Short term short circuit

I guess members of Congress don't play chess. You know, developing a strategy, thinking several moves ahead, taking into account that every move you make will generate a counter move. The inevitability of that counter move apparently escaped Congress when they passed the financial reform bill with the Durbin amendment intact.

Durbin mandates the Federal Reserve to regulate debit card interchange. For those of you who have never heard of or do not understand interchange, it's a small, per transaction percentage charged merchants when bankcards are used to purchase products and services. A Fed report puts the average amount of interchange per transaction at $0.44.

The Fed's plan announced last week is to artificially cap interchange on debit cards (not credit cards) at $0.12. If the proposal is approved by the Fed, merchants will save money when customers use debit cards to make purchases, which will allow merchants to pass along savings to customers. Or that's what lawmakers and regulators think will happen -- end of the story.

But every action has a reaction. The reaction will likely be that banks (beneficiaries of interchange) will reduce or eliminate low-cost or free services on checking accounts, since debit card interchange helps to fund those programs. Because banks will start to charge fees on checking accounts to make up for the lack of interchange, people will stop using their debit cards as much.

If consumers shift from debit back to credit cards, merchants will start paying more credit card interchange, which is significantly higher than debit card interchange. And if consumers can't shift back to credit cards because they have bad credit, and they don't want to pull out those expensive-to-use debit cards, maybe they start to reduce (even more) their amount of shopping altogether.

So, an amendment designed to help merchants and consumers ends up costing merchants more than they already pay in interchange, causes consumers to spend less or go into greater debt with credit cards, and hinders economic growth.

If Congress plays any board game, it's checkers, not chess.    

   

Putting tech in its place

The software developer I interviewed a few weeks back seemed a little uncertain about me when I mentioned I don't own a smart phone. But it gets worse. Not only do I not own a smart phone, I don't own a cell phone with a wireless plan. I use a prepaid phone.

For someone who portrays himself as a tech writer, I can see why someone would have reservations. But the reason I don't own a smart phone is simple -- it wouldn't improve my life.

When I go for a walk, I don't need the ability to download MP3s and "friend" yet another stranger. When I drive my truck, I don't need wireless connectivity.  When I'm on a plane, I'd rather sleep. When I'm crossing the street, the last thing I want to be doing is surfing the Internet (California drivers can NEVER be trusted.)

Of course, there are downsides to my personal brand of Ludditism lite. I can't check e-mail on the fly and I can't use my phone to ignore other people in awkward social situations, like standing in line at the pharmacy and waiting for the movie to begin.

I am not saying I will never own a smart phone. It would be novel to play games on one or otherwise divert myself from the real world. But I prefer a slower pace of life. I access technology when I need to pay bills, write a blog, conduct research, communicate with friends and colleagues. So I ask myself, why do I need a smart phone?

Of course, I would think differently if I lived in the slums of Mumbai or in a tiny village in Malawi, where owning a smart phone might make the difference with that ultimate of applications -- survival.

   

The United Consultancy of America

An offhand comment on talk radio sparked a thought about the future of America. The subject of the talk show was the economy. The host mentioned that Apple could not possibly manufacture the iPhone in the United States, since it would cost $5,000 per unit. 

Everything is expensive to produce in the U.S. when compared to the rest of the world. The effects of  unions, globalization, trade agreements and enviable living standards has starved us of our ability to be competitive as a producer of goods, even if the stuff we import from China is inferior to what we used to make here.

But the one thing we still have is knowledge. We know how to make the best windows, the best doors, the best hinges, the best of  just about anything. If you have an idea for a widget, we have the engineers and the craftsmen to design and build it to perfection. Just not cheaply.

Is that our future? Will we be the priestly class, keepers of secret knowledge -- the divine ratios and secret formulas?

It is being said that this may be the future of NASA.With Obama gutting the program (funding it but giving it no purpose), NASA may discover its new direction as a consultant to other space programs around the world.

Imagine our best road builders and metal workers, civil engineers and technological experts, the best our private sector has to offer,  fanning out across the globe to improve living and working conditions across the globe. Obviously, that is happening today. But has it become nationalized? Is it part of our identity as a people?

Ennobling the private sector into a Jedi class of subject matter experts is an idea that returns to America its special standing in the world. We may no longer be the global superpower in military prowess, but we certainly are the priests of DIY.

Oh, mighty Isis!

As a Gen X outcast, I recall the joy of Saturday morning cartoons of the late 1970s -- Batman, Scooby Doo, The Jetsons, Yogi Bear. But also the live action adventure series Shazam!, which chronicled the exploits of Captain Marvel, and its sister series Isis.

Isis was about a young teacher who finds a necklace that transforms her into the mythical goddess Isis when she utters the incantation, "Oh, mighty Isis!" As Isis, the woman could fly and command the elements of sky and earth.

All I really remember about the show is Isis in flight, with her arms extended out in front of her. The rest is a complete blank, probably because the episodes weren't memorable. (The show only lasted one season.)

This is the dilemma of the new Isis -- a brand new mobile contactless payment network at the point of sale. It is made up of AT&T, T-Mobile, and Verizon. The big three telecoms are trying to leverage their 200 million U.S. wireless phone subscriber base to transform themselves into a payments network like Visa and MasterCard.

Isis is going to use Discover's network of 7 million retailers to develop its own Isis branded network over which smart phone payments will be made.  It's a bold but problematic undertaking because V/MC are such entrenched, well-known brands that operate powerful, worldwide networks. Of course, the card brands also have designs on mobile payments, with pilots in the works that seek to circumvent the power of the telecoms.

So, will Isis soar or bomb? It is very much an open question that hinges primarily on how consumers want to pay with their phones. Remember, Isis was kicked off the air back in the late 70s because not enough kids like myself watched the show. If not enough consumers opt to use Isis, 30 years from now we'll be strolling once again down the hazy corridors of memory lane.

The Magic Dongle

Suddenly, the traditional payments industry seems torpidly slow. I'm talking about Square, the Jack Dorsey company that gives away these little square "dongles" that plug into the headphone jack on smart phones and allow merchants to take swiped payments. You know, payments on a stick.

Apparently the devices are taking off with small merchants. You sign up online, get a dongle mailed to you, you plug it in and start taking card payments. Easier than dealing with salesman, contracts, all that cumbersome hardware.

Now, I've heard Square has a compatibility problem with the iPhone 4. I have also heard that some data security issues still have to be worked out. And Square does not as yet support paper receipts. But, still, Square seems to be gaining popularity. It's small, clever, and easy. So why did it take a payments "outsider," the Twitter guy, to think it up?

I don't think Square is revolutionary. Payments guys have come up with "sleeves" that attach to mobile phones that allow cards to be swiped. There are these clunky handheld devices that take swiped payments. There are even simple pocket swipe devices that allow you only to swipe the card and do absolutely nothing else. And yet no payments company thought up the magic dongle.

Jack Dorsey doesn't look like a payments guy and it seems he doesn't think like one either. Is that why some in the industry don't like him?

Hold on to your envy and do things the way you've always done them and find one day soon that the traditional payment terminal is as antiquated as the rotary phone.

Security Bugaboo

A data security expert told me how ironic it is that people so concerned about keeping their credit card data private have no qualms about broadcasting their private lives on Facebook. It might not be credit card numbers that users are posting on their Facebook pages, but what fraudster interested in identity theft wouldn't target people who post details of their lives for everyone to see?

Beyond the willing disclosure of personal information on social networking sites, it is becoming evident that the back-end security for online privacy is becoming a concern. Google recently said that its Street View vehicles inadvertently collected data passing over unsecured private networks. Then there's the problem of third party applications exposing user information on social networking sites to advertisers and online information tracking companies.

The security expert said that his company, which is in the business of protecting consumers' card data, has that data locked down in a military-grade facility. The servers are located underground, guarded by security personnel, monitored with security cameras, and only accessed after people go through several steps that involve picture taking, palm print scanning, code entering, and passing through a series of locked, nondescript doors.

This level of security is certainly not realistic for social networking sites and for how data in general is stored and transmitted over the Internet. However, the flaws being exposed point to the need for software developers, social networkers and any Internet-based business that touches sensitive customer data to make data security a higher priority.

The 'Shakespeare' App

Tim O'Reilly of O'Reilly Media delivered a provocative and inspirational keynote address at the PayPal DevCon held in San Francisco last week. One point he drove home was that developers should take advantage of the sensor capabilities of smart phones. He mentioned how a phone can sense the unique gait of its owner; thus how we walk can be used as a biometric authenticator. Or how, when two phones running the same Bump application are touched together, a P2P payment is automatically made. So apps can be developed to utilize the "sensitivity" built into smart phones.

My thoughts naturally turned to apps useful for writers. What novelists and poets do is filter the material world through their senses. So why not an app that sharpens or extends that ability?

A Bluetooth-enabled camera can be attached to the rim of my glasses. My phone recognizes when I pause to look at something and snaps a picture of it. Then my phone is also keyed to laughter, since laughter means something interesting was seen, heard, or said. Any time the phone registers laughter, the phone records the audio of that, and the conversation around it. Finally, throughout the day my phone records my breathing and heart rate.

At the end of the day, the app compiles all this information into a multimedia presentation that I view on my phone before I go to sleep. I see all the highlights of my day, all the interesting things I've seen and heard but perhaps have not really registered because I was too preoccupied or distracted to take notice. The audio and video is cued to a graph of how my body responded to the various stimuli over the course of the day. 

In the end, this biofeedback loop helps me experience my day with more clarity than I brought to the initial experiences, and maybe I fall asleep realizing how rich my everyday, humdrum life really is. An app like that couldn't help but enhance my capacity to experience and recall the world. It would ultimately result in better writing.

When many of the apps developed for mobile devices end up distracting users from the real world, my "Shakespeare" app would do the opposite. Anything to make my morning commute a little more interesting.

A rupee for your thoughts

Banks worldwide have proven themselves woefully inept at providing poor people a means to help them prosper financially. Either banks take advantage of them or have no clue how to market services to them or figure they are not worth the effort since they are, indeed, poor. So there exists a gaping need amongst the world's poor for financial tools to help lift them out of poverty.

That's where alternative financial services (AFS) come in. These are processors and program managers that offer microfinance loans for people to start businesses and hire workers; payment cards that are not tied to bank accounts; mobile phone services such as bill pay and money transfers to electronically direct money where consumers want it to go.

Take, for instance, India. This country of over 1 billion people has an inordinate amount of desperately impoverished people. Lately, the Reserve Bank of India (RBI), which manages the country's monetary policy, granted licenses to alternative financial services companies to expand their networks amongst the nation's poor. Using the services mentioned above, these companies are busy reaching out to the "unbanked", expanding prepaid card reload networks, and striking partnerships with telecoms for mobile payment capabilities.

It is ironic that RBI is controlling this initiative, since the bank was unable or unwilling to help its own poor directly. But maybe it has seen the light philosophically, or perhaps to be more realistic, it recognizes the profits available through its AFS intermediaries. I'm sure those bank licenses don't come cheap.             

Evolution, not revolution

When I added the tagline "The revolution will be monetized" to this technology blog, I thought I was pretty clever. But a Google search deflated that pretension, as the phrase had already been used. That's when I changed "revolution" to "evolution" and stumbled upon the general direction this blog will apparently take.

Revolution implies dramatic, historic change that can be pinpointed on a timeline. But evolution is something that is ongoing, always happening. It exists on a continuum, with no beginning or end. It's a river, not a rock.

Evolution is what we are experiencing with the rapid advancements in technology, evolution in how we live and think. Our technological progress reflects -- and is -- that evolution. I believe as the Internet and the mobile phone grow in importance to our lives, we will become more aware of virtualization.

What I mean by virtualization is the abstraction of material things -- physical cash becomes a series of digits in a bank account and a paperback becomes an e-book. While nothing can replace physical experience, and having tangible assets in the bank, such as gold and silver, hedges against financial disruptions, the virtual worlds which we increasingly inhabit are bound eventually for us to start thinking more abstractly and less materialistically.

Materialistic thinking tends to focus only on the self, what we can get for ourselves, even if it is to the detriment of others. Abstract thinking expands our perceptions, opens us up to all that is beyond ourselves. More thoughfulness and greater awareness can only make us better people in the long run.

So, the evolution will be monetized. And don't forget it.

Prepaid and the mobile wallet

There seems to be an affinity between prepaid cards and mobile payments. The percentage of people around the world who have cell phones is very high, even in desperately poor countries. The percentage of people around the world who don't have access to bank accounts, and thus have no debit cards (let alone credit cards), is pretty high. Therefore, the only electronic payment vehicle the world's poor have access to are prepaid cards, because they are not tied to bank accounts or lines of credit. And, since the worldwide unbanked do have cell phones, the wireless phone-prepaid card connection is made.

The same logic applies to the underbanked. Teenagers are representative of this group. Because of their age, they have limited access to bank accounts. So the teen market is a primary one for prepaid cards. And what teen doesn't have a cell phone?

Finally, smart phone payments are likely to be small-dollar purchases. You will probably opt to buy a sandwich at the deli using your phone, not when you make an expensive purchase, like buying a car. Prepaid cards are seen as ideal for those small-dollar purchases, as well, because the cards are really just the electronic substitute for cash. And most people don't buy cars with cash.

It's another reason why folks will slip that prepaid card into their mobile wallet when they take their date to the movies, not when the car needs new tires.

Ubiquity

"Ubiquity" is a popular word in payments. It is an especially relevant term for mobile payments, where ubiquity means that all brick-and-mortar merchants in the U.S. have point of sale terminals configured to accept payments via smart phones. It means that when consumers come into stores, they can make purchases just by tapping the phones on the terminals.

But if the ability for all merchants to accept mobile payments is not there, then it diminishes the convenience factor for consumers. If a shopper wants to pay for groceries with a smart phone, but the merchant's terminal is not set up for it, then the shopper gets frustrated, puts the phone away, and returns to a payment card or cash for that purchase. Maybe next time the shopper wants to pay using a smart phone but thinks better of it because of that negative past experience.

Therefore, to encourage consumers to use mobile phones to make in-store purchases, the ability to accept smart phone payments must be everywhere. Imagine a time when smart phone-enabled terminals are as ubiquitous as Lady Gaga...Ah, what a thought!

Partnerships galore

Pilot programs are nothing new in the payments industry. The card brands (Visa, MasterCard) routinely buddy up with payment technology providers (such as ViVotech) and merchant acquirers (like First Data) to test out new payment technologies. The pilots are designed to work out the kinks in the technology and gauge the interest in it by consumers. Often, the companies publicize the positive results of a given pilot, but then you hear nothing more about it.

But recent announcements seem to point to increased momentum for smart phone payments. In August 2010, an article on Bloomberg reported on a triumvirate of wireless phone carriers -- Verizon, AT&T and T-Mobile -- that apparently partnered with the card brand Discover and Barclays bank for an NFC-enabled smart phone pilot.

And then in September, two more announcements. Point-of-sale terminal manufacturer VeriFone announced a partnership with NFC technology company Bling Nation for a "tap and pay" initiative where consumers would be able to simply tap mobile phones on payment terminals to make purchases. And then First Data announced a partnership with South Korea technology provider SK C&C that would position First Data to become a TSM (trusted services manager) -- a kind of go-between for smart card transactions

The key word is positioning. These companies seem to think that mobile payments will take off eventually and they want to be ready when it happens. And it WILL happen when consumers start clamoring for it. 

The revolution will be monetized

Advances in smart phone technology, coupled with recent actions by mobile payment technology providers, the payment card brands and mobile telecom companies, points to a time in the not-so-distant future when consumers, as well as merchants, will transact without cards or cash, but simply with their phones.

With my background in covering the payments industry, I hope to bring you the most up-to-date information on this exciting and profound transformation in the way we think about and pay for goods and services.

Remember, the revolution will be monitized.