[okfn-discuss] value transmission / open transport

Tue Nov 27 21:45:06 UTC 2007

dear all,

The following is a nearly-done draft of something i mean to post on
the OKFN blog. It comes to the list because it is a bit speculative
and i would appreciate some feedback / pointers to common references
that i may be missing here, as well as is this OT for the okfn blog. 

The thrust is that an interesting 2000 report on "money transmission"
services and payment networks identifies structural problems in
collective maintenance of infrastructure for competing services, which
can be generalised to "transport" networks of many if not all kinds,
more specifically than "things 'utility-like'"

Is it possible there is a whole class of enterprises that are "natural
collectives" which have been filled by different monopolies or "small
oligopolies" in the past, but where increasingly-virtual instances of
them arise (like the payments networks, like the internet) they tend
to be nonprofit collectives run with varying degress of openness?

I have been grumbling a lot about "transport" being seen as an
application or sub-topic of "environment" but perhaps we can also see
it as, "environmental" issues tend to be applications of a collective
action problem over transport networks?

Is this like way abstract, or stating the obvious? I can't tell.
The longer version of the above:

I ran across the Cruickshank Report, a review written in 2000 of the state of
payment information systems in the UK, and enjoyed what it had to say about
"money transmission" (Think ATM networks, point-of-sale networks in shops,
credit card networks, as well as intra-bank schemes for larger sums.)
http://www.hm-treasury.gov.uk/media/B/7/BankReviewChaptthree.pdf

A lot of value is apparently created by the transport mechanism itself, in the
form of per-use access fees: "around three quarters of a billion pounds per
year are paid in this way to UK debit and credit card issuers. The interests
of bank run schemes do not coincide with the public interest." These are
interchange fees, paid between individual members to cover the cost of
services supplied from one member to another.

<blockquote>
Inflated interchange fees create a number of detriments. First, they raise
the cost to retailers of card payments. ... Second, allowing issuers to
recover costs through interchange payments weakens the incentive to cut
costs through greater efficiency ... Third, competition between payment
mechanisms is distorted in favour of products with artificially high
interchange fees.
</blockquote>

Money transmissions such as ATM networks conduct "network effects". Initially
there is a high entry cost to the builder of a network. People are more likely
to join it, the more people they can reach over it - how widely a credit card
is accepted, how widely a videophone is used. Each new user can be given the
same level of service for less new cost than the previous one, and once
maintenance cost is covered up until capacity is full, that cost is
effectively zero. 

"Network effects also have profound implications for competition,
efficiency and innovation in markets where they arise... Once a network is
well established, it can be extremely difficult to create a new network in
direct competition." A very high cost of initial capital investment, at a
great deal of redundancy in services "raises entry barriers" to value
transmission markets which "in turn leads to higher customer charges and lower
levels of service in these markets. It also effects the geographic
distribution..." where densely populated areas become over-served, sparse ones
neglected.

Except at times of high congestion, there isn't a per-access cost impact over
and above the maintenance costs of the underlying network. Cost to install,
fix and improve services may be significant; but the benefit of being able to
join such a network is much greater across participants. 

Through sustaining it via a per-access fee levied against the ultimate end
user.

The Cruickshank report's analysis suggests a license for entry into "money
transmission" networks which reflects the risk. The current schemes have a
"mutual governance" model, where the underlying network is operated by a
not-for-profit company co-owned by the participating "competing" companies. 

Yet the industry associations have formed non-for-profit mutuals on the
grounds that some aspects of their business are better run collaboratively.
There are many situations that look like this and which tend to involve the
underlying transmission medium for moving things from one place to another. A
network - a road network carrying a bus network, or a communications network
with public terminals - becomes so widespread and the necessity of interchange
with it so complete that the cost of replicating it - where that is physically
possible - must tend to be prohibitively more than the cost of joining it. In
a few very congested areas, private toll roads may be viable, but even then
following the topology of a main network. Planning and licensing restrictions
in the dependencies, additionally limit who can participate in building
infrastructure.

What does this look like? Well, it looks a lot like another non-Internet
network which the Internet increasing depends on to be of commercial interest,
the cellular network. To become a full member of the GSM alliance and
therefore entitled to read, and use, the specifications for phone call data
exchange, one needs to have a "license" for a slice of spectrum *and* at least
a minimal physical infrastructure of cell towers. A moratorium on new phone
mast installation means that new market entrants must sublicense from
competitors; even a really significant capital investment cannot do enough.

I want to claim a strong argument that there is a whole class of enterprises
in which competition at the infrastructure layer cannot produce a better
result than cooperation, and is likely to produce a worse one. If there really
is a class of works which are "natural cooperatives", I want to find out more
about how they are constituted and how their runnings are best expressed in
rules. For want of a better word, all these enterprises are some kind of
"transport" and that's what I'm trying to get at in proposing an "Open
Transport" session for next year's Open Knowledge Foundation conferences.

Mutual governance may come in for criticism, but perhaps it is rather the
governance of mutual governance that is the problem. A revision of the rules
describing these sorts of systems ought to be workable; the creation of a
status to which these networks can apply in order to get tax breaks etc, and
could achieve the same as any regulatory regime which aimed to increase
transparency, lower costs and encourage innovation. Surely all participants in
the building of transmission networks which move value around - in the form of
water and waste, data and energy - must share these aims?  

-- 