I had the great good fortune on Tuesday to sit in on the first day of the annual conference of the Institute for Money, Technology and Financial Inclusion. IMTFI is housed at U.C. Irvine and led by anthropologist Bill Maurer. The mission is to support research on money and technology among the world’s poorest people: those who live on less than $1 per day. The Institute is funded by the Bill and Melinda Gates Foundation through their Financial Services for the Poor program.

IMTFI is building a network of researchers, often from smaller universities in the developing countries, who are doing a wide range of projects. It won’t surprise anyone to hear that a lot of the research revolves around the use of mobile phones for financial services. Mobile wallets are, in a variety of different configurations, providing access to bank account-like features (savings, transfers) to previously unbanked people. These wallets are sometimes being offered directly by carriers, by carrier-bank JVs, by other non-banks and (in a few cases) by banks themselves. The poster child of this world is the M-PESA product offered by carrier Safaricom in Kenya.

Mobile wallets are springing up all over – literally it seems as if a mobile wallet scheme is either in the market or in some stage of planning in every country. It was fascinating to talk to researchers who were looking into a variety of cultural, economic, regulatory, and technical challenges with these wallets.

Being exposed to the sheer volume of activity in mobile wallets in the developing world made me think more about cross-border remittances and the role these wallets will play in this sector of the payments industry. I think the answer, over the long term, has a lot to do with the growing use of a “decoupled” payments model.

Decoupled Defined

At Glenbrook, we’ve been talking and writing for some time about the “decoupled” model in the payments industry. We’ve used the term to mean a situation where a payment provider does two payments transactions (one between the payer and itself, another between the payee and itself) instead of facilitating a single, “end to end” transaction.

Consider, as an example, a check written from a consumer to a biller – that’s an “end to end” (not decoupled) transaction. If the same consumer goes to their online bank service, the bank does one transaction (a book transfer) to take money out of the consumer’s account and credit its own with itself. The bank then does a second transaction (either an ACH or a check) with the biller: the consumer is not a party to this second transaction.

Although it seems like this two-transaction model would be more complicated or costly, in fact it turns out that the two-transaction model offers the provider (the bank in this case) a lot of flexibility. It can use different systems for the two transactions; it can vary timing to manage risk; it can aggregate one side of transaction but not the other. It’s a great model. PayPal uses this model; so does Western Union; so does Fiserv’s ZashPay (and most P2P schemes in the market).

Cross-Border Decoupled

So why am I talking about decoupled payments transactions in connection with cross-border remittances? Because I think a version of this concept will work very well applied to these payments. Cross-border remittances are mostly migrant workers sending money home. The flows are talked about in terms of “corridors” – as any sender of money is normally only sending money to one person, in one country. The send-country/receive-country pair is the corridor. Historically, cross-border payments services targeting these corridors needed to solve the whole problem – collecting money from the sender and getting money to the receiver. They did this, again historically, through a complicated set of agent relationships and/or deals with local banks or networks.

These transactions were generally executed on a decoupled basis (you can argue, in fact, that all cross-border transactions are handled on a decoupled basis). But what I anticipate is that going forward, the actual business relationships will increasingly be decoupled as well.
Imagine you are starting a payments service in a developed country to help migrant workers send money home to India. You need to invest in market outreach to find the workers and figure out the ways you are going to enable them to fund their transactions. But rather than needing to invest in an agent network in India, you can simply negotiate a deal with the Indian mobile wallet provider(s) that are serving the Indian market, and deliver the transactions into that wallet. It will take time, of course, to work out the business structure of these deals (who pays whom? who does the FX?) but operationally, it should work really, really, easily. Furthermore (and I’m going out on a limb here) I’d say that over time, regulators should embrace this approach, as it should reduce risk and cost to the consumers on both sides. Of course, there will need to be some know-your-customer checking (on both sides) to ensure that schemes aren’t being hijacked for money laundering or other nefarious purposes. But the good thing about the cross-border remittance market is that it is repetitive, so once the first transaction has cleared, subsequent ones should be easier.

The “decoupled business relationship” means that the receiving customer doesn’t have to know, or be involved with, the service the sender is using – and vice versa. It should just work! Long term, it may even alter the need for scale in this business – for example, a small, non-profit community group, serving migrant workers in a developed country, could, in theory, play in this game – or (perhaps more realistically) be a front-end for a larger bank or payments services provider, who negotiates the deals with the receive-side wallets.

It is interesting to reflect that it may be the activity in the developing world that spurs the developed world payments model to evolve. What do you think? Share your comments below!

I’ve been thinking a lot about the opportunities around helping micro merchants accept electronic payments. You know, your basic nanny/gardner/hot dog vendor/flea market vendor scenario.

There are two competing emerging-payments approaches to this market. One is mobile card acceptance, as evidenced by Square, Intuit GoPayment, and many others. In this model, which “rides the card rails”, the merchant pays a discount fee, some portion of which stays with the acquirer, and some portion of which finds its way back to the card issuer through the mechanism of interchange.

The other approach is an electronic P2P payment, as evidenced by products such as Fiserv’s ZashPay and the clearXchange consortium (being formed by Wells Fargo, JPMorgan Chase, and Bank of America). In these examples, the two banks involved set their own prices to end customers – but there is no interchange mechanism to create, effectively, a minimum price to the receiving merchant. The odds are that many banks will not charge the receiving micro merchant for posting the transaction into their account – rather, it will be incorporated into the receiving merchant’s checking account “bundle”. (This is the way I expect consumers receiving this type of P2P payment to be treated.)

There is a third, hybrid model– represented by PayPal, American Express Serve, and a number of others. PayPal provides P2P payments both directly to end users and as a service to enable banks (and others, such as Discover) to do the same. PayPal, as always, has a unique angle to this. In their own core business, they are very good at identifying when a P2P transaction is to split a dinner tab or pay for a purchase – and then ensuring that fees are paid on the purchase transaction. Presumably (but I’m not sure on this) a similar tracking would be used when the PayPal capabilities are sold to bank partners to support P2P payments. I would assume that Serve will take their product in a similar direction. Of course, from the micro merchant’s perspective, this then becomes just another flavor of the card acceptance model.

I think the big question is whether or not the P2P model will eventually trump the card payment model. After all, the hot dog vendor would clearly prefer to pay nothing rather than a merchant discount fee. Or will the two models develop in tandem? Will some kind of service evolve (perhaps offered by Fiserv or clearXchange) to help banks using this model identify receivers as vendors – and enable banks to charge them? If not, it seems like money is being “left on the table”, as the expression goes.

What do you think? I’d welcome your comments.

I want to be able to use my phone to tap a tag on a piece of merchandise at a store… and know that the item will be delivered to my home, and my card on file at the merchant be charged. I was in Macy’s yesterday, looking at bath mats – the line was too long, so I walked away. But I would have tapped….

And I know, this is what Amazon and others enable if you scan the barcode. But why can’t I buy it from the merchant whose store I am in?

NACHA, the ACH rule-making body that has often seemed like a rabbit among the lions, has stepped out aggressively with a request for comment on a proposed “Same Day ACH” service.

As a long time admirer of the U.K.’s “Faster Payment” system (roughly analogous), I am delighted to see the prospect of a similar service arrive on this side of the ocean. The service would allow originating banks to submit either debits or credits (with some dollar limitations) and, significantly, require receiving banks to participate. This makes it a home run, especially in comparison to the Fed’s “Same Day ACH” pilot, which did not require receiving bank participation.

The U.S. banking industry is unique in the world in its lack of concentration – our rough estimates show that the big three banks (BofA, JPMorgan Chase, Wells Fargo) account for only about a quarter of combined bank and credit union deposits. The only way in which all banks can participate in a new payment product, therefore, is if a 3rd party sets rules which they have to follow – getting banks to “opt in” is a non-starter. (In the U.K., this is actually how Faster Payments works – but they have many, many fewer banks.)

The service would operate along side the traditional next day ACH service – it would most probably be packaged as a premium service for originators. It would be extremely useful for bill payment and corporate trade payments. With some productization, interesting plays in eCommerce payments (some variant of SVP?) and P2P payments might be possible. It is unlikely to change how the bulk ACH payroll and preauthorized debit programs work.

There is nothing not to like about this proposal. Faster payments, less risk, happier customers – and the potential for originating banks to charge fees to originating customers. Ok, so some smaller banks are going to grouse about the cost of complying with the required receive-side. But the more imaginative of them will see the potential to offer new products to local billers and corporates. And I suppose the largest banks may worry that this dilutes their big-bank advantage (and direct routing arrangements) – but I hope they won’t oppose it.

Nice job, NACHA! Let’s hope the comments phase is successful.

I’ve been inundated with messages and calls from friends in the industry – including many Payments Boot Camp alumni – asking for an opinion on the significance of clearXchange, the P2P service announced recently by a collaboration of Wells Fargo, BofA, and JPMorgan Chase.

I spoke on Friday with Mike Kennedy, head of Wells Fargo’s Enterprise Payments Strategy group, and the chairman of the clearXchange board.

So What Is clearXchange?

Using what is clearly a well-practiced metaphor, Kennedy said that clearXchange would be the “air traffic controller” for the banks.  One bank’s customer will use online or mobile banking to send a payment to another bank’s customer – and they will only need to know the recipient’s email address or mobile phone number. The clearXchange service will receive the instruction from the sending bank and look up the phone number or email address in its database.

It then does one of two things:  if the phone number or email address is already registered with clearXchange, it facilitates a payment transaction between the two banks, to transfer funds from the sender’s account to the receiver’s.  If the phone number of email address is not yet registered, the recipient gets a message, essentially saying “you’ve got money”, and instructing them on how to arrange for a deposit of the funds into their account.

The exact transaction flows and mechanics are not yet disclosed, but there are two important points.  One is that the financial transaction is between the two banks – clearXchange is not a financial participant.  The other is that it is an ACH transaction – the system which virtually all U.S. depository financial institutions participate in.  Given clearXchange’s stated intention of expanding the service to include other financial institutions, this seems to be a shrewd move.

My overall reaction?  “It’s about time”.

Banks in the U.S. have a powerful utility infrastructure in the ACH system – which they own and control.  Up until now, they have allowed third parties to use the system to effect P2P transactions – either as service providers to the banks themselves (Fiserv’s ZashPay, CashEdge’s Popmoney) or as competitors to the banks (PayPal).  All of these other services have used a model I think of as “dual ACH”:  an ACH debit transaction by which the service provider “pulls” money from the sender’s account, accompanied by an ACH credit transaction which “pushes” money to the receiver’s account. The service provider in the middle manages the risks (primarily of NSF in the sender’s account, but also fraud).  This dual structure is clumsy in comparison to the straightforward, “end to end” transaction which will occur with clearXchange.  (Note: some of these services also allow other funding sources, such as credit or debit cards.)

Why has there been so much delay in developing something like clearXchange?  After all, the Canadian banks introduced this more than five years ago (with Interac Online), and the ACH capability has been there basically forever.  I think the answer is a combination of previous lack of motivation (domestic P2P has a notorious “no business case” problem; neither senders nor receivers want to pay a transaction fee) combined by a reluctance among the large banks to cooperate with their competitors.  What’s changed?  I’d guess it is a newly awakened fear of nonbank competitors -  PayPal, keep in mind, registered more than 1 million downloads of their new iPhone App in the first three weeks after its release in April 2010.  The ease with which mobile consumers can use these apps was no doubt a contributing factor as well.

My interest in talking to Kennedy was twofold.  First, I wanted to understand the role of the intermediary company itself.  As Kennedy explained, it’s important to note that clearXchange is not a participant in the financial flow – that process is directly between the banks – thus the air-traffic-controller metaphor.  I asked about interbank compensation (interchange, anyone?).  Kennedy said that clearXchange does not, of course, specify the charges that either bank may (or may not) assess their customers.  Each bank will pay clearXchange a transaction fee, but clearXchange will not specify any bank-to-bank, interchange-like compensation in its rules.  “This is a different model” than a card network, Kennedy said.  However, like a card network, clearXchange will have rules that participating banks must comply with. I was curious about the situation in which an unregistered recipient of funds doesn’t respond to the “you’ve got money” message for a week or two.  Are the funds still secured from the sender’s account, and if so, how?  “We’re not disclosing that at this point”, Kennedy said.

What’s Next?

My second interest was in how the service might be extended in the future.  I’m particularly interested in the use of a service like this for payments to micro-businesses.  Both CashEdge and Fiserv are promoting their services as a good way to pay the nanny/gardener/flea market seller/Craigslist seller.  With no network interchange built into any of these services, it seems unlikely that the recipient of funds in these situations would pay anything like a merchant discount fee:  it is far more likely that the recipient would pay nothing, or perhaps a simple deposit transaction fee to their bank.  This positions all of these services as directly competitive with the micro-merchant card acceptance services such as Square.

Think about it:  if you are a hot dog vendor on a New York City street corner, would you rather get a clearXchange transaction for free, or a card swipe for 2.75%?  Kennedy was clear in saying that the banks participating in clearXchange were firmly focused on the P2P use case to start with.   I got the same answer when I asked about connecting a sender in a clearXchange bank to a recipient participating in a P2P scheme in another country.

So I didn’t bother to ask the biggest question.  If this service really gets rolling, why can’t I use it at the point of sale to make payment to a merchant?  Especially if I’m a habitual debit card user – that is, someone who wants to pay out of “ready funds”?  That possibility, by the way, is particularly intriguing if the Fed’s “same day ACH” program takes off and gets decent adoption by the banks.

Bankers Taking Action

There are also interesting similar developments around the world.  Glenbrook partner Scott Loftesness noted the parallels to India, where the Reserve Bank of India is taking aggressive steps to ensure that banks stay central to payments:  they are supporting the bank-provided P2P Interbank Mobile Payment Service.  In the U.K., bankers have collaborated on the development of the bank-provided “Faster Payments” service, used primarily for bill payment and purchases.

As a former banker, it does my heart good to see banks stepping up the plate to take control and ownership of these types of payments.  This has been a big week for news in the payments industry – with the Google Wallet making a big, loud splash.  It’s nice to see banks using the power of their collaborative action to demonstrate that innovation can come from the bank side of the payments world as well.

Glenbrook’s Carol Coye Benson, Erin McCune, and Bryan Derman are teaching one of our Payments Boot Camps in New York City near Times Square today.

Just out the window we spy this:

Glenbrook Partners Erin McCune and Carol Coye Benson are on a mission to discover if the long-awaited  “tipping point” in B2B payments, signaling a world in which electronic payments are the norm, has finally arrived.  In pursuit of this, we’ll be interviewing solution providers over the coming months – let us know if you’d like to talk to us.  Interested in the B2B payments problem? Read why we think the tipping point may be now, and see our target list of company interview targets.  And look at  “The Problem with B2B” to learn our thoughts on the myths – and realities – of why progress has been slow.

Last week we asked readers to help us capture a snapshot of U.S. market contactless/RFID terminalization. We were pleased to get 43 brave souls to respond.

Here are the (admittedly anything but scientific) results:

We also asked respondents to identify themselves by role. Not surprisingly, the average optimism was higher among POS vendors and card networks than among merchant acquirers/ISOs. But merchants themselves were relatively upbeat:

Please share your comments below.

The dramatic vote on the Durbin amendment is causing panic, again, among retail bankers – who were last shocked by the Fed’s overdraft ruling.  I wrote about that in November (Watch Out! Big Changes in Retail Bank Pricing Are Coming).

I think the underlying problem that banks are dealing with is that too much of their retail customer revenue is hidden – that is, their customers don’t know they are paying it.  It seems to me that you really don’t have a customer unless the customer is making a conscious decision to pay you.  Otherwise, you have some other kind of business – sort of like a trading business.  There’s nothing wrong with that as a business – the problem is that if you fool yourself that your customer is “buying” your business, then your management framework is going to get seriously out of line.

You can make an argument that retail bank customers do understand that they are paying for bank services – and I buy this, kinda, when it comes to the value of the balances in the account.  After all, one of the problems that retail bankers have is that customers already think they are paying with their balances (“they’re making money off me somehow”) and therefore don’t need to pay additional fees.

But there is no way that a customer believes that by using their debit card at Shop ‘N Cart they are compensating their banker for the bank account services they get.  So if someone takes that revenue away from the banker (or severely limits it – the likely impact of the Durbin amendment, if enacted), no customer is going to think “OK, that means I’ll have to pay more in fees somewhere”.  Instead, the customer is going to get very angry at the bank.

Retail banks are very customer-centric entities.  They have squads of marketing people surveying customer satisfaction and designing customer-attractive products.  They do care.  They just need to get brave enough to build a business based on getting customers to pay for what they value.