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12:20 PM

What Hath Technology Wrought?

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Technology shifts occur at breakneck speed these days. Then again, they always have. I thought of that recently with news that the last operating telegraph system in the world is shutting down operations.

The last telegram is scheduled to go July 14, 2013, in India. That’s nearly 150 years after Samuel Morse sent the first one.  A pretty good run for a communications technology.

Telegrams were once essential to communications. “Giant in the Shadows: The Life of Robert T. Lincoln” is the definitive biography of the only surviving son of Abraham Lincoln. In it author Jason Emerson writes eloquently about  how President Lincoln communicated about the horrors, successes and failures of Civil War battles via the telegraph. Emerson traces how Robert Todd Lincoln himself in 1900 tracked the assassination of President William McKinley via a series of telegrams. In an era when mail delivery truly was “snail mail,” the speed of a telegram must have seemed breathtaking.

In the 20th century when the telephone surpassed the telegraph for speed, Americans used the older technology for impact rather than immediacy. Often the first news of a marriage, a birth or death came by telegram, with the sender aiming for the impact of a typed, hand-delivered document confirming the news.

But as eight-tracks were replaced by cassettes,  and cassettes by CDs, and CDs by digital music, the telegram’s final death blow was the fax and later email. Telegraph service in the U.S. ceased seven years ago.

I have more than a passing acquaintance with telegraphy. Earlier in my career the company for which I worked, and later was a part-owner, contracted with the Western Union Company to take over operation of the telegraph company’s downtown public offices. These were large, centrally located offices where consumers could wire or receive money, send a message via Western Union’s telex system, or send a telegram. In fact, most communities of any consequence had a Western Union office.

We were a small company so as a manager I sometimes had to deliver telegrams or send telex messages. The telex messages were typed out on a teletypewriter called a “32,” since all alphanumeric combinations had to be made on a keyboard limited to 32 spring-loaded keys. The fastest keystrokers pounded out the messages with their two index fingers. The actual message input produced a thin paper tape with raised dots similar to Braille. These paper tapes were then reversed and fed back into the machine, which electronically reproduced and sent the message via dial-up phone lines.

By the early 1990s messaging like telegrams, telex and TWX (Teletype Writer Exchange) had largely been replaced by newer, less expensive technologies like the fax machine and eventually email. The precipitous drop in the cost of telecommunications, including telephone calls after the breakup of the old Bell network, priced Western Union out of the message business.

By the 1990s the advent of prepaid cards,  other payment schemes built on the trusted third-party concept pioneered by Western Union in the 1800s, and overnight delivery services killed much of the money transfer business. The assets of Western Union, including its name, were eventually acquired by First Data Corporation--itself a modern spin-off from American Express, which pioneered the large scale travelers checksystem in the 19th century.

Western Union has survived by reinventing itself with new products and services, like online money transfer, prepaid cards and online bill payment.


It’s easy to look back on technologies like telegraphy, money transfer, or travelers checks and think of them as quaint throwbacks to ages gone by. But technology isn’t like that. Every technology is a pilot program for the technology that eventually succeeds it. Payment technologies like online bill payment and presentment or prepaid cards owe some measure of their success to those brave 19th century pioneers who risked their lives stringing copper across a vast continent. And to telegraph operators and keypunchers that made the Western Union office as much a part of their community as the corner bank or the post office. 
1:41 PM

What's Behind Those ATM Fees?

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What's Behind Those ATM Fees-and Why Should I Care?

Most consumers who have bank accounts have had occasion to use an ATM. While many ATMs can multi-task—accept deposits, transfer money, etc.—most people just use them for taking out cash. There are over 400,000 ATMs operating in the U.S. today. About half are controlled by banks and the other half by independent ATM owners or merchants.

If you’re of a certain age and remember writing checks to “Cash” and trying to find a bank that would take your check when you needed some "street money," as we say, an ATM is nothing short of a miracle. But the downside of ATMs in getting stuck with the fees charged to use them.

A group of U.S. senators thinks that downside is pretty steep, so they commissioned the General Accountability Office to study them. The GAO, in a report published this past April not only looked into fees, but also into the business dynamics of the ATM industry. What they found may surprise you.

The “fee” charged to use an ATM will vary by the owner, much in the same way that rental car fees or hotel rates differ by company based on that company’s business case. In the case of ATMs, there is no “fee,” but a series of fees. For example, using the ATMs owned by the bank that issued your ATM card is generally part of the deal. But if you use a machine not owned by your bank, you’re likely to be assessed a surcharge of a couple of bucks. In addition, when you use someone else’s machine, your bank is likely to charge you an additional “foreign” fee for having to tell another ATM owner that you have enough money to cover the transaction.

On top of those, your bank will have to pay the ATM owner an “interchange” fee to compensate the foreign owner for the use of his machine. Interchange fees charged by banks to merchants for accepting their debit cards have been become such a bone of contention that Congress in 2010 instituted price caps on them.
There are also “switch” and “acquiring” fees that are paid to the electronic networks that move the transactions back and forth between banks and ATMs.

If all of this sounds pretty arcane, it is. The GAO has tried to sort through the details in its April 2013 report. There are really three factors that underlie the ATM fees. The first is competition. Consumers may pay a certain surcharge in an area where there is an ATM on every corner. On the other hand, use an ATM where the owner has a captive audience—such as a mall or an airport, where it may be the exclusive provider—and you’ll probably pay more.

The second factor that drives fees is the cost to operate a certain machine. Independently owned machines placed in areas where they are subject to damage or additional security requirements are likely to feature higher surcharges to help recover the higher cost of operation. Banks, which may use ATMs to advertise other services or attract new customers, may feature lower fees because costs may be offset by other sources of revenue.

A third factor is usage. The more transactions that flow through an ATM the greater the base over which the operating costs can be spread. A machine that sees less activity has fewer units (transactions) over which to spread its costs, resulting in higher pricing per unit at that machine.

Consumers who wish to lessen the cost of ATM usage have a few options. Many banks and ATM owners belong to so-called “surcharge-free” networks. These networks work out deals with ATM owners that allow consumers to use their machines free of surcharging. Consumers can also restrict their ATM usage to their own bank’s machines. This will eliminate surcharges and foreign fees. Third, consumers can work ahead on their cash needs and request cash back when they use their card at a merchant point-of-sale terminal so they don’t have to visit an ATM quite as often. There’s no need to be paying top dollar every time you use an ATM when these options are available.

If this sounds like humdrum Consumer Economics 101, that’s because it is. These are the same pricing decisions that any business—large or small—goes through. American consumers are pretty savvy but they need to remember that when they pay to use an ATM what they’re buying is convenience. With a little information they can figure out how much ATM convenience they want to buy.

  Nevertheless, look for Congress to use the GAO’s extensive report as justification for rounding up the usual financial industry suspects for hearings on the subject of ATM fees. If past is prologue expect significant political pressure on ATM owners and their profitability. And if that results in elimination of the least profitable of those 400,000 ATMs, the convenience that ATMs offer will become a lot less convenient for consumers—and a little bit more expensive.  
3:21 PM

Healthcare and Responsibility

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When it comes to health insurance many consumers apparently have the same cavalier attitude that they have about their own medical care.

A recent survey for online broker InsuranceQuotes.compolled over 1, 000 adult consumers about their knowledge of insurance and the Affordable Care Act. Among the findings:

·       Nearly 60% of respondents weren’t sure if they would qualify for the ACA’s health insurance subsidies, which will be available on a sliding scale for households with incomes up to $94,000
·       Almost 70% of those at or near the poverty line weren’t aware that they were subsidy-eligible
·       And nearly two-thirds of respondents who said they were uninsured still don’t know if they’ll buy insurance with or without the subsidies before January.

Worse than that, nearly two-thirds of respondents say the new law will result in more, not less, expensive healthcare. Fewer than half said the law would result in an improvement in the health of Americans.

The law’s proponents say that the survey results prove that consumers are misinformed about the new health law.  I disagree. Especially when a search of the term “Affordable Care Act” leads you directly to a variety of the government’s own sites, including the White House.

The only thing easier than finding information on the ACA is blaming the law’s opponents for survey results like these. Ten percent uninformed about the law I could see. Twenty percent. But when you’re looking at two thirds of the people the law was intended to help unsure and apparently unconcerned about whether they’ll take advantage of the ACA’s benefits, I don’t think you can pin it on cable TV or insurance companies.

I think if the survey proves anything it proves that no matter how much government might like to help people, some people don’t want the help. Think about it: How much have we as a nation, through our taxes, insurance rates and cost of goods purchased, paid for wellness programs? Smoking cessation advertising and classes? Gym memberships? The results? Conditions like obesity, diabetes and heart disease are at still at epidemic levels. And still you have consumers, including children, sitting on their butts for hours at a time, watching TV, chowing down a bag of Fritos and washing them down with a liter of their favorite sugary drink.

Let’s face it. Consumers themselves shoulder a lot of the blame for the nation’s health crisis. Congress and the president engineer a law to re-shape what by year 2021 will be 20% of the economy, and you ask those people the law was intended to help if they’re going to take advantage of it and the answer is a shake of the double chins and a puzzled “I dunno.”

Call it misinformed or uninformed; it’s the same thing. You live in this country for four years of screaming 105 decibel debates over the ACA and you still don’t know whether you’re going to buy insurance, or if you’re even eligible for it? That’s the real problem with the ACA. Being uninformed and unsure about the law goes hand in hand with bad lifestyle choices, overeating, not taking your meds, or not getting checkups.

The fact is that too many consumers are divorced from their own health care.

They’re divorced from the responsibility of keeping themselves healthy and figuring a way to pay for it so the rest of us don’t have to.

That’s the real problem with the ACA. And until you solve that, until you make people responsible for their own well-being, you’re going to continue to have this rancorous and now pointless debate. 
7:04 AM

Healthcare Progress or California Dreamin'?

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In the seemingly endless war over the Affordable Care Act, President Obama was able to claim a significant victory last Friday during what amounted to a campaign stop in California. The President chose the occasion to tout California as a model of the new healthcare law’s effectiveness.

The President has chosen to portray the continuing unpopularity of the ACA as the result of misunderstanding and misinformationon the part of the law’s detractors. And he may be right. Even for healthcare professionals this is a tough bill to figure out. So, when California’s healthcare exchange announced that the individual coverage plans to be offered next year by the exchange would be cheaper by up to 30% than comparable private sector plans today, it was time to celebrate.

But not so fast. The Lobster Shift wouldn’t be the Lobster Shift if it didn’t take a contrarian look at things (See our January 10, 2013 post). And if there is anything in this world that requires a skeptical look, it’s healthcare insurance.

Upon further review, it now looks like the optimistic projections of insurance offered at 2% to 29% below current markets was a case of California Dreamin’. Here’s why:

The California exchange regulators were comparing apples to oranges. They chose to compare the projected exchange rates to California’s current small-business market, where the heavy hand of state regulators has already distorted the market to the point where the exchange rates look good by comparison.

A more accurate comparisonwould have been comparing the exchange’s individual insurance plans with today’s individual plan market, which in California is more lightly regulated than the small-business market, and as a result functions fairly well.

If you compare apples to apples, or in this case, the current individual market to the individual plans to be offered next year through the state’s ACA exchange, there’s little to celebrate. According to the Wall Street Journal, there are five plans today that are 64% to 117% cheaper than what the state expects to market in the public exchange. That’s hardly worth gassing up Air Force One to fly across the country.

The narrative is now shifting. OK, say the regulators, we goofed. The individual market will be more expensive, but beneficiaries will be getting a lot more benefits. However, the cost-benefit of paying for birth control, fertility coverage and to have his children covered till they’re 26 may escape that 25-year old male whose focus may be restricted to hot cars and weekends at the beach.

The President is probably right about the misunderstanding and misinformation when it comes to the ACA. All the more reason when one side or the other claims victory in the healthcare battle to take a second look at the claim.  
11:36 AM

Indiana Bill 559 Welfare Reform

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For the past two years it’s been nearly impossible to turn the page of the newspaper or channel surf through the cable news stations without seeing some story about welfare fraud. Whether it’s a Maine woman indicted on 20 counts of welfare fraud or a Massachusetts state agency sending benefits to dead people, there’s no shortage of news on this topic.

In 2012 Congress decided to crack down on fraud by forcing states to tighten up on misuse of federal benefits or risk losing a portion of their welfare block grant from Washington. Shortly thereafter state lawmakers around the country decided to get into the action by passing their own get-tough welfare fraud laws. Currently there are over 40 such bills that have been introduced in state capitals from Olympia to Tallahassee.

Which brings us to Indiana, where Governor Mike Pence last month signed an anti-fraud measure that could result serious unintended consequences.

Senate Bill 559 would do a couple of things to tighten up on welfare fraud. First, it would prohibit beneficiaries from getting their benefits through ATMs or POS terminals located in certain prohibited locations. These include horse tracks, casinos, gun shops, liquor stores, or strip clubs. No problem there. I personally find the thought of someone using the kids’ lunch money to drop a two buck bet or tip a stripper personally revolting.

But the real problem with 559 is that it places the primary burden on the owners of the electronic payment systems, not on the retailer or the recipient of the cash. The exact language of the bill is:

The owner, vendor, or third party processor of an
automated teller machine or point of sale terminal shall disable or
have disabled access to electronic cash assistance benefits in a
location described in subsection (b) unless the location has been
approved by the federal Food and Nutrition Services.

But the real trouble with this bill will come on July 1, 2013, three weeks from now, when ATM and POS operators are supposed to begin complying with the law. That’s not nearly enough time to make the changes to the electronic payment systems necessary to comply with the law.

Electronic payment systems are complex, interdependent systems that connect multiple large scale mainframe computers from disparate sources. These include both the public and private sectors, the EBT processor in a particular state, and downstream third parties like merchant processors and switches. Making the changes called for in 559 will require coding by all parties, testing and retesting of each interconnected system, end-to-end testing and retesting, and regression testing to make sure the changes didn’t mess up any other systems that have access to those particular terminals.

 If that happens you can envision a scenario on July 1 when ordinary Hoosiers find out that their bank cards won’t work in particular ATMs, or retail checkout lines slow to a crawl as befuddled cashiers try to figure out why some cards don’t work while the lines back up. It could be a nightmare. One processor says it will take about a year to make, test and implement the changes the bill will require. The law gives owners and processors less than two months.

This is a case where the bill’s sponsors should have consulted with the payments industry to find out the unintended consequences of their law. Holding open and transparent hearings might have helped avoid this potential mess.

The only way to remedy this is for the governor, the General Assembly and the state agency responsible for implementing the law to get together and push back the implementation date. July 1, 2014 sounds good to me.

I’m all for reforming the way we do public assistance in this country. Payment technology can go a lot to ensure that the money that we allocate for the relief of hunger or lack of shelter goes where it should go. I’m sure Indiana lawmakers feel the same way. But in their rush to judgment, they ignored the one stakeholder group that could help them and instead saddled them with the liability. 
8:36 AM

Protecting Patient Safety

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Protecting Patient Safety
By voice vote the House of Representatives recently passed HR 1919, the Safeguarding America’s Pharmaceuticals Act. The bill would, among other things, expand the FDA’s regulatory authority to track the distribution of prescription drugs. The bill’s sponsor, Rep. Bob Latta (R-OH) said that the bill would help safeguard against counterfeit drugs by replacing a patchwork of federal and state regulations.


 At the same time committee members rejected an amendment sponsored by Rep. Frank Pallone(D-NJ) that would have required an electronic system to monitor the distribution of prescription drugs down to a more specific unit, rather than lot, level.

The bill’s passage provides a cautionary tale about how the current political divide in Washington has opened a chasm into which the interests of ordinary people seem to have fallen.

According to a Bloomberganalysis, the bill is a reaction by House Republicans to last fall’s deadly meningitis breakout. They believe that part of the reason the disease spread was a failure by food and drug authorities to adequately enforce existing laws. Given what Republicans see a regulatory failure, they’re not inclined to give regulators even more power, goes the analysis.

But Democrat lawmakers are concerned about the lack of electronic monitoring -requirements in the bill.  California Democrat Henry Waxman says the bill doesn’t go far enough to protect the existing drug supply chain.

The Democrat-controlled Senate’s version of the bill, S.959, the Pharmaceutical Compounding Quality and Accountability Act, would crack down further on counterfeit drugs by tightening regulations on manufacturers. It would also give the FDA a clearer role in overseeing commercial compounding manufacturers, according to Bloomberg.

Given the wide differences between the two bills, getting a bill out of conference could pose a challenge, says Bloomberg analyst Brian Rye.

So there you have it: the Republicans’ light hand on federalizing policing powers, the Democrats’ belief in the ability to manage every problem from Washington, and the regulators uneven record in managing existing mandates. The perfect storm of inaction. Where have we seen this before?

The problem this time is that peoples’ lives are at stake. In three months students head back to school all over this large country, packed into schools and dorms and apartments where communicable diseases can spread like a California wildfire. This is a bill where both sides can get together and look like heroes. It’s one where they may want to forgo how they look in their respective party caucuses in favor of how they look to the only caucus that should really count—the people who sent them to Washington in the first place. 

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