Wednesday, January 28, 2009

Contactless PayPass Cards at Carrefour in France - a Transaction Limit Enigma

To my great satisfaction I read recently that Carrefour will issue it's PASS card with contactless technology in collaboration with MasterCard.

The new card will be on the cutting edge of current card technology,including multiple accounts on the same chip, giving consumers the choice to pay with their own money (debit) or funds made available by their bank (credit). It also includes extended purchasing guarantees for electrical/electronical goods, and Carrefour's loyalty scheme.

I was all in all quite pleased about the prospect of paying using the contactless card, and benefit from increased speed and convenience when checkouting out of Carrefour stores. That is, until I realized that someone had decided to out a max limit of €25 for contactless transactions, which means that I will have another factor to consider when paying my groceries: tap&go or dip&PIN?

Why complicate the process?
Honestly, I am not sure. Security? Could be. Someone in the card organization or the issuer might believe that it is inherently more risky to let me use the convience of a contactless interface.

I don't. Prove me wrong, but I am willing to take the risk. The card issuer should, as well, in my view.

War on cash, then? Well, maybe. MasterCard and Visa have always wanted to replace cash, and they are doing a decent job at it as well. However, the war will not be won by complicating the cardholders' lives.

The limit of €25 has apparently been set based on research indicating that 80% of all cash transactions are below this threshold.

Really? I actually checked out my grocery shopping transactions over the last 6 months, and here is what I found:
- I did 85 supermarket transactions, at an average of €58 per transaction.
- 80% of the transactions were above €25.
- My card payments ranged from a low €10 up to a solid €163.

So what did I miss re. Contactless payments and the imposed €25 limit?
At least not that most of my transactions are above the limit. Neither that I would be less than enthusiastic about contactless if someone imposes usage barriers and complicates my life. Not even the potential confusion at the "moment of truth" when cardholders must choose between tap&go or dip&PIN depending on the amount.

Now, maybe the press release about the new card did not tell the whole story. Maybe the limit only refers to the need for PIN verification of the transaction depending on amount, ie. Allows for contacless transactions without a PIN below €25, and contactless with a PIN code above the limit.

I certainly hope so. Otherwise Carrefour can look forward to some interesting times soon, with confused customers and frustrated employees at the check-out.

Wednesday, January 14, 2009

Guerrilla Warfare in Business - Armed with New Technology and Business Models

When the founders of PayPal and Skype appeared, they were heavily armed with new ideas, technology and business models. They established new paradigms by challenging existing companies and conventional banking and telecoms strategies. All the time with their customers' needs in mind. And the story continues.

The idea behind PayPal ( when it started in year 2000 was to provide its customers with a simple and inexpensive method of sending and receiving money using an electronic wallet. Eight years later the company has in excess of 164 million accounts (of which 65 million are active), reaching customers in over 190 countries. It processes transactions in 19 different currencies, totalling US$15 billion in 3Q08.

To put PayPal's growth in perspective: American Express spent over 50 years to build a customer base of 80 million cardholders!

Skype has enjoyed similar exponential growth for its internet based phone service( In five years, Skype has reached 370 million users who enjoy free phone calls, instant messages and video conferences via the web. The company is as such a serious threat to existing telecoms suppliers.

Disruptive Innovation Creates Business Earthquakes
Years before PayPal and Skype, Mr. Clayton M. Christensen launched the term ”disruptive technology” and ”disruptive innovation” to describe these types of business earthquakes. However, the phenomenon is by no means new. We could for instance have gone back to the introduction of the first automobile, and how transport has evolved since then.

Look at digital technology, and how it almost drove Kodak out of business. Our behaviour as consumers have changed dramatically since Kodak (!) introduced the first digital camera 17 years ago. We now take lots more pictures (lots!), we frequently "develop" them ourselves by printing them on our own printer, and the old-fashioned photo album is replaces by a giant flat-screen TV in the living room.

The similarity between these disruptive innovations is frequently the wish to offer simple, user friendly, inexpensive or even free services to the mass market. Niklas Zennstrom, one of Skype's founders, has more than once touted Skype's user friendliness - "if you know how to use a web browser, you know how to use Skype."

The Next Earthquake in Media
The competitors do whatever they can to retaliate and retain its customers. All resources are deployed to remain competitive, including technology, marketing, and price dumping. Other stakeholders also engage in the battle, such as the Indian government who announced that it would ban internet telephony for security reasons and loss of revenue.

Skype and PayPal have since joined forces under eBay's protective wings, and PayPal's e-wallet is widely used to pay for eBay purchases or top-up Skype for SkypeOut calls.

The founders of Skype have since launched Joost (, an interactive internet service for distribution of TV and video on the web. It's highly likely that Joost will contribute to another business earthquake, this time in the media industry. The guerrilla war is by no means ended.

Monday, January 12, 2009

Not an Even Playing Field in European Consumer Lending

The European financial services industry should be pleased that the European Parliament finally passed the Consumer Lending Directive earlier this year, after more than six years of mulling, negotiating, and digestion.

Or should it? Does the directive really bring about a single market for consumer lending, and level the playing field for consumers and credit institutions alike?

The directive’s objective is to harmonize the consumer credit market for non-mortgage loans between €200 and €75.000, a market worth at least €900 billion annually, according to the European Credit Research Institute in Brussels. It touches the daily lives of two out of three Europeans – more than 330 million people – who have subscribed to such loans to pay for furniture, buy a new car, or replace that leaking washing machine.

The revised directive aims at making it easier for millions of European consumers to solicit loans from lenders across Europe, facilitating the comparison of loan costs through a uniform way of calculating the annual percentage rate of charge (APR), providing standards for contractual information to be provided to the borrowers, and specifying (almost!) homogenous conditions for early loan repayment, among others.

Undoubtedly, the directive is a step in the right direction to strengthen consumer rights. Face value, it should also stimulate competition among credit institutions, with all it brings in terms of increased offer, more efficient markets, and better rates to consumers. All in all not negligible advantages these days, with financial markets in turmoil and consumers facing a serious credit crunch.

So banks looking to expand to new markets and tap into the €900 billion opportunity should joyfully be jumping up and down as a consequence, then? No entirely so. Important barriers are still forcefully in place, making the European market for consumer lending far from a level playing field. A look at just a few of these obstacles should display the magnitude of the issues outstanding.

No Pan-European Central Registry for Credit Information
In this information-intensive, computerized age, no central registry for consumer credit information exists in the EU. Registries are mostly national, and the information contained in these databases varies widely in terms of information collected about the borrowers and their credit worthiness, and the formats in which such information is stored. It is not uncommon, even within national borders, to find such information scattered across several databases or registries. If such registries exist at all. In certain markets, consumer credit information is only available in paper format, even today…

The lack of information sharing among credit institutions concerning customers credit history, delinquency rates, and other risk mitigating information – be it for legal or competitive reasons – further contributes to a less than perfect market for new market entrants. Data protection laws, which are largely governed by national laws and institutions, also represent a severe entry barrier for financial institutions in terms getting cross-border access to consumer credit information.

No Possibility to Provide a Fully Electronic Lending Process
Another constraints facing European credit institutions is the lack of infrastructure to provide a fully electronic lending process. If there is a striking lack of national infrastructure across the EU for verifying a person’s digital identity and providing citizens with a tool to digitally sign documents in cyberspace, the gap becomes glaring at a pan-European level. Although the directive for digital certificates was adopted in 2001, we still seem to be years away from a common, European-wide infrastructure for using digital certificates.

The result is a process which still relies on traditional mail (yes, we are talking “snail mail”) to provide the potential borrower with a contract, to be signed and returned, please. Needless to say, this process is less instant and more costly – not only the postage, but also in terms of follow-up and customer defection – than a fully electronic process.

The effects of the above constraints are tangible for consumer credit providers. Entry barriers for providing loans cross-border are still significant, both from a risk and a cost perspective. The lack of reliable information about customers’ credit history forces lenders wishing to enter new markets to accept higher risks and loss provisions, which may be reflected in higher interest rates on consumer loans.

More likely, however, is a scenario where new entrants, in order to remain competitive, will align their interest rates with local players by reducing their margins, thus making the business case for cross-border lending less attractive. Additionally, credit based marketing tools and automated assessment tools will have to be adapted to individual market needs, resulting in additional cost and complexity. Not to mention the cost and hassle of paper based processes…

Distorted Competition
The European consumer lending landscape depicted above certainly distorts competition, at the expense of a more efficient consumer lending market, and more favorable interest rates to consumers in need of credit. It also leads me to believe that the picture is not likely to change rapidly. The European Central Bank logged significant spreads in average rates charged for consumer credit in the Euro area in 2007, from a low 6% in the cheapest country (Finland) to 12%+ in Portugal, the country with the highest interest rate.

Although there are obvious benefits of harmonizing the market and allowing consumers to subscribe to loans at more favorable rates from lenders abroad, my guess is that there will be a significant inertia in the market. If the EU really wants to accelerate cross-border lending, which today stands at a meager 1% of total consumer lending, it would need to stimulate the construction of pan-European infrastructures for exchanging consumer credit information and using digital certificates.

Saturday, January 10, 2009

The Never-Ending Battle

No industry observer is surprised by the reported rise in fraud committed abroad on UK cards.

The perverse effect of harder-to-crack chip card technology is that fraud increases where chip cannot be used, by using cards with information obtained by skimming or other ways obtaining the information located on the mag-stripe on the back of the very same chip-card. Fraudsters, seeking the path of least resistance, gradually move to next safe haven to exploit the opportunities where chip has little or no impact.

One of them is the internet, leaving ample space for fraudsters to conduct their lucrative business. Although card issuers and acquirers deploy ever more sophisticated verification methods, there is still room for business growth, unfortunately, for fraudsters.

The other alternative is to move abroad. Although the card industry is finally gaining momentum in implementing chip technology, there are still large white spots on the map of chip-reading POS-terminals. Mag-stripe only POS terminals in combination with collusive merchants or below-the-floor-limit transactions are still among the simple but effective ways of fradulent activity.

Some may think that I am pessimistic on behalf of the card industry regarding its ability to curb fraud. I am by no means pessimistic, just vigilant. Card fraud is like squeezing a balloon. Squeezing one part of it will automatically result in the balloon bulging out elsewhere.
Which is why the industry needs to be in the frontline of this never-ending battle. But I am afraid we will receive numerous reports of the sort for years to come.

Thursday, January 8, 2009

Dinosaur Revival

Not too long ago, ATMs were predicted to suffer the same fate as dinosaurs.

With the invention of payment cards of all sorts, increasing usage of cards as a cash substitute, and the introduction of cash back at point of sale, ATMs were predicted to suffer a slow death. Those predictions, however, failed to consider two key aspects of ATMs.

First of all, the incredible utility of cash, which means that cash will never go out of fashion. Lots of people still prefer cash for certain purchases. Some because they do not have other alternative, but most because they have a cash preference. Cash is convenient, full stop. (Ever heard a retailer say “sorry, we don’t accept cash?” Me neither.)

And despite several decades of strong growth in cards, POS terminals and card usage, there are still quite a few purchasing situations where cash is king. Interestingly enough, cash withdrawals have continued to grow in parallel with card usage at point of sale, although growth is showing signs to slow down as markets mature.

Secondly, the predictions failed to appreciate that ATMs are part of an industry. A large number of stakeholders had lots to lose unless they manage to redefine ATMs. Which is exactly what has happened. Distributing prepaid cards through ATMs is a brilliant example of an industry’s survival strategy and ability to extend the life expectancy of ATMs.

Furthermore, given the reduction of bank branches in certain markets, I would argue that ATMs are still quite a cost effective way to provide basic banking services to clients, build brand presence and awareness on the high-street, and gain additional income from new products and services.

And serve those customers who still prefer to pay for many purchases in cash.