Reflection on almost 100 years of retail payments in the Netherlands

Today marks the end of a period of almost hundred years of consumer payments in the Netherlands. Here is a brief reflection on this period. My hope is that we retain our innovative mindset and that we abandon old school practices like: competition on technology and inward-thinking-based marketing practices.

The beginnings
It all started out with a certain demand of the public and small retailers, around 1900. It took however more than ten years before the city giro of Amsterdam (1916) and the national giro of the Netherlands (1918) were set up. In the period leading up to this moment, the cashiers were asked whether they wished to improve their services, as this might lead to the parliament to conclude that no national giro was necessary. Their response was too meagre as a result of which they created their biggest rival: the national giro system, operated by government.

This system effectively created a benchmark for the private industry by offering (some time after it's start) payment services for free to the public. Today we would call this the Internet model, but in those days, this lead to repeated discussions on the undue competition element. Bankers and cashiers assumed that the national giro was cross-subsidized by government; while effectively the reverse became true. The national giro acted as a cash cow that covered some of the other costs for the Ministry of Transport (including the costs of post offices etc).

The city giro Amsterdam has stood out mostly for its innovations: the use of modern bookkeeping machines, the introduction of photo-imaging (in the 1930s) to process payments easier as well as the early introduction of a payment card to the public. The national giro, in turn, was early to create a mechanism of inpayments that could be used by government services, that used similar (punch card) standards.

In this respect it should be noted that the national giro, during the previous century, was plagued by several operational distortions, leading to 'giro stops'. One big one occurred in the 1920s and shut the system down for almost a year, other ones happened after the second world war. These stops instilled a big trauma into the organisation with the effect that when in 1965 a change was made to using punch cards and mainframes, this was done with meticulous scientific precision in order not to fail. Ever since, the postal giro (later Postbank) would be very keen and strong in the area of operational logistics and control.

Competition on standards and technology
For the most part of the evolution of Dutch payments, there were differences in technology used. A first attempt to bridge these differences occurred after the second world war when a commission on the integration of giro traffic tried to bridge the bankers vs giro gap. This didn't work out.

In the mid 1960s the bankers were keen to find funding in the retail market and realised they needed a better clearing system to process faster payments. While they were in the process of deliberating this move, the postal giro offered them to join/use the same standards as they were, in order to achieve uniform processing. For strategic reasons, the banks decided not to do this and chose a slightly modified technology and numbering system of their own. Remember: this was of course the age of shielding off markets by technology.

The net effect for the consumers and companies was less positive however. In the end it took some 30 years to create bridging standards/protocols to integrate the different payment standards of bank and giro. And even when the digital, networking time started (in the 1980s) banks and giro found it hard to abandon the classic competition by technology paradigm. For the EFTPOS network they did use a common standard and this also seemed to work for the Chipknip e-money products. Yet, due to misunderstandings and distrust at the board room level, the Postbank decided to jump the Chipknip ship to start the separate Chipper product. Again, the effect was that consumers and retailers were burdened with dual standards in a market that is too small to do so.

Inward based marketing of the big banks
With the deregulation of financial markets and the privatisation of the Postbank, all providers of payments were commercial companies. The Dutch banks grew bigger and with that their bureaucracies. Postbank gradually lost its touch-and-feel as a former public entity and became a bank like all others. The best event that symbolises this is the abolition of the Postbank brand by ING.

The net effect of becoming bigger and more ambitious is that straightforward customer research and marketing gets stampified. This is a word that I coined to denote the fact that in those big banking bureaucracies the responsibilities of employees - with the only exception of the board - becomes limited to the size of a postal stamp. The result is that these companies (marketing) departments require more time for internal debate, offcie politics and consensus-finding which they can't spend at finding out how to best serve the customer.

The consequence of this stampification is that the banks lose touch with their customers and reality. Our last retail payment product, the Chipknip, showed this most clearly. The ridiculous local battle between two competing e-money schemes (although perfect from a competition perspective) created so much nuisance for retailers that this inspired them to get back at the banks. Infuriated by high terminal switching costs, they found the newly set up competition authority at their side to fight the banks cartel behaviour.

As such our retailers were quite successful: the banks were being fined and a part of the fine was channeled towards them (via a Covenant) to improve the EFTPOS situation in the Netherlands. This Covenant was even prolonged to ensure a continued collective rebate for retailers on EFTPOS fees. Effectively we could thus see the retailers as being the clear winners in the last 15 years of retail payments here in the Netherlands. [And as with today's MIF-debate we can wonder whether the benefits they derived from emptying the pockets of banks did really end up in the consumer pockets by lower prices.]

Back to inward-based-marketing: the best (and typical) example is the way the Chipknip product was initially taken off the market. Banks informed the customers that they all had to unload their Chipknips at specific loading/unloading points. This lead to a big confusion and questions on twitter. Eventually some individual banks decided to give the money back on the basis of the internal administration so that customers didn't need to bother going to an obscure loading point. And then, quickly, all banks decided to do this.

I sincerely hope that we will no longer witness these old school thinking marketing methods in the new year. Banks need to find a way to innovate and listen to clients and society or they will be trapped in old behaviour that is only comprehensible from a stampification point of view but not understandable for customers outside the bank.

Outlook
If history is anything to go by, we may well see a repetition of the SEPA-dynamics in the banking domain. What I mean with that is the following: as banks are busy lining up their internal systems in order to conform with a whole range of upcoming new EU regulation (keywords: PSD2, MIF, AML), the non-banks will be able to build all kinds of new products at the fringes of the payments market.

Most of these new products won't be made from a payments perspective but will solve a user problem. Creating a payment button in these products doesn't require much more than a direct customer relation and a European direct debit agreement. So we might well see the banks moving into a back-seat role of providers of the payment rails for non-bank providers of user services.

Late july in 1914 and 2014: two significant moments in time

A hundred years ago, the first World War was gradually developing. The political and military turmoil affected the stock exchanges all over the world and the Dutch stock exchange closed. In the Netherlands a run occured for physical silver and the government decided to issue the so-called 'Zilverbon', which was a future claim to physical silver as it would become available. Almost overnight, the payments infrastructure was changed; an infrastructure that was mostly based on the use of cash rather than bank accounts and payment instruments.

Fast forward to today: after a long period of careful planning, we are again at the verge of changing our payment infrastructure by moving to European standards in the retail payments domain. Both political and economic drivers have caused a massive technical change, which to the consumer is mostly visible via the ultralong new bank account number IBAN that has to be used as of tomorrow.

What changed in the mean time?
In between these two historic moments we witnessed:
- the gradual development of city giros, nationwide giro and bankgiro systems, account systems and the development and issuance of domestic payment instruments (acceptgiro, standing order, direct debit, guarantueed cheque, card and app payments),
- a continued learning process with respect to counterparty risk (on the exchange or with respect to banks and countries) and the development of a lot of regulation to mitigate this,
- two world wars, followed by the further economic integration of European countries into the European Union; a body that shows Member States that are still struggling with their position with respect to military action in the Eastern parts of Europe, bordering Russia,
- an improvement in living conditions, welfare and wealth.

What really changed?
It is not easy to distinguish the underlying changes in our society. Technological change may often appear to be progress while it simply reflects and allows the human faults to be reproduced on a more advanced level.

Still, I would hope the most significant change over the last century to be that we have created a number of institutions (UN, GATT, BIS, World Bank, IMF) that allow countries to not fight their battles on the ground but in economic terms. There are of course deficiencies within these institutions, but I would hope that we will move forward in using these structures to limit the amount of military conflicts as much as possible.

Floriade.... and its link to payment history

Today the Dutch Floriade 2012 has opened its doors in Venlo. And that reminded me of the Floriade Amsterdam, which was held in 1972. Few people will know that the Floriade of 1972 has a link to the Dutch payment history. Because it almost became the place were the first electronic payments at the point of sale could have been trialled. So what happened in those days....?

In the early 1970s there were some discussions about a possible merger of the Amsterdam Municipal Giro (Gemeentegiro Amsterdam, known as GGA) with the Dutch national Giro (Postcheque- and Girodienst). While the national regulators wished the GGA to become part of the National Postal Giro, the City of Amsterdam was very much opposed to that idea, since the GGA generated a nice revenue. And its director Stofkoper, did everything he could to ensure that the GGA could prolong its life as an independent organisation. And for that, he chose the path of innovation into modern electronic payments and banking.

Stofkoper invested heavily in study trips to the USA and made sure that the GGA was the first to test and adopt new technology. And for the Floriade of 1972, his true goal was to set up an electronic payment system. So he discussed this idea seperately with the technical people of Bijenkorf and Albert Heijn. He tried to convince them to quickly join in this pilot, suggesting that another interested party would also be willing to step in this pilot and demonstrate an innovative approach.

Unfortunetely for the GGA however, the technical staff of Bijenkorf and Albert Heijn were in contact with each other and found out that they were both being courted. And as the idea of setting up a closed-circuit payment system was still too fresh and new to them, they choose not to participate. So the GGA did not have the  from then on the GGA chose to focus on alternative uses of the new technology. And in 1976 it became the first to provide all its customers with the possibility to withdraw money from an Automated Teller Machine, using a 'betaalkaart'.

Now, for those interested in film and photo's of the early days; there is a five-part film around on Youtube that provides nostalgic footage of the Floriade 1972.




And for those that are more into the old-school black and white pictures, I would suggest to look at these foto's of the Amsterdamse Beeldbank: