Perspectives on Ca-Libra # 1. Getting rid of three smokescreens

This week the world has witnessed the announcement by Facebook of Calibra, a digital currency wallet and company. The wallet holds Libra, a virtual currency, with the idea to be used globally. Its distribution and use will be further promoted, organised and executed via an association of partners, called the Libra-association. The information pack (download here) also outlines more technical details on programming languages, future plans and committment to regulatory compliance.

Immediately thereafter, a storm of analysis emerged in order to understand the initiative. Quite some politicians and regulators are eager to quickly respond and that is completely understandable.

Facebook is not just the grocery shop around the corner, dabbling about with some new technology. It has allocated significant resources to the development of Libra. With a customer base of at least 2 billion (close to 25% of the worlds population) it is an entity that in itself acts as a world-wide platform and does not need others to achieve a network effect.

Perspectives as the approach for this series of blogs
As the Libra-initiative can be viewed from many angles, I plan to write this series of blogs and label them as perspectives. It's always helpful to view things from a couple of angles and that is precisely what I intend to do. This means we will be looking into definitions, regulatory regimes, business case and previous historical analogies. And as we go along I will take stock of developments and responses.

As you may notice, I will be judging Facebook by a very high standard. The reason for that is simple. If an organisation has so many resources available, I expect them to come up with careful, consistent and accurate thinking, wording and technology. And as a sneak preview: this is not what we got over the last week.

While the maturity of the exercise may look impressive to some observers, the huge inconsistencies and home-brewed interpretations of what a blockchain is cannot be a coincidence. We can see an announcement that Calibra will become available in 2020, while the state of thinking mid 2019 is 'early in the process'. This is accompanied by a PR-smokescreen on cryptocurrencies, that doesn't help our understanding the effort.

So the very first challenge that exists, when discussing the Ca-Libra virtual currency initiative, is to separate fact from fiction and to be precise in terminology. That is why this first blog seeks to get rid of the three biggest smokescreens that we were facing this week.

Smokescreen #1: libra association is not an ecosytem but a payment association with added functionalities
If we start with the source of payments revenue for Facebook, this originally all boiled down to payments related to Flash games (in 2015). But technical problems in Flash would hit their revenue. So they quickly understood the need to be more flexible and to be able to operate different business propositions and solutions. Therefore they moved towards licenses in the US (cash via messenger) and in Europe. They also moved the US e-cash system to France and UK, but announced 2 months ago that they would drop it in Europe per June 15, 2019.

And now, per June 18, 2019 Facebook essentially announce to re-up their game, but not with electronic euro's but with a self-invented world currency, backed by other currencies and liquid financial instruments. To blow away the first smokescreen, let's analyse the difference between the old Facebook e-cash or e-money with fiat currencies and the new Facebook libra, as distributed by Libra Association.

What we can see is that Facebook seeks to move the fiat-currency of its e-money system out of its direct control and responsibility as an issuer. Facebook Payments Inc is currenlty the entity that is responsible and guards all the relevant rules with respect to working with the e-currency. But in the new construct Facebook Calibra is merely one validator that can use the Libra-system under open source rules. So we see the fiat-e-currency companies of Facebook stepping aside and a new Libra association entering the playing field. At the same time, the technology shifts from in-house proprietary systems to an open-source codebase in the hands of no one in particular.

Top organisation	Facebook Inc	Facebook Inc
Type of asset	Virtual Currency	E-money
Denomination	Libra (self-invented)	Pound, Dollar
Issuer / Currency creation	Libra ‘association’	Facebook Ireland
Nature of issuing	No direct issuance to customers. Direct issuance to validators.	Direct issuance to customers Direct redemption at issuer
Secondary market	Secondary/tertiary market with reselling - disbursement via exchanges/other institutions	No reselling of e-money.
Fee structure for Reselling	Unknown, but most likely the price for validators is unequal to that for exchanges or customers.	Issuance at par and redemption Of full amount minus some cost
Issuing without Customer demand	Currency base may change without actual demand of customers.	Issuance as part of buy-transaction of the customer
Reserve pool	100% reserve in basket of currencies	100 % reserve in Denominated fiat currency
Technology	Open Source community	Proprietary
Control and use of technology	Unknown contractual arrangements and safeguards for entities in the value chain	All usage governed by contract with issuer and financial law

Bringing the currency to the public or ducking the issuance responsibilities?
Of course one could frame the above shift of roles as bringing a currency to the public. Facebook is however dumping its core-responsibilities with respect to shaping and operating a currency-system and moving a lot of activities to an ill-equipped new Libra association with no track record at all.

While Calibra states that it will comply with all relevant legislation, we can see that the actual information of the Libra Association in this respect is pretty thin. They issue a currency-like digital token/record but do not explain which legal regimes would apply. Also their actual claim as whether they are a not-for-profit organisation does not align fully with this twitter thread outlines that it is a regular company with wider statutes.

If it looks/talks/qucks like a payments scheme, it is a ...?
In payment terms - which is what Facebook says to be aiming for - the Libra Association is essentially a payment scheme. Such a scheme defines the rules for an ecosystem that wishes to transact electronically. Examples are Visa and Mastercard, organisations that need to abide with a lot of rules in order to avoid them becoming a place of illegal cartel-agreements on price and illegitimate contract terms to end users.

With payment schemes we have huge and long discussions and deliberations of price levels. There is the obligation to ensure that there is no obligation to buy processing power from the scheme itself. There are policy views and obligations that schemes should be interoperable and open. And then there is a mountain of rules that specifies how to use the brand and which technical criteria must be complied with in order to be allowed to connect to the system.We find very little of this in the current papers on the association.

What makes this payment scheme special, a payment-scheme-plus ?
What sets Libra apart from Visa and Mastercard is that the association is effectively an issuer of the currency. This means a blurring of operational roles and scheme responsibilities, which is generally considered as a bad practice in governance terms. But what is most striking is that the membership rules are not geared towards controlling/monitoring and creating a safe and sound currency. We find no mention of specific prudential licenses or governance/quality certifications required for different roles under the scheme and as a member (or shareholder).

The only thing we read is: we seek to expand, we want to incentivise the use of the token and for this we don't want the small players in the market. We aim for the big players with market power. We separate the wholesale participants from the retail participants (allowing for price upticks). And then - the devil is in the details - the customer pricing format is based on a FOMO-principle (do you want your transaction processed: please throw in some more gas).

I am curious what reasoning Facebook and its founding members have had in this respect. The whole association setup is ostensibly aimed at market dominance, without proper governance safeguards and without any guarantees as to operational security and safety and soundness of the system. If I were a competition regulator I would jump at the opportunity to wait for the founders to sign the participation agreement and deliver a letter to their doorstep, next day, to start investigating the market abuse that might be at play here.

Governance claims and reality: a scheme is a supertanker without effective governance
I have been reading all the statements on the public structure of the association with a lot of amusement. Facebook is claiming that it will bring the intellectual property into the public domain and of course all the members of the association have a voice. So this seems to be well arranged with room for consultation, discussion and changing course.

The reality is completely different, as everybody in the banking sector knows. There is sufficient experience with clearing houses and associations (even with a relatively small number of shareholders) that are unable to essentially change course, once set up. Large associations like EPC, Visa, Mastercard, are effectively orphans without parents. Stakeholders are always irritated about the fact that these associations set their own course and associations always claim their shareholders have no vision. Bottom line: if you transfer your Libra-currency design into this domain, it is quite likely to be persistent. So don't expect any radical changes after this one is live; it will be gradual evolution from here onwards.

Not just a scheme for the payment instrument, but the unit of account (and a security as well)
There is another difference between Libra and Mastercard and Visa that I would like to highlight. The regular payment schemes seek to transact efficiently, taking existing currencies/structures as a basis. But this scheme introduces a new currency itself and regulates this currency via the management of reserve assets. It demonstrates that the aim of Facebook is to design its own Facebook buck, push it into the public domain and then profit from the benefits of having their own unit of account in place, while hiding behind the members and the open source philosophy when things go wrong.

A specific element in the scheme is that the unit of account is backed by a basket of currencies and financial instruments. Effectively this means that if you buy one Libra, you buy a couple of foreign currencies. Or put differently: you participate in an open ended money market / investment fund. And you use the digital representation of your participation in this fund as a means of payment.

This is a bit of double work as this means the association and the scheme are not just subject to payments legislation but also to investments/securities legislation. But it is legally possible: the payment would legally not be a discharge of obligations via a financial payment, but via a payment in kind (currency basket).

So what do we see here?

The Libra association is a mere manager of the governance and operational arrangements and activities that come with using the virtual currency Libra and participating in the Libra scheme. This Libra scheme is a private and commercial arrangement which:
- defines a unit of account for a new virtual currency: the Libra,
- defines the asset mix that backs one currency unit,
- lays out the distribution and management rules of the currency units and reserve funds,
- lays out commercial rules and does a private placement to further promote the use of the Libra by giving them away (for free or at a discount).

The Libra association itself will be steering future technical development and is charged with the project goal to move the whole infrastructure towards a permissionless setup. This is completely impossible (as these associations act with oil-tanker dynamics) but that brings us to the next smokescreen.

Smokescreen #2: Libra is not a blockchain, not a cryptocurrency but a digital virtual currency /financial instrument
It was fascinating to see that the carefully crafted and prepared introduction of the Libra sought to position it as blockchain and as a cryptocurrency. This creates a lot of noise. Also, the use of similar words for different concepts and organisations is confusing.

We should distinguish between:
1- Calibra, the organisation, a 100 % subsidiary of Facebook, acting as a validator node,
2- Calibra, the branded digital wallet developed by Calibra to carry the Libra virtual currency,
3- Libra, the digital currency that will be in the Calibra wallet
4- Libra, the reserve pool of assets that backs the digital currency,
5- Libra Core, the Network or 'blockchain' that forms the core operating technology for clients and validators,
6- Move, the programming language developed for the Libra Network.
7- Libra, the association governing, promoting and executing the virtual currency system,
8- Libra members, big commercial players that may join the Libra association, provided that they are a validator.

What struck me in the communication is the flagrant re-definitioning by Facebook of the concepts blockchain and cryptocurrency. Facebook really wants to be seen as doing some cryptocurrency stuff. But they don't. Just for fun I will be comparing the Facebook FAQ with the wisdom of the Wiki-crowd.

Libra is not a blockchain
Facebook succeeds in not mentioning the facts that blockchains are, by definition and terminology, a chain of blocks, linked together. Wiki has it right.

What is a cryptocurrency exactly: native currency of an open blockchain
Wiki states, that the decentralized control of cryptocurrencies works through distributed ledger technologies, typically a blockchain. Personally I would not have mentioned those ledgers as the blockchain is not so much a ledger as a journal (log roll of transaction entries). And apps are creating the ledger feeling for blockchains. But let's look at the wording in the image.

The wording of Facebook is interesting. It speaks of using cryptocurrency due to the use of strong crypto. This leaves out the issue that cryptocurrencies may be native to blockchains (as in chains of blocks). And then Facebook moves on to cryptocurrencies being built on blockchain technologies.

Which is true of course, but if I use all the parts of an air plane to build a firmly grounded restaurant, this doesn't mean that my restaurant is still an operational air plane. It is built on air plane technology, but the wording matters. Facebook puts up a smoke screen here to position itself in the blockchain community.

Libra is not a cryptocurrency
The funniest part of the Facebook FAQ was the mere statement that the Libra is a new cryptocurrency designed to have a stable and reliable value. Coming from a perspective where cryptocurrencies are inherent elements of open, truly decentralised permissionless blockchains, this is an interesting statement. It demonstrates that Facebook wishes to be a cryptocurrency but it isn't.

The text above also shows that Facebook has its eyes on the stablecoins that are around. These stablecoin are, in my view, privately issued currencies, with the goal of a fiat peg. The stable-'coin' is used a lot in the cryptoworld to facilitate fiat/crypto exchanges in times when the financial system is not online. The fact that this currency is used a lot in the cryptoworld, does however not make it a cryptocurrency in the terms of an inherent currency of an open permissionless blockchain.

Libra, what is it then, in regulatory terms?
My conclusion, after quite some pondering and tweeting is the following.

Libra is a privately issued and distributed digital  and virtual ‘currency’, that is intended to function as a means of payment. It is not a true currency because its actual composition/counter value is a basket of fiat-currencies and financial instruments. It is not e-money as the Libra is not ‘monetary value’. The digital value qualifies as a financial instrument (a mini-participation in an open ended investment fund) and is used in an open source payment instrument, to be used for payment and acquiring. Both payments and securities legislation apply, as well as the relevant competition and consumer protection rules. 

The Libra association is the scheme owner and scheme operator of the Libra virtual currency. This currency/investment can only be bought directly by members of the Libra association. Other entities or customers must revert to second tier players, exchanges or peer-2-peer applications. Technical development of applications is encouraged and rules to secure the application by contract or licensing seem to be absent.

Due to the blending of scheme and operations, the Libra association cannot really be viewed as the beginning of a proper payment scheme. Functionality, pricing and membership rules make Libra and the Libra association an easy target for consumer/data protection and competition supervisors, bank supervisors and securities supervisors.

Smokescreen #3: Libra is not a charity exercise that seeks to operate a public good but a commercial enterprise
A huge amount of effort has gone into convincing the public this week that Libra is all about helping the rest of the world. Getting more inclusive finance. Making payments faster, easier and such. It is striking that these statements mirror the claims that originally come from the Bitcoin community or from the Fintech community.

Of course those claims strike a chord. People may well be fed up with their banks and the perception of banks with slow procedures and expensive fees for foreign payments are an easy target for PR-people who want to position their initiative in a friendly way to the public. Who doesn't want to take on the banks and improve the world.

Commercially, the thinking of Facebook is most likely to be that it needs to counter the We-chat Pay dangers and all other Fintech movements that lead to easy in-app payments. Payments will increasingly be an afterthought and harvesting the data in those payments will allow for even higher ad revenues, as Facebook will see what works and what doesn't. Interestingly Facebook did not increase the speed of its current developments; it chose to move up the value chain, towards setting up its own currency and hoping that it will work as a unit of account (and may stay in the system for long).

Of course, the move by Facebook is a big signal. But we must note that there are still also other players that could make the same move. Which would lead to some form of a duopoly (as with Mastercard and Visa) and the need to agree on interoperability or on open access to infrastructures of the big techs involved. I did not come across this notion a lot, so far.

The public good narrative: unbelievable coming from Facebook
What struck me most, coming from Facebook as a centralised company that is not interested in respecting democracies and laws written by those democracies, is the sketch of opportunities in the White Paper. And do have a look at the phrasing on public good.

Given that by now I hope to have convinced you that the design of the Libra association and its constituency is far below the usual standards to be expected from payment schemes, you can imagine that I was unable to reconcile these laudable beliefs with the actual proposition.

If you truly wish to create a new public good, a new worldwide currency, it is not impossible to deliver this with private sector entities. There is a whole range of public policy theories (delivery of universal services or service of general interest) that can help out here. But putting the richest, biggest enterprises of the world in one room, to distribute a world currency/investment proposition without proper safeguards or recognition and qualification of the activities of the issuing association is not the way I would go about.

Facebook cloaking its plans in cryptoterms,but why? 
Let's face it. This whole complex open source, cryptocurrency story that Facebook has published is not necessary. If Facebook Payments Inc or Facebook Ireland wishes to change its currency mechanism towards a different setup it could do so itself. Why is there a need to involve other stakeholders with a trendy and hip storyboard on decentralisation, blockchains, cryptocurrencies and such?

It can't be a money issue. Facebook has sufficient resources to fund the whole exercise itself. And the quality of the exercise could then convince other commercial partners to join. So why the need to step out of its digital currency issuing role itself?

To me it is pretty clear that Facebook seeks to move up in our lives. Doing our financial business is not enough. It is all about entering our mind at a deep level. At the fiat currency level. We should think prices in terms of Libra, not in terms of fiat currency. And there is a good power reason for it. Because as long as Facebook uses digital fiat currencies it can be under the rule of the government that issues it. Now, by having a basket of currencies, Facebook can kick out currencies/countries if need be. State regulators and supervisors lose their power.

In addition, Facebook chooses to limit its own role and hide behind am Swiss association, to cover the fact that they don't want to take the responsibilities that come with issuing a worldwide association. They are suckering/forcing partners into joining this programme, without alerting them to the obvious violations of competition rules that may arise. They leave out all mentions of safeguards and contractual arrangements that can aid in ensuring operational integrity for this worldwide currency. Rather they throw the technology in the public domain, knowing well that this means that it's use cannot be fully controlled.

It is no surprise why politicians and regulators were keen to act. Their immediate response was that this was a further extension of an a-moral company that stops at nothing. As Maxine Walters outlined in the US, when asking Facebook to stop further development:

Reversing the statements to see what's hidden in plain sight: ruthless selfishness
As a thought exercise I was wondering. If they claim that it is a blockchain and cryptocurrency, while essentially it isn't, shouldn't we also reverse the other statements to see what is truly happening here.

I leave the result for you to ponder and thank you for bearing with me in this ultralong blog.
Up next I expect blog 2 to be about EU-definitions and legislation.

THE THREAT
As we, as Facebook are in it strictly for our own goals, we intend to hide our true intentions and motivations so we can fool the community and our partners in the ecosystem to go along. 

We believe that many more people should buy financial and identity services from our company specifically, even when doing so will come at a higher cost than the available alternatives. 

We don't believe that people have an inherent right to control the fruit of their legal labour. 

We believe that global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce for us in particular. 

We believe that people will increasingly trust centralized forms of governance. 

We believe that a global currency and financial infrastructure should not be designed and governed as a public good. 

We believe that we don't bear a final responsibility ourselves to help advance financial inclusion, support ethical actors, and continuously uphold the integrity of the ecosystem.

PS. I have changed the definition on June-24, to reflect that the currency is a mini-investment fund which is used in an app/ecosystem that would qualify as a payment instrument. Definition blog will follow.

Outsider ideas in the payment space.... seldom really new..

One week ago Rabobank Nederland announced that it might de-activate the possibility to use their debit-card outside Europe, in an effort to eliminate fraud. And today the Financieele Dagblad has an article in which it becomes clear that an entrepreneur claims that this is actually his idea and not Rabo.

He's written the idea of functional/geographic application controls (including de-activation for certain geography) down as his idea, sent it to the Rabobank. And some time later he even spoke with Rabobank. And now that he discovers that Rabobank will in practice block geographic use, he claims that Rabobank has stolen his idea. It appears that he's in full swing with preparation of a court case.

I think this court case may not be effective. Application and functional controls in the payment area are around since ages. There can be checks and limits on payments via certain channel, with certain amounts, to or from a geographic area, number of times of use, branche-codes and what have you. And we have seen these developing over the years. In a planned talk on this issue in 2004 I already mentioned the user control of these application controls.

In this particular case (blocking a geographic area for card use), it was clear ten years ago that there would come a time that EMV-debit-cards would be blocked for use in countries that hadn't fully migrated to EMV. And that the amount of fraud would essentially determine the timing.

Now I do understand the serendipity-element in this story. It must be frustrating for an outsider to think that he has found the golden idea in payments and observe one bank (that he spoke to) introducing 'his' idea. However, this was certainly not a unique idea, but an inevitable, already foreseen consequence of technology migration and fraud.

Fotograph your bill and pay it... new stuff from Denmark

With all the new apps, technology and stuff, you can just build any payment produkt you like. It appears there is a Danish bank that has developed an app that lets you photograph your bill, send it to the bank and they will transfer the money to the proper account. And for those that master the Danish language: see the instructions of the Danske bank here.

I am not entirely sure if this application will really be a killer-app that fullfills its consumers' needs. But it's interesting to see that nowadays the development burden for banks is lower than in the mainframe-days, allowing for test-trials in the field rather than extensive market research.

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.

NFC project by Dutch banks and telcos: six pack

Since some time, work is on the way between the three big banks and telco's in the Netherlands on payments with NFC. See the report in the NFC as of July and as of September. The project is named six pack by the way and time will tell if it really deserves that name...

From NFC:
The banks have agreed to put the NFC payment applications onto SIM cards the telcos will issue, so they likely have agreed to some type of model in which banks would rent space for their payment applications on the telcos' SIMs. Bol declined to discuss models. ING has been designated to speak for the rest of the partners, a bank spokeswoman said.

There are still many unanswered questions for the project, however, especially how the parties will jump-start contactless payment, since a contactless-payment infrastructure is almost nonexistent in the Netherlands. Much of the discussions among the banks and telcos the past 12 months have concerned how to get contactless terminals rolled out, NFC Times has learned. Bol said the rollout of EMV payment in the Netherlands means merchants will have newer point-of-sale terminals installed, which can more easily be upgraded to accept contactless.

But the banks and telcos still have to convince merchants to accept contactless and, according to Bol, the banks have no plans for a separate contactless-card rollout that could use the same terminals. Banks may issue contactless cards separately, however, and ABN Amro is trialing cards.

New online payments report by Innopay is out !

Always a good read, so for those not yet familiar with the online payments world, do visit the Innopay site, register and read the report on online payments.

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.

van Hove's take on the Commission flawed interchange decision

Amidst all the political noise on the interchange decision of the Commission it is good to also see that some academics still see the whole picture and have the courage to challenge politicians where it hurts. See this article by Leo van Hove and more particularly his closing remark:

So if regulating one payment instrument can have unintended repercussions on substitutes, and a prohibition of interchange fees would be a leap in the dark, what are enlightened policy makers to do? They could simply try to ensure that market forces work, and in particular that merchants cannot be locked in by card networks. To that end, retailers should be allowed to "surcharge" and pass on interchange fees to consumers. Promoting competition among card networks as well as among various payment instruments should also be high on regulators' lists. More generally, we need policy makers who have a comprehensive vision of the future of our payment system -- and who have the political courage to make cash more expensive in order to lower its cost to society.

Commission prohibits MasterCard's intra-EEA Multilateral Interchange Fees

See the press release here to read a landmark decision of the Commission. It's main argument:
The Commission concluded that MasterCard's MIF, a charge levied on each payment at a retail outlet when the payment is processed, inflated the cost of card acceptance by retailers without leading to proven efficiencies.

Well, the discussion cannot be solved and Mastercard will not be able to prove it is right. But neither can the Commission. As I pointed out in an earlier post (ultimate paper on interchange fee by Brookings Insitution). So this is a power game, a legal game and a communication game at the same time.

We should note that at present the multi-lateral fall back MIF allows lots of smaller banks and participants to the Mastercard scheme. Those players would otherwise have to negotiate individually with all issuing banks. And that would be so costly that they wouldn't join the system at all. And I fail to see why the Commission isn't able to calculate those costs of negotation (and view the efficiency benefits of having a fallback MIF). Do they now really expect all members of Mastercard to use the next 6 months to agree bilaterally on new fees...?

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.

Single market review forgets better regulation principles

This recent single market review is interesting in many ways. We can see that the Commission is selling Europe to the citizen. And bashing banks is always popular, so we can see that happening now as well. Without awaiting the results of a consultation on a report (that finds no evidence base on the exisence of a switching problem) the Commission wishes switching services to improve. In doing so it jumps to conclusions and forgets it's own better regulation principles.

This is not the best way forward. Let's relook the earlier committments of Commissioner Mccreevy on this matter:
Ladies and Gentleman, this Commission is taking a more variable, more modern approach to regulation. Strict adherence to better regulation principles. Wide consultation. Full impact assessments to ensure that initiatives are fully thought through. Legislation only where clear benefits are apparent.
And let's now proceed to see the real-life case of user mobility in the retail financial services area.

1. In the white paper on financial services, the Commission set up an expert group to discuss user mobility.
2. After one years work, the group concluded that there was no evidence base and no agreement between different stakeholders on the issue: is there a problem or not.
3. Then, the commission sent out a (coloured) consultation on the report, which already had a spin on it; assuming that there was a user mobility problem. But, the positive news still was that the Commission claimed to adhere to better regulation:
In line with Better Regulation principles and as a follow-up to the Group's work, the Commission is opening a public consultation on the Group's report. Stakeholders are invited to comment by 1 September 2007. Comments should also address the impact of the Group's recommendations and suggest any other ways to improve customer mobility in relation to bank accounts.
4. To top it of however, without awaiting the results of the consultation, without doing any impact assessment whatsoever, the single market review heads for a specific direction (asking the industry to do national things on switching services) that should normally be the result of the analysis in the impact assessment.
5. Given that the results of this expert group do not at all come in handy (as it acknowledges the need for a solid evidence base), the work of the expert group is completely left unmentioned.
6. So now the Commission moves ahead, will undoubtedly publish a press release to take things a further step forward ('inviting the industry to come up with national solutions to switching') without due consideration to the real facts and developments in the market.

Interestingly: if the analysis is that switching is not a pan European issue, it's not up to the Commission to act. Similarly, if there is no impact assessment, it's not up to the Commission to do anything else than make one. But then again, the Commission seems to think: a scare tactic always seems to work with banks, so let's see if we can move them in a direction by threatening, even if we put aside our own principles and follow gut-feeling rather than facts and due process.

Unfortunately this fits nicely into an earlier grim picture that I sketched on the true better regulation approach of the Commission. Which essentially was that it is about lipservice more than true service to the citizens of the Community.

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 ?

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.

Single Market Review.... where are the real barriers to Europe....?

In the next months, the European Commission will publish its Single Market Review. It will be a stock taking high-level assessment and announcement of plans, undoubtedly seeking to charm the citizens into Europe by taking easy one-liners and ideas. The FD reports some of the top issues (conveniently leaked by the commission):
- energy prices,
- prices for mobile phoning,
- pricing of bank services.

It is one thing to devote all this attention to price levels and the conception that by regulation those should be harmonised. But it would be another thing to acknowledge the real root cause of insufficient competition in Europe: uneven, nationally inspired implementation of Directives in combination with national supervisors that interpret their competencies in a domestic manner rather than with the European spirit and legislation in mind. This same commission knows this, as they ordered some academics to writethis contribution to the Single Market. Which contains amongst many others the observation:
The adoption and transposition into domestic law of EU Directives is a necessary but insufficient condition for the well-functioning of the Internal Market. Although the SMP and successive Internal Market strategies have been aimed at creating a level playing field by providing a set of rules to be applied across the Community territory, some provisions have lacked clarity and precision. The result is divergent, occasionally even conflicting interpretations by different Member States, which often result in the distortion of competition. Problems resulting from an uneven application and weak enforcement of EU regulation have been highlighted by many respondents of a recent public consultation carried out by the Commission on the future Single Market policy.

Suppose you have a house with a number of rooms and one central heating system and knobs on the individual radiators in the room. And you note that the temperature in the rooms is different, whereas you would prefer it to be equal in all rooms. Would it be smarter to adopt another extra regulation to align these temperatures, or would it be more intelligent to order the government officials in the individual rooms to back off from the radiator knobs and let the central heating do its work?

I hope the Single Market Review comes up with a structural suggestion other than the 'better regulation' mantra, to solve that problem. Because national sentiments and rules and interpretations of domestic regulators are at the heart of the non-existence of a real Single Market.

Two skimmers arrested in Zandvoort

Trouw outlines that 2 Roemanian skimmers of 16 years old were arested in Zandvoort, as they were carrying an old POS-terminal. The police told the machine was bugged to skim all information but hadn't been used. And the skimming appears to happen more frequently, the police state that there's not really a trend upwards. It's the regular battle against the crooks.

Meanwhile the representative organisations of retailers have a hard time explaining the press why it is that they insisted on being able to use terminals beyond their economic write-off period. Because it's those older terminals that are now hit by criminals and create a situation where the public may want to use cash rather than debit-card.

So now all the previous talks about bad things that might happen when moving magstripe card payments to EMV (including possible liability shifts), keeping terminals long on the counter and so on is sort of gone and the retailers organisations openly call upon the ministry of Justice to quickly catch all skimmers in order to maintain the trust in debit-card payments....

News on being overdraft in the Netherlands

the AD had some news on the overdraft behaviour of the Dutch. One third of the public is never in the red on its account. One third only sometimes. 17 % often and 11% always. The amount of money involved is about 8 billion euro; it's unlikely that (as the article stated) this full 8 billion wouldbe unagreed overdraft. It's more likely that a huge amount of that money is agreed lending via the payment account. But figures in this respect are scarce.

SanDisk and Philips join forces on cell phone payment via NFX

Tweakers.net had a post linking to this EETimes.com article that outlines that SanDisk and Philips join forces on cell phone payment:
Flash memory card supplier SanDisk Corp. has struck a deal with Philips Semiconductors to embed the Philips SmartMX smartcard controller chip in certain types of flash memory cards to allow them to be used for near-field communications (NFC) and in particular, when the cards are inserted in mobile phones, to pay for things.

SanDisk (Sunnyvale, Calif.) said the SmartMX would be embedded in TrustedFlash cards allowing consumers to use their phones as bus or train tickets and perform secure “contactless” payments and other contactless transactions by simply waving their phones near a contactless reader in a mass transit turnstile, checkout counters or drive-through windows.

TrustedFlash cards with SmartMX technology for NFC transactions are available to OEM customers in the microSD card format. SanDisk has started pilot programs and expects broader commercial rollout in 2007. The company did not state where the pilot programs are being run.

Fortis shareholders agree to share emission and ABN AMRO takeover

BNR Nieuwsradio reports that today the Fortis shareholders agreed to a share emission and to the ABN AMRO take-over. So ABN AMRO then published a statement that as of tomorrow there will be two competing bids on the table. One from Barclays and the other from the consortium with Banco Santander, Royal Bank of Scotland and Fortis.

And ABN AMRO also announced that it intends to hold an informative Extraordinary General Meeting of Shareholders on 20 September 2007 at 10:30 in 'de Doelen' in Rotterdam to discuss the offer by Barclays and by the Consortium of RBS, Santander and Fortis. The agenda items for that meeting will include a background to the public offers on all outstanding shares of ABN AMRO by Barclays and the Consortium, and the reasoned opinions of the Managing Board and Supervisory Board on those offers and the alternatives considered.

Quite an interesting meeting that will be.....

PS. Meanwhile today, the European Commission also cleared the merger between Barclays and ABN AMRO. So would the consortium get them to clear their initiative as well?

Interchange complaints are just a call for lower merchant fees..?

Here's an interesting article on the Javelin Strategy and Research site. It ends with the open remark that all the fuss about interchange payments, made by retailers could be merely those groups posturing for lower fees by whining about high charges for merchants and disruptive interbank agreements.

Now, if indeed all this hidden tax for merchants, interbank agreements and huge profit would be so terrible to retailers, why dont't they set up a retailer based card scheme....? Because in the end accepting payment with cards in a shop is a make or buy decision.

If you don't like the brands and fees out there, just do it better yourself. And then, when the argument comes that it would be impossible to reach all consumers with your single retailer card, or that it would become a messy world if each retailer would issue its own card: well, that would make one really understand what it is exactly that you as a retailer are paying for, when you decide to go along with bank issued cards.

Banks have solved a complex cooperation, coordination and reachability problem in the cards-space and do not just use their expertise for themselves (by limiting the interbank card usage to ATM withdrawals) but also allow their consumers/merchants the benefit of using that same card for paying in the shop. But then, when push comes to shove, all the users can do is be unhappy with the pricing (as if anything in the world would need to be provided for free).

So indeed, I would agree with the Javelin remark. It is high time for either a retailer based third card scheme in Europe or a more modest and less agressive approach by retailer lobby organisations.