Microsoft has become the first technology firm to weigh into the debate on innovation in the Australian payments system, calling for the payments infrastructure to be modified to facilitate virtual currencies, such as Microsoft Points.

In its submission to the Reserve Bank’s review of innovation in the payments system, Microsoft says virtual currencies such as Facebook Credits, Microsoft Points, and iTunes are evolving into strategic tools for value exchange, and that in the future it’s likely consumers will want to exchange value between the schemes, particularly as they become more prevalent within online retail.

Microsoft Points are used by 30 million online gamers signed up to Xbox LIVE, membership of which can be paid for using the virtual currency, which is able to be purchased with real currency using a credit card or PayPal account.

Virtual currencies are shaping up to be the thorn in the side of regulators the world over, as more and more online communities find ways to exchange items of value that don’t fit with the traditional understanding of monetary value.

The trials and tribulations of Bitcoin, which is about to see one of its currency exchanges face its day in court in France, show just how difficult it is to define what is electronic money, and what is simply another form of stored value.

But in a world where consumers are increasingly putting a value on their participation in online communities, and generating virtual rewards for online and offline behaviour being encouraged by retailers and advertisers, perhaps it’s time for a rethink on currency.

The economists on the Reserve Bank’s Payment Systems Board won’t want to hear it, but virtual currencies are here to stay, and continue to grow in number along with the broader trend of collaborative consumption, which sees swapping, sharing, bartering, trading and renting that has been enabled through new technologies on a scale never possible before.

PayPal gets it, and has also highlighted the emerging role of stored value and digital wallets in its submission to the Reserve Bank. PayPal leapfrogged the banks for peer-to-peer payments, so it’s no surprise it wants a technology neutral environment and the prevention of incumbent providers from using their market power to block entry by payment innovators to help it deliver the next hot thing in payments.

But more interestingly, PayPal believes it’s mobile payments that will drive real innovation, with payments becoming more deeply integrated into the buying experience, online and in stores. Services PayPal expects to see in the future include special offers based on location and consumer behaviour or social network status, instant redemption of special offers at the point of sale and instant usage of loyalty points.

When consumers are able to get real-world discounts using virtual currency or loyalty points via a mobile device at the point of sale, the lines will start to blur.

PayPal says emerging non-traditional organisations offering virtual currencies and stored value services are subject to less prudential and consumer protection oversight than traditional providers, and argues the pending introduction of an ePayments code will be critical for providing consumer protections. It’s true trust will be an issue, but consumers time and again choose convenience over security, and the firm that offers the most user-friendly experience for fans of virtual currency or loyalty points will likely win out, regardless of its time in the market, or the regulatory controls in place.

With many burning issues on its radar, including credit card surcharging, faster payments, mobile payments, and the data that goes with payments, it would be understandable for the Reserve Bank to put virtual currency and stored value at the bottom of its list. To do so would be shortsighted given the way the sector is rapidly evolving.

*This first appeared on Technology Spectator.

Peter Fray

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