Ruminations: Durbin and Debit

Time for a blog with many questions and few answers. My natural perspective is that of a banker. Banks are created to act as trusted intermediaries of commerce, and I’m concerned when their ability to act on this charter changes. I want banks to win and to create products that satisfy the customer, build trust, and effectively serve in commerce.

Will Merchants loose sleep if debit goes away? Answer probably rests with what will take its place.

13 Aug 2010

Time for a blog with many questions and few answers. My natural perspective is that of a banker. Banks are created to act as trusted intermediaries of commerce, and I’m concerned when their ability to act on this charter changes. I want banks to win and to create products that satisfy the customer, build trust, and effectively serve in commerce.

A friend and I were discussing the impact of Durbin’s 2 tier debit structure (Excellent analysis by Mercator here) on the incentives for large banks to continue to issue debit. My perspective (as a banker) has been greatly altered from my time at 41st parameter working with the largest retailers in the world. I’ve developed a new view and a new appreciation for the pain felt by merchants. It would not be too extreme a statement to say that there is a deep hatred of the cards networks. The feeling is both visceral and reasoned. I remember when a senior executive from Wal*Mart came to Wachovia for a presentation and was asked what he thought were appropriate interchange rates for credit and debit. He said “0” dead pan.. then during the quiet of the audience, he said “actually we think we should be paid for accepting your cards” and emphasized that this was not a joke.  

Will Merchants loose sleep if debit goes away? Answer probably rests with what will take its place. The retail banks are very unorganized around payments. With few exceptions (Chase, WFC, USAA, ..) bank payment executives do not get the focus of their retail organizations.  In general, retail banks are challenged to relate payments to profitability (and hence the overall retail strategy). Debit was a clear exception to this challenge and a “killer product” for cash/check replacement.

The bank value proposition for debit was clear. However, what was the merchant value proposition? Certainly reduction in check fraud, funds availability… but at what costs? The federal reserve studied interchange rates in graph to the right. What exactly drove this step creep? How did it drive value? What were the economic forces that pushed back against it? What additional investments did Visa/MA make in their network?

Will banks develop a debit replacement? Clearly Durbin has reduced banks incentives to push debit (w/ assets over $10B). I project that the market is ripe for a merchant friendly payment method that is much different than the products available today. Instead of funding the card product on merchant interchange.. perhaps mobile advertising?

Can banks/cards regain the trust of merchants as intermediaries of retail commerce? Could the wholesale or merchant acquisition business which drives a new payment product (ie Amex Revolution Money)?

 Thoughts appreciated

Chase QuickPay and Quick Deposit

Chase has a stellar eCommerce and mobile team in both their retail and cards organization, and they are poised to deliver tremendous payment innovation across both of these business units. This innovation that has been “in the works” over the last few years, and Jack Stephenson (PayPal’s former head of strategy) is fortunate to have a joined at a time where both the payment platform and team is gaining traction. This month the JPM retail team has delivered new capability in its iPhone versions of QuickPay and Quick Deposit products.

25 July 2010 (Updated 20 Aug)

Chase has a stellar eCommerce and mobile team in both their retail and cards organization, and they are poised to deliver tremendous payment innovation across both of these business units. This innovation has been “in the works” over the last few years, and Jack Stephenson (PayPal’s former head of strategy) is fortunate to have  joined at a time where both the payment platform and team is gaining traction. This month the JPM retail team has delivered new capability in its iPhone versions of QuickPay and Quick Deposit products.

QuickPay Overview:

QuickPay is a JPM’s money movement “pay anyone” service that provides registration for both Chase and non Chase customers. Chase was very late to the money movement game, rolling out its first QuickPay service in 2008 (whereas Bank of America and Citi have been providing this since 2002  through CashEdge). From a strategy and organizational perspective, JPM is well known for their “preference” to develop applications internally. It may have taken some time for JPM to complete the QuickPay internal build, but in the current release it has surpassed the domestic capability (and usability) of all other banks. JPM is now the leader in retail online payments.

Non-Chase customers can register for QuickPay before or after receiving funds. For non customers, registration for QuickPay is similar to PayPal (or CashEdge’s PopMoney), with the QuickPay wallet currently constrained to single linked checking account. Chase customers have a streamlined enrollment process and the QuickPay functionality is integrated into their existing online experience (demo above). This differs substantially from BAC, where the same capability to transfer funds exists but the usability is very poor. BAC is missing a substantial opportunity to capture beneficiary phone/e-mail information, an unnecessary miss since the capability exists (BAC is Cashedge’s largest US customer but has not yet signed on with CashEdge’s mobile POP money service).  Beneficiary information is critical to maintaining an accurate directory.. the key element in any payment system. Chase’s QuickPay maintains e-mail, phone and other information which gives it a head start in the directory battle (subject of future blog).  Given Chase Paymentech’s role in acquisition (for card, paypal, …) you can see potential for further directory synergies internally.

Quick Deposit

The articles above provide a great overview of the new iPhone App, with Chase following in the footsteps of USAA’s Deposit@Mobile. Application is from Mitek Systems and it is just super, and for small merchants this may become the payment method of choice (when compared to card):

Merchant benefits:

  • No transaction costs (savings of 150-350bps)
  • Usability and simplified enrollment
  • Same day availability of funds
  • Fits existing consumer behavior pattern (checks)
  • Legal protections/enforceability (paper checks vs. electronic signature)
  • Instant verification, risk and fraud management
  • Leverages bank imaging systems and processes (regulatory and consumer receipt)
  • Notification/receipt to consumers

JPM Business Case

  • Check imaging (op expense)
  • Small business acquisition (Customer Net Revenue for SME = $3-$5k)
  • NRFF for non-customers (NIM on settlement funds held)
  • Future “directory” business case, cards growth
  • Prevention of DDA Account Number Breach

The JPM Quick Deposit application was reportedly built in-house, other Vendors such as EasCorp’s Depozip provide similar functionality. As for the success of this application, NetBanker reported USAA’s recent numbers for Deposit@Mobile. (update 20 Aug, my friends at BAC tell me that they have been trialing the Mitek application for almost 3 years now, fine tuning the app and the support process and are set for launch any day) .

Given that the audience for this blog (investors, start ups and innovators), you might ask why it takes 2 years for a bank to roll out this type of innovation. An excellent question! The iPhone app itself is the easy part, perhaps consisting of less then 20% of the overall budget. The “hard work” is in integrating it into existing systems and risk controls. For example, the primary value proposition, for QuickDeposit, is improving check acceptance and funds availability. At the teller line, banks have tools like DepositChek which allows the bank to determine if information on the check is correct and the account is in good standing (stopping check fraud before the check image gets into the system). These same tools must be integrated into the online and mobile process to reduce risk. I’ve picked this particular example because it is a tool unique to bank entities (not available to non-banks). In addition to the technical integration costs, banks have become very prudent in testing, and accessing impact of new functionality to call center support costs. Given the wide availability of both of these applications, it is essential that they are intuitive to JPM customers.

These applications are a great retail success. I understand that the JPM cards team is also poised for a major release in mobile soon (with multiple alliance partners). Well done JPM!

Enroll for QuickPay – www.chase.com/QuickPay

Overview of Quick Deposit  – www.chase.com/quickdeposit

Thoughts appreciated

Visa Payclick

Summary on Visa Payclick: “Partnering with banks” is very challenging…. do banks want Visa to deliver a “bank friendly” paypal competitor.. or would banks prefer to create something they can control? View Payclick today as an Australia “test market” of something Visa intends to grow, with an initial consumer focus on digital goods.

30 June 2010

Summary on Visa Payclick: “Partnering with banks” is very challenging…. do banks want Visa to deliver a “bank friendly” PayPal competitor.. or would banks prefer to create something they can control? View Payclick today as an Australia “test market” of something Visa intends to grow, with an initial consumer focus on digital goods.

Visa just launched Payclick (www.payclick.com.au) with plans to expand globally. I see this service competing more with Bango (see http://www.bango.com/) and payforit (www.payforit.com) than PayPal. There is no way for a consumer to withdraw funds placed in the wallet, or to be paid..  (it is not a wallet), it allows for the addition of current account funds through BPAY integration (note BPAY is a bank owned consortium in Australia providing common services like telephone and online bill payment). Allowing multiple funding instruments provides for a lower cost of funds, and BPAY penetration is over 80% in online customers. However the inability to credit the wallet, while  simplifying risk and fraud operational challenges, limits the consumer value proposition and the addressable market. Given these wallet restrictions, Visa has chosen an initial market focus on teens buying digital content… this narrow market focus may provide Visa the opportunity to “kick the tires” on the system before expanding it (geographically and demographically).

Re: Expansion.  I understand that Visa is “in flight” with expanding the AFT/OCT transaction set (See Patent) which is the heart of the Visa Money Transfer service. My global card contacts tell me that Visa is attempting to get issuers on board with credit push in an updated issuer agreement (see Visa Money Transfer Overview – Issuer presentation). The “incentive” for issuing bank to accept new agreement is a $0.50 revenue share. Banks are not biting on this (subject of another blog on Visa and card remittances).. hence my guess is that the Payclick service has “visions” for being bi-directional.. but not until issuers sign off on accepting OCT transactions.

We should not assess Payclick based solely upon current functionality, given Visa’s substantial investment here there must be plans for additional transaction types. The CYBS acquisition gives Visa assets to develop something much more comprehensive. For example, with the CYBS could serve as an acquirer for Payclick as a “light” tool for small merchants selling digital goods in mobile market places and app stores.  On the consumer side, Visa has a steep hill to climb in creating a value proposition which would drive consumers to store card information with Payclick (particularly given the competing payment methods above).

Risks I see for Visa in Payclick:

  • Initial target demographic is well served by both Bango, Paypal, iTunes Wallet, prepaid card (for my teen), payforit (UK), MNO billing, …
  • “Send only” functionality will not create critical mass in either consumers or merchants
  • Banks will not bite on OCT transaction set and service functionality will not be able to expand
  • Visa will loose focus after core innovation team departs
  • CYBS can acquire and service… but it will take serious marketing dollars to create a new consumer brand… as well as a solid value proposition.

Add these risks to Visa’s existing “dynamic” with  retailers (a group that is not favorably inclined toward assisting Visa nor any card network) in creating another payment type  (issues w/ interchange, compliance, fraud, payment system integrity, ..). Since Visa’s IPO,  Banks are no longer in control and also view Visa’s efforts through a new competitive lens. Banks also like the idea of having their own brand on payments. Thus, Visa is stuck managing a complex 4 party system with limited ability to create an innovative value proposition which all parties can agree on.

Visa is facing head on competition from “unshackled” teams like PayPal. In fact PayPal just launched mobile instant checkout today .

Feedback appreciated

PayPal Virtual Terminal – Accept Cards at POS

I can’t help but wonder how this pricing will effect Chase Paymentech (PayPal’s partner and merchant acquirer). Small merchants may indeed think twice of having their own merchant services agreement and specialized terminals.

PayPal Virtual Terminal

6 June 2010

Great job PayPal…. bringing down the cost of card acceptance to $30/mo. No hardware, no special agreements.. just add the service to your existing merchant account.

The only downside seems to be for the 5+ Valley start ups like SquareUp that were targeting physical POS acceptance in a “Craigslist” type environment. The head of payment strategy at a top 3 bank told me that making merchant acquisition easier was a priority for driving new card volume. Looks like VT can both drive TPV growth and address potential down market competitive threats at the same time.

I can’t help but wonder how this pricing will effect Chase Paymentech (PayPal’s partner and merchant acquirer). Small merchants may indeed think twice of having their own merchant services agreement and specialized terminals.

Thoughts appreciated

US Senate tinkers w/ card rules and rates

The press seems to be focusing attention on the TBD rate setting and “swipe fees”, from my perspective they bigger long term impact to banks and the networks will be elimination of restrictions associated discounts on competing forms of payment. Specifically Mastercard rule 5.9.1 and Visa

http://on.wsj.com/coPzIH

US Senate Amendment Text

14 May 2010

The press seems to be focusing attention on the TBD rate setting and “swipe fees”, from my perspective the bigger long term impact to banks and networks will be elimination of restrictions associated with discounts (and steering) on competing forms of payment.

Amendment Text

“(b) Limitation on Anti-competitive Payment Card Network Restrictions.–

“(1) NO RESTRICTIONS ON OFFERING DISCOUNTS FOR USE OF A COMPETING PAYMENT CARD NETWORK.–A payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person to provide a discount or in-kind incentive for payment through the use of a card or device of another payment card network.

“(2) NO RESTRICTIONS ON OFFERING DISCOUNTS FOR USE OF A FORM OF PAYMENT.–A payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person to provide a discount or in-kind incentive for payment by the use of cash, check, debit card, or credit card.

In June 2003, Visa and Mastercard signed the settlement agreement which provided for steering.

D. Merchants shall also have the right to encourage or steer customers from Visa and MasterCard debit transactions to other forms of payment.

This ability to steer has been somewhat ambiguous, outside of cash. For Example, the Mastercard rules show

5.9.1 Discrimination
A Merchant must not engage in any acceptance practice that discriminates against or discourages the use of a Card in favor of any other acceptance brand.

5.9.2 Charges to Cardholders
A Merchant must not directly or indirectly require any Cardholder to pay a surcharge or any part of any Merchant discount or any contemporaneous finance charge in connection with a Transaction. A Merchant may provide a discount to its customers for cash payments.

and Visa Rules

5.2.D Discounts at Point of Sale
5.2.D.1 Advertised Price
Any purchase price advertised or otherwise disclosed by the Merchant must be the price associated with the use of a Visa Card or Visa Electron Card.
5.2.D.2 Discounts
5.2.D.2.a A Merchant may offer a discount as an inducement for a Cardholder to use a means of payment that the Merchant prefers, provided that the discount is:
• Clearly disclosed as a discount from the standard price and
• Non-discriminatory as between a Cardholder who pays with a Visa Card and a cardholder who pays with a “comparable card”

Will update this blog later, but the US Senate’s amendment will have substantial impact on merchant payment strategy. I see a strong future for new cards issued by  merchants that embed strong loyalty program.. outside of the Visa/MC network (?ACH?.. PayPal…) with a substantial rewards program to drive adoption. Perhaps ACH POP will take on new life..

Card networks and issuers should get active in the merchant funded rewards space.. before the merchants own it

http://www.paymentssource.com/news/merchant-funded-rewards-spark-card-issuers-interest-2637491-1.html

Visa Ooops – PR screw up on new Device Fidelity iPhone App

Device Fidelity is one of the premier MicroSD NFC players (other is Tyfone). Trying to beat Apple to market with their embedded NFC or enabling existing phones? My bet is that this one will have AT&Ts involvement. MicroSD is a great form factor for NFC, issue is who will pay the $15-20 for it and who will certify? AT&T has the best chance to make this successful and subsidize.. in order to bear this cost, AT&T must drive either transaction revenue (create a pre-paid card) or a new advertising service.

Looks like their PR came out a little ahead of time.
Device Fidelity is one of the premier MicroSD NFC players (other is Tyfone). Trying to beat Apple to market with their embedded NFC or enabling existing phones? My bet is that this one will have AT&Ts involvement.  MicroSD is a great form factor for NFC, issue is who will pay the $15-20 for it and who will certify? AT&T has the best chance to make this successful and subsidize.. in order to bear this cost, AT&T must drive either transaction revenue (create a pre-paid card) or a new advertising service.
More to come

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/

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

SEPA: Chicken or the Egg?

The over arching goal of SEPA is to make the EU a single market on “payment” par with the U.S. Perhaps the best way to start is not by incenting changes to “payments”, but to open the EU retail banking market. (Think of the US banks operating under a Fed charter). “All banking is local” can be the mantra ascribed to the EU today, with each country maintaining tight regulatory control over domestic financial institutions (i.e. M&A and Liquidity). Significant market forces could be unleashed when local banks can operate throughout the EU, and a German consumer can seek the best rate and apply for an account at a “Spanish” bank.

4 January 2010

I was reading an update on SEPA : New Alliances Required to Tip the Market. The report gave me new perspective on how challenging it is to change a networked business. This challenge is exacerbated by the ‘well intended’ EU political compromises in SEPA (specifically) and EU regulation of retail finance (more broadly). Clearly “payment networks” can benefit from innovation, but as Juergen correctly states “In a network industry, cost reductions and/or additional revenues that can be realized by applying the new standards have to exceed the network effects currently realized with the old standard”.

SEPA is struggling to resolve issues in cost/benefit allocation given the slow growth and adoption for SDD and SCT. The greater growth in SEPA Cards Framework can be attributed to the “control” and investment from Visa/MA as they manage compliance (and marketing) or the new SCF brand. An excerpt from the report above:

Key strategic decisions have to be made almost simultaneously in organisations that are in competition with each other, follow different strategies and have different abilities to innovate or prepare for an industry change. Only if consensus on a new business model can be reached – among stakeholders who represent significant market shares and hold key positions in the industry– will it be possible to generate the synergies promised by SEPA. As already described, the cross-border business within SEPA represents only a small share of the payments market. The dominant national standards, which all would have to be replaced by the new SEPA standards, are built around national market requirements.

International banks (for example, Deutsche Bank) have separate organisational units in several European countries that run their own national payments engines. They maintain different payment infrastructures in Europe. Modifications in response to new compliance requirements (for example, money laundering or new requirements of the PSD) create several similar projects [for this single bank]..

The costs for SEPA (estimated at €10B) fall heavily on the banks, and the benefits (ex. e-invoicing, cross border competition in payment products, …etc) are expected to be realized by the consumers of bank payment services (with and estimate €7B revenue hit to banks). Fortunately for the Banks, in 2002 the approach decided on by the EPC was to create SEPA in a market-driven and self regulated process.

The over arching goal of SEPA is to make the EU a single market on “payment” par with the U.S. Perhaps the best way to start is not by incenting changes to “payments”, but to open the EU retail banking market. (Think of the US banks operating under a Fed charter).  “All banking is local” can be the mantra ascribed to the EU today, with each country maintaining tight regulatory control over domestic financial institutions (i.e. M&A and Liquidity). Significant market forces could be unleashed when local banks can operate throughout the EU, and a German consumer can seek the best rate and apply for an account at a “Spanish” bank.  Today the regulatory hurdles for this retail competition are significant.

The EU, ECB and the EPC started with payment standards and “infrastructure” as it did not alienate any of the existing participants (market driven.. .not mandatory). What we have is the fruit of this compromise, standards for payments across the EU without the ability for companies to compete for business across the EU domain. The unrealized value of the “SEPA Innovations” are thereby constrained by the market in which banking operates. Perhaps integrating EU retail financial markets would be a better first step. This “openness” would certainly provide an attractive carrot for bank led investment in common payments. Which comes first? The Chicken or the Egg?

See data here

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