Category: Payments

[Stuart Fiske] Fraud bad, reporting fraud good, right? That’s certainly the layperson’s view and while no-one is going to argue that fraud is a good thing, what to do about it is a lot more nuanced than some MPs may realise.

There’s certainly a lot of it about. The National Fraud Authority’s figures for the previous year released in June 2013 estimated that fraud against the individual in the UK equated to a loss of £9.1 billion. Of that £475 million was attributable to retail banking fraud and online banking fraud specifically was up 40% against 2011.

However this isn’t the full picture. Analysis by Action Fraud of cyber-enabled frauds suggests that at least one quarter of them is not reported externally.

Why is that? Given that fraud is both bad and prevalent, shouldn’t banks, for example, or merchants, both report it and stamp it out at any cost when it affects them and their customers?

In the real world it’s not that simple. The “21^st century response” that Keith Vaz calls for has to take into account the business reality of 21^st century shareholder capitalism and that means that money spent on fraud reduction has to viewed in terms of return on investment, just like any other business expenditure.

How much should a bank or merchant spend to stamp out £100 worth of fraud? Perhaps £100? Or maybe £90? But would that £100 or £90 spent elsewhere (on lending to SMEs perhaps) generate a better rate of return? Maybe the bank has a target ROI of 200%. That leaves it with no more than £33.33 to spend on fraud reduction per £100 and if that’s not going to help then again, that sum could, on this view, be better spent elsewhere.

Furthermore, greater investment in more rigorous fraud controls can often lead to a rise in false positives. Different organisations take different views on this. Amazon does not ask for a cvv2 because inconveniencing a customer may lead to losing a customer. Banks can seem less concerned about customer convenience at the lower end of the customer income scale because, after all, switching banks isn’t that easy (although it’s about to get quicker and simpler) but may prefer to make life easier for the higher value customer.

Again though, even this is too simple or one-sided a view. That £100 of fraud that the bank or merchant write off may not just be £100 in a finite sense. Fraudsters may use the proceeds of fraud to fund other criminal activities such as drugs, people trafficking and other types of organised crime. The laundering of the proceeds of fraud can even impact a country’s economy. The cost to society of that £100 of fraud is therefore a lot larger than £100. This is known as the social cost of fraud.

There’s also a recognised multiplier effect that hits merchants too – the LexisNexis True Cost of Fraud study from Javelin calculates that merchants incur $2.70 in costs for every $1 of fraud that occurs through consequences such as customer attrition. But the same study shows that only 39% of merchants think (incorrectly, it is implied) that lower fraud increases customer retention.

So perhaps while banks or retailers may be hesitant about the amount they invest in reducing fraud, either because of ROI concerns or because of fear of losing customers, there arguably is a case for governments forcing them to invest.

After all, that’s what made Chip and PIN happen in the UK and I think it’s safe to say that overall that has been viewed as a net good. Equally, it’s worth noting that there’s no similar intervention threat in the US where government prefers to push measures to enhance market freedom such as Durbin and that may be one reason why EMV has a more uncertain future there than here.

Now that EMV has made the hop across the pond, should retailers skip it? Speaking the CNP Expo in Orlando, Lee Jurgens from Ralph Lauren (who was my favourite panelist at the event) said that the US should have skipped chip & PIN and gone straight to mobile because it is the more secure payment mechanism. He's got a point, and there's no point the industry pretending that he hasn't.

Look. There's no doubt that going to PIN reduces fraud substantially, irrespective of whether there's a chip there or not. So some retailers are clearly wondering whether adding the second authentication factor of a PIN, whether at POS or via an app, is really where they want to go.

For retailers such as hamburger chain Wendy's – which already accepts PIN debit at the checkout – the fraud rate is so small "it's hardly worth mentioning," said Gavin Waugh, Wendy's vice president and assistant treasurer. "Even if we pay the fraud liability, it's a whole lot cheaper than putting in (new EMV) terminals."

[From Finextra: US chip card debate heats up]

Years ago, when I interviewed Jamie Henry of Walmart for a podcast, he told me that the fraud rate on PIN debit was 250 times less than the fraud rate for signature cards. It doesn't make any difference whether it's online PIN or offline PIN: switching from signature to PIN seems to be the key. Maybe online PIN or mobile PIN (the "something present" transaction) would be better solutions in the US? After all, there's hardly a deluge of chip cards on the way. I remember going along to Dinah Tobias' excellent Payments Forward breakfast briefing on the US payments market a few months ago. The briefing, from First Anapolis, was quite interesting. Unfortunately, the slides presented were marked "confidential", so I can't tell you about them. I will, however, comment on what was said in the discussion afterwards. Part of the presentation was about the EMV migration timeline (which, as far as I know, isn't in the least confidential) and over coffee afterwards several of the attendees agreed that many US institutions would miss the impending liability switches.

In fact, 71 percent of the financial institutions have no immediate plans to issue EMV cards

[From Portals and Rails]

In essence, some people were assuming that US financial institutions have decided to eat some fraud losses while they decide what to do. These losses could be in the millions of dollars, by the way.

In a study based on a fictitious bank with 5 million cardholders and average market characteristics, MasterCard Advisors estimated losses could be as high as $25 million if EMV migration is delayed until 2015, rather than starting in 2013.

[From Delaying EMV Migration Risks Significant Losses for U.S. Issuers – Bank Systems & Technology]

So what should they do? Well, perhaps, when a retailer of the order of Ralph Lauren poses the question about going straight to mobile then we should at least evaluate the proposition. You could argue that the "mainstream" payments industry (ie, my customers) already have a strategy to use POS estate renewal as a stepping stone on the way to mobile. This is the idea that contactless is just a step on the road to NFC.

On the other hand, since most EMV POS devices are already NFC-enabled, many deployers, especially banks and independents are already seeing the writing on the wall in giant letters: N-F-C.

[From New EMV dates from Visa could have broader implications for NFC | MobilePaymentsToday.com]

If the mainstream doesn't do this (ie, decides to use mobile to go past EMV) then what might the options be? There are thousands of different mobile payment propositions out there right now, and a good many of them have the sole intention of cutting my customers out of the payments loop completely! So what about tackling them head on with son-of-EMV? I'm hardly the first person to have floated this idea and I'm hardly the first person to suggest that son-of-EMV be identity-centric and based on open standards rather than any financial sector standards or new yet-to-be-invented-by-the-payments-industry-standards.

Could there be an open, industry-based alternative to EMV? The Accredited Standards Committee X9 Inc. seems to think so.

[From ASC X9 proposes exploring alternatives to EMV | ATM Marketplace]

So, yes, there could be a son-of-EMV. It's not a crazy idea. And if it is to be based on industry-standard open identification and authentication technologies, not finance industry standards or even payments industry standards, then it will be moving us toward the "something present" transaction as the norm. The industry could bite the bullet and the scrap the 1971-style messaging protocols in use in favour of ISO 20022 XML-based messaging that can carry the remittance and receipt information as well as the payment details, not as an admission of "defeat" (EMV made perfect sense when it was developed) but as recognition that things have changed.

[Jane Adams] Partly because I want to be down with the kids and partly because of my job, I recently took delivery of a lovely new Barclaycard PayTag. This I duly stuck to my phone, as suggested, and prepared to be part of the new wave of consumers who can leave their wallets at home (personally, I’d rather leave my phone at home but don’t tell anyone).

Not long afterwards I noticed that my phone was behaving very strangely. Every time I unlocked it, it generated an ‘empty tag’ screen that I had to delete. Using the keypad during calls (for example to call centres) became nightmarish as every time I moved the phone, I generated another tag, which switched the keypad off. As I’d recently downloaded an Android update, I assumed that this was to blame and hoped there’d be another release soon to get rid of the problem.

It wasn’t till I was fiddling around with my Wi-fi settings that I noticed that NFC on the phone was switched on. The phone (a Samsung S3) and the tag were fighting with each other. I switched it off, removed the tag just in case and the problem stopped.

I’d actually quite like to keep NFC enabled on my phone (it goes with the job) so where do I stick the tag? Not to my beautiful, expensive, new leather purse, for a start. Nor is there any point in putting it in the purse where it would nestle next to my Barclaycard and cause no end of collisions. I’m not sure I want to attach it to my keyring (more expensive leather) or to the Cryptocard that hangs from it. Nor to my passport either or to my driving licence, which lives in my purse. It’s a bit too big to stick to a lipstick or a pen. I don’t remember anything about this befuddling issue in the otherwise exhaustive pack of paperwork from Barclaycard that came with the tag.

So what’s the point of this? After all, I’m not writing an accessories column for a style blog (it’s a red, faux-snake Longchamp purse by the way – to die for, darling). The point, it seems, is that I know what NFC is because I work for a company that is expert in NFC and so I didn’t take too long to figure out what the problem was. For the regular punter, that is unlikely to be the case and as a result, I predict that there will be an uplift of people taking their tag-encrusted,NFC- enabled phones into their local MNO shop, complaining that it’s broken. This is actually a great opportunity for Barclaycard and network operators to do some positive education around NFC – not just about tags but about contactless in general. As the reader comments resulting from the recent M&S contactless press scare showed, there’s certainly a need for that.

Where would you stick your PayTag if not to your phone?

[Dave Birch] We thought it would be fun to loot the archives of our blogs to see how the world of transactions has developed. So here is the first in our new “Monday Museum” series, from 2nd July 2006.

The BBC’s Money Box programme had a report about the RBS/MasterCard pilot of PayPass contactless debit cards in Edinburgh. I heard it on the radio on Sunday evening. The report was, I have to say, very positive. It definitely reinforced my feeling that something different is happening in retail electronic payments.

The one concern that was expressed by an interviewee was security, but the use of the extended EMV risk management parameters (eg, the offline “noCVM” counter) appeared sufficient to overcome the fears. Yes, I know the general public aren’t especially familiar with EMV risk management parameters, but they were interviewing bank staff who had been using the contactless debit cards.

One of the people they interviewed, who was very positive about the trial, was the manager of Starbucks and another catering operation involved in the pilot. He was very enthusiastic about the pilot and the results so far. One of his points is worth repeating here: one of the reasons he was so keen on the use of contactless to replace cash was that it tackles some of the evaporation of cash that’s a problem in his kind of operation. So his business case wasn’t just about speeding people through a checkout line when they are buying sandwiches, but about cutting into (is this the correct, quaint retailing term?) “shrinkage”.

He also said that the average transaction time for customers using the contactless cards was half that of cash, which is consistent with the results coming back from US markets where customers have been using the technology.

You can listen to the report here on the BBC web site. Other interviewees include the Forum’s good friends Tim Jones of CapitalOne and Roy Vella of Paypal.

Blog readers will be aware that Starbucks finally introduced contactless payments a few weeks ago, making it a reasonable seven years from this pilot to deployment!

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

[Dave Birch] I’ve just been preparing some slides about the drivers in the European retail payments sector for one of our Asian customers and I wanted to cross-check the detailed Consult Hyperion roadmap with a couple of other higher-level narratives. It happens that I saw a very useful description of the European situation recently. In the day two keynote for Sylvia Lukas’ excellent PayComm event near Frankfurt, Christian Bucheli from SIX Payment Services made an interesting presentation about the pressures for disruptive innovation in the European payment sector. Christian used the Christensen framing of disruptive innovation, as we all do, and used it to run through a PEST analysis with the audience. I won’t transcribe everything that was said, but I will pick out the line items that Christian said were the most important because I thought it might be interesting for readers to compare and contrast the European perspective with (for example) the US perspective.

Political.

• The Payment Services Directive (PSD) and the Electronic Money Directive (EMD) and their impending merger in “PSD2”. Like many other people at the event, I feel that the emerging regulatory framework in Europe is, in the long run, the most important factor in shaping the next generation payment industry here.
• Commission “account holder” laws and the proposed account switching directives.
• Data Protection. I mentioned this in my presentation to the conference when I was discussing what new services might be provided by banks using new payment technologies, because I think that privacy as a customer proposition remains untested (except at the margins, by Bitcoin). We tend to treat data protection and privacy as back office “hygiene” factors, but perhaps it is time to work with the marketing and customer experience folk to see how they might work as customer-facing elements.

Economic.

• The euro crisis and the war on cash. I won’t bore you by summarising any of my last 1,000 posts on this topic, but the point holds. The economic crisis means that the war on cash might become serious and in my opinion it is an opportunity for the payment industry to align with the legislators and regulators to do something very positive for society as a whole.
• Bank intermediation. This applies to savings and loans and small business finance as much as it does to payments. Bank intermediation is threatened, as it has been for years, but the technology-driven unbundling of banking functions is becoming easier.
• New business models. I think that Christian meant models based on data rather than on fee income or interest income but we didn’t explore this any further.

Social.

• There was quite a bit of talk of the “digital natives” and how they might use financial services in the future.
• Mobility was, naturally, the dominant meme and not only in the sense of mobile banking and payments. The assumption seemed to be mobility would create the demand for entirely new kinds of mobile services, and I think this is probably true.
• On reflection, I might have put more focus on Europe’s ageing population and the redesign of financial services that this entails (partly because of the work that we have been doing on the relationship between financial and social inclusion) and this might be a good topic to explore at a future event.

Christian then moved on to talk about the Technological. factors in more detail.

• The internet of things. This is inescapable. I remember making a presentation about this to a client a couple of years ago and talking about the problems of moving payments into this environment, which are essentially identity problems.
• The open API. This is the crucial technology for making payments a seamless component of business processes.
• The mobile wallet.
• The rise of big data, although the more I think about it, the more I think it is the relationship between big data and small data that creates the space for disruption because “simple” Big Brother plays aren’t going with the flow of decentralisation and distribution.

He shared some survey results with us. These indicated that industry players think that the card schemes will be the big losers through the disruption and the new “OTT” players will be the big winners. How will they be winners? Because they will ally with the retailers. The retailers are frustrated, they have high and unpredictable costs, they have the relationship with the customers (which they want to deepen) and they want to develop value-added services.

In summary, then, the high-level European narrative? It is that disruption is coming, it is coming from the new players, enabled by a friendly regulatory environment, and the vector into the mass market will be retailers.

This was a sound analysis, serious food for thought, well presented. Thanks Christian, and thanks Syliva for putting together an enjoyable event (in a lovely spot!).

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

[Dave Birch] I’m taking part in the PayExpo “Pre-Paid Dragon’s Den” tomorrow so I’m thinking about prepaid today. I’ve written more than once about the use of prepaid alternatives to bank accounts, so I was very interested to read about a women taking legal action against her employer for forcing her to accept a prepaid card to receive her wages in (where else?) the US. Her complaint is that she gets ripped off because of the fees that are associated with card use.

The J.P. Morgan Chase payroll card carries fees for nearly every type of transaction, according to the lawsuit, including a $1.50 charge for ATM withdrawals, $5 for over-the-counter cash withdrawals, $1 to check the balance, 75 cents per online bill payment and $10 per month if the card is left inactive for more than three months.

[From Woman sues McDonald’s franchisee for payroll debit – News – The Times-Tribune]

Now, I remember working on a project for a client in the financial services sector on a payroll scheme for casual workers. This was some years ago and I don’t want to mention the company as it is not relevant to the issue (it wasn’t in QSR). They worked out that it cost several dollars per worker to mess about with cash or cheques so they went with a scheme that cost $X for an ATM withdrawal (I genuinely can’t remember how much it was, but it was in the region of $1) and gave everyone a pay rise that equated to two ATM withdrawals per week. The overall idea, remember, is that you don’t want people withdrawing cash at all, which is why they are charged for it, you want them to use the card at POS. I thought this was a good solution, an actual win-win. The employer saved money and the employee got a convenient way to access cash if they needed it. Since that time, I think the potential market for this kind of product has expanded beyond the unbanked (and the underbanked).

Prepaid cards have also become attractive alternatives, said John Ulzheimer, president of consumer education at SmartCredit.com… “[T]here has been very aggressive marketing of prepaid debit cards over the past few years targeting young people and minorities,” he said. “So it’s not a surprise that more young people are using prepaid debit cards over credit cards.”

[From Young Americans are ditching credit cards – Jun. 14, 2013]

Some of those fees (e.g., $1 to check the balance) do seem a little high in an age of laser beams and interwebs. In a modern pre-paid debit scheme — what you might call a “near bank” scheme — those other fees for balance checking etc should vanish. It seems to me that there are plenty of suitable products out there already. We happen to use O2 Money in our house and it’s a terrific product (*). The product comprises a smartphone app and a companion Visa prepaid card. I can top the card up from my phone and when the kids use the card to buy something the confirmation pops up on my phone instantly. I can see the balance and the transaction history.

I was surprised by how much of the comment around the O2 wallet launch was of the form of “O2 becoming a bank”, which it clearly isn’t… Perhaps a “near bank”, but not a bank.

[From Why O2 Money is interesting]

As it happens, Consult Hyperion is providing consultancy support to a Cabinet Office “Alpha Project” looking at the use of a prepaid product — coincidentally the O2 Mobile Money product — in connection with unbanked groups. I’ll write about this more when the results start to come in, but it reinforces my point: for a great many people a prepaid “near-bank” mobile-centric transaction account is the correct choice for both those consumers and the banks that would otherwise have had to provide a money-losing bank accounts to them. And I don’t think it controversial to say that as far as I can see, a great many low-income consumers would be better off being paid wages and benefits through something like an O2 Money account rather than a current account, which is why it makes both the British government and the European Commission’s odd focus on the bank account as the centre of their financial inclusion narrative is misplaced.

This is not an anti-bank point. Far from it. What is the point of a service that loses money for the providers and that the customers forced to use it don’t want anyway? Far better to shift the customer to a more appropriate kind of account and then focus on selling more appropriate value-added financial services (with the added benefit of a transactional history that can substitute for a more conventional credit history when it is not available, or prejudicial). This is a win-win-win. It’s a win for employers and governments who are making the payments, it’s a win for the banks and the “near banks” and, most importantly, it’s win for people who would otherwise be trapped in the cash economy.

(* Before the e-mails start arriving, here is the full disclosure: “Consult Hyperion has provided paid professional services to Telefonica O2 UK in connection with mobile payment services”.)

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

[Dave Birch] As I’m chairing at the Mobile Wallet and Retail Innovation conference tomorrow, I’m once again thinking about nothing except mobile wallets. A bit like last week in Barcelona, then.

Dave Birch gave an opening keynote presentation and talked about what the mobile wallets will “really” look like. He argued that for digital and mobile wallets to succeed they will have to deliver something that a physical wallet can’t do, and that the “triple A play” – authentication, apps and APIs – will drive the next phase of the technology evolution.

[From Celent Banking Blog » MobeyDay Shines Again]

In case you think the “triple A play” is a little futuristic, I should point out that (with the inevitable passing hat tip to William Gibson), it is already here. On the way to a train station a couple of days ago, I noticed a PayPal logo in the window of The Farmery frozen yoghurt shop. There was nothing I could do to stop myself from going in to try it out. The very friendly and helpful assistant (she probably appreciated a well-deserved break from serving paying customers to help me with my payment experiments) told me that if I paid with a card using their “conventional” POS terminal then there would be a 20p surcharge but that if I paid with a card using their PayPal reader then there wouldn’t be. (This surcharge apparently didn’t distinguish between credit and debit, which I wanted to talk to her about but I thought I’d leave that for another day.)

She broke out her iPhone and I broke out my splendid Barcalycard OnePulse Visa credit card and away we went.

She ran the “PayPal Here” POS application on her iPhone, at which point I decided to try a different experiment. I expect the customers in the queue behind me were really pleased to see the British spirit of discovery alive and well in West London. I ran PayPal on my iPhone and clicked on “local”. Hhhmm. Nothing. Probably due to the imprecision of GPS around the West London anomaly and the general uselessness of 3G in most of the country, I couldn’t see the shop. So I searched instead. I quickly found The Farmery but then I couldn’t “check in”. At first I couldn’t figure out why, but then @jollytall suggested that it was because I hadn’t loaded a photo. That made sense – without a photo, how would the assistant know that it was me standing in front of her? So I quickly loaded a photo and tried again. Remember, I do this so you don’t have to.

This time it worked perfectly and I made my first UK in-store retail payment using my PayPal account (I’d made in-store payments using PayPal before, but not here).

It worked rather well. Obviously, I was the only person in the shop using it, so only one picture came up on her phone and it was me, but I was able to grab my coffee and go. The receipt was e-mailed. I asked the shop assistant whether she preferred using cards or PayPay Here and said (I’m paraphrasing slightly) that when it worked, PayPal Here was better.

I thought so too. It worked so well that it made me wonder – as was the case using Square in the US – what the point of having the physical card and the card reader was. PayPal have made a real effort to produce a slick customer experience, and it makes you wish that other more conventional players in the retail payment world would do the same. There seems to be an attention to detail in what guys like this do, to be honest. And the race continues. While PayPal is adding Square-like features, Square is adding PayPal-like features.

The page adds that users can send cash by sending an e-mail with the recipient’s name in the “To” field, and by CC’ing pay@square.com. The dollar amount goes in the subject line. It costs 50 cents a transaction to send money, but nothing to receive money

[From Square adds PayPal-like cash by e-mail feature | Internet & Media – CNET News]

So on to the $64,000 question. Is it better than NFC?

Well, yes and no. Yes it is better than NFC is, but it’s not better than NFC could be.

I’ll explain what I mean. Contrast my Farmery experience with my experience in MacDonalds: it’s hot, I want a McFlurry, so I nip in and order one. The chap rings up a quid or whatever on the terminal and wanders off to mix up a delicious ice cream and Smarties(™) confection for me. While this is going on, I’m staring at a not-yet-activated card reader. When the chap comes back, I ask to pay by contactless and he presses a button to light up the reader. I tap my splendid Orange QuickTap phone with Barclaycard on board, wait for the receipt to print and then go. But why didn’t the terminal light up automatically when he rang up the quid? Why didn’t the receipt get sent to phone electronically instead of being printed? This kind of thing drives me mad. A couple of lines of software somewhere and the whole payment experience would have been different.

Imagine how it could have been! If the terminal had lit up automatically, then I could have paid by tapping my phone and got the receipt back automatically before the guy got back with my frozen treat and this would have been even easier than him looking down a list of faces to try and find mine. A bit of parallel processing. Even the PayPal Here experience at the Farmery would have been easier with NFC. Instead of opening my PayPal application, finding the shop and checking in, I could have just tapped the phone on the PayPal Here logo and had all three steps done for me. I’m sure that despite PayPal’s public pronouncements on the general uselessness of the NFC industry to date, somewhere in the bowels of their development team someone is adding the NFC “tap in” to the PayPal Here code even as we speak.

My state of the mobile wallet address for tomorrow’s conference then? Well, we all understand why NFC is where it is. Some decisions have been made that with hindsight were not optimal. I am not criticising anyone. I was in some of those meetings and I understand why those decisions were made. But we ended up with a strategy to minimise the impact on POS (by making the contactless payments in phones the same as contactless payments with cards) at a time when the POS is undergoing a revolution and as a consequence we may end up with NFC implementations of “conventional” payment cards that lag the convenience, ease of use and functionality of PayPal, Square, LevelUp and goodness knows what else to come.

Given that on the day of this conference you cannot walk into a phone shop in London and buy a single handset that will allow you to pay for your bus fare contactlessly — after years of work and hundreds of millions in investment — I’d say we need a bit of a rethink. Hence, I say again, the “triple A play” is closer than you think. Right now I’m going in to the Farmery and manually running the PayPal application, entering a PIN, checking in and all that jazz. Maybe only a year from now I will go into the Farmery and the Farmery’s own app (using the PayPal API) will open in Passbook, check me in automatically and authenticate me using the iPhone’s built-in fingerprint sensor. Or maybe it will use the API to my Barclays mobile banking application (which is what the retailers want) or maybe it will use the API to my V.Me wallet. But it will be an app, with authentication, using a payment API. It’s not that far away.

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

[Dave Birch] I was flattered to be asked to give the keynote address at MobeyDay 2013 in Barcelona. The theme of the day was “Monetising the mobile” and I spoke about mobile wallet infrastructure, making the point that banks could adopt strategies to provide that infrastructure but it means changing the nature of their service provision. I think I made some good points and got some of the banks present thinking differently about their strategic options (without giving away any of the fun stuff that our clients are working on!), and I then got to sit back and enjoy some very interesting discussions for the rest of the day. Including, I might add, the one on “big data” that I chaired, but that’s a topic for another day. This day took, I thought, rather an unexpected turn mid-morning.

What was unexpected, at least to me, was the extent to which the idea of the mobile phone as a catalyst for a growing number of three-party payment schemes as a opposed to a carrier for the existing four-party payments schemes permeated the discussions. This was most definitely a change from the last Mobey Forum session that I attended a couple of years ago. When I sat down at the start of the day, I wasn’t really thinking about this aspect at all, expecting more of the discussions to be around mobile wallet architectures and the usual banks vs. telco arguments. Hence I was unprepared for the fascinating case study of the IKO scheme that has been launched by PKO Bank, Poland’s largest.

Poland’s top bank PKO BP wants to have some 900,000 clients of its newly introduced mobile payments system IKO by the end of 2015, PKO BP official Wojciech Bolanowski told a news conference. The bank would like IKO “to become a local standard of mobile payments,” Bolanowski added.

[From The Warsaw Voice]

This struck me as rather interesting. So interesting, in fact, that I grabbed Wojciech and dragooned him into recording a podcast for our Tomorrow’s Transactions series. Apart from being the leading Polish retail bank by market share, PKO is also Poland’s biggest Visa issuer. I can’t help but wonder, therefore, what Visa and MasterCard think about the Poland’s leading retail bank launching a new national, non-card, direct-to-account retail payment scheme. And they will not be the last, since I am reliably assured than another of Poland’s leading retail banks is contemplating the launch of a similar scheme.

This is big.

If the mobile phone means that people begin to carry around some three-party payment schemes to support the majority of their spending (which is one the one hand domestic and on the other hand in a very limited number of retail outlets) it could lead to some rather interesting knock-on consequences, which may not be limited to the distribution of transaction fees. Let me give you an example. Suppose that the top 100 UK retailers agree to accept the payment schemes of the top five UK banks, provided that the banks deliver a common API to the retailer applications. This could eat into international scheme volumes in a big way. Add to this the BRIC-thing, with Brazil, Russia, India and China all developing their own domestic schemes, and you could see a major shift in the balance of power over the next five years or so.

The dominant payment brands, such as MasterCard and Visa are facing increasing competition from both newly established domestic networks (most notably RuPay in India and PBOC 3.0 in China) and alternative mobile payment developments including digital wallets and m-POS solutions. ABI Research has forecast that RuPay and PBOC 2.0/3.0 cards will have the largest market impact, accounting for 2% of all cards in circulation in 2013, increasing to 21% in 2018.

[From ABI Research]

Now, the international schemes are not stupid and they can read the newspapers better than I can, so they will have to develop new strategies to stay in business. The old strategy, which was to deliver higher interchange to issuing banks, only made sense when the retailers’ choices were constrained. The new strategy must be to use technology to add value to the retailer proposition. Mobile, two-factor authentication, big and small data, But there’s another change in the atmosphere here, I think, because the nature of the POS is changing so the old approaches don’t fit any more. These new strategies to add to value have to be executed much more quickly than might have been acceptable in the past and more flexibly.

One fifth (21.4%) of retailers plan to remove five or more traditional, fixed-station POS units per store and replace them with mobile POS. Does this indicate retail is on the verge of a dramatic shift in POS as we know it? This study says it is.

[From It’s the End of POS as We Know It | Retail Insight Blog | RIS News: Business/Technology Insights for Retail, Supermarket Executives]

These mobile POS devices are (remember Tomi Ahonen’s formula “mobile + anything = mobile”) not conventional POS devices that have been untethered but mobile phones and tablets with added card interfaces. They run apps. National 3-party schemes based on mobile apps communicating with other mobile apps that are now POS terminals? This is a whacky world if you grew up (as I did) in an era of consolidation around 4-party schemes with a single international standard (EMV) and it’s one of the reasons why retail payments are so much fun.

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

[Dave Birch] Well, that was a little bit different. I went off to the British Embassy in Warsaw to take part in Chris Skinner’s Financial Services Club Poland evening. Chris had put together a terrific programme and was rewarded by an equally terrific turnout for the event. An audience including senior bankers and a member of Parliament were met by our woman in Warsaw, the Deputy Head of Mission Gill Atkinson. Gill was an excellent host, and got the proceedings off on exactly the right note, talking about the economic relationship between the UK and Poland and suggesting that British companies spend a little more time and effort in Poland to explore the opportunities there.

Before it got started, Michal Panowicz, the Director of the “mBank” initiative at Bre Bank, gave us a demo of their just-launched online banking portal, which was very impressive. Unfortunately, in order to get it to work, he need web access and there was no wifi inside the Embassy. We couldn’t get a mobile signal either because the Embassy windows are coated in some kind of anti-spy material, so we opened up the emergency exit and had Chris hold his phone outside and used it to create a hot spot. I expect this is, strictly speaking, treason, so mum’s the word.

I spoke about the outlook for mobile wallets in the short- to medium-term and I said, essentially, that retailers were in the driving seat and that banks should build strategies around the “triple-A play” of authentication, apps and APIs. I was exploring the idea of the wallet as an infrastructure rather than the wallet as an application. I got some great questions in the Q&A and very much enjoyed learning about the Polish experiences with mobile, contactless, NFC and online financial services.

57m spend on contactless cards and phones per month
10 million contactless transactions every month
8.6 million contactless cards now in circulation and 116,000 terminals

[From Visa Europe claims growth of 46% in contactless payments in last three months alone! | Contactless Intelligence]

There are something like 5,000 users of T-Mobile’s “MyWallet” NFC service which earlier this year was extended to include Getin Bank and Nobile Bank as well as Polbank and mBank but I didn’t get a sense of how much they are used. There’s an Orange and mBank solution as well but I don’t know how many users it has. I used contactless to pay in my taxi (hurrah!) and at the coffee shop I went to so I can say that in Warsaw at least the acquiring infrastructure is visible.

I was followed by Jakub Gorka, from the University of Warsaw, who gave a much better and much more interesting talk about the differences between the UK and Poland when it comes to cash in circulation, POS density and other such numbers of great interest to obsessives such as me. One of the key figures that he showed was the amount of cash in circulation per head of population, which in the UK is double what it is in Poland. The audience were puzzled as to why the average Brit would have a thousand quid under the bed when they have a much greater POS density to hand. I reassured them that the average Brit actually had very few quid under the bed and that the figure was greatly distorted by the extensive use of cash by criminals, tax evaders, corrupt lobbyists and drug dealers. We then moved on to a fascinating and detailed discussion about the level of interchange rates in Poland and their impact on the industry structure. I didn’t get a chance to ask Jakub about the future of the the Polish one zloty coin though. It is currently worth three times its face value as scrap.

Yet most of the coins end up in cookie jars and piggy banks. The central bank estimates it could save about 40 million zlotys ($12.9 million) a year on producing and servicing about 7 billion of the coins, which make up for over a half of the 13 billion coins in circulation in Poland.

[From Poland Prepares to Ditch Pennies – Emerging Europe Real Time – WSJ]

I got a couple of these in my change so I’ve put them to one side and when I’ve got a few thousand more I’ll pop round to the scrapyard and cash in.

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

[Dave Birch] As the Bitcoin mania continues to evolve and the price of gold continues to fall, I am surely not the only person to have noticed an overlap between the people who want to use both of them to replace the, as they see it, broken system of fiat currencies. Given that almost the entire population of the world have never heard of Bitcoin, and wouldn’t understand it even if they had, it is I suppose unsurprising that in these difficult economic times, finding new ways to use gold has become the more widespread focus for innovation. For example, starting a couple of years ago, there were a flurry of stories about gold-dispensing ATMs. Here is an example from Turkey.

Thus far, all 64 Kuveyt Turk ATMs installed in Istanbul have been upgraded to offer 1 and 1.5 gram ingots of gold bullion as well as banknotes. The bank has contracted with Wincor Nixdorf to retrofit the facility to its national network of 180 machines by year end… The mini gold bars are not dispensed through the banknote output chute, but via a special coin output module that is retrofitted to the ATM. The gold bullion is packed inside a transparent plastic coin roughly the same size as a two-euro coin.

[From Finextra: Turkish bank retrofits ATMs to dispense gold ingots]

While I can’t imagine any reason to use one of these, the fact is that there’s quite a few of them around. I understand there are some specific cultural reasons for people wanting to stick gold under the bed instead of euros, but I’m unconvinced it is good economics. I guess also that I just don’t move in the right circles.

Germany’s TG-Gold-Super-Markt installed a gold bar dispensing ATM in the lobby of Abu Dhabi’s five star Deluxe Emirates Palace hotel last year, and outlined plans to roll out 500 of the machines in Germany, Switzerland and Austria.

[From Finextra: Turkish bank retrofits ATMs to dispense gold ingots]

In the US, too, a similar inexplicable development.

In the US, PMX Gold has set up a banking division with the aim of introducing gold dispensing ATMs nationide follow a pilot run at a shopping mall in Boca Raton, Florida, that saw $270,000.00 in gold sales dispensed through one machine in roughly two and one half months

[From Finextra: Turkish bank retrofits ATMs to dispense gold ingots]

I really don’t get it. Why would anyone mess about with physical gold that you can drop, lose, have stolen etc. And I bet it’s hard to buy anything from Amazon with it. I’m more than happy for people to send me gold (you’re welcome to try the experiment) but generally speaking I’d prefer the dematerialised version sent to my Goldmoney account. As an aside, Forum friend James Turk from Goldmoney will be at the PaymentsForward breakfast briefing on alternative currencies in the City (of London) on July 1st. As will I. Meanwhile, as noted, the Turkish case isn’t all about transactions costs and economic efficiency.

The bank says it wants to become Turkey’s leading retailer of gold to consumers, where demand is driven by the local tradition of investing savings in gold and making gifts of gold on the birth of children and at weddings.

[From Finextra: Turkish bank retrofits ATMs to dispense gold ingots]

Aha. It isn’t really about payments at all. People carrying gold bars are not carrying them as an alternative to a debit card.

The suspect was arrested shortly before boarding a Lufthansa flight for Germany, according to authorities. An inspection by customs officials reportedly revealed that his luggage contained 7,185 kilograms of gold and 293,435 euros in cash. The same suspect is believed to have attempted to smuggle out another bag containing 425 kilograms of silver.

[From ekathimerini.com | German held for trying to smuggle ton of gold, silver out of Greece]

If you travel first class and are a premium member of the frequent flyer club, you still only get 128Kg.

4 bags up to 32 kg each

[From Lufthansa ® – Free baggage allowance for tickets issued with effect from 1 June 2012]

Not very forward thinking of our German friend. Maybe his scales weren’t working properly. I’m sure he was moving his bullion out of Greece for entirely legitimate reasons and I don’t doubt for a moment that it had been earned through entirely legal means and that all appropriate taxes had been paid. But in case you are interested in using gold for criminal purposes, I’d advise you to stick to the virtual stuff. Much safer.

No way to determine if gold you buy is from “legitimate” sources, not “account cleaning”… After cleaned, account is sold to gold spammers used for spam until banned

[From Annotated Chinese Gold Farmer Interview via Markee Dragon – PlayNoEvil – Game Security, IT Security, and Secure Game Design Services – Contact Us at ceo@secureplay.com]

Mining virtual gold and using it smuggle value across borders seems to me to be far simpler, and far less likely to result in arrest, than using the real thing.

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