Narrow interests

[Dave Birch] I referred last year to the noted economist John Kay’s piece about banking regulation in Prospect magazine, since when the issue of banking regulation has continued to attract attention.

The modern financial services industry is a casino attached to a utility. The utility is the payment system, which enables individuals and companies to manage their daily affairs… Modest levels of speculative activity may improve the operation of the utility

[From Essays: ‘Making banks boring again’ by John Kay | Prospect Magazine January 2009 issue 154]

Now that the UK has a coalition government committed to revising banking regulation something will happen, although it looks as if part of the compromise between the Conservatives and the Liberal Democrats will be kicking the idea of a UK Glass-Steagall into the long grass for the time being.

George Osborne is to chair a new cabinet committee on banking, expected to thrash out the conflicting policies of the Tory and Liberal Democrat coalition partners on issues such as selling off the nationalised lenders.

The chancellor will have ultimate responsibility for policy on regulating and supervising the banks, while Vince Cable, the business secretary, will lead on bank lending to business and consumer credit, government insiders said.

[From / UK / Politics & policy – Osborne to chair banking committee]

Nevertheless, there will be changes to banking regulation, whether from Westminster or from Brussels. It occurs to me that just as there is growing regulatory pressure for some form of “narrow banking”, perhaps there ought to be pressure for “narrower” banking that does not include payments. The business of banking could focus more on its core of lending and borrowing while payments would become more of a low-margin, high-volume commodity service. There is no reason to expect that banks will be the best placed providers of the infrastructure for this (most of it is outsourced already and organisations such as Equens, Vocalink, First Data and PayPal seem to do a reasonable job).

The Payment Services Directive (PSD) has already introduced the regulatory category of the “Payment Institution”, or PI, as just as we discussed last year, and interesting range of organisations have already stepped up to obtain PI licences (eg, PayPal). Now, I am the first to note that PSD has its problems, but it does contain the seeds of change.

The conclusion of the research is that European member states are implementing the Payment Services Directive (PSD) in a completely inconsistent manner which threatens to derail the progress of the Single Euro Payments Area (SEPA). Certain member states were particularly cited as at issue more than others, with Germany and Italy seen to be actively blocking progress whilst France and Spain are viewed as delaying the process

[From European Payments: A Land Of Confusion]

Tb be fair thought, the Logica report does note that there are seeds of change planted.

participants do expect new payments institutions to gain market share, particularly money transfer service providers, and that these changes have motivated many banks to look for more innovative services for their clients, particularly around corporate information services, e-payments, m-payments and e-invoicing.

[From European Payments: A Land Of Confusion]

Why am I pushing this perspective? Well, in the Philippines, where the G-Cash and Smart mobile money transfer (MMT) services are well-established, I understand that around a sixth of the MMT customers have given up their bank accounts, thus demonstrating (to my mind) that a reasonable fraction of the population want “payment accounts”, not bank accounts. The banks don’t seem to care that much, because these customers are expensive to maintain and they don’t buy profitable products anyway. So everyone is better off. Separating banks into the banking bit and the payments bit makes a lot of sense, and makes for a more practical approach to solving the problem of financial inclusion.

Viking expedition

[Dave Birch] I was in Copenhagen recently, so naturally I went along to the national museum to see their notes and coins exhibition (galleries 141 to 146, if you’re interested). It was really good, and I particularly enjoyed the display of Swedish copper money from the 17th century. Sweden had lots of copper, so that’s what it used for coins. But copper isn’t worth very much, so the coins were huge — the one thaler “coin” was a block of copper weighing a couple of kilograms.

While pottering around between the 10th century Islamic coins found in Viking treasure hoards, the short-lived Norwegian privately-issued banknotes that preceeded Denmark’s first paper currency and the English gold nobles from the time of Henry II, I happened across some other long-forgotten artefacts from the story of the evolution of the means of exchange in the world’s oldest kingdom…


Danmont cards! I have to admit to a moment of melancholy while gazing at the cards, notes and coins. Some of them were ugly, some of them were beautiful, and all of them tell a story. Such as, for example, you’ve been cheated.

A one euro coin has turned up in Spain bearing the face of cartoon couch potato Homer Simpson instead of that of the country’s king

[From Spanish shopkeeper finds Homer Simpson euro | U.S. | Reuters]

So when cash disappears, and there are no more portraits of heroic characters or Latin inscriptions, what will take over the narrative? Facebook, I suppose. But wiping away the tears, I remembered that there are a great many people around the world who can’t wait to replace coins with mobile phones. The truth is, coins today are as much hassle as the Swedish copper currency from the days of the Carl Gustav wars.

Mr. Zhang of Shenyang carried two bags of coins to a bank outlet in the city, having accumulated 37,000 coins, more than 600 yuan, over the past decade. According to the rules of the bank, there is a one-yuan service fee for counting every 50 coins. If he were to hand the money over to the bank, the service fee would amount to more than the total value of his 37,000 coins… Shenzhen, Shanghai and Beijing banks have charged counting fees since 2005… the most affected were bus companies. In order to save counting fees, the Shenyang Bus Company handed out change to its employees as their wages.

[From China sees change scarcity —]

Enough is enough.

Coin star

[Dave Birch] Pottering along the M4 (otherwise known, but not by the inheritors of Queen Boudicca’s robust policies on European integration, as the E30) the other day, I really enjoyed an edition of Moneybox on BBC Radio 4. It had everything: plastic card fraud, card charges and the cost of cash in a bizarre context. Which was that they had a story about a chap who blogs about what he finds discarded by the Coinstar machine in his local supermarket. Frankly, the Internet was made for this.

It’s amazing what people leave behind on the Coinstar change counter machine in my local Sainsbury’s…

[From The Copper Counter Blog]

There was a serious side to the story though, which was about the cost of converting cash into other forms. The machines currently charge 7.9% and this about to rise to something like 9.5%.

Supermarket coin-changing machines are popular, even though they charge a fee. Banks change money for free – but it is not always so convenient an option.

[From BBC NEWS | Programmes | Moneybox | Have your say: Pin fraud and coins]

Judging by the interviewees, and other previous discussions I’ve been involved in, people seemed quite happy to pay the massive transaction charge of heading towards a tenth in order to use up coins in the supermarket. You put in ten quids-worth of coins and you get back a voucher for £9.21 to use at the checkout. As the Copper Counter blogger pointed out on the show, this is odd, since if you pour the coins into the self-checkout machine then you pay no transaction charge at all. Anyway, the point is that coins are so much of a pain that customers will pay a high fee to get rid of them.

The raid in Spain

[Dave Birch] Police investigating a drugs ring in Spain busted a counterfeiting operation. The counterfeiters were, naturally, producing their own versions of the drug smugglers’ best friend, the 500 euro note.

Spanish police have seized fake banknotes worth eight million euros (£7 million) in the biggest single haul of counterfeit money ever recorded in Europe.

[From Spanish police seize largest haul of forged banknotes in European history – Telegraph]

The article goes on to say that Spainiards call the 500 euro notes “bin Ladens” because, like the world’s most wanted man, everyone knows what they look like, but no-one has ever seen them. The newspaper points out that the notes are frequently used in “black money” transactions and it is thought that Spain has more in circulation than anywhere else in the Eurozone. Frequently? I’d be curious to hear from anyone who has ever used one in a legitimate transaction! The haul, incidentally, easily beat the previous record set only a few months ago.

Italian police conducted an early- morning dragnet across the country to round up more than 100 people in what they described as the largest bust of a euro counterfeiting ring ever… Four laboratories for printing fake euro bills and minting phony coins were discovered, and 1.2 million euros ($1.6 million) was sequestered during the investigation

[From costa confidential: largest bust of a euro counterfeiting ring ever. Euros were tracked out of Italy to Spain]

It’s not surprising that the records are falling, because the counterfeiting of euro notes is steadily and, it appears, inexorably increasing.

The number of seized counterfeit euro notes jumped by 17 percent in the first six months of 2009, the European Central Bank said on Monday, marking two years of constant increases. In January the central bank had reported a six-month increase of 13 percent while stressing that the scale of counterfeiting remained small, a comment it did not repeat this time.

[From Fake euro seizures climb by 17 pct: ECB — – business, legal and economic news and information from the European Union]

Oddly, given these newspaper stories of police raids, fraud factories and international fake note smuggling, the ECB says that no “new” sources of counterfeits were discovered.

The ECB said however that the fake notes seized in 2009 had the same origin as previously discovered notes, meaning that no new sources of counterfeit money had been found.

[From Fake euro seizures climb by 17 pct: ECB — – business, legal and economic news and information from the European Union]

So who cares if there’s some counterfeit cash out there? Well, by itself it has an almost undetectable impact on the money supply (especially compared to the current “quantitative easing”) but it does provide a kind of venture capital for the bad guys. Criminals use the counterfeit money for all sorts of things. One gang was found with a large stock of cannabis for distribution, but

Some of the forged money was used to buy more than 16,000 € worth of jamones in Guijelo, (prized ham from the Iberian pigs, traditionally fed on acorns for their flavour) in Salamanca province.

[From Spanish Police uncover ‘ham-loving’ counterfeit criminals]

Well, even counterfeiters have to eat.


[Dave Birch] At a SEPA seminar I went to — at which, as an aside, the delegates agreed overwhelmingly with the statement that “bank payment products are inadequate for the Internet and mobile world” — we were given a curious pamphlet from the European Payments Council (EPC) called “The most popular misunderstandings about SEPA clarified”. One of the statements was “SEPA is a demand-driven initiative” (which, of course, it isn’t). The clarification from the EPC says “European integration is rarely carried forward on a wave of popular support” (I’ll say!) and goes on to say that monetary union did not materialise by distributing euro banknotes and coins and hoping that national currencies would be enthusiastically abandoned. Indeed. But that’s not say that that idea was wrong: on the contrary, national currencies would have been forced to keep their value up relative to the euro or begin losing seigniorage (and influence). That was one of the points in favour of dear old John Major’s plan for the hard e-euro.

Help! I can’t stop posting about SEPA

[Dave Birch] I saw a very good talk by Gerard Hartsink, Chairman of the European Payments Council. He was talking about SEPA and the evolution of the European payments sector. The context isn’t important, but I did want to highlight one comment he made — which caused some passionate discussion — about the future of payment cards. He said that he could see a situation in 2011 or 2012 when magnetic stripe transactions would be banned in SEPA and only chip transactions would be allowed at ATM and POS. Now, before we launch into a debate on this, let me point out that he is not the only person of influence who is thinking this way.

Tony Chew, head of the technology risk supervision division of the Monetary Authority of Singapore, is advocating for a concerted global effort to phase out magnetic stripe technology entirely. “We can all go chip and PIN which will be a more effective method of combating counterfeit card fraud,” says Chew.

[From Vendor Articles: 12/6/2009 Credit card fraud rising]

It’s the rise in fraud that is causing this kind of thinking. Far from shrinking card fraud, the introduction of chip & PIN in the UK has multiplied a thousandfold the number of places where people use PINs and therefore where PINs can be stolen from. So long as there are places where easy-to-copy magnetic stripes can be used, the incentive for criminals is clear. Things are getting worse.

It is my belief – and feel free to come back and tell me that it’s me that is the idiot – that after a number of years of declining card present fraud (magnetic stripe cloning is so much easier, and a gift from the card issuers), we are now going to see a dramatic increase, and there is nothing we can do about it!

[From 2009 – is that the year we all went online?]

I happened to be reading this month’s Fraud Watch, and one of the front page stories is “ATM fraud threatens global acceptance”. The story says that “several issuers are considering blocking major cities and possibly whole countries where international card fraud is high, because there is no chance for reimbursement for those losses even though the original cards are EMV chip and PIN compliant”. (There are, as I understand, no plans for a liability shift to rectify this, particularly in the USA.) Oh dear. Incidentally, the top three destinations for ATM fraud on UK-issued cards last month were…. 1. Canada, 2. Italy and 3. the USA.

Suppose Gerrard is right? What will happen in 2012 when travellers from the USA arrive in Paris and discover the shops, hotels and ticket machines won’t accept their cards any more?

Anti-anti money laundering

[Dave Birch] I was involved in a discussion about the relationship between the cost of customer acquisition for simple payment services and KYC/AML/terrorist finance legislation and, once again, I said that I was not sure that keeping people out of the “system” was the best strategy (because if the terrorists, drug dealers and bank robbers on the run stay in the cash economy, then they can’t be tracked, traced or monitored in any way). I made a similar point when I was in the City at a round table on financial regulation. I really didn’t expect my views to be particularly controversial, but they were. What I was arguing for was a relaxation in the controls around small payments — and in particular, getting away from quite strict identity checks, which I think hold back the development of low cost, competitive mobile and Internet payment systems — in order to shift the inclusion vs. exclusion balance that we’ve spoked about before.

I’ll play by Chatham House rules and not attribute what was said by anyone (except me, of course) about money laundering. I said — with poetic exaggeration — that the huge amount of time, money and effort that goes into the AML industry never catches any criminals, and I was given a suitablly hard time by someone from part of Her Majesty’s Revenue and Customs (HMRC) who said that they did indeed use Suspicious Activity Reports (SARs) to detect crime and used the example of last year’s major prosecution of criminals who had been using bureau de change as a front for money laundering. OK, I shouldn’t have said “any” criminals. What I should have said was “almost no” criminals.

The 50 year plan

[Dave Birch] When I took one for the team and went to the SEPA session at the International Payments Summit. I did learn something new, which was that at the current rate of progress it will take about 50 years (the actual estimate was 47 years) to migrate European credit transfers to the SEPA Credit Transfer (SCT), which is not bad I suppose. After all, it takes time to develop and integrate new systems, and banks have other priorities. Neverthless, it is fair to observe that progress is slow.

What I was mainly interested in was the zeitgeist around the Payment Services Directive (PSD) rather than SEPA itself. That’s because it will have more of an impact on more of our customers. Selfish, I know. But the thinking is straightforward: for our financial sector customers in the payments business, the PSD introduces new consumer rights and so forth and this will cause them some hassle. One particular impact, which may well be under-emphasised in strategic evaluations of the PSD, is the panoply of new customer rights that come with the PSD. These include transparency. So (under articles 36 and 37) your card issuer has to tell you (when you’re buying a meal in a Greek restaurant) the maximum execution time for a payment, all charges payable and a breakdown of those charges and the actual (or reference) exchange rate. Gulp. That sounds like the Greek restaurant will have to give a British cardholder a couple of pages of A4 and make sure that the customers reads them before they punch in their PIN.

You’d think that a key impact of the PSD would be pan-European, but a couple of people I overheard were definitely sceptical. In fact, some people think it is likely to entrench national markets for the time being. I saw Bob Lyddon give a talk about this recently and he made the point that the combination of national “gold plating”, the mixed adoption of the rights of derogation and different interpretations of non-negotiable elements after national transcription (ie, the process of turning the directive into national law) means that there is a high likelihood of national markets becoming more different, not more similar. (And one country, Sweden, is opting out of it at the moment.) Thus, although a Payment Institution (PI) can theoretically passport, national differences mean that costs and complexity will not reduce for the time being.

Anyway, the point is that for banks, the PSD comes at an interesting time when transaction banking is becoming more central to strategy. The threats from both new entrants and substitutes are, according to Bob (and I agree with him), high. In these circumstances, regulation is turning from a moat that competitors cannot cross into a millstone around the incumbents necks.

The unready

[Dave Birch] I’ve been to a couple of meetings this week, for one reason or another, were the topic of SEPA has loomed large in the discussions. Then I remembered Chris Skinner’s typically pithy (and typically accurate) summary of the current situation.

SEPA Credit Transfers are picking up a pace, but it’s slow. Only 2% of all credit transfers use the SCT structure today. E-invoicing is taking off as a specialist interest area, but nothing has yet been agreed or is in place, and it is unlikely to be until 2012 or later. The Payment Services Directive (PSD) is agreed and is being transposed by most nations, except Sweden. Even with transposition, each country has its own PSD flavour so we have 27 flavours of harmonisation. That’s not a standard. Meanwhile, the SEPA Direct Debit program will start this year. Hopefully it starts in November, when the PSD gets transposed, but it’s not guaranteed. This is to be determined at an EPC meeting on 31st March where the banks will agree whether November is do-able or not. Finally, there’s no migration or end-date mandate for any of the above and, until there is, this program is a road to nowhere.

[From The Financial Services Club’s Blog: SEPA and the PSD: broken but not dead]

It’s certainly a slow burn. But I’m mildly hopeful that the PSD, unlike SEPA, will lead to some actual change in the marketplace that might be discernible to the average consumer. Other people don’t think so. The BCG annual survey of payments forecasts much lower growth in payment revenues in the SEPA zone through to 2016 (which would seem to imply downward pressure on bank pricing, and therefore some success for SEPA) than in the Americas or Asia-Pacific, but goes on to say that “other SEPA objectives may never be realised [including] improved payment services”. There’s clearly a difference of opinion between organisations that sell hardware, software, outsourcing and implementation and those who don’t (eg, BCG) because they go on to say “the benefits of further implementation of SEPA are limited and investments required for achieving full SEPA are prohibitive”.

Greater utility

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

The modern financial services industry is a casino attached to a utility. The utility is the payment system, which enables individuals and companies to manage their daily affairs… Modest levels of speculative activity may improve the operation of the utility

[From Essays: ‘Making banks boring again’ by John Kay | Prospect Magazine January 2009 issue 154]

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

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