Office Of The Devil's Advocate

I fancy that the perceived utility of Devil's advocacy has largely suffered from a having bad name. Which is hardly fair, given both its effectiveness and its holy origins. Although the Catholic church saw the value in appointing a canon lawyer to argue against an allegedly saintly person's canonization, other institutions were too timid to follow suit. And when the Catholic church itself replaced the 400 year old role with a lighter weight "Promoter of Justice" in 1983 it 'opened the floodgates' to 500 new saints, when only 98 had been canonised in the preceding 83 years. The role of Devil's advocate might well have been overdone from time to time, but the watered-down replacement clearly didn't cut it as force for critical thought.

Of course, the advent of the lighter weight Promoter of Justice coincided with the secular trend of appointing 'independent' commissions, internal auditors and other functionaries to review, audit or otherwise evaluate our institutions. Yet, just as we have more saints, we also seem to have corruption and fraud on a grander scale than ever before, and the world teeters on the brink of financial meltdown [cue thunder].

The most recent example of such lightweight independent review is the IMF's Independent Evaluation Office assessment of the IMF's response to the financial crisis. The IEO has waited until 2011 to announce that the IMF was guilty of "groupthink" and a lack of critical thought between 2004 and 2008 and so failed to recognise and respond adequately to the sub-prime crisis. Which means the IEO hasn't been terribly effective either for most of the decade.

So it occurs to me that we need to reintroduce a force for unadulterated critical thought - for Devil's advocacy - in all our institutions. We could put a Devil's Advocate on each of our Boards, in Parliament, in the Cabinet and at the top of each of our regulatory authorities. Each DA's office would act as a lightning rod for critical thought about each institution. And as the DA's figured out how to destroy our institutions, we'd be able to respond to the threats and opportunities they'd identified (in the same way Jack Welch once challenged GE's business units to simultaneously destroy and adapt their own businesses).

Which is all fine in principle.

The Devil's in the detail.

Image from Ask Sister Mary Martha.

SNAFU at IMF's IEO?

Well, it's official. The International Monetary Fund suffers from "groupthink" and a lack of critical thinking... or at least it did between 2004 and 2008, according to its own "Independent" Evaluation Office (IEO).

The IEO defines "groupthink" (at para 42) as "the tendency among homogeneous, cohesive groups to consider issues only within a certain paradigm and not challenge its basic premises (Janis, 1982)." In this context, the IMF's macroeconomists agreed with those in the UK and US that advanced economies were sound, resilient, could allocate resources efficiently and redistributed risks to those able to bear them.

Street: our finances are as good as gold.

In this belief, "the IMF was overly influenced by (and sometimes in awe of) [their counterparts at the central banks]... perhaps a case of intellectual capture."

So what's happened since 2008?

Well, in between visits to the PIGS, I guess the IMF has been waiting patiently on the IEO's report. After all, "the IEO’s mission is to:

* enhance the learning culture within the Fund,
* strengthen the Fund's external credibility,
* promote greater understanding of the work of the Fund, and
* support institutional governance and oversight."

Which raises the obvious question: has the IEO fulfilled its mission in the period 2003 to date?

Or, in pukka, quis custodiet ipsos custodes?

Gordon's Crash

Knowing of my attitude towards this country's most recent former Prime Minister, someone cheekily gave me "Gordon Brown Beyond The Crash" for Christmas. By this morning, I'd only managed to wade through to page 50, as I tend not to dwell terribly long in the only place I could bring myself to store and read this particular opus. So I felt it was time to celebrate with some of my early reflections on the tome.

The cover is perhaps the most insightful aspect of this book so far. It is appropriate that Gordo's name appears in red, since this reflects his political bias, his obvious fondness for that side of the accounting ledger, and the state in which he left the country's finances. The grey background connotes Brown-blighted Britain's economic gloom. And the running together of author and title clarifies that it's more autobiography than observations on economic or political theory.

The contents itself draws a very thin veil indeed around the revolutionary idea that globalisation requires international governance (I know, I'm just amazed the idea never occurred to me before reading this book either). Key features of this 'veil' are the liberal use of the word "I" and saccharin praise for dozens and dozens of staff members, advisers and others who drank the Kool-Aid - so many, in fact, and so saccharin as to be patronizing. Which I guess is the point. Ultimately, these people lost Gordo the war, not him - an attitude we saw exemplified in his handling of the infamous exchange with a certain resident of Rochdale: "Who put me in front of that woman?"

Anyhow, having deftly skirted the reasons why the UK's banks were permitted to become under-capitalised in the first place, I'm up to the part where "As I arrived back in London on Saturday morning I went straight into the office to meet Alistair, who was planning to announce the nationalisation of Bradford and Bingley..."

I can't wait for another bowel movement.

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.