Facebook obtained its e-money license : is it the gamechanger for the bigtech disruption of finance ?

About three weeks ago, Facebook has obtained it's e-money license in Ireland. This was in the making since early 2014 and it begs the question whether or not this will mark a big shift in the banking landscape.

Bigtech going for finance?

One could argue that the move by Facebook is another of many steps of big tech players moving into the financial arena and disrupting the financial sector. Where Google has lead the pact from London (with a license in 2007), Amazon chose Luxembourg (license in 2010, passport-out in 2012). With Facebook going down the same path, could we expect Apple or Microsoft to also set up their e-money institution?

My guess is that the bigtech will indeed all move towards some form of e-money license in Europe. It will allow them a direct billing and payment relationship with their customers as well as a role in terms of payment provider for their platforms and services. This is not to say that they will move there fast. If I'm correct, my Google account payments still do not flow via their e-money institution but via a normal bank.

Now, if this happens indeed, will the bigtech further move into financial services or just stick with digital cash and consumer credit?

Bigtech won't dive deep into finance

I don't expect the bigtech to move into full finance for many reasons. We've seen some of the current players moving still quite slowly and sticking to the straightforward business of e-money.

Moving towards other business lines leads to increased complexity and regulatory burden. Bear in mind that the future revenue opportunities for financial institutions as a whole are quite limited and not so attractive. Finally, financial institutions are often held to a higher standard with respect to maintaining their customers privacy, whereas customer data are the lifeblood for Bigtech.

Further move towards less-cash society

The main impact of bigtech going e-money will therefore be the acceleration of our move to wards a less-cash society in which strong brands, platforms and retailers issue their own payment instruments and digital cash. From the outset, Facebook cash could become a big hit as it has the user base, a regular usage pattern for its users and the possibility to best integrate it's e-money functions within their own platform

Only time will tell whether Facebook is also viewed by the public - reputationwise - as a partner to be trusted with your money. But we can rest assured that their offerings will certainly contribute to a less-cash society.

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.

Google Wallet roll out.... without Google Bucks

It's about five years ago that I discovered, by accident and curiosity, that Google Payments Limited had applied for an e-money license at the FSA. Ever since, people have been wondering how Google would enter the payment space. Would they offer a wallet with virtual cards or would they issue their own new virtual worldwide currency (googles, googlets or gees)?

In good tradition, Google started out doing field tests with the wallet (which would sit in the mobile phone) and announced this in May 2011. The wallet was to contain your credit-card cards as well as a google-pre-paid card. And payment was possible with Paypass while the wallet would also facilitate the savings of loyalty-points. The card information was stored in the Secure-SIM-element in the phone and they experimented quite a bit since then.

So where do we stand now?

Well, the Google Wallet is now being rolled out and the Google development team sent out this video to further explain the wallet concept and roll-out. The most important change is that they decided to move the card-information to the cloud. This allows the Wallet to be used both via Phone and via the Web, with all your card details and important digital documents (ID's, transit pass etc) residing in a safe digital environment. So their distribution model for the application is now changing to making APIs available so that merchants and issuers can easily integrate the Wallet in their site/services.

As such, we can thus see Google moving into an integrators role, rather than a payment instrument issuer role. In fact, at some point in time, the company thought about issuing Google Bucks, according to Eric Schmidt, but abandoned the plan. The concept would consist of a “peer-to-peer” money system by which users seamlessly transfer cash to each other via a hypothetical application. However, various laws about currency and money laundering in different parts of the world made this too complicated to realize.

For now, the peer to peer payments in the Google Wallet are no longer on the agenda. And from a historical perspective (see my other blog) I think it is a good choice. Yet.... one of the developers did mention on this subject: it's impossible for now, but stay tuned for some announcements in the future.

So, are we still in for a surprise here?

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.

Finnius conference on e-money

As some of you may know, I have had quite an interest in electronic money in the Netherlands in the past. And yesterday I had the pleasure of visiting the conference on e-money by Finnius. The conference was concise and clear with talks by Andries Doets on the regulation and a speech by the supervisor (DNB: De Nederlandsche Bank). This provided a good overview of rules, exemptions and clarified the role of DNB.

After the beautiful and energizing musical break (Duo Sottovoce) Casper Riekerk moderated a discussion that focussed on business models and the difference between paper-based and digital electronic money. The panel and audience agreed that the margins in the e-money/payments business are quite slim, certainly given the rule that the float cannot be used for other purposes (which happened when giftcards where still paper-based).

At the end, following a suggestion by DNB, the thought of setting up a representative organisation for e-money issuers in the Netherlands came up once again. So perhaps we will see a new organisation emerging as a result of this conference. Time will tell.

Personally I couldn't help thinking that quite a lot of effort by the supervisor is spent on values and amounts of e-money that are irrelevant, compared to the busloads of similar-type payments via mobile phones and Ov-chipcard (exempted from regulation). It is clear that both market and supervisors have digested and codified this exemption into their rules/system. So no one questions it (if anyone still remembers the history of this exemption).

But it remains a paradox for someone like me, who witnessed and joined the discussions on e-money dating from the rise of e-cash and Mondex. It was in particular the digital forms of pre-paid e-money that raised the awareness and need for legislation on e-money. Everyone got a head-ache when they thought of a situation in which money (and goods) were digital. Because this would create a situation in which central banks in the end will not know any more how much money is in circulation. And consumers might see their digital cash disappear if it was not secured properly.

So the headache lead to the legislation on e-money. And when introduced, supervisors decided to create an exemption for precisely that form of money that made us develop the legislation in the first place.

As such I think the whole e-money debate is quite an interesting casebook example of the Politics of the European Union.

History (of e-money) repeats itself... central bank alert on crowd-funding.... and (still) missing the real issues in the market..

One of the major challenges for central banks and supervisors is to appreciate new technologies and to decide their policy stance on the subject matter. Currently we are witnessing a case of 'history repeats itself' here in the Netherlands, as the central bank, DNB, has informed the public that it will look out for instances of crowd-sourcing. They mean the situation that a group of people pre-pays the production of a book (tenpages.com), film or anything else. And suggest that this is the equiuvalent of attracting deposits (a bank activity), which therefore warrants a closer look by the supervisor.

I dare to disagree and would suggest DNB to reflect on their policy stance and take a closer look in the mirror and in their own recent history (of electronic money). When the first instances of e-money occured (on chipcards: Mondex and in software: e-cash), central banks were keen to quickly state that this was needed to be subject to bank supervision. This resulted in a clash between supervisors and European Commission (that wanted to stimulate competition and that viewed the vision of supervisors as protective). With the Electronic Money directive as the result, that outlined that issuers of e-money (regardless of technology) needed to be subject to supervision.

Since then, we have seen a number of initiatives with respect to e-money, varying from Paypal (now a bank) to Wally, global payways and what have you. Here in the Netherlands (just as in the UK) a separate organisation was set up to represent those issuers of e-money: http://www.11a2.nl. And whoever takes the time to read through their website will find out that the central bank itself was inconsistent in their supervisory approach. In principle, anyone issuing electronic money, was to be subject to bank supervision. So that would also apply to the digital funds, used for mobile phones and digital mobile services. Yet, in response to the lobby of mobile operators, DNB (and later even the European Commission) created an unequality in the market by saying... e-money should be supervised, unless it's e-money for mobile operators. And some more years down the road, they also used tiny holes in the E-money directive to not supervise the Dutch public transport company Translink, with all the requirements of the e-money directive.

Let's review the developments and arguments once again. The main issue here is: who's paying for what? Is the transaction that I am doing a prepayment for a specific good, or is it the purchase of a digital amount of money (or coins, or beenz or what have you) with which I can purchase a wider variety of goods, even goods from someone else than the person to whom I made the prepayment. In the case of crowd-sourcing on tenpages.com, it is clear that the customer does not prepay for any book, but for a specific book. So to call this deposit taking would be silly and no banking laws should apply. Yet, the central bank/supervisor seriously wants to delve into this issue, by going for crowd-sourcing.

Now let's take a look at the situation that I purchase a digital fund: to use on the mobile phone or in public transport. It looks to me that this is so close to money, that you would want the supervisor to take a good look at it. And since 2000, there have been numerous incidents in the Netherlands with a whole range of providers and users of these digital tokens. Over and again, the mobile operators have developed codes of conduct, rules, call centre's and what have you, to make sure that the unasked  provision of paid sms's (reverse billing) would not lead to phone users who suddenly see their phone-money disappear. While the level of annoyance has changed over time, the essential bottom line is that if treated as regular payment mechanisms under the current European Payment Legislation (Payment Services Directive) these services could not exist in this form any more. And a similar thing holds true for the transport company translink. They made a technical system in which the security is insufficiently guaranteed and money is deducted too easily from consumer accounts and cards. So there is actually a real case for concern by the central bank/supervisor. Yet, the supervisor sticks to the old adagium that these do not fall within the definitions and are thus not subject to supervision.

If we further evaluate the role of De Nederlandsche Bank, as a supervisor, we can see they failed big time over the last years, as they didn't succeed in properly monitoring DSB Bank, De Hoop and Icesave (all banks failed). For that reason, parliament has been digging into the topic and the Ministry of Finance and DNB have promised it will organise a change in culture, a change in approach. At the core of this change, we should expect a more self-critical approach in which policy stances are not developed in line with the managerial group-think or in response to lobbying by important stakeholders in the market, but as a result of an assessment of what is at stake essentially; trust in payment systems and any entity providing payments or banking services to the public.

While DNB tries to convince the public over and again that times have now changed and they have reinvented themselves with a new organisational culture, their unchanged policy stance on e-money issuers demonstrates that this is far from true. And although none of the exempted e-money issuers have caused a failure, big enough to worry parliament and society, one might view the current troubles at the OV-chipkaart company, as another demonstration of the failure of the current (failing) supervisory approach by DNB. It is stunning to see that DNB seeks to further investigate legally irrelevant crumbs of crowd-sourcing while missing the leaking boat of OV-Chipkaart/Translink company that is in everyones face nowadays and while ignoring the undermining spinoff that is created by phone companies that handle money (and customer complaints) with a different quality level than justified.

So this leaves us with a public opinion, parliament and Ministry of Finance believing things are now proceeding nicely and on track with DNB as a re-invented, more focused and less obedient supervisor, with the evidence of the opposite being ignored. It is interesting to see when this will further evolve. My guess is that eventually we will see a white washing scam where an actual terrorist attack appears to have been funded by money which has been transferred by mobile phone services (using anonymous top-up cards in country A to demand empty 'premium services' from country B). Yet, by that time, there will be no one around who is politically relevant today, so that means our future politicians can then blame the former politicians, ministries of finance, and supervisors.

And the world keeps on spinning.

Rabobank will start with mobile payments via Ideal

See the press release here and discover that Rabobank will use its mobile banking app also for Ideal. It is announcing that this is an experiment, to be the first Dutch bank to find out how this works. This going-for-it-alone-approach might raise a few eyebrows with other banks and Currence though (scheme owner of Ideal). Yet, it is only an experiment, so other banks may benefit from skipping part of the learning curve...