Brett King

Archive for May, 2011|Monthly archive page

The coming clash of regulators and P2P via mobile

In Customer Experience, Mobile Payments on May 30, 2011 at 08:52

When the commercial internet became popularized in the mid-90s the emergence of e-Commerce quickly led to some amazing new business models, and inevitably the hype of the dot com bubble. While much of the dot com ‘crash’ survived and thrived (e.g. Google, Yahoo, Amazon) there were those that appeared happy to proclaim that the fad of the internet was over. Of course it wasn’t over, it was only just beginning.

Ironically, the impact of those new business models and new ‘paradigms’ that emerged in the late 90s are still being felt today. The collapse of Borders recently, can be traced back to the emergence of the online book store as a category. In the midst of the dot com bubble, Borders abandoned it’s web presence and sold out to Amazon who took over the site because web was perceived as ‘unprofitable’. Within just 6 years was delivering $160 million in annual revenues for Amazon. At this stage, Borders scrambled to break its ties with Amazon, but they never quite appeared to get on top of the new distribution model as evidenced by their recent chapter 11 status. The clear misunderstanding of the role of the channel, along with a weak multi-channel distribution commitment from the get go, is symptomatic of a more fundamental problem – the business wasn’t able to make the shift away from reliance on their traditional store-based approach to book sales because it was too ingrained.

Blockbuster, Encyclopedia Britannica, Travel Agencies, Stock Brokers and others have faced similar challenges over the last decade.

What does all this have to do with mobile payments and KYC?
Clearly we are entering a phase of massive disruption to the payments system(s) and incumbents of today. To put that disruption in perspective, let’s think about what has led up to the current slew of mobile payments announcements and improvements.

PayPal evolves P2P
PayPal commenced business in its current form around March 2000 with the merger between Peter Thiel’s Confinity and Elon Musk’s PayPal’s initial business was focused on enabling payments for EBay’s platform. eBay had purchased Billpoint in March of 1999 to provide this functionality, but by Feb 2000 PayPal was handling 200,000 daily auctions and payments, compared with only 4,000 a day for Billpoint.

Today PayPal handles $62Bn in transactions. That’s growing at an incredible rate of 25% annually too, primarily thanks to mobile payments.

Banks didn’t
Although it is patently obvious that person-to-person payments is a huge business and has been growing incredibly online since the late 90s, today the current bank-based P2P system is incredibly archaic and unwieldy for most banks and consumers. Why have incumbents clung on to the traditional ACH, Wire and Cheque-based payment systems in the face of such rapid growth in online payments? You’ll hear two arguments largely. The first being that P2P represented, up until recently, such a small part of the overall payments traffic that it was incidental and there wasn’t a business case of reforming the payments space. The second is that there is an incredible amount of inertia around the current system, and changing that takes perseverance, effort, investment and considerable re-engineering. That effort and investment was unlikely to come until it was absolutely necessary – of which it obviously is today.

Now, 11 years after PayPal’s foray into P2P we have the first broad financial institution focused effort, namely ClearXchange. Of course, we’ve seen CashEdge, PNC Virtual Wallet, and others have a shot at this, but none of the big banks have got behind the prospect of P2P until now. The fact that it has taken a decade is evidence of the same internalized thinking and inertia problems Borders faced in respect to changing distribution models and modality.

Emerging markets go Mobile
M-PESA has already launched in Kenya, Tanzania, Afghanistan and South Africa with well over 13 million customers. G-Cash and SMART in the Philippines are processing more than $500m in mobile payments each year, and that is rapidly growing. It’s estimated that by 2016, total mobile money transactions will reach $126 billion, with Southeast Asia accounting for $30.1 billion.

The key to understanding emerging markets growth has been the high penetration/adoption of mobile phones and the need for financial inclusion of the large swathes of population in the unbanked category. However, clearly the momentum around mobile smartphone adoption in developed markets, the rapid decline in use of cheques, and the massive competition from operators and handset manufacturers is now forcing the hand of the traditionals in the payments space.

Current KYC regs are a poor fit with where P2P and Mobile Payments is going

The End Game – a problem for Compliance and KYC
The end game clearly is that you should be able to send anyone with a mobile phone, an email address, a Facebook account or Twitter ID money from anywhere in the world. This solves two existing, intractable problems. The unwieldy and needlessly complex system around current wire transfers, TTs, etc and the need to have a bank account with the right receiving bank before you can receive money.

The problem with both issues is the current regulatory environment and bank policy around KYC, AML prevention and security. The more banks insist on complex KYC before you can open an account, the greater the risk is that I’ll circumvent the system because of its complexity. Now I can hear arguments defending such regulation and legal requirements already, but the problem is that the current system is complex because we need to confirm the identity of both parties in a transaction. This is a question of identity, not KYC process.

In December of 2009, my pal Dave Birch articulated a very clear position on why the current KYC regimen can not survive the mobile payments revolution.

“I wasn’t not arguing that we should have no KYC checks, but what I was arguing for was a sensible floor below which KYC checks are not needed. I happened to be in a local branch of national financial services organisation a few weeks ago when, for dreary reasons, I had to get into a queue. The person in front of me in the queue was trying to send fifty pounds to a relative in Liverpool. The clerk told him that couldn’t, because he didn’t have a passport and a utility bill. The chap complained that he had been sending this birthday money every year for decades. The clerk was unmoved. So who benefits from this?”
Dave Birch, Digital Money Blog

To make P2P payments really work, you have to be able to send anyone money at anytime. The current KYC and AML regulations don’t really make sense for day-to-day transactions under say US$1,000 or Dave’s proposed €500. PayPal has been a reasonably elegant solution to this in the short-term, but a long-term solution means if banks want to play in the day-to-day P2P space, they have to push back on stupid KYC rules… and so do we as customers.


Mobile Payments action heats up…

In Customer Experience, Future of Banking, Mobile Banking, Mobile Payments on May 25, 2011 at 20:10

Square POS and Cardcase, ClearXchange (BofA, Chase and Wells), Visa NFC trials, Google NFC trials – wow! Mobile Payments just arrived big time this week in the US particularly. So what does it all mean?

Inevitability is biting
Clearly there’s a bunch of very smart people that have all come to the same conclusion over the last months. Mobile Payments is not about what’s going to happen in 5 years, or 3 years – it is about what’s happening now. Regardless of where you stand on the whole death of checks, death of branches argument, I think that horse has bolted. You can’t seriously be in banking or payments today without a mobile play. End of story.

So who are the players to watch as this roles and who is going to dominate? Here’s a comment I received from PayPal’s communication team this week in respect to the action hotting up.

“eBay Inc. companies are leading the mobile commerce experience with our wide-ranging mobile assets, from eBay’s Milo and Red Laser to PayPal’s recent acquisition of the app, Where. PayPal is the leader in mobile payments. We have been offering our 98 million active users ways to send and receive money anyway they want, anytime they want, wherever they are in the world. PayPal is the only global service perfectly positioned to deliver on the convenient and secure “digital wallet.” – Anuj Nayar, PayPal Spokesperson

Everyone wants to own either the platform, the wallet or the ‘network’. That just isn’t going to happen. What Apple, Google, PayPal and the banks should have done is create a digital wallet standards organization years ago to bring the Telcos, handset manufacturers and banks together. But that’s never going to happen.

The Banks?
Banks think they are much better at this stuff because of security and access to network. The only problem is they are archaically slow.

ClearXchange announced today seems to be an effort to compete with PayPal, with some P2P effect aimed at around mobile. It is a shame that it is only now close to a decade after PayPal has already commanded a huge lead in this respect that a small smattering of US banks has finally got how critical P2P is.

Think about that. It took BofA, JP Morgan Chase and Wells Fargo 10 years to catch PayPal in respect to a basic platform of person-to-person payments. Why? Because they don’t get customer experience (CX). If you’ve ever tried to do a wire or ACH transfer in the US, you’ll know that PayPal with the option of sending to a mobile or email address is massively superior from a CX perspective.

The banks look at risk mitigation as their primary driver and don’t want to move until a secure, safe standard of doing ‘digital’ emerges. The problem is, that by the time it clearly emerges, they are almost a decade behind in capability. Driving customer experience improvements should be in the DNA of banks and it is a long way from being so. Until they crack that, they will increasingly be doomed to being the products, pipes and wires to enable the back-end of the banking system, rather than owning the customer.

Telcos are almost as chaotic as banks when it comes to creating common standards around something like a digital wallet. I get the challenges of platform differentiation, geographical diversity, etc, but organizations like the GSMA or IEEE could have played a strong role in creating a standard. We seem to have been able to crack it in the IP world around standards like HTML5 at least at a high-level, but not when it comes to mobile. Just see CDMA vs 3G vs 4G vs LTE vs WiMax, etc…

Lack of standards is not helping us here. If we want interoperability on payments, it sort of requires we have interoperability from operator to operator, payments network to payments network, etc. We’re a long way off from that.

Handset Manufacturers
Here is where it gets tricky. Ironically it turns out that probably Google, Apple, Microsoft/Nokia and to a smaller extent RIMM will be in the best position to actually build a mobile payments framework. Purely because they own the primary hardware that gives you access to the ‘rails’ payments will have to run on.

So banks, mastercard, visa, etc might own the rails that the payments are processed on, but it does them no good to be restricted to stations provided by Google and Apple (think App Stores) or to have customers only ride on trains run by others (i.e. handsets). Ok here ends the rail analogy.

Start-ups like Square
Square and others think out of the box. They are not hampered by years of inertia behind existing business models, or challenges about who owns what part of the network or who gets what share of interchange. They are able to by-pass all of that and just simply think about a better way of executing. Square has the potential to become significantly disruptive to the traditional players, and when NFC comes along Square can just plug it in to their ecosystem.

We can’t expect banks to think like this, nor them to greet the efforts of start-ups like Square as revolutionary and actually helping to evolve the payments industry. But that is what Square is doing. They are showing us that the current system of checks, unwieldy complex KYC requirements for money transfers, the hoops we have to jump through for card issuance – all the complexities of the banking system when it comes to current payments ‘systems’ – have no place in our future world.

As customers we don’t value complexity – we value simplicity. We need standards, cooperation, and better user experience.

Resistance is Futile – the banking industry is changing

In Bank Innovation, Customer Experience, Future of Banking, Social Networking, Strategy on May 20, 2011 at 15:07

My pals at BankSimple soft launched their debit cards internally for their staff this week, which is big news because it signifies the acceleration of the big shift in the BANK 2.0 landscape. Interestingly, though, this launch wasn’t easy, as the team at BankSimple articulated on their blog post of today.

The last many months have taught us greater patience. It is difficult to change an industry. But we’re leaning into it and can’t wait to show you what we’re building. Thank you for your patience.
Bank Simple Blog Post – May 20th, 2011

The BankSimple launch is significant for a number of reasons. First of all, when was the last time you heard of a new bank having 50,000 customers signed up or registered before the bank launched?? Secondly, the fact that BankSimple doesn’t have a banking license of their own, is no hindrance in offering better banking service today. Lastly, if you are going to change an industry, be prepared for some resistance.

Viral Banking – who’d have thunk?

Banks are notoriously hopeless when it comes to social media. However, Apple, Google, Mint, BankSimple, Square and others who are increasingly stepping on the toes of traditional banking players, are extremely adept at garnering customer support for their initiatives through viral marketing, social media and digital advocacy.

It is incredible that in an age where LinkedIn is worth $9Bn (40 times revenue), there are still some major bank players like RBS and HSBC that don’t have a Twitter account. I know the transition from a controlled media and brand messaging environment to a conversation sometimes dominated by customers, is a difficult leap, but it doesn’t mean you can’t live in this new social world.

I know there will be cynics out there that would say that RBS and HSBC probably hasn’t actually lost any revenue from not being on Twitter – personally I wouldn’t be sure about that. One thing I am sure of though, is that I can guarantee that they haven’t signed up 50,000 new customers as a result of digital presence on social media like BankSimple has.

This is the new way of acquisition. Be a part of the conversation, garner customer advocacy, simplify the engagement and enable relationships digitally. If you aren’t living in the viral, social, conversation space – be prepared to be marginalized as a service provider in the retail banking landscape.

The separation of the bank and the customer

I’ve previously talked a great deal about the customer experience gap and how banks are moving further and further apart from their customers due to lack of behavioral sensitivity and poor user experience, but this is more. BankSimple is working with a raft of back-end providers that hold a banking license and can offer an FDIC guarantee on the deposit, but that doesn’t mean that the holder of the deposit or the issuer of the credit product, actually owns the customer.

For years we’ve seen this in other industries where manufacturing of products and services is separate from the distribution network. The distribution network of the retail banking sector is under enormous pressure today. The BankSimple approach is the first of a massive shift away from traditional distribution channels where owning a branch network no longer means squat. Physical distribution network didn’t save Borders from collapse, nor did it save Blockbuster, Encyclopedia Brittanica, MGM or countless music stores.

In this shift away from physical to digital distribution, it is almost always new players that start to dominate. In the case of books – Amazon. In the case of music and video – Apple.

In banking, it is too distributed and widespread, along with too heavily regulated, for one single global player to dominate the new banking interface. But one thing is for certain. We are about to see a whole new layer of retail banking interface or customer experience that doesn’t need a banking license. If you think banking is “special”, then just keep thinking that while you slump into irrelevance.

The new bank is the customer experience bank.

Resistance is futile

The chaps at BankSimple have found out that trying to change the paradigm of retail banking takes cojones. It also takes patience.

There are a whole raft of embedded bankers who don’t want to see the world change. I liken this to the MPAA’s response to the whole bittorrent landscape, or the RIAA’s response to Napster. When the shift started to happen the traditional industry first denied it would ever happen, when it did start to happen they fought it with everything they had, and in the end they were screwed anyway.

The same thing will happen with banking. No matter how secure you think your relationship with the customer is today as a bank, the fact is if you can’t enable me to bank in a better way, then you are irrelevant. Someone else can put a new layer of customer experience over the top of your banking license and do it better, faster, cheaper and sexier than the traditional players.

At the end of the day physical cash, cheques, plastic cards, and branches are all elements of the banking system that are ripe for digitization. The longer you keep fooling yourself that this transition is going to take years, and the banking sector has plenty of time to adapt – the easier it will be for BankSimple and others to eat your lunch.

Why Apple’s iPhone5 must have NFC capability

In Bank Innovation, Customer Experience, Mobile Payments on May 9, 2011 at 05:36

On 14th of March 2011, The Independent newspaper from the UK published an article suggesting that the iPhone 5 would not include Near-Field Communication (NFC) capability. A few days later on the 17 March, Forbes rebutted the Guardian’s article quoting a source that said NFC was a sure thing. Who’s right, and will Apple delay their NFC launch to better perfect the tech?

The Independent article was surprising as it was hot off the heals of Google already launching their Nexus-S handset with NFC capability and a host of other manufacturers were flocking to utilize Android’s new OS codenamed Gingerbread. Of course, having an NFC chip in a handset doesn’t automatically mean that you can use it in a constructive manner for stuff like payments, coupon redemption and interactions at the point-of-sale. Then again, if you don’t have an NFC chip that’s basically a guarantee that you can’t do all that sexy contactless stuff (unless you use tags for example).

The sexiest NFC application coming is obviously payments, but it isn’t the only one. We’ve already seen Google trialing some pretty cool marketing capabilities with one-touch discounts, and other types of applications like NFC bump.

Now that LG, RIM, Nokia, Google, and Samsung have all launched an NFC-enabled phone, Apple really has no choice, but to go one step better. I can’t see Steve Jobs, who has made a trademark of the ‘this changes everything’ banter, deciding to give up on NFC until the next generation of iPhone in 2012. Imagine Apple launching the iPhone 5 and trying to position it as ‘changing everything again’ without NFC…not going to happen. The iPhone 5 has to go one step better than Google, RIM and all the others. Catching the competitors isn’t going to be enough for Apple.

You can't "change everything again" unless you catch up to NFC-capable competitors

The loss of POS

The mobile payments space is rapidly heating up. In recent times Square was attacked pretty vigorously by the likes of Verifone over their mobile merchant approach. Accusations were flying that the square dongle was little more than a card-skimming device. With Visa recently acquiring a stake in Square, it certainly appears that the smartphone-based POS terminal has hit mainstream.

Certainly it’s not hard to see why Verifone and other POS manufacturers were ramping up the scaremongering over Square’s clever approach. Verifone went so far as demanding a recall of the square hardware, which they claimed could be used for card skimming. The beauty of Square’s approach was not just the simplicity of the hardware, of course, but the real beauty was in simplifying merchant onboarding. Register online, download the app, plug-in the dongle and go…

The ongoing trick to protecting payments networks like Visa and Mastercard, is the ability to leverage off merchants at the point-of-sale. If conceivably most phones within the next 2-years gain NFC capability, each one of those can become a mobile POS-terminal as well as a payment device. Theoretically, circumventing existing payments networks would be possible via the cloud, so card issuers need to rapidly move to providing an economical and interoperable network that is not worth bypassing. POS hardware isn’t necessarily a barrier to entry. As the ISIS collaborative recently found out, however, creating a new payments network is tougher than it appears.

One of the main issues is that you might be able to launch a new NFC or Mobile-powered payments network locally in the US, but take your NFC phone offshore to the EU or Asia, and it could be worthless. Thus, you need global reach, a ready user base and a strong user experience play to take ground in this space. That leaves PayPal, Google, Apple and maybe Facebook with enough grunt globally to create a new payments paradigm.

The payments imperative

With so much happening in the payments space then, the iPhone 5 needs to come out swinging. When the 5 launches it needs to be much more than just NFC-enabled, Apple needs to ‘change everything’ again and the only viable way of doing this is taking a first mover payments capability. That’s tougher than what it appears.

Launching NFC payments out of the gate for the iPhone 5 means one of two things. Either Apple needs to come out with either their own payment network based somehow around the iTunes store account as the backbone, or they need to provide seamless integration into existing payments networks provided by the likes of Visa and Mastercard.

Regardless of which of those two outcomes Apple chooses to go with, if they want to change everything it’s their only possible choice. It’s either that, or let Google change everything and rethink your iPhone branding strategy:

iPhone 5 – not changing everything, but upgrade anyway…

That’s the biggest reason to expect the iPhone 5 not only to have NFC, but to come out of the gate with a swinging payments capability. Get ready to upgrade your life.