Facebook P2P

Why do I think Facebook P2P is a big deal?

1) Evolves Facebook’s network from social graph toward commerce and advertising

2) Enables participants (and FB) to monetize their networks

For readers of my blog, you know my view that Facebook has enormous potential to create a new form of social advertising that is far more powerful than banner ads and search. The primary reason I use Amazon for everything is product reputation. Imagine a future where facebook would allow social networks to create reputations on businesses and products from within “communities” where you participate (clothing, organic food providers, restaurants, local service providers, …).

The central challenge in executing against this vision is that consumer social interaction in FB today is not about commerce. This is why ad click rates are so low.. they don’t capture intent. Enhancing FB community’s ability to discuss products and services will help them capture more intent, and enhance the overall interaction of their network. But how do you get your network to start discussing “commerce”!?  Why would a consumer invest time (reviewing) here?

P2P Payments is a core service that would allow FB participants to monetize the value they create. Each and every person could become an advocate and an expert. Youtube self service videos would go to FB first as they enable creators of the videos to create communities, followers and revenue. P2P is Facebook’s first step to add commerce to community.

Given how far Facebook is ahead on Targeting and Attribution, combined with it’s champion position as the only channel where manufacturer’s interact directly with consumers.. means P2P and new commerce interaction will unlock a massive new “graph”.

Questions on P2P

If you want me to roll my eyes in any forum.. just mention P2P. P2P is simply the largest consistent failure in the market (with Obopay as the poster child)… technically, and as a business model. Consumers don’t split bills with friends at a bar, or pay their babysitters on their phone. P2P money flows are just too unpredictable .. and business models compete with FREE! (Paypal, Google, Cash, Intra Bank, ClearxChange). In this case FB has a solid business objective..

How does facebook enable this P2P? The only thing we know is that involves debit card linking. This is not a new service at all (See my blog on Visa Money Transfer from 5 years ago).  The transaction sets that Visa and Mastercard set 5-7 years ago are still not ubiquitous across all banks.. they may be “mandatory” but the big banks just don’t care.  Square Cash was the first product to break the mold and enable ubiquity, it did this through skipping the official VMT/MSS transaction set and issuing a credit/refund to the beneficiary (that was technically against the rules).

I would love to get more details on how FB will work (in the US). My guess? They structured a P2P routing business that combines ClearxChange (History here from its days as BAC-WFC Pariter) for top 5 bank P2P, and Visa/MA VMT/MoneySend for all else. This would give participating banks a “choice” between implementing the card networks transactions sets or going through ClearXChange.  My sources tell me the price of participation in Clearxchange is $60M (as core member). This routing approach would allow Facebook to work across 95%+ of US p2p transactions out of the box.It would also give Clearxchange its very first business outside of the Bank’s own online banking transfer service.

“New” ACH System in US

The current ACH system will never go away (related blog). There were $33.91 TRILLION moved over the network in 2011, compared to total debit and credit volume of around $4.5 Trillion. However, there are several “improvements” to ACH where all could benefit, primarily speed and fraud management.

19 Feb 2013

(sorry for typos in advance)

Thought I would add a little meat to my 2013 prediction on a new token based payment scheme in the US. 60% of the thoughts below are contrived… as participants and pilot results are not in.. and things are still evolving.

Prior to describing a “new” ACH system, it may be useful to understand what banks are looking to achieve.

  • Stop the dissemination  and storage of DDA RTN and Account Numbers
  • Control the bank clearing network. Particularly third party senders and stopping the next paypal
  • Improve clearing speed (new rules, new capabilities to manage risk)
  • New pricing scheme somewhere between debit ($0.21) and credit cards
  • AML controls (per yesterday’s blog on HSBC)
  • Taking Visa and MA out of the debit game (yes this is a major story)
  • Maintain risk models (see both sides of transaction)
  • Control Retailer’s efforts to form a new payment networkTPS Definition


The current ACH system will never go away (related blog). There were $33.91 TRILLION moved over the network in 2011, compared to total debit and credit volume of around $4.5 Trillion.  However, there are several “improvements” to ACH where all could benefit, primarily speed and fraud management. Thus I believe there will be a carrot and stick approach to creating the right incentives for ACH users to move. The highest priority will be around third party senders (TPS), the lowest priority will be regular customer directed debits and payments to billers.

Third party senders (TPS) are a subclass of Third Party Service Providers (TPSP) which originate ACH transactions based on a direct consumer relationship.  Alternatively TPSP are also known as “processors” whose customers are banks (primarily) and have no direct consumer relationship. Banks are not happy with the “free riders” on their network (see yesterday’s blog). Most bankers view companies like PayPal and Xoom as riding on their rails for free. One of their biggest issues is that they do not have visibility into the actual beneficiary as the settlement account hides where the payment is going to. This impacts their ability to perform risk management and authorization. Take these issues together with the increased regulatory focus on AML and we have a fertile environment for change (HSBC’s See Deferred Prosecution Agreement, and business overview of HSBC’s issues from Reuters). Note that AML concerns are much more relevant to International ACH Transactions (IAT). This blog is not focused on IAT.Token

Banks must therefore architect a solution to evolve ACH while the ship is moving. This is a much better approach than that taken by the UK of mandating faster payments… (one bank was losing 30M GBP a WEEK from fraud when launched). The consensus approach seems to be one surrounding tokens and directory (my blog from last year Directory Battle Phase 1).

Scheme (updated 2/20)

  • Token will replace DDA RTN/AN. Starting with ACH Debit, Third Party Senders will be required to use token for access to top 5 banks. Consumers will not know their “token” as it is unique to the requester.
  • Third party sender (TPS/TPPA) must request token for originating consumer account from consumers bank (more on business incentives below). This establishes a “directory” role for the consumer’s bank and positions them to “approve” ACH Debits, where today the responsibility is only on the ODFI.
  • The bank owning the consumer account will be the owner of the token. Individual banks may choose to issue tokens, tokens will be synchronized with a central director, banks not wishing to issue their own tokens may depend on the central directory for issuance.
  • Once a token is issued, a third party sender will use the token to debit consumer account just as the account number is today. However tokens may be unique to each TPS/TPPA
  • Individual banks may clear payments by using their own local directory, or leveraging the central ACH service. There are no forced routing rules (learning from VisaNet).  Banks also agree to collaborate on fraud and risk (keep information fresh).
  • A token will be unique and represent a combination of both sender and beneficiary information. Focus is initially on ACH Debit. Unclear if multiple tokens will be required in MSB scenario. Banks want visibility beyond settlement account. Multiple ways to achieve.
  • Members of scheme agree not to store consumer DDA/account information after token is received (think PCI for ACH).
  • Token issuance (by the originating bank) will take into account, KYC, fraud and other factors
  • Tokens may be revoked and tokens may correlate to risk/fraud information
  • TPS may be required to include beneficiary information for ACH Debit (my guess here). This may take the form of a unique token for every originator-beneficiary combination.
  • Authorization and intra bank settlement begins to look exactly like debit card/ATM. Only piece missing are agreements which would support usage outside of V/MATPS Noyes

———- Update 20 Feb—————————————-

It seems the Directory service has credit and debit cards in scope… I haven’t fully processed this one. Why would Visa and MA want banks wrapping the card number? Talk about a scheme to cut them out of the loop. Once proxy numbers are issued they could just dump other networks immediately..  Merchant acceptance becomes the big question mark if this is the case. My guess is that banks will focus on mobile, and eCommerce.. defeating V.me, I’m sure CYBS, AMZN and eBay will all jump at the chance to help banks with their tokens

Token provider rumored to be start up Venmo



In the ACH world, the big banks rule.. and make the rules. My guess is that the top 5 banks will inform (and subsequently enforce) a rule on all TPS ACH debits requiring use of Tokens to access consumer accounts. Given that the big 5 have over 50% of the accounts… if they act in concert it will certainly impact the network. The focus of their action is on Third Party Senders, with mobile payments and remittance services as primary examples.

  • NACHA may issue new rules which will change existing ACH. My guess is that we will have a new transaction type (associated with TPS, and token). Note that new NACHA rules become law uniform commercial code.
  • NACHA has already begun tightening requirements on TPS/ODFI relationships (Section II, Chapter II (ODFIs), subsection B-3)
  • Banks which serve as correspondent aggregators of ACH (for MSBs/TPS) may be pressured to make immediate changes (beneficiary data, tokens). These payment aggregation banks (which frequently serve as ODFI) will likely not be part of the system design
  • To “enforce” the rule changes, the large banks will set a date where they will not accept transactions that do not conform
  • There will likely be “options” for fraud checking, and accelerated clearing cycle (Carrot?)
  • Processing Token transactions will have a different baseline fee


  • If your clearing bank is not one of the top 5, they may not even know this is going on
  • PayPal, MCX, Google Wallet, Target RedCard are all likely dependent on some form of ACH. They will likely have incremental costs associated with ACH origination as a third party sender. My guess is that it will be at least $0.21.
  • The big 5 banks will be best positioned to help any start up navigate this changing environment.
  •  It may be better for start ups to focus on obtaining consumer debit card information vs. DDA
  • Small banks that specialize as ODFIs will be squeezed
  • The cost of ACH is going up..

ACH Origination Risk

US banks are getting out of the business of supporting MSBs as the regulatory burdens increase. The most recent (and significant) are CFPB’s final section 1073 rules.

I’ve been thinking about several active projects going on in Start ups, bank networks as well as the Xoom IPO. Who owns origination risk for ACH?

Here is a good Story… back in 2002 banks did not allow for online fund transfer. If you wanted to move money from one bank to another you had to write a check and deposit it at the ATM.. and wait 5-7 days. Online brokerage services (etrade, schwabb, … ) did provide the service. BAC broke the mold in 2003, and my team at Wachovia followed. Both Wachovia and BAC used Cashedge (now part of FISV and still good friends of mine).

The general transaction flow (after registration and account ownership verification)

– Debit sender’s account, credit settlement account (good funds)

– Credit beneficiary account, debit settlement account (good funds)

Rather simple stuff.. but there was one big problem. Cashedge was using a very small California bank Calnet for settlement. Can you imagine.. everyone of their big banking customers (including BAC) were putting settlement funds into this tiny little bank which was originating transactions DAILY at a value close to its asset size. We caught this in project due diligence and subsequently set up a separate WACHOVIA settlement account in our business banking facilities. In this model Cashedge became a third party sender for us operating as ODFI.

This Fed whitepaper outlines a few of the risks in ACH origination. Today the large banks have taken a regulatory view that they own the risk on EVERYTHING  that debits their customer’s accounts. Furthermore they are responsible for every originating transaction (even for MSBs that maintain an aggregate settlement account), particularly KYC.

OCC Bulletin 2006-39 clearly addressed the need for ODFIs to know details about all  participants in third party relationships by indicating that financial institutions “should  know, at a minimum, for which Originators they are initiating entries into the ACH Network

This KYC issue is one of the things the lead to the death of HSBC retail in the US (See Deferred Prosecution Agreement, and business overview of issues from Reuters). Demonstrating there are big risks for third party senders that don’t know their business clients. This NACHA whitepaper provides results from a third party sender survey with NACHA banks.

US banks are getting out of the business of supporting MSBs as the regulatory burdens increase. The most recent (and significant) are CFPB’s final section 1073 rules.

Section 1073 of the Dodd-Frank Act amended the Electronic Fund Transfer Act to require remittance transfer providers to provide disclosures to senders of remittance transfers  pursuant to rules issued by the CFPB. Specifically, remittance transfer providers must give  senders a written pre-payment disclosure of specific information applicable to the sender’s remittance transfer. A remittance transfer provider must provide a written receipt that includes both the information on the pre-payment disclosure and additional specified information.

There are a number of “specialist” banks operating in this environment. But a key takeaway for investors is that the costs to “ride the rails” of ACH are increasing. Top 5 banks are taking the position that every bank must KYC the originating customer. Banks are not keen on supporting start ups on their infrastructure, bearing all the risk and cost of running the rails.. while others reap the benefit. This was my point behind Xoom’s $800M market cap.. a company completely built on bank infrastructure.

Future of Retail Banking: Prepaid?

Today’s pre-paid dynamics may be the tipping point by which 3 party networks begin to overtake V/MA in growth. A trend that will accelerate when other business models require “control”. This next phase will be centered around merchant/consumer transaction data, which will begin to unlock the advertising revenue pool, which is almost 4 times larger than that of payments.

Payments and core banking will become a “dumb pipe” business unless Banks create value and assume a larger orchestration role. POS Payments are the central feature of a transaction account, if banks loose this relationship they will be in a poor position to orchestrate. 4 party networks are very, very hard to change.

Nov 7 2012 (updated for typos)

Warning.. long monotonous blog. Sorry for the lack of connectedness, written over 7 days and my editor is rather slammed. You have been warned, so don’t complain….


  1. The competitive dynamics surrounding a “transaction account” (ie DDA) are shifting. For example, Retailer banking/prepaid products (Wal-Mart, Tesco, ..) offer significant fee advantages to most lower mass customers. Three party networks like Amex and Discover have unique advantages when combined with Retailers distribution/service capabilities. This means prepaid has become a disruption: a new good enough product…
  2. Net interest income is 64% of total US retail bank revenues, yet the bottom four deciles of mass market customers are no longer profitable. Given that the transactional account is the #1 factor for retail bank profitability, what are implications if banks loose it?
  3. There is a high probability for disruptive value propositions in Payments, as advertising replaces merchant borne interchange.  Payments and core banking will become a “dumb pipe” business unless Banks create value and assume a larger orchestration role. POS Payments are the central feature of a transaction account, if banks loose this relationship they will be in a poor position to orchestrate.

Does anyone else have trouble keeping up with state of the art? Who is doing what? My method of keeping up with change is to immerse myself in a given area for a day or two. It also gives me a reason to call my friends and colleagues.  This week the theme is retail banking. I’ve spent too much time thinking about payments and how it relates to mobile, advertising, …etc.   I thought I would dust off my banking hat and think in terms of a banker.

Retail Banking

I’m struck by how odd retail banking is. Why are banking services not more simple? Why do I have a separate savings, checking and card account? Why not one account? if the account runs in a arrears I pay interest and if it runs in credit the bank pays me interest? Why does a bank take 3-5 days to move money? How on earth do the banks afford all of those stand alone branches when I visit them perhaps once or twice a year?  Why all of the regulation? What does my bank do for me? What problems do retail banks solve? Can someone else solve these problems more efficiently?

There is certainly no single answer. Retail banking serves many demographics, from the college student to the billionaire. Historically retail bank relationships were very important relationships, as banks only lent money to people they “knew”, based on the deposits they had. Younger consumers need to borrow, older consumers …  savings. Banks focused on things like college student accounts to lock in that relationship as early as possible. Today’s modern financial markets provide for the securitization of loans, thereby spreading risk among various investors willing to assume it. Does a banking relationship matter anymore? to Consumers? to Banks?

I’m struck by how little change has occurred (in the US) on the liabilities side of the banking business? Quite frankly US consumers are treated like idiots who sacrifice “protection of capital” over risk. We now have an entire agency working to protect US consumers from banks.. (BTW what is predatory lending?). Other markets let consumers take on risk.. and hence have many more choices, and innovation, in savings. For example, I’m very fortunate to have worked with so many fantastic people over the years. The great thing about running Citi’s channels globally is that each and every country had a somewhat unique competitive and regulatory environment. It was like running 27 different banks. There were many different strategies for deposit acquisition, for example:

  • In Spain we had a 10/2 product that paid 10% interest on deposits for the first 2 months.. then went to 1%.
  • In Japan Citi leveraged its global footprint, and the poor local consumer rate environment, to create foreign currency (FCY) accounts which allowed consumers earn higher returns by assuming currency conversion (FX) risk in uninsured accounts.
  • The UK is perhaps the most competitive retail bank environment in the world. Consumers in the UK can switch banks almost as easily as changing shoes, it was thus essential to enable consumers to switch quickly and then get them into other products quickly. Take a look at today’s UK savings rates from MoneySuperMarket (8% on a fixed $30k deposit) vs the US (1.05% bankrate.com).  Rate differences on this scale helped fuel the carry trade in Japan.

In the US, it is well known (inside the banking community) that banks are highly discouraged from competing on rates. Not that it matters, this amazing study by the Chicago Fed (Chicago Fed – Checking Accounts What Do Consumers Value – 2010) shows that US consumers are rate inelastic.. and care much more about fees. You have read this right, consumers don’t care about interest rates on their deposits.. which is certainly NOT intuitive. Perhaps rates are all so close to 0% that 5-10bps doesn’t matter. Or perhaps  because the average US consumer does not save at all, and those that do have their money in another place.

Retail Bank Profitability. Net interest income (2011, represented more than 64% of total US bank revenues) is the rate spread between borrowing short and lending long, or more broadly the differential between asset yields and funding costs. Net interest margins (defined as net interest income over average earning assets) were 3.6% at year-end 2011, just 11% higher from the 20-year low of 3.2% in the last quarter of 2006.

From DB Research

As low rates persist, loan-to-deposit spreads fall as prices adjust, and longer-term securities, held as assets, roll over to lower-yielding securities (the same holds true on the funding side, of course, helping to extend the positive impact of falling interest rates into the future). The net impact on banks’ net interest levels may be negative, though. In previous recoveries, this effect has been offset by increased loan volumes, allowing banks to return to sustainable growth levels. Furthermore, as an economy recovers, banks may quickly benefit as short-term assets roll over at higher rates

To summarize: Bank net interest income is important (64%), and falling. Banks have had a key revenue source taken away from them (Debit interchange) and are also facing another merchant led suit on credit card interchange. Bank brands and reputations are on a steady downward trend. Consumers don’t care about rates, but react strongly on fees. … A new regulatory agency to protect consumers is just now forming and looking to make its mark. What are banks to do?

Transaction Account

What is the purpose of a bank provided transactional account today? Well certainly our mattresses are a little less lumpy, and the relationship factors have largely gone away. So what is left? Transactionality?

The banks have long recognized that the transactional account is the #1 factor driving a consumer relationship. Virtually every other banking product and service hangs from this account. Most retail banks view direct deposit (internationally known as Salary Domiciliation or Sal Dom) as the key indicator of the transactional relationship. Consumers have limited “energy” to connect to more than one network (as outlined in followed my previous blog on Weak Links). 

This financial supermarket concept, authored by Sandy Weill and John Reed, has not exactly been a slam dunk success. Nonetheless every retail bank starts selling with a checking account, even if nothing else is attached. What are the key factors influencing the selection of a transactional account?

  • Why are deposits important to banks?
  • Driver of overall relationship à Customer Net Revenue
  • Liquidity ratio ->Risk ->Agency Rating -> Capital Costs
  • How do consumers select a bank?

The public compete data above is completely consistent with previous proprietary studies I’ve commissioned. Consumers tend to pick their bank based on how convenient the branch and/or ATM is.

Is there something fundamentally changing? What if consumers don’t visit a branch… or no longer use cash? Are there new value propositions? Where will consumers (and their deposits) go?

Recent market developments/Announcements

The Amex Bluebird product is revolutionary in terms of fees. It is the lowest cost reloadable card in the market today. Beyond the product, I’m even more impressed with WalMart’s business strategy here. They seem to be willing to break even on payments/banking in order to win the overall consumer relationship and increase foot traffic and loyalty in their stores. Take a look at the suite of products offered by WalMart. While banks are pushing out the bottom forty percent of mass consumers, WalMart has made a bet that it cannot only serve them, but do so profitably.

There are many different types of pre-paid cards (more below), however most are not regulated as bank accounts. In almost every geography, consumer deposits (interest bearing, insured) are regulated because they drive both bank liquidity (which drives lending and cost of capital) and profitability. Remember before capital markets existed to securitize assets (loans) retail banks could only lend to the extent of their balance sheet (deposits). Consumers put their money with banks in order to earn interest (the carrot) with the downside of fees on usage (the stick).  In the US consumers are beginning to ask themselves “is the carrot big enough”?

In emerging markets many banks have a poor reputation, additionally access to legal resources are limited, as are consumer protections. How would you feel if you showed up to your bank for a withdrawal and your bank said “sorry your money is gone” and you had no recourse? This dynamic has propelled other banking models in emerging markets. For example my friend Nick Hughes and his Vodafone/Safaricom team created MPESA in Kenya which provided enormous value to consumers. However MPESA caused an apoplectic reaction from the banking regulators as 10% of Kenya’s GDP sat in a non-interest bearing Vodafone owned settlement account. MPESA therefore impacted bank liquidity (IF the funds would have gone into a bank account as opposed to just M1/cash). Visa and MA have worked hard to try to make prepaid the underlying account for mobile money in emerging markets, to very little avail. The problem is not connecting people to the V/MA network.. and giving balances to an approved bank. The problem is first transferring money to entities currently not on any network, then paying a very small number of billers.  

Why are consumers defecting in the US? Ernst and Young just published a phenomenal global study on this subject. The result of their analysis was that consumer confidence in banks is degrading. E&Y outlined a call to action by banks: reconfigure your business models around customer needs. My hypothesis is that consumers have reached a tipping point where they view banking services as commodities… In the UK, this is already well established.


I haven’t spent much time thinking about prepaid cards so I thought it was time to refresh myself, particularly in light of MCX and the prospect of retailers acting as Banks.

From the US Fed

Prepaid cards offer much of the functionality of checking accounts, but that does not mean the underlying economics are the same. A typical prepaid card in the data is active for six months or less, a small fraction of the longevity seen with consumer checking accounts. As a result, account acquisition strategy and the recovery of fixed and variable costs are likely different than for checking accounts. …. prepaid cards with [direct deposit are uncommon but] remain active more than twice as long and have 10 times or more purchase and other activity than other cards in the same program category. As a result, these cards typically generate at least four times more revenue for the prepaid card issuer

Similarly Pre-paid cards also face a complex web of regulation (See Philadelphia Fed Paper 2010), across 31 different types of cards.

31 types of cards? Did anyone else realize the diversity here? Wow… For the sake of this blog, let’s focus on reloadable (GPR) open loop cards (references to prepaid below are on this card type only). It would seem that GPR pre-paid is following the general disruption pattern of serving a lower tier of the market at a more attractive price point. According to Mercator, In 2009, consumers loaded $28.6 billion onto prepaid cards. By 2015, prepaids will hold $168 billion.

Last month’s WSJ ( Prepaid Enters Mainstream) outlined this dynamic

Traditional leaders in GPR pre-paid have been Green Dot, NetSpend, . The Durbin amendment exempted most prepaid cards. This means that pre-paid is largely example from the Durbin interchange restrictions… (with several conditions). Thus the business case for pre-paid is rather strong, and Banks themselves are assessing if they can make this the new “starter” account (ex Chase Liquid). However Three Party Networks (Discover and Amex) have a significant advantage.

From Digital Transactions, March 2012

While the Federal Reserve’s rule implementing the Durbin Amendment has its greatest effect on traditional debit cards, it affects prepaid cards too, especially its provision that banks’ prepaid cards can avoid Durbin price controls only if cardholders can access the funds exclusively through the card itself. That provision thwarted banks’ efforts to make prepaid cards more like demand-deposit accounts and led them to scale back or end bill payments through prepaid card accounts.

But American Express and Discover are not subject to Durbin’s controversial provisions, Daniel and Brown noted. Both companies are so-called “three-party” payment systems that function both as merchant acquirer and card issuer. In contrast, Visa and MasterCard debit and prepaid cards are part of “four-party” systems in which the issuer and acquirer are usually different companies and rely on the Visa and MasterCard networks to route transactions among them. The Durbin Amendment exempts, or “carves out” in industry parlance, three-party networks from its provisions, including interchange regulation.

“There’s no restriction on what AmEx can pay itself” for prepaid card transactions, said Brown. Thus, AmEx and Discover have a new opportunity to grow their prepaid businesses, the attorneys said.

Clearly Discover (DFS) and American Express (Amex) have an opportunity to “Kill” prepaid cards, what are they missing? Physical distribution, service and reach in the mass market. These are the very things that retailers like WalMart can provide, and in fact economically benefit by providing them.

As you can tell, regulations are driving the business models here. Most large US retailers leverage a fantastic team of attorneys from Card Compliant that specialize exclusively in prepaid cards (run by my friend Chuck Rouse). WalMart’s move to Amex is brilliant both from a regulatory and business model perspective.  

Today’s pre-paid dynamics may be the tipping point by which 3 party networks begin to overtake V/MA in growth. A trend that will accelerate when other business models require “control”. This next phase will be centered around merchant/consumer transaction data, which will begin to unlock the advertising revenue pool, which is almost 4 times larger than that of payments.

Payments and core banking will become a “dumb pipe” business unless Banks create value and assume a larger orchestration role. POS Payments are the central feature of a transaction account, if banks loose this relationship they will be in a poor position to orchestrate. 4 party networks are very, very hard to change.

I see a battle where 3 party networks work to branch into orchestration and advertising, and existing orchestrators (ie Apple/Google) integrate legacy dumb pipes (payments and telecommunication) to deliver value to the consumer. What do consumers value today? This is the call to action for bankers… who are not always the best at creating alliances.

Here is one idea, focus on trust and helping consumers solve problems they don’t face frequently. For example,

  • Make financial planning easier and less of a sales job.
  • Help manufactures and retailers connect to target consumers.
  • Become a buyers agent?
  •     Help navigate the college application and loan process,
  •     Help  buy a new car for the lowest possible price…

I know this is not a clean finish.. but that’s all the time I have.


Thank you Kansas City Fed for the fabulous brief from the: CONSUMER PAYMENT INNOVATION IN THE CONNECTED AGE. Bill Keeton and Terri Bradford were nice enough to invite me, but unfortunately I couldn’t attend. In my last visit to the KC fed we spoke about future payments types, but we also spent quite a bit of time discussing where mass market consumers will go if banks view the bottom 4 deciles of retail banking as unprofitable (according to proprietary McKinsey Study).  Today I thought I would pull together a compendium of my learnings on retail deposits, MSBs and pre-paid… the “transaction account” by which payments flow.

Social Payments: Paying the Blogosphere

This could be the death knell for established news organizations. Having just renewed my subscription to the online Wall Street Journal last week, I was struck at how much of my news comes from informal social networks. I received a call today from an interesting team operating in this space… quite frankly a fabulous payment idea: Paying the blogosphere.

19 February 2010

This could be the death knell for established news organizations. Having just renewed my subscription to the online Wall Street Journal last week, I was struck at how much of my news comes from informal social networks. I received a call today from a team investigating this space… quite frankly a fabulous payment idea: Paying the blogosphere.

Take a look at Flattr’s YouTube video to get the picture. [youtube=http://www.youtube.com/watch?v=kwvExIWf_Uc]

One of the many competing w/ Flattr is Kachingle (see patent application). My uninformed opinion is that services in this category can structure themselves as commercial services and avoid MTO regulatory burdens. Kachangle’s approach (described in patent app above) seems to be “billing as a service” … in essence users are buying a service for a fixed monthly subscription at $10/mo. Others “social payment providers” contemplating entry here should be very cautious to avoid used of “tokens” which can be “redeemed” (Big US issues here… See eGold and  US DOJ Final, US DOJ Indictment). The rule of thumb for operating in the US: regular payments for a commercial value added/reseller service.. Good.. flexible payments to anonymous end parties .. Bad.

Key payment considerations

  • Where is NewCo legal entity and target customer base?
  • Where is NewCo operating from?
  • Where is NewCo’s bank account?
  • Is it a commercial service or “money transfer”? You have a regulatory requirements with either, but money transfer services are much more burdensome. If commercial service, then commercial requirements typically dictate disbursement KYC as well as tax/revenue reporting.
  • If service is money transfer, business will not only face regulatory hurdles, but also payment clearing hurdles associated with “payment aggregation”. Networks do not want intermediaries operating a payment network within their existing network as they loose their ability to manage regulatory control (ex. AML, sanctioned payments, …)
  • How does NewCo move money in? Cross border? Who will bear regulatory risk? Clearing bank? Network? NewCo?
  • Are there tokens or other stored units of value that can be exchanged?  

A great blog from a publishers perspective http://steveouting.com/2009/08/28/paycheckr-the-sharethis-for-donation-pay-options/

PayPal Shut Down in India

The RBI published Annex I circular on November 27, 2009 (RBI/2009-01/ 236). India’s regulators are some of the toughest on the planet. They expect that organizations read their guidelines.. The country manager should have some scars on his back after this one.

11 February 2010

NYTimes article from last night

India’s Central Bank Stops Some PayPal Services‎ – 

Simply put.. paypal has no license (See RBI list ) for Operating a Payment System in India under India’s Payment and Settlement Systems Act, 2007. The RBI published Annex I circular on November 27, 2009 (RBI/2009-01/ 236).

It Appears that RBI’s central issue is with PayPal’s role as an “unlicensed” Money Transfer Service. This issue is certainly not new to PayPal (see US Regulations – Online Payment/Transfer). As highlighted in the circular above:

All cross-border inward remittances under MTSS must be accompanied by accurate and meaningful remitter information (name, address and unique identification number of each remittance like, MTCN) on funds transfer and related messages that are sent and the information should remain with the transfer or related message through the payment chain. A unique reference number, as prevalent in the country concerned, must be included.”

Further, Paypal’s “agents must”:

Indian Agents should have effective risk-based procedures in place to identify cross-border inward remittances lacking complete remitter information. The lack of complete remitter information may be considered as a factor in assessing whether a cross-border inward remittance or related transactions are suspicious and whether they should be reported to the FIU-IND. The Indian Agent should also take up the matter with the Overseas Principal if a remittance is not accompanied by detailed information of the fund remitter.

Issue for PayPal is that its “agent” in this case is its commercial bank that initiaties the domestic ACH. My guess is that they are also in a bit of hot water for allowing this connectivity in light of the Nov 2009 circular (and subsequent inaction).

In order to resolve RBI’s issues, PayPal must:

  1. Obtain an MTS License (or a Payment System License)
  2. Renegotiate terms and services with its clearing bank(s) so that they will comply with “Indian agent” responsibilities above, namely PayPal must provide detailed information on remittance (above) to clearing bank and hold information in country so that bank can perform both AML sanction screening and other SAR reporting
  3. Put the detailed technology plan in place capture and send information to bank
  4. Review Plan with regulator
  5. Obtain regulatory approval on end state plan and request exception process for operating until final (end state) is in place

India’s regulators are some of the toughest on the planet. They expect that organizations read their guidelines.. “Better to ask forgiveness than permission” is a regulatory approach that probably works best before you are public company.

Note that PayPal’s “merchant” transactions (where an eBay buyer is paid) are not covered within the MTS regs above, unfortunately for PayPal it is difficult to screen these commercial transactions from other payments,  hence the broader impact in clearing both commercial “merchant” ebay payments and P2P/Remittances. 

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