Monthly Archives: March 2006

Pseudo Bank Accounts for the Poor

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I gather that 60 million people are paid with a paper check in the United states and that almost half of those don’t have a bank account. The banking industry calls this market segment the unbanked. If you go into the neighborhoods where those folks live: instead of banks you find check cashing stores. Check cashing stores will cash your pay check and since you don’t have a checking account they will help you pay your bills. Some of them charge a lot for the service. Check cashing operations are more common in poor areas; and they are more common in states with weak consumer protection in the banking industry.

As Clay Christensen points out one way to disrupt an industry, in this case the banking and currency system, is to sneak in below their radar. Serve the people who are currently unserved. If you go after the low margin customers then the existing players won’t bother to compete with you. They don’t want those customers. This is long tail strategy. For the credit card networks I think of this as a loose change strategy.

Christensen’s displace from below strategy for disrupting an industry presumes you can find a way to serve people who couldn’t be served before. Technology provides those; particularly IT. I have a hypothisis that many of these disruptions via IT are similar. You take a previously bundled activity and burst it apart so that you then charge for smaller transactions that were previously charged for in a bundle. The IT enables that. So instead of a monthly phone bill you do pre-paid. So instead of a bank account you sell access to the banking infrastructure with a charge for every little thing.

Here’s the fee schedule for the most reasonably priced stored-value-debit card I could find.

Check “Balance Reimbursement” $9.95
ATM Domestic – Withdrawal $ 1.50
ATM International – Withdrawal $ 3.00
ATM Domestic – Balance Inquiry $ 0.50
ATM International – Balance Inquiry $ 1.00
ATM Domestic – Decline $ 0.75
ATM International – Decline $ 1.00
POS Domestic – Transactions $ 0.50
POS International – Transactions $ 0.75
NET Internet Balance & Inquiry FREE
Load Via Card to Card Transfer $ 2.00
Load Via Direct Deposit FREE
Load Via Bank of America $2.00
Load Via Money Order $2.50
Load Via Retail Location POS $1.00
Fee PIN Creation free
Fee Monthly Maintenance $ 3.95
Fee Paper Statement $10.00
Fee PIN Change $ 0.25
Fee Live Operator Customer Service $ 1.50/call
Fee Automated Customer Service $ 0.50/call
Fee Lost/Stolen Replacement Card $10.00
Fee Emergency Card Replacement $30.00
Fee Dormant Account
(after inactivity of 60 days)		 $5.00 /mo.
Fee Additional Maestro Card $ 9.95
Fee Over-Limit $30.00

The unbanked are the target market for these. Employers are encouraged to hand these out to new employees. That saves money for the employer because he doesn’t cut checks anymore; he just shoots the pay check straight into the card. Notice that instead of the banking term “deposit” they use the word “load.” I bet that’s because they are hoping to avoid some regulations associated with deposit accounts.

These prices are horrible compaired to a real bank account. They are pretty good compared to the check cashing store.

There is a second target market for these; i.e. Guest Workers. Or as we like to optimistically call them in this country immigrants. In that use case the card holder purchases a 2nd card with access to the same account. He then sends this back to his relations in the home country and they can pull money from the account.

There are four drivers for all this. Three mentioned so far – competition with the check cashing industry, lowering costs for employer’s of the unbanked, and better service for the unbanked. The four driver is the police authorities – all currency systems have policing issues – transaction flows that move thru the electronic currency systems are much easier to browse.

State Power and Industrial Standards

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My friend Ben Laurie bought a tiny bit of plastic and he’s pissed. It seems that he bought a CD and it doesn’t work. He thinks, quite reasonably, that this he was shipped faulty goods. Digging a bit deeper he’s becomed convinced that the manufacture intentionally shipped out faulty goods. It seems likely that everybody in the distribution channel knew these were faulty goods.

That seems all bit criminal, so Ben’s gone off to appropriate authorities to bring this criminal activity to their attention. So far, the authorities are confused, but Ben’s helping them to see the light.

One critical function of standards, like the audio cd standards, is to reduce market friction. What you lose is product diversity and in exchange get to eliminate whole bucket of costly activities: negotation, contracting, haggling, quality assesment, etc. This lowers risks for both buyers and sellers. One of my cliches: Standards are a substitute for lawyers.’

It also enables the market to grow and the producers to consolidate. The reduction of risk allows producers to justify making large capital investments – i.e. building a factory that builds machines to build audio CDs. While the loss of product diversity reduces the mutations that might allow the market to evolve the emergence of large producers provides a substitute means for changing the standards; i.e. industrial standards making. For example forking the audio CD standard to create a standard for digital CDs.

Standards set the rules of a game. Sellers have a huge incentive to cheat. If they can label the product as conformant with the standard but get away with cutting corners it’s pure profit. Other industry participants hate that. If you commit to a 100 million dollar factory and somebody else cheats the scale of your response is typically greater than Ben’s. The airline industry had to write specifications for things like lunch because some of their breathren were handing out crackers instead of sandwitchs. Buyers hate it too. You let your guard down. You casually buy a product. You get home and the damn thing doesn’t work. Unlike the guy with the million dollar product your rath is limited – but unlike the producers there are billions of consumers and some of them can get pretty testy.

Big rich guys allied with terrifyingly angry customers makes for a powerful lobby. So it’s easy to get the state’s police power brought to bear to enforce market standards. Who’s going to argue against it? Cheaters will. Market participants who are close to monopolizing the market will; since they are then free to set their own standards. When markets become dominated by an oligarcy; those producers will often argue for it.

The key point: consumer protection regulations benefit more than just the consumer. They function to to make the market less risky for all participants. They are public goods and once there is an installed base of consumers with the guard down and producers with huge sunk costs you mess with them at your peril.

Which brings us to the fundamental question. Are Ben’s bogus CD’s conformant with the relavent standard?

Violence’s powerlaw, chapter 2

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This is another addition to my collection of data about things that have a powerlaw in distribution. This one shows major conflicts of the 20th century and uses deaths/conflict as a measure of their intensity. In a sense this is a continuation of the distributions shown in an earlier posting that display the intensity inside of two smaller conflicts. The paper behind that posting was making the case for conflicts have a fundimental nature which is reflected in the distribution.

I’m becoming more interested in puzzling out what the slight variations from a perfectly straight line have to say. This example is a good one for that because it really isn’t particularly smooth. Of course one possiblity is that they mean the distribution isn’t really powerlaw at all and it’s just an artifact of the sorting; but in those cases the variablity tends to be much higher than here. Sometimes the problem is that you just don’t have enough data; while this data is complete it is only for a single century. Rounding and other reporting bias is always a problem; the straight bit for conflicts with 1.5 million dealths is typical of that. Sometimes you see flat tops on these curves that reflect some regulatory effect; i.e. a physical or legal limit on size. That kind of shifting in the slope of the curve harkens back to the idea of a conflicts ahave a funidmental nature raised in the previous posting. In this case it appears to me that some of the conflicts toward the top were actually one larger conflict; i.e. the 2nd world war which have broken out into distinct theaters. It would be interesting to split the data by civil v.s. international conflicts and see what that reveals.

This data was pulled from Mathew White’s cool atlas of the 20th century. While that isn’t really a peer reviewed journal, he has certainly put a lot of work into the project.

His entire site is just too much fun. For example at his site you can discover the Bill Gate’s networth is aproximately 4.5 times greater than the damange rats do to crops each year.

“I can picture in my mind a world without war, a world without hate. And I can picture us attacking that world, because they’d never expect it.” — Jack Handy

Web Secret Card

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There is a surprising degree of competition for who’s going to run the currency system. There are at least four major currency systems in the US: cash, checks, visa, mastercard, and amex. Running a currency system can be quite profitable, and not just because you can tax people to particpate in your network. Once you start looking for them these private currency systems are extremely common. For example loyality award point programs and phone cards.

Gift cards are an interesing example. Look around in grocery, drug, stationary stores – there are hundreds of these cards! Today I was looking at the ones at CVS and Wallgreens, two drug store chain.

Gift cards let you convert highly fungible money into money with only some limited range of uses. You can spend $25 any where, but a $25 burger king gift card is more limited. But yeah – there are lots of Burger Kings. Some cards are more fungible that others, for example one of the cards I saw on recent visit can be used at any of six different resturants chains!

I find the gift cards that let you buy gift cards amusing. These let you move from highly fungible currency into semi-fungible; before you finally commit to marginally fungible. An online example of this are the gift cards from Great American Days. Those were on sale at the drug store today.

Of course if you have gift cards for one of those drug stores I was in today you can buy any of the gift cards they sell. Converting to another gift card is close to close to free. You will probably have to pay sales tax. I like to note at this point your taxes pay to keep the national currency system functioning.

And then there are the gift cards that can be used any place that those credit card networks reach. You can buy those at the drug store too; but your charged a fee of about 5% – think of it as the tax to regain some fungiblity. Though it looks like it might be possilbe to reduce that some using this vendor

Credit cards aren’t the same as currency though. Lots of authentic little vendors doen’t take them; and those that do pay a heavy lot of fees for access to those private currency networks. When you use them you loose your privacy. As they say in high school: it all goes on your permanent record.

So I was interested to see this gift card today Web Secrets Card. It’s really intended only for buying stuff online. Though it appears you can pay ten dollars and have then ship you a physical card which you could then use to buy offline goods. They charge five dollars a month until you drain the card.

So there you have it. The cost of fungible is around 5%, the cost of privacy is around $5 dollars a month.

Amazon price drop policy; let the games begin.

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Another one for my pile of stories about pricing games.

I read this posting about Amazon’s price drop policy and squirrel’d it away in del.icio.us for the next time I bought something pricy at Amazon.

My wife bought a camera a bit back and so from time to time I’ve been checking to see if the price had dropped at Amazon and yesterday I noticed that it had. So I dug out the posting, logged in as my wife and followed the directions. The directions suggest that you look at your old orders and click thru from them to the item’s you think might now have lower prices; so I did that.

What a surprise. The price my shown when logged in as my wife is the price she paid. The price shown logged in as me is the a lower price. Actually, having played these pricing games for so long I’m not surprised; but still. It didn’t matter how I navigated to the item after my first visit – it sill showed the price she paid.

We asked for the price adjustment anyway and Amazon quickly granted it; so I guess that’s a good thing.