I’ve had quite a few questions from start ups on this subject, so I thought I would address here. In the past few months we have seen press from Obopay on Star/NYCE integration that would allow for “instant” transfers. Only FedWire offers real time transfers between all financial institutions. All other solutions have sporadic coverage unless balances are held within the same institution (bank, paypal, … ).
8 Feb 2011
I’ve had quite a few questions from start ups on this subject, so I thought I would address here. In the past few months we have seen press from Obopay on Star/NYCE integration that would allow for “instant” transfers, yesterday there was a press release from Cashedge/NYCE on the same subject. In my previous blog on Visa Money Transfers I discussed the top 2 fallacies: Instant and Mandatory. These same issues plague NYCE’s and Star’s PIN Debit “credit push”.
For the non-bankers, there are 5 basic payment networks that surround a typical US DDA account:
- PIN Debit/ATM (Interlink, Pulse, Star, NYCE)
- Signature Debit
- ACH (example The Clearing House, Jamie Dimon Chairman)
- FedWire (the US RTGS system run by the Fed)
- SVPCo (Check Images)
- Optional (ex. SWIFT, Western Union, …)
For further information see the FFIEC’s Examination Guide on Retail Payment Systems.
From a global perspective, we are quite a few years behind the UK and most of EMEA. While consumers in the UK can expect that 98% of domestic payments to clear in “real time”, most ACH “payments” in the US clear in the 3-5 day horizon. This blog is focused on “instant” payments. Important to note that the definition of “instant” is relative to both bank and consumer. For example, each bank has its own policy on funds availability and posting (vs clearing). A consumer could see funds posted to their account, but the funds may not be available for withdrawal. Other banks choose to show the consumers available funds to avoid confusion.
FedWire is a Real Time Gross Settlement (RTGS) system run by the federal reserve. Each bank in the US maintains funds with the federal reserve, and FedWire performs real time exchange of funds between member banks. Consumers and Commercial Businesses know of this service as a “wire”, and it is the only real time payment network in the US with universal adoption. FedWire Fees (~ $.52) are paid by the sending bank.
The other “real time” payments systems (surrounding a US consumer DDA) are PIN Debit and Signature Debit. PIN Debit Networks evolved from ATMs, connecting ATM nodes to bank run authorization systems. Bank Authorization processes for PIN Debit/ATM systems are rather straight forward: validate the PIN and funds available (I emphasize this authorization process as it is key to understanding why a “credit” is difficult to process on this debit system). PIN Debit fees are typically paid by the merchant and average around 85bps + $0.10. For ATM use, banks control fees and can assess surcharge for use of bank or foreign ATMs.
ATM Networks grew as groups of banks banded together to monetize ATM infrastructure, and further expand network into the retail POS. This expansion led to further change in structure, from bank ownership to independence. The driver of any independent network is to add volume, nodes and services. ATM Networks evolved into PIN Debit Networks, with Visa’s 1987 contract to operate Interlink serving as a key milestone. Today, Pulse is owned by Discover, Star by First Data, Interlink by Visa (these 3 make up over 83% of PIN Debit Volume).
PIN debit networks have been working to fill the real time “hole” in DDA payment services for many years. Star’s Expedited Transfer, NYCE’s A2A Money Transfer , Visa’s VMT all attempt to EXTEND their respective PIN Debit networks to handle credit transactions. In EVERY CASE, the networks must sell their members banks and get them to extend a PIN based network (which processed only debits in a simplified authorization process), into a funds transfer service. Who owns fraud? Compliance? Reg E burdens? Consumer Support? Returns? Reporting? Integration into online banking? Statements? .. yep the banks.. Oh and by the way.. the other “benefit” to a bank is that once you implement it you can forget about those expensive wire fees. The result of their efforts is what you would expect… VERY poor adoption.
Today, PIN debit networks are looking at a very bleak future. Signature and PIN debit rates will be moving to a flat fee of $0.21 as a result of the recent Dodd-Frank Act (pending completion of the comment period). As a result, my guess is that we will likely see consolidation and bank ownership of shared PIN network infrastructure as with any commodity payment service.
Signature Debit varies from PIN Debit in that it evolved from Credit Card (as opposed to ATM). Visa was and has always been the leader in signature debit penetration, a look back at this 2003 article provides much insight into the history here. Most US consumers today don’t understand why their debit card has both a PIN and signature feature… many books could be written on this subject alone… but oddly enough consumers prefer PIN (see Pulse Federal Reshttp://3dmerchant.com/blog/how-can-i-reduce-american-express-transaction-fees/erve Presentation 10/10).
In the signature debit model, transaction authorization is much more complex, with most banks leveraging either network shared infrastructure (example Visa DPS), or their credit card systems. The complexity arises as the lack of PIN requires the banks to risk score transactions in a manner akin to credit card (absent the credit risk). There are limited facilities for a credit transaction within most Signature Debit systems, and most relate to a merchant credit relating to a previous transaction (ex. Overcharge, returned merchandise). DPS, Mastercard IPS, and most other platforms perform usually perform a daily net settlement with member banks (multiple settlement files are sent throughout the day.. but netted just once) . Just as with PIN Debit, Signature Debit is also designed as a DEBIT ONLY system…
In VMT, Visa is attempting to enhance signature debit network into a quasi RTGS transfer service by leveraging its DPS hosting and authorization role. The QUASI is very important… as DPS, Interlink or any of the debit systems are “real time” ONLY in the instruction, NOT the Settlement. To suggest that any of these services are an actual RTGS system is a significant stretch of the imagination and thoughtful invention. A payment system cannot be faster than its underlying settlement system. The PIN and Signature Debit Networks DO NOT SETTLE, but rather depend on existing bank settlement processes (which are daily batch runs). The “message” to post or credit a transaction to the customer can be “instant” but the funds will not clear into the customers account until settlement occurs (dependent upon each bank’s policy).
What does this all mean for real time transfers in the US?
Only FedWire offers real time transfers between all financial institutions. All other solutions have sporadic coverage unless balances are held within the same institution (bank, paypal, … ).
How should you view NYCE, STAR, Visa “credit” Capabilities?
It works at some banks, with many provisions. I estimate that combined coverage of NYCE, Star and VMT “credit” covers less than 5% of all US deposit accounts. As you can see from WSJ graphic below, the top 5 banks account for 80%% of debit volume…. given that these banks have not adopted the credit services (in debit), there is little likelihood of success.
It is likely that independent PIN debit networks will go the way of Canada’s Interac… a bank owned service.
Messages for banks
Keep bank control of transfer facilities.. new services that give consumers real time transfers compete with wire, increase fraud exposure and enable rate hoppers… Why role this out today when you will likely get it from a bank owned network in 2-3 years.. ?
Mercury NewCo scenario based upon industry intelligence. Following the scenario, there is an outline of the value propositions for the parties involved.
- Mercury NewCo – Aug10
- Mobile Marketing – Jun10
- Googlization of Financial Services
- AT&T Discover Pre-paid – Mar10
Last week I found myself in NYC and was fortunate to meet with several payment leaders. Change is not something we see often in payments as it is historically known for its galacial pace. The most interesting topics centered around new investment and consolidation, with the rumored $500M capital commitment for ATT/Discover Mercury NewCo at the top of the list. I greatly appreciated the dialog, and this blog is a follow up to a few of the discussions. My view is that Mercury will be present a completely new payments value proposition that existing networks will have trouble competing against, with the revenue driver of mobile advertising. As stated in previous blog, mobile advertising may well exceed Google’s precedent set with online…. perhaps a completely different dynamic with established fortune 50 organizations leading the way in collaboration with old line Madison Ave Ad Agencies. The MNO payment strategy seems to be driven by a recognition that mobile advertising is key to future revenue growth, and payments is an outgrowth of this larger strategic plan (see previous blogs above). Why do I like Mercury’s prospects given the dim history of “change” in payments?
- Enhances an existing value chain (mobile operators) that is well established with sufficient investment capital and patience (deep pockets)
- Addresses a new market opportunity in a way that can deliver disruptive value to multiple stakeholders
- Existing payment providers can not adapt. The great thing about networks are their resiliance. The negative is that they are also resiliant to change.. even when necessary
- There is significant short term merchant pain in the card payments. Merchants have been in effective in influencing Interchange rates.
- Consumer behavior is changing, and the pace at which adoption of new tools and technologies are “mainstream” are also accelerating.
- Payments is an “infrastructure service” to every business and every country. Traditional banking is becoming decoupled from the business of payments in both mature and emerging markets.
Its hard to genericize the antagonist view of Mercury.. but the following are key points I frequently hear:
- Consumers have tremendous card loyalty and will not use a different payment instrument just because it is available.
- Discover is a failed network with over $2B invested in infrastructure
- Existing cards can compete on rates. There is nothing that Discover (or Mercury NewCo) can offer which existing issuers can not compete with
- Changing consumer behavior is unpredictable and takes tremendous marketing investment
- Investment in POS infrastructure is expensive and time consuming
- Merchants are happy with the existing payment networks, and will not spend additional money on marketing or interchange
All are excellent points (with exception of merchant attitudes toward V/MA). Below I have laid out a scenario for NewCo success (some of which is based upon industry intelligence…). Following the scenario, there is an outline of the value propositions for the parties involved.
New Scenario 1 – Pre-Paid Card/Mobile Marketing (AT&T Example)
- All AT&T customers are issued a pre-paid Discover card with $10 pre loaded
- AT&T establishes incentives for use and incentives for user acceptance of mobile marketing agreement whereby personal data can be used to market you 10 times per month.
- Customers accepting agreement also receive NFC MicroSD cards
- Mercury commits to $200M in advertising spend to kick off program
- Mercury establishes mobile advertising group in collaboration with major Madison Ave firms, goal of directing $2B in marketing spend by Year 2. Get back at Google (Own Mobile).. is motivation for Madison Ave firms.
- Mercury establishes Merchant division in collaboration w/ Discover. Mercury will over all transactions at 50bps with minimum marketing spend and/or POS updates. Mercury will also provide marketing incentives/discounts for early adopters. Customer and campaign analytics will be key selling point. Mercury will also seek item detail in transactions.
- Google makes investment in Mercury to serve as ad serving engine and direct existing spend. Agreement ensures that google does not have exclusive rights so that Madison Ave firms can work directly with large corporates.
- Mercury/Discover develop common shared wallets and common marketing processes/standards that are used across MNOs (analogous to Apple iAD). Mercury retains directory of customers that have accepted disclosure and campaign engines bid for ad placement based upon demographics, analytics, and location.
- Customer receives advertising via mobile. 4-8 Categories
- Brand level marketing
- Store discounts
- Product discounts
- Free Trials
- Cross sell/Upsell…
- Incentives for card use drive merchant and consumer behavior. Durbin allows merchants to “direct” consumers to preferred payment methods. Discover is used for small purchases, and also acts as “decoupled debit” once history is established. Customers begin to think of Mercury card as new debit with benefits.
Process Flows – From GAO
NewCo Revenue Model – Year 1 (in Previous Post)
- 85M subscribers (7M iPhone)
- Year one penetration of 10% (8.5M or 60% of iPhone base),
- Average purchase amount $40
- Interchange 50bps
- Annual TPV = 50%(85M*10%*$40*5*12) = $10B (note: 50% ramp up)
- Transaction Revenue $50M
- Digital Goods/Usage $50M
- Retention $50M
- Ad Revenue $300M
- Total Revenue $350M
- Processing expense (30% of Rev, 100% ACH funding) – $15M
- IT Build (one time) – $200M
- Marketing spend – $200M
- G&A – $80M
- Total Expense – $495M
Don’t think about this as a card business, think about this as the next Google and payments are the KEY that ties together the mobile, virtual and physical world. NewCo will be to mobile advertising what Google was to online. For example, rumors are NewCo is attempting to consolidate $1-5B+ in Madison Avenue marketing spend in first year (See consumer scenario here). The MNOs are brilliant! Their collaborative efforts here are a severe threat to both banks and established payment networks. Widespread adoption of NFC will revolutionize consumer payments and may result in the next boom cycle for silicone valley. Make no mistake, NewCo will be the leader of the next great ecosystem.
AT&T, Verizon, T-Mobile, .. create NewCo to deliver mobile payments w/ Discover
2 August 2010
In press today – Bloomberg Today – AT&T and Sprint to create prepaid venture
- MNOs form pre-paid venture: “New Rails”? (Nov 2009)
- US Carriers and pre-paid (May)
- ATT-Visa Prepaid
- Mobile Marketing – Apple iAD
- Visa – New Mobile Payment “Rails”?
- NFC Times – MNO Pre-paid venture Feb 2010
Mainstream press has added a few additional details to what we outlined back in November. The biggest surprise to me is that Discover is the network partner (quite frankly I assumed it was Visa). Discover is an interesting partner, given its capabilities (issuer and acquirer) and reveals much about the mobile network operator (MNO) plans to bring a merchant friendly (lower interchange) strategy to market. It appears that First Data is in this alliance as well acting as the trusted service manager (TSM). NewCo represents a major investment (rumors are that the major operators are investing north of $200M) and may start a new venture wave in the valley as NewCo positions itself to be the “Google” of mobile advertising.
Don’t think about NewCo as a card business, think about this as the next Google and payments are the KEY that ties together the mobile, virtual and physical world. As I discussed in March:
Q: What will it mean when every AT&T subscriber receives a pre-paid Discover card with an NFC sticker?
- 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.
- A new business for AT&T which could drive 30-60% growth in LT revenue
- Software REVOLUION. The “Next wave” for iPhone AND the entire mobile commerce ecosystem (see googlization)
- New mainstream marketing channel as couponing integrates with payment, location awareness and detailed knowledge consumer behavior/preferences
- Card business killer for Bank/Issuer revenue as MNO Pre-paid encroaches on the consumer relationship AND issuer debit/credit products (Decoupled Debit)
- 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
- .. would love to hear from you on the next 100…
There are at least 3 major elements to this announcement which warrant further discussion, as impact on the venture and payment community will be significant:
– NewCo business model: It’s all about marketing and control
– Payments shift from banks, Visa, and MA
– Mobile payment value proposition. Can NewCo make this work for consumers and merchants?
The AT&T Universal card changed the credit card landscape in 1990. AT&T 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 Citibank’s portfolio.
As I wrote back in November, The US market is ripe for a break from the 6 party political “fur ball” that is hampering delivery of mobile payment (Card Issuers, Acquirers, Network, Merchant, MNOs, Handset Mfg). For those outside the US, MNOs have substantial control over handset features and applications, and have been leveraging this “node control” to “influence” direction of payments. The central US MNO argument being: “it is our customer, our handset, our network we should get a cut of the transaction rev”. Unfortunately existing inter-bank mobile transfers/ payments are settled through existing payment networks that provide limited flexibility in accommodating a “new” MNO role and the network rules leave much room for improvement in: authorization, authentication and consumer “control”. The Discover partnership would appear to offer NewCo the opportunity to define new rules, rates and incentives for consumers and merchants to participate.
The key to unlocking this new business model is not interchange, but creating a new market for mobile advertising, NewCo will be to mobile advertising what Google was to online. For example, rumors are NewCo is attempting to consolidate $1-5B+ in Madison Avenue marketing spend in first year (See consumer scenario here). The MNOs are brilliant! Their collaborative efforts here are a severe threat to both banks and established payment networks. Widespread adoption of NFC will revolutionize consumer payments and may result in the next boom cycle for silicone valley. Make no mistake, NewCo will be the leader of the next great ecosystem.