Location, location, location and financial innovation

In his super book “Money Tales”, Alessandro Giraudo looks at the emergence of paper financial instruments and tells how the great medieval trade fairs of Europe were gradually replaced by financial fairs where no actual trade took place except in money.

Even after trade routes had shifted away from the north-south axis that depended on the Champagne commodities fairs, the fairs continued to function as an international clearing house for paper debts and credits, as they had built up a system of commercial law, regulated by private judges separate from the feudal social order and the requirements of scrupulously maintaining a “good name”, prior to the third-party enforcement of legal codes by the nation-state.

[From Champagne fairs – Wikipedia, the free encyclopedia]

Hello. New instruments but no new institutions, new technology beyond traditional law enforcement, so a private reputation-based scheme grew up to facilitate commerce where previously gold and silver had been the oil that greased the wagon wheels. It’s almost as if identity had become the new… no, let’s not get distracted…

Giraudo tells how over time the power of the Genoese bankers rose and they shifted the fairs from France down to Piacenza, near Milan. The Genoese had established the function of the banker as a money merchant and separated this function from that of the “merchant banker” with holdings. Imagine how the idea of paper replacing gold and jewels and spices must have seemed to the institutions of the time! The finance and wealth based only on paper astonished the traditional Italian bankers, and those of rest of northern Europe too, but they all had to adapt to the new reality so as not to be overtaken swept aside by this technological revolution.

Those Paicenza money market fairs became the largest in Europe from the end of the 16th and into the 17th centuries with bankers from Flanders, Germany, England, France and the Iberian peninsula converging four times a year to meet with the Genoese, Milanese and Florentine clearing houses. The clearing houses put down a significant deposit in order to participate in the fairs and in return they fixed the exchange and interest rates on the third day of the fair (this was when interest rate fixing wasn’t the thing it is today). In addition to the bankers there were also money changers who also had to put down a deposit (smaller) to present letters of exchange, and there were also there were also representatives of firms and brokers who participated in the trading.

During the fair, the participants tried to clear all of the transactions in such a way as to limit the exchange of actual coins, so it was net settlement system. Any outstanding amounts were either settled in gold or carried forward to the next fair with interest. This was the first structured clearing system in international finance and it lasted until 1627, when the Spanish Empire went bankrupt (again) causing serious losses to the Genoese bankers who were its principal financiers (and sadly for them had no access to a taxpayer-funded bailout). As a result the financial centre of Europe shifted to Amsterdam, which had a central bank for efficient inter-merchant transfers (more on this is in another post) and was developing newer instruments including futures and options, and then onto London. Spain’s gold and silver (from the Americas) never translated into a strong financial services sector and trade-led economic growth.

When Philip III became King of Spain and Portugal in 1598, Spanish commentators were complaining that instead of being used to stimulate industry and business, the treasure from the Americas had created an attitude that held productive work in contempt, while foreigners – Genoese, Dutch, Germans – ran Spain’s trade and finance to their own profit.

[From Spanish Bankruptcy | History Today]

Giraudo observes that while geography and politics have a strong influence on the location of financial centres, the deciding element has always been the capacity to invent and use new financial techniques, and above all to create a dynamic sense of innovation. This is where, in my opinion, London and New York excel and why they remain powerful financial centres. But what if that capacity to invent new financial techniques is in the future better exploited in Kenya or the Far East or on the Internet? What if financial innovation slips its mundane anchors and begins to float free on the tides of cyberspace? In London, in the UK and in Europe we have to make sure that we have a regulatory climate that supports innovation in financial services in the new economy, not one that attempts to prop up the old one.

Well, anyway, that’s what I told the Parliamentary Office of Science and Technology when they interviewed me about fintech this week and it’s what I’m going to tell the chaps from the European Parliament when they interview me about fintech next week.

Regulation is more important than technology when it comes to strategy

Dgwb blog white border

The biggest factor shaping the strategic plans of players in the European payments sector is regulation and right now understanding the impact of new regulation is far more important than understanding the impact of new technology.

Friends and relations

While I was sitting through a presentation (a very good presentation, I might add) on social media strategy for one of our client’s financial services businesses, it struck me that they were slightly misjudging the more interactive and transactional nature of social media, doing great stuff but treating social media as another customer communication channel. I’m naturally more interested in social media for transactions: social commerce. I’ve given a couple of talks about this recently, pointing out the opportunities that social commerce opens up.

One prediction says social commerce will top $30 billion globally by 2015 with Facebook-generated sales one of the primary drivers.

[From Infographic: The history of F-commerce | SMI]

There are many different ways that financial services organisations can exploit this. A good example, to my mind, is the way in which Amex works with Foursquare.

Just after announcing that it passed 10 million users, location-based check-in service Foursquare has said it is partnering with American Express to give members even better deals when they check in at merchants’ stores across the country.

[From Foursquare partners with American Express for deal check-ins | VentureBeat]

This is a terrific proposition and it’s well implemented (through statement credits, so no coupons or vouchers or anything are needed). And, to follow this example, Amex also has a Facebook pages where its large number of fans can come to learn about products and services, share with the community of card holders and so on. Great stuff. And it isn’t only financial services organisations that are integrating themselves into social media to create new kinds of social commerce.

That is because the well-known mobile service provider is now allowing its customers to log on to Facebook to purchase phone credit.

[From O2 details new contactless payment technique]

Wow, that’s pretty interesting.

Pre-paid subscribers will now be able to access a secure app on the social networking website, where they will put in credit card details in order to purchase top ups.

[From O2 details new contactless payment technique]

Credit card details? Not Facebook credits? But you get the picture. Something like Facebook can be used to create a more intimate transactional environment without having to develop software, making it easy for consumers to “friend” and “like” and so forth. Personally, I don’t find this sort of thing particularly appealing because to me it’s the wrong kind of social relationship: I want something more granular.

Here’s what I mean. I don’t want to be friends with my bank — after all, I’m a typical consumer so I hate banks — but I do want to be friends with my bank account. Why can’t Barclays let me friend my current account so I can see its status updates like “Premium card fee £10.00”, “Direct Debit British Gas £37.85” and “Counter Credit £5.00” and so forth? I quite like the text messages that Barclays sends me but would prefer something more immediate and more detailed (I often call this “streaming commerce”) so that I can make decisions and respond.

Similarly, I don’t especially want to be friends with MBNA, but I do want to be friends with my MBNA American Express card. I’m using “friend” generically, of course, I don’t mean to imply that Facebook is the one and only way to implement a social media strategy.

Facebook usage in the UK fell nearly 4pc in July to its lowest level since 2009, sparking concerns that the social network has hit its peak and may be declining in popularity.

[From Facebook usage falls to three-year low – Telegraph]

I don’t use Facebook that much — it’s really for sharing with my brother and sister, other family members and a few old friends — and I’ve not got a crystal ball to see whether we’ll still be using it in a couple of years.

Many of the smartest people I know are leaving Facebook as well. I predict we’ll see many people leaving over the coming months and adopting Twitter.

[From The Facebook Exodus and the Future of Human Communication « Far Beyond The Stars | Cyborgs, second selves and cybernetic yogis]

My idea would work even better with Twitter though. Suppose Twitter made a small change to their system so that a user could opt to be in “secure” mode. A secure mode user can only be followed (or searched) by users in their “secure list” or whatever. Then, my MasterCard could be secure user “mc-53XX-XXXX-XXXX-XXXX” the only name in its secure list would be “@dgwbirch”. Now, when anyone else tries to follow or search mc-53XX-XXXX-XXXX-XXXX they see nothing.

I’d love to follow my John Lewis MasterCard on Twitter in the way instead of having to log in to find out what it’s been up to. Since I use Twitter all day and every day anyway, it would be a much better channel for payment products to develop a more intimate relationship with me. And think of the practical benefits: if I get a tweet from my debit card telling me it’s just been used to withdraw money from an ATM in Belarus, I can call Barclays right away to block it from further misbehaviour. This doesn’t seem terribly complex: all Barclays need to know is my twitter name and then it can use the Twitter API to post tweets and only allow me to follow them.

If I could follow my transactional instruments, I could also (in time) feed their tweets, status updates, notifications and so on into other software for mash-ups. I don’t know what kind of mash-ups – I’m not smart enough for that – but I’m sure there are people out there who could do great stuff with the data. So a plea to my account, card and service providers: I don’t want to be friends with you, because you are corporations and not mates, but I don’t want to be friends with my stuff: my money, my cards, my phone. How hard can it be?

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

Eric Schmidt’s very bullish comments about near-field communication (NFC) technology in the US retail market have got people talking about business models again.

Eric Schmidt, Google’s executive chairman, believes that a third of check-out terminals in retail stores and restaurants will be upgraded to allow wireless “tap and pay” from mobile phones within the next year.

[From Google’s Schmidt predicts widespread “tap and pay” within a year | FT Tech Hub | FTtechhub – Industry analysis – FT.com]

These follow a series of statements by Google executives that, whether they are true or not, seem to have legitimised the technology in the eyes of a broad range of businesses.

She added that there is a ton of activity around NFC in international markets, giving the example of a successful trial of the technology that Starbucks ran in London.

[From Google Commerce Chief: We’re Making A Huge Bet On NFC As A Company]

I’ve never heard of this Starbucks NFC trial, so if anyone can point me in the right direction I’d really like to read up on it. But that’s beside the point. The point is that lots of people are now taking NFC seriously in the retail space and the mobile operators are developing NFC strategies. But what business model will there be for them? And what options do they have?

The question will then be how operators manage to regain relevance for their role in NFC transactions (which will come later, if at all), when the first trillion NFC interactions will have bypassed them.

[From Dean Bubley’s Disruptive Wireless: What will be the business model for free NFC-based interactions?]

You can see the problem that he is alluding to, but it may not be immediately obvious why it is such a problem specifically for operators. Look at the issue from a slightly different perspective, one that stems from security. I would argue that 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. These are what Dean means by “interactions”. 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. These are what Dean means by “transactions”.

Working out how to do implement secure electronic transactions 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 Nexus handset, not on the SIM). The operator has no control over the SE and can extract no “rent” for its use. I notice that in the Nilson report (#972, page 7) it says that the Nexus S is the only smartphone in the US market with an SE not controlled by the mobile operators: it might have said that it’s the only smartphone in the US with an SE, full stop. The operators (in the form of Isis) are not yet in the marketplace. Why are Google being so active then? Well, 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 and from these experiences have developed (I think) a reasonably accurate map. 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.”

So how come banks and operators didn’t connect the dots, then? Banks and operators have smart people in 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 but they didn’t sell any NFC tchotchkes, such as blank 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 for a gig you and your mates are running… well, hard luck. This is problematic, because we need lots of people to be experimenting, developing and playing with the new interface to create the new, open applications.

In April, Nokia’s vice president for industry collaborations, Mark Selby, speaking at the WIMA NFC conference in Monaco, contended that NFC applications not securely stored on SIM cards, embedded chips or other secure elements will account for two-thirds of the revenue that NFC technology will generate through 2013.

[From Nokia Introduces Its Second NFC-enabled Smartphone | NFC Times New – Near Field Communication and all contactless technology.]

I hope Mark won’t mind me mentioning that we discussed this over dinner a couple of weeks ago and, while I agreed with him about the market, I bored him at length with my moaning about the slow development of the ecosystem. Where are the Nokia NFC tags for kids to buy? Where are the NFC USB sticks to connect laptops and phones?

But, looking forward, there’s another issue here. This classification of open/interactive vs. closed/transactional NFC uses is too simplistic, because as the technology spreads in the mainstream, interactions will need to be secure too. When I tap my phone against an advert at the bus stop, I want to find out more about “Kung-Fu Panda 2” and not get directed to a porn site, a reverse-charge premium rate phone call to Honduras or send a text message to someone who wants to sell my mobile number to commercial organisations. I want my phone to check the digital signature on the tag and make sure that it is valid, and that it is signed by an organisation recognised by UK phone operators, or banks, or the government, or whoever. But signing the tags (which is part of the NFC standards, but no-one uses at the moment) means that someone has to distribute keys, and certificates and all that stuff. None of this exists right now, but in the future it will have to.

So… Not only is there no ecosystem for transactions, there’s no ecosystem for interactions either. Now you can see why the mobile operators are going to have to work so hard to stay in the NFC loop. A couple of years ago they could have started to roll out the handsets for open, interactive purposes and started many communities off on experimenting with the new technology while they developed the necessary infrastructure for both secure transactions and secure interactions, but they didn’t because they couldn’t see a business case. What’s the business case for selling public key certificates so that advertisers can digitally sign tags using their internally-generated private keys?

It’s hard to work out a conventional business case around a business that simply doesn’t exist yet, and I understand that. But I think that even three or four years ago, the consumer response to the early pilots and trials was so positive that it was clear that the technology would make the mainstream. Now that Google’s activities have served, in an odd way, to legitimise both NFC technology and the business models around it, maybe the operators should adopt a more Google-like approach to business model: start building way more cool stuff, monetise what works and then be ruthless in killing off what doesn’t.

My employer, Consult Hyperion, has provided paid professional services to some of the organisations named here in connection with products and services discussed 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

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]

Innovation is technology-enabled

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

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

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

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

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

[From Public Strategy: Innovator’s irony]

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

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

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

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

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

[From Payment Gadgets at The Catalyst Code]

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

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

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

[From Digital Money: Hip to be Square]

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

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

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

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

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

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

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

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

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

Finnovation

I really enjoyed the first Finovate Europe in London. We had an excellent couple of days, because we had BarCampBankLondon the day before (I’ll write something about it later), and lots of folk came in for that too.

Although it was in London, three of the UK’s four biggest banks had just one person at the event. Three of the others didn’t send anyone at all. Barclaycard and Santander sent six each. Hmmm. Perhaps the others are just being careful with taxpayers’ money. I wish the head of eBusiness from my bank had been there.

[From Some Observations From Finovate Europe | Forrester Blogs]

To be completely honest, I was looking at most of the presentations in horribly mercenary terms: asking only which of our clients might be able to exploit this? As a consequence, I wasn’t really grabbed by what one of my fellow delegates called the “wheelspinning” around personal financial management (looking at pie charts of your overdraft and that sort of thing). Our space is the secure electronic transaction space, so I enjoyed the presentations from our friends at SecureKey and VoiceCommerce. It’s that kind of thing that is hot, I think. I’m going to find out more about Miicard as well.

I liked the StockTwits presentation, which probably combined innovation in technology and innovation in business model in the most interesting way, targeting a specific niche in an engaging way. There’s a lesson for me here: if I used Twitter for something more than moaning about South West Trains, I could have been a contender. Boku were great and so were Ixaris: I understand what they are trying to do in payments and I’m sure that both of them will succeed. None of my picks made it in to the delegate’s top three in the final vote, but I’m happy to stand alone.

All things considered it was a super day, an excellent opportunity to connect with clients and colleagues, and an energising look around the space. Jim and all of the chaps should be very happy with it.

The presentation that I probably thought about the most after the event, though, was the one from Fidor Bank. They have integrated a variety of alternative currencies into their online banking platform. These are presumably attractive to German consumers fleeing the euro, with folks memories of hyperinflation pushing them toward non-fiat stores of value.

The partnership will enable Fidor’s customers to buy gold, silver, platinum and palladium without completing any GoldMoney application forms. Orders will be processed daily through the FidorPay Account at the bank and then placed with GoldMoney through an ‘Omnibus-Holding’ in the name of Fidor.

[From Finextra: Germany’s Fidor Bank to offer retail access to precious metals via GoldMoney]

If you want to find out more about GoldMoney, forum friend James Turk, their CEO, will be at this year’s Digital Money Forum. Although only precious metals are live at the moment, Fidor are planning to integrate virtual currencies the future. I didn’t get a chance to talk to them to find out what the mechanism for this is: as far as I know there’s no API for accessing your Everquest platinum (or, literally, a payments wizard) so it would have to be done using screen scraping with usernames and passwords, just as it is for other services with no security (eg, banking).

I’m naturally fascinated to see how customers respond to this. If you can shift from euros to gold to World of Warcraft gold in a simple and friction free way, then we might see some interesting markets emerging.


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