Category: Political, legal and regulatory

The use of mobiles to make payments is clearly a boon to terrorists (or, at least, terrorists who have never heard of 500 euro notes) as Rachel Ehrenfeld, founder of the Terror Finance Blog has noted. She calls the hook-up between the GSMA and MasterCard a “terrorist dream”. David Nordell, another finance terror blogger, says, “Person-to-person transfers via mobile phones will be almost anonymous, and completely uncontrollable unless the regulators intervene and block these new services until ways are devised to track the flow of funds.”

[From Digital Money Forum: The prepaid backlash]

A year ago, I expanded on this discussion in an article for the Journal of Internet Banking and Commerce. David Nordell was kind enough to read the whole article and recently provided a considered response. I asked him for his permission to excerpt part of it and he agreed, and I think it’s worth quoting a few passages in full. David says…

I’m afraid that you have reached entirely the wrong conclusions. For all that I agree that there is indeed an element of ‘security theatre’ in the regulatory regime for anti-money laundering and counter-terror finance there is also a great deal of genuine value in the at least some of the regulations, and they are not there just to oppress the general public. The amounts of money that are needed to actually carry out terrorist operations of the kind we saw in London in July 2005 or that planned against the airliners two years ago are small, in the order of a few thousand pounds, and therefore well within the range of a dozen e- or m-payments.

This is a point well taken. Suspicious Activity Reports (SARs) that focus on transactions above £10,000 will not, under any regime, actually catch any more than mildly unintelligent criminal, terrorists, corrupt politicians or child pornographers. According to the Serious Organised Crime Agency (SOCA) here in the UK, there were 228,834 SARs filed last year and of these 703 were referred on to the terrorist finance investigation. Naturally, the report can’t say how many of these 703 (0.3% of the SARs filed) were actually related to terrorist activity (although it does note that one of the terrorist SARs was filed by a charity and one by an estate agent, just to indicate the spread). So far as money laundering goes, and financial crime, I can’t find any figures that show whether the money spent on SARs is a good investment or not. In the Royal Society of Arts debate on white collar crime, one of the researchers put total fraud in the UK last year at about £60 billion so it doesn’t look as if SARs are making much of a dent in that, although hopefully they are deterring some major crimes. David continues…

No financial intelligence unit or police force that I know supports the idea of monitoring every possible financial transaction, whether through conventional banking or technology-enabled services; and all the professionals I know in this field understand perfectly well that the SAR regime, which is based on arbitrary reporting limits, will inevitably produce far more noise than signal. However, there is a lot of value in carrying out KYC checks, in e-money services just as much as in conventional banking: these can help to provide predictive intelligence about people who may be planning to carry out financial fraud, launder money from other criminal activity, or finance terrorist operations in planning.

I wasn’t not arguing that we should have no KYC checks, but what I was arguing for was a sensible floor below which KYC checks are not needed. I happened to be in a local branch of national financial services organisation a few weeks ago when, for dreary reasons, I had to get into a queue. The person in front of me in the queue was trying to send fifty pounds to a relative in Liverpool. The clerk told him that couldn’t, because he didn’t have a passport and a utility bill. The chap complained that he had been sending this birthday money every year for decades. The clerk was unmoved. So who benefits from this? I didn’t stop the 911 terrorists (who used credit cards in their own names) or the crotchbomber (who paid for one-way air ticket in cash) or the tube bombers (who were carrying identity documents). My argument was, and is, that we should decide where the balance should be in order to get the best result for society as a whole.

My suggestion is that we fix on 500 euros as the breakpoint. People should be allowed prepaid cards, prepaid accounts, money transfer accounts or whatever with no identification provided that the maximum balance is limited to 500 euros (it is currently 150 euros) and a maximum annual turnover over 10,000 euros (it is currently 2,500 euros). This will lower costs and ease accessibility — I might even go and get an O2 Money card — thus achieving a variety of goals including social inclusion and reduced transaction costs for the poor.

The problem, of course, is that the existing system makes it extremely difficult to cope with forged identity papers and stolen identities, which are used in the majority of cases of serious financial crime. I certainly agree with you that AML regulations do make access to the conventional financial system more difficult for people, such as recent immigrants, who don’t have the right papers to satisfy what are basically unintelligent regulatory requirements. I’ve actually witnessed an example of the stupidity of these requirements while waiting at a counter at Lloyds Bank – stupidity that the bank official himself didn’t agree with but left the prospective customer unable to open an account. Is there a better way? Yes, but I don’t agree that it should be based on just dropping KYC requirements, because this will just encourage the growth of fraud. On the contrary, I believe it should be based on making KYC more rigorous in order to exclude as many fake and stolen IDs as possible, and then as easy as possible to use in order to make the financial system inclusive.

This is a very different approach. I didn’t suggest dropping KYC requirements completely, to be fair, but I did suggest raising the requirements for the financial products that need KYC. Specifically, I suggested that there should be no KYC prepaid card or mobile money transfer accounts that have a maximum allowable balance of €500. But David’s approach suggests that pursuing the “identity is the new money” meme further might be

Continue reading “Are mobile payments a “terrorist dream” or not?”

Perhaps more vexing, Australian merchants, including retailers, restaurants and airlines, are imposing surcharges for each credit card transaction, even though fees the merchants pay card companies have fallen.

[From U.S. Looks to Australia on Curbing Credit Card Fees – Series – NYTimes.com]

Well, well. Now this can't be because all Australian merchants are corrupt and are trying to get paid in cash in order to avoid taxes, so there must be something else going in and if I were to ask an economist about this, I suspect the answer might be something to do with the imperfect nature of the competition between payment choices at the point of sale and an information asymmetry between retailers and consumers.

costs and interchange, payment cards, retail

Continue reading “Supercollider”

• 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.

Continue reading “Regulation isn’t a bad thing”

At the very first Digital Money Forum, the late Professor Glyn Davies (author of the magnificent “A History of Money“) said that every technology revolution in money led to less centralised control. That’s a good thing, but it also explains why the conservative nature of governments and regulators comes to the fore in questions concerning money. If anyone anywhere in the world can transact in any currency, then the weak will go to the wall very, very quickly. Gresham’s Law on a global scale.

Continue reading “Innovation that matters for the majority”

The Payments Council was created in March 2007 to set out the national strategy for UK payments. It has a Payments Council Board made up of banking representatives, some independent directors and an independent chairman (Brian Pomeroy). The principal UK payment schemes (listed below) have a contract with the Payments Council to set out rights and duties.

The UK Cards Association is the successor the much-loved APACS Card Payments Group (CPG). It is the trade body for the UK cards industry. Its 14 members, the major card issuers and acquirers, work together here on non-competitive issues.

Financial Fraud Action UK was created earlier this year to work alongside the UK Cards Association on the specific issue of reducing fraud.

The Dedicated Cheque and Plastic Crime Unit (DCPCU) is a specialist law enforcement unit made up from officers from the City of London Police and the Metropolitan Police and funded by the banking industry. It investigates serious and organised cheque and card fraud.

SWIFT (UK) Limited is the membership organisation representing the UK’s SWIFT users.

Continue reading “What’s in a name?”