Citi “learns lessons” on Obopay

18 March 2010

American Banker 18 March 2010

Good article.. just a little “too kind”. Citi learned that 2,000 customers found Obopay to be a neat way to give kids their allowance. Of course Citi had higher hopes.. but a sender pays model has rather poor incentives in kick starting a “new network” and consumer behavior (See Citi is out of Obopay).  For those in the industry looking for lessons here, Paybox learned them the hard way in the EU. Obopay’s failure is nothing new.. changing consumer payment behavior is hard. Obopay added a few extra challenges as it attempted to execute a payments business plan with an inexperienced team.

Mobile P2P payments is firmly in the Gartner “hype cycle” stage within developed countries..  The short term future for NFC (at the POS) is quite exciting, particularly with AT&T/Visa’s pending pre-paid card. Within emerging markets, Mobile payment is a game changer for MNOs and the unbanked. The ability of any US tech companies to compete within this emerging market opportunity is TBD as NGOs and MNOs throw substantial resources at the problem.

Interesting to see Obopay start positioning as check (i.e. cash) replacement service. So would you pay $0.25+1.5% of your transaction so that you could provide convenience to a merchant? Me? I think I’ll tell the merchant to take my check.

Hey if the first business strategy doesn’t work… move on.. Jack Dorsey’s square model is focused in a good space (not too keen on his solution though). Obopay.. back to the drawing board.

Related posts

ATT-Discover Prepaid

ATT and Visa will be rolling out a pre-paid card staring next month. What will this bring? Will it take off like AT&T’s universal card? Will it be the “Tipping point” for mobile commerce, ushering in a new era where the mobile phone can transact with a wallet that spans the virtual and physical world?

15 March 2010

Previous Post NFC Break Out – VISA/FirstData/AT&T

My updated prediction is now first week of April. This is real.. and it is imminent.

Q: What will it mean when every AT&T subscriber receives a pre-paid Discover card with an NFC sticker? (Note back in March I did incorrectly guess it was Visa instead of Discover)

Answers

  1. Tipping point for mobile commerce, ushering in a new era where the mobile phone can transact with a wallet that spans the virtual and physical world, aggregating every other account type and payment instrument.
  2. A new business for AT&T which could drive 30-60% growth in LT revenue
  3. Software REVOLUION. The “Next wave” for iPhone AND the entire mobile commerce ecosystem (see googlization)
  4. New mainstream marketing channel as couponing integrates with payment, location awareness and detailed knowledge consumer behavior/preferences
  5. Card business killer for Bank/Issuer revenue as MNO Pre-paid encroaches on the consumer relationship AND issuer debit/credit products (Decoupled Debit)
  6. Cash replacement for small value payments as merchants of all types adapt POS to accept NFC, and small merchants take out POS terminals in favor of making their phone a cash register
  7. .. would love to hear from you on the next 100…

Business Model

Retention or revenue play? AT&T Universal card changed the credit card landscape in 1990. ATT demonstrated it could both create a card business AND leverage  distribution muscle as it attracted over 10M card holders in under 2 years. Citi acquired the AT&T Universal card for $3.5B+ in 1997 and it remains the largest affiliate card in Citibanks’s portfolio.

The biggest variable with anything “consumer facing” is the marketing investment needed to push it into critical mass. Example, will AT&T develop some program to incent “pay by phone” use like a $50 credit with $200 of spend? Discounted airtime rates? Rewards program? AT&T has proven it can deliver new technology and ecosystems (iPhone and Universal card)… and subsequently has many options.

AT&Ts pre-paid revenue model will likely see MUCH lower margins than their 90s card business, perhaps something of a split between a pre-paid card and a “decoupled debit” (which the US banks have long feared). How will customers “load the funds”? How will they encourage bank funding? Will Citibank get its act together and partner to extend credit (existing universal card holders)?

Given that there are many unknowns, here is my high level estimate on year one financials. Assumptions:

  • 85M subscribers (7M iPhone)
  • Year one penetration of 5% (4.25M or 60% of iPhone base),
  • Average purchase amount $40
  • Annual TPV = 50%(85M*0.05*$40*5*12) = $5B  (note: 50% for linear ramp up)
  • Take rate 120bps (Note there are current issues w/ NFC interchange, see BestBuy)
  • Revenue $60M
  • Processing expense (30% of Rev, 100% ACH funding) – $18M
  • Marketing spend – $50M
  • G&A – $3M
  • 12 mo EBITDA – $(11M)

$11M loss obviously doesn’t take into account many unique one time expenses, but it does provide some insight into the dynamics. It seems as though AT&T is spreading out the other “investment costs” through a consortium of First Data, Visa and a number of smaller companies. I would also expect to see a number of new revenue streams (marketing) as merchants experiment with other new Visa sponsored services like mobile coupons. The tech industry needs an initiative like this to expand the “mobile app” world consumer base beyond its current iPhone demographic.

Related Posts

Firethorn gets new CEO

Great news for QCOM this week. Firethorn gets a new executive with payments experience… AND has tremendous start up experience. QCOM is one of the best run, most innovative companies on the planet.. they are everywhere in mobile.

9 March 2010

Press Release

Previous Post “Obopay and Firethorn”

Great news for QCOM this week. Firethorn gets a new executive with payments experience… AND has tremendous start up experience. QCOM is one of the best run, most innovative companies on the planet.. they are everywhere in mobile.

Rocco has a clean slate given that Firethorn’s current customer list is rather sparse (?US Bank?). My recommendations for Rocco:

  • Dual track org: Short term quick hit and a strategic initiative
  • Short term: find some low hanging fruit and attack and forget about the banks in short term (they take too long)
  • Long term: better to “enable” 1M+ of businesses than to “own” a single product…. that is the model of QCOM. Example: Authentication. http://finventures.wordpress.com/2010/03/11/5b-mno-opportunity-kyc/
  • Leverage existing assets and relationships, listen for key opportunities
  • HR: Look at the team you have in place and shake it up… substantially. Start cross pollenating with the rocket scientists at the parent company.
  • Financial: I’m sure Rocco worked this out w/ Dr. Paul already.. but there are few path’s to revenue in 2010 unless there are some reallocation of assets.  Example, QCOM is investing in integrating NFC into chipsets. Should this be owned by firethorn? or should just the software that runs on the chipset?
  • Go global. The only alarm bell on Rocco is that he is lacks much international experience. Most of the innovation in mobile (payment) is taking place outside of the US. He needs a solid global team that can ensure that Atlanta prioritizes the global need.

– All the best Rocco

Obopay and Firethorn

Spoke to most of the top 5 US banks this week. Neither Obopay nor Firethorn will have any traction at the top US banks.

2 March 2010

Related posts

Spoke to most of the top 5 US banks this week. Interesting to note that Firethorn is out of all of them.. even in the model where Firethorn paid one of the majors $1M to take the application and integrate it. As of the latest QCOM 10-Q we can now see that total Firethorn revenue was $3M for the 2009 YEAR!  Wow.. no wonder Len lost his head for buying this thing and making it a separate division.

QCOM and Firethorn have a new product planned:  SWAGG (www.swagg.com). Good luck trying to figure out what this thing is.. could this be associated with Visa/ATT? (Youtube here). There seems to be a pre-paid debit card associated with it (from Dr. Jacobs CES presentation). Hey QCOM is one of my favorite companies… the people there are absolutely brilliant. But the Firethorn team is adopted.. and therefore the  genes do not extend here. They need a top exec to drive this thing.

On another note, Obopay showed up to at least one of the top 3 banks last month (BankX) touting its mobile payment solution. Undoubtedly with “millions” of subscribers (actual estimated at less then 20k). Always interesting to see spin here, they also reportedly told BankX that Citi’s departure was only temporary. Other banks should ask them to get specific.. very specific.. (probably not the US and there is no commitment on use).

From compete.com (Hard to spin facts..8,000 unique visits last month .. estimate only 20% use the service)

The “big secret” in mobile payments is that there aren’t any… (with very few exceptions). Those exceptions usually deliver “payments” as part of an existing value proposition (see  MNOs will rule in Emerging Markets). Banks know that changing consumer behavior is a 20 year effort. Card based payment schemes have particularly high hurdles in emerging markets due to interchange rates and rules that are ill suited for low value payments by unbanked. Toward this end countries such as India are contemplating the development of new domestic payment networks.

Thought for the day

RBIs Payments Vision 2012

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/

Customer Sat Survey Released

Change Sciences also released a new report this week ranking online banks by “online experience”, in this report Ally bank is ranked #1. The sites usability is just fantastic.. and sets a new bar for the big guys to follow.

18 Feb 2010

ACSI just published results of the customer satisfaction survey.  Wells/Wachovia is #1.. keeping them in the spot for last 5 years (job well done guys).

Wells Fargo has emerged from its acquisition of Wachovia stronger in terms of customer service, rising slightly by 1% to an ACSI score of 73, which is the top score among measured banks in 2009. Wells Fargo seems to have benefitted from Wachovia’s legacy of strong customer satisfaction; for many years, Wachovia was the industry leader. By contrast, JPMorgan Chase has not performed nearly as well following its acquisition of Washington Mutual. The subsequent reorganization has been slow, and many Washington Mutual branches were still not rebranded as of the fourth quarter of 2009. Customer satisfaction with the new, larger JPMorgan Chase dropped sharply by 7% to an ACSI score of 68. To some extent, the story is the same for Bank of America. Its acquisition of Merrill Lynch made it the world’s largest financial services company, but massive losses have led to layoffs and substantial cost-cutting. Bank of America’s ACSI score dropped even further than JPMorgan Chase, tumbling 8% to an industry low of 67.

In addition to ACSI’s overall customer satisfaction report (all bank services) Change Sciences also released a new report this week ranking online banks by “online experience”, in this report Ally bank is ranked #1. The sites usability is just fantastic.. and sets a new bar for the big guys to follow.  Ally (was GMAC) is based in Charlotte and run by the former BAC internet management team. They were able to take the best and brightest from both BAC and Wachovia and have assembled a “dream team” of designers that have taken their game to a new level..  Congrats guys!

PayPal Shut Down in India

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

11 February 2010

NYTimes article from last night

India’s Central Bank Stops Some PayPal Services‎ – 

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

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

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

Further, Paypal’s “agents must”:

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

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

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

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

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

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

My related Post

Cash Replacement

NACHA on Aggregation

SEC AML/Patriot Overview Regs

NFC Tea Leaves

9 February 2010 

Previous Post http://tomnoyes.wordpress.com/2009/12/23/visa-att-mobile/

In the last week of December I made an “informed” prediction on a major NFC announcement…. the predicted time has now past.. and… no announcement. This seems to be common place in this space.. NFC presents the best chance for development of a new ecosystem and a new “boom” for small companies… Unfortunately the keys to the “ignition switch” are held by multiple established (read entrenched) overlapping and competing networks (bank, mobile, card, …). Apologize for getting hopes up.. it does look like more of a slow burn than “break out”..

Visa’s mobile apps at CES 2010

[youtube=http://www.youtube.com/watch?v=c3Ff6uYXBD0]

VivoTech

[youtube=http://www.youtube.com/watch?v=Kzyy6ZLbDZk]

All of the activity listed in the previous post has been validated:

– FirstData is acting as a TSM (in vein of Germany’s Giesecke & Devrient)

– Visa does have €200MM planned for NFC (See here)

– Top 3 US bank is planning a major mobile initiative w/ Visa to roll out in early 2Q

– AT&T has TBD initiatives into pre-paid card and pre-paid plans, I do have conflicting information on whether this will be led by AT&T or Apple and time period has extended significantly.

 

 

http://www.youtube.com/watch?v=330RZpwrmAg

http://www.youtube.com/watch?v=z0BwYz1P0BE

 

 

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

CapCo Analysis