How the payments industry is being disrupted

A good overview of the disruption underway in payments from McKinsey.

Global payments revenues have been growing at rates in excess of expectations. Once again, Asia—and China in particular—is the primary engine propelling the global numbers, but all regions, even those where revenues have recently been in decline, are contributing to the surge. Payments growth is currently a truly global phenomenon.

Looking ahead, however, we expect global payments revenues will begin to reflect the flip side of Asia’s prominence as a growth driver. The expected macroeconomic slowdown in Asia–Pacific, in other words, is dampening expectations for payments growth overall. However, the turnaround in other markets will make up for some of this decline. We forecast that this rebalancing between emerging and developed markets will lead to tempered but still healthy revenue growth of 6 percent annually through 2019.

Mck-PaymentsOur most recent research reveals several additional trends of note. In 2014, as in 2013, growth resulted primarily from volume rather than margin growth ($105 billion versus $30 billion). Liquidity-related revenues (those linked to outstanding transaction-account balances) were again the largest revenue-growth contributor (53 percent). But transaction-related revenues (those directly linked to payments transactions) climbed more strongly in Europe, the Middle East, and Africa (EMEA), as well as in North America, contributing more to revenues than they have in any year since 2008.

We expect the contribution of transaction-related revenues to continue rising through 2019, growing at a compound annual growth rate (CAGR) of 7 percent (compared with 5 percent for liquidity revenues) and contributing more to global payments-revenue growth for the period ($360 billion compared with $220 billion). Weakening macroeconomic fundamentals, primarily in Asia–Pacific, will mostly affect worldwide liquidity revenues; transaction-related revenues, more driven by payments-specific trends and the ongoing migration of paper to digital, will continue to grow at historical rates. Further, the digital revolution in customer behavior and the intensifying competition will likely revive the “war on cash,” giving further impetus to transaction-related revenues. Still, with CAGRs of 9 percent in EMEA and 7 percent in North America, liquidity revenues should continue to grow as interbank rates recover from historically low levels.

We also anticipate a rebalancing of revenue growth. During the past five years, payments revenues grew at a CAGR of 18 percent for Asia–Pacific and Latin America combined, comparing favorably with flat revenues in EMEA and North America. During the next five years, however, these growth rates will be 6.5 percent and 6 percent, respectively.

Setting aside changes in macroeconomic fundamentals that are difficult to predict, we foresee four potential disruptions that will alter the payments landscape in the coming years:

  • Nonbank digital entrants will transform the customer experience, reshaping the payments and broader financial-services landscape. The payments industry has recently seen the entry of diverse nonbank digital players, both technology giants and start-ups, that are presenting increased competition for banks. While start-ups have generally not been a major threat to the banking industry in the past, we believe things will be different this time due to the nature of the attackers, the prominence of smartphones as a channel, and rapidly evolving customer expectations. To maintain their customer relationships and stay relevant, banks will need to respond to these changes with new strategies, capabilities, and operating models.
  • Modernization of domestic payments infrastructures is under way. The industry is currently going through a wave of infrastructure modernization that is required to compete effectively with nonbank innovators and address evolving customer needs. More than 15 countries have modernized their payments infrastructures in the past few years, and many others are in the planning stage. Because infrastructure upgrades are costly at both the system and bank levels, banks need to find ways to build products and services on top of the infrastructure that provide value to end users and accelerate the war on cash, in order to recover these investments as quickly as possible.
  • Cross-border payments inefficiencies are opening doors for new players. The entry of nonbank players and new infrastructure demands are not limited to domestic payments: they will also affect cross-border payments. To date, banks have done little to improve the back-end systems and processes involved in cross-border payments. As a result, cross-border payments remain expensive for customers, who also face numerous pain points (for example, lack of transparency and tracking, as well as slow processing times). However, as nonbank players increasingly encroach on the traditional cross-border turf of banks—moving from consumer-to-consumer to business-to-business cross-border payments—they will force many banks to rethink their long-standing approaches to cross-border payments.
  • Digitization in retail banking has important implications for transaction bankers. The digital revolution will extend well beyond consumer payments and retail banking, causing significant changes in transaction banking. As customers grow accustomed to faster and more convenient payments on the retail side, they will soon demand similar conveniences and service levels in transaction banking. Having witnessed the impact of nonbanks in consumer banking, transaction bankers are becoming more aware of the nonbank threat in their own backyard and of the potentially major downside of failing to invest in digital infrastructures and services.
 Overall, we expect to see the payments industry continue to grow at a moderated yet healthy rate during the next five years. But amid that growth, there will be a rebalancing of revenue sources, and, more important, powerful disruptive forces will begin to reshape the global payments landscape.

Apple Pay Now In Australia, For Some

As expected Apple Pay has now officially launched in Australia, but only for some because here, Apple has teamed up with American Express and the online payments provider eWAY.

To use the system, first consumers will need an American Express card – direct from Amex, not from a bank who re brands the Amex card.  Then consumers will need an Apple device with fingerprint recognition, or an Apple watch.

Assuming the default payment details in the consumers iTunes account is an Amex, or by using the iPhone camera to take a photograph of the Amex card, Apple Pay can be set up.

In store, the device can then pay wave, using the id confirmation built into the phone, or consumers can purchase via an app, using the Touch ID, simplifying the purchase process.

The merchant end is handled by eWAY. According to the web site:

Apple Pay will be available to all eWAY merchants when it is launched in Australia.  All eWAY accounts come ready with American Express, so you’ll need to check you’ve selected American Express in MyeWAY.   The two ways to accept Apple Pay are in-person or in-app.if you’re an eWAY merchant with an app, your eWAY account will allow your customers to check out with a single touch using Apple Pay. Checkout is simple and there is no need to manually fill out lengthy account forms or repeatedly type in shipping and billing information.

Customers love shopping in-app, and if you already have an app ready or you’re wanting to develop one and take Apple Pay, you’re on your way to massive sales.

Make your checkout simple with Apple Pay
Your customers won’t need to retype shipping or billing information
Increase conversions with faster checkout
Credit card details are kept private and not shared with the merchant for security
Make your app more innovative and seamless

Shopping in apps with Apple Pay can be as simple as the touch of a finger, so iPhone and iPad® users can pay for physical goods and services, including clothing, electronics, beauty products, tickets and more.

In Australia, Apple Pay users will receive all the benefits of protecting personal information, transaction data, and credit and debit card information with the industry-leading security Apple Pay brings. The actual numbers of the credit card are not stored on the device. To protect you, a unique Device Account Number is assigned, encrypted and securely stored in the Secure Element on the Apple device, and each transaction is authorised with a one-time unique dynamic security code.

As the merchant, you don’t receive your customer’s actual credit or debit card numbers, so you aren’t handling actual credit or debit card numbers in your systems when they pay with Apple Pay.

 

CBA Expands Digital Wallet

CBA has announced that the CommBank app Tap & Pay now supports both MasterCard and American Express credit card payments, adding to the existing debit card functionality and giving more Australians the ability to further embrace the digital wallet and manage their money on-the-go.

Customers can now make credit card purchases at the Point of Sale using CommBank app Tap & Pay on all Android handsets with NFC, as well as the CommBank PayTag solution for iPhone users. CommBank is the first Australian bank to roll out American Express payments on all Android devices.

The latest development of the digital wallet reflects rapid customer adoption of contactless payments. Since launching Tap & Pay supporting Debit MasterCard using NFC technology in Android phones in March this year, more than 300,000 cards have been set up on the CommBank app and one million transactions have been processed.

Angus Sullivan, Executive General Manager, Retail Products and Strategy, Commonwealth Bank, said:

“Australia has some of the highest volumes of contactless payments globally and with more than 2.8 million users of the CommBank app each week, we are focused on delivering innovative payment features to our customers.

“This next evolution of the digital wallet places the power of mobile technology in the hands of even more Australians, giving them more convenient access to their finances whenever and wherever they are,” he said.

Delivering value beyond making payments

Tap & Pay is one of many features developed by CommBank to deliver simple and convenient mobile experiences. Others include:

  • Loyalty feature in the CommBank app allows customers to scan the barcode of their physical loyalty cards and add a digital copy of them to the CommBank app, eliminating the need for a physical wallet.
  • Cardless Cash in the CommBank app allows customers to make withdrawals at ATMs without the need for a physical card.
  • Lock, Block & Limit provides a safe and immediate way to lock credit cards for overseas purchases, block ATM cash advances, set spending limits, as well as put a temporary lock on a misplaced card or report a lost/stolen card for replacement.
  • The CommBank Offers app, currently piloting at Westfield Hornsby, enables customers who have an iPhone 5 or above to opt-in and take advantage of tailored merchant offers that deliver value based on their shopping behaviour and location.

Connecting online can help prevent social isolation in older people

From The Conversation.

John*, a widower, is a retired engineer aged in his 90s. He lives alone in the family home and has struggled with loneliness and depression since his wife passed away. He feels frustrated that as he gets older he can no longer do many of the things he used to enjoy, which exacerbates his sense of feeling alone in the world.

Social isolation in old age

In Australia, one-quarter of people aged 65 and above live alone. Some older people, like John, will be vulnerable to social isolation, which occurs when people have limited opportunities for human contact and become disconnected from society.

Not all older people who live alone are socially isolated. And social isolation is certainly not limited to old age. But social isolation in old age is a significant concern. It is linked to a range of health problems and, in extreme cases, can lead to people growing old and dying alone.

There have been public calls to address social isolation. Earlier this year, UK Health Secretary Jeremy Hunt controversially urged people to invite lonely elderly strangers into their homes in an effort to avoid “lonely deaths”. In Australia, many aged care organisations and local councils offer social programs designed to help older people stay connected to others.

But for older people with limited mobility it can be difficult to take part in organised social activities. And not everyone wants to invite strangers into their homes. For these people, social technologies could provide valuable opportunities to stay connected to the world.

Older people and social technologies

Older people are going online at growing rates and social networking is no longer considered the domain of the young. Pew Research Centre found that that more than half of American internet users aged over 65 now use Facebook.

But not all older people feel comfortable using social networking sites. Existing sites, such as Facebook, can be confusing, with too many functions, distractions and extraneous information. Some older people, meanwhile, fear a loss of privacy and malicious intent when communicating online.

Researchers at the University of Melbourne developed a prototype iPad application, Enmesh, to explore how social technologies can be used to help alleviate older people’s experience of social isolation. The app was a simple social networking tool designed to be easy, fun and safe to use. Its simplicity meant it avoided many of the problems that make existing social networking tools difficult or unattractive for older adults.

Enmesh was used to share captioned photographs and messages within a closed group. The photographs then appeared on an interactive display on each person’s iPad screen. This provided a safe and fun space for people to learn how to use the iPad’s touchscreen and camera while also developing new friendships.

John was one of several older adults, mostly aged in their 80s and 90s, who took part in a series of studies to trial Enmesh. During the study, John shared over 100 photographs and messages with other older adults, all strangers to him at the start of the project.

Sharing photographs might seem like a simple and familiar form of communication to those of us who use social media every day. But for John, and others like him, it was a revelation.

Many of John’s captioned photographs provided personal, poignant – and sometimes humorous – descriptions that illustrated how he felt about ageing. Others could relate to his experiences and felt they got to know John through his photographs.

One of the older adults John connected with was Sarah*. She said the project gave her a sense of belonging to a group. She enjoyed sharing and seeing other people’s photographs. They provided “little snippets” that gave her insight into people’s lives. Sarah said:

It’s lovely to have conversations and I don’t have nearly enough, as I rarely go out or have visitors. I love it when one of those things is possible, but in the meantime this is a wonderful way of keeping in touch with folk.

Older adults who are socially isolated may have few opportunities to share information about their day-to-day lives. Photo-sharing with peers provides an important outlet for this communication.

Empowering older people

Technological innovations for older people – such as emergency alarms and devices that monitor activity – are typically designed to compensate for frailty and provide peace of mind for family members.

While these innovations are important, the Enmesh study has shown that technologies can offer powerful social opportunities for older people too.

As consumer technologies continue to advance, there will be more opportunities to enhance older people’s social worlds through technology. Alongside growing innovation, we need to build capacity in the aged care workforce to ensure the aged care industry is mobilised to take advantage of new technologies.


*Names have been changed.

Author: Jenny Waycott, Lecturer in the Department of Computing and Information Systems, University of Melbourne

Alternative Finance Set to Boom in Australia

From Australian Broker Online. Australia could be the next burgeoning market for alternative forms of finance, if regulators keep up with consumer demand.

Speaking to Australian Broker, Luke Deer, a post-doctoral research associate at the University of Sydney, said Australia is ripe for disruption from alternative and innovative forms of finance – namely peer to peer lending and crowdfunding.

“I think there will be rapid growth in alternative finance in Australia in the coming years. I think a lot of the platforms have just been started in a very uncertain regulatory environment and that is something which has probably hampered their development to date,” he said.

“However, as that regulatory situation becomes clearer and is modified to take account of these new types of financing arrangements then I think the use and the scale of it will increase rapidly.”

Peer-to-peer (P2P) lending has already started to gain traction in the Australian finance market, with SocietyOne being the first P2P lender to launch in Australia in 2012 with a number of other platforms following suit.

Although P2P lenders are still yet to break into the residential mortgage market in Australia – instead currently focussing on debt consolidation, personal loans and SME lending – a number of them have already entered the third party channel.

According to Deer, as the regulators recognise the increasing strength of P2P lenders and adapt legislation accordingly, the market is likely to see a number of more new entrants.

“What has happened at the moment is peer-to-peer lenders in Australia have been able to operate under the old legislation, however, that legislation applies to much bigger financial institutions. To the extent there are modifications to those regulations in the future, this will be more entrants into this market and they will be able to provide financial solutions more efficiently than encumbered players in those markets.”

Deer says the growing demand for alternative forms of finance, such as P2P lending, will be driven by the next generation of financial consumers.

“There other thing is with the uptake of the internet and social media, it is becoming more natural for younger generations in particular to increasingly do financial transaction online – and why limit that to banking? Why can’t they be able to do that for a whole range of different financial needs?” he told Australian Broker.

“…as far as we can tell from other studies we have done it will be the millennial generation in particular which will grow up where banking and finance is going to be more widely available and more mobile than it has in the past, which will ultimately lead to new forms of financing.”

SME’s, Digital, And The Fintech Revolution

Within the DFA Small and Medium Business Surveys, we capture significant information about how these businesses use digital, and their attitudes towards the fast-emerging and potentially disruptive “fintech” sector. Since our last full survey released in mid 2014, and still available on request, much has changed. Today we discuss some of the interesting findings on fintech, in the context of SME’s.

First, looking at how business owners are using digital, (which includes use of smart devices, social media and cloud services) and their preferred channels; the revolution is well underway. We separate business owners into digital luddites (really have not engaged with digital at all), digital migrants (moving to embrace digital, and up the learning curve) and natives (always been digitally at home).

More than half of SME business owners are now migrants, and over 30% natives. This leaves a runt of 12% who are not digitally aware. So, most organisations are well on the way towards digital transformation.

SME-TechngraphicsIn terms of channel preferences (that’s how they would LIKE to interact, not necessarily how they currently do) the shift to apps and online is stunning. This is not surprising though given the penetration of smart devices, and the fact that many business owners are time-poor. We foreshadowed this in the 2014 report.

SME-Preferred-ChannelWe next ask about their awareness of fintech. Of those who were aware, (a small but growing band), we then ask about their attitude towards fintech, and especially whether they might consider accessing funding or other services from new, non-traditional players. The results are again quite sensational, with many digital natives now past awareness, and considering applying or already have applied. Migrants have more mixed attitudes, but many are now beyond awareness. Luddites are not engaged at all.

SME-Fintech So the results highlight the digital transformation underway, and underscores the potential for fintechs to disrupt the market – there are ready customers out there, and as awareness grows, many will seek to embrace.  It also begs the question as to how incumbents will respond.

Our next full and updated SME report will be published later so stay tuned.

 

It’s time for an eAustralia Card

From The Conversation.

Australian e-government is a long way behind many other developed nations. Our national leadership has utterly failed to comprehend why e-government should have been a national priority decades ago, and continues to offer little in the way of policy direction.

Hence, our current solutions are a bizarre mish-mash of inconsistent approaches, making it confusing and frustrating for Australians. Every mis-step sets back public trust in online government services. Usability, reliability and security are the keys.

The Australian Tax Office (ATO), for example, provides online data entry, but inadequate explanatory guidance. Searching the ATO website is risky because it also contains obsolete material from previous years.

The ATO communicates by print-formatted electronic documents to a separate MyGov email inbox, making reference to non-existent additional information, yet two-way communication is not possible through this service.

If the Digital Transformation Office is appropriately funded, empowered and motivated, then a top-down review of government services may be able to address the usability and reliability issues over time. Of much greater concern and urgency is the challenge of digital identity.

Who are you?

The Australian MyGov identity system was developed by the Department of Human Services (DHS) for the online delivery of Centrelink and Medicare transactions in particular.

According to the Department’s own website, it has no role in the development of government-wide online services. So it is perplexing that the ATO has adopted an identity solution from a non-specialist department, developed to address a particular application and its own list of security concerns.

Whether those particular security concerns are relevant to the ATO is not clear. It’s also not clear whether a top-down threat assessment was ever conducted for either the DHS or the ATO.

The security threat is not just that government agencies want to protect their own systems, it is also that the users of these services need to be able to trust that their private information is accurate, correctable, auditable and secure.

The key issue is establishing that the digital identity of an account truly belongs to the physical person. Unfortunately, personal health records, social security payments and tax details provide a strong incentive for identity theft, and MyGov’s identity verification process is weak.

So how else could you establish that you really are who you say you are?

The UK and New Zealand

The UK government rightly puts identity front and centre in the mission of the Government Digital Service. And the UK government has been at pains to consult and to explain publicly how the digital identity system will work.

In the UK model, identity is established by one of a small number of private service providers, using multiple identification sources. In most cases, this can be done entirely online. The UK government also believes that the private sector is the most efficient way to develop evolving solutions to minimise the risk of emerging identity fraud attacks.

There is a further requirement that identity verification for a particular government service is proportionate to the service. Passports need biometric verification, but other services have less stringent requirements.

We have similar familiar in-person processes in the form of a 100 point check for financial service providers such as banks, and multiple identity documents for passports.

New Zealand has followed the UK model with RealMe. However, the service is provided by the Department of Internal Affairs in collaboration with the New Zealand Post Office rather than private providers. Once identity has been established, details can be shared with service providers.

Of particular interest in New Zealand is that RealMe is sufficient to open a bank account and apply for a passport entirely online.

The Estonian approach

The mature and battle-hardened Estonian e-government approach includes digital signatures, electronic prescriptions, online voting, and opening and operating both bank accounts and online businesses. Estonia has also extended its digital services to so-called e-Residents.

Estonia’s identity solution requires a smart identity card to be issued in person, which is when they collect biometric information, including a photograph and fingerprints. A smartphone application also provides identity validation for lower risk services.

The underlying system architecture provides a very robust and secure platform for both government and private sector services, even enabling users to verify who has been accessing their private information, and why.

The Estonian approach works in no small part because of strong and effective leadership in the 1990s, which brought with it public support. Whether or not Estonians like their current government, there is an inherent sense of trust in the security of government services.

What is happening in Australia?

If you search hard enough in the Digital Transformation Office website, you’ll eventually find a glib reference to digital identity. Just A$254 million has been budgeted over four years to begin the transformation of Australia’s Commonwealth services to online delivery. That’s less than half the cost of the Adelaide Oval redevelopment, but with enormous and quantifiable long term benefits to Australia’s economy and society.

In 1985 the Hawke Labor government proposed a national identity card, the Australia Card, which was subsequently abandoned in 1987. Politics got in the way of our nation’s leaders to grapple with real policy substance, to Australia’s detriment.

Robust policy debate still might not have delivered the Australia Card, but whatever solution emerged might have set up Australia to be a world leader in the delivery of modern government services.

Policy needs to be driven by open public discussion and consultation. The UK and New Zealand models are compatible with Australian expectations, although the Estonian smart-card based solution is far more robust and versatile.

We have two clear choices: an eAustralia Card would offer flexibity, security and convenience, not to mention eliminating a half-dozen cards from a typical wallet; or we can continue to fail to innovate, swallow our pride and follow New Zealand’s lead.

In the absence of well-considered policy driving e-government services, Australians will continue to have no good reason to trust our government to keep our private information secure.

Author: Matthew Sorell, Senior Lecturer, School of Electrical and Electronic Engineering, University of Adelaide

Amex Holders First To Use Apple Pay In Australia

As reported  by the tech blog 9to5Mac, Apple has just announced that its mobile payments service, Apple Pay, will be available to American Express users in Australia and Canada in 2015 and Spain, Singapore and Hong Kong in 2016.

Apple chief Tim Cook said that Apple Pay would be made available only to “eligible American Express customers in these regions”, represent a reduced roll out compared with users in the UK or the US.  The Australian deployment will bring the total number of Apple Pay markets to four.

Apple Pay’s mobile payment and digital wallet offering allows users to make payments with their iOS devices, including Apple Watch. At its US launch Apple said more than 1 million credit cards had been registered on Apple Pay in its first three days of availability.

Digital Disruption and the Sharing Economy

The sharing economy has the potential to disrupt current business models, whether its taxis, banking, accommodation or a range of other areas. It also has the potential to be stopped dead in its tracks, if incumbents, or regulation get to dictate too much too soon. This note offers a few observations about the potential of sharing and highlights some of the open but important issues. It is especially relevant given Labor’s announcement on the sharing economy this past week.

First, a few basic points. In December 2014 the Institute of Public Affairs published an excellent report – “The Sharing Economy – How over-regulation could destroy an economic revolution“. It provides an excellent summary of the key issues which need to be considered.

The sharing economy describes a rise of new business models (‘platforms’) that uproot traditional markets, break down industry categories, and maximise the use of scarce resources. The best known services are the ridesharing system Uber and the accommodation service Airbnb. However, the sharing economy extends much further into finance, home tools, investment, and everyday tasks. The ‘sharing economy’ emerged from dramatically falling transaction costs that had prevented certain markets from developing. The sharing economy coordinates exchanges between individuals in much the same way as a traditional market, but does so in a flexible, self-governing, and potentially revolutionary way. These burgeoning benefits are profound: more sustainable use of idle and underutilised resources; flexible employment options for contractors; bottom-up self-regulating mechanisms; lower overheads leading to lower prices for consumers; and more closely tailored and customised products for users.

These sharing economy platforms are only in their embryonic stage of development. The benefits to the Australian economy as the market becomes more efficient are likely to expand. This expansion will only occur if Australia’s entrepreneurs are left to experiment and innovate. The real threat to the sharing economy is government regulation driven by the incumbent industries that are challenged. The danger of excessive legislation and regulation will absorb the gains yielded by technology improvements, preventing mutually beneficial trade and stifling economic growth. This paper recommends new approaches to regulatory design that would encourage the growth of the sharing economy:

  • regulators should encourage bottom-up, organic, self-regulating institutions prior to introducing top-down government control;
  • occupational licensing needs to be reduced to allow private certification schemes and reputation mechanisms to evolve;
  • industry specific regulatory frameworks need to be avoided;
  • regulations making it harder for start-ups to compete for labour need to be reduced; and
  • the status of individual contractors needs to remain separate from highly restrictive employment law.

Whilst it is hard to keep track of all the new businesses springing up, there is a useful web resource which lists at least sixty locally. From this list we immediately see the breadth of industries which may be impacted. Everyone knows about Uber, the lift sharing service, Airbnb, for accommodation, Open Shed for neighbourhood services and tools, Zopa for finance, Kickstarter for funding for new ideas, and Airtasker for services. It is important to understand how wide-ranging the potential impact may be. Bloomberg Finance recently suggested that finance was potentially the area of largest potential disruption, followed by accommodation and transport.

Chart 1

These businesses only exist because mobile devices, and the internet make real-time collaboration and data sharing possible. The core proposition is peer-to-peer, where a platform facilitates someone with an asset to share that with someone looking for just that thing. As a result, underutilised assets can be better used, and the platform providing both matching, and payments. Users can also rate the product or service, so providers can be scored, to assist future prospective purchasers.

Technology reduces the transaction costs, makes pricing potentially more dynamic, and creates win-wins for seller and purchaser, and it fosters market based transactions. But will the market be sufficient to ensure services are of expected quality and ensure potential consumers are not ripped off? Do some of these models create unacceptable disruptions to existing businesses.  If consumers get better outcomes when they use these services will they flourish at the expense of existing operators?

The core question is how and if they should be regulated. Should the sharing economy be allowed to self-regulate? If traditional “top down” forms of regulation are imposed will they simply kill off the business?

 

Andrew Leigh, Shadow Assistant Treasurer and Member for Fraser has highlighted the regulatory conundrum which needs to be addressed in “Sharing the benefits of the sharing economy“.

Initially, many governments have simply attempted to shut these services down. But forward-thinking regulators are increasingly realising that the sharing economy can deliver big benefits for consumers, while also creating new economic opportunities for the people who provide services through it.  So how do we strike a balance between protecting public safety and supporting innovation? How can we ensure providers pay their taxes but don’t end up wrapped in red tape? And how do we open industries up to new competition without inadvertently dismantling important worker and consumer protections? We are just at the beginning of this conversation in Australia, as services like Uber and AirBNB have only been operating here for a short time. Internationally, however, local and state governments have now been grappling with these issues for several years. Exploring how they have responded to the rise of the sharing economy provides a useful starting point in thinking about the kind of regulatory structures we might build here at home.

Uber – restriction or rapprochement?

Ride-sharing app Uber has been perhaps the most controversial of all the new sharing economy services. No small part of the kerfuffle can be sheeted home to the company’s somewhat aggressive business strategies and PR missteps. But it also stems from its success in opening previously locked-up taxi markets to real competition. The regulatory issues surrounding Uber are varied and complex. They include the need to ensure public safety both for those in the car and on surrounding public streets, and the lack of transparency about the company’s pricing model and relationship with its drivers. Then there’s the question of insurance for mixed private and commercial use of a car, and the challenge of ensuring that drivers pay tax on what they earn.

In 2014, Spain sidestepped all of these tough policy challenges by issuing a total injunction against Uber operating in that country. Unlike other attempts at banning the service however, the Spanish authorities went so far as to place associated restrictions on banks and internet firms supporting the Uber app. This detail may well be what lets the Spanish government succeed where others have failed in blocking Uber. That’s because the company might be happy to pay its drivers’ fines from local government authorities, but it simply can’t operate without the payment and communications infrastructure provided by those third parties. At the other end of the spectrum, several US states have now legalised Uber after working with them to come up with tailored regulations. In California for example, local legislators created new rules for ‘Transport Network Companies’, a category which covers Uber, Lyft, Sidecar and any other app offering pre-booked transport in return for a fare. Amongst other things, the rules require these companies to get an operating licence from the California Public Utilities Commission, carry out criminal background checks on their drivers, hold commercial liability insurance worth a minimum of US$1 million, and conduct a 19-point car inspection on every vehicle in their network. Other places, including Pennsylvania and Detroit, have classified these companies as ‘experimental’ service providers, in recognition of the fact that both their long-term impact and viability is unknown. These jurisdictions have given the companies temporary, two-year approval to operate while they decide on a more permanent response. The United States examples may not be exactly right for Australia, but they show that it is possible to regulate sharing economy services without squeezing the life out of them. As for the Spanish approach, it remains to be seen whether an injunction is enough to protect an existing monopoly indefinitely.

AirBNB – no place at home?

AirBNB’s accommodation service has attracted much less political heat than Uber, perhaps in part because it is not competing so directly with established players. The app lets people rent out a room or two – or their whole property – for short stays, with prices that are often well below hotel rates. Because of this, it has tended to attract intrepid adventurers and people on tight travel budgets, rather than the high-end business travellers who are the hotel industry’s bread and butter. As with Uber, AirBNB raises a host of questions about safety, insurance and tax, as well as public amenity for people who live in surrounding homes or apartments. The service has recently been the focus of major protests in New York, but other cities have reached an accord by acknowledging people’s right to do what they please with their own properties.

For example, Portland now allows its residents to rent out properties through AirBNB as long as they get a licence from the city and have a basic pest and safety inspection done. AirBNB has agreed to collect tax on behalf of the homeowners and pay this directly to the City of Portland. As an incentive for people to do the right thing, the city then channels this into a dedicated rental housing affordability fund. Questions have been raised about the transparency of this approach because AirBNB currently lodges a single tax return, rather than letting authorities know which renters earned what. But it’s a big step up from the unregulated way the company still operates in many other cities around the world. Amsterdam and Paris have similarly legalised AirBNB, but both cities only allow people to rent out their primary residences. This means landlords cannot switch their long-term rental properties to short-stay accommodation, as is often the concern of affordable-housing advocates. It also ensures that people living in apartment buildings don’t have to deal with a constant stream of strangers coming and going year-round. The Dutch have gone so far as the mandate that Amsterdammers may only rent out their homes for up to two months a year, with up to four guests allowed at a time. The Parisians, on the other hand, seem satisfied that the primary residence requirement acts as enough of a natural limit.

Rules like these seem to preserve what’s good about a new service such as AirBNB while limiting some of its negative externalities. That’s a balance Australian lawmakers should also be working towards as we move to clarify our local rules for the sharing economy. It’s unlikely that any government around the world will get sharing economy regulation right on the first go. These services are unprecedented in recent policymaking terms, and how they’ll develop in the long term is largely unknown. But if the benefits are real and the risks are manageable, then there’s a good argument for legalising these services now so that they have a real chance to grow.  

If we can get the rules right, this new part of the economy may well bring benefits that everyone can share in.  

So back to Labor’s sharing economy principles:

1. Primary property is yours to share The sharing economy has come about through people making better use of their spare rooms, the empty seats in their cars and their unused tools. So when Australians use this primary personal property to deliver services, rules and regulations specific to the sharing economy should be applied. These should involve light-touch regulation which protects consumers without creating undue regulatory burden. But when additional property is being used to deliver services, this does not fall within the scope of the sharing economy. Standard commercial regulations and requirements should apply when an apartment is being rented year-round or someone has a fleet of cars on the road. When applying sharing economy-specific rules and regulation, compliance responsibility should rest with sharing economy platform operators wherever possible. This recognises that these platforms are better-equipped to understand and meet regulatory requirements than the individual Australians providing services through them.

2. New services must support good wages and working conditions  Sharing economy services must not undercut the wages and conditions of Australian workers. Companies that facilitate labour hire should ensure their pricing and contracting arrangements allow Australians to achieve work outcomes at least equivalent to the prevailing industry standard.  Australians delivering services through sharing economy apps are generally not employees. But it must be recognised that they are not entirely independent contractors either. This is because they do not have the bargaining power to meaningfully negotiate prices or conditions on individual jobs. The Federal Government should look at ways the Fair Work Act, Independent Contractors Act and Competition and Consumer Act could allow collective bargaining by sharing economy workers over issues like pricing, service charges and network access. Commonwealth and State governments should also investigate options for bringing sharing economy workers into insurance and workers’ compensation schemes – as is currently the case for certain independent contractors in states such as New South Wales – and explore reforms to support compulsory superannuation saving through the tax system.

3. Everyone must pay their fair share of tax Everyone doing business in the sharing economy must pay a fair share of tax.  Sharing economy companies must pay company tax at the standard corporate rate on all revenue generated in Australia. Australians delivering services in the sharing economy must pay income tax at the standard marginal tax rate relevant to their annual income. They are also required to collect GST when their annual activity exceeds the current GST-exemption threshold. Since all its transactions take place online, the sharing economy has the potential to improve tax collection and simplify taxpaying. To facilitate the payment of tax, sharing economy companies should collect Tax File Numbers or Australian Business Numbers from the Australians operating on their networks and report annual earnings data to the ATO for pre-filling in tax returns.

4. Proper protection for public safety Sharing economy companies and those delivering services through them must have appropriate insurance policies to cover customer and third party risk. Sharing economy companies should work with the insurance sector to develop products which accommodate mixed personal and sharing economy use of property such as cars and homes. These companies should also act as an ‘insurer of last resort’, where doing so does not create unreasonable barriers to entry for new competitors. Compliance responsibility for meeting insurance requirements should rest with the sharing economy companies. They should cite and hold on file relevant insurance documentation for the Australians delivering services through their platforms.  Sharing economy services should be subject to the provisions of Australian Consumer Law. This means that Australians are entitled to all standard protections relating to consumer rights, honest conduct and product safety when using these services. State and local governments should develop licensing and inspection codes specific to sharing economy services. For example, in some international jurisdictions governments have opted to take a light-touch approach based on minimum standards and streamlined vetting. These codes should recognise the lower level of risk posed by these services relative to commercial operations, rather than seeking to directly replicate existing regulatory structures. In determining whether sharing economy-specific or standard commercial regulations should apply to a particular activity, the personal property rule should be applied.

5. Access for all Sharing economy services should be required to meet agreed accessibility standards. Not every service will be fully accessible for people with disabilities, but sharing economy companies should negotiate appropriate service levels through binding accessibility agreements with disability advocates. The Australian Human Rights Commission should have jurisdiction under the Disability Discrimination Act to intervene where agreement cannot be reached or negotiated standards are not observed.  Sharing economy services should be encouraged to offer platforms that cater specifically to people with disabilities. For example, Uber Assist offers disability-accessible cars and vans.

6. Playing by the rules  In a context where tailored, light-touch rules exist for the sharing economy, there should be zero tolerance for companies that continue to flout Australian laws. Sharing economy companies should be subject to heavy penalties if they are found be operating in contravention of laws applying this flexible and responsive framework. Where platform operators repeatedly violate Australian laws, governments should take action to disable their operations.

To me, these seem on one level quite sensible, although it puts the acid on the platform providers to track, trace and report transactions. Such an obligation should be tailored to the size of the business, because if the full obligations are placed on nascent businesses too soon it will kill them, and it will potentially create a concentration of a small number of large scale players, whereas we should be encouraging a thousand flowers to bloom.

I suggest we should bias the regulatory framework to encourage new businesses to develop. Tender plants need carefully husbandry. Legislators must take the time to get the rules right, but with a bias towards facilitating disruption, not stopping it. In Australia, our track record on this is frankly poor, and incumbents often have such strong influence (at a market, and political level) that as a result new sharing economy businesses are likely to get crushed.

If you think your emails are private, think again

From The Conversation.

When you type up a racy email to a loved one, do you consider the details private?

Most of us would probably say yes, even though such messages often end up filtered through intelligence agencies and service providers.

On the other hand, as the digital world becomes more personalized, consumers have begun to accept, appreciate and apparently request relevant connections between their online behavior and displayed advertisements.

It’s fairly commonplace now. Type camping gear into your browser, and for the next few weeks you’ll see online ads for shoes, stoves, shirts and even fashion accessories, all specially designed for camping.

But when you send an email to a family member, or when you receive an email from a friend, do you expect the same type of follow-on advertising as you do from internet searches?

Or do you expect some different level of privacy simply because the information is cloaked in an email?

That’s the issue at stake in a pending lawsuit against Yahoo! Inc.

The case against Yahoo

Plaintiffs filed an email privacy lawsuit against Yahoo in the US District Court for the Northern District of California under several privacy laws, including the Stored Communications Act (SCA) – a federal law that prohibits an email service provider from knowingly divulging to any person or entity the contents of a communication while in electronic storage.

Under the SCA, an email service provider may, however, properly disclose the contents of such communications with the lawful consent of the originator or an addressee or the intended recipient of such communication.

Earlier this year in May, Judge Lucy Koh granted plaintiffs’ request to proceed in the lawsuit as a nationwide class action.

Class actions allow plaintiffs with identical or similar claims to come together as a group in one lawsuit against a common defendant, rather than each plaintiff bringing his or her own individual lawsuit against the same defendant. Typically, many of the claimants would not have the resources to pursue their individual claims for oftentimes relatively modest economic damages. A class action allows them to pool their resources, hire attorneys on a contingency basis to limit or eliminate plaintiffs’ out-of-pocket expenses and seek potentially larger awards than would likely result from a series of individual lawsuits.

Koh is the same judge who denied class action certification in a similar email privacy case against Google last year. The key difference, as Judge Koh noted in her May ruling, is that the plaintiffs in the Yahoo case sought to include in the class of plaintiffs only non-Yahoo Mail subscribers, while the plaintiffs in the Google case tried to include subscribers as well.

This is important because of the issue of notice and consent: did non-Yahoo Mail subscribers have notice of (and thereby consent to) Yahoo’s publicly disclosed policy of scanning, and possibly sharing, emails simply by corresponding with a subscriber?

Given the express language in the SCA that lawful consent of the originator or an addressee or the intended recipient of such communication is sufficient, and given Judge Koh’s prior ruling that Yahoo’s terms of service establishes consent of the Yahoo Mail subscribers – the answer appears to be yes.

In its request to the Ninth Circuit Court of Appeals for permission to appeal Judge Koh’s class action order, Yahoo argued in part that the court improperly decided that the issue of consent could be analyzed within a class action. Yahoo argued that since consent is an issue that is specific to each potential plaintiff’s behavior and action, it would not be appropriate to examine it on a “class” basis, but rather it should be looked at on an “individual” basis. Yahoo’s request was denied without discussion. A preliminary trial date for the Yahoo case has been set for February 8.

Can we expect our emails to remain private? Yahoo mail via www.shutterstock.com

Consumer expectations of privacy

At first blush, it’s tempting to say that emails are different from online behavior and internet search histories, and therefore deserve a heightened level of privacy. An email, like its offline counterpart US mail, is personal, private and akin to a confidential one-on-one conversation written with a specific recipient in mind.

And recent lawsuits underscore this temptation. A new case filed a few weeks ago in California federal court alleges that Twitter is “eavesdropping” on users’ private messages in violation of federal and state privacy laws. Another suit filed earlier in September in the Northern District of California alleges that Google unlawfully diverted non-Gmail users’ email messages to extract content.

But one of the key issues in the case against Yahoo is whether email users – specifically those who do not subscribe to Yahoo Mail – consented to Yahoo’s publicly stated policy that emails sent through its service are scanned and analyzed by the company.

Yes, Yahoo’s publicly available web pages, including the Yahoo Mail page, disclose its scanning practices and the possible sharing of email content with third parities, yet the plaintiffs argue that before sending an email to a Yahoo user or before receiving an email from a Yahoo user, they were not given notice of that policy and therefore did give their consent to it.

The plaintiffs’ argument, while superficially plausible, will be a challenging one to make. Companies such as Yahoo and Google have long provided notices and disclosures to consumers, yet consumers rarely read privacy policies or terms of use.

So given this persistent choice either to not read or to disregard privacy disclosures, can plaintiffs (whether as individuals or as a group) really object to scanning emails for targeted advertising – whether they’re subscribers or not?

Leaving aside the issue of consent for the moment, is our online behavior or our internet searches really any less personal – or any less private – than the content of messages sent by users of a free email service that publicly discloses that their emails will be scanned and possibly shared with third parties?

No, they really aren’t.

As The New York Times noted in April 2014 in Sweeping Away a Search History:

Your search history contains some of the most personal information you will ever reveal online: your health, mental state, interests, travel locations, fears and shopping habits. And that is information most people would want to keep private.

Given the intensely private nature of internet searches and email messages, it’s hard to think that consumers would somehow expect more privacy in one than in the other, especially when they use Yahoo Mail, Gmail or other services that users know rely on advertising to support the product. And neither should we expect complete privacy if we use a paid email service to send a personal message to a user of one of the free services.

Realistic levels of privacy

It’s clear from Judge Koh’s earlier rulings that Yahoo users do not have a right to privacy in the messages that they send to or receive from a Yahoo email user given the respective terms of service governing Yahoo Mail.

But do the non-Yahoo users who willingly sent an email to a Yahoo account holder (and presumably received some) have a right to privacy when the account holder has none?

The plaintiffs allege that Yahoo intercepts and scans subscribers’ incoming and outgoing emails for content, including the content of emails to and from nonsubscribers. The plaintiffs further allege that Yahoo copies the entirety of such emails and:

extracts keywords from the body of the email, reviews and extracts links and attachments, classifies the email based on its content[,] … [and] subjects the copied email and extracted information to additional analysis to create targeted advertising for its subscribers, and stores it for later use.

Plaintiffs allege that Yahoo intercepts, reads and learns the content of non-Yahoo subscribers’ email communications without the non-Yahoo subscribers’ consent. The plaintiffs say such conduct violates the California Invasion of Privacy Act (CIPA). Judge Koh certified the nationwide class action with regard to the SCA claim and a California-only subclass with regard to the California state law claim under CIPA.

Unlike the Google case, in which Koh denied the plaintiffs’ request for class action certification, the alleged privacy claims in the class action against Yahoo are no longer for money damages (since plaintiffs abandoned their claim for money damages when they moved the court for class action certification). Rather, it is about asking the court to determine that Yahoo’s acts violate the SCA and, if so, that Yahoo be prohibited from engaging in that practice in the future.

The plaintiffs won a short-term victory in achieving class action certification, but this bigger issue over whether they can object to the scanning process – based on a right to privacy – given Yahoo’s disclosure of its scanning and possible sharing practices and given that they chose to send and/or receive an email to a Yahoo user, is far from being decided in their favor.

And they’ll have a tough road ahead making their case, because an important lesson we’ll all learn eventually is that email privacy can sometimes be a digital paradox.

Author: Lydia A. Jones, Adjunct Professor of Law, Vanderbilt University