payment systems blogroll

Blogs that are mostly about payment systems technology: 
Blogs that are mostly about the business of payment systems:
  • Aneace’s BlogIdeas from around the world on how to re-invent the payment transaction as a privileged moment of contact, communication and exchange between customers, merchants and their banks
  • Linkdump on Payments – in the Netherlands – Europe – the World…
  • Bankwatch – Which banks understand the web lifestyle?
  • AllPayNewsMaking Sense of Payments
Coder blogs that sometimes talk about payment systems stuff:
  • Rambling Comments – Len Holgate’s thoughts on this and that… Mainly test driven software development in C++ on Windows platforms…

If you’ve got any other suggestions for this list, post a comment.

More on BSB’s

Ever since I started posting about Australian Payment Systems, I’ve been getting lots of hits on the site from people searching for a list of BSB numbers.

This list can be purchased, but lots of people are searching for a free copy on the net and I’m not sure why.

If you have a deposit showing up on your bank statement and you can’t work out who it’s from,  contact your bank or try this site which lets you lookup the details for a given BSB  [2009-08-07 – link deleted at APCA request]

If you’re after the BSB of your own account, don’t assume you can get the right one from looking up a list – you really need to check with your bank!

If you are building an application and you want to validate BSB’s that people enter, then you don’t just need the list now, you also need to keep up to date with changes to the list, so you really should go buy a subscription. On the other hand, if you don’t mind annoying people by rejecting their BSBs if someone opens an account at a new branch, then there’s a copy of the list (dated 22 Nov, 2002) on the go software download page (look for bank.exe) [2009-08-07 – link deleted at APCA request]

And if you’re just curious about what banks there are, this table might be what you’re after:

Bank Number Bank Code Bank Name BSB’s
01 ANZ ANZ Banking Group 1097
03 WBC Westpac Banking Corporation 1434
06 CBA Commonwealth Bank 1692
08 NAB National Australia Bank 2151
09 RBA Reserve Bank of Australia 7
10 BSA Bank of South Australia 198
11 STG St. George Bank 88
12 BQL Bank of Queensland 120
14 PIB Primary Industry Bank 1
15 T&C Town & Country Bank 7
18 MBL Macquarie Bank 20
19 ADV Advance Bank (Now St George) 11
21 CMB Chase Manhattan Bank 44
23 BAL Bank of America 4
24 CTI Citibank 11
26 BTA Bankers Trust Australia 20
29 BOT Bank of Tokyo – Mitsubishi (Australia) 2
30 BWA BankWest 137
33 STG St. George Bank 106
34 HBA HSBC Bank Australia 38
35 BOC Bank of China 2
36 IBJ IBJ Australia Bank 2
40 CST Colonial State Bank 535
41 DBA Deutsche Bank AG 2
42 TBT Trust Bank 30
45 OCB Oversea-Chinese Banking Corporation 4
46 ADV Advance Bank (Now St George) 14
48 MET Suncorp-Metway 407
52 TBT Trust Bank 122
55 BML Bank Of Melbourne 157
57 ASL Australian Settlements Limited 25
63 BAE Bass & Equitable Building Society 1
63 BBL Bendigo Bank 25
63 GBS Greater Building Society Ltd 5
63 HBS Heritage Building Society 999
64 AUB Australian Unity Building Soc Ltd 1
64 IMB Illawarra Mutual Building Soc Ltd 2
64 IOF IOOF Building Society Ltd 1
64 MBS Greater Building Society Ltd 1
64 MMB Maitland Mutual Building Soc Ltd 1
64 MPB Mackay Permanent Building Soc Ltd 1
65 BAY Wide Bay Capricorn Building Society 53
65 PPB Pioneer Permanent Building Soc Ltd 2
65 ROK The Rock Building Society Limited 1
66 SUN Suncorp 1
70 CUS CreditLink 36
73 WBC Westpac Banking Corporation 1232
76 CBA Commonwealth Bank 1585
80 CRU Credit Union Services Corporation (Cuscal) 234
90 APO Australia Post 60
91 ARA Arab Bank Australia 12
91 FNC Bank One 11
91 MCB Mizuho Corporate Bank 1
91 SSB State Street Bank and Trust Company 1
92 ING ING Bank (Australia) Limited 1
92 MID HSBC Bank plc 4
92 UOB United Overseas Bank 1
93 AMP AMP Bank 9
93 ICB International Commercial Bank of China 2
94 BCY Bank of Cyprus 9
94 LBA Laiki Bank 7
94 MEB Members Equity Bank 2
94 TBB Taiwan Business Bank 1

market consolidation (again)

As I mentioned in my last post, there’s been a lot of consolidation in the grocery markets, and the players in that consolidation – Coles Myer Limited (CML), Woolworths (WOW) and Metcash (IGA) – are starting to expand in to other market segments. I’ve recently come across ideal firm size theory, which suggests there are limits to that expansion, so in this post I want to look at some of the factors that encourage and constrain that growth.

Factors promoting consolidation

Branding & Advertising

People like to buy brands they know about. The way to get a brand message to stick in peoples heads is keep repeating it over and over and over again. So the more money a brand can spend on advertising, the more popular that brand will be.

Purchasing & Distribution

Any product that has high capital costs in production and distribution will show economies of scale. So the more of a particular good a single retailer buys from a wholesaler, the lower the price that retailer has to pay to get those goods on to their shelves. Bigger retailers can even cut out the middle man, buy straight from producers and develop their own private labels.

Systems

Not everyone can hire only above average employees. A good operating system (manuals, POS systems, training materials) can get consistent (although not brilliant) results with workers who are neither interested or intelligent (one POS developer told me "our target user is a 16 year old high school dropout telling her friend what happened last night on Neighbours "). A good system costs a lot of money to develop, but that cost can be amortised across all the stores applying that system.

problems with consolidation

The battle between large and small business is not totally one-sided – large companies are subject to diseconomies of scale. Smaller businesses have much lower management overheads and are able to respond much faster to new threats and opportunities that appear in the market. Smaller businesses are also less prone to conflicts of interest between owners, managers, and employees (the limit case here is self employed workers, where one person fills all three roles).

models of consolidation

Some markets consolidate through one or two retailers expanding by acquiring or undercutting their rivals. These retailers have the benefits of centralised branding, purchasing and systems, and the disadvantage of centralised ownership.

In markets for low value, fast moving goods, where there’s a lot of competition and branding has a big influence on consumer behaviour, franchises can prosper. Franchises have the advantage of centralised branding, purchasing and systems, and also the advantage of decentralised ownership. The franchise model dominates in areas where branding is important and the startup cost for each outlet is low enough that anyone with a bit of industry experience and a house to mortgage can be their own boss. The canonical example here is the fast food industry.

In some markets one or more open platforms can take hold. These give smaller businesses (who have the advantage of decentralised ownership) some of the advantages of centralised systems, and are especially prominent in services markets, where purchasing & distribution is not relevant, and personal relationships are more important than brands. E.g. the SABRE network gives independent travel agents the ability to sell tickets on any airline. Since all market participants have equal access to that system, there is no pricing or operational advantage for large players. Note that this benefits suppliers even more than buyers – if there was no open platform, then there would be huge benefits in centralising ownership of travel agents, which would lead to the emergence of one or two giants dominating the market, these giants would then be able to exert pricing leverage over the airlines. It’s not surprising then that SABRE was actually created by an airline. The real estate market can also be considered to have an ‘open platform’ since cheap newspaper advertising and websites like domain lets an independent agent advertise to the same number of potential buyers as any of their competition. Again, if these media weren’t open to all, then the market would consolidate around the handful of giant firms that could fund the production and distribution of their own advertising, and then those firms would be able to extract much larger commissions from sellers.

conclusions

Not really sure what to make of all this just yet. Ben Barren asked what impact will technology have?  Somewhere in all this WOW vs CML froth & bubble there’s an open platform waiting to get built, something that will keep the independents and franchises in the game once POS systems with supply chain integretion and the ability to sell financial products start to become competitive weapons. I’ll ponder a bit longer and see if I can discern it’s shape.

network effects in australian retail

Over the last 20 years, there has been a huge consolidation in the Australian grocery retail market. Two giant retailers (Coles and Woolworths) have opened up massive networks of supermarkets all across Australia. The number of stores owned by these retailers gives them huge buying power, so they are  able to negotiate very low prices from suppliers. They have also built out very efficient distribution networks (i.e. warehouses that suppliers deliver goods to, and trucks to get goods from the warehouses to the individual stores). This further cuts their costs, allowing them to undercut rival stores.

In order to compete with the 2 giants (who each have about 35% of the total market of groceries), the remaining independent supermarkets have turned to a company called IGA Distribution (owned by Metcash). IGA runs a distribution network, supplying supermarkets that account for about 15% of the total market. This gives IGA sufficient buying power to negotiate with suppliers prices that are about as good as the majors, and they run an equally efficient distribution system.

But the IGA strategy is to not own or manage any of the IGA branded & supplied stores. So while IGA stores share a common procurement and distribution system, they are NOT integrated at the POS level in the way that Coles or Woolworths stores are.

Now the grocery market has reached a stable configuration, Coles and Woolworths are taking their systems and distribution networks beyond groceries and in to other markets, e.g. they both already own, or have strategic partnerships with, liqour and petrol retailers, and both have started to make forays into financial services (e.g. Coles Myer Credit Cards).

As well as increasing buying power, each new segment allows cross-promotional initiatives that increase the "gravitational pull" of the retailer as a whole. e.g. Fly Buys drives business to all CML brands, and I think if CML ever issued a Fly Buys branded Credit Card that combine both loyalty programs on to a single card, it would be a huge winner. But all these initiatives require the use of a common IT platform.

Nop doubt IGA would very much like to be able to form alliances with organisations in other segments, e.g. partner with a petrol supplier, or a financial services company, but their ability to create these kinds of deals will be substantially undermined by the lack of a universal POS system that new products can be built into.

As n example of how IGA is suffering from their lack of a standard POS platform, consider their response to the ‘fuel discount’ programs offered by both Coles and Woolworths. Both the Coles and the Woolworths programs work in the same way, if you spend $30 or more at a supermarket, the POS prints a coupon on your receipt that can be redeemed at a participating service station, for a 4c a litre discount. This program drives business to both participating supermarkets and service stations, and so the costs of the discount can be split between both the benefiting parties.

When these programs first came out, the were very popular with consumers, and the fact IGA did not have a similar program hit their sales in a big way. So they were forced to respond, but since there is no centrally controlled POS infrastructure, the only system they could implement is one where supermarkets give grocery shoppers a discount equivalent to 4c a litre if they present a receipt for fuel from any service station when buying $30 or more of goods. This means that the supermarket has to wear the full cost of the program, they can’t split the cost with a service station in the way Coles and Woolworths can.

As the new products made possible by networked POS systems – stored value products like gift cards, or financial services like bill payments, or enhanced loyalty programs – become more and more competitive weapons for the majors, there will be a huge amount of market pressure to create a common POS infrastructure to give the independents the same benefits of networking and standardisation that the majors get. i.e. there will eventually be a POS network that parallels the IGA distribution network. I doubt this is something that IGA would want to build and run themselves, but it is probably something they would encourage and promote. But I think once such a network gets built, it will rapidly expand outside supermarkets, and the leading franchisors in any segment that the Coles or Woolworths duopoly expands into will feel the pressure to join a larger cross-promotional group (hence my prediction of a loyalty program that combines IGA and Harvey Norman, amongst others).

There’s a few forms this POS network could take. It could require a complete new POS system. (i.e. including the till, scanner, inventory system etc), or it could be a souped up EFTPOS terminal (managed by e.g. MoneySwitch) or maybe even a seperate device (such as a DialTime or Touch terminal). Or maybe even a combination of all of the above, i.e. using a new standard that replaces AS2805 with something a lot more extensible and easy to work with, and allowed both financial transactions (e.g. charging a credit card), as well as non-financial messaging (such as passing details of shopping baskets back to a central loyalty program server that logs it for future data mining, and responds with any applicable discounts). 

Like any system where Metcalfe’s Law applies, the hardest part will be the initial bootstrapping and concensus forming. Will be a good prize for whoever gets there first though.

more predictions on payments

I’ve been thinking and writing about australian payment systems for a while now, because I’m a geek, so I’m interested in systems, and I’m a father-to-be, so I’m interested in money. So yesterday, when Cameron Reilly suggested PayPal was a threat to the banks monopoly on financial services I had to disagree.

As I said on Cameron’s blog, there’s three components to a financial service:

  • the brand – including advertising & marketing.
  • customer service – whether it’s at a shopfront (e.g. bank branch) or via a call centre or website, you need to have ways to allow your customers to do business with you, and help them when they have problems.
  • backend infrastructure – the databases and comms links etc that store and carry transactions.

These are really 3 seperate businesses, but at the moment most major banks are in all 3 of them. But there are also lots of businesses that do only 1 of them. For example, there’s lots of brokers that do the sales & marketing of home loans where the customer service and infrastructure is provided by a major bank.

PayPal (like the banks) also cover all 3 areas, although I doubt they could repurpose their current infrastucture very easily to handle e.g. home loans or credit cards. Also as soon as you get into products more complex than straight money transfers, your customer service requirements will go way up. You’ll need branches where people can get help filling out application forms, and ATM’s where people can take cash out. Basically you need to stop being a purely ‘online’ company and start owning real estate. And it is much much harder to build a network of physical outlets out from a website than it is to add a website to an existing distribution system.

So while PayPal might try to offer more services, I think they will just be rebranding products offered by other companies. So rather than competing with the branches and infrastructure of ANZ / NAB /CBA / Westpac, they’ll be competing with other resellers like Virgin Money to onsell the banks’ products.

But that doesn’t mean the banks aren’t about to get shaken up. They will, just not by PayPal. The real threat for the banks is from organisations that already have strong brands, and lots of physical distribution points and customer service staff. Once again, Coles Myer and Woolworths will be the ones to force an industry realignment. And it’s happening already – today Woolworths announced they are rolling out their own ATM network. Coles Myer offer Credit Cards and Insurance.

The major retailers have a big advantage over the banks when it comes to running a payment processing system – because they own so many retail outlets, lots of the payments will be closed loop, meaning no interchange or merchant service fees. I.e. it will be cheaper for Coles Supermarkets to take payment on a Coler Myer issued MasterCard than a CBA issued MasterCard.

Also, these retailers are able to develop new stored value products that work across their distribution network. e.g. the Coles Myer Insurance Claim Card. I expect to see a lot more ‘single purpose’ stored value products as well, like Woolworths ‘Essentials’ Card. Since Woolworths control the retail outlets as well as the payment instrument, they can ensure that the cards are not used to buy booze or smokes. Compare that with the Visa Debit cards issued to hurricane Katrina survivors for emergency supplies – they were used for gambling, porn and tattoos

So here’s my tips for the Australian financial services market 10 years from now:

  • Both Coles & Woolworths will offer a single integrated Credit/Debit & Loyalty Card (i.e. instead of having separate credit cards and a FlyBuys card, you will just hand over your Coles Myer issued credit card)
  • There will be a loose federation of independent ‘tier 2’ retailers combining to offer financial products (stored value cards & loyalty cards) usable across that network. That federation will probably include IGA & Harvey Norman.
  • 50% of EFTPOS transactions will be on Credit/Debit/Stored Value cards issued by retailers
  • 20% of car & home insurance will be sold by retailers
  • 10% of home and car loans will be sold by retailers
  • At least one of the retailer programs will allow customers to download their receipts electronically. e.g. Woolworths will offer a credit & loyalty card that’s integrated with MYOB. (American Express are pretty close to this already)
  • The infrastructure underpinning the above will be a mix of in-house and rebadged 3rd party products. Where 3rd parties are involved, it will be agile infrastructure companies like MoneySwitch that win the business.

In  short, I’m predicting that the banks will lose their retail banking business to the retail giants, and their wholesale (‘backend’) banking business to the infrastructure specialists. Maybe even one of them will be gone (through a merger, there’s no way the RBA would let a major bank collapse).

reading the tea-leaves on payment systems

in PayPal vs the banks, Cameron Reilly asks what’s going to be the discontinuous innovation into the banking industry, with PayPal being a contender.

Personally, I’m not that convinced PayPal is such a big deal here in Oz – with BECS direct deposits Australians already have a pretty cheap and easy way to send and receive money . So PayPal may be a competitor to BECS, but I don’t think it changes the game in the way that it does in countries without a low-cost bank-to-bank transfer system.

let’s put this to the test – I just did an ebay search for leaf blowers. There were a total of 9 results. 6 of them accepted payment by direct deposit but not PayPal, 2 took direct deposit AND PayPal, 1 took neither, none took only PayPal. Compare this to the first 5 results from US sellers, ALL of them accepted PayPal, none of them wanted a direct deposit.

So let’s say PayPal is NOT going to be as disruptive here as it is in the US. It will certainly compete with BECS, and force the banks to reduce costs and add features, but I doubt it will ever really be used much outside of ebay.

But I still think there is room for a big shake-up in payments. But where I see the room for innovation is in getting a closer integration between the payment system and financial record keeping for consumers and SMEs. It seems absurd that so much work is done pumping data out of POS systems into things like Loyalty Programs and stock control systems (that can then talk to supply chain management systems that talk to wholesaler’s systems) and yet I still get handed a tiny little thermal printed receipt that I then have to type in to MYOB or Excel or whatever.

Where POS data goes (and where it stops)

I know there’s some niche products like fuel cards, which use custom (retailer specific) extensions to EFTPOS transactions to include lots of details about the goods and services being paid for.That way the fuel card issuer can send you a single monthly statement (or even make it available for electronic download) that has all the data you need for your financial records for vehicle expenses.

This works great for expenses related to company cars (which is certainly a huge market) but unfortunately there’s not yet a more general solution here. I guess there’s a few ways this could happen. Maybe AS2805 could be extended so each EFTPOS transaction includes the full shopping basket being paid for (including GST on each item), and then my bank website  could let me download the data or even better, let me assign some kind of expense category to each line item, and maybe even do some of my BAS calculations for me (assuming I tell the bank my ABN, and that the card is being used to run a business, so all GST I pay with that card is claimable). That’s a pretty huge migration though (i.e. upgrading every single EFTPOS terminal  and every POS system in OZ), can’t see that happening any time soon.

Or maybe as POS systems get smarter and broadband becomes ubiqutious, there might be room for some kind of multi-retailer loyalty program where the benefits for the consumer include electronic access to the transactional data that is collected in some industry standard format like OFX.

Or… maybe I’ll just stfu and keep collecting those crappy thermal paper receipts and typing them in to Excel every time my wallet gets so full of the damn things that I can’t sit down anymore.

when business rules collide

A couple of weeks ago, I posted about the non-bill that Telstra sends me every month. At the time, I assumed the reason for the $0.56 charge existing at all was that I had underpaid the final bill.

But the same thing has just started happening to Angela, who is now getting a $0.09 non-bill sent to her after also cancelling a service. And a closer inspection of the first non-bill shows that Telstra have charged a 9 cent fee for paying the previous bill by credit card.

This is actually the result of the RBA rulings that now allow merchants to explicitly pass on merchant service fees (and thus stop retailers having to raise prices for everybody to subsidise credit card loyalty programs). If you look at the fine print on the back of a Telstra bill, you’ll see that paying by credit card incurs a small percentage fee, with different fees being charged depending on what credit card is used).

This fee can obviously only be calculated and charged after each bill has been paid. I.e. the charge for paying a bill this month will go on next month’s bill. But what if there is no bill next month (because I’ve cancelled the service the bills were being sent for)? In that case, then Telstra will create a bill containing only the credit card payment fee, decide that it’s too low a value to collect, and then send me a statement saying the balance will be carried over to the next month. Once that state is reached, there’s no obvious way out – it seems like Telstra are going to spend a $1.00 or so every month telling us we owe them 9c, but not to pay it just yet.

As far as I can work out, this must happen every time someone cancels a Telstra service and then pays the last bill by credit card. In which case, there must be a heck of a lot of these non-bills getting sent each month.

That may explain why Telstra is so keen to revamp it’s billing systems.

Credit Card Loyalty Programs

In an earlier post, I talked about retailer loyalty programs, and showed how for most retailer loyalty programs, the motivation is to encourage customers to identify themselves to the retailer on each transaction, so the retailer can better understand their customers.

But the most commonly encountered loyalty programs these days seem to be those run by credit card issuers. Alittle thinking on the matter will show there’s some major differences between these programs and the retailer loyalty programs I looked at before. The first one being, when you participate in a CC loyalty program, there’s no additional plastic card that you need to produce on each transaction – the CC issuer already knows how much you spend on your card, and at what retailer.

Also, unlike in retailer loyalty programs, the rewards you earn are not things that can be written off as marketing expenses by the program owners. Say you sign up for the Dymocks Booklover program, and spend $100 on books. You’ll then get $5 to spend the next time you come in to the store. So the net result is that Dymocks have given you a 5% discount in exchange for you first telling them what they need to know in order to more efficiently market to you, and then you coming back to the store and spending more money. This is a win-win.

But When you cash in your ANZ Rewards Visa points for a $100 Harvey World Travel gift card, then ANZ are handing over real money to HWT to pay for that gift card. Probably ANZ will have negotiated a discount from HWT, so they will pay a bit less then the face value of the gift card, but they are still paying out real cash to a 3rd party, which has to be raised from somewhere.

Let’s just re-iterate this. Loyalty programs offer credit card issuers no additional information about their customers, and the rewards that they offer cost the issuers real money to provide.

Which begs the question: why on earth would any credit card issuer run such a program? The answer to that comes in two parts. First, every issuer runs these programs because every other issuer does as well, so customers expect to be able to earn rewards. A credit card issuer without a loyalty program would be like a peacock without a brightly coloured tail.

The second part to the answer is, issuers can afford to run these programs because they are able to push the cost of the rewards on to the merchants where you use your credit card. When a credit card is used to pay for goods, the merchant who has accepted the card ends up paying their acquiring bank a fee called a Merchant Service Fee, that will usually be between 1% and 5% of the total payment. The acquiring bank then splits this fee with the issuing bank. In other words, whenever you pay for something on a credit card, up to 5% of what is charged to your card ends up going to the banks processing the transactions, not to the retailer who provided the goods or services. If you paid by debit card (i.e. chose ‘cheque’ or ‘savings’ on the EFTPOS terminal) then there would still be a fee charged to the merchant and split between the acquirer and issuer, but the fee would be a flat fee (somewhere between 20c and $1.00). So when you pop out to your local hardware and spend $400 on a new lawn mower, whether you press press ‘savings’ and ‘credit’ on the EFTPOS terminal can mean either and extra $20 margin going to the hardware store or else, $10 each in fees to the acquiring and issuing banks. Assuming you have the money in your savings account, and you’re going to pay your credit card off in full at the end of the month anyway, why would you press ‘credit’ (and give that $20 to the banks) instead of ‘savings’ (and let the hardware store keep it)? Well one thing that might sway your mind is the fact that choosing ‘credit’ will earn you some rewards points, whereas choosing ‘savings’ won’t.

In other words, loyalty programs are a way of encouraging people to favour one payment method (credit cards) over another (debit cards) that are transacted and settled in exactly the same way but have very different fee structures. The credit card issuers can ‘bribe’ people to pay by credit cards, and fund that through the merchant services fees they charge (Since both the value of rewards you earn, and the fees you earn for the bank that issued your credit card are directly proportionate to the value of goods and services you pay for using your credit card.)

So the merchants in turn know that a reasonable percentage of their customers will pay by credit cards, and so when they are working out what price to charge, they will factor in the merchant service fees.

So the net result is, everyone ends up paying (slightly) higher prices to cover the cost of credit card loyalty programs. This is something the RBA has noticed, and is working to address.

Settlement is Odd

I only just realised this while talking tonight with James from Decillion, but any settlement process should always involve an odd number of parties.

To prove it, we’ll first need some definitions:

Call the party that owes money the debtor
Call the party that is owed money the creditor
Call the party that holds the account the debtor will pay out of, the debtor’s settlement agent
Call the party that holds the account the creditor will be paid in to, the creditor’s settlement agent

The simplest case is if the debtor and the creditor both hold accounts at the same insitution. Then there are 3 parties – the debtor, the creditor, and the single insitution that acts as settlement agent for both parties .

If the debtor and the creditor do NOT hold accounts at the same institution, then settling between the debtor and the creditor creates a debt between the two agents. I.e. the debtor’s settlement agent itself becomes a debtor to the creditor’s settlement agent, and that debt needs to be settled using  accounts held at some third insitutution in the name of the agents.

So settlement is a recursive function, and each level of recursion adds 2 parties, while  the final call adds 1. And 2*n+1 is always odd for an integer value of n.

Here’s the settlement algorithm as pseudo C#

static void SettleDebt(Party creditor, Party debtor, double amount) {
    if (creditor.SettlementAgent == debtor.SettlementAgent)
    {
        Party agent = creditor.SettlementAgent;
        agent.FindAccount(debtor).Balance -= amount;
        agent.FindAccount(creditor).Balance += amount;
    } else  {
        SettleDebt(creditor.SettlementAgent, debtor.SettlementAgent, amount);
        debtor.SettlementAgent.FindAccount(debtor).Balance -= amount;
        creditor.SettlementAgent.FindAccount(creditor).Balance += amount;
    }
}

Let’s apply this to direct deposit transactions, and assume Alice has bought a 2nd hand copy of Applied Cryptography on eBay, so she need’s to transfer $98.36 to Bob. Also assume Alice banks at the CBA. She uses the CBA website to initiate a transfer to Bob’s account.

If Bob also banks at the CBA, then the settlement process is completed by CBA updating it’s record of the current balance of both Alice’s and Bob’s accounts. In this case there are a total of 3 parties involved (Bob,Alice, the CBA).

But if Bob’s account is at NAB, then as well as both NAB and CBA updating their records of Bob’s and Alice’s accounts, a debt is created beween NAB and CBA that gets settled by the RBA updating the NAB and CBA Exchange Settlement accounts. That makes a total of 5 parties (Bob,Alice, the CBA,NAB and the RBA).

I haven’t talked about transfers to overseas accounts yet, so for the moment I’ll just confirm there can be 7 parties to the transaction, one of them being the Bank for International Settlements, and interested readers can fill in the blanks themselves.

Retailer Loyalty Programs

It seems like every time I go into a shop or open my mail I get asked to join a loyalty program of some sort or other. This post looks at why they are so popular (both with retailers and consumers) and also looks at how they are implemented.

Organisations generally have 2 motiviations for creating loyalty programs. They either want to understand what their customers are doing, or they want to change what their customers are doing (i.e. by encouraging people to buy more goods & services), or both.

The organisations that are most prominent in running loyalty programs are retailers, credit card providers and airlines (i.e. ‘frequent flyer’ programs). The blend of motivations, and the implementations, differ between these groups, so in this post we’ll just be looking at retailers who sell things like clothes and groceries to individual consumers. In a later post I’ll look at how and why credit card and airline loyalty programs differ.

For most retailers, loyalty programs are all about being able to track what customers are doing. Any modern POS system will be able to report on how much of each product has been sold, but retailers also want to know who has been buying each different product, so they can tailor their marketing appropriately. The problem is, in an ordinary retailer payment transaction, there is no way for the POS to capture anything about the identity of the purchaser.

By giving customers a plastic card with a unique ID encoded on it, and encouraging the customer to produce that card every time they make a purchase, retailers get to associate purchases made at different times and at different stores with the one customer. They also will have made the customer provide their name, address and other demographic data at time of signup. This means the retailer can work out e.g. what models of leaf blowers are most popular with married male self-funded retirees (and therefore should be advertised in Holding Hands in an Autumn Breeze – The Magazine For Married Male Self-funded Retirees Looking for a Leaf Blower).

The incentive for consumers to first, tell retailers who they are, where they live, and how much money they have, and second, hand over that bit of plastic with their unique ID on it everytime they front up at a POS, is that the retailer offers rewards to people willing to participate in this data-collection exercise.

For some retailers, the reward takes the form of a discount made at the time of the initial purchase. These rewards are certainly easy to implement. But other retailers have decided that the cost of administering a more complex reward and redemption system is worth the benefit of making the customer come back later to use their reward. The ideal result here is if the retailer can motivate you to take your reward in the form of a discount towards something that you wouldn’t have otherwise bought.

Components in a typical retailer loyalty program

Putting it all together, a typical retailer loyalty program looks like this:

  • A customer signs up to a retailer’s loyalty program, and in the process provides demographic data. The retailer stores this data in a database, associates the customer record with a unique ID, encodes that unique ID on a plastic card, and mails the card to the customer.
  • Whenever the customer buys goods from that retailer, they present their card, which is swiped through the POS. The POS captures their unique ID, and forwards that ID along details of individual items purchased on to a central tracking database.
  • Data from the tracking database goes in to a data warehouse, that is used by marketing analysts to see who they typical customers are for different products. This information is used to tailer marketing and advertising programs.
  • At regular periods (most frequently this is quarterly), a process will be run to work out how many rewards each customer has earnt. Usually the rewards earned are directly proportionate to the total value of goods purchased with that retailer.
  • Once the reward values have been calculated, a letter will be sent out to the customer telling them what their reward is. Often this letter will also include marketing material tailored to this specific customer. Remember the whole point of the program is to let the retailer know exactly what each person buys.
  • As well as telling customers the value of rewards earnt, the mailout will also include information about how the rewards can be redeemed. In a few cases (e.g. FlyBuys) the rewards are redeemed by selecting goods or services from a catalogue, and either dialing a call centre or using a web application to redeem rewards for the selected goods. This style of redemption is generally only used for programs (like FlyBuys) that are not specific to a single retailer. It is far more common for the rewards to be presented in the form of a voucher or gift card that must be presented in store, that way the retailer has the opportunity to sell you more stuff while you are there.

If we look at the economics of a single retailer program, we’ll see that costs fall into these areas:

  • System Development & Maintenance – The original loyalty programs where all in-house custom development jobs run by major retailers who are able to amortise the development costs over hundreds of stores. Nowadays the tracking and analysis components of loyalty programs are becoming available as off the shelf products
  • Marketing Data Analysis Loyalty Programs generate a heap of data, and it takes a lot of MBA graduates with wizard-level Excel skills to turn that data into useful knowledge about customers. But any retailer thinking about a loyalty program will probably already be spending a lot on market analysis anyway.
  • Funding The Rewards – In the best case, customers will spend their rewards on things they wouldn’t otherwise buy, and thus running a loyalty program can fund itself by leading to increased sales. Alternatively, with the right market analysis (to identify what products each customer is most interested), and a good relationship with the suppliers, it may be possible for retailers to reward customers entirely with discounts funded by suppliers (e.g. find people who buy a lot of Schick razors, then tap Gillette for some marketing funds to send those people coupons worth 50% off Gillette razors. ) In the worst case however, retailers will end up giving a discount to customers on items that the customer was going to buy anyway. In other words, like any discount program, there is always the risk that loyalty programs can lead to an erosion of margins without any corresponding uplift in volumes.

So there’s lots of room for risks of cost blowout and margin erosion, and potentially a lot of reward in the form of improved market intelligence. As loyalty programs evolve in to an off-the-shelf product, a lot of the risks are being diminished, although the potential for a loyalty program to offer any competitive advantage is also diminished at the same rate.

In fact as loyalty programs become more and more ubiquitous they also become less and less useful, to the point where they can become an essential cost that all market participants have to wear, but non derive any benefit from. In my next post on this topic, I’ll look at how this has happened to airline and credit card loyalty programs.