World payments

Wow. One of my very favourite companies has always been Worldpay. They have a very special place in my heart because many years ago, when they were first starting out, I was sent up to Cambridge by a client to go and meet them and assess what they were doing. As a junior deputy assistant under-consultant, I went to take a look at the technology they had put together to see whether it worked as advertised. Which it did. I returned to our client and told them that the Worldpay had no future, because all they’d done was to plug a PC into the Internet on one side and to a NatWest Streamline acquiring service on the other side. This seemed like a fairly trivial integration to me so my assessment was that all the banks would do it and that WorldPay would not be able to sustain a margin. Last week, Worldpay agreed to a possible offer from Vantiv that would value the combined group at more than NINE BILLION QUID, proving conclusively that you shouldn’t listen to me about anything. Anything at all. Still, it was a useful lesson in banking strategy for me in those long ago days: just because all of the banks could have connected their acquiring services to the internet in about a day didn’t mean that they would, and when they did it didn’t mean they’d make a success of it. Worldpay have done that in spades.

Driven by the inexorable shift from cheques and cash to cards and digital payments, Worldpay’s revenues have risen over 50 per cent and its operating profits have more than trebled since it was sold for £2.5bn by Royal Bank of Scotland seven years ago. 

From Worldpay emerges as a winner in the war on cash

I remember visiting Vantiv in Cincinnati around twenty years ago when they were still Fifth Third Processing, the second biggest acquirer in the US (I can’t remember why I was there but it may have been something to do with smart cards). The combined group will be the biggest merchant acquirer in the world and will give Vantiv access to Worldpay’s global markets and e-commerce business, which is why it makes good business sense.

The deal marks a further step towards the industry’s consolidation. Last year, for example, Global Payments, the sixth-biggest American acquirer, bought Heartland, a smaller rival, for $4.3bn in cash and shares. TSYS bought TransFirst for $2.4bn. Vantiv snaffled Moneris USA, the American arm of a Canadian payments-processor, for $425m.

From An American payments firm goes online and buys British

Apart from being one of my favourite companies, Worldpay are also one of Consult Hyperion’s favourite clients. While the newspaper reports focused on Worldpay’s scope and scale, it is their R&D operation that is the focus of my attention. Worldpay have been making serious investments in the next generation of payment services, looking beyond the current card infrastructure into the future of immediate, invisible and invulnerable payments. Some of you may have seen the Internet of Things (IoT) demonstrator that we helped to build for them last year (we were one of the sponsors of the brilliant WorldPay IoT hackathon) and the virtual reality payments demonstrator that we helped to build for them this year.

 

In my opinion (and in the opinion of a great many other people as well) however, the most exciting project that we have been chosen to support and the most important new product to come out of their R&D lab for a long time was launched at Money 2020 in Copenhagen last month. It’s called My Business Mobile, and it means that merchants can download a POS terminal to the their mobile phones and start accepting contactless payments without any additional equipment. No plugs, no dongles, no fuss.

Nick Telford-Reed, director of technology innovation, at Worldpay comments: “The pilot scheme we’re running in London will give cash only businesses the opportunity to catapult themselves into the 21st Century by taking contactless card payments on the go. But this is really only the beginning.

From Worldpay pilots app-only mPOS for small retailers

When Nick presented at this year’s Tomorrow’s Transactions Forum (which WorldPay were kind enough to sponsor again) he painted a pretty compelling picture of the future of retail payments, talking about the “friction free” payment experience of the future. This is a definitely a step in that direction. Every coffee shop and kebab van that wants to take cards but either doesn’t want to, or can’t, rent and install a traditional point-of-sale terminal can now just use a smart phone. And customers can use the contactless cards in their pockets or the mobile phones in their hands (the phones will accept payments from ApplePay and AndroidPay) to pay quickly and conveniently. They can even use their Apple Watch, as you can see in this video featuring Consult Hyperion’s Gary Munro and Worldpay’s Kevin Gordon. As contactless payments continue to displace cash from the retail point of sale in the UK (my guess is that contactless transactions are currently about third of all retail transactions and the latest figures show that they account for more than half of all card transactions) this gives WorldPay a solution that can really scale.  

paying a phone 

As MasterCard said in their press release about this, making it easier for small and micro businesses to accept digital payments may spur additional growth for them and enable an additional 40 million of these merchants globally over the next four years and will undoubtedly generate significant volume and large numbers of smaller transactions.

So what’s so innovative about this? After all, we’ve been working on mobile contactless applications for years, using phones to read cards for a decade or so (here’s my favourite app: a demo of a nightclub ticket that you put your mobile phone number into). But it’s a long way from reading a card to having an operational service that complies with scheme rules, has a decent UK, has. It was really intellectually challenging to create a POS terminal running on a user device. Therefore the security architecture is absolutely critical to the success of the product. The guys and gals in Consult Hyperion’s Hyperlab have been building, testing (and breaking) secure mobile apps for a very long time. We know all about doing this efficiently and cost-effectively.

One more point. Helping these merchants to move from cash to cards means that they will have data that they never had before. The future, as I wrote after this year’s Merchant Payment Ecosystem conference in Berlin, is about replacing the fees from processing with the fees from value-added services. Most observers would agree that these value-added services are real and if the merchant acquirers can transform into Merchant Service Providers (MSPs, as Ron Kalifa, the vice-chairman of Worldpay, called them at MPE), are able to deliver them then there will be a ready market. But these kinds of value-added services based on data analysis and artificial intelligence and machine learning and all that sort of thing are voracious consumers of data, making this above all a scale business. The bigger players with more data at their fingertips ought to be out to deliver services that merchants value and this will be an area of vigorous competition in coming years, a competition that Vantiv/Worldpay look well placed to compete in.

Quite an ecosystem

A funny thing happened on the way to Merchant Payment Ecosystem in Berlin. Three funny things, actually. I tried to use an app to buy something on the way and I got a message saying “transaction failed”. It didn’t tell me why. I’m sure the service provider didn’t know either, as they just got a decline from the issuer. Some forensic work on my behalf later determined the cause of failure was that the card I’d given the app a couple of years ago had expired. The new card was on my kitchen counter back home, but of course it was my problem to have to go around all the stupid apps on my phone that didn’t use Apple Pay and update update each of them individually.

 new BA POS sighted

Then on the plane on the way to Berlin the British Airways cabin crew said that the on-board POS had a problem because it would accept AMEX and Visa cards but not MasterCards. No one knew why. I was desperately hoping that they would put out an emergency call over the public address system “is there a merchant acquiring expert on the plane” (there were about 200 of them by my estimate) but, sadly, they didn’t and so those people prepared to cave into BA’s new policy of making passengers pay for coffee had to struggle by as best they could.

When I got to Berlin I jumped in a taxi at the airport and set off for the hotel where we were going to be discussing all the new stuff going on in the world of merchant payments. We got to the hotel, I took out my card and was actually stunned to hear the driver tell me “I don’t take cards”! Seriously! In a supposedly civilised country and a city that wants to challenge London’s position as fintech hub! So the driver had come into the hotel with me and wait until I checked in so that I could get hold of some cash in order to help him to evade tax.

I drew on these experiences in my opening address to make three main points to the delegates:

  1. Electronic payments are not ubiquitous, but that’s not because of the technology. The taxi driver could perfectly well have taken electronic payments if he wanted to, but he didn’t want to. When I went to dinner the following night, I of course used an app

  2. Evolution in our sector isn’t really about payments, it’s about identity. Since BA know who I am, and since I had to show a passport to get on board, and I have British Airways Amex card and a BA app on my phone, why are BA messing about with chip and PIN at all? Why not just use my BA app to charge to a token on file?

  3. We’re on the edge of the thingternet. Look at IBM’s recent announcement of a partnership with Visa. Everything is becoming a card, everything is becoming a POS. So what happens when I’m driving down the motorway and my card expires and a new one is issued? Does my car stop dead in the business class motorway lane while I have to send a motorcycle courier to fetch the new card from my house so I can type in the new expiry date and the CVV? We’re shoehorning systems into environments they were never designed for so maybe it’s time to rethink and construct a new kind of infrastructure (based on identity, obviously).

While I’m on the topic, by the way, this was my first visit to Merchant Payment Ecosystem despite a number of recommendations from our guys and others, and I have to say that it’s an excellent event. I was genuinely flattered to be asked to chair the first morning and the key panels. The first was with the panel about digital commerce and omnichannel payments with:

The discussion was absolutely first-class. Sometimes it can be difficult to get the conversation going on the first panel of a major event but we hit the ground running on this one. As I explained the audience at the time there were no rehearsed questions and no PR scripts to follow. We had a genuine conversation about a wide range of topics and I can see from the feedback that the delegates greatly appreciated hearing smart people speak their minds. I really hate to paraphrase such a fascinating discussion, but if forced to I would say that there is a shift underway from the POS as a device to the POS as a platform and there is a convergence under way but that convergence is towards the virtual rather than the real. In other words, the checkout and payment experience is converging to the app, not the tap (okay, that’s my bumper sticker and not exactly what the participants said but I think it conveys the sense of the discussion!) and the payment experience will be the same whether in-store, on the phone or at a web site.

With thanks to @KSthankiya

 

The second panel  was great too. The organisers did me the great honour of allowing me to cross-examine some of the industry’s most senior people on behalf of the wider audience. The panel was:

The panellists allowed me to push them on some of the tough issues facing the acquiring and processing parts of the industry. I made the point that in an environment moving towards instant, push payments the role of acquirers and processors will change substantially. Naturally, since everyone on the panel knew more about this than I did and had already thought of it, they had some great perspectives.  I was particularly interested by their views on future value-added services which, it seemed to me, had a lot to do with data. Hence I was left with the impression that some of the big plays coming in this space are no longer about devices or charging bundles or apps but about big data, analytics and machine learning. I also rather liked the suggestion that emerged from the panel that we need to begin to reframe the acquirer as a merchant service provider (MSP).

mpe-from-aci

All things considered it was a terrific event. My colleague Gary Munro (Consult Hyperion’s principal consultant on the acquiring side), who chaired a couple of excellent sessions at the event, has attended for the last couple of years and he knows a fantastic amount about this business and he always recommended it highly.

Gary Munro at MPE

 

This will definitely be a fixture in my calendar from now on – a couple of days very well spent and the whole experience was only slightly undermined by the Berlin airport baggage handlers strike on the final day.

Wireless Sunday

Off to the Barclaycard Wireless Festival for the day. I don’t really understand why its still called that. In the old days, when it was sponsored by O2, then calling it the wireless festival sort of made sense. But now it’s sponsored by Barclaycard, they should probably call it the Contactless Festival instead. Anyhow it featured a great many very popular bands, as evidenced by the enormous crowd trying to get in.

IMG_0406

I know it looks chaotic but in the end it only took about 25 minutes to get in. Contactless was much in evidence. Barclaycard had kitted all of the bars out with contactless terminals and were kind enough to give me one of the promotional lanyards containing a contactless card (a Visa gift card preloaded with £20) to go and try out. Which, naturally, I did. And, I have to say, it worked perfectly. As testimony, allow me to present the first beer I bought with it!

Dave at Wireless 2011

Being me, I couldn’t leave it at that though, and I started to try out some other contactless paraphernalia about my person. An obvious experiment was to try my Barclaycard phone, and that worked too, but oddly it went online, which rather slowed the transaction down. I don’t understand why it did this, so I’ll ask the chaps when I’m next in the office.

More interestingly, I asked a couple of the bar staff what they thought about contactless and they had both positive and negative observations that I promised myself to report in a spirit of openness and balance…

Positive. It’s quick, and you don’t have to hand the terminal to the customer for them to enter a PIN. And they thought my phone was really cool. They also said that some customers had been paying with their own contactless cards and not just the promotional lanyards.

Negative. There were two big issues that came up in both conversations with bar staff. One was the spending limit, which the bar staff said was too low at £12 (the limit was actually £15, but the all of the drinks cost £4, so you could buy three drinks at £12 but not the advertised four beers in a drinks carrier, because that costs £16). Surely it would have made sense to have subbed the bars so that four beers plus carrier was a £15 special.

Enough of these scientific experiments (most of which I drank), and off to see some of the popular beat combos on show. Here’s 47 second taster so that you can get the idea if you’ve never been to one of these events before.

I was reflecting on the security issue later on, because it really seemed a block. I took the time to explain to one of the women at the bar that there was no risk to her as a customer, because the UK banks’ were unequivocal about unauthorised use: if someone uses your card without your permission, they will refund the transaction. Yet she was unconvinced and was clearly uncomfortable about the idea of “no CVM” purchase. This has been true since the earliest days. As I highlighted four years ago:

Among those that are not yet ready to use contactless, security appear to be the dominant consideration. Which means, of course, that whatever we might think about actual security situation we must get better at communicating it.

[From Digital Money: Contactless update]

As I don’t know anything about customer communications and public information, I genuinely don’t know how to cross this chasm, but I wonder if it’s yet more evidence that we should be moving more quickly to contactless phones. The simple PIN code that I need to open up the mobile wallet on my Barclaycard MasterCard phone (the Samsung Tocco that I wrote about before) might well provide the reassurance that people want, even though it doesn’t really make much difference to the overall risk (phones are inherently safer than cards because people notice when they go missing anyway).

Overall, the weekend’s experiences did leave me with three firm conclusions:

1. Both the public and the merchants liked contactless. In this kind of environment – crowded, quick service – the technology performs very well. These were similar to the results seen elsewhere: the punters like contactless payments.

Festival-goers quizzed on the experience, said they were quicker (96%) and easier to use (98%) than credit or debit cards, while a resounding 100% said they’d want to use the PayPass prepaid wristbands again to pay at other festivals, concerts and sporting events.

[From Finextra: Contactless wristbands join wellies and camping gear as festival essentials]

2. We should accelerate the development of contactless phones, because they help with the security issue.

3. The Horrors are a good band, but not my cup of tea.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Give cash the heave ho, me hearties

There are some people, in some parts of the world, who still prefer cash over any form of electronic alternative. My mum, for example. But her demands on the Treasury are modest. In other countries, cash has a bigger impact, because local distributed entrepreneurs need it for business-to-business transactions.

Somali pirates are reported to have received a total of $12.3m (£7.6m) in ransom money to release two ships. They are believed to have been paid a record $9.5m (£5.8m) for Samho Dream, a South Korean oil tanker, and nearly $2.8m (£1.7m) for the Golden Blessing, a Singaporean flagged ship. “We are now counting our cash,” a pirate who gave his name as Hussein told Reuters news agency.

[From BBC News – Somali pirates receive record ransom for ships’ release]

I’ll bet they are. And It will take them a while. Once again, these marine miscreants aren’t looking for prepaid mobile phones, gift cards or PayPal accounts: they are after cash, and I’ll lay a pound to a penny that they didn’t want Yuan or Roubles or Kenyan Shillings and an M-PESA account in a false name: they wanted dollars, and in $100 bills. The cash was dropped from a helicopter on to the ship. Wait a minute, you might be tempted to think: how on Earth can people move millions of dollars in cash around when we have stringent KYC/AML/CTF legislation in place! I think I may have found the answer. They are criminals, and therefore don’t care about such restrictions. There’s an amazing story in one of the free newspapers you get on the tube (Metro, 20th June 2011).

Three Britons accused or smuggling more than £2m into Somalia to pay pirate ransoms. They were given sentences of between TEN AND 15 YEARS (my emphasis) and also fined £9,000.

That £9,000 fine must have strung. This is, apparently, the first time that “westerners” have been sentenced for their involvement in ransom payments. Hhhmmm. Interesting. Now what were they smuggling into Somalia again? Was it mobile handsets for illicit m-payments? No. Prepaid cards to be used for nefarious purposes? No. Bitcoin wallets on encrypted USB drives? No. It was cash. Of course it’s quite inconvenient to have to ship huge wads of $100 bills around, so perhaps the pirates had asked for euros instead. It could do with the support at the moment. If the Feds decide to start issuing $500, or $1000, bills anytime soon, the euro would be devastated, since almost half of the euros out there are in the form of €500 notes and if drug dealers, money launderers, kidnappers and corrupt politicians decide to dump them for dollars the demand would collapse (nobody uses them in legitimate transactions).

Malaysian police have arrested a Lebanese man allegedly carrying fake currency with a face value of $66 million after he tipped a hotel staff with a $500 note, an official said Friday. The largest U.S. note currently in wide circulation is a $100 bill. But police found bundles of $1 million, $100,000 and $500 notes in the man’s hotel room in Kuala Lumpur on Sunday, said Izany Abdul Ghany, head of the city’s commercial crime unit.

[From $500 Tip Leads Police to $66 Million in Fake Bills – ABC News]

Cash does seem to attract the wrong kind of person. There has to be a better way.

Elizabeth Buse, group president, Visa, responsible for Asia Pacific, Central Europe, Middle East and Africa said that bringing transactions out of cash into electronic forms will allow governments to have better tax compliance and greater monitoring of fraudulent transaction and money laundering.

[From Electronic payments can control black money]

There’s an interesting experiment in this line of thinking underway right now, The Central Bank of Nigeria (CBN) is attempting to restrict the role of the cash in the economy there and push for a more efficient less-cash system.

To be precise, the CBN on April 20 sent a circular to all banks, Cash-in-Transit (CIT) operating firms, payments system service providers, limiting daily cash withdrawals to N150,000 for individuals and N1 million for corporate entities effective June 1, 2012.

[From From cash to cashless economy: How practicable is CBN’s mop up policy?]

There’s been a storm of complaint about this from various elements in Nigerian society. I assume that some of these complaints come from people who are happy with the corruption and tax evasion that cash delivers, but there are also reasoned complaints that the electronic infrastructure is insufficient.

On May 17, the House of Representatives objected to the proposal by the CBN & requested the CBN to suspend the implementation of the policy. They argue that that the country was not prepared for such a change

[From Nigerian Cash Management Reform — Counting On Currency]

I hope the CBN stays the course, and not just because of economic efficiency. Cash discriminates in favour of the tax-evading, corrupt elites at the expense of the powerless and poor: electronic payments should be a cheap, fast and transparent alternative.

The biggest enemy in fighting poverty is physical cash. The fact that people living at the bottom end of the pyramid need to conduct their business with paper notes (and coins) is the main reason why they are often stuck there.

[From Mobile Banking: Nigeria and cash]

But how can an emerging market make the transition from cash to cashless? The answer is, of course, to skip past the slow roll-out of conventional banking and payments infrastructure and use mobiles, not cards, to replace cash. Kenya points the way…

Over 13,000 sugarcane cutters in Mumias Sugar zone will start receiving their pay electronically following a deal between Mumias Sugar Company, Family Bank and mobile phone money transfer service providers. Acting harvesting and transport manager Mr Franklin Maguge said the firm was considering the possibility of extending the programme to cover other casual workers in the next one month… The services will be also extended to cover sugarcane cutters National Hospital Insurance Fund (NHIF) medical scheme monthly remittances to make it easy for them to pay without going through hectic process.

[From 13,000 Sugarcane workers to get paid via phones. « Mobile Money Africa]

This story gets even more interesting, though.

The sugar milling firm in collaboration with Safaricom and Airtel mobile phone services providers and Family bank is also making arrangements to have the cutters provided with mobile phones at a subsidised loan for efficient running of the programme.

[From 13,000 Sugarcane workers to get paid via phones. « Mobile Money Africa]

Providing subsidised loans to the workers who do not have phones presumably saves money compared to paying them in cash. So if some of the workers still insist of getting paid in cash, great ineffeciencies remain for the company. When few enough remain, the company than quite reasonably insist that they are paid by mobile (I can remember my first factory job when I was a teenager, when the company was going through the process of switching the workers from cash to direct deposit – it wasn’t instantaneous, but it was done in the end). Come on mateys, all aboard for lack-of-Treasure Island.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

The Tesco way

At a recent Financial Services Club event, one of the speakers said that it was unlikely that retailers would make changes to their POS systems to adapt to new payment mechanisms, outside of their normal replacement cycles. With one exception. He said they might make the investment in POS if it was for their own payment system. In other words, Tesco won’t change their POS software because some student comes up with a cool way of paying for things with iPhones, but they will change their POS software to launch their own payments service, wallet, device or whatever that reduces costs and increases benefits.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Future tension

I was pottering around the British Library’s superb exhibition on science fiction and, since it is free, felt it only moral and just to stop off in the gift shop and buy a couple of books. Truth be told, there were a hundred books there I wanted to buy, but I decided to limit myself to two, one of them being a copy of Edwin Abbott’s magnificent Flatland, one of my all-time favourite books, for no.2 son. Browsing on, I was astonished to find a new edition of Edward Bellamy’s “Looking Backward, 2000-1887” from the Oxford University Press. This is dated 2009, so it didn’t exist when I wrote about the book back in 2006.

I’m always curious about the first reference to the credit card in literature. The oldest I’ve found so far is in a long-forgotten text from 1886 called “Looking Backward, 2000-1887” by one Edward Bellamy. I picked up a 1947 edition from the Amazon marketplace, which suggests it must have been reprinted a few times. Indeed, the dust jacket claims it to be one of the best selling utopian fantasies of all time.

[From Digital Money: 1886 and all that]

In this new version, according to the web site (I haven’t read it yet – will start tonight):

  • The second most successful novel to be published in nineteenth-century America–a book whose thunderous indictment of industrial capitalism and vision of life in a socialist utopia still touches a nerve in the twenty-first century.
  • The introduction offers a highly original reassessment of the novel, exploring the political and psychological peculiarities of this celebrated utopian fiction
  • Uses the second, revised edition text of the novel which made “Looking Backward” a bestseller, and the notes detail significant variations from the first edition.
  • Contains an up-to-date bibliography and chronology of the author’s life

The discovery of this new edition made me think again about just how long it takes to effect change in the conservative world of money. Yet perhaps Bellamy was only a couple of decades out in his predictions of cashlessness, which isn’t bad across a 125-odd span. Public attitudes are changing, even in conservative nations such as our United Kingdom.

Only 31% of people said using notes and coins was their preferred payment method, with 41% saying they would choose to use a card if they could, according to the Payments Council.

[From The Press Association: Consumers ‘choose cards over cash’]

Personally, I would never use notes and coins again if I had the choice, and it looks as if more and more people are coming to the same conclusion.

It found that while 83% of people aged over 55 would use cash when buying something for up to £3, 12% of under-35s would use a debit card.

[From The Press Association: Consumers ‘choose cards over cash’]

I’m certainly over 35, but I fall in the later category. I would always used a card, given the option, although I never use a debit card of course. Why anyone would use a debit card when they could use a credit card (except in the face of surcharging, about which more in a later post) I don’t know. But this leads me to conclude that Bellamy may well have been a more accurate soothsayer than anyone suspects. This is because the “credit card” that he describes in the book is actually a pre-authorised offline prepaid card, and these surely are they key cash replacement product de nos jours. In the Federal Reserve Payments Study last year, prepaid was identified as the fastest growing segment.

The Study found that prepaid cards represented the fastest growing payments segment from 2006 to 2009, with an annual growth rate of transactions at 21.5%. By way of comparison, the number of debit card transactions grew at 14.8% and the number of credit card transactions declined by .2% annually over the same time period.

[From PaymentsJournal – Prepaid Transaction Volume Continues to Grow, Even as the Size of the Transactions Gets Smaller]

I’ve just been exploring some prepaid opportunities with one of our clients, and one of the factors that we were kicking around (not giving any secrets away!) was that prepaid is a way to experiment (provided that not-too-ridiculous KYC/AML/CTF doesn’t derail it) in a way that other products aren’t.

From the consumer side, prepaid allows consumers to test new opportunities and options without risking a lot of money or putting their bank accounts or credit cards on the line.

[From PaymentsJournal – When It Comes to New Payments Technology, Prepaid Will Lead the Way]

This is a good point, but I feel there’s another factor, at least in Europe. You don’t need to be a bank to offer prepaid services: the combination of an Electronic Money Institution Licence (ELMI) and a Payment Institution Licence (PI) means that any company can offer a full service: an open-loop prepaid card. I suspect that many of the companies applying for these licences are doing so because they want to use new technology to deliver new services that need payment, if you see what I mean. That is, they don’t expect to earn money from the payments themselves, but from the value-added services that need the payments to take place (what people are starting to call the “Google Model”). Hence Bellamy’s vision may be realised not from within the payments industry, but from, say, retail or mobile or brand or somewhere else entirely.

I’ve been using the prepaid contactless MasterCard on my Orange phone for a couple of weeks now — mainly in Pret and McDonalds — and I have to say it works pretty well. I’ve very comfortable with the idea of switching to prepaid, because prepaid on the phone isn’t a pain, it’s easy. When the prepaid balance falls below a certain level, you’re asked to enter your PIN and top up. Simple. Thus while it may be initially hard to imagine prepaid cards replacing cash in retail transactions, the more I use my prepaid “card” in retail transactions, the easier it becomes.

Naturally, I obtained a spare copy of the new edition of “Looking Backward” and I have it on my desk beside me as I type. I will cheerfully dispatch it post-haste to the first person to respond to this post with the name of the first-person narrator of the story in question. In the traditional fashion, this competition is open to all except for employees of Consult Hyperion and members of my immediate family, is void where prohibited and is not connected in any way with the London Olympics 2012. The prize must be claimed within three months. Oh, and no-one can win more than one of the Digital Money Blog prizes per calendar year.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Viva El Presidente!

[Dave Birch] I just saw an American in a bit of a pickle at Holborn Tube. He was trying to buy a ticket, but the machines won’t take non-chip cards, so he was stuck. His US American Express card was useless. Fortunately he was my brother-in-law, so I bought his ticket with my splendid Barclaycard OnePulse card. This is happening to Americans all the time, and since it happens to the banks’ best customers, they are beginning to respond.

I was pleased to see in the news recently that Chase and Wells Fargo announced the issuance of EMV chip-enabled cards for several of their credit card portfolios.

[From Portals and Rails]

I notice that at many of the US international airports I’ve been to recently (on a sample of three) you can buy prepaid Sterling and Euro pre-paid chip and PIN cards from the Travelex booths as well. Chase and Wells aren’t the first US EMV issuers.

State Employees’ Credit Union (Secu) is set to be one of the first financial institutions in the US to roll out chip and PIN debit cards to its customers. The non-profit cooperative has enlisted French vendor Oberthur Technologies to help migrate its 1.6 million debit card holders to EMV between March and the end of the year.

[From Finextra: State Employees’ Credit Union makes EMV move]

The pressure for US migration is growing. As Jamie Henry of Walmart mentioned in his recent Tomorrow’s Transactions podcast, many retailers are asking the banks to go ahead with migration because they think it will reduce their costs dealing with fraud and PCI-DSS. Perhaps the pressure is reaching a critical point of some kind.

Don Rhodes, senior director of risk management policy for the American Bankers Association, says a number of emerging technologies, such as the EMV chip standard, mobile payments and peer-to-peer or person-to-person payments, will soon change the way U.S. financial institutions and merchants connect and transact. And it could all happen in 2011, much sooner than most industry experts expect.

[From EMV, Mobile and the Payments Landscape]

The kind of things that have been going on with Google and Square and Isis would serve, I think, to reinforce that the trend is accelerating. The fact that some of the trailblazers (eg, Bling Nation) have found it heavy going doesn’t mean anything about the overall trend (the weather isn’t the climate, as they say). I saw in a Mercator Advisory Group press release that they are saying that

Merchants are advised to “spend the $10” for EMV capable terminals now in anticipation of an eventual EMV roll-out.

[From EMV in the USA: Waiting on Debit, a Mandate, or Just the Opportune Moment]

They were anticipating an early 2011 start for the EMV roll-out, which is exactly what appears to have happened, albeit still on a limited scale. Elsewhere, the chip and PIN bandwagon rolls on inexorably.

Due to an increasing number of transaction fraud worldwide, more and more countries are shifting from the stripe card standard to the EMV standard, which substantially enhances transaction security and operation efficiency. Now some major Chinese commercial banks are to join the trend, planning to issue their chip band cards by the middle of the year.

[From Banks in China to Launch Chip Cards]

Perhaps in the Americas it will take political leadership to enable to the final push towards EMV, a President with real vision and a commitment to the well-being of his nation.

President Chavez has mandated that the country move to EMV chip cards later this year which should stop this type of fraud

[From Chavez figures out how to stop cross border fraud]

Well, if only President Obama shared the wisdom, vision and economic genius of the noted revolutionary leader Hugo Chavez! So Viva El Presidente and down with the reactionary and counter-revolutionary Yankee magnetic stripe hegemony imposed by the running dog lackeys of imperialist aggression.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Innovation is technology-enabled

Around the world, when faced with new products in the payments space, banks naturally crank up their innovation departments and produce super new products and services to wow customers back. I’m joking, of course. What they actually do in many countries is to going whining to the regulator and force competitors to use the banks’ legacy infrastructure. This is what just happened in India, which really ought to be a huge and dynamic market for e-, m- and new payments of many kinds.

Consequently, from 1 March, the eBay unit says merchants in India cannot receive payments from abroad of over $500 per transaction. In addition, merchants will no longer be able to use any balance in their PayPal accounts to buy goods or services. Instead all payments must be transferred into Indian bank accounts first.

[From Finextra: RBI forces PayPal to restrict payments to Indian merchants]

Now, I’m not saying that banks are the only people who react to innovation in this way: that is, by trying to stop it. This goes on all the time.

For the last fifty years, hard disks have been increasingly super-charged gramophone records: at their heart, there is still a real disk rotating very fast on a real spindle. That’s not the only way to store data, as the memory stick revolution shows, but until now, solid state drives (which have no moving parts) have been too small and expensive to replace traditional hard disks as the main storage device for a computer. Now that’s changing, with real advantages for users as a result… Seagate’s response is to threaten to sue all the new entrants for patent infringement, while insisting that their existing market is not threatened.

[From Public Strategy: Innovator’s irony]

At the dawn of the industrial revolution, the steam engine delivered the fundamental business school case study in this topic, something that I wrote about when I was invited to speak at the European Patent Forum back in 2009.

In his keynote address, the Czech Prime Minister Mirek Topolanek said that we had to find a balance in the intellectual property system, that it was right to let Stevenson patent his steam engine but not the screwdriver he used to build it (he didn’t explain why..).

[From Patent error | 15Mb: yet another blog from Dave Birch]

In fact, as I discussed in this post, history teaches the opposite lesson because the patent system held back the evolution of the steam engine for a generation! But back to our business. What kind of innovation is relevant to the payments industry? This is not clear to me. On the one hand, it seems reasonable to say that…

What would be refreshing is if the focus of innovation could be pegged to the value that it delivers to the entire ecosystem, not just the engineers who get a kick out of building cool new toys.

[From Payment Gadgets at The Catalyst Code]

But is this true? When Apple put together the iPod, it didn’t benefit the “entire ecosystem”. The disruptive innovations in fact devastate parts of the ecosystem, like forest fires that allow new shoots to grow. I hate to harp on about the M-PESA example, but I think it illustrates this point well. The banks complained about M-PESA and tried to stop it but fortunately failed. Now that M-PESA has 13m customers and 20,000 agents, the banks are able to deliver new services to new customers using the platform. Were they devastated by the forest fire? No: it gave them space for new shoots as well.

Where do we look for the next new shoots then? Not in banks, generally speaking, but elsewhere in the ecosystem. The payment innovations to come will be technology-enabled, which is why it’s important for businesses throughout that ecosystem to understand the new technologies relevant to payments and, just as importantly, understand the business model ramifications of seemingly dreary technology architecture decisions being made by nerds right now. While they will be technology-enabled, though, it’s the sustainable new business model that is the key. A good example of this is Square.

..if Square can provide just enough added-value with their app to get traction in the small business sector (they are already processing a million dollars a day), then when new payment technologies come along (eg, NFC phones that can accept payments from contactless cards) the merchants will just expect Square to handle them for them. We have long been advising clients that the key disruptive role of mobile phones in the payments world is the ability to take payments, not to make them.

[From Digital Money: Hip to be Square]

And we still do, in fact. I think Square is an interesting innovation case study. It does not compete with existing acquirers, but opens up the market so that more people can accept card payments.

So where is Square seeing the most traction? Without a doubt, small businesses, independent workers and merchants comprise most of Square’s rapidly growing user base. The technology only requires its tiny credit card scanner that fits into your audio jack and Square’s app. The device and the software are free, but Square takes a small percentage of each transaction (2.75% plus 15 cents for swiped transactions).

[From Square Now Processing Millions Of Dollars In Mobile Transactions Every Week | TechGoo]

In a way, this is a real-world PSP and an fascinating niche play in a large volume-driven acquiring market, one that can be seen to adumbrate mobile disruption and our projection that the mobile-phone-as-POS meme will be more revolutionary than the mobile-phone-as-card meme. But there’s something else to it as well. Conventional acquirers use conventional methods to assess applications.

Square’s qualification rules are more relaxed than those of standard credit card processors, There are no initiation fees, monthly minimums, and when merchants apply for a reader, Square doesn’t just focus on a credit check, but also takes into account the influence a company holds on Yelp, Twitter or Facebook.

[From Square Now Processing Millions Of Dollars In Mobile Transactions Every Week | TechGoo]

That, it seems to me, is more of a window into the coming economy based on the reputation interweb (or web 3.1, as I propose to call it, to avoid clashing with web 3.0). Can you imagine Barclays Business or Streamline giving you a merchant acquiring account according to the number of twitter followers you have rather than your trading history or bank references?

By the way, I can’t remember if I’ve blogged this before but one of my favourite stories about accepting merchants for acquiring accounts goes back more than a decade to the hazy days before the LastMinute flotation. I was doing some work over at what was then NatWest Capital Markets, who had invested millions in Lastminute, when they went beserk because NatWest Streamline wouldn’t give LastMinute a credit card acquiring account because it didn’t have two years’ trading history!

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Hip to be Square

Many years ago, when I was a mere slip of a consultant, I was sent by a client to check out a company called WorldPay, then run by Forum friend Nick Ogden. I reported back to the retail bank I was engaged by that I couldn’t see where WorldPay was going, since it didn’t provide any service that the bank couldn’t provide themselves given a small amount of development effort. Therefore I assumed that the bank, like all other banks, would soon be providing a comprehensive range of services for new internet businesses and that WorldPay’s niche would vanish.

Royal Bank of Scotland Group Plc, the U.K.’s biggest government-owned bank, agreed to sell its credit- card payment processing unit to Advent International Corp. and Bain Capital LLC for 1.7 billion pounds ($2.7 billion).

[From RBS Sells WorldPay to Advent, Bain for $2.7 Billion – Bloomberg]

Please! Don’t listen to me about anything to do with business! I didn’t realise that there is no such thing as a quick and dirty development in a bank, and that starting a new line of business doesn’t happen overnight. There’s a big, big gap between people like me saying that all the bank needs is a simple internet gateway and a merchant acquisition process and these systems and processes actually getting going. Things just don’t work like that, for all of the well-known reasons (focus on core business etc). I was thinking about this when I got into a discussion with someone a few days ago. They said that Square does nothing that existing stakeholders in the card business couldn’t do themselves, so it has no long-term future, the argument being that Barclays or Streamline could just offer a similar service. And Square is reducing its charges, meaning less margin, so they won’t be able to beat the big boys on cost either.

Square’s rates will fall to a flat fee of 2.75 percent per transaction instead of charging 2.75 percent plus an additional 15 cents. (The rate for when a credit card number is keyed in, rather than swiped, will remain the same at 3.5 percent plus 15 cents.)

[From Square Sacrifices Revenues to Ramp Mobile Payment Volumes | Tricia Duryee | eMoney | AllThingsD]

All true. But the reality is that just because other merchant acquirers could do this does not mean that they can do this, and if Square can provide just enough added-value with their app to get traction in the small business sector (they are already processing a million dollars a day), then when new payment technologies come along (eg, NFC phones that can accept payments from contactless cards) the merchants will just expect Square to handle them for them. We have long been advising clients that the key disruptive role of mobile phones in the payments world is the ability to take payments, not to make them.

Incidentally, I can’t resisting commenting on the Square-based debate that sprung up over the last few days. As I’m sure you all know, Verifone wrote an open letter pointing out that Square is not fully PCI compliant, something that has been known since the product was first announced.

iPhone cannot be made PCI compliant without first encrypting the card BEFORE it gets into the iPhone (see the Verifone solution)

[From Square Up update « FinVentures]

Not that interesting, to be honest, but it did stir things up and Square had to respond, which they did by pointing out that the problem is with a payment system built on trivially-copyable magnetic stripes and the like.

In his response, Dorsey said any technology, including “an encrypted card reader, phone camera or plain old pen and paper,” can be used to steal information. “If you provide your credit card to someone who intends to steal from you, they already have everything they need: the information on the front of your card,”

[From Square Responds to VeriFone s Security Claims – American Banker Article]

Will master criminals intent on skimming card numbers sign up with Square and then install a dodgy app? Probably not. There are plenty of better options out there, including the existing magnetic stripe readers that the criminals already use.

Exposing Square’s security vulnerabilities in this manner is an act of outright hostility on VeriFone’s part, and a sign that it’s unnerved by Square’s growth.

[From VeriFone Attacks Rival Square With Ethically-Questionable Security Exploit: Apple News, Tips and Reviews «]

Not that it’s any of my business, but this is why the letter looks like a mistake. If I were Verifone, I would have spent my time making a better iPhone card reader, or something that plugs in to Android phones or EMV chip/contactless readers or whatever, or partnering with people to deliver great merchant service, or something else to compete.


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