[Dave Birch] Once or twice I’ve had e-mails from people who say, to paraphrase, “you only hate cash because you work for electronic payment companies who would benefit from the end of cash”. This is partly true: Consult Hyperion, I’m proud to say, has been chosen by many of the world’s leading electronic payment companies to provide consultancy support and advice. But it is wrong to say that I only hate cash because of that. I hate cash for a variety of reasons and only some of them relate to boosting the business of our customers. There are moral reasons for hating cash too, and one of them is that it discriminates against that least well-off in society.

A group of development organisations, foundations and private companies, including Citi and Visa, have formed the ‘Better Than Cash Alliance’ to lobby for a shift towards electronic payments in the fight against global poverty. The alliance – comprising the UN Capital Development Fund (UNCDF), US Agency for International Development (USAID), Bill & Melinda Gates Foundation, Citi, Ford Foundation, Omidyar Network, and Visa – is calling on governments, the development community and private sector to adopt the use of e-payments for programmes that support people living in poverty.

[From Finextra: ‘Better Than Cash Alliance’ to push e-payments in fight against poverty]

Now, this is a matter very close to my heart, so I can hardly be expected to be a dispassionate observer. As I have long maintained, the poor are the chief victims of cash. People trapped in a cash economy pay higher transactions costs, their money is lost and stolen, they lack access to basic financial services such as a savings and insurance and so on. So I am wholly in favour of this initiative. But what should its goal be? Generally speaking, in the US and the UK, insofar as the government has any policy toward financial inclusion it is based on bank accounts and starts with the observation that lots of people don’t have them.

About 8.2% of U.S. households, or nearly 10 million, lack a bank account, according to survey results released Wednesday by the Federal Deposit Insurance Corporation. That’s up from 7.7%, or about 9 million households, in 2009

[From 10 million households don’t have bank accounts – Sep. 12, 2012]

This issue is wider than the unbanked, though. There are other categories of mismatch between the conventional banking products on offer in our economy and the needs of substantial fractions of the population. There are, for example, people who are underbanked, people who have some banking products but they don’t really use them or use the most appropriate ones.

By underbanked, Javelin is referring to those who don’t have a checking account or a primary banking relationship. They may have a prepaid card. (The unbanked have no bank relationship at all.) They tend to be young — 36% are 18 to 24 years old.

[From Who Are the Underbanked? – American Banker Article]

The underbanked that Javelin surveyed (they are around 15% of the adult population of the US) had mobile phones and an average income of more than $50,000 per annum. This is a sizeable target market for “near bank” services that I’ve written about before, but I imagine that there are at least another 15% (and probably more) of the adult population who are overbanked. These are the great many people who have bank accounts but don’t really need them. This group are either paying for banking services that they don’t need or are losing banks’ money on “free” services. Therefore, I feel that the “near bank” market could account for around a third of the population. If we take the unbanked, underbanked and overbanked together, then, I would strongly argue that bank accounts are the problem, not the solution.

Such customers with balances under $100,000 are, in the words of JP Morgan Chase CEO Jamie Dimon, “no longer profitable,” in most cases.

[From 3 Ways Dodd-Frank Made Banking Worse For Consumers – Business Insider]

You can’t really blame the banks for this. They exist inside a regulatory framework, with legacy infrastructure and cost structures that mean they simply cannot provide free or really low-cost services and furthermore can no longer cross-subsidise. Therefore it makes no sense for governments to enforce a ridiculous “lose-lose” settlement on the market, whereby banks are forced to provide an unprofitable “basic bank account” product of some kind to people who don’t want or need them. That is unsustainable.

The five biggest banks – Wells Fargo, Bank of America, JPMorgan Chase, Citibank and US Bank – have raised fees on their checking accounts so that customers who do not hold a combined minimum balance with the banks (sometimes as high as $1,500 a month) or have direct deposit are paying anywhere from $84 to $144 a year for basic services.

[From Big Banks Should Offer Low-Cost Bank Accounts – Bank Think Article – American Banker]

If bank accounts aren’t the solution, then what is? In recent times, the prepaid card has become the main alternative to a bank account and, indeed, for the majority of unbanked and overbanked people, prepaid card products are a decent alternative.

Budget-minded people fare slightly better with checking accounts; the average monthly service fees come to $3.99 for a checking account, versus $4.50 for a prepaid card. For everybody else, though, even people who handle their money responsibly most of the time, prepaid debit is cheaper.

[From Checking Accounts More Costly Than Prepaid Debit Cards | Moneyland | TIME.com]

This has been a recurrent theme on this blog too. Often, when I speak to an audience of “banked” people, they don’t understand why anyone would want to use a prepaid card product instead of just going and getting a basic bank account (which in the UK is still free). But there are lots of reasons why prepaid cards are useful, even to the banked, when conventional bank accounts are not, especially when they are energised by the connection with mobile. Just being able to see the card balance on your mobile is sufficient to transform the usability.

a psychological and experiential disconnect between those who have traditional, full-service bank accounts and those who don’t. Hard-core bank customers may never understand how, to the unbanked and the underbanked, prepaid cards can look great-even honest.

[From Trying to Understand the Unbanked s Acceptance of Prepaid Cards – American Banker Magazine Article]

This is a great point and the article makes it well, but it does miss one aspect of this market. I have a full-service bank account, yet I also have an number of prepaid cards. I have my prepaid US dollar and prepaid Euro cards that I use when travelling, I have a prepaid Visa card (from O2 Money) that is the “house” card that the kids use when they go to the store to get groceries or school supplies or go on a trip and I have a prepaid Mastercard in my Google Wallet, although that’s getting switched off shortly.

So. prepaid looks like it might be a better solution than a basic bank account. Prepaid cards as they stand now, though, don’t fulfil all of the requirements for a near-bank account. Where are the standing orders and direct debits, for example? In the UK, this isn’t an idle speculation but one of great interest to many of our clients who have been looking at this for some time because there’s about to be a big change in the UK and it will stimulate demand for near-bank services. The welfare system in the UK is switching to a new “universal credit” system where all benefits will be unified and paid monthly in arrears.

claimants will receive just one monthly payment, paid into a bank account in the same way as a monthly salary

[From Universal Credit – DWP]

If you’re wondering why our clients care about this, it’s because it represents a money flow of around £2 billion per month that is up for grabs. The government has been sort of hoping that basic bank accounts will be the destination for this money, but for the reasons noted above, this is in question. In my opinion, what is needed is neither a bank account nor a pre-paid card but a payment account: a prepaid transactional account with an associated card, more like my O2 Money account than my Barclays Bank account but with additional functionality to emulate, in essence, instruments such as standing orders and direct debits.  A software wrap around a Payment Institution (PI) with an electronic money licence (ELMI) and a set of rich standard interfaces should do the trick. We can achieve financial inclusion if we employ some clear thinking around this sort of account and stop focusing on bank accounts. I thought Deutsche Bank’s response to the European Commission consultation on bank accounts in May illustrated this point well. They said

We believe that making payment accounts available to every citizen in the EU benefits all market participants. However, reasons for financial exclusion differ in the Member States and therefore might require different measures in order to achieve better financial inclusion. The percentage of people not having a bank account is an indication but not a proof that those people are actually financially excluded.5 Real financial exclusion is often associated with an inability to provide a proof of identity or domicile (e.g. immigrants, homeless people), unemployment or financial distress in general and low educational attainment.

In this one paragraph, they make very sensible points about financial inclusion but they switch between talking about “payment accounts” and “bank accounts” with no differentiation. But there clearly is a difference: a “payment account” to my mind is the type of prepaid account noted above, offered by either a bank or a Payment Institution. There are plenty of viable candidates who could offer such an account and make money from it. Retailers, to my mind, are in pole position but another obvious category is telcos. I know from one of the projects that we are working on in the UK that even among the long-term unemployed smartphone usage is very high indeed, so the mobile operators could be in a good position to offer payment accounts. It is worth highlighting that both Visa (with Vodafone) and MasterCard (with DT) have already begun forming the kind of partnerships that could deliver some new approaches.

MasterCard and Deutsche Telekom have announced that they will work together to roll out services across DT’s footprint in Europe, starting with an NFC wallet solution in Poland in Q3 and Germany following soon after. For now, the U.S. is not being factored in as part of the deal. In all, Deutsche Telekom has 93 million mobile subscribers in Europe, and 129 million world-wide… This service will also be SIM-based, the two companies say. Under the terms of the deal, MasterCard will be working with DT’s payment subsidiary ClickandBuy, which has the e-money license that is necessary to operate mobile payment services.

[From MasterCard Ties Up With T-Mobile For NFC Mobile Payments In Europe | TechCrunch]

I think, given the current state of development, companion open-loop cards make sense and offer an interchange income stream to cross-subsidise other functions. I notice that SFR, for example, announced just a card last week, much like the O2 Money card and similar offerings elsewhere. The transition to Universal Credit in the UK means, oddly, that the public sector may well stimulate creative and inventive players to enter the already crowded wallet marketplace because the carrot of the initial volume of government benefits is so great and if it does, I’m sure the combination of mobile wallets and chip-and-PIN cards will be the combination of choice. I’ve been invited by the Government Banking Service to give a talk about this at a forthcoming event so I will let you know how it all went later in the year.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers


  1. The reason bank accounts cost money is because banking is a cartel providing an essential service. They have a licence to issue money and they use it to enrich themselves in as many ways and to the greatest extent they can get away with.
    The price of credit should be negotiated with the people taking the risk, which, in the era of perpetual bailout, is not banks!
    Payment services should be free like Firefox is free. The unit cost is zero. The way banks help themselves to ‘charges’ from ‘our’ accounts without explicit consent would be illegal in any other field of commerce.
    The banking industry now produces less than zero value for the economy. It is a psychopathic vampire squid with a government mandate which only subsists because through the lie that its collapse would be the end of civilisation.
    I know all those besuited types seem so nice and rational, and some even care about the poor; but the whole is more than the sum of the parts, Dave, the whole is a monster with its heart in London, and it is ravaging societies across the globe.

  2. Viewing the Banking industry as a “psychopathic vampire squid ” is an interesting but rather extreme metaphor. However, it does show the sliding scale of distrust ranging to outright hatred shown by the general public to the entire banking sector and is something they entirely brought on themselves through sheer greed and corporate corruption.

    I feel that a move back to Victorian times is possibly required, where Credit Unions, Co-operatives and building societies etc came about to service the millions of working class people that were not being serviced by banks back then. Perhaps a payment account protected by an eMoney licence run by a trusted non-profit making body is the way forward. Step forward the Post Office…???

  3. The problem is finding a viable business model for the PI. Bank based payment products are free to the purchaser because the banks can make profit via ancillary charges for revolving credit, merchant service charges and interest on deposits. A stand alone PI is disbarred from those (else they’d be a bank).

    This leaves PIs trying to levy a transaction charge, which is difficult to ‘sell’ since the bank based alternatives, and of course cash, are free.

    This is why Dave is looking towards retailers and MNO’s, and Simon to the PO. I like the PO idea a lot as it leverages existing infrastructure and probably shows a net cost saving to HMG. I’m sure Dave is already preparing the consulting proposal to HM Treasury grin

  4. Hi Roy, I think we are moving to a point of disruption where the intrinsic value of the data behind the payments is worth more than the actual transaction revenue itself…

    I fully expect Google to buy a payment processor and offer zero rated transaction fees to major retailers, selling them back the processed data linking the orignal internet search data with the actual in-store card payment transaction – A “Clubcard for the rest of them” as it were….

  5. Hi Simon, whereas I kinda agree about the value of the background data, monetising it is a different bouilloire de poisson. Just look at the trouble Google got into by inadvertently capturing anonymous data for Streetview. To link search data to purchase data requires very un-anonymous data tracking which would have the privacy brigade marching on Mountain View.

    The idea also kinda reaffirms my point that it is difficult to find viable, stand-alone business models for electronic payments via a centralised system. The cost of such a system scales with usage.

    From a technology perspective, I see a couple of ways forward:-
    1. P2P, either NFC or son-of-bitcoin (depending on when 100%-online becomes a reality)
    2. Government backed. For example, I liked your PO idea. Equally HMG could support/encourage an equivalent of BACS for PIs. This would allow PIs to build localised schemes, perhaps based around affinity, but offering equivalent liquidity to cash.

    Perhaps somewhere, someday a state will combine 1 and 2. Given the source code of Bitcoin is in the public domain, why wouldn’t a country implement a national version of it: Bitrupees anybody?

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