Facebook deals: the start of a new payment system?

It does happen that I don't know much about what I talk or write. This article is a case in point and it was triggered by the well-published launch of Facebook Deals. (Read here). The new industry offering real world deals (or coupons or offers) to digital social networks is really fascinating. While it is still very much in its infancy, I do believe that it has the potential to produce some killer applications.

First a summary of what is out there:

• Groupon is probably one of the pioneers of this industry, having launched the service in 2008. Today it is available in a hundred markets and have 35 million registered subscribers.
  
• Living Social is a similar company based in Washington and has close ties with Amazon.
  
• Google Offer was recently launched and is growing into new regions on the Google brand.
  
• Of course there are many-many more similar examples. Companies with names like LevelUp, Scoutmob, zozi, etc.
  

Why is it important from a payment perspective:

• It strikes me that the process of offer, accept and pay will change. This may require a new way to pay.
• Many existing payment features (like refunds, discounts, fees and commissions), may not be suitable for this world. Payment schemes offering more suitable features will work better.
• The existing payment domain (so called four party model), may not map onto this world, with much more intermediaries that will participate in the payment process.

It is definitively important to scratch around in this industry from a payment perspective. My gut feel is that there is something that someone may just uncover that will make coupons/offers and deals much more palatable if the payment experience is better.

Person to Person payments in Mature Economies still needs a tipping point event.

It is unclear how big the person to person payment market is; but indications are that it is huge. Many individuals pay each other for a diversity of reasons and in many locations. These transactions usually occur by means of cash and this is what most of us are used to. Paypal has made some inroads into this sector and online person to person payments via ECH-type payments are big in some countries, but very little progress has been made to turn these payments into mobile in mature economies. Take-up in emerging markets for electronic person to person payments are huge, but this is not the case in first world markets. Why is that?

Many examples can be found where mobile person to person payments are available to individuals in first world markets:

1. Cashedge recently announce Popmoney - a product that enables subscribers to send money from a bank account to some-one else's.
2. Dwollah is a scheme of payment between registered users.
3. ANZ GoMoney in New Zealand is a cool new way on an iPhone to transfer money between friends.
4. ING Direct recently announced a P2P payment tool allowing customers to bump two phone against each other to pay. (Or at least that is what I understood from the cryptic press release)
5. Similarly Amex announced a P2P service called Serve recently that is available on Android and iPhones.

Many of the big names (Nokia, Apple, Google and of course Paypal), have eluded to be working on mobile person to person payment offerings, but I have not seen any of these working and I am not sure if anything will be forthcoming. So why is it so difficult to get something, that is clearly needed, widely adopted in first world countries? The challenge is to find a product and a strategy to launch that will create a tipping point that will lead to a critical mass of adoption. I am not sure what this will be.

Governmental control over payments.

Cash is still king in one specific way: one can spend it where and with whoever you want to. This is different in the case of electronic currency as it is traceable and as such can be controlled. In the past, Governments have been prescriptive in some instances on how electronic money can be used. The examples of control over the flow of money are growing.

• The big backlash after the sensitive leaks made by Wikileaks lead to most payments made to Wikileaks being blocked by payment processors on the request of governments. This meant that money held on behalf of Wikileaks by (for instance) Paypal was frozen and could not be accessed.
• The PATRIOT act of 2001 provides for mechanisms to regulate payments that could be used to fund or benefit terrorist organisations. The implementation of the terms of this act usually have a large impact on electronic payment systems
• The US Unlawful Internet Gambling Enforcement Act of 2006 requires payment systems to block electronic payments to listed beneficiaries. Similarly, a proposed law: Combating Online Infringement and Counterfeits Act (COICA), would also require payment processors to block transactions to sites placed on a black list.

One can find a lot of merits in utilising the payment system to enforce laws and change behaviour. As such it is a very powerful tool that can be used to great effect. But is the philosophy of blocking payment morally defensible? Should the illegal act itself not rather be punished? Is this really an effective way to police illegal behaviour, as funds will now start flowing through other (untraceable) mechanisms. How about having an approach of warning or auditing, or rather using information in support of prosecution. In my view, it would be much better to make electronic payment systems more frictionless and with less barriers.

This approach would help in the fight against cash.
(The content of this blog was triggered by the following article.)

Banking as a behavioral science

Bill Gates is attributed to have said: “Banking is necessary. Banks are not,”. I think what he meant was that we need banking services, but banks are not delivering what we need. Surely this cannot be true? If we look at the scope of services that we get from banks, all kind of products, different types of transactions and so forth, then we should be able to find what we need. Many would agree (I think) that the question is not WHAT, but HOW banks deliver their services that is important.

In a recent article called "Redesigning banking with behavioral economics in mind" (Read here), an approach to the establishment of a new bank is described. Rather than thinking about what customers need, designers are thinking about what customers would enjoy. The emphasis is to ensure a positive experience and to remove those things that frustrate customers. In order to do this, more emphasis is given to the behavioral science than banking.

The article refer to two case studies that have made use of this approach. The first is a new start-up bank (expected launching date next month), called BankSimple and the other PNC financial services (Bank of the year 2010 in the US, according to the Banker).

Interesting concept.

Free mobile banking model

During March the South African blogging community announced the launch of a fee mobile banking network (Read here, here and here). Based on the information on these blogs, a brand new mobile banking service will be launched in May... for free. Very little information about Mahala or the Forus network could be found after an extensive search on the web. The Mahala facebook page had one comment and ten people "liked" it.

The Branson Center for Entrepreneurship does exist, but no independent corroboration could be found that the Center is indeed supporting the initiative and what the form of this support would be like. On Indiegogo website, Mahala requests donations to make this venture a reality. According to the website an initial aim is to raise $200 000 by means of donations. (I tried to make a contribution, but the website's Paypal connection was down.)

What I found interesting is the connection between Mahala, the Forus Financial network and FireID. The different companies are referred to in many of the article and also, the logos are all very similar:

More observers are doubtful about NFC take-up: a sample of quotes

We all know that NFC payments will play a major role in how we conduct financial transactions in future. Lots of energy and effort are being invested in making this happen and one should take cognisance of this. At the same time though, it is important to be sober about the potential and the impact that it would have. Lately, a number of analysts and industry players have been more doubtful about the immediate success of NFC. Below is a collection:

• Nick Holland (Yankee Group): "The announcements by Sprint and Isis seem very half-baked at this point." (Read here)
• Bob Egan (The Sepharim Group): "... it's just another science experiment."(Read here)
• Marty Beard (Sybase): “Everyone is jostling for position but will people actually use this thing?” (Read here)
• Sarah Clark (NFC Business Models) "Does not necessarily mean, however, that these leading operators have now found an answer to the need for a business model for the launch of commercial NFC services,” (Read here).
• Richard Crone (Crone Consulting): "...with NFC, all you’ll get are mobile check-in and mobile marketing," (Read here)
• Thomas Husson (Forrester) "Mass adoption of NFC mobile payment systems is still "years away"" (Read here)

In the meantime many other analysts will ensure that the hype level remains high.

KYC for mobile banking in emerging markets

The foundation for the implementation of a robust "Know Your Customer" (KYC) system is a trusted, uniform ID document system. The system would typically require a new subscriber to provide a photo ID when opening a new bank account. The details of the ID is then verified and stored as proof that the customer exists and was present when the account was opened.

But what if a uniform ID system does not exist, or if more than one ID system exists? Or what do you do with members of the population that have not yet received their ID documents in countries where issuing of ID documents are slow or inefficient? Or what do you do if a large percentage of ID documents are fraudulent or not trustworthy? This is the case in many emerging markets.

Not having a plan in these situations means that a large percentage of the target market cannot be served, or on the other hand, not having a robust KYC solution could detrimentally impact the basis of the integrity of your system. These are some of the challenges that robust platforms for mobile money must be capable of solving. Solutions usually cater for this by a combination of the following:

• Catering for multiple different ID document systems on the same platform, building a trusted view of the prospective customer's identity.
  
• Providing support for identifying individuals by means of verification by trusted subscribers already registered on the system.
  
• Building verification algorithms to discover potential fraudulent registrations and integrating this into the compliance policy.
• Managing validity terms of ID verification.

The best systems for mobile money in emerging markets are significantly more sophisticated regarding KYC than best practice in first world markets.

Thinkmoney: lessons for mobile banking

A company called ThinkBanking is offering no-thrills bank accounts to residence of the UK under the brand Thinkmoney. These bank accounts can be opened with little hassle, no credit check and with no penalty fees. Royal Bank of Scotland provides the deposit taking license and the associated debit card is issued by the Newcastle Building Society. This means that Banking (the company), can focus on distribution and client service. I am not sure how popular the service is, but am convinced that a need exists for a different kind of bank account, even in a mature market like England. Access to the account is provided via the Internet, but not via mobile as far as I could ascertain.

A number of lessons for transformational banking in emerging markets can be taken from this initiative:

• It is possible to design and deploy a banking product without holding a banking license, by making use of other banks regulatory compliance.
• New generation banking is about service, banking features, distribution and branding. It is important to think out of the box when offering new types of banking services.
• Bank accounts can be opened legally with very little hassles and even remotely (I am not sure if Thinkmoney does this). Much of the red-tape associated with opening bank accounts with mainstream banks are not required legally.

I am sure one can find many other examples of similar initiatives in other parts of the world. It would be interesting to produce a register of such initiatives.

Confidentiality and mobile wallets

One thing that is great about doing a cash payment transaction is that very little uncertainty exists in making the payment: you either have the money in your pocket or you don't. When asked about mobile banking, most people are uncomfortable about fraudsters getting access to their personal information and then doing transactions on their behalf. The ease with which information can be stolen is an important topic in the world of mobile banking and I was made aware of this in a recent article from Software Advice written by Michael Koploy that I read.

Unfortunately, in the case of mobile security, simple is better. It is the much more complex phones with their multi-feature operating systems that scares me. It is now possible to develop all kinds of interesting applications that could potentially sit and listen or present in another format. Clever developers can build applications living in these operating systems (Android, Apple etc.), that could potentially steal sensitive financial information and send it off to another recipient. Michael argues that application developers and operating system producers should be the gate-keepers to the security of mobile phones. This is unfortunately a pipe-dream. Somewhere one will find a rogue developer that will flex his/her skills to get (in)famous by stealing sensitive information.

I believe that the solution can be found through a combination of some of the following:

• Education to ensure that rogue applications do not get installed easily. Consumers must be taught that one should not install any old applications on a mobile phone.
• Building mobile banking applications with simple security designs that are easily understood. For instance building security on simple PIN entry mechanisms that most people understand and can relate to.
• I believe that hardware and firmware manufacturers should become part of the solution. Security designs should ideally utilise primitives available in the phone or the SIM card and this should be visible to the consumer.

Phones with more features are great for the average consumer, but bad news for the designers of mobile banking solutions.

Why SIM registration is important

The SIM card in a GSM mobile phone is the basis for identification of the caller. In transferring a SIM card from one phone to another, the identification is transferred to the other phone. This is important to consider in the case of mobile payments as it is possible to transfer your mobile money identity to another phone by means of a SIM card swap. Mobile money systems should cater for this eventuality by flagging SIM-cards that have been swapped or re-activated.

In many countries legislation has been passed recently requiring mobile operators to register (and also to collect KYC information) for customers buying a SIM card (For instance read here and here). While this is a costly process and often difficult to implement, it is extremely helpful to improve the security basis for mobile financial services.

In a recent article produced in Nigeria (Read here) the author questions if SIM registration can lead to a reduction in mobile money fraud. While it is unlikely that SIM registration (on its own) will be able to reduce fraud, it can form the basis for systems that will combat fraud. SIM registration legislation is a step forward to creating systems delivering more secure payments.

Some thoughts on Interchange fees for mobile payments

In the world of credit card payments, interchange fees are the fees paid by the acquiring bank to the issuing bank for each card transaction done. This is a simple mechanisms to ensure that card issuers are getting paid when the cards that they have issued is being used. In credit card systems, the merchant (the payee) and not the card holder (the payer) is responsible for the transactions fee. (There are some exceptions, but this is generally true).

If we were to apply the same principle to mobile payments we start running into a number of problems. This is because many mobile payment solutions work in a different way than what credit card transactions would work in general. Some of the challenges that one will have to consider are:

• In many cases, it is the payer that pays for the mobile payment transaction fee. (Consider for instance money remittance case study)
• The management of exchange rates for different currencies are dealt with in many different ways. Supporting this in a clear interchange fee will be difficult.
• Interchange fees often also caters for a credit component. Mobile payments are usually based on positive balance value stores.
• The willingness of both parties to pay for transactions (to send and receive money) is different in the mobile payment dispensations.

It is therefor unlikely that Interchange can be made applicable to mobile payments in exactly the same way as for credit cards. Also, designing a consistent, transparent and fair interchange fee for mobile payments will be difficult and may take some time to emerge.

American Express serving for Payfone

American Express have made two moves that seems to signal an important strategic direction. During March, a new person to person payment offering was launched, called Serve. (Read here). Initial scrutiny of the product and comparison with Paypal does not create any excitement: very similar product to Paypal, just more expensive. The question is if the American Express brand will help sell this product.

The second announcement came during April, when American Express joined a third round investment in a company called Payfone (Read here). Other investors include BlackBerry Partners Fund and Verizon. My limited research into Payfone did not provide much insight in the offerings of Payfone, so it is difficult to comment on the relevance and the likelihood of synergy with Serve.

When studying the announcements, one can make the following observations:
1. The timing of the two announcements indicating that they form part of a bigger strategy
2. The big deviation from the existing business of America Express. The two products seem to have very little in common with the existing American Express payment solutions, nor create much synergies.
3. The clear US focus (Serve is only available in the US).
4. The recognition of the importance of mobile.

Federal Banks describe mobile payments road ahead

The United States probably has the most complex financial regulatory system. Established in the beginning of the previous century, the Federal Reserve are to conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to banks. As such, the Federal Reserve plays a major role in check clearing and the reduction in the use of this antiquated payment instrument. In a long term strategy implemented in 2003 check processing would be reduced significantly. Today the US is much less dependent on check processing... but much more than most other economies.

The Federal Reserve is a complex system consisting of (amongst others) twelve federal reserve districts. Each district has regional responsibilities and the president of each bank represents the region on the FOMC (Federal Open Market Committee), where monitory policy is set. Sometimes the reserve districts collaborate with each other to produce white papers and policy guidelines.

The Federal banks of Boston and Atlanta recently jointly produced a fifty-seven page document called "Mobile Payments in the United States: Mapping Out the Road Ahead" (Read here). This document is the result of the MPIW (Mobile Payments Industry Workgroup) activities during the past fifteen months. Having been made aware of this document, I made sure that I got a copy as soon as possible. The document describe a mobile payment system based on an "open wallet" with ambitious characteristics that will make the deployment very difficult. Very few (if any) wallet deployments globally meet the required characteristics described, and it is unlikely that one will see a prototype soon. A clear preference towards using the domestic ACH infrastructure as a means to clear mobile payments is (well) interesting.

The authors indicate that lots of work still lies ahead and that it is not clear how to proceed. Also many different bodies within the US regulatory dispensation may have to get involved (According to the document this could be the following: The Fed, FDIC, OCC, NCAU as well as the Department of Commerce, the FCC and the FTC).

Regulatory guidance on the deployment of mobile payment is still years away. In the meantime, the industry will have to offer solutions complying within the existing frameworks.

A view on Mastercard's many mobile themes

Mastercard produced many press releases about and related to mobile payment and banking during the past period. If the product and technology guys were as busy as the PR people, expect to see a lot of results. When analysing the different announcements, a number of themes emerge. Rather than looking at the plethora of stories, it is better to track the different themes. These are the important (unrelated) themes that I picked up:

Moneysend
Mastercard has been working on the Moneysend capability for some time and with limited success. The ability to send money from one card to another has been around for the better part of a decade, but is starting to receive more attention. Some of the recent press was a partnership with Obopay (May 2009) (Read here) and recently making this functionality available on smartphones (For instance, read here). I think that this is probably one of the most promising initiatives, but is not very popular because of high costs and limited number of target countries.

Banking the unbanked
A number of (almost unrelated) articles have attracted attention in this space. The most notable one was the collaboration with Telefonica announce in Jan 2011 (Read here). Soon afterwards a collaboration with Airtel in Africa (Feb 2011) was announced (Read here). It is also known that the Mastercard foundation provides support for various organisation, especialliy in micro finance. (For instance read here). While it seems that Mastercard is doing a lot and seems to be committed to this space, the substance and actual products that will be launched are not clear.

Proximity payments
As can be expected, Mastercard has been quite busy pushing out press on a number of NFC initiatives. The best strategy, was announced last month by my friend Eddie Grobler down-under. He spelled out a five year Paypass strategy for Australia (Read here). For the rest, Mastercard have been very busy associating themselves with some of the major brands in the industry; Google and Citibank (Read here), Gemalto (Read here) and of course the big one: working with Isis (AT&T, T-mobile and Verizon) to bring mobile payments to Salk Lake City (Read here). It does seem as if Mastercard is able to make some impressive announcements, but what is lacking is a central plan, a story, a clear strategy... or maybe, I am just not sharp enough to get it.

Also, I have found some of the general stories from Mastercard interesting. Sometimes, one is left with a feeling of contradiction, for instance, the important announcement regarding collaboration with Unionpay (Sept 2010) (Read here) followed by a statement last month by the CEO that India is a more exciting market than China (Read here).