Category: Retail

Currency conversions

28th August 2008by Consult Hyperion1 Comment

[Dave Birch] There was a fascinating discussion about the use of mobile minutes as currency in Africa during a workshop that I was attending. The case study under discussion was the Democratic Republic of Congo (DRC), a country the size of Western Europe. Some people there are apparently using mobile top-up vouchers instead of bank notes and, according to the experts I was talking to, and the use of top-up vouchers as an alternative currency is actually growing. That is, the general public use mobile top-up vouchers just as they use banknotes here in the U.K. and they are accepted in retail transactions. The general lesson seemed to be that the reasons why airtime replaces central bank currency are varied, but they can be usefully categorised by the function of that central bank money that they are replacing/ In the case of DRC, the mobile phone vouchers are not merely a mechanism of exchange but a store of value because they are denominated in U.S. dollars: Thus Gresham’s Law is once again operating under our noses and people will trade away the local currency in order to obtain mobile vouchers because the mobile vouchers are just as liquid but there value is more stable. In an odd way that would nonetheless be recognisable to economists, the mobile phone operators have become a kind of currency board, except that instead of using gold or actual U.S. dollars as the reserve, they are using airtime. A currency board, as was used in Argentina for a decade (the 1990s), is a way to bring inflation under control and return stability to an economy. Having just read Tim Butcher’s outstanding book Blood River, about his journey down the Congo river, I’d have to say that it’ll take a lot more than airtime vouchers to deliver stability in that environment, by the way.

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The reduced interchange world

1st August 2008by Consult Hyperion1 Comment

[Dave Birch] The Revolution card seems to be gaining an amount of traction in the US:

Since being launched 9 months ago, the card has already garnered acceptant 150,000 merchants with plans to reach 1 million by the end of the year.
[From National ACH: Revolution Card Acceptance Rising]

Their essential tactic is, as we’ve discussed before, to provide a more merchant-friendly payment card scheme (although I still don’t really understand why merchants don’t just do this for themselves if payment cards, as they claim, are taking such a big chunk out of their profits) that is geared up for the reduced-interchange world of the future:

The main advantage to merchants is that accepting the card costs only 0.5% of each purchase amount, significantly less than the discount rates merchants pay to accept credit cards. In addition, the company recruits merchants as distribution partners and rewards them to provide an incentive to promote usage of the card. Merchants have the option of co-branding the card.
[From National ACH: Revolution Card Acceptance Rising]

Price and promotion are only part of the future reduced-interchange world, because one might hope that the kind of new technologies that we are always talking about here will provide platforms for new value-added services to benefit all of the stakeholders. Falling interchange might even stimulate some new developments:

This strategy is especially relevant if interchange gets cut. Merchants will be paying less, so there is an opportunity for the merchant’s acquirer to offer new value added services that are paid with a portion of the money freed up by lower merchant discount fees.
[From Aneace’s Blog: Are some banks already preparing for lower interchange fees?]

There’s a great deal of scope here, because the “narcotic” of interchange (to use Steve Mott’s provocative description) has meant that such value-added services (loyalty, coupons, rewards,, management, control, folio, groups and so on and so on) are still in their infancy. Retailers pay large amounts in interchange for (as they see it) very little.

He also notes that IKEA pays some €90 million annually and Tesco pays about €128 million in fees to the banks for processing credit and debit cards – that’s more than €210m p.a., between these two firms alone.
[From Retailers count the cost of interchange]

it therefore ought to be easy to co-opt retailers into using a deploying value-added services and charging them for the “something” of these services rather than the “nothing” of interchange.

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User inexperience

15th July 2008by Consult Hyperion1 Comment

[Dave Birch] So I’m a big e-money fan, and I really don’t want to bother with cash, and I want to pay everywhere using cards, phones, psychic power, whatever. Yet my cash replacement experiences are so poor I’m being to lose heart. I tried to pay for my coffee (and a colleague’s Snapple — note the journalistic accuracy) using my contactless Visa card. The UOB terminal said that it read the card, then a red light flashed momentarily and I got the message “transaction failed”. Why? I didn’t know, and nor did the shop assistant. Wrong card? Wrong card scheme? Gone over my limit? Offline No CVM counter reached zero… now I’m thinking “shall I waste money on an international mobile call to Barclays, shall I waste money on a call to UOB, shall I have to pay another ATM fee” as well as “how many times have I used this card without the PIN, is it 9 or 10 you’re allowed before you’re declined… but hold on, shouldn’t the terminal say if there’s a routine security check… no, what’s the phrase on the terminals in our office…”

Wait a minute: Normal people don’t start thinking about Cumulative Offline Value and other EMV risk management parameters, they just think “what a bad system, I won’t bother to use it again”. If we want to replace cash, guys, we’re going to have to do better than this. I’m hope that London taxi drivers have been given a full briefing on extended risk management in EMV Level 2 transactions over a wireless interface…

RBS will pilot contactless card acceptance in association with MasterCard in 25 London-based taxis owned by Xeta. If demand meets expectations, rollout of contactless card readers will be extended to Xeta’s entire taxi fleet.
[From ePaynews.com – the payment news and resource Center]

As was discussed back at the Digital Money Forum, after an excellent presentation by Ronnie O’Toole from National Irish Bank, a significant step toward cash replacement would be for taxi regulators to insist that cabs take contactless. This was part of the bank’s submission to the Irish Department of Finance:

The taxi regulator should make it compulsory for all taxis and hackneys to accept payment by debit or credit cards by the 1st of November 2008.
[From Digital Money Forum: I don’t care too much for money…]

I think I’m going to write to Boris about this.

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Contactless trajectory

8th July 2008by Consult Hyperion3 Comments

[Dave Birch] It looks as if the roll-out of contactless payment cards is not going as well as the industry had hoped. Our good friends at CPP commissioned a survey and found out that

two thirds (77 percent) of respondents are worried about card fraud, as no PIN is required for contactless purchases below £10. Other concerns include a fear of increased crime levels (48 percent) and of criminals hacking into personal details (34 percent).
[From ePaynews.com – the payment news and resource Center]

So people are scared of using contactless cards because of fraud, retailers are surcharging to cut down use and terminals are not good enough. What with one thing and another, it’s a surprise to discover that there are any contactless retail transactions in London at all. Is it therefore reasonable for James van Dyke to say that

I’m coming around on contactless.
[From Javelin Strategy and Research » Coming Around on Contactless]

I’m genuinely wondering. But is this the usual post-hype dip or has contactless just taken too long to move into the marketplace? I’ve heard more and more people — on the issuing side — talk about skipping over contactless cards completely and just moving directly to phones of one form or another, either NFC phones or phones with NFC stickers on them. The argument is, essentially, that it’s hard to deliver enough added-value to compete with the cash just using a card whereas a phone can be a platform for more services for the both the payments and retail sectors.

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BarCampBank biometrics

7th July 2008by Consult HyperionLeave a comment

[Dave Birch] I’d never been to a BankCarCamp before so I wasn’t sure what to expect at the BarCampBank London last week. I needn’t have worried: as well as Forum friends such as Chris Skinner, Stephen Mason and James Gardner, there were both old pals and new acquaintances. The discussions were open and fluid and the combination of views did its job in generating new thinking. I was only sorry that I had to leave at lunch time to get over to OpenTech. One of the groups that I took part in was looking at the use of biometrics at retail POS and I tried to write up some notes to report on the key issues, as I thought blog readers would find them interesting. The discussion ranged over three fairly distinct areas: the drivers for biometrics at POS, the technologies and the business case. So far as the drivers go, the CHYP position has been reported before:

Biometrics work well in controlled environments such as ATMs, it’s true. But it’s not clear — despite a number of roll-outs — whether they offer a realistic alternative to cards at POS because, as we have consistently advised our clients, biometrics at POS are driven by convenience, not by security.
[From Digital Money Forum: Fingering suspects]

I think it’s fair to say that most people felt the same way, although there was some discussion on whether POS fraud is high enough to demand more security but the consensus was that it was not. As for the issue of technology, framed by the debate about convenience, it was not clear to me that the example often used, the fingerprint, has much role to play going forward. It doesn’t provide a particularly good trade-off between convenience and security, for one thing, and to many people it has connotations of criminality. Nevertheless, the technology is moving along and standardisation will help it:

“I think that ISO 19092:2008 will certainly be the kick start that biometric security needs, as it will provide the financial industry with some fantastic guidelines to enable them to implement both the architectural and policy/procedural changes required,” says Jason Pearce, director of sales engineering in Asia-Pacific for RSA, the security division of EMC.
[From Vendor Articles: 4/7/2008 Biometrics usage to pick up with new ISO standard?]

There are plenty of other biometrics to choose from, but surely we will end up using voice, for the straightforward reason that it can function in both local and remote environment, unlike biometrics such as fingerprints (because a remote service provider couldn’t tell if you were really putting your finger on the reader or replaying someone else’s. But for the purposes of the discussion, we can assume that the technology is there (provided it’s main purpose is convenience rather than security). A couple of people mentioned the combination of biometrics and mobile phones as being a promising avenue for exploration and I must agree. The mobile phone is clearly going to be the key device in the consumer space, so for biometrics to go with the grain they have to embrace the mobile from the start.

The business case discussion naturally focused on fraud and the relationship between biometrics and other technologies (eg, contactless) at point of sale. I can’t say that this part of the discussion came to any particular conclusions (if it did, they’re not in my notes) but the fact is that the chip and PIN migration has led to substantial reductions in POS fraud (and substantial increases in CNP fraud) so there’s no desperate need for another technology at POS, especially when the retailers and banks are already engaged in rolling out contactless.

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Aussie rules

2nd July 2008by Consult Hyperion1 Comment

[Dave Birch] Card schemes point to Australia as a place where attempts to regulate interchange fees have resulted in no beneficial change for the consumer. In essence, as the Australian Consumer Competition Commission (ACCC) implies when it says that “nothing real has happened”, the card issuers were forced to halve interchange but the merchants did not pass the saving on to consumers. So was the regulatory intervention a good idea? Aneace thinks not:

Mandated reductions in interchange fees in Australia were supposed to cause retail prices to drop, directly benefiting consumers. The whole idea is that interchange is a “hidden fee” that retailers bundle into their prices, and that a reduction in fees charged to merchants would benefit customers. Sounds like basic, logical thinking that you would find in a high school economics and civics class, doesn’t it? As it turns out, the regulatory experiment resembles a high school lab experiment gone wrong.
[From Aneace’s Blog: Has interchange regulation in Australia redistributed wealth in favour of merchants?]

This makes me wonder why we expect any different outcome in Europe. It’s certainly true that IT suppliers are confident in their predictions of jam tomorrow:

The report is produced by Cap Gemini, and shows that SEPA might create “net benefits to payment markets” of €123 billion in six years.
[From The FinanSer: SEPA today, SAPA tomorrow]

Of course, it “might” create none at all, so it’s difficult to pass judgement on the specifics of the SEPA provisions, but it’s hard to argue about the benefits of anything actions that create a more efficient market (in which domestic debit schemes with 0.1 percent interchange have been scrapped and replaced with fr more expensive international schemes… oh wait…).

If we’re going to discuss the best way to improve the lot of European consumers, then there are two fundamental options: competition or regulation. This brings us back to the general point: if we want to improve the payments system (by which I mean reduce the social cost of payments, thereby increasing the net welfare) should we expect regulation to be the best way to achieve this?

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Shrinking sweet spot

9th June 2008by Consult HyperionLeave a comment

[Dave Birch] As you may know, the banks have launched contactless cards in the U.K., aiming for a cash replacement “sweet spot” in the range UKP2.50 to UKP10 pounds, where the speed and convenience should work well. So I was thinking of suggesting to the pub over the road from our office that they install a contactless terminal, thus ensuring a steady stream of traffic from Consult Hyperion as we conduct visitors from around the world in their direction for a contactless lunch. But oh dear..

I’m genuinely beginning to worry.

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Low-tech loyalty

12th May 2008by Consult Hyperion1 Comment

[Dave Birch] I’ve been sitting in a workshop on high technology solutions in the payments world but I’ve spent the whole time thinking about low technology paper receipts. It’s first of all because Aneace pointed out how Boots were doing a great job on using till receipts to deliver special promotions to shoppers. He goes on to make an excellent suggestion…

Imagine if the same type of offer appeared at the bottom of the customer’s credit or debit card receipt, triggered based on whatever criteria Boots chooses, using payment data managed by Boots’ acquirer.
[From Aneace’s Blog: Boots till receipt promotions]

His general point — the receipts are an opportunity to deliver to some extra value in the payments value chain — is certainly correct, but it of course led me to think about the additional possibilities that will arise when paper receipts are replaced by electronic ones. I think electronic receipts are an excellent service: when I buy things in the Apple Store, their system automatically recognises my credit card and the assistant asks me if I want a paper receipt (in a tone of voice that suggests that she may then ask me if I have a butter churn). I say no, and the receipt is automatically e-mailed to me: great service. Now move forward to the situation where there are no paper receipts any more…

The Federal Reserve Board recently requested public comment on a proposal to exempt transactions of $15 or less from the “Reg E” requirement that consumers receive paper receipts for all electronic transactions.
[From Digital Money Forum: Where’s the Walmart?]

Apart from saving lots of trees, one might expect banks, retailers and others to come up with some interesting new services around the management and processing of receipts. If there’s the slightest prospect of the bank filling out my expenses claim for me at the end of every month, I will batter down their door to sign up.

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I don’t use debit, but…

7th May 2008by Consult Hyperion1 Comment

[Dave Birch] I’ve no idea why anyone uses a debit card, decoupled or otherwise, for anything, but I hear they’re very popular. That’s one of the reasons why I found Capital One’s decoupled debit experiment so interesting. In fact, I went on the record as saying that I thought it was the most interesting new product last year. But now Capital One have terminated the experiment after only a few months. So was I wrong to focus on the product? Well, I don’t think so. For one thing, while Capital One won’t say why they are stopping, it’s not because of the people who count: merchants. According to American Banker, Rich Steckroth, who is Director of Business Development for Sheetz, said clearly “We like the program”.

So who didn’t? One of the analysts quoted says, rather plausibly, that it’s more to do with Capital One not having the money necessary to really launch the project than a verdict on the concept itself, and I agree. Other people think that they will simply offer the facility to their own credit cards holders (as some other issuers are going to do, I’m sure). Customer and merchant proposition apart, though, you may also recall something else lurking in the background. If I were a competitor, particularly a smaller bank sensitive to the loss of interchange revenue, I might be very tempted to take the traditional banking approach to competition in the payment sector and ask the relevant regulators for clarification about the new entrant. As it happens, just such a clarification took place earlier in the year…

There was an excellent post by Carol Coye Benson over at Payments News the other day. She highlights the new rules interpretation around decoupled debit in the US. The three key points are:

First, the transactions must be classified as “POS” transactions, rather than using other ACH transaction codes.

Second, the transactions cannot represent an aggregation of underlying consumer purchases – e.g. three separate purchases at one (or more) merchants on a given day cannot be combined into a single ACH debit transaction.

Third, the “payee” in the ACH transaction, which is carried through to the consumer’s bank (and therefore appears on the consumer’s statement or online transaction listing) must be the underlying merchant, and not the card issuer: in other words, “Capital One” could not be the payee shown on the consumer’s statement.

[From Digital Money Forum: Decoupling the small print]

There’s no doubt that the ban on aggregation increased costs for Capital One, but who knows whether they increased them enough to make the program uneconomic. I’m sure that wasn’t the goal of the clarification anyway, which was wholly to do with safety and soundness of the U.S. banking system and nothing to do with raising barriers to new entrants. I’m sure we haven’t heard the last of the decoupling concept. I can certainly imagine decoupled debit operating through any secure token to provide maximum customer convenience. Why shouldn’t I pay with my Tesco Clubcard, digital certificate on my PC, fingerprint, employee badge or (rather obviously) mobile phone — as they do in Germany — and have the transaction routed via ACH?

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Connecting debit

14th April 2008by Consult Hyperion2 Comments

[Dave Birch] I was interviewed in connection with next week’s Digital Money Forum and asked to highlight a significant change in the payments world since last year. I chose to highlight disconnected debit. I’m certainly not the only one who thinks the concept of disconnecting the bank card from the bank account may well cause big changes:

A January 2008 survey by Aite found a sizeable potential market for decoupled debit cards in the United States, with about a third of cardholders expressing interest.
[From Aite Group, LLC Report #200803101]

Debit card use as a whole continues to grow (although it hasn’t reached anything like the level that some of us think it should do) and in the U.K. there are already a minority of people who find debit cards more convenient than cash.

According to the survey, 19% of people use cash and cards interchangeably, while 16% say debit cards are the most convenient way to pay. About one in ten say they use plastic to help keep tabs on spending.
[From Finextra: Cash is no longer king – survey]

It seems to me that the addition of contactless interfaces should up this fraction further, but I wonder if there isn’t more of a potential for disconnected debit to drive it up further still because of the potential to use other technologies, not merely other cards, to front the debit account?

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