1995 and all that
[Dave Birch] The newspapers full of their end of year staple, the predictions for the coming year. They’re generally wrong, so it’s fortunate that no-one pays any attention to them.
There were things we missed – the financial crisis, the internet and wars – that have had a huge effect on the economy and budgets
Well, no big ones there. The problem with “futurology” is that it never gets it right about specific events, because it’s not about predictions. It’s boring to talk about sweeping, general trends - but those are things that are predictable, and the subject of futurology. So futurology is too boring for the end of year newspapers and you get ridiculous astrology-style predictions instead: people read them because they are fun, even though they know they are made up (and essentially random).
This is true in our world too. When it comes to payments and banking, the general trends have been visible for a while. But the pace of change has been surprising. Surprising, I mean, in the sense of glacial. When throwing away some old papers the other day, I came across a curious artefact from the dawn on the modern age (the modern age began with the Netscape IPO on 9th August 1995). It’s a booklet from the accountants Deloitte, then known as “Deloitte Touche Tohmatsu International”, called “The Future of Retail Banking—A Global Perspective”. It has a section entitled “Why has the technological revolution affected banks so mildly?”, which was a good question then and an even better one now.
So far as moving money is concerned, the report has a very interesting diagram in the middle of a discussion on “Internet electronic money” pointing out how much cheaper it would be to switch payments across the open Internet outside of the banking system. I wrote about this often at that time. Here’s the idea:
- You could pay your gas bill by credit card or bank transfer or whatever at non-zero cost, or
- You could pay your gas bill via e-purse at zero cost. Here’s how I thought it would work, back in the days of Mondex: you log in and see that your gas company needs £32.15, you press a button, £32.15 is downloaded to from your bank account to your e-purse, £32.15 is transferred from your e-purse to the gas company’s e-purse (this would have been free using the Mondex e-purse). Job done.
Therefore, I thought, everyone would rush to use e-purses (note: they didn’t). But never mind 1995, this idea that money, being nothing more than data, would be switched instantly from person to person around the world goes back to the very dawn of the information age. Writing in the New Scientist magazine in 1963, in an article on “Computers and Money”, R. Sayers talks about 1983, forecasting that
Of course, at this stage, transfer of money would be completely automatic; the payment of a birthday fiver from an uncle to a nephew merely a matter of direction and timing of electronic impulses
Now we all know that this didn’t happen in 1983, nor for that matter in 2003, but I have every reason to be believe that it will happen by 2023. Why? Not because of cheques or debit cards or PayPal, not because of government policy or the banking system or social engineering, but because of… yes, you’ve guessed it, the mobile phone. There’s no need to harp on about it here, but the ability of mobile phones to act as terminals as well as “cards” is the key reason why cash replacement is now a possibility, which it wasn’t in 1995 no matter how cheap Mondex cards were.
The reason for bringing up this e-purse example is that I still think that e-purse to e-purse, person to person, prepaid balance to prepaid balance payments anchored by tamper-resistant hardware (i.e., SIMs or secure elements) will, eventually, change the shape of the mass market.
Peer to Peer payments dis-intermediating most of the links in the current payments value chain are here to stay. They will continue to develop simply because the customer, can transact directly with the value producer without any infrastructure provider taking a cut.
I’ve said a few times, in a few different contexts, that prepaid products haven’t done as well as they should have (for a variety of reasons) but that I think they are set to play a much bigger role in the near-future world of retail payments.
Prepaid products, particularly those in general purpose reloadable programs, have begun to transform the lives of millions of consumers. With the full implementation of the Durbin Amendment following the defeat of Tester’s Bill, these programs may stand to see broad adoption by millions of consumers.
I agree with Tim here, and so do plenty of other people.
From the consumer side, prepaid allows consumers to test new opportunities and options without risking a lot of money or putting their bank accounts or credit cards on the line.
This is a good point, but I feel there’s another factor, at least in Europe. You don’t need to be a bank to offer prepaid services: the combination of an Electronic Money Institution Licence (ELMI) and a Payment Institution Licence (PI) means that any company can offer a full service: an open-loop prepaid card. I suspect that many of the companies applying for these licences are doing so because they want to use new technology to deliver new services that need payment, if you see what I mean. That is, they don’t expect to earn money from the payments themselves, but from the value-added services that need the payments to take place. Therefore, it’s reasonable to assume that new entrants using these licenses will mean significant change in the payments world.
The 1995 Deloitte booklet does actually talk about the potential for new entrants, highlighting Microsoft (which was the spirit of the time—today all similar articles talk about Googe), telcos, payment schemes and big outsourcing companies, burt ends up by posing the interesting question as to why this sort of thing had not happened faster. Remember, this was back in 1995. Deloitte says that “one would tend to think that the possibility of a vastly-cheaper and better-specified service would create a tidal wave of change in the banking industry”. Indeed, one would. And compared to 1995, we now have a great many more payment choices within the banking industry. Then we had wires, ACH, credit cards and debit cards. Now, in comparison, we have wires, ACH, credit cards and debit cards. Although to be fair in the UK we have the Faster Payment Service (FPS) so that direct credits are now (within limits) immediate. In Kenya they have M-PESA and on the internet we have PayPal, but when you look at the big picture the only really noticeable differences between then and now (in the UK) are the way in which debit cards have replaced credit cards and the decline in cheques.
Deloitte’s answer to the question about the pace of change focuses on the conservative nature of consumers and their propensity to become even more conservative as they get older which, across Europe in particular, they are. But I don’t think we should deduce from that the payments world in 2012 will be the same as it was in 2011, or 1995, or 1963.
Just weeks before the Russian Revolution of February 1917, Lenin suggested that change lay in the distant future and that he himself would not live to see it.
Revolutions are like that: they sort of sneak up on you, like the so-called “Arab Spring” or the fall of the Berlin Wall, and I don’t suppose the world of banking will be any different. Now that the mobile phone has delivered a platform for change, and new entrants and banks will be competing to work on that platform, I think it’s entirely reasonable to say that there will be major changes.
None of which constitutes a prediction. So I suppose I should join in the fun and make the Tomorrow’s Transactions predictions for 2012. I’ll stick to three of them:
- The most innovative mass market payment product for the UK in 2012 will come not from a bank or a telco but from a retailer.
- Mobile e-Identity rather than mobile e-Payment will be the strategic preoccupation of our financial services clients.
- I will still have to pay for the bus using cash.
OK, that’s my neck on the block. Your predictions?
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