E-money is back
[Dave Birch] A recent Deutsche Bank Research "Banking & Technology Snapshot" on "E-Money" (11th May 2012) says that there are three factors that could lead to an increased importance of e-money in the future. These are:
- Innovative mobile payment systems that could lead to a renaissance in the use of hardware based e-money.
- The digitalisation of financial services that could boost the use of software-based e-money.
- Virtual e-money that could spread rapidly, once started, due to the sheer mass of potential users.
I think that the trends that this analysis draws on are real, but I would draw them together in a different way: virtual e-money and software e-money will grow, wallets will be the means to manage them and the successful wallet plays will have security based on mobile devices that incorporate hardware security. In reality all three of the factors that DB identify are different perspectives on the same central trend, which is money heading off into the cloud, where it will happily circulate under remote control from secure, consumer-owned mobile devices.
If this analysis is correct, then DB are right to expect to see more announcements around e-money in the future, in contrast with the "usual" announcements about banks and mobile operators co-operating to put existing non e-money payment products (i.e., debit cards, credit cards, account-to-account transfer) into mobile handsets. As it happens, we've just seen one such announcement.
MasterCard and Deutsche Telekom have announced that they will work together to roll out services across DT’s footprint in Europe… Under the terms of the deal, MasterCard will be working with DT’s payment subsidiary ClickandBuy, which has the e-money license that is necessary to operate mobile payment services.[From MasterCard Ties Up With T-Mobile For NFC Mobile Payments In Europe | TechCrunch]
So MasterCard will be using e-money rather than bank products issued by its former members. This certainly does illustrate rather well the point that "three party" non-bank e-money might make sense in a mobile environment when it didn't in a card-based physical world (which would require all banks and all shops to connect to the single value pool). You can see why DT are happy to go down this route as well. For one thing, it will be far cheaper to operator a payment system under PI/ELMI licences than under banking licenses.
Most of the operators we know in this situation would prefer to be directly regulated by their central bank as an e-money issuer or payment services provider. Doing so gives regulators better visibility into and oversight over mobile money services, and makes it more likely that customers will have more services from which to choose in the financial services space. It’s a win for everyone involved.[From Regulating non-bank mobile money service providers | Mobile Money for the Unbanked(MMU)]
I'm going to write some more about the potential for "near banks" in the not-too-distant future, but I'd like to focus on the long-term implications for a moment. In the short term, naturally, the e-money that mobile operators, retailers and others will issue will be euros and dollars and so forth. But in the longer term, I suspect that we will see new currencies arise. In a way, the Starbucks £££ in my Starbucks app that can only be spent in Starbucks is already a kind of "truck", a kind of private, company money and there's no reason why these monies might not circulate more widely in the cashless future. But back to tomorrow. Over at Payments Views, Scott Loftesness talks about the impact of the Apple Passbook in terms of multiple closed-loop systems rather than open-loop systems and I strongly suspect that he is (as usual) right about this.
But, it’s important to understand that, as announced today, Passbook appears to be a “closed loop” solution – where the acceptance of the passes/tickets stored in Passbook is also the responsibility of the app developer (think “merchant” or “airline” for now).[From Payments Views from Glenbrook Partners — Views and Opinions about the World of Payments]
The ability the phone to pivot multiple closed-loop e-money system means that the barriers to the spread of those systems reduce. Carrying a hundred different retailer, transit, city, sports, festival and other e-money cards in a physical wallet is unappealing, but carrying a hundred different such "cards" in a mobile wallet (especially when they are all using the same underlying APIs) works fine.
Hence the vision. I wander into Starbucks and my Starbucks wallet opens. The account is empty, so the wallet uses the Visa API to reload a tenner from my debit card. I wave the barcode at POS and go on my way. Next door I pop in to Tesco. Now the Tesco wallet opens and reminds me I've got a special offer on 2-for-1 fruit shortcake biscuits (this is my vision, remember) so I pick some up, When I get to the POS, I wave the phone and the Tesco Wallet uses the same Visa API to charge to my credit card. I get my club card points, but I also transfer £5 to the Tesco Xmas Club, another e-money account in the same wallet. It may not be the definitive narrative around mobile payments, but it's a reasonable vision to be getting on with.
So what is the implication of the DB report? It's that banks should take prepaid "near bank" services seriously and make them part of their roadmap but not only for conventional payments.
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