Smart Card & Identity News A New Flavour for eCash

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Events Diary May 2012 14-17 Mobile Money 2012 - http://www.mobile-money-gateway.com/event/mobile-moneyafrica-2012v 15-16 Cards & Payments Middle East- http://www.terrapinn.com/exhibition/cards-andpayments-middle-east/index.stm 21-23 Security Document World 2012, Queen Elizabeth II Conference Centre, London, - http://www.sciencemediapartners.com Source: www.smartcard.co.uk/calendar/ …. Continued from page 1 The Royal Canadian Mint has gone for the third approach by adopting a direct asset transfer model. There are advantages and disadvantages of each approach which we will look at in more detail. The 4-Party model is that commonly seen today when paying with a credit or debit card. The bank holds the consumer’s accounts for which funds can be either pre-paid or post-paid. The bank that holds the account is called the Issuer because it traditionally issues a card which allows the consumer to access their account. The consumer is called the CardHolder because they traditionally hold the card that gives access to the account. The Merchant is the provider of goods or services to the cardholder in exchange for payment. The fourth member of the set is the merchant Acquirer which is the bank or service provider that acquires the transactions for clearing and settlement within the networks of the financial institutions. In other words the Acquirer has to get the funds from the Issuer on behalf of the merchant. It doesn’t take very long to appreciate that all these various parties have costs and therefore want to charge fees for their payment services. The Issuer charges an Interchange fee for the costs of managing the cardholder relationship, the acquirer charges for the costs of managing the transaction (which will include an authentication and authorization process) and the network processing costs applied by the payment operators such as Visa and Mastercard. All these fees of course are accumulated and get applied to the merchant, sometimes called the merchant discount fee. These fees are applied per transaction and for a small merchant may be 3% or more for a credit card transaction. Debit card transactions are usually a fixed fee per transaction and for a small merchant may be 25 pence or more per transaction. It is immediately obvious that this 4-P model is unlikely to be economically feasible for very low value transactions of a few pounds or less. In the cash world these small value payments dominate the market. So the question is how can we reduce the cost of these 4-P model transactions. That’s not easy and the approach adopted by the payment operators to date has been to remove the on-line authentication/authorization step. Effectively what the Issuers are doing is taking the risk on an off-line transaction if the value is low enough (e.g $20 or less). However ignoring the details for the moment it is clear that there is an increased risk and only a part of the costs have been reduced. In addition you would want to minimise the risk of card fraud and at the least would want the consumer to be using a secure smart card. This is really not a place for a magnetic stripe card. From the consumers point of view there is an advantage because the Issuer often has to bear part of the transaction risk under the various consumer protection laws and of course if you lose your card you don’t lose your money (assuming you report it to the bank). You don’t need a degree in economics to realize that this still isn’t going to work for transactions with a value of say less than say $5 and in the virtual world of the internet there is a need to handle transactions perhaps less than $1. The ultimate test is whether you can handle a transaction of 1 cent? Not by the 4-P model! Smart Card & Identity News • March 2012 4
The second approach to handling low value payments is to have some form of aggregation. What you want to do is to avoid the 4-P overheads of handing individually small value transactions. Cardis is a company http://www.cardis-international.net/ that has been working on this for some time with a scheme that does effectively aggregate small transactions leading to reduced costs. They have recently announced that Austria’s Raiffeisen Bank International is to use Cardis software plug-in for low value payments in Q2 this year. The other approach to aggregation is effectively a subscription model where you lodge funds with a service provider on a pre or post-paid relationship. What is clear is that you are effectively setting up an account with the service provider and although it is a closed system (only you and the service provider) there are still the overheads of the service provider having to authenticate the consumer requests. This part of the transaction is no different to the 4-P model and if the scheme is post-paid then there is also the risk overhead of the service provider not being paid. Apple’s iTunes is effectively a subscription model. From a consumer’s point of view this works with any intermediary you regularly use such as Amazon or iTunes, we will however save discussion on the 30% fee taken from the service providers by Apple for another day. Can you do a 1 cent transaction? Mmmm now that also seems unlikely because you still need to cover the overheads. And then not last is the third model where the transaction does not require intermediaries. This is the approach being adopted by the Royal Canadian Mint in their current R&D project. This is of course exactly analogous to the use of cash. I can make a payment to you (in the physical space) where no third party is involved in the transaction. In this case the asset is being handed from person to person. What the Mint has been working on is the ability to do this electronically in the internet world so again you can pass 1 cent from person to person. Now of course nothing really comes for free, in the UK it has been estimated that it costs £4 Bn per year to manage cash. It is the cost of collecting it all up, counting it and securely distributing it between merchants, banks and consumers. Now this is the $64K dollar question (just changing currencies for the moment), can you electronically manage electronic cash without hidden overheads? Mondex actually had a good go at this back in 1990 (can you believe it’s that old) and suffered with a lack of infrastructure. There were few mobile phones in those days and who do you know that was using the internet. So let’s see what happens to a 21st century approach to electronic cash. Conie Mutters (Analyst, Electronic Payment Systems) Ed: Since this article was written the Royal Canadian Mint has gone public with a developer Challenge to test and gather industry ideas www.mintchipchallenge.com for its MintChip eCash system. They have provided a lot more information on their web site which we will review next month. World News In Brief American Express Unveils P2P Money App for Facebook Serve from American Express has announced an application that allows friends to send, receive and request money from directly within Facebook. The Serve app is currently the only application available on Facebook that allows friends to send requests and receive payments in just a few clicks. "The way people exchange money is evolving, and so is Serve," said Dan Schulman, group president, Enterprise Growth, American Express. "We're constantly working to bring our customers a seamless and consistent payment experience -- one that makes sense for our increasingly social lives, Smart Card & Identity News • March 2012 whether that's paying a friend back for movie tickets or sending someone money for your share of the vacation house -- it can now be sent on Facebook." Exchanging money with friends takes three simple steps: Choose your friend to send money to, enter the dollar amount, and click send. Facebook friends are automatically populated directly into the app's interface, so there is no need to worry about finding a friend's email address or gathering additional information. Once completed, a message is immediately posted to the recipient's Facebook wall providing directions on where to collect their money or to sign up for Serve. 5
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