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7:19 AM

The End of XP at the ATM

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There are changes coming to the ATM industry, and we don’t mean EMV. Microsoft has announced that next year it will end its support of its workhorse Windows XP operating system, a standard of the ATM industry.

Most ATM owners run XP, Kevin Casey writes in today’s Information Week. In the early 2000s ATM owners began converting to XP because of the flexibility and cost advantages it bought them.  Prior to Windows, upgrading and modifying ATM terminal software was a slow, expensive, laborious process.

With Windows downloading new applications and software became similar to what we all do today to upgrade our PC software. This in turn allowed ATM owners to offer more services through their terminals and to deploy machines in ever-increasing numbers.

Today most ATM terminals run on the Windows platform.  Running XP without Microsoft support won’t meet the critical PCI industry standard for transaction security. This could lead to thousands of dollars in fines, not to mention a loss of consumer confidence. So ATM owners are scrambling to find cost effective alternatives to XP.

The operating system issue is just one of many that the ATM industry faces today. These challenges include EMV complianceskimming, and continued backlash against ATM surcharges. Personally, I don’ t thing the phase-out of XP is such a bad thing. it’s true that XP was a great advancement at one time. But its final phase-out  will clear the way for newer technology.

 This past June 28 we blogged about  the telegraph industry and how its demise was the result of being superseded by new technology. ATM owners are understandably upset about the cost of upgrading to a new platform. But let’s remember that the switch to Windows offered advantages that its predecessor, IBM’s OS/2 could not.

While upgrading to a new OS will be painful, we predict that it will eventually lead to a technology approach that will advance the industry even further beyond what the most devoted XP supporters could imagine.
7:26 AM

Does “Too Big to Fail” Mean “Too Big to Compete?”

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In these languid days of the summer one story has flown below the radar this week. The Dodd-FrankWall Street reform law contained a little-known provision that placed a three-year moratorium on commercial businesses starting up banking affiliates. That moratorium quietly expired this week.

Since the moratorium was statutory it will require an act of Congress to extend it. That assumes that regulators like the Consumer Financial Protection Bureau, also a creation of Dodd-Frank, play honestly in the regulatory sandbox and don’t attempt to extend the moratorium by fiat.

There are good reasons to let the moratorium die. As John Berlau and Kyle Tassinariwrite in the Wall Street Journal, most other developed countries have no wall between banking and commerce, and seem to do OK when it comes to banking stability and soundness. Britain-based retailer Tesco operates a bank that has nearly $9 billion in outstanding mortgages and other loans that they’ve made to the public. A large percentage of credit card transactions are made on cards issued by Tesco Bank. The bank also controls a large percentage of ATM cash withdrawals in Britain.

Allowing commercial companies to enter the banking arena also provides more options for consumers and more competition. Competition helps companies step up their game, and that benefits everybody. From 2007 through 2008 over 100 U.S. banks, thrifts and other financial institutions went belly-up. We could use some new blood in the industry to replace them, and, frankly, to add some new DNA to the banking gene pool.
Opponents of this change will say that commercial entities can’t be trusted with your money. But the fact is that retailers large and small have been providing banking services for some time, and doing it in a stable, responsible manner.  Wal-Mart, for example, was blocked here from offering banking services, but currently operates a full-service bank in Mexico. Companies that sell big-ticket items, like Harley-Davidsonand Toyota, have provided credit to their customers for years in a sound, responsible manner.

Perhaps the biggest reason that argues in favor of commercially operated banks is the opportunity to further spread the risk of financial failure. The U.S. now has a huge bureaucracy designed to prevent the failure of large, global money-center banks operating here. If one or two of them failed, the result in terms of constrained credit and financial services could be catastrophic. However, that risk would be mitigated by being spread over more institutions, including those created by responsible commercial entities.

For years regulators ignored the looming threat posed by a sub-prime mortgage business that everyone nodded their heads at, but few really understood in terms of potential risk. Maybe they were too concerned at the time with the red herring of keeping banking and commerce separate.

Well, the recession is over, but credit is still hard to come by. “Too big to fail” remains the bogey. And regulation of financial services hasn’t made life easier for consumers. Maybe it’s time to take a look at the Wal-Mart and Tesco models and try the third rail. 
6:48 AM
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THE HILL’s Healthwatchblog recently referred to the July 2 delay in the Affordable Care Act’s employer mandate as “stunning.” I agree. But the delay in the employer mandate, a key linchpin of the law, is only the latest in a long line of gaffesin the law’s history.

Pundits will disagree on how important the employer-mandate delay is in terms of implementing the law. But I’m more interested in the public relations aspect of these missteps and what they say about the law’s future. So here are what I consider the Top Five PR blunders to date in the ACA’s short history.

Blunder No. 5: The one year delay in the implementation of the ACA employer mandate. The law’s supporters play down the importance of the employer mandate. But if you’re trying to achieve near-universal healthcare coverage, this is the place where you can insure the most lives. So you lose public credibility by minimizing your failure to deliver.

Second, the administration announced the delay in a mid-level bureaucrat’s blogshortly before the long Fourth of July holiday. But this only gave  the impression that the administration had something to hide. 

Third, Democrat supporters of the law played right into the hands of Republicans who chargedthat the delay was intended only to help Democrat incumbents in next year’s mid-term elections avoid questions on the unpopular law’s implementation, which is expected by everyone to be messy. Republicans have complained about the mandate for years. A better play would have been to co-op some of them to at least give the move a veneer of bi-partisanship. 

So the focus once again has become the politics of healthcare, rather than the benefits of healthcare. That's not where the law needs to be at this point.

Blunder No. 4: 1099 reporting. The law’s detractors, of which there are many, have claimed that the ACA will require an enormous bureaucracy that will spew out red tape by the mile. So the law’s 1099 reporting requirement just validated that opinion. 

The thought of businesses having to file a 1099 for every single, inconsequential transaction over $600 was a bridge too far for even the law’s supporters, let alone the business lobby. A bi-partisan death squad killed it in Congress, but not before the image of the ACA was cast as a huge, overreaaching monster.

Blunder No. 3: The CLASS Act. The ACA was intended to include a program for long-term care, known by its acronym, CLASS. Given the rapidly graying of America this was an important component.

But two problems arose. The first was the fact the bill’s supporters, through creative accounting, claimed that the expense of caring for millions of aging baby boomers would somehow mystically contribute to deficit reduction. The second was that from the beginning budget analysts said CLASS was not financially viable.  Congress repealed the CLASS Act last year.

This was a golden opportunity missed by the administration. It should have been able to score points for calling out Congress on a bill that budget analysts said would never work, and for pulling the plug on it. Instead, by sticking too long to phantasmagorical claims of deficit reduction that everyone knew were impossible, they helped foster skepticism of the law as a whole.

Blunder No. 2: ObamaCare for Congress. During the Congressional debate over the ACA, the law’s opponents threw down the gauntlet: If this is such a good idea, then Congressshould give up its own “solid gold” insurance coverage in favor of what at the time was beginning to be called “ObamaCare.” This, by the way, included Congressional staffers. Eventually Democrats accepted a Republican amendment to the bill mandating that Congress and its staffers use ACA-compliant plans.  But by dithering over the issue, the bill’s supporters created an indelible impression in the public that health insurance in this country was going to remain an Upstairs-Downstairs affair.

Second, by failing to commit immediately to ACA coverage for their own families and employees, Congress raised doubts in the mind of the public on the value of the product. It would be like seeing the CEO of an American car company, show up at work in a BMW.

Blunder No. 1: Waivers. Perhaps no blunder on the part of the ACA’s supporter was bigger than giving certain organizations passes on key ACA requirements. Let’s just say from the outset that government regulators grant waivers from all sorts of rules all the time. Not just healthcare. Nothing new there.

But in the case of the ACA the velocity of the waivers was breathtaking. The Department of Health and Human Services has approved over 1,200 waivers alone from one requirement: the elimination of annual caps on benefits.

It also hasn’t helped that many of the waivers were granted to organizations like the United Federation of Teachers, which has supported the administration and the ACA.  Again, the administration lost an opportunity to demonstrate that by exercising flexibility in administering the law it was being reasonable. Instead, the public was left with the impression that the administration was rewarding its friends for their support of the ACA. 

So where does this leave us? Supporters of the ACA look at the law and see the realization of an 80-year old dream: equal access to healthcare for all, lower cost and better quality outcomes.

 But because of these gaffes others see a law that will result only in a massive bureaucracy. A law whose supporters haven’t told the whole story. A law whose goals are outlandish and will never be accomplished. A law whose enforcement will be uneven at best and unfair at worst. 

You can’t fault ACA proponents for believing in the cause of healthcare reform. But when your focus changes from writing, passing and administering law to thinking you’re doing the Lord’s work, you run into trouble. The danger is in believing that the value and benefit of what you’re doing is self-evident, and that any rational person should share your belief. 

But in a diverse pluralistic society that’s rarely the case. You’ve got to build people’s trust in you and your product—in this case the ACA. That's the value of public relations. Until the bill's supporters understand this, the ACA will remain a political, rather than a healthcare, issue. 
12:04 PM

The Curious Case of EMV

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If you follow the comings and goings within the financial services industry you’re familiar with the issue of EMV. It’s an issue every consumer needs to be aware of because the changes being discussed affect your debit card.

EMV stands for Eurocard, MasterCard, and Visa. It is a security standard established by the three card brands (MasterCard subsequently acquired Eurocard) in 1994 for payment cards like your debit card. Rather than rely on the humble magnetic stripe on the back of your debit card for dealing with your personal card data, EMV uses a harder-to-hack computer chip on the card for authorizing your PIN.

Today all industrialized countries with the exception of the U.S. and Israel have adopted EMV. There are a lot of reasons for that which we won’t go into. Suffice it to say that the financial industry is in the midst of a barroom debate over the best way to implement the standard.

Here are the players: On one side you have the two big card brands, Visa and MasterCard. Allied with them are the major card issuing banks. These are the institutions that issue millions of debit cards that carry the Visa and MasterCard brands.

Visa and MasterCard have upped the ante on EMV by setting deadlines for various industry segments to comply with their diktat to accept EMV-enabled cards. Their leverage is an attempt to shift fraud liability from the card issuing bank to the retailer or ATM where a debit card may have been scammed.

On the other side you have the other players who are involved every time you use your debit card. These include the retailers who accept the cards, the ten or so PIN debit networks that transport your card data back and forth from your financial institution so your purchase transactions can be authorized, transaction processors and assorted smaller financial institutions like credit unions and community banks.

It’s important also to note that this debate is being conducted against the backdrop of a ten-year feud between the big-box retailers on one hand and Visa and MasterCard on the other.  Like most business conflicts this feud comes down to money. The retailers have alleged that the card brands make too much money processing the card that people use to pay for stuff they sell. So far the retailers appear to have gotten the better of the card brands. This includes billions of dollars in settlements, not to mention Congressionally-mandated price caps on how much banks can make on the interchange they charge retailers for authorizing their card transactions.  

So amid this poisoned atmosphere the parties are attempting to negotiate the implementation of what is arguably the biggest technology shift in the payment card business since electronic data capture at the point-of-sale terminal.

A key sticking point right now is a piece of software in computer chip called an Application Identifier, or AID. The way things are done now a POS terminal or ATM will pick up the bank identification number from a card and rout the transaction to that bank for authorization. But EMV is different. The routing scheme is determined by that AID. So the transaction will be routed over the network that has its AID on the card.

The issue of routing is important here to consumers. He who controls the routing for the most part controls who gets the bulk of the processing fees when you use your card. If a consumer’s card doesn’t have the application that routs the transaction over a particular network, that network makes no money. So the threat to consumers ultimately is loss of this multitude of competing networks and potential higher card fees.

Right now Visa and MasterCard are in the catbird seat. As global companies they’ve been issuing millions of cards with their AIDs for years. They also have relationships will all of the major card-issuing U.S. banks. Their motivation to negotiate with their potential competitors who are starting from scratch in EMV appears, shall we say, limited.

For their part the PIN debit networks (Everyone in this story has an acronym or nickname. Let’s call them the PDNs) not named Visa or MasterCard have struggled mightily to come up with a solution. Their proposal is to join forces and develop a single common U.S. debit payment AID.

This seems like a common sense solution: cards with a Visa or MasterCard AID as well as the common AID. But it creates two new problems. First, will card issuers, who own the card real estate, agree to put a second application on their cards, just to keep the PDNs in business? And second, will retailers configure their system to recognize that common AID? At least one large big-box retailer has said it will only accept cards with one application of which the AID is part. Any others will be stopped at the register.

So there you have it. A high stakes game of Texas Hold ‘em. Who wins? Here’s what I think:

The PDNs are fighting for their collective lives here. The common AID is a good solution but time’s probably running out on them. They’re like a football team that’s run out of time-outs and is having trouble getting the right players on the field for one last Hail Mary play.

As far as the retailers go, they can harrumph all they want and arrogantly lay down the law to issuers. But big-box retailing is a high-volume, low-margin business.  Are merchants really going to jeopardize throughput in the checkout lane by sticking to their one-application rule? Will they incur the ill will of customers and the cost of abandoned orders and carts as disgusted customers walk out of their stores? Their technologists might want to. But has anybody talked to the C-suite? Standing in a checkout lane at these stores is already like watching paint dry. You really want to make it slower by having cards rejected in lane?  Time is money. I’d call their bluff.

And are these retailers, who have fought the global brands tooth and nail for ten years going to give the global brands a captured market? Put their only competitors, the PDNs, out of business ? I’m not taking that bet, either.

And why wouldn’t card issuers put a second application on a chip? Sure, it might require a little baksheesh from the PDNs, but this is business. Everything comes down to money. If the PDNs understood that, which I don’t think they do, they’d start talking dollars with the issuers. Will that happen? I’ll bet that it does.

This is a long story. But long story short, EMV will happen when the business people in these organizations figure out who gets to make the money here and how much. Right now the process is being driven and filtered by the technologists. Once the business people figure out which way the money flows, EMV will get implemented. Like everything else in business, it all comes down to money.
7:45 AM

5 Things Consumers Need to Know about the New Health Insurance Market

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This week we commemorate the 150th anniversary of the Battle of Gettysburg. That turning point of the American Civil War pitted friend against friend, brother against brother, state against state. Perhaps it’s fitting at this time that we revisit another more recent battle that pitted American against American—the battle over the future of healthcare.

Wherever you came down on the Affordable Care Act of 2010, either in favor of the law or against it, is irrelevant now. It’s a round that’s been fired. You can’t get it back in the casing. Now is the time for the law’s supporters and opponents to deal with the implementation, which will be messy. Just this week the government announced a one-year reprieve for large businesses to comply with the law’s mandatory insurance requirements.

So, there are five things consumers need to know about health care going forward.

First, in six months the policies sold by “insurance exchanges,” the crown jewel of the law, begin taking effect. That means if you’re not covered by insurance through an employer, the Medicaid program or Medicare, you’ll need to buy health insurance or pay a penalty. The exchange in your state is a likely place to start looking.

Second, in this new world of health insurance, no good deed goes unpunished. So if you’re a healthy adult who’s taken care of himself all these years, you’ll probably pay more than you have been paying for insurance. A lot more.

The third thing you need to know about health insurance is that the law now mandates guaranteed issue of policies. This means, like the announcer on late-night cable TV says, you can’t be turned down. Regardless of your health condition you’ll be issued a policy.

If you’ve got a pre-existing condition, in all probability that policy will cost less than what you have been paying on the open market. But how can the insurance carriers do that? How do they offset the risk that you present to them? Simple. 

And that’s the fourth thing you need to know about the new world of health insurance under the ACA. The premiums of healthy insureds will be going up to subsidize the risk presented by the less healthy policy-holders.  In essence, if you’re a healthy non-smoker in your 20s or 30s you’ll be paying to cover the risk presented by other, less healthy, policy holders.

So who wins and who loses under this new system? Clearly, the winners are those individuals who have trouble getting affordable insurance now or who have altogether been priced out of the market because of their health conditions. The losers are those healthy, demographically benign individuals who will see their rates go up.

For example, in one analysis, a 40-year-old nonsmoker in Virginia today could obtain a high-deductible ($5,000) plan, which would cover half his medical costs for about $60 per month. By comparison, the least expensive plan available through the exchange system will cost him nearly $200 per month.

Unknown at this point is how many healthy individuals will resist seeing their premiums more than triple going forward. In order for the exchanges to function they’ll need as many nonsmoking vegans, joggers and yoga enthusiasts as they can get. If they bail out of the insurance market and just decide to pay the penalty for not carrying insurance, the actuarial tables get really sideways really fast.

So the fifth thing you need to know about the new healthcare law is your options. If you’re that healthy, middle-aged individual, you need to develop a plan now to anticipate the changes coming next year. Compare insurance quotes—to each other and to what you’re paying now. Examine what your liability would be if you “ran bare”—without coverage. Know now what changes might be in store for your current policy.

Guaranteed issue is an attractive concept and papers over a lot of the flaws in our current healthcare system. But the cold, hard reality is that someone has to pay for it. And like everything else that seems too good to be true, that person is you, the consumer.