Bitcoins and PCs

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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]

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.

Time to do something about ATMs

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There has been another spate of cash machine fraud, near where I live, entirely coincidentally. The police have instructed us to… well, let them tell you.

Officers have advised members of the public that if possible they should not leave the scene if their card is retained

[From BBC News - Cash machine users in Woking warned over thefts]

So, essentially, if an ATM keeps your card (this has never, ever, happened to me) then you should stay by the machine and call for help. Who you are supposed to call is not made clear, but I will call one of our local police stations. These are open from 8am to 10pm. As an aside, when I last went to one of our local police stations, I was ushered into a small room with a telephone, from where you are connected to the same call centre as if you had just stayed at home and phoned them, so come to think of it I may just as well call the call centre directly. Perhaps it’s time to rethink the “hello 1966″ card plus 4-digit PIN system and either get rid of ATMs completely or improve their security.

Perhaps we should look further afield for ideas for new ATMs.

The Intelligent ATM comes equipped with a camera that recognises the customer’s face and sends details of the facial dimensions to a database for verification… Its use could also reduce the now common incidents where carjackers force their victims to empty their accounts at gunpoint, often taking the card and the personal identification number (PIN).

[From Daily Nation: - News |Your face is all you’ll need at an ATM]

I think this is unlikely: it would simply replace customers being forced to hand over their ATM card at gunpoint with customers being forced to go to an ATM at gunpoint, which strikes me as being more dangerous! Relatively few people are carjacked and shot dead in Woking at the moment — this generally happens up the A3 in South London — but it could all change. Mind you, you’ve got to be pretty brave to use an ATM at all in the UK.

‘We were surprised by our results because the ATM machines were shown to be heavily contaminated with bacteria; to the same level as nearby public toilets… In addition the bacteria we detected on ATMs were similar to those from the toilet, which are well known as causes of common human illnesses.’

[From Cash machines 'as dirty as public toilets' | Mail Online]

Yuk. It’s time to stop the silly 1960s fashion for putting things in slots and touching filthy keypads. This might help prevent fraud as well as the propagation of intestinal disorders.

The future may lie with RFID chips and mobile phones. If a mobile phone replaced the ATM card and withdrawals could be performed only by placing an RFID phone near an ATM then cell site analysis (plus E911 and E112 compliance) would greatly limit the scope of fraud against banks. But such a secure deployment needs investment – and in these difficult times this looks doubtful.

[From Forensic Computing Expert and Barrister - Automated Teller Machines]

Maybe Barclays, who have issued millions of contactless debit cards in the UK, might want to start experimenting with ATM de nos jours. After all, I want to leave home without a wallet, with only a phone, but there are still backward and underdeveloped parts of the world (eg, Woking) where many retailers do not yet have contactless terminals and so there is the need for occasional recourse to the hole in the wall, but it’s difficult to get my iPhone in the slot, especially when it is fitted with anti-fraud devices. Consider this appealing alternative: take splendid new Barclaycard/Orange mobile phone with NFC, open card application and enter numerical passcode and amount of money required. Then hold phone next to ATM and wait for the money to come out.

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.

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

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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]

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.

Smart art

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As one of the legions of fans of the brilliant BBC / British Museum radio series on “A History of the World in 100 Objects“, I was absolutely fascinated by the episode on 14th-century Chinese paper money: follow the link and have a look at the beautiful picture of the Chinese banknote from 1375.

The Chinese writing along the top of this note reads (from right to left): ‘Da Ming tong xing bao chao’ and translates as Great Ming Circulating Treasure Note’

[From Chinese Ming bank note › The British Museum]

I love that name: Bank of England notes really should be inscribed “Circulating Lack of Treasure Note”. These notes had pictures of the “cash” (copper coins with holes in the middle, threaded on to a string) that they represented: ours should have a picture of… what? What do they represent?

Things have moved on a little since mulberry bark. Some of you may remember Paul Makin’s super presentation about “E-ink and smart banknotes” at the 13th Digital Money Forum in London back in March 2010. The presentation was based on some work that Consult Hyperion had been doing with the Bill & Melinda Gates Foundation. Less than a year on, it’s fascinating to see how the smart banknote technologies have evolved. Display technology, in particular, is advancing apace.

Quantum dot light emitting diodes (QLEDs) are an advanced technology currently in development that will deliver the ultimate solution for displays and lighting applications… QLEDs are only a couple hundred nanometers thick making them virtually transparent and flexible, and highly suitable for integration onto plastic or metal foil substrates as well as other surfaces[From QLED Technology]

Displays aren’t the only technology of interest here. I think we can focus down and think of a smart banknote as comprising four main technological components:

  • The note itself, made out of a plastic polymer rather than paper. This makes it durable and waterproof, important if it is to contain electronics. Some countries (eg, Australia) have already switched from paper to plastic for their banknotes and others (eg, Canada) are planning to follow. Plastic banknotes last much longer than paper ones, so the additional cost of production doesn’t stop them from being cost-effective.
  • The electronic ink display on the note. Electronic ink, as you’ll recall, only uses power when it is changing, so once the banknote display has been written then it will stay displaying the same thing until it changed.
  • The chip inside the banknote. Why do we need a chip inside the banknote? Well, we want the banknote to be secure: we don’t want it to be counterfeited or altered. And we need the banknote to be able to communicate intelligently with terminals.
  • The antenna connected to the chip. We want our smart banknote to work like an Oyster card, so that you only need to tap it to some form of terminal for it to work.

How would such a note be used? Well, imagine that you have a banknote that says “£10″ on it. You to the coffee shop and spend £1.50 on a coffee. You tap the note on the till to pay, and the display now changes to say “£8.50″. When you get to work, your friend reminds you that you owe him £8 from the pub. You give him the note and he gives you a 50p coin in change. Your friend can absolutely trust that the value represented by the note is indeed £8.50 because the tamper-resistant chip and the cryptography it deploys make it impossible to counterfeit.

It’s hard to imagine the implications so a technology combination so radical in everyday use. Take just one aspect: the expense and complexity of engraving plates, adding holograms, printing fine detail and everything else that is needed to make notes hard to counterfeit

Modern banknotes contain up to 50 anti-counterfeiting features, but adding electronic circuits programmed to confirm the note’s authenticity is perhaps the ultimate deterrent, and would also help to simplify banknote tracking.

[From Banknotes go electric to outwit counterfeiters - tech - 21 December 2010 - New Scientist]

A smart banknote needs none of these, because its security depends on cryptography and the chip tamper-resistance. The state-of-the-art here is already more than adequate for purpose. There are other differences too: since the smart banknote works using contactless communications, there’s no reason for it to be a rectangle. The best smart banknote might be a ball, or a strip or a disc.

What would a banknote look like without security printing, freed from the tyranny of form factor and with a display that changes? That’s an interesting question. Since it’s about technology, it’s easy for people like me to imagine how a smart banknote might work. It’s much harder to imagine what it might look like, and that’s why Consult Hyperion have a launched a competition for artists to design a smart banknote. It’s going to work like this: the competition will run for a month from 21st January 2011 to 21st February 2011. During that time, artists are invited to submit a picture, sketch, diagram, draft, model or any other means of communicating their vision to art (at) chyp.com for consideration. All of the entries will be displayed at the Digital Money Forum website.

The artist Austin Houldsworth, who presented at the 12th Digital Money Forum in 2009, has been commissioned to review the entries and create a shortlist. The shortlisted candidates will be informed by 25th February 2011 and invited to come along to the Digital Money Forum on Thursday 3rd March to present their concept to our judging panel and you, the delegates. The panel will then select the winning entry and present them with a prize: in this case, an Apple iPad (although naturally the prestige associated with award outweighs the value of this base material prize).

As an aside, the Curator of Modern Money at the British Museum, Catherine Eagleton, will be speaking at the 14th annual Digital Money Forum in London in March, so if you would like to ask anything about the money objects featured in the radio series, don’t miss the opportunity to come along and meet a genuine expert.

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

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.

Photographic evidence

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[Dave Birch] I got involved in an interesting discussion about photos as an authentication method at POS following on from Erin McCune‘s excellent reports from Payments 2010 discussing Facecash, amongst other things. Facecash displays a picture of the “card” holder at POS as an authentication mechanism, which sounds as if should add a great deal of security to the payments process and deter criminals, but I’m not so sure that this will work. Citibank had a go at putting photos on credit cards nearly twenty years ago but found, as did (as far as I can remember) RBS in the UK, that it actually doesn’t make a difference.

Many people choose to have their pictures on their debit and credits, but KFOX found out they actually do little to keep your accounts from being used without permission.

[From KFOX Investigates: Are Photos On Credit Cards Effective? - News Story - KFOX El Paso]

I recall working with a retailer on EMV migration some years ago, and they specifically instructed their staff not to look at any photos on payment cards because they didn’t want their staff to be put at risk for refusing. “Computer says no” is acceptable in modern Britain whereas “I’m sorry tattooed thug with rottweiler on chain, you don’t look like Mrs. Doris Finklestein” will get you stabbed. The retailers want the POS to say yes or no, and they didn’t want to have to make any judgements about risk: that’s what they pay the banks for.

[Read more...]

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.

A quantum of dollars

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[Dave Birch] The introduction of the word “quantum” into a paragraph not about physics usually signifies the start of something entirely bogus, like Californian new age healing or post-modern deconstructionist thinking. However, when it comes to digital transactions, heavy users of applied cryptography, there is a reason to take quantum speculation seriously because it will in time lead to entirely new developments in digital money and digital identity. Pop over to the e-prints library arXiv and have a look at a paper from MIT.

Breaking and making quantum money: toward a new quantum cryptographic protocol

[From [0912.3825] Breaking and making quantum money: toward a new quantum cryptographic protocol]

I was reminded of this paper by the article about quantum cash in last week’s New Scientist. Having read the article two or three times to try and understand it (bear in mind that I actually have a degree in Physics) i decided that it probably wasn’t ready for the short-term roadmaps of our customers.

To physicists, quantum cash is a toy problem, a sort of test case with which to study the strange properties of quantum mechanics.

[From Schrödinger's cash: Minting quantum money - physics-math - 20 April 2010 - New Scientist]

Well, it may be a toy problem, but it’s a tough problem. In the original conception of quantum cash, where the authenticity of the banknote depends on the polarisation of a number of photons, you could only use the note once (because measuring the polarisation of the photons would change them) and only the issuing bank could tell you whether the polarisations were correct or not. This isn’t much like a banknote, where you or a shopkeeper can self assay. The New Scientist article discusses a new idea, a hybrid between quantum and public key cryptography.

In Aaronson’s scheme, so-called “public key quantum money” is always issued in two parts. The first is the quantum state. This might belong to a group of photons with a particular set of polarisations, which the issuing bank keeps secret. The second part is a circuit (or the plans for such a circuit) that verifies whether the secret set of polarisations is present in something purporting to be quantum cash. Such a circuit would be to quantum transactions what an ultraviolet light is to today’s banknotes.

[From Schrödinger's cash: Minting quantum money - physics-math - 20 April 2010 - New Scientist]

There’s another problem, which is that even if you can make money that can be verified by anyone and not counterfeited, how do you stop the bank from creating clones and putting them into circulation? This is entirely hypothetical, of course, and I’m not for one moment suggesting that banks would create financial instruments with a face value that exceeded the value of the assets behind them many times over. But just hypothetically? The authors have come up with a solution, which is to use a state for the quantum money that is constructed in a way that is known but not replicable.

This state is a superposition of an exponentially large number of unrelated terms each of which is created by the measurement of an equally exponential superposition. Incorporating this quantum measurement into the process of creating the quantum money ensures that a bank cannot reproduce this state, even though it knows how the initial superposition was created. At least, the bank cannot do this in any reasonable amount of time.

[From Technology Review: Blogs: arXiv blog: Unexpected Problems For Quantum Money]

Got that?

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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.

Genghis did have some good ideas

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[Dave Birch] China continues to fascinate, especially given the news that one of the companies that we look at from time and time again, Tencent, is now taking a stake in DST, the Russian holding company that owns part of Facebook. Tencent are famous (to me) for their QQ Coins, a very popular virtual currency in China that we have looked at again and again because the sheer scale of their use makes them a case study for the impact of virtual currency. You may remember that the Chinese government have not been entirely happy with the astonishing success of QQ’s currency.

The Chinese government had a bit of a crackdown on QQ coins with the predictable (to economists) result: the price of the money went up (in fact it went up by 70% against the Yuan) which clearly indicates that there is a significant unfulfilled consumer demand for the new currency.

[From Digital Money: What kinds of competitors?]

Tencent runs social network and instant messaging services, but its business models makes use of virtual goods rather than being advertising-based.

Unlike its U.S. counterparts Tencent makes money by relying on users to spend money within its networks, not on brands to advertise on it. For example, online advertising is a small part of Tencent’s overall revenue, or only 10 percent, while e-commerce represents about 70 percent of the company’s overall revenue (mobile makes up the rest). In all, it sells about $750 million in virtual goods a year.

[From How One Social Net In China Is Making A Lot Of Money | paidContent.org]

Interesting, to say the least! It’s not just Tencent’s QQ Coins that are causing concern to the authorities. Last year, a senior official with the People’s Bank of China said that the rapid development of e-money and online payment systems “affects the central bank’s monetary policies”. Is this right? What are the figures?

The amount of cash in circulation reached 3.4 trillion yuan ($500 billion) last year, and the gross payment, the total amount of money exchanged in transactions nationwide, was 1.13 quadrillion yuan ($166 trillion) as of last December, according to Ouyang Weimin, director-general of the Payment System Department of the PBC… “The gross payment has risen rapidly, but the cash in circulation has kept steady at around 3 trillion yuan ($441 billion) these past few years. This indicates a rapid increase in the use of electronic money and online payment.”… Of the more than 10 trillion yuan ($1.5 trillion) in gross retail sales last year, electronic payment through bank cards reached 3 trillion yuan ($441 billion).

“More than 1 trillion yuan ($147 billion) cash went into circulation in 2005. From this we can see the increasing liquidity, which may cause inflation, partly due to the frequent use of electronic payment,” said PBC’s Ouyang.

[From Global Times - E-money poses problems for central bank]

This is an understandable concern, but if the cash is not being used for transactions then it is less of a worry. The figures show that in China, just as in Europe and in America, the amount of cash in circulation continues to increase significantly, but the fraction of retail payments in cash is falling. So what is the cash being used for? Who can say: some of it is probably being hoarded, but there must be a suspicion that some of it is being used to fuel less-regulated parts of economy. Presumably the authorities will at some time become concerned, but will they want to start a Chinese war on cash? I think they may, and given the administrative arrangements in China compared to Europe, say, then one might predict a greater likelihood of success. Back in the day, Genghis Khan created a paper money system through the simple expedient of capital punishment, instituting the death penalty for anyone who tried to use gold or silver instead of his accept paper money.

As Marco Polo noted in his “Travels”… “Furthermore all merchants arriving from India or other countries, and bringing with them gold or silver or gems and pearls, are prohibited from selling to any one but the emperor. He has twelve experts chosen for this business, men of shrewdness and experience in such affairs; these appraise the articles, and the emperor then pays a liberal price for them in those pieces of paper. The merchants accept his price readily, for in the first place they would not get so good an one from anybody else, and secondly they are paid without any delay. And with this paper money they can buy what they like anywhere over the empire”   

The Chinese fiat currency system eventually collapsed in hyperinflation (as I suppose they all do in the end) in the 14th century, but I digress. So far as a potential war on cash goes, the Chinese central bank says that

Compared with cash, electronic money has advantages such as lower cost and higher efficiency… “The cost of electronic money is just 35 percent of that of a cash payment”… However, it brings problems such as payment safety and supervision difficulties, Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics, told the Global Times.

In April, the PBC launched its first investigation into the payment business of non-financial companies, including online payment services like Alipay.com, China’s PayPal, virtual money providers like qq.com, and shopping malls and supermarkets issuing shopping cards.

[From Global Times - E-money poses problems for central bank]

Incidentally, Alipay (which is China’s leading e-payment system with more than 200m users)has just announced another five billion Yuan investment in its infrastructure, which must reflect confidence in the continuing growth of the online payments sector there. There’s still a long way to go though.

In many parts of the world it is a difficult to buy things online with traditional currency and traditional payment vehicles such as credit cards. The phenomenal growth of virtual worlds, virtual items and virtual currency in China is directly related to the lack of good ways to buy and trade things online in a traditional manner.

[From Kevin's Corner: Virtual Currency Meets Main Street]

The market needs payments, but it works the other way round as well. New payment systems (that work) create new markets on top of them. The Chinese have so far focussed on introducing “Western” payments to their domestic market (although under a local monopoly) but I wonder if it might develop further by creating new payment systems more suited to the local market? There are a staggering 1.5 billion payment cards in the Chinese market already but

Of the huge sum, active cards, which were used at least once every month, were only about 80 million, less than 10 percent of the total… The large number of dormant cards is partly due to payment habits of some domestic consumers, who prefer cash transactions instead of the “virtual numbers” on the cards, analysts said. Besides, to lift market shares, domestic banks issued a massive number of cards to take in as many clients as possible. Many cards were scarcely used after issuance.

[From Bank cards pose challenge yet opportunity]

This all looks puzzling from a pure market perspective: QQ Coins are successful, so crack down on them and issue everyone with cards that they don’t use instead.

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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.

Regulation isn’t a bad thing

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[Dave Birch] One of the areas of great interest for this blog is the evolution of “alternative” payments in different environments. As a consequence, I am always very interested to see how alternative payment system differ between markets. For example, the Russian market for alternative payments is very different from the European market. This year, broadly speaking, it will break down into

  • About 14 billion Roubles spent via the leading e-wallet schemes Webmoney and Yandex.
  • About 9 billion Roubles spent via mobiles for digital content.
  • About 10 billion Roubles spent via the near-ubiquitous “terminals”, the reverse ATMs that are on every street corner in Moscow (more on these below), some of which goes into loading e-wallets and mobile prepay accounts.

So a big chunk of the alternative payments market in Russia is taken up by a payment system that simply doesn’t exist in Europe (or, in fact, anywhere else so far as I can see), which is the near-ubiquitous “cash in” terminals or, as we tend to cal them, “reverse ATMs”.

In the last ten years, a rapidly growing shadow banking system has sprouted up in Russia to service these small payments by turning cash into electronic currency, or e-money. And now that this sector has reached the $1 billion mark – and this in a crisis – and has expanded to include 10 million customers, e-money business owners are getting antsy about government regulation.

[From Crashing Russia's all-cash culture - Fortune Brainstorm Tech]

Estimates vary, but there are somewhere in the region of 400,000 of these terminals in use right now. On literally every street corner is a terminal that Russians feed with banknotes to top up their mobile phone, pay utility bills, obtain pre-paid virtual credit cards (I did this: you feed the cash in and the Visa card number, expiration date and CVV are sent by text to your mobile phone). You can see from this screenshot the wide range of services available:

Cash-in Terminal

It seems like a bizarre market arrangement, one that the laws of economics should mitigate against. As Evgeniya Zavalishina, the General Manager of Yandex Money put it rather neatly, people are taking money out of an iron box, walking a metre and then putting the money back in another iron box. Incidentally, Evgeniya will be joining an excellent line-up of speakers at the Electronic Money Association’s 3rd annual conference in London on 24th November so if you are interested in learning more about the evolution of e-money regulation around the word, head on over to the EMA web site and sign up. But back to the iron boxes. By astonishing coincidence, the restaurant where I went to dinner with Evgeniya and other members of the Russian E-Money Association (set up by a good friend of the Digital Money Forum, Victor Dostov) had precisely such an arrangement!

Iron Boxes

How can this be economic? Surely you would expect banks to incentivise the terminals to take chip cards so that people could pay their bills with a debit card. Come to that, why can’t they do that from a bank ATM in the first place instead of going to a terminal at all?

Well, one reason might be a lack of regulation. At the excellent Russian E-Money conference I attended, one of the speakers placed Russian banks as the 53rd most efficient in the world, but the Russian non-banks as the 4th most efficient in the world (for payment services). Yet both the banks and the non-banks would benefit from a better regulatory infrastructure. The problem that was discussed at the event was that everyone knows that regulation needs to come, but no-one is sure what that regulation might look like (and some of it, such as impending regulation on data protection) simply won’t work technologically. Nevertheless, a good infrastructure for electronic payments would, I’m convinced, help both the alternative payment providers (ie, the terminal networks) to invest further and develop new services while at the same time enable banks to invest in their own terminal and enhanced ATM services. Everyone would benefit.

This reinforces something that has been said before on this blog: no regulation is not a way forward. We want to see digital money deliver real solutions to real problems all around the world and a good regulatory framework helps in this enterprise.

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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.

All mobile, all the time

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[Dave Birch] The foreseeable horizon for electronic transactions is, as far as I can see, dominated by mobile. Most people, in most organisations, in most countries, most of the time, will be using their mobile phones to access financial services and (in particular) to instruct transactions. The people who use PCs and the web to access, manage and instruct transactional services are already a minority and for some of us the extent to which mobile is beginning to dominate in some countries is almost shocking.

While on a trip to South Korea, Chen, a 24-year-old graphic designer from Sacramento, Calif., noticed how people whipped out cell phones when it came time to pay. One of her friends had a mobile phone from SK Telecom, South Korea’s biggest mobile operator, that let her fill her commuter train account when it fell below a certain amount, and remotely send the charges to her Visa account. “She just held out her phone as we walked through the turnstile,” said Chen. “I got spoiled. Now I want to do the same with my phone.”

[From Mobile Payments: Will That be Cash, Check Or Cell Phone | VASreport.com]

I noticed this sort of thing on my last visit to Seoul as well. It’s not even regarded as novel any more: the mobile phone as transaction device is part of normal life. Back home, we’re nowhere close to this. At the time of writing I can’t use my mobile phone on the Tube, let alone to pay for the Tube, and the proposed mobile front-end to the Faster Payment Service (FPS) — which I’ve always been keen on — seems quiescent. Having said that, I noted over at the VRF blog that the “pay your plumber” scenario has receeded somewhat, at least for my plumber who now has a chip and PIN terminal. We seem slow to notice the mobile revolution and act, yet surely many people recognise the transformational potential for mobile in the payments space. I found it odd, when leafing through the old APACS paperback “Payments Past, Present and Future“, published in 1996, that it did not even once mention mobile phones, despite the fact that (according to the BBC):

Once beyond the reach of most mortals, mobiles really took off in 1996, becoming fashion accessories for all.

[From BBC - Cult - I Love 1996 - Fashion]

Fair enough: it’s really hard to see what technologies are going to have an impact when they are all around you, let alone when you are trying to imagine technologies of the future. But mobile phones aren’t “the future”, they’re now.

You’ve probably heard it before – mobile banking is the next big thing. It’s about to take off. But this time, analysts say it’s poised to happen, and the numbers seem to back that up.

[From Mobile Banking Poised for Takeoff]

I don’t think it’s a particularly controversial view to say that the future of electronic transactions and the future of mobile phones (or, at least, the devices formerly known as mobile phones) are inextricably linked.

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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.

Heavy weather

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[Dave Birch] One of the very first projects that Consult Hyperion worked on was the Bank of England Central Gilts Office (CGO), way back in the days of “Big Bang”. We were subsequently chosen by the Bank of England to work on the Central Moneymarkets Office (CMO) and then CREST, the equity settlement system that they created when the Stock Exchange’s TAURUS project collapsed. These are now part of Euroclear, which makes the card scheme networks look like loose change: it currently handles an average of HALF-A-TRILLION pounds per day in gilt, equity and money market trades. At times of stress, these systems are critical to the economy.

There’s also the interesting fact that on separate occasions during September and October 2008, the UK’s Continuous Linked Settlement system broke its previous record daily volume by over 35 per cent; ‘Crest’ saw a 33 per cent increase in the highest value settled before September 2008; and ‘Swift’ saw new record volume days on four occasions. Essentially, a lot of people moving a lot of money in a very short period of time. [From FT Alphaville » Blog Archive » Financial crisis, UK payment system edition]

All of the systems stayed up, which is a testament to the designers. These systems generate a huge amount of data as a by-product of their operations and I wonder if this data is captured and used effectively? I mentioned before about using the data from payment systems to create a kind of weather map for regulators and supervisors so that they can pick out major “fronts” and see storms brewing. Perhaps the web 2.0 way forward is to anonymise the data in some way and then just put it out on the Internet so that people can see (and mash up) the financial weather for themselves: a picture of where the moving is moving through Europe in real-time might be fun. By the way, we talked about the money forecast, but here’s a money map of Europe that I just love.

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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.