The banking & cloud connection

Some people are very worried about their data. They contend that data stored in the cloud is open to advert targeting, compromises legal ownership, open to theft and abuse (multi-tenancy arguably making this easier), legally accessible by many Governments and not exactly open (i.e. in silos) in terms of passing data between organisations. All of this is oppressive, reduces flexibility and is ultimately little different to proprietary software.

These feelings are attributed to practical experience, distrust of large organisation motivation, appreciation that data centres are inevitably farmed out to third-world countries and doubts over centralised security. On this latter point, certainly hackers could break your firewall accessing your personal data but the effort/risk simply isn’t worth it just for you. The same effort/risk for millions of people’s data is a different matter entirely (not exactly like locking your door when you’re not at home).

Cloud vendors including social networks aren’t (understandably) forthcoming about their security protocols. Key targets for security concerns are Google/Facebook since they have been most successful at getting our data to date.

People evidently believe they want control of their own data back. What options do they have? There are parallels here with the start of banking: 

1. Leave it where it is but demand more visibility/control. Cloud vendors can expose detailed controls to the user e.g. privacy/security/access/ownership etc. Some options free, maybe some on a payment scale e.g. reducing the level of advertising/data mining. This is complicated for consumers especially since they need to do this consistently across several services. They like things nice-and-easy.
2. Take it back. Putting your data back into your own network is impracticable. You need to remove duplicates, comply with legalities, elect who can access it, keep it current, ensure its connected to the newest services, access it remotely through your firewall, tag it, back it up, archive it, analyse it, share it and maybe sell it. You need USB keys to move data around and you’re at risk of direct physical loss/theft. You need to handle all this using common standards (so you know it can be accessed in future). Directly controlling your own data is a lot of work for all but the most paranoid/justifiably wearisome.
3. Leave it where it is but apply competitive pressure. Data portability allows you to pull your data out of one site and put it into another at will. This too is convoluted. It is also somewhat of a nuclear option in that consumers won’t actually do it unless cloud abuses are so flagrant (and widely reported) that they feel compelled to and competing sites exist that can import it using a common format and their friends do it too i.e. almost never. The threat of it is arguably enough to keep cloud vendors mostly honest. Despite making in-roads over the last year, Facebook comes in for most criticism here (since at time of writing, it doesn’t allow you to download your social graph or emails). Google with Chrome OS though will surely trump this (due to its sheer cloud nature) when released.
4. Leave it where it is but apply third-party pressure. It is still unclear how much pressure third-parties such as the Cloud Security Alliance, ENISA, general certification or indeed entire Governments can realistically muster against distributed clouds operating under multiple jurisdictions.
5. Give it to a specialist. A mostly utopian ideal is the concept of the personal data locker. This focuses on holding your identifying information, financial credentials and personal information e.g. allergies/airline seating preferences centrally online with a trusted dedicated organisation. With your permission, companies/services you subscribe to e.g. social networks pull data from your locker – each using it for their own value-add functions. It could also act as an agent – storing your purchase criteria - providing deals to you and perhaps even trading your data on a open market for a return.

Continuing our banking analogy, personal data becomes less about control and more about oversight, trust, commoditization, service differentiation, commission and regulation.

The obvious missing element with cloud/data is an open market for trading – much like banking/cash relies upon today. Google are fine getting into Enron-esque energy trading to moderate their data centre energy requirements. Why not building the foundation for a data trading market? They are ideally placed to analyse, quantify, monetize and then sell data. Will someone else steal the lead much like Facebook did with our social graph? Building a data trading market might actually allow them to build on Facebook’s social graph and make real money trading. It would create a commission-based eco-system where much needed data integration/consolidation/MDM could be funded. In this world, Facebook are relegated to merely banknote printer. 

Which consumer model above will prevail? Much like retail banking at least they all will. There’s no silver bullet. Some people prefer direct control/hoarding/easy access, others will trust specialists as they are too busy (and pay for the privilege), others will lobby Government (maybe they closely identify w/ a particular ideology).

Cloud has been around for ages (pre-1990 it was called - Terminal). It is only in the last decade though that there has been both a wealth of data and the widespread desire/capability to do something with it. An open data trading market is needed to consolidate and then drive forward personal data management.

Money makes money

Following on from last post, clearly one of the key benefits of digital cash is that it does not incur transaction fees. This is the main method of monetization for services currently providing cashless transactions. The digital cash concept is not exclusively people-focussed/altruistic; there are ways to make an on-going business out of it. Here are the obvious ones off the top-of-my-head. I'm sure there are lots more (?):

1. Affiliate fees. The validator site can also function as a free service, able to connect to your bank(s), retrieve your bank account details/transactions and provide value-add services with the data e.g. Mint. In particular, would allow you to see where your money is being spent and give you hints on how to save money. Money would be made through affiliate fees/recommendations.
   
2. Marketing. Digital cash contains with it, details of what was bought, when and for how much. Analytics analyse consumer transaction patterns, build spending usage pie charts and suggesting relevant ways to save or make more money via competitive offers. Marketing managers would purchase the analytics to analyse usage patterns, create marketing campaigns and target specific demographics and customer types e.g. through Google AdSense. All of this would be tied to the (anonymous) cash rather than the individual.
   
3. Purchase sharing. A modish site (Blippy) enables the controlled sharing of purchases to see what others are buying online and in real life. Blippy lets you share purchases by syncing already existing e-commerce accounts e.g. iTunes, Netflix, Woot, eBay. It is thought to monetize through turning links on Amazon purchases into referrals/featured vendors. Analysing purchase data is a gold-mine for analytics/consumer behaviour insight. Card companies cannot share this information but having consumers proactively share with others overcomes this obstacle (and when aggregated sold on). Facebook's Buy With Friends feature works in a similar way for virtual goods only. Purchase sharing in general is a great way to drive group buying behaviour e.g. Groupon.
   
4. Exchange service. Digital cash could be freely exchangeable into physical cash and vice versa. Existing currency exchange outlets would have the infrastructure for this and this would afford them a new revenue opportunity. Also a non-monetary currency exchange could be established. There is a trend toward metacurrency: treating movement of non-monetary flows of attention, participation and trust e.g. frequent flier miles, college degrees/grades/credits, five-star ratings, certifications, bus passes, votes, your eBay rating, scores, coupons much like physical cash. Transactional commission may be made on converting between these. Obviously you cannot buy votes or college degrees but it is certainly possible to buy coupons or frequent flier miles.
   
5. Banking. Digital cash being essentially being stored in a personal data locker - free secure cloud storage identified to you. As with a regular bank, it would store your digital cash for when you need it (download to your wallet) and (like banks) make money by market speculation.
   
6. Loyalty/payment card service. Existing proprietary loyalty/payment cards such as those operated by Tesco and Starbucks respectively could be outsourced to a new consolidated, cheaper service. Anonymity could be preserved with this new solution and subscriptions could be charged to the store.

How to get money

Following-on from last post, there were some questions around how you might actually get digital cash, there are three basic methods of obtaining digital cash that I can immediately think of:

1. It could be given. Directly acquired by interaction with others (tap and pay). This is the simplest method. It incurs zero transactional charge, is quick and can be performed offline.
   
   1. Conceivably, digital cash could be printed out using a home printer (essentially becoming physical cash). The value is in the number; the bits containing its identity (value/history/security key). The number could be rendered as an abstract pattern as a security measure. Mobile app vision solutions e.g. Google Goggles on Android and Word Lens on iPhone are highly sophisticated and could read details of printed digital cash, enabling transactions/validation to be conducted, allowing printed digital cash could be exchanged without a mobile. Fundamentally, it's no different to one-use vouchers validated by merchants. If the consumer copies a voucher and tries to double-spend, it would be caught at POS.
      
2. It could be earned. This can be physically earned (in a way identical to above) e.g. a paymaster gives you $100 for a day's work (tap and pay). Other consumers/online solutions can also give you digital cash (downloadable to your mobile) in exchange for some service/incentive; for example, with Twitter, you earn a credit when someone acknowledges your tweet e.g. one cent for a view, three cents for a click, five cents for retweets and eight cents for a favourite. In this way, it behaves in a similar way to virtual cash only becoming digital cash once downloaded.
   
   1. Conceivably, digital cash could be earned by enabling the mobile app to use idyll CPU cycles to run a distributed version of the validator. In this way, a separate validator web site would be unnecessary (w/ associated costs). It would function in a similar manner to Bitcoin, an open source virtual cash solution for desktops. However, due to the complexity of decentralising the encryption algorithms involved, the need to maintain a "spent" database, the limited processing power of mobiles and the need for physical separation to prevent hackers back-engineering the validation process, this may not be entirely practicable. The situation is worth monitoring however since it makes restricting digital cash solutions e.g. by Government sanction very difficult.
      
3. It could be bought. When bought online, PayPal or similar could be used. It would be analogous to going to an ATM. PayPal last year announced PayPal for Digital Goods. Payment transactions cost 5% plus $0.05 per purchase under $12, lower than most previous micropayment transaction standards. Alternatively it could be physically bought by visiting a currency exchange with higher exchange rates.

Creating money is easy

Physical cash drives 60% of all transactions. Everyone knows it has a few issues though: production/distribution costs, counterfeiting/terrorism use, loss/theft, coinage doesn't pay interest, you need a purse/wallet and a digital divide (cannot use a physical $1 note to pay for a digital newspaper) amongst others.

Why can't we directly replace physical cash with digital cash?

By digital cash here, I mean specifically anonymous digital cash: a $10 note simply being a string of digits - a number. This number would most usefully be stored on a mobile for payment purposes (or anything else digital). What stops people inventing their own numbers – making their own money? - Cryptography. Cryptography acts like the intricate banknote design/watermark – preventing counterfeits.

How does it work? At a high level, validators and consumers have public-key encryption keys. Public-key encryption keys come in pairs. A private key known only to the owner and a public key, made available to everyone. Whatever the private key encrypts, the public key can decrypt and vice verse.

Digital cash itself accumulates the complete path the digital cash made through the economy and therefore "grows" each time it is spent. The history of each transaction (minus the identities involved) is appended and travel with it as it moves from person to person, merchant to vender. When deposited (or validated), the validator checks its database to see if the piece of digital cash was double spent. If it was copied or spent more than once, it will appear twice in the "spent" database. The validator uses the transactional history to identify dates and potentially locations associated with the double-spend and reacts appropriately e.g. contacts authorities/blacklists etc. It has more tracking potential than physical cash (despite still being anonymous).

The validator can always reconstruct the path the digital cash took through the economy (except who owned it). The validator will know what was bought, where it was bought, when it was bought and how much was paid. A side benefit of anonymity i.e. not including identities in transaction history means that the war being fought over global Internet identity is conveniently side-stepped (Facebook, Google, Twitter, OpenID [even Angry Birds] etc.).

If your mobile (or any other device containing your digital cash) is stolen or lost, you could remotely deactivate the cash (and additionally claim it back). This process would not (by necessity) be fully anonymous but it could be just tied to your mobile number, making it semi-anonymous in much the same way that Standard Bank in SA have done with mimoney.

In respect of transactional proof, the basic rule is: everyone can prove that they took part in a transaction but no-one can prove that someone else took part in a transaction.

Why is digital cash a good idea for both consumers and merchants? Simply, cost, convenience and privacy in that order.

1. Cost
   1. Credit/debit card based solutions are expensive. Merchants prefer cash since it is the cheapest to process. A British Retail Consortium (BRC) survey claims that credit cards account for 11% of transactions (but 49% of merchants' costs in accepting them). The biggest single cost of card payment collection is the bank merchant service charges. These cost the UK merchant 2p per transaction for cash, compared with nearly 8p for debit cards, 35p for credit cards and 53p for cheques. These costs are inevitably passed onto the consumer in the form of higher prices. Credit/debit cards companies simply cannot reduce this charge and are obliged to focus on target based rewards programs in order to compete. Credit/debit card solutions may not be available to all. Finally many consumers have bad credit ratings and find it difficult to obtain credit/debit cards. This also affects PayPal since it takes these cards into its wallet. In the US, this figure is reportedly 25%. Finally, merchants are never quite sure how much a credit card transaction will cost. MasterCard and Visa charge hundreds of different rates (interchange fees) for every type of card that runs through their network. MasterCard for example has 243 different fees.
      
   2. PayPal based solutions are commonly portrayed as the liberator of cashless payment however they also incur substantial fees: +2.9% + 0.30$ per transaction, +1% for transactions from abroad and +3% for transactions in a different currency. This could reach +6.9% + $0.30. This is 2-4 times as much as banks charge. Again, these costs are inevitably passed onto the consumer in the form of higher prices.
      
   3. Carrier billing based solutions are new and very considerably in terms of cost. However they also make money/transaction. It depends on volume e.g. takes around 5-10%. On top of this, there are carrier charges. They take anywhere from 25-45% of the transaction amount. Carrier billing solutions typically pay merchants once a month which affects their liquidity. Carriers are currently reticent of supporting transactions of physical goods due to issues of returns/payment disputes and so typically have $100 transaction limits for virtual goods only. Finally, carrier billing solutions are not widespread. They are unsuitable as a complete replacement for physical money, particularly in the developing world due to mobile coverage.
      
2. Convenience
   1. Card/PayPal/Carrier solutions are all centralized, you lose a bet and want to give your friend $10; one of you has to pay the cashless overhead? Who? You and three friends share a dinner at a restaurant and you pay the bill in full. Your three friends each then need to be able to transfer a quarter of the total amount to you – creating four transactions in total (and four times more transactional revenue for payment processors). You all also need to be online.
      
   2. Card/PayPal/Carrier solutions just don't work offline. With digital cash, if you and a friend are both offline, as your friend is in your social graph, you can accept it money he gives you at face value (and then perhaps validate it later when you are online). A bit like a cheque. The concept of trustspace could also be used to grade and evaluate trust outside a user's social graph.
      1. With trustspace, consumers would be rated by how many times their balance has reached zero (since here you have contributed exactly as much to society as society has contributed to you). To avoid rating manipulation (a sort of new credit rating), trustspace could be parameterized by personal turnover, a damping factor and a connectivity index derived from the number of other people you have dealt with. Your rating would diminish over time and so you would need to continue earning/purchasing with digital cash to stay active.
         
3. Privacy
   1. Card/PayPal/Carrier solutions log all transactions made by the consumer. If you lose a bet and give your friend $10, that transaction is recorded. If you go into a bar and rack-up a large tab, that transaction is recorded. If you pay for prescription medicine, a DVD in a bar, "herbal" remedies, a massage or Playboy magazine; all –all those transactions are recorded and used, at the very least, to target marketing to you. There is a growing demand for data privacy and consumers want the option to remain invisible to a payment made on their behalf. Privacy is not so much a blanket consumer need to be unseen in terms of online/digital activity but a desire for easy control. The recent WikiLeaks scandal compelled some services to stop handling Wikileaks' business including payment services (inc. PayPal). Anonymous digital cash helps fund enterprises that, for whatever reason, others object to.
      

Additionally, there are wider economic benefits to digital cash:

1. Being a zero transaction cost solution enables consumers to sell online content and would be an alternative to advertising revenue meaning a reduction in distracting/invasive banner ads (micropayment). The fact that it is free means that it will stimulate a free market economy on the web where the best people, organisations and content will rise to the top because they can be directly paid. This, in turn, would make it easier to find things of most importance (currently we are spending 53% of our time searching for the right information).
   Consumers should also see an improved web experience through a freer market economy.
   
2. A 10% shift in consumer spending, from chains/Internet to locally owned retail (currently being driven out of business due to Internet purchases), would create nearly 1,300 new jobs and over $190M in increased economic output for San Francisco alone. More jobs and more economic output in a specific geography where you own a house also means houses increase in value.
   

Twenty years ago, a digital cash solution was developed called ecash. It was sold by a company called DigiCash. A now defunct US bank and a handful of small European banks went live with it in the mid nineties but DigiCash went bankrupt later that decade and assets were acquired by InfoSpace in 2002. There was a similar story with CyberCash (over a similar timeframe). They went bankrupt in 2001 and assets were acquired by PayPal in 2005. No commercial organisations are now known to be operating these or similar systems.

Both organisations are considered to have failed due to security, implementation and administrative problems. They also made the validators – banks (when they really just needed to be web-services) which added unnecessary overheads/slowed down time-to-market. Countries historically used to back bank notes with gold but this is barely done any more. Canada for example has no gold backing for its currency.

Media interest in digital cash coincided with the dot-com bubble of 1995-2000. The vast majority of books on the subject date from that time. Online finance in general has stalled since then e.g. W3C abandoned attempts to incorporate micropayment into HTML. InfoSpace itself was a notorious dot-com casualty (in March 2000 stock reached $1,305/share but by April 2001 had crashed to $22/share).

Other than the fact that over two-thirds of the world still have no Internet access, there are several convergent trends right now that could build a landscape for a digital cash solution:

1. Smart-phones replacing traditional dial and text mobile phones.
   
2. Cheap/pervasive contactless NFC technology with an open API. Estimated 40-50M phones on market in 2011. Widespread NFC adoption of payments (149+ projects worldwide). High-profile assertions that mobile is the safest way to pay.
   
3. A thriving start-up culture (possibly due to the recession?).
   
4. Widespread and growing mobile/app culture. Mobile app market to be worth $25BN by 2015. App downloads to increase 605% by 2014. There is also more evidence that consumers are more likely to buy using a mobile app than regular web applications. Location services are on the rise.
   
5. General distrust of existing financial services (esp. banks) with consumers being open to alternatives. With both cash and clients in limited supply, barter networks e.g.
   Dibspace , ITEX, BarterCard and IMS are becoming popular. P2P lending in particular e.g. Zopa, FriendsClear, LendingClub is becoming accepted.
   
6. Rising social graphing acceptance (bolstering trust issues).
   
7. Widespread acceptance of storing personal details in the cloud via trusted sites.
   
8. Digital signature/public key based cryptography acceptance.
   
9. 25% of consumers have poor credit scores.
   
10. Distinct lack of retail banking innovation.
    

What about other forms of cashless payment?

Visa's payWave system was introduced last year as a digital wallet for the iPhone although this requires a separate case for the mobile (basically containing the same chip as new Visa cards). AT&T, Verizon and T-Mobile also announced as Isis, a joint venture to equip mobiles with NFC chips; linking them to credit/debit cards. Barclaycard has signed on to issue credit accounts through this system. Google have said that they will work with industrial partners for their digital wallet solution and with them pulling players together (highlighting better loss rates); previous collaboration issues should be resolved. Google clearly say though they want to replace your credit card not your cash.

Square allows anyone to accept physical credit card payments through a mobile or computer by plugging in a free sugar-cube-sized device so no expensive card reader is required. Of course this solution suffers from credit/debit card dependency.

Obopay lets consumers and businesses purchase, pay and transfer money through a mobile phone using a mobile application, text message, mobile Web or Obopay.com. It works on any mobile phone and any US carrier; again though it is tied to a card, in this case MasterCard debit.

Start-up Bling Nation went live in the US last year. They partner with both PayPal and banks, who then offer consumers a Bling Nation and "Bank" branded chip that can be stuck onto any mobile device. The chip allows any user to make a payment directly out of their checking account similar to a debit payment.

Rovio is taking a carrier billing approach with their payment system Bad Piggy Bank, intended for in-app payment of virtual or online goods. Zong have a similar approach. They also run a points system if you link your credit/debit card to your mobile and have reportedly processed transactions from 15M unique consumers.

All of these solutions are various themes on Card/PayPal/Carrier solutions and so also carry their failings. It could be argued that consumers and merchants are having installed on their behalf technological solutions that continue established order in preference to directly addressing their needs. In much the same way that PayPal principally extended the credit card model into the online world, current social/cashless payment solutions are seemingly doing so now.

Digital cash, in theory at least, straddles online and physical worlds better than any other solution. It empowers consumers and merchants through clear cost, convenience and privacy benefits over existing/planned solutions (physical cash or cashless payment solutions) and affords wider economic benefits to both.

The market has moved away in the last couple years from online/online solutions (payer/payee respectively) e.g. PayPal toward online/offline e.g. Groupon, Uber. On the topic of Groupon, receiving/generating a coupon then integrating this with digital cash (applying usage constraints/"increasing" your digital cash as appropriate) automatically within your digital wallet would be very powerful. It is quite possible the market will shift again to an offline/offline model in the near future. Is the best way to realise this - digital cash?

Obviously, big issues of system and national security, cryptography restrictions, economic stability and consumer acceptance would need to be overcome. As Minsky said "creating money is easy; the hard part is getting it accepted". However, alternative payment systems are already being adopted; being 20% of all online transactions. We are also seeing a surge in self-organized /managed citizen activism especially around finance and digital cash perhaps hooks into this trend too.

UPDATE: There are several ways to obtain digital cash.
UPDATE: Possible ways to monetize digital cash.