Mobile P2P Payments Continue to Evolve in the US

by guest on July 21, 2008

in Guest Post, Jim Salters, Writings

by Jim Salters

One of the “hot topics” in payments in the US market is the evolution of mobile payments – from “inevitable idea” to reality. Obopay and PayPal Mobile are both now over 2 years old – having been launched in the spring of 2006. TextPayMe, a mobile payment service that launched in late 2005, is now a part of Amazon’s payments offerings. How are these services evolving?

July 25, 2008 Update

Following my original posting of the following article on July 21, I learned about some errors that need to be corrected:

  • The instant bank transfer service that Obopay will discontinue on August 7,
    2008 was launched in Q4 2007, and was not part of the new functionality
    announced in March 2008.
  • In March 2008, Obopay introduced the ability for recipients to accept payments
    without opening an Obopay account as well as the ability to send and receive
    directly from a linked bank account. These features will continue to be
  • In the original article, I assumed Obopay was discontinuing both services,
    but later learned that Obopay was no longer extending credit when users were
    funding their transactions with a linked bank account. Senders can still
    send instant transfers, but must use a credit/debit card (and pay the normal
    2.5% fee). DDA-based payments will require a delay for the funds to clear before they are received.
  • I was also able to confirm that the Citi/Obopay trial set for this summer is
    proceeding according to plan and that an alternative instant transfer capability
    is in the works to enable instant transfers from Citi accounts (and
    eventually to other bank accounts as well).

My sincere thanks to my readers who provided me with these clarifications.

July 21, 2008

Last week, Obopay informed registered users about upcoming changes to its Terms and Conditions. Effective August 7, 2008, fees for sending a payment using Obopay will rise from US$0.10 to US$0.25, and Obopay will discontinue its “instant bank transfer” service. The “instant bank transfer” service was launched four months ago and was intended to “make it easier than ever for any bank customer to conveniently send and receive payments from their mobile phones.”
The instant transfers were intended to provide benefits to both senders and recipients.

To send money, Obopay users have traditionally been required to conduct two transactions: first they had to load their Obopay account, which is a stored value account typically funded with credit/debit cards (for a fee) or from a DDA account through ACH; then they could send money from their Obopay account. This two step process is cumbersome, and requires monitoring two balances and conducting manual “loads” when insufficient funds are already loaded into the Obopay account. And for recipients of Obopay payments, the instant transfer service eliminated the requirement that recipients sign up for an Obopay account. In theory, recipients would be more likely to accept payments through Obopay because they could route them to their DDA account and not have to open a separate Obopay stored value account.

The “instant bank transfer” capability enabled Obopay to provide a mobile payment offering directly from a user’s DDA account. This enabled Obopay to match a capability PayPal has had for several years: if the funds aren’t already loaded into the PayPal account, PayPal will usually allow the transaction, and then debit the linked DDA account through ACH that night. As a result, users can think of their mobile payments as coming directly from their DDA. This subtle difference is very important in terms of usability and perceived value.

Citibank had piloted Obopay-based payments last year with the stored value model, and in April announced that it would conduct a trial of the integrated instant transfer-based service this summer. This latest trial would have enabled Obopay-based payments directly from Citibank DDA accounts. It not clear whether that trial will now take place, although Citibank has participated in two of four rounds of funding for Obopay.

What does this all mean? Here are two conclusions that I’ve drawn.

First, the instant transfer service may have increased the risk of the system overall. Critical to effectively offering instant transfers to senders is the ability to authorize those transactions based on funds availability. In the absence of a real-time authorization network like the payment card networks provide, Obopay (or anyone looking to authorize payments from DDA accounts through ACH) has to make an educated guess on whether funds will actually be there when they initiate an ACH after approving a transaction. Otherwise, you likely have to delay the transaction until you know “good funds” are available. Payments professionals will recognize the parallel here to the decoupled debit and ACH-based cards offered by Tempo Payments, Capital One, and retailers like Safeway, Target, and Nordstom. This authorization capability is not easy to build. PayPal, for example, often requires a credit card as backup, in case the ACH transfer “bounces”.

This increased risk on the sender side may have contributed to the termination of Obopay’s instant transfer service. It is also possible that, on the recipient side, the elimination of the due diligence required to open an Obopay account enabled more fraudulent payments. This also could have contributed to the decision to end instant transfers. It’s possible that the expected increase in adoption didn’t materialize, while the risks increased significantly.

Secondly, the price increase and the end of the instant transfer service could be an indication that demand for mobile P2P payments in the US is still relatively weak, although it is still early and there are still niches of users who will be willing to pay more. Obopay also recently announced a deal with MasterCard to provide P2P payments to and from MasterCard accounts. These card-based payments might not suffer from the authorization risks associated with DDA accounts, and could result in faster adoption given the association with the MasterCard brand and existing credit, debit, and prepaid accounts. In addition to the MasterCard deal, mobile point-of-sale payments (e.g. NFC) might eventually increase demand for mobile P2P as consumers become more familiar and comfortable with handling payments from their phones.

Beyond domestic P2P, international remittances might be the first service to generate meaningful revenue for mobile P2P payment providers, especially in developed countries like the US given the higher fees and dearth of options. Such services could target both banked and un/under-banked here, and include a capability on the recipient side to easily withdraw or access their funds. Obopay’s efforts in India could be an indication of the direction they’ll take into other markets: develop a domestic capability first, and then enable international remittances between users in different markets. Tie-ins with global card brands like MasterCard could make that much easier to accomplish.

While we are still bullish overall on the prospects for mobile banking and payments, it is important to understand that mobile banking and mobile payments are wholly different animals. Mobile banking is growing here in the US at a healthy clip. But mobile payments, where there are at least three component businesses that may or may not prove to be profitable and useful for consumers, remains unclear even though it’s thought to be inevitable. Mobile P2P appears to not be growing as fast as some had predicted – but it is still early and deals like Obopay-MasterCard could bring new awareness, trust, and perceived value by consumers as they are able to use their existing card-based accounts.

With most mobile payments traction thus far occurring in emerging economies where mobile is the first option, international remittances built between domestic markets of users could prove to be much more successful for Obopay, PayPal, and others.

It’s still early days for mobile payments in the US. I continue to watch for the winning strategies given how the US market is evolving.

Agree? Disagree? Comments?

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