Why O2 Money is interesting
[Dave Birch] By the way, before I get e-mails about this, let me make the appropriate disclosure: Consult Hyperion provides paid professional services to Telefonica O2 UK Limited. However, everything discussed in this post is based on public information and is my personal opinion.
I've been out and about trying out my splendid new O2 Money Visa card. This is a prepaid Visa card that is issued as a companion to the O2 Wallet on the phone. It's a standard chip and PIN online-only prepaid card with an online-only contactless interface (service code 221) issued on behalf of O2 by IDT Finance. (IDT are the BIN sponsors and e-money issuers while O2 is waiting for its licences to be approved.) I was surprised to see that it has a magnetic stripe on the back and has signature enabled in the CVM list, and I don't know why it has my name printed on the front, but there you go. Cards people are a conservative bunch.
You know I'm not the sort of person to go by advertisements, PR statements or by management consultants' Powerpoint, so I applied for a card as an interested member of the general public (which, apart from the three passwords and one PIN that I now have to remember, was a straightforward process except for when I got the passwords mixed up and got locked out) and set out to try it out. The first thing I did was try and scan the card in the envelope to see if the card might be vulnerable to Channel 4-style fraudsters, but it correctly implements contactless best practice: the contactless interface didn't give up any details and it won't do so until the card has been used in a contact transaction. Hurrah.
When the PIN mailer arrived, I went down to an ATM to change the PIN and then tried to scan it again. Nothing. Excellent.
The first experiment was to load the card. I went into our local newsagent and asked them if they could load the card for me. They said they could (because it had a PayPoint logo on it) so I gave them £40 and in a few seconds I was on my way with a mobile wallet with £39 in it (it cost £1 to load it). You can also load it from a debit card or a bank account but I couldn't be bothered to set these up. (I subsequently set up a debit card and it worked fine.)
I went off into Guildford to try it out. A contact transaction first, which went splendidly well. I got an almost instantaneous message on the phone confirming the transaction. So I immediately ordered an extra coffee and paid for it contactlessly. Again, an almost immediate confirmation message. Love it.
Naturally, as soon as I got back to the office I put the card into Dr. Fiske's box of tricks to see if I could do some Daily Mail-style hacking, but once again found that the card implements best practice and does not give out the cardholder name out over the contactless interface. Remember, I do this so you don't have to.
At home, the card has now become our "house card". I keep a prepaid card at home in the hallway for the boys to use if they pop out to get the shopping or need to buy something for school or such like. The O2 Money card is perfect for this and displaced the incumbent immediately. There are two key reasons why it took over: one is the almost instant text messages when it's used and the second is that it's really easy to load from the O2 Wallet. Super product, works well. But none of that is why you should find it such an interesting case study in the world of payments...
It is the transition from a bank product to a non-bank product that makes O2 Money such a fascinating case study. As you may recall, when the O2 Money product was first launched it was a "simple" Visa prepaid card (actually issued by RBS) that was connected to the consumer's phone only in the sense that you got text messages when you used the card. That was a very limited degree of interaction between the phone and the card, but nevertheless customers liked it. But there was a problem. Well, two problems, really. I hope I'm not telling tales out of school to note that bank platforms tend to be a) expensive and b) inflexible. So Telefonica O2 decided to go down a different route by applying for their own (non-bank) licences under the recent EU regulations around Payment Institutions (PIs) and Electronic Money Institutions (ELMIs) and setting up their own scheme. They canned the old O2 Money card and launched their new combination: the O2 Money Wallet with an optional O2 Money Card. I expect to see this template replicated across sectors, because the newly-built PI will be cheaper and more flexible than a bank system.
I was surprised by how much of the comment around the O2 wallet launch was of the form of "O2 becoming a bank", which it clearly isn't. It isn't a bank because it does make loans or take deposits. The O2 Wallet is a prepaid account with a wrapper around it. Now it is possible to imagine a very bank-like wrapper (so that you can make payments, pay bills and so on) but it still isn't a bank. Perhaps a "near bank", but not a bank. Now I happen to think that the "near bank" is a very appealing commercial model for many businesses in many sectors and I'm sure we'll see more such organisations spring up over the next few years in response to the regulatory space that has been opened up in Europe.
A very good example of a new "near bank" is the Finnish startup Holvi. Holvi is a "near bank" with a new kind of account aimed at groups. So the idea is that each account has multiple owners and the owners have different privileges.
Holvi was one of the pitches that I voted for at Finovate Europe 2012[From Payments work fine, why are you bothering us?]
You might imagine this kind of account product integrated into other forms of new financial services. Look at Zopa, the P2P lender that now has some 3+% of the UK personal lending market. I might log in to something like Holvi that is integrated with something like Zopa so that surplus funds are transferred from the prepaid account into the P2P lending account. It looks like a bank to the customer, but it isn't. (I was thinking about this when I was writing about the idea of near-banks for the elderly a few days ago, because you could imagine something like Holvi that allows relatives access to elderly persons accounts under defined controls together with access to insurance, savings and so on.)
There's another point to be made here as well. Saying that O2 isn't becoming a bank isn't the same thing as saying that they will not take some banking business, because there's real dynamic around this: not non-banks becoming banks, but bank products and services becoming non-bank "bank-like" products and services that look the same to the customer but are better and cheaper. There is inevitable disintermediation here.
“With open access to borrower information, held centrally and virtually, there is no reason why end-savers and end-investors cannot connect directly. The banking middle men may in time become the surplus links in the chain. Where music and publishing have led, finance could follow.”[From Technology could take the bankers out of banking, says BoE policmaker Andy Haldane - Telegraph]
This isn't some techno-autistic matrix-deterministic digital money hype merchant (e.g., me) talking. It's Andy Haldane, the Executive Director of Financial Stability at the Bank of England.
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