Brett King

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 Borders.com 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 X.com. 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.

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