This is conference week for me! Today I’m sitting at Mobile Money Americas in Mexico City, with a fascinating group of people working on mobile wallets in countries throughout the region.

Of the 129 live mobile money projects worldwide (and let’s not get distracted, right now, by defining that…), 17 are live in the LAC region, with many more planned or in pilots.  There is a tremendous attitude of optimism here, and what appears to be a shared belief that these systems can, with proper regulatory support, provide real social good – helping in particular unbanked consumers to get access to ways of keeping, saving, and moving money securely.

There’s been lots of discussion about the factors that encourage success or create barriers to success on these projects – and many presentations showing “lessons learned” from the experience of African countries – which, in general, have more/longer established mobile money projects than their LAC counterparts.  Some of the issues being discussed include:

• Agent networks. What models work: direct models (controlled by the MFSP – mobile financial services provider), shared models, third party network models, models using the card network ISO approach.  Interesting questions about how to support the liquidity requirements of agents, as well as the physical questions of supporting the cash in/cash out currency requirements of the agents.
• Regulatory models.  Huge discussions and debates around how to let this market evolve while appropriately protecting consumers.  In general, LAC countries have had a more bank-centric regulatory model than have many African countries.  In some countries in Africa, MNO’s and their partners have been allowed to open mobile money wallets and other services, without being subject, for example, to the same account opening regulations that banks are.  In LAC, many of the regulators are taking a “if it quacks like a duck” approach, and requiring the involvement of banks (and their regulators) for the storage and movement of money.  Bank of Mexico (the central bank), as an example, requires that only banks or their agents open accounts that store and move money.  (So an MNO can have a prepaid airtime card for their consumer, but couldn’t, on their own, open a mobile money account – nor could they allow the airtime minutes to be used for the purchase of goods or services.)  But to encourage the growth of mobile money (Mexico has apparently about 90 million mobile subscribers and only about 30 million bank account holders), the Bank of Mexico has authored new regulation that allows registered bank agents (for example, a retail store) to accept deposits.  It has also, importantly, introduced tiered levels of KYC requirements, to allow low value accounts to be opened with lighter weight regulation.
• Additional services.  Most of the mobile money initiatives have been started as mechanisms for cash deposit and P2P transfers.  In some countries, these are expanding to incorporate micro-loans, micro-insurance, and micro-savings products.

  I’m particularly interested in the spread of these services to allow mobile wallet users to pay for goods and services at the point of sale.  There are vendors here (such as Verifone, with an “mWallet MFS POS Gateway product) that are talking about providing both small merchants (who may be mobile money agents who are also selling other goods and services) with the ability to accept mobile money transfers as a method of payment.  They are also helping existing card accepting merchants to accept the new forms of mobile payment.

  Accomplishing this, of course, requires not only the physical interconnection and gateway-ing, but also in some systems changes to rules and pricing for the mobile wallets.  In many countries, for example, a consumer pays a “cash in” fee to the agent when depositing money – it is highly unlikely that the same consumer would pay the same fee for the privilege of buying a loaf of bread.One of the intriguing aspects of this is that it is the opposite of what we are facing the developing world – where we are trying to see if there are reasons for consumers and merchants to move from a well-functioning card-based POS environment to a mobile-based one.

• Business models.  Lots of talk, and acknowledgement, of the fact that everyone needs some form of return, or reason to participate in mobile money.  But I am continually amazed at the over-simplification of “other people’s” business models – you will hear someone say “all banks want….” or “merchants just want….” or “the mobile carriers want….”, followed by a one-sentence description of their complete business model, in the speaker’s view.  The truth, IMHO, is that business motivations – and models – are often much more complex than this – and that a failure to understand these on a deeper level is often the problem with multi-party new product adoption.  (By the way, this rant is not specific to this conference – but to conversations about mobile payments in general!)

Altogether a worthwhile conference so far. The focus on regulation, infrastructure, and business models here is also a nice complement to the recent IMFTI (Institute for Money, Technology and Financial Inclusion) conference that I attended, where we heard a lot about the behavioral and cultural factors that drive – or inhibit – the adoption of mobile money services in the developing world.  And as one rep from U.S. AID here said, it’s heartening to see that sometimes there are innovations in the developing world that may lead to similar initiatives in the developed world.

As anticipated, and widely leaked, PayPal today announced PayPal Here, its mobile payments acceptance solution, at a private event in San Francisco. At a high-level it matches – and in some cases, exceeds – the features offered by Square and the other mobile POS vendors.

In context, this has been a big week for PayPal, which just days earlier revealed the specifics on its new digital wallet at the SWSX conference in Austin. We’ve previously written about PayPal’s Wallet Stratgy and how it relates to the POS, but it was nice to see things shift from mockup screens to real screens. While today’s announcement was largely directed towards merchants, I was surprised to see the linkages between PayPal Here and the new PayPal Digital Wallet. Maybe PayPal really does believe in this O2O phenomenon!

Here are the key points from today’s announcement that caught my eye followed by Glenbrook’s perspective.

Pricing and Funds Availability: The story here is simplicity. The merchant fee for PayPal Here transactions is 2.7%. Slightly lower than Square, and about the same as Intuit GoPayments. The big differences is access to funds. Just like online merchants, offline merchants are credited sales into their PayPal account in real-time as purchases complete. When a U.S. merchant signs up for PayPal Here they also get a PayPal debit card and can spend against balance right away (or go to an ATM for cash). PayPal is offering sellers a 1% rebate on these debit transactions, making the PayPal Here 2.7% fee effectively 1.7%.

Device: The PayPal Here dongle is shaped like a triangle, and has a “wing” that tilts down to slightly cover the front of the phone and stabilize the reader so that it doesn’t spin (picture below). The triangle shape also allows for a slight longer magstripe reader than the competing Square dongle, about the same as Intuit’s GoPayment device. They made such a fuss over the design – showcasing their designer, Yves Behar’s Fuseproject, and playing a video on the dongle design process –  that I couldn’t help thinking of Steve Jobs.

If the merchant forgets their triangle shaped dongle, he or she can use their phone to take a picture of the consumer’s credit card or key in the card number. The merchant will have to enter the CVV2 and zip code associated with the card (as it is now a card not present transaction).

Global Scale: At launch (“in about a month”) PayPal Here will be available in the U.S., Canada, Hong Kong, and Australia with other geographies – they mentioned UK and other unspecified European markets – to follow “very quickly.” As of today a select number of beta merchants (“a thousand or so”) are using it. PayPal emphasized its global reach and that it will be “aggressively” promoting PayPal Here and its localization features to its 100+ million active consumers worldwide (of which 17 million have downloaded the PayPal iPhone app).

More on PayPal Here in other geographies:

• Canada: www.paypal.ca/here
• Hong Kong: www.paypal.com.hk/here
• Australia: www.paypal.com.au/here

Payment Methods: PayPal emphasized that PayPal Here accepts all forms of payment: credit and debit cards (Visa, MasterCard, AmEx, Discover), PayPal, and checks. Checks are only supported in the U.S. (we’re so archaic) by taking a picture with your phone a la remote deposit; there is no fee to merchants to accept checks, but they may take up to 6 days to clear. The PayPal Here app will also allow the merchant to track cash payments, so that they have a comprehensive record of all their incoming revenue. For those that need the help, it will calculate the change due when paid via cash, just like a standard register solution.

Invoicing: Rather than accept payment on the spot, merchants can elect to create an invoice for goods or services delivered today but paid for later. The invoicing features are very similar to the online invoicing capabilities that PayPal already offers. At the demonstration PayPal’s Mobile VP David Marcus pretended to be Joe the Plumber and created a service invoice to install a dishwasher and fix a leaky pipe. He could elect to have the invoice due now, or in 5, 10, 20, or 30 days. Given all the work I do with large merchants on B2B transactions, I was particularly interested in the opportunity to use PayPal Here in a delivery context or for sales agents. To do so, the invoicing solution should be smart enough to support multiple agents at once, avoiding duplicate invoice numbers and synchronizing pricing and promotion data across sales reps.

Interface: The software (powered in part by Card.io) is intuitive. As announced earlier this week, for the first time in fourteen years PayPal is revamping its entire user interface (online and on your phone). The screens look very clean and intuitive. PayPal is featured prominently, as are cards and cash. By swiping with a finger, the merchant can select from what are anticipated to be less frequently used options for checks and invoicing. (The PayPal Here website appears to features older screen designs than were demo’d today. The ones we saw this morning look like the ones in this merchant video.)

Use cases: PayPal described a number of different use cases.

• In flea market, farmers market, craft fair, etc.  – all the places that we’ve come to expect micro merchants who up until recently haven’t accepted cards.
• At a retail POS using either an iPhone or Android handset. An iPad app will follow shortly, the folks at PayPal assured me.
• On site sales when plumbers, contractors, repair, sales agents, merchandisers, etc. visit consumer or business customer locations
• As an extension of online sales – when retailers that typically sell via the Internet have special promotions or events and want to sell in person

Reporting: All of the reporting capabilities inherent in an online PayPal merchant account are available to PayPal Here merchants. In fact, one of the key differentiators  that PayPal offers is that a merchant can use one solution, regardless of whether they are selling online or off, or both. The same reporting, the same list of available items to sell (whether goods or services), and the same pricing tables.

Localization: The PayPal Here merchant service is tied to the localization features in PayPal’s enhanced mobile app (just  made available today via iTunes) that allows consumers to find nearby merchants that accept PayPal and are offering promotions. The ability for small merchants to offer promotions was not emphasized today, but the ability to accept them is featured in the consumer facing promotion of the enhanced PayPal Wallet.

Not Just Mobile. The solution facilitates remote card acceptance, but what sets it apart is the ability to pay via your PayPal Wallet. So you can leave both your wallet and your mobile phone at home. To do this, the consumer has to make the merchant aware that they have entered the store by “checking in”– this is very similar to Square’s Card Case feature – and then they can pay without taking their phone out of their pocket or handbag. The sales clerk sees the consumer’s picture to aid in identification when there is more than one customer checked in at a time. The consumer can elect to automatically “check in” to up to ten merchants that they frequent regularly; that’s particularly nice for your morning coffee at the corner café and go-to burrito spot.

I confirmed that all of the recently announced PayPal Wallet features, like installment payments and the ability to switch from one funding source to another, will be available when the consumer elects to pay for a PayPal Here purchase with their PayPal account. This may not be relevant for payments to incidental transactions but could be relevant for larger service purchases (e.g. contractors, plumbers, etc.).

Feature comparison: During the presentation today they sized up PayPal vs. all the others mobile card acceptance solutions. The picture is pretty fuzzy, so here’s a chart:

Security: In addition to being PCI compliant, the PayPal Here solution brings PayPal’s considerable risk management capabilities to bear, protecting both merchants and consumers. There was heavy emphasis at the event on the familiarity and trust inherent in the PayPal brand.

Support: The app has a “shake for support” feature, connecting merchants to live customer service agents 24/7.

Merchant Reaction: They were doing demos at a cupcake shop next to the venue, Kara’s Cupcakes, and I had a chance to talk to the owner, Kara (she wasn’t officially available for interviews, but we got to chatting). She observed that the PayPal Here offering “is the first that makes sense.” When I probed, asking what she means when she says it makes sense, she said that the PayPal brand offers security and is well known for online transactions, so that using PayPal for mobile is the “logical next step” and therefore makes sense for consumers. She also emphasized the simplicity, security, and speed of the transactions. She is particularly keen to use PayPal Here for her fleet of mobile cupcake trucks and for curbside sales (today her sales clerks run back and forth from the store to the street for drive up customers that need an immediate sugar fix).

How to sign up?

Merchants: PayPal Here is live as of today with a limited number of beta merchants. Those that are interested in participating once the solution is available in general release can sign up here.

Consumers: Consumers that want to pay a participating beta merchant can do so now, using the newly refreshed PayPal iPhone app (available via iTunes as of today).

Glenbrook’s Take

One of PayPal’s true strengths is its global reach. But if you are a local merchant, PayPal’s International scale is irrelevant. You are more interested in streamlining your day to day processes, saving time, and earning more. But from a competitive stand point, it is a huge advantage over start ups like Square and it’s various mimics around the world who are building users and merchants on a market by market basis. Every payments start up claims that they are going to be the next PayPal. PayPal is already PayPal and the healthy revenue from PayPal’s existing business enables it to invest heavily in new initiatives and pay for a global support infrastructure.

Today PayPal announced that there have been 17 million downloads of its mobile app (double the number last summer). But the PayPal Wallet is not just a mobile feature, it’s an electronic wallet, for use online and off. There are 100+ million active PayPal consumer users. And I imagine that there will be a number of new users given the press they got this week on the new Wallet features. That’s significant scale – for comparison, last month TechCrunch reported that of the 1 million Square merchants, 40,000 accept Card Case (granted, that’s twice the number from November, just four months ago).

For occasional merchants PayPal’s ability to accept all forms of payment (card, checks, PayPal), the means to track cash, and generate invoices, too, means that you could feasibly use just PayPal to run your microbusiness. I think that this is a real advantage. Not having played around with the merchant reporting capabilities I can’t compare them against the slick Square analytics, or the ease of use that Freshbooks delivers. But given its recent emphasis on retooling its user interface, I trust PayPal is at least heading in the right direction. Now if PayPal allows the entrepreneur to export that data into a simple accounting tool for tax purposes then we’d really be in business (pardon the pun).

There was no mention today of PayPal X and whether developers will have access to the PayPal Here features in their own apps. It’s hard to imagine the clever and arcane use cases they might come up with. I would think that over time PayPal would want to allow their developer ecosystem to access PayPal Here features via API.

Today PayPal hinted at leaving your wallet and your phone behind. The pay without even your phone concept intrigues me. It intrigues me a lot more than waving or tapping my phone. I would love to stop at the market en route home from a jog and grab a couple things. But do I have to have my phone with me to “automatically” check in or does the limit to 10 regular locations where I am autochecking in mean that somehow my PayPal Digital wallet (as opposed to one on my phone) is linked to my favorite merchant(s) PayPal Here account? [I'm reaching out to find out.] Meanwhile, my beloved neighborhood grocer has a nice low grocery-specific Interchange from the networks, why would they want to pay 2.7% to PayPal? Or would it be 3.5% as a CNP transaction – even worse!

There is already a huge base of PayPal merchants, and it appears easy to link an existing PayPal merchant account to the PayPal Here dongle. No doubt PayPal will be promoting it heavily to its existing customer base as part of its online to offline strategy. But the dongle isn’t instantly available – PayPal mails it to merchants. Meanwhile, the Square dongle is can be picked up at retail (Target, Wal-Mart, Apple stores). There was no indication today whether PayPal is even considering a retail distribution model.

PayPal is running on all cylinders, announcing impressive stats and new features at a fast clip, despite the unexpected departure of its President back in January. The company is serious about its offline expansion and focused on exploiting the increasingly fuzzy distinction between shopping online and off. It feels like they’ve got some momentum and are executing against their vision. If I were Square I’d be feeling nervous. And if I were one of the ever increasing number of mobile wallet competitors I’d be feeling very, very nervous.

Learn more:

PayPal Here website
PayPal Here “How it works” video
PayPal Here merchant video
PayPal Here FAQ
Announcement on PayPal Blog

We recently sat down (virtually) with BOKU to learn more about how the company views the mobile payments market and where BOKU Accounts fits in the emerging mobile POS landscape. What follows is a summary of what we learned and our reaction to the their strategy and approach.

One of the reasons that the mobile payment market is fascinating is that you can look at five mobile payment companies and see five different unrelated payment opportunities. Often the only thing they share in common is their over-the-top zeal that the mobile device is going to change some things. Okay, maybe change everything.

One company, for example, might be doing a mobile P2P wallet, one a mobile bill pay solution. Another might be building a mobile POS wallet, another enabling consumers to bill purchases to their mobile account. Some are friends of the mobile operators, others are friends of the banks. Others want to do an end run around BOTH operators and banks. It’s a crazy market.

A week ago if you would have asked me about BOKU, I would have said they were one of five major companies in the United States providing carrier billing to merchants, or bill-to-mobile as it is called nowadays. The others are Zong, PaymentOne, BilltoMobile, and Payfone. If you haven’t been watching, a lot has changed in the bill-to-mobile space in the last 18 months. American Express took an equity position in Payfone, Zong was acquired by PayPal, and collectively all of the players have shifted to direct carrier billing, a lower-cost, more advanced form of bill-to-mobile.

Against this background, and, to some extent, out-of-the blue, BOKU announced that it was entering the mobile POS market with a product called BOKU Accounts. They see the market hyperventilating with excitement right now, but understand that NFC is still quite a ways from critical mass. BOKU believes the industry needs a non-NFC centric approach that combines the best of the mobile device and the best of the cloud. And because of who they are as a bill-to-mobile provider, they think mobile network operators (MNO’s) are in the best position to deliver mobile payments to the POS.

This last point is perhaps the most important as BOKU’s entire initiative is designed to deliver a turnkey white-label, mobile payments solution to MNOs all over the world. When deployed by one of BOKU’s carrier partners, BOKU Accounts is an MNO-branded solution, with an MNO-specific user experience, and an MNO-integrated dashboard. BOKU is very clear that the MNO owns the customer relationship, and their role is to act as the mobile payments enabler behind the scenes.

How BOKU Accounts Works

As the name implies, a BOKU Account is a prepaid account with multiple ways to get money in and multiple ways to get money out. To manage their BOKU Account, consumers can use a native app on an iOS or Android SmartPhone, or on any feature phone that has an HTML5 browser. It doesn’t matter, because the BOKU Account is in the cloud.

Funds can be added to a BOKU Account using a card on file, a direct debit against a bank account, or via any cash-in top-up capability that an MNO might have access to; so all funds on hand must be prepaid. But the account dashboard does provide the consumer with auto top-up control for when the prepaid balance falls too low.

For spending, there is a MasterCard-branded prepaid card attached to the account, as well as an NFC sticker that duplicates the same information on the card. The prepaid card gives the consumer the ability to buy in a retail setting or buy online. The NFC sticker is for retail merchants that are equipped for contactless card acceptance. BOKU envisions adding in-phone NFC support when that option makes sense. But for now, they are sidestepping NFC completely. Sound familiar?

Against this backdrop, BOKU has added transaction alerts, budgetary alerts, and a channel for merchants to deliver promotions and offers to consumers. Offers can be delivered ahead of purchase (“Take 10% off on purchases more than $25”) or after purchase (“Thanks! Make just three more lunch purchases and get a free sandwich”). The offer targeting also includes a geo-location capability so that merchants can reach out to consumers that are nearby.

Offer redemption is applied in the cloud, so to speak, against the consumer’s BOKU Account. Consumers see two transactions on their dashboard — one for the full purchase price and one for any discount that has been automatically applied.

BOKU Accounts Value Proposition

Besides BOKU, there are three other important stakeholders in the BOKU Accounts ecosystem. A quick summary of the benefits to each of them would be:

• Consumers
• Works with any phone, and provides the ability to pay anywhere (in store, in-app, online)
• Provides personalized offers to save money, with seamless redemption
• Provides real-time spending control and visibility (via alerts on balance and spending budgets)
• Merchants
• Ability to deliver targeted offers to nearby mobile customers
• No changes to current checkout flow or promotional strategy
• No new equipment (terminals, scanners, etc.) to purchase, no new training for sales clerks
• MNOs
• Complete turn-key mobile payments solution
• Additional source of revenue (advertising rev share, prepaid interchange rev share)
• Added value to retain existing subscribers, competitive differentiator to capture new subscribers

Banks are important enablers for account funding, but not vital stakeholders in the system. MasterCard is BOKU’s strategic partner for the prepaid account, prepaid card, and the contactless PayPass environment.

Glenbrook’s Take

One of the things we like about BOKU is that they are always looking for the shortest path between the problem and the solution. They’re not overly focused on “perfect”, when “good enough” will work. In this case, going around secure elements, trusted service managers, and the NFC infrastructure challenge makes a ton of sense when there are other off-the-shelf building blocks readily available.

While we were initially taken aback by this sudden emphasis on mobile POS payments, we don’t view it as a complete shift in mission. At its core, BOKU is a payments enabler for MNOs. With this new initiative they are still a payments enabler for MNOs. In fact, the existing business relationships they have with the major MNOs is perhaps their greatest strength.

We don’t expect the three major U.S. carriers who are invested in Isis (the NFC MNO payment platform) to jump into BOKU Accounts. However, if Isis fails to thrive (and especially if PayPal’s cloud wallet starts getting traction while Isis limps), one can imagine that this might be an easy fall-back strategy for a carrier – and one it could pursue to its own advantage, without collaboration with its competitors.

Outside of the U.S., it is easy to see where other MNOs may very well take a look at BOKU Accounts and see it as a clear build versus buy decision. The value proposition that BOKU has put together is directly aligned with what MNOs say they want to provide to consumers. BOKU indicated that they would be in trial with a large MNO and a national MNO consortium this summer, so we may learn something about adoption over the next couple of years.

How does BOKU Accounts compare to other mobile payment initiatives? While the BOKU approach is clearly not the “base case” NFC strategy like that being executed by Google and Isis, there are similarities. The most striking of these is the emphasis on offer targeting, delivery, and redemption. Google, Isis, and now BOKU all see mobile offers as a key driver of consumer and merchant adoption, as well as an important source of revenue.

This is consistent with how we see the market evolving and speaks to the importance of getting the offer system “right” in terms of multi-party adoption, data analytics, and offer targeting. If there is an Achilles heal buried in this pony for BOKU (how’s that for mixing metaphors!), it’s probably analytics and offer targeting. Its not obvious that BOKU has any existing capabilities in this area and basically sidestepped the question when we asked them about how they plan to handle offer targeting. But maybe this is their secret sauce and they didn’t want to say anything about it?

The big question in mobile payments, of course, is consumer adoption. How soon? How fast? The market trials around the world all seem to indicate that consumers are enthusiastic to embrace mobile payments, but there are many open questions about business models, infrastructure readiness, and critical mass. In the case of BOKU, we see both tail winds and head winds. The cloud model being used by BOKU, along with the attached card and NFC sticker, means consumers can start now, with the phone they have, without having to wait on a phone upgrade cycle or wait for merchants to deploy new terminals. We certainly like that.

We worry, however, about the economics around the funding model. BOKU, and by extension its MNO channel partners, is going to have to pay a lot of attention to funding mix. BOKU’s model will be in a fairly deep hole if it has a lot of transactions earning prepaid debit interchange (we assume Durbin exempt in the U.S.) but are funded in a significant way by CNP credit card load transactions. This is something that will have to be managed, and will vary, on a country to country basis. BOKU might argue that the adverting revenues from the delivery of mobile offers will offset any payment mix problems. That might be true, but it would be nice to hope that the payment transactions by themselves are break-even on aggregate.

We also worry that the general prepaid nature of the underlying BOKU Account may prove to be a drag on consumer adoption. Yes, there is an auto top-up feature. That’s a good start. But what is really needed, in our view, is a decoupled transaction model that provides what some refer to as pass-through funding without the explicit need to have prepaid funds sitting in yet another account. Prepaid is great for the unbanked and cash-oriented consumers, but it seems counter intuitive to have a payment card or bank account on file that is only used to reload a BOKU Account. Why not just pull from payment credentials on file when needed?

Our take on the competitive landscape may surprise you. One view is that, at a macro level, BOKU is competing to be the prepaid program manager for MNOs that want their own branded prepaid program with a strong mobile delivery arm. As the general market moves toward mobile, you could image other prepaid programs going down this same path.

Competitively, for example, we don’t see a lot of reason that Green Dot or NetSpend couldn’t offer this same sort of mobile package to their prepaid sponsors. This also speaks to the opportunity that BOKU might have. If it works with Vodafone, why not approach H&R Block, just as an example, to mobilize their prepaid program?

Stepping back, its also interesting to see MasterCard’s involvement with BOKU. BOKU Accounts seems consistent with MasterCard’s mobile payment strategy. Rather than focusing on a single wallet strategy for the POS — what might be called the MasterCard Wallet — MasterCard is working with Google, Isis, Telefónica, mFoundry, and now BOKU to seed a multitude of different mobile payment solutions.

Let a hundred flowers bloom, indeed.

On January 26, FIS announced a new mobile payments solution using technology provided by Paydiant. In its announcement, FIS said:

This cloud-based payment solution is adaptable and secure, requiring only downloadable applications for both consumers and retailers. Importantly, the mobile payments solution can be built into retailers’ and financial institutions’ existing mobile applications, preserving brand equity and strengthening customer loyalty.

With much of the card payments industry zigging toward an NFC-based solution securing payment card credentials on mobile handsets, FIS is zagging in a different direction with this new solution – one that doesn’t need to wait for NFC and Secure Element (SE) chips to be embedded in mobile phones. We might call this new cloud-centric approach “Payments Over the Top” – because, as you’ll see, with this new FIS/Paydiant approach card credentials never leave the cloud.

FIS is pursuing multiple strategies here – see their announcement earlier this week with mFoundry, the company who recently announced a global strategic partnership with MasterCard to deliver NFC-enabled mobile payments solutions to its customers.

Back to the notion of an “over the top” strategy. We spoke with Doug Brown, FIS Senior Vice President of Mobile Products, to learn more about this new approach to mobile payments.

There are a couple of difficult problems to be solved to enable mobile payments at physical POS locations – namely, where is the card credential stored, how is it accessed, and how it is exchanged with the merchant’s POS terminal?

Many in the industry advocate storing card credentials in mobile handsets – specifically, in Secure Elements in those handsets under the control of a trusted manager – and then using NFC (Near Field Communications) technology to communicate the card credential from the handset to the POS device through emulation of contactless cards. Participating merchants must have POS terminals capable of accepting an emulated contactless card – but, otherwise, the rest of the value chain (from merchant to acquirer to network to issuer) need not make any changes.

New infrastructure is required, however, on the issuing side where payment card issuers need to participate in a new mobile payments ecosystem in order to provision and manage their card credentials onto mobile handsets.

In the US, we’ve currently got two examples of this approach: Isis, the joint venture company formed in late 2010 by AT&T, T-Mobile and Verizon, and Google Wallet with partners including Citibank, MasterCard, First Data, and Sprint.

FIS is taking a different approach with its newly announced solution – one that avoids the need to store any payment card credentials in the consumer’s mobile device. Consumers are enabled to participate by installing a bank-provided mobile banking/payments application on their mobile handset. This mobile app doesn’t store any card data on the handset. Rather, it’s a mobile application that utilizes the mobile handset’s camera as the sensor that is used to initiate payment at POS. Neither an NFC chip or a Secure Element is necessary in the consumer’s mobile handset.

Similarly, participating merchants don’t need to install new POS terminals to support contactless acceptance. Merchants do, however, have to make software modifications to their POS systems to support generation of 2D bar codes – presented either on customer-facing screens or on printed receipts. The bar code, scanned by the consumer using her mobile payment app, is what links this particular purchase at this particular merchant to this consumer. Once scanned, it’s sent up to the cloud where the FIS server matches things up, accesses the consumer’s card credential and sends it securely on to the merchant’s acquirer. Authorization and settlement to the merchant proceeds normally from that point.

I think of the challenge of mobile at POS being the “last inch” problem. How does a mobile handset communicate with a merchant’s POS terminal to consummate a purchase transaction? With NFC, it’s done as we described above – riding the existing merchant/acquirer network rails. With cloud-based approaches, it flows differently – in this case from the merchant’s POS to the consumer’s mobile handset, into the cloud and back around, through the merchant’s acquirer, to settle and pay the merchant. Think of clockwise vs. counter-clockwise!

Using 2D bar codes with a mobile payments application also could enable other use cases. For example, in an eCommerce purchase, the online merchant could display a 2D bar code on the consumer’s computer screen – which could be scanned by the mobile app to complete payment just like at the physical POS. For bill payment applications, billers could print 2D bar codes on their paper statements – or, similarly, display them online and enable payment from consumer handsets.

While the FIS solution avoids the NFC-related hardware issues, it will need to overcome two-sided adoption challenges to reach any meaningful scale. Consumers will want to know that it’s worth their while to try to pay this way – which means that “enough” merchants have to be on-board. Consumers will also be asking “Why bother? What’s in this for me?” And, their banks will need to embed the solution in their mobile banking/payments application. But the NFC-based approaches face similar adoption challenges.

One intriguing opportunity with this “optical” over the top solution is that merchants could decide to adopt this irrespective of bank participation. A merchant, with a mobile app that embeds the FIS solution, could enable convenient payments at their POS locations – analogous to what Starbucks has been doing with it’s mobile payments application. This might enable merchant-specific adoption to occur without issuer participation.

Zigging and zagging we go – into the new world of mobile payments. FIS’ solution is yet another innovative solution to the “last inch” problem – going over the top and into the cloud to consummate payment.

What do you think? Share your thoughts in a comment 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?

Every year I try to attend what I think of as the PayPal Developers Conference. This year what used to be the PayPal X Innovate Conference was expanded to include eBay app development, Magento app development, and –– most importantly –– X.commerce app development. X.commerce is eBay’s new end-to-end, multi-channel commerce technology platform. While most of the conference was focused on the X.commerce platform, this is the first of two posts reflecting on what’s new with PayPal.

Over the last several quarters eBay has beating the drum about extending PayPal’s momentum in online payments to point of sale in the offline world. More recently, PayPal starting talking about wanting to help brick-and-mortar retailers engage with consumers through the entire purchase process — from customer acquisition, to in-store engagement, payments, and post-purchase retention. This vision is nicely pulled together in a video entitled “PayPal: Future of Shopping” that PayPal released about a month ago.

So, with the marketing campaign in full force, much of the industry was waiting to see what PayPal would say at last week’s X.Commerce Innovate Conference in San Francisco. First, the bad news. None of the shopping capabilities shown in the video were announced. Now, the good news. To show how these shopping concepts might work in everyday life, PayPal did assemble a Shopping Showcase demonstration and provided access to experts to answer questions from curious developers.

The Showcase was divided into a number of “vignettes” that illustrated different end-to-end use cases. Most involved some sort of front-end customer engagement utilizing a combination of shopping list, local product inventory, purchase incentives, loyalty points, gift card balances, etc. The vignettes showed how these components could be combined when the consumer is out running errands and shopping on a typical Saturday afternoon.

It’s hard to say which scenario would be best received in the market, but there is no question that PayPal is swinging for the fence, so to speak, and rethinking how shopping could be made easier for both buyers and sellers. We especially liked the way a shopping list could be built online and then shared with the merchant upon in-store check-in to match what the consumer wants with product availability and purchase incentives from the merchant.

Presumably, most of the merchandising capabilities would be drawn from the various acquisitions eBay and PayPal have made over the last 18 months –– companies like Milo, Where, etc. They might be accessed as their own app in a SmartPhone or integrated with the PayPal Mobile app. Besides the standard capabilities we’re familiar with today in the PayPal Mobile app, PayPal also imagines users would have a wallet capability that would hold the consumer’s payment methods, current offers, loyalty cards, gift cards, available points, purchase history, and digital receipts.

We’re always curious about who controls the wallet and where the payment data resides. In PayPal’s case, the wallet would be one of many functions inside the PayPal Mobile app. And the wallet in the app would act as the user interface to the consumer’s payment data in the cloud. This is in sharp contrast to the models being advocated by both Google and Isis, where the wallet is the app and the payment data is in the phone.

While all this merchandising stuff is interesting, let’s get to payments. PayPal envisions three different ways that a consumer might use PayPal for purchases in a brick-and-mortar setting.

Option #1 – PayPal Card

The PayPal Card is an unembossed, PIN-enabled payment card with the PayPal logo on the front and a magnetic stripe on the back. There is no visible customer name, card number, expiration date, or CVN on the outside of the card. The basic motion for the buyer would be to swipe the card, enter their PIN, and approve of the purchase amount. Essentially, the same motion of using a PIN debit card today. Funding would be drawn from the buyer’s default PayPal payment method.

Here’s how it would hypothetically work. When swiped at the point of sale, the merchant’s iPOS software would communicate over an Internet SSL connection with unannounced PayPal APIs to authenticate the buyer, access and apply relevant credits, capture the transaction, and generate a digital receipt. The digital receipt would be stored in the buyer’s PayPal account and a purchase alert sent to the buyer’s mobile device.

It’s not clear how consumers would get their PayPal card, but its easy to imagine existing PayPal users would simply ask for one on their PayPal dashboard so they could use their PayPal account at the POS. PayPal stressed a number of times that there is no hardware upgrade required by the merchant –– its simply a software integration. In addition, if the terminal has enough interactive capabilities, the merchant might want to ask the buyer if they want to apply relevant coupons or use loyalty points.

A point of clarification here — because this is a payment card used at the POS it’s natural to think there would be some underlying use made of the existing card industry infrastructure. But that’s not the case. The transaction does not use existing card industry “rails” nor is there necessarily a merchant acquirer involved.

Option #2 – Empty Hands

The second option, called “Empty Hands”, replaces the swipe of the PayPal Card with the terminal entry of a phone number and PIN. PayPal believes this is what a buyer would use when they don’t have a PayPal Card with them at the time of purchase. Essentially, they have empty hands. The basic motion would be to select PayPal as the payment option (Credit, Debit, PayPal), enter their registered phone number, enter their PIN, and approve the purchase amount. Like the PayPal Card option, funding would be drawn from the consumer’s default PayPal payment method.

Behind the scenes, the Empty Hands options would work very similar to the PayPal Card option. Instead of the PayPal Card being the “token” to locate the buyer’s PayPal account, it is the buyer’s phone number.

Option #3 – In-Aisle Purchase

With the third option, called an in-aisle purchase, the PayPal Mobile app is the exclusive interface for the purchase done in-store — and because PayPal fully controls the point of interaction on the mobile devices, it can provide a richer set of features. Instead of just accepting the default payment methods, the consumer might pre-select their preferred funding source for the purchase — and would be able to see and control how various offers and gift card balances might be applied to reduce the total “out the door” cost.

One innovation that PayPal imagines is being able to offer installment payments to qualified buyers. The buyer might, for example, want to break a $300 purchase into a series of three $100 installments transactions against the payment method of their choice. Installment payments are an especially interesting twist in the PayPal funding model because they potentially blur the traditional banking industry distinction between credit and debit.

Once the purchase is complete, the buyer receives their receipt electronically and can leave the store. In industry terminology, this is unassisted checkout so it will be up to the merchant how they want to verify payment prior to their customer leaving with the goods. For low-value goods or familiar customers it might just be the buyer flashing their phone receipt on the way out the store. Large ticket merchants might want to restrict in-aisle purchases to just goods that are picked up from the dock or delivered to their home.

Post Purchase Flexibility

Regardless of payment method, PayPal envisions offering certain qualified buyers the ability to adjust their funding methods after they leave the store, and potentially the option to set up installment payments for select purchases instead of one-time payments. This would have nothing to do with the merchant. They would get paid immediately in real-time for things they sell, irrespective of what funding method is used or when the funds are actually received by PayPal.

The capability, which PayPal believes will be unique in the industry, gives buyers the ability to sit down at the end of the day’s errands and adjust how they want to fund various purchases –– perhaps using their bank account for budgeted purchases, their credit card for discretionary purchases, and installment purchases for large ticket items. Not every buyer would qualify for installment payments, and the available installment options might not be the same. PayPal indicated, for example, that small ticket purchases might be available to be adjusted for 7 to 14 days, while larger ticket items might be adjustable up to 30 days.

How does this work? As indicated earlier, merchants get paid immediately by PayPal, meaning that purchases are credited in real-time to the merchant’s PayPal account. On the buyer side, PayPal would hold the default funding transactions for some amount of time, giving the buyer the chance to change which source they want to use. Simplistically, you might think of this as a user changing a pending ACH transaction to a pending credit card transaction before it is submitted into the appropriate network at the end of the day. But instead of submitting all transactions every night, as they do today, they would wait days or potentially weeks before they submit the transaction. In the case of installment payments, they are breaking down the single funding transaction into 3 or 6 equal installment transactions.

Sounds risky, but PayPal must obviously feel good about their ability to risk manage their customers and their transactions. And if you think about it, this model is not a lot different than their current model. Today, every merchant is funded immediately even though PayPal doesn’t collect the funds for several days, and is not guaranteed that funds will be available for bank-funded purchases.

Glenbrook’s Reaction

eBay has been very vocal about mobile starting to blur the distinction between online and offline, and that’s something we see very clearly as an important trend in the market. We think buyers and sellers don’t see the distinction today and, quite frankly, don’t care. Consumers just want to buy things and merchants just want to sell things.

It is interesting that PayPal is focused on optimizing the shopping experience, and not just the payment experience. As many have pointed out, it’s not just how long it takes to swipe your payment card at BestBuy –– it’s how long you have to wait in line for that privilege. Either way, you have to prove to the door police that you’ve paid for your purchase. So, the emphasis on the overall shopping experience instead of just the payments piece seems right.

Of course, the hard part about ramping up any sort of new payment paradigm is breaking open the chicken and egg problem. Here PayPal is working both sides of the hen house –– providing a rationale for merchants to adopt without the capital expense of redeploying terminals, and providing consumers with an incentive to use PayPal as a payment option at POS.

For merchants, the value proposition is clearly all about selling more –– auto alerting consumers when a store location a couple of blocks a way has an item in stock; auto matching shopping lists with inventory availability to apply coupons; in-aisle checkout to reduce line abandonment; 100 million active buyers with multiple payment methods on file, etc.

For consumers, the value proposition is all about convenience –– interactive access to coupons and credits; loyalty point management; digital receipt tracking and management; no-interest installment payments on large purchases; post-purchase reshuffling of payment methods to better manage daily or weekly budgeting; in-aisle purchasing to eliminate wait times to get out of the store; and on and on.

Will it work? Who knows? There are open questions on the actual products, real-world adoption challenges, strength of the value proposition, credibility of the initial partners, and overall economics and pricing. Still, PayPal’s vision is quite ambitious. If this whole thing doesn’t work out, it won’t because PayPal was thinking too small.

Got back this morning after a whirlwind two days in Austin for NACHA Payments 2011. I was in briefings or meetings nearly the whole time, so I barely attended break outs and skipped all of the general sessions, but here are my reflections based on my observations, various conversations on the exhibit floor, and my admittedly limited exposure to the official conference material.

Key Themes

• Mobile Mobile Mobile – No self-respecting payments industry event can ignore mobile. There were a number of sessions devoted to mobile banking and payments, often in conjunction with P2P transactions. Every bank is eager to develop its mobile play (feels a lot like the late 90s when everyone was trying to define their Internet strategy). Despite the largely consumer focus of much of the mobile conversations, there were a smattering of corporate applications – I heard rave reviews of Amy Johnson (Wells Fargo) and Laura Listwan (U.S. Bank)’s presentation on mobile for corporates.

• Security & Fraud – There seemed to be more anxiety over security. It’s hard to know whether it’s just an episodic uptick or a true increase in concern. Recent AFP research on account takeovers may also be fueling interest in fraud and security. And the email breach that has been making headlines (and resulting in a steady stream of contrite messages from name-brand companies admitting the breach in all of our inboxes throughout the week) may have contributed.

• Non-Banks – PayPal had a stronger presence than I recall at past NACHA conferences – they had panelists/presentations on mobile & P2P, global ACH for eCommerce. The Twitter stream was disproportionately PayPal-centric, but that shouldn’t be surprising as the techno-savvy attendees that were tweeting tend to be more focused on the non-bank payment schemes than the general conference population. There was a rumor that Facebook was present, although I can’t confirm it. This seemed to make a number of providers nervous (they were spreading the rumor).

• Regulation – There was curiously little (public) discussion of regulation – and the Durbin Amendment in particular.

• Corporate Advocacy – Wal-Mart and a number of other prominent corporates (many of them members of the AFP Payments Advisory Group) were on hand to present their hopes and desires for the future of ACH. I admire how these companies have collaborated to define their requirement for better payment processing and present them at as many events as possible. I suspect that all corporates will benefit from their persistence (eventually!). Specific changes that Wal-Mart would like to see from the ACH network include same-day ACH clearing (mandatory as opposed to opt-in), same day credits, mobile payments, and corporate eChecks (push ACH transactions).  Meanwhile Costco, Target, and Cox Enterprises shared concerns about check-to-ACH conversion of B2B checks (which fouls up existing fraud prevention methods that were designed for checks).

• Healthcare Payments – Healthcare payments are clearly the new hot industry vertical for payment providers – or at least NACHA thinks so. The NACHA conference organizers devoted an entire track to “Healthcare Opportunities” and the keynote speaker was Dr. Robert Bonar, CEO of Dell Children’s Medical Center to address “the intersection of healthcare and technology and the benefits administrative simplification – including payments changes – will have on healthcare providers, insurers, and patients.” (Although, from my perspective, automating a process that is systemically flawed may prove to be a foolhardy investment. There are so many non-technology issues contributing to dysfunction in healthcare, one has to wonder if there is any realistic hope of widespread adoption of the solutions discussed?)

• NACHA News – The latest NACHA stats were published in conjunction with the show. Here at Glenbrook, we haven’t had a chance to dig into them yet, but we’ll post something shortly.

My Take-Aways

Interoperability

This is my new payments mantra and it should be yours, too. International transactions, B2B remittance data, supplier networks and all kinds of other payment enablers depend on interoperability. I’ve been harping on this theme for a few years now (within the context of B2B payments) so I was heartened to see evidence of it gaining traction in a wide range of settings at NACHA.

The classic network effect is hard to achieve, and involves a lot of effort, good timing, and a fair dose of luck. Rather than focus on trying to get everyone to adopt your standard, or your solution, why not integrate with existing solutions in order to strengthen the over all ecosystem? If the result is more electronic transactions, fewer exceptions, and satisfied customers everyone benefits.

Legal Entity Identifiers

This wasn’t even on my radar (other aspects of the Dodd-Frank bill held my attention!). The concept has been floating around for nearly a decade, but the collapse of Lehman during the financial meltdown brought renewed interest and focus from regulators. Initially LEI will apply to trading activity, in order to help industry participants more easily monitor exposure against specific counterparties and regulators to determine whether any given firm poses systemic risk.

LEI will be assigned at the over all corporate entity level and also at subsidiary levels. Its usage will be standardized Internationally. My immediate thought was, never mind systemic risk, this is the perfect means to route B2B transactions across a myriad of financial systems and payment schemes worldwide!

I’ll be doing further research and share what I learn here on Payments Views. In the meantime, you can learn more about it here.

Global Payments

Recently, I’ve been spending a fair amount of time thinking about global payments [new Glenbrook research here], particularly B2B transactions as opposed to P2P remittances, and spent much of my time at the conference on this topic. I am particularly intrigued by ACH based cross-border transactions as an alternative to wires.

As we’ve covered previously, the Federal Reserve – in conjunction with the IPFA and NACHA – have been working toward ACH interoperability between the US ACH system and other low value, high volume payment systems around the world. These new ACH payments utilize the IAT format that was introduced after much consternation in September 2009. FedGlobal International ACH is not intended to replace wire transfers, but is meant to be an alternative to check payments for non-urgent, low dollar transactions to and from foreign countries. The Fed is partnering with Equens for transactions to/from Europe (SEPA) and with Arias for transactions to/from Latin America.

Volumes processed are modest thus far (there have been some implementation issues) but there is widespread curiosity and interest in how this will pan out. Personally I’ve vacillated between skepticism and enthusiasm, and am currently cautiously optimistic. We’ve got a briefing with the FedGlobal team coming up and will report back here with more details.

Various Odds & Ends

The exhibit hall was relatively small. Although all the big banks were in attendance, and a few had sponsored educational tracks, they didn’t have their usual big booths. Yet, compared to the past few years, when bank and corporate budgets were anemic, there seemed to be a number of substantive conversations going on. My completely anecdotal, informal poll of vendors indicated sales were on the upswing.

Supposedly there were 2400 attendees, but it didn’t feel like that many. At first I didn’t think that there were many corporates in attendance at all, but a number of them attended my presentation on Tuesday afternoon, so I guess they were just keeping a low profile.

I did some interviews for our “Have B2B payments reached the tipping point?” series here on Payments Views, so watch for those in the coming week or two.

And finally, I presented with Mark Brousseau of TAWPI-IAPP-IARP the on e-Invoicing conundrum. After years of investment and effort, there is still only limited supplier participation in EIPP schemes, much to the frustration of buyers. And a large proportion of invoices are still paper based, or only quasi-electronic (Fax, PDF via email) requiring further effort on the part of AP. In our presentation we offered our perspectives on the industry approach to the problem, and shared the results of our Buyer/AP research as well as preliminary results of the Supplier/AR survey that is in progress now. We had an engaged audience and some really good discussion during and immediately afterwards. If you are interested in a copy of the slides or just want to discuss e-Invoicing, let me know.

Sadly, I didn’t have a chance to explore much of Austin – a city I’ve been eager to visit. Just before the conference I was joking with one of the other analysts over Twitter whether any of the residual hipness from SxSW would rub off on Payments 2011 (of course it didn’t). Perhaps SxSW is the Austin event I should be attend next.

This week I’ve been in Amsterdam for Sibos – the annual international banking conference sponsored by SWIFT. (For those of you who aren’t familiar with SWIFT it is a consortium of worldwide banks that runs a global secure network connecting banks in over 200 countries. Interbank messages to support payments and brokerage trades all travel via SWIFT.) This was my first Sibos and I’m impressed. There were over 9000 attendees from 150 countries, 170 sessions and 175 speakers, including yours truly. The exhibit hall was filled with the most extravagant booths I’ve ever seen – more over-the-top than BAI during the late 90s. It was all very well organized although I can’t believe they didn’t have wifi widely available (it made the Twitter coverage somewhat spotty, but we did our best).

It will take me a few days to digest and synthesize Sibos 2010 but here are some of the key themes and links to some must-see videos:

Cautiously Optimistic

The mood was generally positive. From what I gather the last two conferences were dreadfully gloomy: ’08 was right in the midst of the crisis with executives arriving only to turn around and board return flights to head straight back to the office, and last year in Hong Kong was subdued as a result of belt-tightening, with everyone unsure whether they’d still have a job, plus a Typhoon on the first day! So this year, with things feeling relatively normal the mood was one of relief, with a tinge of optimism.

Don’t get me wrong – there is acute uncertainty in the banking industry. But I was struck by how self-aware and open delegates and speakers were. Regulation, business models, trust in banks and bankers, profitability and even the relevance of the industry were openly questioned and debated.

Globalization (and Localization)

This event underscores the fact that payments are inherently local. Despite the reach of multinational banks, financial technology providers, and collaborative payment networks, most countries rely on domestic payment schemes for the vast majority of transactions. SWIFT was formed as a means to increase the efficiency of the correspondent banking relationships that all banks rely on to support their customers cross-border needs. Yes, SEPA will change things (at least in Europe) but it’s going to take awhile. The most often repeated (and often mispronounced!) word of the week was “interoperability” — recognizing that if we can’t all use the exact same standards, we can at least find ways to translate from one format to another in order to pass transactions and conduct business globally.

As large US and European banks seek continued growth, despite sluggish recovery at home, they turn to emerging markets such as India and China. (The Chinese bank pavilions on the exhibit floor were the largest of all as the Chinese banks demonstrated their importance.) There was a promising panel discussion on banking in India and China with really impressive participants, but sadly three quarters of the session was taken up by prepared introductory remarks and what little debate there was sounded very scripted. I was disappointed. An earlier session, featuring Om Prakash Bhatt, Chairman of the State Bank of india, highlighted the contrast between the developed and developing world, as he described that the biggest challenge facing Indian banks is how to manage rampant growth.

The recently published World Payments Report 2010 demonstrates the resilience of the payments industry, despite the economic crisis, but also underscores regional differences in payment preferences. Growth is strongest in emerging markets — such as China (up 29%), South Africa (up 25%) and Russia (up 66%) — although admittedly from a low base. I wasn’t surprised to hear Bertrand Lavayssiere of Capgemini observe that one of the primary drivers of increased adoption of electronic payment is eCommerce. At Glenbrook we’ve had a deluge of requests from clients wanting to understand payments in emerging markets. Often we advise those clients that they will have to rely on non-bank partners to deliver domestic payment assistance, particularly when it comes to e-commerce in markets where cards are much less popular and people rely on eWallets, local debit card schemes, and even cash.

Regulation

The uncertainty regarding regulation was one of the most dominant themes at the conference. With Sibos in Amsterdam this year SEPA was on the forefront, although regulatory activity in the UK and the US was on the radar, too. The Europeans are acutely sensitive to local interpretations of EU-wide regulation. There was considerable talk of “geographic arbitrage” opportunities opening up as a result. As an American it was a eye-opening to witness the fissures in the supposedly united Europe. Recent economic woes have only underscored the tensions. SEPA – the ongoing effort to consolidate the domestic payment schemes in Europe – is moving ahead very, very slowly. The EU acknowledges that widespread adoption will require a mandated deadline; an open hearing is scheduled for mid-November. Meanwhile, the industry is waiting for pending announcement of mandatory SEPA deadlines and in the midst of the uncertainty not much is happening.

Innovation

Nearly every session mentioned innovation, and the need for banks to up the ante in order to remain relevant and continue to meet shareholder expectations for growth and profit. Throughout the week, it was clear that the banks all seem to know that they need to add value to payments in order to ensure margins, yet they can’t seem to execute. It’s a classic case of analysis paralysis.

Meanwhile, in sharp contrast to all the talk about innovation in the broader conference, there is a mini-conference within Sibos devoted to innovation called Innotribe. I applaud the efforts of Peter Vander Auwera, the leader of SWIFT’s Innotribe effort, who had the vision and put in significant effort to make this second annual Innotribe a reality. He brought together an impressive International group of technology thought leaders and VCs to stir things up. (It was amusing and actually rather nice to see the California/Silicon Valley Sibos attendees in their suits – we clean up well!) SWIFT also enlisted some of the most talented facilitators I’ve ever witnessed. It was really impressive.

Here are a few pictures to give you a sense of the energy and content of the Innotribe sessions:

Cloud computing concepts from Innotribe

Smart Data brainstorming at Innotribe

It was sad, however, when one of the SWIFT employees admitted that they’ve been talking about innovation for three years and haven’t started yet. That’s tough.

With coaching and support six teams worked in 2 hour sessions throughout the conference to develop innovative banking business concepts. They presented their efforts on the last day of the conference and were judged by a panel of bankers and SWIFT board members as well as a team of VCs. The winning concept received 50,000 Euro in start-up funding from SWIFT. I will do a follow-up post featuring more about Innotribe, the contest, and the winning idea.

Mobile

There was a star-studded panel to discuss mobile payments, featuring carriers, handset manufacturers, money transfer companies, and banks. Much of the debate centered on whether or not banks have a role to play in mobile payments – the consensus seems to be yes, but that the role will vary from market to market, depending on the varying degrees of cooperation and relative assets of carriers, banks, and regulators in each country.

Friend-of-Glenbrook Carol Realini, CEO of Obopay observed “If you want to know the potential of mobile go to Kenya. Kenya is the silicon valley of Africa.” Today there are 14 million mobile banking users in Kenya. The astounding success of m-Pesa is widely discussed – at Sibos and at other industry gatherings – but it is hard to emulate in other markets. There was only one (government controlled) carrier, so interoperability was not an issue.

At the conclusion of the debate, the moderator asked the audience whether banks would participate or lead in mobile payments. Nearly the whole room nodded in agreement that banks would participate, but only one person raised their hand to indicate that they believed banks would take a leading role in mobile payment.

Every bank technology firm seemed to have a brand new mobile app and there were even some slick iPad applications on display. At this point, I’d say that consumer mobile banking and payments are table stakes — every self-respecting bank should have a solution available and to be perfectly honest, the mobile banking discussions left me rather bored. However, I was really excited to see some business-oriented eInvoicing and payment mobile solutions. I’ll feature solutions I saw from LUUP, Fundtech, and Edge in more detail next week — the vendors are going to get me some screen prints to share. In the meantime, here’s the team at Fundtech showing off their iPad app:

Rhys Jones & Joe Mazzetti of Fundtech

Cloud Computing

It’s coming – perhaps not as soon as the financial technology vendors think – and is definitely relevant. The challenge for the banks is to evaluate their infrastructure and determine which capabilities are core and which are not and therefore candidates for SaaS. There was an intense debate about private vs public clouds – and whether a private cloud is an oxymoron. FinExtra has a nice video interview with Sean Kelley, Global CIO for Deutsche Asset Management talking about cloud computing and the bank’s use of Amazon and Google, among others.

The Future of Business Payments

On Monday I spoke to a respectably-sized crowd on The Future of Business Payments — the team at SWIFT asked me to be provocative and I did my best. It was a 90 min session and I spent half describing what makes B2B payments unique vs consumer transactions and outlining the challenges that prevent widespread adoption of e-Invoicing and electronic payments for businesses. And then I profiled twelve companies that are operating at the fringes of the B2B payment ecosystem and aren’t on the radar of banks, but should be. Reach out if you want to learn more.

As I listened to the speakers this week debate the relevance of banks and how they need to do a better job of wrapping value around increasingly commoditized payment services, it occurred to me that one of the most effective means to do so is to better support businesses by reliably delivering and synthesizing the data that accompanies payments between buyers and sellers. As large corporate increasingly connect directly to SWIFT, rather than rely on portals provided by banks to obtain payment data, there is an opportunity to focus on SMEs, a category that has been woefully neglected by banks and other business payment providers. As mature economies struggle to emerge from the economic downturn they increasingly look to smaller businesses to lead job creation. Banks can help by providing enhanced small business offerings, liquidly through early payment discount schemes, and perhaps the means to connect with some of the banks large enterprise customers that might be buyers.

[Meanwhile, in San Francisco at the PayPal Xinnovate conference for developers PayPal announced new business payment capabilities (and B2B pricing) -- the irony of the bankers getting anxious about innovation in Amsterdam while simultaneously the PayPal crowd was gathering in SF was not lost on me.]

Best Quotes

• Charles Goodhart, London School of Economics: it’s a difficult time to be a banker, whether you were doing gods work, or just behaving naturally.
• Paul Saffo, in response to one of the Innotribe pitches: “I’m a consumer, I don’t care about banks”
• Judd Holroyde, SVP, Head of Global Product Management & Delivery, Wells Fargo: “Innovation is difficult, but necessary to ensure margins in payments”
• Michael Steinbach, Chairman, Equens: “Banks tend to discuss and discuss and discuss whereas others [Google, PayPal, Apple] tend to act”
• David Sear, Managing Director, Travelex Global Business Payments: ”Banks need to concentrate on the consumer otherwise Apple eats your lunch”
• Lázaro Campos, CEO of SWIFT: “Asia Pacific is growing much faster than ever before, much of that intranet-Asia traffic.”
• Stephen Hester, RBS “We are all in this together. That requires humility and change”
• Carol Realini, CEO Obopay: “The mobile opportunity breaks down as follows: retail $10 Trillion, replacing checks & cash $5 Trillion, eCommerce and mCommerce: $500 Billion, cross-border P2P $400 Billion”
• John Hagel, referring to the Red Queen in Alice in Wonderland, who runs faster and faster to stay in the same place, Hagel commented that . “The financial industry is not even doing that well, it’s running faster and faster, but still sliding further and further behind.”
• Hans Van der Noordaa, CEO Banking Benelux, ING “The biggest mistake banks could make is to think we’ve fixed the trust issue”

Cool Stuff

The Finextra team recorded 33 videos throughout the conference. You can watch them here. I’m indebted to Liz Lumley and Finextra who graciously let me hang out in their booth and recharge my batteries (both literally and figuratively) throughout the conference. Liz also moderated a fantastic panel on social media usage by commercial bankers (as opposed to retail banking applications of social media). This session was simulcast on the web, so you can watch the whole thing here or read a brief recap here.

Official SWIFT conference converge (video, articles, photos) here. I recommend watching at least the Innovation Keynote and the Closing Plenary.

And here are some must-watch videos that made their debut in the Innotribe innovation sessions:

The Financial Reformation

The Future of Money

And now I’m off to explore Amsterdam by bicycle!

You are a bona fide payments professional if that headline makes senses to you. For everyone else, here’s an explanation.

Kombini Payments

Before we take a look at PayNearMe, let’s first explore how Kombini payments work. Kombini (variously spelled Konbini, Kombini, or Combini) or convenience store payments are an important element of the Japanese payment system. Since the late 1980s many Japanese consumers have paid their monthly bills at convenience stores, rather than online or at a bank. This practice has expanded to support eCommerce payments.

Survey data indicates that one-third of Japanese consumers visit convenience stores 2-3 times a week, and 17% visit daily. The Japanese Franchise Association reported in early2009, sales increased 7.6% over 2008. Services – primarily Kombini payment fees – represent 4.3% of convenience store revenue. Service revenue was up 9.6% versus the previous year, indicating strong growth of Kombini payments. Anecdotal evidence suggests that, in Japan, Kombini payments may account for more transactions than credit cards. A number of convenience stores support Kombini, but 7-Eleven dominates. The company has over 12,000 locations in Japan (the company is headquartered in Japan) and also has a banking license. It has its own eMoney platform, nanaco, to facilitate payments.

In Japan, the Kombini eCommerce payment process is as follows:

1. Consumer makes online purchase and selects Kombini as the payment method
2. Consumer obtains a “receipt” number from the merchant website
3. Consumer goes to Kombini store location (or in some situations an ATM) and effects payment, referencing the receipt number or showing the clerk the barcode on the receipt
4. The Kombini network collects information for all payments made in stores and ATMs
5. Kombini network notifies merchant that payment has been received, referencing receipt number and/or barcode
6. Merchant ships product or allows download of digital goods.

Seems like a niche solution doesn’t it? Not so fast. Kombini payments made in advance (COO) or at the time of delivery (COD) represent approximately 25% of Japanese eCommerce transactions. [If you want to learn more about eCommerce payments in Japan let us know. We have a series of global eCommerce country profiles.]

Enter PayNearMe (nee Kwedit Direct)

Meanwhile, back in the U.S., the payments start-up formerly known as Kwedit has garnered a lot of attention for its Kwedit Promise payment method that was designed for teens as a way to pay for online games and virtual goods. But quietly, behind the scenes, the company has been working to test and refine the Kombini payment method here in the United States. The resulting service, called PayNearMe, was recently announced in partnership with 7-Eleven.

Unlike Kwedit Promise, PayNearMe has broad applicability and the right economic model to handle purchases of physical goods, travel and tickets, online services, digital goods, and even loan payments.

Here’s how PayNearMe works:

1. The merchant stages or initiates the transaction, defining rules for what will happen when the buyer visits the 7-Eleven location to make payment.
2. The rules for each transaction are associated with a unique token. The token may take the form of a printed barcode, a mobile-displayed barcode, or a magstripe associated with an optional PayNearMe card (for those without printer or phone).
3. The buyer is directed to nearest 7-Eleven (buyer enters their zip code as part of checkout process; there are more than 6,000 7-Eleven locations that accept PayNearMe payments in the U.S.)
4. The buyer presents the token (in whatever format) to the clerk at the 7-Eleven location.
5. 7-Eleven sales associate accepts the exact cash amount for the individual transaction associated with the token.
6. Payment credit is posted to merchant in realtime before the buyer even leaves the store.
7. Merchant releases the goods for shipment or download.
8. Optionally, the receipt printed at the 7-Eleven may include a download code, a game activation code, event ticket, or specific instructions to redeem the product.

At the point of payment, the steps takens by the 7-Eleven clerk are the same, regardless of whether the transaction is for an eCommerce purchase, a telephone order, an event ticket, loading an eWallet, purchasing virtual currency, or repaying a loan.

PayNearMe Under The Hood

In terms of money handling, PayNearMe handles both ends of the payment process, providing a walk-in network to collect cash (via 7-Eleven) and a settlement system to distribute the funds collected to merchants.

Merchants utilize APIs to connect their eCommerce site, customer service rep platform, or other sales systems to PayNearMe to create unique payment instructions for each transaction and be informed real-time when the cash payment is received at the POS (effectively, the authorization to ship or release the goods).

The service also allows merchants to send context-specific confirmation information back to buyer in real-time via the 7-Eleven receipt. For example, merchants are working with PayNearMe to provide insurance products, sell transportation tickets, and initiate money transfers. When payment is made, customers leave 7-Eleven with proof of insurance, a valid ticket, or appropriate legal disclosures, respectively.

Notable Early Adoptors

The company has announced that Amazon.com, Facebook, Progreso Financiero, MOL AccessPortal (MOL), m-Via, Lexicon Marketing, LLC, Adknowledge’s Super Rewards, Money to Go and SteelSeries will be among the first merchants to use PayNearMe to provide their customers with the option to pay with cash at 7-Eleven stores. Here’s a description of how some of the merchants are utilizing PayNearMe (excerpted from the press release):

• Amazon.com : Amazon.com customers can conveniently buy Gift Cards online in any amount they choose (in $0.01 increments up to $1,000), and pay for them with cash. These Gift Cards can be used to buy millions of items on Amazon.com starting the end of this month.  Here’s a sample for what the Amazon.com purchase token will look like (click to see full size image):

• Facebook: Facebook users can safely and easily buy Facebook Credits with cash using PayNearMe at a 7-Eleven store, and those Credits will be deposited into users’ accounts before they reach the parking lot.  Facebook Credits are used to buy gifts and virtual goods in many games and applications on the Facebook platform. Here’s sample of a Facebook Credit purchase token that I created.

• Progreso Financiero: Progreso Financiero helps underbanked Hispanic families build credit and gain access to mainstream financial services.  The company extends small dollar loans to customers that are often repaid in person at Progreso Financiero storefronts located in neighborhood retail outlets. PayNearMe increases the number of locations at which Progreso Financiero customers can make their loans payments from approximately 30 throughout California and Texas to more than 1,000.  Progreso customers who make payments at a PayNearMe location will receive an up-to-date receipt reflecting their payment and outstanding loan balance.

It’s interesting to see how the original Kwedit model has morphed to reflect what the market wants.  In addition to understanding the need, PayNearMe has refreshed the model to reflect todays hyper-connected, real-time consumer.

We will be curious to see how merchant’s take advantage of the cash-in network and start to interact with their customers through the oldest of transaction mediums – the sales clerk and the receipt.