Open-Loop Time Banks?

I spent Monday partly examining the practicalities of treating time as a currency at BarCampBank4.

In essence, 'time banks' for social care are no different to other closed-loop 'alternative' currencies ranging from loyalty schemes to gift card and store card programmes. Hureai Kippu, the Japanese system for earning the right to senior care by caring for senior citizens yourself, is often cited in this context. That specific model, which involves a nationwide clearing system for care credits, is being considered by various local authorities in the UK, though Age UK is among those who question its utility.

But we've had UK time-banking schemes since the '90s, e.g. TimeBank, TimebankingUK and Local Exchange Trading Systems or Schemes (LETS), the mutual aid barter network. The difference is explained here. So I it's clear there is something worthwhile that can be achieved by trading units of time to solve underfunded problems like personalised social care in its many forms.

However, we need to be cautious about 'open loop' time banks, even though this may bring welcome liquidity and funding to support an aging population with a giant pension deficit. There's a range of practicalities that stand in the way of time - or loyalty points, for that matter - becoming a 'real' or open-loop, freely negotiable currency or E-money. I'll cover these briefly below. But a more fundamental point is that I'm not even sure that opening up such currencies would add any utility to what's already feasible with any real currency, unless the underlying E-money system is somehow cheaper and more cost effective in moving money or other resources to where they are needed. And there are of course plenty of E-money systems that did not need to go to the trouble of creating a new currency to get going.

Other than funding the business itself, perhaps the main practical challenges to time banks becoming open-loop are achieving 'critical mass', enabling immediate redemption in cash, and tax. Issues of trust, privacy, data protection and so on seem secondary and surmountable so long as the upside to participating and disclosing information outweighs any perceived downside.

Achieving a 'critical mass' of people that will ensure adequate supply and demand for the type of time in question is an awesome challenge that deserves a post in itself.

The requirement for users to be able to redeem the time they have 'earned' or 'acquired' in cash at any time would go hand-in-hand with the need to be authorised as an E-money issuer, and to comply with various capital and prudential requirements, including safeguarding the cash corresponding to the outstanding time. Redemption in cash and safeguarding would seem to defeat the purpose of a time bank, founded as it is on the notion that participants deal only in time.

Finally, we are obliged to pay income tax on our earnings, as well as indirect taxes on sales of goods and services. And governments tend not to accept payment in anything other than their own national currency. While in a closed-loop UK time-bank for charitable purposes tax is not an issue, as soon as you enable redemption for cash or goods and services, tax would come into play.

For these reasons, I think time banks are very useful in allocating resources within a specific community, network or scenario, but not as an open-loop currency - at least not without substantial changes to the regulatory and tax framework.

How We All Pay For Card Payments

Few people are aware that when you pay using a credit or debit card, your 'issuing' bank charges the retailer's 'acquiring' bank an "interchange fee". The rate is either agreed directly between the banks, or is imposed via a card scheme, like Visa or MasterCard. Nobody outside the banks and card schemes really sees this fee. The retailer receives your money for the purchase price, less a service charge. A little bit of that service charge is kept by the retailer's bank as a payment processing fee, but most is kept by your bank as its interchange fee.

Like any other retail overhead, these charges need to be accounted for in retail pricing. So, even if you aren't paying by card, interchange fees are a significant drag on your personal economy. The European Retail Round Table, a network of large retailers, has found that "the average European household pays €139 per year on interchange fees". And, according to the European Commission, "in the EU, over 23 billion payments, exceeding a value of €1350 billion, are made every year with payment cards." In other words, retailers have no real choice but to accept payments by card.

But who benefits? The ERRT cites a 2006 report found that only 13% of the fees go toward your bank's processing cost, while 44% of interchange fees pay for cards reward programmes - which of course only benefit cardholders. That leaves a healthy profit for issuing banks. In their defence, Visa and MasterCard claim that interchange fees are essential to investment in systems, marketing and anti-fraud efforts. Which is what banks must do themselves, anyway, to meet their own anti-money laundering and prudential requirements. The schemes also suggest that interchange fees may be cost-neutral to retailers if savings on the acceptance of cash and reduced check-out times for card payments are factored in (which has not been accepted in Europe).

Looking at the situation from the consumers' standpoint, non-cardholders get no benefit from card loyalty schemes at all. And even cardholders themselves might prefer the equivalent of interchange fees being spent in ways that directly improve their retail experience.

The card schemes argue that because retailers say they have no choice but to pass on interchange costs to consumers, the measure of whether interchange fees are really too high is whether retailers would actually lower their prices - and they would not. That doesn't hold water. Firstly, all of a retailer's costs are ultimately accounted for in its prices. So it would be wrong of retailers to say that all consumers are not paying for interchange, unless the retailers specifically imposed a specific interchange-related fee only on those paying by card. Secondly, as I commented earlier on Digital Money, the card schemes' assertion rests on the assumption that the only way retailers should reasonably differentiate themselves from each other is in terms of price. So the card schemes would have it that every time a retailer cuts any of type of cost, including interchange fees, the retailer should take the ultimately suicidal step of always reducing prices to the consumer, rather than, say, investing in increased selection, improved customer experience or expansion to achieve economies of scale. That's an unrealistic position in itself, let alone one that would support the assertion that if retailers do not cut prices to consumers on the back of lower interchange fees, they are somehow behaving just as anti-competitively as the card schemes are alleged to be in imposing them. The retail markets are distinct from the market for payment services. Lack of competition in retail markets can be - and is frequently - addressed on its own merits and action taken accordingly.

So it's no surprise that competition regulators have given a lot attention to how interchange fees are set and imposed. The Reserve Bank of Australia has perhaps been the most progressive. It was the first to impose a standard rate for interchange fees in July 2003 and has maintained downward pressure ever since. In December 2007, the European Commission ruled as anti-competitive interchange fees on cross-border MasterCard and Maestro branded debit and consumer credit cards. The EC later accepted certain undertakings to settle proceedings for alleged breach of the ruling. European Commission action in relation to Visa Europe's interchange fees has culminated in a reduction of debit interchange fees. But importantly that decision "does not cover MIFs for consumer credit and deferred debit card transactions which the Commission will continue to investigate. The proposed commitments are also without prejudice to the right of the Commission to initiate or maintain proceedings against Visa Europe's network rules such as the "Honour All Cards Rule", the rules on cross-border acquiring, MIFs for commercial card transactions, and Inter-Regional MIFs."

The battle is also raging in the US, where three bills were put before Congress in 2009 to regulate interchange fees. The Federal Reserve is consulting on proposals to limit debit card fees from July 2011 "one that would base fees on each issuer’s costs, and one that would set a cap of 12 cents per transaction", as explained here by Jean Chatsky, and discussed on Digital Money. Potential implications for bank stocks are discussed here.

Ultimately, however, the outcome of all this depends on which payment services best facilitate the end-to-end activity in which a payment is being made. The winners will not be those who insist on viewing consumers' activities through the lens of their own payment product.


Image from GAO report on interchange.

Thoughts Ahead of BarCampBankLondon4

I'm looking forward to BarCampBankLondon4 on Monday, where we'll be exploring the impact of complementary currencies on the financial services landscape and the kinds of financial organisations needed for the new economy.

At the heart of many initiatives is the ability to cost-effectively and efficiently match those with surplus resources - e.g. cash or time - with those who need it, in a form that is consumable and takes account of the risks/rewards to both parties.

Liquidity is of course key - without adequate supply and demand there won't be a sustainable market for the resource in question. Yet most of the peer-to-peer initiatives are complementary rather than competitive, which also prompts consideration of the extent to which different initiatives might share platforms to reduce costs and access economies of scale more quickly than if they were separate. That would extend to marketing, customer service as well as the technology. A shared home page and familiar set of market rules could make it easier for more people to participate, perhaps offering voluntary time in one market, donations in another and loans in yet another.

Of Love Marks And The Institutionally Deluded

I'm reading Henry Jenkins' Convergence Culture at the moment, which discusses the attempts to transform brands into 'love marks' by developing more intense relationships with consumers.

I guess the increased interaction between the 'brand' owner and consumers might have the side-effect of facilitating the resolution of real consumer problems, or improving consumers' day-to-day activities in some compelling way. But the strategy seems to view the world through the products the provider has chosen to sell, rather than from the individual consumer's standpoint. And that implies the business ultimately exists to solve its own problems rather than those of its customers. In which case, the business is exposed to the downside of the trend towards increasing consumer power over the design and supply of the products they use or consume.

As a case in point, I had a conversation recently with someone who believes that the most important brand that is present during a consumer's purchase from a retailer is the brand on the consumer's debit or credit card. This of course ignores the fact that the consumer activity in question is 'buying a widget' of the right quality from a merchant one trusts, rather than merely 'paying'. Then I showed him the latest random survey of the UK's most trusted brands - although this one might be a little more reliable, to the extent that any of them really is. But clearly consumers think their retailers are doing more for them than their banks or card schemes.

Image from LoveMarks.

Shuffling The Deckchairs On HMS Status Quo

I've kept a beady eye on the 'progress' of the Commission on Banking, while holding out little hope that it will result in more than a shuffle of the proverbial deckchairs, rather than any wider solution to our general funding woes.

UK banking, as we know it, would be finished without ongoing taxpayer support of at least £512bn, according to the latest National Audit Office report. And that's assuming the economic headwind doesn't get any stronger.

But this figure doesn't include the subsidy banks get to help gather deposits cheaply, especially in the form of the Individual Savings Account tax-free savings programme. Banks are accused of abusing this privilege by offering a mere 0.41% average interest rate on the £158bn they attract with higher teaser rates. Of course, you can add to that practice the many £millions in fines incurred to date for such things as mishandling customer complaints, reporting failures, lapses in anti-money laundering controls and poor investment advice (keep up with the latest fines here).

So, if it weren't for the uncertainty about the extent to which the government will continue to bend the theory of evolution in their favour, the only way for us to really make money out of UK banks would be to bet against them.

Instead, the taxpayer safety net allows the Commission the luxury of merely wondering whether good old British banking might be delivered more safely (if still more expensively) via independently funded, ring-fenced subsidiaries.

What difference could this possibly make?

Testament to this bizarre preoccupation with maintaining status quo is the government's determination to ignore alternative models. For instance, the government has just meekly referred to Zopa, the UK's own world-first in person-to-person finance, as a form of "giving" (see page 15). That's weird, because with absolutely no government assistance Zopa has so far enabled over £100 million in person-to-person loans, representing 1% of the UK personal loans market. Lenders are seeing annual returns of 7.9% and a default rate of under 1%, while delivering market leading rates for creditworthy borrowers. Banks aren't offering anything like this service, even with the added government subsidy of tax-free ISA status. Imagine how much of the personal loan market would shift to the Zopa platform if people's lending returns were also tax-free? FundingCircle has already launched a similar model for small business funding. Could the greater liquidity enable mortgage funding in the same way? Such horizontal funding processes also offer a more transparent, low cost and efficient solution than the vertical intermediation model that operates in the 'shadow banking system'.

It's one thing to avert overnight systemic failure, but quite another to prop up exploitative, inefficient business models over the longer term in preference to more efficient alternatives. We should expect a more holistic approach to the UK's financing woes than the Commission on Banking is attempting to provide.