Payments and passports

The new administrations in the UK and USA are apparently planning to work together to create a new transatlantic America First / Buy British trade alliance. This will, it seems, include financial services. 

A deal to reduce barriers between American and British banks through a new “passporting” system was being considered by Mr Trump’s team

From Donald Trump plans new deal for Britain as Theresa May becomes first foreign leader to meet new president since inauguration

Now what this passporting might mean is anyone’s guess, since this is just a newspaper story based on gossip, but I think it might be a little more complex to arrange than it seems at first because of the nature of banking regulation in the United States. If a British bank were to get a US banking passport this would presumably be equivalent to the implicit granting of a national bank charter and state regulators do not seem enthusiastic about the granting of more national bank charters. We know this, because at the end of 2016 the US Office of the Comptroller of the Currency (OCC) said that it was going provide a new national bank charter for fintech companies.

“The OCC will move forward with chartering financial technology companies that offer bank products and services and meet our high standards and chartering requirements,” said Comptroller of the Currency Thomas Curry

From OCC Grants New Charter to Fintech Firms — with Strings Attached | American Banker

The reason for wanting to do this is obvious: right now, if I want to create a competitor to Venmo or Zelle, I have to either have to be regulated as a payment processor and have regulated banks involved or go and get regulated by 50 different state regulators under 50 different regulatory regimes, most of which remain rooted in a previous, pre-internet age. This seems anachronistic. Surely an American company should be able to a get a licence and get going. Well, the OCC’s proposal is attracting a lot of negative comment.

A turf war is brewing between US state and federal regulators over oversight of the financial technology sector after New York’s top watchdog sent a stinging letter to the Office of the Comptroller of the Currency (OCC), telling it to back off plans for a national bank charter for fintech firms.

From New York regulator blasts OCC over bank charter plan for fintech fi…

Now I saw a few comments about this and other responses from state regulators that cast them in the role of Luddites standing in the way of progress but I have to say I agree with them. I mean, I am not a lawyer or anything, I don’t really understand US banking regulation and I couldn’t make any sensible comments on the proposals myself, but I think that the US regulatory environment is broadly speaking unfit for purpose and might benefit from at least a cursory examination of the direction of regulation in one or two other jurisdictions including Europe, for example and India.

Saycanyousee

The fundamental problem with the OCC proposals to my mind is that they are about a national charter for banking as a whole. They do not distinguish between the payments business and other parts of the banking business. Hence the charter means extending systemically risky credit creation activities in new directions. I don’t see any immediate problem that this solves. And the state regulators may well be right that it potentially makes the problems associated with banking regulation much worse.

Connected to this is the worry that a national charter would encourage large ‘too big to fail’ institutions – a small number of tech-savvy firms that dominate different types of financial services simply because they are able to get a national charter.

From New York regulator blasts OCC over bank charter plan for fintech fi…

Whatever you think about Facebook they are not too big to fail. If Facebook screw up and lose a ton of money and go out of business then that is tough luck on their employees and their shareholders but it’s nobody else’s problem. That’s how capitalism is supposed to work. But if Facebook obtained a national banking charter they would immediately become too big to fail and no matter the greed or incompetence of their management, the government will be on the hook to bail them out just as the Roman senate was forced to bail out the banks there two millennia hence.

Romani

(In case you are curious, in 33BCE the emperor had to create 100 million sesterces of credit (a trifling couple of billion dollars in today’s money) through the banks to save them from collapse. Plus ca change, as they didn’t say in Ancient Rome).

If you look at what is happening in other jurisdictions, what you see is a separation of payments and banking so that the systemically less risky payment activities, which many people see as somewhat less than optimal in the world’s largest economy, can be reinvigorated while the systemically more risky credit business and investment banking business are left alone. In the European Union there is the regulatory category of the payment institution (PI). In Europe, Facebook is therefore a payment institution and not a bank.  They don’t want to lend people money, they want to facilitate buying and selling and for that they need access to core payment systems and that’s all to the well and good. Similarly, in India, the regulator created the new category of payment bank (PB) so that mobile operators and others could start providing electronic payment services to what will soon be the world’s most populous nation.

The reasons for going down this path are entirely logical. If you leave innovation to the banking system then you end up in the situation of India as was or Nigeria as it is. A huge population, phones everywhere, talented and entrepreneurial people, huge and unfulfilled demand and… Nothing happening. I’m sure you’re all utterly bored with me reminding you, but the key innovations in technology in banking do not originate in banks. That’s the nature of the beast. The four digit PIN code was invented by a Scottish engineer. The payment card was invented by New York lawyer. M-PESA was invented by a telco. Bitcoin was invented by… Well, for all I know, it may well have been the head of Citibank or programmer number 2216 in the North Korean army, but you get my point.

This is why I think that the OCC should leave the regulation of credit institutions where it is now and propose instead a new national charter for payment institutions amalgamating the European PI and Electronic Money Institution (ELMI). Allow these American Payment Institutions (let’s shorten this to APIs to avoid confusion) to issue electronic money but not to provide credit, allow membership of payment schemes (e.g., the UK’s Faster Payment Service, Visa and so on), ensure customer balances are held in Tier 1 capital and so on.  This way, Apple and Verizon can apply for a national charter and start providing competitive payment services that will benefit businesses and consumers and the existing banks will just have to suck up the loss of payment revenues for the greater good.

The passporting of such institutions should be much less controversial than the passporting of credit institutions. Surely it will be to everyone’s benefit if the “fintech” passporting agreements give UK and EU payment institutions the right to operate nationally in the United States, in return giving recipients of my proposed American Payment Institution charter the right to operate in the UK and EU? This would allow innovation and competition in the fintech space without creating yet another financial time bomb that bankers will inevitably trigger.

 

The new PSR’s priorities

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The UK’s new Payment Systems Regulator is now open for business. I imagine that their highest priority work stream will be around access to payment systems, because this is what “challenger” banks need in order to create the more competitive environment that the UK Treasury wants.

Regulation is more important than technology when it comes to strategy

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The biggest factor shaping the strategic plans of players in the European payments sector is regulation and right now understanding the impact of new regulation is far more important than understanding the impact of new technology.

Who does AML hurt?

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I’m hoping somebody can send me a plausible and documented cost-benefit analysis for anti-money laundering legislation but it’s proving difficult to find one. I’m not saying it’s a waste of money, I’m just saying that I don’t know whether it’s a waste of money or not. Please note this is a repost as the original was lost through a tear in the spacetime continuum.

Special Report: Didn’t we have a lovely day, the day we went to the Italian Parliament

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Life is never boring at Consult Hyperion. If you’re not marvelling at a totally cool working prototype of HCE running over BLE on an unmodified iPhone, you’re in the Italian Parliament at their hearing on Bitcoin.

We can contribute to childhood e-safety

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We can use identity and authentication (ie “recognition”) technologies to improve Internet safety, if we use them correctly.

It is good to wander out of the comfort zone from time to time and expose your ideas to more acid tests. Hence I went along to the seminar on “Childhood and the Internet – Safety, Education and Regulation” in London in January. I was there for three main reasons:

  1. I am interested in the evolution of identification and authentication in an online environment, and protecting children is one of the cases that brings the mass market practicalities into sharp relief.
  2. We have clients who are developing recognition services, and it seems to me that if these services can contribute to a safer environment for children then we may have something of a win-win for encouraging adoption.
  3. Protecting children is an emotional topic, and as responsible member of society it concerns me that emotional responses may not be society’s best responses. This is a difficult subject. If, as technologists, we make any comment about initiatives to protect children being pointless or even counterproductive we may be accused of being sympathetic to criminals and perverts hence we need to learn to engage effectively. I’m not interest in childhood e-safety theatre, but childhood e-safety.

The seminar was kicked-off by Simon Milner, the Policy Director (UK and Ireland) for Facebook. He started off by noting that Facebook has a “real” names policy. Given my fascination with the topic, I found his comments were quite interesting as they were made on the same day that the head of Facebook, Mark Zuckerberg, was interviewed in Business Week saying that the “real” names policy was being amended.

One thing about some of the new apps that will come as a shock to anyone familiar with Facebook: Users will be able to log in anonymously.

[From Facebook Turns 10: The Mark Zuckerberg Interview – Businessweek]

Simon went on to say that the “real” names policy, setting to one side whether it means anything or not, is a good thing (he didn’t really explain why and I didn’t get a chance to ask) and then talked about how children who are being bullied on Facebook can report the problem and so on. I know nothing about this topic, other than as a parent, so I can’t comment on how effective or otherwise these measures might be. To be honest, there were several talks that I’m not qualified to comment on so I won’t, other than to say I found some of the talks by the subject matter experts extremely thought-provoking and I’m glad I heard them.

The main discussion that I was interested in was led by Helen Goodman MP (the Shadow Minister for Culture, Media and Sport) and Claire Perry MP, who is the Prime Minister’s special advisor on preventing the sexualisation and commercialisation of childhood. The ex-McKinsey Ms. Perry attracted a certain amount of fame in web circles last year (just search on “#PornoPerry”) when she made some public statements that seemed to indicate that she didn’t completely understand how the internet worked, despite being behind the government’s “porn filter”. (I am not picking on her. I should explain for foreign readers that most MPs are lawyers, management consultants, property developers, PR flacks and such like and they don’t really understand how anything actually works, least of all the interweb tubes. Only one out of the 635 MPs in the British Parliament is scientist.)

Now, let me be completely honest and point out that I have previously criticised not only the “real” names movement in general but Ms. Goodman’s views on anonymity in particular. I think she is wrong to demand “real” names. However, as I said a couple of years ago,

I’m not for one moment suggesting that Ms. Goodman’s concerns are not wholly real and heart felt. I’m sure they are.

[From The battle of the internet security experts – Tomorrow’s Transactions]

This does not make her right about what to do though. Forcing people to interact online using their mundane identity is a bad idea on so many levels.

But that was the same month that the Communist party struck its first major blow against Weibo, requiring users to register their real names with the service. From that point, those wishing to criticise the Party had to do so without the comforting blanket of anonymity and users started to rein themselves in.

[From China kills off discussion on Weibo after internet crackdown – Telegraph]

I’m not suggesting that Ms. Perry represents a government intent on creating a totalitarian corporatist state that reduces us wage-slaves to the level of serfs to be monitored at all times. I’m sure her good intentions are to block only those communications that challenge basic human decency and serve to undermine the foundations of our society, such as MTV, but the end of public online space seems a drastic step. What has been the result of the Chinese campaign to end anonymity? What is the practical impact of a real names policy?

Once an incalculably important public space for news and opinion – a fast-flowing river of information that censors struggled to contain – it has arguably now been reduced to a wasteland of celebrity endorsements, government propaganda and corporate jingles.

[From China kills off discussion on Weibo after internet crackdown – Telegraph]

None of us, I’m sure, would like to see pillars of our society such as the Daily Mail reduced to the level of “celebrity endorsements, government propaganda and corporate jingles”. Perhaps there is now less crime in China too, but I have yet to discover any statistics that would prove that. I don’t want this to happen to Twitter, Facebook and The Telegraph web site (where it is my right as Englishman to post abuse about the Chancellor of the Exchequer should I so choose). So here is a practical and positive suggestion. At the seminar Helen said the “The gap between real-world identity and online identity is at the root of [the problem of cyberbullying]”. So let’s close that gap. Not by requiring (and policing) “real” names, but by implementing pseudonymity correctly. I wrote an extended piece on this for Total Payments magazine recently.

Now imagine that I get a death threat from an authenticated account. I report the abuse. Twitter can (automatically) tell the police who authenticated the transaction (i.e., Barclays). The police can then obtain a warrant and ask Barclays who I am. Barclays will tell them my name and address and where I last used my debit card. If it was, say, Vodafone who had authenticated me rather than Barclays, then Vodafone could even tell the police where I am (or at least, where my phone is).

[From Dave Birch’s Guest Post: Anonymity – privilege or right? – Total Payments : Total Payments]

As I said, I don’t just want to talk about doing something about cyberbullying and the like, I actually want to do something about it. “Real” names are a soundbite, not a solution. What we need is a working identity infrastructure that allows for strongly-authenticated pseudonyms so that bullies can be blocked and revealed but public space can remain open for discussion and debate. Then you can default Facebook and Twitter and whatever to block unauthenticated pseudonyms without insisting the kid looking for help on coming out, the woman looking at double-glazing options or the dreary middle-aged businessman railing against suicidal economic policies from revealing their identities unless they want to

What will the new UK Payments Regulator change?

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You may think payments regulation is a rather dull subject, but it isn’t. Angus McFayden from Pinsent Masons spoke about the changes to the regulation of the UK payment sector at the Westminster e-Forum on “Digital Payments in the UK” [PDF] that I spoke at last November. As I remember him pointing out, with characteristic accuracy, these changes are not going to drive down costs (there is nothing in the UK National Payment “Plan” about this anyway), which I would have thought to have been a reasonable goal. So what are they going to do? Well, they are supposed to improve competition while simultaneously ensuring stability and so forth.

How? You may remember that HMT (Her Majesty’s Treasury, the UK’s Ministry of Finance, essentially) had a public consultation on the options for UK regulation a while back, and…

So given it was what the government said they wanted, want the respondents said they wanted and, most importantly, what I said that I wanted… the government has decided to choose an alternative path and it now says it will create a new payment regulator

[From You searched for response to consultation – Tomorrow’s Transactions]

So we are going to have a new payments regulator, and this will improve competition and ensure stability. Angus explained that this regulator, expected to be operational in April 2015, will have a number of powers and that one of them will be to mandate access to payment systems. This means for schemes, rather than direct access to accounts, and is laudable. If more organisations have access, there will be more competition and therefore, hopefully, reduced costs. So far, so not particularly interesting.

However, under proposed reforms to PSD2 things might move a little further and, somewhere downstream, there may be changes following on from the European Commission’s consultation on third-party access to the bank account, known as “XS2A”. In this scenario, I would be able to grant a licensed third party (a Payments Institution or bank, essentially) access to my bank account so that they could get the balance, look at transactions and perhaps even trigger FPS payments. Now this is really interesting. The potential for new services here is obvious and by removing an intermediary layer there should be a reductions in costs. But, and this is a big but as far as I am concerned, without the right identity infrastructure, the right security and the right compliance regime, this could be another Chernobyl.

I imagine that this is the sort of thing that will be discussed in London in February at the forthcoming “Payments Intensive”, where you can listen to Consult Hyperion’s Anthony Pickup and Adrian Kamellard, the Chief Executive of the Payments Council, amongst others, talking about payments regulation in more detail.

Payments Intensive 2014: Future Development and Regulation, will bring together key figures from business, legal and regulatory backgrounds, to discuss the most pressing issues in the payments sector today.

[From Payments Intensive 2014: Future Development and Regulation | Cecile Park Conferences]

The magnificent group of gentlepersons and scholars at Cecile Park have very kindly given Tomorrow’s Transactions a complementary delegate place at this event to dispose of as we please, so we’re having one of our blog competitions. If you are going to be in London on 6th February and would like to attend the Payments Intensive, then all you have to do is be the first person to comment on this post with the name of the British record label that has just released a version of Bach’s Wurttemberg Sonatas performed by the Iranian-American harpsichordist, Mahan Esfahani, and you will be given entirely free a place at the event (worth an astonishing THREE HUNDRED AND FORTY FIVE of your English pounds).

As always, the judge’s decision is arbitrary and capricious.


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