Payments Views from Glenbrook Partners » Mobile Banking & Payments

The Most Pressing Issues in e-Payments: An Open Forum at BAI

Erin McCune — Tue, 02 Mar 2010 20:27:44 +0000

Glenbrook’s Erin McCune is in Orlando for BAI’s Payments Connect conference.

John Stewart of Digital Transaction News moderated an open discussion exploring the most pressing issues in e-payments. It picked up on the list of 10 pressing themes raised in the November issue (pgs. 26-32). The panelists were:

Aaron Fine, Oliver Wyman
David C Stewart, McKinsey
Andrew Frisbie, First Manhattan Consulting Group

The audience fielded questions and the panelists, moderator, and even other audience members chimed in. Highlights are as follows:

On merchant interchange:

Dave Stewart questioned the strategy of merchants positioning interchange as a consumer issue, as a jobs issue. Would merchants really lower prices or hire additional people if interchange was reduced? John Stewart raised the Australia example to illustrate how interchange was cut drastically yet merchants did not pass on savings to consumers.

On cash usage:

Cash usage is increasing. As a result of consumer deleveraging – cash and debit are perceived to be good budgeting tools. Dave Stewart observed that the single biggest growth opportunity for the banking industry is to take on cash usage (offering more carrots than sticks).

Andrew Frisbie commented that many debit users, recognizing the risk of overdrawing their account and getting hit with fines, continue to do so. It isn’t as effective a budgeting tool as perceived.

Aaron Fine shared that he rarely pays with cash anymore. Yet Dave Stewart wondered how much easily displaceable cash is there? From his personal experience, knowing the merchant perspective, he feels guilty charging $5 for a taxi. Until micropayment pricing schemes gain traction, consumer guilt may inhibit widespread use of cards for what are currently cash transactions today – for instance in a taxi. Can banks offer sufficient incentives to make consumers less concerned about merchant value proposition?

On mobile:

Dave Stewart indicated that NFC in the U.S. is still a long way out.

Aaron Fine onbserved that if you are a bank, the opportunity to increase transaction volume via mobile payments is relatively modest. But if you are a non bank – carrier or Apple for instance – payments are incremental business, and an exciting opportunity.

Andrew Frisbie remarked that from a customer perspective, who is interested in trying all these new channels? Those interested in new means of interacting with the bank (depending on the era, ATM, IVR, debit, mobile… ) are some of the least attractive customers from a profit perspective.

Aaron Fine observed that the carriers and a big retailer such as Wal-Mart together form a formidable threat to the banks, rather than retailers or carriers acting alone.

Dave Stewart reminded everyone that even those micropayment charges that are charged to the carrier bills are ultimately paid by a banking product often a credit or debit card.

Andrew Frisbie observed that as more and more electronic transactions are linked to DDA bank accounts (as recurring ACH debits, funding of a PayPal account, etc.) it makes it harder and harder consumers to switch banks.

On banks as incumbents:

Picking up on the general session that immediately preceded the session, one audience member observed that banks are in a very defensive position with a lot to lose, versus new providers with very little to lose and a lot to gain.

“Buy ‘em and run ‘em into the ground” quipped one of the panelists with a laugh. But in all seriousness, this is the nature of being an incumbent. You ride cash cow and meanwhile, have your innovative “tiger” team focus on new stuff and be ready to roll it out as customer need dictates. Someone is going to address the need, if the need really exists, so be ready.

Dave Stewart suggested that there is actually a “ton of innovation going on at banks” right now – more than in a decade. Largely due to regulation addressing overdraft fee and threatening to address interchange. New products and functionality enhancements are giving some banks a clear competitive advantage. Investment in credit card act compliance, new payment hubs, and enterprise- wide risk management give banks an opportunity differentiate. He cites the Chase blueprint card as an example of , innovation blurring lines between credit and debit. What it takes to actually change the processing for a given transaction behind the scenes is really remarkable from an operations perspective.

Andrew Frisbie, picking up on a topic from the Digital Transaction News article noted that bank product managers have needed to innovate for the first time in a decade due to Reg E, CARD Act, etc., and they will be demanding innovation from partners as well, including Visa and MasterCard.

John Stewart observed that the best thing that ever happened to innovation in a bank is the iPhone.

Aaron Fine observed that the marketplace evolving in a way that makes the core assets of the bank less valuable than they used to be. It’s not a case of innovation as usual, or innovation accelerated. It’s more drastic.

Andrew Frisbie observed that there has been considerable payment innovation outside the U.S. and that U.S. banks could derive their innovation playbook for the next five years by emulating some of the solutions overseas.

John Stewart notes that both NACHA and BAI have played a role in fostering innovation.

Dave Stewart wondered whether it is appropriate for NACHA to take strong stance on innovation, versus rule making. An audience member noted that “utility based innovation” is ideally appropriate for NACHA, delivering core, common functionality to the industry and allowing banks to do product development. [As an aside, NACHA’s supplier directory ambition ss an example of utility innovation to serve the industry.]

On EMV/Chip & PIN deployment in the US:

An audience member suggested prepaid cards with Chip & PIN that could be sold to tourists and business people in airports for US travelers heading overseas. [Note: it was unclear whether the audience member had actually seen this product or was suggesting it as an industry opportunity – Glenbrook is in favor of this idea, given the popularity and number of comments we received on our posts highlighting the frustration of using US mag stripe cards in Europe.]

Dave Stewart noted that while EMV introduces card security that doesn’t exist today in the US, what are the incentives for banks to implement it? Thus far card issuers have not seen a compelling reason.

Aaron Fine notes that the business case isn’t strong enough, that fraud reductions are not great enough.

On the impact of social networking:

Dave Stewart notes that social networks are a good opportunity to get customer feedback. They may also provide more touch points for consumers to purchase. But he doesn’t see a provider of social networking being a big player in payments.

Andrew Frisbie notes that here is a big cultural barrier – hard to imagine Facebook thinking like NACHA or a bank. But social networks are a highly effective channel for branding, customer service, etc.

Aaron Fine notes that the flow of information available via social networks is amazing, but that the social networks are not ready to build a payments network accessing the information flow, despite the desire to monetize it.

NFC vs. Not-NFC, or “Why Put Card Data on the Phone?” A look at Mocapay

Carol Coye Benson — Tue, 23 Feb 2010 14:41:56 +0000

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:

A consumer registers a card with Mocapay online or with their mobile phone
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.)
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.)
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.)
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!)
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.

Mobile Payments: Replacing Cash in the “Last Mile”

Jacqueline Chilton — Sun, 10 Jan 2010 16:55:30 +0000

Editors note: This post describes the third in a series of panel discussions on mobile payments. The series is organized by MPay Connect and seeks to tap innovators in Silicon Valley and link them to mobile payment pioneers overseas, fostering understanding and discussion of how to apply lessons from the developing world to other markets. See also our Payments Views posts from the first and second events in the series.

Thursday evening a group of Wharton, Harvard alumni and payments professionals met at Google to discuss “Will Mobile Payments replace cash in the last mile?” Money in is the “first mile” of using cash to fund a mobile account and Money out or payment for goods is the “last mile.” Today, typically agents – called human ATMs – are receiving the cash to get it into the mobile payment scheme and a subscriber must go to an agent to get the cash out. Agent commissions make these programs difficult to scale as costs grow as volume grows, unless the mobile money transfer network can move to electronic payments in or out.

The session was moderated by Menekse Gencer from mPay Connect Consulting. The panelists were

Thor Hauge, Vice President, Digital Ventures at Western Union International
Toffene B. Kama, President, WillStream
Benjamin Lyon, Executive Director of Frontline SMS: Credit

There was an interesting discussion of the distinction between the developed and the developing world. The developed world has little friction in the current payment models. Many of the economic models that encourage cash replacement will succeed in developing markets but are not expected to work in developed economies. In many environments where cash is being replaced, the consumers are working in a what is called a “delegated payment” environment. The person funding the transaction and the person in the store making the purchase are different (perhaps a wealthy uncle or an immigrant sending remittances home provides the funding). Mobile wallets can enable control by the funds originator (the uncle or immigrant overseas) of how funds are sent.

An excellent example of the benefits of electronic money transfer comes from Afghanistan. When the payroll for the local military /police force was moved to direct deposit they thought they had received a 40% raise. No one had realized how much the agents distributing the cash payroll were skimming. (See further discussion of mobile payments in Afghanistan from the first in the series of mobile payment panels back in September ’09.)

Thursday’s panel generally agreed that cash might be eliminated for specific types of transactions, but mobile payments will not replace cash more broadly. Perhaps delegated payments is an example of suitable electronic payments but they do not represent all transactions. Cash is frictionless and too well understood to be replaced all together.

The primary challenge in electronifying the last mile is merchant acceptance. The panel discussed the problems of limited merchant acceptance leading to lack of use. In the Philippines with Smart Cash, the users are doing mobile top-up but not necessarily using the card issued with that account. Even though the chip card associated with the account rides the MasterCard rails there still is a lack of point of sale merchant penetration.

Mobile faces the age-old payments problem: you need enrollment of consumers and enrollment of merchants – not just a great network in between. Perhaps some of the payments views readers have thought through the merchant side of this equation… your comments, as always, are appreciated.

Payments Views 2009: Most Popular Posts and Recurring Themes

Erin McCune — Thu, 31 Dec 2009 23:56:10 +0000

Glenbrook launched this Payments Views blog back in February as a place to debate and discuss the Payments News of the day. We’re thrilled with your participation in the comments and pleased with the steadily climbing traffic. Looking back over the past year, seven popular topics and recurring themes stand out:

PayPal
The two most popular posts on Payments Views in 2009 are about PayPal. The #1 post is a summary of the PayPal discussion during the eBay Analyst Day back in April. A close second, is Russ Jones’ post describing PayPal’s Adaptive Payments Platform in July.

Mobile
Payment professionals can’t get enough of mobile banking and payments. Carol Coye Benson’s series of interviews with mobile payment providers in the US and Canada was wildly popular. She featured Billing Revolution, Blaze Mobile, Bling Nation, Boku, CashEdge, First Data Corp., mFoundry, mPayy, Obopay, Payfone, Zong, and Zoompass. You can download a compilation of all of the posts in PDF format here.

Google Checkout
Two posts back in March about Google Checkout remained popular throughout the year. Scott Loftesness’ commentary on Google Checkout’s new pricing (to match PayPal’s) and Russ Jones description of Google Checkout’s subscription capabilities.

NACHA & ACH
We’ve been closely following developments at NACHA throughout Janet Estep’s first year as CEO. Carol Coye Benson’s interview with Estep and my post on The Future of ACH have received heavy traffic. In addition, our coverage of the 2009 NACHA Payments conference and Council meetings were popular.

B2B Payments
It is no surprise that Carol Coye Benson’s discussion about The Problem With of B2B Payments had enduring appeal; business payments have long challenged the payments industry but there are signs of progress and renewed investment and interest. The “B2B Payments” category is the most popular category topic on Payments Views. In addition to our blog posts, the research that Carol and I co-authored on Card Acceptance for B2B Payments has been downloaded frequently.

Revolution Money
Allen Weinberg’s interview with Jason Hogg, CEO of Revolution Money was a big hit. Bryan Derman’s discussion of Revolution in conjunction with Hogg and Steve Case’s appearance at the NACHA Payments conference, This Revolution Will be Televised, also garnered a lot of attention. All the interest in Revolution culminated in November when American Express announced that they would be purchasing Revolution Money. Scott Loftesness wrote about American Express’ acquisition of Revolution in a post titled A Revolution in Payments; that post had the most active comment dialogue on Payments Views this year, so I encourage you to read the comments, too.

Cards
Jacqueline Chilton asks if this is The End of Cards As We Knew Them (subtitled “How my trip to the U.K. left me with a chip on my shoulder!”) and apparently she’s not the only one with a chip on her shoulder. The comment dialogue and email traffic that her post attracted warranted a revisit of the topic in a second post on Chip-and-PIN. Meanwhile, Carol Coye Benson debated whether Debit Cards Aren’t a Product attracting another active comment dialogue.

In addition, you may be interested in the most popular posts and content on our sister blog, Payments News. Yesterday’s post by Payments News editor Scott Loftesness features the most popular posts and content for 2009.

Your Payments Views comments and contribution to the debate are most appreciated and we look forward to continuing the conversation next year. We’ve got exciting plans for more robust content and features for Payments Views.

In the meantime, we wish all you payments professionals out there Happy New Year. May 2010 bring you health, prosperity, and plenty of engaging work!

Erin McCune
Editor

Musings about Mobile Payments 2009

Carol Coye Benson — Tue, 22 Dec 2009 22:20:01 +0000

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.

Blinging it Home? A Look at Bling Nation

Carol Coye Benson — Mon, 19 Oct 2009 14:49:23 +0000

One of the good things about having a really odd company name is that people do remember it. We mostly heard skeptical laughs when Bling Nation first emerged from stealth. But lately we’ve been getting more questions…. I spoke recently to co-CEO and founder Wences Casares.

Wences and co-CEO Meyer Malka have an interesting background, having worked together in a series of successful financial services and telecom investments in Latin America. They’ve taken venture financing from Lightspeed Venture Partners, added former Bank of America Vice-Chairman Luke Helms to their board of directors and have pulled together some impressive advisors – including John Reed (former CEO of Citicorp), Carl Pascarella (former CEO of Visa USA) and Jeff Stiefler (former President of American Express).

What They Do

Bling has their eyes firmly on the prize – point of sale transactions and the huge payments industry revenues associated with that. Their approach, however, is quite unique.

Bling is creating a series of community-based local payments networks. The mobile phone is a piece of the puzzle, but not the defining one – instead, think of the mobile form factor as an enabler of the core payment service.

Bling targets a small community which has a decent population and financial asset size, and which is served primarily by local community banks. They sign up one or more of the banks, and an assortment of frequently-visited local merchants (movies, pizza, dry cleaners…). The banks provide customers with a payment sticker (co-branded with Bling and the bank’s brand) and instructions on how to enroll their phone in the service.

The merchants are given a stand-alone device (called a “Blinger”) for payments acceptance. At time of purchase, the consumer taps the Blinger, the transaction is processed and the consumer and merchant both receive confirmation of payment – the consumer to their mobile phone and the merchant on their Blinger. Bling also supports a variety of merchant rewards, loyalty, discount, and couponing programs, all tied to mobile phone messaging.

Sounds like any debit card or open loop network-branded prepaid card, right? Wrong! There is no network brand on the sticker or the Blinger. Transactions are authorized by the consumer’s bank – Bling looks like a foreign ATM to the bank. Settlement in batch is done at night, between Bling and the banks, as a private, not network, settlement. The merchant doesn’t have to submit any clearing transactions – as long as they got the Blinger confirmation, they know their account will be credited that day.

Bling is finding that the operational management of this is pretty straight forward – and, significantly, that the processors which are serving many of their target banks are willing and able partners.

The Pitch

The pitch to the consumer is “coolness” and convenience – and the ability to access merchant rewards programs. The pitch to merchants is primarily cost – transactions are about 50% cheaper than traditional card acceptance.

But a secondary, and very strong, part of the pitch is the ability to deliver rewards based on things like the frequency of visits to a merchant – which the consumers can redeem instantly as they pay. Neither the merchant nor the consumer needs to keep track of anything – and, says Wences, “merchants love that.”

The pitch to the bank is the opportunity to get local merchant POS business – a business that many community banks have given up on as much of that business has migrated to large, national acquirers. When compared to a transaction where the consumer uses the bank’s own traditional network-branded debit card, the bank’s revenue can be three to five times higher.

This higher revenue is made possible because the middleman – Bling in this case – is taking significantly less from the merchant discount fee than is taken, in aggregate, by the many players in the traditional bank card value chain. As the community network grows, a bank can also earn money if their consumer shops at a merchant served by another Bling partner bank, but this is not a significant piece of the economics currently.

For both the bank and merchant, the “stay local” aspect of Bling is highly attractive. In fact, Wences said they were surprised by how strongly the “local” aspect of the pitch resonated with local merchants. Frankly, I’m not at all surprised – in my small community there is a terrific energy around several community programs promoting support of local merchants – but my community’s banking needs are served primarily by local branches of national banks. Bling is staying away from those communities – for now. I asked Wences how they were dealing with the local branches of big banks in the communities they are serving. “Right now,” he said, “we’re not approaching them.”

So just how big an opportunity is this? It often amazes people from outside our industry – or outside our country – that the U.S. banking market is as unconcentrated as it is.

Our estimates show that the “big three” banks – Bank of America, Chase, and Wells Fargo, even after recent acquisitions, account for only about 25% of bank deposits (consumer and commercial, bank and credit union) and only about 35% of debit card transactions. There are over 8,000 credit unions and over 5,000 community banks out there, serving local retail customers. Bling is betting that a lot of these smaller institutions will be interested in a new payment service that gives them a shot at playing a new role in their community’s merchant business.

Common sense tells us there is a lot of volume in local purchases. I remember seeing statistics years ago about what percentage of phone calls were made locally – I don’t remember the number, of course – but it was very high! If anyone has seen an analysis of what percentage of POS transactions are done in the cardholder’s home town, I’d love to know about it – I’m sure it’s very high. Then just factor in the percent of transactions done in small communities – certainly seems that it is a big enough number for Bling to pursue!

The Future

Bling clearly has its work cut out. Just pursuing the many small banks and communities that fit its profile will take time and resources. They are active in four communities right now, and expect to be in ten by year-end 2009.

At Glenbrook, we’re always interested in studying just how these new payments propositions are likely to evolve in the future. One development, of course, might be the move to NFC-based contactless payments built-in to the mobile phone – rather than the use of contactless stickers. Wences was pretty philosophical about that. “We are not,” he said, “waiting for that to happen….I expect non-financial applications will lead the way for NFC”.

Longer term, it is extremely interesting to note that while Bling is taking a community-by-community approach in its initial market development, they are also building a larger infrastructure. If my community bank issues me a Bling sticker and I travel to your community…. that sticker works when presented to the Blinger of your local merchant! A new network is born?

Mobile Payments at the Point of Sale [ATM, Debit & Prepaid Forum 2009]

Jacqueline Chilton — Mon, 19 Oct 2009 14:31:23 +0000

I am currently attending the ATM, Debit & Prepaid Forum 2009. The event started today with pre-conference workshops.

Due to my recent work in mobile payments, I was interested to talk to Richard Crone about the key messages in his Mobile Payments workshop. Richard’s key point was that “the one who enrolls [the customer] is the one who controls [the customer] .” I found the discussion of the market potential for mobile payments was interesting; these days there seems to be industry consensus that person-to-person payment is not the leading application to drive consumers to use the phone for payments.

Richard proposes that mobile payments will gain momentum with prepaid – even without penetration of NFC terminals to support it. “Households have an average of 5 cards with $150 of unused funds.” If the phone can be used to redeem this value at the point of sale, the consumer will benefit, explains Richard. These comments add to those of my colleague Carol Coye Benson and her recent post on mFoundry. mFoundry announced a new Starbucks iPhone application using 2d bar code technology. The application puts the customer’s Starbucks prepaid cards on the phone. Like mFoundry, the mobile payments providers need to find a way to the point of sale.

Mobile Payments Needs a Match…

Jacqueline Chilton — Wed, 14 Oct 2009 17:49:16 +0000

The Bay Area Mobile Payments Series focused on the US market last week with the topic “Is there REALLY a market for mobile payments in the US?”. The event was hosted by the Harvard Business School Technology Alumni Association, Wharton Club of Northern California and Google and moderated by Menekse Gencer of mPay Connect. Read on for my comments on the panel discussion.

The panel consisted of:

Dion Lisle – Citi Growth Ventures and Innovation – Citigroup
Arjan Schutte – Associate Director, The Center for Financial Services Innovation providing Research and Venture capital to the under banked
Dhidha J. Timona – President, Shaka Mobile, MNVO targeting immigrants remitting to Africa
Scott Shaw – Board Member AliasWire, Previously Senior Executive VP Kessler Financial Services. (Their mPay solution enables credit card account holders to directly transfer funds to any domestic card or bank account via ACH or pin-less ATM credit with a 2% sender fee)
Gabriel Torres – Vice President of Business Development, Affinity Global Services with a focus on cross-border remittances.

Highlights

Secrets to Success
While the points were generally teased out over the entire conversation, the panelists discussed the secret to success of mobile payments as the following:

A strong use case
A good price
An attractive target segment
Points of presence or market coverage

By points of presence we are referring to the points to put money in and take money out of the mobile payment solution. The target segment needs to have access to both.

For example: Those solutions that have access to the target customers’ credit cards or bank accounts have many points for putting money on to the phone. The mobile payment solution also needs sufficient points to use the mobile phone as payment or to withdraw the funds. This includes significant coverage at relevant points of sale, appropriate billers or desired remittance locations as appropriate for the target customers.

Discussion Review

The discussion began with a brief overview of the market and types of mobile payments. The US market has grown up differently than other countries with high costs making the US slow to pick up texting and other mobile services. A key distinction between the US market development and the rest of the world seems to be that other countries have developed successful Mobile Network Operators (MNO) owned and operated mobile payments offering.

Arjan reflected his concerns that sophisticated payments channels are ubiquitous in the US, so there seems to be no clear advantage to pay over the phone. The unbanked may present a target segment as there are more people with a cell phone than a bank account and mobile payments can bring them services they cannot attain without a bank.

Dion from Citibank pointed out that price has also been a key driver of adoption of mobile services. Consumers have free payment channels including exchanging cash and therefore are less willing to pay fees for mobile payments.

The panel discussed use cases as a key success factor and quickly focused on remittances as an attractive use case for mobile payments in the US. It seems the panel has not had positive experiences with the P2P market and were still looking for the “killer application” of that capability. Since some foreign countries have sophisticated mobile money transfer markets, Shaka Mobile is finding opportunity in targeting African immigrants familiar with mobile banking. Gabriel with Affinity Mobile is focusing on the Latin American customer. Points of presence can be a key success factor in the remittance market and Affinity Mobile has recently announced a strategic partnership with MoneyGram to attain access to their extensive physical presence in foreign markets.

To combat the challenge of making consumers comfortable using the phone for payments, Arjan identified the company iSend that has focused on bill payment as a new channel for remittances. iSend is in the international bill payment and cell phone refill market. Their strategy is to enable remittances through the Bill Payment process allowing the sender to control how money is used. As a consumer pays their bills, they can also remit money to pay bills for family. Bill payment is a known / current behavior and so adoption of remittances through this channel has been fairly high.

For those interested in financial services for the un- and under-banked, check out Denari Payments in Atlanta. Sizzle Money is a mobile stored value product that enables mobile money access, payments and sharing. It employs an SMS-based mobile technology and includes person-to-person, merchant payments, remittances and a prepaid card for physical retail and ATM environments. They are particularly interesting for their “MaryKay approach” to reaching the underbanked with ISizzle Representatives reselling their kits to their communities.

The panelists also answered questions concerning identity in the post 9/11 USA and the challenges to support some consumers desire for anonymity.

The Starbucks iPhone App

The audience was delighted at the end of the evening with a surprise appearance of mFoundry to discuss their new Starbucks application (see previous Payments Views post here) that creates a prepaid card management tool with a 2D barcode that can be read from the phone at point of sale. The hope had been that this required no infrastructure changes, but unfortunately, it seems Starbucks is adding to their traditional POS devices to read the new bar codes. A very interesting implication is that this application does not involve the mobile network operators at all.

Mobile Payments Needs a Match…

In the end the conclusion was that mobile payments is “straw and someone needs to be the match.” The Silicon Valley is rife with smart people looking to launch the next great thing.

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Highlights of the event can be found on YouTube or the full session was recorded and you can register to view the video at www.mpayconnect.com

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Hope to see you all at the Vlabs MIT/Stanford event Mobile Wallet: Can your phone replace your wallet? on October 20th – Glenbrook’s Russ Jones is planning to attend.

The Phone is the Wallet: A Look at mFoundry

Carol Coye Benson — Mon, 28 Sep 2009 21:21:15 +0000

Last week, Starbucks announced a raft of new mobile capabilities, with iPhone apps to enable consumers to use their phone as their card in a variety of ways, including seeing a balance and reloading. For the payments industry, however, the announced test of a usable-for-purchase prepaid card on the phone, using 2d bar code technology, is big – very big. This piece is enabled by mFoundry, an early leader in mobile banking; who, it appears, is again moving to the forefront, this time in a new category of mobile payments.

I spoke recently with CEO Drew Sievers. I was particularly interested in understanding his new initiative, and also to understand his thoughts on the connections – real and potential – between mobile banking and mobile payments.

Background

When the whole topic of “mobile” came to boil for the financial services industry about three years ago, there was a lot of confusion about the difference between mobile banking and mobile payments. Some people assumed that mobile payments would simply be a logical next step after mobile banking. That was naive – in the U.S. in particular, many people make payments through cards that are not provided by their banks. And we’ve seen the various person-to-person, digital content, and NFC/POS mobile payments plays emerge and evolve separately from the evolution of the mobile banking environment. (We’ll discount, for the moment, bill payment – which is included in most mobile banking offerings.)

Looking Back: Mobile Banking

We started with a retrospect on mobile banking. A lot has happened in three years! If you recall, three years ago most banks were worried about deciding among competitive delivery technologies – the phone browser (pretty awful at the time), SMS, or an application on the phone. The application required carrier participation. Some large banks (including Citi, working with mFoundry) went forward with an application in order to ensure an attractive user experience. Other companies (including Firethorn, later acquired by Qualcomm) moved even more aggressively to provide pre-installed applications with deep carrier involvement. Sievers thinks the financial services industry collectively had a bad experience with these applications, and particularly with the carriers: it “established an adversarial relationship between carriers and banks… if we fast forward, it became very clear that mobile operators had no real role in mobile banking.”

The obvious game changer was the iPhone, and the whole concept of an open environment for apps on the phone. Regardless of who wins and loses on the question of app stores, Sievers thinks it is clear that open ecosystems are how consumers are going to get apps for their phone through open ecosystems – including mobile banking apps. mFoundry and other providers are now merrily creating iPhone, Android, and other lightweight apps for banks to offer consumers, as well as solutions via WAP and SMS.

The marketing challenge for mFoundry and other mobile banking companies is reaching the many banks in the United States; that’s why mFoundry’s strategic partnership with bank processor Fidelity National is so important to them. I questioned this, pointing out that the cross sell between bank core processors and online banking is pretty low (e.g. a bank using Fidelity for core processing may well use another provider for online banking and bill payment.) Sievers acknowledged this but thinks that the cross sell between core processing and mobile will be much stronger – partly because the real time alerts that mobile solutions support (and demand!) require deeper integration with the core than is the case for online banking. And there is a need to serve all of a banks customers, not just the ones who use online banking,

Looking Forward: Mobile Payments

The mFoundry team has been thinking hard about what this new app environment means for payments, and most importantly, the question of how purchases at the point of sale – presumably using NFC technology – will roll out. The common wisdom is that doing these kinds of transactions requires a level of security beyond that supported in the open apps environment. This leads banks and other payments providers to rely on phone SIM card security, and thereby drops them back in the laps of the carriers, who control the SIM card. Payments providers are fighting hard against the notion of sharing their payments revenue with carriers. (One of my partners here at Glenbrook, Bryan Derman, is fond of pointing out that when you aren’t creating new revenue, but rather trying to re-allocate existing pools of revenue, the water gets bloody pretty quickly.)

Sievers sees no quick resolution to this battle, and is generally skeptical about the short-term promise of NFC payments. The convenience argument isn’t enough for him: “it’s not materially faster or easier than swiping a card.” And he is particularly doubtful about the whole set of marketing arguments, which revolve around ideas such as providing real-time couponing. The marketing industry (of which he is a veteran, having been a “Mad Man” at Ogilvy-Mather and other agencies in the 1980s) has “been talking about this promised land for decades… in reality”, he says, “we are not really drastically closer to that than we were 30 years ago.” He thinks that even if the marketing applications of NFC become real, they won’t necessary be tightly coupled with payments.

Despite what sounds like some pessimism about mobile payments, Sievers is actually quite optimistic about consumer use of phones for payments and identity management. In the short-term, the killer app for mFoundry will be frequent-use, closed-loop stored value cards – delivered not by NFC but by the use of 2D bar codes. The Starbucks test announced last week is the first of what Sievers claims will be multiple announcements coming from mFoundry in the near future. With this approach, consumers will be able to check their balances and reload using light weight apps on their phone, and then simply display a bar code to the store clerk for payment. This solution typically does not require new software for the merchant – since most merchant optical readers come with this capability (reading a 2D bar code and generating card payment data) “baked in.”

mFoundry’s role is writing the client software for the phone and generating the barcodes based on the consumer’s profile and account balances. They also manage the security of the system. The back end prepaid functions are not provided by mFoundry but by a prepaid processor. mFoundry’s business model is as a managed service provider – not a transaction processor.

We closed by talking about the future for payments innovation – a topic that we at Glenbrook are always interested in discussing! Sievers thinks that the most exciting element of the open app environment is that it enables innovation from a broader ecosystem, rather than relying on one or a small number of companies that control a technology to provide it. He is optimistic that over time “external innovators” will figure out how to use the NFC chip for payments, and more importantly for identity and access management, without forcing payments providers to share revenue with the carriers.

We talked a bit about the ongoing industry discussion on mobile wallets – what are they, who provides them, etc. Of course, everyone agrees that “the wallet” will hold multiple payments instruments and identity documents. Interestingly, Sievers said “how it actually happens is less relevant than the content”. “The phone”, he said, “is the wallet”. This would mean that a consumer might have multiple payments related apps on their phone – with no particular integration or organization of them.

Before dismissing this (“of course consumers would want to go to one place to see their mobile payments”), keep in mind that many products that have as their premise the organization of consumer finances find very limited markets – think of the personal financial management systems and bank aggregation offerings. Consumers tend to value convenience, and discount organization, when it comes to their finances – so this is one prediction that merits careful thought.

In the meantime, I’m waiting for the Starbucks test program to expand in the Northwest from Seattle – one of their test cities – to my (small) home town of Ashland, OR. I’ll be the first in line for my latte!

Decoupled Mobile? A Look at mPayy

Carol Coye Benson — Mon, 21 Sep 2009 13:00:53 +0000

At Glenbrook, we’re fascinated by the topics of mobile payments (in general); the potential for new ACH applications; and the continued growth of eCommerce. So it was great to talk to Conrad Sheehan, CEO of mobile payment startup mPayy – who has moved his company right into the center of all three topics.

To start with, Conrad is no slouch – he is an industry insider, having built his payments skills as a consultant to banks and Viewpointe during those early check image days, and then later as head of Chase’s consumer payments group during the early growth days of POS debit.

mPayy, which was started in 2007, is interesting today because of the platform it has built to support eCommerce and P2P (person to person) payments. It might be even more interesting in the future – at the point of sale – more on that later.

The Platform

The mPayy platform is a “secure debit platform”. mPayy, says Sheehan, is a “decoupled debit provider” using mobile as a key channel. A consumer sets up an mPayy account and authorizes a transaction on the merchant’s or biller’s website or mobile site. For billers or any invoicing merchant, mPayy can send a mobile invoice and collect payment from the consumer’s cell phone. P2P transactions can be done on the mPayy website, by mobile, or on the major social networks. mPayy then manages the process of drawing funds out of the consumer’s account, by an ACH debit transaction, and sending money on to the recipient.

All of this, of course, requires some sophisticated risk management on mPayy’s part – to ensure that the consumer is properly authenticated; that the bank account information they have provided is valid, and that there are sufficient funds in the account to pay for the purchase. The mPayy platform handles this through a complex set of back-end processes.

You can think of mPayy as a PayPal-like platform, but Sheehan is quick to point out that there are some important differences. First is that credit card funding is accepted only as a back up (if the DDA funding fails), not as an up-front option for the consumer. That means that virtually all mPayy transactions run on the more profitable half of PayPal’s business model. This also enables mPayy to pass some of the savings (from avoiding card funding expense) on to merchants. Secondly, the consumer identifier is the mobile number, rather than the email address, as in PayPal’s case (making PayPal sound “so 1990’s” in this respect!).

Merchants & Consumers

Like many payments startups, mPayy faces a “chicken and egg” problem of signing up both merchants and consumers.

Sheehan’s starting point is merchants, where he feels he has a “very compelling proposition”. The elements of the merchant appeal?

Acceptance costs “materially below that of cards”.
The management of ACH risks. Once a payment is authorized, mPayy guarantees settlement and absorbs any fraud-based charge-backs and NSF’s.
Rapid set-up process – mPayy can open up a consumer account and execute a transaction all in one session
Checkout support – the merchant can opt to have mPayy populate the address page, etc.

mPayy is signing merchants up by the now-established route for payments start-ups, of making deals with acquirers – “the usual suspects”.

What about the consumer half of the chicken and egg problem? The best route to getting consumers, Sheehan feels, is through merchants: “anything else just isn’t cost-effective for a startup”. He recognizes the challenge here, but thinks mPayy can benefit from lessons learned by other start-ups that have had a hard time taking this path. Of course, he says, the consumer proposition is “easy, secure, and free”.

Easy sign-up and the mobile interface, he hopes, will help drive consumer use of mPayy once they are signed up. A basic WAP capability for the consumer is of course already in place: iPhone and Android applications are coming soon.

Looking Forward

Sheehan is also enthusiastic about mPayy’s ability to support social networking and payments; they already have secure widgets available for installation on Facebook – but he admits “there’s been very little usage”. He thinks the work they have done there will find better applications in supporting digital content purchases – in particular for newspapers.

We closed with a very interesting discussion about how mPayy might play in an NFC world. Sheehan, like the rest of the industry, is watching the carriers and the card issuers battle out the question of how payments revenue – now in the issuer’s pocket – might get shared with carriers in the future. Carriers have a shot at this because they control the SIM chip that (in the base case scenario) needs to be provisioned with card data for security. But a debit platform such as mPayy’s could work directly with carriers on an NFC solution. Rather than being concerned about losing existing interchange, mPayy (or any other similar debit platform) would see it simply as an opportunity for new revenue – which (and this is my speculation) they would presumably be more than ready to share with a carrier.

What do you think the chances are that a scenario like this could interest a carrier in getting started with NFC?