Tag: costs and interchange

State-mandated price-fixing is not the answer, but as it goes this isn’t too bad

1st July 2011by Consult Hyperion1 Comment

Our good friends at Glenbrook summarised the final outcome of the Durbin process:

Debit interchange cap – $0.21 plus 5 bps (for both signature debit and PIN debit)
Fraud prevention adjustment – $0.01 (interim rule)
Routing restrictions and network exclusivity – Option A (two unaffiliated debit network)
Card Present vs Card Not Present – No distinction
[From Federal Reserve Issues Final Rule on Durbin Amendment]

Now there will be a lot of comment from people far better qualified than me on what all of this will mean for the payments industry, so I don’t want to get into those specifics here, but there’s something that bothers me about the whole thing. I went back to Steve Bartlett’s article on Durbin in the EFPLP [Bartlett, S. Announcing the death of the debit card in E-Finance & Payments Law & Policy (Mar. 2011)] and it prompted me to have another reflection on the Durbin process as it seems (to a foreigner!).

Plenty of lawmakers are anguished about their swipe fee position, but largely because they’re worried about falling out of favor with good friends in the corporate world.
[From Swiped: Banks, Merchants And Why Washington Doesn’t Work For You]

I think what this means is that they knew that government price-fixing is wrong, but that big companies (particularly retailers) spend a lot of money on lobbying. This isn’t something to be cynical about, it’s just the real world. I’m happy to offer these lawmakers a solution though. Why not go down the European route and create a regulatory framework that allows competition from non-banks? There is no reason for payments to be a banking business, and competition rather than regulation is a better way to reduce costs to the rest of the economy.

There are other ways to reduce total costs too, but these mean some short-term spending (which no-one wants to do) in order to improve the situation for the longer term (which, naturally, congressmen don’t care about).

The Federal Reserve could, and should, use the Durbin Amendment as a vehicle to move the United States onto the EMV smart card standard
[From Why The Fed Should Use Durbin To Push EMV ( – Industry Verticals )]

Why would this save money in the long term? It’s because one of the key reasons why US debit card fees are so much higher than elsewhere is that they are predominantly signature debit transactions. Moving to PIN, and offline PIN at that, and offline completely for low-value contactless transactions, ought to kill a few birds with the same stone.

the Fed has the power to change this equation. By allowing card issuers to recover some of the costs of issuing smart cards in the form of higher interchange, it could make it profitable for banks to issue smart cards. At the same time, card networks such as Visa and MasterCard could then impose a liability shift policy, similar to that deployed in other regions
[From Why The Fed Should Use Durbin To Push EMV ( – Industry Verticals )]

In reality though, none of the lobbying seemed to be about pursuing the best long-term strategy for USA Inc. It just all came down to fighting between banks and retailers. I assumed that banks were going to lose.

Lobbying on behalf of banks is a bit of a lost cause at the moment, so you can’t blame the retailers for striking while the iron is hot, but if Congress wants to reduce the fees paid by retailers for payments, then it should create a regulatory environment that allows new entrants to come in and provide (non-bank, if necessary) solutions to the marketplace.
[From Digital Money: If you don’t like cards, don’t take them]

Well, despite their (entirely deserved) lack of popular support, it looks as if I was wrong about the banks’ capacity to lobby. They mounted a serious campaign.

Last year US banks generated $536.9 billion of interest income, according to FDIC data, and while that is down from heights of the boom years, it is still a hefty amount of revenue. Non-interest income, which includes fees, climbed to $236.8 billion last year from $207.7 billion in 2008.
[From Bankers, Hear My Plea: Stop the Fee Insanity – Bank Innovation]

It’s very difficult to obtain an accurate picture as to what proportion of the non-interest income relates to payments. The last figure that I have that I believe to be reasonably accurate was 45%, but many commentators seem to think that this is too low. So let’s say that all of the “other” category of non-interest income reported is payments, and call it 50%. There was a paper published last year called “Banks’ Non-Interest Income and Systemic Risk” by Brunnermeier, Dong and Paliac that showed that the higher the proportion of non-interest income, the greater a bank’s exposure to systemic risk. In other words, the more a bank depends on income that comes from outside of the core business of savings and loans, the more exposed it is to changes in market conditions (eg, Durbin amendment, non-bank competition, that sort of thing). I read this as meaning that it’s better for the economy as whole if banks make less money from running debit card systems.

The lesson here is that if we want serious regulation of banks, we can’t trust it to be done by bank regulators.
[From The Fed Bails Out the Banks…Again – Credit Slips]

Therefore, it seems to me, that the ruling wasn’t that bad for banks. If you have to have a cap, from the banks’ perspective, it might as well be this one. Retailers wanted a cap, and they got it, but the cap is high enough that banks won’t suffer a catastrophic collapse in fee income, so the banks ended up with not such a bad deal provided that they shift signature debit to PIN debit. The banks will lose some fee income because of this, retailers will pay a bit less and customers won’t see much difference because the difference won’t be passed on them. I disagree with observers who think that Visa and MasterCard will see big trouble because of the loss of signature debit transactions. I think that Visa and MasterCard won’t be too affected because they will boost their PIN debit offerings to make them more attractive to banks and they will push PIN debit into mobile, online, retail and so on. This means that the income lost from signature debit transactions can be made up by replacing cash and other kinds of transactions with PIN debit (I think – but I’m keen to hear from others who know far more about the US market dynamics).

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

Economy class

28th June 2011by Consult Hyperion1 Comment

At the Intellect / Payments Council conference on Driving Change in Payments, one of the delegates (I think it was one of the chaps from Accenture), raised the topic of surcharging, asking whether the surcharging of non-cash payments might slow the spread of e-payments in general and low-value contactless cash replacement payments in particular. He also mentioned the example of surcharging by low-cost airlines.

Perhaps the most obvious example of tender steering in Europe is in eCommerce – where Ryanair (and other low-cost carriers) surcharges considerably for all but a single method of payment (currently MasterCard Prepaid cards)
[From Will Retailers Use “Tender Steering” to Control Interchange Fees? |… | LinkedIn]

While the point about surcharging in relation to the spread of new payment mechanisms is interesting, what’s going on with the airlines isn’t really surcharging (Ryan Air said specifically that “these are not surcharges”, and they are correct). What these charges are are a transaction tax that everyone has to pay (I’d be curious to find out how many people actually pay with Ryan Air MasterCard prepaid cards). Unsurprisingly, a great many people were unhappy about this practice (ie, advertising an air fare as £10 then charging £18 because the customer pays with a credit/debit card) as it smacks of unfairness.

A super-complaint is to be launched about the “murky practice” of surcharges levied on customers who pay by debit or credit card
[From BBC News – Credit and debit card surcharges ‘are excessive’]

Bear in mind that if you are booking tickets for a family, these transaction fees can easily become significant: if they were folded into the price of the ticket, it would give a more accurate guide to the public.

I recently used Ryanair and cost me £30 in booking fees and another £48 in online checkin fees to use my printer and my paper and my Ink. Can anybody explain how that works ?
[From Which Launches Super-Complaint Into Credit And Debit Card Surcharges With Office Of Fair Trading | Business | Sky News]

Well, the solution to that seems pretty straightforward: don’t book Ryanair. It’s not just them, by the way. I understand that EasyJet charges £8 (EIGHT QUID) for a debit card transaction that costs it, what, 15p? Personally, I won’t use any of the “low cost” carriers, so I don’t know what the exact figures are. Anyway, today the OFT ruled on the super-complaint (and I can’t wait to Ryan Air’s response because they will undoubtedly go bonkers):

Travel companies have been ordered to end the use of hidden surcharges for passengers paying by card. Airline, ferry and rail passengers typically have to click through four to six pages of an online booking before the charge is added to the price. Now the Office of Fair Trading (OFT) has ordered them to make all debit or credit card charges clear immediately.
[From BBC News – Hidden card charges for travel tickets to be banned]

But that, to me, isn’t the interesting part of the ruling. This is:

It also wants the law changed to abolish altogether charges for using debit cards.
[From BBC News – Hidden card charges for travel tickets to be banned]

Much as I dislike government intervention in the pricing of anything, unless the costs of cash are to be distributed properly (which they won’t be) this is the only sensible course of action. Making debit cards the “zero” and allowing retailers to surcharge other payment mechanisms (including cash) is fair, with one proviso: that pre-paid cards are counted as debit cards. This is necessary to deliver financial inclusion.

Perhaps the European Commission could be persuaded to adopt this as part of its SEPA initiative and make it common throughout Europe so that pre-paid and debit cards become the “normal” way to pay?

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

Licensed operators

13th April 2011by Consult Hyperion1 Comment

France has been in the forefront of the NFC revolution, with an early commitment to cross-industry co-operation, considerable work on standards and models and an aggressive timetable for getting phones into the market. Remember this?

A dozen French cities plan to launch wide-scale contactless payment and information service on mobile phones with the backing of the ministry of industry, reports Les Echos. The city projects approved under the initiative will receive state assistance for consultancy and engineering, but no other subsidies are planned at this stage.
[From Aid from French Ministry of Industry for mobile contactless cities. « Contactless & NFC City League]

You will undoubtedly recall that a few months later, the French mobile operators decided to get together with a processor and form a mobile payments proposition to launch a serious assault on the banks’ retail payment franchise.

Orange, SFR, Bouygues Telecom et Atos Origin créent une société commune pour proposer une plate-forme unique de paiement en ligne, sécurisée par le mobile.
[From Union sacrée des opérateurs mobiles dans le paiement sur Internet – OPERATEUR DE TELECOMMUNICATIONS SERVICES INFORMATIQUES ATOS ORIGIN FRANCE TELECOM SFR BOUYGUES TELECOM]

Well they’ve made their first assault on the enemy positions and have been granted a PI licence. Why would they bother, you might wonder, when polls show that the majority of consumers don’t want to use mobile payments?

The 59% of consumers who were against the idea, meanwhile, gave their reasons as: Security (79%)
[From Most French consumers not in favour of mobile payments • NFC World]

The answer is, of course, that consumers don’t know what they are talking about and it’s a waste of time asking them about anything new. Whatever they might say a priori, in all of the pilots and trials that we have been involved in, they really, really, liked mobile proximity.

But there are some real issues, and we need to address them.

Dead phone batteries. Wrong merchant terminals. Terminals turned off. Terminals unrepaired. No terminals at all.

These and other, less obvious glitches suggest contactless technology may not be the mobile payments panacea for tattered magnetic stripes and other problems with plastic cards.
[From Mobile Payments Inheriting the Problems of Contactless – American Banker Article]

Well, yes and no. (I am a consultant, after all). Let’s have a look at these

Dead phone batteries. NFC is interoperable with the existing contactless payments and ticketing systems. As you may have noticed, your Oyster card doesn’t have a battery in it: that’s because it is powered through the electromagnetic field of the terminal you touch it to, and the same is true for the NFC interfaces in phones: if the phone has no battery you may not be able to access your m-wallet to check your transactions, redeem coupons and so on, but you will be able to to use it pay in a shop and ride the subway.

Wrong merchant terminals. I don’t think this will an issue. Right now there are some problems with some cards not being accepted in some terminals, but this is the result of standards problems three or four years ago. The contactless EMV standard should interoperate seamlessly. Some of the terminals are certainly “wrong” from the point of view of consumer experience, but that’s a different thing.

Terminals turned off. Fair enough, I do see this from time-to-time. But it’s a teething problem. There is a problem with terminals being turned off after the merchant has rung up the purchase and then having press some more buttons to turn it on, but that’s an implementation issue.

Terminals unrepaired. I don’t think this is a long term problem. Contactless terminals (since they have no slot or contacts) are considerable more reliable in practice than contact or stripe terminals. Experience from other sectors suggests to me tha tthe cost of maintaining an estate of contactless terminals is less than half the cost of maintaining an estate of conventional terminals.

No terminals at all. This, I think, is the real problem. When I was last in the US, I saw contactless terminals in places where they didn’t really have much impact, like in CVS. But in the places where contactless would have really helped and speeded things up — BART machines, airport carts, Coke machines and so on — nothing.

The point is, that those are real issues that do need dealing with, whereas what the public says are their concerns, such as about the security are, in my opinion, not real issues and it should be handled through marketing communications. Oh, wait…

85% of users said they considered the protocols for operating with the NFC system to be sufficiently secure.
[From Sitges trial results: Consumers pay more often and spend more with NFC phones than with cards • NFC World]

This must be a translation from Spanish, because I’m not sure that “protocols for operating with the NFC system” translates properly in English, but it’s good news all the same. I’m not saying that everything is perfect in the NFC world. Even in France, where progress has been slow despite the commitment of major banks and operators. It’s still a new technology.

The problems are one of the main reasons bank Crédit Mutuel-CIC has held back on launching its m-payment service, according to Patrice Hertzog, payment systems manager for Crédit Mutuel-CIC. He said it has been difficult for the bank’s trusted service manager, Gemalto, to set up and manage the bank’s PayPass application on SIM cards produced by other vendors, such as Oberthur Technologies.

The problems have occurred despite much standards work by the French Association Française du Sans Contact Mobile, or AFSCM, and prior trials involving multiple French banks, mobile operators and vendors.
[From ‘Open’ Battles Break Out Among NFC Vendors Over Android | NFC Times – Near Field Communication and all contactless technology.]

To be honest, this suggests that vendors are not building TSMs from scratch based on the new standards but are putting wrappers around their existing card personalisation systems. That sort of thing is, to me, more of a real issue than incorrectly worrying about what the public think, but whatever. Things are moving. Even in the US, the new technology is getting a foothold and there will soon be TSMs there too.

The joint venture formed by U.S. mobile carriers to launch NFC-based mobile payment… has selected France-based Gemalto to download and manage payment and other secure applications on NFC phones to be used in pilots expected to be held in three to four cities during the second half of 2011
[From U.S. Carrier Joint Venture Chooses a Trusted Service Manager | NFC Times – Near Field Communication and all contactless technology.]

There’s plenty of activity in the US as elsewhere, and since I’ve been looking at the US for clients recently I was interested to read about the work done by the Federal Reserve Banks of Atlanta and Boston. This work suggests that the success factors for the US will rest on the evolution of an open eco system for NFC.

The mobile infrastructure would likely be based on Near Field Communications (NFC) contactless technology resident in a smart phone and merchant terminals.

Ubiquitous platforms for mobile should leverage existing rails, including the ACH network for non-card payments, and support new payment types that meet emerging needs.
Some form of dynamic data authentication would be at the heart of a layered mobile payments security and fraud mitigation program.

Standards would be designed, adopted, and complied with through an industry certification program to ensure both domestic and global interoperability, including a standard to ensure that devices used to facilitate mobile payments do not create any electronic interference problems.

A better understanding of a regulatory oversight model should be developed in concert with bank and non-bank regulators early in the effort to clarify compliance responsibilities.

Trusted Service Managers should oversee the provision of interoperable and shared security elements used in the mobile phone.
[From Mobile Payments in the United States Mapping Out the Road Ahead – Boston Fed]

On that final point, things are already moving.

The joint venture formed by U.S. mobile carriers to launch NFC-based mobile payment… has selected France-based Gemalto to download and manage payment and other secure applications on NFC phones to be used in pilots expected to be held in three to four cities during the second half of 2011
[From U.S. Carrier Joint Venture Chooses a Trusted Service Manager | NFC Times – Near Field Communication and all contactless technology.]

So there’s plenty of activity in the US as elsewhere and plenty of organisations are looking at how the move to mobile proximity may impact their businesses.

A white paper that outlines the survey findings, including how the most forward-thinking financial institutions are building a business case for mobile payments, is available at http://www.fiserv.com/mobilestrategy.
[From Forward-Looking Financial Institutions Focused on Mobile Payments Business Case, Says Fiserv Survey – pymnts.com]

I couldn’t help but think, as I read this, that the very act of building a business case for something like this is fundamentally backward-looking, trying to shoehorn something that is the basis of a new value network into the existing business models. The report says that the factors that the FIs evaluated across these business lines included customer retention and profitability, cost reduction, revenue generation and retention, increased customer engagement and competitive parity. When I looked at the revenue generation part of it, though, it only referred to revenue generation in terms of debit card transactions and keeping the connection to the DDA. This isn’t how forward-looking organisations are thinking about revenue generation from mobile payments, they are thinking about delivering entirely new products and services that are simply not possible in conventional (ie, card) environments, generating revenue from things that banks don’t do.

Google is to run tests of mobile payments at stores in New York and San Francisco in the summer, according to anonymous sources cited by Bloomberg. The search engine giant will pay for installation of thousands of NFC cash-register systems from VeriFone Systems at merchant locations, one source told the wire.
[From Finextra: Google to run commercial trials of NFC at the POS – Bloomberg]

Well, well. So while financial institutions are agonising over the business case, Google is giving out the terminals for free. It’s not hard to see why: they don’t care about the miniscule margins on the payment transaction and arguing about how to slide and dice the merchant fee, they care about building new business around knowing who is buying what and where. So leadership in the NFC space is may well shift away from the payment incumbents. Perhaps the answer to the age-old question about whether banks or operators would control the mobile payments space is… neither.

If you don’t like cards, don’t take them

25th January 2011by Consult Hyperion7 Comments

The cases of debit interchange in the US and cross-border interchange in Europe will, in the longer-term, serve to illustrate a general point: price controls don’t work, a fact well-known since the days of Diocletian:

Despite the fact that the death penalty applied to violations of the price controls, they were a total failure. Lactantius, a contemporary of Diocletian’s, tells us that much blood was shed over “small and cheap items” and that goods disappeared from sale. Yet, “the rise in price got much worse.” Finally, “after many had met their deaths, sheer necessity led to the repeal of the law.”
[From How Excessive Government Killed Ancient Rome]

OK, so the Durbin amendment probably wont lead to rioting in the streets, but it’s still price control, and it will have unfortunate consequences (not for me, since I never use a debit in the US anyway). There’s a good article in the January issue of Digital Transactions by Lauri Giesen examining the US card market. She’s specifically looking at the strategy of retailers with respect to cards. Having won lower debit card fees, retailers are going to go after the credit card business. Trixi Wexler, a spokeperson for the Washington DC-based Electronic Payments Coalition, says that retailers didn’t spend $10 million in lobbying “just to walk away with lower debit card fees”. I’m sure that’s true, but even if it isn’t, that $10 million represents pretty good value for money, since it will result in considerable savings for retailers.

The big retailers and other merchants — who are the real winners — claim they are going to help consumers from their end by passing their savings on in the form of lower prices… But those claims are spurious at best. In countries where these types of interchange rules have been adopted, like Australia, consumers have seen no benefit.
[From Bill Cheney: New Interchange Rules for Debit Cards: A Perceived ‘Win’ Is Really a Loss]

Retailers in the UK make the same claim.

The BRC claim that if charges for every payment method were as low as they are for cash, its members could pass on £480 million in cost savings to their customers.
[From Retailers concerned over ‘unjustified’ fees]

Yes, I’m sure they *could*, but they won’t. The evidence from Australia shows that the retailers managed to persuade the regulator to cap bank fees (for no real economic reason) and then simply kept the loot. That’s exactly what I’d do if I was them: it’s called “regulatory capture” by economists, because market participants are using regulation rather than competition to obtain a larger share of market rent. This all left me wondering, once again, what exactly the lobbyees (is that a word?) think that they are achieving by transferring this share of market rent from banks to retailers. Why, for example, are retailers more deserving of 0.1% of my supermarket purchase than banks? It’s not even as if it’s all retailers anyway.

Cooper said 80% of the projected debit card interchange revenues banks stand to lose will go to 1% of merchants.
[From Untitled]

This, to me, looks less and less like Durbin striking a blow for the little guy and more and more like regulatory capture by some of America’s biggest businesses, the culmination of a well-managed campaign.

Retailers have begged Congress for years, in vain, to limit the fees they must pay to banks when customers swipe credit or debit cards.
[From Debit Fee Cut Is Rare Loss for Largest U.S. Banks – NYTimes.com]

I imagine consumers have begged Congress for years, in vain, to limit the fees they must pay to retailers for food or to gas stations for fuel, so what’s the difference? Why has Congress intervened in order to transfer wealth from one group within society (consumers) to another group (retailers)? The answer, of course, is lobbying.

But retailers mounted an unusually effective yearlong campaign to frame the issue as a chance for Congress to help small business. A leading trade group for chain retailers worked with small-business groups to make sure that every time a senator held a town hall meeting back home, a local business owner showed up to ask about card fees.
[From Debit Fee Cut Is Rare Loss for Largest U.S. Banks – NYTimes.com]

Lobbying on behalf of banks is a bit of a lost cause at the moment, so you can’t blame the retailers for striking while the iron is hot, but if Congress wants to reduce the fees paid by retailers for payments, then it should create a regulatory environment that allows new entrants to come in and provide (non-bank, if necessary) solutions to the marketplace. Are they going to do this? (It’s not a rhetorical question – I genuinely don’t know, and look forward to hearing from some of our US readers to tell me.)

In short, then, if banks had gone up the hill asking regulators to cap the price of food, on the perfectly reasonable grounds that employee salaries are a big part of their costs and that employees spend a lot of their money on food, they would have got short shrift. But given the general hatred of banks, retailers spotted a good opportunity to transfer some of their costs away.

MasterCard said… This provision stands to benefit some of the largest retailers in the world and will harm not only consumers, but also community banks, credit unions, and government benefits administrators. Currently, merchants pay their fair share of debit acceptance; in the future, consumers will be responsible for bearing this cost.
[From Consumers to Pay More for Merchants’ Debit Card Benefits | MasterCard®]

I don’t want to be accused of being MasterCard shill [full disclosure: my employer Consult Hyperion has provided paid professional services to MasterCard within the last year] but there is a valid point here: what’s best for society is to have payment systems that have the lowest total social cost. Speaking in very general terms, this means debit cards (and in particular, PIN debit). So if that’s best for society, how should society apportion the costs? Unless we think we can do better than the market, then we should leave the market alone. Since neither I, nor retailers, nor banks, nor regulators know what the interchange fee should be, they should focus on competition to set them at the right level.

There’s another point that the Digital Transactions article makes that I found interesting. Trixi says that the money from card fees goes to pay for innovation and that without the income, issuers will stop innovating. This may be correct, although innovation is more about non-banks than banks and it is not only Durbin that is hampering payment innovation.

Rich started his address with the assertion that the “Payments system is under attack,” from a regulatory barrage – the CARD ACT, NSF/OD regulation, forthcoming rulings under the Durbin Amendment and the newly formed Consumer Financial Protection Bureau (CFPB) all are paralyzing innovation in the financial services sector. At the same time, innovations from outside the financial services industry are happening at an incredible pace.
[From Payment System Under Attack? Solutions Found in Georgia! – pymnts.com]

I think that in the US case it also means that the retail payments business will slide down the priority list. The lost income from debit interchange, which should have been reduced by competition (ie, the regulators should have told the big retailers “if you don’t like cards, don’t take them” or “if you think you can do it cheaper, go right ahead”) rather than by regulation, will be replaced by fee income from consumers and the marketing, management and retention of checking accounts will surely become more of a priority than debit card activation.

If retailers think that payment systems are too expensive, then why don’t they start one? Or why don’t they invest in payment startups? Starbucks seems to have done quite well by running its own prepaid card scheme and its own mobile payment service, and has been exploiting the benefits of integrated mobile so successfully that it has now decided to go for an immediate national roll-out with barcodes, switching to NFC when the handsets are out there.

However, Starbucks Corp., one of the few stores with a mobile payments program in place, says these transactions are little different from other card purchases, and the real benefit to the merchant comes when people use its app to reload their accounts while waiting in line instead of at the register.
[From Upside For Mobile Payments Comes Before The Payment – PaymentsSource Article]

Perhaps it will be the innovative retailers, working in partnership with technology companies, who will make the breakthroughs while the biggest retailers still find it more cost-effective to spend the money on lobbying.

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

It’s a card Jim, but not as we know it

17th November 2010by Consult HyperionLeave a comment

[Dave Birch] The issue about EMV migration continues to attract attention and discussion as the US and EU become two regions divided by a common standard, as one might say. The problems with using US-issued magnetic stripe cards (dynamic or otherwise) elsewhere are becoming more common and more serious. Take this representative tale of woe from Business Week, concerning an American stuck in Europe following volcanic misbehaviour in the North Atlantic.

Burke stood in line for more than seven hours at an Amsterdam train station in April as he sought passage to Belgium. He watched European travelers, also grounded by the eruption, buy tickets at automated kiosks that accepted microchip-embedded credit cards. Burke’s Bank of America (BAC)-issued Visa (V) card, with the standard magnetic stripe on the back, was useless. When the 64-year-old retired economist from Bandon, Ore., returned home, he called Bank of America to ask whether he could get a chip card. The answer disappointed him: “They have basically said, ‘Sorry, but you’re out of luck.’ “
[From Why U.S. Credit Cards May Not Work Abroad – BusinessWeek]

How they resisted the temptation to say “it’s card Jim, but not as we know it” I’ll never know. But there’s a serious point to all this: the end of the universal acceptance. It’s always been a pretty fundamental consumer characteristic of the international card schemes that customers expect to be able to use the cards wherever they see the acceptance mark, but how much longer can this last? I mean, I know it’s my business to mess around with different, new cards (and near-cards) all the time, but I do find it slightly worrying that I can no longer tell when going to buy something whether my cards will be accepted or not. It’s worse for our American friends, because the transition to chip and PIN makes it more attractive to have unattended POS for higher-value transactions.

The problem is particularly acute at automated kiosks in Europe, such as the vending machines at regional rail stations and bicycle rental racks in Paris, parking meters in parts of London, toll roads and gas stations, all of which accept only chip-and-PIN cards. And the problem could get worse. More unattended pay stations are appearing in Europe.
[From Americans abroad run into trouble using credit cards – USATODAY.com]

I don’t know what proportion of US cardholders travel to Europe, or indeed anywhere else, but I imagine it’s quite low. So, we’re soon going to see a situation where unless US issuers provide chip and PIN cards to those cardholders, they will start to find their cards useless. At which point, they might be vulnerable to an assault from Bling or Isis or whoever.

In line with Europol’s stance on the future of the magnetic stripe and in support of the industry’s efforts to enhance the security of cards transactions by migrating from the “magnetic stripe” to “EMV chip” cards, the Eurosystem considers that, to ensure a gradual migration, from 2012 onwards, all newly issued SEPA cards should be issued, by default, as “chip-only” cards.
[From The end for the magnetic stripe on payment cards?]

Of course, the reverse will also be true. Persons such as myself who travel to the US will have to obtain magnetic stripe cards from their banks. I already have a Travelex $ Cash Passport stripe-only prepaid card that I take to the US with me, and I really wouldn’t have a problem with paying a couple of quid to my issuer to get a stripe-only limited-time card for use in the US when I travel there. I would also like the ability to limit my Barclays Visa debit card to ATM-only use in the US. I’m not alone in thinking about this sort of thing.

In the first poll 60% of the respondents felt that European EMV cards should not hold sensitive cardholder data as standard in a magnetic stripe, and in the second poll 28% indicated that they would be happy to contact their bank to activate the stripe on their card before travelling outside of Europe, 12% were happy to carry a Chip only card, and to apply for a separate stripe card should they need to travel outside Europe, and 20% were in favour of both.
[From The end for the magnetic stripe on payment cards?]

How do we balance this out? What is the appropriate strategy in the US? We might categorise the broad options as migrate to EMV (very expensive), keep stripe and issue EMV to international travellers (very inexpensive) or forget about stripe and chip and (via contactless) let them fade away as we move to NFC, mobile, biometrics and other forms of 21st-century payment (costs utterly unknown).

Continue reading “It’s a card Jim, but not as we know it”

Clipper chips

29th October 2010by Consult Hyperion1 Comment

[Dave Birch] I've read quite a few stories about the new Citi card with a chip in it. Not an EMV chip, of course, but a chip that allows the cardholder to dynamically rewrite the "magnetic stripe" on the back of the card so that it can switches between a credit card and a rewards card.

Next month, Citibank will begin testing a card that has two buttons and tiny lights that allow users to choose at the register whether they want to pay with rewards points or credit, at most any merchant they please.
[From The Mundane Credit Card Gets a Modern Makeover – NYTimes.com]

These are the "dynamic stripe" cards from Dynamics. The idea of them is that since US retailers are not going to replace magnetic stripe readers with chip readers, the way to deliver new services to customers is by emulating the magnetic stripe.

Called “Redemption,” the cards will work at any merchant where mag stripe readers are used. The new cards include programmable and electronic components such as a battery, an embedded chip, buttons and a card-programmable magnetic stripe.
[From Citi’s Pushes Buttons With 2G – Bank Technology News]

You can see how this kind of thing might have a window in the US where the retailers don't have chip terminals. It would make no sense anywhere else: in the UK, for example, Barclaycard's new Freedom rewards programme works at the POS so when you put your card in it asks you if you want to pay with Pounds or Points, which seems much easier than press a button the card, but anyway. And if you try to use a magnetic stripe card in a UK terminal, whether it's dynamic or not, they'll assume you're a fraudster and call the police.

So why do I say that using this kind of technology in the US may have a window?

Well, consider the example of the Cutty Sark. The Cutty Sark was a tea clipper, built for speed, and at one time was the fastest ship of its size afloat, famously beating the fastest steamship afloat and doing the Australia to UK run in 67 days. At the time, get tea from Asia to Europe at high speed was economically important and so there was pressure from the tea companies to get the fastest ships (so they weren't built just for the fun of it, or to show off the technology, but because of the economic imperative.

What's the point of brining this up? Well, it makes the point that the fastest sailing ship was built after the steamships arrived. In Christopher Freeman and Francisco Louca's "As Time Goes By: From the industrial revolutions to the information revolution" they note that

However, it had taken a fairly long time for the steamship to defeat competition from sailing ships, which also began to use iron hulls. The competitive innovations in sailing ships are sometimes described to this day as the 'sailing ship effect', to indicate this possibility in technological competition for a threatened industry.

In the long run, the sailing ships vanished, except for leisure, and the steamships took over. But when the steamships first came on to the scene they stimulated a final burst of innovation from the sailing ship world, which was then stimulated into building some great ships as a kind of "last hurrah".

Source: Historic Naval Ships Assocation (2004).

Perhaps we should look at the Citi initiative as the "last hurrah" of the magnetic stripe. I bumped into our good friend Adrian Cannon from Edgar Dunn while I was writing this, and he summed it up as "a very complicated way to achieve a partial answer" to the problem of card security, which strikes me as an accurate description.

Continue reading “Clipper chips”

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26th October 2010by Consult Hyperion1 Comment

[Dave Birch] When I checked in to PayPal X "Innovate 2010" I was given a free "Bling Powered by PayPal" sticker with a free $10 on it to spend at local merchants (such as the diner round the corner). Hurrah!

A helpful young chap explained to me that I had to text the sticker number to 78787 to activate it, so I did, and then I got this puzzling response.

I showed it to the chap, and he explained to me that Bling and PayPal are discriminating against foreigners and that the short code only works if you have an American phone number: if you have an international phone number, you have to pay for you own breakfast at the diner! Fair enough: there is a bit of backlash against immigrants in the US at the moment. But they should have told me before I texted my Bling sticker number to a UK "dating" service. I just got this message…

Unlike e-mail, there's no junk filter for text so I can't put this number onto a kill list or send the messages into junk mail automatically. I hope my wife is reading this.

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