Schwerpunktthema: Elektronisches Geld und Internet- Zahlungssysteme

An Interview with the Financial Issues Working Group's Chairman Charles Goldfinger

Charles Goldfinger is one of the outstanding experts in the area of global finance and intangible economy. He worked as consultant for S.W.I.F.T (Society for the Worldwide Interbank Financial Telecommunications) before he started his own company Global Electronic Finance (GEF) in 1987. He is also a well-known author for his books "Geofinance: pour comprendre la mutation financiere" (Le Seuil 1986), "L'utile et le futile: l'economie de l'immateriel" (Odile Jacob 1994) and forthcoming in September 1998 "Le travail et le hors travail: vers une société fluide"(Odile Jacob). When the Financial Issues Working Group (FIWG) was set up on behalf of the European Commission, he became its chairman. Knud Böhle of Project PEZ (Projekt Elektronische Zahlungssysteme im Internet) spoke with Charles Goldfinger.

Q: The FIWG appears to be a catalyst of discussion in the field of electronic commerce and electronic payment systems. That is the impression we got from the FIWG's WWW-Site ( http://www.ispo.cec.be/fiwg ). How would you describe the FIWG and its role?

G: First of all it's a new type of group: it is an informal network. I think it fills a definite gap, because of the way things are changing in the area of electronic commerce and in the area of finance. Everybody who works in financial services needs to better understand what technology does and the technology providers need to better understand financial issues. Technology is no longer just a tool that financial service industries use. Nowadays the big technology providers, such as IBM and Microsoft as well as big telecommunication companies are a major player in their own right in electronic services. So there is a clear need for a forum. But although the WWW-Site of FIWG has turned out to be useful, it is not as interactive as we would like it to be. We had great difficulties trying to stimulate discussion. And often people will send out e-mails rather than post contributions to the site. I think it is a little bit of a cultural problem: in Europe we are simply not used to the same kind of "posting culture" that you have in the United States.

Q: How did the FIWG come into being?

G: The general idea, that it would be useful to have a network type of organisation, came from the Commission. But it was our principal role to define the specifics, the objectives of FIWG and the way it should be organised. We drove and we continue to drive the group. In April 1996 meetings with the Commission started and we decided it would be useful to provide more structured and stronger support. Then we spoke with industry and we got support from them and therefore - as a result of it - we set up a formal structure with a Steering Committee and with the financial support of the Commission. And that's how we operate today.

Q: What DG of the Commission has been involved?

G: FIWG started with DG III and as part of the G8 Electronic Commerce Project ("A Global Marketplace for SMEs"), but we co-operate very closely with DGXV too. If you work in financial services DGXV has to get involved and DGXV is very actively involved in what we do. The close relation to the G8 project initiative means that we are very attuned to the international developments that go beyond Europe and in this area you have to basically deal with what is happening in the United States, particularly because many initiatives in this are coming from the United States. We have close contact with major American players who are present in Europe, but also with organisations such as BITS (Banking Information Technology Secretariat), based in Washington, which provides a focus for the input of the American bankers with respect to information technology.

Q: How is the Steering Committee of FIWG composed?

G: The Steering Committee is really a mixed group. We have Europay there, we have Visa, Banksys, we have Gemplus, the Thomson Group, we also have a major Dutch bank, ABN/AMRO, and Electronic Commerce Europe. The European Committee on Banking Standards (ECBS) is also a member and we work very closely with them. And we have DGIII and DGXV. By the way, we do not have a strictly European Union membership . One of the members for example is coming from Norway, BBS (Norwegian payment system). So we try to have a cross-section of people who are knowledgeable and influential.

Q: Are there members from national parliaments or national political organisations involved in FIWG?

G: No. We do not have direct interactions with political bodies. But what we do for example is to keep the European Central Bank regularly informed. So they are involved in our meetings and other activities but they don't sit on the Steering Committee. We also monitor activities such as the Stevens initiative ( John Stevens, UK MEP, who wrote a report concerning a "smart card Euro electronic purse").

Q: Let's get into some more detail with respect to the political role of FIWG. From the information at the WWW-Site I have the impression that FIWG is not only moderating, but contributing more directly to industry policies - think of those pilot projects.

G: We have been very actively involved in the definition of the priorities for the Fifth Framework Programme in our particular area. For this purpose we have set up a group of experts from the telecommunication industry, the financial services industry, suppliers and me as the pen holder. One of the things we are also trying to do is to get the pilot projects (like the Smart Euro project) working.

Q: Again, how are you influencing politics? Are you aiming at awareness of issues such as the Smart Euro?

G: We try to. We haven't done it by publishing editorial pages in wide circulation newspapers, but we have spoken to some senior political figures - Finance ministers and people like this - to make them aware of the Smart Euro possibility. We try to influence policy more than politics.

Q: Did you influence political regulation, for example of the European Monetary Institute?

G: We had no input in any statements EMI has made about electronic money. The group as such does not take a position. It works more like this: people from various constituencies meet and exchange views, communicate with each other. For instance, DGXV communicates its views during a FIWG meeting, then everybody, who wants to speak, can express his or her opinion, either personally or on the behalf of his/her organisation. You cannot expect a unique position, because there is such a variety of interests around the table that it is not always evident to bring it to a consensus,. except for the lowest possible common denominator of the type "level playing field", "liberty of choice" etc. As said before FIWG is more a kind of a forum, where people can come and talk informally, exchange ideas and so on, rather than a formal committee.

Q: Lets take the issuing of electronic money as an example. There is an ongoing debate if the regulation by the "Kreditwesengesetz" and the forthcoming regulations at the EU level are kind of over-regulation that might be disadvantageous for innovation in this field. Could FIWG articulate an opinion different to the official policy?

G: My personal opinion is different, but this is my purely personal opinion. I have two points. One is that it is going to be very difficult to restrict the issuing of electronic money, although the Central Bank is trying to make the separation between a completely generic money and a specific money. For example, you can say certain types of stored value cards are a specific money, because you cannot use them except for a specific purpose: telephone calls, transport tickets, etc. But what happens in a situation when you can use them for broader purchases, as it is the intention of the Paris transport company, whose card will be used not only for transport but also for purchases at the subway stations, telephone calls, etc. So, little by little an overlap is being created between specific and generic money. Their strict separation becomes more difficult to enforce. But I have a more fundamental point ( and again that is my personal view, it is not a view of the Commission or of the FIWG). It does not matter who issues the money but who settles the money. It is the settlement that should be controlled by the financial sector and overseen by Central banks.

But I admit, nobody really knows what is going to happen. E-money or cybermoney is a very new situation and the expertise is not particularly concentrated in one place or in another. Also there are a lot of things which are being said publicly which are not correct, to say the least. I feel there is a real need to have a forum where people can discuss and look at the issues in a kind of analytical way, regardless of their institutional hat.

Q: But again, if we take the example of the Smart Euro, what FIWG is doing is more than only talking...

G: If we have a subject which we feel is of real interest and there is a real need, then we try to organise a specific working group. So we had a c meeting dedicated to the Smart Euro and everybody who is concerned was around the table. By the way, it was not such a large number of people. And we said "what can we do?". And some people from the Commission said "we would like to do something, we would like to get involved". And that, of course, leads to some projects which then are discussed directly between the Commission and the project promoters.

Q: Is the SmartEuro project a political project?

G: The Euro is a political undertaking and I would say this project has a political dimension. The Euro is for the man in the street. It is not the kind of an institutional project as TARGET for wholesale banking. It will be there and it will be everywhere. And it is going to develop much more quickly than people think.

What we are trying to do is to make the electronic Euro a reality. And it is not going to happen by politics, it is going to happen because somebody will issue the cards, and the standards will be agreed, and there will be things done like cross-boarder standards. That's what we are trying to do.

Q: Do you think it is a realistic option that the Smart Euro should be here in this millennium?

G: I don't know if it is realistic or not, but I think at least we should try. As Jack Welch, CEO of General Electric says, it is a stretch. But unless you try you will never know. We will never know what we missed.

Q: Do we really need a Smart Euro? Won't the credit card organisations say "We have a solution for this problem. We don't need a Smart Euro. Look at VisaCash and Mondex"?

G: Everybody agrees that there is no universally agreed solution. There are many different schemes, many of which being completely incompatible. I mean completely different: technically different, different philosophy, different set-up etc. The basic channel for technical interoperability in Europe is ECBS. And in this body the key role is played by nationalcard issuers not by international card issuers. That's the current situation. Today Mondex has very little presence in continental Europe, and VISA has a problem because VisaCash experiments are not compatible technically with each other. If you look at who really are the leaders in terms of the deployment of smart cards systems, clearly national organisations - whether it is Proton, GeldKarte or Carte Bancaire - are leading. So the best and quickest way forward would be for these organisations to agree how it could be done. And that involves as the first step technical interoperability, which is making considerable progress. But that is only the first step, because the key issue in banking always was business interoperability rather than technical interoperability. If you look at ATM interconnection, it is the business interoperability that was a major hurdle and the main reason it took so long (eight years) to find a solution. Ultimately, the whole SmartCard business is a business problem and not a technical problem.

Q: But it may also be a problem of power...

G: We cannot discuss power. We can discuss economics, we can discuss convergence of interests. Power is something that is completely outside our terms of reference. I wouldn't comment on it at all. I think what is important, however, is to show and demonstrate that there is a definite cost of fragmentation and a definite benefit of interoperability. That is what we are trying to do. I would say that in economics we are trying to build a business case and I think everybody would agree that the business case for interoperability is strong.

The benefits are obvious. If there is an interoperable scheme with a clear migration path and with good underlying economics, then you're going to get from a situation with a lot of cards with no merchants and subsequently no transactions, to a situation where you issue a lot of cards but you have much more merchants and many transactions. Point number 1.

Point number 2: We do not see this problem as a purse problem. "Purse" is merely the tip of the iceberg. The key issue is how you are going to migrate from the payment card infrastructure to a Smart Card-based one. And if you are going to migrate, you are better off using a common standard. Migration is not a major problem at the card level, because every card has to be renewed every two to three years anyway. So it is not a problem. A big problem could arise with merchant terminals, with merchants more reluctant to migrate.

Q: But everybody agrees that at the moment there is no business case.

G: There is no business case for the purse per se. The purse has to be integrated in the broader scheme. The reason why this is so important: you need to migrate your infrastructure to a Smart Card based one. That is the business case. This has not always been articulated clearly. One of the roles we are trying to play is trying to articulate the business case. So that is something we're working on.

Q: You refer to a recent study of Global Electronic Finance?

G: That is what I am talking about. You saw some elements of the study at our WWW-Site. The full study will be available soon. It will take some time, because we want to be sure of the way we articulate our viewpoint.

Q: At your WWW-Site you write, we have to rethink the purse...

G: That's right. That is my view. You have to rethink the purse. There is a justification for the simple type of purse that is being issued by telecom companies or transportation companies, which is a quasi-currency.But if you are talking about a generic all-purpose purse, it has to be integrated with other payments. And that is in a sense the way that Proton is moving and the GeldKarte too. Once you get a smart card-based infrastructure, you can make the whole thing fairly transparent to the customer. In the end it is his choice to make a debit or credit payment or use the electronic purse - information technology should make such choice easy and transparent.

Q: The basic idea is to have a common infrastructure for all types of payment cards...

G: The problem is very simple. The Smart Card is always more expensive than magnetic strip. Therefore, if you use the Smart Card for smaller-value payments than the magnetic card, it will never make sense. The card only makes sense if you use the Smart Card technology to its full potential, which is integration and multifunctionality.

Q: I see the point, but many banks acted differently...

G: In France or in the United States, for instance, they said "well, the electronic purse is a new business, lets separate it". And then you make absolutely sure that it can never work.

Q: In addition to the Smart Euro working group, there is a working group on internet banking.

G: That is just starting. We had a first meeting. And what we tried to do is to get people involved to think about what we can do in internet banking in Europe. Again, the problems of standards (Do we need European standards?) and do we need some specific infrastructure? Do we need some Europe-wide Intranet/Extranet? That is the kind of issues we are discussing. And that is very much an ongoing process.

Q: Do you think the developments have been taken further in the United States than in Europe?

G: I think one has to be careful. I would say that if you take electronic banking as a whole, Europe has a clear lead. If you speak about initiative in terms of standardisation then of course Americans are much more visible, with OFX, Integrion Gold, which are a specific US standards. In Europe we have national standards. We have one in Germany (HBCI) and one in Spain. That is not the best way to go forward.

The question I am asking is if we have to adapt US standards or do something else on our own. We can adopt the American standards or we can try to do something else. But I am sure the natural framework is the European framework not the national framework.

Q: Internet banking has to be more attractive than other forms of direct banking, e.g. by the integration of billing systems or one-to-one marketing capabilities...

G: My view is that banking today is a multi-channel phenomenon. You don't just use one channel, you don't just use branches, you use ATM, you use telephone banking and telephone banking has a great future. Banks will do internet banking and telephone banking and ATM at their branches. It is not one or the other. Some thought that computers would replace paper. They have not replaced paper. internet banking will not replace telephone banking.

Internet banking is very different from current forms of electronic banking, because when you do internet banking it is a multi-tasking business. When I am on the phone to the bank it is a single channel of communication, a single circuit. If I do banking on the Internet, I can do something else at the same time, do some shopping, etc. internet banking is windows-based banking. Another thing of course is that the Internet (IP) is a standard, and I think that ultimately all of the IT infrastructure will migrate to that standard. So you are going to have internet phone banking, internet GSM banking, internet television banking, etc. That is what needs to be understood.

Q: Do you think that billing systems integrated in online-banking are an important feature?

G: We have them in Europe! And sometimes it works, sometimes it doesn't. It is a customer choice. Some people may want to pay their bills by phone, others may want to pay them directly or indirectly. It is certainly not a kind of a killer application. At least not based on European experience.

Q: But it seems as if in the United States billing systems were important...

G: There is some excitement, because people want to supply these system, and because banks are concerned about Microsoft and First Data venture (MSFDC). There have been many projects running in Europe for years, e.g. paying your telephone bill or your electricity bill by a Minitel. It is not that big a deal. What is a big deal is whether you are going to make payments on the Internet by your bank account or by your card. That is the critical issue: Many banks are realising that they have, in a sense, not really understood the significance and meaning of the SET standards. They are becoming concerned that SET is going to structure the payment for electronic commerce around cards. Many banks are very uneasy with this proposition. They would like to make sure that their existing clients are using their banking account to make payment on the Internet. That is a more critical issue.

Q: And that might lead to new services in the banking field...

G: Definitely. It's going to lead to new services in the banking field. We have not really seen it yet. The question is what people like Quicken, like Yahoo are going to do and whether we are going to have people like this in Europe.

Q: Where do you see the biggest difference between the United States and Europe in this respect?

The big difference is, I would say, that in Europe telecom companies are the big players. You know of the importance of Deutsche Telekom or France Telecom. In the United States telecom companies are not very visible in the financial area. In Europe we do not have Quicken or Microsoft. Therefore the competitive picture is different.

Q: There is another issue: international retail banking...

G: As a result of the Euro, retail banking will become cross border. Much more than today. The only people who are ready for it are American banks such as Citibank. So that raises a question. I think it is a little bit like in the card business when people say "well, most of the card business is local". But there is a tremendous potential of cross-border spending. Take the GSM business. There is a roaming function on GSM which is used by a very small number of people, but who spend a lot of money on it. In a new technological environment you always have to look at the early adopters, the leading fringe. So I am concerned, that the European banks aren't looking at cross-border retail banking as a competitive opportunity. But it is more a broad concern than something we can act upon through FIWG.

Q: Are you discussing this issue in the internet banking or the Smart Euro working group?

G: We highlight it as one of the background issues, but it is not something that we can influence directly. One of our roles is that we try to bring some issues, that are not necessarily going to be solved or even discussed within the group, to people's attention. So there will be a discussion and it is a little bit like when you throw a bottle in the sea. You never know who is going to pick it up. That's Internet.

Q: You mentioned especially Citibank...

G: The Citibank has a clear cross border retail strategy. As you know, they are the leading foreign retail bank in many European countries. They are more successful in their international retail strategy than any European bank you can think of. And the deal with Travelers will give them additional weapons in the areas of bank-insurance and brokerage.

Q: ... a threat for European banks...

G: Well, look what happened with investment banking. American banks have cleaned up investment banking in Europe. It's over. A few years ago, American investment banks were doing only cross-border business. And now they are taking over domestic business. In any big transaction in Europe right now, e.g. merger acquisition financing, you will always have an American investment bank involved. American banks are very strong in Europe and you cannot say that the European investment banks are strong in the United States,. with the possible exception of Credit Suisse.

Q: Please, let's now touch upon the "business to business" issue; the FIWG started a working group on that topic recently...

G: That is still in the very early stages. And what we are doing in this area, we are working with Electronic Commerce Europe, a trade association, and we are going to start a working group in September. Again, we have a similar agenda: standards and pilot projects. Business-to-business is an area everybody is talking about, but let's see what is happening. People call electronic commerce EDI; is it really electronic commerce? If you talk about business success, you speak about General Electric, about CISCO. Let's see what we can do in Europe.

Q: On the one hand you stress the competition between the United States and Europe, but on the other hand there are many fields where you have to work together. How would you describe this tension?

G: We are firm believers in co-opetition. If you look at our WWW-site we speak a lot about co-opetition. Basically, I think that Europe has to be strong, because if Europe is not strong, electronic commerce will not develop. The trade develops when there are two strong partners. The largest commercial partner of France is Germany, and the largest partner of Germany is France. This is the trade of equals. And you have to do the same thing in electronic commerce. Unless there is a strong pole in Europe, electronic commerce will not develop globally.

Q: Would you say that transnational firms like IBM play a special role, e.g. in the shaping of standards?

Those companies have very strong resources, an incredible amount of knowledge and a strong focus. And we have to work with them, and that applies to IBM, Microsoft, telecom companies, companies such as SUN or Hewlett Packard etc.

In internet banking, both IBM and Microsoft play a very strong role. We have to take advantage of what we have in Europe, which is diversity. We have to find a balance between involvement of national organisations and involvement of those multinationals. (And they are very actively involved, no question about it). That is what we are trying to do.

Q: It is hard to believe that smaller national firms can compete with the potential of the multinationals...

G: Well, this is a new area. What really matters is the strength and the capability to mobilise the competencies. In the end there are actually few people and what we try to do is to get to know them. IBM or Microsoft are big organisations, but what I am trying to do is to find some knowledgeable people with IBM, Microsoft (and other IT suppliers). We also seek to identify emerging players, such as Brokat, who is fast becoming the leading internet banking provider in Europe. That's the way we approach it.

Q: This approach of yours is reasonable, but in the long run there might be a dominance of solutions from transnational firms such as Microsoft (e.g. the Microsoft Wallet) or IBM (their SET interests)...

G: Well, that depends. If there is a Microsoft Wallet which is part of the Windows interface that is of course one thing. If, on the other hand you think of the SmartCard you cannot do it without national organisations. You just cannot do it. One of the lessons that you learn with SET is that SET was too technical. You have to bring the user in and you have to make it clearly transatlantic. You have to work on a network basis.

Q: Europeans claim the leading edge with respect to Smart Cards and security technology and generated the idea to successfully export security technology to the United States. Do you think that is a realistic position?

G: You cannot export it to the United States, not at this point. My position is that first of all, we have to make sure that what you are talking about in terms of technological advantage actually does result in deployment on a large scale. That is priority number one. As far as the integration, for example of SET and Smart Cards in the internet banking environment, you have to think about the deployment. If it succeeds it is because you work with people who are supplying PCs and keyboards, which can become card readers, etc. So that is really what you need to do. But I cannot see any short-term possibility of deployment of the Smart Card in the card networks in America. The future of the Smart Card in America is internet banking and internet payment, but not the card networks as we see them in Europe. So there is going to be a big difference between the United States and Europe in this particular area.

Q: But some advantage should result from the developed European chip card technology...

G: If you are going to have a deployment of several hundred million cards in Europe according to the common standard it is going to provide quite an advantage. And if the card also becomes a standard for internet payments it is another advantage. Yes, if you look at the way GSM was leveraged. GSM (which is by the way a Smart Card technology) was leveraged into a global leadership position in telecom equipment - you see the potential there. Again, there is a similar situation. GSM is mostly used in Europe not in the United States. But remember, Europe is a very big retail market. Very big. Bigger than the United States.

Q: If we take the comparison as well to Asia, what do you think Europe could learn from Asia?

G: There is a very interesting scheme in Japan on electronic money where NTT, the telecom company, has a leading role and which is actually supported by the central bank. But it is still far from deployment. These days, it looks as Asia has a lot of other things on its mind. So I am not sure what we can really learn from Asia. Asia is also a market for SmartCard technologies and should not be neglected.

Q: Towards the end of the interview I would like to come back to the innovation called "electronic money" and particularly to "electronic cash". Mondex seems to be the most cash like scheme. How would you judge the potential of Mondex?

G: Mondex has a fundamental problem in Europe because on the continent most of the big European banks don't like to see the card-to-card payment. They see it as a desintermediation and they are very, very reluctant. I am talking of the continental banks, I don't know about the UK banks. Therefore those banks which are very active in Europay, don't want Europay to get too much involved with Mondex. On the other hand, Mastercard is a major shareholder of Mondex. So it creates a very complicated political situation. Very complicated.

Q: One might imagine that MasterCard will bring Mondex to the market..

No, I think that the whole concept will have to fundamentally evolve. Mondex has two problems: one is the card-to-card transfer of money but the other is a lack of accounting. As you know, central banks, and the Commission just expressed a very strong doubt about it. It is okay for a telecom company not to have accounting, but is it okay for a bank? People like to trace every transaction. If you have a banking account you are able to trace every transaction. And on the other hand, if you have accounting, the business case for the purse goes through the window. Then who issues the cash? So that again is an argument for what we called rethinking the purse.

Q: What is going to happen to the ideal of real electronic cash with peer to peer function, anonymity etc.?

G: I don't think it is a big deal. I think that the problem is that if you can do big-sized transactions then everybody will get very nervous and if you do a small transaction, then who cares ? The problem is that if you are going to have the possibility of transferring large sums of money then you are going to have a very serious concern of central banks and commercial banks. If you leave it with the very small value transactions only , then why get excited about it? On the Internet, most people don't buy from each other, they buy from a merchant. If they are going to sell information, they may as well sell to a merchant, and you buy from a merchant. So there is no point in having person-to-person transfer. I just don't see that it makes tremendous business sense. It's a feature, but unless it's a big value, it's not a make or break feature. And if it is a big value, I think regulators and banks will get very nervous.

Q: You think there should be no concentration on small-value Smart Cards. What we need are money products for all types of payments and all amounts...

G: That's right. It should be very fluid and transparent. And there are some solutions that exist to address this particular requirement. But unless there is a unified and integrated infrastructure, there will be no business case.

Q: Talking about start-up companies like DigiCash or CyberCash, what is their role in the ongoing process?

G: DigiCash has some interesting technology so I think the future is in unbundling. In a sense we need to unbundle their technology from the total system. And I think the rhetoric of DigiCash now has been toned up considerably. CyberCash is an interesting proposition. I think it has established a leadership position in internet payments, but it is a very precarious situation. They will have to somehow find an alliance, or a working relationship with finance institutions. No question about it.

Q: You said, DigiCash should freely distribute its technology, unbundle it...

G: Absolutely. As I said to David Chaum, it's lots of sophisticated technology, why use it for a small-value payment? It is much more interesting for the large-value payments.

Q: And what did he say?

G: That's an interesting idea.

Q: Do you think we have omitted an interesting point?

G: Well, I don't think so,? We covered a lot.

Q: Thank you very much for this interview.

Contact

Charles Goldfinger (FIWG Chairman)
GEF
Avenue de Tervuren 412
1150 Bruxelles
Belgium
Tel.: ++32-(0)2-763-1270
E-mail: chgo fiwgDir5∂www ispo cec be