"PayPal iPhone app downloaded one million times in three weeks"!!! (see article here)
I love technology and I'm convinced that over time new Value Transfer Systems will become more and more common. I can't wait to take advantage of them and also watch our economies and companies benefit from the liquidity and growth due to the ease of use
and efficiency of these tools.
Regarless of their benefits, using cell phones, laptops, FOB devices, magnetic cards, or even cards you recharge to later waive in front of the toll collector module on the bus or in the subway, creates opportunity for abuse and misuse when they are not
properly monitored and audited.
Some people will see the risk and say, we have to regulate this, while others (like myself) see an opportunity. PayPal is a non-bank financial institution (NBFI) but it employs many of the compliance practices required to ensure that risks from financial
crimes are minimized. The combination of its services with the iPod format is a really exciting solution that empowers new technologies and facilitates commerce, while minimizing risk. The iPhone solution is the technology facilitator, while PayPal represents
the commerce solution, made less risky by its safeguards already in place for carrying out financial transactions.
So do the risks still exist and where might we find new opportunities, like iPhone and PayPal did?
First we need to understand what the risks might be, so let's take a quick look at what an IVTS is.
An informal value transfer system (IVTS) refers to any system, mechanism, or network of people that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether
or not in the same form.
Informal value transfers generally take place outside of the conventional banking system through non-bank financial institutions (NBFIs) or other business entities whose primary business activity may not be the transmission of money. The IVTS transactions
occasionally interconnect with formal banking systems, for example, through the use of bank accounts held by the IVTS operator. (Let's come back to this point in a minute...)
IVTS are utilized by a variety of individuals, businesses, and even governments to remit funds domestically and abroad. Expatriates and immigrants often use IVTS to send money back to their families and friends in their home countries. IVTS operations are
also used by legitimate companies, traders, and government agencies needing to conduct business in countries with no or inadequate formal financial systems.
Because IVTS provides security, anonymity, and versatility to the user, the systems can be also be used for supplying resources for doing illegal activities.
Following the September 11, 2001 attacks on the United States, IVTS have come under increased scrutiny and regulation in many countries as a result of pressure from the United States.
So let me go back to the point about IVTS operators accounts and the potential for anonymity with funds flowing through the IVTS accounts. In the financial sector, efforts have been made to enhance "know your customer" practices for a number of years. Thus,
a bank or other financial institution, with sufficient KYC practices can more readily detect risky customers or unusual transactions that may be related to financial crimes such as money laundering, fraud or financing of terrorism. Informal systems with occasional or
intermittent contact with formal banking systems can thus present risks because of the lack of information about who might be moving money through the system.
Perhaps now you are thinking, "oh come on, aren't you stretching a bit here? How much money can you launder or use to finance terrorism using cell phones or stored value cards like my pre-paid phone card, anyway?"
The answer is, a lot of money can flow through these systems. If there wasn't a need or opportunity, the products wouldn't be offered. So new technologies can be a powerful tool for good guys like us who want to easily pay for goods or make a donation, and
can also be a very useful tool for those who want to move money easily for more dubious reasons while avoiding detection.
But instead of getting off on a tangent and presenting examples, let me get back on point. The barriers such as country borders no longer exist in a technological world. Money moves more freely and that's a good thing, but there is a risk presented by companies
that are now moving money around, through their own accounts on behalf of others. This presents a risk that others sooner or later exploit, while our government attempts to regulate. These are both negative implications for the company that is trying to move
it's service offering forward, unless they already have the safeguards in place like PayPal does.
The opportunities lie in many areas. Two of which I want to point out here.
First, opportunities exist in assisting companies to address these risks proactively so that they do know who is using their services, where the money is flowing, can minimize their own risk to fraud and abuse, and finally, enhance their reputation capital versus
putting it at risk.
Second, the fact that country boarders are non-existent or more easily crossed in a cyber-world, is considered by many to be a problem that is difficult to deal with. Particularly because different countries enforce different levels of control on their financial
systems. Banks in the US and Europe frequently close correspondent accounts of financial institutions in countries deemed to be insufficient in their efforts to regulate and prevent against financial crime risk.
Solutions like the PayPal iPhone app, allows for international transactions, while leveraging technology and extending the compliance and "KYC" practices required by US and European regulatory authorities, into foreign environments.
These kinds of solutions not only represent opportunities to us as individuals and companies selling products and services, they also represent an opportunity to shrink informal economies ("cash on the street" outside formal systems) and drive huge amounts
of capital into national and global markets.
That's something we can all use right about now.