Clearxchange – Bank Strategy Perspective

The service is very solid, but I do wonder what the retail wires group must think. Most bank services today allow for transfers to and from accounts I own at other FSIs (we call this A2A). Now I can transfer money to anyone via mobile with no fee (p2p). What about P2B and impact on Debit? For example, eBay purchase? Or how about at a store? If I can send money to a person with no fee.. what prevents use on Debit? Because of Durbin making Debit “almost free” is there an incentive to create a new payment network?

28 May 2011

As I related in last week’s Post, Clearxchange (let’s call it CX) evolved out of the online/mobile payment groups at Wells and BAC.  I also described how bank’s will “Win in Payments” along with a high level view on internal bank dynamics which drive Debit/ACH vs. Credit payments strategy, as well as the fragmentation that is occurring in “unprofitable” payments like ACH, carrier billing and P2P… etc.

Consortiums are not the most nimble of creatures. Banks also have the tendency to follow the lead of the big 3 (BAC, WFC, JPM) in all things retail. BAC/WFC are well positioned to execute in CX, and certainly have a sufficient customer base to make CX work. Their addition of JPM (and associated QuickPay) and the creation of a separate entity also aligns well with getting something done quickly. Developing CX within an existing bank consortitum could have taken much longer than 2 years to get a common bank service built… This “build it and they will come” approach is how many of today’s bank services get their start (visa, interlink/debit/ , clearing house, …).

Unfortunately, CX does not have a sustainable “stand alone” business case. Because it was completed within the channel organizations, business strategy (with the LOBs) was not well coordinated with the other LOBs (exception is JPM, the top bank in payments strategy). I’ve actually made 5 CX payments on launch day already. In BAC, just go to internal transfers and fill out the form on the left (did you receive a transfer). I clicked yes as it did not require an accurate answer in the Ts&Cs..

The service is very solid, but I do wonder what the retail wires group must think. Most bank services today allow for transfers to and from accounts I own at other FSIs (we call this A2A). Now I can transfer money to anyone via mobile with no fee (p2p). What about P2B and impact on Debit? For example, eBay purchase? Or how about at a store? If I can send money to a person with no fee.. what prevents cannibalization of Debit? Because of Durbin making Debit “almost free” is there an incentive to create a new payment network?

My sources tell me that there has been very little planning around CX (outside of JPM) to answer these questions. Not only were people with the big 3 banks scrambling to explain the service internally, their CEOs were getting called by peer banks about why their bank had not been asked to join? While banks are not free from anti-trust concerns.. payments is a network business that requires broad participation. The CX announcement comes at a rather sensitive time for them, as Jamie Dimon chairs The Clearing House meetings, there is little doubt that TCH has also served a forum for coordination on all retail payment “industry matters” like Durbin.  Can you imagine working with JPM, BAC and WFC in TCH meeting on retail debit strategy.. then hearing they have a new service rolled out without your knowledge? Not the most polite thing to do.

It certainly was not Jamie’s fault (my favorite bank CEO by far.. fellow Citi alum).. but rather the poor “payments” coordination within banks. In my previous blog Bank’s Need Payment Councils, I laid out how these bank teams had worked historically. CX is a fantastic idea.. and it could even evolve into a profitable service if banks can improve the way the coordinate internally. This is a CEO level decision.. no one wants to tell the CEO that he needs to create a cross LOB council to coordinate payment strategy.. The Citi approach is much more “get a guy to own it”.. like Wayne at Citi, Vin at Chase, or Steve at WFC. But decisions that impact multiple LOBs are very challenging to coordinate across the organization.. CX is the manifestation of just such a dynamic (better to get something done.. then work in a bank committee that never makes a decision).

I’ve been getting called this week on “what is the CX strategy”? The answer depends on who you talk to. BAC has a number of debit/retail payment initiatives.. and there are certainly overlaps..

–          New Visa Debit with BAMS/First Data

–          Visa Money Transfers (directly competes with CX)

–          CX

–          Internal Payment Warehouse (3 yrs in making)

–          Cashedge (A2A money transfers)

–          Pariter (On we w/ WFC)

–          NFC Credit w/ Visa and Device Fidelity

–          …

If banks have trouble coordinating internally.. the situation certainly does not improv

e when 20+ of them get together to set a strategy. Of course this “least common denominator” is why today’s existing payment network is both rigid and resilient. What the banks really need is a firm “platform” vision for payments that they own. For example, what if I broke payments into 3 broad categories: pay before, pay now, pay later? Having multiple products that compete in these categories is a sign of a good healthy market.. having multiple networks process the payment is NOT (only some of which are bank owned). As a side note, there is little reason to doubt that there will be SUBSTANTIAL consolidation surrounding the 6 major debit networks (Visa, Pulse, Star, NYCE…)

My top idea for CX to drive a little incremental revenue?  2 years ago, Metavante (now FIS) negotiated a PayPal deal that would provide for revenue sharing for eBay merchant payment.. PayPal collects 3%+fees and would share 30-50% with FIS. Why would the banks not want to do this? The original plan had more to do with this happening over bill pay.. but a transfer probably makes more sense.  Either way, the banks should jump on this kind of opportunity. My #2 idea.. well I’m only telling my customer this one.. (my poor attempt at a tickler).

Happy Memorial Day

– Tom

Visa and Cashedge

Visa is getting decent traction in Asia/ME in receiving VMT, problem is that there are no send capabilities, and the majority of banks are telling Visa to “pound sand” with their OCT transaction set mandate (see previous).

16 March (updated 17 March)

http://www.prnewswire.com/news-releases/cashedge-and-visa-to-expand-network-offerings-118071239.html

Visa has been chasing after any party with direct links to DDA accounts. This in an attempt to “end run” around poor OCT adoption (see previous blog).  I understand that Obopay is also set to announce support of VMT. What a change from their MasterCard approach!

Visa is getting decent traction in Asia/ME in receiving VMT, problem is that there are no send capabilities, and the majority of banks are telling Visa to “pound sand” with their OCT transaction set mandate (see previous). I was told yesterday that the OCC is looking into both the mandatory nature of Visa’s OCT and the AML controls.

It will be interesting to see how Visa explains the loss of international wire fee revenue to their member banks. Why pay $40 for an international wire when you can use CashEdge to send to Visa, then VMT to send to India/Mexico, …? As I ran Citi’s online properties I can tell you this completely overlaps with my Citi Global Transfer service and I would not be happy at all.

As a banker, I’m mad as hell at Visa. Why don’t I like this VMT?

  • Visa will keep the directory of cards, mobile numbers, and DDAs. The last 2 really really make me mad. Who says they can hold my customer information?
  • Visa runs it..Continues to build Visa brand on your ACH
  • You own the risk, Visa develops new services
  • Circumvents all of the industry controls on ACH (ex. Early Warning)
  • Unfunded Reg E research burden and consumer support reqs.
  • Confusion in online services
  • Cannibalizes existing bank products (wire transfers)
  • Customer service/research nightmare .. all unfunded
  • Visa may have a much smaller role to play in debit.. why would I want to add new services to their group?
  • it will be very, very hard to shut down once it gets moving.

Fortunately for banks, CashEdge is a bank friendly vendor. Actually, it wins the prize for  best bank vendor (I signed 2 contracts w/ them).  Visa will not do enrollment, nor will they have directory of DDA/Debit. CashEdge is providing multiple service/pricing  options t0 participating banks:
– Send to DDA
– Send to phone
– Send to e-mail
– and new option.. send to Visa Debit Card (w/ fee)

Each bank has flexibility in determining IF they want these services and how to price them. As you can tell.. I would never let the Visa option happen.. but then again I don’t run the online bank anymore.

I’m beginning to wonder if I’m just a pessimistic nag. I’m tired of being negative on things… What do I like this quarter? Google and NFC, the Chase QuikDeposit app, PayPal at the POS, .. oh and I loved (past tense) ISIS until they fell on their own sword.

No blogs next week.. will be out of pocket…

Citi goes live with POP MONEY

Citi just went live with Cashedge’s POP Money service. Citi is now the leader in mobile payments for both retail (this service) and card. Congrats to the Citi team for getting this done.

28 October 2010

Citi just went live with Cashedge’s POP Money service. Citi is now the leader in mobile payments for both retail (this service) and card. Congrats to the Citi team for getting this done.

You may ask why does POP Money position Citi above Chase’s QuickPay? The answer is network and integration. With Quickpay, it only works if you are a Chase customer or you go through the registration process. With POP Money, Cashedge can deliver direct to account distribution to every one of its 100+ enrolled banks, as well as manage risk in transfers to accounts at its largest retail bank customers (Citi, BofA and Wachovia all use Cashedge for external transfers). The customer experience is also integrated into online banking and the funds transfer process.

From a network perspective, PayPal is the only other company which could surpass Cashedge in number of “links” to deposit accounts (~30M, ~20M respectively). The key difference is Cashedge is a bank service provider and has much better risk controls for P2P transfers (as opposed to online purchases of goods). As a bank service provider, it is also integrated into key bank risk infrastructure (ex. Early Warning’s DepositChek).

It would seem that Bank of America and Wells are intent on following Chase down the road of building a home grown system. Quite a shame, as Cashedge is a bank friendly vendor helping to keep banks at the center of emerging payments. The bank battle is not a technology one, it is against non banks and customer mindshare. Citi clearly recognizes this, keeping control of payments and delivering value while minimizing execution risk. I hope BAC and WFC will move in same direction, doing your own thing may satisfy the NIH folks.. but creating a bank owned service which can be used by any bank customer means that you will eventually need to integrate to POP money… at some point.

Fiserv ZashPay (Update)

Checkfree is extending its “merchant integration” process to consumers. Creating a directory of e-mail/mobile/ACH accounts, and adding a “consumer registration” process where you receive a notice that someone has sent you money.. adding a mobile interface.

12 May 2010

(Update) I love a good laugh.. so be assured that you will have new insight into the importance of product marketing and product naming after you google “zash urban dictionary” to discover how Zash will resonate with urban consumers. Lesson learned: just because the URL is available.. doesn’t mean you should use it. Also interesting to note that they “new” definition of “moving quickly online” was placed in Urban Dictionary in April.. probably FISERV’s addition?

Skipping the humor, Checkfree is extending its existing “merchant integration” process to consumers. Creating a directory of e-mail/mobile/ACH accounts, and adding a “consumer registration” process where you receive a notice that someone has sent you money.. adding a mobile interface. Unfortunate that FISV/Checkfree will be loosing Bank of America as a bill pay customer, having 10% of deposit accounts in a directory would have been fantastic.

As a user you should be able to send someone cash via bill pay (or mobile) based upon an e-mail or mobile number. Checkfree has all of these pieces to make this work, and rock solid fraud and operational controls from their merchant integration activities. This product makes sense for ad-hoc P2P payments to an e-mail address or mobile, particularly for mid to small banks that are currently clients of Checkfree.. allowing them to send money to anyone with an e-mail address.

From a competitive perspective, Metavante/FIS has integration with Paypal which will accomplish most of this as well (from bill pay interface). What is lacking is a mobile client.. but not for long as FIS just hired Bank of America’s mobile guru Doug Brown as head of mobile product and strategy.

Cashedge’s Popmoney also competes here. The “transfer” paradigm seems to make more sense than a “bill pay” so I will give CashEdge a big edge in usability and in fraud controls as it has 6+ years experience (and data) managing individual account to account transfers.

As a banker, I much prefer the FIS/Metavante model, as PayPal shares merchant interchange. As a consumer I also prefer the FIS model for eCommerce goods purchase as it is quite important to establish “network rules” between buyer and seller and integrate the payment process with the marketplace. There would seem to be a solid revenue business case for FIS, while the ZashPay seems to be a bill pay extension to address an uncertain P2P need.

Both FIS and Fiserv may be getting into some interesting patent territory with other established players. For example, if either are using good funds they are probably stepping on this patent below..

http://www.patentgenius.com/patent/7177830.html

Bumping payments? Paypal Bump

What I’m most impressed with is Paypal’s ability to extend itself in niches like this. Their open APIs and ability to extend “their rails” beyond internet merchants is 5-10 years ahead of what any other payment network can do.

26 March 2010 (updated April 13)

Excellent Video overview below (30 sec commercial)

[youtube=http://www.youtube.com/watch?v=suCe4-SWsHo]

I’m reading the CTIA press and see this come out, wondering how my iPhone communicates with another iPhone. The bump application listens to the iPhone accelerometer and when it reads a bump (when running) it sends time and event to the bump cloud. The bump cloud looks for 2 events and then requests that your bump user information be shared (from bump)

When you bump, if we find a match with a phone that felt the same bump, our servers ask each phone to send up the contact information each user chose to share, but nothing more. If and only if both users then confirm that the match is indeed correct will the contact information be sent down to the other person. None of your personal data is ever stored on our servers.

Very ingenious…. What I’m most impressed with is Paypal’s ability to extend itself in niches like this. Their open APIs, ability to manage risk and extend “payment rails” beyond internet merchants is 5-10 years ahead of what any other payment network can do. Beyond the technology side, it certainly helps that  Paypal’s user penetration within the iPhone’s customer base is “rather high”.

This application also highlights the opportunity for NFC in Apple’s platform. For those that aren’t familiar with my previous posts, industry G2 indicates that Visa and AT&T are going without Apple. Obviously a good strategy for AT&T as Apple already has significant leverage in the “relationship”. Of course, NFC P2P will require an intermediary to own “risk” of card acceptance and work through (payment network related) merchant and third party payment aggregator (TPPA)  issues.

From a regulatory perspective, it is fortunate that PayPal has already gone through the “heavy lifting” in obtaining money service licenses in the 50 states (see related post).

What other vendors/payment networks could compete here? A: CashEdge and Money Bookers. In the UK I could almost envision the video clip for a money bookers “Bump Bet”. In the US CashEdge is a 3rd party service provider with 60-70% of US retail deposit accounts in their footprint (BAC, Wachovia, Citi, …). CE has  a much more efficient (low cost) ACH network and is one of the few US companies with proven operational risk management in “remote” payments. CE should look into riding PayPal’s marketing wave and leverage bump technology to allow me to do everything PayPal does,  only directly from my bank account (at no cost). On the regulatory side, Cashedge runs as a bank service provider… in essence you are dealing with your bank to “push” funds (ACH debit) when you use POPMONEY.

Great job Paypal.

US Regulations – Online Payment/Transfer

This blog takes a look at the regulatory risk today’s start ups face and gives background on how PayPal got to where it is today. For today’s “emerging” payment companies, there are 4 primary choices for operating in the US: 1) Obtain the licenses, 2) Operate as an agent of an entity with the proper licenses, 3) Sell your software to a licensed entity, 4)Exchange non-monetary forms of value (minutes, eGold, credits, …).

Lessons from PayPal

January 25, 2010

I was on the phone today with Jeff McConnell, a tremendous exec with a long history of leading innovation in money transfer (WU, Moneygram, iKobo, …). In some respects it’s hard for me to believe that 2002 is 8 years ago, and I was reminded of how challenged PayPal was in obtaining the proper licenses “after the fact” in its early business.

In his 2006 book The PayPal Wars, Eric Jackson did an excellent job laying out the challenges paypal faced in its early years.  In the early days after its inception in 1999, PayPal was moving toward becoming a bank, but the Internet startup decided that banking regulations were too cumbersome. “We just wanted to be able to facilitate a quick payment,” he said. “The question of how to classify PayPal lingered for some time….It’s a sort of modern-era Western Union.. really, all PayPal is doing is shifting money around on your behalf.” 

To see the “change” in PayPal’s regulatory approach, take a look at PayPal’s 2002 prospectus.

We believe the licensing requirements of the Office of the Comptroller of the Currency, the Federal Reserve Board or other federal or state agencies that regulate or monitor banks or other types of providers of electronic commerce services do not apply to us. One or more states may conclude that, under its or their statutes, we are engaged in an unauthorized banking business. In that event, we might be subject to monetary penalties and adverse publicity and might be required to cease doing business with residents of those states. A number of states have enacted legislation regulating check sellers, money transmitters or service providers to banks, and we have applied for, or are in the process of applying for, licenses under this legislation in particular jurisdictions. To date, we have obtained licenses in two states.

This 2002 regulatory view, by the Paypal exec team, was based on a position that PayPal was acting as a Third party payments aggregator (TPPA), not in need of a money transfer license. TPPA is a description used for merchants that are charging a credit card for a product or service that they do not own. TPPAs simply facilitate the exchange of money between two parties sometimes using a credit card as a funding source. Several fraud and AML incidents arose which got the attention of both federal and state organizations. It became clear that PayPal was being used for much more then payment for goods within the eBay marketplace.

In Feb of 2002, the Federal Deposit Insurance Corporation (FDIC) ruled that PayPal is not a bank, which accelerated efforts by states to pursue PayPal for violating money transfer laws (New York and Louisiana are most notable).  This could have been the death knell for PayPal, as they were operating without the proper licenses. PayPal’s “post facto” licensing efforts were greatly aided by the local political support from thousands of eBay’s buyers and sellers. Today, according to spokesperson Michael Oldenburg,  PayPal is licensed as a money transmitter in 43 states (not all states require a license), demonstrating that regulatory risk was far greater than what they articulated in the 2002 prospectus. For those interested in the legal/regulatory conundrum faced by regulators, I highly recommend:  Regulating Internet Payment Intermediaries, by Ronald J. Mann, University of Texas School of Law

For today’s “emerging” payment companies, there are 4 primary choices for operating in the US:

  1. Obtain the licenses
  2. Operate as an agent of an entity with the proper licenses
  3. Sell your software to a licensed entity
  4. Exchange non-monetary forms of value (minutes, eGold, credits, …).

Obtain the licenses

For those of you that read my Blog, you’re probably aware that I’m fairly negative on Obopay, however they do excel in obtaining US MTO licensing (https://www.obopay.com/corporate/stateLicenses.shtml) . Unfortunately, all of these US licensing effort seems for naught as they are pulling out of the US and focusing in emerging markets as the “sender pays” model does not work in developed countries (morphing from a failed US P2P effort to Remittance). Today, PayPal, Western Union, Travelex, Moneygram, MoneyBookers (soon to be NY licensed) also operate as licensed Money Transfer Organizations (MTOs).

Becoming an MTO is not for the faint of heart, as regulatory capital requirements in excess of settlement obligations (fiduciary assets) are a complex (state by state) maze. This creates a challenging dynamic where capital reserve requirements grow as payment volumes grow. As a start up this means you not only need to raise capital to start the business, but also the regulatory capital BEFORE you get the state licenses.

MoneyGram’s 2007  “investment issues” offer many insights into MTO challenges. MGI suffered an $860M+ plus loss as it shifted out of high yield asset backed securities (which lost their investment grade rating). To preserve liquidity it sold $630MM in preferred and received debt financing of approximately $500M, a situation which today leaves MGI common shareholders in a $870MM equity deficit.

Operating as an MNO is not your only choice. I’m amazed at how few companies there are attempting to develop a bank based model. Trolling the dust bin of failed financial institutions may provide a unique opportunity for a start up to acquire the “shell” of a licensed bank to develop a “payment” focused value proposition. The strategy behind Revolution Money’s acquisition by Amex gives Revolution the “best of both worlds”: an acquirer and a bank. If it were not for Amex’s bank charter (and associated regulatory capital), Revolution’s PIN based debit would be highly susceptible to NACHA aggregation restrictions if they are operating as a non-bank, operating as a type of decouple debit.

I know from my own personal experience that operating as a “payment bank” is not without challenges, not just Citi C2it.. (which stopped 2.5 yrs prior to my role), but Citi GTS which today provides many of the banking licenses for payment providers like WU, Vodafone, ZAIN, …  In addition to Citi GTS, one of Citi’s most profitable “global” retail bank businesses is NRI (Non Resident Indian) which serves affluent Indians (within the US, UK, …) with comprehensive services that cater to the needs of affluent clients. Citi also effectively up sells NRI clients services within its investment and commercial bank.

Operate as an agent

Pre-paid cards offer a “fast track” to operating a new payment service (Revolution money, Squareup, payoneer, iKobo, …). In this model the service relies on the licenses of the underlying bank (example Metabank). The legal precedent here is rather new as witnessed by May 30, 2007 finding by the First Circuit , which affirmed that the National Bank Act preempted New Hampshire regulation of the pre-paid product. In the “agent” model, it is therefore paramount that start ups seek a federally chartered partner. 

There is still substantial “risk” in this pre-paid agent model, as traditional banks and networks control the “rails” for this payment type. For example, Consumer accounts must be “funded” from either a card or DDA account. NACHA has developed new rules which significantly curtail the ability of a “payment aggregator” operating off of a current account (see NACHA Tightens Risk Management and aggregation rules) . Additionally, card networks and acquirers are much more attuned to the risks that these new payment intermediaries present.

My top vendor in the bank model is CashEdge (having been the banker who signed the agreement at Wachovia). CE is the “3rd party sender” for Citi, BAC, Wachovia, PNC and other top banks representing approximately 50% of US DDA accounts. You don’t hear about them much because they are a white label “bank friendly” service. They excel in risk management, with a team second only to paypal. Most of you in the US reading this already use their software.. but just don’t know it.  In the mobile space, I love the innovation at BlingNation.

Sell your software

This is rather straightforward. Within the mobile money space, companies such as Monitise, HyperWALLET, Fundamo, Paybox (now Sybase 365) all provide good platforms from which to build an offering. Issue for small companies is that the entities which have the necessary license have largely made significant bets here already. Of course some of the bets by big banks (some alliteration here) have been terrible, most notably Firethorne which has lost the accounts at Chase, Citi and Wachovia all in the last 8 months.

Exchange non-monetary forms of value

Beyond the scope for my discussion here. My advice is that this is a slippery slope and you will have trouble (as a payment company) attracting “A Class” capital. Look no further than the history of e-Gold for education on the issues.

U.S. GOVERNMENT SEIZES E-GOLD ACCOUNTS, OWNERS INDICTED

Summary

In writing this I cannot help but be struck by many similarities in the “unregulated growth” of PayPal and Vodafone’s MPesa. The growth of both companies was driven by an existing customer base and a value proposition which addressed clear gaps within the payment systems of their respective markets. In both cases, there was no clear regulatory authority to restrict them and once they were firmly established (through contagious adoption) it was too late to stop.

Within the EU, the ECB has developed ELMI regulations that are supported by other initiatives such as SEPA (See http://www.paysys.de/download/Krueger%20e-money%20regul.pdf).

Related posts

http://tomnoyes.wordpress.com/2009/12/16/cash-replacement-part-2/

http://www.banking.state.ny.us/legal/lo020603.htm

http://www.ecommercetimes.com/story/18211.html?wlc=1264432425

P2P on Mobile – CashEdge POP Money

Just announced at Finovate today

http://sev.prnewswire.com/banking-financial-services/20090929/PH8333229092009-1.html

I know the folks at CE very well. Fantastic organization.. they excel at both the Sexy front end as well as the messy back end (risk/fraud) of payments. Their new POP Money service is rock solid and could give FSIs a strong contender in competing w/ PayPal in Sending money to any phone number or e-mail address.

CashEdge is a “Bank Friendly” service provider in that all of their services are white labled for banks. Few people know that if you use Wachovia, Citi, or Bank of America today, to transfer money outside of the bank, you are using a CashEdge Service. In 2004 I selected CE (Wachovia) because they provided a higher quality service at a lower price point then what I could build  internally (fully loaded). Many eCommerce teams only focus on the User Interface and top level design when assessing the cost of delivering P2P payments.  However it is risk and fraud management where you will find the true costs of “payments” to the organization. 

This new POP service will allow banks to create a revenue generating service, and take back consumer mindshare from PayPal.  Existing CE customer have a tremendous advantage in enabling this service, particularly given the current resource constraints within bank IT.

Many large banks are just beginning to offer A2A transfers (accounts that I own across FSIs). Wells just made this service available on a pilot in June.. Chase has it, but it is buried deep within the online functionality. There will be a big first mover advantage here, and my informed opinion is that Bank of America will be the the leader… or should I say stay the leader in payments.

Move over PayPal.