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.

Related articles:

1. Specifications Lead the Way for Contactless Payments
2. Remote Deposit Capture and the Electronic Draft Capture POS Terminal
3. Your Views on Contactless POS Deployments in the USA?

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.

Related articles:

1. The End of Interchange?
2. Getting Real About Durbin
3. Watch Out! Big Changes in Retail Bank Pricing Are Coming

Editors note: Our colleague Carol Coye Benson recently experienced first hand the power of social payments and shares her experience in this post. To learn read more of Glenbrook’s thinking on social payments check out this post by Russ Jones.

I had a great online experience yesterday – the kind of thing that makes you realize how different our world is today! I found out, by reading my local newspaper (online, of course) that a filmmaker here is trying to do a documentary about two local piano teachers.  These men – incredibly – died of the very rare Creutzfeldt-Jacob disease within a few months of each other.  As it turns out, each of them had been a teacher to my now-fourteen-year-old-son.  I wanted to support the project, so I followed the link to the Kickstarter page.

I was able to log on to Kickstarter using my Facebook credentials,

And then fund my contribution using my Amazon payment capabilities.

Finally, I was able to easily send an email to the filmmaker – who (if she is able to complete funding for the film) will probably interview my son!

Now, if booking a trip online could just get this easy….

Related articles:

1. Glenbrook’s Model for Social Payments (A Work in Progress)
2. Forte Speaks! Exploring the Intersection of Social Networks and Payments (Nov 3-4 Boston)
3. Social Media in Financial Services

Are you planning to attend NACHA Payments 2010 in Seattle April 25-28? If so, let us know. Glenbrook will be there. Erin McCune and Russ Jones are speaking on the emerging world of social payments and the B2B cash payment challenges. Carol Coye Benson and Jay DeWitt will be meeting with vendors and industry leaders. We’d enjoy talking to you, too, so please reach out.

We’ll be presenting the following:

Web 2.0 & The Emergence of Social Payments
Monday, April 26th
8:00 a.m. – 9:00 a.m.

Social e-commerce and virtual currencies are the new frontier of payments. Person-to-person transfers, charity donations, and micropayments for virtual goods are exploding within social networks. In this session Glenbrook provides an overview of social networks: their reach, who participates, how consumers and businesses interact online, and the increasingly influential role the social web plays in guiding purchase decisions, both online and off. Speakers demonstrate how payments within Facebook, MySpace, and Twitter work today and outline probable future social payment scenarios. Finally, speakers examine the social payment business model: who’s profiting from this emerging payment domain? Presenters explain social shopping, affiliate networks, and the importance of developer networks, APIs and widgets, and transactional advertising and examine how established leaders in eCommerce like PayPal, Amazon, Apple, and Google are enabling social payments. Speakers identify the niche social and micropayment players, including PlaySpan, Jambool, Boku, Zong, Zoura and more.

Russ Jones, Partner, Glenbrook Partners
Erin McCune, Partner, Glenbrook Partners

How Coca-Cola Enterprises is Quenching the Thirst for Alternate B2B Payment Solutions
Monday, April 26th
4:30 p.m. – 5:30 p.m.

Enter the arcane world of B2B cash payments. Most direct-store-delivery (DSD) companies collect COD payment from a subset of their customers, typically small retailers and independent grocers. Literally billions of dollars in currency, coins, and checks are collected by DSD route drivers nationwide and have to be counted, reconciled, locally deposited, and centrally applied to open A/R balances. Coca-Cola Enterprises is in the midst of piloting “cashless delivery” alternatives for its 250,000 retail customer locations that currently pay COD. Learn from Glenbrook and Coca-Cola Enterprises how novel applications of consumer bill payment solutions and receivables products have the potential to completely eliminate payment at the time of delivery, increasing route efficiency, improving employee safety, accelerating cash availability, and reducing cash handling costs.

Erin McCune, Partner, Glenbrook Partners
Sharon Petrey, CTP, Corporate Director Treasury, Coca-Cola Enterprises, Inc.

Related articles:

1. Glenbrook’s Model for Social Payments (A Work in Progress)
2. When Worlds Collide [NACHA Payments 2010]
3. Glenbrook on Emerging Payments and Many Other Topics (Need a Speaker?)

Related articles:

1. The Check is in the Email? Electronic Payments Orders Could Be An Opportunity for Banks
2. Fiserv Will Fill the Gap as Fed Sunsets Paper Check Services
3. Check 21: Open Discussion Among Bankers, Billers, and Vendors (TAWPI Conference)

Green Dot’s IPO plans revealed that they are becoming a bank holding company. This is completely fascinating to me – and gives, I think, a peek at what may come for retail banking in the future.

At Glenbrook we’ve been talking, thinking, and writing for some time about two related issues. One is the problems retail banks have with their economic model: in a nutshell, that consumers expect “free checking,” and that too much of the bank’s revenue comes from either customer-invisible (interchange, NII) or customer-antagonistic (overdraft fee) sources. The other is the growth of the open-loop prepaid card industry, and the potential for these “banks on a card” to serve not only the unbanked, but the unhappily banked as well.

The first logical intersection of these two issues is to predict continued growth for prepaid cards as they exist today – issued by non-bank companies with a shadow “network bank” as a supplier. But Green Dot’s plans go in a different, and potentially much more interesting, direction. Simply put, a prepaid, open-loop card from “Green Dot Bank” could be not just an alternative to a bank account, but a new type of bank account – one with a completely different economic model from current retail banks, but with some of the positive attributes (trust, security, etc.) that consumers associate with banks.

What appeals to me is the potential to get away from this trap of consumer-invisible or consumer-antagonistic revenue sources. These cards are, after all, paid for by consumers – at least in their current incarnation. The skeptic in me, of course, says that over time, these new prepaid cards will simply become “normal” retail bank accounts- with the bank living off of overdraft fees, interchange and NII. We’ll have to wait and see!

Related articles:

1. Watch Out! Big Changes in Retail Bank Pricing Are Coming
2. Memo to Bankers: A Customer is Someone Who Pays You
3. No News is Bad News?

When it comes to mobile payments in the U.S. market, there’s a lot of talk and action around P2P and remote purchasing (bill to carrier models, etc.).  But the biggest potential is our huge POS (point of sale) market.  This market today is arguably the best-served payments market in the world, with extensive merchant terminalization and multiple cards in the hands of all banked and many non-banked consumers.

The assumed path forward for mobile at the POS has been NFC (near field communication) technology.  The technology is reasonably stable and has been extensively trialed around the world, with encouraging consumer reactions.  Despite this, there has been little in the way of commercial launches – and none in the U.S. market.  That may be about to change – rumors are rife in the industry that major mobile NFC/POS announcements are imminent  – possibly through a consortium of carriers working with a single or a group of card issuers.

If there is an NFC introduction, the players will have to tackle the “usual suspects” – the reasons that NFC has been stalled, to date, in the U.S. and in many markets around the world (see “Common Wisdom” inset below).

Common Wisdom: Why NFC at the POS Has Stalled

• An economic stand-off between card issuers and carriers over fees paid by issuers to carriers to enable secure storage of card data on phones: the fees could be one-time, recurring, or even include a portion of issuer’s card interchange.  Carriers understandably want value for access to the phone’s secure storage capabilities; issuers understandably are reluctant to cough up incremental and ongoing fees for a technology that is most probably replacing, not adding to, existing card swipe transaction volume
• The cost of adding NFC chips to phones, which currently don’t have them
• The cost of upgrading merchant terminals to support NFC.  (Terminals in the U.S. which currently support contactless cards can already support NFC, but this is mostly concentrated in the quick-serve markets such as convenience stores, drug stores, and fast food outlets.)
• A concern that consumers may not really want to use their phone to pay: the lackluster adoption of contactless cards is seen by some as indicative of this; others feel the comparison is irrelevant and cite the growing importance of phones in daily life and transactions for the consumer
• An overall feeling of “a technology that’s solving a problem that doesn’t exist” – a belief that consumers love cards and think they are convenient to use

Alternatives

I’ve been intrigued, recently, with a number of alternative approaches to mobile POS that are becoming increasingly visible.

Some of the alternatives are work-arounds to the carrier control of secure data on the phone – these approaches include the use of SD cards, USB sticks, and stickers (especially, “super-stickers” with secure and NFC chip outside the phone – and therefore outside of carrier control).

I’ve also been thinking a lot about what’s going on with payments in eCommerce, and how it may apply at the point of sale.  All merchants – eCommerce and POS merchants alike – have been struggling with the enormous costs and difficulties of PCI compliance in recent years.  In a nutshell, the problem is securing card data.  eCommerce payments providers, taking advantage of the remote environment, have been increasingly focusing on tokenization – a scheme which keeps card data away from a merchant entirely.

Why can’t this approach work for mobile payments?  Instead of going through huge contortions to store data securely on the phone – and possibly paying through the nose for it – why not simply avoid putting the card data on the phone?

Mocapay

One company that is taking this approach is Denver-based Mocapay.  I spoke recently with CEO Kevin Grieve and VP Product Doug Hurst.  Mocapay has a tokenization scheme that keeps the card data away from the merchant. Currently, they are using this for gift cards.  But the approach could easily be applied to open-loop payment schemes as well.  Here’s how it works:

1. A consumer registers a card with Mocapay online or with their mobile phone
2. The merchant signs up for Mocapay and installs software for its POS system. (According to Mocapay, the software, which is delivered on a software-as-a-service  model, is simple and easy for merchants to install.)
3. The consumer, when ready to pay, opens an application on the phone, chooses the card, and pushes a button “get payment code”.  (If the consumer has a simple phone, they do this with an SMS message.)
4. The Mocapay server immediately returns a code to the consumer’s phone.  The code is good for a limited amount of time (e.g. 20 minutes).  The code is six digits, in two blocks of three easy-to-remember numbers. (The scheme also supports 2d barcodes as an alternative, but Kevin seems to think this is an unnecessary complication – the short, grouped number code works so well you don’t need new barcode-reading hardware.)
5. The consumer then reads the code to the cashier, or shows the cashier the phone.  (Mocapay recounts that cashiers are often picking up the code from the phone laying on the counter – reading it upside down!)
6. The cashier enters the code, which is transmitted to Mocapay, which passes the transaction – now authenticated – into the payment processing stream, for authorization and clearing like any other payment card.

What works:  This is an incredibly simple scheme.  No one has to buy any new hardware (works with any phone, any terminal).  Card data is secure, as the merchant never sees it.

What will be debated:  Mocapay claims that the end-to-end card payment time (counting getting your card out, and swiping it) is tied with their approach in a no-signature environment, and that their approach is faster if signatures are required.  Common sense would tend to question this (cards are really fast) – but it is true that many people have their phones easily at hand, and their cards tucked away in wallets and purses.

Where this may go: the gift card scenario is intriguing, but the real payoff here is the potential to expand this to open loop cards and/or ACH payments.  Mocapay isn’t there yet, although they are clearly thinking about it.  The big question for open-loop cards isn’t whether or not it would work (it seems pretty clear that it could), but whether or not the card networks will support the technology – and grant the all-important “card present” status: if not, increased interchange rates would kill the approach with current merchants. Visa and MasterCard are pretty far down the road with NFC – it’s hard to read how they might evaluate this opportunity.  It is also interesting to note that the PIN debit networks have been increasingly flexible with rules lately – and this may be just the opportunity for them. (It is also useful to remember that a refusal by the card networks to grant “card present” status  was, famously, one of the problems the late Pay By Touch encountered.  Some speculated that the underlying reason that the card networks withheld the status was not a concern about security, but rather one about issuer and network branding.  The branding issue goes away in the Mocapay scenario – at least for smart phone and WAP users.)

Another consideration is that this scheme is easily extended to an eCommerce or unattended POS environment.  For eCommerce in the U.S. market, it would be interesting if this could be used to create “card-present” transactions – making use of the inherent authentication value of the phone.  Far simpler, it seems to me, than pushing the 3D Secure rock up the hill.  And it is a very neat trick to have the same system work in the various environments, rather than requiring consumers to keep track of different protocols for different places.  Again, this is, of course, nothing but idle speculation without the blessing of the networks.

Mocapay announced today that they have been issued a U.S. patent on the process.  If I were a card issuer, I’d be looking at this approach closely – and leaning on my card networks to do the same.   Remember – the first principle of process improvement is to eliminate tasks, rather than automate them.  Eliminating the storage of card data on hundreds of millions of hard-to-control devices seems like a concept worth considering.

Related articles:

1. The Phone is the Wallet: A Look at mFoundry
2. More Musings About Location-based Data and Payment Card Risk Management
3. Getting the Garden Ready: First Data and Mobile Payments at the Point of Sale

A few weeks ago, Glenbrook issued a challenge to Payments Views readers: “What Are the Best Ways for Banks to Replace Lost Overdraft Fee Income?“ Given how significant the financial hit will be (JPMorgan Chase estimates a 2010 impact of $500 million after-tax), we thought we’d at least get some good ideas. Well, we got very few ideas at all, and none from bankers! The no-news-from-banks could, of course, be because banks are keeping their well-laid plans a deep and dark secret. Or it could be …. there are just no good ideas?

What was interesting was that some of the ideas that did come in seem to be more likely to reduce, rather than increase bank revenue – or at least are challenging, to put it mildly.

The ideas that did come in included:

• A suggestion that all banks sell low-balance accounts to non-banks, who would convert them to open loop prepaid cards, and pay banks a revenue share
• A suggestion that banks aggressively pursue decoupled debit, in order to capture interchange revenue from the underlying account bank
• A suggest that banks begin charging fees for basic account services
• A suggestion that banks cross-sell with retailers and/or offer financial planning services
• A suggestion that banks allow contextual advertising within online banking, and charge customers fees if they don’t want to see the advertisements.

Thanks to the people who did contribute. But given the dearth of contributions, and (may I be frank?) the not-so-innovative ideas proposed, we’ve dropped the idea of ranking the ideas or publishing them in full. I did ask my fellow bank-watchers for comments:

Jim Bruene (Online Banking Report, Netbanker.com)

“Speaking from the experience of someone who’s first significant contribution to his employer’s bottom line in 1989 was increasing NSF/OD fees from $8 to $10 per item – here’s what I would recommend 20 years later:

• Take as many OD/NSF transactions as possible and move them to an OD credit line. Charge a small trans fee for each item (under $5 each) and a reasonable, but relatively high, rate of interest on the line of credit (APR in mid-to-high teens for good credit). You might even be able to charge an annual fee (under $35) for the OD line. While this only works for credit qualified customers, it puts the fee hit more back in the ATM-ish “convenience fee” rather than the $30+ penalty fee…an important distinction for holding on to the relationship.
• For those that can’t or won’t go with an OD credit line, drive them to a similarly-priced OD-protection “prepaid” account, perhaps starting them with an initial bonus for the first deposit.
• For the rest, use “value-based” OD pricing with a fee no more than 50% of the transaction value (25% would be better) with a minimum under $5 and a maximum no more than $50. Process items in chronological order.
• Finally, encourage everyone to sign up for alerts via multiple email, and especially text-message, low-balance alerts and transaction confirmations.

While this won’t replace the revenue from unlimited $35 OD/NSFs, those fee levels were never going to be sustainable.”

Steve Williams (Cornerstone Advisors, Gonzo Banker)

“I think most financial institutions are in the Petri dish phase of their ideas for replacing OD income. This issue is also illuminating the important “where do we truly add value” that financial institutions will be forced to answer in the decade ahead where payment innovations are bound to happen.

I think an important variable in the ultimate “opt in” percentage for POS/ATM overdraft will come down to price. Sure, most will opt out of $27 OD fees at the cash register, but they might opt into a program where the fee is $5. I think we will see the emergence of accepted micropayment OD structures that are more like ATM surcharging or overnight mail costs. Additionally, I think systems that track the value of retail customer relationships will grow more sophisticated. Retail banks will be adding certain behavioral based fees (e.g. bill pay fee if you don’t keep adequate balances) but they will create relationship packages to make sure “A” clients do not get ticked off.

Retail product strategy will continue to reward broader financial relationships and the use of cheaper electronic channels while attempting to levy fees on the “unbundlers” more heavily.”

And from me: (Carol Coye Benson – Glenbrook Partners, Payments News, Payments Views)

Banks should recognize – and take advantage – of the fact that consumers at a gut level think the bank is “making money on them somehow”. Rather than pretending that this isn’t the case, banks should be more transparent and more “deal-oriented” to the consumer. Some ideas under this umbrella would include:

• Offer (in the manner of wireless “hotspots”) prepaid packages of “tickets” for OD coverage – buy 10 for $5 each, for example.
• Offer multiple-day OD coverage to help consumers with tough times of the month: a two day pass up to $X for a fee of $Y; five day coverage for $Z, etc.
• Tie reduced overdraft fee rates to paper turn off for statements
• Offer “account analysis” on retail accounts – similar to what is done for corporate accounts – showing consumers exactly the value of their balances for the previous month, and relating this to fee schedules.

And finally – this situation reminds me – painfully – of what happened in the late 1970’s when corporations woke up to the value of the balances in their bank accounts. At the time, I was a lending officer for global multinationals at a top three bank. Our largest clients had historically left millions of dollars in interest free balances at the bank – as a rough form of compensation for all the many things (including payments services) the bank did for them. Once rates spiked, companies started pulling those free balances out – and never returned them. Believe me, there were many strategy tasks forces around replacing this revenue. But at the end of the day the lesson was: ”windfalls are nice, but when they go away, they’re gone!”

We’d still love to hear from any bankers on this topic! Post your views below.

Related articles:

1. Memo to Bankers: A Customer is Someone Who Pays You
2. Payments Views Challenge: What Are the Best Ways for Banks to Replace Lost Overdraft Fee Income?
3. Watch Out! Big Changes in Retail Bank Pricing Are Coming

For the last several months, Glenbrook’s Carol Coye Benson has been interviewing a number of companies involved in mobile payments in the U.S. and Canada. The companies included are Billing Revolution, Blaze Mobile, Bling Nation, Boku, CashEdge, First Data Corp., mFoundry, mPayy, Obopay, Payfone, Zong, and Zoompass.

To make it easy to access all of Carol’s analyses in a form that you can download, print out and take with you, we’ve created a PDF booklet titled “Musings about Mobile Payments 2009” that includes each of Carol’s commentaries. You can download a copy of the PDF e-Book for US$19.95. 

As always, Carol welcomes your comments and suggestions – either here on PaymentsViews.com or via email to her: carol@glenbrook.com. If you’d like to learn more, the new 2010 editions of our Glenbrook Payments Boot Camps include an expanded and updated focus on emerging payments – based on Carol’s on-going mobile payments research, new options now available for online payment for digital content, and the uses of ACH-based payments across both online ecommerce and physical POS domains.

Related articles:

1. Mobile Payments at the Point of Sale [ATM, Debit & Prepaid Forum 2009]
2. Payments Views 2009: Most Popular Posts and Recurring Themes
3. Latest research on mobile banking and payments

Bank income from debit card overdraft fees is variously estimated as $25 billion to $38 billion annually. The recently announced Federal Reserve Bank regulations requiring opt-in procedures will result in a gigantic hit to retail bank P&Ls, as we wrote about recently. JPMorgan Chase, for example, in a recent investor presentation, estimated the impact of their implementation of the new rules at $500MM after-tax.

So what’s a bank to do? Glenbrook is inviting its Payments News and Payments Views readers to submit their ideas.

Here are the requirements:

1. Keep it short! a paragraph would be nice
2. Explain what a bank would need to do and how it would capture revenue
3. Let us know who you are – but also tell us if you want a published piece to be signed either anonymously (“debitgirl”) or not (jdimon@jpmorganchase.com)
4. Get it to us by December 15th.

Payments Views will publish the top ideas. We’ve invited fellow bank-watchers Jim Breune of NetBanker and The Online Banking Report, and Steve Williams of Gonzo Banker and Cornerstone Advisors to help us rank the submissions. The criteria will include a) potential revenue impact b) feasibility (from “slam dunk” to “never gonna happen”) and c) innovation!

Have fun and let us know what your ideas are!

You can either complete the form below, or follow this link to complete the submission form.

Related articles:

1. Banks Still Have A Ways to Go in Addressing Small Biz Needs
2. No News is Bad News?
3. The New Banks