Archives for February 2013

Celent Innovation and Insight Day Live

I’m currently in Boston with the entire Celent team at Innovation and Insight Day. We’ve got a great lineup of speakers and will be addressing subjects like multichannel delivery and mobile payments. We will also be presenting the prestigious Model Bank Awards.  If you are here in person or sitting at your desk in the office, you can follow the event live on Twitter. I invite you to join the conversation at #Celentiandi on Twitter.

I&I Day is almost here.

Not long left before our annual Insight & Innovation Day in Boston – indeed, it’s next Wednesday, 27th Feb. It’s not too late to join us as we can probably squeeze a few more in still. The agenda is looking great, with various of my colleagues presenting, the Model Bank awards and a keynote from Innovation guru, Jeanne Ross of MIT. On the innovation front, it’s still not too late to enter our competition to find the best definition of innovation – but in six words or less! There have been some great entries so far – take a look at our LinkedIn forum for some of them or look at the summary  here– but for a chance of winning prizes, then I’d suggest sending them by email direct to Erica Ferguson at using the subject line “Innovation Is” along with your contact information. My favourite? My own of course! (“ Tomorrow’s ideas delivered today”). But if I had to choose, it’s trickier. I like “Never seen that before. Very cool” which sums up what innovation is often considered to be, and “Commercially successful invention”, as innovation for innovation sake is never quite as compelling as how it’ll make you money! It’s actually my first I&I Day, so I’m doubly looking forward it. Whilst I expect to see a number of familiar faces, it’d be great to put some faces to names, so please do stop us and say hi.

Why don’t banks pay me for going paperless?

I recently stayed at a Sheraton in London. On arrival I was intrigued by a card that offered me 500 points for not having my room cleaned.  This was a different approach than the old, and not particularly effective, exhortation to hang my towel if I wanted to save water – in that scenario, there was nothing in it for me but the potential for some vague good feeling.  But this – this was real, this gave me something that I valued.  So I opted to go without my room being made up for two nights, was 1000 points the richer, and the hotel saved on labor, detergent, water, and the like.  It was a true win-win situation.  When I remarked on it when checking out, the clerk said that the initiative was only a couple of weeks old, but had received very favorable responses.  Count me as a fan! What’s the analog for banks and other senders of paper statements?  The plea to go paperless.  We’re told it’s green, and might reduce the risk of identity theft.  But I know that the bank will save a lot of money by not sticking that statement in the mail (in round numbers, 50 cents per customer per month).  So why not just offer to split that (relatively small) amount with me, or offer some other incentive?  When added to those other worthy reasons, it might be enough to tip certain customers over the edge of going paperless.  The goodwill it generates will certainly help from a marketing perspective.  And finally, it’s a great example of a win-win for the bank and its customers. I love to ponder why we do what we do.  The rapidly evolving world of behavioral economics is particularly relevant to financial services, and I’ll be exploring on an ongoing basis some of the lessons that banks can draw from this emerging field.  If you’ve got your own interesting examples of changing behavior, let us know.

Is MCX Betting On QR Codes and ACH?

In my recent report on Digital Wallets, I discussed a number of players which while still keeping their cards close to their chests, have a potential to significantly influence the payments market. One of them is Apple, which made headlines recently with their patent for cash distribution without ATMs – see Bob Meara’s excellent blog and my related comments for more details. Another one is MCX (Merchant Customer Exchange), a joint mobile wallet initiative amongst a number of the US retailers. The initiative was announced in August 2012, but the details have remained scarce since. The participating retailers have been talking about their desire to have a collective voice in shaping the future of mobile payments, and protect their data and customers. They have talked about developing a wallet, but it hasn’t been clear if they also had ambitions to create a new payment scheme or would rather rely on the traditional cards in their wallet. So I was intrigued to come across an article that appears to shed a little more light on MCX ambitions in payments. Citing sources close to MCX, the article suggests that MCX is indeed planning to build a new payment system based on QR codes and ACH payments cutting the transaction costs to 4c. Two cents would go to the FI for processing an ACH payment and the other two would go to the technology partners and towards future MCX development. If it is indeed a confirmation that MCX are inclined to build alternatives to cards, then it is very interesting. However, it is still not clear how such a payments system would work:
  • Would the QR code identify the customer, the merchant’s payment request or just the merchant?
  • Would the customers be asked to register their bank account details with MCX wallet in the cloud? I can imaging this would be a big stumbling block for many consumers.
  • Will the transaction be based on ACH debit or credit?
  • If it’s debit, how will the authorisation happen? If there is no authorisation, will the fraud costs just become unacceptably high negating any savings on the interchange? There is speculation that consumers would be asked to register their debit card, which would be used for authorisation over card network rails, and then the transaction would convert into an ACH debit for clearing and settlement. If that’s the case, the overall transcation costs need to include the authorisation fee as well. And it sounds very similar to many decoupled debit propositions, most of which have failed to ignite the market so far.
  • If it’s credit, the authorisation challenge turns into the authentication challenge. One way to solve it would be to ask a customer to log-in to their bank account (e.g. through a mobile banking app) and authorise a payment to the merchant. Somebody would also need to pass a token to the customer’s bank with the payment request details. This is pretty much how Online Banking ePayments (OBeP) networks work; however, attempts to build such a network in the US (e.g. NACHA’s Secure Vault Payments) have again had limited success so far.
More questions can be raised and that’s just about the technical aspects of the solution. Commercial and other questions might prove to be just as difficult to answer. Will the banks co-operate? Will the proposed restrictions for participating retailers to accept other types of mobile payments (e.g. Isis or Google) work against MCX? Will the stated desire not to share any customer data amongst the participants limit the commercial opportunity? And will the (inevitable) delays to a project of such scale and uncertainty grind the intiative to a halt before it even has a chance to take off? Only time will tell if MCX succeeds. For now, I suggest we continue to keep an eye on its progress with a healthy dose of scepticism.

Gareth Lodge for Chancellor – “Save our Payments!”

Yesterday, George Osborne, the Chancellor for the UK, made a speech about the reform of the UK banking industry. It covers a number of points, but some of the closing remarks are of particular interest to me as they relate to the payments infrastructure in the UK. Much of the preceding speech was, frankly, yada, yada, yada, “you’re not the messiah, you’re a very naughty boy” that we’ve come to expect from any and every politician talking about the banking industry. Details of the speech in detail can be found here As the points on the payments systems are worth analysing in more detail. In essence, George was making a number of points, which we’ll cover off separately. Firstly, there was an accusation that the payment systems were a closed shop, and that was hindering the success of new entrants, drawing a correlation that the big 4 had 75% of the current account market. My initial reaction was to laugh out loud. This speech was to a bank who are, to the best of my knowledge, only a member of only one clearing scheme, and is, according to his logic, struggling as a result. That “poor”, put down bank? JP Morgan. Yeah, they obviously suffering from a lack of access to payments systems…. Secondly, he made the following statement:

The last Government let the established players off the hook by failing to implement the conclusions of the review they themselves commissioned, and allowing the big existing banks to regulate themselves.

This is somewhat fudging the issue. The recommendations were from the OFT, who are supposed to be independent and apolitical, and most of the recommendations were put in place, despite many in the payments industry being unconvinced that these changes would actually improve matters. Indeed, there is, so far as I am aware, no definitive study to have even measured whether the changes had achieved what they had set out to do. Indeed, I would suggest that the cheque debacle was in part due to the changes, and that the Government cannot and should not continue to try and use sloping shoulders to absolve itself from its role. But the most telling point was this statement:

And it’s a bit like the electricity grid, every person and every business needs to be plugged into them to enter the banking market. ……And it other walks of life, like telecoms, we don’t operate like that.

  In both cases (electricity and telecoms), the infrastructure piece of the puzzle is moving in the exact opposite direction to that George is proposing. The electricity market structure was created by the Government, and is widely perceived to have failed the customer. The telecoms market is seeing that either it’s a specialist market with each building their own network (dataworks, landlines) or that the infrastructure isn’t a competitive differentiator, and are moving to sharing, or even selling their networks. Now there are some broad brush statements but far more granular than those George made. Indeed, some other statements were laughable, but more worryingly showed a complete lack of understanding of even the basics or business sense.   So here’s my manifesto, assuming that this is happening regardless.
  1. A clear statement of objectives, because currently they aren’t and are just populist in nature
  2. A clear statement of assumptions. They seem to want the infrastructure to be both commercial and nationalised. It patently can’t be both, so which is it?
  3. A clear statement of the costs and benefits, and to whom, for making the changes. For example, cheques are free to consumers. They could be cleared faster, but that will cost A LOT of money. They’d also, probably, have to legislate/force/bribe a private company, Unisys, to do it! So – who pays? And will that really matter? And what are the consequences?
  4. Be bold. Every other country bar one in the world is to trying to, or already has, abolish cheques, yet it seems George wants us to invest massively in them. Do the right thing, not the vote winning thing.

Now, Virtual ATMs?

All things mobile are so hot right now, and for good reason. Smartphones are quickly overtaking mobile telephony devices at breakneck speed. Remember when people talked on their mobile phones? AT&T activated 8.6 million iPhones and 10.2 million smartphones in the last quarter. Verizon iPhone activations increased by 47% in th3e past quarter. 6.2 million of the 9.8 million smartphone activations in the past quarter were iPhones. Beyond the growth in smartphone usage, it seems new mobile payment options are emerging with mind-numbing regularity. But what about cash? As much as mobile payment proponents would love to see it occur, cash hasn’t shown much migration to digital payment alternatives. Will the erosion of cash usage accelerate? I think so, but cash will be commonplace for the foreseeable future. In fact, that’s why there are so many ATMs. Until recently, 90% of bank-owned ATM transactions were one thing…cash withdrawals. This need for cash spawned the installation of 135 ATMs per 100,000 adults in the US – that’s roughly one ATM for every 750 people (including non-bank owned devices)! As far as we know, this represents the highest ATM density in the world, except for Spain and Canada (see below).

ATM Density

ATM sales have stalled over the past few years to no surprize. We probably have enough of them deployed – in developed countries at least. But what if there were a credible alternative to ATMs for cash dispensing? Apple apparently thinks it has one. It has filed a patent application accordingly. I was made aware of this courtesy of Janney Capital Markets.

Forget Digital Wallet. Apple Wants to Turn YOU Into an ATM Via Ad-Hoc Cash Dispensing Network A recent patent application filed by Apple (AAPL – $456.83; Buy, Janney analyst Bill Choi), describes an iTunes-based ATM network. “Need some quick cash right now and there’s no ATM around? Launch the Cash app, and tell it how much do you need. The app picks up your location, and sends the request for cash to nearby iPhone users. When someone agrees to front you $20, his location is shown to you on the map. You go to that person, pick up the bill and confirm the transaction on your iPhone. $20 plus a small service fee is deducted from your iTunes account and deposited to the guy who gave you the cash.” The patent application makes 24 claims and makes interesting reading. The idea invites a few questions…
  • Could Apple pull it off? Effortlessly! It has all the requisite components: a critical mass of iPhone users, geolocation enabled on the vast majority (I think), a distribution mechanism for the requisite apps and its iTunes accounts each iPhone user must maintain.
  • Would anyone use it? That invites a less obvious answer. Both Apple and the cash provider would need some incentive. Research suggests consumers aren’t fond of ATM surcharge fees, particularly as they grow over a couple of bucks. The fee structure would be key as would the user experience. A few attempts with poor response, or fast response by a total jerk, for example, would likely present an adoption barrier.
So if this comes to market, it might never see widespread usage. Even so, the cost to deploy is so small compared to maintaining vast fleets of ATMs, I find the idea compelling. I hope it is available the next time one of my kids asks me to borrow 20 bucks.

The Start of the Surcharging Era?

Do you feel annoyed when having decided what to buy, you get to the checkout only to find out that the price has increased because the merchant slapped an extra fee for paying by card? I know, I do. The card networks know that as well, which is why they have been insisting on a “no surcharge” rule – i.e. that the customer price should not be discriminated based on the choice of their payment method. The same product should cost the same irrespective of whether the customer chose to pay by credit card, debit card, check or cash. The rule has not always been observed in practice, particularly in many European markets, sometimes against explicit regulations of card schemes. The European budget airlines are notorious for charging hefty fees (way above any conceivable processing costs or interchange) for the privilege of paying by card, whilst typically the only way to buy a ticket is online and the only way to pay is by card – a practice that attracted widespread criticism from consumer groups and other industry bodies. Surcharging is more prevalent online, although my local deli shop charges me £0.35 if I pay by card (debit or credit.) Many merchants in Denmark also surcharge. However, the US merchants have so far been prohibited from surcharging. The first blow to the “same prices” principle in the US came from Durbin amendment, which stipulated that the merchants could discount for cash or debit card purchases. Then, as a result of the credit card settlement, the US merchants got permission from the card networks to surcharge consumers using a credit card from January 27, 2013. It will be interesting to see how many merchants do take up on their new right to surcharge. 10 of the US States limit surcharging by law: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas, so a large national chain operating across multiple states, may not be able to surcharge anyway. To avoid a “free for all” situation, sensibly, the card networks introduced rules for how surcharging should be implemented in practice, such as asking the merchants to notify the networks of their plans to surcharge 30 days in advance, requiring to clearly post signs in the stores to inform customers, and defining the surcharging limits. It remains to be seen how many merchants decide that surcharging is “worth the trouble.” Representatives from the National Retail Federation, retail trade association, were quoted this week saying that “while there conceivably could be exceptions, merchants in general have no intention of surcharging.” That may be true. What did surprise me was another statement from NRF: “The lawsuit sought to bring down swipe fees and the prices paid by consumers, not to increase prices. The card companies’ new surcharging proposal runs 180 degrees counter to the intent of the lawsuit.” Now, I may have missed something, but I always thought that it was the merchants themselves who have long lobbied for their right to surcharge. Now that the settlement is in place, they seem to be implying that it’s the card networks who are forcing the surcharging on merchants. Are the networks “damned if they do, and damned if they don’t?”