Payment instruments and network effects: why Americans still write checks

Next week, Gottfried Leibbrand will defend his dissertation Payment instruments and network effects: Adoption, harmonization and succession of network technologies accross countries in Maastricht. His dissertation fits nicely in the research tradition of the Maastricht Economic Research Institute on Innovation and Technology. And the summary for layment, Why Americans still write checks, fits similarly in the McKinsey tradition to provide well written executive summaries.



The dissertation contains two models to further explore and explain network effects in payments and the stepwise innovation and adoption of technology. So after reading the dissertation one understands why:

- payment systems are national (as a result of the underlying transaction patterns),

- one single technology standard may not be the only equilibrium outcome on a national or European level,

- choices for technological innovation and adoption build upon previous choices and existing infrastructures,

- stepwise innovation is the way forward rather than paradigm shifts and payment systems that are built from scratch.



The theory is applied to a number of cases and thus allows testing and discussion on the basis of empirical data. And although some theoretic deliberations on network effects do actually reach this more detailed level, the adapted models of Leibbrandt provide more insight into the subject matter and are more close to reality in the payments industry.



In sum, the dissertation makes particularly good reading for public policy makers in the payment industry as they might want to reconsider the popular one-single-standard idea (and some more issues...). Other than that, we can rest assured that the content of the work and its paradoxical copyright notice (in which copying, pasting, disseminating of the work is encouraged) will contribute to its visibility to both practicioners and academics.

The Myth of Systemic Risk

Ian Grigg points to these remarks made at the St. Louis Banking Conference by Professor George Kaufman:

I also come from the perspective that "systemic risk" in banking is not a threat and has not been a great danger in world history. It is a scare term, much like the use of the word "fire" in a crowded theater. Systemic risk is used shamelessly by regulators to justify their own actions, and by novelists and movie script writers to provide plots for horror stories. This is my bottom line, and if I had two hours I could go on and give you all the evidence.

Dutch flavour of EU directives....

For reasons unknown to me, Dutch government still wants to add a Dutch sauce to EU-regulation when implementing these. Yesterday, two lawyers identified this same behaviour of government in the Financieel Dagblad (Onno Brouwer, Kees Schillemans). They noticed that the implementation regime of Regulation 1/2003 de facto withdraws previous exemptions as issued by the competition authority. In the retail payment sector this would mean that the exemption rulings for interchange fee acceptgiro and atm-usage may be immediately up for legal testing.



Apart from their observation, the Regulation 1/2003 holds promises for more competion in local markets. Market players may now take one another to court if they observe collusion/kartels. Interesting enough, this change has not received a lot of attention in the media.

Laws or self-regulation?

This SEO research report is about the cost and benefits of regulation. It concludes:

1-the cost of regulation are lower for self-regulation when compared to using laws and legal rules,

2-at the moment, the possibilities of self-regulation have not been explored/used to their fullest potential. Common choices for self-fegulation now often lead to a certification structure (with a transfer of compliance costs to the private sector),

3-in practice, there is still hardly a systematic discussion of the possible regulatory options: laws/rules vs self-regulation.

Undesirable research...?

While browsing I found an interesting speech (oratie: Dutch download) that discusses the tensions that may arise when research for policy-makers does not provide the results that are desirable from a policy perspective. To resolve some of the problems that may arise, the author (Carl Koopmans) suggests that all research that has been commissioned by government, will be published actively on the web.



He provides (and illustrates) five arguments:

1-improved public discussions, deliberations and decision making due to the availablity of all information,

2-improved research, due to the scrutiny of the results by peer-researchers and the reputation effects of the publication,

3-citizens pay taxes for this research so they deserve to see the results of what has been paid for with their money,

4-improved confidence in government and elimination of the element of secrecy that now exists if government refuse to publish reports,

5-keeping it secret is impossible; one slip of the tongue/pen by the involved researchers/researched will lead to further questions about the nature of the research, its contents etc. And to the questions why the results are kept secret, which is the content of the reports etc..

Cost / income ratio flawed...?

As this weblog evolves into a literature/article linkdump, I hereby present some interesting material. First of all a report by Peter Welch of BankEcon (download summary) that discusses if the cost/income ratio is really useful for determination of a bank performance.

Pre-paid funds of mobile operators are e-money (when used to pay others) !

In July 2000 (!), when I was still working as a senior policy analyst at the Dutch central bank, I wrote an article on the relevance of e-money rules for mobile operators, concluding:

The adapted infrastructures and billing engines from mobile phone network operators may fall under the future local legal implementation of the EMI-directive and (for the billing part of it) under local law with respect to payment instrument. It appears to be useful, therefore, for mobile phone operators and regulators to further consider and discuss the potential legal consequences of the current technical developments.



Regulators may benefit from this discussion and be better able to decide on the best local implementation of the EMI-directive. The mobile phone network operators may benefit by better understanding the supervisory consequences of some of the technical choices to be made.



Today, May 10, 2004 (more than 2 years after the obliged implementation date for the emi-directive), the European Commission releases a consultation paper on the treatment of mobile operators under the E-money Directive. Their conclusion is similar to mine:

According to Member States experts and the Commission services, pre-paid mobile phone cards are likely to be a form of electronic money when they are used to buy and pay third party products or services.



Assuming that it will take some 2-4 years to sort this stuff out, we will eventually have a level playing field for e-money players in 2008.



Better late than never ... (?)

What is play and what is reality in money and payments?

Ron Onrust sent me this link to an article that describes how stuff in multi-player on-line games may get a real-world value. And how that real-world value might be traded by using Paypal as a payment mechanism. But it also shows a potential weakness in Paypal: multiple accounts for single individuals, allowing the beefing up of positive feedback for accounts......

Competition authority fines Interpay and Dutch banks

As a first conclusion of the debate on the fee levels for pin-authorisation network services provided by Interpay, the NMa (Dutch competition authority) has published its findings and list of fines:

Interpay: € 30.183.000,

ABN AMRO, Rabo and ING: € 3.900.000

Fortis Bank and SNS Bank: € 1.900.000

Friesland Bank en van Lanschot: € 500.000



See also the reaction of Interpay and their additional report on the issue.

On competion law and payments

I think this weblog will evolve into a linkdump on retail payments literature:

EC Antitrust Law in Payment Card Systems.

The world's first scientifically researched/backed design parameters for e-payments

Kicking a habit is tough, especially if one has been blogging for more than two years and a unique piece of research work is on the table. So this blog is the exception to confirm the rule.



Today I've been reading a bit of research by Dennis Abrazhevich on how to design payment systems in a proper way. It is a Ph D study that is solidly scientific as well as practical. See this summary of the Ph D. The Ph D will be defended next monday in Eindhoven (also the place where Stefan Brands defended his Ph D) and I will make sure to show up.



As far as I can see, the Ph D study is the first bit of scientifically screened research on user interaction in retail payments. Most work in this domain remains limited to in-house knowledge of banks and card-organisations which is not scientifically checked but checked against a gut-feeling: 'fitness for use' in combination with some user testing. And more often than not, legacy systems are the constraints that limit the actual product features.



In the case of this study, the actual validation of design criteria occured with a system called: Payphone. The system was set up and tested by Postbank and Comsys, companies that are both open to new developments, learning and innovation and perhaps therefore not afraid of the results of scientific testing of applications. While it is impossible to summarize the results the research demonstrates that there may be a lot of trust to be wun by informing users better on the security measures and security policies.



As I understand it, the author is (still) on the look-out for assignments or regular jobs in his specialty. Given the fact that Dennis has also reviewed the user interface of e-wallets and websites, I can only assume that his Ph D marks the beginning of a fruitful career.

April's fool ?

I guess today is a good day to announce that I will stop this weblog and start working for the Dutch Bankers Association... ;-)

Last days....

Today is the day of last days. The last day of this quarter (with its inevitable administrative burdens, tax forms). It's also the last day that the Postbank m-phone solution (in cooperation with Telfort) will be operational. And my goal is to be actually the very last customer that has made a transaction with the system.



Today also marks the end of an era (1992-2004) in which drs. J. Koning was the executive director of De Nederlandsche Bank NV, responsible for payment systems and retail payments. Under his guidance the central bank stepped into the time of the Euro; new systems (TARGET) were built and the bank started supervising electronic money in all its forms. Also DNB reported on the structure of retail payments (advising a better governance structure for Interpay) and further trimmed down the work force in cash handling.

Contopronto sells its technology to Saudi Arabian Company Zafa

See this press release. But do visit Contopronto's website as well. It turns out that they no longer accept customers and that the usage domain is restricted to Norwegian mobile phones.



What I think has happened here is that Contopronto has wrongly assumed that its Norwegian license as an e-money issuer would allow the use in all EU-countries. Having boasted about this in the media, the bank supervisor may now have informed Contopronto about the proper scope of their license (local at first, international only after notification of other bank supervisors in Europe).

First World Retail Banking Report demonstrates local banking playing field

Yesterday the first World Retail Banking Report was presented during an afternoon session in the hotel Okura. The report was a collective effort of the European Financial Management & Marketing Association and Cap Gemini Ernst & Young. Todays Financieele Dagblad reports on the meeting to highlight the following:

- banking is still a local business in EU-countries, with considerable cost for banking/payments,

- each country knows a delicate balance between banking sector, merchants, consumers and regulators,

- pricing information is widely available and consistent on a loca scale but international comparisons are quite hard.



The interesting thing is that the study also indicates that this local situation will not quickly change. If so, it would most likely be large players such as ING that may do so by introducing new and cheaper services upon entering different markets. Hans Verkoren, responsible for ING Direct is quoted to have said that ING might -given the 9,1 million customers of ING Direct- consider offering payment facilities as well.



In fact such a choice appears imminent. All over on TV we can now see ads for ING Cards. It would appear quite sensible that this infrastucture will also be used to enter other markets.

New release of Interpay Internet cash register for banks...

Interpay E-commerce services provide the back-office technology for some Internet cash registers of banks (TWYP, ABN AMRO, BNG). And as of tomorrow a newer version of its software will eventually allow end users more options such as:

- support for Mastercard Securecode and Verified by Visa,

- layered login (allowing merchants to use more than a single username/password and create their own sub-users/profiles for the internal treasurer, the customer care employee etc),

- more detailed reporting of transactions, more language options,

- etc.



Interpays technology is now in use by banks such as TWYP, ABN AMRO, BNG. Rabobank however has built its proprietary Internet cash register. And there are of course other providers such Bibit, Ogone, Triple Deal, Global Collect etc. Their offerings are sometimes based on using Interpays back-office or on the use of independent international acquiring agents.



The respective websites of these players are quite different in terms of transparancy on features/fees etc. For those who want to do a quick tour of the webinfo on cash registers and payment service providers:

- Abn Amro,

- Bank Nederlandse Gemeenten,

- The Way You Pay (ING Bank),

- Rabobank,

- Bibit,

- Global Collect,

- Triple Deal,

- Ogone,

- Multipay,

- Netgiro Nederland,

- ontwikkelaar Chess met PURE transactie techniek,

- Buckaroo,

- Virtual XS.

E-gold scams....

I've just received another 'brilliant' e-gold scam. Behind the href part of the html-mail (asking me to update my e-gold account data) I did not see the e-gold.com website but this other site: http://finsinox.biz/. The scam uses the @-problem in old Explorer versions (that does not show the proper e-mail adres of the website). And, interestingly, the website asks consumers explicitly to check certificates. Also the link to e-gold examiner (on the normal website an explanation of how much real gold backs the e-gold) is now this broken link (http://ruweb.net/?page=suspended) to an obscure russian server.



So would really no one fall for this? Imagine that only 1 in a million users in the Netherlands would fall for this one there will be about 3 or 4 account data collected.



Update: only 5 mails later in the same mailbox another try. This time the link is: http://fun4girls.risp.biz/cp/scripts/guestbook-doc/.ego/acct/acct.html.

Payments and Settlements News, nr 4 is out

The fourth issue of Payments and Settlements News, the newsletter of the European Central Bank on retail electronic payment is now out. It contains references to regulatory developments in the UK, Australia and Europe as well as to card fraud figures in the UK and a working paper of the IMF on e-money.



On the Epso website there is also a discussion on on-line payment instruments by Roland Uittenbogaard of the Dutch central bank, In it I particularly like the following obvservation:

Presumably, there will never be a single standard payment product satisfying all payment needs, just as there currently are several payment products alongside each other, satisfying different needs. Transactions involving different products and services go hand in hand with different ways of paying for them.



And the more diplomatic central-bankerish statement:

The manner in which the [electronic money, SL] Directive is to be implemented has not fully crystallised across Europe (or indeed in the Netherlands).

Dutch most satisifed with their bank (but don't feel it that way...)

Todays Financieele Dagblad reports that a comparative study by KPMG shows that of all European citizens, the Dutch are most satisfied with their banks (90 %, compared to a European average of 57 %). KPMG's Stef Kroon observes a discrepancy between this outcome, the efficient Dutch payment infrastructure and the public perception in the Netherlands that banks are expensive.



I think the Dutch people may be sitting too much on the penny. KPMG's research also shows that of all nationalities the Dutch are most negative about the euro (73 % says that it has not been beneficial). So my hypothesis is that the Dutch are overly sensitive to direct pricing. As a result the comparatively cheap banking sector appears to be too expensive and the Euro is viewed as a failure.

Paypal coming to the Netherlands..?

Planet Multimedia reports that Paypal will soon start operating in the Netherlands as a part of an eBay offensive to challenge market leader: Marktplaats.nl

MP demand free and transparent payment services

A good old Dutch saying says: only the sun rises for free. But some Dutch MP's feel that a set of basic payment services should always be provided free of charge. This is reflected in their quesitons to the Minister of Finance. The Ministers reply (in Dutch) essentially states that this goal is reached through a convenant with the banking sector. And for the rest, the economic principles and self-regulation ensure transparency and a proper level of fees.

Eastern Europe source of false Euro-notes

In reply to questions from Dutch MP's the Minister of Finance explains that indeed the number of false Euros is increasing rapidly. The source is often Eastern Europe (Bulgaria, Litouwen) but a lot of police effort is spent in preventing/detecting and arresting the fraudsters.