Immobile

There’s something odd about a conference on Mobile Money & Migrant Remittances held in a hotel with no mobile coverage and a $25/day charge for wifi, but despite that I thoroughly enjoyed popping along and meeting up with friends from around the world there. I was on the Strategy Panel covering financial inclusion, and this coincidentally, the day after I had been quoted in Warren’s “Washington Internet Daily“:

Mobile payment systems are often treated with a lighter regulatory touch than mobile banking, to reach as many users as possible, Birch said. The need to integrate the “unbanked” into society should “tip the value” toward less regulation of low-value transactions, he said.

An entirely accurate representation of my views. A correspondent wrote in response:

Very sensible words! Not sure if you have actually read FATF’s NPM report from October 2010, but it is actually pretty good, and recommends the right thing: a light KYC regime (including no verification) for specific low risk accounts, praising the power of transactions limits and monitoring.

As it happens, I hadn’t read the FATF New Payment Methods report, so I downloaded it to take a look and discovered some surprisingly sensible conclusions. By “New Payment Methods”, or NPM, the FATF means specifically internet payment systems, mobile payment systems and prepaid card products. My correspondent had noted, to my surprise, that some of their conclusions echo my own ranting on the topic: that is, a light-touch KYC regime (including no verification for specific low risk accounts), with attention paid to setting the right transaction limits and appropriate monitoring and reporting requirements. The report is based on a number of case studies, so the conclusions are based in practical analysis, however it must be said that they are probably not statistically utterly sound.

The project team analysed 33 case studies, which mainly involved prepaid cards or internet payment systems. Only three cases were submitted for mobile payment systems, but these involved only small amounts.

Personally, I found many of the case studies in chapter four of the report uninteresting. Yes, in some cases prepaid cards, or whatever, were used as a part of a crime, but in many of the frauds so were cash and bank accounts. One of the case studies concerned the use of multiple prepaid cards by an individual found to have 12 legally-obtained driving licences in different names (and $145,000 in cash). I’d suggest that cracking down on the driving licence issuing process ought to be more of a priority! The issue of access to transaction record is, I think, much more complicated than many imagine. You could, for example, imagine transaction records that are encrypted with two keys — your key and the system key — so that you can go back and decrypt your records whenever you want, but the forces of law and order would need to obtain a warrant to get the system key. Sounds good. But I might not want a foreign, potentially corrupt, government department to obtain my transactions for perfectly good reasons (like it’s none of their business).

The report says very clearly that the overall threat is “difficult” to assess (so some of the rest of it, I think, is necessarily a trifle fuzzy) but also that the anti-money laundering (AML) and counter terrorist financing (CTF), henceforth AML/CTF, risks posed by anonymous products can be effectively mitigated. I agree. And I also strongly agree with chapter three of the report notes that electronic records give law enforcement something to go on where cash does not. This is something that I’ve mentioned previously, both on this blog and in a variety of other fora, because I think it’s a very important point.

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)

[From Digital Money: Anti-anti money laundering]

The report goes on to expand on the issue of mitigation and, to my mind, deals with it very well. It says that:

Obviously, anonymity as a risk factor could be mitigated by implementing robust identification and verification procedures. But even in the absence of such procedures, the risk posed by an anonymous product can be effectively mitigated by other measures such as imposing value limits (i.e., limits on transaction amounts or frequency) or implementing strict monitoring systems.

Why is this so important? As well as keeping costs down for industry and stimulating the introduction of competitive products, the need for identification is a barrier to inclusion. This link between identification and inclusion is clear, whatever you think about the identification system itself. India is turning out to be a fascinating case study in that respect.

The process would benefit beneficiaries of welfare schemes like old-age pension and NREGA, enabling them to draw money from anywhere as several blocks in Jharkhand have no branches of any bank and would save them from travelling to distant places for collecting money.

[From Unique numbers will save duplication in financial transactions – Ranchi – City – The Times of India]

But I can’t help cautioning that while customer identification is difficult where no national identity scheme exists, but there is a scheme it may give a false sense of security because obtaining fraudulent identities might be easier than obtaining fraudulent payment services in some jurisdictions or where officials from dodgy regimes (like the UK) are at work…

Prosecutor Simon Wild told the court Griffith abused his position by rubber stamping work permit applications that were obviously fake or forged using false names and references.

[From British embassy official ‘nodded through scores of visa applications’ | Mail Online]

For low risk products, then, the way forward is absolutely clear: no identification requirements, potentially strong authentication requirements and controlled access to transactions records. One small problem, though, that the report itself highlights: there are no uniform, international, cross-border standards for what constitutes a “low risk” product. But that’s for another day.

Finally, I couldn’t help but notice that the payment mechanisms that scored worst in the high-level risk table (on page 23) and therefore the one that FATF should be working hardest to crack down on is cash.

P.S. I apologise to the conference organisers for my radio silence during the event, but I belong to the #canpaywontpay tendency: I can afford $25/day for wifi (since I’m not paying, I just expense it to the compnay) but I won’t pay it, because it’s outrageous. No wifi means no twitter, no blog, no buzz. That’s not how conferences should be in 2011.

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

Black Wednesday

They called April 6th “Black Wednesday” in the UK. Well, I heard someone say that on the BBC. It’s because it was the start of the new tax year, and since the government maxed out the credit card, the payments are going up. There’s going to be some pressure to collect to more tax, because there’s a limit to how much you can put the rates up before avoidance (and emigration) reduces the total amount collected. I wonder if we will soon be going down the Greek route.

The Greek government announced Thursday it is shutting down bars and nightclubs… that fail to offer receipts. So far, six bars and clubs have been shut down as par of a broader sweep where two-thirds of all inspected businesses were fined. The absence of receipts allows businesses to avoid value added tax, or consumption tax, the Ministry of Finance said in a press release.

[From Euro Debt Crisis – Cash-Strapped Greece Cracks Down on Fun – CNBC]

Now this could be good for the e-payments industry, because the easiest away to avoid receipts and therefore evade tax is to pay in cash. Here, in the birthplace of income tax, the government are apparently going to have something of a crackdown on tax evasion.

HMRC has targeted so-called ‘ash cash’ or payments to doctors for signing death certificates before bodies can be cremated and also undeclared cash payments to dentists.

[From HMRC targets middle class tax evaders – Telegraph Blogs]

This seems on the margin to me: I shouldn’t think the amount of tax being evaded by doctors writing death certificates will amount to one payoff of a local government official and I have to say that none of my dentists has ever asked me for a cash payment for anything.

It could even be argued that agreeing to pay your builder in cash might be seen as a conspiracy to defraud the Revenue

[From HMRC targets middle class tax evaders – Telegraph Blogs]

Now you’re talking! Agreeing to pay your builder in cash is precisely engaging in a conspiracy to evade tax, and people who do it should be prosecuted. If they paid their share, mine wouldn’t be so much.

And it’s not just that carrying around cash is inconvenient and time consuming. These days, one of its main functions is to finance the black economy: drug deals, counterfeiting, under-the-table employment and other nefarious activities. Because cash is anonymous, people can easily opt out of the taxable economy – leaving the rest of us to pick up the tab for their use of public services.

[From I’m dreaming of a cashless Christmas – Telegraph]

Getting rid of cash won’t eradicate tax evasion, but it will make it more difficult, and hopefully more expensive, thus shifting otherwise black commerce back into the formal economy. And since the scale of tax evasion in Europe is so colossal, small improvements will deliver significant sums to the treasuries. I couldn’t find a reasonable estimate for this in the most recent tax year, but I did find this estimate for VAT alone.

The current collection model brings with it a VAT Gap due to e.g. VAT fraud, insolvencies, mistakes by the taxable persons in the VAT return and VAT avoidance schemes. Desk research shows that the VAT Gap for 2009 can be cautiously estimated at 6,9% of GDP and 12% of total VAT liability in the EU-27. This means that, in the EU-27, a total of EUR 118,8 billion has according to those estimates not been collected by the tax authorities in 2009.

[From 118,8bn euros lost in 2009]

Let’s say that 20 billion of this is in the UK, and that getting rid of cash would cut it by a quarter. That’s an instant five billion bonus to the exchequer. I look forward to my rebate.

Will they or won’t they pay?

The outsourcing company Accenture conducted a survey to find out if consumers want to use their mobile phones for payments. Unsurprisingly, there is a strong correlation between countries where people have already used their mobile phones for payments (eg, China) and where people wanted to use their mobile phone for payments (eg, China).

Overall, 69 percent of survey respondents in Asia indicated they favored using mobile phones for most payments, led by Chinese consumers (76 percent) and India (75 percent), followed by Korea (56 percent) and Japan (47 percent). Outside of Asia, the next highest positive response was in Brazil, where 70 percent of consumers favored using mobile phones for most payments… asked if they had used a mobile phone to make purchases in the past six months, nearly half (47 percent) of tech forward consumers in China indicated they had, followed by Korea (42 percent) and Japan (33 percent).

[From Interest in Mobile Phone Payments Strong Among Most Active Mobile Users Despite Security and Privacy Concerns | Business Wire]

Now, the figures cannot represent a desire for mobile out of a lack of alternatives. I’m in China right now, where China UnionPay already has gazillions of cards out there and I’ve been using my splendid Travelex prepaid Visa card all day without a problem (some shops just wanted signature, some wanted online PIN and signature, I don’t know why). Meanwhile, back home, the situation looks rather different.

In the U.S. and Europe, combined, however, only 26 percent of respondents favored using mobile phones for most payments.

[From Interest in Mobile Phone Payments Strong Among Most Active Mobile Users Despite Security and Privacy Concerns | Business Wire]

Oh well, I guess there’s no need to spend much money on m-payment solutions in Europe or the US then, when only a 100 million or so people will want to use them, especially so in the US where another survey shows that few consumers are prepared to pay for m-payments.

However, the [Yankee Group] consumer survey results also indicate that less than 10% of respondents would be willing to pay extra for mobile transaction services such as mobile banking, mobile coupons and mobile payments

[From Less than 10% of US consumers willing to pay for mobile payments • NFC World]

But hold on, I thought. If you asked consumers in the US if they were prepared to pay for debit cards then only 10% would have said yes. Yet everyone has (and uses) a debit card. Hhmmm…

So who does pay for debit cards then? In the US, where the merchant fees are much higher than in Europe, transaction fees are the major source of income. But the economics of debit are different in Europe where the already lower debit interchange and fees mean that in some countries (eg, the Netherlands) the banks lose money on every debit transaction, whereas in some countries (eg, the UK) they make a small but vanishing margin. Yet debit is profitable for banks. Why? It’s because the major component of income from debit schemes is not the transaction fee but

  • The interest foregone on current accounts. Consumers who use their debit cards keep money in their current accounts to fund and the bank earns interest on that money.
  • The fees earned from unauthorised overdrafts and such like. If you are out spending on your debit card and you see something that you want, you might go into the red to get it. Or you might make a mistake.

This led to an interesting twitter conversation with Forum friend Scott Loftesness. As Scott pointed out, people do, of course, pay for debit cards, but they just don’t see explicit pricing. But they might, if the “Durbin debate” ends with issuers being forced to reduce interchange. The National Retail Federation (NRF) in the US has told Congress that delay to debit card swipe fee reform will save banks and their customers more than a billion dollars for every month of delay. Actually, that’s not quite what they said…

A postponement of the debit card swipe fee reform could cost US retailers and their customers more than $1bn per month, the National Retail Federation (NRF) warned Congress.

[From Debit fees regs delay could cost $1bn]

I wrote before that if retailers think that they are being so grotesquely overcharged for debit schemes then they should start their own, and I do have to say that I am puzzled that more of them haven’t already gone down the decoupled debit route, especially those with strong loyalty databases (eg, Tesco).

My wife’s visit to Target this week prompted a revisit to the decoupled debit space. Target’s value proposition: hand me your check and sign a release form, you will then receive a RedCard linked to your checking account and good for 5% off all future purchases

[From Decoupled Debit « FinVentures]

Retailers in the US, it seems, prefer a different kind of competition. A little while ago I read a piece in the Financial Times, which I couldn’t find given five minutes googling, that said that the regulatory capture of $1 billion a month, most of it going to America’s biggest retailers, wouldn’t make any difference to the prices that consumers pay. I’m sure that’s true, and I don’t suppose banks pass on all of that billion to customers any more than retailers would, but let’s face it: someone has to pay.

Banks have never lost out because of their gracious generosity in allowing customers to use cheque books, debit cards or cash machines for free.

[From The end of free banking would be another slap in the face | Chris Leslie | Comment is free | guardian.co.uk]

This is what people in the UK genuinely believe. As Scott says, they see debit cards as free. There’s no way you can now charge them for them. So why wouldn’t mobile payment cost be bundled into the bank account fee just as the debit card cost is? Actually, I suspect that it won’t be, for the simple reason that I don’t believe that consumers won’t pay. Mobility has value. If you had asked me whether I would be happy to pay an 8% transaction fee for using mobile payments a few months ago then I would have told you no way. But that’s exactly what I did last week when I went and parked at Woking station, cheerfully paying a 40p extra charge for using RingGo (a mobile payment for parking scheme) rather than use cash for a £5 parking charge.

Scott asks how mobile payments can deliver additional value to the merchants. I would say that in my recent dealings with issuer/acquirer/merchants, three general themes have emerged (I stress that these are general: they don’t relate to any specific project we are involved in).

  • The first is that retailers like mobile wallets. anticipate lower online abandonment rates with mobile wallets and I suspect they may also anticipate a higher average sale than with cash in physical environments.
  • The second is that retailers expect to be able to use these mobile wallets to interact directly with consumers through loyalty products, coupons, special offers and so on.
  • The third is that mobile should mean fewer disputes and chargebacks, which cost retailers time and money.

All of which means that the retailers will incentivise customers to use mobile, so customers will use it even if it costs them an explicit fee versus the implicit fee associated with debit. Ultimately, I’m pretty sure, that the fact that only 10% of consumers say they will pay doesn’t mean anything.

Barcelona

It’s that time of year again, so along with many of my peers I went to the GSMA Mobile World Congress in Barcelona, the annual festival for the mobile industry. There were 60,000 people there this year. You can’t not go, even if you don’t look forward to trudging around with 60,000 fellows. At least we had an eventful start to the trip. I bumped into Claire Featherstone from Maxis at the gate and we sat next to each other on the bus chatting. When the bus was almost at the plane, it was clipped by one of those trolleys that carry the baggage containers and the window right next to Claire shattered! When we got on the plane she was a little nervous about sitting next to the window…

MWC is getting to be a bit of a pain, to be honest. It’s just too big, but for a company in our market you just have to go, because that’s where everyone wants to arrange their meetings. Maybe it’s time to split it into two different events and have all of the mobile infrastructure at one event and the mobile software, services and solutions at anotherSince some of our biggest customers are there, we’re there, and that’s all there is to it. Actually, there was an extra factor: the GSMA had kindly invited me to be one of their awards judges — I voted for Colin Firth in the King’s Speech (just joking, I voted in the “Best Mobile Money Product or Solution” category) — so I was there for the awards dinner as well*.

The big news was, of course, the whole Nokia/Microsoft thing. But the news that I was really interested in was the stuff about shaping and control the value network around secure transactions which, in the first instance, means getting decent penetration of NFC handsets and, in the second instance, the war over the secure element (SE). This was a good show for NFC. NFC isn’t new to the show — or to Spain, where Visa has been running a trial in Sitges for a year.

The phone for the Telefónica trials, the Samsung S5230, known as the Star or Player One, is an EDGE handset–not a 3G phone. But Samsung said it is one of the handset maker’s top sellers.

[From New Samsung NFC Phone Gets First Trial in Spain | NFC Times – Near Field Communication and all contactless technology.]

It’s also a Single Wire Protocol (SWP) handset that implements the “GSMA NFC” model where the SE is on the UICC and under the control of the mobile operator, who hopes to rent security domains (SDs) to banks and others. And this is where things were different at the show this year: SWP/UICC isn’t the only game in town any more because of the spread of embedded SEs and removable SEs (eg SD cards).

The NFC interface is all the rage. ZTE said all of their new handsets would be NFC, Nokia had already said that all new smartphones announced in 2011 would be NFC, Blackberry said NFC was central to their strategy, an NFC iPhone is rumoured. Some of these handsets contain their own SEs. For example, the Android Nexus. How many times have I bored people to death on this blog, and at conferences, by complaining that the business side of some organisations (and their management consultants) don’t understand the relationship between nerdy technical decisions being made over the last couple of years and the business models that they enable or constrain? One of the first of the mass-market NFC_enabled handsets, the Google Nexus S, illustrates this rather well. The onboard SE is the widely used SmartMX.

The Nexus S comes with a PN65N from NXP. This chip is a combination of the PN544 NFC controller and an embedded SmartMX secure element.

[From Uncovered: The hidden NFC potential of the Google Nexus S and the Nokia C7 • NFC World]

This means, of course, that anyone with access to the SmartMX embedded SE can run secure applications (eg, credit cards) without going through the operator’s TSM etc. You may even have applications split between the two, so your O2 Money prepaid card is on your UICC (say) whereas your Visa debit card is in the handset. Both of them could be accessed through the same mobile wallet. Note that in order to create and access SDs you need keys — a big part of of our work on other mobile secure applications to go into various handsets (eg, for banks) is working out the key management strategies for these Global Platform (GP)-based SEs — so someone is still in control of the SE (hint: not the operator), but the framework in which you can do this is there.

Here’s what we did next: Download the source (actually from CyanogenMod 7 to have the full build environment for the new Nexus S), make the appropriate changes to the code, recompile everything and put it back into the phone and it works — Nexus S supports card emulation and SWP… Then we developed an Android app which we call “The Secure Element Manager” that gives the user full control over the secure element in the phone as well as the NFC chip.

[From Uncovered: The hidden NFC potential of the Google Nexus S and the Nokia C7 • NFC World]

This is getting so interesting. In the early days of NFC, I wrote once or twice about the need for “open” SDs (that is, SE SDs that are not under the control of the mobile operator) because I suspect they will be the home of innovation. Perhaps all Android handsets should come with one open SD on the SE for people to experiment with. Of course, there still has to be a structure for, say, banks to obtain their SDs (you wouldn’t want to share an SD with anyone else, because the SD contains things like security keys).

Talking about Android, that really was the story of the show, I think. (Someone joked that next year they should call it the Android World Congress.) I even know a couple of people who have switched from iPhones to Android, which seems to be a barometer of change!

All in all, the show was a great place to catch up with a whole bunch of friends from around the industry and the exhibition was mildly interesting (to me, I stress, since I don’t really care about adding Facebook buttons to phones and that sort of thing), but satisfactory progress on the inevitable march towards mass-market digital money and victory in the war against cash** that has been made winnable by the device formerly known as the mobile phone.

* The awards dinner featured: Jonathan Ross, who was less objectionable than I had expected, and entirely unknown to the majority of the audience; a Canadian indie rock band called Metric, who I’d never heard of but were mildly interesting; and the Welsh singer Duffy, who I’d never heard of, and was OK but not really my cup of tea (I’d been listening to Molotov on the subway on the way over). Many thanks to Rory Cellan-Jones from the BBC and Matt Warman of The Daily Telegraph for the company and conversation.

** The war on cash wasn’t going very well in Barcelona. In one of the bars, I saw a chap pay with a €500 note. I was sure it would be refused, but the patron accepted it cheerfully and returned the 480-ish euros in change. Either the customer was a regular or I stumbled across a rather blatant money-laundering operation.

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

Price in practice

When I was checking in to a hotel the other day, I saw a sign on the counter advising that there would be a £2.50 surcharge for paying by credit card. Naturally, I asked the receptionist about the impact of explicit pricing of payment instruments on customer preferences (remember, I do this so you don’t have to). I’m interested in both why retailers do this and what impact it has on their customers.

She told me that it made no difference to business customers, because they aren’t paying the bill and they always pay with credit cards anyway, and many of them pay with corporate credit cards and there are no corporate debit cards. For personal customers, most of them paid by debit card anyway, but the surcharge had pushed even more of them in that direction, to the point where probably four-fifths of personal customers paid with debit cards. Of the remainder, most paid with credit cards but some paid with cash. I thought it would be impolite to enquire further as to whether the cash payers were predominantly drug dealers, prostitutes or (given the location of the hotel) politicians.

Are these results typical? To what extent pricing drives payment choices is uncertain. In some cases (remember the case study of IKEA steering customers to debit in the UK) it clearly does, in other cases — such as my favourite case study of the parking at Woking station, where it costs 40p extra to pay by mobile, and half the customers do it — it doesn’t. In theory, though, there’s nothing wrong with the idea of making the costs explicit and then letting the market choose. Except… A little while back, Deborah Baxley of Capgemini (talking about the US environment) wondered if the appearance of explicit pricing for payment instruments (in itself, a good thing) might lead to a perverse outcome as merchants seek to externalise the cost of payments.

Merchants benefit from lower acceptance costs for debit cards. In a surprising twist, incentives and steering could have the perverse result of driving consumers toward cash and checks.

[From Changing the Game in Cards – pymnts.com]

I think this is a realistic projection, especially given that merchants don’t care about the costs they impose on the rest of society by driving up the use of cash and because customers simply do not pay the real cost of cash or checks. I would love for this to change, but it’s not going to. It’s reasonable to wonder, in response, whether banks can use EMV, NFC, SMS or some other TLA (three letter acronym) to generate added-value around payment transactions and thus stem the shift to cash. In the case of NFC, I think they probably can. Since NFC is now entering the consumer market, it might be time to firm up on some value-adding plans. This has been clear, I think, for some time.

Last week Google confirmed that Android 2.3 will support Near Field Communication, as will Nokia and RIM smartphones, starting next year. And judging from Apple’s recent hiring of an NFC expert, and patent filings for a probably-NFC-powered iTravel app, the iPhone 5 will boast NFC too.

[From I Have Seen The Future, And It Looks A Lot Like Bump (Without The Bump)]

But just because the idea has been around for some time, that doesn’t mean that finding genuinely value-adding applications around technologies such as NFC is easy. But I digress: the clear problem is that when you make the pricing of things explicit, then that pricing appears in the first instance to show an increase. Hence the perverse thinking that emerges.

Banks have never lost out because of their gracious generosity in allowing customers to use cheque books, debit cards or cash machines for free.

[From The end of free banking would be another slap in the face | Chris Leslie | Comment is free | guardian.co.uk]

This is what people in the UK genuinely believe. I have no idea who they think pays for all of this stuff (hint: you do) but it does make it very difficult to introduce “real” pricing that allows consumers to make informed choices. This real pricing would take offline prepaid debit as the benchmark and then price everything else from there: debit, then probably cash, then credit, then cheques, that sort of thing. Then the consumer preferences would be meaningful.

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 magic number

William Long and Kai Zhang, from our friends at Sidley & Austin, present a typically good summary of the main issues raised in the consultations preceding the implementation of the new E-Money Directive (EMD) in the UK in the recent issue of E-Finance & Payments Law & Policy (December 2010).

Generally speaking, things look very positive. The capital requirements are being relaxed so that anyone who wants to provide e-money services probably can do with too much trouble, so I predict that you’ll see some major companies moving in now. The prime candidates to offer services are probably telecommunications operators and retailers, but transit operators, event managers, corporate “campus” suppliers and others will surely seize the opportunity. Some have already declared their intentions.

O2 will apply for an e-money licence this year, signalling its commitment to support contactless payments in the UK in the near future.

[From O2 to apply for e-money licence to support NFC payments – 2/2/2011 – Computer Weekly]

The French operators announced a similar move this week. I can’t resist noting that this is precisely the strategy that we recommended to mobile operators a couple of years ago (that is, use the upcoming PSD/ELMI changes to start their own payment businesses). Competition is good for innovation, and bringing these new players into the payments business will be very positive for all of us.

The interest of mobile operators is natural, and they have to move quickly to avoid being cut out of the loop by handset-based secure element providers (eg, Apple) who may move quicker than the UICC-based secure element providers (eg, mobile operators). The interest of the transit operators is also natural, since they have the cards out there in peoples’ pockets. I still think that we’ve yet to see the really big plays yet: these will come from the retailers, just as they are in the US.

Kmart has begun testing check cashing, money transfers and prepaid cards in stores in Illinois, California and Puerto Rico, with plans to roll out the services nationally later this year. Best Buy has installed kiosks in its stores for shoppers to pay utility, cable and phone bills. Wal-Mart has opened roughly 1,500 MoneyCenters that process as many as 5 million transactions each week.

[From Retailers offer financial services to ‘unbanked’]

The use of retailer-issued e-money pre-paid products as a low-cost alternative to bank accounts for the excluded is a win-win. It takes unprofitable customers away from the banks and gives those customers more convenient services. And the retailers could steer customers to use these products at POS, thus saving on their payment processing costs. Personally, I think the prepaid market is not competitive enough (the charges are still too high) but new entrants enabled by the ELMI, new entrants with economies of scale (such as high street retailers), could open up the market and drive down costs very quickly.

Finally, I was also very excited to note in the article that the Treasury is considering my idea of making the balance limit for simplified due diligence (under the Third Anti-Money Laundering Directive) for low-value electronic money “accounts” the same as the value of the largest banknote: in this case, €500. Although they are only looking at this for non-reloadable devices, I think this should be the guiding principle for reloadable devices as well. The link between the two, the “magic number”, is entirely symbolic: it doesn’t mean anything at all, but it’s a good focus for debate.

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

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

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

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

[From How Excessive Government Killed Ancient Rome]

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

The big retailers and other merchants — who are the real winners — claim they are going to help consumers from their end by passing their savings on in the form of lower prices… But those claims are spurious at best. In countries where these types of interchange rules have been adopted, like Australia, consumers have seen no benefit.

[From Bill Cheney: New Interchange Rules for Debit Cards: A Perceived ‘Win’ Is Really a Loss]

Retailers in the UK make the same claim.

The BRC claim that if charges for every payment method were as low as they are for cash, its members could pass on £480 million in cost savings to their customers.

[From Retailers concerned over ‘unjustified’ fees]

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

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

[From Untitled]

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

Retailers have begged Congress for years, in vain, to limit the fees they must pay to banks when customers swipe credit or debit cards.

[From Debit Fee Cut Is Rare Loss for Largest U.S. Banks – NYTimes.com]

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

But retailers mounted an unusually effective yearlong campaign to frame the issue as a chance for Congress to help small business. A leading trade group for chain retailers worked with small-business groups to make sure that every time a senator held a town hall meeting back home, a local business owner showed up to ask about card fees.

[From Debit Fee Cut Is Rare Loss for Largest U.S. Banks – NYTimes.com]

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

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

MasterCard said… This provision stands to benefit some of the largest retailers in the world and will harm not only consumers, but also community banks, credit unions, and government benefits administrators. Currently, merchants pay their fair share of debit acceptance; in the future, consumers will be responsible for bearing this cost.

[From Consumers to Pay More for Merchants’ Debit Card Benefits | MasterCard®]

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

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

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

[From Payment System Under Attack? Solutions Found in Georgia! – pymnts.com]

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

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

However, Starbucks Corp., one of the few stores with a mobile payments program in place, says these transactions are little different from other card purchases, and the real benefit to the merchant comes when people use its app to reload their accounts while waiting in line instead of at the register.

[From Upside For Mobile Payments Comes Before The Payment – PaymentsSource Article]

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

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

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

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

Burke stood in line for more than seven hours at an Amsterdam train station in April as he sought passage to Belgium. He watched European travelers, also grounded by the eruption, buy tickets at automated kiosks that accepted microchip-embedded credit cards. Burke’s Bank of America (BAC)-issued Visa (V) card, with the standard magnetic stripe on the back, was useless. When the 64-year-old retired economist from Bandon, Ore., returned home, he called Bank of America to ask whether he could get a chip card. The answer disappointed him: “They have basically said, ‘Sorry, but you’re out of luck.’ “

[From Why U.S. Credit Cards May Not Work Abroad – BusinessWeek]

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

The problem is particularly acute at automated kiosks in Europe, such as the vending machines at regional rail stations and bicycle rental racks in Paris, parking meters in parts of London, toll roads and gas stations, all of which accept only chip-and-PIN cards. And the problem could get worse. More unattended pay stations are appearing in Europe.

[From Americans abroad run into trouble using credit cards – USATODAY.com]

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

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

[From The end for the magnetic stripe on payment cards?]

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

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

[From The end for the magnetic stripe on payment cards?]

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

With my peers

[Dave Birch] I went over to the FS Club to hear Forum friend Giles Andrews of Zopa give an update on their progress. He explained that one way of thinking about Zopa is as a bond market for consumers, but one that allows people to get a social return as well as a financial one. What an interesting description. And it was an interesting meeting. I won’t quote anyone, because the meeting was held under the Chatham House rule, but rather I will give some general impressions of the discussion…

We all know Zopa as P2P lending, a marketplace for money. It’s not that hard to set up a web site, though, so there must be more to it. What makes it work, seeing as their numbers have steadily climbed? Giles gave a few insights: he said, for example, that the core of Zopa’s business is their sophisticated credit rating model. I deduce it must be working tolerably well, since their bad debts over the last five years have averaged 70bp.

What I found particularly interesting was the relationship between Zopa and retail banks. In an odd way, the credit crunch came along at the right time for Zopa. Their lending went from £15 million in 2008 to £35 million in 2009 to £75 million this year. It seems to me that as public trust in banks collapsed (along with the interest rates) so more and more people turned to Zopa.

Recently Zopa have been lobbying for regulation of P2P Lending in UK.

[From New Datamonitor report on P2P Lending in the UK has some interesting analysis points « The Bankwatch]

This is true. In fact Giles has said that Zopa think they should be highly regulated and properly supervised. This would be good for them for two reasons: first of all it would create a structure for more competition, and more competition is good for innovation and excellence, and secondly it would further legitimise the P2P sector, thus bringing in more borrowers and lenders. It would also, presumably, bring in more competitors, which would be good for competition.


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