develop new services while at the same time enable banks to invest in their own terminal and enhanced ATM services. Everyone would benefit.

This reinforces something that has been said before on this blog: no regulation is not a way forward. We want to see digital money deliver real solutions to real problems all around the world and a good regulatory framework helps in this enterprise.

Incidentally, one of the speakers (and I’m embarrassed to say that I can’t remember which one because I can’t find my notes) said that one concern of regulators in developing economies is that the transition to e-money may have a tendency to cause inflation because the velocity of e-money is much higher than notes and coins. There’s some evidence to support this view in the latest figures from China, where the government has for some time said that e-money is destabilising the Yuan. I was puzzled why this should be, given that the volume of e-money is so low compared to M0. Their concerns go back some time, as we have noted before…

the Chinese government has decided to restrict the convertability of virtual currencies into Yuan because it is worried that virtual currencies from online games could undermine the country’s financial system

[From Digital Money Forum: Chinese walls]

Recent comments from the central bank, though, confirm that there is evidence in these Chinese monetary statistics that the concern about electronic payments are well-founded, although these still dwarf the circulation of e-money itself (eq, Tencent’s QQ Coins).

“More than 1 trillion yuan ($147 billion) cash went into circulation in 2005. From this we can see the increasing liquidity, which may cause inflation, partly due to the frequent use of electronic payment,” said [People’s Bank of China].

[From Global Times – E-money poses problems for central bank]

China has already started registering non-bank e-payment businesses, presumably as a first step toward regulating them. As noted above, though, this is not necessarily a bad thing. The right regulation could generate a huge e-money business in China.

In April, the PBC launched its first investigation into the payment business of non-financial companies, including online payment services like Alipay.com, China’s PayPal, virtual money providers like qq.com, and shopping malls and supermarkets issuing shopping cards. The PBC asked these companies to register with them before July 31.

[From Global Times – E-money poses problems for central bank]

It remains fascinating to observe the impact of the e-economy on the “real” economy in a country such as China, so I can’t help put point to one of my favourite facts about the emerging online market there.

A Chinese [virtual gold miner in MMORGs] earns around $100-$120 per month… Actual miners in China seem to earn even less: about $12 per month (and tend to die vastly more often than people playing World of Warcraft).

[From Digital Money Forum: The whole real/virtual thing is a bit fuzzy]

So you can earn ten times more mining virtual gold then real gold: surely there is no finer statistic available to teach students about the transition from an industrial to an information economy!

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