Plastic banknotes

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[Paul Makin] Seeing the recent coverage in the media of the Bank of England’s interest in issuing plastic banknotes reminded me of some work we did a while ago. What interests me about plastic banknotes that they make a much better substrate for various types of electronics than paper does.  During the project, we looked at printable electronics, organic electronics, flexible displays, printable batteries, quantum dots and a range of other technologies, and it is surprising how much you can add to a sheet of plastic

Of course, the simplest option is the addition of an RFID chip, the size of a grain of sand, which replicates the banknote serial number – so you can in theory count banknotes by scanning them with a suitable device as they move past. But that seems a little mundane.

Of far greater interest is the more complex idea of a smart banknote with a particular focus on their applications alongside mobile money in emerging markets. With the right combination of technologies, a smart banknote could be created whose appearance changed according to the value it currently represents; blank if it has no value, looking like a £10 note if it’s currently worth £10, etc.

It could then be integrated with your mobile phone and used to download money from your mobile money account (and change its face value accordingly) – and vice versa. Once it had value loaded, it could be used to buy things in shops just like ordinary notes.

Apart from the fact that this would reduce the need for ATMs and mobile money agents, it would also remove the huge costs associated with moving cash around – security guards, vans etc – the savings from which would allow blank smart banknotes to be issued for free (transporting them is cheap, because until you download cash onto them, they have no face value).

Of course, there’s always the crumple test standing in the way…

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

My mobile day out

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[Dave Birch] I had a bit of a mobile day out when the kind people at Barclays invited me along to give a keynote at the launch of their PingIt payment service to corporate partners. The day started out with me deciding to take the bus to the train station. I normally buy my bus tickets on my mobile phone using the Arriva app. The app works, but it’s a bit rubbish. I’ve used it countless times, but only to buy one particular ticket. Ever. The only ticket I ever buy is a Woking one-day ticket (which now costs a staggering £4.70 as a result, I imagine, of the government’s green energy policy by which we will all be forced to stay at home and not use transport of any kind by 2020). So despite the fact I have only every bought that one ticket, every day I run the app I have to select my region, then I have to select my town, then I have to select my ticket type. Why it just can’t default to the same ticket I bought last time (an elementary piece of UI design that pre-teen coders at their first JSON/REST summer camp would have figured out before the first juice break) I don’t know. Anyway, I ran the app. But I was using my splendid new iPhone 5S and this was the first time I’d run the app on the new phone, having switched to it the day before. So instead of the ticket-buying page, I found myself looking at the “yes it’s the same mobile phone number and yes you entered the right application PIN and yes you unlocked the phone using your fingerprint but hey will still want you to party like it’s 1994″ page.

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Really Arriva? In 2013? At this point (in common with approximately two-thirds of all mobile purchasers in the UK), I gave up. The marketing people call this “cart abandonment”, I understand. I was about to drive to the station instead, intent on using my trusty RingGo app to pay for parking (after all, I’d have half-an-hour to kill standing up on the train, so I could re-enter the card details then), when I realised that there were some coins in my car’s centre console. Grabbing them, I saw I had enough for the bus. So much as my great-great-grandfather might have done, I waited for the bus and bought a paper ticket with coins. “Hhhmmmm….”, I was thinking to myself, “I’m glad payments work well, and I can see why people question the need for mobile payments”.

Soon enough I was at Woking station, where the system is not as advanced as it is on the buses. There is no mobile app, even an annoying one, so you have to stand in line for ticket machines. These have recently been upgraded, as you can see here:

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I couldn’t really say how they have been upgraded, since on the odd occasions when they are working, all they seem to do is print out exactly the same tickets as before. Anyway, I got on train and set off for Canary Wharf, and soon enough found myself at the launch. Barclays were showing off their new PingIt services for corporates and they had invited along a wide range their customers to check it out: utilities, retailers, consumer goods and so on.

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In truly astonishing, almost supernatural instance of money-related morphic resonance, as I started to enjoy the PingIt corporate hospitality, this arrived on my iPhone…

Yep. A bona fide PingIt funds request. Having two teenage children, I am a frequent PingIt user – this wasn’t staged for effect! So far, however, I’ve only used PingIt for inter-personal money transfer and to buy Bitcoins. Around the country, however, consumers are starting to use it to pay merchants. I saw an airport taxi ad with a PingIt logo on it and I’m going try to persuade my taxi driver to start taking it – I’ll ask him why he doesn’t take cards. I should have asked our oven repair man last week but I forgot. His GPRS card terminal wouldn’t take my card (couldn’t get a reliable connection, what with us being out in the wilds of Woking) so I should have asked about PingIt but much to my disgust I wrote out a cheque instead. People are already using PingIt to pay utility bills (Severn Trent have started� sending out water bills with PingIt QR codes on them) and charities (they have integrated Gift Aid notification into the app). All in all, I can see why PingIt has become such a case study of what can be done by a retail bank when they put their minds to it.

In more advanced parts of the country, PingIt is already being integrated into the transport network. Take, for example, the case of Wessex Bus. A happy commuter in their zone of control can buy a bus ticket using the PingIt app already installed on their phone rather than having to mess about entering a 16-digit PAN and other details. Here’s how it works. You choose the ticket, then instead of opting to pay by card, you can pay by PingIt.

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It works like this. When you select PingIt for payment, you get bounced to your PingIt app where you authorise the payment as normal, and from there you get bounced back to Wessex Bus. The consumer likes this, because they don’t have to mess about entering card details, and the corporate partner likes it because the payment comes in as a credit push which is both immediate and (although I am not party to commercial details) cheaper than a card payment.

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In the future, you can see this being done through an API, with a token. I download my new Arriva app, the app notices that I have PingIt installed, so it asks for authorisation to use it. I get bounced to PingIt, I authenticate and I grant permission. Under the hood, PingIt generates a token of some kind that it passes back to the Arriva app. For subsequent purchases, the Arriva app can pass the token to the PingIt API and the payment can complete without me having to re-authenticate every time. Just like my iPhone settings tell me which applications I’ve authorised to post on Twitter, or access Facebook, they will tell me which applications I’ve authorised to charge to PingIt (perhaps with different limits for each one – Arriva £5 per day, Kentucky Fried Chicken £20 per week, Apple iTunes £50 per week and so forth – but you get the point). The “Triple-A Play” that we have been advising clients about is a win-win-win. It’s better for the consumers (less hassle), better for the corporates (less abandonment) and better for the payment schemes (less fraud).

(And before I get the e-mails, here’s the disclaimer: Consult Hyperion has provided paid professional services to companies mentioned in this blog post in connection with products and services described in this blog post.)

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

Britain’s no longer number one and I for one am celebrating

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At the UK Card Association autumn reception, which was rather splendidly held on the walkway over Tower Bridge, giving an excellent view of the city of London by night, forum friend Melanie Johnson, the Chair of the Association, gave a super talk about pickpockets and prostitutes and there was much good cheer. Melanie used to be a politician but she's really nice and it was a pleasure to see her again. In her talk she mentioned that the industry has had some success in reducing card fraud, but I feel that she missed the opportunity to celebrate a tremendous milestone in the evolution of our card payments industry. So let me do it for her…

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I couldn't resist raising a glass of the champagne so liberally supplied and making to a toast to our friends across the water. Yes, the UK is no longer the card fraud capital of the continent. France has overtaken us and, as the chart below shows, while there's a really big drop off to the number three position, we should be pleased to be number two for a change.

European Card Fraud mid-2013

In France, overall fraud losses have risen by two-thirds in the last five years, with the highest lost-and-stolen fraud levels in Europe. Although fraud is rising in the UK (up 14% last year and up even faster in the first half of 2013) it is still below its historic high.

The number of frauds against plastic card accounts (e.g. credit or store cards) rose by 19% in first half of 2013 compared with the last six months of 2012. Frauds targeting loan products (personal unsecured loans and payday loans) also increased markedly over the same period.

[From Plastic card account fraud (e.g. credit or store cards) rose by 19% in first half of 2013]

Despite our sterling efforts (sic), it is Russia that has the fastest card fraud growth rate. Overall, card-not-present fraud is booming everywhere, but the UK issuers have spent a lot of money on fraud detection, as evidenced by the phone calls I get from my issuers from time to time. I get robocalls from my bank asking me to confirm transactions (some of which, if I recall, were chip and PIN transactions), a chap from an issuer asking me if I used my card for something or other online which I couldn't remember but turned out to be a shareware licence fee (which, as I recall, was a chip and PIN transaction) and a message asking me to call Amex to see if I'd used my card in Detroit car wash (I hadn't, and my new Amex card arrived yesterday).

You can see how, from the card industry point of view, things aren't too bad. According to the UKCA's annual report for 2013, fraud on UK-issued cards is a touch over six basis points (a decade ago it was over 13 basis points) so the investment in chip and PIN has worked. But this is a narrow analysis. Yes, chip and PIN has made some impact on card-present fraud (although criminals are coming up with ever more sophisticated scams to get hold of cards and PINs), and yes, significant industry investment in various types of fraud prevention and detect systems has stopped card-not-present fraud from zooming off the scale, but this has been at the expense of other stakeholders. The costs have been transferred to merchants and consumers and law enforcement.

If we were keeping a lid on fraud, then all of these costs (e.g., PCI-DSS costs) could be justified and (perhaps shared more fairly) sustained. But they are not. Fraud is going up and the cost of fraud is going up too. LexisNexis reckon that every dollar in fraud loses merchants almost three dollars in total costs. When we as industry add up the total costs of fraud, the costs of fraud prevention and the associated costs that fall on others (e.g., the cost of handling chargebacks) then the picture is not so rosy. Chargebacks are a particularly interesting case: I mentioned before that the most interesting panel that I attended at the CNP Expo this year was the one about chargebacks. I suppose like a lot of people in the payment space I don't spend too much time thinking about the retailers' issues with chargeback management, but these costs are high.

Results of the LexisNexis Fourth Annual True Cost of Fraud Study drive home this point. Conducted by Javelin Strategy & Research, the study calculates the overall cost of chargebacks for merchandise, as well as fees and interest paid to financial institutions and processors to replace and redistribute lost or stolen merchandise. In 2012, that cost worked out to $2.70 for every $1.00 in fraudulent transactions, up from $2.30 in 2011, and that doesn't count costs associated with lost business.

[From The Green Sheet :: E-Magazine]

The costs are not distributed evenly, as you might imagine.

Merchants hardest hit by card fraud are those with mobile, e-commerce and international transactions, the LexisNexis report revealed. In 2012, mobile merchants paid $2.83 for every $1.00 lost, compared to just $2.00 in 2011.

[From The Green Sheet :: E-Magazine]

At that expert panel on Best Practices for Chargeback Management, I learned a lot about the nature of these costs. For example, I learned that criminal fraud using stolen credit card information is the most visible source of chargebacks for merchants, and the most prevalent kind of fraud. Jim Rice, director of market planning for LexisNexis, said during the session some two-thirds of a US merchant’s fraudulent transactions, on average, originate from professional fraudsters using stolen credit-card information. It is just too easy to steal card data and then go and use it. But there's a growing problem for merchants in "friendly fraud", where a cardholder or accomplice makes a card-not-present purchase, receives the goods and then calls the card issuer or merchant and claims he never received it. Rice noted that friendly fraud accounts for a fifth of all fraudulent transactions and that it is more costly to merchants than traditional criminal fraud because it is more expensive to investigate. Jim also pointed out that sometimes chargebacks are not the result of nefarious actions on the part of outsiders at all but stem from the operational processes of the retailers themselves. In fact, an otherwise healthy merchant can expect more than a fifth of their chargebacks to be caused by business process failures.

I think that latter problem is going to get worse. It happened to me a while back when I saw a charge I didn't recognise on my card statement and called up to put it into dispute. It subsequently turned out to be a perfectly valid charge, but it was for a transaction in Spain (where I had been) that was acquired through a French parent company leading to a reference that meant nothing to me. While I was puzzling over the charge ("What is this? I didn't go to France last month") and pointlessly clicking on the online statement for more information (there wasn't any – my issuer knew no more about it than I did). Hopefully, when we get working digital wallets, this problem will go away because my wallet will link the charge and the receipt for me.

In the last two decades we've stuck some band-aids on cards and shoehorned them into new channels while avoiding fundamental changes to the legacy infrastructure. It's time for change. We need to start work on post-internet infrastructure that reduces the costs of fraud and shares those costs fairly across the stakeholders in proportion to the risks that they are prepared to take. Some retailers might prefer a high risk, low cost option (rather like they do in Germany) whereas other might prefer a lower risk but higher cost option. I might mention this idea to a few people at the Merchants & Payments Conference in London in October. Consult Hyperion are one of the sponsors for this excellent event (I've had a heads up on the delegate lists and I'm really happy to see so many merchants coming along – it signals to me that payments have become interesting to them again) and I'm looking forward to chatting to John Lewis, IKEA, Carrefour, Aurora, Waitrose and others to find out what they want from the next-generation payment products. See you there.

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

Missing transactions

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[Paul Makin] Consult Hyperion are strong advocates of mobile money – we believe that not only does it offer the best route for financial inclusion, it also represents the next generation of financial services, unencumbered by legacy issues and constraints.

So we’re disappointed to note that, of the 191 services that are apparently live (according to the Mobile Money Tracker), very few of them have reached that milestone of 1 million customers – the level at which they can be viewed as a profitable, successful service. In fact, rather less than 10% have reached this point.

Why are so few reaching this milestone? We contend that in many cases it’s to do with relevance to most customers’ lives. Much of the industry is founded on watching M-PESA, and doing what they do: to paraphrase, “M-PESA is built on domestic remittances (P2P), and M-PESA is successful, so we must do the same”. But Kenya is different from many other countries in having such a strong culture of domestic migration. The consequence is that very few services have been able to build a base of regular and sustained P2P transactions. And since the profitability of mobile money services is largely determined by the number of transactions they carry out rather than the amount spent, they need to find other transactions beyond P2P if they are going to prosper.

Consider this. The large majority of the unbanked populations in emerging markets do not have access to refrigeration, so that they need to buy fresh food every day. Whether they buy the staples from a small shop or from a market trader, it is likely that this amounts to (say) one transaction a day, or 7 over the course of a week. In even the most optimistic scenario where a customer receives a P2P remittance from a relative once a week, these small retail transactions outnumber P2P by 7:1!

Addressing Retail

So if retail transactions are the answer, the question becomes “how?” Merchants are not going to be willing to sign up to multiple mobile money operators with the attendant inconvenience of using multiple MMO handsets with multiple transaction experiences and making multiple claims for settlement in order to accept payments, and so an interoperable solution is needed.

The conventional answer to this problem is the payment switch: someone – probably a bank or a large international payments organization – should be tasked with providing a switch, connecting all of the merchants, banks and mobile money operators, and giving customers a card. This familiar solution, the standard model in the so-called developed world, has evolved over five decades to overcome limitations such as the difficulty of communication, the limited availability and power of computers, and the reliance on paper for confirming contracts.

But emerging markets are coming to this need for interoperable payments with a blank sheet, to which none of these limitations apply: we have powerful mobile telecommunications, mobile phones which exceed the power of the fastest supercomputers of 30 years ago which can all interconnect via the mobile Internet, and an understanding of modern cryptography. Taken together, these factors give the emerging markets the potential to leapfrog the rest of the world and to adopt a truly modern approach to payments interoperability.

WinguPay

Consult Hyperion have developed such a solution. We call it WinguPay. It:

  • Allows complete interoperability for retail/merchant payments across participating mobile money operators and banks;
  • Uses a single merchant smartphone or POS terminal for all transactions;
  • Makes no assumptions about the capabilities of the customer’s mobile phone;
  • Does away with the need for a switch;
  • Does not require the retailer to have multiple accounts – his/her account can be at any participating mobile money operator or bank;
  • Uses public key cryptography to ensure the integrity and confidentiality of transactions;
  • Uses NFC technology to enable customer identification.

The details of WinguPay are too complex to set out in this blog post.  I’ve prepared a White Paper, which may be downloaded at:

http://www.chyp.com/assets/uploads/Documents/2013/09/White_Paper-MM_Interoperability-Introducing_WinguPay_V0_8.pdf

Of course, adopting WinguPay is not sufficient. There also need to be changes in tariffs, of which more in another blog post.

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.