A question came up in today’s EBA sessions for Joe Pawelczyk, Vice President for International Relations at CHIPS, the American Clearing House for over $2 trillion of wire payments each day. The question seemed quite simple: “Why doesn’t America use IBANs for their bank account numbers, as all of Europe has now standardised on this?”
I have been attending a conference on Prepaid this week, one of the largest of its kind with over 300 delegates all focused upon this burgeoning market. The fact so many are attending says something, and most of these attendees appear to be from organisations other than banks. Transit authorities, mobile telephones operators, governments, utilities, retailers ... oh yes, and MasterCard, Visa and AMEX.
Initially, I thought: what's the big deal about prepaid? It's just another payment type, like credit and debit isn't it?
Well, maybe not.
Intriguing discussions today about the Oyster Card in London.
This is the contactless card operated by Transport for London (TfL) to allow everyone to travel across the London public transport system without using cash. It’s basically a prepaid contactless card, like the Octopus Card in Hong Kong or the New York Subway Card.
Oyster was launched in 2003, and I love stats so here’s a few from Transport for London (TfL).
There was a lot of buzz around this year’s Federal Reserve Bank of Chicago’s Payments Conference, “Payments Fraud: Perception versus Reality”.
First, there’s the sheer numbers involved. For example, it is estimated that each year $3.5 billion worth of chargeback losses occur in the USA through fraudulent transactions, according to Orbitz.
Bruce Cundiff of Javelin Research had some particularly interesting stats, that show identity fraud is on the decline in the USA from 10.1 million cases in 2003 to 8.1 million today, with the cost reducing 12% during this period from $56 billion to $45 billion. Ouch! $45 billion losses through identity fraud is still pretty steep, with the average amount defrauded in each case coming in at just over $5,500.
Front Page of Business Week today: Banks versus Consumers - who wins?
The focus is upon credit cards and debt collections and, with American credit-card debt hitting a record high of $957 billion in Q1 2008, up 8% from the previous year, according to Federal Reserve data, this is a growing market. One of the market leaders in debt collections is the National Arbitration Forum (NAF), used by many banks to chase up delinquent accounts.
The article then goes into a few statistics:
As a result NAF is becoming the target of a legal action with consumers claiming that rather than arbitrating, they are purely acting on behalf of banks. For example, 1,400 Virginia residents claimed that they had been promised, in writing, that they could appear at hearings before an NAF arbitrator but that the law firm representing NAF, Wolpoff & Abramson, failed to arrange the hearings. The case was settled in favour of the residents.
Interesting article.
Reading the PayPal blog is worthwhile, particularly as this item appeared the other day. It’s all about stamping out phishing with Michael Barrett, chief information security officer, blogging about the ways in which PayPal were attacking this issue. As PayPal and eBay are the target of three-quarters of all phishing attacks, according to Sophos in July 2006, they should know what they are talking about.
The reason why Michael’s blog is relevant to you, me and all the bankers and citizens of the world, is that he thinks they have found a way to stamp out phishing losses. Between July 2006 and July 2007, the phishing rate targeting PayPal and eBay dropped from peak rates of over 80% to under 10%.
How did they do it?
Fascinating item sent to me by a mate that says that First Data are responsible for Frontier Airlines going bankrupt in the States.
Apparently, Frontier blame First Data because they demanded a sudden jump in collateral, due to the credit crunch, and started taking a large slice of the 70% of Frontier's revenues which they controlled; the other 30% is from cash, cheques, AMEX and Discover.
On April 8th, First Data not only told Frontier that they wanted to raise Frontier's collateral from $55 million to $130 million, but allegedly claimed withholdings would rise from 45% to 100% by May 1st in order to build this up.
As a result, Frontier declared bankruptcy on April 10th.
First Data ... how could you?
Aha ... First Data were as surprised as everyone else by this announcement.
Sounds like it could be a bit of brinkmanship between a customer and their processor, especially as Chapter 11 in the USA just means that you don't pay your suppliers for a while. And you can still book seats on the flights ...
... even so, declaring bankruptcy is a bit radical just because your card processor has kicked you in the collaterals so to speak.
Is it just me or is the sight of an advert for PayPal in a newspaper a bit like some form of colonic irrigation?
I don't know why, but travelling along on the tube this morning, I saw a half-page advert for PayPal in the free Metro newspaper. It jarred for two reasons:
First,
I could not see why PayPal is advertising in dinosaur media - a printed
newspaper - when they're so well-known online. They only operate
online and through mobile and so anyone who hasn't heard of them by now
is obviously a luddite ... or is that the reason for going with
dinosaur print media, to get the luddites paying online?
In which case, second, why run an advert which shows a typical internet payments area of a website, with people in silhouette holding binoculars and looking at the payment area. Underneath is the headline: "Are you concerned about people seeing your financial details online?"
It just sits wrong.
If (1) is the objective, then why unsettle the luddite by using headline (2) which makes them feel even more nervous?
If item (2) is the focus, then it's probably tech users who are already paying online that is the target, so why advertise in print media (1)?
Either way, it just didn't work for me. I can't link to a picture of the ad because it's in print, but sorry PayPal. Turn around and do it again.
Now that Visa have IPO'd and the execs and banks are profiting from the rocketing share price, the firm has decided to push the limits further by stripping their products down to the basics for their latest TV campaign.
More numbers, and I was fascinated to see a presentation from O2, the UK mobile service, the other day where they held up a few numbers that are fairly staggering. In the UK:
This was followed by a few other amazing stats, courtesy of my friend Roy Vella:
There's loads more numbers in this area, with many banking estimates and discussions on Finextra. For example:
Whatever.
I guess this quote demonstrates why the mobile is important to all of us financial services: "In 2007, there are 2 billion mobile phone users who do not have a bank account, or regular internet access, or both. Their primary banking service will be their mobile phone.” The GSM Association
In the world of daft inventions, here's a great new one: the hamster shredder.
No, it's not a machine for grinding wee hammy into pulp, but a document shredder driven by hamster power.
The idea is that you get rid of your sensitive documents by putting them in the slot on top of the shredder, like normal. Then little hammy goes around and around and around on his little wheel and, as he does this, it drives cogs and barrels and shreds your pages.
There are two versions of the hamster shredder: Mark I and Mark II.
The great news is that when little hammy has finished his running, he can sleep on his produce of the day - lots of little bits of paper. And the only downside is that it takes him about 45 minutes to run through 1 piece of A4, so don't try doing mass shredding here folks.
If you don't have a hamster, by the way, you can always go and find a rat.
In banks today, technology strategy is the essence of business strategy.
In capital markets, where algorithmic trading analytics can make the difference between success and failure, technology is critical to competitiveness. If you cannot compete with another bankâs new derivatives capabilities, which are driven by technical excellence, you might as well give up the ghost. If you lose a millisecond of speed in the investment markets, you are dead. That is why low latency is at the core of capital markets today and technology strategy is at the core of latency.
This is why an exchange said to me, âIf it takes more than 500 milliseconds to process then it is of no value because it is out-of-dateâ. Technology strategy is the core focal point for the exchange.
This is why an investment firm said to me, âWe moved servers to Moscow because it takes 60 milliseconds to route a trade from London to Tokyo via Moscow compared to 240 milliseconds if we process the trade via New Yorkâ. Technology strategy is the core focal point for the bank.
This is why investment firms are co-locating their servers within exchanges. It is also why we are seeing market blips occurring on a regular basis, because markets move in real-time.
In capital markets, technology strategy is at the core of business strategy.
This is also true in commercial banking.
For the commercial banker, faster payments are all about real-time payments. SEPA is all about replacements of technology infrastructures. And the supply chain for the corporate client is all about straight through processing.
In corporations, especially manufacturers, you can now transport goods as cheaply from Guangzhou to Grantham as you can from Gillingham to Grantham. How come? Because mass container shipping has made the transport of skyscraper-sized boats full of goods a reality. Hence, the cost of shipping a box of shoes from Guangzhou is now as cheap as shipping a factory full of shoes.
This is due to standards. And the standard is a container box.
In the financial support of that supply chain, there are no standards. Therefore, banks are scrambling to work with SWIFT on SCORE, MA-CUGs and TSUâs; with ISO on ISO20022; and with TWIST on implementing einvoicing standards, bank services billing standards, and other standardised processes for straight through processing.
All of this is about making the bank easy to do business with, which means plug-and-play connectivity, real-time reporting, and value-adding information services for the corporate client. In other words, technology strategy is at the core of business strategy.
This is also true in retail banking.
Many of us believe that retail banking is all about branches.
Rubbish.
Branches are just sales stores today, as transaction services have moved out of the branch to the ATM and the internet. In other words, retail bank customers serve themselves online through automated systems, and in real-time.
This self-service culture is going to be even more pervasive as retail banks offer more services across electronic mobile channels, as well as introducing new payments channels using chip technologies. New payment channels are critical to the war on paper: cash and cheques. Yet, paper is the only reason customers go into branches these days, purely because they cannot process paper, cash and cheques, electronically so they cannot serve themselves.
The result is that retail banks purely have electronic connections with their customers. In other words, technology strategy is at the core of business strategy.
So, technology is at the core of the strategy deployed in retail, commercial and investment banking. It is the foundation of banking in the 21st century. You cannot reduce and downgrade the import of getting technology right or wrong.
Now the challenge.
Bearing in mind that technology is fundamental to client relationships, is obsolete the day you buy it, is disruptive and changing at a speed that is hard to keep up with, then the bank has to place technology as the cornerstone of their business strategy.
It is the most important aspect of the bankâs business strategy.
Put it in the context of a bank being like a human body.
The brain of the bank is the executive management, who set strategy.
The heart of the bank is the people, the organisation structure, the front line staff.
The skeleton of the bank is the buildings, bricks and mortar.
And technology is the nerves, veins, muscles, tissues and blood for the bank. It keeps the bank body connected.
The brain is the IQ of the bank, with some being more intelligent than others.
The heart sets the culture of the bank, and it is hard to copy a culture.
The skeleton is rarely broken but has to be on occasion, as branches are moved and new markets opened.
But if the nerves, blood and veins of the bank are clogged, blocked or hardened, then the bank will die. It is not the brain that stops thinking; it is the blood to the brain. It is not the heart that stops beating; it is the blood flowing through the heart. Bones do not disappear; it is the blood and tissue.
A bankâs blood flow is itsâ technology, as thatâs the only thing that connects all of the disparate pieces of the bank together.
This is why technology strategy is the bank strategy in todayâs world.
I have had the contention for a while that Technology needs to be seen as disposable. The day you buy it, it is out-of-date. No sooner do you invest in new technology, than you find your investment is obsolete.
It has always been this way ever since the PC revolution took over. Should I buy an Intel 80386 processor when the 80486 is on the way, and then the Pentium chip and the Celeron, the Xeon and the Atom ...
This is the point of the IT industry: to change, to adapt, to innovate and to continually get us to upgrade. In so doing, technology has moved from being a long-term investment to a short-term hike.
As consumers, we know that this point is obvious. We get a new mobile telephone every eighteen months. No sooner have we bought a new iPod than the iTouch or iPhone appears. You just bought an HD-DVD player when the world settles on Blu-Ray. You invest in a Sony Bravia TV and a new one comes out a week later.
Do banks get this?
Not really. Many banks still work on net present value depreciation models. They still want cost-benefit analysis and 18-month return on investment business cases. They need to settle and agree by committee the decision to purchase, and the committee meets once every quarter, so wait for your investment requirement to appear on the business radar before you can even think of a sign off.
The trouble is, bearing in mind the speed of technology change, these are the processes and structures of yesteryear.
Yesteryear, banks made massive investments in technology that required huge consideration because of (a) the cost, (b) the risk of getting it wrong, (c) the time it would take to implement, and (d) the time you intended to use it for.
Two to three decades ago, you would be buying into a lifetime’s investment.
A core system would be expected to last … well, a lifetime. That’s why so many are still around today. That’s why so many banks are worried about changing core systems. That’s why so much is layered upon legacy, rather than displacing such legacy, although a lot of the legacy exists due to cost avoidance: if it ain't broke, don't change it.
In 2008 however, we need to look at things differently. Nowadays, techology is disposable. It is obsolete the day you buy it.
Take the CIO I mentioned yesterday, who sees his issue as applications and capacity. This CIO had run out of physical space for servers in London. Then a front office head of dealing came up to him and said, “Look, we need to implement a new derivative to compete with XYZ and we need it fast”.
The derivative was so complex and global, that the CIO basically brought a lease on a new office, deployed a grid server farm, developed a new application to run the derivative at low latency globally, and had the whole thing up and running within 18 months. By the time it was deployed, there was more computing power in the new data centre than the old one.
That’s disposability in mission critical core applications in action.
We need to look at things differently.
We need to think that our delivery channels might change every year and our services may be completely overhauled in months. Therefore, our systems and structures cannot constrain us. They have to be agile and flexible.
And bankers are concerned that their systems are not agile and flexible.
That’s why Open Account trading for corporates is of concern. After all, this moves the commercial bank out of the corporate supply chain to become just a commoditised settlement engine at the bank-end of the process. No bank wants to be just a commoditised back-end, which is why they are all trying to create real-time services to add value to their corporate clients.
That’s why social lending is of concern. How rapidly could services such as Zopa, Prosper, Smava and ppdai displace traditional bank lenders? Who knows? What we do know is that they are offering a real alternative to banking in the 21st century.
That’s why retail banker’s are deploying new retail services, such as mobile and contactless. Bankers want to innovate and to show their technology capability can keep up with consumer and societal changes.
But here’s another issue. The sooner you change something, the sooner you need to change it again.
By way of example, the UK banks determined to implement Chip & PIN in 2000, five years after France and the Netherlands had proven the model worked. The fact that such a change would mean a national implementation, it had to be agreed by committee through APACS, which took about three years to decide on how to implement this.
The banks determined to implement the service using Static Data Authentication (SDA), which means that the PIN can be authorised by terminals that are offline. The alternative would have been Dynamic Data Authentication (DDA), where a unique number is generated for each transaction. This is used in France, but was considered too expensive for the UK banks.
So the service rolled out in 2005 and was made mandatory on February 14th 2006.
In other words, it took six years to implement a service based upon a decision by committee.
Then the cracks started to appear.
First, not all card issuers had sent out EMV-chip cards.
Second, not all customers had PIN’s or used them.
Well, those two were overcome easily enough. It just meant all UK cards had to be reissued and all customers had to change behaviours.
Then industry pundits came out and said the system was being hacked because static authentication is too easy to defraud. In other words, we should have implemented Dynamic Data Authentication, as it is more secure.
Then we find that Chip & PIN only works for retail payments where the cardholder is present, so we send out Xiring terminals for online payments.
Then we want to rollout contactless payments, so merchants now have to have two terminals at the checkout.
Then we want to move to mobile payments and so on and so forth.
The speed at which banks
make a consensus decision is too slow, whilst the speed at which
individual banks are trying to rollout innovations is, for some, too
fast. The two processes are potentially even in conflict.
On the one hand, the customer expects the bank to innovate to suit their life, to make buying and selling stuff easy, to provide information services that are of value to them. On the other, the bank needs to rollout technologies that secure the bank's systems, that force customers to behave in a secure manner ... even if the customer doesn't want to.
The result is that technology is therefore not only disposable, but it is potentially undermining the relationships between the banks and their customers.
So here’s the quandary of today’s modern bank.
Technology is disposable. It needs replacing rapidly and easily. But technology also fundamentally changes your customer’s and corporate client’s operations, processes and behaviours. In other words, it can make or break your customer relationship.
So how can you get technology right, first time, every time?
There’s the rub.
The banks that can deploy and implement technology at low cost and faster, more efficiently and effectively than their competitors, in a flexible, agile and rapid methodology, will be the banks that win in the future of this technically turbo-charged industry.
Interesting podcast from the British Computer Society today discussing a Moroccan phishing kit called "Mister Brain" that you can download and use for free. It allows you to create a nice little phishing site of your very own. They even provide templates for spam e-mail including brands such as Bank of America, eBay, PayPal and HSBC.
The only thing is that each time you phish someone's money, a little bit disappears into Mister Brain's bank account. Nice one!
Maybe one day we'll have identity theft stealing identities from stolen identities of people who's credit cards don't exist to fund accounts that are stealing from other accounts which also don't exist.
If you don't want to listen to the podcast, then you can read about it here.
I've spoken about community currencies regularly, but some folks find them hard to visualise.
Well, there's one project alive and kicking in the Devon town of Totnes, as described in the Observer and many other articles. This BBC coverage of the Devonian Totnes pound shows the concept best though, and includes a video that explains how it works.
Worth having a look if you want to see an alternative view of the future of money.
I know I shouldn't post this, as some folks might take note for illicit purposes, but what I'm writing is nothing new. It's already well-known by the criminal fraternity, so I might as well share it with you. It’s also well known in the risk and security community, but they don’t seem to make it as clear as I’d like it to be.
What am I talking about?
Social engineering.
The number one method of committing a robbery in the 21st century.
Here are a few examples of how easily social engineering works.
Example #1
You go to a conference in a suit. You are not part of the conference and you wait until lunchtime, when everyone leaves the room. You then go in and steal as many laptops and briefcases as you can without looking conspicuous. Because you are in a suit with a briefcase, no-one in the hotel stops you as you leave. Because all the conference folks are in another room scoffing, no-one notices.
This one happened to me where I lost my passport and laptop one time. Now I always pack everything up and make sure I carry it around with me.
Example #2
Two customers in the bank hall are taking their time to complete paying in forms and are carefully looking at their statements. They obviously are meticulous about their financial affairs. What they are actually doing is listening carefully to the branch staff conversations, and they pick up the fact that tomorrow morning the systems are being checked and a replacement network router is due to be installed.
The next day, two technicians turn up with a new network router and are sent through to the back of branch to carry out their work. They then steal almost over $250,000 ... and the real technicians turn up an hour later. The two imitators were the studious customers of yesterday.
Example #3
I look around Facebook and find the details of a person. They have given their email address as sxodavies@aol.com and, as I look around their Facebook profile I find their mom is called Ruth, their dad is David, they have a sister and brother, Carly and Robert (Bobby), and a pet dog called Scamps. Their favourite rock star is Christina Aguilera and their favourite celebrity Ashton Kutcher. I go to AOL and enter username as sdavies and then try variations of passwords from Ruth, David, Carly, Robert, Bobby, Scamps, Christina and Ashton. It works as most folks use a password that is a family member’s name, a pet or a personality they like.
Result: identity compromised in less than ten minutes.
Example #4
I want to gain access to someone’s account so I begin by using Facebook as above. This time, I have found a variety of details about the individual, including the fact that their name is Suzanne and they have a number of financial accounts and investments. I’ve discovered this information because I'm quietly watching what they’re emailing, both sending and receiving, and they have no idea I’m watching or accessing.
Eventually, I know enough to be confident to call their bank, and I get my female friend to make the call and pretend to be Suzanne:
“Hello, my name’s Suzanne Davies and I’d like to move £650 to my savings account.”
My friend struggles with some of the security questions and, not wanting to be rude, the call centre person helps them out with a little prompting, as Suzanne seems to know most of her personal information. So she gets to know the postcode, the place of birth and other information. However, she gets to the personal security question, “what’s your mother’s maiden name”, and my friend says that she’s been interrupted and will call back.
This goes on several times until my female friend has all the information needed to transfer funds.
Result: identity stolen within half a day (something I’ve spoken about before)
Example #5
There’s a major merger and acquisition going down in the City with Megabank Advisory Services taking the lead. I’m the lead negotiator for one of the firms in the fight to win the bid, and I’m desperate to know what’s going on with the competition and with the advisory firm. So I hire some friends to help and they offer £25,000 to a cleaner, who works for the advisory firm, to place a covert listening device under the leading advisor’s desk. The cleaner, who earns about £15,000 a year, of course accepts.
As a result, I can hear and know everything that is taking place and act accordingly. After all, how many of us look under our desks and check there’s not a bug there every day?
These are just a few examples from hundreds and, although you may think me a little risky in posting them, if anyone wanted to try these techniques then they're all out there, known and can be easily demonstrated.
This is because all of the stories above are true stories and all of them rely upon one fundamental characteristic: the villain is bold, confident and assertive, whilst the rest of us are trusting, unchallenging and supportive.
That, my friends, is the total basis of social engineering for robbing in the 21st century.
In other words, most deliberate theft relies upon the fact that most of us are trusting. We don't protect vital information because we trust people. We fear challenging someone who seems to know what they’re doing because we trust they should be honourable and ok.
All you need is a little information, a lot of confidence and then prey on people's trust. This is the stuff of The Real Hustle and there are many other examples of how this works in practice. In fact, robbers haven't really changed for years, as Raffles, the fictional gentleman thief from over a hundred years ago, stole with the same tricksters confidence. It's just far easier to be Raffles today than it was a century ago.
A robber who is confident and knows a few facts, can blag their way through anything. A bit like the way Chris Tucker in Rush Hour or Eddie Murphy in Beverly Hills Cop can convince a bar room full of tough guys that they’re a cop with a licence, when all they are is a guy with a flashy badge, if you look the part, act the part and believe you are the part, then you can swing anything.
So, there you have it. I can easily pass myself off as anyone I want to be, as long as I believe.
Somebody stop me!
Since time immemorial, folks have bartered and haggled over goods and services. It’s the nature of society, which is why we have swap shops, car boot sales and markets.
“C’mon, c’mon, roll up, roll up, 3 for a £1 today”.
“Ere mate, I’ll give you a fiver for 20?”
“Okey-doke”.
eBay encourages a bit of swapping, and then there’s always more focused exchange markets, such as Swapace.
But barter is obviously more complex as a market as, rather than exchanging cash for goods in a haggling market stall, you’re exchanging goods for goods. Now many of you may think that this practice is no longer relevant, but it’s actually a growing service in corporate trade. For example, Stolichnaya is America’s favourite foreign vodka because Pepsico used to get paid for their fizzy drinks in Russia through a barter exchange for Stolichnaya vodka.
These days, the most popular form of bartering goods and services is to build up trade credits which are left on account until needed to buy goods and services from others.
In fact, this open account operation, where credits and debits for goods sourced, manufactured and exchanged, is of growing concern in the context of supply chains as it potentially means that no banking services are required across this process. You just exchange virtual debits and credits of goods and services traded.
After all, some believe that Wal-Mart’s use of trade credits is worth more than the capital they receive from banks and shareholders. This is why it is of concern to banks and why you have trading associations to facilitate barter between businesses, such as ITEX.
ITEX describe themselves as: “the leading marketplace for cashless business transactions. Put your cash and credit cards away and buy and sell using ITEX dollars! With ITEX dollars, money will never be the same.”
So, there is a roaring trade in bartering and swapping, estimated to be worth 15% to 20% of global trade per annum.
But one recent development that could add fuel to this debate is the bill moving through Washington State right now which will allow consumers to swap airmiles for cash. So, there you go. Fly around the world, drop carbon emissions on everyone, and make money in the process. Sounds like a good deal to me.
Alternatively, you could invest your bartering in sustainability by creating community currencies to exchange time or other non-monetary forms of value. This is what many communities around the world have already been doing, with the most impressive concept being a thing called the Terra.
Like an airmile program, the Terra will exchange time credits and other units of community value, globally. Now, there's an idea.
After my discussion yesterday of cashless economies, and my blogs before about a cashless world such as this one, I find that nearly all of the cashless discussions come from the card companies. For example, Peter Ayliffe, CEO of Visa Europe, made a statement in March 2007 that we would be living in a cashless society by 2012.
Five years to be completely cashless.
This kicked off a great debate at Channel 4 Newsdesk, where the great British public made comments like:
"It will create an underclass who will be forced into a barter economy which the government will be even less able to keep track on. That may even be a good thing by creating a parallel economy."
"Lets hope if/when the cash in hand people pay their taxes we will be able to reduce the loads of methods Brown has to shaft us."
"I can't see it happening. I use cash for everything - it's a lot quicker than using a card. Just hand over your notes/coins, get your change then leave the shop."
"The population is aging. There are a lot of people in the higher age groups who dislike credit/debit cards. There are still quite a number of pensioners who do not have a bank account. I think this is wishful thinking from a vested interest."
"I bet I can tap in my PIN number in less time than it takes a lot of people to fiddle about looking for change."
"Maybe you can, but most people can't. It's really irritating to get stuck behind someone paying in this manner in the supermarket queue."
"Perhaps we should reorganise supermarket checkouts so that instead of having a ten items or less queue, we have a non-timewasters queue, no old dears etc allowed?"
And so on and so forth.
There was also the usual major resistor’s comment in relation to card interchange fees, which is already being clamped down upon by the European Union, with Nick Mourant, treasurer at Tesco, saying: "There is a duopoly between MasterCard and Visa in the UK. Their setting of fees is anti-competitive." And other retailers saying there’ll never be a cashless society whilst interchange fees charged to retailers cost around 4p for each transaction.
So what’s the truth?
The truth is that ever since Diner’s Club, the first credit card, was invented we’ve believed that a cashless society would one day come upon us. However, instead we have rising levels of cash in the economy, and some say that the cashless society is about as likely as the paperless society, e.g. not in our lifetimes.
And yet, rarely reported in our wonderful world of infrastructures and processing, is the fact that cash makes more sense both as a medium of exchange and also as a cost to process.
What? Cash is cheaper to process than cards? You cannot be serious!
Well, rather than presenting the card processing view of the world, let’s look at the cash processing view of the world. The most interesting perspective I’ve seen in this area is this research (33 page pdf) produced in March 2006 for the European Security Transport Association (ESTA). These are the people who move cash around Europe, so yes they're also biased.
The report, titled “The Role of Cash in EU Payment Services”, makes some interesting and bold statements with the Executive Summery stating:
“The Directive proposed by the EU ‘on payment services in the internal market’ is intended to harmonise the regulatory regime for payments across Member States, but the Directive excludes cash and paper cheques ‘since, by their very nature they cannot be processed as efficiently as other means of payment, particularly electronic payments.’
“This report challenges this basic assertion and argues that if markets are allowed to function properly, price signals will lead to the most efficient allocation of resources and that consumers should be allowed to choose whether to make cash, paper or electronic payments ...
“The paper concludes by arguing that it is impossible to know the optimal balance between cash, electronic and other forms of payment that will emerge from the market being allowed to function properly. It is therefore a mistake to favour one form of payment over another, even on grounds of efficiency, let alone the non-price preferences of consumers.”
You know what? There therefore is an argument to be had here. Is cash better than cashless? Should we even think that paper is that inefficient?
I’ve got lots of other proof points that says the ESTA could be right ... but most of it comes from the ESTA and their friends so I'll just have to look around the banks and see what they say.
It is interesting to think about cash and where cash is going. Can we really be cashless?
The history of cash, as those who know my presentations, is that it was invented for sex. I know a lot of people don't believe this, but the first form of money was the shekel. The shekel was invented because 5,000 years ago Sumeria, which is now Iraq, was moving from the disorder of the ancient world to a more formalised society. As one of the most advanced of the Ancient Civilisations, Sumeria used religion as the political force to manage law and order for their society.
Trouble was that they had no way to control that society. Therefore, the Sumerian priests invented the shekel to ensure farmers worked hard on the land and behaved. But why would a farmer want a shekel? A useless bit of metal with little real value.
The answer was that the shekel could be used at the temple to meet Ishtar, the goddess of fertility. The Goddesses were actually ordained women, priestesses, who represented Ishtar on earth and, in exchange for a shekel, these women would have intercourse with the farmers as a holy act.
Farmers gave their shekels to the priests in exchange for sex with the priestesses and the world’s most ancient profession was launched.
For much more depth on this subject, or for those who have no knowledge of the subject and want to know more, please read this link where, halfway down, it explains the currency of Ishtar.
5,000 years later, both prostitution and cash are around in abundance and are still as difficult to manage, police and control.
In the case of cash, it is all about the fact that you have a real-time exchange of guaranteed value that is anonymous. If you give me your credit or debit card, can I really trust it's you and it's not a fraudulent transaction? Also, if you give me your card then everyone knows it's you and what you purchased, from whom, when and where.
With cash, we don't have those concerns. As soon as you give me cash, that's it. I've got the money.
I sell a car and I don't want a banker's draft. I don't want a cheque. I don't want a money order. I want cash. I want to know the money is clear before I give you the goods. Only cash gives me that reassurance.
I hire a cowboy builder to stick a conservatory on the back of the house and, guess what, I give him cash. Avoid the tax and all that guv'nor.
I want to move my $205 million of drug runner's illicit earnings across borders, and so I stick it in the bedroom. It's the only way to ensure I have my most liquid asset to hand, and I can always stick it in a suitcase to move bits across borders.
I go to see the goddess Ishtar, which I don't by the way ... but if I did, would I use cash or a credit card? I think cash still rules there too.
Cash rules.
This is why most societies thrive on cash. For example, recent research sourced from a variety of diverse groups* provided me with this picture of cash usage worldwide:
%age of total payments made in cash
94% Russia
90% China
79% Japan
77% Spain
67% Italy
40% Australia
21% America
These figures reflect, in some cases, the sophistication of the markets' usage of alternative payment mechanisms, such as cheques and cards, rather than the 'cashless' society. For example, Russia and China have very low usage of credit and debit cards today, but this is changing. America has low cash usage but cheques, or checks if you like, constitute 36% of all payments which is why Check21 is so important for the USA.
Even so, most low-value transactions are made in cash, and how the hell will we ever get rid of cash when it fuels the underworld, allows those who want anonymity to be anonymous, and ensures those who want real-time value transfer to have it?
Well, I can start to see a way. The basis of cash is that it needs to maintain those two key elements of being anonymous and providing real-time transfer. The former is why direct debits, credit transfers and cards could never promote themselves as a cash substitute, and even PayPal has issues with the latter as they run on the bank and card network.
But there may be a way, and it made me wonder if I could create a cash injected economy, that was anonymous and outside the banking system, or the tracking system as we should call it, in real-time.
How about starting with PayPal or a prepaid card?
With PayPal it's hard to transact unless you provide name, address and other details. However, you can open an unverified PayPal account with no such information. You are asked for name and address, but you can falsify this information to open an unverified account.
This means that anyone can open a PayPal account as a Premier Account, without giving out bank or other details, and with a false name and address potentially. You only need to "Get Verified" and prove all of this information, if you want to get more benefits such as higher spending power and increased security.
In order to start my cashless trading, I open a fictitious PayPal account, unverified. Maybe I put £100 in there by buying an IDT Prime prepaid Credit Card, which also needs no identity proof to transact on the card, unless you want one that's reloadable.
I put £100 ($200) on the IDT card and transfer that to PayPal, or I start selling a little on eBay to create a debit float on my PayPal account. I then take that debit float or prepaid card, and stick the cash into Second Life's Linden $'s or Entropia's PEDs (Project Entropia Dollars). Through this method I can now have unlimited anonymous transactions.
And, you can generate real cash in these worlds. We all know about Anshe Chung being the first millionaire in Second Life by buying and selling land that doesn't exist, but what about Jon NEVERDIE Jacobs who has become the millionaire owner of Club Neverdie in Entropia, the most expensive virtual object ever, according to the Guinness Book of Records. In the press release that goes with this record, there's an interesting paragraph:
"Many high-end items in Entropia Universe are regularly traded between players for tens of thousands of dollars. Recently documented sales include a virtual shopping mall for $70,000 USD, a land area for $35,000, a top-of-the-line healing kit for $30,000, an Imp MK II Hunting Rifle for $17,000 USD, a spaceship and hangar for $12,000, a complete Supremacy armor set for $11,000 USD and a Unique Green Atrox Queen (mystery) Egg for $10,000."
Hhhhhhmmmmmmmmm.
For fraud and money laundering, there are definite possibilities here, which I've blogged about before when I mentioned the Chinese were concerned about QQ for all the reasons above.
Meantime, there's also China's version of PayPal, Alipay.com.
Alipay is owned by Alibaba, China's largest ecommerce firm, and is China's largest online payments services with 47 million users in August 2007, with 80,000 new users registering every day!
Launched in 2005, Alipay is proving to be incredibly popular for these reasons and also because their business model is different to eBay and PayPal's. Rather being positioned as a payment service for online trading, Alipay positions itself an online service to support and promote Chinese trade. Maybe this is why eBay have found them to be a pain in the derriere.
All in all, between prepaid cards, virtual worlds and online payment services that allow me to open accounts without providing full and verified bank and billing details**, I reckon I could quite happily build a very nice cashless business that is anonymous and outside the bank network, with real-time value transfers.
This means that maybe, just maybe, after 5,000 years, we will finally have a society that can operate electronically and still pay for the world's oldest profession with a shekel ... but now it's an e-shekel.
* including Global Insight, National central banks, GIE CB, APACS, ARA and McKinsey's Payments Practice
** with PayPal, this is difficult to do, but with some other services not mentioned, it's a lot easier.
Interesting to be in Asia at the moment, which is where I flew out to in case you were wondering yesterday. I'm here at a major payments conference and was sorry to miss the minor "hurrah" as SEPA went live on Monday.
Whoopee-doo! Did you see the celebrations and fireworks? Nope? Neither did I.
In fact, to mark such an important event most of Europe's payments elite, such as Gerard Hartsink who is the Chairman of the European Payments Council (the EPC are the designers of SEPA), appear to be over here with me at this conference. Maybe we all knew something that others didn't, like Monday would be a bit of a non-event.
Anyway, Gerard did take some delight in pointing out to me that the European Commission have just released an in-depth research report on the benefits of SEPA. The report is produced by Cap Gemini, and shows that SEPA might create "net benefits to payment markets" of €123 billion in six years. The study (pdf) was published at the weekend on the bit of the European Commission's website dedicated to the announcement.
SEPA delivers about €20 billion a year in benefits to euro payments. Yowser.
Mind you, this contrasts somewhat with other studies, such as some of the contributions I read in my new book on SEPA. With contributions from a wide range of folks ... from the MEP who drafted the PSD, to the EC, EPC and EBA folks, to the JPM's, Citi's and Nordea's, and on to the corporates through TWIST and the EACT, and on to the IBM's, Sterling Commerce's, Eiger's and Vocalink's, concluding with the SEPA consultancy, UTSIT, Price Waterhouse Coopers and more ... the book provides a 360 degree review of SEPA and it's implications for the future.
So, what the hell are folks like me and Gerard, with our close involvement with SEPA, doing in Singapore in this momentous week?
Well, partly because Asia, like the GCC in the Middle East, may follow our example.
There has already been some discussion here about an ACU - an Asian Currency Unit. The idea is that the ACU would emulate the ECU in Europe, as the precursor to a regional currency. This implies that the Singapore Dollar, Malaysian Ringgit, Thai Baht and others would become the Aseo, or whatever the currency is called longer term.
The challenge however is to think of the size of Asia.
With China and India being so predominant, and Japan's heritage and historical prowess, through to Indonesia's mass and Philippines populous, it is hard to see how Asia could ever create a SAPA, a Single Aseo Payments Area. In particular, I cannot see how governments could work together across such a diverse region. Mind you, we said the same about Europe, and look what has happened there.
All it takes is a few key countries to kick off the process and maybe we could see Southern Asia starting this process. For example, Thailand, Singapore, Malaysia, Philippines and a few others could get together and create an economic union and a common currency unit.
This is the thing we have been debating over the past couple of days, as well as the other thing Asia is seeking to do which is to create a Regional Settlement Infrastructure. The aim is to have a regional SSP, like TARGET2 for Securities Asia, and some authorities are trying to play a key role in delivering such services, especially the Hong Kong Monetary Authority.
The thing is though that gaining momentum in the GCC and Asia is hard, and both regions appear to be delaying or even rejecting economic and monetary unions of the type Europe has just installed. It intrigued me that it is actually the banks who seem keener to have this than the governments for example, and some banks are starting to lobby to get regulations drafted to enable this. They cannot just develop it themselves without the political backing you see, as the legal recognition of cross-border products wouldn't exist.
However, if they did form an Asian Union, what would they call this currency if not the Aseo?
Pardon?
Oh ... I am told they would call it the US dollar.
Not sure that's a good choice as we created SEPA to make euro the intelligent alternative. Personally, I would hedge both ways and invest in the Yuan. Seems like the only currency with some growth potential right now.
Meanwhile, as discussed before, the real vision is to create a single global currency ...
... and, one day, pigs might fly.
I was looking at mobile finance this week, as we had a meeting to discuss this at the Financial Services Club last night. In the meeting, Samee Zafur of Edgar, Dunn and Company outlined results of research he has led into mobile finance. The research was conducted amongst nearly 500 payments professionals, and was a repeat of a survey conducted the year before.
The results provided some interesting views:
What intrigues me is that I've spent my life in IT and yet I'm pessimistic about mobile. I'm not pessimistic about mobile payments using contactless chips, as that's darned convenient, but I am pessimistic about mobile banking.
Why?
Because customers don't want it.
For example, the Japanese have had mobile payments for years, thanks to the endeavours of NTT DoCoMo. Then, in 2004, DoCoMo introduced the FeliCa phone with a built-in chip from Sony for contactless payments. By summer 2007, over 21.5 million FeliCa phones had been sold in Japan, all with the extended EDY (Euro, Dolllar, Yen) payments functionality in the form of a fully functional mobile wallet called "Osaifu Keitai". Osaifu Keitai - "Osaifu" is Japanese for "Wallet", and "Keitai" for "Mobile" - and was launched in April 2006.
So I was surprised to find this intriguing research the other day, from a website called "What Japan Thinks". "What Japan Thinks" found that, by the summer of 2007, 4 out of 5 Japanese knew what Osaifu Keitai is. Not that surprising as over 21 million phones have it. But what was surprising is that only 1 in 7 people are using it!
Mmmmm.
Last year, I reported a similar reaction in the USA, and the mobile carriers tariffs and costs structures don't help there. According to US research, under 1 in 10 Americans want mobile finance.
Meantime, I have also found surveys that indicate Europeans feel the same way, such as this study from TNS in November which states that 65% of consumers want online access and only 5% would use mobile as their preferred channel.
All of this is against a backdrop of analysts such as TowerGroup and IDC, who think we should be using mobile big time by now ... but we aren't.
Why?
Psychology.
It is this pyschology of a mobile device being insecure.
For example, the osaifu keitai is not taking off because only 7% of Japanese consumers believe the wallet is secure.
For example, I recently started to use the Monilink service, which HSBC and Royal Bank of Scotland have adopted. Barclays and other banks have similar services. So mobile banking is here and now. However, I didn't even know this was available today until I stumbled across the Monilink website. The bank has never advertised the fact that this is available, or sent an email or letter about it.
So I downloaded Monilink and started using the service. Great, I can now check balances and pay bills on the hoof ... but I started to think "what if I lose my mobile? What if someone sees my password or account number? Why am I trying to do this here? Wait until you get home."
To be honest, the bank reassures me that all of the above is not a problem as it's all PIN and password protected. In some ways, it's more secure than online banking as you have multi-layered security over and above the usual online access. And the banks all offer guarantees that mobile banking is as safe as online banking and so on and so forth.
But the take-up is not that great because the customer doesn't feel it's as safe as online banking. This is because they are using their mobile in full public view in the open air. al fresco banking may be a better description than mobile banking.
It's this open air aspect that creates the customer insecurity. A bit like entering PINs in public, it's that feeling of shoulder surfers and ease of loss. After all, online banking is something you probably do on your own in private ... along with a few other things I could mention. You don't want people seeing your online details. And that's the problem with mobile banking.
Until banks and mobile carriers allay these concerns, and create confidence in mobile banking, all of the investments being made in these services will result in an additional channel that's good for the fun of it, but generates few real results.
Most people think the marketing of financial stuff is as dull as dishwater. Maybe that's why the Goldfish are cleaning the waters to allow the fish to swim freely ... what am I talking about?
Goldfish.
Goldfish is a credit card that's been available in the UK since 1996. Originally launched by British Gas, a non-bank, and backed by HFC, it's been marketed heavily in the past and became the second most recognised credit card brand in the UK by 2003.
Then it languished as credit card competition heated up and the gas firm's interest cooled down. This was in part because the gas industry was deregulated and British Gas became Centrica. As a result, their interest and capabilities to diversify into finance reverted and they sold the Goldfish portfolio to Lloyds TSB in 2003. It was then sold again to Morgan Stanley in 2006. Morgan Stanley paid £1 billion for it, netting Lloyds TSB a tidy £175 million, and it increased the Morgan Stanley UK credit card business by 50% in the process. Finally, Morgan Stanley spun-off their cards division, Discover, last year and they are now the owners of Goldfish.
So, in order to make a killing in the hot UK credit card markets, Discover have used a major chunk of their annual marketing budget to create a campaign with Grey London to revive the card's fortunes.
Grey London and Stink Digital worked together to create a brilliant viral website, http://www.meandmygoldfish.com/. The website uses celebrity endorsements from folks like Ranulph Fiennes, the explorer; Anthony Horowitz, the author; Meera Syal, the writer and actress; Rik Mayall, the nutter and b'stard; and others.
It looks great.
Called "Me and My Goldfish", it's also an interesting way to rebuild a brand. The site tells you stories, delivers videos, entertains and is engaging.
As well as being online, it's also backed by an extensive advertising campaign, with posters across most London Underground stations for example.
As a result, it's winning the admiration of marketing communities, who like it's irreverence and different look.
Nevertheless, with the doom and gloom around the credit markets, is it the best timing? After all, in December, Discover washed away $422 million of goodwill on Goldfish!
Equally, even with a great viral campaign, when I clicked on the "Visit goldfish.com" link, it didn't work as the website was down or the link was not the right link. It's not good to have your marketing website running and your business website out of action, as I'm now entertained but you lost your chance to get my business Mr. Fishy.
Finally, it also does not mean you can keep things looking that good when you have stinking reviews from customers available online and comparasites everywhere that don't rate you.
For all the viral marketing investments in the world, the beauty of the social internet strikes again and Discover may have just thrown some millions out with the bathwater.
Swimming with sharks might have been a better bet.
So I blog about credit
cards not being the major issue yesterday and then realise that it is
unsecured debt worth billions. Just in the USA, credit card debt nears
$1 trillion. Therefore, just to show that it cannot be discounted
after all, the Wall Street Journal runs a report yesterday that shows AMEX and Capital One struggling with their high-end consumer delinquencies. Apparently,
Citigroup and JP Morgan Chase are reporting fourth-quarter results this
week and "are expected to set aside hundreds of millions of dollars to
cover mounting losses on credit cards and other consumer loans ... "'This
isn't an AMEX issue, it's an industry issue. We have started to see a
spillover from the mortgage market and the weaker economy into credit
cards', said Christopher Brendler, an analyst at Stifel Nicolaus in
Baltimore." Mind you, this is just picking up on an earlier article in SmartMoney.com which states: "With
home equity dried up, consumers are piling up credit-card debt at a
rapidly increasing pace. As of the third quarter of 2007 (the latest
for which data is available), credit-card balances increased by 7% on
an annualized basis, according to statistics compiled by market
research firm TowerGroup. Compared to the average annual increases of
2% over the previous six years ... "In the third quarter of 2007,
delinquency rates — the ratio of the dollar amount of loans 30 days or
more past due to the amount of total loans outstanding — at the
country's 100 largest banks crept up to 4.47%, from 4.24% for the same
period in 2006, according to Federal Reserve statistics. During the
real-estate boom years (2004 to early 2006), when homeowners easily
refinanced mortgages or took home equity loans to pay off mounting
credit-card debt, delinquency rates rarely surpassed 4%. Charge-offs,
or debt that has been removed from the banks' books and declared a
loss, are also on the rise, at 4% at the end of the third quarter,
compared with 3.84% a year earlier."
I then see a CNBC headline that says "Citigroup's Layoffs Could Reach 24,000 This Year" after they post a near $10 billion loss. That's good news as it's smaller than the $15 billion+ forecast by some ... oh, wait a minute, that's a $10 billion loss for one quarter!
Next, there's an article from
