MiFID is Here! Hear from industry commentator and FinanSer blogger Chris Skinner on how best to tackle the challenges and implications of the new legislation. Email Chris or leave a comment on a post if you have any questions.
I was sitting at my PC today, drafting my blog whilst skirting over the news
headlines on my iGoogle homepage.
There were a few other windows open on my PC.
One for Wimbledon live on the BBC, which I can now watch through live
streaming video. I like to listen to the radio commentary, so I also had BBC
Radio 5 Live on my internet radio player, rather than listening to the BBC TV
commentators.
I have a TV in my office as well and, as usual, I had that tuned into
Bloomberg News to track the business and stock markets, with the sound on
mute.
Anyway, I was happily clicking between iGoogle news, Internet TV-Radio and TV
News whilst clattering away on the keyboard drafting this blog when my Skype
phone went off.
After my blog entry about Germany losing Euro 2008 due to Twitter, Techcrunch are reporting a new service, Tipit, that allows you to make payments with Twitter. It actually doesn't though ... it just sends you a message to send the money you promised via PayPal.
Even so, money via social apps are growing rapidly. For example, at the turn of the year Facebook was reporting developing Payments Applications and, guess what?
There are now quite a few, with the most popular being Spare Change.
Spare Change has almost 5,000 daily users today, and describes itself as: "the first integrated
payments application on Facebook. Put a little money in your Spare Change
account. Spend it on your favorite applications all over Facebook."
Paul Kedrosky, one of my favourite bloggers, picked out a quote from Andy Rappaport of August Capital about social investing -- the idea that you can do good via investing in ethical funds. Andy says:
"A
lot of socially responsible funds have this idea that they’ll provide a
social return, but you’ll have to accept a below-average financial
return. I disagree. Once you give a business an opportunity to make a
below-average return, you make it more likely it will."
It kind of reminded me of one of my favourite quotations from Orson Welles, playing Harry Lime in the Third Man:
"In Italy, for thirty years under the Borgias, they had warfare, terror,
murder, and bloodshed; but they produced Michelangelo, Leonardo da
Vinci, and the Renaissance.
"In Switzerland they had brotherly love,
they had five hundred years of democracy and peace, and what did that produce?
"The cuckoo clock."
You need friction and struggle to create genius and heroism.
It is risk versus reward ... the more you risk, the greater the rewards.
Following yesterday's dialogue about the
long tail of banking being mobile focused, the EPC and
GSMA announced a cooperative agreement for mobile payments this week. Here's
the press release:
GSMA Press Release 2008 GSMA Teams Up With European Payments Council
Alliance will accelerate deployment of mobile payment services
30th
June 2008, London: The GSMA, the global trade body for the mobile industry, and
the European Payments Council, which represents 8,000 banks in the European
Union and EEA and Switzerland, are to work together to accelerate the deployment
of services that enable consumers to pay for goods and services in shops,
restaurants and other locations using their mobile phones.
Both the GSMA
and the EPC envisage that this cross-industry cooperation will enable banks to
deliver better mobile payments services to their customers, supported by mobile
operators' infrastructure. These services will be facilitated by a ‘Trusted
Service Manager', which will support banks and mobile operators in the
distribution, configuration and activation of the bank's payment application on
the UICC within users' NFC handsets. The GSMA, through its Pay-Buy-Mobile
initiative, and the EPC will focus initially on defining a contractual framework
document detailing the minimum set of requirements for a Trusted Service Manager
to interface with banks and mobile operators.
"Together, the European
Payments Council and the GSMA are well-placed to develop the tools our members
need to deploy mobile payment services that will work internationally to the
benefit of consumers," said Alex Sinclair, Chief Technology Officer of the GSMA.
"We look forward to a productive working relationship with the EPC."
"We
are convinced that this cross industry cooperation between GSMA and EPC is the
best way forward for efficiently enabling the mobile as a channel for initiation
of payments in SEPA, and this cooperation model could also be a model for other
parts of the world," said Gerard Hartsink, Chairman of the EPC.
Following this announcement, Commissioner Reding and Commissioner McCreevy
released an official response (pdf download) from the European
Commission:
EU Commissioner for Internal Market and Services, Charlie McCreevy, and EU
Telecoms Commissioner Viviane Reding welcomed the announcement today of GSMA,
the global trade body for the mobile industry, and European Payments Council
(EPC) to promote the use of mobile payment services. EPC and GSMA have agreed
today to accelerate the deployment of services that enable consumers to pay for
goods and services in shops, restaurants and other locations using their mobile
phones.
“Bringing more competition to the payment services market has been my aim and
agreements such as this show the possibilities that new technologies and
innovative approaches offer in this regard” said Mr. McCreevy. "This is exactly
what the Payment Services Directive, which comes into force at end of 2009, is
designed to promote", he added.
"Voluntary industry agreements by the mobile industry are always welcome
where they bring about concrete benefits of consumers and enhance the
level-playing field for European companies in due respect of competition rules",
said Commissioner Reding. "I therefore applaud today's announcement which should
bring Europe to the forefront of mobile payments."
Mr. McCreevy recalled that a huge effort is being made by industry and
stakeholders to create the conditions for a Single European Payments Area. In
this regard he said that standards and requirements resulting from the agreement
should be prepared in an open and transparent manner. "It is important that all
stakeholders can have access to the process so that the outcome is of benefit to
all." he said.
There’s a fascinating roundtable discussion in Prospect Magazine this month.
The discussion features:
Jonathan Ford, Deputy Editor of Prospect and Chair of the discussion;
Anatole Kaletsky, Economic Commentator and Associate Editor of
the Times;
George Soros, Chairman of Soros Fund Management;
Mark Hannam, an independent who has previously worked for the Bank of
England, Citibank and Barclays;
Martin Wolf, Chief Economics Commentator at the Financial Times; and
Sir John Gieve, Deputy Governor for Financial Stability at the Bank of
England who stepped down shortly after this discussion took place.*
In light of Sir John Gieve’s departure, George Soros’s regular and outspoken
depressing comments about the credit crunch, and the regular
Economists’ Forum in
the Financial Times led by Martin Wolf, this was bound to be an
interesting dialogue.
It was, with George Soros saying we should shoot the directors of Bear Stearns and Citigroup.
Actually, it's the other way round: Germany lose Euro 2008 thanks to Twitter, according to CNet News.
If you're not familiar with Twitter, it's a great way to communicate short messages and links and views, using SMS texting on mobile, blackberry, as well as short updates via Facebook or the internet to Twitter.
It's an aggregation of thought streams for the great and the good.
CNet take it a step further with the idea of Angela Merkel providing advice to the German team during the game in real-time, such as "Tell Torres, he's a girl".
Unfortunately, Twitter's reply service was down at the time, so the team got confused about why they should call him a girl and that allowed him to get past Lahm and dink the ball over Lehmann to score the only goal in the game. The winning goal that is.
They take this on to illustrate other ideas, such as Gordon Brown twittering to our Olmpic racers that they should "imagine they are being chased by Margaret Thatcher". That'll make them run faster.
I'm just wondering what Alan Sugar of The Apprentice: You're fired would Twitter to Gordon Brown?
The Long Tail in banking would be a mass market of
niche microgroups that incur no cost overheads to manage but, for each
transaction, creates a small profit. As the mass of niche transactions build,
the small profits become big profits. This is not far off what banking does
anyway – processes massive volumes of small transactions – but, right now, we focus upon making money out of account management.
Account management involves staff to deal with the
customer onboarding process, KYC and AML requirements, service on the telephone
and in branch, as well as transaction processing and account maintenance.
However, in the case of the long tail of banking,
there are no accounts. You want to reach people who were previously
underserved, because it would not be profitable. Using technologies
such as the internet means that, today, you can serve them. You can serve them because there are
no people involved, no account onboarding process, no branches or telephone
support services, and no account maintenance costs.
So, are we talking about the unbanked?
Yes, but a whole lot more.
We are talking about children, students, the
unbanked, the underbanked, the grey market, the welfare market, the pensioners,
the migrant workers and more. And we are talking about social lending
and saving, PayPal, prepaid and mobile.
Social lending sites, such as Zopa and Prosper, are
connecting the long tail of savers and borrowers. This is best
demonstrated by Kiva, where
anyone can invest a few dollars in microfinancing people globally. A
global connection of niche players. I've blogged about these sites before, but they show one aspect of internet financing that
is based around a long tail model.
PayPal is an even better example of showing a
great way to create profits out of the Long Tail, although its reach goes far
beyond the long tail.
As mentioned yesterday, PayPal provides a method of moving money between
people globally in multicurrency at low cost. PayPal claim to reach out to over
160 million registered users, with one in three requested at least one payments
transaction every quarter. PayPal make their profits and revenues by charging a
$0.30 flat fee per transaction as well as a variable percentage of 4.9%,
reducing to 1.9% or 2.9% for Premier and Business Accounts respectively. There
are also fees for cross-border transactions.
The real secret of PayPal’s operation is that:
(a)
it builds on the existing bank network, as you have to have a bank account to
use PayPal; and
(b) an email saying “you’ve got money” makes people open
accounts.
The overall result is that PayPal’s model has
increased reach and breadth immensely by linking people to money using viral
networking. They do reach the long tail through this structure but, in terms of
the long tail, they also have a major restriction. You have to have a bank
account and proof of identity to move monies around with PayPal.
So there’s a barrier for some of the children,
students, unbanked, underbanked, grey market, welfare market, pensioners and
migrant workers.
So we need to look at prepaid and mobile for these
folks.
Prepaid provides a great way to reach the unbanked
and underbanked, as mentioned last week.
In one of the best examples of a prepaid programme,
migrant workers in the United Arab Emirates, working on their massive
construction projects, are receiving their weekly and monthly wages on prepaid
cards.
They can get cash and pay for stuff around Dubai without a bank account,
and the beauty of this card programme is that it comes preloaded with one
cross-border money transfer per payment period for free.
Migrant workers can receive their monies and send
money home painlessly.
Prepaid for kids as gift cards, or for students as a
budgeting method due to weekly restrictions on balance limits of usage, or for government
welfare and company benefits is seen as one of the strongest markets for
reaching the long tail of finance.
However, there is still a restriction here.
To get cash, you have a habitual movement of people
that creates a criminal focus.
I only discovered this one recently, and it was the
idea of moving monies around on cards that highlighted an issue.
The issue is that in countries where the criminal
fraternity are represented typically by gentlemen with large muscles or big
guns, receiving money on a card is a problem. The problem is that you have to
go somewhere to get the card, and then convert the card into cash.
Apparently, for example, many people would know that
they were getting a prepaid card on a Friday morning from their offspring
overseas. So they would toddle down to the Post Office on a Friday morning,
pick up their post with their prepaid card, and then go straight to the cash
machine and convert the card into cash. As they walk out of their Post Office
with their lovely lolly, the men with big muscles and large guns jump out from
behind the nearest lamppost and nick the dosh off them.
Whoops. I apologise as I’m getting a little
colloquial here.
The point, I am told, is that card payments create
physical movements that can be tracked and targeted by criminals.
And so we come to mobile.
Mobile overcomes the
issue because you do not have to go and physically get a card and then
translate that card into money. You can receive a mobile payment anytime,
day or night, and then use the money flexibly either on your mobile account or
as cash, but not by always going to the same place at the same time, every week
or month.
Mobile overcomes these issues because:
almost everyone has one, or can get access to one,
you do not need to have a bank account to have a mobile,
mobile technology is cheap to access and easy to use,
mobile builds upon internet technologies to become even cheaper to access through VOIP
you can move monies wirelessly, silently and easily between people
the money movements do not create physical movements that are necessarily habitual and tracked by criminals
mobile is global
... one could go on and on.
Whether you prefer mobile or prepaid as your
focus, they combine to create the real long-tail of banking. Mobile
and prepaid can reach one and all, with micropayments that do not add
overhead to the bank infrastructure, but can build volume for small transaction
fees on each transaction.
Suddenly, the billions of unbanked and underbanked,
the long tail of society, can be served through the financial system at
virtually zero cost overhead, with margins that are attractive
enough through micropercentage fees on microtransactions. Billions
and zillions of microtransactions.
Think about it.
If Amazon and iTunes can make 40% of their profits
from the zero overheads of stocking the zillionth book and song, then banks can
make profits from the zero overheads of processing payments transactions
through internet, prepaid and mobile on the banking network.
That’s something that rings of the long tail of
banking isn’t it?
I wrote an indepth analysis eighteen months ago about PayPal’s 100 months birthday and now they’re celebrating their official tenth anniversary, so I thought I would add a small addendum. Although I say it’s a small addendum, it’s quite an interesting one.
Basically, I was updating some old slides about PayPal and thought
that I should track their number of users over the years, as they do
publish these numbers. First of all, I looked up the last published
quarterly results from PayPal on the eBay website.
In their latest company presentation, published June 16th, they have these figures:
PayPal operates in 190 markets using 17 currencies
Anita Elberse has created a great discussion in the Harvard Business Review this week about the Long Tail, the theory expounded by Chris Anderson, editor of Wired Magazine.
The theory goes that you can make as much money as an online retailer from the 80% of specialised products that sell occasionally, the tail, as retail merchants make from focusing upon the limited best-sellers in the head of the sales line.
Anita states:
"In 2006 just 20% of Grand Central’s (book publisher) titles accounted for roughly 80% of its
sales and an even larger share of its profits."
She also goes on to look at Rhapsody, the online music store, and finds:
"The top 10% of titles accounted for 78% of all plays, and the top 1% of titles
for 32% of all plays."
As a result, she concludes that:
"For Chris Anderson, the strategic implications of the digital environment seem
clear. 'The companies that will prosper,' he declares, 'will be those that
switch out of lowest-common-denominator mode and figure out how to address
niches.' But my research indicates otherwise."
Chris Anderson has already posted a response on his blog:
"She finds the top 10% of titles (out of more than a million in that data
sample) accounted for 78% of all plays, and the top 1% account for 32% of all
plays. That sounds pretty concentrated around the head, until you reflect, as
she notes, that 'one percent of a million is still 10,000--[...]equal to the
entire music inventory of a typical Wal-Mart store.'
"This is a good moment to remind everyone of the normal definition of 'head'
and 'tail' in entertainment markets such as music. 'Head' is the selection
available in the largest bricks-and-mortar retailer in the market (that would be
Wal-Mart in this case). 'Tail' is everything else, most of which is only
available online, where there is unlimited shelf space.
"So in the data she cites, the head of the online music market represents 32%
of the all plays, and the tail represents 68%. That's certainly no challenge to
the Long Tail theory; indeed, it's even more tail-heavy than the data I cited in
my book (probably because I used a more generous estimate of 50,000 tracks for
Wal-Mart's inventory)."
Nothing like a good argument is there?
Why am I bothered?
First, because the Long Tail is an important theory about modern retailing.
Second, because it plays to the heart of online channels and why we virally network socially through blogs and virals in a networked world.
Third, and most important for readers in banks, is that there is a Long Tail in banking that's emerging through prepaid cards and mobile telephones. Take note of the views of both Anita and Chris, as they are crticial discussions in how to make money in these markets.
I attended a long discussion yesterday about High Value Payments (HVP).
I wondered why we even bothered to discuss and delineate between Low Value
Payments (LVP) and HVP these days. Surely, we should just talk about Real-Time
Payments (RTP), near RTP (sub two hours) and D+n. Alternatively, urgent versus
non-urgent with T+n, dependent upon your view of the world.
Having introduced enough acronyms in my opening paragraph to confuse a rocket
scientist, I think I can see why we talk about HVP versus LVP … it makes us
sound more interesting and knowledgeable.
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