FATF attempts to grasp modern payment technologies

FATF published this report on new payment mechanisms. It would be a nice try for a second year student, trying to come to grips with reality in modern payments. But if one considers this effort to be the result of heavily government funded research by public servants paid out of our tax money the result is astonishing, notably in the lack of capability to grasp what is really happening in todays markets.

Take for example the use of premium services via the telephone as a mechanisms of transferring money. The fact that 0900 services are being phoned over 2 billion times each year in the netherlands: not mentioned. A feeble attempt at stating that mobile phones may be used for payments. But not a mention of market reality. As planet multimedia outlines today: revenue for data services in sms/mms in 2006 in the Netherlands will be 1 billion euro (on total revenues of 6 billion euro). Quite a solid channel to smurf some money away to other venues.

The issuers of such phone-based payment mechanisms do not comply with FATF-special recommendation VI (all alternative payment mechanisms should be brought under a license regime) and local governments apparently do not (want to?) know of their existence. So the only main conclusion of FATF is not to look inside their own markets for unregulated alternative payment channels but to fear off-shore providers of payment/bank services. As if we're still in the 1995 point in time when people tried to come to terms with the internet and its consequences.

If this quality of analysis also underlies the rest of the FATF-work, we may well reconsider the relevance/efficiency of all FATF-measures. Then again, it may not be the counter-measure itself that is effective, but the threat of it. Thus, paradoxically, the FATF-efforts may work, even if they miss the target. And by that same paradox, we could also consider this to be a good report.

Inspirational commercial about paying cash...

Aneace noticed a nice Visa Commercial featuring speed of transaction of card based payments versus cash. Stuff like that is what we can use in the Netherlands to improve awareness.

Interchange under fire at Eu hearing

Last week there was a hearing at the EU on interchange fees. Reuters reported on that:
* The Commission conducted the hearing to let MasterCard reply to allegations that it restricts competition by setting minimum prices retailers must pay. The EU executive is considering abolishing the controversial and complex interbank fees charged by MasterCard, which can differ card by card.

* EU countries, shops and representatives of the airline and petroleum industries sharply criticised MasterCard's fees. A representative of Ikea, the Swedish furniture chain, said it could lower costs on many items, even amid high energy prices, but could not negotiate the fees imposed by MasterCard.

* MasterCard drew a rebuke at a closed European Commission antitrust hearing last week after claiming incorrectly that Britain had dropped an investigation into its fees, people who were present said. Mastercard made the statement near the start of the two-day hearing on Commission allegations that it sets excessive charges on shops and others that accept its credit and debit cards, they said.

This remains an interesting debate. There are quite some cheap shots thrown at Mastercard, but yet again, they are no saints either. Specifically the honour all cards rule could indeed be kicked out. But it remains painful to see grown up people still confuse interbank interchange fees with acquirer merchant service charges. That does'nt help the debate.

My guess? This banging on interchange fee in Europe may result in some changes that in the end hurt the retailers/governments more than they now realize. They're now all in for the card-scheme interchange fee banging experience without realizing the strategic effects of their behaviour. Specifically in terms of increased complexity and higher cost of decision making in the future.

It's a bit like the Netherlands. Retailers kept on nagging for years about POS-service charges (lowest in the world), which in the end lead to a restructuring of the industry so that scheme, processing and acquiring would all be different things. The central coordination concept was exchanged for a market forces dynamic, which means that it is harder to coordinate developments in the terminal market, telco-infrastructure etcetera. Both merchants, telco's and terminal builders have no single point of communication/entry for a debate on POS-issues. And what happens then: here come the retailers again, complaining that banks make life too complex/complicated as a result of the split of processing/acquiring/branding.

Well, you can't have it both ways. If you're really in for market forces rather than the simple life, you have got to buy in to increased complexity and coordination/information costs as well.

New payment data for 2005 from the BIS

can be found here (summarizing tables). But please all you scientists, be aware that these contain quite a condensened and in some sense arbitrary classification as to the nature of instruments. Don't bet your grandma on it.

The Eurosystem's view of a SEPA for cards

Quite interesting. The world of cards is already a worldwide business since quite some years. And here we have a bunch of central banks in euro-countries focusing on a suboptimization issue: how to allow similar types of payments in euro-countries with cards. See the Eurosystems view on SEPA for Cards. One might wonder: have they been sleeping all the time when banks were developing cross-border usage of debit-cards?

And another question: why suddenly the concern with consolidation. First the eurosystem insisted on one card-one terminal and harmonisation of features in the cards-world. Then suddenly as this materializes, there is the fear that it may not be a good thing to increase standardisation and allow for consolidation.

And a final remark. This is another annoying example of institutional drift. We set up the Eurosystem to do just one thing: determine monetary policy and operate a gross-settlement system used as a mechanism for executing money market policies. Over time, as any good institution apparently wishes, the eurosystem seeked to grab more territory by making statements, policy reports and implying that it retail payments are also within its remit. But I resent that drift. Retail payments are mere peanuts that will not shock the monetary engine whatsoever. So why bother about retail and card payments as the Eurosystem?

Isn't it more relevant to European efficiency in payments that cash payments be properly priced and kicked out as a very dirty, costly payment mechanism? That we get rid of the physical euro as soon as possible? That would be a more important issue that falls within the eurosystem remit. But alas, that would also be too impopular a statement and would not be good for the image of central banks. So rather the Eurosystem chooses to make cheap and easy statements on the neighbours grass than weed its own.

An opportunity missed...

First V-pay transaction in Europe

See the Visa press release and read:
The first V PAY transaction in Austria took place on November 15, 2006 at Denkstein in Salzburg's Getreidegasse with the attendance of Annika Karlsson Hill, Vice-President Visa Europe, Jutta Müller-Liefeld, Country Manager Austria, Visa Europe and Hubert Neumayr, CEO hobex AG.

Just one tiny hickup; V-Pay is always PIN - always Chip. So its potential penetration is dependant on the rate with which retailers move to EMV. As opposed to the Maestro brand that allows stripe-PIN transactions and thus may be a better bet for customers/banks/retailers that focus on smooth transitions.

UK Government changes governance for payment schemes

See the website of the OFT to find out that:
...following a recommendation from the Chairman of the Office of Fair Trading, the Chancellor of the Exchequer has agreed to the establishment of a new governance body for payment systems, the Payments Industry Association. In addition, the Payment Systems Task Force, which is chaired by the OFT, has also announced that agreement has been reached on a number of improvements to the cheque clearing process that will benefit both consumers and businesses.

The Payments Industry Association will be the new strategic governance body for the payments industry in the UK, and will concentrate on access, innovation and governance issues. It will provide a lasting governance solution to the issues raised in the Cruickshank Report. The Payments Industry Association Board will consist of independent directors and directors from the payments industry with an independent Chairman, Brian Pomeroy. The OFT will review the outputs and achievements of the Association against its objectives after two years. The Chancellor has agreed that the majority of the outstanding work of the Payments Systems Task Force can be transferred to the Payments Industry Association. The Task Force will meet for the last time in December.

I think this may be a model that may become the norm internationally. In the Netherlands, we do it a bit different, but not too different altogether. The scheme-owner Currence has a board of Commissioners with independent members. And its work is closely monitored by the Competition Authority. Meanwhile, the policy issues are discussed in the National Platform for Payments. And we also maintain a Bankers Association that does payment things.

It will be interesting to see which countries follow suit.

The unbearable lightness of hyping and PIN-cracking

Of course it is big fun to mess about with PIN-code systems and devising a way to attack them. That's what the security game is all about. But it is another thing to devise an insider attack and imply/suggest that such an attack is so easy to pull off that all banks worldwide should retroactively compensate so-called phantom-withdrawals (which as the camera tells us is often a family-member withdrawal).

So three cheers and one hurray for the authors of The unbearable lightness of PIN cracking but also a pat on the hand for hyping their research a bit too much.

Usage data for Messenger balance information of ABN AMRO

ABN AMRO informs us that its Windows Live Messenger service to provide balance information to its users now has 16.500 users, which grows with 500-1000 users a week (on a total of 2.6 million Internetbanking users). Half of the users is aged between 18 and 25 jaar, 36% belongs to the 26-40 years categorie.

There's more than just a 'card-payment'

Scientists and policy makers often make the misstake of simplifying reality to fit their preconceived assumptions on how markets work. As a part of their reality check they might actually benefit of the Mastercard overview on interchange rates for different types of cards.

Contactless terminals in Amsterdam target for vandalism; Rotterdam expands use of Ov-chip

In all the cost benefits analysis of contactless payments, the assumption is (calculated) that terminals and machines would not be subject to vandalism. Alas, Amsterdam estimated that - while now hardly in use - it will lose 250.000 euro on costs of repair and replacement for terminals, load machines and entry/exit gates for public transport. Which may be less than in the cash age, but is higher than estimated beforehand.

Meanwhile the city of Rotterdam is proceeding the planned expansion of usage of contactless OV-chipkaart. Before the end of this year, it will be possible to use the contactless card in bus and tram. And as of March 2007, it will be the only payment mechanism in the metro (which by the way still requires the permission of the Ministry of Transport).

Postbank uses Google to help customers find ING&Postbank ATM's

Perhaps a first in the world-innovation by Postbank this monday. On their website there is a link that allows customers to find an ING or Postbank automated teller machine on the Google map of the Netherlands. Fancy stuff and nice work. Click here to find out and experiment.

Rabo starts mobile phone banking in alliance with Orange and entertainment company Talpa

Planet Multimedia reports that Rabobank announced this monday that it will offer internet banking via mobile phones distributed by Rabobank. The phones come with a low fee phone bundle and allow for internet banking without the complicated Rabox (and debit-card). Rabo envisages NFC like usage of the phone as a payment instrument. As for the content part, Rabo has agreed with Talpa that they will sell video and music and soccer games via the mobile.

The historic relevance is that this is a first bank entering the telco domain. While telco's generally remain unwilling to formally enter the payments/banking domain and become a bank. An interesting game will develop here.

CCV Holland ready for Europe

See article in HFD. CCV Holland have received certification for its terminals and is now ready for roll-out and replacement of card terminals (costing app 500 euro per terminal). But CCV is also processing/switching 200 million card transactions per year and sets out to become the second switcher of POS-transactions in the Netherlands. For that reason CCV is better off with industry moving to V-Pay and Maestro than a continuation of domestic POS-protocols.

By the way, let us all be reminded that it was retailers themselves who complained about all different terminal protocols and requirements in Europe: they demanded a unified protocol/service level. And as we are reaching such unified protocols/service levels, they now start complaining how they lose their local flavour (and local fees). Sufficient to demonstrate that the adhoc element of retailer reasoning is high and its consistency quite low.

New Zealand authorities to attack no-surcharge rule

Card schemes have a habit of starting out as incompetetive as possible. So if undisputed they will introduce a no-surcharge rule in scheme-rules. Until regulators attack it and then they drop it. In this article we can see that New Zealand regulators have apparently found out what the RBA were doing and now are on a antitrust mission of their own.

So much for the no-surcharge in New Zealand. Although the situation may not be as clear as one would think. There may be a tourist issue/effect involved (see also the paper by Rochet and Tirole on the tourist test).

Regulation by McCreevy: action would speak louder than words...

Interesting speech here with the following notes on how the Commission should regulate:
Those who know me well recognise that this is not a plea for regulatory action, rather for the most "appropriate and proportionate" response in each area. Appropriate can be to let the industry take the initiative, such as in the case of the Single European Payments Area. Appropriate can be not to legislate but to agree upon a set of principles, such as in the case of the Code of conduct for Clearing and Settlement, with industry agreeing to implement, subject to strict monitoring. . Appropriate can be to amend a directive to bring it up to date or to repeal it when it becomes redundant. There is no "one fits all" solution across financial services, nor should there be.

Before taking any decision, the Commission carries out impact assessments and consults extensively with stakeholders. Many of you have already been consulted or have expressed opinions, for which I am grateful. Indeed, the success of any measure - be it legislative or non-legislative- largely depends on the input it enjoys from regulators, supervisors and market participants.

All very well but action speaks louder than words. If all the above is true, why are the retail bankers still waiting for:
- the repeal of regulation 2560 as it is inconsistent with the cost-based fees in payments that the Commission deems necessary to promote more efficiency in EU-payments,
- publishing of the comments that the Commission received on the SEPA-incentives paper.
Apparently the Commissioner is not willing to put his money where his mouth is?

A new (erotic) life for Wallie card...?

Good article this week in Emerce by Erwin Boogert on Wallie Card. It turns out that new investors have taken over at Wallie Card which results in a shift away from the card as a voucher. E-vouchers are all that matters now, as is expansion towards other countries and entertainment sector (a whitelabeled e-money voucher for use on erotic websites).

Again a demonstration of the rule that the entertainment industry is the niche that makes new payment instruments profitable. With a first good example is the 0900-premium line capabilities introduced in the 1990.

DNB research conference on payments and contribution by Katz

The conference programme with presentations can be found here. The hearsay has it that the conference was quite animated, indeed academic and with a very good presentation by Micheal Katz. Katz discusses the difference between antitrust action of government vs regulation of payments industry by regulators. Reading the slides, one might conclude that market players may be better of with the scrutiny requirements of the anti-trust domain (which demands governments to make a case which stands in court) as opposed to the more fuzzy regulation (where lobby-interests and regulatory capture may lead to unclear outcomes and positions).

ECOFIN October 2006 conclusions on SEPA

I will recite the conclusions below. Of course the usual stuff about how the SEPA world may not be worse more costly than the current payment services. This is essentially the equivalent of ordering a free payment lunch which consists of:
- a technical overhaul (as a result of EPC-standards),
- a legal overhaul of bank internal processes (as a result of the payment services directive)
- a commercial overhaul (working towards a cost-based fee structure for all customers and payment products in order to achieve more efficiency fo EU-society)
- maintaining current price/product/functionality features in Europe.

I've highligted two interesing recitals (perhaps overlooked). The first one outlines the concern that member states have that the Commission may actually not be doing a serious job with respect to assuring a level playing field for all new entrants in the payments market. Could this be a reference to the free-lunch that mobile operators are already enjoying for some years?

The second one is on the SEPA next steps initiative. Having had a consultation in the beginning of the year, the Commission professionally shoved its results on the table and decided not to publish the results of the consultation (right now). Quite remarkable for a Commission which states that it attaches a lot of value to the principles of better regulation. But then again, quite understandable. If the results to the SEPA-Incentives paper were to be made public, the Member States would become aware of the real sentiments in the market with respect to the way the Commission acts in the payment domain. And that would mean the Commission's position during the discussion of the Payment Service Directive would substantially weaken (BTW: I'm assuming here that all market players used the sepa-incentive consultation to explain to the commission that there goals and vision for payments in Europe are too ambitious, unrealistic and actually damaging to banks and customers alike).

Well, having said that, here is the full October ECOFIN-statement on SEPA:

"The Council:
– SUPPORTS the aim of the Single Euro Payments Area (SEPA): to achieve an integrated market for payment services in euro which is subject to effective competition and where there is no distinction between cross-border and national payments in euro wthin the EU;
– CONSIDERS that the highest priority must be given to meeting users' needs by the payment services developed under the SEPA, which requires continual involvement at national level of all interested parties;
– EXPRESSES appreciation of the substantial work undertaken by industry to achieve this aim and encourages it to make progress in the areas where work remains to be completed;
– NOTES that the completion of SEPA calls for the removal of all technical, legal and commercial barriers between the current national payment markets;
– NOTES that continued attention is needed to ensure that SEPA-payment services,
including their supporting technology and procedures, do not represent a deterioration compared to the national cost and service level in the most efficient Member States and that SEPA products and services are offered in a competitive environment;
– STRESSES the importance of ensuring a level-playing field as regards the application of competition principles to all market participants, including new entrants to the payment services market, and INVITES the Commission to continue without delay, its work on this subject;– UNDERTAKES to work, together with the European Parliament, towards a swift adoption of the Proposal for a Directive on Payments Services;
– WELCOMES that the Commission intends to come forward with the final report regarding the sector inquiry into competition in the retail banking market (which includes payment cards) before the end of the year,

– In order to facilitate commitment to an early use of SEPA,

- INVITES Member States to carry out cost and benefit analysis, where necessary, to check that SEPA products are better or at least equivalent to existing products in terms of price and quality, including as regards the security of payments and INVITES the industry to provide information to this end;
– INVITES Finance Ministries of Member States to monitor progress on SEPA at national level, with all interested parties; as well as the Commission and the ECB to continue monitoring the overall development, together with the Financial Services Committee and the Economic and Financial Committee, and report back to the Council if progress is not satisfactory and at the latest in 2008;
– INVITES the Commission to assess the economic and competition impacts of the SEPA taking into account its planned time schedule, and
– INVITES the Commission to continue its work on the next steps regarding the issues raised in its consultative paper on SEPA, including the responses to the public consultation, without delay."

Payments & Settlements news 44

is out here, with some nice features:
- cooperation of Norwegian banks and Telenor in identification via mobile telephone (October 2, 2006);
- ECOFIN conclusions on SEPA (see this separate post),
- website SEPA-world;
- an article by Leo van Hove, once more explaining why fighting cash is a worthy cause on pages 8-13.

Police arrest a lot of juveniles that loaned out their debit-card to criminals

HFD reports that more than 100 younger adults have been arrested this week as they loaned out their debit-card for money laundering to criminals. The interregional fraud team performed arrests simultaneously in Amsterdam, The Hague, Rotterdam, Flevoland and Zaanstad.

TSYS Certified to Process Prepaid Cards on MasterCard Network

See press release here... to discover that TSYS is now certified to support open-loop prepaid cards in Europe on the MasterCard network. The certification includes capability for chip-and-PIN processing on MasterCard's network.

Most likely this announcement will not be noticed by EU regulators. So while effectively the markets for processing and issuing of cards-transactions opens up with a considerable speed, they are still debating how to make the EU market more open by regulating new entrants in the new payment systems directive.

ABN AMRO, Rabo and Postbank to transfer Dutch web-payment scheme to Currence

This week, the large banks that developed the web-payment method iDEAL for their Dutch customers, transferred the scheme/standard to Currence. Currence is the bank-owned but independent scheme manager for the Dutch domestic products debit-card (PIN), e-purse (Chipknip), direct debit (Incasso) and paper based bill-payment (Acceptgiro).

The consequence of this transaction is that any bank that wishes to use iDEAL may now do so buy purchasing an IDEAL-license from Currence rather than having to come to an agreement with the three developing banks. So the shift of scheme responsibility most certainly leads to a more open market.

At present, there have been 4 million iDEAL transactions on an annual number of 20 million web payments. iDEAL has thus a steep adoption curve with a penetration percentage of 20 % after about 1-2 years after introduction.