Thought leadership from Consult Hyperion
Why do my UK card issuers insist on putting magnetic stripes on my payments cards? Why are they still embossing them? Where do they think I’m going to go on holiday? 1972?
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 guest post from a CHYP Friend for many years, Leo van Hove, Professor of Economics at the Solvay Business School of the Vrije Universiteit Brussel, looking at the issue of costs and consumer choice in retail payments.
‘Tis the season to take stock of the past year and look ahead to the next. As far as the payments sector is concerned, picking the Technology of the Year is a no-brainer. Or perhaps 2014 will prove to be Bitcoin’s year. Time will tell.
Whatever the outcome, the Bitcoin hype has had one beneficial effect: heightened interest in the hitherto unsexy topic of payments and, in particular, in the efficiency gains that innovation might bring.
For payments in the off-line world, surely with all the QR, RFID, NFC and Bluetooth experimenting going on, a bright and wonderfully efficient future awaits us. That remains to be seen. Under the hood, many of the new mobile payments initiatives look decidedly un-novel. Worse, in the current setting there is no guarantee that the payment instrument with the lowest social cost will prevail.
Take PayPal’s Check-in. In order to be able to use it, you need to download the app to your smartphone and upload a selfie. Once you have the app ready and fired up, you can check-in to a store that accepts PayPal by selecting it from a list and swiping a button from left to right. As soon as you enter the store, your name and picture then appear on whatever touchscreen the shop uses as a point-of-sale system. When you reach the cash register, you simply say you would like to pay with PayPal and the cashier clicks on your photo. The receipt is sent via e-mail. You also get a notification on your phone but during the payment there is no need to pull it out – or perform any other manual operation.
Fascinating stuff, you say? Indeed. Will I give it a try if and when it reaches my favourite shops? Absolutely. But because my PayPal account is linked to my credit card, as is the case with most PayPal users, my seemingly state-of-the-art payment will, behind the scenes, actually be a run-of-the-mill credit card payment – with all the costs that entails.
Indeed, PayPal basically piggybacks on the existing credit card back-ends and has simply added a new front-end: my phone and picture replace my card as the authentication device. The problem is that a longer payments chain, with an extra intermediary, translates into higher social costs – and higher merchant fees.
On the Internet, PayPal has clearly generated added value. It has made it possible for mom-and-pop businesses to accept electronic payments. But in the off-line world, do we, as a society, really want to displace, say, existing debit card payments with more expensive payments of the kind just described?
The problem is obviously not limited to PayPal. The bank-driven scan-to-pay or tap-to-pay solutions are, for example, not necessarily faster than ordinary cards. Especially not if customers end up typing in a PIN or signing a receipt after all. Hence, in stores that already accept cards increased customer throughput may well be illusory. For tap-to-pay to benefit society it would need to be successful in penetrating as yet untapped sectors, and provide a cost-effective alternative to cash there.
This is not to say that m-payment technology does not hold much promise. My point is simply that one should not fall victim to ‘innovation infatuation’ and think that just because a new initiative uses the latest in technology it is by definition more efficient in all circumstances.
Now, why would a merchant in her right mind accept mobile payments if they are so costly and if the additional benefits are limited? The hip factor is part of the explanation. Also, in a competitive marketplace merchants are afraid of losing custom and will therefore tend to accommodate their customers’ preferences.
And this is where the fundamental problem lies: consumers are insufficiently steered in their payment behaviour. This is because in the payments sector pricing is pretty anomalous. Whereas both merchant and customer derive utility from a payment, in most countries only the merchant faces direct, per-transaction fees. Yes, consumers often pay annual fees, and, yes, in the end consumers as a group always foot the bill.
However, the reality is that at the check-out consumers do not worry about whether a specific payment instrument is costly for the merchant or for society; that is, unless the merchant passes on part of the cost. But most of the time consumers are not confronted with the consequences of their choices and do not realise that collectively they will, somehow, somewhere, end up paying for an inefficient payment system. In short, what is missing on the consumer side are cost-based transaction fees, as signals of underlying costs and set in such a way that the instrument that is most costly for society is also most costly for consumers.
So, will m-payment technology prove to be the game changer many pundits think it will be? Quite possibly. But in order to make sure that the future payments landscape is not only technologically advanced but also lower-cost for society, it would be best to first change the rules of the game and give consumers financial incentives to think about their choice of payment instrument. Only then will we have a fair beauty contest
.
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.
[Dave Birch] I was totally shocked to arrive home from work the other day to find my good lady wife celebrating with her tax rebate cheque. Apparently HMRC miscalculated millions of Her Majesty’s subject’s tax bills and we were one of the lucky overpayers. We are a couple of gallons of petrol better off than before. But a cheque! HMRC must have our ethnic background on file as “Amish”. Despite the fact that since time immemorial (for me) we have paid our tax bill online via internet banking, the creaking hand-cranked contraptions at the Revenue are apparently unable to use any form of payment invented after the Act of Union (in 1701).
To be honest, I’ve always been puzzled by the Amish, the strange religious sect in America made popular by the noted screen actor Harrison Ford in his 1985 film “Witness“. The Amish reject “modern” technology, but they seem to me to have a rather arbitrary definition of what constitutes “modern”. Why, for example, do they use wheels? Or nails? Or chemical fertilisers? What’s the cut-off point? 1750? Why not the invention of the transistor in 1948? Or the synthesis of urea in 1828?
The Amish, particular the Old Order Amish — the stereotypical Amish depicted on calendars – really are slow to adopt new things. In contemporary society our default is set to say “yes” to new things, and in Old Order Amish societies the default is set to “no.”
[From The Technium: Amish Hackers]
Speaking of reactionary sects that eschew the modern world to remain in the comforting cocoon of a romanticised rural past, I read in the Daily Mail that
Plans to scrap the use of cheques from 2018 were dropped today after the UK Payments Council admitted there was no better paper alternative.
[From Cheques will not be scrapped in 2018 but because there are no better alternatives | Mail Online]
Well, the wrinklies have triumphed again. Another minor skirmish in the intergenerational war for resources has been won by Joan Bakewell’s generation and our children are going to be made to subsidise a paper cheque system that should have been a distant memory for them. The Payments Council has been forced to cancel the end of cheque clearing (originally scheduled for 2018) and promise to keep cheques
for as long as customers need them
[From Payments Council - Payments Council to keep cheques and cancels 2018 target]
Note that I am specific in the wording, as were the Payments Council. No-one was banning cheques: they were ending cheque clearing. If someone else — the Post Office, Age Concern or the CBI — wanted to run a cheque system, they were free to do so. And, to be honest, that would be a good solution, because then their members could pay for it and those of us who couldn’t care less if they never saw another cheque could have ignored them.
I suspect that in the coming age riots of 2025, the cheque book will used as a rallying symbol of revolt by our impoverished offspring because the banks (ie, bank customers) are going to have to pay to support paper cheques into the foreseeable future. This is ridiculous. If some people (eg, my mum) want to carry on using cheques, it should be on the basis of full cost recovery: if you want a cheque book, you should pay for it, and if you want to cash cheques, you should pay £2 (or whatever) to do so.
The Government is aware that, although there are declining numbers, 54% of adults still write cheques, and on average every adult write 13 cheques and receives 4 cheques each year.
[From Frequently asked questions on the closure of the cheque system - HM Treasury]
Yes, but that misses the point. When I last wrote a cheque to my son’s school, I didn’t want to. I would much rather have used PayPal, internet banking, my debit card or M-PESA. I don’t want to receive cheques either, from HMRC or anyone else.
When someone sends you a cheque, it’s like being set homework.
So what happened? In recent weeks I’ve had some conversations with people countries such as the Netherlands, Belgium and Denmark where no-one has seen a cheque for a generation asking me why the UK is different. It’s the British disease: faced with the end of cheque clearing in a generation, the British response is not embrace electronic alternatives, for charities to look at inventive and efficient online and telephone giving, for small businesses to exploit the Faster Payment Service (FPS) or for the Post Office to create its own paper-based alternative but to moan and complain and demand that everything be kept the same as it is. What happened was that reactionary press comment, entrenched interests, publicity-seeking MPs and a fragmented industry have combined to conspire against the forces of rationality and modernity. And they won.
But why stop there? Cheques are quite modern invention and I don’t understand why the Commons Treasury Committee and the Daily Telegraph want to turn the clock back only to the 17th century. They are not true conservatives, whereas I am. I have therefore decided that my only course of action is to appeal to the European Court of Human Rights to force the Payments Council to reinstate the tally stick system that was prematurely ended in 1834. My great-great-great-great-great grandfather was perfectly happy using tally sticks and was, I’m sure, most distressed by the end of the scheme and the burning of the sticks in the Houses of Parliament furnaces which, as you may recall, resulted in the fire that destroyed the medieval palace and a splendid painting by Turner. It is most unfortunate that Associated Newspapers and Saga did not exist at that time, since I feel they might have been able to spearhead a successful campaign against the introduction of foreign methods (such as double-entry bookkeeping).
Tally sticks had numerous advantages over paper cheques. They were much harder to forge, for example, and were understandable by a largely illiterate population (a situation soon to be restored in this United Kingdom). The sticks were far more durable than cheques are, cheques being made out of flimsy paper instead of fine English wood. Why was this sound and practical system swept away for the convenience of bankers! It is my right to continue to use the tally sticks developed under William I for as long as I need them and quite reasonable of me to demand that the rest of society bears the costs. I hope The Telegraph will support my campaign with vigour. And while we’re at it, why haven’t farthings been legal tender since 31st December 1960? I tried to use some when out shopping the other day and they were refused: outrageous.
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.
Our good friends at Glenbrook summarised the final outcome of the Durbin process:
Debit interchange cap – $0.21 plus 5 bps (for both signature debit and PIN debit)
Fraud prevention adjustment – $0.01 (interim rule)
Routing restrictions and network exclusivity – Option A (two unaffiliated debit network)
Card Present vs Card Not Present – No distinction[From Federal Reserve Issues Final Rule on Durbin Amendment]
Now there will be a lot of comment from people far better qualified than me on what all of this will mean for the payments industry, so I don’t want to get into those specifics here, but there’s something that bothers me about the whole thing. I went back to Steve Bartlett’s article on Durbin in the EFPLP [Bartlett, S. Announcing the death of the debit card in E-Finance & Payments Law & Policy (Mar. 2011)] and it prompted me to have another reflection on the Durbin process as it seems (to a foreigner!).
Plenty of lawmakers are anguished about their swipe fee position, but largely because they’re worried about falling out of favor with good friends in the corporate world.
[From Swiped: Banks, Merchants And Why Washington Doesn't Work For You]
I think what this means is that they knew that government price-fixing is wrong, but that big companies (particularly retailers) spend a lot of money on lobbying. This isn’t something to be cynical about, it’s just the real world. I’m happy to offer these lawmakers a solution though. Why not go down the European route and create a regulatory framework that allows competition from non-banks? There is no reason for payments to be a banking business, and competition rather than regulation is a better way to reduce costs to the rest of the economy.
There are other ways to reduce total costs too, but these mean some short-term spending (which no-one wants to do) in order to improve the situation for the longer term (which, naturally, congressmen don’t care about).
The Federal Reserve could, and should, use the Durbin Amendment as a vehicle to move the United States onto the EMV smart card standard
[From Why The Fed Should Use Durbin To Push EMV ( - Industry Verticals )]
Why would this save money in the long term? It’s because one of the key reasons why US debit card fees are so much higher than elsewhere is that they are predominantly signature debit transactions. Moving to PIN, and offline PIN at that, and offline completely for low-value contactless transactions, ought to kill a few birds with the same stone.
the Fed has the power to change this equation. By allowing card issuers to recover some of the costs of issuing smart cards in the form of higher interchange, it could make it profitable for banks to issue smart cards. At the same time, card networks such as Visa and MasterCard could then impose a liability shift policy, similar to that deployed in other regions
[From Why The Fed Should Use Durbin To Push EMV ( - Industry Verticals )]
In reality though, none of the lobbying seemed to be about pursuing the best long-term strategy for USA Inc. It just all came down to fighting between banks and retailers. I assumed that banks were going to lose.
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.
[From Digital Money: If you don't like cards, don't take them]
Well, despite their (entirely deserved) lack of popular support, it looks as if I was wrong about the banks’ capacity to lobby. They mounted a serious campaign.
Last year US banks generated $536.9 billion of interest income, according to FDIC data, and while that is down from heights of the boom years, it is still a hefty amount of revenue. Non-interest income, which includes fees, climbed to $236.8 billion last year from $207.7 billion in 2008.
[From Bankers, Hear My Plea: Stop the Fee Insanity - Bank Innovation]
It’s very difficult to obtain an accurate picture as to what proportion of the non-interest income relates to payments. The last figure that I have that I believe to be reasonably accurate was 45%, but many commentators seem to think that this is too low. So let’s say that all of the “other” category of non-interest income reported is payments, and call it 50%. There was a paper published last year called “Banks’ Non-Interest Income and Systemic Risk” by Brunnermeier, Dong and Paliac that showed that the higher the proportion of non-interest income, the greater a bank’s exposure to systemic risk. In other words, the more a bank depends on income that comes from outside of the core business of savings and loans, the more exposed it is to changes in market conditions (eg, Durbin amendment, non-bank competition, that sort of thing). I read this as meaning that it’s better for the economy as whole if banks make less money from running debit card systems.
The lesson here is that if we want serious regulation of banks, we can’t trust it to be done by bank regulators.
Therefore, it seems to me, that the ruling wasn’t that bad for banks. If you have to have a cap, from the banks’ perspective, it might as well be this one. Retailers wanted a cap, and they got it, but the cap is high enough that banks won’t suffer a catastrophic collapse in fee income, so the banks ended up with not such a bad deal provided that they shift signature debit to PIN debit. The banks will lose some fee income because of this, retailers will pay a bit less and customers won’t see much difference because the difference won’t be passed on them. I disagree with observers who think that Visa and MasterCard will see big trouble because of the loss of signature debit transactions. I think that Visa and MasterCard won’t be too affected because they will boost their PIN debit offerings to make them more attractive to banks and they will push PIN debit into mobile, online, retail and so on. This means that the income lost from signature debit transactions can be made up by replacing cash and other kinds of transactions with PIN debit (I think – but I’m keen to hear from others who know far more about the US market dynamics).
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.
Eric Schmidt’s very bullish comments about near-field communication (NFC) technology in the US retail market have got people talking about business models again.
Eric Schmidt, Google’s executive chairman, believes that a third of check-out terminals in retail stores and restaurants will be upgraded to allow wireless “tap and pay” from mobile phones within the next year.
These follow a series of statements by Google executives that, whether they are true or not, seem to have legitimised the technology in the eyes of a broad range of businesses.
She added that there is a ton of activity around NFC in international markets, giving the example of a successful trial of the technology that Starbucks ran in London.
[From Google Commerce Chief: We’re Making A Huge Bet On NFC As A Company]
I’ve never heard of this Starbucks NFC trial, so if anyone can point me in the right direction I’d really like to read up on it. But that’s beside the point. The point is that lots of people are now taking NFC seriously in the retail space and the mobile operators are developing NFC strategies. But what business model will there be for them? And what options do they have?
The question will then be how operators manage to regain relevance for their role in NFC transactions (which will come later, if at all), when the first trillion NFC interactions will have bypassed them.
[From Dean Bubley's Disruptive Wireless: What will be the business model for free NFC-based interactions?]
You can see the problem that he is alluding to, but it may not be immediately obvious why it is such a problem specifically for operators. Look at the issue from a slightly different perspective, one that stems from security. I would argue that there are two different classes of application for NFC in mobile phones. These are, broadly speaking, “open” applications and “closed” applications. They are, broadly speaking, about interaction in the case of open applications and transaction in the case of closed applications. Creating such applications is, broadly speaking, easy to create in the case of open applications and difficult in the case of closed applications.
Why? Well, it’s because the closed applications need security and the open applications don’t. Open applications are things like games and business cards and “friending”, where consumers touch phones to something (which may be another phone) in order to get or exchange some information. These are what Dean means by “interactions”. Closed applications are things like payments and tickets, where real money is involved (other than the service providers own) and the applications must be what security professionals refer to as “tamper resistant”. They must also work, all the time and every time. These are what Dean means by “transactions”.
Working out how to do implement secure electronic transactions is (I’m happy to say, since it’s a big part of Consult Hyperion‘s business) difficult, complicated and interesting. It’s easy to picture how life might be with your credit card inside your mobile phone, but think what has to happen to realise that picture! How will the security keys necessary for the card application be transported across potentially insecure networks into the tamper-resistant chips (the “secure elements”, SEs) in handsets? How does the bank know that your credit card is going in to your phone and not a fraudsters? When you get a new phone, how does your card make its way from your old phone to the new one? How does the wallet application in the phone communicate with the card application in the secure element?
In the architecture developed by the transaction incumbents (by which I mean banks and telcos), the management of the closed applications is undertaken by something called a “trusted services manager”, or “TSM”, an entity that stis between the providers of closed services, such as banks and transit operators, and the mobile operators who connect to the SEs that they, in effect, own and rent out space on. This model may be disrupted, because it was founded on the assumption that the SE would be under the control of the MNO and that the TSM would have to cut a deal with the MNO to rent the SE space (what you’ll often here telco people refer to as the “apartment model”).
In the Google play, the TSM is operated by First Data and the SE is operated by Google (it’s in the Nexus handset, not on the SIM). The operator has no control over the SE and can extract no “rent” for its use. I notice that in the Nilson report (#972, page 7) it says that the Nexus S is the only smartphone in the US market with an SE not controlled by the mobile operators: it might have said that it’s the only smartphone in the US with an SE, full stop. The operators (in the form of Isis) are not yet in the marketplace. Why are Google being so active then? Well, on the Catalyst Code I read a while back.
Google has obviously made a decision that NFC is an opening into something more interesting and lucrative than transforming a phone into a payment card– advertising and marketing opportunities at the point of sale – the physical point of sale. And, it has done a deal with VeriFone that takes the economic sting away from the merchants who need to buy into their vision to make it work – and who have by and large turned their noses up at NFC up to this point. Layer on top of that their Google Checkout asset and their newly launched One-Pass wallet application and you have the makings of an interesting new payments player.
[From Google Takes on NFC, Will They Crack the Code? at The Catalyst Code]
Karen is, as usual, spot on about this. But I’m not so sure about this…
What’s amazing is that Google was the first to connect all of these dots
[From Google Takes on NFC, Will They Crack the Code? at The Catalyst Code]
This doesn’t seem amazing to me, because I’ve been involved in numerous attempts to develop mobile proximity propositions involving banks and operators and from these experiences have developed (I think) a reasonably accurate map. A month before the Google announcement, I wrote on Quora that “I’m sure [loyalty and rewards] will be Google’s strategy too. Payments are not an interesting enough application to persuade people to go out an get an NFC phone.”
So how come banks and operators didn’t connect the dots, then? Banks and operators have smart people in them, and some of them have smart consultants too. But it is very difficult to make institutional strategies for non-core businesses and have them translated into a practical tactics with appropriate priorities. If you were in a European mobile operator back in 2009 and you had an idea for using NFC to create a new business, where did you go with the idea? I went in to an Orange retail outlet: they are the first operator in the UK to sell a commercial NFC handset with an onboard payment application: not only did the shop not accept NFC payments but they didn’t sell any NFC tchotchkes, such as blank NFC tags. If you’re a smart kid and you get one of these phones, and you have an idea for using tags as tickets for a gig you and your mates are running… well, hard luck. This is problematic, because we need lots of people to be experimenting, developing and playing with the new interface to create the new, open applications.
In April, Nokia’s vice president for industry collaborations, Mark Selby, speaking at the WIMA NFC conference in Monaco, contended that NFC applications not securely stored on SIM cards, embedded chips or other secure elements will account for two-thirds of the revenue that NFC technology will generate through 2013.
I hope Mark won’t mind me mentioning that we discussed this over dinner a couple of weeks ago and, while I agreed with him about the market, I bored him at length with my moaning about the slow development of the ecosystem. Where are the Nokia NFC tags for kids to buy? Where are the NFC USB sticks to connect laptops and phones?
But, looking forward, there’s another issue here. This classification of open/interactive vs. closed/transactional NFC uses is too simplistic, because as the technology spreads in the mainstream, interactions will need to be secure too. When I tap my phone against an advert at the bus stop, I want to find out more about “Kung-Fu Panda 2″ and not get directed to a porn site, a reverse-charge premium rate phone call to Honduras or send a text message to someone who wants to sell my mobile number to commercial organisations. I want my phone to check the digital signature on the tag and make sure that it is valid, and that it is signed by an organisation recognised by UK phone operators, or banks, or the government, or whoever. But signing the tags (which is part of the NFC standards, but no-one uses at the moment) means that someone has to distribute keys, and certificates and all that stuff. None of this exists right now, but in the future it will have to.
So… Not only is there no ecosystem for transactions, there’s no ecosystem for interactions either. Now you can see why the mobile operators are going to have to work so hard to stay in the NFC loop. A couple of years ago they could have started to roll out the handsets for open, interactive purposes and started many communities off on experimenting with the new technology while they developed the necessary infrastructure for both secure transactions and secure interactions, but they didn’t because they couldn’t see a business case. What’s the business case for selling public key certificates so that advertisers can digitally sign tags using their internally-generated private keys?
It’s hard to work out a conventional business case around a business that simply doesn’t exist yet, and I understand that. But I think that even three or four years ago, the consumer response to the early pilots and trials was so positive that it was clear that the technology would make the mainstream. Now that Google’s activities have served, in an odd way, to legitimise both NFC technology and the business models around it, maybe the operators should adopt a more Google-like approach to business model: start building way more cool stuff, monetise what works and then be ruthless in killing off what doesn’t.
My employer, Consult Hyperion, has provided paid professional services to some of the organisations named here in connection with products and services discussed here, but the opinions in this post are my own (I think) and presented solely in my capacity as an interested member of the general public
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.
The House of Lords (for foreign readers, this is the unelected second chamber of government, stuffed full of government placemen – so many, in fact, that the Lords are begging the government to stop sending more of them) has been getting into a bit of a tizzy about cheques.
Lord Sassoon: the criteria which the Payments Council itself put forward and which the previous Government welcomed back in December 2009—I echo that welcome—was that the new system had to be generally available, generally acceptable to its users and widely adopted. There also has to be, in the view of the Government, a paper-based system
For foreign readers, Lord Sassoon is James Meyer Sassoon, Baron Sassoon, the Commercial Secretary to the Treasury, a minister in the UK’s finance ministry. Note his words: the British government wants to replace the current paper-based system with a new, dynamic, forward-looking, white heat of new technology 21st century paper-based system. Hhhmmm….
Surely we can do something more interesting than that. Cheque replacement was a subject of much conversation in my vicinity last week. Consult Hyperion were one of the sponsors of this Intellect / Payments Council conference on Driving Change in Payments, and an excellent event it was too. Here I am with the Conference Chair Michael Alexander (an Independent Director of the Payments Council), telling him just that.
Mobile was one of the recurrent themes. Alastair Lukies, the CEO of Monitise, was one of the speakers (see below) and one of the subjects he touched on in passing was the potential for mobile to provide the replacement for cheques in the UK. This is a hot topic, since the Payments Council has announced its plan to end cheque clearing in 2018. This, in turn, caused a predictable response from the reactionary press and various interest groups, all of whom want to retain the current system of expensive cheques subsidised by people like me who hate them.
Just to give you a snapshot of the views of the British public — which are of no interest to me, naturally, but may serve to frame the debate here — I cut a few comments from a recent article about this on the Daily Telegraph website,
If cheques are expensive to process then increase the price, I think I already pay 35p per cheque
[From Plans to phase out cheques should be scrapped, say MPs - Telegraph]
Businesses do, but personal customers have grown used to what they perceive to be free banking. I’m all for transparent pricing. If the Payments Council decides to retain cheque clearing but charge full cost recovery to users, that would be a reasonable outcome. However, this would mean that cheques would cost probably even more than 35p each, and once again the pleading for special interests will become the substitute for the real debate.
If cheques go then genuine charities should be given free transfer by card or someone should think of another method of paying small amounts at no cost
[From Plans to phase out cheques should be scrapped, say MPs - Telegraph]
It is plausible, although I don’t think it is likely, that the government might impose a social obligation on banks and payment institutions to execute low-value transactions (those, say, of a value less than the largest banknote in circulation, €500) for free as a social obligation in return for their licenses. The root problem is that people think not only that payments should be free but that someone payments are free. This is wrong, but you can imagine the newspaper headlines about the charity for sick children being forced to pay outrageous processing fees by the evil financial sector. (The impact on charities came up a few times in casual discussion around the topic at the recent event.) Some people are worried that this will even put an end to some charities.
the Institute of Fundraising has warned that the plans could be disastrous for charities, some of which receive up to 80% of their income through cheques.
[From Finextra: Dumping cheques could "spell disaster" for UK charities]
I don’t understand what they are thinking. Getting rid of cheques will save them a fortune. Charities in countries without cheques — eg, Finland — seem to be able to raise money without too much trouble. I’ve already made a perfectly sensible and reasonable suggestion as to how to set up unique financial sector identifiers that can serve as payments addresses for mobile and online payments and for the 0.1% of the population who don’t want to use these (eg, my mother) they can just call an 800 number and effect the transfer with voice authentication (or something similar). Why on Earth should we be targeting paper-based replacement? Doesn’t this discriminate against people who can’t read or write? Let’s set the bar higher.
It must be further noted that in the Telegraph, as well as a couple of other papers, the particular issue of paying the gardener was also seen as being an important payments use case in the UK. I thought at first that this might be something to do with the English class system, but it turns out that paying gardeners is an issue around the world!
I live in Belgium at the moment and have not used a cheque in years. All the transfers are immediate, not 3 days later which is just a scam by the UK banks to use your money for free for three days. If I pay the gardener its cash or a virement (transfer) easy.
[From Plans to phase out cheques should be scrapped, say MPs - Telegraph]
Look, I’m sure there will be a small number of people who will find it hard to use mobile payments, or web payments, or whatever, just as there are a small number of people who find it hard to use cheques right now, but that’s no reason for the Payments Council to get fainthearted. The end of cheques in 2018 should be a stimulus to innovation in UK payments. Except, as I said before, it isn’t the end of cheques.
Cheques aren’t being outlawed in 2018, but cheque clearing is going to stop. If Associated Newspapers wants to apply for a Payment Institution (PI) licence and operate its own cheque system, then good luck to them
[From Digital Money: Cached]
Surely the noble Lords can contribute some seed capital to assist the Daily Mail, Saga, Oxfam and the House of Parliament Tennis Club in creating the new paper-based system that they want.
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.
There’s a lot going on in the world of payments in Denmark, sparked in part by SEPA, but with other factors as well. Many people think only of Denmark in terms of its principal exports — such as bacon, Lego and sperm — but it means only one thing to me: Danmont, the first of the European smartcard-based e-purses to try and take on cash half a generation ago.
In a statement, PBS says Danmont has not been adopted by the Danes as a preferred way of making small payments… the debit card Dankort has taken over from Danmønt in areas where the e-purse was formerly used as a form of payment. The scheme will continue to operate until 31 December 2005.
Now everything is changing again, because the domestic debit scheme can no longer discriminate against “foreign” cards and there needs to be a new national payment strategy. This is why its such an interesting time there and why I was so delighted to be invited by the Copenhagen Finance IT Region, a “cluster organisation” with 13 partners including the Danish Bankers Association, to come and talk at their event looking at the future of money. I was invited along with Alberto Jiminez, the Mobile Payments Global Leader at IBM, and Roslyn Layton from KLEAN, a Danish consultancy. Alberto was talking about mobile, Roslyn was talking about the internet, and I was talking about mercantilism, Kublai Khan and Facebook Credits. Here we are in the Tivoli!
Alberto divided the world into developed (North America, Western Europe, South Korea, Japan, Australia and New Zealand) and developing payment markets, a simpler model than the “quadrants” that we use at Consult Hyperion. Anyway, he pointed out that in the developing countries where there are real opportunities only a handful (Kenya, Philippines, South Africa, Pakistan, Uganda) have reached scale, which he defined as being more than a million users. He explored the benefits of opening up mobile payment markets which, in the IBM model, fall into three categories: the revenue opportunities, cost savings and the “indirect” benefits. This last category — which includes social inclusion, government agendas, brand benefits and so on — I find really interesting, probably because it’s the least understood. He also mentioned government agendas, something that has come up in a few recent discussions that I’ve been involved in.
In her talk, Roslyn touched on one of my very favourite topics, which is the online games business and the growth of what she called “funny money”. But she was also taking about the permeable boundary between loyalty schemes and pseudo-currency. In particular, she drew attention to a Lufthansa “Miles & More’ scheme that lets you trade in your frequent flier miles for a cash management account (CMA) that can contain both securities and deposits. She also drew attention to the relative size of some markets: online games are a $15 billion business at the moment, sure, but premium SMS (as Tomi never tires of reminding me!) is a $23 billion business and online gambling is a $35 billion business. Great stuff. She finished up, though, by saying that we won’t go to an entirely virtual economy, because people ultimately want to keep their money in banks.
Well, up to a point. There’s a big difference between keeping money in the bank and keeping bank money, one of the points I tried to bring out it my discussion about the “ages of money” and the shifting implementation of the functions of money. I’ve included the slides below for anyone interested.
I think the main point that I was trying to get over was that while new technology means real change in payments, it also means real change in money itself. All in all, a really enjoyable event, where I learned a lot and had fun too. Many thanks to everyone involved.
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.
It was obvious a few years ago that not only were virtual worlds going to be big business, but that they would have an impact on the payments market. I used put things like World of Warcraft into product and service roadmap discussions for our clients in the financial services space, and I’m sure that they thought I was doing it just for fun, just to get some discussion going. But having played around in the space, I could see it would lead to some new thinking. When you’re sending World of Warcraft gold pieces to a friend in Asia via an elven intermediary (quicker and cheaper than banks, by the way) you can’t help but wonder at the “real world” instruments to hand. This from three years ago…
Well it wouldn’t surprise anyone then, that most of our partners report they have a completion rate of 0.5-1% when they present a credit card payment page to their users for virtual goods…Mobile on the other hand… takes 15 seconds, and off goes the user to his virtual good or points that will enhance his game or app experience immediately without ever leaving the environment of the app.
[From Virtual Goods / Currency and Mobile Payments: the business model for Social Apps]
Note that figure: one in a hundred transactions complete. People playing at being virtual farmers want to buy some virtual cows, so they click to buy, but when they see a credit card payment screen, they can’t be bothered. So there was a demand for a new kind of payment instrument that was not being met by the banks. Look how much things have changed since then, with the incredible boom in app store and in-game payments. There’s no doubt that the retail payments roadmap is indeed being affected by the world of games.
Now I’m not implying that it’s only payments will be impacted, because in the longer run it will be many kinds of financial service, including banking.
The publisher of the online science-fiction game “Entropia Universe,” set on the planet Calypso, received a banking license from the Swedish Financial Supervisory Authority last week and plans to open a real bank within a year, albeit one without physical, walk-in branches.
Players of “Entropia” already exchange real money for a virtual currency that is used for their expenses on Calypso. And virtual money they make in the game, through hunting, mining, trading or other activities, can be cashed out into real money. The virtual currency, Project Entropia Dollars, has a fixed 10-to-1 exchange rate to the U.S. dollar.
By setting up a real-world bank, Sweden-based publisher MindArk PE AB gains the protection of the Swedish government’s deposit insurance for these accounts, up to about $60,000 for each customer.
[From The Associated Press: Online game gets real-world banking license]
A healthy development! My younger son spends a lot of time online with his friends at the moment, hanging out not at the mall but at the WoW auction house (this is where he learns about economics, I’m happy to say). That’s where our clients’ next generation of customers are learning about money, payments and financial services. This from two years ago…
Today, Facebook application developers monetize their games and other applications by accepting payment directly using PayPal, Google, Amazon FPS, or SocialGold. Or developers may opt to receive direct payment via mobile phone via Zong, Boku, or another mobile payment provider… game developers in particular, often accept payment via a prepaid card sold in retail establishments, such as the Ultimate Game Card. The social and gaming web is exploding with virtual currency offerings, yet thus far no one model or payment brand dominates.
[From Purchasing Facebook Credits with Zong Mobile Payments — Payments Views from Glenbrook Partners]
Now, forward-looking organisations could see what was going on and began to target R&D appropriately.
Google is developing a micropayment platform that will be “available to both Google and non-Google properties within the next year,”… The system, an extension of Google Checkout, would be a new and unexpected option for the news industry as it considers how to charge for content online.
The idea was then that micropayments would be a payment vehicle available to both Google and non-Google properties within the year. The idea was to allow viable payments of a penny to several dollars by aggregating purchases across merchants and over time. Google planned to mitigate the risk of non-payment by assigning credit limits based on past purchasing behavior and having credit card instruments on file for those with higher credit limits and using proprietary risk engines to track abuse or fraud. Merchant integration through Checkout would be extremely simple. Google, in fact, subsequently decided to purchase an in-game payments company rather than build it themselves.
Facebook and Google are poised to challenge the banking industry in online payments.
[From Facebook and Google Encroach on Banks Turf - US Banker Article]
Is this really true? I think the answer is yes and no, in the sense that I can’t see any reason why Facebook or Google would want to be a bank, unless it’s to get some sort of government handout, but I can see why they might want to get involved in payments in order to make money (not from the payments, where margins are thin, but from new products and services that have payments integral to them). This is why the news that Facebook had also begun experimenting with a payment system was hardly unexpected, but was notable nonetheless. There was an expectation that the existence of a secure and convenient micropayment scheme for Facebook users (of which there now more than 600 million) would stimulate the development of a new marketplace within Facebook’s “barbed wire”. This seemed plausible to me — if it had been up to me, I would have added a spurious green element to the proposition somehow (getting merchants and other organisations to give out Facebook credits to reward environmentally desirable behaviour) — and I was sure it would do well. I wondered in a number of forums as to who else might enter this more competitive currency market?
In the coming months, facebook users will be able to obtain facebook Credits using MOL points purchased through MOL’s network of more than 500,000 outlets, which are mainly in Malaysia, Singapore, Indonesia, Philippines, Thailand, India, Australia and New Zealand. In addition to outlets such as 7-Eleven stores and cybercafes, customers will be able to purchase Credits through MOL’s network of online banks in these countries.
I gave a talk last year when I mentioned that I thought that Facebook credits would become the biggest virtual currency in the world fairly quickly. Unusually for my glib and sweeping predictions from the conference platform, this one appears to have come true, and even more quickly than I had imagined.
By the end of the year, Facebook expects that Credits will be used to buy the vast majority of virtual goods sold on Facebook. The fast-growing market is expected to reach $835 million on Facebook this year, according to the Inside Network… Through Credits, Facebook will take a 30 percent cut… To bolster that market, Facebook began selling Credits gift cards at Target stores across the country this month.
[From Facebook Promotes Its Credits as Path to Dollars - NYTimes.com]
Now this will one day become a standard business school case study. Talking of which, a few years ago, as part of a course I was teaching at Visa’s Bank Card Business School, a colleague and I mocked up a future Visa card that drew on a World of Warcraft account rather than a fiat currency account. This was photoshopped up to make a point, and at the time it was supposed to be a totally out-of-the-box crazy picture of the future. About two weeks after we made it up, I read that a US bank was issuing a Visa card with cashback in World of Warcraft gold. Oh well. It did help to make one of the points that I was trying to get across, which is that the future of payments will extend beyond the “traditional” bank, consumer, merchant and acquirer for 4-party model.
Vegetable company Green Giant is offering an unlikely reward for purchasing their products: virtual currency in Zynga’s hit social game FarmVille.
[From Wacky: Zynga Gives Away Free FarmVille Cash With Purchases Of Real Life Vegetables]
That was bad timing, coming just as Zynga (the people behind Farmville) caved in to Facebook and agreed to replace Farmville cash with Facebook credits, but it was an interesting development nonetheless, showing that virtual money is just as valuable as “real” money. Facebook’s tactics show they undoubtedly have a strategy in this field.
First Facebook turned off notifications for applications, taking away the primary mechanism for social games to go viral. Now if a company wants a massive audience for a new game, they almost certainly have to buy it through Facebook advertising.
Now Facebook is rolling out Credits as the preferred method of payment for games on their Platform, and taking a 30 per cent cut of the transactions. That’s a much larger percentage than the social games companies were handing over to the small payment companies that had sprung up to fill this niche, and higher than the fees charged by PayPal and credit card companies.
[From Zynga says it’s not leaving Facebook | Tech Blog | FT.com]
Now there’s something to be said for the creation of a single currency area as a way to encourage trade and therefore prosperity.
Besides leading the creation of a more people-centric web, it could also end up having the dominant virtual currency, according to an early adopter of Facebook Credits. PopCap Games has been using the service, which is still in the beta testing phase, as the sole payment method for Bejeweled Blitz on Facebook.
The game is free to play and attracts 11m monthly players, 3m of them playing it daily. PopCap sells extra power-ups, which boost players’ capabilities, and is moving onto sales of virtual items. It has decided to ignore offering other virtual currency options and only accepts Facebook Credits. Users can buy them with credit cards, Paypal or through their mobile phones in $5, $10 and $20 increments for 50, 100 or 200 Credits.
[From Facebook’s Credits Bank of the Web | Tech Blog | FT.com]
These are all useful case studies, showing how a new currency can develop and evolve.
Facebook has certainly tried to guide the development of its online economy, almost in the way that governments seek to influence economic activity in the real world, through fiscal and monetary policy. Earlier this year the firm said it wanted applications running on its platform to accept its virtual currency, known as Facebook Credits. It argued that this was in the interests of Facebook users, who would no longer have to use different online currencies for different applications.
[From Social networks and statehood | The future is another country | Economist.com]
I think I’ve seen the playbook before.
That means all Facebook game developers will be able to start using Credits as their payment system for virtual goods — in fact, Facebook is requiring them to make the switch by July
[From All Facebook Games Will Have To Use Facebook Credits Starting In July]
This comes from the Great Khan’s playbook for monetary and fiscal policy. Not Genghis Khan. His fiscal policy was confused: when he took control of China in 1215, his pacification plan was to kill everyone in China, no small undertaking since China was then, as now, the world’s most populous country. Fortunately, one of his advisors, a man who ought to be the patron saint of Finance Ministers everywhere, Yeliu Ch’uts’ai, pointed out (presumably via a primitive Treasury model of some sort) that dead peasants paid considerably less tax than live ones, and the plan was halted. In 1260, Genghis’ grandson Kublai Khan became Emporer of China. He decided, much as Mark Zuckerberg has, that it was a burden to commerce and taxation to have all sorts of currencies in use, ranging from copper “cash” to iron bars, to pearls to salt to specie, so he decided to implement a paper currency.
Here’s what Marco Polo had to say about it…
His monetary policy was refreshingly straightforward and more robust, even, than Mr. Zukerberg’s: if you didn’t accept his money, he would kill you. Naturally, in a short time, the new single currency was established and paper money began to circulate instead of gold, jewels, copper coins and metal bars. If you think talking about a new currency is crazy, take a look at Facebook Deals. According to Facebook, at launch, you will not be able to buy physical goods with Facebook Credits. Rather you will be able to get things like vouchers that you can redeem at events: now this is, frankly, a paper-thin distinction. I can’t use Facebook Credits to pay for, say, a Coke at a pop concert but I can use them to pay for a voucher for a Coke at a pop concert. I am not an economist, but…
When beloved national retailers start offering goods and lower prices to customers who pay with a new, virtual currency – that’s when said virtual currency becomes a force to reckon with. Somebody call Congress and the Federal Reserve – it’s time to start having some serious conversations.
[From Facebook Deals Launches Tonight & Groupon Doesn't Stand a Chance (Updated)]
There’s a warning from history here! Unfortunately, the Khan’s paper money ended in disaster because the money supply was not managed: it collapsed in hyperinflation, because in the days after Yeliu Ch’uts’ai, the temptation to print money was just too great for the monetary authorities too resist. Let’s hope that the Emperor of Facebook finds an advisor of the calibre of Yeliu Ch’uts’ai.
One possible future might be that, just as China turned in on itself and stagnated, leaving technological and commercial progress to other people, Facebook will become an inward-looking economy while others take up the torch! Perhaps competition in currency, not only in payment methods, is need to keep an economic space vital.
The new program, announced today at SXSW, is called RewardVille, which will give players zPoints and zCoins in CityVille, FrontierVille, FarmVille, Mafia Wars, Zynga Poker, Café World, Treasure Isle, YoVille, PetVille and Vampire Wars.
Competition. This is the American way, not going complaining to Senator Durbin.
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.
Around the world, when faced with new products in the payments space, banks naturally crank up their innovation departments and produce super new products and services to wow customers back. I’m joking, of course. What they actually do in many countries is to going whining to the regulator and force competitors to use the banks’ legacy infrastructure. This is what just happened in India, which really ought to be a huge and dynamic market for e-, m- and new payments of many kinds.
Consequently, from 1 March, the eBay unit says merchants in India cannot receive payments from abroad of over $500 per transaction. In addition, merchants will no longer be able to use any balance in their PayPal accounts to buy goods or services. Instead all payments must be transferred into Indian bank accounts first.
[From Finextra: RBI forces PayPal to restrict payments to Indian merchants]
Now, I’m not saying that banks are the only people who react to innovation in this way: that is, by trying to stop it. This goes on all the time.
For the last fifty years, hard disks have been increasingly super-charged gramophone records: at their heart, there is still a real disk rotating very fast on a real spindle. That’s not the only way to store data, as the memory stick revolution shows, but until now, solid state drives (which have no moving parts) have been too small and expensive to replace traditional hard disks as the main storage device for a computer. Now that’s changing, with real advantages for users as a result… Seagate’s response is to threaten to sue all the new entrants for patent infringement, while insisting that their existing market is not threatened.
At the dawn of the industrial revolution, the steam engine delivered the fundamental business school case study in this topic, something that I wrote about when I was invited to speak at the European Patent Forum back in 2009.
In his keynote address, the Czech Prime Minister Mirek Topolanek said that we had to find a balance in the intellectual property system, that it was right to let Stevenson patent his steam engine but not the screwdriver he used to build it (he didn’t explain why..).
[From Patent error | 15Mb: yet another blog from Dave Birch]
In fact, as I discussed in this post, history teaches the opposite lesson because the patent system held back the evolution of the steam engine for a generation! But back to our business. What kind of innovation is relevant to the payments industry? This is not clear to me. On the one hand, it seems reasonable to say that…
What would be refreshing is if the focus of innovation could be pegged to the value that it delivers to the entire ecosystem, not just the engineers who get a kick out of building cool new toys.
But is this true? When Apple put together the iPod, it didn’t benefit the “entire ecosystem”. The disruptive innovations in fact devastate parts of the ecosystem, like forest fires that allow new shoots to grow. I hate to harp on about the M-PESA example, but I think it illustrates this point well. The banks complained about M-PESA and tried to stop it but fortunately failed. Now that M-PESA has 13m customers and 20,000 agents, the banks are able to deliver new services to new customers using the platform. Were they devastated by the forest fire? No: it gave them space for new shoots as well.
Where do we look for the next new shoots then? Not in banks, generally speaking, but elsewhere in the ecosystem. The payment innovations to come will be technology-enabled, which is why it’s important for businesses throughout that ecosystem to understand the new technologies relevant to payments and, just as importantly, understand the business model ramifications of seemingly dreary technology architecture decisions being made by nerds right now. While they will be technology-enabled, though, it’s the sustainable new business model that is the key. A good example of this is Square.
..if Square can provide just enough added-value with their app to get traction in the small business sector (they are already processing a million dollars a day), then when new payment technologies come along (eg, NFC phones that can accept payments from contactless cards) the merchants will just expect Square to handle them for them. We have long been advising clients that the key disruptive role of mobile phones in the payments world is the ability to take payments, not to make them.
And we still do, in fact. I think Square is an interesting innovation case study. It does not compete with existing acquirers, but opens up the market so that more people can accept card payments.
So where is Square seeing the most traction? Without a doubt, small businesses, independent workers and merchants comprise most of Square’s rapidly growing user base. The technology only requires its tiny credit card scanner that fits into your audio jack and Square’s app. The device and the software are free, but Square takes a small percentage of each transaction (2.75% plus 15 cents for swiped transactions).
[From Square Now Processing Millions Of Dollars In Mobile Transactions Every Week | TechGoo]
In a way, this is a real-world PSP and an fascinating niche play in a large volume-driven acquiring market, one that can be seen to adumbrate mobile disruption and our projection that the mobile-phone-as-POS meme will be more revolutionary than the mobile-phone-as-card meme. But there’s something else to it as well. Conventional acquirers use conventional methods to assess applications.
Square’s qualification rules are more relaxed than those of standard credit card processors, There are no initiation fees, monthly minimums, and when merchants apply for a reader, Square doesn’t just focus on a credit check, but also takes into account the influence a company holds on Yelp, Twitter or Facebook.
[From Square Now Processing Millions Of Dollars In Mobile Transactions Every Week | TechGoo]
That, it seems to me, is more of a window into the coming economy based on the reputation interweb (or web 3.1, as I propose to call it, to avoid clashing with web 3.0). Can you imagine Barclays Business or Streamline giving you a merchant acquiring account according to the number of twitter followers you have rather than your trading history or bank references?
By the way, I can’t remember if I’ve blogged this before but one of my favourite stories about accepting merchants for acquiring accounts goes back more than a decade to the hazy days before the LastMinute flotation. I was doing some work over at what was then NatWest Capital Markets, who had invested millions in Lastminute, when they went beserk because NatWest Streamline wouldn’t give LastMinute a credit card acquiring account because it didn’t have two years’ trading history!
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]
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.
As a chap named Bill Gates wrote recently,
Technology can be a major force to advance financial inclusion, which can help improve the lives of the poor in the developing world.
[From Untitled]
He’s absolutely right, of course. People who are trapped in the cash economy are the ones who are most vulnerable to theft and extortion, most likely to lose their hard-earned notes and coins or have them destroyed by monetary policies, pay the highest transaction costs, lack credit ratings or references and (in an example I heard from Elizabeth Berthe of Grameen at the Digital Money Forum this year) most likely to have their life savings eaten by rats. So what should be done? Well, having governments take the problem seriously and set targets is a good start.
the RBI target of ensuring 100% financial inclusion in villages of 2,000 plus population in the state by March 2010… banks could adopt the RBI’s advice of making use of the business correpondent-BF model, as per the guidelines, to extend the banking services.
This was in keeping with the RBI’s decision to launch a renewed drive for opening up of no-frills accounts in respect of families who do not have a bank account, on the basis of the data relating to the public distribution system.
[From Banks urged to take steps to ensure 100% financial inclusion - dnaindia.com]
To continue with this specific case, it has proved very difficult to translate these targets into action in the heavily-regulated Indian market.
Adding to their presence, the cost of operating a bank account and the cost of transaction for banking services —which includes deposits, withdrawals, credit and other banking products — is not only high for the consumers but also for the banks. This leads to little penetration and reduced delivery of services in order to bring the large number of potential un-banked/under banked population under the mainstream banking system.
[From Financial Inclusion In India]
As far as I can see, banking is a really expensive and really inflexible way to obtain inclusion, and as we all know, there are better ways to obtain inclusion with new technology. In particular, new technology when combined with the business correspondent model mentioned in connection with the RBI guidelines above ought to be delivering more transformation.
A Wharton School study pegs the cost of a transaction at a bank branch at around $1 (Rs. 45). At an automated teller machine, it goes down to about $0.40. And done through business correspondents, the cost drops even lower to $0.10.
[From Banking on technology to bridge financial inclusion gap - Economy and Politics - livemint.com]
Another way forward might be to treat mobile payments as a first step on the ladder to inclusion and try to find a way to bring mobile payments to the mass market and then use the mobile payment platform to deliver other financial services. Naturally, give our work on the project, I can’t resist highlight M-PESA in this context.
This is why, I believe, that the success that Vodafone (through its subsidiary Vodacom) achieved in Tanzania is so important. It was reported that more than a million subscribers have signed up on the service (Read here), but indications at the Congress were that this number has now more than doubled. The fact that Vodafone has demonstrated that they can duplicate the success of mPesa in other countries, is of significant importance. This means that the Kenya experience was not a fluke, and that Vodafone has learned what it takes to make these roll-outs work.
I hate to keep going on about M-PESA, but our experiences advising Vodafone in the early days of this project contain a number of useful lessons, in particular about the relationship between new entrants and regulators. But I wanted to make a different point.
A couple of years ago we were doing some work for a client who was thinking of developing something like M-PESA. I won’t name them, obviously, but I hope no-one will mind if I mention one of our recommendations. Our Head of Mobile Money, Paul Makin, who worked on M-PESA when it was still whiteboard scribble, was asked what he would have changed in the original specification if he had had the wisdom of hindsights, and his top priority was APIs for MIS access. This is why I wasn’t surprised to see this in a report from the front line.
Data from M-PESA cannot directly be imported into the management information systems (MIS) at MFIs. For KADET, this means all payments made through M-PESA have to be manually input into their MIS, another opportunity for human error to affect the process.
[From Mobile Payments: the Devil is in the Details « Kiva Stories from the Field]
(I strongly urge you to read this short and fascinating article about real experiences linking to M-PESA in the field, by the way.) Taking the mobile payments transactional data and providing corporate access is, I think, a key plank in the inclusion strategy. In Kenya, financial institutions have already started to use M-PESA transaction data as a substitute for a credit rating when looking at providing loans and I’m sure that new opportunities will arise due course: with the wisdom of hindsight, better corporate interfaces would have accelerated this process.
This is the short of thing I expect to discuss more when I’m on the panel on Financial Inclusion at the forthcoming Mobile Money and Migrant Remittances conference in London on 16th-18th May 2011. They’ve got a great set of speakers, including Forum friend Elizabeth Berthe from Grameen and John Maynard from Vodafone, and I’m really looking forward to it.
In an act of astonishing charity, the wonderful people at ICBI have given me a two-day delegate pass for the conference — worth an amazing ONE THOUSAND FOUR HUNDRED AND NINETY NINE POUNDS — to give away on this blog as a competition prize. So if you are going to be in London on those dates and you’d like to come along to meet some of the global leaders in the mobile and remittance space, all you have to do is be the first person to respond to this post telling me when Western Union, the founders of the electronic money business in 1871, finally shut down their telegraph service.
In the traditional fashion, this competition is open to all except for employees of Consult Hyperion and members of my immediate family, is void where prohibited and has been risk-assessed under all relevant guidelines. The prize must be claimed within three months. Oh, and no-one can win more than one of the Digital Money Blog prizes per calendar year.
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.
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