On the weekend, I read a rather alarming commentary by David Stockman European Banking System is on the Verge of Collapse. While this analysis clearly highlights the fragility of bank balance sheets, it doesn’t dig deeply into the graver issue facing the Eurozone policy makers and indeed the world –  that of hypothecation. As has been highlighted in the past (MF Global may be apocalyptic for the eurozone), the deeper concern is the amount of leveraged collateral that exists in the markets that has very little, or zero underlying asset foundation. In the sort-term, such leverage should give our children cause for concern. However, perhaps this is just the beginning of a more slippery slope.

The almost constant press commentary and hype about mobility and mobile/internet payments causes me to consider a potentially similar situation of hypothecation and re-hypothecation occurring in The Future of Money.

While regulation is inherently expensive and potentially limits free market activity, it can also (if applied prudently) act as a sound governor of irrational activity – witness the lack of attention afforded to AIG, Lehman’s and MF Global in the UK, and their excessively leveraged use of collateral.

Why is this relevant for the Future of Money and mobility? Mobile and Internet commerce have enabled the expansion of financial services activity beyond the boundaries of the banking industry and remit of regulators. Multiple participants (Telcos, Payment providers, Retailers and even private individuals) offer products and services that are bought, sold and financed outside of the traditional financial services market. They and their activities are unregulated and potentially unchecked due to the consumerization of IT and the power/reach of the Internet. Moreover, the enabling currency of these transactions is not necessarily fiat-based, ie government issued national currency.

As the euro crisis unfolds and individuals face difficult living conditions and austerity constraints, they may well turn to new, digital currencies (loyalty tokens, gaming credits, bandwidth etc) as a means of survival, continuing to conduct commercial activity, barter etc. And, much of this activity may be leveraged and the means of payment used as collateral.

So, now to the point of hypothecation and the question for our grand children:

• in a totally unregulated and poorly audited market,
• where digital content and value can be created and exchanged in real-time by anyone,
• without the frictional cost of an intermediary,
• where potentially there is no underlying asset to back the exchange for value.

Is the Future of Money facing an apocalypse of digital new money hypothecation?

Of course, this may be a stretch and is perhaps an insignificant concern in the current crisis. However, as policy makers debate the “solution” to the current malaise, keeping one eye on emergent trends may help defer an unfortunate legacy.

What does this mean for our clients?

• The rush to connect with innovative payment schemes, providers and commercial channels should not abrogate responsibility of senior executives to monitor carefully the viability of counterparty relationships, and the extent of any “new money” hypothecation.
• Applications to manage collateral must account for new mediums of exchange and systems must be capable of managing new money
• The criticality of developing a holistic strategy for mobile financial services incorporating the Future of Money is essential to maintaining sound fiscal management.
• Companies should emphasize their account services (statements, fraud protection, etc.) as they launch payment services that support digital content, social gaming, social commerce, etc

 Remember to read our latest research: CIOs Should Address the Impacts of the Euro Crisis on Their Enterprises Now and The Euro Crisis: Four Scenarios and How CIOs Can Prepare for Them, as well as attend the January 19^th webinar on this topic: Euro Crisis Webinar and contribute to our survey: Euro Crisis Survey

• PayPal and Google Checkout Show the Way for Banks’ Payment Operations

• Nonbank Payment Institutions: A Threat and an Opportunity for Banks

• Banks’ Retail Payment Operations at a Tipping Point

Banks need to stop looking at non-bank payment providers as foes. When consumers work with PayPal outside of a banking relationship, the bank completely looses visibility of the customer relationship – and the customer isn’t thinking of the bank either. True, PayPal and others have hijacked Internet payments revenue away from banks. But the real danger for banks is that they loose relevance in the customer relationship and the financial supply chain.

The industry would do well to partner with PayPal and other non-bank payment providers, both to meet the needs of their customers (who want to work with PayPal, too) and to maintain the relationship with their customers (rather than losing site of what happens with payments outside their walls).

I don’t know if you noticed, however a few weeks back a number of  payment providers issued a press release outlining their progress towards cross border collaboration for their Online Banking enabled E-Payment solutions. These E-Payment solutions look to re-use banks’ existing customer authentication systems, combined with the local ACH (Automated Clearing House) systems, to deliver new payment solutions primarily to the b2c market. The group, entitled ICPNO -  International Council of Payment Network Operators ( www.icpno.com ), comprises a number of ACH focused payment providers -  iDeal, GiroPay, Interac Online, VocaLink and Nacha  - focused on  developing standards that will ensure the international interoperability of their domestically based payment schemes.

Whilst I would applaud such foresight, especially in today’s difficult market conditions, am I alone in wondering whether focus on such cross-border functionality – especially the global focus – may distract attention from their most obvious opportunity? As the low cross-border volumes for the SEPA direct credit payments applications has shown, demand for a service needs to lead supply, if the benefits are to outweigh the costs. Is there really enough demand for cross-border business to consumer payments to justify building a global scheme at this time?  Well PayPal obviously saw a market, but then they weren’t cannibalising their own payment card market ( in Gartner we’ve written extensively around market opportunities for new players such as PayPal – notes such as  The Biggest Threats to the Bank Franchise: What Banks Should Do About Them Now and  PayPal and Google Checkout Show the Way for Banks’ Payment Operations have outlined man of the issues). Personally I think the short term global opportunity is probably too small to distract from the here and now.

These ACH-based solutions have a strong proposition for consumers, merchants and banks in their own domestic and adjoining markets, if they can get their marketing correct and develop a persuasive business case. iDeal have for example proved in the Dutch market that they can develop a significant market presence, with nearly 28 million transactions through to the end of 2008. However to be truly successful I think today’s conditions demand a lens on the short term. They need to focus on helping banks save costs as they face today’s challenges, such as the transition away from the use of cheques, or the migration to full SEPA deployment. They need to look at helping  bank customers and retailers by offering them accessible alternatives to cash.

What do you think ? Do the members of ICPNO have the right idea – or do they need to keep a clear and solitary focus on the short term ?

According to Silicon.com

The venerable paper cheque celebrates its 350th birthday next week, although the prospect of the payment method celebrating many more is diminishing.

According to the Cheque and Credit Clearing Company (CCCC), the industry body that manages the cheque clearing system in the UK, the first cheque was made out on 16 February 1659 for £400 by Nicholas van Acker to a Mr Delboe.

When was the last time you wrote a check at the grocery store or clothing store? More likely you used a debit or credit card. Last month I purchased some hand printed cards from an artist on Etsy.com who happened to live in Israel. Did I write her a check? No, I used PayPal. (Now, if only, the post was as efficient. It took almost a month for the cards to arrive in the US.)

The decline in cheque usage is not uniform, according to the report. Older people still prefer to use it, with more than 50 per cent of over 65s in the UK still making spontaneous payments by cheque at least once per month. Women write more cheques than men, with more than 40 per cent making at least one cheque payment in a month.

Yes, I know many banks, especially in the US, deposit and process millions of checks a month, a year. Banks have finally adopted remote deposit automation at the branch and extended it to their business customers. Some are even considering consumer remote deposit automation. If you are a Gartner client, you might want to read our (Rick DeLotto and myself) warnings about this new trend.

And, while I have some affection for checks – I worked for several years in check and remittance processing, the heyday of the check is passing or passed (depending on where you live). They are time consuming – to write, to process. This isn’t news to you, I’m sure. It’s no secret that banks have either maintained or outsourced at least one shift of operations staff to process checks. Yet, the adoption of image-based processing and clearing took years – and in the US was jumpstarted only by Check 21 legislation in 2003.

As checks decline in countries that still use them, some organizations are pushing for a end date for them.

In 2008, the Payments Council published a report tentatively suggesting 2018 as the end date for cheque processing. This has been rejected in favour of determining a date when alternatives to cheque payments are available to those that still rely on them. Subsequently, the Payments Council has decided it will agree on an end date for cheque payments by the end of 2009.

Checks were the PayPal of its time in 1659, no doubt. As banks look forward, look for ways to optimize operations and lower costs, maybe it’s time to stop plans for next year’s birthday party.

Amazon Payments, Moneybookers and PayPal are nonbank payment solutions involved with conversational media, such as blogs and social networks. They are using online communities and social networks to offer:

• Client services and marketing – One example is PayPal’s Online Merchant Network, which promotes its services and meets merchants’ payment needs.
• Product development – PayPal’s site for developers lets them share ideas on using PayPal solutions; for example, ChipIn and PayMe are payment systems available on Facebook created by developers using PayPal application programming interfaces (APIs). Amazon Payments supports developers via Amazon Flexible Payments Service APIs to develop merchant payment systems.
• Payment solutions for online social networks – PayPal is used on FSNs Kiva and MicroPlace to support investment, lending and loan repayments. Amazon Payments is used on networking applications, such as Buxfer (which lets users track spending) to facilitate related P2P payments. Moneybookers has a payment system on Facebook and uses viral marketing to promote its services.

The short-term prospects for P2P payment methods as part of online social networks and for FSNs are limited.   Users worry about security in online social network transactions; phishing attacks in online networks will exacerbate this.

However, information flows rapidly from one online community to the next, so a payment solution viewed as useful in one will be adopted in another.  The aim of payment providers – whose development is driven by payees and payers – is to drive use of their solutions as part of conversational media, and to support overall product development and sales.

Nonbank payment providers will supplant banks because bank payment solutions are driven by internal perceptions, which don’t necessarily reflect customer needs. This makes it more difficult for banks to market their payment products and services, as well as other offerings.

For instance, eBay now has a very rich data set taking into account consumers’ interest in using marketplaces to compensate for a loss of income and achieve cost savings. Combined with aggregated data from PayPal on its use outside of eBay, this could turn into an interesting indicator of the evolution of consumers’ shopping patterns and confidence for the next two years.

The opportunity is strong for banks and other payment providers with both issuing and acquiring services. They have an ability to integrate the information from those operations to design early indicators of changes in consumers’ shopping patterns. This could contribute to their own business decisions, and maybe provide their investment business with the most useful business intelligence to guide them through those troubled times.