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]

Bitcoins and PCs

Anyone in the e-payment space will not have failed to notice the attention that Bitcoin has been attracting over the last few weeks. I have to say that I was surprised by the interest from journalists — I was even interviewed for the Wired podcast and for New Scientist — for what is, after all, pretty small potatoes. Thanks to its open and transparent nature, it’s easy to see just how big the Bitcoin economy is. This is how it looked on one of the biggest exchanges on 18th May 2011 when I was talking to a European journalist:

Last Price: 7.285; High:7.98; Low: 6.9799; Volume: 34428

[From Mt Gox – Bitcoin Exchange]

So that’s a quarter of a million dollars in trades, although you can’t tell how much of that is people shifting bitcoins between their own accounts and how much is new money coming in. That’s not a huge business. Yet in some of the more hysterical reporting — the most dangerous idea ever, etc etc — you’d think that China was switching its reserves from dollars to bitcoins.

Because on Friday, the Bitcoin experienced a rather dramatic drop. In the words of one anonymous commenter: “it looks like it lost 1/3 of its value in the last 24 hours. Lots of big sells, complaints of liquidity, and pissed off nerds.”

[From FT Alphaville » Bitcoin’s Black Friday]

A couple of weeks later, then, the value has fallen and the first bitcoin heist has been reported.

In the first Bitcoin theft of its size, a user has lost 25,000 BTC — or nearly $487,749 at today’s market rates — to an unknown thief.

[From Close to US$500k stolen in first major Bitcoin theft – Industry]

As I somewhat uncharitably posted on Twitter, “help I want my anonymous, untraceable digital cash back!”. Now we read that Bitcoin is dead, it’s a scam, it’s a bubble etc etc. So what’s the truth? What strategy, if any, should stakeholders in the e-payments space consider?

The only thing that’s even kept Bitcoin alive this long is its novelty. Either it will remain a novelty forever or it will transition from novelty status to dead faster than you can blink.

[From The Underground Economist, Why Bitcoin can’t be a currency]

I think it’s more than a novelty. I’d actually started writing something about Bitcoin a while back, when twitter friends pointed me to a paper “Mobile Payment Systems and Services: An Introduction” by Mahil Carr which says that (with no evidence at all to support the assertion) “mobile payments have to be as anonymous as cash transactions” and I’d been involved in a subsequent discussion about whether bitcoin might be suited to this environment. I couldn’t help but observe that cash is the wrong benchmark: it isn’t as anonymous as some people think.

On April 26, a state police trooper was called to the Subway after the owner said one of her employees found three “obviously counterfeit” $20s in the safe. The owner checked the surveillance video and saw one of her employees, the 17-year-old boy, take bills from his pocket and exchange it for money in the cash register… Before exchanging the bills, the employee marked the bills with a counterfeit marking pen, which resulted in a dark brown mark, meaning they were fake.

[From subway counterfeit money: subway counterfeit money, teens charged with making fake money on computer scanner – mcall.com]

In a world of mobile phones, twitter and CCTV, anonymity is a high bar to set. In the virtual world, however, anonymity can be an implementation choice, should it be a requirement for a payment system. Personally, I don’t think it is. Transactions need to be private, not anonymous, and that means a different set of design principles. In all of my experience, even during my days as an firm proponent of anonymity as a key element of retail transaction schemes, I never saw the slightest demand for this from any of the stakeholders, including consumers. Nevertheless, that doesn’t mean that new technology could not, quite easily, lead to entirely new ways of making payments recognising the fact that the underlying technology has changed beyond all recognition in the previous generation.

Visa processed 37 billion transactions in FY2008, or an average of 100 million transactions per day. That many transactions would take 100GB of bandwidth, or the size of 12 DVD or 2 HD quality movies, or about $18 worth of bandwidth at current prices.

[From Cryptography, Law and Privacy Blog: Re: Bitcoin P2P e-cash paper]

Will Bitcoin be the new technology to revolutionise money? To answer that, I have to step back a little. Generally speaking, I think there is a problem with language, because people (I mean normal people, not people like us) never think about what money is or how it works. Sterling (the currency) could continue to exist even if there were no notes printed by the Bank of England or coins produced by the Royal Mint. People could sign contracts for Sterling payments, but those payments would be commuted for execution: when the payment falls due, the counterparties agree on a mechanism for exchange (which might be Dollars in a bank account, Euro bank notes or cowrie shells). Why would they, then, sign a contract in Sterling in the first place? Well, it’s because they expect the currency to serve as a means for deferred payment in that its value in the future is predictable. I’m not saying that this always works well, because currencies are not as stable as might be hoped, but that’s the theory.

Now let’s move on to this specifc implementation. Bitcoin is a decentralised, peer-to-peer means of exchange. If you have a bitcoin, which is just a string of numbers, you can send that bitcoin (or a subdivision of it) to anyone else on the interweb. If you want to understand how Bitcoin works, a good place to start is the original paper on the topic, “Bitcoin: A Peer-to-Peer Electronic Cash System” by Satoshi Nakamoto. I’m no expert on cryptography but there’s no reason I know of to question the basic idea: use a computationally difficult challenge to create strings of bits that it’s hard to make but easy to copy, then use digital signatures for transactions. I get my bitcoin (a string of bits) and then in order to transfer them to you I add a digital signature and send them to you. Every time we do a transactions, we tell (essentially) everybody else that the bits now belong to you. The closest analogy to this is the stone currency of the island of Yap, in the South Pacific. The huge stones that represented money never went anywhere, people just remembered who they belonged to.

Every transfer of ownership is public knowledge, and the physical stone can stay in place.

[From Quezi » How is Yap stone money similar to Bitcoin?]

Rather like Bitcoin, in some ways. So far so good. But why would people use Bitcoin? There seem to be three key reasons: one is that they want a cheap, irreversible online means of exchange (cash for the 21st century), another is that they want an anonymous means of exchange (coins for the 21st century) and yet another is that they want to use of non-government currency because they don’t trust governments to manage money properly. Let’s have a quick look at each of these.

Frictionless low-value payments

Now, having been involved in a previous attempt to create a global, decentralised, peer-to-peer means of exchange that addressed the first two of these issues, Mondex, I’m naturally interested to see how Bitcoin develops. I’m frankly sympathetic to many of its goals, because I too believe that a “frictionless” means of exchange for the online world would stimulate a new era of trade, and therefore prosperity. In an essentially frictionless system, where the transfer of value is simply the transfer of bits, the key problem to overcome is that of “double spending”. In other words, if I send you some value (bits), how do you know that I haven’t already sent that value (ie, a copy of those bits) to someone else? There are a number of different approaches.

  • The usual solution is to have a central register.
  • The Mondex solution was to use tamper-resistant hardware (smartcard chips) to store the balances.
  • The Bitcoin solution is to distribute the transaction record across the network (every node knows every transaction), which works provided that the timestamps can be co-ordinated properly (otherwise the nodes wouldn’t know the order of the transactions). When you get a bitcoin, it takes a few minutes before you can spend it again because the network needs to be updated.

Which is best? It’s not really the topic of this post, but I’d say a combination of 1 and 2: a central register plus tamper-resistant hardware so that low-value payments can handled quickly, offline in some environments.

Anonymity

What the general public want is privacy, not anonymity. If I lose my wallet, I want my money back. This is why I always carry prepaid cards when I travel, rather than carrying cash. In fact I’ve just been through the very process of getting my money back because I gave my son a prepaid Euro card to use on a school trip in Spain (a Thomson MasterCard) and he lost it when there were still €70 on the card. No-one else can use that card (they don’t know the PIN and it has no name on it so they can’t pass AVS online) and I am getting the money back. Personally, I think this is closer to the kind of cash that makes sense in the new economy. It’s economically infeasible (although not computationally infeasible) to track and research every payment, but when something goes wrong it can be restored. And if I did use the card for some illegal purpose, the police could get a warrant and Thomson would of course point them to me.

I’m not sure that I want to live in a society where unconditional anonymity exists for payments. I don’t want the bad guys to be able to operate with impunity. But neither do I want every little transaction I make trawled by corporates, the media, the government. The solution has to be payment systems with privacy built-in, so that privacy is the default and it takes legal process to uncover transaction details.

Private Currency

This may well be the most contentious area for debate. I am a Hayekian, in that I would prefer to see a system of competing private currencies rather than government monopolies, because I think that sound money is an important base for the economy. But this issue is, to my mind, orthogonal to the other two. You could implement competing private currencies in anonymous, pseudonymous or absonymous (note to pedants: this is a word I made up, that’s why it fails the spell-check, not because I spelt it wrong) ways and you could implement the mechanism for exchange using all sorts of systems. Whether transactions are reversible or not has nothing to do with the currency.

Trajectory

Is Bitcoin a good currency? I suspect not, but I’m not an economist, so I must defer to the experts. The question that most of our clients are interested in is whether Bitcoin will form a niche parallel economy or whether they will scale into the mainstream economy. I have a suspicion that this won’t happen, and that’s because the anonymity that is the attractive feature to the early-adopting bitcoiners is not attractive to the mass market.

The best strategy is to learn, and to think about ways that the cryptography at the heart of Bitcoin can be used to deliver new kinds of services in a connected environment. I don’t think cash will be one of them.

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]

Harsh, but fair

[Dave Birch] A few days ago I was at Experian’s annual Payment Strategies conference, where I had been kindly invited to provide a closing keynote. In it, I made a few predictions about the next phase of evolution of the European payments business, and in passing I mentioned that I felt that some progress had been slow.

Birch lambasted traditional banks and payments providers for their failure to grasp the nature of the opportunities presented by mobile technologies, which has led them to miss the boat. “I’m almost embarrassed to stand before you and say that I thought that banks and mobile operators could work together,” he told the conference. “It was a stupid fantasy for which I apologise.”

[From Identity is the next big thing for payments | Banking Technology magazine]

This isn’t a new rant, but a considered opinion. In fact, I wrote about this last year, round about the time I made some similar remarks at an event at the GSMA, reflecting the fact that I think that mobile operators should have been quicker in to the NFC space and with more open models, and that I think banks should have been quicker to develop and implement mobile approaches other than “windows on to the web” or “cut down ATM” solutions.

All of my experience over the last few years has served to reinforce my opinion from those ancient times that it’s much harder for banks and operators to work together than either of them might think. So perhaps this part of the [Booz Allen Hamilton] 2001 vision for 2010 may never become reality

[From Digital Money: Let’s put the future behind us]

The reference to Booz Allen Hamilton, a management consultancy, is because the post was discussing a magazine article by them from a decade ago:  “Why banks and telecoms must merge to surge” from the Booz Allen Hamilton strategy+business magazine that I’d filed away back in 2001. I took some comfort from it, because it meant that I wasn’t the only one who had expected banks and operators to get together, but I was commenting on the cultural factors that meant that it had proved very difficult for them to co-operate effectively.

This has meant that it has taken longer for the infrastructure to develop than he’d predicted, but more importantly, banks are still missing out: only recently, banks in the US had told him that there is no business case for subsidising the installation of contactless readers in retail premises, just as Google was announcing that it will.

[From Identity is the next big thing for payments | Banking Technology magazine]

It is absolutely true that I (as well as number of other consultants) were at an event with US banks earlier in the year where this opinion was expressed. But there was nothing special about it: the banks had said exactly the same thing in public to retailers.

Representatives of three of the country’s largest banks, Bank of America, Citigroup and U.S. Bank, attended a meeting last month organized by the Merchant Advisory Group… to talk about the new opportunities that mobile technologies, such as NFC, will create for the payments industry. “You know what they (banks) told us? There’s just not a business case right now,” Dodd Roberts, head of the merchant group, said last week

[From Digital Money: Inception]

But back to the 2001 article, which agreed with me about one particular strategic element. That is, that while banks had have a strong hold over payment systems, mobile network operators would be challengers.

Today, banks are at another competitive crossroads. This time the new contenders in financial services are telephone companies, specifically wireless telecoms.

[From Why Banks and Telecoms Must Merge to Surge]

The Booz Allen Hamilton article finishes up by saying that it would be logical for “mega players” such as Vodafone and Citi to combine. This hasn’t happened and I can’t help but observe that Vodafone’s most successful mobile payment service, in fact, probably the world’s most successful mobile payment service, M-PESA, doesn’t involve banks at all except as a secure repositories of funds.

So why did my comments about banks and operators working together sound so harsh? It’s because we (Consult Hyperion) have been involved in a number of projects, going all the way back to the Orange/NatWest joint venture, and so have seen at first hand what works and what doesn’t in these relationships. And, yes, things are improving: but it may well be the case that having let a couple of years evolution slip away, the idea of the bank/operator partnership as the central organising principle for mobile payments is over. European operators have started to apply for their own Payment Institution licences, while I expect banks to focus more on developing value-adding services for the retailers and consumers and less on the “bare” retail payments (where the downward pressure on transactional fee income will continue).

Incidentally, I wonder if both the banks and the mobile operators held back because they’d been listening to their customers? If you had done a survey of consumers asking them if they wanted an iPod, the day before hte iPod had been invented, you would never have launched it.

in an interview with the Daily Telegraph in February 2005. The founder of Amstrad said: “Next Christmas the iPod will be dead, finished, gone, kaput.”

[From Bill Gates and Sir Alan Sugar made some of worse technology predictions of all time – Telegraph]

Predictions are difficult, as the saying goes, especially ones about the future. Of course, you do have to understand what it is that you are predicting, and in many cases people don’t really understand the proper context. This is why I read surveys like these with a raised eyebrow.

Just One-in-Five Brits Currently Interested in Paying by Mobile Phone

[From Just One-in-Five Brits Currently Interested in Paying by Mobile Phone]

Now this might be interesting news if I cared what the public think about anything (I don’t), but I wonder if it’s the sort of thing that causes mass market players to slow down? It caught my eye because it tallies with the revealed consumer preferences of Japanese consumers, where mobile proximity payments are mainstream. Indeed, only around one in five or six people in Japan use their proximity handsets for payments. But then only one in five or six people here pay for things using credit cards (debit cards dominate in Europe) and that’s still a business. The headline intends to be negative, but what it says to me is that the potential for mobile payments is such that ten million people could be using them in the UK in the not-too-distant future, if banks and operators (or someone else?) can come up with the right proposition.

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

Why use contactless?

The results from the first couple of years of contactless payments use in the UK show that, as expected, contactless is being used as cash replacement for small transactions.

The average value of a contactless transaction is only £4.93.

[From Tap-and-go is on the move to a shop near you | Mail Online]

It’s not always used simply because of the convenience, as one commentator noted in the comments on this story:

I have swtiched to using the contactless payment method to purchase sandwiches at shops such as Pret A Manger and Eat mainly because I am fed up with them ofloading their fake pound coins on me in their change

[From Tap-and-go is on the move to a shop near you | Mail Online]

Bizarrely, I was thinking about this the other day. I parked in Derby, which is in the midlands and when I returned to the car the local council wanted to charge me £11.20. In some kind of hommage to Derby’s past, the machine didn’t take cards or mobile payments, so we were reduced to emptying out our pockets, rummaging in the glove compartment and searching the floor of the car for change. Fortunately, my fellows had plenty of pocket change. But when we started feeding it into the machine, four out of the ten £1 coins we had amassed were repeatedly rejected, presumably because they were fake. I’d never really thought that the avoidance of fake currency would be part of the retailer’s business case, but I need to revise my opinion!

But what is the business case? Is it just about payments? For some kinds of retailers, the convenience of contactless payments makes sense only when it is also part of some bigger model, generally involving value-added propositions such as loyalty. The was recognised by Bling Nation, when they decided to refocus on the loyalty side of things…

John Paul Coupa of Coupa Café has the system in all three of his northern California locations. “It gets used a lot,” says Coupa, “(even) more than American Express.” Coupa recently implemented the FanConnect system.

[From ContactlessNews | Contactless payment scheme enables loyalty via Facebook]

In Northern California, then, things look good. But on the other side of the country, on the apparently more conservative east cost, the results were quite different.

Other merchants have not enjoyed the same level of success. Charles Savas, president of Center Beverage in Stoneham, Mass., got rid of the system after just three months. “They were going to charge me $40 a month,” he says, “and I only had $35 in sales for the first three months.”

[From ContactlessNews | Contactless payment scheme enables loyalty via Facebook]

A mixed picture. But does any of this early experience matter? If contactless is important only as the rails for mobile to run on, then the early feedback from the contactless card deployments doesn’t really matter. It doesn’t tell us anything about the mobile future, does it?

These, and related topics, will be discussed at Contactless Cards and Mobile Payments in London on 20th and 21st June at the Kensington Hilton. I’m chairing the event on 21st and look forward to see you all there. And guess what? The utterly splendid people at SMi have given me a two-day delegate pass worth an astonishing ONE THOUSAND TWO HUNDRED AND NINETY NINE POUNDS to give away on this blog as a competition prize. So if you are going to be in London on those dates and you’d like to come along to learn more about the world of contactless, all you have to do is be the first person to respond to this post with the current maximum payment value for “no PIN” contactless payments in the UK.

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 has been designed to be carbon neutral. 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]

Lording it up

The House of Lords (for foreign readers, this is the unelected second chamber of government, stuffed full of government placemen – so many, in fact, that the Lords are begging the government to stop sending more of them) has been getting into a bit of a tizzy about cheques.

Lord Sassoon: the criteria which the Payments Council itself put forward and which the previous Government welcomed back in December 2009—I echo that welcome—was that the new system had to be generally available, generally acceptable to its users and widely adopted. There also has to be, in the view of the Government, a paper-based system

[From Hansard – Lords | Houses of Parliament]

For foreign readers, Lord Sassoon is James Meyer Sassoon, Baron Sassoon, the Commercial Secretary to the Treasury, a minister in the UK’s finance ministry. Note his words: the British government wants to replace the current paper-based system with a new, dynamic, forward-looking, white heat of new technology 21st century paper-based system. Hhhmmm….

Surely we can do something more interesting than that. Cheque replacement was a subject of much conversation in my vicinity last week. Consult Hyperion were one of the sponsors of this Intellect / Payments Council conference on Driving Change in Payments, and an excellent event it was too. Here I am with the Conference Chair Michael Alexander (an Independent Director of the Payments Council), telling him just that.

IMG_20110526_150113

Mobile was one of the recurrent themes. Alastair Lukies, the CEO of Monitise, was one of the speakers (see below) and one of the subjects he touched on in passing was the potential for mobile to provide the replacement for cheques in the UK. This is a hot topic, since the Payments Council has announced its plan to end cheque clearing in 2018. This, in turn, caused a predictable response from the reactionary press and various interest groups, all of whom want to retain the current system of expensive cheques subsidised by people like me who hate them.

IMG_0354

Just to give you a snapshot of the views of the British public — which are of no interest to me, naturally, but may serve to frame the debate here — I cut a few comments from a recent article about this on the Daily Telegraph website,

If cheques are expensive to process then increase the price, I think I already pay 35p per cheque

[From Plans to phase out cheques should be scrapped, say MPs – Telegraph]

Businesses do, but personal customers have grown used to what they perceive to be free banking. I’m all for transparent pricing. If the Payments Council decides to retain cheque clearing but charge full cost recovery to users, that would be a reasonable outcome. However, this would mean that cheques would cost probably even more than 35p each, and once again the pleading for special interests will become the substitute for the real debate.

If cheques go then genuine charities should be given free transfer by card or someone should think of another method of paying small amounts at no cost

[From Plans to phase out cheques should be scrapped, say MPs – Telegraph]

It is plausible, although I don’t think it is likely, that the government might impose a social obligation on banks and payment institutions to execute low-value transactions (those, say, of a value less than the largest banknote in circulation, €500) for free as a social obligation in return for their licenses. The root problem is that people think not only that payments should be free but that someone payments are free. This is wrong, but you can imagine the newspaper headlines about the charity for sick children being forced to pay outrageous processing fees by the evil financial sector. (The impact on charities came up a few times in casual discussion around the topic at the recent event.) Some people are worried that this will even put an end to some charities.

the Institute of Fundraising has warned that the plans could be disastrous for charities, some of which receive up to 80% of their income through cheques.

[From Finextra: Dumping cheques could “spell disaster” for UK charities]

I don’t understand what they are thinking. Getting rid of cheques will save them a fortune. Charities in countries without cheques — eg, Finland — seem to be able to raise money without too much trouble. I’ve already made a perfectly sensible and reasonable suggestion as to how to set up unique financial sector identifiers that can serve as payments addresses for mobile and online payments and for the 0.1% of the population who don’t want to use these (eg, my mother) they can just call an 800 number and effect the transfer with voice authentication (or something similar). Why on Earth should we be targeting paper-based replacement? Doesn’t this discriminate against people who can’t read or write? Let’s set the bar higher.

It must be further noted that in the Telegraph, as well as a couple of other papers, the particular issue of paying the gardener was also seen as being an important payments use case in the UK. I thought at first that this might be something to do with the English class system, but it turns out that paying gardeners is an issue around the world!

I live in Belgium at the moment and have not used a cheque in years. All the transfers are immediate, not 3 days later which is just a scam by the UK banks to use your money for free for three days. If I pay the gardener its cash or a virement (transfer) easy.

[From Plans to phase out cheques should be scrapped, say MPs – Telegraph]

Look, I’m sure there will be a small number of people who will find it hard to use mobile payments, or web payments, or whatever, just as there are a small number of people who find it hard to use cheques right now, but that’s no reason for the Payments Council to get fainthearted. The end of cheques in 2018 should be a stimulus to innovation in UK payments. Except, as I said before, it isn’t the end of cheques.

Cheques aren’t being outlawed in 2018, but cheque clearing is going to stop. If Associated Newspapers wants to apply for a Payment Institution (PI) licence and operate its own cheque system, then good luck to them

[From Digital Money: Cached]

Surely the noble Lords can contribute some seed capital to assist the Daily Mail, Saga, Oxfam and the House of Parliament Tennis Club in creating the new paper-based system that they want.

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

Yet more about NFC and business models

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There are two different classes of application for NFC in mobile phones. These are, broadly speaking, “open” applications and “closed” applications. They are, broadly speaking, about interaction in the case of open applications and transaction in the case of closed applications. Creating such applications is, broadly speaking, easy to create in the case of open applications and difficult in the case of closed applications.

Why? Well, it’s because the closed applications need security and the open applications don’t. Open applications are things like games and business cards and “friending”, where consumers touch phones to something (which may be another phone) in order to get or exchange some information. Closed applications are things like payments and tickets, where real money is involved (other than the service providers own) and the applications must be what security professionals refer to as “tamper resistant”. They must also work, all the time and every time. Working out how to do this is (I’m happy to say, since it’s a big part of Consult Hyperion‘s business) difficult, complicated and interesting. It’s easy to picture how life might be with your credit card inside your mobile phone, but think what has to happen to realise that picture! How will the security keys necessary for the card application be transported across potentially insecure networks into the tamper-resistant chips (the “secure elements”, SEs) in handsets? How does the bank know that your credit card is going in to your phone and not a fraudsters? When you get a new phone, how does your card make its way from your old phone to the new one? How does the wallet application in the phone communicate with the card application in the secure element?

In the architecture developed by the transaction incumbents (by which I mean banks and telcos), the management of the closed applications is undertaken by something called a “trusted services manager”, or “TSM”, an entity that stis between the providers of closed services, such as banks and transit operators, and the mobile operators who connect to the SEs that they, in effect, own and rent out space on. This model may be disrupted, because it was founded on the assumption that the SE would be under the control of the MNO and that the TSM would have to cut a deal with the MNO to rent the SE space (what you’ll often here telco people refer to as the “apartment model”).

In the Google play, the TSM is operated by First Data and the SE is operated by Google (it’s in the Galaxy S2 handset, not on the SIM).

So, for example, on the Catalyst Code, I read a while back.

Google has obviously made a decision that NFC is an opening into something more interesting and lucrative than transforming a phone into a payment card– advertising and marketing opportunities at the point of sale – the physical point of sale. And, it has done a deal with VeriFone that takes the economic sting away from the merchants who need to buy into their vision to make it work – and who have by and large turned their noses up at NFC up to this point. Layer on top of that their Google Checkout asset and their newly launched One-Pass wallet application and you have the makings of an interesting new payments player.

[From Google Takes on NFC, Will They Crack the Code? at The Catalyst Code]

Karen is, as usual, spot on about this. But I’m not so sure about this…

What’s amazing is that Google was the first to connect all of these dots

[From Google Takes on NFC, Will They Crack the Code? at The Catalyst Code]

This doesn’t seem amazing to me, because I’ve been involved in numerous attempts to develop mobile proximity propositions involving banks and operators. A month before the Google announcement, I wrote on Quora that “I’m sure [loyalty and rewards] will be Google’s strategy too. Payments are not an interesting enough application to persuade people to go out an get an NFC phone.” Banks and operators have smart people them, and some of them have smart consultants too. But it is very difficult to make institutional strategies for non-core businesses and have them translated into a practical tactics with appropriate priorities. If you were in a European mobile operator back in 2009 and you had an idea for using NFC to create a new business, where did you go with the idea? I went in to an Orange retail outlet: they are the first operator in the UK to sell a commercial NFC handset with an onboard payment application: not only did the shop not accept NFC payments (come on guys – you have to eat your own dogfood, as our transatlantic cousins are wont to say) but they don’t sell (for example) NFC tags. If you’re a smart kid and you get one of these phones, and you have an idea for using tags as tickets to a gig you and your mates are running… well, hard luck.

My employer, Consult Hyperion, has provided paid professional services to organisations named here in connection with products and services mentioned here, but the opinions in this post are my own (I think) and presented solely in my capacity as an interested member of the general public

Inception

At the end of March, we learned that there is no business case for moving to NFC at POS in the USA.

Representatives of three of the country’s largest banks, Bank of America, Citigroup and U.S. Bank, attended a meeting last month organized by the Merchant Advisory Group… to talk about the new opportunities that mobile technologies, such as NFC, will create for the payments industry.

“You know what they (banks) told us? There’s just not a business case right now,” Dodd Roberts, head of the merchant group, said last week

[From Big U.S. Banks Look for A Business Case for NFC | NFC Times – Near Field Communication and all contactless technology.]

That’s a shame, because it’s a fun technology that consumers like. Never mind. Of course, not everyone thinks that banks can’t make a go of it, and going back a couple of years we can find some positive projections.

Celent estimates that a 30% cash displacement ratio, or an incremental US$151 per card account, per year is reasonable, with an average revenue increase of US$1.83 per debit card account per year.

[From The View from the Mobile NFC Finish Line: Bank Economics in a Mature Mobile NFC Payments World]

Anyway, a month after the US banks told the Merchant Advisory Group that there was no business case, we learned that…

France-based POS device manufacturer Ingenico has confirmed that it is working with Google on the development of NFC-based services for retailers

[From Confirmed: Google developing NFC solutions for retailers • NFC World]

Was this an “Inception“-style paradox? A fault line between two sets of dreams that don’t quite connect? A glitch in the matrix that could be eliminated if we all take the bank’s blue pill? Because now someone is offering red pills…

The first NFC service launched by Google for its Nexus S phone is an enhancement to its Google Places service. Customers tap the phone against NFC tags embedded in stickers or decals that merchants affix to their storefronts to access information about the local business, including phone numbers, hours of operation, payment types, reviews and recommendations.

[From Checking in with NFC–Some Social-Networking Start-ups to Use NFC | NFC Times – Near Field Communication and all contactless technology.]

Aha! So now we can see how to resolve the paradox. There’s no business case if you only think about transaction revenues (the bank model) but there is a business case if you “ignore” payments and focus on value-added services that retailers will pay for (the Google model). This has got the mobile operators interested enough to start upping the orders.

Such Android handset makers as Samsung, HTC and likely LG and Motorola are preparing for NFC, based on keen interest or orders from mobile operators, including South Korean telcos, SK Telecom and KT; China Mobile; as well as American and European carriers, NFC Times has learned.

[From ‘Open’ Battles Break Out Among NFC Vendors Over Android | NFC Times – Near Field Communication and all contactless technology.]

But is Google’s interest enough to create the contactless rails for these mobile devices to run on, as we keep talking about? Chris Skinner made a very accurate post about this recently.

And here’s the rub: we need more terminals. Maybe they could learn something from Zapa in Ireland, where AIB Merchant Services has worked closely with them to rollout terminals that can use the tags. Half of all AIB’s merchant terminals are now Zapa ready: that’s 40,000 of their 90,000 terminals, with over 1.5 million contactless transactions in the year to September 2010. Compare that with Barclaycard, which has rolled out just 42,500 merchant terminals to date and is processing just over a million transactions by November 2010, and you can see the challenging dimensions they face.

[From BAI | Banking Strategies | Distribution Channels | Mobile | Why Mobile is Critical to Banking]

A characteristically well-informed comment from Steve Mott delves further into resolving the paradox. Perhaps payments are losing their strategic appeal for banks because they are becoming commoditised, utility businesses that just won’t generate the cash that they did in the past.

Consultant Steve Mott, CEO of BetterBuyDesign, who also attended the Merchant Advisory Group meeting, told me the U.S. banks do see the advantages of mobile to increase transactions. But mobile confronts them with an unfamiliar payments landscape at the same time they are being squeezed by regulators with the Durbin amendment,

[From Big U.S. Banks Look for A Business Case for NFC | NFC Times – Near Field Communication and all contactless technology.]

Banks aren’t stupid. They know that NFC is coming, that consumers and merchants like it, that it means disruption. But it is very difficult to change core businesses, especially at a time of great regulatory uncertainty. In the meantime, the non-payment use of NFC will lead it into the mass market. But will the new technology pull in the customers? Sam Shrauger, VP Global Product and Experience at PayPal, puts it succinctly:

People couldn’t care less which technology a hardware or software manufacturer would like to sell them. They couldn’t care less which technology merchants may or may not put in their stores. Ultimately, they just want something that makes their life better when it comes to buying and paying.

[From Why the Mobile Payment Debate Is Headed in the Wrong Direction [OPINION]]

Now, as it happens, I was chatting with Sam last month and I agree with him about many things, but I think that in this particular case he may be underestimating the impact of “tap and go” technology. The point is that tapping is so much simpler, so much quicker, so much more convenient for consumers that it will make a difference to them. People will start looking for the phones that you can tap together to become Facebook friends, or whatever, because that experience blows away bumping, or texting or QR codes or whatever.

This, I think, means risky time for bank payments. Once people are using their non-bank wallets on mobile phones to execute retail transactions, initially using bank-provided payment schemes, it will be a small step to get them to move to non-bank payment schemes inside those wallets. Banks need more active responses to the changing environment and I hope I won’t be offending anyone to say that I know from personal experience with recent projects that banks are losing opportunities right now because they are not able to deliver products in the timescales demanded by other industries.

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


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