Archives for November 2011

The War on Cash – the Phony War?

I’ve been attending the EFMA conference “The Future of Cash” in Frankfurt this week. As someone who has spent the majority of their working life in the cashless space, I felt somewhat an intruder at times in the conversations (though I have to say by no means unwelcome – my thanks again to my hosts). That’s because of this perception, at least in some quarters, that there is a war on cash, and that its being waged by the cashless industry. As one wag put it, I and the speaker from MasterCard, were the foxes in the hen house, and we were scaring the chickens with our mere presence! I think what was interesting that all sides, including the pure cash people went to great lengths to point out that cash was not going away any time soon, and that the war, if one did exist, was on the cost of cash, not cash itself. Yet no consensus really exists on the actual comparative costs. One speaker repeated a rumour that the European Commission sponsored study on just this had been pushed back because it was unhappy with the results. I have no insight into the truth of this, but having tried to do such an exercise previously just for electronic payments, I can attest to the complexity of undertaking such a task, where assumptions and their treatment can make significant differences to the end result. So, should we give up just because it’s difficult? No, but I do believe that this is not the only question to be addressed and indeed, nor is it the largest. One point I made in my presentation is that electronic payments types are not just productized but also owned. They had to have been to stand a chance of being adopted. That in turns a requirements for a value propositions, advertising, etc. things which are lacking for cash The key here is that cash seemingly doesn’t seem to be owned or managed. The Central Banks were very clear that they were neutral to all payment types. As we have seen in the last year, this position can create consequences that pose risks to the Central Bank in the short term and a challenge in the long term. In particular is the case of Brinks in Belgium. It’s a complicated case, as these articles show here and here , complete with diamonds being held as ransom! In short, Brinks got into financial difficulties, not least because of the competitive nature of the business in Belgium, losing $10m in 2010. For a period of time, many ATMs supplied by them ran dry simply because Brinks were unable to fill them. Brinks chose to go into bankruptcy, and the other main player, G4S stepped in and fulfilled the contract. This raises a number of issues, including standards and interoperability – each bank and ATM manufacturer often has its own standards. But the largest is a “what if”. I do not suggest that G4S are, or plan to, pull out of the market. But they are a business. If sufficient profit cannot be generated, their duty to the shareholders would be to leave the market. Which leaves the banks and the Central Bank with a huge problem. The contracts may exist with the banks, but its fundamentally a Central Bank problem. Indeed, the Central Bank would almost certainly have to step in and take-over the running of the process, something which it isn’t geared up todo nor necessarily has the competence to do so. So in being neutral, the central banks are in effect creating their own issues. Whilst regulation probably has a part to play, more importantly, a managing oversight role and a strategic view on each and every payment type is absolutely critical. They may argue they have , but recent events and public positioning suggests that this requires much more attention from all concerned. The reduction in use in cash and the focus on the cost of cash has consequences. And the Central Banks, it could be argued, with seiginorage are the only people making money from, well, money. And furthermore, there needs to a European view to, or at least co-ordination. It exists on half of the equation – the EPC and ESTA for example are doing great work – but I’m not aware of any activity on the other side. If cash is to have a future, it should be by choice rather than the current situation where it seems to be unloved and misunderstood. Not so much a war on cash but the neglect of cash.

Lockbox: Still Crazy After All These Years

Wholesale lockbox (WLBX) has been a staple treasury management product for five decades or so. It amazes me that after all these years, the market for WLBX continues to grow and innovate. A far cry from retail lockbox, WLBX enjoys significant revenue growth opportunities. By Celent estimates, over 12,000 eligible U.S. companies with over $25 million in revenue do not use WLBX services. So, how do banks pursue this opportunity? For starters, banks need to offer WLBX services. Most don’t. For years, WLBX has been the purview of the large cash management banks. Lockbox operations are expensive and required a good book of business to justify the large capital investment. But, imaging technology and intelligent workflow tools now allow extraction and image capture to be entirely separate from the downstream processing. “Capture anywhere” and “correct anywhere” workflows have created hub and spoke operations, with multiple capture sites and perhaps a single processing site (with a disaster recovery site).

Hub and Spoke Lockbox Architecture

This has makes it relatively easy for banks to augment their WLBX operations by using third party capture capability in new and interesting geographies. It is also allowing banks and third party processors to offer outsourced WLBX services to smaller banks that might not otherwise justify investing in their own operations. But, more capture locations are needed to move farther down market. Most processors have just a few sites. Most clients want pretty basic WLBX services. Features like same-day decisioning and AR matching appeal to a minority of clients. Most just want basic image lockbox. And, they’d rather not have their customers mail payments to a distant P.O. Box. A lack of capture sites has, at least modestly, been a barrier to more widespread lockbox adoption. If only someone could figure out how to cost effectively create a good number of capture sites so most metro areas could be easily served. Enter Brinks. Brink’s U.S. is a division of Brink’s, Incorporated. Traditionally a cash logistics provider, it provides a variety of services including cash in transit (CiT) services, cash and coin processing, ATM servicing and a variety of security services. In so doing, Brinks has built a nationwide network of some 285 vaults. Brinks has been quietly building its capability to provide check imaging services (through a relationship with FIS) and just recently announced an outsourced lockbox service provided through a relationship with Cash Management Solutions (CMS). CMS is a provider of wholesale and retail lockbox software and operates its own outsourced lockbox solutions under the Image Remit brand – with a few capture sites. The combination looks to be a win-win. Brinks has yet another service line, further diversifying its business and leveraging its relationship with a large number of U.S. banks. CMS has access to a nationwide network of image capture sites to differentiate itself from several larger competitors. It wouldn’t surprise me to see Brinks open up its capture capability to banks and other third party processors, regardless of operating platform(s) in use. Still crazy after all these years…

Winning the Battle for Mobile at the Retail Point of Sale

Over recent months, there has been a considerable increase in the buzz around mobile and electronic wallets in the developed markets. New wallets have been launched (e.g., Google Wallet, Amex Serve), with many more companies announcing intent to compete in this space (e.g., Visa, PayPal, Isis, and others). A number of industry leaders proclaimed (again) the end of physical wallets. Are all these new wallets fundamentally the same? If not, how do they differ? What challenges do they face? What does it take to replace a physical wallet? Who are most likely to emerge as leaders in this space? How will they compete? What does it mean for the payment industry incumbents? These are the questions I am exploring in my new report “What’s in Your Mobile Wallet? Winning the Battle for Mobile at the Retail POS,” published yesterday. One of the insights of the report is that retail POS is not just about NFC. And actually, despite all the challenges to implement NFC-based solutions, they might just offer the banks an opportunity to remain in control of merchant and consumer relationships. The alternative vision of commerce promoted by cloud-based mobile wallet providers, such as PayPal, is a lot less appealing to banks and other incumbents. The report defines the four major domains along which players will compete to bring mobile solutions to retail. It also describes the requirements mobile wallets should fulfill in order to succeed in the market and how specific features are likely to evolve. Finally, the report offers predictions on how the market is likely to develop and makes recommendations for financial institutions. Let me know if you agree with my conclusions.

“Should We Repel Durbin?”

That was the question someone asked me last week at an ATM, Debit and Prepaid Forum. I know – it was in Vegas, the person was joking and the question is really a rethorical one. And yet, it kind of rings true, because no one seems to be happy with the new regulation. Except, of course, the lobbyists, lawyers and other industry advisors. And perhaps some acquirers and ISOs. As expected, “Life after Durbin” discussions dominated the event. Of course, the large debit issuers are unhappy – the general consensus is that this will wipe out about $8bn in annual interchange revenue for the industry. The issuers are looking for ways to cut costs or to raise revenue. It was interesting to watch how nearly everyone had to update their slides, as Bank of America withdrew their planned $5 debit card fee about 24 hours before the official conference started. The bank itself explained that they “listened to the customer feedback and acted accordingly.” The smaller exempt issuers are not entirely unhappy. Credit unions announced a large new customer intake (“760k new accounts in the last 10 days, more than in the entire year previously”). However, they are worried that they will also feel competitive pressure on interchange or might be discriminated by the merchants and their acquirers. Also, it remains to be seen how profitable the new customers will be for them. Prepaid issuers seem to be unsure what to make of it. On one hand, some prepaid cards are exempt from regulation, however, the exemption conditions and small print gets very complex very quickly. Cue in the lawyers and corporate counsels to help navigate the regulatory maze. The network routing rules banning the exclusivity arrangements are seen as an opportunity by at least some of the networks, especially the smaller ones. However, the implementation – renegotiation of contracts, setting up of routing rules, etc – is not an insignificant undertaking for all involved. Cue in consultants and more lawyers. Perhaps most surprisingly, the merchants are not happy at all. The merchant panel, represented by senior executives from Walmart, 7-Eleven and McDonald’s was one of the most interesting sessions at the Forum. They all expressed disappointment in the final regulation. Walmart said that the regulation was a “disappointment, but a good start for future regulatory reforms, including credit.” It is true that for small ticket purchases, the costs of debit acceptance have gone up, as it’s now a flat fee, i.e. the cap was implemented also as a floor. When asked if and when consumers can expect to see lower prices, the merchants responded by saying that the “merchant market is very competitive, therefore any cost changes will be passed to consumers, both increases and decreases”. In other words, “expect prices not to change much or perhaps even go up.” Redbox, a US-based DVD rental firm, already followed through on this and raised its prices for DVD rentals from $1 to $1.20 quoting increases in their costs of debit processing. Smaller merchants are also unhappy because it might take time for any savings to trickle through to them. Unless their acquirers and processors charge them “interchange plus”, they may find it difficult to demand immediate reductions in their bundled fees. Those with lower volumes may also lack the necessary know-how or may simply prefer avoiding the hassle of putting pressure on their acquirers to lower their fees. It will take a better part of next year for the full effects of Durbin regulations to become clearer, but the early signs are that it won’t reach all of its intended outcomes. So, what’s next? P.S. As an aside, this year’s ATM, Debit and Prepaid Forum saw the best-ever attendance – over 1,100 participants – and had a very interesting agenda with great speakers. Congratulations and thank you to SourceMedia, the event organisers, and Tony Hayes, a conference chairman (and a partner at Oliver Wyman, Celent’s parent company) for all their efforts!

How Simple is “Simply Tap”?

Last week the UK saw the launch of the Mobile Money Network’s (MMN) new Simply Tap mobile shopping service. Is this yet another mobile app destined for obscurity or will it truly re-design our shopping and payment experience? I’ve downloaded the app to give it a try. The registration process was simple and straightforward. The idea is that you register your card and the shipping address with the app and then you can shop by simply entering a product code to have it shipped to you. So, what do I like about the solution?
  • I can see this working for billboard/ poster/ TV/ etc advertising, where a customer sees the code and uses it to buy the goods.
  • It’s not trying to develop a new payment solution – the actual payment is still done over a registered card. This is, essentially, a new way to shop and check out
  • Card details are not shared with the merchant
  • It’s backed by an impressive list of partners and individuals, such as Charles Dunstone, Sir Stuart Rose and others
  • It’s built on a proven technology platform provided by Monitise
However, I also have a number of other observations and questions:
  • I don’t think the buying process is as simple as the name of “Simply Tap” implies. When Google Wallet talks about “Single Tap”, you indeed pay by simply tapping the phone against the terminal. This version of “simply tap” involves finding the product code, then typing it in on your phone’s keyboard (in the demo it appears to be 7 characters – 3 letters and 4 numbers, but I guess the codes will vary), then pulling out your card to enter the three-digit security code on the card, etc.
  • While there was talk of adding QR-code or even image recognition functionality, the app just launched doesn’t have any of those capabilities. Perhaps something for the future?
  • The merchants need to assign codes to their products and to have a relationship with MMN, which offers two services – fully integrated and fully managed. How quickly will MMN be able to sign up and integrate new merchants? Also, I wonder if the code only points the customer to the product, or also includes channel information, allowing the merchant to understand better how their products are bought and which advertising channels pay off?
  • This is clearly not a solution when a customer is buying multiple items and wants to check out at a traditional point of sale. The way it could work in the physical retail environment is if you see a product you like and type in the code to check out without queuing for the product to be sent home. This, however, assumes that you don’t just want to walk away with the product from the store – one of the remaining advantages of actual, rather than online shopping. Of course, it would be handy for large bulky items or the items that are out-of-stock in a particular store.
  • A week after launch I couldn’t find online any product codes to type in. I haven’t been to the participating physical stores yet, but I checked a number of websites of participating retailers (e.g. moreTvicar, and even Carphone Warehouse, a founding partner) and could not find a single code…
  • The only code I did find was on the Simply Tap website, where a box of Thornton’s chocolates was advertised as being available for £5 instead of a regular £15. I entered the code (6 letters) and indeed, a box of chocolates came up on my mobile screen. However, the price was £15 and not £5. I logged-in (typing in an 8-character password), as I thought that perhaps the discount would be applied as I proceed with the purchase, but I got to the Buy button and there was no discount. I exited the app… I am sure these are teething issues and things will get better.
  • The app includes offers and promotions that could be pushed to the customer, but they don’t seem to be integrated and making use of geolocation or other unique mobile feature to truly enhance the shopping experience.
  • The success will also be dependent on the economics. If MMN will take a cut on a transaction, the cost of card acceptance would increase for a merchant. While this would likely be acceptable if it generates more impulse purchases off the billboards and posters, it would not be easy to convince merchants to offer that as an alternative online or in the physical stores. A service-based fee might work better assuming the merchants can be convinced of the additional value the solution generates.
  • Best Buy Europe, one of the key partners in the MMN venture, have not been very successful – they lost £47m in the first 6 months and are pulling out of the UK, shutting every store.
  • MMN says the solution works on any handset, and then points you to the Android or Apple store. Not clear how it works for non-smartphones (that is, its claim of any handset, any network)
In summary, while I can see how the solution could be useful in a number of use cases, I don’t think it will revolutionise our shopping on a mass scale. At least not this holiday season yet. Do you agree?

1.25.12: Celent Banking Event: What Corporate Mobile Banking Will Really Mean For Your Bank

Celent senior analysts, Banking Group Admission to the event is free, but space is limited and pre-registration by Wednesday, January 18, 2012 is required.

Please click here for more information.

SEPA – the opportunity for non-European Banks

I’ve read with interest the press release from Wells Fargo this week stating the expansion of their Global Treasury Platform into Europe. I’ve long pointed out that SEPA (Single Euro Payments Area) creates an opportunity not just for European banks but any bank who wants to make payments in or out of Europe. I’ve recently written about this in these two reports – SEPA Redux: Understanding How We Got Here and The SEPA Ripple Effect: Impacting a Non-European Country Near You Soon . In short, it means that now a single format and connection – in theory at least at the moment – can reach every bank, corporate and consumer in 31 countries. Indeed, it can be argued that it benefits non-European banks more ad they have the advantage of not facing legacy migration issues. With the US being a key trading partner with Europe, some large but primarily (today at at least), domestic US banks have an opportunity to expand both their corporate and remittance transfer business. A a result, this move and others, such as that of Bank of America, came as no surprise. In fact, the surprise is that not more have done this. Perhaps we ought to rename SEPA Statesides’ Europe Payments Access! Having been at the inaugural meeting of the IPFA (International Payments Framework Association), I am probably biased, but I see this as being a way of further taking advantage of what SEPA has to offer to smaller US banks (it should be noted IPFA is not just a US channel, just that it is the first live connection). However, as with any new initiative, its not been without its issues. Teething problems perhaps, but its not quite delivering its potential yet.

Welcome to Kafka Bank

It seems to be a point of perverse pleasure to my friends that as a banking expert I actually seem to suffer worse treatment from my bank than they do! I suspect that this is in part my imagination. Having had repeated conversations around x for umpteen years, to then suffer issues around x is frustrating. Case in point – customer experience + fraud prevention. I recently had need to make 4 or 5 large transactions, with payment coming from my bank account. My bank branch won’t initiate a faster payments for me “for fraud protection reasons”. My telephone bank service won’t do the transaction according to them because the receiving bank doesn’t do Faster Payments. In reality, I know that the receiving bank won’t accept large value (but not that large) because of fraud. As a result, I usually pay via debit card on each card providers website. This month, 3 transactions in a row was blocked by my bank for, you guessed it, fraud reasons. Two of them I can perhaps understand – relatively infrequent previous interactions, so no discernible patterns. The third is the same amount, on the same day, to the same provider, in the same way, and with using SecureCode to sign the transaction. That’s frustrating, but I can almost live with that. It’s how it was then dealt with. Below is an excerpt of the automated text I got. How not to do text validation This went one for 4 or 5 more attempts, all to no avail. I’m afraid I’m unable to share my latter answers in case you are of a sensitive nature. Pity also I can’t play you a recording of the automated phone calls, because they were even odder. Having confirmed the transactions were mine, it thanked me, stated that it had declined the transactions and then hung up. But oddest still was the discovery that my bank has multiple fraud departments. Nothing in usual in that other than the discovery that one of them was secret. The bank wasn’t allowed to know its phone number, only I would know that. So when I asked how would I know if it was a genuine bank department if they didn’t know about it, they said the person would answer it with the name of the bank. When I rang, they wouldn’t identify themselves, but I had to give all personal details for them to check my status. Either that, or for them to now take over my complete identity. Fraud protection at its best. So what can we learn from this? There is a fine line to be trod. For example, I don’t want the bank to ask me about every transaction but I don’t want the exceptional transaction to go unspotted. Equally, I want to the interaction to be brief but thorough. Fraud protection should be treated as a product, and the customer experience is as important, if not more so, than say the account opening procedure – the risk in an existing client s more predictable than in a new one for example. Banks who can address this may have a potent advantage of those who can’t. With more transactions, over more channels in an increasingly international world, this is a problem that is not going to go away. Rather than an opportunity, for many banks it will increasingly become a risk to their relationship to their clients.