Bid and offer

There was an involved discussion about convergence of transaction platforms on a project that I am involved with and it set me thinking about what convergence actually means in this space and what the impact of that convergence might be. I started by remembering something that I’d read at Payments Views.

A couple of weeks ago, eBay held an Analyst Day where eBay senior management shared their thinking about the future of the changing commerce landscape – and how they’re thinking about taking the “e” out of eCommerce… What’s this taking out the “e” business all about? It’s about the influence of mobile on integrating online and offline commerce together.

[From The PayPal Juggernaut — Payments Views from Glenbrook Partners]

Scott is typically accurate with his comments hereafter. The strategic direction is convergence. Not the simplistic kind of convergence, where our mobile phones become watches, cameras, wallets and devices for getting stones out of horses hooves. This simply hasn’t happened. Sometimes I use my iPhone, sometime my iPhone, sometimes my MacBook Pro, sometimes my MacBook Air, sometimes my Apple TV (spot a bit of a theme here?) and sometimes I still walk into a store to buy things. The point is that the strategic direction of transactions is convergence so that whichever of these channels I use, I use the same digital money and digital identity infrastructure. It’s the transactions that become integrated, not the devices. And by integrating across channels, the transaction systems give me a better service, whether in terms of loyalty, fraud protection, price or whatever. I then continued by remembering a good report on e-payments that I’d read a couple of months ago.

A new O’Reilly/PayPal report on web-native payment platforms, “ePayments: Emerging Platforms, Embracing Mobile and Confronting Identity,” is now available for download. Among the topics covered in the report are the rise of payment platforms, the mobilization of money, and the advent of contactless payment in mobile commerce.

[From 3 mobile payment products hint at the future – O’Reilly Radar]

The thought experiment in the O’Reilly Radar “report about auctioning payments set me thinking. The idea is that, rather as advertising networks such as DoubleClick auction page impressions to advertisers in real-time (when you click on a page, the advertising network sends the details to advertisers who get 20 milliseconds to respond with a bid, and then the advertisement from the highest bidder is displayed) so when you click on “pay”, the payment platform might bundle together some facts about the transaction and auction them to processors. Presumably, one of the key elements in the bid decision would be related to fraud, especially if the pricing for the fraud management is unbundled from the pricing for the transaction itself and any other value-added services.

If this analysis is correct, then there will be a premium on identity and authentication because the higher the standard of identification that can be provided to the processors, the lower the bid! This would mean – to continue the thought experiment – that we would have a very accurate means of pricing identities. I imagine that this accurate pricing would reveal at least two interesting things. First of all, whether an identity is “real” or not is immaterial to the price, because the price will be based mainly on reputation (ie, transaction history). Secondly, the strength of the authentication will be directly reflected in price but for smaller transactions the price increments from 2FA to 3FA will be minimal. Thus, pricing will point towards pseudonymous 2FA as the “sweet spot” for transactional identities. So far, so good. Can we use this analysis to make some predictions about who might be best-placed to take advantage of this converged platform then? Well, last year I read that (all other things being equal) then it really should be the mobile operators. Qualcomm call these “horizontal models” for mobile operator value-added services – what I would call the “smart pipe” future of the mobile operator – and say that if operators do make a play in delivering intelligent services now, the potential upsides are great because…

  • They will strategically position themselves as a valued service provider to their subscribers – getting the retail experience right on mobile will be critical to capturing value;
  • They can act as an honest broker – trusted, secure, in their interests to protect and cater to their users’ needs;
  • They stand to gain from the uptick in usage as well as providing services using their billing platforms and the knowledge of their subscribers;
  • The potential of data analytics to turn digital footprints into value for consumers, MNOs and other players that have been cited in the two sided business model begins to emerge.

Vertical models may have created the marketplace, but Qualcomm believes a retailing experience that is not tied to any one operating system or technology is necessary for the industry to scale.

[From Mobile Internet: Horizontal Platforms Needed (Guest Post, Qualcomm) – Convergence Conversation]

I think this is broadly correct — especially the part about the honest broker, protecting the “real” identity of the consumers — and I think it means that operators must be more aggressive about their digital identity infrastructure as well as their digital money infrastructure. After all, who has this “retailing experience that is not tied to any one operating system”? The mobile operators do, but so does Apple. On the other hand, the mobile operators have a direct billing relationship with customers (and they know where they are). It’s time for the operators to start talking to processors about creating the mobile transaction auction house.

Party like it’s 2019

After sitting in on a few sessions at the International Payments Summit 2011 — and in particular the excellent Chatham House session chaired by Forum friend Ruth Wandhofer of Citi — I have to say that in all honesty my professional opinion is that it’s a mess. The ECB predicted that SEPA would erode payment margins in Europe by 5-10% (eventually) but that banks and customers would benefit from lower costs in the long run. Yet the cost burden is crushing. According Equens, there are 200 different formats for SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) messages. They further estimate that since both the XML message formats and the EPC rulebooks are updated every year, it means 20-30,000 man-days per annum just to maintain the software. And that’s for just one processor. What’s more, SEPA is reducing competition (and therefore increasing costs) in local markets long before the projected cost savings arrive.

One way to do something to bring on these cost savings might be to enforce and end date. When I had the honour of chairing ECB board member Gertrude Tumpel-Gugerell in Brussels last November, she said that an end-date for SEPA would be her first New Year’s resolution for 2011. Well all I can say after IPS 2011, is good luck Gertrude. If there is going to be an agreed end-date this year, I’d lay a pound to a penny that it will be 2019. Frankly, who knows what will have happened to the payments business by then?

Gertrude and others have said that one of the goals of SEPA was to encourage innovation to the payment sector, but has it? Tom Noyes excellent analysis of the current environment ends with three key constraints on innovation.

Innovators are dependent on local national relationships to launch a product;
SEPA creates harmonization, but country specific laws and regulatory guidance are unique;
ECB initiatives (ex. See ELMI) create opportunities for non-bank participation in payments, but SEPA has removed all margin from the business.

[From Payments Innovation in Europe « FinVentures]

I’m not so sure about that last point. SEPA has removed all of the margin if you are bank, but if you are not a bank and are not dependent on their high-cost, highly-regulated infrastructure. All of these issues mean that I can’t help but let an evil thought wander in to myconsciousness, a thought-crime of the most serious degree. What is SEPA doesn’t happen? What if it ends up defining the standard for pan-European payment infrastructure that is vanishing? Worse still, what if there are sinister forces at work to torpedo the project?

The EC will “effectively derail the entire Sepa project” if upcoming regulatory intervention on migration end dates does not include deadlines for phasing out national schemes, says the European Payments Council.

[From Finextra: EC migration plans would ‘derail the entire Sepa project’ – EPC]

I don’t want to bore foreign readers with the ins and outs of the relationship between the Commission and the EPC, but I will say that it is not good. If the Commission regulatory “intervention” were to be to mandate the EPC rulebooks with a fixed deadline, then banks (I’m pretty sure, having spoken to quite a few bankers about this) would grin and bear it. In some countries (eg, Germany) it might be an unpopular decision, but it would get done. Instead, the Commission seem to want to tinker with what the EPC has been going but without an end date? Why? (Answer: because they are politicians responding to national interests.)

Personally, I think the Commission are derailing the train taking us to lower costs in other ways as well, such as by forcing retailers to accept euro coins and high-value euro banknotes, thus promoting the least efficient and most expensive payment mechanism instead of electronic alternatives that would be better for society.

One of these days, this sort of thing will get me into trouble

[Dave Birch] I very much enjoyed my day chairing the Next Generation Cards and Payments conference (tag #ngcp) in Brussels. I have to say that our friends at Clarion did a fantastic job: the speaker line-up was outstanding and the room was packed (mainly with banks but there were telcos, retailers and others too).

SEPAarate development

[Dave Birch] There is a looming deadline for SEPA compliance in the cards business: by 31st December 2010, all payments cards and ATM cards in the EU27 plus Norway, Switzerland, Iceland, Liechtenstein and Monaco must be EMV-compliant and all POS and ATM terminals in those countries must support EMV applications. This is extremely unlikely to happen as far as I (and other observers) can see. Currently Germany, Portugal, Italy and Slovenia have less than 80% of their cards converted and Romania, Greece, Bulgaria, Hungary, Spain, Portugal and Malta have less than 40% (according to Banking Automation Bulletin for September 2010). Apart from the UK & Ireland, France and Luxembourg, no countries have 100% POS compliance (in Germany it's not even 10%). Additionally, many countries do not have ATM compliance, including Germany, Belgium, Italy and Portugal.

Why the slow progress? And what does it mean for the future? Well, I was invited along to a meeting of experts to discuss the progress towards SEPA and eSEPA (SEPA for the internet and mobile payments), but unfortunately I've been told by the Commission that the discussions were confidential and so I can't comment on them here.

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