Payment Start ups – MSB or Bank?

7Sept Update

Late last year the state of Georgia created a new bank type. See link below

http://www.paulhastings.com/assets/publications/2197.pdf

 

16 Aug

I had 6 calls in last week on the same topic, covering different companies…(Strange how things go in waves… )…. General theme is what regulatory structure should I take on if I’m a payments business. My answer is: go talk to your attorney, as this is not legal advice… just a few random thoughts for INVESTORS.

This blog is a follow on to my note 2 months back Payments: What is a Start-Up to Do?  Perhaps the best way to start this off is from the quote I gave in US Regulations, which demonstrates the regulatory evolution that has taken place over last 10 yrs.

From 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.

Data points from this week:

• New payments focused bank led by Bob Willumstad (former AIG CEO) – Independence Bancshares (public company IEBS: OTCQB).
• Carol Realini bought Obopay US (the MSB licenses)
• Wirecard’s international MNO wallet success (see 2013 earnings presentation, and Bank Licenses.
• Greendot 2x run up.. now a bank and “model” GPR card and BANK IN A BOX.
• Analyst question… would Visa ever seek to be an MSB or a Bank?
• US regulatory clamp down … KYC enforcement is the theme here. Banks must know their customers.. and also KYC every single one of their corporate customers beneficiaries.

Thoughts for the day

If there is one thing you do today.. get familiar with Wirecard. I love this model….  I’ve gotten myopic in my old age (48), at Citibank I was 100% focused outside of US.. in last 2 yrs I’ve switched to 90% US focus.. now paying the price. I can’t believe Wirecard slipped my radar. 2,400MM EU transaction volume.. almost 500MM EU in Rev.. 2,700MM EUR Market Cap. Think of them as a white label banking platform with bank licenses. For those that read my blog.. Wirecard is a new cluster at scale in Europe and Asia.

Don’t have time to make this a 5 page blog.. so I will resort to bullet points

• MSBs are limited, and costly, licenses. If the core of your business is leveraging another primary account (bank), and leveraging existing “rails” then this is probably the right structure. In the US, you must work to obtain 47 separate licenses with each state individually.
• Bank licenses are certainly more flexible, and provide for managing the customer relationship but there are 3 big downsides. #1) your financial reports and balance sheet must include a separate bank division #2) Acquiring customers is really hard #3) Regulatory burdens can be insane and consume your time and capital (Ex, CRA and Bloomberg article)
• Most Start ups “rent” a license through an existing  player. Square/Chase, Google/Bancorp, …
• Leveraging existing banks is proving very, very problematic as they own the customer, “rails” and the “rules”
• Today, Top issuers, Networks, Retailers and Platforms are at War here… See CEO View – Battle of the Cloud 5. There are billion dollar bets being made..
• In Europe, an ELMI Structure is the global reference model for a start up.. unfortunately there are no other regulatory equivalents (see E-Money regulation in the EU)
• Mobile payments (physical/POS) success today centers around transit.. and is either transit led or MNO led.
• NFC is failing completely.. technology is fine, but the supply chain and distributed control are unworkable
• Every major entity today is competing for the “TSM” role. My belief is that Apple, Google, Amazon are in the Driver’s seat.
• I am 80% confident that Visa, MA will follow Amex’s/Discover and obtain bank licenses in a limited number of markets. Neither wants to be first.

Take Away

If MNOs look to retain a leadership role in payments, then Wirecard is the reference model. I’m not the only one to see this… Today we see banks working to squeeze in their existing product (Credit Cards) in to the mobile phone. As MPESA’s success showed, mobile payments are much more likely to succeed when you have one leader capable of driving a focused value proposition.  Why squeeze and existing product into the phone if you can create an entirely new one? What if the future of banking “profitability” is driven less by Net Interest Margin, Treasury, and Transfer Pricing and on more on Consumer Data…?

Buy Wirecard (I just did). I also think they will be acquired within 18 months… Buyers: Visa, MA, Platforms, … Biggest Hurdle: Who can handle having a bank balance sheet.

Related Blogs

Paypal – Lending

Investors Guide to Mobile Money

Emerging markets – MNO Led

India – the craziest market on the planet