Weekly Market Commentary – Week Ending 07/10/11

OVERVIEW

The Bank of England finally caved in under the pressure of a faltering UK economy and increased its quantitative easing program on Thursday by a further £75bln, taking the total they have injected into the UK economy to £275bln. The “printing of money” is something that George Osborne, the UK Chancellor, had previously stated was a “leap in the dark” and was only necessary because of Labour’s “complete failure” to deal with the recession via other methods. In an apparent u-turn the Chancellor now insisted that injecting money into the economy via “printing money” was an appropriate tool considering the gathering storm engulfing the global economy. Even though the UK Chancellor has changed his views on the subject, it does seem to have had a positive effect from the financial sector as many were taken by surprise by not only the size of the injection, which many had thought would be £50bln, but also by the timing of the injection from the BOE, which most thought would not have happened until November. The move, although one of trying to stimulate growth into the UK economy did not help sterling initially, hitting a 13-month low against the greenback soon after the announcement, but later in the day in the New York trading session the pound recovered as many traders viewed the BOE’s move as proactive and thinking ahead of the game.

The move by the BOE is in stark contrast to the European Central Bank who has been floundering over the past months to deal with the serious issues facing the eurozone, in particular Greece. The lack of coordinated action has greatly contributed this week to the demise of Deixa SA, the troubled Franco-Belgian Bank, which has had to seek help from both the French and Belgian governments to fund a massive rescue and restructuring plan. Deixa is highly exposed to some of Europe’s most indebted countries, namely Greece and Italy, and the fear of default in those countries has made other banks very nervous about lending further money to Deixa, which in turn is making it harder and harder for Deixa to fund its day to day business operations. You may remember that in my blog a few weeks ago I stated that the ECB’s lack of determined action could force banks not to lend and hence create another liquidity crisis – it seems as though this is now starting to become a reality.

If there is any good to come out of the liquidity problems at Deixa SA then it has at least forced the hand of the ECB and European policymakers to take swift action, as yesterday the ECB announced aggressive liquidity measures and resumed its controversial bond buying tactic to give a lifeline to lenders who over the past few weeks have seen wholesale lending dry up as confidence in the markets has evaporated.

The news of the ECB’s actions prompted Gold, Oil, copper and equities to all rally in the hope that the ECB are finally starting to get to grips with the sovereign debt issue that has plagued the eurozone for almost 2 years.

CURRENCY MARKETS

The effect of this week’s events pushed the euro higher against the dollar, but still way off its highs earlier in May when it hit $1.50 against the greenback. However, many analysts have put the rally down to short-covering, where traders buy back into a currency on a previous bet it would fall, rather than on any fundamentals, as most still believe that the problems facing the eurozone will keep the euro on a downward trend over the coming months.

Sterling rebounded today after being initially sold off against the majors yesterday, following the announcement by the Bank of England to inject a further £75bln into the UK economy and the decision to keep interest rates at their record low levels of 0.5%. However, once analysts and traders alike had a chance to review the day’s events they viewed the decisive action taken by the BOE to inject money into the UK economy now, rather than later, as a good move for sterling in the months ahead.

Across the pond all eyes were focused on the U.S Non-Farm payroll jobs data, with many analysts only expecting a small gain of 60,000 jobs being created in the month of September. However, the release of the jobs data earlier this morning boosted investor sentiment as U.S. non-farm payrolls rose 103,000 last month, beating analyst forecast of 60,000 and suggesting that the world’s largest economy may avoid falling back into recession.

The news continued to aid the Canadian dollar which over the past few days has crept higher against its U.S counterpart as the ECB’s actions, has eased fears of another banking crisis, giving investors the confidence to move back into riskier assets and commodity driven currencies.

CONCLUSION

So another very eventful week in the markets is soon to come to a close, with some better news at least coming out from the U.S. in relation to its jobless numbers. However, Europe still does not seem to want to play as “a team” and the two biggest and perhaps most influential members in the region, Germany and France, seemed to singing off different hymn sheets today ahead of crucial talks this coming Sunday on how best to deal with both the current banking crisis threatening to engulf Europe and the ever increasing scenario of a default in Greece. It is this kind of indecision that has pushed the global economy to the brink once again and we can only hope that both President Sarkozy and Chancellor Merkel can find some common ground this Sunday and drive forward a solution that will not only work for Europe, but for the world.

On that note I wish you all a very happy Thanksgiving Day on Monday. Enjoy the long weekend.

OVERVIEW

All eyes this week were clearly focused again on the ever mounting Euro debt Crisis and the challenges the Euro zone faces over Greece. Earlier in the week cracks seemed to be appearing in the shaky consensus around rescue efforts for the euro zone and about how much money should be set aside to help deal with the huge debt pile in Europe. After last weekend’s talks at the IMF and World Bank meeting in Washington, it became clear that the current €440 billion set aside for the European Financial Stability Fund fell way short of what was needed. The figure agreed to be set aside was closer to €2 trillion and both UK Chancellor George Osborne and US Treasury Secretary Tim Geithner, urged Europe “to get on with it” and find a rescue plan to prevent not only the euro zone, but the whole global economy spiraling out of control.

Fortunately for Greece and the rest of the world, at a meeting this week, Germany’s parliament got approval of new powers for Europe’s bailout fund in order to increase the size of the fund to the €2 trillion. The news did give the euro and the equity markets some respite, but it was short lived as fears the global economy is slowing and the debt crisis will spiral out of control caused many investors to cut bets on risky assets and flee to the safe haven of the greenback, Swiss franc and gold at the quarter end.

The continued problems in Europe over the past few months have contributed heavily to the biggest drop in the MSCI world equity index falling more than 16% over the past quarter, the largest fall since the last three months of 2008.

Asia has not escaped the “European Problem” as Asian equities staged their worst monthly performance since the fall of Lehman’s in October 2008. China’s benchmark stock index stacked up acute losses amid fears of a property market correction, which is a clear indication that the problems in the euro zone are starting to impact the rest of the global economy.

CURRENCY MARKETS

The euro continued to fall this week against both the dollar and the yen, down to lows last seen in January and 2001, respectively. Overnight it was sold off again on doubts over the solidity of a strengthened euro zone bailout fund, leaving the euro on track for its biggest monthly fall in over 10 months.

The worry for the euro is that although the German parliament agreed to the extra powers to raise the EFSF, comments from Germany’s economy minister stated that the lower parliament seemed unwilling to approve higher limits, wiping out all the gains the euro had made on Thursday when lawmakers voted to approve bolstering the size of the fund.

The dollar continued to make gains last week, rising against a basket of currencies, raising its trade-weighted index 0.3 percent to 78.255. The rise in the dollar has much to do with month-end and quarter-end demand, as analysts saw a need for investors to buy the dollar against the yen, pound, and Aussie and Canadian currencies for adjustment purposes.

It is also interesting to note that the commodity driven currencies such as the Aussie, Kiwi and Canadian dollar have all suffered losses this week due to varying reasons. The New Zealand fell yesterday almost 1% to a six-month low, when Standard and Poor’s followed Fitch ratings in downgrading the country’s sovereign debt by one notch.

The Canadian dollar did not fare much better and was trading at a one-year low against the U.S. dollar as investors shied away from riskier assets by buying U.S. dollar-denominated assets. The loonie, (the Canadian dollar’s nickname in the markets) has fallen 2.2% over the last three months among a basket of currencies as the worry over the euro zone debt crisis and slowdown in global economy has bought risk aversion to the forefront of most investor’s current strategy.

CONCLUSION

I wish I could paint a rosier picture than the one I have been painting over the past few weeks, but until the euro zone countries get to grips with the debt crisis facing them it is hard to see how growth can be stimulated in the global arena. The crisis not only threatens to destabilise the global economy but the very existence of the Euro. The laissez-faire attitude to the crisis by many European leaders has contributed to the fear of contagion and confusion across the region, which has increased to an epic scale. This is what makes Europe’s crisis so worrying and more importantly, so very very difficult to treat.

NB:  hyperWALLET has been processing payments in the England and Europe for over 5 years, but we’ve recently expanded our (human) footprint in the UK, too.  Our team in London now has both sales and Foreign exchange trading expertise, to better serve our global corporate customers.  Nigel Green is the former Head of Corporate Dealing at Travelex, and thinks about payments from the  perspective of the treasury professional and ‘all things macro’.  Here Nigel’s first dispatch from theCurrencyCorner:

Weekly Market Commentary – Week Ending 23/09/11

 OVERVIEW

 This week has seen the financial markets fall back into turmoil as the situation in Europe threatens to derail the global economy. The situation in Greece has got so bad that many analysts in the market believe they are going to default on their loans, a theory that was backed up today when Greek Finance Minister Evangelos Venizelos was quoted as saying, “an orderly default with a 50% haircut was one option open to Greece to try and bring back the insolvent euro zone nation bank from the brink of bankruptcy”.

This view was shared by Klaas Knot, a European Central Bank governing council member, who told a Dutch newspaper that a Greek default could not be ruled out. He is the first ECB member to openly admit such a thing and is not following the party line of other ECB members and European leaders who have constantly denied that Greece is insolvent. European leaders are now in danger of creating contagion across the region if they do not admit the real situation in Greece and take firm action to prevent another credit crisis that took hold in 2008 after Lehman’s bankruptcy.

The alarming fall on the world’s stock markets this week seems finally to have pushed European leaders to act, where they announced yesterday at the G20 meeting that the world’s major economies will do all they can to prevent Europe’s debt crisis to undermine banks and financial markets and have pledged to increase the European Financial Stability Facility (EFSF), which currently stands at €440 billion. The effects of all of the above this week, forced stock markets across the world to tumble at an alarming pace, with the FTSE in the UK shedding some £64 billion in value on Thursday alone.

CURRENCY MARKETS

The currency markets have also had a see-saw ride this week with the US dollar being the biggest winner as investors, in a flight to safety, moved out of riskier assets and moved into the safe haven of the USD and US Treasury bonds.  The greenback rose to 1 year highs against the pound, the euro, Canadian and Australian dollar. However, on a more sour note for the US economy weekly jobless claims fell, but not as much as analysts had forecast, putting further pressure on the US economy sliding back into recession.

As for the Canadian dollar it lost ground against its U.S. counterpart this morning hitting 11-month lows, as appetite for risk in commodity driven currencies waned as fear of a renewed recession surfaced. However, many traders said that the weakness of the Canadian dollar was victim to the bigger story of U.S. dollar strength and would take its lead from U.S. equities. This view was backed up by C.J. Gavsie, Managing Director of FX sales at BMO Capital Markets who stated, “This is not a Canadian Story here, so we’re going to be held accountable like everybody else is to the direction that equities give us.”

CONCLUSION

Next week will be another very testing time for the global economy with many thinking the repeat of the credit crisis of 2008 is only around the corner.  Equity markets lost billions of dollars in value across Asia, Europe and North America this week and many analysts feel that for another crisis to be diverted, it will take more than just words to sooth fears of another global economic slowdown, and until substantial coordinated action is taken, these fears will continue to grow.

Financial Institutions rely on proprietary datasets drawn from a variety of sources to be consolidated and pre-conditioned to be suitable for automated name screening in account opening, account maintenance, and transaction processing scenarios.

Civil libertarians and privacy advocates have raised concerns that the screening processes adopted by Institutions have become opaque, and practitioners worry that the proprietary list data they rely upon for their processes expose their institution to litigation risk.

hyperWALLET is proud to be one of the founding sponsors of the  Open Sanction Data Project.    An idea formulating in my mind since about 2007, the catalyst for actually  moving on the idea was a recent  Privacy Commissioner of Canada report (pdf ), which examined private sector anti-money laundering databases for possible areas of concern in relation to Canada’s Privacy Act.

The Open Sanction Data Project’s Subscription Service  will be launched in beta in October, 2011.  The service seeks to improve transparency within the financial services industry by providing a free and open source alternative to commercial, closed-source feeds of globally-consolidated Sanction List databases.

The project will publish and make accessible without charge a transparent global Sanction database, together with:
- Source code of all routines used to condition original data
- URLs of all original data sources
- Names and Roles of team contributors

If you are a data analyst, software engineer, or compliance practitioner I encourage you to check it out and perhaps think about contributing as a service developer or beta tester.

Are you familiar with the buzz around workers’ remittances? Prominent institutions such as the World Bank, the Inter-American Dialogue and even Swift have devoted significant resources to studying workers’ remittances. Why all the commotion?  The attention?  The effort?

First, remittances are important.  Countless people around the world rely on remittances for clothing, food and shelter.  That’s powerful stuff.

Second, there’s money in remittances.  Everyone has heard of Western Union and MoneyGram.  These are big companies that send massive amounts of money around the world each year.

But what about the smaller players? iREMIT is publicly traded and reported approximately $21.66 million Canadian dollars in cash and cash equivalents for the period ending March 31, 2011?  Have you heard of UAE Exchange?  If you haven’t, you will soon.  This supercapitalized remittance provider out of the UAE is making a strong entry around the globe, and operating in the U.S. under the name Moneydart.

And that’s just the tip of the iceberg.  Banks from remittance receiving countries are establishing an ever-growing network of outposts in remittance sending countries to leverage their name and brand familiarity among immigrant communities.  Visa and Mastercard are getting into the remittance business, and so are many, many others.

hyperREMIT Launches in Oct. 2010.

With so many payments companies trying their hands with workers’ remittances, hyperWALLET elected to join the fray, because we think our service approach is unique and represents the future of remittance.

Our hyperREMIT service ( http://www.hyperremit.com ) targets Filipino Canadians and Filipino overseas foreign workers (OFWs) living in Canada.  For purposes of this article, I will refer to the group collectively as “Filcans.”  Filcans sent almost $2 billion home in 2010.

From humble beginnings with virtually no marketing or branding initiatives other than word of mouth, we have seen and maintained tremendous month-to-month growth by focusing our efforts on an underserviced market segment – Filcans wishing to send funds to a bank account in the Philippines conveniently, and for a small service fee.

We focused our efforts on supporting the three legs of this stool:  (i) limit deviation from bank to bank transfers; (ii) make the service convenient; and (iii). charge low fees to win the approval of credible sources such as the World Bank as well as the Filcan community.

The First Leg of the Stool:  Bank to Bank Transfers.

Focusing on bank to bank transfers meant charting a different course from that taken by most of our competitors.  Accepting payment by credit cards exposes the merchant to high interchange fees and chargeback penalties, costs which generally need to be passed through to the consumer.  Credit card payments were not consistent with our mission.  Also, as an Internet company at heart, we did not wish to open up stores or kiosks, or build a large agent network to accept cash, at least in the short term.

Therefore, we elected to accept payment in only two forms:  (i) bill payments from the customer’s online banking account, and (ii) pre-authorized debits (PADs) from the customer’s checking account.  Bill payment adds an extra day or two for clearing and settlement, but it gives the customer an added sense of security.

PADs can be sent instantly, and are inexpensive, costing hyperWALLET about $.08 per transaction.  To date, PAD is by far the most popular means of payment for our customers.  While we offer cash pickup, door-to-door delivery and Smart Money payment services to our customers, our market research accurately predicted the most commonly used payout method: the safe and reliable bank deposit.

The Second Leg of the Stool:  Convenience.

Most Filcans live in Canada’s big cities, especially Toronto and Vancouver.  These Filcans have a wide number of stores servicing their remittance needs.  Nearly every Asian grocer offers at least one remittance program.  Nevertheless, the Canadian winter is long and cold.  In many cases Filcans may wish to avoid trudging through the snow or rain if their only errand is to send money home.  In addition, smaller towns and cities offer fewer remittance services to their inhabitants.

Before hyperREMIT, Canada’s web-based remittance offerings were generally second rate.  Have you heard about the Filcans from BC’s gulf islands that spend hundreds of dollars per year traveling to Vancouver to send remittances once per month?  We have.

Canadian Filipino Community Outreach

According to our analytics report, last week visitors to hyperREMIT’s web page came from almost 150 towns and cities across Canada, demonstrating hyperREMIT’s broad geographic appeal.

SMS Remittances

When developing a convenient service, we drew from the models of existing online remittance providers and improved on them.  We based the send function of our platform on the mobile phone, and we made it simple.  Filcans can send remittances by calling us toll free.  For those too busy to wait on hold and respond to security questions from our call center staff, we also accept remittance requests by SMS text message.

Yes, the humble text message – the tube steak of modern communications – can now be used to authorize financial services transactions.  When a Filcan sends us a message saying “Send 2500 PHP Mama”, we send the remittance in accordance with their previously specified parameters, e.g., to Mama’s bank account, home address, Smart Money account, or to a cash pickup location (usually it’s a bank account).

hyperREMIT's SMS Remittance service

We filed a provisional patent on this sending method because it just may revolutionize the remittance business.  I would like to buy and sell stocks using the same format, but that’s another blog altogether.

The Third Leg of the Stool:  Low Cost.

Finally, we had to find a way to support our desired low cost structure. For a $6 flat fee to enable a direct to bank remittance, we had to keep our costs down if we were going to make any money.

As noted above, our costs to take in customer funds are very low.  We already operate a call center, and handling additional volume for hyperREMIT is essentially a fixed cost, at least for the time being.

Therefore the biggest expense is delivering the ACH payment locally in the Philippines, which is a relatively modest sum per transaction.  We expect to reduce this sum over time as our volumes increase.

The Result.

How is hyperREMIT doing?

The charts below denotes a number of key indicators, including new accounts per month, total accounts per month, total remittances per month and the number of accounts that complete a transaction per month (sorry, the actual numbers are confidential).

To learn more about hyperREMIT (a service of hyperWALLET Systems Inc.), visit http://www.hyperremit.com

Canada rolled out chip+pin for our national debit scheme in 2010 and we’ve all just about gotten the hang of it at the POS now, even cranially-challenged consumers like me. chiping+Pining debit purchases wasn’t a huge leap since Canadians have been swiping+PINing our debit cards for the past 15 years (we’ve never had signature debit up here). Plus, debit cards issued by a primary financial institution are easier to manage. Its the same one that you use for online banking, smartphone banking, payroll deposit, recurring debits, and even those dwindling number of visits to the branch. So if you forget your PIN or lose your cards your have multiple accessible ways to get service and help.

But the migration to chip+PIN for Credit Cards its taking us Canucks bit longer – somehow setting/remembering another PIN for the average 3.7 credit cards we carry in our wallets is harder. In my case, 2 of the 3 credit cards I carry are issued by institutions other than my primary F.I, and I dont access online banking for either one. One of these cards is only used for company expenses, and the other one is personal but only for backup, like 2 weeks ago when on a trip to L.A. when my primary card was suddenly rendered useless. I think TD’s fraud robot trip may have taken offense with the poor nutritional choice I made @ 30,000 feet (granted, buy-on-board Alaska airline snacks are junk), but for whatever reason the card hasn’t worked since then. Thank goodness the USA hasn’t gone to chip+PIN, because I had no clue what the PIN was for my backup non-TD VISA card, having not used it in 6 months, but happily I could still remember my name and sign with it so I wasn’t left washing dishes at the happyThai palace on Sunset Blvd.

There is no way consumers are going to be able to set and remember unique secure online passwords, VBV/MasterCard Secure Codes, a mobile access code, and now a POS PIN for each card they carry, so better access to set/reset/panic services for cardholders is going to become important. This is why the announcement a few months ago that Canada Post launched a chip/pin reset service caught my attention: http://www.canadapost.ca/cpo/mc/business/productsservices/pinservices.jsf . Very cool – I don’t need to worry about where is the nearest x-bank branch to set my backup card PIN – I can just pop in to the Canada Post outlet on the corner and do it!

Canada Post Chip PIN reset Service

At hyperWALLET we starting mulling the possibility of Post offices as the ultimate real-world customer onboarding solution for electronic financial services providers which lack brick and mortar presence. That’s why this announcement, which I missed at the time, really knocked my socks off: http://www.amlcompliance.ca/2010/09/08/canada-post-presents-face-to-face-authentication-in-canada/

Post offices are natural partners for Financial Service providers – the largest MTOs like Western Union and Money Gram have known this for a while – they vie for tie-ups with Postal Services in each jurisdiction for prime remittance agent presence.

Isreali Post Office Offering Western Union Services

Consumers and businesses are of course used to trusting post offices, signing for parcels and presenting Ids, and Post Offices are desperate to find new revenue models if they want to survive and service their unionized workforce pension obligations.  Everywhere we see examples of Post Offices trying to “go Virtual”, leveraging their trusted brand with electronic services like bill payments and SME payable applications. But post offices governance structure and unionized public institution cultures strike me as being at odds with this approach – their offerings will be annihilated in the market by private companies orders of magnitude more innovative and more nimble. I think a smarter strategy for Post Offices to make in Financial services would be to leverage the one asset they have that neither ADP, nor VISA, nor paypal, Amazon, etc will ever have – physical global neighbourhood presence. Offering identity verification, risk management, customer onboarding and secured device access points to the industry as a whole would be a better bet.

On the Picket Line with a Coldie

Starting with Employee Screening, AML KYC, and Credit Card CHIP/PIN reset services, it will be interesting to see how Canada Post’s 2010/2011 initiatives play out over the next few years, and whether or not they are mirrored in other jurisdictions.   Regardless;  those friendly CUPE workers at Canada Post, (once they get back on the job), have made the playing field for Consumer and small business financial service providers in Canada just got a whole lot more level!

According to the Boston Consulting group, the global payments industry is approaching 500B in revenue.

According to my math, this implies that payments industry’s revenues alone represents a 0.67% tax on human effort.

Global Tax of Payments

If payments industry revenue, as summed by the Boston Consulting group, were the true and total cost of exchanging value, then the world would have something to celebrate, because a 0.67% tax on human output to redistribute the fruit of that output doesn’t seem too bad.

But the fact of the matter is quite different. I was talking to a CEO in an eCommerce industry a while ago, who told me that the metric he and other CEOs in his sector use is 10%. Yes that’s right – - – the “cost to cash” for him is 10%. Note that he doesn’t think in terms of his merchant discount rate for CNP vs POS, normalized by the distribution of loyalty and premium cards over his client base, adjusted for the absolute value of rolling reserve/incremental cost of his bank’s adjustable operating line charges. Nope, he just knows that payments takes 10% from the top line. Kind of makes you understand why one merchant reserved the www.wayTooHigh.com url, doesn’t it?

I’m happy that the Dodd-Frank bruhaha in the USA is focusing media attention on our sector, and don’t agree with Karen Webster’s article at pymnts.com that this legislation, if passed, will threaten payments innovation by throttling investment incentives.  Her logic is valid, because innovation ‘as we know it’ may have to revisit its obvious revenue model if interchange undergoes a step function change. But I don’t think this is a bad thing – I don’t believe the world been well served by payments innovation as we know it. In my opinion, the Fresno Drop represents the last time there was true innovation in payments, and that was over 50 years ago. Despite half a century of human progress, massive reductions in communications costs, massive improvements in computing power, and now almost continuous ubiquitous human connectivity, the payments innovations attracting venture interest in new economy might actually be sending the cost-to-cash higher: iTunes, BillmeLater, FaceookCredits, BOBO taxes range from 10% to 30%. Even exciting new services like paypal and now square are fundamentally layering additional small data processing taxes on top of existing card association tarifs – - – As Galen Gruman points out in his insightful infoworld article, none of these, and likely not NFC either, will represent a new payment paradigm: they will only be a faster, shinier route to the set same 2-4% Fresno-Dropped discount fee.

I believe that a new service model which interlink banks, regional switches, and ACH scheme services with low-cost corporate payable and receivable apps, and which can be extended to consumer payment acceptance scenarios will set the stage for the next few decades of innovation.

But anyway its much lower cost than locally competing services – about 1/3 the price.
2) The marketing model is good for the community. We’ve designed a referral viral marketing plan that returns 30% of those $6 fees back to the community, on an ongoing basis, much like a compensation plan adopted in the Direct Selling industry. Its early days yet, but we’re seeing enthusiastic reuse and friend introductions. We want to auger in the age of the agentless remittance model. Or, as I prefer to think of it: the agentful remittance model, since on a planet where every remittance participant has a mobile phone, every remittance participant is also a potential remittance service agent.
3) The technology & service innovation required is good for us. After 11 years in business, hyperWALLET is no longer a fresh-faced startup. Our shareholders justifiably expect us to be solving real world corporate and Financial Institution payment distribution problems, @ real world margins and volumes. So… how does a company with innovation as its raison d’etre stay…interested?

Fortunately the payments market – where there is just so much really horribly inefficient about global clearing, and really just so much horribly unjust about remittance offerings, is that there remains tons of opportunities for projects and services to keep things interesting. hyperREMIT happens to be one such example.

The patent that this blog post refers to is a byproduct of keeping things interesting. Figuring out how to compliantly fulfil KYC regulations, risk manage bank debit advances, and provide a $6 SMS service across multiple continents and languages with minimal project budget is non-trivial. i.e. interesting.

One day a heated argument between interested product managers and marketing folk on the small team arose (with engineers caught in the middle, as is our lot in life.)  The gist of the argument was “The command should be ‘SEND’ $50′, not ‘REMIT’ $50!” “I disagree! ‘REMIT’ is anglo-centric…how are we going to pick a localized equivalent & implement necessary edge-case error detection /correction algorithms for ‘REMIT’ across the 17 languages we support?”

Luckily a collective lightbulb went off before the scene devolved into fisticuffs… who are we to mandate what the command syntax should look like? Why not let our users decide? The upshot of hyperWALLET’s newest provisional patent ‘User-Specific SMS Text Messaging Syntax Service’, means that “Send 50 mum” can have a completely different interpretation to a service provider, depending on who is sending it. In the case of our hyperREMIT service, this command may result in $50 CAD being sent from a pre-configured and pre verified source bank account to the Credit Union account of our user’s mother in a small village in the Phillipines. But the same command received by a speciality infant clothes distributor in Boise idaho could result in quite a different commerical outcome. Service providers can provide online wizards for their user community to define their own text command syntax. No need to localize is just one of the benefits of this approach.

So, the next time you are innocently happening by your company’s meeting room and notice the blood spatter staining your walls and your engineers’ eyes bugging out as they yell at your product managers (or each other) , consider asking yourself if the most cost efficient resolution to the matter is

• (a) order more sanitizing wall cleanser, or
• (b) file a new provisional patent.

Is globalization accelerating the pace of convergence to payment network homogeneity?

My guess is that EFTPOS needed to take this action if it didn’t want to see issuers start to abandon the EFTPOS product as a standard component of their DDA accounts. Still, it is kind of sad to see another unique thing about a place go away – I lived in Sydney in the late 80s/early 90s, so I remember EFTPOS introduction at the POS.  One acquiring processor spent a bit of time with me explaining the history of card payments in Australia.  After the introduction of ATMs, it was natural that a debit service would be expanded to shops. But who to pay? Evidently the industry got together and decided on a 25 bp (est) -ve POS interchange because “the largest merchants, and their acquirers were the ones who bore the most costs setting up and running the service”. i.e. device deployment, POS system changes, etc. This struck me as eminently sensible logic. But still slightly trippy, since its an unalloyed tenet of North-American payment practitioners that the merchant shall pay.

Every Australian now carries an EFTPOS card, just like INTERAC here in Canada. Every merchant accepts it. Credit cards are and have been extremely widely deployed, but were really credit cards, and not typically used to buy things like groceries, etc. Fast forward to 2009 and Visa/MC enter the Australian market with prepaid and debit products.  Issuers began distributing dual-badged EFTPOS + Visa/MC cards, and promoted the use of Visa/MC over EFTPOS at the POS to consumers, since of course this choice is more profitable for the issuing bank.

In retaliation, Merchants start surcharging for scheme card use, and changed their POS devices to promote the use of EFTPOS.  The other interesting difference about Australia vs Canada, is that every POS processor in OZ detects dynamically the ‘type’ of card swiped, and looks up its corresponding discount fee.  This information is passed back to the POS device in real time, so the surcharge presented to an individual consumer for choosing to use his scheme card over EFTPOS will vary depending on whether his Visa/MC card is one of those ‘evil’ premium cards.  Wow – Australian merchants really do have control over their processing costs.

At the Canadian Payments Association conference last summer, I recall distinctly Canadian scheme association representatives warning about what a terrible situation they have down under. Their message was that dynamic POS prompts in Australia have resulted in horrible confusion for the poor brainless consumer, who is overwhelmed with complexity at the POS when having to decide whether to use EFTPOS or Visa/MC.  Worse, the consumer is unfairly penalized by merchants gouging with surcharges ‘way beyond’ the interchange rates for the use of their products, up to 8%.  (Total interchange fees can not exceed 50 basis points by regulation).

These assertions are at variance with my experience when I was in Sydney 2 weeks ago.  I paid an average of 2% POS surcharge for using my North American-issued Mastercard everywhere.  I also closely observed as many natives paying as I could, without calling attention to myself.  My conclusion: the average Australian consumer possesses the intellectual capacity necessary to negotiate the POS choice complexity challenge presented to him when paying his bar bill.  Even after a few beers!   I concede that Australians are indeed a clever people.  But imho no more clever, on average, than the rest of us.

I’ve been reading some January ‘Predictions for 2011′ payments blogs and the general vibe is not overly optimistic.  Tom Noyes at FinVentures  notes a “tough start” for mobile payments, citing service discontinuations (Firethorn) and CEO succession (Obopay) on the back of disappointing revenue growth and inscrutable value props.

And a recent entry on the bankingTheUnbanked blog warned against mobile payment services becoming complacent and uninspired in their remittance product and partnership strategies.

Instead, let’s start 2011 on a hopeful note, even if it is 19 days late.

First, on the merchant side of things.  Could 2011-2015 become remembered as “the 4 years that turned the POS payment segment on its ear“?  Consumer smart phone adoption + the Dodd-Frank financial-reform law in the USA might just set the stage, since:

• merchants will enjoy transaction-routing freedom, and radically reduced interchange on debit, and
• consumers will  start to trust their phone apps for more than SMS, skype calls, and Facebook status updates.

This combination to me signals a fertile opportunity for mobile applications – from even small startups – to be promoted by merchants and adopted by consumers, without reliance on card association affiliation.

Here’s an example:  yesterday a coworker gleefully offered to fetch me a free mocha – delivered right to my desk and ordered on her iPhone.  Nearing the end of my first double espresso of the morning, this was a tough offer to turn down.  Mobio is a startup with founder expertise in identity management, a paper QR code coupon @ the coffee shop, and a downloadable smartphone app for consumers.  The consumer app is Easy and Fun.  Payment is currently by credit card, but one can easily see the value for merchants for an app like this to connect them directly with their customers, regardless of which payment instrument (cash, card, ACH, prepaid) is ultimately used to settle a transaction. I hope that services like Mobio and local variants start to take off – Starbucks shouldn’t be the only coffee shop with a prepaid card or a mobile reward program.

Still on cards and innovation at the POS:  if merchants can enjoy freedom of POS debit transaction routing, (admittedly only after it is imposed by regulators), is it beyond conception that  consumers should similarly  enjoy the freedom to dynamically ‘choose’ which account they present for settlement at the POS? Granted, the cold war stalemate strangling ubiquitous mobile innovation at the POS remains in place, with Mobile Network Operators controlling access to secured applications on mobile handsets, and Acquirers/Card Associations largely controlling merchant POS infrastructure.  But here’s a wild thought – what if someone taught the old mag stripe dog a new trick?  This CES award-winning technology could potentially break that stalemate, since merchant infrastructure would not have to change for new products to be introduced; the height of the mountain to climb is halved.

So you see, its not all bad innovation news.

Have a happy 2011.