I didn’t want to write about fraud yet again, but…

[Dave Birch] The U.K. remain Europe’s largest exporter of card fraud, and it looks as if this year we’re going to do even better than last year. Total card fraud last year was UKP 535 million (about a billion dollars) but the half-yearly figures for 2008 are predicting a full year well in excess of UKP 600 million. The prospects of fraud reducing remain, I think, slightly gloomy. SDA clones (of French cards, luckily) have already been found in Europe and I would imagine that we’ll begin to see SDA cloning on a large scale over the next twelve months as the ICVV base expands. When you add this to the lack of a mass market solution for EMV in the Internet/MOTO environment, there is no possibility of U.K card fraud falling over the next year. 3D-Secure technology (Verified by Visa and MasterCard SecureCode) has not even dented the problem. Despite the fact that nearly 20 million cards have been registered for 3DS in the U.K., and the fact that a tenth of e-commerce transactions are already 3DS verified, the CNP fraud figures are increasing remorselessly. I have heard some anecdotal evidence that some customers are switching from cards that are 3DS to cards that are not, simply because they can’t be bothered with the 3DS authentication when they’re buying online. And, rationally, why should they even care? Consumers are protected whether the transaction is 3DS or not so unless the retailers the incentivise them to use 3DS instruments, why would they bother?

At some point, I assume, fraud will get so bad that banks will be worried about it. That’s some way away, of course, since in the U.S. fraud is well under 1% in card portfolios that have bad debt well in excess of 6%, so I know which area will be attracting most management attention for the foreseeable future. It’s clear that chip and PIN isn’t going to crack the problem by itself, so we’ll have to start looking around for the next generation of card technology. Since the cards themselves will be disappearing into mobile phones, that would suggest that the banking sector begin ramping up their efforts in mobile. Which, of course, they already are.

We’re from the government and we’re here to help

[Dave Birch] Even if you don’t understand the intricacies of the credit crunch or the precise mechanism by which investment bankers have greatly enriched themselves while beggaring the rest of us, you must be wondering why on earth we spend so much money on regulators and regulations, directives and directors if they couldn’t prevent (or apparently even mitigate) a calamity on this scale. As Chris Skinner asks

With SEPA, the PSD and MiFID all paling into relative insignificance as the major banking markets explode globally, there are questions about whether the European plan will succeed or is even needed now

[From The FinanSer: Are Europe’s plans for Banking, MiFID and the PSD irrelevant?]

This is a very good point. If regulation serves only to hamper innovation but fails to deliver any commensurate benefits in stability of security, then what’s the point of it? Right now, it looks as if European initiatives in the finance sector have been a waste of time and money. They certainly haven’t worked as intended, either through a process of watering down (as in the case of the Single Cards Framework, the SCF) or through irrelevance in other cases. The Banker, more charitably, says that the EU is undergoing massive regulatory upheaval and while the goal of a single market in financial services may in principle be worthwhile…

As with all regulatory initiatives, not all the outcomes are exactly what the policymakers intended and The Banker has reported faithfully on a number of significant deviations. There are lessons to be learned from these failures as, no doubt, other parts of the world are planning to adapt the European model for their own uses.

[From The world can learn from EU’s regulatory shake-up mistakes – The Banker]

Still, as The Banker notes, we should take comfort from the fact that some scraps of usefulness might accidentally be left behind as many regulatory initiatives are swept away, saying that

Some of it will eventually come out right and Europe will be left with a half-fixed system.

[From The world can learn from EU’s regulatory shake-up mistakes – The Banker]

Frankly, given the costs of SEPA et al (which are several billions of euros), I think we ought to expect a little more than an almost coincidentally “half-fixed” system. When it comes to payment systems, I’m certain that a further separation between banking and payments is a way to move forward. It’s a combination of inactivity and accident that has led to payments being regulated, managed and delivered within banking and the goals of initiatives such as the Payment Services Directive are hardly coincident with the goals of banks

More non-electronic cash debate

[Dave Birch] It’s fascinating to me — who couldn’t care less about notes or coins — just how heated the debate can get. Over at Freaknomics, one of my favourite blogs, there’s been yet another discussion about whether the U.S.A. should reform the coinage, abolishing pennies (and perhaps nickels as well) and getting rid of dollar bills. It all kicked off because it turns out that for some unfathomable reason (which means, I’m sure, that Congressmen were some how involved) the U.S. Mint is going to issue for new versions of their “super-duper costs nearly two cents to make” penny.

Imagine my surprise at the recent announcement that the U.S. will be issuing four new versions of the penny, the first of which comes out in February, in honor of Lincoln’s bicentennial. What a waste of resources… It’s time to join the rich world; it’s time to stop wasting resources; and it’s time to stop transferring taxpayer money as subsidies to zinc producers.

[From Pennies: Enough Already! – Freakonomics – Opinion – New York Times Blog]

Surely the U.S. doesn’t more pennies does it, not unless the old ones are disappearing, which under the normal laws of economics you might expect. I imagine they are being smuggled over the border to Mexico because

all pennies up to 1982, which are made of a 95% copper alloy are worth twice as much as scrap metal than as currency.

[From Pennies: Enough Already! – Freakonomics – Opinion – New York Times Blog]

Fascinating. But if you read the comments you can that there’s an element of conservatism about money (and an almost paranoid suspicion of any proposed change) the we e-money persons ignore at our will.

Coin of the Realm

[Dave Birch] All of the newspapers, radio and TV are full of the news that 1 in 50 of the £1 coins in circulation in the U.K. are now counterfeit.

The number of fake £1 coins in circulation has doubled in the last five years and now stands at more than 30 million, the BBC has learned.

[From BBC NEWS | UK | Number of fake £1 coins ‘doubles’]

It seems like a reasonable business to be in, if the figures given in respect of the recent arrest of a counterfeiter are correct:

It is thought that at one stage he was making 10,000 to 12,000 coins per day and was paid about £2,000 in cash a week by the two men.

[From BBC NEWS | England | London | Man jailed over 14m fake £1 coins]

I wonder how much it costs the Royal Mint to make a £1 coin? Anyway, the reason why this story is worth mentioning here, is because one of the experts quoted in, Mr. Robert Matthews (until recently the Queen’s “Assay Master”), says that 2% is the threshold at which people become nervous and begin to feel uncomfortable about accepting coins. At this point, Gresham’s Law steps in to drive the good coins out of the marketplace and confidence in the circulating coin of the realm collapses. The Royal Mint rather unhelpfully say that if you find yourself with a counterfeit coin you should not attempt to spend it, but that is of course precisely what any sensible person will do with it, since as a rational economic actor I want to dump bent coins on mug punters at the first opportunity, carefully stashing away the coins that I know to be authentic. Oddly, The Royal Mint also say that this counterfeit incidence is “comparatively low” by global standards, which it may be when compared to some developing countries but it is not when compared to the forgery rate for euro coins, which is down at 0.1%. More to the point, it’s considerably higher than the retail card fraud rates, which are well under 1% (card-not-present fraud is much higher).

Life without cash

[Dave Birch] I read in The Daily Telegraph the story of James Allan, 25, who has spent the last ten months living in Britain without cash. He’s been cards and cheques only since a drunken bet made in pub last December and has so far encountered on two really difficult problems: the one pound coin needed for a deposit on a supermarket trolley and a cash deposit that he needed to put down to rent a flat (he didn’t say why it had to be in cash). In the latter case, he called his Mum, and she took care of it for him. He says that he is likely to continue living without cash: “It is filthy and dirty and I have really gone off it”. His Mum’s comments on having to ferry a large amount of cash from Oxford to London because of her son’s pointless activities are not recorded.

Delivering for the unbanked

[Dave Birch] Professor Steve Worthington has a piece in the current Journal of Financial Transformation looking at financial services for the unbanked in the U.S. It contains some very useful figures and statistics — noting, for example, that half of the unbanked have college educations and that a quarter of them have prime credit ratings, which implies that they have opted out of the banking system rather than been excluded — that reinforce the point that the unbanked are an underserved segment. If the financial sector could develop appropriate products, they could make money from a socially beneficial enterprise (ie, reducing transaction costs).

The headline conclusion, for me, was that a fifth of U.S. households are either unbanked or underbanked and that some of them have already begun to turn to non-banks to deliver financial services to them. An example used in the article is the Wal-Mart Money card, exemplifying the point that simple, transaction-oriented financial services are well-suited to the core skills and competitive approach of mass-market retailers. With the growth of, in particular, government use of prepaid card products to provide better and more cost-effective services to the unbanked, it seems plausible that non-banks might do rather well in this space. Leave the “lending money” part of banking to banks (who seem hopeless at it, but there you go) and treat the “moving money” part of it as a business up for competition just like any other business.


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