Political, legal and regulatory - Consult Hyperion

More anecdotes

11th May 2009by Consult HyperionLeave a comment

[Dave Birch] Erik van Winkel from our friends at Edgar Dunn as a nice piece in the current Journal of Payment Strategy and Systems (vol. 3, no. 2) looking at the potential for new entrants in the European payments sector in response to the arrival of the Payment Services Directive (PSD). At our seminar on this topic earlier in the year, I asked the panelists about the likely categories of new entrants, and we spent some time discussing whether telcos and retailers might be prime candidates. Erik sets out his own thoughtful classification of potential new entrants as follows:

International organisations already providing processing spaces for acquirers;
Large pan-European retailers who might immediately benefit from self-acquiring and synergies with loyalty and CRM schemes;
E-commerce businesses such as PayPal, Google and Amazon who might be able to offer European consumers some modern, customer-friendly options;
Mobile operators. Erik thinks that if banks and telcos cannot agree on common business models then telcos may well decide to launch their own initiatives. Some operators (eg, Vodafone) already have successful m-payment systems running outside Europe and may decide to try them out inside Europe given the right conditions.

An excellent analysis. I think Erik’s point about mobile operators is a particularly good one. We’ve been told over and over again that “mobile operators don’t want to be banks” and I’m sure they don’t. But a Payment Institution (PI) isn’t a bank. The point of setting up a PI is not to compete on banking services to run payment services more efficiently. Saying the mobile operators don’t want to be banks is one thing, saying that they don’t want to get into the payments business quite another.

banking and finance, SEPA and PSD

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Risk and lack of reward

13th April 2009by Consult Hyperion1 Comment

[Dave Birch] One of our chaps was at a seminar concerning developing countries recently, and overheard an interesting conversation. Someone from the telecommunications world said that financial service regulators in developing countries were concerned mainly with risk, whereas telecommunications regulators were more concerned with competition. The effect of this is that mobile operators are raring to go with more services along the lines of G-Cash or M-PESA but they are being blocked by regulators who see payments as a financial service rather than as some kind of utility.

This is why I’m so worried that knee-jerk additional regulation of financial services in response to the current crisis will end up holding back the development of the payment sector, with really negative consequences in developing countries. A better payment system is an unalloyed good and it would be bad for lots of people if the evolution of new payment systems, especially in the developing world, were to be held back by inappropriate regulation. Payments are not banking, and while banking regulation may well need to be toughened up in many countries (as subject on which I am not qualified to comment), payment regulation may not.

mobile, social and community

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Paying for innovation

9th January 2009by Consult Hyperion2 Comments

[Dave Birch] So who, exactly, is going to pay for innovation in the payments field? Should individual stakeholders incrementally innovate or shoudl we make co-ordinated attempt to improve the payment system and share the cost? Should we regulate and let the market sort things out or should we try to constrain some of the paths through the roadmap. Hhhmmm. In this, as in so many things, Australia proves a useful case study. They had one of the first and best-developed EFT-POS systems in the world, but of late it has been looking a little antiquated.

Australia’s central bank has criticised the nation’s four largest commercial banks for shirking on investments in payment systems technology, resulting in a lack of innovation and neglect of systems like EFTPOS.
[From RBA criticises payments innovation: News – Hardware – ZDNet Australia]

This is, of course, the very same Australia that capped interchange fees, so reducing banks income from cards and therefore reducing their incentive to invest. The results are not surprising. If we use online payments market share as a proxy for innovative new products, then the result has been a steady loss of market to more innovative competitors.

Research from Nielsen Online has tagged PayPal as the most preferred online payment method in Australia and the UK. There are more than 141 million PayPal accounts worldwide. In 2007 more than $47 billion in payments were processed by the service.
[From The Better Banking Blog: PayPal vs Credit Cards]

In Australia, it was the merchants who were the winners. They obtained reduced merchant services charges because of reduced interchange and, broadly speaking, pocketed the difference. Was this what the regulators wanted? It’s hard to imagine that this is the case, so the lesson to be learned here is (surely) that we need a clearer vision of what we want before we set off, if you see what I mean. If we want some real innovation, then simply focusing on interchange isn’t going to deliver anything.

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Greater utility

7th January 2009by Consult Hyperion3 Comments

[Dave Birch] The economist John Kay wrote an excellent, excellent piece in Prospect magazine at the turn of the year. In it, he says, amongst other things, that

The modern financial services industry is a casino attached to a utility. The utility is the payment system, which enables individuals and companies to manage their daily affairs… Modest levels of speculative activity may improve the operation of the utility
[From Essays: ‘Making banks boring again’ by John Kay | Prospect Magazine January 2009 issue 154]

His imagery is not only, as always, accurate and thought-provoking but also valuable because it gives us a context for thinking about the way to take the payment system forward.

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Straight bananas

5th January 2009by Consult Hyperion2 Comments

[Dave Birch] Normally the only stories about European standards that you read in the newspapers here in Britain are the ones about straight bananas (actually, I think that the rules on banana curvature were recently relaxed) or people going to jail for advertising brussels sprouts in imperial measures (although, once again, the EU’s stringent policy appears to have been abandoned). But I read in last month’s Cards & Payments that the European Commission are upset about EMV being chosen as the standard for the SEPA Cards Framework (SCF) because they view it as “non-European” (worse still, and more specifically, they view it as American). The EU Competition Commissioner, Neelie Kroes, recently labelled the worldwide standard for card payments as “proprietary”.

Perhaps there is some displacement going on here. Perhaps the Commission are upset because they pushed for SEPA and SCF. It is now clear that SCF will lead to an increase in the average merchant service charge in Europe as low-cost domestic debit schemes are replaced by more expensive international credit and debit schemes (ie, Visa and MasterCard branded cards). But it’s an interesting development to move on and begin the attack on EMV.

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2.5D Secure

10th November 2008by Consult Hyperion4 Comments

[Dave Birch] The 3D Secure (3DS) schemes — Visa’s Verified by Visa and MasterCard’s SecureCode — have come in for a lot of criticism (from, eg, me) and it’s been getting worse recently. Card-not-present (CNP) fraud continues to climb

According to the latest statistics from banking association APACS late last month, more than 25 million UK-issued credit and debit cards are registered with either Verified by Visa or MasterCard SecureCode,
[From Merchants and punters cry foul over Verified by Visa • The Register]

I have to say that, personally, I’ve never bothered to register either of my credit cards, but plenty of people have. Here’s the issue, from my perspective as a rational consumer. I’m protected from fraud by my credit card issuer, so I have no incentive to use 3DS of any kind. Any 3DS means more hassle for me for no return. The people who do benefit from 3DS — merchants, since merchants are protected against fraud by offering me 3DS even if I don’t use it — don’t insist on it and, crucially in my opinion, don’t incentivise me to use it. If I got air miles for using 3DS, I’d use it.

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Debit dreams

20th October 2008by Consult HyperionLeave a comment

[Dave Birch] One of the key negatives in one of my diatribes against debit was that security is much more of a problem for debit than for credit. If debit goes bad, the money is gone from your bank account, not from your credit card provider’s bank account. Here’s an interesting suggestion for getting around this.

It would be really great if card issuers would give everyone two card numbers, one for only recurring, stable, relatively secure payments, and another, which is on the card that is used for day to day use at merchants, and maybe even a third, ‘high risk’ number for online/card not present purchases – but all linked back to the same ‘master’ account. This way, you wouldn’t need to get a new card if compromised online, wouldn’t need to change recurring payments if the card was lost, and wouldn’t need to manage multiple accounts – all activity ‘forwards’ to one account. Decoupled debit might be one way to get closer to this. There has been some activity around single use/virtual/disposable card numbers which usually expire after a short period of time. These are effective for avoiding fraud in online purchases, but I think they are too limiting, there are too many issues if you want to try to return something, and creates an extra step in the purchasing process most consumers don’t want to deal with.
[From Use Case for Decoupled Debit Cards]

This is an inventive twist: a decoupled debit product that uses existing debit products. I rather like the idea of my existing debit card provider (Barclays) offering me a disconnected debit product that connects to the same bank account. Why? Because I only use my physical debit card in ATMs — I never use it at POS — but I might sometimes want to use debit online and I don’t want to give out my real debit card number in case it ends up in the hands of fraudsters. But, you might ask, why would I want to use my debit card online but not in shops? It’s because I’m a rational consumer: there are some things that I pay for online that offer a not insignificant discount for debit (eg, car tax).

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Zoom out

29th August 2008by Consult Hyperion3 Comments

[Dave Birch] I’m sitting working at home, going through some slides for a conference that I have to have finished shortly, and I’m listening to the radio. An airline called Zoom has gone bankrupt and, once again, the news report points out that people who paid with credit cards will get a refund, people who paid with debit cards and cheques will not. They’ve just interviewed a woman (on BBC radio) who paid UKP1600 (ie, $3,000) for tickets with a debit card and will now not get her money back. I feel sorry for her, obviously, but I just don’t get it: why does anyone ever pay for anything using a debit card? There’s no frequent flyer miles, no cashback (in the U.K.) and no legal protection, yet debit volumes keep on climbing: there were about two billion credit card payments in the U.K. last year but about five billion debit card payments.

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Elf regulation

18th August 2008by Consult HyperionLeave a comment

[Dave Birch] If you thin that European regulators are having a hard time trying to sort out SEPA, the Payment Services Directive, KYC, AML and all the rest of it, remember that they do at least have the advantage of trying to control money that sort-of-exists, even if they aren’t able to control it terribly well. Elsewhere, as most economists would predict, I’m sure, other kinds of money that sort-of-exist are beginning to suffer from the exactly the same problems.

Police in China have arrested 2 men for running a World of Warcraft gold farming operation and charged them with “unfair revenue distribution” (presumably a crime against socialism of some kind). The two men ran the operation for 7 months and earned 1.4 Million RMB (just over US$200,000). They had 20 computers and 20 employees and were based in Chengdu’s Shuangliu county.
[From Only in China – Gold Farmers Arrested! Earned over US$200,000 in 7 Months – PlayNoEvil Game Security News & Analysis]

Of course, if your local constabulary don’t respond when you dial 999 to complain that there’s been a jack and your friend’s World of Warcraft Guild has been rolled over for a hundred gold pieces, because they’re busy helping people look for their glasses and so on, you’ll have to look for alternative law-and-order structures. I doubt that the Financial Services Authority (FSA) would be much help either, although it enough players got together they might be able to persuade the government to underwrite the gold pieces and have WoW Gold Institutions regulated under the Payment Services Directive (PSD). There is an alternative, though. As in any other frontier community, a long way from centralised authority, virtual communities can choose to police themselves.

disgruntled Alliance players have come up with a clever, though perhaps somewhat EULA-non-compliant hack to enable community self-help (aka murder) as means of silencing n00b bot gold spammers
[From Terra Nova: The Bot-Slaughtering Totems of Stormwind]

It’s the Wild West. Economics may work differently in wholly virtual environments, but human nature does not.

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The reduced interchange world

1st August 2008by Consult Hyperion1 Comment

[Dave Birch] The Revolution card seems to be gaining an amount of traction in the US:

Since being launched 9 months ago, the card has already garnered acceptant 150,000 merchants with plans to reach 1 million by the end of the year.
[From National ACH: Revolution Card Acceptance Rising]

Their essential tactic is, as we’ve discussed before, to provide a more merchant-friendly payment card scheme (although I still don’t really understand why merchants don’t just do this for themselves if payment cards, as they claim, are taking such a big chunk out of their profits) that is geared up for the reduced-interchange world of the future:

The main advantage to merchants is that accepting the card costs only 0.5% of each purchase amount, significantly less than the discount rates merchants pay to accept credit cards. In addition, the company recruits merchants as distribution partners and rewards them to provide an incentive to promote usage of the card. Merchants have the option of co-branding the card.
[From National ACH: Revolution Card Acceptance Rising]

Price and promotion are only part of the future reduced-interchange world, because one might hope that the kind of new technologies that we are always talking about here will provide platforms for new value-added services to benefit all of the stakeholders. Falling interchange might even stimulate some new developments:

This strategy is especially relevant if interchange gets cut. Merchants will be paying less, so there is an opportunity for the merchant’s acquirer to offer new value added services that are paid with a portion of the money freed up by lower merchant discount fees.
[From Aneace’s Blog: Are some banks already preparing for lower interchange fees?]

There’s a great deal of scope here, because the “narcotic” of interchange (to use Steve Mott’s provocative description) has meant that such value-added services (loyalty, coupons, rewards,, management, control, folio, groups and so on and so on) are still in their infancy. Retailers pay large amounts in interchange for (as they see it) very little.

He also notes that IKEA pays some €90 million annually and Tesco pays about €128 million in fees to the banks for processing credit and debit cards – that’s more than €210m p.a., between these two firms alone.
[From Retailers count the cost of interchange]

it therefore ought to be easy to co-opt retailers into using a deploying value-added services and charging them for the “something” of these services rather than the “nothing” of interchange.

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