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.

Frijda's theory of money (1914): still relevant for bitcoiners today

This week, Mount Gox, a very large provider of bitcoin services, couldn't live up any more to its services agreements with bitcoin users. It provided exchange and storage services for bitcoins, but due to a technical implementation flaw, the bitcoin holdings of users were compromised. Essentially it wasn't clear who really owned the bitcoins. The website went black and users can no longer claim their bitcoins.

Tumbling off the learning curve
I view the failure of Mt Gox as a logical consequence of the learning curve that bitcoin holders and bitcoin companies face. The bitcoin, although considered decentralized, is just as centralised a system as any other value transfer mechanism. However, for ideological reasons, the developers chose to only describe the technical heart of the system (the algorithm) leaving the rest up to the market.

This open source code approach has some advantages, among which a very speedy development of applications. Yet, we are for some time now witnessing what it means if systems lacks a central authority or scheme manager. There is no entity taking responsibility for the proper application of this scheme so no one is chasing users or companies because they don't abide by:
- usage conditions (demanding user identification),
- security requirements and certification of tools,
- specific legal frameworks.

As a result we have seen a whole community of interested companies and users climbing up the payments, banking, investments and monetary learning curve. The inevitable consequence is that those who do not get it right, will pay a price, while the others continue to learn. Due to the digital nature of bitcoin, these developments unfold rapidly, allowing us a compressed overview of interactions and developments from financial history.

Frijda's theory of money (1914)
The essential lesson at stake is that the usage of any value transfer mechanism does not just rest on its acceptance by users, but just as well on the rules and regulations that underly the value transfer. In 1914, the Dutch lawyer Frijda analysed this topic in his dissertation on the theory of money. At that time discussions emerged on the nature of banknotes. Did they have value because they were exchangeable for bullion, because they were defined as legal tender or because the public used and accepted it?

Frijda pointed out that the underlying legal framework that safeguards property in a society constitute a necessary precondition for the use of payment instruments. Without such safeguards, people will tend to stick to other stores of value rather than attaching value to local bank notes. Until today this effect is clearly visible: consumers tend to hold and use foreign cash or commodities if they live in country with a lot of curruption, a weak system of justice and an instable monetary climate.

Trust is built by institutions and markets
What makes money tick is a solid institutional basis, upon which trust can be further developed. The latter part can be done by a combination of regulation (supervision) and self-regulation (market action). Which brings us back to the Mt Gox cas.

Following the events of this money, a statement was released by the bitcoin companies Coinbase, Kraken, BitStamp, Circle, and BTC China. The industry leaders committ to safeguarding the assets of customers, to applying strong security measures, to using independent auditors to ensure integrity of their systems and to have adequate balance sheets and reserves to be able to ensure continuity.

In sum we can now see both a gradual development of both the institutional framework for virtual currencies and the market-driven self-regulation. This reflect the fact that - whether you like it or not - trust for financial services is always built on institutions, regulations and self-regulation.

All 2013 activities for Financial History of Amsterdam

Launch of digital museum 'Financieel Erfgoed op de Kaart'

2013 started out with the launch of our digital museum on Financial History. It is called Financieel Erfgoed op de Kaart and is a website that contains the stories and lokation where financial history happened. The site can be viewed on the desktop, in which case it looks like a rich google-map, or via the mobile. The mobile is sensitive to the location and will show the nearest hot spots of history as well as a responsive mobile menu. The launch was covered in both national and regional media and has a steady flow of visitors ever since.

Boat- and walking tours
We organised several taylor-made walking tours on the financial history of Amsterdam for visiting US Students, Norwegian insurers, financial supervisors, Nyenrode college students, employees of Booking.com and the Dutch Ministry of Economic Affairs. On top of that we introduced a boattour on the financial history of Amsterdam, for two large organisation in the financial sector. 

April: Filosofy night on guilt and debt
In april of 2013, the Filosofy night was dedictaed to the theme of guilt and debt. We presented an overview of history and future of money with the title: “Back to the future”. In addition we joined a radio show conversation with Werner Trio of Radio Klara on the topic of money and value.

The Filosofy Night occured in the former Exchange building: 'de Beurs van Berlage'. This inspired us to dedicate a separate part of our virtual museum on the financial history to this site. Since then, all visitors of the Exchange building can use their mobile phone to have a look at the financial history of that building. 

Lectures/workshops/blogs
We wrote some guest blogs. One was about Leviathan for Felix Meritis, the other was a blog on the hands, swearing an oath, at the Amsterdam Museum site. Apart from that we regularly published in the online-blog of the Dutch Financial Newspaper: het Financieele Dagblad. We presented an unknown story of Amsterdam's city giro for a festive event in June and held a workshop on the future (and past) of money for a large financial institution.

Radioshow: Casa Luna
To end the year, we were asked to join the Dutch radio show Casa Luna to talk about the history of money, alternative payments and the current situation in the banking sector. This was a very inspiring two hours of discussion, with a nice deviation to the role of artists and their capability to point out the faults in the financial system, way before supervisors acted. 

2014: pubquiz and walking tour apps
In 2014 we will continue sharing our passion for financial history with all visitors to Amsterdam. We will develop a pub quiz on financial history and launch an iTours app on the financial history of Amsterdam. It will show pictures from the city archive and allow you to experience the history in your own pace. 

We look forward to seeing you in the new year !

Tapering delayed: another historic moment for the FED?

Yesterday evening, Money 2.0 was on the agenda in the Arminius church in Rotterdam. It was an evening in which I briefly outlined some of the major developments and lessons from monetary history to the audience. This coincided with an announcement of the Federal Reserve Board on their monetary policy, that may prove to become a historic case in point.

Balancing the amount of money against economic activity
I explained that history learns us that the amount of money in a society needs to balance the economic activity. The role of central banks is to monitor both and make serious judgment calls as to whether or not contract or expand the so-called monetary base. Expanding too much may lead to high inflation, and a more restrictive approach can lead to deflation. Finding the right balance is thus the essence of monetary policy.

I sketched that each country has in the past experienced a different learning curve in executing monetary policy. These differences help to explain why the German central bank (and the ECB, in its first years of existence) tend to be restrictive and careful not too expand the money base, while the FED appears to lean towards easing the money supply. As if to prove my point, at that very moment, the FED informed the markets that they were delaying their planned contraction of the monetary base until the economy would be seriously better.

Now, let's see where this might be coming from.

Different lessons lead to different central bank styles
First, we will look at the situation in Germany between the two World Wars. Germany had to pay France a huge amount of money as 'repair' payments for the damage done in the war. A sequence of events in 1922 however makes it clear that the Germans will have a hard time paying back their money. And as a part of the conflict between France and Germany, the Germans start printing money, to finance a strike in the industrial area of the Ruhr. The cumulative effect of the developments - see Kindleberger-  was hyperinflation and even the Dutch still recall this (some of us are still holding worthless million mark notes of those days).

Now, let's have a look at the United States at the end of the 19th century. We can see a depression, deflation and a shortage of money. And there is a serious debate as to the use of gold or silver as a standard to base the currency on. This discussion even filters down to a book, the Wizard of Oz, as Hugh Rockoff explains here. In short, the US experience is that you have to be careful not to have a shortage of money.

As both memories linger on in the collective minds, we can thus see that the German central banking approach is not to ever encounter high inflation again. They tend to be on the careful side and tried their utmost to instill this sense of discpline in the European Central Bank. Meanwhile, the FED is making sure not to ever encounter a shortage of money again, so are expanding their money base more easily.

Delayed tapering: a historic moment ?  
When the FED yesterday announced that they were not yet going to contract the money base, this came as a surprise to the market. Earlier this year, Bernanke had explained that the FED would slowly start contracting the money supply. So he caught the market off guard. And in a few years, we can determine if that was indeed a historic moment. I think it was.

The FED-announcement above all marked the beginning of an unclear policy. So far the FED has been careful to explain and predict its own moves to the market by providing so-called forward guidance. While a bit unconventional, the market has been getting used to this guidance and has also responded to the earlier announcement of more restrictive monetary policy. This response may in turn have led the FED to change its previous opinion on the timing of tapering.

What may happen now is that the market and the FED get entangled in a dance where neither party knows whether to lead or to follow. Both are looking at each other while trying to find out if the economy itself is getting in a better or worse shape, as a result of their dancing. Rather than leading the dance, based on the music, the FED is now adapting to the dance partner as well.

It's this ambiguity of the FED and increased unpredicatbility that may well make yesterdays announcement a historic one.

History of nationalisation of SNS unfolds quickly .... it's not the endgame that matters

Yesterday evening, the Dutch RTL-news released a number of confidential documents about the supervisory and regulatory discussions on SNS Reaal Group. And while it could be expected that bits and pieces of this process would slowly enter the public domain, I must say this is a very rapid disclosure. It also allows a further reflection on the very recent financial history: the nationalisation of SNS Reaal Group.

The endgame
The details of the latest discussions, just before the nationalisation, are highly fascinating. We see the board of SNS fighting for their bank, clinging onto the hope that:
- the regulator sees that the valuation of the possible losses in property finance should be lowered,
- hence, nationalisation cannot be considered a valid legal option (as any loss would not be sufficient enough to trigger the legal nationalisation bazooka),
- thus: the CVC offer stands a good chance of continuing.

Meanwhile the regulators' view is also quite clear. DNB, the central bank and supervisor, has been very patient and lenient in allowing the search for possible private-public solutions. But at some point they have to draw the line. This point arrives when the SNS-CEO and CFO explain in January to the Minister that it is either the CVC bid or nationalisation. Perhaps they hoped that this would force a momentum for the CVC-rescue.

Instead, this statement may have finally convinced the Ministry of Finance and DNB that a nationalisation was indeed the only option. The proposed deal of CVC did indeed, as our Minister of Finance explained during a press conference, contain too many goodies for CVC with too little compensation for the State. Furthermore, as I was expecting, CVC was asking for something impossible: the committment of the supervisor not to intervene in the coming years. In sum, the private-public rescue action was nowhere near to a solution that suited both the business and the regulatory constraints.

2011- and later... working towards a solution
The RTL-papers also clarify the run-up to the nationalisation. It's interesting to note that at the end of 2010, the supervisor observes that SNS Reaal Group is undercapitalized and unable to really wheather a further storm in the market or the media. From that moment on, all work is geared towards eliminating the risks in the portfolio and getting SNS Reaal to take all necessary action, including the sale of parts of the company.

I think 2011 also marks the start of a period in which both DNB as a supervisor and the Ministry of Finance become aware of the fact that some form of rescue may be necessary. But it's a different rescue this time. There are obstacles that stand in the way of the usual solution: inviting the biggest Dutch players and working out a way to safeguard continuity. This did still work for the smaller Friesland Bank (absorbed by Rabobank), but is impossible for the more complex SNS Reaal Group.

As FT Alphaville puts it, the SNS demise was an accident waiting to happen. While bank board and supervisor were doing their utmost to save the bank, the losses and problems were just too much. In this respect it should be noted that in these years, the politicians did a good job at confusing and complicating the financial markets with their prolongued sovereign crisis. In combination with all the post-financial crisis measures, this meant that there were no buyers or parties in the market that would be interested in helping solve the SNS problem. At the same time, SNS could benefit from the crisis by using ECB-funding to buy time.

Essentially we can see that the years 2011 until the beginning of 2013 all eyes were focused on getting to save SNS Reaal. And in that time the so-called Intervention-law (allowing nationalisation) was also being developed and ratified. It think that this law and the principles of trying to seek a private solution within its regulatory framework, focused the minds of all persons involved, whether bankers, supervisors or civil servants.

But is it the endgame that matters?
We should note that the true accident happened in 2006 when SNS did not limit its risks when taking over Bouwfonds Propery Finance. In doing so they exposed themselves to a continued drain on their profits and capital, which they were unable to neutralize. When the financial crisis further evolved and lead to a further worldwide change in risk and capital attitudes, the situation had essentially become unsustainable. SNS Reaal had become, in the Netherlands, the elephant in the room, that no one dared to discuss.

This leaves us with an interesting but highly hypothetical scenario. What would have happened if, at the end of 2010, the supervisor and Ministry of Finance would have stepped back a bit further. Suppose that they would have outlined that any resolution for SNS Reaal Group would have to occur in a stressed market. Which is a market in which it is hard to expect to get a good deal. And thus, they could have argued, while the financial stability of the market was not (yet) at stake, nationalisation of SNS Reaal or ringfencing of some of its activities were essentially the only two options in 2010.

My guess is that the public might have resented such an approach as being too premature. Yet, if we truly wish proactive supervision, we must also be willing to allow unexpected and early interventions, rather than just the end-of-the-road nationalisations. And it is in this respect that the current Intervention law doesn't help. It details a roadmap for the last part of the journey of a bank in despair, and thus focuses all energy of the involved players on remaining within that roadmap. As such it blocks and diverges the attention from other solutions that might have been possible and useful on the earlier bits of the road.