Assessing Future Requirements

A WORKSHOP CO-SPONSORED BY THE FEDERAL RESERVE BANK OF CHICAGO, INSTITUTE FOR SCIENCE, LAW, AND TECHNOLOGY OF
THE ILLINOIS INSTITUTE OF TECHNOLOGY, AND THE PROGRAM FOR RESEARCH ON THE INFORMATION ECONOMY AT THE UNIVERSITY
OF MICHIGAN.
CHICAGO, ILLINOIS. OCTOBER 10-11, 2000.
Proceedings from the Workshop on
Promoting the Use of Electronic Payments:
Assessing Future Requirements
A WORKSHOP CO-SPONSORED BY THE FEDERAL RESERVE BANK OF CHICAGO, INSTITUTE FOR SCIENCE, LAW, AND
TECHNOLOGY OF THE ILLINOIS INSTITUTE OF TECHNOLOGY, AND THE PROGRAM FOR RESEARCH ON THE INFORMA-
TION ECONOMY AT THE UNIVERSITY OF MICHIGAN.
CHICAGO, ILLINOIS. OCTOBER 10-11, 2000.
Workshop on Promoting the Use of Electronic Payments:
Assessing Future Requirements
Organizing Committee
Henry H. Perritt, Jr., Dean, Vice President, and Professor of Law, Chicago-Kent College
of Law, Illinois Institute of Technology (Chair)
David R. Allardice, Senior Vice President and Emerging Payments Program Director,
Federal Reserve Bank of Chicago
William Barouski, Senior Vice President and Chief Information Officer,
Bob Chakravorti, Senior Economist, Emerging Payments Studies Department,
William Gram, Senior Vice President and General Counsel, Federal Reserve Bank of Chicago
Ed Green, Senior Policy Advisor, Federal Reserve Bank of Chicago
Elizabeth Knospe, Vice President, Legal Department, Federal Reserve Bank of Chicago
Brian Mantel, Program Manager, Emerging Payment Studies Department,
Federal Reserve Bank of Chicago (Secretary)
Jeff Mackie-Mason, Professor and Director, Program for Research on the Information
Economy, University of Michigan
Ann Spiotto, Senior Research Counsel, Emerging Payment Studies Department,
Richard Warner, Associate Professor of Law and Director, Building Businesses on the
Web Program, Chicago-Kent College of Law, Illinois Institute of Technology
Workshop Support Team
Ping Homeric, Tasha Kincade, Hala Leddy, Helen Lee, Tim McHugh (Co-Coordinator),
Mariann Rapp (Co-Coordinator), Loretta Novak, and Elizabeth Taylor.
Citing Speaker Presentations
Before citing any speaker presentations extensively, please contact the individual to gain
authorization in advance.
Sponsors Web Site Addresses
www.chicagofed.org/paymentsystems
www.kentlaw.edu
http://www.si.umich.edu/prie/
2 ELECTRONIC PAYMENTS WORKSHOP PROCEEDINGS
Workshop Planning
The Federal Reserve Bank of Chicago, Illinois Institute of Technology, and the University of
Michigan Program for Research on the Information Economy were very pleased to host the
workshop Promoting the Use of Electronic Payments in October of 2000the second
forum we have held on this subject.
The first workshop, held in October of 1999, considered whether legal and technology hurdles
impeded the greater migration to electronic payments. Speakers and workshop participants
alike noted critical areas where obstacles or technical issues existed. However, speakers also
came to the conclusion that, in many cases, the most critical questions surrounded a better
understanding the business cases for various payment innovations and finding better ways
to collaborate. Speakers also made it clear that technology, standards, law, and public policy
must evolve over time in the context of business and customer requirements.
The October 2000 workshop agenda was once again developed in consultation with industry
and academic experts. The workshop took a fact-based approach, leveraging research as well
as the insights of industry experts. The format was interactive with ample time for discussion
amongst a diverse audience. The workshop produced several important points regarding its
three key questions:
In terms of lessons from other countries experiences, workshop participants learned that
European smart card and electronic purse implementations have not reached the level of
success that is sometimes attributed to them. Nonetheless, several individual European
countries have seen significant migration away from checks towards debit cards. These
changes have been based in large part on the industrys ability to work collaboratively to
implement new pricing models that encourage the use of electronic payments, which could
potentially raise policy questions in some countries.
In terms of developing a better understanding of the business case for e-payments, several
observations were made. First, a number of presenters highlighted the increasingly intercon-
nected nature of e-payment providers and merchants businesses. For instance, an online
retailer discussed its willingness to consider investing in joint work that improved e-payment
product offerings, in exchange for pricing incentives.
Second, workshop participants also noted that not all e-payment innovations would have
compelling business cases in the near term. For example, a panelist discussed the difficul-
ties of extending online business-to-business practices to smaller trading partners, which
often include 80 percent of a companys suppliers. Workshop participants noted that many
innovations will occur only over extended periods of time as a core infrastructure is built, as
customers gain experience, and as providers introduce improved functionality.
3 WWW.CHICAGOFED.ORG/PAYMENTSYSTEMS/
Introduction
In terms of the evolution of technology and legal policy, speakers discussed in detail some
of the challenges and opportunities associated with the convergence between different
communication technologies, the evolution of security systems, the important role that busi-
ness process patents may play in innovation, and the evolving nature of banking regulation.
While no document can adequately portray the array of lessons learned through workshops
like this one, this proceedings document serves as another piece of the foundation to estab-
lish a better understanding of the changing payment system. Workshops like this one will
undoubtedly continue to play an integral role in increasing understanding by facilitating the
interaction of key leaders in both the private and public sectors. On behalf of the entire work-
shop organizing team, Henry Perritt, Jeff MacKie-Mason, and Michael Moskow, I would like to
extend our grateful appreciation to the speakers, moderators, and participants for making this
workshop a success.
David R. Allardice
Senior Vice President and Emerging Payment Studies Program Director
I. Welcome and Workshop Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Michael H. Moskow, President, Federal Reserve Bank of Chicago
Henry H. Perritt, Jr., Dean, Vice President, and Professor,
Chicago-Kent College of Law, Illinois Institute of Technology.
II. International Comparisons: Lessons Learned . . . . . . . . . . . . . . . . . . . . . . . . . . 11
R. Gerald Fox, Editor, Payment Systems Worldwide (Moderator)
David Humphrey, Eminent Professor, Florida State University
Leo Van Hove, Assistant Professor, Money and Banking Group,
Free University of Brussels
Marianne Palva, Head of Division, Payment Systems Division, Bank of Finland
III. Luncheon Keynote Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Diogo B. Teixera, Executive Director, The Tower Group
IV. Online Payments: Challenges and Opportunities . . . . . . . . . . . . . . . . . . . . . . . 58
Catherine Johnston, CEO, Advanced Card Technology Association (Moderator)
Gregory K. Jones, President and Chief Executive Officer, Ubid.com
Peter B. Gustafson, Executive Vice President, E-Visa, Visa U.S.A.*
Kirk Ergang, Executive Vice President, CashStation*
V. Electronic Bill Payment: Challenges and Opportunities. . . . . . . . . . . . . . . . . . . 64
Jeetu Patel, Vice President and CTO, Doculabs (Moderator)
Ron Braco, Senior Vice President, Chase Manhattan Corporation*
Ravi Ganesan, Vice Chairman, CheckFree Corporation
Matt Lawlor, Chairman and CEO, Online Resources, Inc.
John P. Tedesco, Jr., Co-Founder and Chief Executive Officer, PayMyBills.Com
*Comments were not available at the time of publication.
Table of Contents Tuesday, October 10, 2000
VI. Keynote Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Roger W. Ferguson, Jr., Vice Chair, Board of Governors of the
Federal Reserve System
VII. Business-to-Business: Challenges and Opportunities . . . . . . . . . . . . . . . . . . . . 93
Emery Kobor, Research Director, CFO Magazine (Moderator)
John Quinn, Partner, Diamond Technology Partners
John Sheriden, Executive Director, National Center on Manufacturing Sciences
Sarah Billings, First Vice President, Electronic Commerce Manager, ABN AMRO
VIII. Technology and Security Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Stewart A. Baker, Partner, Steptoe & Johnson (Moderator)
Peter Honeyman, Director, University of Michigan, Center for Technology Integration
Bruce Summers, Director, Federal Reserve Information Technology Services,
Federal Reserve Bank of Richmond
Thomas P. Brown, Associate, Heller, Ehrman White & McAuliffe
IX. Legal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Richard Warner, Professor of Law and Director of Doing Business on the Web,
Illinois Institute of Technology, Chicago-Kent College of Law (Moderator)
David Teitelbaum, Partner, Sidley and Austin
Sarah Jane Hughes, University Scholar and Fellow in Commercial Law,
Indiana University School of Law
X. Presenters Biographical Sketches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
XI. Workshop Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Table of Contents Wednesday, October 11, 2000
Michael Moskow, President, Federal Reserve Bank of Chicago
Good morning and welcome to this workshop. I am pleased to welcome you on behalf of our
co-sponsors Hank Perritt, Dean of the Illinois Institute of Technology, Chicago-Kent College of
Law and Jeff MacKie-Mason Professor of Economics and Director of the University of Michigans
Program for Research on the Information Economy. I would also like to welcome you on behalf
of my colleagues in the Federal Reserve System; leaders from local banks; representatives
from several trade associations; and consultants, all of whom contributed their ideas and
their expertise to make this an excellent program.
The mission of the Federal Reserve includes fostering the efficiency, integrity, and accessibility
of the U.S. payment system. The mission of our colleagues from local universities is to con-
tribute to developing the intellectual capital that will support many innovations in the United
States. This workshop blends these two interests, as illustrated in an excellent program. Your
willingness to participate indicates the importance of the subject on how electronic payment
systems are going to evolve. This is a very challenging issue. It involves tough questions
about business, technology, law, and public policy. The idea of developing the rules of the
road for a road that really does not exist yet is a particularly challenging and important one.
Understanding electronic payments requires a range of expertise and a variety of perspec-
tives. Informal forums, like this one, promote debate on subjects ranging from standards, to
access to payments, privacy, and the future evolution of clearing and settlement. This is our
second workshop on the subject. We held the first workshop in October of last year. Last
years agenda considered whether legal, regulatory, and technological obstacles stand in the
way of migration to electronic payments. We also considered such questions as Are con-
sumers resistant to electronic payments? Do corporations current systems preclude moving
to electronic payments? Do end users see a compelling reason to change? Last years
participants cited cases where the lack of standards and certain laws hindered migration to
electronic payments.
The key result from last year was the importance of focusing on the business case and the
importance of discussing potential obstacles from the context of a business case. Many of
the obstacles are actually symptoms of other factors. The challenges are actually much deeper.
This workshops content and format was developed through discussions with leaders in uni-
versities, industry, and the Federal Reserve, and builds on the lessons that we learned last
year. It focuses on what is needed in specific areas such as online consumer payments, elec-
tronic bill payment, and business-to-business payments. Based on the importance of shared
expertise and perspectives, this workshop is organized around interactive panels, rather than
around a series of keynote addresses.
These panels are informal and designed to promote active discussion and debate within the
audience through the presentation of differing opinions. Our intention was to design a work-
shop that on the one hand was large enough to include all the key stakeholders, but was
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I. Welcome and Workshop Overview
small enough to ensure that discussion went beyond just a lecture style format. The modera-
tors are also experts in their fields and they will help lead the discussion. I would like to thank
in advance each of our presenters for agreeing to this format and for being so generous with
their time and their expertise today and tomorrow.
Today we have an international lessons panel, an online consumer payments panel, and elec-
tronic bill payments panel. We have one keynote address, Diogo Teixeira, Executive Director
of the TowerGroup, and then we have a reception after the workshop later this afternoon.
Tomorrow we have three panels, business-to-business, technology and security policy, and
legal and consumer protection policy, and we have one keynote speech tomorrow, Roger
Ferguson, Vice Chair of the Federal Reserve System.
Henry H. Perritt Jr., Dean, Professor of Law, Chicago-Kent College of Law; Vice President,
Illinois Institute of Technology
The Illinois Institute of Technology and its law school, Chicago-Kent College of Law, are
delighted to work once again with the Federal Reserve Bank of Chicago on these important
issues relating to electronic commerce. It is always a pleasure to collaborate with Michael
Moskow, who throughout his career has been both a creative force for new thinking and also
a source of respect for the integrity of institutions.
The issues that we are going to talk about over the next couple of days are issues that
require an interdisciplinary, or if you will, interprofessional approach. My institution believes
that interprofessionalism is essential for future progress in America and around the world.
We try to teach our students to cross disciplinary boundaries, and we also believe that the
academy should engage the world, and work with people who actually have to make decisions
and do things as a way of imposing discipline on our academic work and the generation of
intellectual capital.
We all know that the Internet is a new marketplace and that markets require payment mecha-
nisms. The most common payment mechanisms in todays new marketplace are the existing
ones. Some people are still writing paper checks for transactions that they otherwise con-
summate online, and millions of people are using ordinary credit cards to pay for things and
services that they buy online.
There also are new concepts emerging. Some of you may have read in a recent American
Banker about a new partnership between Yahoo! and the Canadian Imperial Bank of Commerce
to develop an innovative payments mechanism that would allow people to pay for things that
they buy through Yahoo! auctions. Yahoo! and CIBC are not the only people that are develop-
ing new mechanisms. America Online and Citigroup announced earlier this year an effort to
allow AOL customers to make payments to each other, and Wells Fargo and eBay similarly
have announced a partnership.
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As we examine this new marketplace and its possible new payments mechanisms, let us
focus on some of the things that we have, or should have, learned since the Internet entered
commercial consciousness in, to pick a year, 1995. The first thing that we have learned is that
the future belongs to open systems and not proprietary systems, even though open systems
present special problems for security and authentication.
The second thing we have learned is, despite lots of predictions to the contrary, consumers
are not afraid of cyberspace. They are perfectly willing to buy and sell things and services
online, and despite predictions to the contrary, they are perfectly willing to use their ordinary
credit cards to do that.
A third thing that we should have learned is that sometimes, high technology can get in the
way. An enormous amount of energy in the early 90s went into developing new kinds of pay-
ment mechanisms for the Internet, things like Digicash, concepts for micropayments, and the
secure electronic transactions (SET) standard for credit-card transactions. For the most part
those initiatives were not successful. At least they have not yet resonated in the marketplace.
And I will submit to you the reason that they did not is that they were too complicated.
We must therefore be careful as we design payment systems for this new marketplace that
we keep them simple. Often the greatest barrier is drawing new consumers into the market-
place, and things that are complicated make it difficult to do that. Credit cards and credit-card
chargeback mechanisms have attracted interest not only because they have proven their
acceptability as a payment mechanism for consumers, but also because they have a built-in
dispute-resolution mechanism that seems attractive to consumers and to merchants.
As many of you know, the OECD wrote a white paper about two years ago suggesting that
the governments of developed countries look more closely at credit-card chargeback mecha-
nisms as a way of meeting the need for an inexpensive dispute-resolution mechanism for
consumer transactions on the Internet. Catherine Johnston is going to have more to say
about credit-card chargeback mechanisms this afternoon, and I urge you to pay particular
attention to what she has to say.
There is another lesson to be learned here: that crooks operate in the electronic marketplace
just like they operate in brick and mortar marketplaces. So we need to be concerned about
fraud and forgery and other kinds of problems.
We also have to realize that just because consumers find something acceptable does not
mean that the inquiry should end. The risks to consumers may be very different and much
smaller than the risks to merchants and bankers. Even if a moderate level of security is
satisfactory from a consumer perspective, it nevertheless may be necessary to develop
higher levels of security to protect the interests of financial intermediaries and merchants.
The final thing I want to mention this morning is the new legal framework that we have as
of this year for digital signatures. As many of you know, the Congress of the United States
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enacted this summer the Electronic Signatures in Global and National Commerce Act. If that
seems a cumbersome name to you, the statute was so named in order to produce a pro-
nounceable acronym. The acronym is E-Sign. E-Sign is significant in three respects. First, it
embraces a very broad definition of electronic signature. Quoting from the legislative history,
Electronic signatures can range from simply typing a name at the end of an e-mail message,
to a digital signature, to a unique biometric identifier such as a fingerprint or an iris scan.
Second, E-Sign pre-empts state law that favors any particular technology. For example, the
Illinois Digital Signature Act gave special legal significance to digital signatures accomplished
through asymmetric encryption. E-Sign preempts that law. Illinois is not entitled to give spe-
cially favored status to asymmetric encryption over other forms of digital signature.
Third, E-Sign, the federal law, will give way to state law in any state that adopts UETA,
the Uniform Electronic Transactions Act that was finalized by the National Conference of
Commissioners on Uniform State Laws about a year ago. UETA, like E-Sign, does not give
any specially favored place to asymmetric encryption as a way of digitally signing something.
Where is this all going? First, it will result in a decentralized approach to developing more
secure forms of electronic signature. Because the approach will be decentralized, it will take
us longer to develop a universal infrastructure for electronic signatures. Under the Illinois
Digital Signature Act, for example, the State of Illinois agencies were well along on develop-
ing an accreditation mechanism for certificate authorities, which are necessary if asymmetric
encryption is to be used widely for digital signatures. Now we will see a wider variety of
infrastructure mechanisms for electronic signatures, and it will take a while to develop them.
But we will be better off in the end because we will be better able to adopt procedures that
assure the integrity of payment systems, and e-commerce more generally, in proportion to
the risk involved.
In some cases a simple name typed at the end of an e-mail message is quite enough. In other
cases, we will want higher levels of technology. The new federal statutory framework provides
the opportunity to do that.
We have a very rich program before us, and I look forward to learning from all of you.
Thanks.
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Mr. Gerald Fox, Editor, Payment Systems Worldwide (moderator)
Welcome to the first panel presentation. We have heard much in recent years about experi-
ments and pilot projects for Mondex card, VisaCash, and other stored value and electronic
cash approaches. What we have not heard much about are reports of real success or signifi-
cant acceptance, at least for applications for which they were initially envisioned. It does not
appear that success for these products is likely in the very near future. Perhaps the future of
smart cards lies with a different range of applications, like the Internet and computer network
security systems.
Of course, unlike most other countries, the U.S. still struggles with the growing number
of checks and a love affair with credit cards. We are still faced with the adoption of credit
transfers and direct debits for retail payments. Such payment methods are more common in
most major countries, yet difficult to achieve in the U.S. But if purchasing patterns change,
with more buying online for example, payment patterns likely will change also. With this in
mind, lets explore the subject of international activities and the lessons we may learn from
other countries.
Professor David Humphrey, Professor of Finance and Fannie Wilson Smith Eminent Scholar,
Florida State University
What I will talk about today is pricing and payment choicescomparing the use of cash, debit
cards, credit cards, and checks in the United States and Norway. In short, the Norwegian
experience indicates that small price increases in traditional payment methods can cause a
consumer to shift into the less expensive electronic payment methods.
As you can see in Figure 1, from 1987 to 1996, seven out of ten countries showed a decrease
in real cash use per person. Of course, what they have shifted to is seen in the last column,
which is the change in per person noncash transactions.
In Figure 2, all of the countriesand youll note that Norway is identified with the dotted line
with the arroware moving away from cash towards electronic payments. On Figure 2, the X
axis is the value of cash outstanding as a percentage of GDP, which is a general way of trying
to indicate the use of cash in the country. On the Y axis, we have the percentage of electron-
ic transactions as a percentage of the total number of transactions.
In some cases, like in Norway, the shift has been rather dramatic. As Marianne Palva will talk
about next, it has also been very dramatic for Finland.
Now let me offer some cost estimates of the U.S. payment system. If you take a look at the
estimated cost to the payor, the processing bank, and the payee who accepts different pay-
ment instruments, it comes out to about roughly 3% of the gross domestic product. That is
a big number. If you divide that number by the number of adults in the country, it is about
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II. International Comparisons: Lessons Learned
$1,000 a year. After doing more math, the average cost for checks, credit cards, and ACH in
the United States is about $2.60 per transaction. So our payment system is relatively expen-
sive. Since the average transaction value is around 50 or 60 dollars, that means that the
transaction cost is about 5% of the payment value. Again that is a fairly large number. On
the other hand, electronic payments, except for credit cards, cost anywhere from 1/3 to 1/2
as much as a check.
In Figure 3, we see the costs as identified from a survey of banks in Norway. This survey has
been going on for ten years, and I took this information from an article that was published in
the Norwegian Central Bank Economic Bulletin and translated it into U.S. dollars.
And for paper-based payments, you see that check costs about $2.15, and a paper giro pay-
ment, which is like or equivalent to our ACH except it is a credit transfer system, is about $1.
The giro done at the counter, because of the human interaction, is about $2. The electronics,
as you can see down below from the first column, are a lot less. Essentially the electronic
costs are only the bank costsa lot less than the paper equivalent.
The average price is in the second column. And as you can see the price being charged does
not cover the full cost. In fact the ratio is seen in the last column. As we will see here in just
a moment, you do not need to charge the full price to get people to change their behavior.
The cost ratio between the electronic instrument and its comparable paper-based instrument
is shown in the first column on the cost side and on the price ratio basis in the second col-
umn. The interesting point here is that both in terms of cost and in terms of the relative
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Cash and Non-Cash Transacti ons ( 1987- 1996)
- 14%
- 20%
- 09%
- 14%
- 25%
Change i n per person
real cash hol di ngs
54%
19%
41%
41%
39%
Change i n per person
noncash transacti ons
Bel gi um
Denmark
Fi nl and
France
Germany
- 15%
- 05%
- 35%
- 14%
- 24%
30%
54%
09%
90%
67%
I tal y
Netherl ands
Sweden
Swi tzerl and
U.K.
Country
7 out of 10 counti es show decrease i n real cash hol di ngs ( r=- 0.13)
Figure 1
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2
prices being charged, these ratios are less than one. This means that the electronic instru-
ment for either point of sale or disbursement or bill payments are a lot less costly than its
equivalent paper-based item. The electronic component is a lot cheaper, which then gets
people to shift their behavior.
In the United States, payment expenses were covered by float. Float per checks was relatively
small. What happened here was that if you made a paper-based bill payment through the giro,
the bank would debit your account one to two days beforehand, earn the float, and not charge
for the service. From the consumers perspective it looked to be free because all they did was
lose their availability by a few days before the value date.
If we look at how the price changes have occurred over a recent period of time, again based
upon bank survey information, the check price rose 100%, the ATM price rose as well, the
debit card price did not rise as much. This means that the relative prices have favored the
electronic instrument, i.e. the debit over the check.
Next, referring to Figure 4, we will see transaction volumes, with millions of transactions on
the Y axis and time on the X axis. What we see is a rather substantial decrease in the use of
checks throughout the whole economy and a substantial rise in the use of EFT-POS, which is
in Norway debit cards, not credit cards. Pricing has been successful from that perspective.
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Bank Payment Cost & Pri ce i n Norway ( i n 1994 U.S.$)
$2.15
$1.06
$2.26
$0.92
$0.49
$1.20
43%
46%
53%
Average
Cost
Average
Pri ce
Pri ce as
% of Cost
Check
Mai l Gi ro
Gi ro Counter
Paper- Based:
$0.63
$0.21
$0.49
$0.45
$0.14
$0.25
71%
67%
51%
EFTPOS
Di rect Deposi t
ATM Wi thdrawal
El ectroni c:
$0.92
$0.49
$0.42
$0.14
46%
29%
Noti f i cati on
No Noti f i cati on
Di rect Debi t:
Figure 3
Economists have tried to quantify consumers responsiveness to priceswe call these
demand elasticities. Referring to Figure 5, we see right underneath the first heading what the
relationship is to the change in quantity as a result of the change in price from an economet-
ric estimate.
With a 10% increase in the price of checks, holding everything else constant (e.g., income,
other prices, etc.), a 10% increase in the price of checks leads to almost an 11% reduction
in the quantity being demanded. It is a negative relationship because we increased price and
decreased quantity. So that is not a problem here. What we see is that consumers are very
responsive to price changes and relative price differences. Relative price differences we can
see in terms of the substitution elasticity, which is in the middle of the graph. Here we see,
looking at the denominator first, a 10% relative rise in the price of checks. Check prices go
up by 10% relative to other prices leads to a reduction in the use of checks, which is the
same thing here as an increase in the relative use of debit cards at the point of sale. That is
why we say that debit cards and checks are significant substitutes, that there is quantitative
relationships. ATMs are also a substitute for checks at the point of sale.
What direct pricing has done for Norway is to speed up the shift from costly paper instru-
ments to less expensive electronic instruments, which means the cost savings are realized
by the banks as well as the consumers. As such, the discounted value of that benefit will
then be more broadly recouped by the population. The essence here is they shifted from the
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Norway: Use of Checks and EFTPOS
1
1989. 2 1995. 2
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35
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EFTPOS
Checks
Figure 4
90% paper-based system to a 60% electronic system. That number has risen since these
numbers came out.
How much did Norway save? Looking only at the bank cost, which comes from survey infor-
mation, in moving from an all paper system to an all electronic system Norway could save as
much as .6% of the gross domestic product. That is a very large number, and is only the bank
cost. We were unable to estimate the effect from payee and payor cost.
There are two methods that can be used to estimate the legal use of cash in Norway. We
can directly calculate it, and what we see in Figure 6 is that the share of cash over total POS
payments from 1980 to about 1990 was about 90%. Then it started to fall precipitously
down to 50% in 1999. These are hard numbers, hard numbers in the sense that they are
reliable numbers.
What is not so reliable is our projection. That is because what we used a formulaic approach
to estimate how this would be extended according to what we call growth curves (namely the
diffusion of technology within an industry, for instance, the diffusion of robots within the auto-
mobile industry, the diffusion of ATMs within various banking markets). This type of analysis
(growth curves or logistic curves) has been used, but the problem for Norway is that we do
not have a good inflection point. Therefore the use of cash in POS transactions could also
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Demand El asti ci ti es f or POS Payments:
( 10.7% change i n check quanti ty) / ( 10% change i n check pri ce)
Debi t cards and ATMs are si gni f i cant substi tutes f or checks.
Di rect pri ci ng of payment servi ces has accel erated the shi f t to el ectroni cs.
Hi gher di scounted val ue of cost savi ngs when di rectl y pri ce payment servi ces.
- 1.07 i nel asti c
- 0.29 i nel asti c
- 0.50 i nel asti c
Checks
Debi t Cards
ATM Cash Wi thdrawl
Substi tuti on El asti ci ti es Among Payment I nstruments:
( 7.1% rel ati ve ri se i n card use) / ( 10% rel ati ve ri se i n check pri ce)
- 0.71 si g. substi tutes
- 0.82 si g. substi tutes
Debi t Cards wi th Checks
ATM wi th Checks
Quanti f yi ng the Response to Payment Pri ci ng
Figure 5
rise with not much difference in the statistical significance. What we are saying here is that
our predictions cannot be perfect.
Because we have estimated the amount of legal use of cash, we can also determine what is
unexplained, and the unexplained component represents illegal use of cash. In Norway this is
mostly for escaping sales and income taxes, both of which are very high. In the 1980s Norway
did a survey and found that one third of the population had participated in a transaction that
escaped sales taxes or income taxes. So this is a little bit different from the United States.
In Figure 7, we start with 100% here as the total value of cash outstanding, we subtract the
components that we know about, and this leaves us with 79% unexplained, which is associ-
ated with illegal use of cash in Norway as well as hoarding. And hoarding is believed to be
small. Some 79% to 80% of the cash is used for illegal purposes.
Here we see what it was in 1980 as opposed to 1999it rose about 20 percentage points. At
the bottom we have the largest Norwegian note, which is 1,000 krone, which is roughly about
112 euros, which is equivalent to about 100 U.S. dollars, which is our largest outstanding cur-
rency at the present time. And that also rose by about 20 percentage points. What we are
saying here is that, and this comes as no surprise to people who do research in this area, is
that the value of large value notes in total currency stock is a good indicator of illegal activity.
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Norway Esti mated Share of Cash i n POS Payments
Act ual ( 1980- 1999)
Forecast ed ( 2000- 2015)
Non- Li near Symmet ri c
Logi st i c S- Curve ( by gri d search)
1980 1985 1990 1995 2000 2005 2010 2015
10
9
8
7
6
5
4
3
2
1
0
Figure 6
We have the same numbers shown in Figure 8. Here we have the legal use of cash, again
the legal use of cash stock, cash stock here by consumers. And the rest of this is estimated
illegal use. So it has been growing rather rapidly. Even though it looks large absolutely and is
large absolutely, it comprises about 6 to 7% of gross domestic product.
Drawing my conclusions largely from Norway, Europe has replaced cash and checks at the
point of sale through the use of debit cards instead of credit cards. Prices cover about half of
the cost of bank production for payment services, but these prices have been sufficient to
markedly change consumer behavior.
Now, when pricing was implemented in Norway, the banks did not move in unison, and they
certainly did not charge the same prices, but they all sort of put the prices into place around
the same time. At the time it turned out that the Central Bank, as well as their competition,
decided that the cost savings would mitigate any antitrust concerns. Not a likely situation in
the United States. Because of the different legal structure and different history of bank coop-
eration, they were able to move this forward and implement pricing more or less at the same
time and realize the gains from it.
In terms of quantitative relationship, a 10% increase in check prices leads to about 11%
reduction in quantity of use. That is just a quantitative measure of price responsiveness. Over
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Esti mate of I l l egal ( and Hol di ng) Use of Cash
- Cash stock hel d by banks
- Cash stock hel d by stores
- Cash stock hel d by publ i c authori ti es
- Cash stock i dl e bef ore repl eni sh cash i nventory
- Cash stock hel d taken out of country ( Touri sts)
- Cash used at POS ( a f l ow) /turnover rati o*
Total val ue of cash outstandi ng ( a stock)
9%
2%
2%
1%
1%
6%
100%
*Turnover rati o: 1980 365/12.6 days = 29 ti mes a year
1999 365/15.0 days = 73 ti mes a year
( f ree cash back at POS started i n 1992)
NOK 1,000 = 112 euros
= Cash stock hel d f or i l l egal acti vi ti es ( & hoardi ng) 79%
1980
1985
1990
1995
1999
61%
52%
54%
71%
79%
44%
56%
63%
67%
62%
NOK 1,000 notes/cash stock
Figure 7
the last 10 years Norway switched from being an essentially heavy paper instrument user,
either checks or paper giro, to in fact very large electronic user. Going from all paper to all
electronic saves about .6% of gross domestic product.
In the future, we see debit cards still replacing cash at the point of sale, and the projection,
at least for five years, is that the percent of point of sale payments that will be cash will fall
from 50% to around 35%, that is a five year projection. It is more tenuous to make a 10 year
forecast, but there is the number.
As the legal use of cash falls by the substitution away from cash towards cards (debit cards),
you find that illegal use will be taking up the slack in terms of the overall quantity. But you do
not really have the substitution possible for illegal use to in fact switch from using cash to
cards. There is a limit to what is going to happen.
From a political standpoint the interesting aspect here is that if most of the cash outstanding
is used for illegal activities, then the seigniorage revenue the government makes by issuing
cash-seigniorage revenue since it only costs about 4 cents to issue a 1,000 krone note. So
you have a very large payoff here. What this means is that most of the seigniorage revenue
will be used from illegal activities.
Thank you very much.
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Esti mates of Stocks of Cash Hel d
by Vari ous Groups
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
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50000. 0
45000. 0
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Cash stock hel d by banks
Cash stock hel d by stores, publ i c authori ti es,
i dl e cash, and overseas
Cash stock hel d by the publ i c f or POS transacti ons
Cash stock used f or i l l egal acti vi ti es and hoardi ng
( determi ned as a resi dual )
Figure 8
Dr. Leo Van Hove, Assistant Professor in the Money and Finance Group and a Postdoctoral
Fellow of the Fund for Scientific Research all at the Free University of Brussels
Good morning, everybody. The organizers of the workshop have asked me to bring you a
report on the current state of electronic purse schemes in Europe. I might as well tell you
upfront, the news that I bring you is not very good. Some schemes perform better than
others do, but overall the picture is pretty bleak.
My presentation today builds on a paper of mine that was published recently in the online
journal First Monday and will consist of two parts. First I will document the current state of
European electronic purse projects by bombarding you with data. Second I will point out a
number of important lessons that can be drawn from the European experience so far.
Now, a few words about the data that I will present. Over the past two years or so, I have
compiled a database that covers, although to varying degrees, some 15 or 16 European elec-
tronic purse schemes. The bulk of this data was obtained directly from the electronic purse
operators, although with considerable difficulty. This is because electronic purse operators are
usually quite happy to release either cumulative figures, such as the total number of transac-
tions since their start, or their growth rateswhatever looks best. But they are usually quite
reluctant to release transaction data, especially relative figuressuch as the number of trans-
actions per cardfor the simple reason that these figures are not very impressive.
We will see in a minute that the coverage of my database differs markedly from scheme to
scheme, and this is simply because not all electronic purse operators were equally cooperative.
Some schemes are hardly covered at all. For example, I have no transaction data whatsoever
for the Netherlands. I have summarized my results in a series of graphs, and you have these
graphs and other graphs in your handouts. These graphs, incidentally, are updates of the
graphs that are in my First Monday article. If you combine the text of my First Monday article
with the graphs in your handout, you should have a really up-to-date analysis. I will first show
graphs on the infrastructure, so to speak, the number of cards, and the number of terminals.
And then the final graphs will be about actual usage.
Before we turn to the first graph, let me stress that the graphs should be interpreted with cau-
tion in view of the many country-specific differences. The most important difference is that the
electronic purses were launched at different points in time. This is why I will focus my presen-
tation on graphs where the horizontal axis represents the time elapsed since rollout. But there
are, obviously, other differences which are not accounted for in the graphs; differences in con-
sumer and merchant fees for example. There is also the pace of geographical expansion. The
Proton card in Belgium, for example, was introduced on a city-by-city basis. It took the Belgium
electronic purse operator more than two years to cover the whole of Belgium. There is also the
degree of competition. In some countries you have two or three local electronic purse schemes
competing for the same market, and obviously that can make a difference too.
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With this in mind, let us turn to Figure 9, which provides you with a picture of the total num-
ber of cards in circulation as a percentage of the population. Even though this is not a very
meaningful indicator for the very simple reason that in many of the countries studied, in
Belgium, in Germany, for example, electronic purses were simply incorporated into debit
cards and sent out to cardholders when their debit card was due for renewal. It is obviously
very easy to flood the market with electronic purses in this way. However, as I will show you
in a minute, many of these unsolicited electronic purses typically remain unused and are not
even activated. It is therefore better to concentrate on active payment cards.
However, there are a number of interesting observations in this graph as well. Let me first
point out the case of miniCASH in Luxemburg. MiniCASH is an interesting case because it is
the latest electronic purse to be launched on a nationwide scale in Europe. It was launched in
February last year. Interestingly it is one of the few electronic purses that seems to be doing
relatively well. It is important to note here that the local banks in Luxemburg were particularly
quick in putting cards into the hands of cardholders.
Another interesting case is Chipknip in the Netherlands. This is because in the Netherlands
there are two local electronic purse schemes which were incompatible at first; Chipper, which
is not mentioned in this particular graph, and Chipknip. And between the two of them, they
have more electronic purses in circulation than the total number of citizens in the Netherlands.
Yet, interestingly enough, the success of the new means of payment is very, very limited.
That shows you that simply flooding the market with cards is clearly no guarantee for success.
It is better to concentrate on the number of activated cards because that is a more reliable
indicator of the real degree of penetration (see Figure 10). Activated cards being defined as
cards that have been loaded at least once, which is not to say that these cards are really
active cards. I will come back to this difference in a minute.
What stands out in this figure is that Proton in Belgium really has the highest values, really
towers high above the other schemes. However, if one corrects for the number of months
since rollout, miniCASH in Luxemburg actually has the best result. When comparing the two
graphs, you must note that the degree of penetration for several schemes is significantly
lower when gauged in terms of activated cards, as opposed to the total number of cards in
circulation. This is true for the Cash scheme in Switzerland, the Cash scheme in Sweden, for
Quick in Austria, and especially so for the Geldkarte scheme in Germany, which is not even
on the map here. However, the Geldkarte scheme is a special case because the German fig-
ures do not relate to activated cards but rather to active cards, defined as cards that have
been used at least once during the month in question. Due to this significantly more rigorous
definition, the German figures are in fact not comparable to the data on the other schemes.
Looking at Figure 11, what strikes the eye is the steady increase in the number of Belgian
Proton terminals. Still, as was also the case with the number of cards, the expansion was sig-
nificantly slower than was initially expected by Banksys, which is perhaps not surprising. It is
also interesting to point out that there are two or three schemes that significantly outperform
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9
and consistently outperform Proton, although to varying degrees. The most salient example is
Chipknip in the Netherlands, which clearly has the highest number of terminals. And the over-
all penetration rate in the Netherlands is even higher than this because the other scheme,
Chipper, also has a significant amount of terminals in operation. It is interesting to note that
the miniCASH scheme in Luxemburg again outperforms Proton.
At the other end of the spectrum, so to speak, you have, for example, the Geldkarte scheme
in Germany for which the number of terminals is clearly too low. Note also the slow growth
for the number of terminals in Denmark. And this lack of acceptance will obviously result in
disappointing usage levels, as we will see in a minute.
So much for the infrastructure, what about actual usage?
Figure 12 presents average frequencies of use per card and per month. Obviously the most
important observation is the low overall level. Even the schemes that perform best fail to
reach the level of one transaction per card per month, except for Protons early months after
the national launch. But this is simply because these figures were to a large extent still influ-
enced by the cards that were in circulation for over a year in the pilot cities of Louvain and
Wavre. There are a couple of schemes for which the frequency of use is increasing, but on
very low level; miniCASH in Luxemburg, and Cash in Switzerland. The other schemes for
which I have data are not doing very well, to say the least. For example, the Geldkarte
scheme is not even on the map. There are also a couple of schemes, Multibanco in Portugal
and Cash in Sweden, that are both confronted with falling usage levels. Finally, to complete
the picture, I should add anecdotal evidence on the Netherlands, where I repeat, electronic
purse operators simply refuse to communicate transactions data. But anecdotal data points
towards low usage levels, 2 to 4 times as low as Proton in Belgium.
Like I said, it is better to concentrate on activated cards. Figure 13 provides you with data on
the frequency of use for activated cards, and again per month. The overall level is higher, but
it still falls well short of expectations for the mature electronic purse, which, according to
some, would be 3 to 4 transactions per day and not per month. Concerning Proton, I have to
point out that the results are strongly influenced, one might even argue biased, by the gradual
geographical expansion of the scheme in a sense that tapping new regions lowers the overall
result. And this explains why there was a fall in frequency of use until, if I remember well, the
fall of 1998. But these days, the frequency of use is clearly on the increase.
Note also the increase of the frequency of use for the Cash scheme in Switzerland, and the Quick
electronic purse in Austria. Again, although it is not clearly visible on the graph, the miniCASH
scheme in Luxemburg is doing fairly well. It is outperforming Proton anyway. Again the figures for
the German scheme, the Geldkarte scheme are not comparable to the data of other schemes.
Lastly, Figure 14 presents comparative data on the average amount outstanding on a per
capita basis in Europe. You can see in this graph that as of the end of June this year Proton
clearly was the most advanced scheme. If one corrects for the time elapsed since rollout,
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miniCASH in Luxemburg actually has the best result. Where the other schemes are con-
cerned one can see, for example, that the float in Germany increases only very, very slowly,
and that Chipknip and Chipper in the Netherlands do not seem to be making any headway.
The float is almost stable. There are also other schemes, MEP in Portugal, Cash in Sweden
and MINIpay in Italy where the float is actually falling instead of increasing.
Finally, to complete my overview I should point out that as a percentage of currency, even the
float figures for Proton are negligible. In December last year the total amount outstanding on
Proton cards was equivalent to no more than 0.3% of the amount of currency in the hands of
the Belgian public. Also, according to an estimate by the Belgian Bankers Association, the
number of cash transactions conducted in Belgium would amount to some 4 billion. In 1999
the number of Proton transactions totaled 45 million, which implies that Proton had displaced,
at that point in time, a mere 1.1% of cash transactions. Whether Proton will be able to reach
its target of displacing 5% of cash transactions in 5 years time remains to be seen.
So, what can be learned from this overview? The first clear conclusion is that the initial
expectations concerning consumer uptake of electronic purses were unrealistic. The most
salient example is Quick in Austria. Initially, Europay Austria was confident that the Quick
electronic purse would be able to displace no less than 20% of cash transactions in three
years time. But that was 95, 96. Today even Protons more conservative target, 5% in five
years time proves to be quite challenging. That is the first conclusion.
Just how worried should we be by these disappointing results? Is this the beginning of the
end for electronic purses?
A first remark is that an initial slow adoption does make economic sense because of the exis-
tence of the network effects. Network goods typically display an S-shaped adoption path with
slow growth at first, followed by more explosive growth once a critical mass is reached. This
is due to a sort of positive feedback effect where more merchants means more cardholders,
more active cardholders anyway. More active cardholders means more merchants and so on.
So there is no reason to panic yet.
However, this feedback effect can also work in a negative sense as we have seen in the
combined Mondex/Visa Cash trial in New York City. So schemes which are faced with falling
transactions levels, such as in Denmark and Cash in Sweden among others, should start to
get worried. But I must also remark that my figures are average figures, and as such may
hide underlying currents, so to speak. For example, I had a long and interesting talk with
Fabrice Constantin, one of the people behind the Moneo pilot in France. He told me that as
a general rule 20% of cardholders generated 80% of transactions. This was also the case in
the early years of debit cards. There is also a glimmer of hope in that the newcomers like
miniCASH in Luxemburg and Moneo in France (though Moneo is only a pilot) seem to be
doing fairly well. The operators behind Moneo and miniCASH clearly seem to have realized
that simply flooding the market with cards will not work. And it is crucial that cardholders
perceive a critical mass of acceptance points right from the start.
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So what are the critical factors of success? Why do some schemes perform better than others do?
Well, the network externalities theory will tell you that what matters is the size of the net-
work in terms of both terminals and cards. This theory does indeed help explain why miniCASH
in Luxemburg, with a higher number of terminals and cardholders, outperforms Proton in
Belgium. It also helps explain why the Geldkarte card in Germany, with a low level of termi-
nals, performs less well than Proton in Belgium. However, it does not help explain the limited
success of the Chipknip cards in the Netherlands. Chipknip had the highest level of terminals
and the highest level of cardholders. What is so strange about the case of the Netherlands?
First of all, in the Netherlands there were initially two incompatible schemes. This clearly
shows that incompatibility may prove to be detrimental because it creates uncertainty among
both cardholders and merchants, and because it divides the market into two networks, with
each being too small to make the card sufficiently useful. Another distinctive feature about
the situation in the Netherlands is that a large proportion of the Chipknip terminals were in
fact converted point of sale terminals. These terminals are of very little use for electronic
purse cardholders.
Coming back to this issue of coverage, it is clear that cardholders demand universal service.
During the conversation I had with Mr. Constantin he emphasized the importance of visibility
and predictability. In the Moneo pilot, for example, one of the big successes was parking
meters. And Mr. Constantin emphasized that one of the main reasons for this success is that
the full 100% of parking meters in Tours were converted to accept Moneo. And people know
that. On the other hand, not all bakeries, for example, accept Moneo, and apparently people
do not bother to find out whether that particular bakery accepts Moneo or not, hence lower
usage. So visibility and predictability are very important.
Another interesting finding that emerged in my conversation with Mr. Constantin is that the
relationship between high coverage and high usage also works on a geographical level. The
marketers behind Moneo divided the city of Tours into sectors and they noted that when there
are many merchants in a particular street that accept Moneo, all of them will see higher than
average usage levels. On the other hand, isolated merchants will never see high usage levels.
One other important factor is unattended point of sale applications. It is interesting to point
out that the newcomers typically bring unattended point of sale applications into the scheme
much faster and with results. For example, in Luxemburg unattended point of sale applica-
tions were good for 50% of transaction volume at the end of 1999. This has increased in
the meantime to 75%. In Tours, France parking meters, while accounting for only 15% of the
number of terminals, are actually good for 30% of transactions. In Belgium, public pay phones
are proving to be the most popular use for the Proton card and generate 35% of the total
transactions. The second most popular use is vending machines. This clearly shows that unat-
tended point of sale is very important. This also seems to be the direction that other schemes
seem to be heading. For example, the Geldkarte card in Germany expects a whole lot from
cigarette vending machines. They have a pilot on that right now. When implemented,
VisaCash in the Philippines will initially concentrate on pay phones.
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1
4
As a general conclusion, the immediate future of electronic purses seems to lie in multi-
application cards with a clear emphasis on unattended point of sale applications. The future
of electronic purses as a replacement for cash at the retail level crucially depends on the
existence of a spill-over effect from unattended point of sale. In other words, once people
start appreciating the convenience of using electronic purses at unattended points of sale,
they might also start using it in other transactions as they become comfortable with it. If I
were an electronic purse operator, that is what I would be hoping for anyway.
Thank you for your attention.
Marianne Palva, head of the Payment System Division at the Bank of Finland
I have been asked to share my thoughts with you on the lessons to be learned from Finlands
successful changeover to electronic payments. Before tracing developments in the payment
system, I would like to give you some background information on the Finnish banking sector
and payment infrastructure. Finland is a small country with some 5 million inhabitants. There
are only about 10 commercial banks that participate directly in the payment system. In addi-
tion, there are about 350 cooperative banks and savings banks that participate indirectly,
through their central institutions, which are commercial banks. The payment system was
developed by the banks themselves and is based on bilateral exchange of transaction informa-
tion. The routing of transactions is based on account numbers. There is no ACH. The central
bank has not participated in development of the system, but it does provide settlement serv-
ices and, in recent years, has begun to oversee the operation of the system.
Finland is a giro country. The postal giro was introduced in 1939, and the bank giro came on
the scene a few years later. A major step in promoting the use of payment services based on
giros and bank accounts, instead of cash, was the introduction of the salary bank scheme
in the early 1960s. As a result of an understanding reached between the banks, employers,
and employees, wages and salaries were paid into bank accounts instead of in cash. This sys-
tem was extended to other recurrent payments, e.g. pensions and social security benefits. In
the early 1970s, the banks introduced checks with bank guarantees of up to $120-$160 as a
payment medium for individuals. As a result of the salary bank scheme and the direct deposit
of other recurrent payments into bank accounts, currency held by the public decreased from 4%
of GDP to less than 3% in 10 years. After the introduction of the check, the ratio declined fur-
ther during the next 15 years, to less than 2% (Figure 15). In the 1990s, the ratio moved onto
an upward trend, for reasons that I will explain later.
As the use of payment services expanded, the banks started to automate the handling of pay-
ment transactions. By the mid-1970s, the banks had begun to exchange payment transaction
information electronically on a bilateral basis. Checks were truncated and stored in the bank
branches where they were presented for payment, and the information was forwarded elec-
tronically to the payers bank. Credit transfers were also forwarded electronically from bank
to bank, but paper receipts still had to be sent to receiving banks and receiving customers.
I
n
t
e
r
n
a
t
i
o
n
a
l
In order to do away with paper receipts and to automate the link between bank and receiving
customer, the banks developed the reference giro system. This was a rather simple solution.
It is based on a reference number provided by the seller, which identifies payments it receives
by invoice and payer. The reference number is printed on the invoice, and later on it was also
printed on the giro accompanying the invoice. The reference number is linked to the payment
and accompanies it from paying customer to receiving customer. This enables the receiving
customer to automate payment reconciliation. In order to avoid sending paper receipts to cus-
tomers who do not use the reference giros, banks introduced the statement-as-receipt in
the early 1990s. All information related to a transaction is printed on the statement, and paper
receipts are priced and provided only on demand.
The check rapidly gained popularity, but using checks is expensive. A check has to be printed
and it requires manual handling, in both the shops and the banks. It is also cumbersome. In a
shop it takes some time to write a check, and the shop has to forward it to a bank, which in
turn has to do some further processing. As soon as the technology became available, Finnish
banks introduced the debit card as a substitute for the check. Pricing was used to persuade
consumers to use debit cards. A small price was introduced on checks - about 10 cents per
checkwhile debit card payments remained free of charge to the card holder. This approached
worked. The number of checks declined and the use of debit cards increased. The debit card
quickly became popular, and checks have almost disappeared from the scene (Figure 16). During
the early years, a paper slip was used with the debit card, but in the second half of the 1980s
I
n
t
e
r
n
a
t
i
o
n
a
l
Currency Hel d by the Publ i c, % of GDP
1960 1965 1970 1975 1980 1985 1990 1995 2000
6
5
4
3
2
1
0
USA
Fi nl and
P
e
r
c
e
n
t
a
g
e
Figure 15
the number of EFTPOS terminals grew rapidly (Figure 17), which resulted in the automation of
the debit card process. Besides debit cards, we also use credit cards, charge cards and retail
cards; but the latter are less important payment media and their growth has been slower
(Figure 18).
We also use cash ATM cards, and the use of these cards has grown quite rapidly over the
years (Figure 19). The cash ATM was introduced in the mid-1980s in order to reduce cash han-
dling chores at bank branches. At first, the number of cash ATMs grew quickly, but later there
was a marked slowing of the growth. In 1994 the major banks and banking groups estab-
lished a company, Automatia Pankkikortti Oy, to administer their cash ATMs. Subsequently,
the number of cash ATMs declined. As cash ATMs could be used from the onset by cus-
tomers of all the banks, banks installed them partly for competitive reasons. At shopping
malls and other places with lots of people around, one would find, side-by-side, ATMs of all
the big banks. Once Automatia took over these operations, competition between the banks
was eliminated in this area and the number of ATMs began to decline. As ATMs became
fewer and farther between, people began to withdraw larger amounts at each visit, which
increased the amount of cash held by the public. There were other reasons for the relative
growth of cash held by the public. During the deep recession in the first half of the 1990s, the
banks became more restrictive in granting debit cards to customers, which also increased the
need to hold cash. The main reason for restricting the use of debit cards was that EFTPOS
terminals, in contrast to cash ATMS, are not connected on a real time basis to banks accounting
I
n
t
e
r
n
a
t
i
o
n
a
l
Number of Check and Debi t Card
Payments i n Fi nl and
C
h
e
c
k

a
n
d

D
e
b
i
t

C
a
r
d

P
a
y
m
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t

i
n

M
i
l
l
i
o
n
s
85 84 86 87 88 89 90 91 92 93 94 95 96 97 98 99
250
200
150
100
50
0
Debi t Card Payment s
Check Payment s
Figure 16
I
n
t
e
r
n
a
t
i
o
n
a
l
Total Val ue of Card Transacti ons
F
I
M

i
n

B
i
l
l
i
o
n
s
86 87 88 89 90 91 92 93 94 95 96 97 98 99
100
80
60
40
20
0
Ret ai l Cards
Credi t Cards and Charge Cards
Debi t Cards
Figure 18
Number of EFTPOS Termi nal s
E
F
T
P
O
S

T
e
r
m
i
n
a
l

i
n

T
h
o
u
s
a
n
d
s
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
70
60
50
40
30
20
10
0
Figure 17
systems. During the recession the underground economy grew, and this also boosted the
need for cash. After the collapse of the Soviet Union in the early 1990s, traffic over that bor-
der grew and more people became accustomed to using the Finnish markka, which was even
used to an extent in Russia. It was the combination of all these developments that led to the
rise in the ratio of cash held by the public to GDP.
Technological developments and the introduction of the reference giro enabled the electroni-
fication of customer interfaces and expanded the range of self-service offerings. The first
electronic interfaces were introduced for companies in the late 1970s and early 1980s.
Home banking by telephone was offered to households in 1982 and banking based on home
computers and modems in 1984. Companies soon began to use electronic interfaces, but
the home banking products were not an overnight success. PCs were not so widely available
at that time, and banks were still offering paper-based giro services free of charge. In order
to avoid the paper, the banks introduced giro ATMs in 1989 and began to charge for over-the-
counter payment of paper giros. Using a giro ATM, you key in the payment yourself. Giro ATMs
were normally installed in bank offices but also in shopping malls and department stores. The
number of giro ATMs increased fivefold in the first five years, but after the introduction of
Internet-based services in 1996, the number started to decline while growth picked up in the
number of data connection agreements between banks and customers (Figure 20). By June
2000 the banks had over 2 million Internet service agreements in place.
I
n
t
e
r
n
a
t
i
o
n
a
l
Number of Cash ATMs and Val ue of Cash Wi thdrawl s
120
100
80
60
40
20
0
F
I
M

i
n

B
i
l
l
i
o
n
s
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
3600
3000
2400
1800
1200
600
0
Cash ATMs
Cash Wi t hdrawl s
Figure 19
Technological progress is not the sole explanation for the increase in the number of giro
ATMs and data connections between banks and customers. During the first half of the 1990s,
the availability of services tied to physical outlets declined sharply. The total number of bank
branches was reduced from 3,300 to 1,500, and the number of bank employees was halved,
roughly from 50,000 to 24,000 (Figure 21). These changes were due to the banking crisis of
the early 1990s and the banks need to cut costs.
Looking at the history of the automation of payment transactions between banks and their
customers, we see that the degree of automation has grown steadily: In 1986 it was 25%,
already in 1991 it was 50%, and now it has reached 85%. Focusing on the different cate-
gories of payments, we see that electronic transfers and EFTPOS transactions have been
growing at more or less the same pace and have superseded the corresponding paper-based
products. The proportions of debit and credit transactions have remained more or less the
same, while sales slips have been replaced by EFTPOS transactions and the paper giro by the
electronic giro (Figure 22). Paper giros still account for 13% of the total number of transac-
tions, sales slips for 2%, and checks for only 0.1%.
Looking now at the breakdown of credit transfers by intermediary in 1999, we see that EDI,
which is used by companies, accounts for almost 50% of the total. Giro ATMs, which are used
mostly by private customers to initiate credit transfers, as well as payment services and PC or
I
n
t
e
r
n
a
t
i
o
n
a
l
Gi ro ATMs and Data Transf er Agreements Between
Banks and Customers
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
O
f
f
-
L
i
n
e

A
g
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e
m
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s

i
n

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s
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i
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s
a
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d
s
2000
1600
1200
800
400
0
3
2. 4
1. 8
1. 2
0. 6
0
Gi ro ATMs
Tel ebanki ng Agreement s
Of f - Li ne Agreement s
Figure 20
telebanking each account for 11%. Payments made over the counter in bank branches account
for 8% and direct debits for 7% (Figure 23). The direct debit was introduced already in the
early 1980s, but so far it has not gained much popularity. One reason is probably that people
like to make the final decision on payments themselves and are thus reluctant to permit auto-
matic debiting of their accounts. Another reason may be the ease of executing credit transfers.
The breakdown of credit transactions will probably change in the years to come. The use
of giro ATMs will diminish as people get more and more used to the Internet. Mobile phone-
based payment services, which were introduced in 1996, will also change the picture,
especially since WAP phone banking was introduced by all the major banks in 1999. So far,
there are no general statistics on mobile phone-based banking services. However, all of these
services, including payment services, should start growing rapidly in Finland, which is the
world leader in the penetration of mobile phones. More than 75% of Finnish citizens now have
access to a mobile phone. The number of WAP phones is still moderateabout 100,000and
only 10% of the new mobile phones sold are WAP phones.
The banks are also trying to promote the use of their existing Internet services by providing
e-commerce payment facilities. The customer can pay in real time for an online purchase by
selecting from the merchants website the Internet payment code for his own bank and accept-
ing the bill that appears on the screen. After this, he is directed to his banks website in order
to execute the payment. The arrangement requires prior agreements both between the merchant
I
n
t
e
r
n
a
t
i
o
n
a
l
Bank Branches and Empl oyees
B
r
a
n
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e
s

i
n

T
h
o
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s
a
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d
s
B
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k

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m
p
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o
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e
e
s

i
n

T
h
o
u
s
a
n
d
s
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
4
3
2
1
0
60
45
30
15
0
Branches
Bank Empl oyees
Figure 21
and the bank (on Internet payments) and between the customer and the bank (on Internet
banking services). At least for now, the two agreements must involve the same banking group.
E-commerce is still in its infancy in Finland and is not as widespread as in the United States.
Another recent development is EBPP, that is electronic bill presentment and payment via the
Internet. Customers of service providers, e.g. telephone companies, can request that their
bills be sent electronically to their own Internet banking website or by email instead of by
ordinary mail. There are options for paying bills such as direct debiting and direct payment,
which requires that the customer approve the payment via the Internet service function.
EBPP has been available in Finland since spring 1999 for telephone and electricity bills. So
far it is not widely used, but the outlook is for strong growth in the years to come.
In order to reduce the use of cash and cash ATMs, banks introduced a new online debit card
in May of this year. This card is attached to the payees account, and EFT-POS terminals that
accept the card include online account checking features that prevent overdrawing of the
account. In this, it differs from the traditional debit card, which is based on batch processing.
The new online debit card is an option for customers who are either ineligible for or unwilling
I
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r
n
a
t
i
o
n
a
l
Bank Payment Transacti ons and Automati on Degree
S
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Aut omat i on Degree El ect roni c Credi t Transf ers
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Figure 22
to use traditional debit cards. If the card is attractively priced, it should gain popularity fairly
quickly and reduce the need for cash.
Another relatively new payment medium that might reduce the use of cash is electronic money.
This was first introduced in Finland in 1993. At present the only general-purpose e-money
scheme in use is Automatias Avant II, which has been in operation since 1997. Automatia,
which is owned by the three biggest banks, is the system operator and its Avant money is
available in the form of disposable cards. Banks issue reloadable smart cards embedded in
debit or credit cards, and the three bank-owners of Automatia issue e-money on the cards.
The cards can be loaded from ATMs or via the Internet using a card reader. E-money has
however not yet achieved wide usage. One reason for this could be that debit cards are wide-
ly accepted and there are very few items that can be purchased solely with e-money. But the
situation could change dramatically, particularly if e-money could be used to pay for purchases
over the Internet.
Finally, what are the main factors explaining the Finnish case. One is the Finnish data com-
munication network, which has always been highly advanced and early on enabled electronic
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EDI ( 46%)
Bank Branch ( 8%)
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Gi ro ATM ( 17%)
Breakdown of Credi t Transf ers by I ntermedi ary, 1999
Figure 23
transfer of data. Another is the cooperation between the banks in developing the necessary
systems and new products, as well as the cooperation between the banks and the authori-
ties. In order to develop electronic transmission and storage of data and to reduce the need
for paper, our legislation had to be changed, and the authorities were willing to do this. Close
cooperation between the banks and Finnish computer manufacturers was behind the early
development of banking terminals that were used by branch personnel for all types of banking
business, including payments. The banks early on acquired real-time in-house systems cover-
ing the whole country and including links from all the branches to the main frame. One could
go to any branch to make a payment or withdraw cash. The next step was the real-time con-
nection from ones home PC, and now one can have a real-time connection to his bank via the
Internet or by using a mobile phone from anywhere in the world.
We have been able to automate and electronify most of our payments. Practically, the only
time a Finn handles paper today in making a payment is the odd time when he uses cash.
There is still much to be done before we get something that will replace this usage of cash,
but the time will come when we no longer use paper at all for payment purposes, but rely
instead on electronic messages and perhaps e-money. Thank you for your attention.
Mr. Gerald Fox, Payment Systems Worldwide (moderator)
I would like to use the moderators prerogative to ask the first question. As U.S. banks look to
increase the usage for making retail payments via such vehicles as the computer, telephone,
debit card, how much are banks here going to be able to influence that usage through pric-
ing? My past experience both as a bank director and as an industry observer is that banks,
with a few notable exceptions, generally price either on the basis of competition or what the
market will bear. I would be interested in hearing some comments on how to more effectively
use pricing as an incentive to moving the customer in a direction that might be more appropri-
ate for the banks.
David Humphrey, Florida State University
First of all, the U.S. is quite different from European countries. We have a very disaggregated
banking system. I do not even know what the numbers are now, but it used to be in the thou-
sands of banks; you could aggregate those before you would even get 90% or 85% of total
deposits. Second, we do not have a history of working together on the banking level largely
because of antitrust issues, which do not inhibit the cooperation that we saw in Europe as
Marianne just spoke to.
The third element is the government subsidy to the credit unions. Anything the banks try to
do basically on their own often times is undercut by the fact that credit unions can under price
banks for most of the banking services because their profits are not taxed. I am not very opti-
mistic about direct pricing. There are all sorts of indirect pricing schemes that go on today, as
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you are well aware. And I think that will probably be the way, which will be a much slower
type of process in the transition.
Audience Member
I am from a community bank just outside of Chicago, and it seems to me that a lot of the suc-
cess that we have seen in Europe has to do with the fact that all the banks seem to say We
are going to price this way, and they have all done it together. As a community bank, we can
certainly say we want to push our customers towards using electronic payments rather than
checks by adjusting our pricing accordingly, but what we would experience is that our cus-
tomers would get mad and go bank with someone else, which presents a challenge. We
have tried to come up with ideas that are more positive pricing incentives.
Those of you who live in the Chicago area probably remember when First Chicago decided
that they were going to start charging for teller transactions and got ugly press for it. And all
they were really doing was reflecting some of their own costs to do it. I think we have to be
careful about how we go about it. I am not real sure how we fix it because we certainly can-
not, as David was saying, have all the banks work together to adjust their pricing accordingly.
And we have found it very difficult to get the consumer to move in the area we want him to.
I work with a number of the larger banks as well and nobody seems to have a real good
answer on how we are going to go about doing this.
Audience Member
I am always struck by the dominance of the credit card in this country. If you think about this
perverse pricing arrangement, it is a wonderful deal for a consumer; you get a consolidated
bill, you might even get air miles, and you get float. Why would you ever want to use any-
thing but a credit card if that is the value proposition that is being put to you?
But in Finland it seemed retail cards and credit cards are growing there, maybe at a slightly
higher rate than the debit cards. I wonder why the credit card has not caught on in Europe.
And I guess to your point it would seem to me until one can start pricing that float, you are
going to have a hard time selling the American consumer on any of these other things.
In Europe you have a history of credit transfers through the giro, which means you do not
transfer anything if you do not have the money. In the U.S. it is almost the reverse. You bor-
row when you are younger and pay it back presumably when you are older. That is the history
of the arrangement. The intellectual arrangement for the history emphasizes the debit card.
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The other thing is the credit-card companies are trying to make inroads in Europe, and they
might be successful. The reason why they are so successful is the cross-subsidy, namely
everybody else that uses cash, checks, or debit card at the point of sale is cross-subsidizing
the credit-card user. Although you have to wonder about some people paying their govern-
ment income taxes, millions of dollars, through the credit card in order to get the air miles.
They are not necessarily rational about it. But I think it has been the pricing arrangement.
Remember how S&H Green Stamps used to be? I am a little older I guess. If there are only
a few merchants that have S&H Green Stamps, then that is fine, you attract a little bit larger
flow of business, and you might write it off as a volume discount. If everybody has it, then it
can be a parasitical relationship to the merchants. It is the same way right now with the credit
cards in my judgment.
Marianne Palva, Bank of Finland
I have two reasons why the debit cards are more popular than credit cards. One is that debit
cards are free and for credit cards you have to pay something, even if it is not much. I think
another reason is that people can better track their expenses with a debit card. They do not
want to get one bill at the end of a month and perhaps be surprised how much they have spent.
Those who do not have to keep track of their daily budget probably use the credit card more.
Audience Member
Mr. Humphrey referred to the antitrust laws and a positive reaction to a change or increase in
prices across the board by all financial institutions. Do you also see a reaction from consumer
or community groups that would be a barrier to the use of debit cards and number of checks,
and is there anything in the community groups that would be attractive to them in the use of
debit cards?
Well, the antitrust action deals with banks working together, and, of course, consumers are
very happy with the situation, or they are fooled with the situation where they believe that
they are not paying anything, at least on the margin. When a consumer, not a businessman,
writes one more check they typically think it is a free check. It does not really work that way
in Europe.
With respect to the antitrust, I know of no serious case going to the Justice Department or
the Fed to try to argue that the cost savings would justify some sort of overall movement for
all the financial institutions toward a direct pricing arrangement. That is why, if anything, we
have gone the indirect route.
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Audience Member
Leo indicated that one of the great values of cash is its anonymity, as you pointed out the
avoidance of sales tax of some sort. Does that mean in the long term we are going to slow
the adoption of electronic payments simply because the electronic form leaves a footprint?
Dr. Leo Van Hove, Free University of Brussels
That is clearly a barrier to adoption in Belgium. It has never been publicly acknowledged by
the electronic purse operator, but off the record you hear stories about stores not wanting to
accept electronic purses because they are afraid of higher taxes. In Belgium, with merchants
such as bakers and butchers, you have a peculiar taxing system in that they are taxed not on
their sales, but on their input. It is a very strange situation and obviously there are a lot of
loopholes because they can buy input in illegal ways and thus avoid sales and income taxes.
Obviously, once the government can keep track of bakers turnover it is easier to tax him to
the fullest. So, bakers and butchers are very afraid of that.
Audience Member
In listening to Professor Van Hoves presentation, it struck me that perhaps his lessons are
very applicable to the emerging online or Internet payment systems. And I wanted to hear if
he agreed with that thought or if there was some differences and similarities that maybe he
thought about.
There are obviously similarities. The chicken and egg problem is probably the biggest chal-
lenge for when an electronic purse operates in the real world. This is also a problem on the
Internet. In Belgium, the Proton card has been used for Internet payments for two years. The
success so far is very limited, though exact volumes are not available. One reason why is that
it is still an exclusively Belgian thing. You have approximately 30 merchants that accept the
Proton card, and all of them are Belgian. You have the Internet, which is a potentially global
market, and the Proton card is extremely limited there. The problem for electronic purses is
that they need interoperability on the Internet. We know that the Common Electronic Purse
Specifications will help to bring that about, but that will take some time.
Another point is that you need a card reader to connect to your computer in order to pay with
your Proton card. It is sold for about 2,000 Belgian francs, which would be some $50, which
is not much, but still, you have to pay it. Consumers are not willing to pay that amount just
for being able to purchase with 30 merchants of which they might, for example, use only 5
on a regular basis. So, there are similarities and there are additional problems. On the other
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hand, there are perhaps advantages compared to the real world in that electronic purses on
the Internet actually solve a problem, because you do not have currency on the Internet. So
potentially Internet usage might be a very interesting application, but it will take some time.
Electronic purse operators have to come up with a solution to break this chicken and egg
dilemma, that will be very important.
Audience Member
Following up on the statistics about the illegal use of cash, my question is first would those
ratios apply to the U.S. in your opinion? Secondly, could you again explain the distinction
between the legal holding and the illegal use of cash.
We can observe and compute what we think is the legal use of cash. The remaining amount
we attribute to illegal use of cash and hoarding. We know from anecdotal information that
hoarding is small. This mostly represents, as the tax authorities in Norway say, the avoidance
of sales and income tax. As I mentioned before, according to the survey, over the course of
a year one third of the population in that type of illegal transaction. It is fairly common in
Norway, much to my surprise. It is not that common in the United States.
You also have to recall that about 60% or more of cash outstanding in the U.S. is not held
or used here but overseas. The numbers that I have seen suggest that in the United States
around 35% of the value of POS sales are done in cash. Of course in our situation we have a
higher crime rate than Europe, and Europe has a higher crime rate than Japan. Japan has very
heavy use of cash, Europe is next, and the U.S. seems to be the lowest. It is related to the
crime rate, number one, and to the ease in which checks replaced cash in the U.S.
Audience Member
Just to respond, if all that is true would this not argue for a positive trend for electronic payments
because the governments eventually will see that that is a good way to stamp out crime?
The problem is, as they are finding out in Norway, the police have found that certain illegal
activities are increasingly using foreign currencies. Swedish krona, German marks, and when
the euro comes out as a piece of paper, even if you entirely remove cash in the hands of the
Norwegian public, they will find a way of using an anonymous form of payment, which will be
the euro. If the euro is not there, they will probably use the U.S. dollar. If the U.S. dollar is not
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there, they will use something else. Unless all the countries get together and remove their
large-value denomination of currency, it is not going to happen. And that is impossible.
I might add that the ECB is going in the opposite direction. The highest denomination of the
euro will be a 500 euro note. Let us use an optimistic exchange rate, $500, which is well,
ridiculous, because there is no use for such large denomination notes in everyday legal
transactions. On top of that these euro notes will be identical in all participating countries.
So laundering drug money from the Netherlands to Italy will be much easier. We seem to be
going in the wrong direction.
Audience Member
It seems like all of you have addressed pricing from the bank side. It seems another player in
this equation is the merchant. There is really no case of POS discrimination in terms of being
an instrument used. I was wondering what your thoughts are on that. And I had a question
for Leo as to what the cost to the merchant was on these electronic purses. In the U.S. we
have seen that the cost to the merchant has been relatively high and adoption has hence been
relatively slow. Do you have any numbers on per transaction basis or something like that?
In Belgium, merchants have to pay a commission of .6% of turnover, and they have to pur-
chase or rent a terminal, but I cannot really recall the cost price of that.
As I understand it, the credit card contracts between the companies and merchants do not
allow a surcharge to be placed on credit card transactions. I think you can still have a discount
for the use of cash, and we have seen that sometimes in gas stations, but now in fact I do
not see that any more where I live in a small town in Florida. Everybody just uses a credit
card at this point in time.
You do not have the opportunity for some merchants to have a surcharge for the use of credit
cards, which is the more expensive instrument, in fact it is the most expensive instrument to
accept at the point of sale. Because of that I think you find some merchants obviously who
would like to charge a differential fee, a little bit of a surcharge for the use of this expensive
payment method. If you change the contractual arrangement then you might see some mer-
chants moving to that direction.
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Marianne Palva, Bank of Finland
One of the reasons why electronic money did not become popular in Finland was because
while the debit card was free to the customer, loading e-money requires a service charge of
around two marks, which is 30 cents, each time you load money in your purse. This is still
true today. And then the shops have to pay more to the banks. I am not sure what they pay,
but they pay more than they pay for the debit card to the banks.
I am not sure exactly what the cost to the merchants is for debit cards and credit cards, but
credit cards are more expensive, that I know. Still nowadays there are very few shops in Finland
that do not accept credit cards, even American Express, which was not so commonly accept-
ed but is now. So it has changed.
Audience Member
This question is for Leo. Picking up on these last questions, can you say a little bit more about
the governing structures of some of these different e-money implementations? One of the
points that got raised last year by Gary Grippo from the U.S. Treasury, was about the chal-
lenges of launching new, fundamentally different systems. There was the lack of a governing
structure, one that had the resources and the incentive to launch and support these types
of innovations.
How deeply rooted were some of these innovations in the current banking structure versus
new joint ventures? Was it the antitrust authorities at the back end that held up the wall,
allowing everybody else to go through? Was it the contracts among the parties within the
joint venture and among the banks? What was it that provided some of the glue to get more
behind these launches?
In Belgium the Proton card is supported by Banksys. Banksys is basically the EFT-POS opera-
tor owned by all Belgian banks. It is a joint initiative of all Belgian banks, which is important,
unlike in some other countries where you have competing schemes.
As far as government involvement, there has been none that I know of. Not in a positive
sense, but also not a negative sense. So far no antitrust questions have been raised, although
in Belgium Banksys actually has a monopoly position there used to be a bank owned by the
Postal System, but this has been taken over by a normal commercial bank and has been priva-
tized, so there is really no competition, not as far as electronic purses are concerned, not as far
as debit cards are concerned. A merchant wanting to accept debit cards in Belgium only has
one choice, Banksys, same for electronic purses. And only financial institutions offer the cards.
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Audience Member
I do have a question, but I have a couple comments I would like to make on pricing. In terms
of talking about e-purses there certainly is a difference between electronic cash and stored
value, which I think has a great effect on pricing at the merchant level. With true electronic
cash it is just a deposit at the end of the day, it is not a transaction-based process that can be
priced accordingly. So from a merchants perspective I think that would be very attractive. I
was surprised, David, when you said that credit cards are the highest cost for the merchant.
Our bankers are now telling us that one of the biggest mistakes they made was telling mer-
chants that there is no cost in dealing with cash, when it actually could be the highest cost
for a merchant, ranging anywhere from 4 to 8% when you factor in all the costs of a retailer
dealing with cash. My question, though, is what exactly is a giro?
Let me respond to the cost to the merchant. This is based upon the time and motion studies
done three times for supermarkets in the United States and Washington, D.C. There is an
organization that takes small, medium, and large size supermarkets and goes through the
whole process of recording the time that the cashier at the checkout counter takes, the
counting of the currency, losses due to fraud, losses of cash, the armored car service, all
these costs have been added up and on average the credit card is by far the most expensive.
Cash is the cheapest. Next comes the debit card, very close behind that would be a check.
That is three different surveys, and the only information I have ever seen that is publicly avail-
able at the merchant level.
I just read a report by a Dutch retail industry association that comes to the same conclusion,
that cash today is still by far the cheapest to merchants. I have my doubts concerning the cal-
culations. There are German studies that go in the same direction. At least merchants still
have the feeling that it is the cheapest.
As for a giro, you basically give an instruction to your bank to transfer money from your account
to another account either via the phone, at the teller, an ATM, Internet, whatever. That is a
giro. It is not used at retail point of sale. Then we use the debit card.
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Diogo B. Teixera, Executive Director, The Tower Group
I was very impressed with this morning, and I am certainly looking forward to the rest of the
two day seminar here. I want to address the issue of how banks are going to go forward in
the electronic commerce era, including payments, but perhaps not restricted to them.
Federal Reserve Chairman Alan Greenspan stated last year: It appears to be only a matter of
time before the Internet becomes the prime venue for the trillions of dollars of commerce
conducted every year. The question that is of primary concern to banks is what role will they
play in this newer era. The battle is on for the billions of dollars that are at stake.
Banks are in the midst of this struggle and they must decide how they will capture a piece of
this action. By simply looking at the balance of the transactions that banks already process, it
might be difficult to argue that they are in a leading position, or indeed are even ready, for
electronic commerce. Figure 1 shows the growth of electronic payments broadly defined ver-
sus paper payments.
In the year 2000, for the first time, electronic payments exceeded paper-based payments in
the industrialized nations of the world. Unfortunately, the banking industry continues to
Growth by Payment Type:
El ectroni c Payments Surpass Paper i n 2000
46. 2
79. 6
64. 4
82. 5
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I ndustri al i zed Nati ons of N. Ameri ca, W. Europe,
Asi a: Bi l l i ons of Payments
Figure 1
III. Luncheon Keynote Address
process a very large volume of paper-based payments, and no significant reduction appears
on the horizon. So there is a great deal of work to be done by banks if they are to capture a
large part of the e-commerce business.
Before we go further, let us see if we can define the term electronic commerce. One pos-
sible definition might be the following: Automation of trade in connection with which the
financial services institutions that maintain the accounts and process the payments for those
buyers and sellers enables the transaction-related elements of the practice to be integrated
seamlessly and automatically into the trading process on behalf of the trading partners involved.
The key words are integrated seamlessly and automatically. However, electronic com-
merce means more than making payments on the Internet, and two things that often get
neglected are the intranets and the extranets that make products available over the Web,
promote sharing of information internally, and provide external clients with access to internal
information via proprietary links. Increasingly, we are going to see networks of extranets,
particularly extranets that involve trading partners and financial institutions that support
each other.
Electronic Transactions
If one looks at the 88 billion electronic transactions, it is clear that only a small portion of
them are in any way associated with what we might term electronic commerce. In Figure 2,
electronic transactions are broken down into four broad typescard-based (debit or credit),
credit transfers initiated by the payers, direct debit payments initiated by the payee, and
electronic money which would include stored-value and Internet-based digital money.
Let me briefly touch on each of these. The credit card growth rate outside the U.S. is high.
Credit cards are penetrating many markets where they have never been used before.
In this statistic in Figure 2, which includes both the U.S. and the rest of the world, the U.S.
growth is driven by expanded acceptance, as well as by greater POS debit card usage. In
terms of future growth, large parts of the world will, to an even greater extent, adopt more
liberal attitudes toward the use of consumer credit.
At the same time, its interesting to note that even though the credit card is now the payment
method of choice on the Internet, the Internets portion of credit card volume growth is still a
very small percentage of the overall share (see Figure 3). The impact of Internet payments on
credit card growth is virtually nonexistent today, and even with our projected growth, which is
a high growth rate, it will still be quite small for the next few years. This is a testament to the
tremendous position that credit cards already have established.
Looking at credit transfers, our opinion at TowerGroup is that electronic bill payment will be
the major driver of growth in the U.S. It is less needed in Europe, where standard transfer
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systems are already in place. Bill Pay has been around for awhile, but it is still struggling in a
sense. CheckFree, the leader, has about three and a half million customers. Bill presentment
is often described as the service that is needed to get more people to use Bill Pay, and we
shall watch this development of the consumer bill presentment business.
In a conversation with Edward McLaughlin, Chief Executive Officer of Paytrust, he provided
some interesting statistics that illustrate the dilemma they face as a start-up. Paytrust, at that
point in time, had 40,000 consumers paying $8.95 a month. They were paying about 400,000
bills, of which 98% were paper. In essence they are in, as he put it, the early retail lockbox
business; but they arent simply a lockbox processor for the bills. There are, for instance,
four different types of mail required to change an address, and they have to handle them all.
Much of the growth in Internet payments is driven by micropayments, which we have defined
as a payment on the Internet that has a value of less than $10. We believe that there really is
a market for small transactions. However, the structure of the credit card business wont sup-
port transactions that small. Even if it is possible to make a $5.60 credit card transaction today,
the credit card system will eventually reject payments that small because of the processing
costs. If the processing cost of an average credit card transactions is $2.80, it doesnt make
sense to utilize the credit card for small purchases. We are, however, going to see growth in
payment mechanisms that handle such small-dollar payments, whether it is e-cash or Qpass
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El ectroni c Transacti on Growth: Gl obal Vol ume
CAGR 11. 4%
CAGR 11. 9%
CAGR 9. 0%
CAGR 100%
Debi t /Credi t
Card
Credi t
Transf er
Di rect
Debi t
El ect roni c
Money
70
60
50
40
30
20
10
0
1994
1997
2000
2003
CAGR f or 2000- 2003
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Figure 2
or e-charge. There are already several million accounts opened of this type, although the usage
is low. The phenomenon is very much like the stored-value cards. However, spreading out a
lot of accounts is not adequate to build usage to a profitable level.
IT Investments
Who will be spending the money to incorporate micropayment systems? In Figure 4, we
estimate the IT spending on such systems.
It is not large because there will be a lot of economies of scale, and once the systems are
built they are highly automated. The interesting thing is that the banks, represented by the
darker shading at the bottom of Figure 4, will not be making the majority of payments. In the
United States, there is a heavy participation and involvement in the payment system by non-
banks, and we believe they will be absorbing the bulk of the micropayment expenditures.
It is also informative to look at where we think banks are spending their technology dollars
in connection with payments. Banks process payments using multiple mechanisms, and they
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I nter net-Based Retai l El ectroni c Commerce
I mpact on Card Vol umes Sti l l Negl i gi bl e
Gross bank/charge card vol ume
I nt ernet non- card payment vol ume
I nt ernet bank/charge- card charge vol ume
CAGR = 14. 9%
$1. 764
$1. 534
$1. 334
$1. 160
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2000 2001 2002 2003
$2. 0
$1. 8
$1. 6
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$1. 2
$1. 0
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$0. 6
$0. 4
$0. 2
$0. 0
Figure 3
provide two types of services. First, there are the basic payment services, which simply
process the transactions. Second, there are the value-added services, where additional infor-
mation is presented to the customer in connection with the payment, such as a check image,
online bill, financial EDI file or some other payment-related service.
Spending on IT for basic payment processing, including back-office processing of checks,
electronic funds transfers, wire transfers and centralized utility integrations, is increasing at
less than 4% per year worldwide. This indicates that banks, in our opinion, are not spending
enough on upgrading their basic payment-processing infrastructure. Much of that infrastruc-
ture is already outdated and was designed in the past for paper-based, rather than electronic,
payment processes.
Value-added payment services, on the other hand, are typically delivered through remote retail
banking interfaces, primarily PCs, or remote wholesale banking interfaces such as the elec-
tronic window or the treasury workstation.
Bank spending on those two items is relatively small but they do have higher growth rates
(see Figure 5). They are less than one-quarter of what banks collectively spend on the back
office systems necessary to process the payments. So we argue that banks need to spend
more in these areas in order to make the payment system as a whole relevant and germane
to electronic commerce and therefore help banks compete better with nonbanks.
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Bank I T Spendi ng on Mi cro-Payment
System Predi cted to Remai n Smal l
$1. 2
$4. 9
$13. 5
CAGR = 72. 6%
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$3. 9
$9. 4
$3. 7
$6. 3
$3. 3
$1. 5
2001 2002 2003 2004 2005
20
18
16
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12
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08
06
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Non- Bank Spendi ng
Bank Spendi ng
Figure 4
Let me illustrate this point in another way. Payments are often an afterthought in the world
of electronic commerce. In the retail area, for example, e-commerce payments charged with
a credit card, as they usually are, is not accomplishing much except increasing card volumes.
In the wholesale area, where the purchasing process is more complex, banks seldom, if ever,
become involved in the pre-order, order, production or logistics phases of a transaction. They
typically become involved only at the back end, when its time for credit or payments. Thus
the danger is that banks will be forced out into this low-value back end only. They might
become simply a payment utility, while other organizations capture the high-value portions
that are created by the rise of electronic commerce.
Strategies for the Future
Let us look at what banks are presently doing and what they could do to address this chal-
lenge. I will work through this framework on four levels and will describe, relative to each
one, what banks can do to counter the threats. The four levels involve the following:
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Banks are I ncreasi ng Spendi ng on
Customer I nterf ace Technol ogy
Spendi ng CAGR
28. 1%
8. 7%
4. 4%
5. 0%
2. 0%
3. 2%
Customer I nterf ace vs. Back Of f i ce
1. 41
1. 11
4. 15
4. 01
1. 51
1. 16 Bi l l i ons of US$
0 1 2 3 4 5
Remot e Ret ai l
Remot e Whol esal e
EFT/POS
Wi re Transf er
Paper Payment I t ems
Cl eari ng & Set t l ement Ut i l i t i es
Figure 5
1. Basic online information services.
2. Basic online transaction services.
3. Value-added transactions services.
4. Web-based trade support and sponsorship.
The battle is being waged over the high-value parts of the relationship with the customer, and
banks can only address this by providing high-value services. But high-value services must
start with a foundation of basic online information services. In the retail sector, this refers to
banking or home banking, and in the corporate area it involves web-based corporate banking,
e-cash management, and online information reporting in connection with a variety of whole-
sale products such as trade finance, institutional trust and custody, foreign exchange, sweep
investments and reconciliation.
Basic payments are a critical part of the banking business. In the U.S., the Federal Reserve
System recently estimated that basic payment processing accounts for one-third of U.S.
banks revenues, expenses and profits. A study by the Federal Reserve Bank of New York
estimated that basic payments services account for 40% of the operating revenue of the 25
largest U.S. bank holding companies. But basic payments are a commodity-level service and
may have low profit levels, which will lead banks to increase the value of their basic online
payment offerings.
The second layer of market offerings is basic online transaction services. These services are
not just account-to-account transfers and balance inquiries but services that enable customers
to initiate payments over multiple electronic payment networks. There are, of course, the
well-established interbank networks, including SWIFT, FedWire, CHIPS and the ACH in the
U.S., plus their equivalents in other countries. But there are now new and special purpose
payment instruments and networks, including TARGET in the European Union, the developing
CLS Bank for foreign exchange, and Bolero and TradeCard for trade finance.
The third layer of offerings builds on the previous two by adding value-added services on top
of existing payment services. Because basic payments services are low-value commodity
services, banks with a vision are adding value to payment services. Electronic bill present-
ment and payment is very visible because of the potential volume of transactions but, of
course, the business world pays bills too. Banks can provide even more profitable services in
the corporate area, including financial EDI, electronic invoice presentation and payment, and
check image-based services. These services can be used in connection with corporate cash
management; examples include such services as positive pay, account reconciliation process-
ing, controlled disbursement and lockbox.
The fourth layer of offerings, and the layer that adds the greatest degree of value, consists of
the support for buyers and sellers in their web-based activities. Basically, there are two types.
Digital Authentication. The first type is support for digital authentication. The Internet does
have limitations, one of which is that the network provides no real security. In their role as
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digital certificate authorities, banks can take on a new role of the trusted third-party interme-
diaries. Organizations that are active in this area include Identrus, which is supported by a
number of the largest banks; ABAecon, which is part of the American Bankers Association;
and the Internet Payments Council of NACHA. These organizations are working on establish-
ing digital certificate standards for user authentication in support of business-to-business
electronic commerce.
It is easy to envision a scenario in which banks act as certificate authorities. First, at the top,
a root authority that is trusted and recognized by its participantsbanks in this caseman-
ages and administers the program on behalf of all of the participants. This root authority main-
tains a database of participant certificates in order to provide real-time validation services. It
also establishes all user system standards and the four Pspractices, processes, procedures
and policies. Finally, the root authority manages administrative functions, such as the audit
requirements for adherence to a set of uniform rules, standards and contracts.
Second, certificate authority issuers, which again would be banks, issue the digital certificates
to their customers employees and servers, in this case corporations that want to trade via the
Internet. The root authorities exchange keys across each others certificate directories, and cor-
porations use the digital certificates in their business dealings with each other (see Figure 6).
Providing Merchant Services. A second way that banks are helping to promote web-based
trade is by assisting corporations in their efforts to become active in the world of electronic
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ROOT AUTHORI TY
CORPORATI ON CORPORATI ON CORPORATI ON CORPORATI ON
FI NANCI AL SERVI CE I NSTI TUTI ONS ( Cert i f i cat e Aut hori t i es)
Manages and Admi ni sters Program f or
Mul ti pl e Certi f i cate Authori ti es ( FSI ' s)
I ssue Cert i f i cat e t o:
Corporate
Customers
Figure 6
commerce by providing smaller businesses with merchant services. Banks can help develop
Internet storefronts that can enable small businesses to securely accept credit card pay-
ments, and banks can register their customers with popular Internet search engines. Wells
Fargo, Citigroup, Fleet/Boston and KeyCorp are just four examples of banks actively providing
these value-added services.
While these activities can provide service opportunities, we should also look at the potential
threats that could prevent banks from achieving these goals.
Threat #1: Banking Portals. Portalssuch as Yahoo!, AOL, GO, Netscape, Lycos and others
are here to stay. When we look at the top 500 Web sites in terms of attractiveness to con-
sumers, we find numerous portals, many of them financial portals, but relatively few actual
financial institutions. Portals are already powerful, and growing more powerful every day as
they add more services. Yet portals cannot become banks. They will not displace the basic
payment systems, they will not hold accounts and they themselves will not make loans. Thus,
as many large banks have already found out, the idea is to play the game with the portals,
treat them as media, advertise if needed, and sign partnerships when appropriate. Will it pay
off? We dont know yet. But to those who believe portals can become banks and usurp the
relationship with the consumer, I would respond that I dont think this is likely to happen.
Threat #2: Online Financing Services. Getsmart.com, Livecapital.com, Primestreet,
Lendingtree.com and others in this category generally have a variety of funding sources for
loans. Again, this is a logical extension of the fact that consumers will not surf the Web end-
lessly but only go to perhaps a couple of sources to look for a product. These types of online
service have nothing to do with existing relationships. It is simply a question of, If the cus-
tomer is looking for a new loan, will he or she go to these places? Over time, the answer
will be, Yes. The question now becomes, Will this practice have a negative impact on the
long-term relationship between the bank and its customer?
Threat #3: Payment Aggregators. Payment aggregators are also a potential threat. This cat-
egory includes institutions such as E charge, CheckFree, Princton.com, Bottomline Technologies
and others. There are really a lot of new things going on with these firms. E Charge, for exam-
ple, is basically trying to build a new proprietary payment and credit system. It is specifically
designed for the Internet, with heavy emphasis on fraud prevention. Their problem, however,
is the old chicken and egg problem. They have gone through about $70 million in venture cap-
ital and they have no revenue. It is highly debatable whether they will actually succeed or not.
Yet their model is probably one of the best for payment aggregation.
Threat #4: Web-Based Trading Communities. The next threat is one of the most interesting
developments on the Internet and in electronic commercethe trading community, some of
which include Purchasingcenter.com, VerticalNet, 121 and FreeMarkets. The back end of this
approach offers opportunities for banks because, as trade occurs on these B2B exchanges,
financial transactions will also occur. In addition, there are a tremendous number of new
marketplaces in practically every type of financial business unit, whether its commercial
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lending or derivatives. TowerGroup recently found about 170 new marketplaces in the capital
markets area alone. And they are going to have an impact beyond what they are doing today
because they offer the opportunity to disintermediate the banks in a way that hasnt been
seen before.
Summary
In summary, we cant really predict who will win or how much they will win. But if banks
focus on the four potential threats described above, there will be powerful opportunities to
succeed. The threats are going to force down their gains, but in the long run Im sure it will
prove to be a balance. The banks will find plenty of opportunity, and the new players will also
find opportunity. It will be interesting to watch what happens.
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Catherine Johnston, President and CEO Advanced Card Technology Association (moderator)
We all believe there is an opportunity to profit from e-commerce, bill presentment, and online
payments. The question is whether we can meet the consumers expectations and at the
same time manage the risks. Here in the United States, NACHA has approved an amendment
to their Operating Rules to authorize ACH debits to checking accounts in an effort to boost
consumers payment options for Internet purchases. In Canada, American Express is prepar-
ing to roll out its Blue Card product next year and has joined with MasterCard, Visa, Mondex,
and Interac to support the formation of a Program Management Office. This resource will
focus on the tasks required to move forward a migration to chip or smart cards. ING Direct
will be launching a smart card with a biometric identifier to secure and facilitate online banking.
With Web purchases estimated to see revenue growth of 100% to 150% per year over the
next three years, there is no question that opportunities abound. Total Web-generated rev-
enue worldwide is expected to rise from just under $132 billion this year to $533 billion in
2002. However, challenges are linked to the opportunities, which our panelists will address.
But timing may be the greatest of all challenges. Consumers are becoming far more aware of
fraud. In Canada, both credit- and debit-card fraud are growing significantly, and it is already
taking its toll on consumer confidence.
Public key encryption is one of the security devices being studied by payment associations
and financial institutions. As Diogo Teixeira said, it is easy to see how certificates will be
issued by financial institutions, but there are many questions that must be answered before
we will see any significant move to the use of this tool by consumers and merchants. Will
there be a timely and affordable way for merchants to authenticate customer certificates?
Can processes and standards be established to allow cross certification, or will consumers
end up with a virtual wallet full of certificates? Where will they store their certificates? These
are just a few of the questions.
But there is no question that the race is on to build consumer confidence in online payments.
I will now turn it over to the panel.
Gregory Jones, President and CEO, Ubid.com
To give you a little bit of background on us, Ubid online auction is the second largest auction
company in the world, and the 11th largest e-commerce company in the world. We are doing
half a billion in revenue in our third year of operation. A company like eBay is different from
us in that eBay has consumers and small businesses selling to other consumers. Ubid has
major corporations selling to small businesses and consumers. We sell only products from
major corporations that have warranties. We facilitate payment and ship product ourselves,
which makes things easier for the corporations we deal with. We sell a tremendous amount
of product, and thus have a tremendous amount of fraud to deal with every day.
IV. Online Payments: Challenges and Opportunities
The reality is that the Internet is wild and wide open. You have to be very aware of these
problems and issues. To give you an example of how wild west the Internet is, I will tell you
a true story about what happened to us in the early days. When we first started our company,
we set up the business so that you keyed in your own ID and password to get to your user
profile, much like a Hotmail account. Someone in Texas wrote a program to take every word
in the English language and run it into our user entry window until they got in. Because some
people are lazy and use something like dog for both their user ID and password, it was
easy for this hacker to enter a user profile, get the credit card number for that profile, and
make purchases.
That is pretty smart. I did not know whether to send the law after those guys or to hire them.
The FBI did find them, and we were able to secure the merchandise. But that gives you an
example of how careful you have to be in processing and keeping peoples information secure.
These crooks were actually biddingthey would switch the profile, then bid, change the
address, then switch it back and leave it. So it was very difficult to detect. We had to do
extensive log file analysis to figure out exactly what happened. The log files are what keep
every single keystroke in our database, which allowed us to figure out what happened. But
that gives you an idea of how complex it is.
We also store your IP address, which is a unique number your Internet service provider
assigns to your computer each time you connect to the Internet. If you are a crook, we can
eventually find you with the help of various ISPs. It is not fast, which is the biggest problem,
because by the time we figure out what has gone on, the cops will bust into an empty house,
or the accused will be gone. Hopefully, the tracking process will be more efficient someday.
In fact, the FBI is currently attempting to find a way to do just that. Here is another true story
that we have heard. One company had a case of internal theft. A programmer was doing bank
transfers into his account. He was actually caught the next day, but Visa caught it first. We
give a lot of credit to our Visa and our electronic partners for their fraud detection schemes.
The complex algorithms and statistical analysis they are using is a tremendous benefit to us.
And as we gain credit history, they are able to better understand our patterns.
As a result of these events, we use the credit-card companys authorization systems as well
as a hot file, a manual detection file, and other precautionary measures inside our company.
Such measures include people checking information like shipping addresses, and we have a
department that looks at your transaction before we send it through. Visa helps us with that
as well. As a result, our fraud rate is less than half of the Internet average.
E-commerce is a low margin environment because of the comparability. If you look at eBays
business, you will see it is a $6 billion business at a 6% margin. That is, they move $6 billion
of transactions and charge about 6% to make their money. In general, the Internet will always
be a low margin, high comparability place to do business. The largest will survive, and we
believe that only the variable price new guys will be successful. If you are willing to lose
$2 or $3 billion, you might make some money. However, we feel very, very strongly that the
biggest online bricks and mortar people will be the survivors in the long run because of scale
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and comparability. Off the top of my head, I can name ten sites that let you compare prices of
anything before you buy, MySimon being on of them. You type in the product you are looking
for and are presented with a list of Web sites with their prices for the product. Naturally, you
click on the site with the lowest price and are taken right to it. That is a tough environment to
survive in.
Another subject is the fees charged by Visa. In our environment, a third of my gross margin
goes to interchange fees. That is significant, to say the least. A regular retailer pays less
because they can see who is using the card. But card groups charge more for e-commerce
transactions because of the risk involved. I can leverage my fixed costs, but that is a very
hard cost to leverage because it is a straight percentage. Our consistent business pressure
is how do we reduce those interchange fees and how can we work with other companies to
help reduce that cost. Part of that can come from co-op advertising. But you will see Internet
retailers leaning more on the charge card companies to lower fees. As a result, you will also
see a joint effort between the Internet retailers and the card companies to figure out a way
to reduce the fees while keeping the interchange secure. Visa has been very proactive with
the Internet retailers and very cooperative in co-marketing and co-branding. Those are very
positive benefits. As we increase our business, that is the same thing as helping with the
interchange fees.
Here is how we as an Internet retailer are looking for out of the payment systems: a better
and faster way to get payments handled, and of course more inexpensive ways to confirm
that the right customer is attached to the right card to avoid issues of fraud. Perhaps the
smart card is the answer.
Audience Member
Question for Greg Jones. You said 100% credit card payments. Have you considered other
electronic payments? If not, why not? If so, what are they?
Gregory Jones, Ubid.com
We have, and we are going to be moving in that direction. There is a bunch of online check
companies, like PayPal, ExchangePath, other businesses that are really wire transfer facilities.
They are a lot less expensive and offer the customer a lot of options. It is a virtual debit card,
if you will. We will be moving in that direction. But the thing that has been so comforting for
is that our main procurement mechanisms have been credit card. The credit-checking rela-
tionship we have with Visa, for example, has been very, very beneficial to us. Compared to
everyone else on Internet, we have a substantially lower fraud rate. Customer confidence
is as important as inexpensive rates. We do not want to see those fraud rates spike up.
That would be more disastrous than higher fees. To answer your question, we are very, very
comfortable with the way we are working with Visa on the fraud side, as well as Discover,
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MasterCard, and some of the other folks. We have worked hard with them on that. We are
moving more slowly into other payment methods because of advanced credit and things like
the chip card.
Catherine Johnston, Advanced Card Technology Association of Canada (moderator)
You have talked about the working relationship in trying to bring fraud down. Would your com-
pany and similar companies assume more risk? And secondly, if there were a way of getting
a product out to the consumer that would contain the risk from the consumer end in, would
your companies be willing to offset some of the cost of building that infrastructure?
We would definitely be willing to do that. We would be willing to spend a tremendous amount
of money on infrastructure, technology, and even invest in our customer file to change their
buying habits if we could see a benefit down the road in reduced transaction fees and fraud.
We would be happy to do that.
Audience Member
You spend a lot of capital and time in minimizing, I presume, netbacks, chargebacks, avoiding
fraud. What are you hearing that the average fees are from other Internet merchants, is it 3%
or is it 5%? What is the ballpark?
It is higher. We are the 11th largest in the world and move a lot of product, which probably
helps keep the percentage down. I do think that there are other companies out there that are
getting charged 5%. It is a volume issue. If you are a small merchant, in other words, it just
costs you more. There is no other way to describe it.
Audience Member
I think it is more than volume. To give yourself credit, you have invested in an area that most
Internet merchants cannot invest in.
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We have probably spent a million dollars in back-office processing. We check things. We have
all these tolerances. In the Internet space, there are probably 400 commerce companies. My
expectation is there will be about 40 or 20 by the end of next year. I do not believe there will
be many survivors after all the big guys are in. To answer your question, for the consumer we
have a lot more protection than a smaller site. Shoppers are learning more about encryption
and security. We have 160 servers behind 15 firewalls. We have a tremendous amount of
security built into our system as it is. These are the kinds of things smaller companies cannot
afford to do. That is the reality of scale.
Audience Member
I am a Visa charter member institution, and I have a suggestion for improvement, a bylaw that
is necessary to make Visa more user friendly for Internet commerce. There are a tremendous
number of people that have their identities stolen in the United States every day. Case in
point, I happen to run a bank in Michigan, and my older sister, who is a medical doctor, had
her identity stolen. The average person who has their identity stolen spends 200 hours over
the following 18 months straightening out the mess caused by the thief. In her case the thief
took her drivers license and logged onto the Internet, charged up on one of her credit cards
with my institution on a new PayPal account, and proceeded to go on a very big spending
binge. So the question is, who takes the loss? First of all, PayPal takes the loss because the
card was not present in the transaction.
However, my clever sister realized that her identity had been stolen very quickly and found
out that there is no way to communicate this fact to her bank. She thought it was Visa until
I informed her that no, it is not her bank that she is dealing with, it is actually Equifax that
processes the credit card for over 2,000 issuing banks. There is not even a fax number reach
Equifax at and register your card stolen. She put her stolen card complaint in the mail, snail
mail, and until the complaint reached Equifax, PayPal is completely unwilling and uninterested
in talking to her about the fraud issue. Meanwhile, three or four days go by, and the thief is
merrily spending away. It is a very interesting problem.
My suggestion to Visa is to better understand how these new technologies interrelate and
cause further problems. PayPals authentication is extremely weak, and a good thief can do a
lot with such a utility that he would not normally be able to do. You can open an account with
a drivers license and use any credit card to download money to that account. Drivers license
information you can literally almost buy off the Internet. It is extremely weak authentication.
The suggestion I have is a bylaw that requires all issuing banks to accept complaints at least
via fax, if not e-mail, for cards stolen or other issues of this type.
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Audience Member
I have a question for you. I am a banker and I carry a lot of plastic, and I really do not know
what goes on behind the scenes here. I have got two bank card credit cards, Visa and
MasterCard, plus I have a debit card that is a Visa card that I can use to get money out of my
ATM machine. I think what you were espousing in your speech was if I use that debit card
with a PIN number over the Internet and other people did, somehow that would reduce the
transaction cost because the underlying fraud cost would be a lot less.
Is that what you are saying? If that is the case, can I not do that today?
Kirk Ergang, Cash Station
That was part of what I was saying. If you look at PIN-based transactions in the merchant
world today, they are considerably cheaper. If you use that card at Mobil or Shell or Amoco
or Jewel and you put your PIN in, that merchant pays a lot less. Why? There is a different bal-
ance proposition there for the cost of moving the transaction, as well as fraud. The issue with
security is you are there doing it and that PIN is secure at the time of entry at the ATM or
point of sale device.
The trick here, and maybe you younger folks can figure it out, is how do you do that from
home to where it is secure at the point of entry? My point was some people are giving it a
try. Maybe you will have a CD-ROM or maybe some type of peripheral onto your PC. Maybe
Compaq or Dell will build something into the PC to where you can enter your PIN. If that
is the case and it moves that way, then it can move like an online point of sale transaction
from a physical merchant, and therefore should be much less of a cost proposition for the
merchant. I do not know if that answers your question. I do not know how the pricing
mechanisms will go.
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Jeetu Patel, VP and CTO, Doculabs (speaker and moderator)
It is a great pleasure to be here. Doculabs is an independent research and analysis firm that
is based in Chicago. Our primary chore is to help end user organizations in making intelligent
buying decisions in areas that we have expertise in. We gain such expertise through a bench-
marking process where we bring products into our labs, try to really understand their capabilities
and strategies, and then help the organizations that come to us for assistance in selecting
products that best fit their business and application needs within the marketplace.
I would like to discuss a slightly tangential view of looking at all the players in the Internet
payment space, detailing what the differences are in philosophy and approaches, and how
Internet payment has evolved. Let us also talk about the next generation.
Who are these players? I am actually not a banker, I used to work at Bell Atlantic for many
years. When I first joined CheckFree we only had two or three competitors, and we knew
exactly what they were doing. Now the space has exploded and everyone, absolutely every-
one wants to be in the payments business. So today, I took the opposite approach and tried
to see if I could find someone who does not want to be in the Internet payment space, and
I found this company, the Afognak Native Corporation in Alaska. They are focused on optimiz-
ing financial benefits and creating shareholder wealth. They do not have a P2P productthey
do not have any payments product, for that matter. But everyone else does. Interestingly
enough, earlier we were discussing in what order to arrange the speakers. One school of
thought was to order them in successive customer convenience, another suggested order of
growth of subscribers, a third jokingly suggested order of charisma of the speakers. My own
suggestion was to schedule us based on how much money we are all losing in the EBPP
business. Four companies, none of which are making money today, but all of us will. In the
meantime those guys in Alaska are still busy making money.
There are two fundamental approaches. This next slide extends beyond EBPP. It is a general
philosophical view of the world. One is the Cool Software View which essentially says billers
can go buy biller software, banks can buy software. I do not know how much Ron plans to sur-
round that switch with people, but maybe that switch is a piece of software that sits silently
in a data center where there are no human beings and the whole process works, you do not
need any middlemen. This was the promise of the Internet six or seven years ago, a lot of us
were saying this.
There is what I call the messyware view which is the idea that many of these transactions
are going to have lots of stuff happening in the middle, and the Cool Software sitting on either
side of the connection point cannot handle this stuff. It goes by fulfillment. But I cannot think
of many successful Internet companies which are not in the middleman business. Yahoo! is a
V. Electronic Bill Payment: Challenges and Opportunities
middleman, eBay is a middleman, Amazon is a middleman. You name the Internet company,
they are all middlemen of some sort.
What is this messyware? I think this is a good predictor for which of the Internet compa-
nies will be successful. Those who focus purely on product brand technology will not be
successful. I think those that will be successful realize that you fulfill the product brand and
the technology. Even if you are the first mover, you need stuff like institutional knowledge.
Lots of people have tried to compete with CheckFree in the bill payment space, some have
been doing it with relative success. Lots of people who do not have a historical institutional
perspective of payments came in and said that is an easy problem. From the outside all prob-
lems look real easy. There is far more value in the middleman than meets the eye. He has
messyware! Most of those companies who tried to compete with us on that basis failed. A
large part of the reason is a lack of institutional knowledge, which a company like CheckFree,
having been in the payments business for 20 years, takes for granted sometimes.
The next two things sort of go together. They are exception handling and customer care. If
the Fed was run for profit and if someone wanted to charge 15 cents for an ACH transaction,
I think they could. But then they say well, why can all these people not just do ACH transac-
tions, is that not all that you do? The truth is that the actual transaction, the actual processing
of that is a small, small fraction of CheckFrees cost structure. It is a small fraction of the cost
structure of anyone using the ACH, anyone using the credit card system. Most of your costs
are in the exception and having customer care. We have 2,000 employees. More than half of
those are customer care people.
Over the last four years, we built a brand new system called Genesis for doing our bill pay-
ment applications. When we built it, we started with how do you do event tracking, how do
you do exception handling, how do you do customer care, and then we built it out from there.
Most of the people they say have technology and software focus where you throw the prod-
uct together and then slap on customer service as an afterthought. That is messyware. That
is really hard to do. I used to be the Chief Technology Officer of CheckFree before my current
role, and I am not going to downplay technology. The IT assets that a company has are valu-
able. I think Amazon was very smart in going and hiring the IT guys from Wal-Mart before
Wal-Mart sued them and got them to stop hiring all those people. I am pretty proud of the
fact that we have the only system that is both new and proven to scale a half million con-
sumers. That is only one piece of everything else. The IT assets are not the company.
Lastly it is a quality focus. I have had meetings before with Ron from Chase and Spectrum.
We have had good and bad meetings with Chase. The good meetings would be when the
quality of our system was up. The bad meetings would be if we had quality problems. The
simple truth of the matter is the quality of the system is what is going to make or break the
companys success. What is their up time, what is their payment quality. So that is messyware.
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The Cool Software Approach
I have been writing software since I was in my teens, and Figure 1 is a little bit tongue in
cheek. What I am trying to say here is that problem complexity is growing so fast, and improve-
ments in software engineering are growing so slowly, that maybe the effective quality of
every new system you buy is getting worse. Maybe DOS was a more stable application than
Windows 95. This is a little tongue in cheek. I do not believe this is the truth because prob-
lem complexity has not grown that much. People are coming up with ways to improve quality.
The whole notion that you can solve all these problems by throwing technology and software
at it, to me as a technologist, is a crime.
I was writing an article for a magazine and I made two points. One point, if all the dollars
spent in America on failed client projects were all taken and shipped to England, we would
have solved all the poverty and hunger. If all the time and energy and frustrations that each
of us have vented on some piece of PC software not working were all bottled up channeled
to rocket science we would have settled Mars long ago. Keep that in mind when you hear of
technology solution. It is a matter of possible versus practical. People think that since the Net
makes direct communications possible, it must make it practical. It is a huge difference.
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Sof tware Engi neeri ng: Compl exi ty of probl ems i ncreasi ng
f aster than abi l i ty to produce qual i ty code
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Figure 1
Here is an example I like to use. If three of us met and we decided to exchange business
cards, it would work smoothly. If ten of us met and we go through the usual business card
shuffle, I would probably get two of someones card and someone would not get my card.
We would never get it all. If all of us in this roomit is perfectly possible for us to exchange
business cardsdecided to get up and start exchanging cards, there would be utter chaos, it
would not work. So what do we do? We hire a middleman. In this case, the organizers of this
conference compiled sheet of our names and addresses, then the middleman put it altogeth-
er. They used the model on the right hand side of Figure 2 and they did it very efficiently.
This is another thing that you need to keep in mind when you look at the possible different
approaches, and this goes back to the messyware. What is happening here is you have a
service provider. If Spectrum is going to be that service provider, they would not be holding
a piece of software. They have to be an entire infrastructure with a thousand customers, key
people, and operations people among others. A part of it can be outsourced to the end points.
But the beauty in this is that the cost of each of these links is amortized over all the people
that you are talking to. Whereas if it is one biller billing a connection to one bank, the cost of
the link is borne just for that connection.
So much for philosophy. Let us talk about how the markets evolve. This is what I call
Generation 1 (see Figure 3), which is contains most of the 4 to 5 million U.S. consumers
paying their bills online. A vast majority are still here, where from their perspective it is a
completely electronic experience.
If it is going to a big merchant, the payments go electronic. If it is going to Bob or a small
business or a mid size business, then CheckFree prints a check or M&I prints a check or
ORCC does the same. The bills come to the consumer on paper. I disagree completely with
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Possi bl e vs. Practi cal :
The Net makes di rect communi cat i on
bet ween any t wo ent i t i es possi bl e.
I t does not make i t practi cal !
Figure 2
the notion that for 100% of consumers there is a chicken and egg situation where you need
these bills to be electronic before the consumers will start this behavior. I happen to be doing
online billing. If I ever wear a CheckFree T-shirt when I am traveling, there is always someone
who says I have used your service for a dozen years and I cannot imagine going back. The
simple truth of the matter is 5 million consumers are not wrong. There is a certain segment
of the marketplace for whom electronic billing is the stimulus which gets them over the hur-
dle and into this world. There is a certain segment of the population for whom managing their
bills is not about managing finances, it is about managing their mail. For them they will only
start to perform this behavior online when they get their e-bills over e-mail and they click pay
and it goes back. I have met so many consumers like that.
The next stage of this evolution got a little interesting (see Figure 4). We thought how much
we would like to get rid of the paper bills and go with electronic billing to the consumer. We
started calling on billers. And I personally think that this part of the business is as exciting as
everything else, but it is one part of the Internet business. Internet payments are about pay-
ments, invoicing, and delivery of goods. We do not actually physically deliver goods, but we
have partners like the USPS who will be doing some interesting stuff in that arena.
The one thing I can assure you, I call on billers all the time. I have not met any biller who
wants to turn over their cash management business to CheckFree yet.
Finally, the last phase is pay anyone for anything anywhere (see Figure 5). I think you heard
a lot about this earlier in the previous panel. We are announcing our pay anyone for anything
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Paper Bi l l s
El ect roni c El ect roni c
Paper Check
Fi nanci al
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I nter net Payments Generati on 1: Bi l l Pay
Figure 3
product which should go live early next year with Bank of America and USPS as the
initial partners.
What comes next? To talk about what comes next, let us talk about the evolution. In the
beginning you had the Thick Consolidator Model. When people rush to apply technology
the first thing they do is do it exactly the way it was done with paper. CheckFrees first e-bill
product, which came out in March of 97, was exactly that. It is great for consumers because
you have the same convenient method for having all your bills arrive in one mailbox, and the
same convenient method for paying it all with one checkbook. It is the same method elec-
tronically. For all those reasons which the previous speakers talked about, at the end of the
day it is the biller footing the bill. The biller wants to do rich interactive stuff for the consumer.
If you just told the biller that you are going to stick a bank, or the post office, or a Yahoo! or
anyone between them and their customer, the biller does not like it.
This model was not going to fly because it does not satisfy the needs of one of the constituents
in the process, which is the biller. So along comes the thin consolidator, who says I will tell
you what, Mr. Biller, you can keep the bill detail over at your web site. Then the thin con-
solidator can have a link off the billers web site, though it will probably not be obvious. For
example, suppose you have been making lots of calls to Italy and I want to pitch you a Reach
Out Italy plan on that billing cycle. I will have to roll the dice and say I hope that Alice decides
to go click on her bill detail and come to my site. That is pretty much the only way I can guar-
antee that she sees that. OFX and IFX are capable of supporting these thin consolidator
schemes, but it is not perfect yet. We did not get it right away when we first wrote it in 96
and 97. Take a simple case. A customer goes to Bank of Americas web site and sees her
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I nter net Payments Generati on 2:
El ectroni c Bi l l i ng and Payment
E- Bi l l s
El ect roni c El ect roni c
Paper Check
Fi nanci al
Portal
Figure 4
phone bill for $60. She clicks, goes to the biller site, and the biller says, Hey, I wrote a pro-
gram for you. Since you have made calls to Italy you can sign up for this Reach Out Italy plan
and get 10% off this bill. So $6 was taken off the bill and there is a new bill for $54. The
customer clicks back. And what happens with OFX or IFX is that the customer still sees $60
because there is no way to dynamically route that new changed summary. That is one prob-
lem. There is also stuff happening in multiple places without it all being tracked centrally,
which is a problem because you have to deal with the exception. When the exception hap-
pens, you have to know exactly what happened.
So for all these reasons, by the middle of 97 all the billers essentially told us this will not
work. They are going with a new model called biller direct (see Figure 6). In fact some of
our billers, like Bell South, implemented both models and said they are putting up their own
web site. Customers are going to be drawn to our web site because their bill is there. If we
decide to change the summary information, or if customer questions a charge, whatever, it
happens at our site. Very good. Unfortunately it completely lacks customer convenience.
This is the model equivalence of you getting in your car and driving to the phone company
and driving to the mortgage company to pay your bill. If you change your bank account from
which you pay, you have to make 12 changes. The customer service experience is different.
So what we did back in late 97 is created a model called the direct distribution. We essen-
tially sit behind the scenes as an orchestrator, still sitting in between the biller, banker, and
the customer. The customer still goes to the aggregator site, to the Chase, to the Bank of
America, to the USPS site. When the biller so chooses they can enclose a little token that
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I nter net Payments Phase 3:
Pay Anyone f or Anythi ng Anywhere
E- Bi l l s
Wi rel ess Emai l
Fi nanci al
Portal
Figure 5
says this is a bill at this particular site, I want to reach out and offer Alice this particular mar-
keting plan, or whatever. This is called a magnet. At that point control is transferred to the
biller. The customer is sitting there, they do not know the control has been transferred. They
just see different things happen in different windows. Sitting on their PC they have the rich
interaction they want with the biller and if the summary information changes, the new sum-
mary is promulgated dynamically back.
Take a mortgage company, for example. A mortgage web site is not a favorite destination for
most people surfing the net. But Yahoo! is. A mortgage company can use Yahoo! as a funnel,
or a bank where people do their online banking, either way a company can enclose a magnet
and pull the customer to his site.
So what happens in the future and what are we building? That was our Version 3 project. What
are we building in our Version 4 and 5? We are building some neat things with magnets and
allowing mom and pop to automatically bill and stuff like that. I think the neatest thing is to
allow for dynamic real-time billing. The easiest way to explain this is to ask, when is the last
time you took a loan from your phone company? And all of you will say, in spite of most of
you being bankers, you will say that you have never taken a loan from your phone company.
The truth is whenever you use your phone, you are running up a balance that will not be paid
until the end of the month. The phone company is essentially loaning you the service with the
assumption you will pay them back for it. The balance you carry was historically tied to the
fact that the cost of money was probably cheaper than the cost of the billing cycle. You could
not bill every day, and customers do not want to be billed every day. The Internet actually
does not mean that customers want to be billed every day. It is just that it provides lots of
fascinating ways in which you can shift money to make a payment.
Those are the sort of things that the Internet makes possible, and we are rushing full steam
ahead to come out with a product that takes advantage of all that.
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Bi l l er Di rect
( wi t h Dynami c
( Summary)
Post Of f i ce
or Thi ck
Consol i dator
Model
Thi n Consol i dator
Bi l l er- Customer i nteract di rectl y. Bi l l er control !
Customer Magnet: Bi l l er guaranteed that
customer i s drawn to thei r web si te.
Dynami c Summary: customer can i nteract
wi th bi l l er si te to CHANGE summary data.
Compl ete l ack of customer conveni ence.
Figure 6
Matt Lawlor, Chairman and CEO, Online Resources
I would like to focus on the role of financial networks, particularly in the electronic bill pay-
ment and presentment area, and then I would like to tickle you a little bit with a potential
model for real-time end-to-end bill payment and presentment. We are what is called an ASP,
application services provider. We provide an end-to-end solution primarily to community and
regional banks. But we have some pretty large clients. On the West Coast, we serve Cal Fed,
which is about $60 billion. In New York we serve Dime and GreenPoint. But our bread and
butter is primarily smaller community and regional banks. We provide the online banking, we
do the bill payment, we do e-finance aggregation, we have a call center, we have most every-
thing. We shrink wrap it and basically give these smaller community banks the opportunity to
have a one-stop shop, a single point of accountability, an end-to-end service, quality guaran-
tee, an integrated database, a seamless customer experience and all of that.
We were founded in 1989. You can see why I got my gray hair, I have been at it for a long
time. We are based in Virginia. We have some 500 financial institutions that are our clients.
It is their brand. We are in the background. We process some 300,000 users, about 35 million
transactions a year. In our bill payment engine we are processing about $2 billion in payments
a year. We are not quite the size of Ravis CheckFree, but we are up there.
What is particularly unusual about us is our architecture. Users come into our platform, using
the universal Internet languageTCP/IP. We have a storefront web server, which is proprietary.
Then we have e-finance products, including our bill paying engine, where we act as a CSP.
Then we have infrastructure, namely middleware, a 150 seat call center, and settlements
capabilities. All of this is shrink-wrapped. The problem we have solved, thanks to financial net-
works, is to marry the Internet with the online payments world. We have worked hard over
the years to marry the online front-end portion to the online back-end payments portion. It
seems silly to do it any other way than to have a fully end-to-end realtime solution.
So we connect to some 22,000 financial institutions, half of which are credit units and half
of which are banks and thrifts, through ATM networks and core processors. We speak in ATM
talk, which is called ISO 8583. What we have found over the years is that this is very good
for moving money, which is a lot harder than moving information. Moving information is solved
pretty much by the Internet. Indeed we talk to our processors and banks in IP when we want
to collect a statement or a balance or something like that. When we are moving money around,
you have got settlements, you have got reconciliation, you have got security issues. The power
of what we have done is to piggy-back on the existing ATM standards, and the networks run
by the processors and ATM switches.
This is further detail on how we are architectured.
Users dial into us through the Internet and telecom networks. We then authenticate them
through ATM networks and core processors. Most of our connectivity is directly with core
processors who are client banks or credit unions. We are talking ATM talk. Transactions may
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be PIN-based or PINless depending on the network rules and client desires. After users are
authenticated, then the payment is debited. It then clears through standard kinds of ATM clear-
ing mechanisms that exist already, and we go pay the merchant. This process enables us to
know that there are good funds. There is no speculation or risk that the funds are not there.
CheckFree has been very, very cleverand others have been cleverat devising other ways
to deal with the problem of knowing whether the consumer has the money to pay the bills.
We solve that problem by going through the ATM network and authenticating and knowing
that there is money. What that means is if you were to dial into us as a consumer, where we
act in the name of the bank, we would know that you have the money. We therefore never
have to send out a piece of paper, a draft against the consumers checking accountwhen
the merchant can take electronic payments.
If we did not know you had that money, then we would have to credit score the consumer, or
use some other technique. In this case, if we did not know that we had good funds, we might
hedge and not send the bill remittance electronically. So while other processors who do not
have good funds run approximately 40-50% electronic, Online Resources is now approaching
60% electronic. In Chicago, New York, and California, among others, we now are 65 to 75%
electronic remittances. It is because of these good funds, an idea of piggybacking onto finan-
cial networks.
Why did we do that? I gave in, I confess: I was a banker. As a result, my thinking goes
something like this. There are merchants out there. There are acquiring processors. There
are networks. There are issuing processors and there are FIs. This is classic EFT infrastruc-
ture. It exists in the credit card business, it exists in the debit card business. This is the way
the EFT world works and always has worked in financial systems. So what we did is said
Look, let us take that philosophy and apply it to home banking and bill payment.
In our world there are firms that have front-ends who are doing the Web driving. We are one
among many fine companies out there that do that well.
Then there are the equivalent of acquiring processorsthese are bill payors or CSPs such
asCheckFree, ourselves, M&Is Metavante. These CSPs are routing payments through a
variety of financial networks. The Federal Reserve has a network, ACH. Visa ePay is out there
looking to provide connectivity. There are the ATM networks that we use. Integrion was all
about trying to form a network connecting to core processors and ultimately banks. Basically
the backbone of our business has been built on this concept that there is a role for a network.
That is because they provide important thingsinteroperability, switching, settlements, oper-
ating rules. When you look at the ATM networks, you have 20 years of standardsimagine,
20 years accumulation of big thick books of operating rules. This did not happen overnight.
Why reinvent it? Why not piggyback on it? And very importantly, the role of these networks
is that they are neutral. You have competitive acquiring processors on one end. And you have
got competitive issuing processors on another. So you need to provide some neutral third
party. That is the role of a network. At its very heart, therefore, is a standards organization.
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Lets look at the electronic bill payment and presentment business. You have approximately 5
million bill payers out there right now that are registered in doing an electronic payment. Now,
roughly 40 to 60% of their bills are being remitted electronically. Of that portion we estimate
that 33 to 40% are potential candidates for bill presentment. Not every electronic payment
can have a complementary electronic presentment. Not every merchant is going to have an
electronic invoice capabilityat least for a few years.
But to be successful, bill payers must provide the consumer with an end-to-end solution where
they can pay anybody anywhere any time. Not just bills that are presented, but all bills. I think
the point was really made well by Ravi, bill paying is messy. What drives the costs in the busi-
ness is not the direct cost. Bill paying is like the proverbial iceberg, with only a portion of the
costs appearing above the water-line. It is the indirect costs, lying below the water-line, that
are associated with managing exceptions and database management, which really drive bill
payment costs. Indeed, it is this messy thing called the inquiry rate that we all focus on
thats where the costs areand the lower the better.
The point that I am making here is that there are a variety of different processes and aspects
to electronic bill payment and presentment. Its not as simple as one would think, and there
is too much to focus on the easy stuff without an appreciation for the details. I get particularly
frustratedI suppose because I have been around too long before the Internet and have gray
hairwhen all I hear about is bill presentment without bill payment. Bill presentment without
bill payment is like the sound of one hand clappingyou need both to make it really work. And
you need to have integrated solutions and partnering along the way to make both sides work.
Let us look at how the bill payment business really got started. Let us start on the payment
side. You can start with the banks and other providers. Then they have guys working for them
called CSPs, consumer service providers who work with the banks and payment providers. At
the other end of the supply chain you have the biller and firms that work with them, including
a clearing bankwho is on the wholesale side of a bank. So you have banks involved in two
waysa retail side and the wholesale side.
Looking back, in the early 80s you basically had a bunch of home bankers doing the pioneer-
ing. And guess what, you also had this problem of interconnectivity. Fortunately, and I give
them credit for their foresight, MasterCard stepped in and they formed MasterCard Remittance
Processing Service. MasterCard basically provided a network, or a standard, for home bankers
to talk to the billers. Today MasterCards network is doing over 100 million payments. This
network is now 15-20 years oldwith credibility, rules, and industry buy-in (see Figure 7).
There are also some very neat bill payment and presentment networks on the drawing boards.
And while we are big supporters of what Ron is trying to do at Spectrum, in fact what CheckFree
is trying to dothe bottom line is there is a functioning bill paying network already there. It
simply needs to morph itself into one that can do presentment, as well as bill payment.
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7
This is another view of the bill payment world, specifically how CSPs connect to BSPs, billing
service providers, through MasterCard RPS or Visas ePay. We also have the ACH network
that can basically play the role of an intermediary, both without the detail bill payment and
presentment standards role of the other networks (see Figure 8).
Let us now move to the debit side. Classically, your CSP would connect through ACH to the
actual bank or other service provider. Then Online Resources came in and said Let us make
this real-time, it has benefits of giving us certain funds. Again you have an ATM network or
the ACH network playing an intermediary between the CSPs and the ultimate banks that hold
consumer checking accounts.
This is how the bill payment business developednetworks played a key role. Bill present-
ment, I would submit, is a repeat of that same phenomenon. We have been talking about it
for three years. The problem is everybody had their own proprietary solution. There was no
standard. There was no interconnectivity. MasterCard RPS actually stepped in, finally, and said
we are going to build a presentment capability on top of our payments capability. This, finally,
may get them providing the critical role of the intermediary network for the presentment por-
tion of the business. The good news, with respect to MasterCard is that the development of
presentment standards is evolutionary, not revolutionary. Presentment can leverage on the
existing RPS infrastructure. There are hundreds of BSPs out there connected to RPS today.
There are hundreds of CSPs connected to RPS. They all agree to a set of standards. They all
have thick rulebooks just like the ATM networks and other EFT networks. Its logical to lever-
age on it. It builds on a de facto standard, and you have got a neutral third party.
While this is good news to me, for others it is bad news. Some argue that presentment net-
works need to be a bit more revolutionary, not evolutionary. Their approach is to take the OFX
protocol, which is a very fine beginning standard, but it is not designed to be real-time. Then
develop it to IFX, a real-time protocol. This may ultimately be the way to go. This is something
that Spectrum is really working on now. MasterCard will probably move in the same direction.
MasterCard may lack presentment experience and its solution is not real-time. Indeed, it is
not the be all and end all. But it is at least a start, a way to break the chicken and egg prob-
lem and a way to establish a standard.
What you have, in any case is a number of network options that are emerging. And as such,
for the first time, billing payments practitioners, can be really encouraged by the prospects for
getting bill presentment. It is finally going to happen because you have got some standards
organizations stepping in. MasterCard, Visa, and Spectrum. And of course theres CheckFree,
which is both a CSP and a BSP, which because of its size also holds the promise of being a
proprietary network. I understand CheckFree is opening up its network to other players and
are providing that intermediary capability, where they did not do so before which stipulations
that make it unworkable for competing third parties. So, in whatever form it develops, I am
very optimistic about bill presentment finally happening. I would predict in the mid 2001 you
are going to start seeing more and more mass market deployment of this moving out of
pilot programs.
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Where is this going long run? I come back to the industrys long-held EFT model. I see the
biller, the BSP, your credit and remittance networks, you have got debit networks out there,
CSPs and financial institutions. What we see in the long run is that the batch-oriented credit
card and ACH networks, and the online debit networks need to be merged. Our firm has set
up an initiative, called Certain Funds, to help bridge the gap. But this only a start. We need to
marry these real-time debit networks with ultimately what will be real-time credit networks.
What that will deliver are some really nice consumer benefits.
In our bill payment niche of the EFT universe, consumers can enjoy some benefits of data
mining without compromising privacy, such as the special messaging and the notification on
bills that was talked about before. The other thing consumers can gainand I hate to talk
about this at a Federal Reserve conferenceis the K word, the kite. What we bill payment
providers are selling to consumers is not just convenience, it is control. Most people are living
day to day. As such, they kite checks. Wouldnt it be nice for consumers to go right to the
dead brinkthe very last daythe last minute, to pay their bills and to know that it is going
to get there with absolute certainty. That means the convergence of batch and real-time net-
works, and the enablement of both real-time debit and credit.
I would like to end my remarks with what Pete Gustafson kind of said. Her referred to an
Andrew Mellon quote. Pioneering does not pay. Settling does. Well, the problem is you do
not know when the pioneering ends and the settling begins.
I would submit that the settling does begin very clearly here with the networks. The pun is
entirely intended. These networks are essentialwhether its the Fed ACH, or whether it is
the private or the public networks that are available. To grow the businessparticularly the
bill payment and presentment businessit is essential to growing the business. They promote
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BI LL PAYMENTS: Other Network Opti ons
Bi l l Servi ce
Provi der ( BSP)
Bi l l Payment
Provi der ( BPP)
Customer Servi ce
Provi der ( CSP)
Customer Payment
Provi der ( CPP)
Bi l l er Consumer
MC RPS
Vi sa ePay
ACH
Figure 8
the standards that are the key to the business, and we should look for ways to give them our
full support.
John Tedesco, Co-Founder and CEO, PayMyBills.com
I am going to deviate from my script for a couple of reasons, mainly so we can dive into some
Q&A. More importantly, I wanted to call your attention to an article you can find outside called
Why do consumers pay bills electronically? It is written by Brian Mantel. I skimmed it
between the break and I think it is extremely relevant for this conversation.
When I take a look at this, seeing all of the EBPP infrastructure diagrams, I just think one
thingthis is very ugly. We have had three standards presented today in this meeting alone.
That is not my definition of a standard. I am not sure what is. I also go back to Pete Gustafsons
presentation from e-Visa where he said the consumers want it simple. They do not care. I think
it is very important as well. I view this as an iceberg, and EBPP infrastructure should remain
below the water line, and it must remain very simple for consumers throughout the process.
I am going to go to the report briefly because I think it is very important with regards to why
the curves are always going upwards and to the right, but always a few years out. To quote
straight from Brians report, There are two general, complementary theories of how new
products are adopted. The first theory, the new product diffusion model, assumes that the
primary determinant of new product adoption is the time it takes consumers to learn about
a product, to experiment with it, and then ultimately to use it. This theory assumes that con-
sumers view a new product or service as a clear and valuable substitute for past products
or services and that risks associated with trial can be managed by some combination of con-
sumers, distributors, and producers. The second theory, the new market development theory,
suggests that a new product by itself will have a limited market potential. In order to reach
mass consumer markets, firms need to offer additional product features, services, and/or
infrastructure over time, tailoring the product to new customer segments and/or to new uses,
as well as making products interoperable.
Why is this important? New product diffusion theories point to the important role of con-
sumer awareness in promoting adoption. There is relatively little public data on consumer
awareness and perceptions. But a recent study by the Federal Reserve Bank of St. Louis
finds that 99% of consumers say they understand direct deposit, and 97% of current users
report satisfaction with the system. However, only 55% of consumers feel they understand
electronic bill payment and ACH. Why is that important? Consumers who report an under-
standing of direct payment technologies are 79% more likely to use electronic bill payment.
While the fact that a significant fraction of consumers may not fully understand electronic
bill payment services might indicate a problem to some, the new market development model
might suggest that this is not a problem per se. After all, if the evidence continues to suggest
that an important fraction of consumers do not yet perceive electronic bill payment and checks
as clear substitutes, it may be that the electronic bill payment market is still developing. In
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this case, a significant fraction of consumers will likely continue to report a lack of familiarity,
even as significant improvements are made over time, until the products functionality are
fully developed. When future studies find evidence that a larger portion of consumers see
electronic bill payment and checks as clear substitutes, then firms then may be better able
to target their communications campaigns to consumers unique needs.
Why is that important? It is important for two reasons. Number one, we do not want this
killer app to be the subject of this workshop in five years. We want to start hitting those
curves to the right. Reason number two, I believe that is the mission of PayMyBills.com and
Paytrust. Diving right in, just to give you some background, I am the co-founder and CEO of
PayMyBills.com. We recently merged with one of our competitors in this space, Paytrust,
and we had very similar, if not identical, business models. And I am going to dive into them
right now.
We all know that the bill delivery market is tremendous and it touches every consumer, but
the key is the last component. The Internet is ideal to change the process if it is better than
what they are currently using today, which is the mailbox at the end of their driveway. Most
of the panelists today have already skipped over electronic bill presentment. Maybe the topic
of it was focused mostly on payments networks, but we seem to have missed the present-
ment side of the equation. With Paytrusts bill management services, we are the only service
providers to allow consumers to receive 100%, all of their bills online. You then review them
in complete detail, you pay them, and then we store and organize and keep all that informa-
tion online for you. That is our value proposition to the consumer marketplace.
The key to that is the universal in box. This is the similarity to the post office-the mailbox at
the end of your driveway. There, side by side, are all of your billing details, whether they come
on paper-based format or electronic bill format. This is not something that is in the future. This
is a service that is up and running today and has been up and running for over 18 months now.
In summary, this is a consumer-focused message, a strong management team and some
great partners to really focus on what we think is a very exciting marketplace. Thank you.
Jeetu Patel, Doculabs (moderator)
If you look at the consumer adoption problem that you have at CheckFree, it is a chicken and
egg problem. The consumers do not come to you because you do not have all the billers, and
billers might not come to you all the way because you do not have all the consumers yet. And
I think you folks that are probably in the consolidator space executed the best so far on the
number of others and CSP relationships.
However, if I want to truly experience 100%, or even 80% of my bills being presented and
paid on CheckFree, I cannot do that with any of the sites that are being proposed for the next
3 to 5 years.
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My question to you is Do you see that as an issue? Do you think that what PayMyBills is
doing is a model that might actually fit in with your model?
Ravi Ganesan, CheckFree
Basically, like I said in my comments, I do challenge this notion. There are people in CheckFree
who disagree with me, even on the executive team, who would agree with you. But I do chal-
lenge the notion personally that all the customers are sitting back and waiting for bills to be
presented online. I really divide it up into three categories.
One segment of customers are those who need the bills to come to them on e-mail. Some
busy travelers on wireless will be building out those capabilities. There is another segment
who are waiting for e-bills, and that will be what gets them over the hurdle. And the third cat-
egory people who would be perfectly willing to adopt the service, but it has not been market-
ed to them. My intuition tells me that this third category contains the largest amount of cus-
tomers.
I personally am a little biased. I think online bill payment is one of the three most useful appli-
cations on the Internet. I use the word useful, since online bill payment is not entertaining.
There is no gambling or e-trade involved. There is no entertainment involved. It is a convenience.
And look what it is replacing. It is replacing a deeply ingrained behavior involving something
that works extremely well, the U.S. Post Office and paper checks. Every time a bank puts the
pedal to the floor and does marketingChase in New York or Bank of America in the south-
east, for examplethey practically have to stop their marketing because their systems and
the systems of everyone else cannot quite keep up with the demand.
Is the fundamental value proposition of CheckFree that you have multiple people whose bills
can be made available at a central location? Otherwise biller direct would have been a great
model if you do not need critical mass. What is that critical mass number that you think is
required in order for your model to become successful.
With our acquisition of TransPoint within the next eight months we hope to divide the United
States into 67 major metropolitan areas. I know the average consumer might see five to six
bills. That number is a little hard to pin down exactly.
We will also have a solution which looks and feels from the imaging perspective like what
Paytrust and others are doing. For 12 years we have been looking at scanning bills. There was
a company, I forget the name, in Florida six years ago which had exactly the same model the
three scan pay companies had, and they eventually did not quite make it. Maybe they were
too early. And we looked at acquiring them. This is five or six years ago. The problem is that
bill payment is extremely messy and scanning bills, we think, will be a good niche product for
a small group of customers because customers have security issues with changing addresses
for bills.
Matt Lawlor, Online Resources
I agree. You are making such a big deal out of bill presentment. The evolution here is it starts
with online banking. It starts with people going in like they go in with a telephone, with the
ATM, they see where they are, and then one cross sells into bill payment. Will presentment
increase the value of that for consumers? Yes. But we are finding in our banks we get a 50%
cross sell ratio between once they get them on banking, then you incentize them into bill pay-
ing, and then you have got them.
Where is the thinking screwed up over here? Help us understand.
John Tedesco, PayMyBills.com
This is the first time I have really ever seen electronic bill presentment being moved off
of as a key component of any of these businesses. Not so much Matts, but more so with
CheckFrees. Five or six, that is a number that has been internally made up, some will claim
artificially. In fact it is almost highly illogical because the more bills that you have online the
better. If you have these one or two loose ones coming in the mail, they have probably
caused more of a problem.
I think we will have a bill pay solution. We have a 100% consumer solution. But I think the real
part is the focus on the consumers. It is the SmartBalance technology. It is the person-to-person
payments functionality. That should be the focus. I do not see enough of these companies
focusing on making the consumer solution a good one.
Ron, what is your take on charging the consumer to pay the bill?
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Ron Braco, Chase Manhatten
I think bill scanning services are concierge services that some of our customers are going to
want. I think you are going to be required as an organization to charge the bills just because
the cost of scanning is high. I think where we are heading is trying to get to more of an elec-
tronic world, which will take longer to get to. But when you do the cost proposition, it will
be much more effective. And I do not think you can charge for the average electronically
presented bill.
I think the other part of bill presentment that we are missing, and I know the bill payers like
to argue with this, is that bill presentment reduces the cost and improves the quality of bill
payment. And that is what the consumer is after today. Today their banks are charging them,
for the most part in the industry, because of the cost of the third parties to pay the bills.
The quality of the bill payment is still subject. We have to get more efficiency, we have got to
get higher quality. Bill presentment enables that, particularly in the electronic world.
Audience Member
I am a consumer. Who owns me, the biller or my financial institution?
You know, I get asked this question a lot of times because by the time I present our biller
data distribution model which tries to balance the interests of all three parties, people start
saying wait a minute, this is not consumer friendly. At the end of the day these things have
competing tensions and the market evens it out.
There is going to be the biller wanting to interact for one hour with you every time you want
to pay your bill, there is going to be the bank wanting to control the relationship completely.
In the end, I think the consumer owns themselves. And just like we all live with a certain
amount of junk mail today, we all live with a certain amount of advertising, where even
though we do not want it I think the market forces give it to us regardless. CheckFree will
own absolutely no part of the consumer. For instance, Bank of America just invested in us
and owns 15% of CheckFree now. They would not do it if they thought we were in any way
disintermediating.
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In Spectrum the model is between the bank and the consumer, not the Spectrum organization
or the biller and the Spectrum organization. It is between the bank and the consumer. In that
case our privacy rules would fall right out and say that the consumer owns the data.
I think along the lines of Ravi. I think the key point is the distribution point which the con-
sumer selects in which to get their bills presented, whether that is a credit card company,
a financial institution, Yahoo!. But I do not think any of those people own them specifically.
Who is going to have the most amount of dominant brand shoved in the consumers face,
is it the bank, the biller, or your position?
We work for financial institutions. If the consumer is buying a pay anyone capability from a
financial institution or from CheckFree, if they are ever in the branded business or anybody
else, they are providing that. When the consumer wants to find detail on a bill you click over
to the biller and then the biller provides it. It depends upon what the consumer wants as the
service. Nobody owns the consumer but the consumer.
Audience Member
What does it cost the utility to send the consumer a bill? It does not cost the consumer any-
thing, but when the gas company sends you a bill, how much would they save if you took it
electronically?
Panel Responses
Panelists responded that total costs were likely around $1.75 to $2.50, while incremental or
variable costs might be closer to fifteen to thirty cents.
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Audience Member
When you look at those numbers and then you run your own numbers and they do not match,
the savings are really not there from a biller perspective right now. At least they were not. The
savings are not there. And would the cost not in fact go up if you have a disaggregated stream
of payments and information? Right now at least you have got almost 100%.
I think it has been at least four years since anyone paid us anything more than 50 cents a bill.
Even if we adopt you four years ago you were saving 10 cents a bill supposedly. The market
cost now, which I cannot comment on, it is more along what Matt said, 15 to 30 cents, so
you are saving half your costs. That would be pretty good for many business cases.
But the other issue is focus groups for these sorts of things. If you look at all the studies I
have seen where people were asked if they would use a credit card to shop on the Internet
between 93 and 94, all of them said they would never, ever enter their credit card number
on the Net, ever. And last year 40, 50 million people did. You can go and ask people if they
prefer a red sports car or blue sports car, because they know what that red and blue is and
they know what a sports car is. But to ask people about something they have not experi-
enced or even seen, that is a different story. I found these focus groups to be notoriously
unreliable both ways.
Audience Member
I will say when I started looking at the business case two years ago, I wrote the business
case for our utility for electronic bill payment and presentment and I had CheckFree and oth-
ers telling me it is $2.75 to send the bill. But there are other costs than your costs, I will tell
you that. It is your internal IT cost. So your number is not right when you throw out 50 cents.
There is more to it than your number.
Let us ask every single one of the members. What would the pricing be? What was your
average volume? Lets take your volume580,000 bills a month. What would it cost to buy a
service for presenting the bills online and paying it online?
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Panel Responses
The panel gives the responses 25-30 cents per bill per transaction, or a fixed cost of $3.95 to
$5.95 per month.
Let us take for 580,000 bills how much would your organizations commit to have all those up
and running in how much time? 60 days, 90 days, 120 days?
Panel Responses
Some respondents make the point that the job of getting the process up and running would
be the banks, not their organization. Others make the point that it depends on the willing-
ness of clients to use their templates. With the templates, they could be up and running in a
week, but customization would take longer, approximately 60 days. Size of the customer is
immaterial, level of customization being the true factor in determining how long it takes for
implementation. Average time is 60 days, with the longest time being 6 months.
Audience Member
This is more directed to John. On the consumer side, if I transfer my bills to you, especially
the paper-based bills, how does that affect my potential credit rating or my credit score when
there is a change of address, and how does it also affect any online order processing when
they want the actual billing matched up to my credit card?
First question, with regards to credit rating and the change of the address there, we work
with the credit agencies. Many times the billers either have both a shipping address and a
billing address, or a service address and a billing address. So these are allowed to be differ-
ent. In the cases where the credit agency has issues, we work with the credit agency on that.
And the second component with regard to online purchasing, most web sites have a ship to
address and a billing address and all consumers are sent a plastic card with their permanent
billing address which they can type online for those verification components. We work through
that with tens of thousands of customers, and most sites are developed with a ship to and
billing address.
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Audience Member
I think all of you, with the possible exception of John, mentioned standards. Two questions.
Do you really want them, or is the lack of them in essence a competitive advantage in your
strategies? And secondly, if they are necessary, who ought to set them?
Standards, yes. We certainly support the former OFX standards that were built and then
certainly IFX. And we think they are important in terms of creating an interoperable world.
We believe in competition.
We pretty much have to by definition support any standards that are out there. We helped
write OFX, we helped write IFX. When the banking industry told us to write a goal, which was
the Integrion standard, we did that. We pretty much, by definition, are open and will write to
any standard that gets set up.
I talked about networks and the evolution of standards, and we like standards. But basically
the reason is what we provide financial institutions is simplicity. There are so many different
databases, so many different aspects to these bill payment, and information delivery, aggrega-
tion. You can have all the standards in the world and we would still provide value to these
financial institutions. So we like standards, as complex enough as it is.
Standards are good. I think Spectrum and/or CheckFree should be establishing them. And
they are beginning to narrow, which is good, because you just want to sell to billers to get
their bills up.
We are out of time. This is one of the most distinguished panels that I have ever been fortunate
enough to moderate. I would like to thank each of the panelists.
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Roger Ferguson, Jr., Vice Chair, Board of Governors of the Federal Reserve System
Electronic commerce and finance are growing rapidly. Media announcements of new pay-
ments mechanisms designed to aid electronic commerce have become routine. Some recent
predictions look for mobile phones and sophisticated wireless devices eventually to become
important tools for conducting electronic commerce and payments.
As in the 1960s, business and government officials are being asked to predict the future
of electronic payments in the United States. This is understandable. Strategic planning and
investments will be shaped by views about the future. Yet the future, by definition always
unknowable, is hardest to predict when we are in the midst of a wave of innovation and
change. At such times public policy also faces special challenges and opportunities.
This morning I would like to offer some thoughts about that earlier period of innovation and
change in the banking and payments system that began in the 1960s. I would also like to
review briefly our more recent experience, as well as to draw out some lessons for the pri-
vate sector and public policy. Finally, I would like to provide you with an overview of the
recent work of the Federal Reserves Payments System Development Committee.
Past Predictions
We often remember the predictions of a checkless society from the mid-1960s as a lesson
in the pitfalls of forecasting the future of electronic payments. Today, as a nation, we write
something on the order of 65 billion to 70 billion checks each year, and many electronic
bill presentment and payment services continue to receive paper invoices and send paper
checks. Looking back, banks and policymakers in the 1960s were grappling with significant
problems created by the growth of economic activity relative to our ability to process paper
payments and other financial instruments.
At one point, the New York Stock Exchange was regularly closed on Wednesdays in order to
catch up on paperwork. At the time, there were also fears that contemporary check-processing
systems would not be able to handle further large increases in volume as the economy con-
tinued to grow. Deep thought and tremendous effort went into solving what came to be called
the paperwork crisis.
I recently reread some of the material from the mid-1960s, particularly the work of one of my
distinguished predecessors at the Fed, George Mitchell. At the time, computers were increas-
ingly being used to automate business processes. Computer and communications costs were
predicted to fall, and automation was being discussed with the same sense of high expecta-
tion that we hear today. At least three things stand out from the discussions of payments and
banking in this earlier era.
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VI. Keynote Address
First, a number of the predictions from the mid-1960s about the payments system were in
the end remarkably accurate. The fact that cash and checks have not disappeared should not
blind us to the fact that real change has taken place. Many of the retail payments innovations
in the 1960s, such as credit cards, debit cards, and the automated clearinghouse, are now
taken for granted. In the wholesale financial markets, checks and drafts are rarely used and
securities are transferred in book-entry form.
Second, some of the analysis of the long-run effects of automation on banking and finance
was both insightful and, with hindsight, too conservative. Even in the mid-1960s, it was
becoming clear that the combination of computerized banking systems and telecommunica-
tions could fundamentally change both business practices and banking regulations. Successive
generations of technology, now including the Internet, have helped to accelerate the process
of change and to create a dynamic financial system.
But third, the early analysis of electronic payments also underestimated the transition costs
of the rapid automation and probably overestimated the rate at which computing and commu-
nications costs would decline. Changing and integrating infrastructure within businesses and
banking organizations and convincing enough players to adopt a technology so that invest-
ments will yield a reasonable return have posed many challenges. Even a recent survey by
the Association of Financial Professionals showed that the integration of corporate accounting
and payments systems still presents a challenge to the greater use of electronic bill present-
ment and payment. In this complex environment, it is hardly surprising that the overall demand
for electronic payments to replace a well-functioning paper-based system has tended to grow
more slowly than anticipated.
Recent Trends
Thus I suspect that we should be simultaneously optimistic and cautious in our expectations
of future retail payment systems, including electronic systems. It is certainly most likely that
checks and cash will be with us for a long time. Even though the number of checks written is
not measured precisely for the economy as a whole, the number appears to have grown slow-
ly but surely over the past decadeby about 2 percent per year. Yet over the past ten years,
there has also been a good deal of growth in the use of electronic payments both as a share
of noncash payments and on a per capita basis. For example, we initiate more than 30 billion
electronic payments over credit and debit card systems and the ACH. And these retail elec-
tronic payments have grown by about 10 percent per year over the past decade. As a result
of these factors, the proportion of checks written compared with the total number of noncash
payments has actually declined from about 80 percent in 1990 to around 70 percent in 1999.
The share of electronic payments increased by a corresponding amount.
This is a significant change for an economy as large and diverse as that of the United States.
On a per capita basis, credit cards are still the most intensively used form of electronic pay-
ments for retail transactions, although the use of debit cards has recently been growing at
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double-digit rates. Furthermore, more than half of workers now receive a direct deposit of
their paychecks through the ACH.
As I noted at the outset, the pace of innovation in the retail payments system has once again
picked up. There seems to be a continual stream of announcements about new products and
projects, as well as new players and shifting alliances. Some of the products are ingenious
new ways to make payments over the Internet. Others aim to automate older payments
mechanisms, such as projects to convert checks to electronic payments at the point of sale.
The competition among all the different actors has intensified, as they jockey for competitive
position in the marketplace.
Therefore, I put these facts together to conclude that todays trends might give a hint of the
contours of tomorrows world. Checks, cash, credit cards, and the ACH, the established retail
payment tools, will all have a place. However, some of the newer electronic payments mecha-
nisms, including Internet-based person-to-person and C2B payments mechanisms, will grow
from infancy to greater maturity as well. Each of these payments mechanisms will find a niche,
and some will break from the pack into general use.
Challenges for the Private Sector
The major lesson for the private sector is a challenging one, particularly given its limited
resources and its imperative to create shareholder value. I believe that the firms that will
succeed in the world of retail payments will have to be prepared to invest simultaneously in
modernizing the current retail payment systemsgiving them a more electronic and automat-
ed backbonewhile also experimenting with some of the newer payment tools. It appears
that many institutions that thought that the check was going to die off now recognize that
they must make strides in improving the security and increasing the automation of this prod-
uct. However, these same institutions must also make selective investments in the newer
and more visionary retail payment mechanisms.
I am not in a position to determine for each private-sector firm how to balance these two
goals. Managers and directors of these businesses are closer to these decisions and bear
greater direct responsibility for the success of the institutions they guide. However, all firms
interested in participating in the payment system will have to recognize explicitly the chal-
lenge of maintaining the existing system while building the new one.
Lessons for Public Policy
What are some of the lessons for public policy that we have learned from our experience
with electronic payments since the 1960s? Our general goals of fostering a safe, efficient,
and accessible payments system have not changed. However, one broad lesson is that in a
dynamic economy, markets need to play a key role in guiding the development of infrastruc-
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ture, including mechanisms like payments systems. This means that innovation and competi-
tion will be central to the future development of the payments systemas they are in other
areas of the economy. Of course, questions of interoperability between different systems will
probably need to be addressed by payments providers. Policymakers for their part should aim
to remove barriers to innovation that do not conflict with important public policies and should
resist calls to limit competition.
A second and related point is that successes and failures are bound to occur as the ultimate
users of payments systems choose among competing options for making payments. The les-
son for public policy is that it should not be built on a single product, system, or vision of the
future, no matter how compelling at the time. Instead, policy should be flexible in a way that
allows experimentation and change to take place, particularly in the rapidly changing world of
electronic payments.
A third lesson is that public policy should exercise restraint and resist calls for premature
regulation. Users face important tradeoffs as they make choices about the use of new pay-
ment technologies among key attributes such as cost, convenience, safety, and complexity.
These tradeoffs may even shift depending on the specific parties to a payment or its purpose.
Regulations typically make implicit assumptions about these important tradeoffs, which may
preempt adjustments by users and providers of the new technologies. Even well-intentioned
regulations can end up addressing the wrong problem or short-circuiting creative innovations.
On the other hand, public policy will have to confront genuine and significant problems, when
these become clear and are not self-correcting.
A final lesson should temper the thinking of both policymakers and payments system innova-
tors. This lesson involves payments system risks: operational, security, fraud, credit, liquidity,
and legal risks. Many payment innovations are being built on top of older established systems
and infrastructure, while others attempt to circumvent more established payment practices.
This is part of the process of innovation. At the same time, innovations need to address risk
consistently and responsibly. Relevant information about risk should be provided to the users
of payment arrangements. As we know, the failure of private-sector innovators to address risk
early may ultimately force public policy to prescribe solutions.
Payments System Development Committee
I would now like to give you an overview of the recent work of the Federal Reserves
Payments System Development Committee, which I co-chair with Cathy Minehan, President
of the Boston Fed. The Board created this committee last year to help follow up on the work
of my predecessor, Alice Rivlin, and to help stimulate the Federal Reserve Systems engage-
ment with the private sector on a range of issues involving payments system innovation. Four
important activities of the committee are the following: (1) to identify strategies for enhancing
the long-term efficiency of the retail payments system, (2) to identify barriers to innovation
and work to address those barriers where possible, (3) to monitor market developments, and
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(4) to conduct workshops and forums that encourage focused discussions with the private
sector. The current areas of concentration by the committee include electronic check trunca-
tion and presentment, efforts to reduce legal and regulatory barriers to innovation, standards,
and future clearing and settlement systems to support electronic commerce.
In this age of the Internet, the committees work on electronic check collection deserves
comment. Checks continue to be the most widely used retail payment instrument after cur-
rency. At the same time, it has been very difficult for the banking industry to move from a
paper-based to an electronic check collection system. There has been experimentation with
check truncation and electronic presentment in the United States since the 1960s, with limit-
ed success. Recently, the banking industry has shown renewed interest in this topic. The
Banking Industry Technology Secretariat (BITS) for example, has endorsed the goal of having
their members present at least 50 percent of their checks electronically by 2001. The Federal
Reserve Banks now present about 20 percent of their checks electronically to more than
3,800 banking organizations. Both the Federal Reserve and the private sector are piloting
new arrangements for truncation, presentment, and digital imaging.
The issue of how to streamline the electronic return of dishonored checks is also being dis-
cussed. Against this background, the Payments System Development Committee held a
workshop at the Federal Reserve Bank of Boston this past June and invited more than 100
public and private-sector experts to help identify barriers to the greater use of truncation and
electronic check presentment, along with steps the Fed and the private sector could take to
help address these barriers. The Board released a summary of the Federal Reserve staff analy-
sis of these suggestions early in September, and we will be following up on the suggestions
in several areas.
One of the promising ideas discussed at the workshop involves a potential reduction in legal
barriers to check truncation. The general idea is not only to facilitate the truncation, digital
imaging, and electronic presentment of checks when this makes economic sense but also to
protect the rights of consumers or others to receive a paper check if they want. One means
to accomplish this goal, for example, would be to provide a legal foundation that would treat
the digital image of a check, or an accurate, machine-readable paper copy of that digital image,
as the legal equivalent of the original check. Banking organizations would then have greater
flexibility to truncate checks, while allowing banks, other businesses, and individuals to receive
legally equivalent paper copies of original checks to satisfy business or personal needs. Again,
a key feature of this idea is that rights would have to be protected. The Federal Reserve staff
has been following up on this idea in discussions with banking, legal, business, consumer,
and government representatives, and will continue to engage the private sector in dialogue.
The committee also expects to pursue initiatives in the area of technical standards, particularly
for exchanging electronic checks and paper substitute checks, as well as to discuss new
operational concepts for check imaging and ways to test these concepts. We will also look
for ways to work with the private sector to inform depository institutions and the public about
electronic check collection.
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Some organizations have suggested that it is more often business considerations than techni-
cal issues that hold back participation in electronic check initiatives. In other words, some
banks do not see a strong business case for electronic check collection, and this has clearly
been a stumbling block for many organizations over the years. Several groups have already
done work to identify costs and benefits. To follow up on suggestions that there may be a
need for further work, the committee will seek additional views from the banking industry
about the best approach to deal with these issues. Ultimately, however, each financial institu-
tion must decide what is best for that organization, and the Federal Reserve can serve as a
facilitator for discussions, if needed.
Speaking of the information one might need to create a business case and plan business
investment, I feel compelled to note here that we do not really know how many checks are
written in the United States each yearinformation that might be helpful to those interested
in automating or replacing check payments. The Federal Reserve is in the process now of
planning to collect data from which to help estimate the annual volume of check payments
and their value. We are counting on the assistance of the banking industry in this endeavor.
Conclusion
Overall I have a sense that new energy is flowing into efforts to improve the retail payments
system. The fact that check, cash, and credit cards are likely to be with us for some time
should not blind us to the changes that are occurring. I believe that new technology, changes
in the banking laws, and old-fashioned competition are producing change. Some believe that
we may see revolutionary change. Several newer retail payment mechanisms will be added
to the existing ones, but the history of automating the retail payments system cautions that
evolution is more likely than revolution.
The Federal Reserve is actively engaged with the private sector in discussing changes in the
payments system. We need to be alert to help remove barriers to innovation, including regula-
tory barriers, when this is in the public interest. At the same time, new payment arrangements
need to address traditional payments system risks in a responsible manner and not wait until
problems tarnish innovative thinking.
Finally, I continue to look for a market-oriented approach to payments system innovation that
will provide long-lasting benefits to the consumers and businesses that use the U.S. payments
system. True innovations frequently disturb comfortable habits. Thus we need to approach
payments system innovations with an open mind and a willingness to learn. This is particu-
larly true in the world of electronic commerce, where payments are being adapted to new
technologies, products, and methods of doing business. These innovations are important in
themselves. But they are also important because successful innovations to support electronic
commerce may, over the long term, have a broad influence on the payments systems we use
throughout our economy.
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Emery Kobor, Research Director, CFO Magazine (moderator)
It seems as if we are always talking about the challenges and opportunities in business-to-
business payments, but rarely mention the accomplishments. According to the Yankee Group,
there were $396 billion worth of trades last year via EDI. EDI has been an emerging technology
for about 20 years now, yet Goldman Sachs estimates Web-based business-to-business trade
last year at $114 billion. A portion of that is likely to have been EDI. Right now EDI is running
ahead of Web-based business-to-business trade at about 4 to 1. B2B vertical exchanges on the
Web were expected to change that picture. Not yet, however.
U.S. Bancorp Piper Jaffray equity research issued a report just last week, and the opening sen-
tence reads, Among the B2B worlds disappointments this year has been the lack of traction
gained by vertical or industry-specific marketplaces in terms of adoption, revenue and valua-
tion. Piper Jaffray singled out lack of systems integration as the culprit. Vice Chairman Ferguson
mentioned that the Association for Financial Professionals recently released survey found that
50 percent of the 535 respondents identified lack of integration between their electronic pay-
ment and accounting systems as a highly important barrier to making electronic payments.
I would suggest, however, there is a more important barrier. The decision to implement sys-
tems integration comes from the top. And traditionally, payment systems have not been on the
radar screen of CEOs and CFOs as a major strategic initiative. In my experience, a companys
strategic interest in working-capital management and cash management is indirectly propor-
tional to the companys solvency. Generally, as you slip toward bankruptcy you become much
more concerned about your cash position and your efficiency in using cash. Hopefully we can
offer some less drastic solutions to improving the business-to-business payments climate.
So without further ado, let me welcome John Quinn to the microphone.
John Quinn, Partner, Diamond Cluster International
Thank you, Emery. Today, well be discussing three major topics with regards to B2B e-commerce.
One is evolution. We feel that the B2B marketplaces are going to have to go down an evolu-
tionary path before we will really see some accelerated action around embracing these exchanges
and using them on a more wide-scale basis. The second concerns the competitive forces that
are shaking up the payment solutions which need to be offered within the marketplace before
it takes off. And then three, some of the emerging technologies to watch as these payment
solutions unfold.
Before I hop into that, how many people in the audience are familiar with Clayton Christensens
book, Innovators Dilemma? Real quickly, the overarching premise of this book is that large
corporations or large companies often make rational decisions around research and develop-
ment based on listening to their customers. Through that interaction with their customers,
what happens over time is, even though they are making good decisions and they are investing
VII. Business-to-Business
the right things for their product set, they put themselves out of business. Because what hap-
pens is a new and emerging technology spawns itself at a lower price-performance level, and
ultimately that newer technology overtakes the mature technology and puts the original com-
panies out of business.
The case study he shares is the disc drive business in the 70s and 80s and how players like
IBM focused on larger disc drives based on listening to their customers. They worked on improv-
ing those larger disc drives from a price performance standpoint. Businesses that approached
disc drives this way were ultimately put out of business as the newer, smaller disc drives ulti-
mately overtook the large disc drive business. These smaller drives had a completely different
price performance profile and a completely different usage pattern. With that you had an
emergence of a whole new class of competitors and a whole new class of products.
The analogy in the payments world is that when people think about large-scale payment sys-
tems they focus on the B2B model and not necessarily payment systems supporting the small
retail consumer. And I think an overarching message is that if you really want to see the future
for online payments in B2B, you should keep your eye on the person-to-person payment mar-
ket and think about how those emerging solutions will ultimately be applied in the B2B space.
A main reason for that, getting back to the Innovators Dilemma, is that in the business space
you are talking about high dollars per transactions, low transaction volumes, more secure
participants, and more powerful customers, which translates into more specialized and frag-
mented solutions. Whereas in the consumer space you are talking about lower dollars per
transaction, higher transaction volumes, higher incidents of fraud, which should ultimately
translate into a more generalized and open system that will eventually produce the killer app
payments platform.
As I said earlier, I am going to be covering three areas. Setting some context for the B2B mar-
ketplaces, our belief is that these B2B exchanges are going to need to go through three waves
of evolution before they are really going to take off and be a complete solution for companies.
Wave one is just the proliferation of these exchanges. Over the last year there has been a
huge variety of exchangesvertical exchanges, horizontal exchanges, specialty exchanges
announced by various players. Giving you some quick statistics, as of this summer there were
about 1,000 of these exchanges in the marketplace. The expectation is that there will be around
10,000 of these exchanges in the marketplace by 2003. That said, less than 1 percent of this
years B2B commerce actually took place via those exchanges. That commerce is actually
expected to grow to 2.7 trillion by 2004. That is based on some Forrester research. Another
thing our experience shows is that when you look at these numbers, although the individual
stories tend to be overly hyped, when you look at the macrodata what we are seeing is that we
are drastically underestimating the volume that will ultimately be transacted via these exchanges.
Looking at wave two, it is important to think about the role of these exchanges. One is to
improve the overall efficiency between two market players, between buyer and seller. And
that is where a large part of the value proposition is being talked about today, actually driving
inefficiency out of the system and improving the communication between two players. Role
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number two is to add liquidity to a marketplace, and that is done by introducing new buyers
and new sellers to each other. When you look at wave two, it is our belief that the efficiency
gains will not fully be reaped until payments, and payment solutions, are electronically attached
to the delivery of the physical goods. This will ultimately start to remove a lot of the inefficiencies
around reconciliation, tracking, manual work flows, manual interfaces between organizations,
et cetera. The second thing is liquidity. It is our belief that the liquidity gains will not really start
to be more fully realized until we can create more transparency around counterparty risk. So
when I am going to an electronic marketplace, do I know the person or entity that I am doing
business with? How will I go about getting to know them? Can I actually look at some of their
financial data online, real-time? Can I interface with a trusted third party to deliver that evalua-
tion for me? And then, based on that information, am I more comfortable with doing a real-
time transaction in the marketplace?
The third wave is essentially about online, real-time access to market demand as well as
information about the individual companys historical and current financial performance. Back
to my point about transparency of information. We need to electronically share information so
I can become more comfortable that you are the type of counterparty I want to do business
with, whether it means doing an actual purchase or sale, or financing that purchase or sale.
Secondly, we have the creditors financing tied to the underlying asset. As we tie up pay-
ments with the exchange of physical goods, a creditor does not have to monitor what they
are actually financing or spend a lot of time monitoring the company itself since they already
know the company is in good standing due to the transparency of information. What does this
translate into? Reduced credit risk for lenders and reduced cost of capital for top performers.
You get rid of the situation where top performing companies are in a sense subsidizing lower
performing companies because the financing companies treat them all in aggregate. For exam-
ple, a mid-sized CLEC based in Iowa would get treated like all other CLECs with regard to credit
risk. What we would ultimately like to have is more insight into the performance of that com-
pany. That way, we have a financing or credit risk decision based on the financial information
of that company alone. Thus, we are able to price that credit based on those risks, and able to
monitor that company in real-time to make sure it is making good on its promises, et cetera.
Moving on to types of competitors that we see influencing these emerging products or offer-
ings around credit or payments, there are three categories at the highest level. One is the
new online finance companies, the second is banks partnering with exchanges, and the third
would be the pure payment platforms. When you look at the online finance companies, they
are really a new set of competitors that have migrated from different historical roots. Some
have migrated from the consumer-to-consumer online auctions such as eBay or AOL, others
have migrated from things like international trade finance and escrow into an online space,
and then they broaden their business models to serve more parts of the market. Some exam-
ples would be Attrade, which is delivering payments in 24 hours; eCredit, which is delivering
financing in seconds online; eTime Capital, which is delivering financing and payments in 24
hours; and then TradeSafe.com, which is an example of players that started in the C2C mar-
ket and have migrated their business to the B2B marketplaces. The second category would
be banks partnering with exchanges, companies like Bank of America partnering with Ariba.
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Some of the main impetuses for those partnerships are one, to defend or make better use of
their existing relationships; and two, to secure an option in the online marketplaces to contin-
ue to serve their existing customers with financial products. The third category would be the
pure payment platforms, things like Visas direct exchange, Citibanks payments focus compa-
ny, and some server-based wallet companies like Earthport.com which has recently emerged
in the UK. That is the competition, or some of the types of competitors.
Looking at this market, I think the standards issue is one of the main barriers to accelerating
the use of such broad-based, next generation payment solutions. Free markets work very,
very well, and a lot of people would agree with that. But I think one of the areas where free
markets tend to fall down is when it comes to setting the standards, and that is going to be
one of the critical success factors to the acceleration of these payment systems. In looking at
some of the standards that are out there, there are things like FIXML, which is an emerging
standard within the capital markets arena. Things like FIXML will help govern how information
is exchanged between companies as well as how information is shared between systems with-
in companies. I think those transaction-based standards are essential before you are going to
see any of these more global, standardized payment platforms take off.
A second standard would be something like XBRL, which is a payment standard that is emerg-
ing around how financial statement information is actually being codified and shared. WBRL
will give us a greater ability to share historical and current financial performance with potential
users, such as a counterparty or a bank, or between a buyer and a seller who are deciding
whether the seller actually wants to finance the buyers purchase, et cetera. That is a stan-
dard to keep your eye on, and the focus there is really the static information, the financial
statement information, and being able to codify that information in a sharable form.
The last one is an emerging, hidden standard that a lot of people do not really think about.
If you look at the back office systems that have wide scale deployment, like Oracle financials
or SAP, there is really an opportunity for those players to cut out a lot of the middleman. In
a sense, the information that is stored in two systems is already stored in a consistent form,
and what is needed is a way to share the transfers of financial data between those two back
office systems and cut out all the middlemen in between that perform conveyance and recon-
ciliation functions. I think the key here is where will the framework for interoperability emerge.
I think that is essential for creating a public platform versus what exists in many cases today,
which are private platforms serving in each market.
Moving on, a lot of this is fairly straightforward. The two points I would like to reinforce are
efficiency and liquidity. Key benefits are improving transparency into counterparty risk and the
ultimate linking of the delivery of goods with the actual payments, which in our view will lead
to more widespread usage of these marketplaces because the value proposition for the indi-
vidual companies will be more compelling. Then the second thing to consider when you are
thinking about these B2B marketplaces is the actual benefits that are being observed. People
are saying that as far as net cost savings goes, we are talking about 50 to 80 percent of costs
being driven out of the system. Once again, we do not feel the benefits are really going to
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be reaped until these manual work flows and interfaces are removed. Earlier we were talking
about how everybody focuses more on the procurement side and goods exchange, and not
so much on the payment side. Until we can get these parallel processes linked electronically
you are going to see continued delay around embracing these marketplaces.
Moving on to technology, here are technologies to watch. The list of technologies in use right
now is huge. Rather than focus on the commonly talked about technologies, I want to identify
two that are emerging. They are emerging largely in the consumer-to-consumer space, but one
of the challenges here is to think about how they can be applied in the business-to-business
space. The first one is instant messaging. This is something that people are using in a leisure
setting, but we are starting to see this usage actually migrate into the business setting. Brokers
talking with their customers, customers delivering trade orders, businesses relaying payment
instructions via an instant message, because you have the benefit of knowing in real-time
whether the party on the other side is actually there. A conversation can be had via these
exchanges. With that new usage starts to come some new issues that people really had not
thought about before. Instant messaging in its current form is a very open, nonsecure, non-
trackable exchange. You are seeing companies like Jabber.com starting to fill this niche for
securing that instant message exchange. This provides the enterprise with their need for con-
trol and improved ability to integrate with internal systems, not to mention extensibility, better
security, archiving of exchanges, and the delivery of structured messages.
And then the last technology area, and this is really a set of technologies, is mobile devices.
How are we going to address this new, emerging last mile? When you look at it, it is really a
combination of technologies coming together. One is the mobile device itself, two is the wire-
less technologies and standards that are emerging that are going to allow those mobile devices
to be maintained in real-time links to the corporate infrastructure, and three, things like server
wallets that will allow information to be stored centrally in a secure fashion interfaced with the
mobile device. The mobile device can really act as nothing more than a security key so that
you can keep things like keys and PINs on it. It knows the user, the user knows it, there is only one
person that can use it. The rest of the information and instructions can be maintained on a server.
The other thing to think about while considering mobile devices and their impact on the emerg-
ing payments systems is the volume that is going to be generated as a result of this new
infrastructure. The frequency of traditional transactions may increase just from of ease of use.
Secondly, there is the emergence of new transactions. Things like microtransactions would
allow a user to make a purchase real-time. I can purchase a piece of research on the way to
the airport and have it shipped to me or purchase a ticket in real-time and have that transac-
tion be closed at the point. I think a lot of the players are recognizing this. The new payment
system Visa is putting out is being designed to handle volumes in the neighborhood of 10,000
messages per second. To give you an idea of how that relates to their current system, that is
approximately double their global volume today. It is these kinds of issues we need to think
about as these payment platforms are being generated.
With that, I hand it over to the next speaker.
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John Sheridan, Executive Director, Information Technology, National Center
for Manufacturing Sciences
When I showed up here today I asked myself, What is this engineering/manufacturing type
of person in the middle of a financial industry for? It is because we have a lot to learn. I am
from the National Center for Manufacturing Sciences, an industry consortium of about 150
manufacturers. We have been forming and managing industry collaborations for a long time.
However, there is a new opportunity and a new challenge for usto turn the National Center
for Manufacturing Sciences into a channel for commerce. I am here to talk about that par-
ticular topic.
You have heard some people describe the number of exchanges that are arising. I think Diogo
used the number 170 yesterday, and that is probably very conservative. I would like to insert
a new term: private exchanges. The notion of public exchanges is a very difficult notion for
many manufacturers. Places where you pit suppliers against each other, compete for source
selection, and pay for the privilege are probably not winning propositions. I think you were
making that point a couple minutes ago too, John. We hope that a private, closed supply chain
community that supports both the buyers and the sellers in the marketplace has a lot more
future. This is exactly what we are trying to develop. I know of six of these, and I only know
of one that is making money.
We think this private community should be organized along a single product or product line.
Imagine Whirlpools home refrigerators or Cincinnati Milicrons vertical milling machines. Think
of all the people involved in creating them, the motor and controller and casters and bearing
and ball screw and slide providers all working together in a secure environment where they
can collaborate on product design and production, synchronize the supply chain and avoid a
lot of the aggravation that happens to people, and transact commerce in real-time.
When people form their relationships in marketplaces they do research and investigate. Is this
technology mature enough to put into our next product? Is this going to work? Do we have to
wait for an appropriate window of opportunity? All those decisions and all those relationships
are formed at these early investigative stages. Thus, an exchange must support customers
during these early stages. Jumping in at source selection is really the second phase of a long
story (see Figure 1).
And this, of course, is NCMS. This is engineering. This is the part that we know, understand,
and where we have very strong relationships. These are engineered products, not tubes of
toothpaste, but milling machines, refrigerators, cars, airplanes, and similar items that are more
appropriate. And a lot of this decision making and a lot of the work gets done here. It is much
more a joint journey among suppliers and buyers. The head-to-head source selection competi-
tion is not a big piece of this. People who have been making refrigerators have been making
refrigerators together for 50 years and they are not about to change their supplier tomorrow
because they have deep relationships with their suppliers. There is a lot of source selection
that still goes on, but nevertheless this is a balance.
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As shown in Figure 2, the middle part of this activity is supply chain synchronization. Supply
chain synchronization does not work too well unless you add the financial transactions, and
then we automate the whole process and pull it together. That is what we at NCMS propose
to do. At the very end of this business and engineering cycle, you see an assessment phase.
Here, you want to assess how the last job went, take the lessons learned from that, and feed
it right back into research, which is the first effort on the chart above.
So this is a slice through a manufacturing production process that we propose to address.
The value proposition is obvious. These are private, secure services. It has to be a compre-
hensive supply chain optimization, not little pieces of this and that. That is so difficult to achieve
I am not sure we can do it all at once. This is a secure, neutral environment in which all the
participants are protected, and we will find that the participants are an immense diversity of
companies. If, for instance, we use the Whirlpool example, some of Whirlpools suppliers are
very small companies and they probably need manufacturing applications, they need support
to be able to work at the level of sophistication that this e-hub demands. Other suppliers are
Motorola and T.I., who are bigger companies than Whirlpool. There is a lot of diversity here,
and we need to accommodate the needs of all of a wide variety of players. So we are going
to have to provide applications and support to make this all work in order to bring some peo-
ple up to the level of sophistication required.
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N C M S
MARKETPLACE
El ectroni cs
STORAGETEK
Consumer Products
KODAK
HEWLETT PACKARD
Heal thcare
BAXTER
Aerospace
HAMI LTON
SUNDSTRAND
Automoti ve
FORD MOTOR
COMPANY
Machi ne Tool
UNOVA
NCMS, a Channel f or Commerce
Figure 1
The four sub-bullets in Figure 3 show what the exchange must accomplish: Collaborative prod-
uct design, inter-enterprise processes, reducing volatility and risks, and then coordination of
capital and risk management with the production process. This is not a public exchange. We
believe this is something that NCMS is well equipped to do. This is bringing our collaborative
experience into a new marketplace.
The first round of research in business development is to understand what the market was
ready for, to assess the readiness of people to adopt e-commerce. John, you appropriately
pointed out in your talk that sometimes newer technology will overtake older technology. So
studying all the people who are immersed in their older technology is only part of the research
we need to do, and the rest is simply being here and learning from seminars like this one. It
is interesting to note that of the people who responded, 3 percent said they are in manufac-
turing. They are all in manufacturing. The question is how people label themselves. All these
people are definitely manufacturers and this is how they describe themselves in manufacturing.
You do not have to sell e-commerce to anybody. In 1998, working with InfoTEST, we worried
about peoples readiness to do anything business related on the Net. That has obviously passed.
However, a lot of what is happening in the marketplace right now is very hard on suppliers.
Predatory pricing and other things that are happening in open exchanges are not what people
are interested in. Any reluctance for people to get involved has a lot to do with what is cur-
rently available for them in the marketplace. Smaller companies especially do not have a good
appreciation of the cost of doing this. I think that is an opportunity for us. Because if they think
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ENGI NEERI NG PROCUREMENT SETTLEMENT
COLLABORATE SYNCHRONI ZE TRANSACT
Figure 2
that a million dollars would be a lot of money to spend on this particular venture, maybe I would
like to invest the million and then charge you by the month for the service.
There are barriers to implementation, but nothing that cannot be surmounted. People used to
worry years ago about security and quality of service on the Internet. But such things can be
overcome. Figure 4 is just one of the more detailed slides to show the results of the market
research. This one focuses on companies responses to suppose this cost a million dollars.
81 percent of the respondents who now are executives in manufacturing organizations said
that is a lot of money. Well, it is going to cost more than that. I invite you to take a look at the
rest of this at your leisure.
The third part of this presentation is about where the bank fits into this. Diogo already men-
tioned the four areas yesterday:
1. Web-based trade support
2. Value-added services
3. Basic online transaction services
4. Basic online information services
That is exactly what we are seeking a relationship with a bank. This is about banks getting
involved with exchanges. I am actively looking for partners in that area and talking to some now
who want to be involved in this e-hub and provide a comprehensive solution to their customers
who are not manufacturers. The private e-hub serves the bank because it makes a lot of oper-
ational information visible to them. And if that information is visible it can be used to reduce
their risk. They know what is going on. You might imagine that that might automate lending.
There are different kinds of banks who want to have different roles in the e-hub. One is the
powerhouse e-commerce leader, the big Chase, Bank of America, and those sorts of folks. And
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Val ue Proposi ti on f or Customers
I ntegrated servi ces enabl e manuf acturers to be
more competi ti ve by i mprovi ng key processes
i n the manuf acturi ng cycl e:
- Faci l i t at e col l aborat i ve product desi gn
- Creat e more ef f i ci ent i nt er- ent erpri se process
- Reduce vol at i l i t y and ri sk t hroughout t he suppl y chai n
- Coordi nat e l ogi st i cs, capi t al , and ri sk management
- wi t h t he product i on process
Bri ng NCMS col l aborati on
experi ence to commerce
Figure 3
they want to participate just as you described. They want their name on this marketplace so
they can be seen as satisfying their customers needs and contributing to their prosperity and
preserving their role in this. Then there is another kind of bank that is maybe a smaller bank, a
mid-market lender, and they want to have access to this for their customers. Such banks may
look to a technology provider, which could be a larger bank. The big Chase and Bank of America
groups are really providing technology to this hub. They could be perfectly happy to have some-
body else provide the technology. We are talking to both sides.
I drew a picture before of the long process from research through engineering procurement,
settlement, and then using the feedback from such a process to improve performance on the
next attempt. But underneath that there are many layers of detail. This might be useful to help
appreciate the scope of what it is that we are trying to do. Where we start in this process is
such a difficult question for us. And the highlighted parts are the parts the financial institutions
would probably play a leading role in. We have examined, and continue to examine, the ques-
tion of should we start a private e-hub with a market entry that focuses on financial services?
There are two schools of thought. Some people will tell you there are spectacular opportuni-
ties for banks that are going to make a lot of money with new innovative services in this area,
and other people say it will be a commodity next year, so do not bother. It is a commodity they
have to provide but nevertheless it is not a place to put all your marbles to begin with. The
value in this hub is back in engineering and procurement and what it does for the customers,
and the banks want to have their name on it for different reasons. I hope that gets to be in
the discussions. I do not know the answers and I would like to learn a little more about it.
So now I will pull this all together. This is really just introducing the topic, and I hope we are
going to talk about this for a long time. Innovative financial services are certainly required to
realize the value of these networks. Different people have different views about whether this
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Smal l er Compani es are Especi al l y Concer ned f or Cost
80% of compani es respondi ng are manuf act urers
wi t h sal es l ess t han $100 mi l l i on, and 68% have
f ewer t han 200 empl oyees
Of t hese compani es, 81% cl ai m t hei r sharehol ders
woul d be seri ousl y concerned i f t hey knew an
e- commerce proj ect was goi ng t o cost more t han
$1 mi l l i on
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Figure 4
is viewed as a persistent source of differentiation. I do not know, but I would like to ask some
bankers about that. And certainly, there is no confusion that banks and their customers are
always going to be closely related. That relationship continues to be important. This is the tip
of the proverbial iceberg. We have not even begun to appreciate this. That is all I have right
now. I look forward to the discussion part of this.
Sarah Billings, First Vice President, ABN AMRO
Good morning. I have been asked to come here and talk about what our bank, ABN AMRO
Bank, is doing in terms of financially enabling the e-commerce business models. Before I get
into those remarks I would just like to take a little bit of historical perspective, not that there
is all that much history in the last two to three years of this electronic commerce revolution.
But basically when we first looked at e-commerce, when all the hype, all the excitement start-
ed a few years ago, there was a great fear among banks, even large institutions such as ABN
AMRO, that we would get left behind. Are we too slow and sluggish to compete with these
22-year-olds in their garages who are fueling the e-commerce revolution? Everything new was
good, everything oldespecially stodgy old bankswas bad.
I am happy to say we have learned and grown a lot in the last few years. And the common
thinking now, at least the marketplace feeling that we get, is that the tide has really changed.
A banks core competency, such as payments enabling, our global scale, our goal as a trusted
third party, and our overall stability, all are really core competencies that are even more need-
ed in this new economy. We are taking those core competencies and parlaying them into our
new e-commerce segments, our new products, our new services.
I want to share some components of ABN AMROs overall e-commerce strategy. I was asked
to give these remarks as representative of what many large global banks are doing. Many of
our efforts revolve around e-payments enabling, various e-commerce models, e-trust enabling,
and also providing risk mitigation services to these new e-commerce models, such as
e-marketplace, stand-alone Web stores, and other types of e-businesses. The Internet has
given us a large opportunity to create nontraditional bank products that use the Web to add
value to our customers. Those would be anything from e-procurement to some innovative
online enrollment services, and many more. Specifically I want to talk today about five differ-
ent B2B financially enabling services that ABN AMRO currently has or is in the process of
developing. Those are B2B financial settlement, online escrow services, electronic invoice
presentment and payment, Identrus digital certificates, and finally online credit decisioning.
I will go through them very briefly.
B2B financial settlement is a tool for settling transactions with e-marketplaces. Specifically,
the solution is a bank neutral solution. Every buyer and every seller who comes into these
e-marketplaces is not going to change their banking relationship to participate in this
e-marketplace. So we have to come up with services that allow them to maintain their
existing banking relationships. But we all know from trying to make financial EDI work over
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the years that you cannot expect all the thousands of banks in the U.S.not to mention the
worldto come up with all these e-commerce products and services that interoperate among
themselves. We, of course, offer risk mitigation for both the buyer and seller. That is another
calling card. You have to have that before you enter the room.
Our services start with U.S. based settlement that is facilitated by some of the payment sys-
tems or regulations that we enjoy here. But as befits a global institution such as ABN AMRO,
we are rolling it out for global settlement as well in the coming year. Online escrow service is
a different flavor of how to settle transactions within e-marketplaces, but can also work within
stand-alone Web stores for facilitating the transactions settlement and risk mitigation. We need
true B2B online escrow services. Many of the online escrow services that exist today have
restrictive dollar limits that do not really work for large business transactions on the Web. We
need to support multiple currencies. We will initially be supporting the U.S. dollar and the euro
with global currencies being rolled out in the next year.
Another key initiative for our bank is electronic invoice presentment and payment. Of course
this will be very different from the consumer variety of e-bill presentment and payment serv-
ices, which offer robust business-to-business functionality like the ability to review thousands
of line items within a bill, adjudicate each one line-by-line and have payment scheduling capa-
bilities. But the exciting thing about electronic invoice presentment and payment is how we
can integrate it within e-marketplaces, especially when we couple it with payment settlement
capabilities such as our B2B financial settlement. We can have the whole automated invoice
processing plus the payment within the e-marketplace. And this is so critical because if you
cannot complete the transaction within the e-marketplace from procurement, or even from
the collaboration stage through procurement to settlement, then a lot of these transactions
will fall apart. Electronic invoice presentment and payment can also be offered on a stand-
alone basis. It does not need to be within an e-commerce business model just to automate
accounts receivables practices.
One of the challenges that we face in rolling out our product is the global scope. When people
talk about the global scope of this type of service, they talk about having to support multiple
currencies and languages. We think that is just the tip of the iceberg. That is really the easy
part. The hard part is supporting all the regional taxation and regulatory requirements that we
have around the globe.
Identrus digital certificates. Most of you are probably well aware of the Identrus organization
global joint venture of about 30 banks and growing. ABN AMRO is one of the equity founding
members alongside with banks such as Bank of America, Chase, Deutsche Bank, and a core
set of large global banks. Identrus is not so much a product in and of itself, but rather a utility
that banks are using to create e-commerce products and services. The goal of Identrus is to
create a predictable and transparent trust environment in which to conduct our electronic
commerce transactions. This is obviously sorely needed. ABN AMRO Bank, in addition to the
other banks that are part of Identrus, will issue and warrant digital certificates which vouch for
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the identity of the transacting parties, both buyer and seller. Identrus also warrants the integri-
ty and non-repudiation of the messages that are passing through, and all within a global scope.
Beyond the direct selling models, the e-marketplaces, and the online Web stores that Identrus
enables with these digital certificates, there are some more traditional uses of Identrus digital
certificates for businesses that are not involved in selling online. Those could be secure docu-
ment transmissions. If you have to pass legal documentation back and forth between two law
firms, you can do it over the Web and you can do it securely. You can even sign the documents
ultimately with an Identrus digital certificate. We are providing strong authentication, much
more than the variety that you see commercially available today. I would be remiss if I did not
mention the recent partnership of Identrus and SWIFT to do global secure payments. We think
it is a winning combination to bring together the thousands of banks that are tied together with
SWIFTs messaging system and Identruss PKI secure technology.
The last specific service I want to mention is online credit decisioning. Online credit decision-
ing brings many individual products together into a suite of services. Such a suite creates a
solution for almost any marketplace. It includes everything from buyer/seller authentication
using Identrus digital certificates with real-time, online credit scoring, along with credit and pay-
ment decision tree logic. So the credit analysis that is gone through in a human, manual sense
today is being put online. Then, based on the buyers credit worthiness, it ultimately combines
the services with a variety of payment, leasing, and financing options. All of these components
are customized and put together in a unique way for each seller in each e-marketplace.
It starts when you are on the e-marketplace and buyer and seller have just agreed to buy 100
tons of steel. At that point, if not before, the seller obviously wants to authenticate the buyer
to make sure they are who they say they are.
You can use an Identrus digital certificate to do that, and then maybe once they authenticate
that buyer they find out they are one of their trusted trading partners. We bump it up against
a database that we hold of that group of tier one trading partners. Then the deal is done. These
two trading partners have settled payments for years using EDI. You have your confirmation
number and you are offline. But if the buyer is not somebody who is known to the seller, then
we may have to do a real-time credit score. Based on the creditworthiness of that buyer, a
variety of payment, financing, and leasing options will be shown to him or her. Those would
include some of the payment options I talked about today, B2B financial settlement, escrow,
and, of course, financing, leasing, things like that. It sounds very simple to write it up there
when it is certainly not. It is not all there today. But this is the vision, this is what banks per-
ceive the market need to be and what we are going after.
I just want to conclude by saying that this is not something that we feel our bank or other
banks can do on their own. We are forging alliances with new economy companies, mainly
forging a lot of relationships with e-marketplace infrastructure providers. We are one of the
two banks selected by Ariba to financially enable their slew of marketplaces. Entrade is anoth-
er infrastructure provider for e-marketplaces, and i2i similarly. Once we integrate our financial
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services into their technology, marketplaces will come packaged and ready with these pay-
ment settlement services.
Emery Kobor, CFO Marketplace (moderator)
Excellent presentations, thank you, each of you. Each of you touched on the role of the bank
in a B2B exchange, but Sarah, you made a point that has often been on my mind that partici-
pants are not going to change their current bank relationships when they go to a B2B exchange.
Unfortunately, I am not exactly clear on what the third bank does with the exchange for each
of these two participants that already have a bank relationship. Could each of you touch on that
a little bit, the role of the bank and the exchange when you have participants that have already
come to the trading process with preexisting bank relationships? Sarah, would you begin?
Sarah Billings, ABN AMRO
I think that the point is that the bank should act as a service provider behind the scenes of
the exchange. So, it is not that the e-marketplace has to form relationships with every bank
that their buyers and sellers could conceivably need, but with a single bank who can do the
messaging and the secure payment initiation between all of the banks that the buyers and
sellers use. And that entails using the payment systems in a very different way than they are
traditionally used today.
John Quinn, Diamond Cluster International
You raise a good point from the standpoint that the existing banks have owned that relation-
ship. For marketplaces to choose a single bank entity to host their value proposition would
put two assets at odds; the customer relationship versus the value delivered by the market-
place itself. I think we need to recognize that the bank that is acting as the hosting entity needs
to deliver an open enough solution that allows the customers bank to plug into it. Until that
interoperability exists I think you will see continued hurdles encountered due to the fact you
cannot engage the marketplace because you cannot bring your preferred partners to it.
Absolutely. I just want to interject. I see a fundamental problem with a brand building here, as
you just said. I am building my brand, I want you to recognize me. I am not going to hide behind
or be a service provider behind the exchange. I want to be out in front. What are your thoughts?
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John Sheridan, National Center for Manufacturing Sciences
I am not particularly well qualified to answer the question. But when I look at my own bank,
my own bank does not actually perform all the services that I ask it to do. It has relationships
with other banks for specialized offerings. I imagine large powerhouse banks offering special-
ized services and then somebody else owning a relationship with a customer, the manufacturers,
and this. Will there be creep? Will there be conflict? I am sure. As long as there is capitalism I
am sure there will be opportunities for the host bank to encroach upon the territory that used
to belong to the manufacturers bank.
I think that is an interesting point. I think you may have really hit on the solution there; the
local banks will partner with the larger powerhouse banks to provide services that they cannot
provide today.
I think one of the key things here is using digital certificates to authenticate participants. Sarah,
would you mind just briefly going over how that process works; what a digital certificate is for
those people who do not really understand the mechanics. Also clarify for me whether or not
these two parties have to get a certificate and be recognized by the same digital authority
before the transaction. There has to be some previous coming together before these other-
wise strangers log onto the same site.
There are a lot of parts to your question, so I will go through them one by one. First, they do
not have to have a prior coming together. But they do have to have digital certificates before
they embark on a deal in cyberspace. But the whole model of Identrus is what we call a four
corners model. Each company goes to their bank to get their digital certificates. It is like when
you open a business, you need a bank account to conduct business. You will go to your bank
to get digital certificates, and from buying that Identrus service from your bank you have the
authority to issue digital certificates to your employees for various business purposes. With
that comes the responsibility for managing those digital certificates, for revoking those digital
certificates when someone leaves the company, gets fired, or changing job responsibilities.
There is a very, very high level of security associated with these digital certificates, because
ultimately it is the bank who is on the line for the warranting of them.
Each party, the buyer and the seller, go to their bank to get their digital certificate, then when
they have a transaction in an e-marketplace, they each insert their digital certificate, which is
on a little credit card-like device that they plug into a card reader on their computer. It would
enable the seller to send a message to their bank, requesting them to validate the buyer by
contacting the buyers bank. Then, the buyers digital certificate is either validated or rejected.
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Each entity always goes to their bank to either get a digital certificate or to validate one that
has been given to them by a trading partner.
A relevant point I would like to make is that we see the larger banks having Identrus member-
ships in their own right. But they may also act as correspondent banks to smaller institutions
who could not bear the cost of being Identrus members themselves. There are technology
companies who have been commissioned and have products out on the market to Identrus-
enable the smaller banks. So banks like ABN AMRO, Chase, Deutsche Bank, we spend the
millions of dollars to create it and make ourselves Identrus-ready. In turn this would enable
the smaller banks to be Identrus-ready at a significantly lower cost. This will keep the number
of participating banks growing and growing.
Audience Member
I have a question about Identrus. Identrus is basically focused on identity. And what their
business customers want is more like assurance payment, credit scoring, all sorts of things
that they do not offer. And they are very, very slow in just getting off the ground with identity.
You guys in turn are doing global settlement as well as a number of other things that Identrus
could be doing down the road. What is the relationship between what Identrus does or could
do and what the individual banks are doing, like global settlement, et cetera?
Audience Member
I am the Identrus representative that works with Sarah. There are working groups within
Identrus to cover things such as warranty, payments, and items of that nature. Those have
been active. However, being that it is a consortium of banks, it is taking longer for that aspect
to agree as to what the liabilities are. When is it Identrus, when is it the participant bank, when
is it the reliant customer, when is it the subscribing customer? That is something that has
been voiced by every potential Identrus customer and user out there, that identity just is not
enough. Who is going to warrant if something goes wrong? Identrus feels that it is more like
everyone getting together to help build a highway. It is up to each bank to decide what kind
of cars to put on that highway, whether you want a Yugo or a Cadillac or things of that nature.
But you will see banks offer additional services utilizing Identrus that we would not be in a
position to offer without a utility like that.
But if you can imagine this exchange in which people are conducting commerce, synchroniz-
ing their supply chains, coordinating about the design of their future products, I need to pass
a lot more information than just financial information, and I need to do so securely in a com-
prehensively secure environment with appropriate levels of security for the different individual
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transactions. Let me suggest a wider view of this. If I want to buy that 100 tons of steel, maybe
I need to also know if you are QS9000 certified, or if it is legal to do business in your country.
All these other things that have nothing to do with the financial transaction are important
attributes as well.
Bill Gram, of the Federal Reserve Bank of Chicago, been involved in the Financial Services
Technology Consortiums FAST project, which is an effort to think of a protocol for passing
attributes back and forth. When I have talked to the people involved in that project, it became
pretty clear that it was really appropriate for the bank to take care of the bank attributes
because you know that best, and I never want to learn it. But you do not really want to learn
about QS9000 certification or QS14000. So you might want to leave the exchange owner with
the responsibility for handling these other attributes more, manufacturing and financial. We
need to pass them altogether in some sort of a unified environment.
Secondly, beyond Identrus there are probably some technologies that are appropriate for this
that are becoming more mature. I bring to your attention the whole idea of digital rights man-
agement technologies. They are actually being used in the MP3 music industry right now to
keep you from downloading CDs. You can take the content and the rules for its use and put
them in a box, and I can give it to you, but you cannot change the content or rules for its use.
I might want to put CAD drawings inside this box, and if you do not work for Ford you cannot
open them. You can also put money in the box. Someone over here will tell you how to do that
too. There are other technologies, other things that need to be solved. It would be nice if you
can make the highway a little wider and anticipate other traffic on there, whether it be CAD
drawings or certifications.
Audience Member
Sarah, you mentioned part of your service offering the idea for selecting the method of payment
based on the creditworthiness and the risk assessment. Are you indicating a service offering
based on payment negotiation? How can we negotiate which method of payment we can choose?
I think there are a variety of ways to work that, and that can certainly happen. The online credit
decisioning can serve to narrow the payment options that the buyer and seller have to negoti-
ate on, because the seller may not want to offer certain options if they do not trust the buyer.
Audience Member
In your presentation, Sarah, when you talk about invoice presentation, presentment and
payment, do you deal at all with line item reconciliation? And how key is that from a B2B per-
spective when you go out and have the summary market invoice reconciled to the line item?
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It is critical. You have to have it. It is not pay all or pay partial. You have to go through every
line item. Definitely we have to separate ourselves from the myriad of B2C e-bill presentment
and payment solutions out there that go parading themselves around as B2B solutions, which
they are not. It was very interesting. We did a big RFP process last year and we looked for
vendors who could help us do true B2B e-bill. Could not find them. I should have just banged
my head against the wall instead of what I went through with vendors trying to pull some-
thing out that just was not there. We did the same sort of RFP process earlier this year and
found huge surprises in the marketplace. Even the consultants that we were working with
who were specifically knowledgeable about this space were surprised between the time we
put the RFP out and when we had finalists come in and present to us. So there has been an
enormous growth in this area and there really are products out there now that can do that.
Audience Member
My question is for you, Sarah. In your speech about online credit decisioning, you mentioned
credit scoring. This is traditionally not used for commercial or wholesale lenders. There is
some usage up to say $250,000. And I wonder if you are implying that you saw a lot of
expansion in that area.
No, we have not seen more than $250,000. The point is our goal will always be to push it as
high as it is prudent to push it. But we are also finding when we talk to e-marketplaces that
many of their transactions are lower than $50,000. So, there has not been much interest in
$4 million transactions from the e-marketplace customers that we have interviewed. I think
they also understand the components there and the risks there. And there is also not a lot of
reluctance to take something offline for 24 hours and have an analyst review it. But we want
to push the boundaries of what can be done online more and more.
Emery Kobor, CFO Magazine (moderator)
I have just a thought that I want to ask the panels reaction to and everyone else in the room.
Yesterday in the presentation regarding electronic bill presentment and payment, Ravi with
CheckFree made the point that in his conversation with billers, nobody ever came to him and
said, I want to outsource the billing process and give that over to the bank. In this conver-
sation, I am struck by all of the efforts of banks over the last ten years to try to expand their
lockbox function or even to try to get into the accounts payable process. They have tried hav-
ing nothing whatsoever to do with the Web to expand those businesses, and without a great
deal of success. It seems as we have fleshed out some of the issues that came up in the
presentations, I think a lot of what we are talking about is still somewhat theoretical, it is still
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somewhat hopeful, it is still somewhat anticipatory. When I look at efforts over the last ten years,
I wonder how much the bank can really do today? Have you not already been trying and playing
in the sandbox for awhile and gotten kicked out? Is there really much more you can provide? Is
it perhaps due to the fact that the companies do not really see very much opportunity for
value creation in improving working capital management? Sarah, let us start with you.
I think, first of all, there is still more value that the banks can provide, and it is obviously our
job to show that. But there have been some missed steps, specifically on outsourcing accounts
receivable. I think there was too much confidence in the idea that large companies would out-
source their accounts receivable to banks, or really to anybody. But what we have found is
that our customer base has completely shifted. It is not so much the large companies that
need it, but with the growth of e-commerce and start-up companies who do not have infra-
structure. They are the companies that want these type of services. They are the companies
who are coming to the banks and saying, I do not have anything in place now. Companies
are asking us if we can be their treasury department. The same with accounts receivable and
accounts payable. So I think there are tremendous opportunities to be had there.
When I talk to people about these things I am talking to the users rather than the banks. How
much are you willing to change your business processes? If you have to do a three way match
and somebody has to sign off and double-check things before payment is going to go to X,
then things are going to take a long time. If you are willing to have my exchange spend your
money on accomplishment of a milestone without your intervention, now we can do some
things. The manufacturers are up for some business process change, but they are not going
to go leap off a cliff until they have a clearer understanding of what it is going to gain for them.
Can I jump in and answer what you are saying? I totally agree with you that as much as we
are talking about e-commerce and turning everything on its ear, we have to stick as much to
traditional practices as possible. We found in 20 years of EDIand in other things as well
people do not change and companies certainly do not change their practices very quickly. We
have had a real challenge, because you cannot just throw a whole new payments model out
there and expect people to adopt it. We have seen some different models that rely on shadow
accounts to do your business on e-marketplaces. We do not hold a lot of confidence in those
types of models. We do not think that treasury managers want to manage yet another whole
other set of accounts. It has just been our experience in talking to customers and looking at
past advances in just treasury management, if not to say banking as a whole, that our cus-
tomers want to push the envelope, but not too much.
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David Allardice, Senior VP, FRB Chicago
Stewart Baker is our panel moderator for this session. He is a partner in Steptoe & Johnson
law firm and was described by the Washington Post as one of the most techno-literate lawyers
around. His practice includes issues relating to encryption, digital commerce, privacy, electronic
surveillance, national security and export controls. He is a former general counsel for the National
Security Agency, and if you read his bio you will find a lot of other qualifications that Stewart
has and brings with him. And we thank him for moderating our panel today.
Stewart Baker, Partner, Steptoe & Johnson (moderator)
Lets start with a test. How many people here have been seriously inconvenienced by a break-
down in computer security? By that I mean inconvenienced in ways that add up to more than
just the cumulative inconvenience of all the secure ID cards and log-on failures that youve
had. How many people have had serious problems in their computer system as a result of
security breakdowns? How many people have actually lost money as a result of that? Not
many. So why are we talking about security if there is no problem? I want to come back to
that. I think there are some forces pushing us to talk about security. Part of it is we all know
our systems are not secure. We all know that we can be had in a variety of ways.
Im on a Defense Science Board panel where we are looking at information warfare, and its
scary to see that some people are actually determined to do harmas opposed to just steal
money. What could such people do to the United States? The next guy we send cruise mis-
siles after could retaliate with information warfare. Saddam Hussein is probably working on
that now. That is one reason that the government is increasingly concerned about it.
We are starting to see it tied into the privacy issue. Gramm-Leach-Bliley includes a bunch of
privacy requirements. When the privacy regulations are published, what are they about? They
are not about privacy, they are about security. That is partly because people are worried about
information warfare hijacking the privacy train and turning it into a security regulation. But there
is also a sense that security regulation is necessary in order to protect privacy, that people
will lose their privacy in part because of security breaches, and that security breaches will
lead to embarrassments that undermine peoples faith in the privacy of their data. The other
thing, of course, that is going on is that vendors are telling us that they have got solutions.
But we have to believe there is a problem before we will buy the solution. And these things
go through fads.
Weve had a lot of talk about PKI today. I see this in my practice. I used to have two or three
times as many lawyers working on encryption issues as PKI issues, and now that ratio has
completely flipped. Were doing far more PKI deals than crypto work. This is a bad sign for
the PKI industry, I should say. If its that lawyer intensive, theres something wrong. Its clear
that its the flavor of the month. I think the next flavor will be dealing with actual security reg-
ulations imposed by governments and subsequent violations of those. In that area, I cannot
VIII. Technology and Security Policy
help but tell you one story from my government service when we did TQM training: total quality
management. There were people from all the Services there. And the trainer, who was from
private industry, got us all in a room and had us each identify our customer and our mission in
customer relationships. So he goes around the room and asks everybody what agency theyre
from and what their mission is in connection with the customer. One of those attending was
a Marine. When he was asked the question, he said, Sir, United States Marine Corps. Our
mission is to find the customer and kill him. That tells you something about how government
approaches to security could backfire.
So let us get under way. Bruce, would you like to start?
Bruce Summers, Director, Federal Reserve Information Technology Services,
FRB of Richmond
Thank you very much, Stewart. I would like to stimulate discussion based on my insights as
an IT practitioner whose job is to enable businesses to kill the customer with kindness. I am
talking about B2B, but in this case it means bank-to-bank as opposed to business-to-business.
From a banking standpoint, I am a Central Banker and stand at the apex of the correspondent
banking pyramid. I am going to start to help establish the frame of reference by sharing with
you the mission statement for the Federal Reserve System. Some key words in our mission
statement involve fostering stability, integrity, and efficiency in the monetary and financial
systems of the United States.
So, think of those words, stability, integrity, and efficiency, in the context of promoting
or ensuring integrity and trust in electronic payments. It is about more than making sure that
money is not stolen. In the Internet economy, things like denial of service attacks can be as
serious a threat as the traditional threat from loss of funds due to theft.
Beyond that, we want to enable an efficient and effective system. I think we are involved in a
paradigm shift. Let me call it the new economy paradigm shift for purposes of this panel. From
an IT standpoint, I still think of us as being involved in an IT revolution. I consider us to be a
revolutionary country just in terms of how we are willing to embrace a complete make-over in
terms of how the economy and how society works. Thinking about the paradigm shift to the
new economy, the old economy is tactile money like cash, checks, etc.; the new economy is
electronic money. In terms of the framework, as bankers in the old economy we have physical
vaults that we have protected things in, and we still do. Now we are worried about devising
our electronic vaults. This is an operative term in banking now, the electronic vault. We had
physical threats to security and now we have electronic threats to security, which are the
principal orientation of the business that I am in as an IT practitioner.
Figure 1 is data out of the Federal Reserve Bulletin and it is simply designed to illustrate the
significance of electronic money in the economy today. These are stocks, rather than flows of
funds. Think of it according to traditional measures of what the money supply is. There is a
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$6.5 trillion of what we call money by an M3 definition, and about $.5 trillion is physical cur-
rency seeding the economy.
The purpose of Figure 1 is simply to illustrate that we are far along into the new economy in
terms of dealing with electronic money. I think someone from the TowerGroup was here yes-
terday talking about the sheer number of payments. The number of electronic payments may
be near or even exceeding the number of physical transaction payments in the economy today.
In the old economy banking model, we have a security paradigm for ensuring integrity and
trust. There are Federal Reserve Bank guards with machine guns, bullet proof vests, and riot
helmets protecting our vaults. And the question I ask myself concerns the nature of the
deterrents to malfeasance, stealing, and disruption in the new economy compared to the
old economy. What do these armed guards convey? They convey a threat. If you try to steal
money from the Federal Reserve, you will get hurt. If you try to disrupt the smooth operation
of the payment system, deny service to our vaults, you will get hurt. So there is a serious per-
sonal threat. And a source of concern is that an equivalent deterrence atmosphere cannot be
found in the new economy. If you try to steal money electronically, or if you try to disrupt the
nations payment system electronically, there is really no serious threat, in my view, to paying
a personal price for doing that. That needs to change.
Figure 2 is a Federal Reserve model of the transition from our so-called legacy platform for
supporting electronic transactions to our target platform. This model is designed to illustrate
that the new platform is significantly more complex in a technological sense than the old plat-
form. And as anybody running legacy systems in banking will tell you, we are not swapping
out new technology for old technology; we are layering on new technology in addition to the
old technology.
I will share a couple things with you about this plan. One, it is really expensive. Two, it is really
risky in a technological sense. We use browsers on the clients side now. No more proprietary
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MEASURE AMOUNT
currency $0, 515. 5
M1 $1, 147. 4
M2 $4, 683. 7
M3 $6, 517. 5
US Dol l ar Money Stock,
Dai l y Aver age December, 1999 ( $ bi l l i ons)
Figure 1
technology. It is open systems. We use browsers on the clients side to complete the IT pro-
cessing platform so it can reach the ultimate client, whether that is a corporation, a bank, or a
consumer. Browsers are built for the recreational market, the mass market. Browsers are not
built, in my view, for industrial strength use in banking systems. So, I see problems there illustrat-
ed by the risk that we have identified in these off the shelf products as well as middleware,
which is something you probably do not think about as a business practitioner or a consumer.
Middleware products are really not built to industrial strength capabilities for use in high end
banking systems. This technology is expensive and still risky in terms of its utilization in mis-
sion-critical environments.
A word or two about software. Software is a critical component of the platform that is being
built across three dimensions; quality, durability, and security. Allow me to quote from a really
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Compari son of Legacy and Target End-to-End I T Pl atf orm
Legacy Pl atf orm Target Pl atf orm
Wi ndows Cl i ent
Propri et ary SNA
Appl i cat i on and Securi t y
MVS Legacy Host
Propri et ary SNA
Appl i cat i on and Securi t y
Propri et ary SNA Net work
Web Cl i ent
COTS Browser
Web Enabl ed Securi t y
I nt ernet or I nt ranet
Fi rewal l
PKI and RBAC
Securi ty Servi ce
Web Enabl ed Appl i cati ons
Mi ddl eware
Appl i cat i on Servers
Dat abase Servers
MVS Legacy Host
Propri et ary SNA
Appl i cat i ons
Figure 2
wonderful book, Machine Beauty: Elegance and the Heart of Technology by David Gelernter.
The quote dealing with software, which I subscribe to, is as follows. This is what David refers
to as softwares permanent crisis. If you build a big enough program, and our programs are
big, it is almost impossible to make it come out right. Your only hope is to keep the number
of serious bugs low enough so that your program is more or less okay most of the time. The
beta test is the industrys admission to failure, the procedure whereby a product that is known
to be flawed, but is nonetheless as good as the manufacturer can make it, is handed to expert
users in hopes that they will find some of the remaining bugs. By the way, Beta testing was
developed originally by kings, emperors and potentates of the ancient world whose field engi-
neers would taste each dish on the menu before the big man tried it for himself. If the taster
keeled over, the beta test concept had proved itself yet again and a new tester was hired on
the spot. I feel that is kind of what we are dealing with in software.
Finally, summing up from my standpoint as a practitioner, there are challenges in promoting
electronic payments through the assurance of integrity and trust. One is the complexity and
the cost of robust security, and being able to guarantee that as a bank. Secondly, there are
competing business objectives in the Internet age. Both can deter more than help the notion
of bulletproof security. Quality of commercial off-the-shelf software is also an issue. Anybody
practicing IT as an enabler has got to be concerned about the quality of the products they import
into their environments. Are they really deterrents to criminal activity? And finally, there are
concerns about the reliability of the standards process. People like me have issues with respect
to the less structured process under the aegis of the IETF.
I hope those introductory comments are helpful in seeding the discussion which I look for-
ward to having with you momentarily.
Peter Honeyman, Director and Research Scientist, University of Michigan, Center for
Technology Integration
Stewart asked why we are talking about computer security. Hes right: really the problem that we
face here is risk management. This is well known to anyone that deals with large amounts of
money. The reason we talk about security is precisely because of the requirements of due dili-
gence, fiduciary obligations, and other responsibilities in electronic transactions. Designing and
analyzing security plays an important role in helping us assess what the risks really are. What we
are trying to do in thinking about the future of electronic payments is to find a system that is as
trustworthy as the card present case, for example, when someone walks up to a K-Mart termi-
nal, hands over a card, and signs their name. That level of identity assurance is not now present
in electronic transactions. In designing secure electronic payment systems, we are looking to get
that kind of assurance, and to do so in a way that is simple, practical, and inexpensive.
To structure my remarks, I want to make some introductory comments about secure comput-
ing, smart cards, wireless telecommunications, and biometrics. Then I will weave them all
together to construct a hazy vision of the future of electronic transactions.
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First, some comments on secure computing. Broadly speaking, secure computing demands
tamper-resistant devices like smart cards to reduce and manage security threats. As Bruce
indicated, small is beautiful in this marketplace. The larger the system the more difficult it is
to have any confidence in it at all. For example, this morning we talked about having public
key infrastructures and smart cards interoperating with banks that assure identity. What lies
in between are things like Windows 95, Cisco routers, firewalls, et cetera. If you read the bug
tracking mailing lists, then you discover that there are many well-known bugs being exploited
everyday in exactly these systems. The problem with security goes far beyond the issues of
securing the end points: there is all that stuff in the middle.
Next, I want to talk briefly about smart cards. I do a lot of work with smart cards; I think they
are pretty cool. Because they are so small and primitive, they cannot do much, but what they
can do well is key storage and management and a little bit of cryptography. The role that they
play best in security infrastructures is that of a personal cryptography assistant, which is
usually a matter of providing secure identification. The challenge is to build large-scale sys-
tems inhere the security and trustworthiness properties of smart cards. There were some
comments this morning about identification not being the whole problem. Thats true, but at
the same time, without identification as a starting point, you have nothing. Everything starts
with identification. If you want warrants, if you want contracts, if you want to limit your liabili-
ties, et cetera, then you first have to have the parties well identified. This is true for almost
any kind of transaction: secure identification is the starting point, and that is the fundamental
role that smart cards play. Then from that trust platform it is possible to build systems that
have the potential to be trustworthy in broader ways.
Now I want to introduce some of the recent advances in wireless communications technolo-
gies. GSM, the wireless telecommunications standard used in Europe and Asia, is beginning
to become prominent in the US as well; for example, I use it all the time. In addition to voice
service, GSM offers data service, but at low data rates and high cost. This service is being
replaced in Europe today with a system called GPRS, which offers high-speed modem rates.
And that will turn into UMTS in a few years, which will offer megabit data rates. What we use
in North America mostly is CDPD, a way to send digital data over analog cellular. CDPD will
fade. I personally believe that GSM offers so many advantages that it will soon force every-
thing else out of the marketplace. At a somewhat higher level in the technology space, there
is change taking place at the protocol level. WAP, for example, is a wireless applications pro-
tocol that is being promoted in Europe. I will say more about WAP in a minute, and argue that
it is really an effort to occupy the transaction space, not just the communications space.
Let me move on and talk about biometrics, another topic where I am relatively suspicious of
what the industry has to offer us. The goal of biometrics is personal identification. This can
be done with fingerprints, face prints, retina, and iris scans, and other means. The claims
made by the biometrics industry are really very amazing. For example, I recently learned
about a biometric system that claims to scan the iris and look for little specks (motes) in it,
even as you are moving at high speed through an automotive tollbooth. Yet, speaking as a
technologist, I am skeptical. When I ask anyone in the biometrics industry a serious question
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about the pattern matching, they either demur or insist that I sign nondisclosure agreements.
As a scientist, I have to question the foundations of any discipline that is so secretive about
its own basic foundations. Aside from the fact that I am suspicious about the power of bio-
metrics, there is a problem with revocation of credentials derived from biometrics. Revocation
is very difficult for fingerprints or other durable identifiers. While I dont worry too much that
criminals might cut off our fingers and use them in their own nefarious ways, the problem
remains: if your fingerprint is somehow compromised, how do you replace your fingerprint?
Now, I will return to these topics and relate them to secure electronic payments. As cool and
useful as they may be, smart cards present an infrastructure problem. If you want to use a
smart card, whether for transactions or identification or what-have-you, you need to find a
reader. In fact, you have to have readers all over the place. But there are not readers all over
the place; smart card readers are not free. Or are they? Why not populate the world with
portable, disposable smart card reader? Bear with me for a minute.
One of major advantages GSM phones have over what we are used to in North America is
that inside each one of them is a chip module stamped out of a standard smart card. So every
GSM phone user is carrying a smartcard reader in her purse or pocket. You can see that this
holds the potential to solve the infrastructure problem: readers are everywhere.
What we are all awaiting and anticipating is the grand convergence of all the geek toys strapped
to belts, merging Palm Pilot or other personal digital assistant, mobile phone, pico-cellular
high-speed networking such as Bluetooth, high speed cellular technology, and smart cards.
Really, we are almost there now. I started playing with the OmniSky service just a week ago,
and I love it. I am on the Internet all the time. So the convergence is nearly upon us.
At a recent conference on smart cards, there was a fascinating paper that demonstrated how
to forge a fingerprint with the kinds of tools and materials easily obtained at a dental supply
house or hobby shop. We can all think of ways to spoof a voiceprint with a tape recorder; and
we can spoof face images with a photograph, et cetera. So we have to assume that spoofing
biometric systems is relatively easy, but does require some work. To improve overall confidence
in identity, there is no silver bullet. We will require some sort of multi-factor identification that
uses a combination of methods, some secure cryptographic platform, some collection of bio-
metrics, and some strong incentives to the consumer or to the business provide revocation
when necessary.
Can this offer risk management that is comparable to the current card present transaction?
The problem with risk management in this space is how you assess risk in a market of emerg-
ing technologies before you have the necessary experience and statistics. When deploying
new technologies, it can be very difficult to predict fraud rates. For example, in the Identrus
system discussed earlier today, I do not understand who would be willing to bear the risk in
a high value transaction given our inexperience in adjudicating these matters in front of juries
made up of non-technologists.
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Let me now, as promised, return to WAP and talk about how to promote and prevent compe-
tition. WAP is really serving as a re-intermediator. The WAP standards replace all of the Internet
protocols with Winternet protocols. We have IP, they have WIP; we have TLS, they have WLS;
we have HTML, they have WML. The WAP advocates fear becoming commodity bit movers,
because there is not enough money in it. What they want instead is to require that each and
every transaction of value be forced to move through a space they control. For example, to
check off on every transaction with a smart card they provide. If you control the transaction
flow there is a lot of money to be made there. So I feel that WAP is dangerous and must die.
Fortunately, clever technologists will likely find ways to tunnel Internet protocols through WAP
and turn WAP into an unconventional Internet service provider, and that the Internet protocol
will then be the instrument of its death.
Open systems have demonstrated huge advantages in risk management and have also shown
the disadvantages that come from closed systems. For example, the GSM protocols that are
embedded in smart cards to provide secure identification were developed in private. These
security protocols have been utterly defeated, thanks to some clever researchers at UC Berkeley.
Cloning of GSM phones, for years claimed to be impossible by the GSM manufacturers, is
now possible. The design of the French bank smart card in the press last year was also devel-
oped in private. People who create these protocols in private try to keep them a trade secret
because they know that when the secrets become revealed, the holes become exposed.
Compare that with Rijndael, the new advanced data encryption standard announced last week.
The selection was done in an open way: people submitted their best ciphers, which were
subjected to attack and analysis by the worlds best cryptographers. Many of the submitted
candidates fell by the wayside as cryptographers discovered and announced their potential
flaws. What was ultimately selected was a new cipher that, at the very least, offers the
assurance that a lot of really smart cryptographers tried very hard to crack it and came up
empty-handed. This stands as a testimonial to open systems. Eric Raymond, one of the open
source gurus, argues that given enough eyeballs, any bug is shallow. And that has proven
itself to be true.
Let me close up now by summarizing where I see we are. Personally I believe we will see
over the next few decades a continuing explosion of the growth and influence of Internet
technologies, which, of course, provides folks who have the entrepreneurial spirit with fertile
ground for innovation and making fast money, folks unlike me. What I want to leave you with
is my assertion that the most important part of all of this is the extent to which it is integrated
with personal communications, so that we actually can get to individuals through the network
and have some assurance who the individual is on the other end. So those are my remarks.
I look forward to a debate.
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Thomas Brown, Heller, Ehrman White & McAuliffe
This is the part of the presentation that is going to be from Mars. I am a competition lawyer.
Some of you might recognize the name Heller, Ehrman. We are Visas chief antitrust counsel.
I live and breathe the antitrust battles that are going on right now in New York, one in the
Eastern District, one in the Southern District. I am not here to talk about that. But I think it is
useful to know that that is the environment from which I come. I think it is interesting in this
context because I am here talking about the ownership of technology and infrastructure. This
is, it seems to me, a new topic. While listening to some of the conversations earlier, I felt I had
come from another planet and had been dropped down into a group of people who were speak-
ing about cooperation and all of the wonderful things that flow from that. And I was pleased
because I knew that there would be a market for my services long into the future.
How many of you here work for a financial institution? How many of you know if that financial
institution has a single patent? It is a much smaller number. And it is revealing. I was struck
by Bruces description of the two beefy guards with guns standing outside a vault. That is how
you get security in the real world. The banks are the owners of that technology. You call a
contractor, they pour concrete, somebody comes up with gates and a safe and they give peo-
ple keys and then you hire two people, give them guns and stick them outside of your bank.
That is not how security happens in the virtual world. There are protocols, there are algorithms,
there are business methods, and they are owned by nonbanks.
So I have been talking about this for two and a half years, and it is not clear to me that any-
one yet has paid attention. This case that you see up there, the first bullet point, State Street
& Trust Company v. Signature Financial Group, says that business methods and mathematical
algorithms are patentable. That means you can own them.
It is apparent from the number of people who put their hands down that you are not owning
them. Somebody does, and you are going to have to pay them to get the rights to that tech-
nology so you can continue to do what you have been doing as bankers for a thousand years.
Did any of you know about State Street before I mentioned it? Just a couple. This is of earth-
shattering importance. The notion that people in the financial services industry do not know
about this is sort of frightening.
Everything that you do is patentable. If it is useful, if it creates value, if it improves the way
that someone else is doing business, then you can assert an ownership interest in it. And
they are different, these ownership interests, than the ownership interest that you see in the
real world. You take title to something. You buy a piece of property, you have that title, every-
body knows about it. In the virtual world you can implement some solution to a technology
problem. You can come up with some really, really great security solution and design your
whole business around it, and someone can show up 5, 10, 15 years later and say, That is
mine, I have a patent on that. And then you are going to come looking for someone like me.
And it is expensive.
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The Patent and Trade Office almost doubled the size of their Internet patent staff in 1999
because people are flooding it with patents. And what they are patenting is all of the stuff
that you people have been talking about today. Let us talk a little bit about what things can
be patentable. Someone earlier was talking about a method for online, real-time credit scor-
ing. That would be patentable. I am not sure if they have the patent. If they do not have the
patent, somebody else will. Let us say you have some way of identifying potential customers.
If you get these big giant databases of people living in the United States and you can go through
them and pick out the best targets; patentable. If you have some way of figuring out how to
price your products for those people that you have identified that is better than for other people,
that is patentable. If you have some way of identifying investment opportunities that is better
than anybody else, it is patentable.
On the plane here, I was thinking about Long-Term Capital Management. In the post-debacle
debriefing, many of the principals, like Merriweather, were complaining that they were forced
to constantly change their trading system because people were copying it. They developed
this really great and robust model and were making a ton of money. Then they turn around
and all their trading partners are starting to copy their trades. Well, you know what? You know
what Merriweather should have done? They should have patented it so when people started
copying their trades they could have sued them and maybe you would still be making money
rather than having almost collapsed the world banking system.
Citigroup has 60 patents, which is a fair number for a financial services firm. And they have a
lot of interesting patents, some of which we talked about in the paper that we wrote a couple
years ago having to do with smart card systems. Merrill Lynch, 24 patents, that is a reason-
able number. American Express, 22. Chase Manhattan, 9. Ouch. Goldman Sachs, none. So all
the people out there who do not have any patents, you are in good company.
Some things that happened since State Street have changed the score a little bit. One of them
is the American Inventors Protection Act. AIPA is what everybody calls it. It is a narrow safe-
harbor for defendants accused of infringing business method patents. If you find yourself on
the back end of a business method patent, sue. It comes at a big price though, because if you
do not prove the various elements of the defense by clear and convincing evidence, you are
going to find yourself subject to treble damage liability. Everything that you have done bad,
threefold. Just last week someone introduced legislation in Congress that would have a short-
er time period on business method patents and would require earlier disclosure so you could
avoid some of the submarine patents you have seen in the past.
We get to the final question. Are business method patents a good thing?
You have some prominent naysayers: Tim OReilly, Fundamentally destructive approach to
innovation. Larry Lessig, Congress needs to take a stand on patents before they get out of
control. Some patent lawyers dismiss these criticisms automatically. They say this is a frontal
assault on the patent system. They say it has been around since the Constitution and the patent
system works in all industries, including here. They say that what Larry and Tim are saying is
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just silly. I actually think that there is something a little bit more subtle going on in what Tim,
Larry, and others are saying. I think what they have launched is a critique of one element of
substantive patent law. The technical word is nonobviousness.
For nonpatent lawyers, and I am among you, it has to do with the concept of innovation. How
new is this thing that someone wants to patent? I think what they are saying is that on the
very intuitive level when someone like Amazon.com comes along and says I have patented
the single click sale method for the Internet, that that is just wrong. And I find some force in
that argument. I do not want to say I would come out one way or the other, because I am
happy to argue it either way. I am a litigator after all. There are analogs from our real world
experience. I can go up to any vending machine in the City of Chicago, and I can put my dollar
bill in it and I can press a button, a single click, and out will come whatever I wanted to buy.
I can go to Safeway and show them my check guarantee card and they will let me walk out
having handed over the check. Essentially a single click. I think what Lessig and OReilly are
saying is when we take these obvious and apparent and long standing business methods and
we put them on a new environment, like the Internet, this open network, is that really suffi-
ciently innovative to be worthy of patent protection?
That is an interesting question. But in the end I do not think that it warrants abandoning patent
protection for the innovations in this space. This is where more of the Mars thing comes back.
I heard all through the morning about how what we need is innovation. I find it interesting that
people were coupling the concept of cooperation with innovation. Well, maybe it is my back-
ground as a University of Chicago trained lawyer. You do not really get this drive for innovation
from cooperation; you get it from competition. You get it from somebody knowing that at the
end of the day if they come up with some better mousetrap that they are going to be the ones
to seize the money that comes from having solved that problem. If the idea is that we really,
really, really need some creative solutions to the difficult problems that Peter and Bruce have
laid out, then I think that patents and patent protection are the way to go. This is not a univer-
sally shared view, but I think that 10, 15, 20 years from now people will look back and think of
the notion that patents were not useful for the Internet as a rather quaint idea, something along
the lines of a horse and buggy in the age of the automobile.
Stewart Baker, Steptoe & Johnson (moderator)
Id like to talk more about open systems and try to get Bruce and Peter to engage a little on
that. I think, Peter, you chose an example of an open system that is not really an open system;
it is the open development of the crypto system. But it is not clear. DES was developed
proprietarily by IBM, reviewed by the National Security Agency, and put out, and everyone
said dark things about this proprietary development. It has not been broken.
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Peter Honeyman, University of Michigan, Center for Technology Integration
Actually, everything that they have predicted has come to pass. It has been broken. The major
criticism of it was the short key length. I have been offered time on the DES cracker, and this
is a machine that in three days on average will do an exhaustive search of the key space and
find the key. You probably would not want to entrust too much to that particular algorithm.
Look at the academic interest in attacking systems, look at Windows and Linux. It is hard to
say whether there is any enthusiasm for debugging Windows 2000. The source code is unavail-
able to all but a select few. But if you look at systems where the source code is available,
there is a huge interest in debugging those systems. That is what defines the Linux commu-
nity, which is a group of a million hackers.
Bruce Summers, Federal Reserve Information Technology Services, FRB of Richmond
I think open source has a lot to say for it. I am really warming up to the concept. With that
said, part of the culture is that the world is your test bed. It is okay to propagate product that
is imperfect and the world will then find the flaws. And there are certain applications where
that works well, but for mission critical applications, like in the nations financial infrastructure,
I do not think we can afford to take that route. I would almost prefer that a very reputable
proprietary vendor that has a patent on a new, top rate, industrial strength idea will offer more
assurance and integrity. So for certain applications and mission critical infrastructures, I do not
see the fit.
Bruce, you are describing the open source community as viewing the world as their test bed
and shipping flawed products. Think about Microsoft for a second. What do they do? We are
all beta testers for Microsoft products. It seems to be in their interest to ship flawed products
to give us incentives to upgrade and pay the money. I do not think your characterization of
open source is really limited to open source.
I take that point. I am not a Microsoft basher. I could point to other premier companies that
are equally unreliable in terms of what they offer in the marketplace. But, the reality is that
organizations like ours, we know who to go to with our problems and we can get flaws fixed
and we have exercised leverage to try to improve the strength of the product.
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If I could interject for a second. You might think, given the discussion of patents that I just
gave, that I would side on closed versus open systems. I do not. What I believe is that it
should be left to competition. Going open or going closed is a competitive choice. People
face it every day. You can surrender to the public your source code if you want or you cannot.
I believe that so long as people understand where the rights are initially allocated and what
the consequences are for relinquishing those rights, that in the end we the public will get the
benefit of the entrepreneurs living and dying with that choice. And I have a worry, a really big
worry that government regulators will adopt the view that somehow open is best. They have
to at this point, particularly in the Internet space. Well, it may be best. It might prove to be
the best way to go, but we do not know that going in. We should let competition and the
market decide, and not anticipate the right direction simply because we do not know.
Audience Member
What does a patent do to competition? Is a patent open or is a patent closed?
A patent can be licensed, and smart people usually do license it if they want it to become
the standard.
Audience Member
Does the one click get better through competition? Honeyman, you should come in on that one.
Is one click better than two clicks? I do not know. The patent system is open. The whole
point of it is to spread the knowledge of these innovations in a way that allows the innovator
to reap profits for a time.
I want to talk about the one click patent for a second, and my discussion was a little biased.
Because if you go look at the prior art at the time that Amazon.com submitted that patent
application, no one was talking about allowing people on the Internet to make purchases
with a single click. It was completely foreign to the state of the Internet art in the mid 90s.
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Everybody was talking about virtual shopping carts. No one suggested that someone could
visit a site, press a button, and get a book delivered to their house. If you read the opinion in
which the District Court assessed this issue of innovation, within the confines of patent law,
within the confines of the art as it existed at the time, it looks like a rather powerful innova-
tion. Now it can be designed around with relative ease. Barnes and Noble adopted a two click.
Audience Member
Did they patent it?
I do not know that at that point it would be sufficiently innovative to be patented.
So what does this mean then to the consumer? It means that I will be able to use one click
on Amazon and nowhere else for 20 years or so and then I will be able to use one click
everywhere. If you go back 20 years and look at the patent on public key technology and ask
yourself why we are suddenly seeing this explosion of interest in public key technologies
today, maybe it has something to do with the time lag that the patent system is working in,
the friction that it is building into the movement of innovation from the lab to the marketplace.
But I would say that maybe the innovators behind public key cryptography made a bad busi-
ness decision. Maybe they should have licensed that technology from the get-go.
I wanted to raise a question about deterrence, which we have not yet talked about but which
Bruce has raised. In many cases the presentation of cards lack all of the security features that
we described. You pull up to the Exxon, pull out your card and you slide it through, and nobody
double-checks anything. So you head out without even having your signature checked. The
real problem is that people are worried that when they pull up and slide that card through, an
alarm will go off and theyll get arrested. So it really is deterrence that works in many card-
presenting circumstances. We need to make sure that when somebody comes into our system,
we send something back to them that takes their system down for longer than they can take
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our system down for. But, short of that, or maybe including that, Bruce, what kind of deter-
rence can we build into these kinds of electronic networks?
I am really perplexed on that particular question from the standpoint of a practitioner. But some-
how I look to the legal process, the regulatory process, if you will, to correctly size the nature
of the cost that is being paid by individuals as a result of the threats they face hypothetically
and what might incur in actuality. I am a little conflicted on the question of how much ought
to be a free-for-all and how much ought to be regulated and legislated. But I believe that there
is more to be done on the former side with respect to simply protecting the basic rights of
the consumer, not only in terms of what they own, but in terms of what they have and what
they are. We have not talked about privacy, and that is an important issue too in the context
of ensuring integrity and trust.
I want to raise this: our report said that you could count the number of people who are serving
serious jail time for computer intrusions on one hand and you would still have enough fingers
left to hold a martini. Prosecuting people is not going to work. Peter, do you have a solution?
One of the big problems with privacy is that it is usually a word that is not defined in any dis-
course regarding this. Privacy issues came up this morning when discussing the willingness
in a B2B context to share all of this information about a company with any third party at all.
You know, I really think privacy is dead. If I cut to the chase I think that privacy is a concept
that came into being maybe a few hundred years ago, is going out of existence today, and I
am trying not to be too worried about that.
The reality is privacy incursions can eliminate a lot of the friction in commercial transactions.
The more you know about your customer the better you can manage your risks. I think we
want to think about being spammed on the one hand as a privacy incursion and being target
marketed on the other. To me this is an advantage, though I really do not know how to balance
these competing interests. And certainly from a security perspective, since it is an undefined
problem, security guys like me are going to have a lot of trouble offering privacy assurances.
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The thought of privacy being dead is a frightening statement. I happened to give a paper in
Japan and engage in a discussion with Central Bankers from the Asian Pacific Central Banks,
and privacy was a big topic on the agenda, particularly privacy with respect to the financial
transactions of citizens. And when the discussion got around to the Singaporeans, my gosh, it
was an eye opener. Singapore is an authoritarian state, and the opportunities the Singaporeans
saw for improving the efficiency of society and the economy as a result of collecting private
information on individual transaction habits was absolutely frightening. We do not live in such
a society, but nonetheless it made me just kind of want to grasp my wallet and credit card and
hold it tight during the discussion.
A big portion of my life has been dedicated to the review of massive piles of documents. And
since I work a lot with Visa, you can imagine the kinds of documents that I am looking at. It
seems to me that privacy is secure by the fact that no one cares about the minute details that
we as individuals care so much about. We are awash in information, and the stuff that might
be of interest to other people is rather small. I mean maybe it is that I am not a sufficiently
proficient technologist. I do not see how people who might have nefarious intentions are
going to sift out these little bits that we do care about from the great mass of stuff.
I advise companies on IT law generally, and Ive spent time reviewing the downloads of indi-
vidual employees with the counsel for the company to decide whether this guys sexual tastes
are over the line into child pornography. That was a real invasion of the privacy of the person
that we were investigating. I think we had to do it, but that is something that the technology
made possible and really forced us to do.
Audience Member
There is a government policy issue that was not really touched on. I can speak from experi-
ence that Internet patents take about four years to be issued under the best case scenario.
Now the concept of the patent system is that all the information should be out there ASAP
so that you can collaborate, license, partner, et cetera. As the leader of this FAST project, the
problem going on is we have developed a lot of proprietary solutions in the payments space
and have applied for a patent. But if anybody comes to me at this conference and asks me
about it, I have to ask them if they want to sign the NDA.
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Every roadblock you put in the way of innovation like that is going to severely impede progress.
There really is an extremely strong need for the federal government to have even more patent
examiners. They should increase it by a factor of 10 or 100 if that is what it takes to literally
issue Internet patents in months. Because such ideas are pretty much useless after four years
of Internet time. Someone will be the dominant factor of that industry who does not own the
patent and their attitude is going to be, Well, sue me.
I cannot tell you how many software development firms have told me they do not care about
patents, that patents are useless because by the time the patent is issued the world has blown
right past you and it is irrelevant now. That person will be sitting there with a couple hundred
million dollars in profit and they can pay as many lawyers as they want to defend their space
and their turf.
That argues for open disclosure, to kill the patent, to kill anyone elses patent.
Audience Member
Yes, you need to have open disclosure to have the innovation go forward. But you need to
provide the innovators with absolute protection in a timely basis. Society as a whole can be
hurt by this, and here is where government has a role in policy decision making.
I will give one example that reinforces your suggestion that people can do very well without
patents. We got called in maybe three years ago to do a patent review for MCI which had
gone from 0 to 35 or 40 percent market share against AT&T, which had plenty of patents. We
searched the company. You know how many patents we found? We found 1. They had 1 patent.
Their whole business was built on not worrying about getting patents and they have done just
fine. It does not mean they could not have been put out of business by the wrong patent, but
they had done pretty well without them.
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David Teitelbaum, Sidley and Austin
As private consultants on privacy law, we always advise companies that just because you can
do it does not mean it is a good idea. I think it bodes well to keep all that in mind, as we go
through the presentation.
First, when you are talking about payment systems you are talking about both account infor-
mation and transaction information. To really get a grip on that, you need to first walk through
a typical transaction in the existing payments space. Take a traditional credit card transaction,
for example, and then think about how that changes in an Internet transaction. Using a tradi-
tional credit card transaction, I will take it from the point of sale forward. If you are in a restaurant
and you want to pay your bill with a credit card, you give your card to the waiter or waitress,
who then swipes that card through a terminal that is going to be connected to a processor,
which passes the information through perhaps a Visa system, lets say. The issuer may or may
not have a third-party processor handling information on its behalf.
You have several different touch points here. You have the merchant side, the payment system
itself, the operator of the central facility, and you have got the issuer of the payment device.
Those are the central categories. At each level you have the potential for other payment or
service providers to touch the information. How does that change in the Internet environ-
ment? In terms of the general categories, not all that much. If you take a typical credit card
transaction on the Internet the flow is exactly the same. Typical credit card transaction, you
are buying goods or services at Amazon, you are giving your card number to a merchant which
flows through various processing entities, off to MasterCard or Visa, and back to the issuer or
its processor.
What is changed fairly significantly is the number of entities that may be providing services.
For example, at the merchant level, they might run their own terminals but have a processor
provide the gateway links to various networks, or they might have a processor provide every-
thing. But there is probably only going to be one other processor besides the merchant involved.
When you are dealing with the Internet you have the potential for many more entities provid-
ing such services, because you have to get the transaction formats from an Internet format,
to a payment system format, back through the payment systems, and off to the issuer. And
all of the entities that are handling information along the way have gotten much more sophis-
ticated about warehousing the information, about using the information for other purposes.
But at the end of the day the information is still the same, as are the participating groups and
categories of entities. It is just that the information is being warehoused much more signifi-
cantly. Merchants may be providing a simple means of checkout by warehousing your credit
card data at the merchant site so you do not have to reenter it every time you go to the mer-
chant. There may be an electronic wallet in use that itself maintains the card information in
encrypted format. There are various technologies available that involve additional parties along
the way, but the flow is really quite similar.
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IX. Legal Policy
Now, there are systems that are different that do not involve quite the same flow. There are
person-to-person payment systems that involve transfers from one individual to another where
merchant warehousing methods are not present, but the issues of a central facility having your
account information are still the same. So, we are talking about a difference of degree, but not
really a difference of type in terms of how confidential information is being handled. But what
that does lead to are the questions of where the risks are. And as we heard in the last pres-
entation there is a risk of involuntary disclosure, such as misuse of customer information in a
way that exposes the customer to potential financial loss; a merchant site is hacked and card
numbers are taken from the site. And there have been several very well-publicized examples
of that. CD Universe reported that up to 300,000 card numbers may have been taken. AOL and
Western Union recently had about 15,000 accounts compromised. So, the potential for wrong-
ful access to customer information is there, it is real, and it is happening. So contrary to the
last panel I would say there is a real risk out there. Do not be under any illusion that the infor-
mation is always safe and protected.
There is also a risk of corruption or disruption. There are people out there who are after your
money. There are also people out there who are after the notoriety of being able to access
systems and affect them, regardless of whether they actually take anything. Where does that
leave us? Where it leaves us as a regulatory matter is with the new requirements set by the
Gramm-Leach-Bliley Act. In June of this year the federal banking agencies published intera-
gency guidelines for establishing standards for safeguarding customer information. The com-
ment period is over, final guidelines have not yet been issued. The approach that is being taken
by the banking agencies is, I think, the right approach. It is an approach that says this is an
incredibly complicated area. And Congress has said we need to give some direction to the
banking industry with respect to the administrative, technical, and physical safeguards put in
place to protect customer information.
But we as regulatory agencies are not in a position to be restrictive of things like different
payment technologies and how different institutions incorporate them. So, what the banking
agencies have proposed is a set of standards that would require financial institutions to identify
and assess risk to customer information. FIs would have to develop written plans to manage
and control the identified risks, then implement and test the plans, and then adjust and update
them as the types of information change, as security risks change, as the technology changes.
They proposed issuing these as guidelines rather than regulations with the express under-
standing that this is an area that requires an incredible amount of development. I think that
the bank agencies are onto the right approach here. It is an approach that is proactive with
the industry, that empowers the industry to do the right things without telling them exactly
what to do.
There are a lot of different kinds of issues that are going to come up for banks and other
financial entities as you try to develop and react to these policies and procedures. You have
to consider not only the hacking of Web sites, but also pretext calling and internal issues. The
flexible guidelines would allow such things to be addressed as they apply to your individual
institutions. Some of these proposed guidelines have been the subject of commentary. There
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are ambiguities, for example, in the area of Board oversight. One of the things that the bank-
ing agencies have tried to do is say If we are going to take a hands-off approach, then we
are going to require the Board of a financial institution to directly oversee the security poli-
cies. I think there is a fair amount of ambiguity in terms of the level of detail that is required
for a Board review. And that is very important for anybody advising a financial institution. It is
one thing to say the Board must set an overall policy perspective and tone; it is another thing
to expect a Board to approve a true privacy policy that incorporates all of the policies and pro-
cedures for a complex institution. That just cannot happen, should not happen, and hopefully
is not what was intended.
Similarly there is a list of factors that must be considered, and it is unclear whether each indi-
vidual institution needs to consider each factor. For example, one of the factors is encryption.
Well, encryption makes sense for certain types of data for certain types of uses. It does not
necessarily make sense for data warehoused in a particular locked environment, since there
are other means of limiting access to that data. With regards to security in general, the guide-
lines mention information security training for employees. Well, it is one thing to say we have
to train our employees, but it is another thing to say everybody has to be trained sort of generi-
cally. Obviously there should be different levels of training for people with different levels of
responsibility. Again, it seems to be the kind of thing that is intended by the guidelines, although
there is a bit of ambiguity there.
Probably the most important piece that we hope to see clarified in the final guidelines is a
requirement regarding the oversight of outsource service providers. Because there is obvious-
ly a recognition that as much as banks want to be in the technology business, technology is
not necessarily a banks core competency, and a tremendous amount of technology work is
being outsourced to third-party providers. The guidelines propose that the banks manage and
monitor their outsource providers. Managing and monitoring would, at least to me, seem to
indicate a level of service provider oversight. If you are a bank in the room, that is probably
beyond what you actually do. It would be an incredibly complicated task for any bank to
actively manage and monitor all of the service providers that a bank utilizes in providing pay-
ment services. Although a bank does remain ultimately responsible for things that are done
in its name, this issue needs further clarification. Different service providers may be subject
to different levels of managing and monitoring.
For the service providers in the room, FTC, by contrast, has issued a notice of proposed rule-
making that questions how proscriptive we should be. The one thing that I caution against in
this regard is that the questions asked by the FTC indicate the potential to be much more
restrictive than the banking agencies or SEC already are today. And I think it would be a huge
mistake if the FTC went in that area. To give you a sense, they have asked, for example,
whether they should require paper shredding in certain circumstances, whether they should
require customers to have access to the records maintained in order to verify the validity of
those records, whether employees should sign confidentiality agreements, and on and on. A
number of very specific questions about how to manage a security policy, which I think are
certainly well beyond where the banking agencies and the SEC have been in their proposals.
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And if the FTC were to go in that direction I think that would create a very significant issue for
service providers in the financial industry.
So for those providing payment systems, I think you need to be thinking about the risks. You
need to be thinking about managing the potential for financial losses, managing the effect of
a security breach, whether it is down the line, whether it is information that you control, your
service provider controls, or other participants in your system control. Because when CDNOW
has their site hacked and account information relating to your system and account holders gets
accessed, that impacts the trust in the entire system.
The second piece of privacy that everybody should be considering is voluntary disclosure. That
is the piece of Gramm-Leach-Bliley that has probably got the most attention and press. And I
want to set this up briefly and then turn it over to Sarah. Gramm-Leach-Bliley limits a financial
institution from disclosing nonpublic, personal information to nonaffiliated third parties unless
there is affirmative notice and opt-out. There are exceptions, and I am not going to go through
all the detail because these are very complex regulations. But there are exceptions for infor-
mation that is disclosed in connection with authorizing, settling, billing, processing, clearing,
and servicing payment transactions of all sorts. However, any entity that receives nonpublic,
personal information may use and disclose that information only for the purposes that it received
it for. So for example if I am a payment processor, I have access to account and user authenti-
cation data. A financial institution needs this data to control access to customer accounts, but
I cannot just go off and use that information for any purpose. I can only use it for the purpos-
es that the financial institution delegated to me. By contrast, at the other end of the spectrum
when a merchant takes that card, the merchant is not receiving the information from my finan-
cial institution. If you are surfing through a merchant site, they are following your click pattern
all the way to your total amount due. All that information is not subject to the Gramm-Leach-
Bliley limitations.
I think we are at a juncture. There are still a number of things that are permitted by Gramm-
Leach-Bliley, like still being able to market to your customers. But there is still a sense that
what really should be protected is a right against being marketed to. A right not to get the
phone call at dinner time that says gee, would not you like to buy X, Y and Z. They do not tell
you that the reason you are being marketed to is because you made the following 20 purchas-
es. Those types of things are all protected by other statutes. We do not need the additional
legislation to protect against that. But when a customer says yes, I do want to purchase that,
the customers existing account can be charged without exchanging much vital information
over the phone because their bank has allowed that marketer to make sales calls on their
behalf. This presents a dilemma, because if you do not allow access allowing the financial
institution to directly charge that particular account, then you need to exchange payment
information over the phone. I think that all the law enforcement agencies would not want the
consumer to respond to a telephone call by giving out personal information. It is better to main-
tain that in a controlled environment within the financial institution industry.
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Sarah Jane Hughes, University Scholar and Fellow in Commercial Law, School of Law,
Indiana University
The conference organizers asked me to comment on the state of consumer protection laws
that apply to electronic payments, to discuss account aggregation and the legal issues it
raises, and to speak to the future of consumer protection regulations in promoting the use of
electronic payments from the perspective of three specific questions. The first of these ques-
tions was, How important will it be to develop business, technical, and/or legal standards
and practices for electronic payments more expeditiously? Next, How does the collective
vision for the future of electronic payments relate more broadly to financial services relation-
ships? And, the final question was, What is the relationship of the future vision pertaining
to future technical, legal, and security infrastructures, nationally and internationally?
First, let me address the state of consumer protection laws that apply to electronic payments.
There are three ways to consider this issue.
First, one can argue that there are perfectly adequate legal standards for every current elec-
tronic payments system, including those most recently introduced. Before anyone faints in
the audience from disbelief, let me explain. In this view of the world, the new generation pay-
ments products are merely electronic variations of existing retail payments products in the
United Stateschecks, drafts, credit cards, debit cards, and pre-authorized transfers under
the EFTA. The fact that they are offered in new or newer electronic as opposed to paper form
should not deter us from recognizing the similarities between electronic drafts and paper drafts,
between credit card transactions processed primarily through paper means, mixed paper and
electronic means, and exclusively electronic means. These are essentially a mix of push
and pull payments transactions being offered by traditional depositary and non-depositary
payments providers. This comparability means that those who offer new electronic payments
products should be able to provide adequate internal protocols and to obtain insurance for
their activities based on existing, paper-based or older electronically based payments products
operations. The similarities also should enable regulators to determine which of the state or
federal bank regulatory or non-bank regulatory schemes apply to the new payment product.
There is evidence that this is happening. For example, earlier this year, states such as Texas
began contacting electronic payments service providers such as Paypal to advise them of the
need to be licensed as money transmitters under Texas law.
Following this thread, provisions of existing state and federal commercial, consumer protection,
banking, and non-bank licensing laws create a solid platform of laws that consumer customers
of these payments providers may employ when an error or loss occurs in an electronic payment
context. The primary problem would be the expense of establishing the applicability of the exist-
ing legal standards to the new product, which could be very burdensome for an individual and
which the less scrupulous payments provider might resist with considerable force.
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Second, and following my last observation, from the consumers perspective, there is anec-
dotal evidence that consumers do not perceive these cyber-payments products as having
established legal standards. There is additional, anecdotal evidence that consumers hesitate
to embrace some of these products because they do not understand what legal rules will
applythat is, which laws or regulations would protect themif something should go wrong
with the payment they might authorize one of these new cyber-payments providers to make
or receive on their behalf.
This hesitancy has the potential to be a very substantial barrier to consumer acceptance of
these new electronic payments products. But it is a barrier that might be addressed by a vari-
ety of relatively inexpensive, non-regulatory means. These means would include more aggres-
sive disclosure by entities, including depositary institutions, of the legal rules that the provider
will employ to deal with issues important to consumers such as error-resolution and reversibil-
ity, validity of the instruction to pay, satisfaction of the underlying obligation, and the like.
Additionally, one of the most attractive means of encouraging consumer acceptance would
involve more competition to offer better terms to consumers than the law requiressuch as
Capital Ones recently introduced refund guarantee offer. In other words, attractive terms
presented in readily understood language and format would enable providers to overcome
consumers hesitancy about some of these products in the e-commerce world.
The issues that are most likely to be important to consumer users of cyber-payments prod-
ucts are similar to those that arise in the more established paper-based or electronically based
payments productschecks, drafts, credit cards, debit cards, and pre-authorized payments.
These issues include validity of the instruction to pay and the systems ability to protect against
alteration of instructions in terms of the intended payee/beneficiary and amount, certainty of
redemption of deposits and other stored value, reversibility and other error-resolution rules,
ability to stop a particular payment or withdraw a prior authorization for pre-authorized pay-
ments, and initial and periodic disclosures of the terms and conditions of use, including the
issues related to privacy of their transaction records that David Teitelbaum has discussed. I
reviewed these payments issues in my 1999 article, A Case for Regulating Cyberpayments.
It is important to correct any misconceptions that consumers may hold about the lack of a legal
framework for cyber-payments. Addressing this perception would require uniformity and trans-
parency of the legal rules governing cyber-payments. From the consumers perspective, this
would mean that electronic payments systems and products of comparable type would have
the same basic legal standards applied to them, just as today we apply the same standards to
credit card or debit card transactions regardless of the identity of the issuer. In addition, in
marked contrast to todays situation, consumers would have better means to evaluate the fea-
tures of the various categories of payment products to select those that best meet their general
or particularized needs. This would result in the kind of transparency of legal rules that we have
supported for at least the past 40 years in our commercial laws in the United States, and since
the enactment of the federal Truth in Lending Act in 1968, in specialized consumer credit laws
and federal consumer warranty disclosure laws as well. Issues of transparency and, particular-
ly, cross-border transparency are key to broader acceptance by consumers.
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Under either of these approaches, in order to acquaint consumers and small businesses with
the legal features of the most common types of cyber-payments products, I would suggest that
consumer education might assist consumers in evaluating their risks in adopting new cyber-
payments products. The Federal Reserve Banks (recognizing their longstanding role in education
about bank products), other state and federal bank regulatory agencies, the American Bar
Association, the American Bankers Association as well as their community bank counterparts,
the Consumer Bankers Association, and federal and state consumer protection officials could
undertake more consumer education efforts for bank cyber-payments products, in particular.
In the third approach, one could argue that federal and state consumer protection agencies,
such as the Federal Trade Commission and the attorneys general of the states, are engaged
in a range of consumer protection activities that is adequate to address the types of problems
that have been arisingeven in the payments areaand that we ought to continue to wait for
a more mature electronic payments industry before we decide whether we prefer my first or
second approach to the overarching issues of payment regulation. In addition to carrying the
same problems of uncertainty and non-transparency that I have mentioned earlier, this approach
runs the larger risk of coming too late for the individual consumer, for example, whose pay-
ment instruction is wholly unauthorized or not completed in accordance with instruction in
another fashion (alteration of the name of the beneficiary or of the amount of the instruction),
or who cannot redeem the value stored in the electronic payment system. In other words,
there is the risk of leaving the consumer without a remedy, and the attendant risk to the repu-
tation of or trust in the infant retail electronic payments industry that probably is too large to
be tolerated.
The second issue the conference organizers asked me to discuss was account aggregation
and the legal issues that surround this rapidly expanding service. Account aggregation, or
screen-scraping, as it is colloquially known, involves offering access to many web-accessible
accounts that one customer owns without the consent of the institutions or entities that hold
the accounts. Since the introduction of this new service in late 1999, use of account aggrega-
tion services has grown and banks have begun to offer these services directly.
I have a number of observations about account aggregation to offer as a platform for further
discussion. One of these is the ability of a third-party aggregator to access sensitive financial
information concerning the consumer in a manner that may give the aggregator access broad-
er than needed to serve the particular customer who has shared whatever access identifier is
required. A subset of this point is that third-party aggregators gain access that the bank or
other institution offering the account has little ability to control. Unlike vendors that the bank
may supervise directly or commission to create a product for the bank, third-party aggregators
have no contractual relationships or other allegiance to the bank and they cannot be required
to warrant their work or procure insurance, or to hold the bank harmless in case of error. For
this reason, I have a recurring nightmare that banks may keep the risk of liability despite the
inability to control this non-bank intermediary in any way. The strongest consumer protection
in terms of third-party control would include steps such as contractual ability to perform
audits and obtain independent audits, review of financial statements, confirmation of the
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third-party recovery plans, oversight of virus protection tools employed, contracts governing
data-ownership rights, and risk allocation for performance failure.
One can imagine that the account-maintaining bank or institution could take the position that
if the account holder shares unique identifiers with third parties then the account holder should
bear any risk of error or system failure or fraud that might follow. But I think there is a risk that
banks will be held liable regardless of their relatively poor ability to deter errors, etc., or that
the customers trust in the bank may deteriorate regardless of the banks innocence in the
troublesome transaction.
Another, obvious concern is that the third-party operator may earn fees that would otherwise
go to the bank or institution for transactions that in the past have been processed by banks
and other depositary or financial institutions. To the extent that banks and others must recoup
these fees from other sources in order to support the services they provide in offering the
underlying accounts, this will tend to weaken the role of banks in the future economy. From
the purely consumer protection perspective, pressure on fee structures obviously makes com-
mercial banking services harder for many consumers to afford. In addition, as recent entries
by banks into account aggregation demonstrate, aggregation is a value-added service in an area
where banks are eager to re-prove their overall worth to customers and particularly to younger,
higher-end customers not quite ready for private banking services. The popular mycfo.com
service is one that poses the risk of cherry-picking very affluent customers.
Additional kinds of risks that arise in account aggregation may include: (1) natural disasters,
(2) participant failure, (3) system attacks, (4) breaches of data privacy and confidentiality, and
(5) inadequate authentication. Banks should consider what approaches they will take with
consumer customers who use account aggregation service that the bank, other banks, or
non-bank service providers may offer. This consideration should include technology manage-
ment risk assessment, including adequate resources for internal security and reliability of
systems, and periodic monitoring. These risks require that attention be paid internally to issues
such as transaction verification and user authentication, virus protection, and, if possible, ses-
sion controls (restrictions on excessive failed access attempts, ensuring automatic log-off for
inactivity, encryption, and the like).
The last observation in this motley assembly of observation is that because of the cross-selling
opportunities that account aggregation offers, banks that offer aggregation sites should review
carefully their compliance with the cross-selling and privacy requirements found in or mandated
by the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, and in the regula-
tions promulgated by the appropriate regulator.
I do not mean to seem pessimistic about account aggregation. On the contrary, I am excited
by the prospect of the mix of service and content that lie at the core of aggregation. I see bank-
sponsored account aggregation as one of the most interesting innovations of the past two
years. We also must recognize that non-bank service providers are capable of competing for
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the diverse business opportunities that account aggregation affords the individual, and that the
risks by either bank or non-bank aggregators are similar and require aggressive management.
Now let me turn back to the first of the three questions that the conference organizers asked
me to discuss. When one looks at the history of retail payments systems in the United States,
one sees the pattern of establishment of legal standards in the relatively early period after
introduction. This observation holds true for the checking account (spurred by the National
Banking Act of 1863 and its progeny), for credit cards (the Fair Credit Billing Amendments to
the Truth in Lending Act in 1971), and for electronic fund transfers (the Electronic Fund Transfer
Act of 1978). For travelers checks, contracts between the issuers and purchasers formed the
standard; the issuers steadfast performance of their promise to replace lost or stolen travel-
ers checks fostered customer acceptance of this new payment instrument. On the wholesale
side, because wire transfers were the province of banks with bank-to-bank and bank-to-cus-
tomer contracts, the nature of the major participants who had personal knowledge of each
other and leverage to enforce contracts when necessary enabled wholesale wire transfer sys-
tems to operate without over-arching commercial laws for decades. Eventually, system rules
emerged to handle the relationships of the banks to the transmitting entities in the chain of
instructions, to provide standardized message content, and to facilitate use of shared trans-
mitting avenues. Fedwire and Federal Reserve Board Regulation J occupy a mid-position
between system rules and legal standard stages in the development of the legal environment
for this wholesale payments system. In the last stage of this progression of legal rules for
wholesale wire transfers, states enacted Article 4A of the Uniform Commercial Code to pro-
vide more legal certainty in the event of errors in multi-party transactions. Of each of these
retail and wholesale payments systems developed over more than 100 years, only onethe
consumer EFTmay have been regulated too early in terms of the possibility that regulation
thwarted or chilled innovation in the industry.
The sense that the EFTA and Federal Reserve Board Regulation E came too early has been
an obstacle to clarifying the regulatory structure for retail cyber-payments. And, this sense
has allowed many others to assume that non-regulation would be the best course for these
emerging cyber-payments products. Indeed, one hears industry opposition to regulation of an
Internet-based product at nearly every conference on the subject of electronic payments. The
real question for all of us is whether regulation is needed to spur acceptance of electronic
payment methods.
Given the speed of change in and rapid-fire adoption of many Internet-based consumer tech-
nologies since early 1995, retail electronic payments systems have not achieved the level of
consumer acceptance that had been anticipated. Some anecdotal evidence exists that the
absence of legal standards has operated as a barrier or hurdle to consumer acceptance. (There
also exists some countervailing evidence that slow consumer acceptance resulted from gen-
eralized satisfaction with the existing array of retail payments systems in the United States
and traditional credit card issuers aggressively pursuing on-line credit-card use. Without signif-
icant volume or consumer demandconsider the retreat from the NY experiment fall 98 or
fall 99merchants are reluctant to invest in technology to support newer electronic payments.)
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As I mentioned earlier, there is anecdotal evidence that consumerand possibly merchant
misperceptions about which legal rules would apply to these new cyber-payments products
have deterred their acceptance by consumers. Certainly, since September, 1996, consumers
have heard much about the preference of many in industry, the Congress, and the Administration
not to regulate e-commerce products at this time so as not to retard innovation in e-commerce
or e-payments as a whole.
Many commentators have suggested that banks and other depositary institutions need to devel-
op fresh means of attracting new customers and of retaining those customers they have. The
risk is that banks will lose specific transactions and the fees they may generate to non-bank
payments services providers who can operate at lower cost. An additional riskon a broader
scaleis that banks will lose ground as intermediaries in the overall financial services sector
with the resulting shift in the economic engine functions that banks have played historically
in Western economies. (This point was first made to my knowledge in a superb article by David
Laster and John Wenninger of the Federal Reserve Bank of New York that John presented at
the April, 1995 CITI conference at Columbia University.) To maintain their current positions,
banks must provide new value-added payments and information products and services that
customers want. This includes maintaining banks traditional roles as advisors and repositories
of property and information customers entrust to them.
This question hints at one problem that we all face in projecting the future of electronic pay-
ments. This is the duration of the standard-setting process in the United States, whether at
the federal level or at the state level. Every regulator who deals with issues such as these
must wonder whether a product seeking regulatory advice or approval will even be in opera-
tion by the time that advice or approval is given and before the standard can be implemented.
This poses a risk of continuous regulatory redundancyalways reacting to the last battleas
opposed to finding means to create a set of rules or regulations that are sufficiently flexible
to allow these payment systems to grow into the rules, and vice versa. For these reasons, I
have long thought that system rules are more likely to be capable of providing uniformity and
certainty and at the same time to be capable of shifting with some frequency to deal with
emergent issues. In 1996, I argued that system rules might be preferable to state or federal
regulation for cyber-payments systems.
There is precedent for the rule-based approach I suggest. In the wholesale wire transfer area,
system rules were able to adapt to changing needs far more rapidly than were formal regula-
tions. System rules have the potential to meet the needs of the consumer and merchant
participants in electronic payments. I believe this is the case despite the obvious structural
differences between retail and wholesale payments.
What are or should be our collective vision of or relationship of electronic payments products
to broader financial services relationships? Banks and their non-bank competitors seem to have
answered the question of whether electronic financial services are the key to broader financial
services relationships in the future in the affirmative. The amount of energy that banks are
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devoting to creating online banking services, to offering account aggregation, and to promot-
ing the security of their online products is ample demonstration to me. In addition, banks are
eager to do business with their higher-end customers in the manner most convenient to that
range of customers and most suitable to providing the opportunity for cross-selling of banking
and other financial services products. In particular, banks should be in a position to create serv-
ices that combine information and other value-added products and services to complement
bankings traditional services.
But there is countervailing evidence. Apparently, online-only banks are not realizing the effi-
ciencies that many imagined based on a September 2000 Office of Thrift Supervision report.
Moreover, those institutions that offer only electronic products and services, as opposed to
those who operate in the atomic and byte worlds harmoniously, may find consumers difficult
customers to retain. Therefore, at least for the time being, I see a need to provide many tradi-
tional services while also providing cutting-edge electronic banking services and products, or
to provide local outlets or other inexpensive means for special paper-based instruments, such
as cashiers checks.
Additionally, banking offers many opportunities for meeting the needs of different categories
of customerscarefully. No one wants to repeat the public relations issues that arose when a
Midwest bank announced that its depositors would pay a flat fee for a teller-assisted transac-
tion. I should note that the bank resolved this episode with speed and grace.
A final point on this topic: Banks and other financial institutions have enjoyed a very favorable
attitude from bank regulators at the federal and state levels over the past decade. Some bank
regulatory agencies have urged and facilitated the development of electronic products by an
expansive view of their respective authority to approve new products and investments.
What is the relationship of this collective future vision to future technical, legal, and security
infrastructures, nationally and internationally? First, technical standards: There will be a constant
need to innovate in the area of technical standards. This innovation and the costs associated
with its development, purchase or license, and implementation are likely to remain considerable.
Second, legal standards: The biggest challenge here involves maintaining the different domes-
tic laws that govern payments and the key legal features of paymentsreversibility, validation
rules, satisfaction of the underlying obligation, etc.so that consumers do not experience shock
in using one of these electronics payments products or services abroad without appropriate
notice that a different set of legal rules would apply to the transaction. The potential damage
to consumer confidence in the new electronic products that would obtain if the consumer
experienced unfamiliar rules in the resolution of errors or regarding the validity of the transac-
tion. Consumers in the United States would be unlikely to understand how different the rules
governing payments systems abroad arevery different attitudes about interest rates and
reversibility have persisted over the past 20 to 25 years as credit cards and debit cards became
available to users around the world.
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A very important sub-group of these legal standards are rules about user privacy. The recent
consultations resulting in the safe harbor understanding for the European Unions Data
Privacy Directive between Europe and the Department of Commerce suggest the importance
of resolving these issues as amicably and completely as may be appropriate, recognizing the
differences in our respective economies and cultures.
Security standards: As much as the need exists for more sophisticated technical standards,
the need is at least as great for security standards. The security of stored data and the high
regard in which we hold the issue of security and privacy for parts or all of our financial serv-
ices and medical data demonstrate this need to me.
In conclusion, I am excited about the prospects for innovation in the range of electronic pay-
ments products and related services for consumer users. I am eager to see the banking industry
resolve the most pressing issues of security and privacy through private contracts, system
rules, and regulationsor whatever combination of the three is appropriateto achieve the
most vibrant electronic payments products mix in the world. I am confident that the banking
industry in the United States can realize this goal.
Audience Member
You mentioned in your paper that the bank could be found liable for account aggregation even
though the customer provides the information, the number, PIN, et cetera, and the bank does
not even know they have done that and yet could be held liable. I have heard that a number
of times. I wonder how that is the case.
Sarah Jane Hughes, Indiana University School of Law
I do not think there is a law on that subject. I certainly took a quick look to see if I could find
one and I failed. That does not mean there is not something out there, I just have not heard
about one. I think it is a question of proof and whose fault it is. On one level it is the customers
fault for disclosing information that should be guarded. But we never know whether it is a
participant failure, participant error, system issue, electrical outage. And we have had exam-
ples over the last 15 years of payment issue problems that are related to electrical outages.
We do not know whether there is a hacker. We just have a lot of difficulty proving fraud.
From the consumers perspective it is incredibly difficult to show where an error occurred. It
is comparable to one of us looking at a car that has many embedded computers in it and point-
ing to the one that is not working correctly, assuming we know nothing about cars. And from
the consumers perspective the cost of finding someone to help penetrate this problem is
enormous. I think we have to consider the prospect that a jury is going to be deciding this,
and that the jury is highly likely to assume that the error is not the consumers error but some-
body elses in the system. And we also have the tendency to look for the deepest pocket to
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assign the loss to. In this room I think we all know which entity is likely to be the deep pocket.
So it suggests to us that we need to consider how we are going to insure ourselves, or as
consumers how we are going to consider the prospects of who may be at fault when we ask
to have so many thousand shares sold or funds moved among funds and it does not happen
and there is a loss.
I would add that the most prominent issue for liability in account aggregation is the question
of unauthorized use. That is addressed by the Electronic Fund Transfer Act and Regulation E.
In terms of whether the bank has liability, if the password that the customer gives to the
aggregator and the account number can later be used to initiate transactions on the banks
site, then clearly those are codes that the bank has issued for purposes of initiating EFP, and
the bank is responsible for unauthorized use. When you get the question of the aggregator,
the question is what kind of unauthorized use are you talking about. Has the aggregator been
hacked and somebody was able to pull up the PIN and the account number and use it? If so,
I think the law is quite clear, the customer is not responsible. The customer can write the PIN
on the back of their ATM card and leave it on the bus and they are still not responsible. We
are very protective of the consumer. I think a different question is whether the aggregator
itself exceeded its authority to use the data.
Audience Member
Just as a practical question, in terms of privacy, can a financial institution contractually dis-
claim its liability and can it do it electronically with the customer? I am referring to misusing
consumer information, particularly for market research, marketing basically.
To restate the question, the question was whether a financial institution could contractually
disclaim its liability for misuse of customer information. Stated that way I would say no. To
the extent that the financial institution is limited by Gramm-Leach-Bliley and the regulations
promulgated thereunder in the use of information, those restrictions cannot be waived.
On the other hand, Gramm-Leach does provide a methodology for financial institutions to get
the authority to use information in a variety of ways. So if Gramm-Leach gives the customers
notice about using their information in various ways unless told otherwise, and the customer
does not give that opt-out, the institution can then use their information. The thing to be very
careful of here is that on the merchant side where Gramm-Leach does not apply, institutions
are doing things other than what they told the customer they would do.
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Toysmart put out a privacy statement that said we will never share your information, never.
The word never was used. If you take one thing away from this presentation, never use the
word never in your privacy box. They said we will never share your information with a third
party. They ran into financial difficulty, they are in bankruptcy, they are trying to sell the assets
of the company. One of the assets of the company is the customer list.
To point out to you the different perspectives on privacy here, the FTC proposed a settlement
that would have permitted the sale of the customer list as part of the sale of an entire Web
site. Basically the FTC said as long as you are transferring the business, then the customer
list transfers with it. Makes sense to me. Should make sense to most folks I would think. The
state AGs intervened in that case and said, among other things, Judge, we do not think you
should allow this. We think each individual customer should have to opt-in to the sharing of
that information in connection with the sale of the assets of this company, number one. And
number two, we do not necessarily agree that if you were truly just selling the company as a
whole that you would get to pass the customer information along with it.
You cannot operate in a commercial environment like that. You cannot be limited in the ability
to merge a company simply by the fact that you said we want to share your information.
Because the we, who is the we? The we is the company that is being transferred. But
the state AGs expressly reserved that position. That gives you a sense of the scope of how
differently people are feeling and taking positions on the question of the transfer of confiden-
tial information.
May I add one more thing? It also strikes me that Toysmart presents an additional issue. With
the Visa Buxx for teens, there are some things where we have overlays of other important
policies, like kids and which toys they are buying, or where teens are spending their Visa Buxx.
How we consider some special categories of persons within this larger privacy context is an
additional and very important issue that requires attention. I would not pretend to have the
answer to it.
Audience Member
The relationship between screen scrapers and banks is a pretty complex one. The screen scrap-
ers need good data to make the customers happy. The banks can sabotage that good data by
making their screens very dynamic, I think. Maybe technologists can tell me whether I am
right or wrong on that. And so each scraper is trying to figure out how they can make money
and get good data. The banks want to be in this space, they do not want Yodlee taking it over,
or maybe the banks want to be the engine behind it using the Yodlee engine. It is a lot more
complex than just the them and us sort of a situation.
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I did not mean to give any other impression than that. And you do have stand-alone providers,
you have banks, and you have banks using platforms like Yodlee to facilitate their own services
for their customers. If I were a bank I would probably have a very distinct view of which one
of those three categories I would want to be in. I think that is a different kind of a problem.
Because if I were a customer and I wanted to use a nonbank account aggregator service, I would
be really upset with my bank for interfering with my ability to use that kind of a content provider.
Audience Member
Are there any top successes or top failures that come to mind? Do any real strong successes
or real strong failures jump out in your minds in terms of things people have done to provide
a fair playing ground for both consumers, banks, and merchants that we should be thinking of
or cautious of?
Clearly the success is the bank card systems. Over the past 20, 30 years the bank card has
developed into a means of payment for goods and services, a system of rules and participation
has also developed with it and has had a dramatic effect on customer usage and the economy.
The failures are harder to pick because perhaps they just have not lived up to expectations yet.
Point of sale debit, while being somewhat successful, has still not lived up to expectations.
Smart cards have not lived up to expectations. I would not call either of those failures at this
point because the time has just not come yet.
I think that the whole digital coin industry has been a disappointment. In this country we have
not seen any real value from it yet except on college campuses and a few other incredibly
closed environments. And I think that is in part attributable to the fact that, unlike most other
payment systems in the world, we have many more choices, and credit cards are widely dis-
tributed here and widely used and they work. And there are tiny little failures. I think Toysmart
is an example of a failure. Even though it is not a payment issue, it is a privacy concern where
people did not think carefully enough about the policies or practices they wanted to employ,
or they were not candid with their customers about which ones they were using and which
ones they would really fight hard to protect.
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David R. Allardice, Senior Vice President and Detroit Branch Manager, Federal Reserve
Bank of Chicago
Mr. Allardice is Senior Vice President and Manager of the Detroit Branch of the Federal Reserve
Bank of Chicago. Mr. Allardice was appointed to this position on December 1, 1995. In this
position, Mr. Allardice has overall responsibility for operations at the Detroit Branchan organi-
zation with 330 employees and an expense budget of about $25 million. In December of 1997
Mr. Allardice was given the additional responsibility for overall Seventh District cash operations.
As part of his duties, Allardice works closely with the Detroit Branchs seven-member board of
directors, which are chosen from a broad cross-section of the Michigan business community.
Mr. Allardice joined the Federal Reserve Banks Research Department in 1974, after complet-
ing his Ph.D. in Economics from Colorado State University. In 1985, he became the Assistant
Director of Research and in 1994 was named Director of Regional Programs and Statistics.
On August 1, 1995, he was appointed Senior Vice President.
During 1997, Mr. Allardice coordinated the Seventh Districts involvement in the Federal
Reserves Rivlin Committee Study. The Rivlin Committee study focused on the future role of
the Federal Reserve System in the payments mechanism. Mr. Allardice currently leads the
Seventh Federal Reserve Districts effort in Emerging Payments, a study effort to focus on
the public policy aspects of electronic payments.
Mr. Allardice has been actively engaged in writing about issues relating to the Midwest economy
and is a frequent speaker through the Midwest. His Regional Economics section, in conjunc-
tion with the Great Lakes Commission, released in April 1991 a book entitled The Great Lakes
Economy Looking North and South. And in 1992, a cooperative effort with the Northeast-
Midwest Institute produced The State of the Region: Demographic and Economic Trends in
the Northeast and Midwest. In 1994 his research unit produced a study on the impact of the
Clean Air Act on the Midwest Economy.
Mr. Allardice has worked actively with regional economic development groups in Illinois, Iowa,
Michigan, and Wisconsin. Mr. Allardice has served as an economic advisor to the Illinois
Department of Commerce and Community Affairs, a member of the editorial board of the
Economic Development Quarterly, an advisor to the state of Indianas Third Strategic Economic
Development Plan, a member of the Board of the Chicago Economic Development Council,
vice president for economic policy for the Council of Great Lakes Industries, a member of the
Regional Development Committee of the Chicago Metropolitan Planning Council, and was
president of Illinois Economic Database, Inc. Mr. Allardice currently serves on the boards of
directors of Economics America-Michigan and Junior Achievement-Detroit. In addition to his
writing and speaking activities, Mr. Allardice has taught finance in the MBA programs at
Roosevelt, DePaul, and Loyola Universities. Mr. Allardice currently teaches in the banking
school of the Michigan Bankers Association.
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IX. Presenters Biographical Sketches
Stewart A. Baker, Partner, Steptoe & Johnson
Stewart A. Baker has been described by The Washington Post (November 20, 1995) as one
of the most techno-literate lawyers around. His practice includes issues relating to encryp-
tion, digital commerce, privacy, electronic surveillance, national security, and export controls.
He has advised hardware and software companies on US export controls and on foreign import
controls on encryption. He represents major telecommunications equipment manufacturers
and carriers in connection with the Communications Assistance for Law Enforcement Act
(CALEA) and law enforcement intercept requirements. In the area of authentication and
digital signatures, his clients include major banks, mortgage companies, and credit card asso-
ciations, as well as technology companies.
Mr. Baker is the former General Counsel of the National Security Agency (1992-1994) and
author of the book, The Limits of Trust: Cryptography, Governments, and Electronic Commerce
(1998), as well as various other publications and articles on electronic commerce and interna-
tional trade. Earlier in his career, Mr. Baker served as Law Clerk to John Paul Stevens, US
Supreme Court (1977-78), Frank M. Coffin, US Court of Appeals, First Circuit (1976-77), and
Shirley M. Hufstedler, US Court of Appeals, Ninth Circuit (1975).
Mr. Baker has been named to numerous US government and international bodies dealing with
electronic commerce and related topics, including: Presidents Export Council Subcommittee
on Encryption (1998-present); Defense Science Boards Task Force on Information Warfare
(1995-1996; and 1999-present); Federal Trade Commissions Advisory Committee on Online
Access and Security (2000); Free Trade of the Americas Experts Committee on Electronic
Commerce (1998-present); UNCITRAL Group of Experts on Digital Signatures (1997-present);
OECD Group of Experts on Cryptography Policy (1995-1997); International Telecommunication
Union Experts Group on Authentication (1999); American Bar Association Task Force on
International Notarial Issues (1996-1998); International Chamber of Commerce Working Party
on Digital Authentication (1996-1998); International Chamber of Commerce Group of Experts
on Electronic Commerce (1996-present).
Sarah Billings, First Vice President, Electronic Commerce Strategic Manager, ABN AMRO Bank
Sarah T. Billings is a First Vice President and Strategic Manager for Electronic Commerce at
ABN AMRO Banks North American headquarters in Chicago. She has primary responsibility
for developing and executing the Banks electronic commerce strategy for treasury manage-
ment products and services. Additionally, Ms. Billings manages the Banks EC Sales Consultant
Group which sells EC services to the Banks large corporate and middle market clients,
eMarketplaces and e-businesses.
Ms. Billings has extensive knowledge in the areas of electronic and paper-based payment
systems. Prior to assuming her role as Electronic Commerce Strategic Manager in 1997, Ms.
Billings served as Senior Product Manager for EDI and ACH services and was responsible for
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the development of many of the Banks electronic payment solutions. Upon joining the Bank
in 1990, Ms. Billings managed the disbursement services product line.
Ms. Billings presents frequently on Electronic Commerce topics at industry conferences.
She received her BA in History from the University of Michigan, Ann Arbor.
Ronald Braco, Senior Vice President, The Chase Manhattan Bank
Ronald Braco is Senior Vice President and the Business Development Executive for Chase
Manhattan Banks newly created Chase.com organization. He is responsible for developing the
strategy, direction, and business opportunities for the online consumer marketplace. This role
includes the development of Chases emerging alliance and venture initiatives for E-Commerce
and Internetrelated businesses including bill presentment, electronic on-line payment and
emerging technology opportunities. His previous responsibilities included the management of
various Consumer-related Electronic Banking businessOn-line banking, Point of Sale, ATM
and Smart Card initiatives. He has also managed various merger transition teams responsible
for the planning and implementation of efforts to consolidate technology platforms and branch
banking networks.
Mr. Braco has been an active participant in the Electronic Banking arena for more than 20 years.
He was key contributor to the formation and growth of ATM Networks such as Cirrus where he
served as operations chairman for several years and NYCE where he was a Board director. He is
currently Chairman of Mondex USA, a Board Director of Mondex International, and Chairman of
the newly formed Bill Presentment Venture, Spectrum. He is also a member of the Financial
Services Roundtable BITS Advisory Group. He attended the New Jersey Institute of Technology
where he attained a BS in Industrial Engineering and MS in Management Engineering.
Thomas P. Brown, Associate, Heller Ehrman
Experience: Since joining the firm, Mr. Brown has practiced primarily in the antitrust area and
participated in cases involving anti-trust claims, including class actions, as well as counseling
clients preparing for merger activity and dealing with antitrust enforcement agencies. Mr. Brown
is co-author of the Heller Ehrman whire paper Altered Strategies: Electronic Commerce and
Owning the Means of Value Exchange.
Education: Columbia College (A.B. Economics-Math, cum laude, 1992). University of Chicago
(J.D., 1995). Member, University of Chicago Law Review. Mr. Brown was a law clerk for the
Honorable Diane P. Wood of the U.S. Court of Appeals for the Seventh Circuit.
Memberships: State Bar of California; American Bar Association.
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Representative Engagements:
In Re Visa Check/MasterMoney Antitrust Litigation (antitrust class action)
Visa U.S.A. Inc v. American Express and Advanta (trademakr infringement, antitrust)
Member of the Heller Ehrman team that handled the antitrust aspects of WorldComs
merger with AOL and Compuserve.
Roger W. Ferguson, Jr., Vice Chair, Board of Governors of the Federal Reserve System
Roger W. Ferguson, Jr., took office October 5, 1999, as Vice Chairman of the Board of Governors
of the Federal Reserve System for a four-year term ending October 5, 2003. Dr. Ferguson
originally took office on November 5, 1997, as a member of the Board to fill an unexpired term
ending January 31, 2000.
Since July 1998, Dr.Ferguson has also served as Chairman of the Joint Year 2000 Council. The
Council, supported by the Bank for International Settlements, was formed to address issues asso-
ciated with the Year 2000 computer challenge within the global financial supervisory community.
Dr. Ferguson was born October 28, 1951, in Washington, D.C. He received a B.A. in economics
(magna cum laude) in 1973, a J.D. in law (cum laude) 1979, and a Ph.D. in economics in 1981,
all from Harvard University. In 1973-74 Dr. Ferguson was Frank Knox Fellow at Pembroke
College, Cambridge University.
Before becoming a member of the Board, Dr. Ferguson was a Partner at McKinsey & Company,
Inc., an international management consulting firm. He was based in New York City and he
managed a variety of studies for financial institutions from 1984-1997. Dr. Ferguson also served
as Director of Research and Information Systems, overseeing a staff of 400 research profes-
sionals and managing the firms investments in knowledge management technologies.
In 1981-84 Dr. Ferguson was an attorney at the New York City office of Davis Polk & Wardwell,
where he worked with commercial banks, investment banks and Fortune 500 corporations on
syndicated loans, public offerings, mergers and acquisitions, and new product development.
He formerly was an elected member of the Board of Directors of the Harvard Alumni Association,
and Treasurer of the Friends of Education, a Trustees Committee of The Museum of Modern
Art, New York City.
Dr. Ferguson is married to Annette L. Nazareth and they have two children.
Ravi Ganesan is the Vice Chairman of CheckFree Corporation, headquartered in Atlanta. Prior
to serving as Vice Chairman Mr. Ganesan was Executive Vice President and Chief Technology
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Officer of CheckFree Corporation. As Vice Chairman, Mr. Ganesan serves as the companys
spokesperson on technology and manages technology strategy from a corporate level.
Prior to joining CheckFree Mr. Ganesan served as Vice President-Distributed Operations &
Information Technology and also as Director-Center of Excellence for Internet Services at Bell
Atlantic in Arlington, Virginia.
Mr. Ganesan graduated from Anna University in Madras, India with a B.E. in Computer Science
and Engineering, received a M.S. in Computer Science from The University of Maryland and is
completing his Ph.D. in Computer Science at The Johns Hopkins University.
He is a frequent speaker at technology conferences, and his work has been published in numer-
ous industry journals. Mr. Ganesan serves on the following editorial boards: Communications
of the ACM, IEEE Transactions on Computers, Journal of Electronic Commerce and IEEE
Communications Interactive.
Founded in 1981, CheckFree is the leading provider of financial electronic commerce services,
software and related products for more than 850 financial institutionsincluding more than
276 that are under contract for remote banking and bill payment processing; 1,000 businesses
and 1.8 million consumers. CheckFree designs, develops and markets a complete suite of
products and services that support device-independent remote banking Internet-based servic-
es and bank-branded, on-line, realtime applications; including the industrys most comprehen-
sive Internet investment resource.
Pete Gustafson, Executive Vice President, e-Visa, Visa U.S.A.
Pete Gustafson, executive vice president of e-Visa, a division of Visa U.S.A., is responsible
for overseeing product and technology development for the new e-commerce-focused team.
Gustafson identifies, evaluates and manages new electronic initiatives and ventures; applies
technologies to solve real business problems; provides working interface into technology sup-
pliers; and works with internal groups to evaluate processing and technology alternatives.
While at Visa, Gustafson has held a number of positions in a variety of departments. His pre-
vious titles include senior vice president and executive vice president of deposit products and
vice president of Visas Member Relations department.
Prior to joining Visa in 1980, Gustafson was employed by Fidelity S&L, where he ran computer
operations and led development of an online mortgage origination through closing system.
Gustafson earned his bachelors of science and masters of business administration from
Arizona State University.
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Peter Honeyman, Research Scientist and Director, Center for Technology Integration,
University of Michigan
Peter Honeyman is Director of the Center for Information Technology Integration, Research
Scientist in the Information Technology Division, and Adjunct Professor of Electrical Engineering
and Computer Science.
Honeyman holds the B.G.S. (with distinction) from the University of Michigan and the M.S.E.,
M.A., and Ph.D. degrees from Princeton University, where his research was in database theory.
He has been a Member of Technical Staff at Bell Labs and Assistant Professor of Computer
Science at Princeton University.
Honeyman has been instrumental in several software projects, including Honey DanBer UUCP,
PathAlias, MacNFS, Disconnected AFS and Webcard. His research focus is on middleware,
with an emphasis on security, distributed file systems, and mobile computing. He is the author
of dozens of journal and conference papers and serves regularly on conference organizing
committees. Honeyman is Treasurer of the USENIX Association, Co-Vice Chair of IFIP TC 8.8,
and a member of AAAS and EFF.
Sarah Jane Hughes, University Scholar and Fellow in Commercial Law, Indiana University
School of Law
A.B., 1971, Mount Holyoke College; J.D., 1974,
University of Washington. Board of Editors, Washington Law Review.
Federal Trade Commission, Seattle, Washington, and Washington D.C., 1974-88.
Professor Hughes is a dedicated and dynamic teacher, and for her enthusiastic focus on stu-
dents she was honored with the Law Schools Leon Wallace Teaching Award in 1993 and the
graduating classs Gavel Award in 1996 and 1997. Her courses include Sales, Negotiable
Instruments, Secured Transactions, and Regulated Industries Banking Law.
Professor Hughes is a nationally recognized expert on payment systems (domestic, interna-
tional, Internet banking, smart cards, wire transfers, checks, embezzlement, credit cards);
public and private methods to deter, detect, and prosecute domestic and international money
laundering; and consumer protection and privacy.
Professor Hughes is a member of the American Bar Associations Subcommittee on the Law
of Cyberspace, Subcommittee on Electronic Commerce, Subcommittee on Payments Systems,
and Subcommittee on the Uniform Commercial Code.
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David Humphrey, Professor of Finance and Eminent Scholar in Banking, Florida State University
David B. Humphrey is Professor of Finance and Fannie Wilson Smith Eminent Scholar in
Banking at Florida State University. He has published some 80 articles on banking and pay-
ment system issues and is on the board of editors of the Journal of Monetary Economics
and the Journal of Banking and Finance. He has also consulted for the World Bank, the U.S.
Treasury, the Government of Canada, and the Federal Reserve.
Dr. Humphrey has been at Florida State University since 1991. From 1975 to 1991, he was
with the Federal Reserve System. At the Board of Governors, he served as Assistant Director
of the Division of Research and Statistics and at the Federal Reserve Bank of Richmond he
was Vice President and Payment Systems Advisor. Prior to that, he taught at Tulane and San
Francisco State Universities. He received his Ph.D. in Economics at the University of California
(Berkeley) in 1969 and a B.A. and M.A. in Economics from San Diego State University in 1962
and 1963.
Catherine Johnston, President and CEO, Advanced Card Technology Association of Canada,
Ontario, Canada
Catherine Johnston is the President and Chief Executive Officer of the Advanced Card
Technology Association of Canada. ACT Canada, founded in 1989, is a non-profit association.
Its mission is to promote awareness, understanding and use of all advanced cards including;
smart, optical, capacitive, and emerging card technologies, as well as complimentary tech-
nologies such as biometrics.
ACT Canada has taken an active role in international discussions on protection of privacy and
data. In addition, the association serves Industry Canada as the conduit for requests for informa-
tion, products and services related to advanced cards, received from international consulates.
In her twenty-seven years in the technology marketplace, Catherine has specialized in emerg-
ing technologies. Her prior involvement with advanced cards started at Philips where she was
responsible for introducing optical disc technology in Canada. From there she moved to Bull
HN Systems Canada. As the Smart Card Market Development Manager, she and her team
developed an award winning, highly sophisticated, secured laptop computer, using smart card
technology to provide the security.
Catherine was elected to the board of ACT Canada as President in 1992, and assumed the
staff position of Chief Operating Officer the following year. In 1995 she was promoted to
Chief Executive Officer and President.
In this capacity she monitors the market place and industry, conducts corporate briefings,
develops and teaches seminars related to advanced cards and consults in this area. In the
past seven years, Catherine has traveled around the world talking about the technology and
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Canadas place in the world market. She has also become a leading expert in the field of pri-
vacy and card technologies. With the Office of the Information and Privacy Commissioner/Ontario,
she co-authored the worlds first Privacy Assessment procedure for Smart, Optical and Other
Advanced Cards and is currently working on a version for multi-application cards.
Her work brings her in contact with governments, privacy advocates, suppliers, users and reg-
ulators. She served on the federal governments National Advisory Board for Technology and
Tourism and currently sits on the Canadian Payments Association Stakeholders Advisory Council.
Catherine is a founding member of the Global Smart Card Summit and is currently co-authoring
a book on the future of smart cards.
Gregory K. Jones, President and Chief Executive Officer, uBid.com
Gregory K. Jones is president and chief executive officer of uBid.com, where he is responsi-
ble for the strategic and operational direction of the business. Jones also serves as chairman
of the board, a position he was appointed to in July 1998.
uBid.com, an online auction marketplace established in 1997, is already one of most recognized
Web sites in the country. Under Jones direction, uBid has experienced exceptional growth by
building revenues exceeding $205 million annualized during the second year of operation. In
December 1998, uBid went public and during that year was the third most successful IPO
behind eBay and Amazon. In February 2000, uBid entered into a definitive agreement to be
acquired by CMGI, the largest, most diverse network of Internet companies in the world.
In addition, uBids customer base has flourished under his leadership, with the number of
registered users more than quadrupling over the past year adding over 1 million registrants to
the file. Jones has also been successful in establishing key relationships with several leading
companies that will assist uBid in continuing to provide its customers with a state-of-the-art
online experience. Jones joined uBid after serving as senior vice president of strategic mar-
kets at APAC Teleservices, Inc., a provider of outsourced telephone-based marketing, sales
and customer management solutions. During his tenure there, revenues rose from $100 mil-
lion to $276 million, and the company was both the top IPO for Merrill Lynch and the fourth
fastest growing company in the U.S. in 1996 (according to Forbes magazine).
Prior to joining APAC in 1995, Jones spent five years with the Reliable Corporation of Chicago,
a $200 million direct mail seller of office products. He first served as vice president of MIS
and new business development and later as president and chief operating officer. He was the
architect of the companys reorganization, repositioned the company within the industry, and
established a new marketing direction, which increased sales by 18 percent and gross margin
by 10 percent. Earlier companies with which Jones was affiliated include: The Warehouse
Club, Office Express, and Ernst & Young.
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Jones is the recipient of many business leadership awards including: The State of Michigan
Leadership Award, the 1999 Ernst & Young Entrepreneur of the Year Award, the 1999 KPMG
Entrepreneur of the Year Award, the 1999 Crains Chicago Business 40 Most Influential People
Under 40 Business List, and is an inductee into the University of Illinois at Chicagos Entrepreneur
Hall of Fame. Jones sits on the board of directors of DigitalCars.com, magnify.com, FreeDrive,
divine interVentures, Inc., HomeFinishes.com, Visual Insights, Inc., uBid.com, and the Miami
University Business Advisory Council. He is a member of The Economic Club of Chicago, The
Executives Club of Chicago, The Chicago Area Entrepreneurship Hall of Fame, and the Mayors
Council of Technology Advisors.
Jones received his B.S. in business from Miami University, Ohio in 1983 and his M.M. in mar-
keting and finance from the J.L. Kellogg Graduate School of Management, Northwestern
University in 1991.
Emery Kobor, Research Director, CFO Enterprises
Mr. Kobor is the research director for CFO Enterprises which is the executive education arm
of CFO Publishing, a part of The Economist Group. Prior to joining CFO he was research director
for World Research Advisory, a syndicated research service for Fortune 500 financial execu-
tives. Mr. Kobor is the former editor of Treasury Managers Report and Corporate EFT Report,
both published by Phillips Business Information. He has an MBA in finance from George
Washington University and earned his BA from Vanderbilt University.
Matthew P. Lawlor, Chairman and CEO, Online Resources
Matthew P. Lawlor, Chairman & CEO, is co-founder of Online Resources and has 25 years of
financial services experience. Lawlor, 52, headed a consumer banking division for Chemical
Bank in New York and directed Chemicals international investment company, managing its
overseas banks and joint ventures. Lawlor worked as a project engineer with RCA before
beginning his banking career. In 1980, he served as a presidential exchange executive with
the White House. He later formed a venture development firm that provided capital to RSA
Security Dynamics and other early-stage technology companies. He serves on the Board of
Directors of the Electronic Funds Transfer Association and chairs its Internet Commerce
Council. Lawlor holds a bachelors degree in mechanical engineering from the University of
Pennsylvania and an MBA from Harvard University.
Michael H. Moskow, President, Federal Reserve Bank of Chicago
Dr. Moskow took office on September 1, 1994, as the eighth chief executive of the Seventh
District Federal Reserve Bank, at Chicago. He is currently serving the remainder of a full term
that began March 1, 1996. Dr. Moskow was born on January 7, 1938, in Paterson, New Jersey.
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He received a B.A. in economics from Lafayette College in Easton, Pennsylvania, in 1959 and
an M.A. in economics in 1962 and a Ph.D. in business and applied economics in 1965 from
the University of Pennsylvania.
Dr. Moskow began his career teaching economics, labor relations, and management at Temple
University, Lafayette College, and Drexel University. From 1969 to 1977, he held a number of
senior positions with the U.S. government, including senior staff economist, Council of Economic
Advisors; assistant secretary for Policy Development and Research, U.S. Department of Housing
and Urban Development; director, Council on Wage and Price Stability; and under secretary of
Labor, U.S. Department of Labor, serving as the second ranking official in the department with
responsibility for day-to-day management of its 15,000 member staff and $20 billion budget.
Dr. Moskow joined Esmark, Inc., in Chicago in 1977 as vice president of Corporate Development
and Planning and in 1980 was named executive vice president of Estronics, Inc., its wholly
owned subsidiary. He later served as president and chief executive officer of Velsicol Chemical
Corporation, a subsidiary of Northwest Industries, Inc., of Chicago; vice president of Corporate
Development for Dart and Kraft, Inc., of Northbrook, Illinois; and vice president of Strategy
and Business Development for Premark International, Inc., of Deerfield, Illinois (a spinoff from
Dart and Kraft).
In 1991, President Bush appointed Dr. Moskow Deputy United States Trade Representative
with the rank of ambassador. In this post he was responsible for a wide range of activities
including trade negotiations with Japan, China, and Southeast Asian and Middle Eastern
countries; industries such as steel, semiconductors, and telecommunications; and functional
activities such as intellectual property rights, services, science, technology, and the environment.
In 1993, Dr. Moskow accepted a professorship of Strategy and International Management at
the J.L. Kellogg Graduate School of Management, Northwestern University.
Dr. Moskow is a member of the boards of directors of the Council on Foreign Relations, World
Business Chicago, Chicagoland Chamber of Commerce, Chicago Council on Foreign Relations,
Economic Club of Chicago, and the National Bureau of Economic Research, where he also
serves on the executive committee. He is also treasurer of the Commercial Club of Chicago
and a member of its Civic Committee, a fellow of the National Academy of Public Administration,
and a member of the governing board of the Illinois Council on Economic Education. He is the
author of seven books and more than twenty articles.
Marianne Palva, Payment Systems Division Head, Financial Markets Department,
Bank of Finland
Ms Palva has headed the Bank of Finlands Payment System Division in the Financial Markets
Department since June 1999. She joined the Bank in 1976 and has worked in a variety of areas,
including payments, monetary policy and accounting. In the early 1990s she participated in
the Banks project for developing the Finnish RTGS system. Since preparations for Finlands
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entry into the European Monetary Union began in 1994, Ms Palva has represented the Bank
of Finland in the European System of Central Banks working groups concerned with pay-
ment and settlement system issues, eg the development of the EU-wide RTGS system,
TARGET. In 1992 and 1993 she participated as a payment system adviser in several IMF mis-
sions to the Baltic States, which were in the process of forming their own central banks after
becoming independent.
Jeetu Patel, Vice President of Research and Chief Technology Officer, Doculabs
Jeetu Patel heads the research division at Doculabs, an information advisory firm specializing
in intranet, extranet, and e-business technologies. Mr. Patel works with Fortune 500 customers
and dot-com e-commerce start-ups to identify the most appropriate technology solutions
for their business requirements; he also provides executive-level consulting for product devel-
opment organizations. Mr. Patel has performed hands-on evaluations of a vast number of
products, including solutions for Web application development, electronic commerce, knowl-
edge management, and document management. He frequently interfaces with key executives
of both the corporate and the vendor communities to discuss strategic developments in the
e-business marketspace.
Jeetu has keynoted and is a frequent speaker at industry conferences, including Internet World,
Application Server World, Internet Expo, Documation, Windows NT Internet Solutions, Internet
Billing, eBusiness Conference and Expo, Billing 99, Knowledge Management Expo, and others.
He is the author of a column in Information Week, focusing on market trends in the e-business
arena. Jeetu is regularly published and quoted in other leading industry publications, including
CIO Magazine, PC Week, KMWorld, Internet Week, Imaging Magazine, and Inform.
As Doculabs CTO, Jeetu maintains key relationships with Internet software companies, includ-
ing Sun Microsystems, Netscape Communications, Microsoft, IBM, Apple, Open Market, and
numerous others. In addition, Jeetu acts as the primary liaison between Doculabs and CMP,
the publisher of InformationWeek and Internet World, and Ziff Davis, the publisher of PC Week.
B.S. Information Systems, University of Illinois at Chicago.
Henry H. Perritt, Jr., Dean, Vice President for the Downtown Campus, and Professor of Law,
Chicago-Kent College of Law, Illinois Institute of Technology
As dean of Chicago-Kent College of Law and vice president of the Downtown Campus of
Illinois Institute of Technology, Dean Perritt has emphasized the dual roles of American law
schools as developers of both intellectual and human capital: intellectual capital in the form of
faculty scholarship, law reform and policy development, and human capital in the form of law
school graduates who are educated to function effectively in a changing profession. He has
been responsible for the establishment of the Institute for Science, Law and Technology, a
university-wide framework for faculty, student, and professional collaboration at the intersections
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of technology and law. He has increased Chicago-Kents involvement in international affairs,
making it possible for groups of law and engineering students to work together in using the
Internet to build a rule of law, promote the free press, and provide refugee aid in the former
Yugoslavia through Project Bosnia and Operation Kosovo, and building new links with
educational and governmental institutions in China.
Before coming to Chicago-Kent in June 1997, Dean Perritt was a member of the faculty of
Villanova University School of Law for more than 15 years, where he designed a course in
computer applications for lawyers and ran an Internet server specializing in public agency
information and practitioner access in addition to his regular teaching duties.
Dean Perritt is the author of more than 70 law review articles and 15 books on technology
and law and employment law, including the 730-page Law and the Information Superhighway.
He served on President Clintons Transition Team, working on telecommunications issues, and
drafted principles for electronic dissemination of public information, which formed the core of
the Electronic Freedom of Information Act Amendments adopted by Congress in 1996. During
the Ford Administration, he served on the White House staff and as deputy under secretary
of labor.
Dean Perritt serves on the Computer Science and Telecommunications Policy Board of the
National Research Council, and served on a National Research Council committee on Global
Networks and Local Values. He is a member of the Bars of Virginia, Pennsylvania, the District
of Columbia, Maryland, Illinois and the United States Supreme Court. He is a member of the
Council of Foreign Relations and of the Economic Club and is secretary of the Section on Labor
and Employment Law of the American Bar Association.
Dean Perritt earned his B.S. in engineering from MIT in 1966, a masters degree in manage-
ment from MITs Sloan School in 1970, and a J.D. from Georgetown University Law Center
in 1975.
John Quinn, Partner, Diamond Technology Partners
John Quinn is a partner with Diamond Technology Partners. He has more than eight years of
consulting experience with Andersen Consulting and Diamond. His consulting experience has
focused on technology assessment and strategy, systems and business process design, orga-
nizational design and the implementation of leading edge and mainstream technology solutions.
He has worked with clients in the financial services, health care and utilities industry to realize
significant short-term and long-term benefits.
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John J. Sheridan, Executive Director and Chief Operating Officer, InfoTEST International
Sector, National Center for Manufacturing Sciences
John Sheridan serves as Executive Director and Chief Operating Officer of InfoTEST, the
information technology sector within the National Center for Manufacturing Sciences (NCMS).
He is responsible to the InfoTEST Board of Directors and the NCMS President for creating
and implementing innovative programs and strategic alliances that bring value to the industry
members of this consortium, which merged within NCMS in 1998. InfoTESTs mission is
to facilitate the collaborative development of large-scale business applications of advanced
technology in information systems, networked computing, and telecommunications in a
global environment.
John concurrently serves NCMS as leader of a new group to develop NCMS strategy and rev-
enue generating products to be sold to the public in an e-commerce environment. This approach
complements the non-profit NCMS organization by developing commercial offerings that are
well aligned with the mission of NCMS and enhance its reputation.
Mr. Sheridan holds a MS degree in Systems Engineering (with distinction) from the Naval
Postgraduate School and a BS degree in Mechanical Engineering (with honors) from Manhattan
College. These are supplemented by continuing professional education in management
and engineering.
Bruce J. Summers, Director, Federal Reserve Information Technology, Federal Reserve
Bank of Richmond
Bruce J. Summers is the Director of Federal Reserve Information Technology. The two princi-
pal units of this national organization are Federal Reserve Automation Services, which provides
computing and network services to the 12 Federal Reserve Banks and Board of Governors,
and Federal Reserve IT Planning and Standards, which develops the Federal Reserve Systems
information technology vision and strategic plan.
A native of Chicago, Mr. Summers holds degrees from the University of Notre Dame and the
University of Illinois at Champaign-Urbana. He served on destroyer duty in the U.S. Navy and
worked in commercial banking before joining the Federal Reserve in 1974. His Federal Reserve
career prior to assuming leadership for information technology has spanned a range of respon-
sibilities, including economic research, financial services, banking supervision and regulation,
reserve accounts, the discount window, and risk management. He served as the Federal
Reserves first electronic payments product manager in the mid-1980s and then as deputy
director of the Division of Reserve Bank Operations and Payment Systems at the Board of
Governors. While at the Board, he developed payment system policy and oversaw the bank-
ing services and automation activities of the 12 Federal Reserve Banks.
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Mr. Summers has participated in a number of international banking initiatives of the G-10
central banks through their committees meeting at the Bank for International Settlements in
Basle, Switzerland. He has also been active in the work of the International Monetary Fund
and The World Bank aimed at reform of the financial and banking systems of emerging mar-
ket economies. As a consequence, he has first-hand experience with banking and financial
markets in North America, Latin America, the European Community, central and eastern Europe,
and Asia.
Mr. Summers has written extensively on payment system matters. He is the editor of the book
The Payment System: Design, Management, and Supervision, published by the International
Monetary Fund in 1994.
John P. Tedesco, Jr., Founder & Chief Executive Officer, PayMyBills.com
PayMyBills.com is the second Internet business created by John since 1995. While at the
financial conglomerate GE Capital, he was the Founder and General Manager of an Internet-
based commercial real estate business called CRE-NET: The Commercial Real Estate Network.
After identifying the business opportunity, John led the development, launch and operation of
this wholly owned subsidiary of GE Capital. His experience also includes working for McKinsey
and Company, where he assisted the German media giant Bertelsmann in executing a global
e-commerce strategy to compete with Amazon.com, with a focus on marketing and business
development.
John graduated from Fairfield University (Magna Cum Laude) with a double major in Finance
and Accounting before joining GE Capitals Financial Management Program. On this program,
he gained valuable experience in operations and marketing, particularly while working in General
Electrics mutual fund group and GE Capitals private label credit card and mortgage insurance
divisions. John earned his MBA from The Wharton School at the University of Pennsylvania,
majoring in Information Strategy and Entrepreneurship.
David Teitelbaum, Partner, Sidley and Austin
David Teitelbaum has a wide-ranging general regulatory practice for financial institutions
with specialties in payment systems, electronic commerce and banking, diversified financial
organizations, retail securities and insurance activities of banks and thrifts, and fair lending
and community reinvestment. He works closely with clients in strategic planning, day-to-day
regulatory advice, retail product development, transactional work (including mergers and
acquisitions) and legislative and regulatory initiatives. Mr. Teitelbaum also is an active writer
and speaker. His publications include co-authoring the U.S. chapter of the International
Monetary Fund book, Payment Systems of the World, contributions to The Law of Electronic
Fund Transfers, co-authoring The Community Reinvestment Act: Policies and Compliance,
and numerous articles. Following law school, Mr. Teitelbaum also served for one year as a
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law clerk to the Honorable William A. Norris, U.S. Court of Appeals for the Ninth Circuit
(Clerk, 1986-1987).
Representative payment systems and electronic banking projects include:
Structuring and negotiating relationships among Internet service providers and providers of
financial services to enable electronic delivery of financial services and payment products
Negotiation of numerous major processing contracts (including ATM, POS, credit card, EBT,
electronic banking, and Internet-based payments)
Drafting of payment system operating rules, including ATM, POS, credit card and on-line
person-to-person payment rules as well as the QUEST operating rules for electronic distribu-
tion of government benefits
Structuring of a variety of electronic delivery services utilizing a wide range of ATM, POS,
VRU, PC, stored value and Internet technologies
Structuring of payments and asset management vehicles, such as sweep accounts, com-
bined banking and brokerage services, and secured credit cards
Reviewing and promoting changes in regulations
Drafting of legislation
Practice Area: Financial Institutions Regulatory
Bar Admissions: District of Columbia, 1991
California (inactive), 1986
Education: Stanford Law School (J.D., 1986, Order of the Coif)
Amherst College (B.A., 1983, cum laude, Phi Beta Kappa)
Diogo Teixera, Executive Director, TowerGroup
As founder of TowerGroup, Diogo has functioned as a partner with major financial services
institutions, assisting banks in benchmarking their information technology spending, evaluat-
ing cost/performance of various technologies, and determining which applications software
and services would best support existing business initiatives. He has also worked with some
of the worlds largest information technology vendors to help them create innovative and
cost-efficient solutions for the financial services industry.
Because of his unique depth of knowledge and experience in the financial services industry,
Diogo has moved TowerGroup into the global marketplace, especially Europe, Latin America,
and the Pacific Rim. His ever-current expertise has positioned him to help clients evaluate the
impact of new technologies, including electronic and Internet commerce, on current business
practices in the financial services industry.
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Prior to forming TowerGroup, Diogo was a Partner at Ernst & Young, Center for Information
Technology and Strategy. He specialized in formulating strategic directions for financial servic-
es companies dealing with the impact of new technologies on their core businesses. Before
that, he was a consultant at McKinsey & Company, where he provided research and advisory
services to companies interested in the interplay between technology applications and finan-
cial institutions such as banks and insurance companies. He came to McKinsey from BancOne,
where he held executive-level positions in operations, credit card, and retail banking areas.
Diogo lectures extensively to domestic and international groups, conferences, and industry
forums. A prolific writer, he coauthored Technology in Banking: Creating Value and Destroying
Profits, now considered a standard reference in the industry. He also has written more than
100 articles for the trade press. He is quoted frequently in publications such as The Economist,
Business Week, Institutional Investor, and Computerworld, and he is a regular contributor to
American Banker.
Diogo holds a BS in Management Science from the Massachusetts Institute of Technology and
an MBA from the Harvard School of Business Administration, where he was a Baker Scholar.
Leo Van Hove, Postdoctoral Fellow, Fund for Scientific Research, Flanders at the Vrije
Universiteit Brussel
Leo Van Hove received a Ph.D. in economics from the Vrije Universiteit Brussel (Free University
of Brussels) in 1997. He is currently Postdoctoral Fellow of the Fund for Scientific Research
Flanders at the Vrije Universiteit Brussel. In addition, he teaches international monetary eco-
nomics at Vesalius College, Brussels.
Leo has published extensively on electronic money in national and international journals (such
as Netnomics, International Journal of Electronic Commerce and First Monday). A complete
list of his publications can be found at <http://cfec.vub.ac.be/cfec/lvhpub.htm>. Leo also
maintains a web site on electronic purses at <http://cfec.vub.ac.be/cfec/purses.htm>.
Richard Warner, Associate Professor of Law and, Faculty Director of the Center for Law
and Computers
Professor Warner was an assistant professor of philosophy at the University of Southern
California and the University of Pennsylvania before attending law school. Mr. Warner holds a
J.D. from the University of Southern California, where he served on the Law Review and was
elected to the Order of the Coif. He received his Ph.D. in philosophy from the University of
California, Berkeley, and he received his B.A. (with distinction and Phi Beta Kappa) in English
from Stanford University.
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Professor Warner has authored articles and books on philosophy in the areas of ethics and
philosophy of mind. He writes and lectures on jurisprudence, contract law, distance learning,
Internet law and e-commerce. He is the director of IITs executive education program, Building
Business on the Web, and director of Project Poland.
Arbar Ahmed, GeoTrust, Inc., Portland, OR
Kiril Alexiev, ABN Amro Services,
Chicago, IL
David Allardice, Federal Reserve Bank of
Chicago, Chicago, IL
Enis Alldredge, Federal Reserve Bank of
Kansas City, Kansas City, MO
John Allen, Doculabs, Chicago, IL
Jeff Anderson, Federal Reserve Bank of
Vicki Anderson, Federal Reserve Bank of
Atlanta Miami Branch, Miami, FL
Dick Anstee, Federal Reserve Bank of
Andrea Apter, Cramer-Krasselt, Chicago, IL
Russ Augsburg, Allstate Insurance
Company, Northbrook, IL
Stewart Baker, Steptoe & Johnson,
Washington, D.C.
Bill Barouski, Federal Reserve Bank of
Sarah Billings, ABN Amro Bank, Chicago, IL
Eleanor Bloxham, The Value Alliance,
Westerville, OH
Eve Boboch, Federal Reserve Bank of
Henry Bourgaux, Federal Reserve Bank of
St. Louis, St. Louis, MO
Ron Braco, Chase Manhattan Corp.,
New York, NY
Angela Brown, Amicus/CIBC National Bank,
Maitland, FL
Tom Brown, Heller Ehrman, San Francisco, CA
Mike Burnham, Clareon Corp., Portland,
Maine
Bob Chakravorti, Federal Reserve Bank of
Tom Ciesielski, Federal Reserve Bank of
Steve Cole, Cash Station, Chicago, IL
William Conant, Payment Technologies,
Atlanta, GA
Bill Conrad, Federal Reserve Bank of
Adam Coyle, First Data Corporation,
Englewood, CO
Thomas Durkin, ABN Amro Services,
Chicago, IL
Roger Ferguson, Federal Reserve Board,
Washington, D.C.
Robert Fitzgerald, Chicago Clearing House
Association, Chicago, IL
Chuck Furbee, Federal Reserve Bank of
Ron Gafron, Glenview State Bank,
Glenview, IL
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XI. Workshop Participants
Vince Galloni, Mellon Financial Corp.,
Pittsburgh, PA
Ravi Ganesan, CheckFree Corporation,
Atlanta, GA
Joe Garnett, Allstate Insurance Company,
Northbrook, IL
Alton Gilbert, Federal Reserve Bank of
Barbara Glatt, ProofSpace, Chicago, IL
Judith Graf, Chicago Clearing House
Association, Chicago, IL
Bill Gram, Federal Reserve Bank of
Nancy Grant, NACHA, Herndon, VA
Ed Green, Federal Reserve Bank of
Douglas Grote, ACI Worldwide Inc.,
Omaha, NE
Peter Gustafson, Visa USA, Foster City, CA
Patrick Gutmann, ABN Amro Services,
Chicago, IL
Steven Harris, Chicago- Kent College of
Law, Chicago, IL
Mike Haswell, Yahoo!, Santa Clara, CA
Marcia Heister, Concord EFS, Memphis, TN
Peter Honeyman, University of Michigan,
Ann Arbor, MI
Sarah Jane Hughes, Indiana University,
Bloomington, IN
David Humphrey, Florida State University,
Tallahassee, FL
Stuart Ingis, Piper & Marbury, Baltimore, MD
Richard Jenkins, SHAZAM Network,
Johnston, IA
Catherine Johnston, Advanced Card
Technology Association of Canada,
Ontario, Canada
Christion Johnson, Loyola Law School,
Chicago, IL
Gregory Jones, uBid.com, Chicago, IL
Randy Joss, Ariba, Inc., Mountain View, CA
Jonathan Kingsepp, eReliable Commerce
Inc., Naperville, IL
Thomas Kleinschmit, Federal Reserve
Bank of Mineapolis, Minneapolis, MN
Emery Kobor, CFO Magazine Enterprises,
Boston, MA
Liz Knopse, Federal Reserve Bank of
Matt Lawlor, Online Resources, McLean, VA
Chris Lawrence, Clareon Corp., Portland, ME
Martin Lemay, Laurentian Bank of Canada,
Montreal, Quebec, Canada
Jon Lindstrom, Automatic Data Processing
Inc., Roseland, NJ
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Arthur Magnus, JP Morgan, New York, NY
Edward Mahon, Federal Reserve Bank of
Philadelphia, Philadelphia, PN.
Scott Manley, ABN Amro Services,
Chicago, IL
Brian Mantel, Federal Reserve Bank of
Ted Mason, Food Marketing Institute,
Washington, D.C.
Timothy McHugh, Federal Reserve Bank of
David Medeiros, TowerGroup, Needham, MA
Michael Moskow, Federal Reserve Bank of
Steve Ollenburg, Principal Financial Group,
Des Moines, Iowa
Grace OMalley, ABN Amro Bank, Chicago, IL
Marianne Palva, Bank of Finland, Helsinki,
Finland
Kathy Paese, Federal Reserve Bank of
Jeetu Patel, Doculabs, Chicago, IL
Joseph Pawelczyk, New York Clearing
House, New York, NY
Henry Perritt, Chicago-Kent College of Law,
IIT, Chicago, IL
James Pittman, BellSouth Corporation,
Atlanta, GA
Niki Potamianos, Robert Bosch
Corporation, Broadview, IL
John Quinn, Diamond Technology Partners,
Chicago, IL
Stephen Lange Ranzini, University Bank,
Ann Arbor, MI
Terry Roth, Federal Reserve Bank of
Cleveland, Cleveland, Ohio
Eileen Serafin, ABN Amro Services,
Chicago, IL
John Sheriden, National Center on
Manufacturing Sciences, Washington, D.C.
Rui Filipe Silva, Banco de Portugal, Lisbon,
Portugal
Sam Smith, Federal Reserve Bank of
Cleveland, Cleveland, OH
David Severson, Global Commerce,
Broomfield, CO
Ann Spiotto, Federal Reserve Bank of
Aruna Srinivasan, Federal Reserve Bank of
Atlanta, Atlanta, GA
Brian Spagat, Freedom Systems, Chicago, IL
Jeff Stehm, Federal Reserve Board,
Washington, D.C.
Robert Steigerwald, Federal Reserve Bank
of Chicago, Chicago, IL
Bruce Summers, Federal Reserve Bank of
Richmond, Richmond, VA
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Mike Taipale, Federal Reserve Bank of
Cleveland, Cleveland, OH
Mick Talley, NCMS, New York, NY
John Tedesco, PayMyBills.com, Pasadena, CA
David Teitelbaum, Sidley & Austin,
Chicago, IL
Doigo Teixeira, TowerGroup, Needham, MA
George Thomas, Electronics Payment
Network, New York, NY
Wally Tokarski, Heller Financial, Chicago, IL
Jeffrey Trachtman, Juniper Financial,
Wilmington, DE
Bill Urick, U.S. Bank, Minneapolis, MN
Leo Van Hove, Free University of Brussels,
Brussels, Belgium
Jack Walton, Federal Reserve Board,
Washington, D.C.
Viveca Ware, ICBA, Washington, D.C.
Richard Warner, Chicago-Kent College of
Law, IIT, Chicago, IL
John Weinberg, Federal Reserve Bank of
Richmond, Richmond, VA
Stuart Weiner, Federal Reserve Bank of
Kansas City, Kansas City, MO
Jonathan Wineberg, Globeset, Inc., Austin,
Texas
Michael Woods, ABN Amro Services,
Chicago, IL
Kathy Williams, Federal Reserve Bank of
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Assessing Future Requirements

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A WORKSHOP CO-SPONSORED BY THE FEDERAL RESERVE BANK OF CHICAGO, INSTITUTE FOR SCIENCE, LAW, AND TECHNOLOGY OF

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