EC gives open banking to bigtech via PSD-2 and Apple closes its doors to banks in return ?

Just the other day I attended a session of the Dutch Foreign Bankers Association, all about Fintech disruption and innovation. Guest speaker Jesse McWaters, who is the project lead for the Fintech programme of the World Economic Forum, shared his insights into the tech-revolution and how this impacts the business models in financial industry.

Banks, big tech and big data: the uneven battlefield- thanks to PSD2 
One very important observation that he made had to do with the place of banks in the future value chain. They can choose whether to be a product provider or whether to engage in battling for the end-consumer experience by providing multi-party platforms. In this latter approach, it is a big data game. Both banks and big tech will be battling in the same arena where banks need bigtech data and bigtechs need bank data to complete their 360 views of their customers.

In this respect Mc Waters had an interesting question to us, Europeans. He asked if anyone at the European Commission would have understood the huge impact that PSD2 and obliged open banking will have on the competition balance between banks and big techs in the market. Doesn't this skew the balance in favour of the bigtechs without anything in return for the banks?

My response was that in essence the whole open-banking idea in the PSD2 originated from an EC-monoline bureaucratic approach to solving a competition case between one fintech and the European Payments Council (see newsbulletin).

I also sketched that the implicit rule of the PSD2 appears to be that such access without prior commercial contract would be free, even though an analysis from our Dutch competition authority outlines why there is a good case for putting in place a compensation for banks for the access to the customer data. And no, the access is not reciprocal. Big data companies would not have to open up their accounts full of customer information for banks.

Bunq opening up Apple Pay for Dutch customers but then being foreclosed by Apple 

The interesting thing is that we were having the above exchange of thoughts in a week where Bunq had announced to move its systems fully into the could of Amazon (bigtech). And Bunq had also opened up Applepay for its customers. By tweaking the geography settings, Dutch users could start using their phone for Apple-pay.

The fun for bunq-ers didn't last too long though. Apple used its powerful bigtech position to shut out the Dutch bunqers from using Applepay. And my guess is, that its arguments for doing so would be pretty much the same arguments that Sofort heard when they connected to German banks. It would not be safe, there would be no required commercial contract allowing this access and so on.

Time for reciprocity?
It seems that already some time ago the EC course on Bigtech has been changing. We are beginning to realize that we may need to protect our citizen's data somewhat better and that we should not help them avoid taxation. Hence the announcement this week of a 3% tax for bigtech, to make sure they do not get a free ride here in Europe.

It would be very much in line with this new vision towards bigtech if the European Commission mandates open acces to customers big-tech information for banks or any other licensed entity that have the customers permission to request it.

If the Commission truly seeks to achieve a balanced market with proper competition, it should redress the design errors in the PSD-2 and allow banks to ask fees for access and/or allow them reciprocal access to the customer data.

The Euro Retail Payments Board: first meeting and outlook

On Friday, the 16^th of May, the Euro Retail Payments Board (ERPB) held its first meeting (with this agenda) in Frankfurt. The ERPB is the successor to the SEPA Council, which aimed at realising the SEPA-project. Whereas the SEPA Council was co-chaired by the ECB and the European Commission, the chair of the ERPB is Yves Mersch, Member of the Executive Board of the ECB.

First Meeting

The first meeting was dedicated to agree to the mandate, functioning and work plan of the ERPB. The ERPB Members decided to set up a working groups on post-migration issues relating to the SEPA credit transfer and SEPA direct debit schemes as well as one working group on pan-European electronicmandate solutions for SEPA direct debits. In addition the ERPB acknowledged and asked the Cards Stakeholder Group (CSG) to carry out a stock-taking exercise and devise a work plan with respect to card standardization.

The ERPB further discussed the expansion of the SEPA Direct Debit scheme (SDD) with a non-refundable (one-off) direct debit. It was agreed that the EU legislators would be asked to clarify legal refund-conditions when evaluating the Payment Services Directive and that a possible scheme would be launched only after this review was complete.

In order to further investigate the future use of pan-European electronic mandatesfor SDD, the ERPB set up a separate working group. Finally, the EPC presented the latest update on the migration to SEPA. Whereas the migration to credit-transfers was very close to completion, there remained work done for direct debits. The ERPB called upon all stakeholders in the euro area to complete their migration to SEPA payment instruments as early as possible and before the deadline. 

Outlook for the ERPB

The launch of the European Retail Payments Board marks a new starting point for discussing the future of European payments with all stakeholders involved. The inclusion of payment institutions and e-money industry can add considerable value given their different approach and background. These providers live and breathe Internet-based technology, seek EU-standardisation and do not have similar legacy-systems as the banks. I expect this to lead to fruitful debates and exchange of insights.

Some observers may cite the lack of legislative powers as a disadvantage of the ERPB. Others may wonder if it is possible to achieve results in a body that only meets twice a year. I would submit however that in ten year’s time, the sceptics will look back in surprise to see how the ERPB has positively shaped the outcome of the European debate on retail payments. The Dutch experience with similar standing committees (see this separate blog) demonstrates that there is a lot of unlocked potential that lies in the trust and bonds that will be formed and shaped by this collective effort. 

ECB provides outlook on retail payments in Europe at EPCA-conference

Pierre Petit, deputy director general (payments and market infrastructure) of the European Central Bank, has outlined the ECB’s  views on European retail payments. He made his remarks at the EPCA Summit 2014, where he defined the role of the European Retail Payments Board (ERPB) and the follow-up on the SecurePay recommendations on access to payment accounts.

New players to be part of drive towards integrated European payments market

The ERPB is to become a forum for driving the further development towards an integrated European payments market in the post-SEPA situation. Petit confirmed that the first meeting of this group is to take place in May, and new industries such as e-money providers and payment services institutions are to join in these discussions, along with other representatives of both consumers and providers.

The ERPB will aim to further stimulate the development of the European retail payments market by working together on topics such as innovation and integration.  The group will identify  and address strategic issues and work priorities, including business practices, requirements and standards. Issues could include the development of a single e-mandate solution or the improvement of interoperability between national e-payment schemes.

Security requirements for payment account access services

The ECB announced that it would this month publish the responses and the results of the consultations on security for payment access to the accounts. The publication would be for information only, given that the European Banking Authority will be providing guidelines on security measures under the revised Payment Services Directive.

Although the ECB does not want to impose formal requirements as there is a risk that the EBA could take a different position, it is likely that the two-factor authentication model of the SecurePay forum will remain the norm for retail payments account access services and mobile payments.

Debit card usage influenced by the news...

Today, the Dutch central bank published a report that debit-card usage is affected by news articles on fraud. On average, the number of daily debit card payments drops by a little over 2% on days that newspapers report on POS terminal fraud and by some 3% when skimming at ATMs is in the news. The news has the largest impact when it makes the headlines. Furthermore the news-effect increased after 2007, when fraud incidents more often happened and made it to the headlines.

DNB remarks that other factors also influence the payment intensity. Rainy days create a drop in shopping and thus in transaction traffic. And they also noted that the payment pattern returns to normal after one day, so the news-effect on payments doesn't last long.

Digital Money Forum 2012... 15th anniversary and lively as ever

The Digital Money Forum is an event that this year reached it's 15th anniversary. And a special event it is. My previous visit to the Forum was probably some ten years ago, when everyone was pretty much into the e-money way of life. But technology, money and society continue to develop and that's where Dave Birch and his team of Consult Hyperion come in. In setting up the forum they provide for a lively and thought-provoking event where money is dealth with from all different angles. And as before, it was a pleasure to participate.

So this years event was special in many ways. We all got a better look at the evolving phone payment landscape, delved into possible future scenario's for the world and money, we spoke about the future and death of cash, about social inclusion and lots, lots more. And, quite fascinating, I got to issue my own currency, PunkMoney, via Twitter, by promising the developer, Eli Gothill, two beers and a financial history tour in Amsterdam.

A bit more on the principles of Punkmoney (as I understand them). If we look at money it is an invention to facilitate transactions in society. But before the official money we had mutual obligations and trust relations in society. I would help my neighbours out with building their house, assuming they would do the same for me, in time. And so on. So there was this web of mutual obligations and promises that cemented the relations in society.

Now what Punkmoney does is to leave all the monetary issues and digital money aside and elegantly replicate this web of promises. With some rules as how to form proper messages, Twitter as the carrier and a software enige that scans twitter for any promises of Punkmoney. And when it finds one, it registers it and there you have it. Not the real money, but something even better: real promises. Just as trustworthy as... yourself.

After Punkmoney, we moved on to another kind of money. Monopoly money, sitting on a Samsung phone (with an application neatly developed by Easan).

Six teams on six tables started playing and as for me personally, I was literally quite lucky. I landed on 3 airports in the beginning of the game, won some lotteries and eventually turned into a big shot property owner. I turned out to be the winner of the competition, with an awesome price: this incredibly beautiful banknote (an official German forgery of a UK 20 pound note; part of the Bernhard operation):

Some more on that will follow on my financial history blog later.

New card design by Rabobank marks migration to international POS-scheme

As many of you may know, the Netherlands are now in a final stage of migrating from the Dutch POS-system PIN to the international card scheme Maestro. And as a part of this migration, Rabobank has changed the looks of the card. Given the fact that chip-terminals require a dip of the card, Rabo has moved its cardholder from a landscape to portrait design. In addition it has put the IBAN number on the card, so that customers always have their SEPA-oriented account number nearby.

DNB releases results of survey how Dutch consumers pay...

Today, our central bank, De Nederlandsche Bank (DNB) released survey results on Dutch payments in 2010. It showed that in 2010 consumers in the Netherlands made 4.4 billion cash payments at checkouts (shops, cafés and restaurants, petrol stations and at markets) and some 672 million between persons. So this creates an interesting benchmark for anyone doing studies on payments. If you wish to estimate the number of p2p payments in a country, just take about 16 % of the total cash transactions (but remain aware of cultural differences though...).

The study (only available in Dutch: here) also reveals that most Dutch consumers pay with the payment product that they prefer. So it appears as if everyone in the Netherlands is quite happy with the way we pay. Yet we should note that the scope of the study was limited to the classical payment products. Consumers weren't asked about their preference for strippenkaart, the payment means for public transport:

I would bet that when asked, many would prefer to continue using the strippenkaart over the OV-chipcard with its cumbersome operational flaws and failures. But as of today consumers have no choice, because the strippenkaart has been taken out of circulation. Paper tickets are now only available in trains but the National Railways are planning to scrap these at the end of 2012.

E-money: an innovation revisited...

I think it is fair to say that technology and payment innovation occurs in several 'rounds'. It's sort of a boxing game where enterprises seek their niche in terms of consumer/company services but also in terms of regulatory niches. This holds true in particular for the domain of e-money.

Some fifteen years ago (I feel quite old when writing this) the buzz was all about Mondex and e-cash: two new e-money schemes. The development of these schemes coincided with the increased use of the Internet as well as the use of mobile phones. And there was a lot of debate on which rules to apply. Should e-money issues become banks or not. I remember setting up a specific branche-organisation (11a2: here's the old website) and conference on that specific issue.

While in this first round it appeared to be the case that anyone using digital coins for consumer payments needed to be regulated similarly, it turned out in a later round of regulation that some industries, notably telco's and transport companies, succeeded in convincing the regulator that their consumer money was not the same as the consumer money in banks. And this lead to a reshuffle of all kinds of regulations to allow for this.

The regulatory developments of 2011 essentially mark the conclusion of this second reshuffling round of regulation on e-money. And the industry has adapted in the meantime and is now looking forward to the new challenges, as we see the further development of mobile phone's, tablets and many other exciting new opportunities for e-money.

Should anyone be interested in the current state of affairs of the European e-money market or regulation I would warmly advise to sign up for the e-money conference of the Electronic Money Association (EMA). All players are there and all topics are on the table.

Bitcoin.... dubious payment mechanism

Every now and then, Bitcoin keeps on popping up in posts (including mine). At first I only looked at the technical bit, but I've come to understand that essentially the amount of coins issued in the system will be fixed. Furthermore, in terms of governance, there is little known about the developer and designer.

So that leaves us with a payment instrument with:
- security by obscurity, both in technical and governance terms,
- uncertainty as to legal rules/jurisdiction applied,
- a limited amount of coins to be issued.
And let me be clear. All of the above mean that it is unfit for use and essentially only an activity that may somehow benefit or amuse the owner.

So, we can be brief about what it is. If presented as a solid payment mechanism, we must officially consider it a mere scam, designed to fool some subcultures in this world to believe that there may be something as a free unregulated worldwide anarchistic form of money that can work. History shows that while some of these systems may work for a while, they will never work for similar time periods as regular currencies do, and the reason for that is the lack of governance, security and legal underpinning.

To illustrate this in a simple way. Bitcoin has a fixed amount of coins. Now imagine a country with a limited amount of money available. This country cannot sustain the use of a limited amount of coins to pay for ever increasing trade and a growing economy. Unless it has a central bank monitoring the amount of money in circulation in relation to economic growth. But Bitcoin doesn't come with a central bank, so the coins will continue to increase in value until they become unpayable. As such it has all the characteristics of a ponzi-scheme. Which means: the last owners of IUOs will pay for those that have exited early.

[Update June 13, 2011: I've come to understand that in technical terms the scheme is open and transparant, yet I'm still struggling with the monetary and governance side of it. And it does take more than pure trust in technicalities to get a payment system to survive.]

Interchange fees: do the FED know what they're up to...?

I've just read the FED's speech on interchange fees. Most striking, in my view, was the conclusion that this is a complex issue. Now, the FED are good thinkers, and if they say something is complex, it means that even they can't make something out of it. So if I read the text below with that in mind:
In light of the novelty and unusual complexity of the issues raised in this rulemaking effort, my colleagues and I are very interested in reviewing the full range of comments offered on our proposed rule and are reserving judgment on the terms of the final rule until we have the opportunity to benefit from these comments.

This just looks as if the FED are saying: Sorry, but even we don't know what to do here. So my guess would be that they go for an easy, less controversial solution. Because in the meantime, I noticed in the SEC filings that Visa and Mastercard are already preparing for a large legal battle (and have agreed how to share the burden between them). And from the above, I reckon the FED is not looking forward to more complexit or novelty.

Dutch contactless chip (OV Chipkaart) in trouble

Hello there again.

As you can see from the dates on the blog. I have been out for a while, taking a good number of sabattical years off and enjoying myself with other stuff than payments. But developments here in the Netherlands remain entertaining enough to take up some blogging. No too much, because I shouldn't overdo it.

Hottest news here in the Netherlands is that last week the OV-Chipkaart once again became the subject of media attraction as a tv program explained how to crack the card. A free program to increase the credit on the card became available and known through Geenstijl. And contactless card readers got sold out, even via the Internet.

So discussions in parliament and media once again occured and the province of Zuid-Holland decided to not completely migrate to the OV-Chipkaart but allow the old Strippenkaart to be used. And the Dutch Parliament did not wish to discard the whole project yet. Still, we should note that this is all not really new: already since 2008 the dutch newspaper Trouw decided to open a separate corner in their website for the 'Drama' of the OV-chipkaart.

Translink systems formally claim they can handle the frauds and point to the fact that also bank cards are prone to attack/fraud (forgetting to mention the differences in financial and technical impact). So thay play it all down. But we keep on discovering unintended or hidden consequences. For example: the sigar/tobacco shops that used to sell the strippenkaart found out sme serious financial impact of decreased visitors to their shops. And the new OV-chipkaart loading machines that some install in their shops, don't give as much kick-back as the strippenkaart.

Now, this is quite a nice time to have a renewed look at the cost benefit analysis of the OV-chipcard. Effectively the business case gets a bit worse, because there will not remain a lot left of the 'income' made by the reduction of fraud or 'grey' travel (possible with the Strippenkaart and assumed to be non-existent with the OV-chip). This is calculated as a benefit of between 380-500 million euro. Also the re-use of OV-chipkaart in other applications would give benefits of 100 million euro. So we'll be seeing a slow meltdown of the business case of the OV-chipkaart.

So while the business case is slowly fading into the sea, what in the end may make or break the card is the consumer-side of things. For example, right now, the handling of consumer complaints in case of forgetting to check-out, is near to disastrous. So there is not much of a warm feeling with the Dutch citizens with respect to this card. Also, in practical terms, the card doesn't completely do what its predecessor can. Try taking a group of people (of a school class of 14) to the ZOO and you'll discover the hassle soon enough.

It's a matter of time before we'll move on to the next generation or next system. And with this experience of a non-bank issuer/provider of payments means, perhaps the public will now more appreciate the quality of service that they are used to from their bank-issuer provided system.

Paying cash more expensive than using the debit-card

Here's an interesting bit of research done in the Netherlands. All shops, banks and central bank have joined forces to evaluate the cost of payments with cash, when compared to debit-card. The results are that it has taken us in the Netherlands some 15 years to ensure that the full cost of debit-card payments are lower than cash-payments.

The research outlines that:
- full cost of payments in retail are down from 839 million euro in 2001 to 788 million in 2006,
- in 1992 a debit-card payment was triple as costly as a cash payment
- in 1998 the debit-card payment with PIN was roughly twice as costly as a cash payment
- in 2006 the debit-card payment is almost the same price as a cash payment (20-18 cents in retail-environment),
so that now, at the end of 2007 it's safe to state that the full cost of Dutch debit-card payments to merchants are lower than cash payments (on a per transaction basis).

As a consequence, the retailer representative organisations advise all merchants to use the debit-card rather than cash and to stop old habits that date from earlier days: the surcharging for use of the debit-card. Because other research by the central bank shows that still 20 % of the retailers surchagre an amount of approximately 23 cents for payment wit a debit-card.

So one landmark achievement is that over here in the Netherlands we have started to beat cash in terms of real cost.

Comes with it another interesting development. One fifth of the retailers surcharges 23 cents for a debit-card transaction that costs them 20 cents. Leading to a 3 cent per transaction profit. The bank-side of this equasion is that banks sell their debit-card transaction for 5 cents, while it effectively costs them 13 cents (see McKinsey reports in 2005). Meaning that debit-card payments have turned into a profit maker for retailers and a bleeder for banks.

This makes you wonder why it would make sense for banks to still subsidize debit-card payments to merchants with a one cent per transaction 'efficiency-stimulus' as agreed in the 2005 Covenant.

Postbank puts link to Virus Remover from Kaspersky on its web

The attacks on banks continue in cyberspace. And to such an extent that Postbank found the need to warn its users to check their PC and use the Postbank Virus Remover by Kaspersky Lab. Apparently the virus listens for the inlog-code and later on asks for tan-codes to be used in transactions.

Well, we've come a long way since in 1995 or 1996 first virtual demonstrates that it was easy to eavesdrop on the web. By now First Virtual is long gone and the eavesdropping is done professionally. And the importance of user education increases per minute.

Chipknip to disappear from manned-retail locations

Many papers and the national news discussed the ending of the Chipknip in manned retail loactions. Among them also Het Financieele Dagblad. All merchants are advised to just use the debit-card for low value payments, which is by now just as cheap as the e-purse (developed in a time when off-line payments were considered to be a smart way to circumvent the high telecommunication costs).

So, since the 10 years of its existence, the merchants didn't pick up the Dutch e-purse, which is partly due to the product characteristics. Consumers don't appear to like loading the card and keeping track of its balance. But then again, the use in parking, vending and catering niches is quite considerable. Th benefits of not having to collect coins at home for use in those machines clearly outlines the hassle of loading a Chipknip. So in these segments the Chipknip will survive.

Yet, we should also not forget the headlines of 10 years ago. Merchant lobby groups at that point of time explicitly stated that they were going to boycot the use of the Chipknip in the stores. Well, they lived up to their promise. It would be interesting to know if Neelie Kroes or any of her staff at DG Competition would also consider such collectively enacted boycots an abuse of dominant market position ?

Rabobank introduces challenge response token for the visually impaired/blind users

See this Techzine article: Rabobank will help the visually impaired by providing them with a bigger, audio-equipped device that acts as the regular challenge-response token that internet-bankers use. It's a sign that in mature e-banking markets (over 2/3rds of the Dutch now bank via the internet and pc) the tools are now being developed to serve and include the not-so-trivial target groups.

Mastercard to reconsider ad valorem based fee plan in UK...

See the website of the British Retail Consortium to read that Mastercard planned for a new approach to debit card interchange charging but was stopped by retailers...

In the UK retailers currently pay a fixed fee on debit card transactions regardless of the value of the transaction. Rates range from 6 pence to 18 pence, depending on which card it is and where and how the transaction occurs, but the fee on a £20 transaction is the same as for a £100 transaction.

For this new debit card MasterCard wanted to introduce percentage, or so-called ad valorem, fees. It wanted to charge a fixed fee of 3.5 pence plus 0.15 per cent of the purchase price.

It's intruiging: the attempts of debit card schemes to go for the ad valorem fee structures for payments where actual value (in terms of cost) does not influence the cost of the transaction....

The PayPal Blog: Observing Trends in the Payments Industry

Interesting article here on Payment industry trends on the PayPal Blog. Essentially the trends are:
- cash will lose out slowly
- convenience will make the customer chose for debit
- rewards are what matters in a saturated market.

Well, the first two are clear; I'm not sure about the third one. There's bound to remain a lot of national culture in payments. So the decisive factor in a saturated market can take a variety of forms, not necessarily being rewards. But for example the eco-image of the provider, the image of a brand, the actual customer service if stuff goes wrong, or perhaps price.

Still, an interesting article by Dan Schatt.

Time for e-invoicing...?

This Planet - Multimedia column by Arjan Dasselaar outlines that it is e-invoicing time and states that direct debits and paper based bill payments should quickly move to the musea. With e-billing and the e-billing standard developed in the Netherlands, the bills and payment orders slide into the customers e-banking environment to be paid whenever you wish as a use. No more revocations of direct debit, no more typing 16 digit payment numbers when doing bill payments...

Indeed, one could question if the direct debit mechanisms (developed in the 1960s, when computer time was not abundantly available) would today be designed if we would not have it already. The answer is most likely negative. The direct debit comes with a lot of uncertainty for consumers (you never know exactly the date of the debit nor the precise amount), there is uncertainty for the companies (you never know if consumers refund the transaction) and there is a lot of work for banks (you never know when consumers/companies are going to call to ask for information/refunds).

Meanwhile one can see the European Payment Council still betting on the direct debit to be used as of 2010. Which, if this would indeed work, would become a typical case example of path dependency. This means that although rationally a technical standard does not make sense, the fact that so many people are used to it, will mean it won't be abolished.....

The Economic impact of the single euro area... ECB research

The fun thing of policy research is that it always gets you the desired result (as apposed to scientifc research where you seek out to dismiss a hypothesis. Last year the ECB set out to do some work on the economic impact of the single euro area. And now, the result is here.

The ECB has carried out in cooperation with the banking industry a SEPA impact study with the aim of enriching its understanding of the potential economic consequences of SEPA. Based on the quantitative and qualitative expectations of major pan-European banks, the study finds that a dual SEPA implementation phase should be as short as possible. In fact, a longer migration period would give rise to higher costs than a shorter period. It can furthermore be concluded that those institutions that embrace new technological developments, create new businesses and provide innovative services are likely to gain most from SEPA.

Well, that's of course the desired ECB answer (I guess deep inside they still stick to their former 2010 deadline for phasing out national payment products...). But it is by no means the whole picture. A lot more is happening then just a move to technological EPC-standards. Like the major impact of the Payment Services Directive. And the report outlines on that issue:
The scope and impact of the PSD goes far beyond SEPA, e.g. in terms of currencies, products and players. Overall, the banks shared the view that the PSD introduces rules with uncertain consequences on the payments business and their financial results. At the time of this analysis, the participating banks preferred not to commingle the pure SEPA impact analysis with a PSD analysis, as this might dilute the results and lead to unbalanced conclusions. The interviewed banks acknowledged that the main effects of the PSD stem from the extension of information obligations, shortening of transaction times, tightening of liability regulations for payment service providers, and more stringent processing of cancellations of transactions. However, at the current stage, the banks felt they were not yet well enough equipped to provide any precise estimate concerning the potential economic impact of the PSD.

Meaning: while the technical and migration stuff is already giving banks a headache, the implementation of new legal rules all across the board may be hitting the banks even harder. Thus undoubtedly raising the cost of doing payment business and thus raising the barriers for entrants even more...

Only the older customer still wants the bank branch

See the ABA-website to discover that although branch banking still ranks first overall among consumer's usage, younger customers are continuing to choose the anonymity of their laptops over the human contact of a teller.

Banking at a local branch was the clear favorite of nearly half of those over the age of 55, but only 25 percent of those under 34 said they use branches most often. In fact, younger customers ranked branches behind online banking (30 percent). Older customers said the opposite with 47 percent saying branches are their preferred method of payment with ATMs (17 percent) and online (13 percent) trailing far behind.