Obopay Update – 4Q10 (update on 3Q)

Given their poor performance to date, MA is starting to step away from them as primary MoneySend platform (example is recent RIM announcement). Obopay now seems to have a split focus: US and emerging markets.

5 Oct 2010 (Updated 12/9)

For those that don’t read this blog often, I’m an Obopay cynic. A company that is the very definition of a hype machine (and I came from Oracle). The company has many awards, and very few customers (<20k see site analytics below) and only $3.8M in revenue as of Sept 2010 (no wonder the CFO left).

Why am I so cynical? They are focusing on emerging markets, and the rural poor.. a group than can ill afford to buy into vapor. Press release above shows them targeting US banks now. Good to see them change strategies. Three years ago they wanted to build a direct to consumer brand,  investing in money transfer licenses in all US states and alliance with MasterCard. Now they want to sell a new a “white label” P2P bank service?

Given their poor performance to date, MA is starting to step away from them as primary MoneySend platform (example is recent RIM announcement). Citi has also moved on from the limited Obopay pilot it launched in 2007, into a great new service delivered by Cashedge (POPMoney). The press release indicates quite a dramatic shift in the Obopay business model back to the US, with very little press relating to emerging markets (UPDATE NOKIA bought Obopay India). The bank shift may have been driven by cash burn as the $130M in invested capital is not enough to compete against the likes of Visa and AT&T in marketing a new consumer payment service. This strategy shift, and resulting financial implications, may have been a driver of Obopay’s CFO departure (never a good sign).  Message to Obopay.. you may want to update your management team page as Tyler’s name is still there.

With respect to a new “white label” strategy, there does seem to be thoughful expansion of their transaction network;  Obopay announced integration to both NYCE and STAR (allowing PINless debit) . This network structure follows in the footsteps of PayPal, and is not a bad strategy at all (if you are stuck to a card based money transfer paradigm).  Cards have many advantages in P2P use, top among them are the facilities for authorization and “instant” transfer. The word instant is in quotes here because authorization and posting of the transaction can be near real time, but settlement is up to the bank (1-2 days) and settlement network. The downside for Obopay’s card model is cost, particularly sensitive in a  sender pays model. Of course these initiatives will bring down transaction cost, but they neglect to address Obopay’s core issues: no consumer value and hence few transactions.

The problems with a bank White Label strategy is that they are late to this game with sales team not geared for banks. They have set themselves up for competition with vendors such as Cashedge, FIS and FISV who host bank infrastructure. Cashedge is the clear leader in mobile P2P here, with the recently launched Citi service and over 100 banks (including Wachovia, BB&T and Bank of America). Chase’s QuickPay is another example of a bank led mobile P2P initiative. As I told one of the major banks last week, the Obopay business case for P2P may look better (because of interchange), but the price is steep (consumer adoption, behavior change and limited use). In other words, there is no proof point for a card based P2P model, as demonstrated by Obopay’s adoption over the last 3 years.

Emerging Markets

Over the last 2 years, Obopay has been active in attempting to penetrate emerging markets (particularly India – See previous Blog on Obopay’s failure). India is a very tough business for any payment players. RBI is well known as one of the toughest regulators on the planet, Obopay (and local MNOs) have been hamstrung in pursuing any model that is NOT bank led. Their YES bank pilot shows the challenges of rolling out a solution that is bank led in a card model… all best described in this Nokia presentation. It would seem that Nokia is taking the lead from Obopay on India (UPDATE 12/9 Confirmed), as it is key to retaining their 60% handset market share. The Nokia team is stellar, and their leadership of India efforts will put them in a much better position to execute against complex alliance and regulatory issues. As a side note, I expect to see Nokia focus on a handset “wallet” (bank/MFI/BC agnostic) with Obopay as the “switch” to IMPS (see related blog) clearing and bill payment (perhaps a future blog on Obopay as the Checkfree/Cardlink of India?). Understand that a government pilot on this approach is under consideration.

Message to investors: make some big changes. You have lost the early lead, and your partners are running away. The risk in competing against the big networks and banks in P2P is not within your investment hypothesis. Banks do not need your core asset (money services licenses) and you do not have the right team to sell and service banks. Emerging markets have limited revenue prospects, and MNOs are capable of building mobile payments from scratch (ref MPESA). MasterCard is making alliances with teams that drive network (either customers or merchants) expect them to develop alternatives.

Visa Money Transfer

A clear theme has emerged: card based money transfer will not be successful except in very limited circumstances. This is true for both (pre-paid) cards tied to mobile phone plans and network initiatives (Visa Money Transfer, Mastercard Moneysend/Obopay). Visa and Mastercard both have grand designs for taking part in the tremendous growth within emerging markets, but it looks like the growth will be at the top end …

22 November 2010 (updated 15 Dec, sorry for previous typos)

SUMMARY: VMT may by “Mandatory” but no one cares and is not acting on it.. As one bank told Visa “do you want my attorneys or yours to draw up the waiver”.

Correction (11 March) Chase and Bank of America are committing to it in next 6 months.

Visa Money Transfer Overview – Issuer presentation

I’ve been on the phone this month with several folks focusing on the unbanked and emerging markets. A clear theme has emerged: card based money transfer will not be successful except in very limited circumstances. This is true for both (pre-paid) cards tied to mobile phone plans and network initiatives (Visa Money Transfer, Mastercard Moneysend/Obopay).  Visa and Mastercard both have grand designs for taking part in the tremendous growth within emerging markets, but it looks like the growth will be at the top end (which is still substantial) rather than with the unbanked in areas like G2P payments.

In my previous blogs, I’ve certainly shared my views on Obopay/Mastercard. This blog focused a little attention on the Visa Money Transfer (VMT) service. In both the Mastercard MoneySend (MMS) and VMT models the networks own the switch of card/bin/mobile#/service provider/issuing bank. MasterCard’s MoneySend service attempted to focus Obopay in “mobile acquiring” of both senders AND beneficiaries (come pick up your money).  VMT’s AFT/OCT transaction set (see Patent)  attempted to bypass this “registration” intermediary and go directly to issuers.  Technically, the solution is excellent and the comments below are not meant to detract on Visa’s substantial lead on MA in developing this service. The problem with VMT is the business model. Unfortunately for Visa, global card issuers (particularly in OECD 20 countries) are taking a pass. The adoption challenges are particularly acute on Debit and within Western Europe (business case, conflicting services, pricing, fraud, customer support, agreements, Visa Europe and bank control… ).

VMT also suffers from 2 widely held misperceptions: it is “instant” and mandatory. With regard to the first item, just as with any debit transaction funds can “post” to the account but actual clearing and settlement is at best next day. It therefore remains up the each bank when to show the “post” and when to make funds available (within the Reg E guidelines it can be up to 2-3 days). With respect to VMT’s “mandatory” status, I’m surprised that this issue has not been picked up in the mainstream press. Visa has lost its ability to force issuers to do anything, particularly when a contract addendum is required. I can tell you with certainty that 4 out of 6 large US banks DO NOT plan to implement VMT on the debit side. These banks like being in control of their liabilities run off and payment channels. Visa has much better adoption prospects on credit side, but the “mandatory” date has slipped from Oct 2010 to something more “flexible”.

Retail Banks are very reluctant to provide Visa/MA an avenue for service and product growth that they neither own or control. Visa’s attempted to “force” issuer’s hand by making the AFT/OCT transaction set mandatory is rather amusing and makes for good theater (see Visa Money Transfer Overview – Issuer presentation). The “incentive” for issuing bank to accept new agreement is a $0.50/tran revenue share (beneficiary). Market data clearly shows lack of participation and hence Visa is attempting to adapt and shift focus of VMT to narrow market opportunities. I’ve listed three example efforts and probability of success (reaching $10B+ TPV).

1 – Large Bank (<10% probability of success)

Work with a large bank (like Bank of America) to lead adoption and create a critical mass with a focused value proposition (example: USBANK mobile phone/NFC).  We all understand the convenience strategy for the NFC/POS/Phone focus, but for P2P? If you are scratching your head, join the crowd. Why would banks outsource P2P payments to Visa? If Visa only gets 1-2 “a major banks” to join them, what will be the P2P proposition? I can just see the Visa commercial “with Visa Money Transfers, you can instantly transfer money to some other cards some times and funds will show up in 2 days”….

Beyond the issuer adoption issues, yhy would you pay $0.50 to send money to a domestic bank account when you could do it for free online? The problem here may be that the bank’s card team doesn’t talk to the retail team… Banks need to think strategically about this and stop Visa’s P2P efforts in their tracks. Card-Card transfers present consumers with a very confusing option and forsake the enormous bank investments in shared infrastructure (ACH, RTGS, Clearing House, Early Warning …).

Message for smaller banks.. Visa is NOT getting commitment from the majors to adopt this “mandatory” transaction set. The “Mandatory” Oct 2010 date has been pushed back to April (and will probably be pushed back again). To be clear, the credit side of the house loves the idea of VMT, the debit/deposit side does not. The “value” of VMT is on the Debit side. Can you imagine the customer experience of any solution using VMT.. it only works for 50% of the cards. Message to vendors: don’t build your solutions around VMT.

2 – Domestic Payments – Emerging Market (<10% )

Solve specific problem in emerging market (India domestic money movement). Few people realize that (within India) Western Union and MGI are licensed to receive only. They cannot transfer money within India. Hence banks like ICICI and HSBC are offering VMT. As noted in a previous blog, each bank may choose to act as either remitter and/or beneficiary. Citi for example allows VMT receive, but not send. The VMT service fills a small gap in India today, but this gap should recede as banks accommodate recent updates to NEFT/RTGS process . In fact only today, India’s RBI launched Instant Interbank Mobile Pmt Service. VMT’s consumer value proposition is built around gaps in bank services and requires bank (issuer) sponsorship.

With respect to VMT as a cross border money transfer service, Visa will have no trouble signing up beneficiary banks in emerging markets. What they lack is origination network (above). They will see some progress with mid tier banks in specific markets (MEA), as they extend thier role as cross border processor (from P2B to P2P). Enabling beneficiary banks to nudge out the MSBs. This is why RBI approved the VMT service in India.. it was good for banks and bad for MSBs.

3 – NON BANK partners (40%, if emphasis is on prepaid)

MoneyGram Example. Following in the theme above, Visa is a network business and the strategy of any network business is to increase volume. Given that issuing banks are not signing up for originating AFTs, Visa is moving aggressively to create partnerships with MSBs, post offices and other non-banks for “cash in” services. These non-banks can also sell pre-paid cards through additional partnerships. This is not a “bank friendly” strategy, but market focus seems to be non-banked.

If card based money transfer is not the future what is?

The answer really depends on what problem we are trying to solve. Remittances? POS? P2P?  In the unbanked world, interchange and sender pays does not work. Regulators will not let US based companies derive revenue from G2P payments to the rural poor. Visa has many assets to create a successful solution, specifically in its Monitise unit, but ACH payments do not provide a great business model for Visa (or its bank partners). Again reinforcing the axiom that retail payments is a very low margin business (in steady state). This is why MFI and MNO models present a better opportunity, payments supports the profitability of their existing business models to a segment of customers that they already serve.

Will Visa find growth in VMT? Absolutely, growth from 0 is always and easy achievement.

Will it be a $50M revenue business for them? Not that I see, neither in emerging markets nor in OECD 20. Visa’s 10+ innovation initiatives are a mystery and a nuisance to issuers, banks no longer want Visa to control and view P2P as an encroachment on their core deposit relationship. In emerging markets, the regulators will not let Visa succeed beyond the top end of the market (not the base of the pyramid). Since writing this, Visa announced that Indian regulators approved the VMT scheme for inbound remittances. There will be some success here, primarily with regional banks looking for a focused partner (UAE Bank looking toward India remittance service).

What should Visa do? Instead of attempting to develop customer facing services and brand (ie payclick, VMT, …) that compete with bank offerings, it should focus on expanding the capability of the network to handle additional data types (fraud info, POS items, coupon, location, …).  Make the rails more robust and new ecosystems will form to take advantage. Of course the downside of this approach is that it takes agreement of 4 parties to make this type of change, hence the change cycle is over 20 years. This is one of the reasons that new networks are forming which support new business flows and switch data to Visa only when necessary (business remittance/invoicing is excellent example, eCommerce another). This cycle further isolates the card networks, and drives innovation outside of the “card process”.

See August 2010 White Paper from US Federal Reserve

http://www.frbatlanta.org/documents/rprf/rprf_resources/wp_0810.pdf

Thoughts appreciated.

Obopay/Mastercard

http://www.americanbanker.com/issues/175_107/mastercard-offers-cash-transfer-app-1020320-1.html

Am I the only one that thinks this is a little sad? Why would you roll out a service that can’t be used (no banks signed up for it)? Obopay has built an iPhone app for the Money Send service.. the only way to make it work is for both the sender and reciever to have a Bancorp pre-paid card.  They should have probably sit on this until they get a bank signed up.. ? Given that Obopay has MSB licenses in 48 states.. recievers could get notified, registered, link bank accounts and get cash 3-5 business days later after they validate bank account? sound convenient to you?

Obopay India – Another Failure?

I read this Journal article today and was very disappointed that marketing spin can now make its way into both academia and the WSJ. Serving the worlds poor and unbanked is something to take very seriously.

November 12, 2009

http://online.wsj.com/article/SB125774328035737917.html

I read this Journal article today and was very disappointed that marketing spin can now make its way into both academia and the WSJ. Serving the worlds poor and unbanked is something to take very seriously. One of the few areas where I personally make an impact is: directing investment to opportunities.. My attempt here is to cut through the obfuscation and provide , to those that are investing,  an accurate view of Obopay’s current state, and the challenges that lay ahead for those investing in this space.

It is a slippery slope for Academics (like WSJ Author) to start acting like marketing agents. This article is beyond obfuscation.. “Thanks to Obopay, millions of unbanked people in places like Africa and India are having access to financial services for the first time in their life.” I question whether there are more the 100k active Obopay customers globally. Obopay has no customers without a bank account today (credit/debit/ACH), therefore Obopay did nothing to provide this “access”. For example Obopay’s service requires you to enroll online.. nothing quite suited for the “unbanked”.

India is a fantastic emerging market, but Obopay’s success in this market (or any other) is highly questionable. Here are some factors influencing my view of Obopay.

  • Go on Obopay’s website and take a look at the backgrounds of their 8 top execs.. Very “limited” experience in banking, profile seems to be Bay Area software development, or having worked at a card network.  A Payments company should be attracting talent with that has run a payments business.  I doubt you will see this same exec team next year as the BOD makes some tough decisions based upon the progress of the company. (note that since this post they have updated.. thanks for listening.. )
  • Obopay Press releases.. many alliances and awards.. NO CUSTOMERS.
  • Obopay’s US experience. See http://tomnoyes.wordpress.com/2009/10/30/citi-is-out-of-obopay/
  • Obopay’s invested capital http://tomnoyes.wordpress.com/2009/10/13/nokia-moneyobopay/
  • India has some of the toughest regulators on the planet. Its most recent regulation (HERE) in August of this year prohibits non banks from participating in mobile P2P.
  • In India, similar to the US, Obopay is swimming upstream, where regulations require it to tie its products to a debit/credit card and each bank must authorize. For example, Citi only authorizes “send” not recieve.
  • Go to Obopay’s Indian website http://www.obopay.co.in/why_obopay.html.. you will see  “future” services like top-up and bill pay because they are having to morph their strategy due to reg constraints (above).
  • Try to find “fees” for Obopay in India. You won’t find them separate from Yes bank (which goes to scale of use in India.. few customers, and Obopay can’t sell the service separate from a bank/MTO).
  • Unbanked. Grameen Solutions is a fantastic team serving the worlds poor, but their choice of partner in Obopay is not working out. Some of this “blame” could be shifted to the regulations (mentioned above), but the ecnomics of Obopay are just not working for this team. Take a look at http://www.grameensolutions.com/News-Events/. Perhaps Obopay should morph into an NGO ?

Currently MNOs have the best chance of success serving the unbanked (MNOs will rule in emerging markets). Obopay is currently serving banked customers in India and there are many services that the banks currently offer that compete directly with Obopay. For example, in Citi India Citigold/NRI customers could instantly transfer funds to any Citi customer globally (at no charge).

India’s domestic banks also have similar services. Put yourself in the shoes of an Indian bank customer, why would you want to pay 1.5% + 100RS (estimate) for sending money when you could use cash or wait until you gain access to your computer?

Obopay started out as a “cash replacement play” where the sender pays, a model that has not worked well for them. They are continuing to morph their strategy to find a fit…. Banks and MNOs have several strategic advantages here, and will likely compete aggressively in any area in which Obopay attempts to “Brand” payments (to the detriment of existing products and services).  Cash replacement is a win-win area.. stepping beyond that will be challenging for a company whose top execs have no banking background.

For the unbanked, MNOs will be the industry group most likely to succeed as they are the only business that has developed a business model to sell and support unbanked (MNO/Bank partnerships and new regs).  See MNOs Rule in Emerging Markets

Other great Blogs

http://paymentsviews.com/2009/08/06/a-look-at-obopay/

BlingNation Review – Updated 11/2

Was on the phone w/ the CEO of Bling Nation recently. The company’s advisory board includes John Reed, a former chairman of Citibank and of the New York Stock Exchange and Jeff Stiefler, a former chairman of Digital Insight and a former president of American Express. I was very impressed with the focused value proposition and team they have put together.
 
Overview
Stick RFID tags on phones, establish NEW RAILS, NEW SWITCH and provide merchants POS terminals. Focus is “on us” payments within community banks.
 
Key items that should give Visa/MC and the big banks pause:
NEW RAILS. They have direct integration w/ core deposit systems (think JackHenry)
NEW SWITCH. They are the switch between DDA and POS, completely new Auth system
REPLACE CASH.
Consumer Adoption. They have 10 community bank pilots going on now. 25% of all DDA volume is going through them within 4 months. John Reed said “if this consumer behavior is true.. it would be the fastest consumer adoption [of a new Payment method] in banking”
Value Prop is FOCUSED.
    Merchant:             Small merchants.. 50% reduction in interchange
    Community Bank: Replace Cash, Interchange revenue, customer retention (loyalty program), minimal
                               IT work for bank. Core deposit system “plug in”, hosted services
    Consumer.           Use your phone as a payment device, get rewards and account status. Keep your money with local banks
 
USABILITY. Instant activation.. get the tag in the mail, call up your bank and give them the number
Board of Advisors. John Reed is a visionary.. how often have you seen his name on anything? These guys will be successful
 
 
Challenges
– Private networks have typically faced regulatory and compliance scrutiny. How advanced are the operating rules and agreements? Think ACH return… 🙂
– Long term consumer adoption.. is it just a flash in the pan.. or could this be an enabler for repacing cash for “community POS” payments (thing barber and soda shop) and move upstream from community to micro payments.. Something like this help small banks take back customers from the big guys?
– Fraud. Fraud doesn’t attack a system until there is sufficient volume to warrant investment.  If Cash replacement focus, then system should be air tight as it will be tough to commit investigative services to $0.50 transactions.