Archives for December 2011

Holiday Cheers for Consumers from the UK Treasury

Just before the country stopped to celebrate Christmas, the UK Treasury announced that the government plans to ban the ‘excessive’ fees for card payments before the end of 2012. Essentially, this is the ban for card surcharging, i.e. fees that get added to the transaction if the person chooses to pay by card. Unfortunately, in Europe surcharging is quite widespread. When I was regularly travelling to Denmark, I used to pay a fee for pretty much all card transcations. Here in England, consumers rarely get charged by brick-and-mortar retailers, but are quite often hit by charges from online merchants, especially the airlines and various ticketing agencies. As a consumer, I find it really annoying, as these fees are not made transparent until late in the checkout process. So, you think you are getting a good price, only to find out that you’ve been slammed with an extra fee just to pay by card. The surcharges have already come under scrutiny. Earlier this year, Which?, a consumer group, complained about the surcharges which prompted an investigation by the Office of Fair Trading (OFT). The European Union also has approved the new rules giving the European shoppers more rights when returning goods or paying by card, but the rules are unlikely to be implemented until 2014. So, the latest announcement by the UK Treasury expected to come into force by the end of 2012 is a welcome step towards limiting surcharging and increasing price transparency. It will be interesting to see how this will be implemented – what level will be deemed as “excessive”, how the compliance will be monitored and how any breaches will be penalised. There is a clear difference between a small mom-and-pop store charging £0.35 to recoup their additional cost of a card transaction and the likes of Ryanair, a so-called “budget” airline, charging £12 per person for booking a return flight. The other question, of course, is that of the alternatives – at a physical store, I can perhaps pay cash to avoid card fees, whereas online, the card is often the only payment method available. The Office of Fair Trading report has been arguing that the fees should not be applied to at least debit cards, as they represent the equivalent of cash in the digital world. The Treasury’s proposal seems to go one step further and limit the fees to credit cards as well. Will it reduce the ultimate price consumers have to pay? Possibly not, as the retailers can easily just add the today’s fees to tomorrow’s prices. Yet, it would be a big improvement, as consumers could more easily shop around and compare prices knowing that they wouldn’t be charged for the privilege of parting with their money. Given the background of all the gloomy reports about recession, rising unemployment and other bad news, the Treasury announcement should bring the holiday cheers to the UK consumers.

The End or The Begining of A New Chapter?

So. Now we know. February 1st 2014 has been negotiated as the deadline for the end of domestic, legacy payment schemes in euro countries. It’s sometimes erroneously referred to as the SEPA end date, but in reality it’s the start date. The end referred to is the end of the migration to SEPA. So where does this leave us? Well, some of the reports mistakenly said that the date is fixed. The actual vote on the regulation doesn’t take place until sometime in Feb 2012. This date is the one that will be included in the draft of the regulation that will be voted upon. So highly likely (98%+), but by no means guaranteed – as we’ve seen in the last few drafts, last minute changes are not uncommon. As discussed in recent reports on SEPA, (SEPA Redux: Understanding How We Got Here), the date may see the final leg of the project, but for many, will cause a great deal of challenges. Some banks will undoubtedly struggle to make the deadline in terms of internal systems. Some elements are still unclear, such as that surrounding direct debit mandates. The largest unknown remains the corporates though. In the European Business Test Panel SEPA Survey 2011, undertaken in Q1 2011, some surprising results emerged. The sample was considered to representative of the make-up of the European business landscape. 24% of those surveyed had not heard of SEPA at all. Of the remaining group, 65% felt they had been under-informed about SEPA, with 46% feeling that they still were lacking in sufficient detail. This then is not an information gap but chasm, and one that needs to be bridged rapidly, as the planning for the conversion needs to need to take place as soon as possible. Experience from other large scale migrations such as that in the UK to a new communications protocol, BACSTEL-IP, shows that even with forward planning, and a 2 year window for migration, over two thirds migrated in the final three months and a number of significant companies missed the deadline altogether. With other elements in the draft regulation requiring changes by the corporates as well (such as the requirement for bank-to-corporate communications to be in ISO20022), the new SEPA challenge is somewhat different. The success of SEPA is in the hands of the corporate yet we’ve seen that they know least, and nor have they been involved in its design. We may have an end-date, but the story is far from over.

The Season for Gift Cards

Christmas is the time of giving, and so the gift cards are definitely “in season.” Gift cards come in all shapes and forms – from a single retailer and the shopping malls, in various denominations, single-use and reloadable, as a plastic card or as an e-voucher, etc. They are clearly convenient for the person who gives (easier to decide than the actual present), receives (can buy what they want) and even the retailer (people tend to spend more than the actual amount on the card). Also, gift and reloadable cards have come a long way – today they are usually cheaper than they used to be before, the fees are more transparent, and many no longer expire or can be easily renewed. Plus, there are services allowing you to exchange or cash-in the unwanted cards. However, the adoption rates seem to be very different in various markets. US is clearly the leader with the estimates for the gifts cards market size ranging from $90 to over $100bn for 2011. On the other hand, the UK Cards and Voucher Association estimates the gift card sales to be only £4bn in 2010. And that includes business to business sales of gift cards and gift vouchers to corporations for use as customer incentives, employee rewards and insurance replacement. Even accounting for differences in the overall market size and a potential growth in the last year, it seems that the Brits are simply less keen on gift cards than the Americans. Every year, First Data runs a Consumer Insight Study on gift cards in the US and Canada and in 2010, they extended the survey to the UK and Germany. It was interesting to see that of all the UK consumers who have not purchased and did not intend to purchase a gift card, 46% said that the primary reason was that “gift cards were not personal enough.” 29% said they “already knew what to get as a gift,” while further 21% simply “didn’t think of buying a gift card.” Everything seems to be going digital these days – music, films, books, holiday cards, even gifts. Obviously, there is a time and place for that and much of it is incredibly convenient. But are we in danger of losing something here, especially when it comes to gifts? That personal touch and thought that shows another person we really care? As one observer of the music industry asked rethorically when lamenting the demise of vinyl: “has any boy ever wooed a girl by inviting her ’round to listen to his iTunes?” Something perhaps worth keeping in mind for that last-minute gift shopping. Happy Holidays and see you in the New Year!

Show me the money!

There have been many discussions about the link between GDP and the use of electronic payments. I recently spoke at the Future of Cash conference in Frankfurt, and created some charts to show actually that cash is still the dominant payment type, at least by volume. I’ve extracted part of that chart below. It shows a selection of countries, ordered by their total non-cash payment volumes in 2010. The chart shows the volume of those payments, on a per capita basis. It’s very interesting that there is a clear split. The “rescuers” – France, Germany, UK – have high volumes per capita. With the exception of Ireland, all those countries we are concerned about have below average per capita payments. European Payment Volumes (2010) On a Per Capita Basis Now we all know that we can make numbers sing and dance and tell any tale we want. Indeed, 63.2% of all stats are made up on the spot. Including this one :-). But we may have a once in a lifetime opportunity to try and correlate the connection between electronic payments and GDP better than ever before. As part of the recent austerity measures, Monti, the new Italian Prime Minister has banned, with immediate effect any payment in cash over €1000. ABI, the Italian Banking Association, estimates the economy loses €10 billion every year from increased security and labor needed to process cash transactions. More importantly though are the estimated €100bn in lost taxes every year. Now, there are plenty of other measures being introduced and so a scientific link can’t be proved, but I’ll certainly be watching with interest to see what we can derive.

Mobile RDC and the Quest for Retail Banking Revenue

We’ve all witnessed how difficult it has become for retail banking to dig itself out of its retrospectively misplaced devotion to free checking. The recent brouhaha over several banks’ attempt to recover lost debit card interchange through monthly fees gives testimony to just how challenging this new climate has become. After a decade of training consumers to expect retail banking services for free, banks are challenged with positioning products and services in a way that provides value to customers while effectively monetizing the bank’s capabilities. Said another way, banks did it to themselves – and they’re doing it again. In this context, I’m a bit perplexed at how quick banks are to leave money on the table. One particularly egregious example in my opinion is mobile RDC. Here we have a product that: • Resonates with consumers and businesses alike for its convenience and usefulness • Is offered by a small fraction of U.S. financial institutions at present, providing early-mover advantage in a largely undifferentiated mobile banking environment. • Is easily bundled with other services that appeal to highly attractive market segments. So early-mover banks must be enjoying revenue from mobile RDC, right? Of the one hundred plus financial institutions currently offering mobile RDC, I only know of several that are charging for consumer usage. This is in sharp contrast with P2P payments, for example, where the significant majority of institutions using solutions (ZashPay et. al.) for mobile P2P payments charge for the service. Some institutions may be proceeding under the belief that consumers simply wouldn’t be willing to pay a small fee in order to avoid a trip to the local (or non-local) branch. Heck, one can barely start an automobile for less than a buck with today’s fuel prices. But, Fiserv research conducted in 2010 suggests that a percentage of consumers would indeed willingly pay at least two bits per deposited check. Admittedly, this does not constitute a thorough analysis of mobile RDC price elasticity, but it does suggest banks may be missing an opportunity.


Let’s look at two banks that are charging for Mobile RDC; First Tennessee and U.S. Bank. First Tennessee First Tennessee offers a full-featured mobile banking platform supporting Android, Blackberry and iOS equipped phones. First Tennessee Mobile Banking offers account transfers, bill pay (Mobile Bill Pay), ATM locator and Mobile Deposit. First Tennessee also offers SMS Text Banking and Mobile Web Browser with more limited capability. First Tennessee bundles Mobile Deposit into its Premier Checking product at no additional cost and Premier Checking customers are automatically eligible for Mobile Deposit. Premier Checking is free for those maintaining a $5,000 minimum balance. Otherwise it costs $9.00 per month. Brokerage customers are also eligible for Mobile Deposit at no additional cost. For other customers, First Tennessee is disclosing a $.99 per check fee, but is temporarily waiving that fee. Eligibility requirements for non Premier Checking or MAP customers aren’t disclosed on its web site. Instead, only eligible customers will see the Mobile Deposit option on their mobile banking app. Simple enough; if you see it, you can use it. U.S. Bank U.S. Bank Mobile Banking is a full-featured mobile banking app for Android, Blackberry and iOS equipped smart phones and is also available via browser (Mobile Web) with more limited capability. The applications offer bill pay, ATM locator, P2P payments (Pay A Person), transfers, real time alerts and mobile RDC (DepositPoint) on Android and iOS phones. To be eligible for DepositPoint, one must be a U.S. Bank Internet Banking customer with direct ownership in a U.S. Bank Checking or Savings account and have no more than two returned deposited items in the past 3 months. There is a $0.50 fee per deposited check. Both banks are positioning mobile RDC as a value added feature. U.S. Bank charges all users, while First Tennessee overtly bundles its application with premium accounts. Both are valid options that balance risk and reward. Most other banks are simply leaving money on the table.

Wanted: A few Good Fraudsters

OK, just kidding. But, there is an interesting irony related to RDC that I’d like to highlight. Risk concerns loom large among the majority of U.S. financial institutions that haven’t yet made RDC available to consumers and mobile banking users. Other banks are throttling small business RDC initiatives, in part, because of risk concerns. Clearly, risk isn’t the only reason banks aren’t rushing to radically improve the convenience and operational efficiency of deposit processing, but it may be the primary reason. So is the concern justified? I think so, but I also think it is hugely overstated. Here’s why. In two consecutive surveys of U.S. financial institutions (September 2011, n=218), fully 90% of surveyed institutions have suffered no monetary loss at the hands of RDC. The small minority that did suffer loss mostly had a single incident – after offering RDC for 4 or 5 years in some cases. Could 90% of credit card issuers make such a claim?

90% of US FIs have suffered no losses through RDC

90% of US FIs have suffered no losses through RDC

And, the prevailing loss mechanism is straightforward; duplicate presentment. Financial institutions could be on the receiving end of a duplicate item whether they offer RDC or not. This has prompted most financial institutions to install enterprise wide duplicate detection capability. The most interesting scenario involves a fraudster depositing via RDC at one or more institutions and later depositing via the ATM or teller at a second or subsequent institution. Matters are made worse if there is a meaningful delay between the first and subsequent deposits because many banks only look for duplicate items over a narrow time period. Losses have been so low that banks appear unwilling to invest in additional fraud reduction mechanisms. If actual RDC related losses have been higher, then banks could more easily justify the business case to stem losses. One approach would be to extend duplicate detection across institutions. The Federal Reserve, SVPCO, Viewpointe and Early Warning Services (EWS) among others would be in a position to provide these services. With all the commotion about RDC risk, you’d think there would be several industry-wide solutions available by now. Not so. Last month, Mitek announced an initiative, MitekONE that is said to be available in 2012. MitekONE’s mechanism was developed to improve the ability of banks and partners to detect attempted duplicate deposits of checks, both within banks and across institutions. Mitek will be offering this capability through a strategic relationship with EWS. Here we have an innovative response to a pervasive systemic risk. But, absent a few good fraudsters, I wonder if banks will invest.

Should Social Sign-in be Used For Financial Services?

Earlier this week, startup Movenbank came under fire for allowing users to its alpha site to sign in using Facebook credentials. Should Facebook be used to identify and authenticate users at a banking site? I commend the Movenbank team for trying something different and for attempting to use a standard that’s already in place. I understand the concept and the idea behind using a social tool. However, I don’t believe that a Facebook Connect login has a home on a secure banking site. Firstly, Facebook and privacy don’t exactly go hand in hand. Even more importantly, Movenbank is a front end solution and is going to require bank partners sitting in the background. I’m not aware of too many banks that are going to be comfortable with the notion of a Facebook login. Facebook and banking are still like oil and water and it’s going to take quite some time before that changes. There’s good reason for this. Facebook is still too much of an open book and Facebook Connect isn’t exactly the most secure thing around. The online video site Hulu is an excellent example. Earlier this year, a small number of Hulu users found this out the hard way – users were being erroneously logged into the accounts of other users. Hulu claimed, “that it was a coding and configuration error on Hulu’s side, and not the result of hacking, or other third party actions, or a vulnerability in Facebook Connect.” Sure Hulu, this had nothing to do with the third party tool… Facebook Connect isn’t ready for prime time for online or mobile banking. There are many who are going to disagree with me here, particularly given the popularity of Facebook Connect. Sure, it’s cheap and fast to get up and running. Cheap and fast doesn’t equate to secure or private, particularly once the FFIEC gets into the picture. To be fair Movenbank does plan to, “supplement the registration and login features with additional authentication channels, including a private, Movenbank-specific user identity.” Now I’m not sure what “supplement” means here exactly, but I take it to mean that the user will have options and a second factor of authentication. I hope one of the options is not Facebook.