The Financial Services Club's Blog

Banking as components or integrators

I just spent the day in a payments conference focused upon operational excellence.

We talked about Basel III, SEPA, the PSD, Mobile … the usual stuff, but there was a particularly intriguing presentation from Olivier Denecker of McKinsey in the morning session on what operational excellence in payments is all about.

I took a whole bunch of notes, and here’s a few of the key bullet points:

• EU banks RoE went from 13.5% in 2007 to 3.9% in 2010 = increase revenues or decrease costs to survive
• Payments = 30% of the €150 billion cost base of EU banks
• Although payments is well automated for STP, half of all costs are still people-related
• IT application costs in payments vary by a factor of up to 3x between the best and worst in class providers
• IT spend varies between 5.7% and 11.7% of operating income between best and worst in class performers
• Outsourcing in EU has DECREASED for the issuance of credit and debit over last decade (increased for acquiring)
• McKinsey recommend banks become more like car makers and common source components, outsource more and use standard metrics for benchmarking

What struck me as Olivier talked is that banks don’t view payments as a separate product stream.

It’s not an individual product line.

For most banks, it’s an integral part of the bank operations.

It’s the glue that hooks the customer to the bank.

It’s the core of their offer.

That’s why banks find it so hard to think of payments neutrally, objectively, dispassionately.

Payments are not objective, they are emotional.

For most banks, they are very emotional.

Ask a banker to outsource core payments processing and they’ll give you a look like you’re the devil’s spawn.

It’s just not done.

And yet, this is changing.

Payments is no longer the glue for bank, but more like the foundation and even bulilders don’t always drill the foundations.

They bring in specialists.

That’s what Olivier was driving at: bring in common component providers and develop value on top of their services.

This is where it gets interesting as banking has historically been a vertically integrated industry, providing an end-to-end service that is wrapped around the customer and is incredibly difficult to unlock.

And yet it will be unlocked if Olivier’s message comes true and banking is driven into a componentised industry where you have a payment app, a balance app, a cashflow app, a budgeting app, a fraud app and so on and so forth.

Oh, wait a minute.

That’s Banking-as-a-Service if I remember rightly (presentation from February 2009!).

Banking as a Service (download)

View more presentations from Chris Skinner

The presentation may be two years old but Banking-as-a-Service is coming around faster than many might believe if you checkout

Square (now processing $2 billion a year),

iZettle (€8.2 million raised this week),

PayPal (now going offline as much as online with cards),

Movenbank (no plastic, no cards, no hidden fees),

Zopa (active lenders up from 9,000 in 2008 to 16,000 in 2009 to over 22,000 last year),

Banksimple (over $13 million invested and now demonstrating their offer

BankSimple Demo from BankSimple on Vimeo.

… jeez, there are 100s of these startups and established disruptors out there doing stuff as I’ve not even mentioned what Facebook, Google, Amazon, Apple, Bitcoin, Ven Currency and others are doing here.

Suffice to say that the componentisation of banking and shift from vertical integration to horizontal components that can be put together as you like, is happening and happening fast.

Has anyone noticed?

 

 

 

PayPal's ubiquitous vision

A couple of interesting posts about PayPal this week. 

First, they presented their ideas about competing with Visa and MasterCard at physical points-of-sale.

"PayPal set up several user scenarios that are intended to disrupt the way we pay for things online and in stores today, using a variety of technologies. What stood out was that none of the scenarios required merchants to adopt new infrastructure or buy new terminals. Likewise, customers won’t be required to upgrade their phones or have certain types of bank accounts.  Instead, PayPal users (of which there are 100 million worldwide) will be able to pay by entering a phone number and a PIN code at the existing payment terminals, or by swiping a PayPal-issued card that’s not associated with a bank and does not have an account number printed on the front."

This was followed up by a blog post from PayPal President Scott Thompson, PayPal Unveils the Future of Shopping:

"PayPal is re-imagining money and making it work better for merchants and consumers – whatever device you’re on, wherever you are in the world, and however you prefer to pay (whether that’s cash, credit, or installments)."

Which has led to all sorts of headline write-ups in various media.

Bottom-line, as I've said so often recently, there is no online and offline anymore.  Just real-time ...

 

 

Alipay: innovation in banking is a good thing

Going back to my discussions in Asia last week, I am intrigued by the results of the interactive voting we performed.

I asked a number of questions last week, and have already blogged about one of them:

Do you agree that innovation can only be delivered by a CEO or equivalent mandate?

• Yes – 49%
• No – 51%

Considering the audience were Asian CEO’s or equivalents, that one is quite telling.  I disagree with this view, and believe you have to have the line of business owners’ mandate to change or otherwise it will be constrained.

However, let’s look at one of the other ones:

PayPal has been the only real disruptive innovation over the past decade, do you believe there are others out there and should they concern us?

• Yes, and they are serious threats – 42%
• Yes, but they are not serious threats – 27%
• No, disruption has happened already and will wipe out parts of our business – 24%
• No, I have no worries about disruption – 7%

This poll reflects the old mantra that Only the Paranoid Survive, as coined by Andy Groves of Intel.

What worries me here is that a third of the audience are not paranoid.  Are they complacent?

And the other two thirds, what are the threats they worry about and what do they mean?

I managed to ask the audience to clarify a little and one bright spark said that the disruptors in Asia were people like Alipay.

Alipay is China’s PayPal and was part of Alibaba, the largest online commerce group in China, until it was hived off without board approval in order to keep it out of the hands of Yahoo.

This dispute has rumbled on for a while now, as Alipay was transferred into the ownership of CEO Jack Ma last year, without the agreement of 40 percent Alibaba shareowner Yahoo, whilst 30 percent owner Softbank has been playing hardball over the whole deal.

It looks like some agreement is being made now, but what is the real deal here?

The real deal is over China’s PayPal and the fact that it dominates online payments with every other cent exchanged over the internet made through the payments service.  As of December 2010, Alipay had more than 550 million registered users and facilitated around 8.5 million transactions daily.

The service is the key service recommended by Alibaba, and by Taobao.

Alibaba.com is a global leader in e-commerce with an online business community of more than 65 million registered users from more than 240 countries and regions; whilst Taobao is China's largest online retail website and one-stop platform for shopping, socialising and information sharing, with over 800 million product listings and 370 million registered users

In addition to Taobao and Alibaba.com, Alipay provides payment solutions in China for more than 500,000 external merchants for online retail, virtual gaming, digital communications, commercial services, air ticketing and utilities fee payment transactions.

In July 2010, Alipay was processing about RMB 1.4 billion a day, which is over US$ 200 million a day or near $80 billion of transactions for the year 2010.

Hmmm … PayPal processed $92 billion in transactions in 2010 so it’s serious stuff.

As is Tenpay and QQ which I’ve referred to before.

So there are serious threats out there, and some have happened and some are emerging, such as Facebook Credits.

Maybe this is why 78% of the audience voted that innovation in banking is critical (38%) or important (40%) for banking today.  20% said it was required, and only 2% thought innovation irrelevant.

Equally and more stunningly, 88% of the audience thought that innovation would be more important for banks in the future and no-one thought it would be less important.

So, is innovation a good thing to pursue in banking?

Of course it is.

Oh, and just noticed this from the O'Reilly Radar:

China's AliPay develops barcode payment system

China's search engine giant, Alibaba, has launched a barcode-based mobile payment system for paying for real-world goods. Alibaba's payment subsidiary, Alipay, isn't waiting for near-field communications (NFC), and has developed an app on iOS, Android, and Nokia platforms. Similar to the well-knownStarbucks app in the U.S., Alipay generates a unique barcode that merchants can scan with a barcode reader or their own smartphone camera. The system draw funds from a user's credit card or a prepaid AliPay account.

Like everything in China, the opportunity is tremendous. There's more than 420 million Internet users, including some portion that spent 400 billion yuan ($62 billion U.S.) online in the first quarter of 2010. Within this market, AliPay (which some U.S. readers may know as the subsidiary that was spun off from Alibaba without notifying key investors Yahoo and Softbank) held 45.5% of the market for online payments in China in 2010, followed by number two player Ten Pay. Earlier this year, AliPay announced that, having signed up 200 million users, it has more registered users than PayPal.

 

 

Massive innovations in payments ... not?

Just been through a meeting on payments and all areas of payments from SEPA to Basel III, corporates and trade, risk and liquidity, innovation and change and more.

My role was to talk about all things that I see as innovative in payments right now.

That’s a long list and so, in the interests of brevity, here’s my summary:

• Jack Dorsey’s Square which launched over a year ago, and is now processing over $4 million in payments transactions per day, compared to $3 million in  May, $2 in April and just a million a day in March. That’s a hockey stick curve if I ever saw one, and is the reason why Visa made a strategic investment in the firm back in April.

• Google Wallet was an industry milestone when it launched in May.  It was a milestone because it gave the seal of endorsement for the tipping point of mobile contactless.  It has since led to wild speculation about Google’s long-term plans, especially as Chairman Eric Schmidt has recently predicted that 1 in 3 merchants terminals will support NFC next year, thanks to the card providers upgrading merchant terminals.  The result is the Mr. Schmidt expects such a development will prepare the ground for a “trillion dollar” industry of mobile advertising and payments.

• Mobile remittances is still bubbling away nicely, as M-PESA’s lead is copied into multiple geographies.

• Virtual currencies, such as Facebook Credits, are nibbling away at the bottom-feeding end of the market and may well be mainstream soon.

• PayPal is finding itself under attack from the card firms, as AMEX, Visa, MasterCard and the banks with iDEAL and ePayo are targeting their schemes.  As a result, PayPal are fighting back with their own direct merchant offerings and the delineation between the banks and the disruptors are becoming blurred.

• Small bank innovations, like those seen with Bank Inter with their biometric iPhone app, are going to be notable as payments developments move forward.

• New payments processing capabilities developed on these ideas by innovative Payment Service Providers, such as those of Voice Commerce, are also well worth tracking.

• Personal Financial Management tools, like Standard Chartered’s Breeze which is best-in-class imho, are taking off big-time this year.  It’s like Corporate Cash Management Dashboards of Treasury Workstations meet Retail Consumer Service, thanks to innovative software solutions.  A space to watch.

These are but a cream off the cake of the extensive list of innovations in payments that have been covered on this blog over the last year.

The only question I asked at the end of this list is: when will all of these innovations in retail payments hit the wholesale payments markets?

Apart from Voice Commerce, there’s a not a lot of change in the core processing of payments that’s out there yet.

This was the question we covered in our recent research: Are payments infrastructures fit for purpose?, and the answer came back that wholesale markets will focus far more on cloud computing and scalability than sexy things like mobile internet.

Not so sure myself.

I think the whole area of mobile internet can revolutionise the corporate-to-bank and bank-to-bank space  as much as the consumer-to-bank space, especially in the area of Treasury Apps for tablet PCs by way of example.

Would anyone else agree?

 

How Facebook Credits could replace traditional banking

I just made a comment this week about Facebook Credits being bigger than Amazon by 2020.

This was on the back of my favourite stories about Zynga becoming the biggest PayPal merchant in under a year on the back of Facebook games, and how QQ and Second Life currencies have been examples of how virtual currencies can and will work.

But I suspect Facebook might screwup this opportunity as they stiff their community with the 30% fee base and mandatory usage of credits.

It seems like restrictive practices that a monopolistic firm would apply, and does not fit the nature of community-based practices.

So, as I haven’t blogged in detail about this, here’s a quick round robin on what’s hot in the virtual currency world of Facebook.

From Facebook’s overview: “Facebook Credits are a virtual currency you can use to buy virtual goods in all games on the Facebook platform.  You can purchase Facebook Credits using your credit card, PayPal, a mobile phone and many other payment methods powered by PlaySpan.”

The basic idea is simple.

If you are playing games in Facebook, such as Zynga’s Farmville or Cityville, you can quickly and easily buy additional fun using the Credit system.

This interview with John Silverman, chief executive officer of Ifeelgoods Inc on Bloomberg on 1^st July, puts it all in context:

The reason July 1st was a big day is that this was the day when Facebook made it mandatory to use Facebook Credits for any games or apps on Facebook.

Now this is where it gets interesting, as Facebook take a 30 percent cut from any payment made using Credits.  That’s a whacking big slice of the action.

By way of background, the 30 percent cut was introduced in February 2010, nine months after the Credits system was launched in May 2009, with the idea that 70 percent of the payment stays with the developers of games whilst the 30 percent allows Facebook to develop the games ecosystem.

Zynga is the biggest gaming firm on Facebook, and therefore critical to the success of Facebook Credits.

Zynga are the fuel that created a sustainable gaming system on the social network.

This is illustrated by the documents Zynga just filed for their IPO, with many believing their business will reach a valuation of around $20 billion.

Not bad for a firm that deals in virtual nothings.

But then read the numbers:

“From 2009 to 2010, Zynga’s revenue increased 392 percent. In 2010, Zynga made $27.9 million profit on revenue of $597.5 million. In the first quarter of 2011, the company had revenue of $235.4 million, a 133 percent increase from the previous year, putting it on track for well over $1 billion in sales this year.”

So you can see why Facebook needs Zynga and Zynga needs Facebook but, with Facebook stealing taking 30 percent of Zynga’s revenues, there would be some issues here surely.

And of course, there were until a deal was struck in May 2010, where Facebook and Zynga agreed a five year partnership for the use of Facebook Credits in Zynga games.

The deal would obviously be a sweet one, but what does it mean after 2015 for Zynga?

They’ve already thought of that.  From their IPO filing documents:

“In 2010 Facebook adopted a policy requiring applications on Facebook accept only its virtual currency, Facebook Credits, as payment from users. As a result of this change, which we completed in April 2011, Facebook receives a greater share of payments made by our players than it did when other payment options were allowed. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform, change how the personal information of its users is made available to application developers on the Facebook platform or restrict how Facebook users can share information with friends on their platform. Beginning in early 2010, Facebook changed its policies for application developers regarding use of its communication channels. These changes limited the level of communication among users about applications on the Facebook platform. As a result, the number of our players on Facebook declined. Any such changes in the future could significantly alter how players experience our games or interact within our games, which may harm our business.”

In other words, Zynga’s business is TOTALLY reliant on Facebook.

It is why Zynga filed documents with the Security and Exchange Commission last Friday, saying that it generated “substantially all our revenue” from Facebook and that a breakdown in the relationship could “harm business and adversely affect the value of our Class A common stock”.

Maybe Facebook should buy Zynga or something, but this is not the point of this piece.  The point of this piece is that Facebook is on course to generate $1 billion in revenue this year from social gaming.

If that is the case, the social gaming market on Facebook alone is worth at least $3 billion, as they’re taking a 30 percent cut.

This is an ecosystem that is only a couple of years old.

And it's just for gaming and not commerce.

Now think how it might play out further.

Facebook Credits are not just for games and apps in Facebook, as they are now being used to vote in reality TV contests and as rewards from American Express.

And sitting on Facebook is an Amazon-styled embryonic retailer called Payvment. 

Described as ‘the mall of the future’ , it has 60,000 retailers in its social store, with about 400 new etailers added every day.

So here’s why I think Facebook Credits is big news.

If Facebook gets its act together for using Credits for Commerce, then they could be bigger than PayPal and Google.

This is because, by 2020, Facebook – or it could be Google Circles or something else – will  be the internet.

People will go there first and stay there, visiting all of the destinations these ecosystems offer and trading with them in their currencies.

These social sites will house millions or even billions of people in a social ecosystem that embraces music, relationships, ideas, creativity, business … life basically.

And where there’s life, there’s commerce.

As a result, the dominant internet-hosted world of 2020 will encourage their credit system as the de facto standard.

Just like PayPal did for Web 1.0, Facebook or Google will try to become the de facto payment service for Web 2.0.

It may be in partnership with PayPal (Facebook) or a bank (Google), but all the user will see is their internet-hosted world.

The way Facebook could get into this space is by offering Credits as bonuses to retailers who transact through their service.

They may do this in partnership with someone like Payvment, and offer 1 Facebook Credit as a bonus for every $10 spent.

The credits can then be used by retailers to advertise on Facebook and so on and so forth.

In other words, it becomes a virtuous virtual circle.

Rather obvious really.

So the vision a bank should be considering, if they want to be relevant to this future life, is that if there’s a next generation world where everyone lives virtually, exchanging virtual goods and services with virtual credits, where is the relevance of the bank?

Right now, in the context of social worlds and virtual currencies, banks are irrelevant except as dumb pipes beneath.

After all, Zynga sits on Facebook Credits which sits on PayPal which sits on banks.

Everyone’s taking a cut to reinvent the system for the future world.

But what if the future world says “no”.

Tomorrow, Amazon just sits on Google Circles, and who needs anything else?

 

How banks are becoming PayPals

There was an interesting statement from one of the banks at this week’s conference: “we wish we could just take a real-time NFC payment direct from the mobile contactless terminal in the merchant and straight through to the bank’s deposit account.”

This got me thinking: “why not?”

Why can’t a bank take a payment direct from terminal to account?

Oh yes, there’s too many hands involved.

The terminal is part of the four-pillar merchant to bank, issuer and acquirer structure that involves interchange fees, waivers and infrastructure loops.

Then, if it’s an international payment, you probably have the payee’s bank and the payer’s bank and possibly several banks along the way touched by the BEN, SHA, OUR SWIFT messaging transmitters and receivers.

Finally, you have the different governmental controls, taxes and structures overlaying all of this, which means that the idea of a direct payment from mobile NFC to account is near impossible.

Unless you’re Google or PayPal of course.

What are these guys doing?

They’re purely putting a wrap, a skin if you like, over the complex infrastructure underneath ...

... and making it look like a simple touch and go.

That’s what the banks should be doing isn’t it?

Ah yes, we are far too bogged down with our own language and ways to realise this simplicity of putting skin in the game.

Or are we?

The Dutch iDEAL approach and more recent announcement of ClearXchange from Bank of America, Wells Fargo and Bank of America are clearly changing things, as are SERVE from American Express and the launch of Visa and MasterCard initiatives all based around mobile wallets and P2P services is starting to move all of us to real-time direct payments from the bank deposit accounts to the point of sale.

That’s what we all have to strive for today.

In other words, we are all becoming PayPals when it comes to retail payments processing.

This is an area we will debate in depth at a Financial Services Club meeting in London on 20th June 2011 (added in response to Dave Birch's comment below: from 6:00pm till 9:00 at The City IOD, New Broad Street House, 35 New Broad Street, London, EC2M 1NH).

As AMEX and VISA open P2P payments offerings and PayPal moves into merchant terminals, the markets are asking: what is the future for retail payments?  Will we all just become PayPals?

To debate this point, we have gathered a prestigious panel with: 

   John Chaplin, President, Ixaris;
   John France, Managing Director, eWise Payo;
   Mike Jones, Senior Manager, Core Payments Group, PayPal; and
   Tom Gregory, Head of Digital Consumer Payments, Barclaycard.

John Chaplin, President, Ixaris
Ixaris, a provider of prepaid payment applications and services, appointed John Chaplin as President in July 2010.  John has previously worked in senior positions at First Data Corporation and Visa, where he was Executive Vice President in charge of its processing business in Europe. He is also a member of the Payments Market Expert Group that advises the European Commission.

John France, Managing Director, eWise Payo
eWise, a global provider of online payments and personal financial management solutions, appointed John France as Managing Director of the eWise European Payments Division, based in the UK, in October 2010.  John was formerly Head of Processing Sales for Visa Europe where his exposure across the entire payments value chain enabled him to understand the various stakeholder models and value propositions associated with B2C and B2B payments. Prior to Visa, John held senior sales roles with ACI Worldwide and Nomad.

Mike Jones, Senior Manager, Core Payments Group, PayPal
Mike Jones has responsibility for PayPal’s European and International card processing strategy. In previous roles he worked on PayPal’s European expansion, SEPA strategy and deep localisation projects. Prior to joining PayPal, Mike worked for CyberSource Europe running strategic alliances.

Tom Gregory, Head of Digital Consumer Payments, Barclaycard
Tom was appointed to Head of Digital Consumer Payments for Barclaycard at the start of 2010, and is responsible for the digital payments strategy, partner development, execution and delivery, and management of the digital payments service including NFC / mobile payments, online payments, and adjacent areas in the payments cycle.  Prior to this role, he was Head of Change, Business and International with Barclaycard and had various roles in the Barclays Bank Group.


If you wish to attend you should register as a Member or Non - Member .

 

Banks will absolutely be disintermediated

OK, so I said that banks would absolutely not be disintermediated last week, and it sparked some interesting debate and dialogue.

A few folks were incredulous that I could say this; others thought it made eminent sense; some noted that the movement of money could be disintermediated, but the holding of money could not; whilst others were up in arms over the fact that I could possibly believe any of it.

Well, for those who know me, it was written with a deep sense of irony and disbelief.

I absolutely believe that banks will be disintermediated and have believed it for a long time.

However, I also believe that some of the system will be protected and will never be destroyed or replaced.

This is the part that governments are regulating, protecting, licensing and calling too big to fail, or 2B2F.

The 2B2F area is the core of the monetary system, and needs to be protected.

If your social media account is compromised, it doesn’t matter too much that someone sends a status update saying: “I’m flat on my face in a flap” or worse from your account.

Sticks and stones will break my bones, but names cannot hurt me.

Losing money can hurt though, so it does matter if they steal all your worldly wealth.

This is the part that will never be disintermediated, and I guess that’s the part that Nancy Pierce of HSBC and Mark Buitenhek of ING were saying is core.

• “We will absolutely not be disintermediated … who’s better to move the money than the banks?” Nancy Pierce, Head of Product Management for Payments and Cash Management Europe, HSBC

• “Banks need to reinvent themselves as they will be disintermediated by other banks, because we are the only ones that are trusted for secure transaction processing.” Mark Buitenhek, Global Head of Payments and Cash Management, ING

But it’s open season for the rest of the financial system and yes, there are companies that claim they could replace VISA, MasterCard, SWIFT and other infrastructures.

In fact, as discussed on Monday, it’s warfare between the banks, card processors and PayPal.

The iDEAL system originating from the Netherlands gains more traction for banks across Europe as an alternative to PayPal; this is in the same moment as AMEX opens a P2P platform, as does VISA, as an alternative to PayPal; and this is in the same breath as PayPal stretches out towards physical store paypoints to compete with VISA, AMEX and MasterCard, as the online world merges with the offline.

A similar story can be seen in capital markets where the rise of Chi-X, from upstart electronic trading platform to the biggest trading system in Europe, took place in just two years (doubleclick image to see full size version):

Source: Monthly MiFID Monitor / Thomson Reuters Equity Market Share Reporter

A similar story can be seen with BATS in the USA, which is why BATS is buying Chi-X.

So disruption can occur.

In the latter case, it’s down to deregulation.

In the case of PayPal, it’s down to disruptive innovation and the dilemma of something that appears to be innocuous at first but soon becomes mainstream, e.g. with $4.2 billion revenues forecast for 2011, PayPal is now almost half the size of Citigroup’s Global Transaction Services business.

The real issue of disintermediation therefore, is not around the core of banking – the holding money area that is protected by banking licences – but around the boundaries of banking.

The thing is the boundaries is where all the profit lies.

The boundaries is everything from savings to investments, cards to loans, trade finance to treasury dashboards, insurances to wealth management, foreign exchanges to bond markets, pensions to mutual funds, swaps to futures, mortgages to marriages …

In fact, everything in a bank can be broken down into components of functionality and then traded in and out by new competitors.

Source: ACI Worldwide

This is the picture I’ve talked about for a while, where all of the processes and functions of a bank can become apps that users can download and integrate to build their own bank.

The Build-Your-Own-Bank (BYOB) is the new generation of banking.

It’s the generation where anyone from a banksimple to a Mint can step in and take out a piece of core banking.

That’s what disintermediation is really all about.

Taking out the parts of banking where there is not enough competition, and leaving the bits of banking that aren’t worth competing against … which is the part that is protected by licence because it’s too big to fail.

BYOB will absolutely be disintermediating, whilst 2B2F will never be disintermediated.

That’s the real bottom-line.

• “Could we see a wholesale version of Zopa or PayPal? Yes, I think we can.” David Birch, Director, Consult Hyperion

• “Disintermediation is well under way, and will happen very quickly.” Daniel Marovitz, Head of Product Management, Global Transaction Banking, Deutsche Bank

 

AMEX enter the P2P payments war

I got an interesting link last week to a new website called Serve.com.

It’s the website spawned from the takeover of Revolution Money by American Express for $300 million last year, and goes live today with a marketing blitz across the USA.

The service is basically Revolution Money’s MoneyExchange, Version 2.0.

If you’re not familiar, MoneyExchange is a payment service that allows users to easily send and receive money to and from friends, family and colleagues online, in a secure, free and instant way.

It’s a P2P service in other words, and one that could displace PayPal as an online and mobile direct payment platform.

Here’s what the Serve home page says about it:

“Wherever you need to move money, Serve makes it easy. It is your virtual wallet, accessible 24/7 online and on your mobile phone via the Serve mobile app. And you can even use your prepaid reloadable Serve card to make purchases in stores where American Express Cards are accepted.

“In addition to making purchases, Serve is a fast, simple and secure way to send and receive money to and from your friends and family. All you need is the recipient's email address to quickly send and receive money.”

It also has some interesting new features over and above the old MoneyExchange, such as subaccounts:

“You can extend your Serve account to others by creating subaccounts. With subaccounts, you control how much of your money to distribute, who to distribute it to and how they can use it. You decide which transactions they can perform with their subaccount, can set daily limits on transaction amounts, limit their purchase capabilities and more.

“You can create a subaccount for virtually anyone you choose, thirteen and older. Create a subaccount for the babysitter so they can order pizza, create a subaccount for your son to receive his allowance, the possibilities are limitless. And managing your subaccounts is easy. You can set and change your subaccount privileges from anywhere at anytime.

“Whatever the reason and whenever you choose, you can quickly transfer money to and from your subaccounts online or via the Serve mobile app1 available for iPhone and Android making it simple to get money to the people who need it without slowing you down.”

The service  allows you to add money via a debit or credit card and has limits of $1,000 per day or $2,500 per month of transactions, which is quite low, but enough for basic usage.

In the first instance, AMEX is also waiving fees.  This waiver applies for the first six months, after which it costs 2.9% + $0.30 per load to put money into accounts and $2 for ATM cash withdrawals.

It’s interesting to see AMEX doing this and yes, it has all the obligatory stuff related to blogs, facebook and twitter.  It also has a mobile component for the iPhone and Android, as well as access via Facebook.

This is a serious gambit by the card firm, and I hear that AMEX is investing heavily with 200 people working in their Florida office on Serve, along with more developers in New York where all of the marketing is based.

This division is all run by Dan Schulman who joined AMEX as Group President, Enterprise Growth, in 2010 and is responsible for the company’s global strategy to expand alternative mobile and online payment services, form new partnerships and build revenue streams beyond the traditional card and travel businesses.

Previously, he was President of Sprint’s Prepaid Group and was the founding CEO of Virgin Mobile USA, where he led the company from its concept stage and national launch in 2002 to become one of America’s top wireless carriers, with more than 5 million customers and $1.3 billion in annual sales.

As can be seen, there is real substance behind all this and, like the Visa attack on PayPal – did you know that Visa has splashed out $2.2 in acquisitions in just the last six months? – the card companies have finally recognised that they have to cannibalise themselves and offer P2P services or PayPal will take over.

This push into P2P occurs just as PayPal push the other way, and target to open a physical network to complement their online services in a bid to displace Visa and MasterCard.

Interesting times indeed.

 

Banks "will absolutely not be disintermediated"

We got into another fine debate this week about bank disintermediation, a term used liberally throughout the 1990s and early 2000s when Web 1.0 came around, and then was dropped just as fast.

Disintermediation – taking the bank out of the customer delivery cycle and displacing it with a new provider.

As if that could happen.

We thought it might happen a decade ago and a decade later, nothing’s changed.

Sure, we have more banks competing with each other through these channels but Netscape, Intuit or Microsoft opening a pucker bank has not happened.  Even Virgin and Tesco's threat of disintermediating the banks has failed.

Sure, we now have bank net and mobile channels, but there is no big new bank anywhere in the world.

Sure, there’s PayPal, but PayPal is just a layer on top of the old system. They’ve not replaced anything.

Maybe I’m just being a realist, but banks don’t need to worry a jot about the new payment providers.

PayPal will never be a serious player: Visa and MasterCard will crush them.

The threat of a BT or Earthport offering a secure transaction alternative to SWIFT is just a fallacy.

And the idea of Google, Facebook, Amazon, Apple or any of those guys becoming a serious contender in the financial servicing space is just smoking dope. They’re not in that space. They’re search engines and IT shops, not financial servicing processors.

As Nancy Pierce from HSBC put it yesterday: “we will absolutely not be disintermediated … who’s better to move the money than the banks?”

Or as Mark Buitenhek of ING put it: “banks need to reinvent themselves as they will be disintermediated by other banks, because we are the only ones that are trusted for secure transaction processing.”

So, for all my bleating about change and new entrants, don’t worry about them.

They are irrelevant.

 

VISA's pride before a fall over the Chinese wall

I was at a fascinating meeting yesterday looking at developments in credit, debit and prepaid cards. There was a standout moment when we had a discussion about China Unionpay (CUP), China’s card processing operator.

First a bit of background.

CUP was set up under the auspices of China’s central bank in March 2002, and is the only domestic credit card organisation recognised by the People's Republic of China as it is owned by 80 Chinese banks and other state entities.

The reason it is disliked by the likes of Visa, MasterCard and Amex is that there are barriers for these processors to get access into the Chinese markets, whilst CUP feeds off their networks to support processing overseas at discounted rates.

For example, the interchange fee structure that Visa, MasterCard and Amex operate is pretty much ignored by CUP.

Consumers who use cards which simply display a China UnionPay logo will not only be exempted from brokerage fees but also will enjoy various services provided by China UnionPay. However, if they choose to use Visa's settlement channel, they will be required to pay a currency transaction fee of 1 to 2 percent of the total amount they have paid or withdrawn ...

At the end of March, the three major global credit card companies, Visa, American Express and MasterCard, pushed the American government to urge China to open up its credit card market to foreign competition. The companies estimated that there was the potential for a 997.8 billion yuan ($150 billion) credit card market in the country. Meanwhile, China UnionPay has expanded its settlement network to 90 foreign countries and areas. They accept not only cards with the China UnionPay logo but also those that display both the Visa and UnionPay logos.

The figures above are actually low-balling it, as the firm describes themselves as follows:

To date, the total number of CUP card issued worldwide has exceeded 2.1 billion; in 2009, the number of CUP card inter-bank transactions reached 7 billion with an amount of USD 1.1 trillion; the overall merchants, POS terminals and ATMs reached 2.13 million, 2.88 million and 930 thousand respectively. China UnionPay has also established partnership with around 400 financial institutions all over the world. As of now, CUP card international acceptance network has been extended to 90 countries and regions. Over 10 of them, including Japan, Korea, Singapore, Russia, Mongolia etc, have issued CUP card.

So the figures are more like over two billion cards transacting over $1 trillion a year.

Wowser.

For a market that size, it does seem a bit strange for Visa to take the bold action of attempting to block CUP users from using their network outside China in June this year, as it resulted in CUP retaliating by blocking Visa from China for a year.

I say strange as Visa has shot themselves in the foot.

Rather than trying to pressure China into opening their borders to trade through international lobbying, whilst trying to partner with them, they have now become an enemy.

Meanwhile, firms like Amex and PayPal have partnered with them.

In a press release last week:

November 18, 2010 

China UnionPay and American Express today announced that they have signed a memorandum of understanding that calls for both companies to explore the expansion of their current cooperative activities. For the past several years, China UnionPay and American Express have cooperated within China where American Express Cards run on the China UnionPay network. This new MOU will establish working teams to develop potential new areas of cooperation between the two companies within China and in markets outside of China.

And in a press release in March:

17 March 2010 

PayPal and China UnionPay, China's bankcard association, today announced that China UnionPay (CUP) card members will be able to use PayPal to shop online, representing a new opportunity for international retailers to sell to a large base of Chinese customers who, combined, hold 2.1 billion CUP cards ... Chinese consumers have more disposable income than ever before and are starting to look for the best products the world has to offer. CUP card members will be able to use PayPal in the third quarter of 2010. This gives merchants the opportunity to spend the coming months preparing their Web stores for Chinese consumers, including adding Chinese translation and fast, cost effective shipping methods.

What this says to me is that firms who see China as the land of opportunity must be willing to adapt their business models and, potentially, their principles to gain access. You could admire Visa therefore for not dropping their values ... or view them as foolish for sacrificing access to this trillion-dollar opportunity by not changing their business approach.

Meanwhile, a nuance of this story is here in the UK, where RBS WorldPay has been opening access across UK POS and ATMs for Chinese tourists in partnership with CUP.

Chinese tourists only started arriving in London in 2005, and are now the biggest spenders in our country. Apparently, the average Chinese tourist spends about £800, compared to American tourists who spend an average £650 each.

Who would have thought the wealthiest tourists in the world would be Chinese a decade ago?

And who would have thought that RBS would be doing so much to bring wealth to our impoverished nation during these austerity times.

Bravo ... or is it shame on you?

Totally depends on your own point of view.

 

So is there a chance of getting rid of banks?

So to the really interesting question: if the industry is a polluting, festering, rotten and foul mess, should we try to shut it down?

The reason I ask this is that this is the question that came up as I was writing yesterday's blog, debating the similarities between the banking and oil industries.

If BP and their brethren had a Deepwater Horizon every few years, we would seek to substitute oil for another fuel ... and we are.

If JPMorgan and their brethren had a financial crisis every few years, we would seek to substitute banks for another service, and some of us are.

I think this is really to the point that Venessa and her friends are asking: can we evolve a system that substitutes banking with something far more robust, resilient, safe and secure and trusted, created by the people for the people.

Sounds revolutionary, but maybe the time is nigh.

After all, I was at a debate this morning that posed the question whether we still trust banks, and what banks should do to create more trust.

I’ll blog about that specific debate separately, but comments were made about the 18-25 year old generation and how their trust in the financial system, in fact their trust in the institutions of the 20th century, has been smashed.

Graduates who are desperate for jobs in these hard times are just not applying to banks.

Banks are hiring but no-one’s applying.

The world now views our revered institutions as being broken, and the question was asked: can they be fixed?

Let’s say no.

Let’s say that the new generation decides that banking is rotten to the core and they want to do it a different way.

That’s what Venessa’s blog really challenged to say, and it’s what the Future of Money video is all about too.

So let’s look at what would be involved in getting banking shut down and replaced by something else, and maybe the best way to illustrate this is to start with our metaphor industry: oil.

If you wanted all vehicles replaced by another fuel, let’s say electricity or hydrogen or biofuels, what would it take?

Hmmm ... first there has to be a fuel that allows you to have as good a vehicle experience as we have today.

The cars need to run as fast and efficiently re kilometres to the litre, or miles to the gallon if you prefer.

The power needs to be the same or better too, so that you can rip-roar past those pesky pensioners in the slow lane.

And refuelling should be about the same, as a full tank lasts about 350+ miles for the average vehicle today.

Oh, and it might be useful if the new fuel was cheaper too, with easy switching to these fuels and plenty of gas / petrol stations to distribute it.

As you can see, it’s quite a big ask and, just to cap it all off, the vertically integrated oil industry means that the guys who are producing it are also distributing it and so it’s not in their interest to switch to alternatives until they deem it necessary.

Hmmm ... LOCK-IN!

And then youth see Deepwater Horizon and say: “this is not right”, so the new generation of great minds begin to crowdsource ideas of alternative fuels and transport.

Could they build something different and break the deadlock of the incumbents?

Howsabout this then: Venessa and Gabriel have started a flame that may lead to a fire that burns down the house of banking cards?

Radical!

Not sure if this is what Venessa and Gabriel (Shalom, producer of the video) want, but here’s an example of how this works in transport.

I started looking at crowdsourcing ideas in transport and found some wonderful blog entries and articles.

One is on the future of shipping, where many experts gathered online and started discussing how to make new fuel efficient ships for the 21st century. As Ryan Skinner (no relation) states: “The distance from a group of knowledgeable industry pros answering a speculative ‘What technologies are hot?’ to a real specification for a future ship could be pretty short.”

Or just read this fantastic extract from Call4.com:

The coalition’s recent initiative – to essentially crowd-source ideas for spending cuts in its budget via Facebook – had the potential to be ground-breaking.

Despite the headline-grabbing launch to Facebook – which, by the way, reached 500 million users last week – the channel was removed when a competition site was launched which made a mockery of the official one. This in itself is testament to the ability of social media to level small and large organisations – with Liberal Conspiracy and a goat mascot (ie. ‘Can this goat get more followers than HM Treasury Spending Challenge?’) causing the government to feel they wanted to take down the page.

...

Greenpeace’s online campaign against palm oil was far more successful than their face-to-face efforts – with social media taking the sharing of their ‘Kit Kat: Give the Orang-utan a Break’ video to viral proportions. This campaign culminated in Nestlé ditching their supplier of palm oil Sinar Mars.

There are lots of other examples in this blog of the crowd in action, and the entry above finishes with the story of how Greenpeace took on HSBC’s funding of Sinar Mars after winning against Nestlé:

“After receiving nearly 10,000 emails (and seeing some excellent spoof adverts), HSBC has sold its shares in Sinar Mas, one of the worst companies responsible for ripping up the Indonesian rainforest for palm oil and pulp plantations. It's fantastic news that has shone a light on the financial side of deforestation.”

The crowd in action can be strong, and my own smoking gun in all the blogging this week was the link to the quotes and comments from Stephen Hester about banking being the oil of trade.

Why was this a smoking gun?

Look at the blog title for that entry: “Social media will bring banking to its knees”, a direct quote from Hans van der Noordaa, CEO Banking Benelux, ING.

Here’s what he actually said:

“The banking industry has not been seen as an example of customer centricity in the past ... with social media, we underestimate what the public can do. They have all the tools there to bring you to your knees if they want to. This means banks must be clearer in their strategies in choosing the customers they want to serve and the customer they don’t.”

Too right Hans, and so to the real heart of our conversation.

What would happen if we crowdsourced new ways of funding, exchanging value, generating wealth and supporting communities and groups of interest?

This is what Venessa is asking for and what potentially could be given.

At present, it is all periphery but tomorrow it could be heartland.

Today’s Zopa is tomorrow’s Citi; today’s Social Finance is tomorrow’s NYSE Euronext; today’s PayPal is tomorrow’s SWIFT; today’s Facebook Credits is tomorrow’s Visa ... and so on and so forth.

Caveat: going back to my oil illustration, the banks own most of the pipes and plumbing for the creation, management, organisation, sharing and distribution of money today.

How could money be replaced by something else if the controllers wouldn't allow it?

Like oil, how could we move from money to credits or something else, whilst the 'powers that be' will not allow it?

Could we really start with crowdsourcing a new bank?

Some have tried and succeeded in doing this.

In September 2009, the BBC aired a fascinating debate about the topic, with contributions from: Andrew Hilton, Director, Centre of the Study of Financial Innovation; Muhammad Yunus, Founder, Grameen Bank; Brandon Davies, Chief Executive Office, dRisk.biz Limited; Lindsay Mackie, Consultant, New Economics Foundation; Antony Elliott, Fair Banking Charity; Ian Hatton, Senior Regeneration Manager, Essex County Council; and Giles Andrews, Managing Director, Zopa. 

My issue is that:

• that was a year ago;
• many of these discussions have taken place over the years; and
• where is that new mainstream institution that displaces or replaces the banks?

Maybe it's Sprowd?

Pascal Spelier highlighted this with me yesterday.

Sprowd is “a revolutionary platform that takes the concept of crowdfunding to a new level”, and wants to go “beyond grass roots and hobbyism” to “crowdfund substantial business projects.”

Pascal has reviewed the new service, after interviewing founder Niels Feenstra who states that:

“We start with Sprowd with a focus upon finance, but it would be nice if Sprowd could develop into a medium for social entrepreneurs. An entrepreneur who wants a product on the market can use our service to connect with crowd funding with believers, not just financiers. A believer can help the entrepreneur to really get their ideas, product and services to market launch.”

Wonderful stuff and I wish Niels and Sprowd well.

But yet again, we have many models of investing and exchanging today, from business angels to venture capitalists, from private equity to capital markets.

None of this replaces the heart and soul of banking: the deposit account, the checking account, the money transmission; which is where I keep bringing the discussion back to, as this is the controlling factor.

And so I come back to the real expectation here, which is that if the financial system and money starts to move to some new form of dynamic, such as information exchange and the safekeeping of data.

Information exchange incorporates peer-to-peer connections, social media and network exchanges, trust scores and crowdfunding, as well as gifting and credits.

Let’s say all that stuff starts to take off and the Sprowd’s and Zopa’s, Facebook Credit’s and Flattr’s begin to see scale, volume and critical mass.

Do you really think it will just happen around the banking industry, without the industry responding?

Do you really think that the financial firms will allow their own circumvention and disruption without smothering the newbie before it takes over?

Sure, they did this with PayPal, but PayPal was not replacing but supplanting.

Even with PayPal, they’ve been held at bay in certain countries, such as the Netherlands, where the banks have created a more trusted alternative.

Therefore, it is far more likely that if crowdfunding and social currencies really start to show traction, that the traditional monetary institutions will move with it.

And they won’t even need to move that fast as, like driving oil-fuelled vehicles, the speed of change of the masses will be so slow to transition.  This will be because anything new is monitored and will be carefully controlled over time by governments and institutions.  Therefore, if there is a movement, then it will eventually be managed by the very same organisations that the movement is trying to replace.

Like oil refining and distribution, the tight coupling of value exchange between governments, regulators and institutions is so tight, that anyone trying to break these bonds will be frustrated.

By the time any real change does start to occur, the system will have copied and managed it to ensure it continues to be controlled and organised by them.

Depressing and cynical?

Not really. Just the way of our world.

If it wasn’t, then banking would have disappeared centuries ago.

Vive la revolution!

 

This article links to four others this week, in a series challenging the future of banking.  The series of articles are as follows:

1. Why banks and socials agree to disagree
2. Where banks and socials can agree
3. If banks are like oil, build better vehicles
4. So is there a chance of getting rid of banks?
5. Can banks be trusted?

 

 

Why payments innovations are rubbish!

Here's my latest retail payments focused presentation.  It's premise is that there's loads of innovation out there, with micropayments and iPhone apps being hotbeds of innovation for developed economies whilst microfinance and 2G GSM messaging being creative fields for developing economies. 

However, all of these innovations are just froth on the cake of the payments infrastructure and the core of that infrastructure - the clearing and settlement services that underpin these services - is still pretty rotten.  There's still lots of legacy infrastructure out there, which needs updating to operate in our 21st century world ... but sits languishing because banks are slow to act.

And the fact that banking protects banks through bank licensing, means that none of the innovative firms - including PayPal - can make much difference to this rotting core.

A little bit over-stated, but I think it makes the point.

 

Why all payments innovations are rubbish

View more presentations from Chris Skinner.

You'll notice some of my usual slides in here, but I've also added quite a few new ones, including several that list stunning numbers ... such as Facebook currently uses over 30,000 servers!!

Branches are dead, the future is social (Part Two)

After my post last week about my latest presentation with an audio file, my keynote in Bahrain this week was going to be a variation of the presentation.  Due to being unable to fly to Bahrain, I mentioned on Monday that most of the day had been spent editing a video file for the conference to be able to present my keynote. 

This 'aired' for the first time this morning and so here is the video version for the blog:

MEFTEC 2010 Presentation from Chris Skinner on Vimeo.

And the original slides, in case you missed them:

Branches are dead, the future is social

View more presentations from Chris Skinner.

And an audio file to go with it if required:

Download Chris Skinner, EBF2010 (45MB)

Bearing in mind that this was made with a cheap ($200) HD video camera, free video editing and slide management software and cheap ($59 per year) hosting services, it's an extraordinary way for anyone to create and become their own media channel in the 21st century.

Mind you, they could improve the looks of the anchor hosts a bit, couldn't they?

And here's some commercial payments news

I sometimes get unusual things in the email – no comments thanks – such as the full post-conference write up of a cards and commercial payments conference in the USA last month.

Here’s a few quotes and notes that caught my attention ...

Marcie Verdin, Group Head of Large Market Segment, Global Commercial Products (why do people have such strange job titles in American firms) for MasterCard Worldwide stated that there are $90 trillion commercial payments made each year, of which cards were responsible for less than $1 trillion.

Oh yes, being a US conference, I guess all of the other payments must be made with paper cheques.

As if to back that up Peggy Yankovich, Senior Vice President for Global Transaction Banking Division at HSBC, stated that the total amount of American B2B payments were currently worth around $18 trillion per annum. The majority of these - $14 trillion worth – are for transactions worth over $5,000 each. What is astounding therefore is that cheques accounted for around 70% of B2B payments.

Get electronified America!!

Thinking that this might be the case, it was nice to see that einvoicing made the agenda with Henry Ijams, Managing Director and Founder of PayStream Advisors, noting that half of all companies were evaluating einvoicing and one in five are currently using this process.

Conversely, it was a bit disappointing that 80% don’t use einvoicing though and, most tellingly, 64% said that they process fewer than 25% of their invoices electronically.

A long way to go to get efficiency in those processes.

Just to get in on the act, Darren Parslow, Head of Global Commercial Solutions at Visa, estimated that prepaid is worth about $3 trillion of payments.

Interestingly, this was the figure that TowerGroup put on prepaid market for 2010 ... back in 2005!

Tony Cunningham, Vice President Business Development at UATP, then made a point that surprised even yours truly: ‘30% of the largest global retailers now accepted an alternative form of payment such as PayPal’.

Wow!

There’s a whole load of other useful stuff for those interested in commercial payments, so may well be worth a look.

You can download the complete post-conference report here, or checkout more about the commercial payments world at Commercial Payments International (CPI) ... and thanks to Joanne Robinson, their founder and CEO, for sending the info over.

Online payments is far more than PayPal

As those who follow this blog know, I write regularly about services such as Facebook and PayPal.

This is because they are disruptive and fresh, as well as being incredibly successful.

For example, Facebook is now the world’s #1 website, bigger than Google.

Not bad for a five year old.

Meantime, PayPal is still growing fast, making over $95 a second in revenues based upon $3 billion in revenues this year. This makes them the interweb’s sixth most successful website by earnings.

Not bad for a ten year old.

But these sites are not the be-all and end-all. You have to bear in mind that they are purely popular in their language of origin: English.

As a result, there are several other search engines, social networks and P2P payment services that are succeeding out there, from China’s QQ to Russia’s Yandex.

Here's a world map of social networks, taken from the blog of Vincos, Italy (doubleclick to enlarge picture):

Although Facebook is a big hit worldwide with 400 million users, it’s tiny in some countries like the Czech Republic (Lidé is the #1 social network), Hungary (iWiW), India (Google’s Orkut), Japan (Mixi), Netherlands (Hyves), Philippines (Friendster), Poland (Nasza-Klasa), Russia (vkontakte), South Korea (Cyworld), Taiwan (Wretch) ...

Similarly, PayPal is hardly recognised in some countries.

In the Netherlands, for example, the banks launched iDEAL, a set of standards to facilitate online payments.

iDEAL was created in 2005 by a range of participating banks with ABN AMRO, ASN Bank, Fortis, Friesland Bank, ING, Rabobank, SNS Bank, SNS Regio Bank and Triodos Bank on board today.

Some of the major features of iDEAL include the fact that it offers both real-time payment initiation and authorisation by both the issuing and acquiring bank, followed by irrevocable credit transfers to the merchant at the time of online purchase.

The participation of the banks along with real-time processing, has created a strong perception of iDEAL being SAFE. As a result, iDEAL has gained over 15,000 participating merchants and 5.8 million users, resulting in a total of 45 million transactions in 2009 worth over €3.4 billion (up 60% over 2008).

* maandtotalen = monthly total

In other words, iDEAL has a 40% market share of all e-payment transactions in the Netherlands, with an acceptance rate at almost 9 out of 10 online merchants (88% of all Dutch merchants) compared with only 1 in 4 for PayPal (although that’s up on 1 in 5 a year ago, thanks to the decline of AMEX in the Netherlands).

So the banks do have a PayPal service equivalent ... but, right now, only in the Netherlands, although iDEAL aims to expand across more of Europe by gearing up for SEPA Credit Transfers (SCT) and the Unify XML standards.

Meanwhile, in Russia, their version of Google Checkout has taken a place ahead of the market.

Google Checkout is actually called Yandex.Money run by Yandex, Russia’s largest search engine.

According to Liveinternet.ru, Yandex increased its share of search traffic from 56% in January 2009 to 59% in December to 62% in February 2010.

Yandex.Money claims to be the leading online payment system in Russia as a wholly owned subsidiary of Yandex. Founded in 2002, Yandex.Money has seen payment volumes grow 135% CAGR, processing 21.5 million transactions per year worth $350 million.

This may sound small, but the appeal of Yandex.Money is for the vast numbers of unbanked and underbanked Russians who want to deal online.

Yandex.Money provides over a million prepaid cards per year through 100 distributors, to be used in over 50,000 participating outlets all over Russia. They have over 200,000 participating terminals to load cash on the cards in 80 of Russia’s largest cities, and 1 in 5 customers use them as top-up wallets. Meanwhile, 61% of users pay directly from the Yandex.Money interface online.

So Russia’s online payments market has developed a slightly different way.

Meanwhile, China has an incredible story of the success of Alipay, a division of Alibaba the B2B ecommerce portal.

Alipay is China's primary payment platform thanks to being the preferred payment system for sister firms Taobao and Alibaba.com, along with over 460,000 external merchants. The result is that Alipay has a 49% market share today for all online payments in China:

Q1 2010 market share figures from iResearch

Equally, it has a larger userbase than even PayPal with over 300 million registered users as of March 2010, with five million transactions per day worth an average RMB 1.2 billion (US$176 million).

Why should this be of interest to our global banking community, and PayPal specifically?

News Headline, April 11th 2010: “Alipay, China’s largest online payment network, has announced that Alibaba Group will invest a total of RMB5 billion (US$732 million) over the next five years to upgrade the payment solution for e-commerce in China and around the world.”

Serious stuff!

Meanwhile, in a non-exhaustive list, there are many other online payment services worth a look including 2CO, AlertPay, Bill Me Later, C-gold, CashU, Dotpay, E-Gold, LiqPay, Mobile Wallet, Nochex, PayPay and Z-Payment.

So in future, when I talk about PayPal, don’t forget that we’re also talking about their national equivalents such as iDEAL, Yandex.Money and Alipay. Similarly with Facebook, don’t forget that there’s also Mixi, Hyves, Orkut and Friendster.

The implications of these services on core banking is exactly the same which is that we are seeing the creation of many disruptive, fresh and incredibly successful web services for social and P2P finance ... leading, in future, to social B2B finance.

Why PayPal et al REALLY matter!

So yesterday I argued that PayPal and their brethren of social monies don’t matter. It was like unleashing the sceptical banker that I know resides deep within me, and it felt good.

Then I got a dose of new reality vision (maybe due to so many comments on yesterday’s piece) and it felt not so good, because PayPal and their brethren really do matter. In fact, they matter a lot more than we think.

Most of their secret lies in the pages of the innovator’s dilemma, which I’ve written about before:

The premise is that a new operator enters your industry offering something that looks irrelevant; before you know it, the irrelevant operators subsumes you and the industry by changing its economic paradigms. The best example is Japanese car operators in the USA in the 1950s who offered cheap new cars. Ford and GM thought they were rust buckets and dismissed them as such. However, Americans could suddenly buy new cars and they did en masse. The second hand car market disappeared and, over the years, the Japanese car manufacturers upscaled and produced cheap luxury cars. After half a century, Ford and GM were on their knees and the Japanese had won.

This central tenet of theory is absolutely critical when we look at PayPal, Facebook credits, Twitpay and more, as these developments will be a dilemma for banks, in the innovator’s dilemma style. The question is: do the bankers see the threat?

First, PayPal and their clan are not thinking about being the cream or froth on the cake. They are, instead, thinking about a new market dedicated to froth and cream that has nothing to do with cakes.

Whilst bankers focus upon cake, PayPal and the new breed of payments processors are focusing upon cream.

They have recognised that customers don’t want boring old stodgy cakes, but flexible sweet products that can go with cakes, meringues, biscuits, crumbles and even drinks: think cappuccino!

So they are creating a whole new market for cream, or rather payments, that has nothing to do with traditional processing but sits alongside it today, and could replace it tomorrow.

This new payments market is focused upon convenience, fun and the socialisation of money, rather than on the payments process or the need to pay. This is why it is so different – it’s the virtualisation of exchanging credits – and so yes, it is frictionless, flexible and free. More than this, it’s different.

Second, just like the car industry of the 1950s, it’s also insignificant as a dilemma right now. As mentioned before, PayPal are processing peanuts - $72 billion of transactions – compared to banks that process $4 trillion per day ... but give it time and you have to inevitably ask:

When do we take this market seriously?

When it gets to a trillion dollars a year?

A trillion a month?

A trillion a day?

You see, PayPal are moving and extending reach into higher ticket items and into core merchant services.

And what happens if and when PayPal offer a cashback program? Oh yes, they already do.

So what would happen if PayPal started offering real incentives, as in undercutting banks if you use a PayPal account as your core payments account, rather than paying via card or withdrawing into a bank account?

They could easily do this, as PayPal don’t allow negative balances, and are rumoured to hold over a billion dollars in deposits on accounts at any time.

That’s a significant figure to play with as a float.

Third, and most important, who owns the last mile?

This is the most critical question, and was raised in yesterday’s comments.

After all, if your main interface to monetary movements becomes PayPal or Facebook, so much so that you forget that a bank or bank account exists behind that brand, then does anything behind it matter?

So here’s the long-term play.

PayPal becomes your primary interface to money.

After a while, using their banking licence, PayPal gains direct access to the electricity generators of monetary movement – the clearing, settlement and payments infrastructures of the world.

They move upscale from being peanuts processing for consumers to displacing acquiring and issuing banks from the payments process through an ever expanding range of services:

• PayPal for Merchant Services
• PayPal for Working Capital
• PayPal for Supply Chain Finance
• PayPal for Trade Finance
• PayPal for Trading
• PayPal for NYSE
• PayPal for the London Stock Exchange

PayPal for ANYTHING!

BTW, it's not just PayPal at this point of time, but any firm that wants to operate in the cream and froth market.

At this point, you’ve realised the innovator’s dilemma.

What started as insignificant small beans payments that appears to be froth or cream on your cake, has suddenly become core business services and major margin erosion as the new entrants upscale and redefine the model.

The payments businesses erode and are substituted by new markets services.

To be clear, if you remember that PayPal currently generates around $800 million in revenue per quarter, or $3 billion a year, then compare this with today's other big boys.  The world’s largest global transaction processors, such as Citibank, typically generate around $10 billion in revenues and $3 billion+ in profits. 

So today, Citibank’s transaction services is three times bigger than PayPal.

In 2002, PayPal’s annual revenues were around $200 million.

In 2005, they broke a billion.

Today, they’ve reached three billion.

They’re growing at an average of over 25% per annum.

And they can keep growing as they expand services and upscale.

What will inexorably happen is that the core of the payments world – the infrastructures, settlement systems and clearing houses - will remain. These do not need to be substituted, as it's just cables and pipework. But like the electricity and water companies, it's the owner of the interaction and therefore, the customer, that is key and will change.  The owner of the 'last mile' as we refer to them.

And that’s where our creamy new players are making their froth.

You see they enjoy being the cream on the cake because they are defining two separate markets – exchanging virtual credits in a digital world versus making a payment.

In conclusion, PayPal and their brethren matter because they are redefining payments and may be insignificant today ... but tomorrow?

Meanwhile, bankers can cry: ‘Let them eat cake’ ... trouble is, what happens when no-one wants cake anymore?

Why PayPal et al don’t matter

Many of us get excited about new and different toys in the payments world.

From Jack Dorsey’s twittering Square to PayPal’s billions of payments, we think the world is changing dramatically. SMS texting payments in Africa and credit exchanges on Facebook add weight to our arguments for change in the core of bank processing.

We then use these illustrations of small change to make allegations about big change. We speculate that everyone will be using twitter for payments via PayPal’s core system within the next few years, for example.

I do it myself because it’s nice to see a bit of concern in a banker’s eye; a slightly less confident swagger in a global transaction processor; a jitter of confidence in a commercial banker’s pricing.

But it’s all just a bit of noise when you look at the reality of these systems. It’s just cream on the cake.

In fact, I would say that all of the online P2P consumer developments in payments are nothing more than a wart on the backside of the flea attached to the hairs on the backside of the cat, which purrs in the lap of the banker who operates just a small piece of the parts of the whole, that comprise today’s global payments industry.

Oh yes, and that backside’s wart includes PayPal.

Shock, horror, heresy but yes, it is nothing special.

PayPal, Facebook Credits, Square ... even prepaid cards and mobile payments, it’s all just a little bit of froth or cream on the layers of the cake of the core banking industry, and its heart of payments processing.

Let me illustrate it best by picking on PayPal (sorry mates).

Today, PayPal deals with around $80 billion worth of transactions per annum – they broke $20 billion in transactions processed for the first time in Q4 2009, processing $21.4 billion in transactions for a revenue of $795.6 million.

That sounds significant, doesn’t it?

For them, it is as PayPal is a major growth machine that has eaten its parent, eBay, by becoming the de facto standard for online payments.  PayPal's revenues hit a billion per year in 2005 - now they do that per quarter.

The thing is that it is major for them but, in the scheme of the overall payments world, it’s not major at all.

First, their revenues are peanuts.

Assuming PayPal generates around $3 billion per annum in revenues this year, it’s still a long way off the largest banks that make $3 billion in pure profit in a typical year.

Second, PayPal sits on top of the core banking infrastructure. It hasn’t created anything new. It’s just added a layer of cream to the cake of payments. It sits on top of Visa and MasterCard which, in turn, sit on top of bank accounts.

So nothing has changed.

This is why PayPal is cream on the cake, but not a core ingredient.

The core ingredients are the infrastructures of clearing houses and banks, of counterparty systems and SWIFT messaging, of Real-Time Gross Settlement and Card Processing systems. PayPal is just a little bit of cream on those layers of cake.

For this reason, although I love PayPal as a model of providing payments for new internet and mobile services, from a payments context it is nothing serious.

As for Facebook Credits or other add-on services like Twitpay, which all use PayPal as their underlying service, these are just froth on the cream.

Third, even if you take them seriously, what are they actually doing? They’re providing a bit of payment functionality on top of the card and bank account functionality.

Actually no, they’re not even providing that. What they’re actually providing is a bit of account aggregation of payments for a small fee.

In other words, because banks and payments processors aren’t interested in sub-$10 payments processing, someone had to do it and that someone was PayPal.

So PayPal scooped up all of these P2P small payments online, and that’s their core business.

It’s not high value payments processing. It’s peanuts processing.

OK, so PayPal does the odd airline ticket for $1,000 but, for every airline ticket, they process $1,000’s of more dollars for buying cables, DVDs, mobile phone covers and similar goods at $10 or less.

Bring on Facebook credits and Twitpay and they’re processing $100s of more dollars for sharing a note, reading a page or downloading a song for $0.99 or less.

In other words, they are just payments aggregation services.

Like a telephone billing service, PayPal and its gang of payments aggregators offer small payments processing on a massively scalable platform. By doing this, it enables them to generate enough to warrant a worthwhile bank payment per month.

But they are not payments processing, just aggregating payments like a telephone service.

A telephone service provider processes 100s of transactions a month to generate a single worthwhile monthly payment through the banking system.

PayPal, Facebook and Twitpay are doing the same thing for online services.

This is why they are actually irrelevant, in terms of core payments processing.

Core payments processing represents $4 trillion of debit and credit card payments per annum, significantly more than PayPal’s $72 billion for the year.

Core payments represents the almost $4 trillion in foreign exchange transactions performed every day.

That's over a quadrillion dollars worth of transactions per year.

A quadrillion dollars per annum makes PayPal look like a bit of detritus on the landscape of global payments volumes.

This is not to say that PayPal are detritus. They are important, but they are not all consumingly the be-all and end-all of innovation or even change because, when it comes to payments, nothing much has changed.  In fact, banks are starting to eat back into their business by launching secure online payments systems like iDeal and Rightcliq by Visa.

And this is easy, when you have an industry that processes gazillions of dollars per year using standards, structures and systems which have globally stood the test of time.

These standards, structures and systems allow the billions of transactions in global capital markets and corporate supply chain and person-to-person payments to operate.

These are the core ingredients of the cake.

So yes, add to this a little bit of cream on the cake, PayPal; or add to this a little froth on the cream, Facebook and Twitpay.

But don’t mistake the froth and cream as core.

It’s not.

Fragmenting the banking structure

Most banks have evolved from days of branches and large offices, to banks with multiple channels of distribution and extensive technology backbones.

The issue banks have with this structure is that the technology backbone is broken.

This is well illustrated by a comment from one payments manager who said to me that he gets his highest rating for performance if he changes nothing. This is because the complex beast of transaction processing is best left alone. If it ain’t broken, don’t try to fix it. Leave it well alone.

This is why some banks have payments systems that are ten years, twenty years, thirty years old or even older. There is the classic story of one UK bank that still processes in pounds, shillings and pennies – a pre-decimal system – and Britain converted to decimalisation back in 1971!

But this just isn’t good enough anymore. Not only does it mean that banks are intransigent to change, but they will also be outsmarted by new players.

For example, it’s already seven years since Europe determined to introduce the Payments Services Directive and the Single Euro Payments Area, and we still have no end date in mind, nor do we have any idea how to get our customers to migrate to these instruments.

Many say it will be 2018 or after before we get to a fully-integrated Eurozone. That would make it a sixteen year change program.

Similarly, most banks will admit that there are so many councils created to provide governance over the change of these systems, that you can only move at the speed of the slowest player ... that is why change is so slow in the backbone infrastructures of this industry.

But it won’t be slow for the new entrants: the Payments Institutions.

It wasn’t slow for PayPal, who have rapidly become one of the largest payments processors by volume of transactions, and yet they are not even ten years old.

What PayPal achieved, and other Payments Institutions will do the same, is not just to build innovation on the old, out-of-date, legacy backbones ... but to completely rethink the payments process as a layer of innovation above the backbone.

This will happen more and more with other Payments Institutions.

Where this leads is that banks need to fragment themselves.

Break the bank into pieces.

Each piece should represent a piece of functionality, a process, a capability.

And for each piece of functionality, a process, a capability, the bank should ask hard questions: are we good at this? Should we be doing this? Could we provide this service to other banks? What would it mean if we did? How much do our customers value this? Would they pay for it?

Without this hard analysis, banks will stagnate in the sandpits of historical approaches, where legacy builds upon legacy, and the bank tries to serve all customers across all channels in a bank managed way.

Doing the above results in average and will never be exceptional.

Instead, banks should focus upon who they are trying to reach and serve, and in what way.

They should then look to see which areas of this service they can deliver exceptionally and, where it is average or below average, either improve it or junk it.

This means that the old way of banking, where the bank would deliver the entire infrastructure, product and service in a vertically integrated package, is no more.

Today, for banks to compete, they must focus upon where they have strengths, and outsource the rest to the best provider of the services they need to offer around their core competencies.

Equally, a bank must stop believing that they can serve all of the people all of the time. That is the reason banks have expensive legacy overheads because they are trying to keep the old products alive for the old customers, whilst trying to innovate services at the other end for the new customers.

The result of a bank believing they have to do everything internally end-to-end and serve all customer demands from legacy customer channels and instruments to new ones, is failure.

Banks must rationalise to categorically reach and serve the customers they want to reach and service the best, and internally restructure to process and manage only the parts of the customers’ processes they are strong at delivering internally whilst outsourcing the rest to the best.

Simples!

*

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Zombie money in a chainsaw hell

I recently discovered that friends were killing me.

Literally ripping me to shreds with a chainsaw.

And it hurt.

After all, I am meant to be the Zombie Priest in the Church of Goth, and no-one had beaten me before.

And where did that chainsaw come from?

I was mad.

In fact, I was steaming.

So I vowed to get a chainsaw myself.

Problem is that I would have to turn at least 40 friends into Zombies too (note: not Zombie Bankers), in order to earn enough points to buy a chainsaw.

And so far, I had invited over 200 mates to become Zombies and only 12 had bothered to do so.

How would I get 40 of them to turn?

It was a problem.

And I was still mad.

In fact, I was boiling.

Then I found Spare Change.

Spare Change sits on top of PayPal (which sits on top of the banking system) and, for a small fee for each transaction, allows me to make microtransactions and buy things to spice up my favourite Facebook apps.

Oh, thank heavens for Spare Change.

For just $5, I could buy a chainsaw. So I spent $50 and bought two chainsaws, plus a machete, shotgun, uzi, meat cleaver and bazooka for good measure.

Forget turning mates into Zombies ... just kill them.

Now, I am the Zombie Pope in the Cathedral of Death.

And Richard, the idiot who attacked me with a chainsaw, is dead meat.

Now you may wonder what the hell I am talking about, but the above is a real incident that occurred on Facebook last year, after I signed up for the game promotion of Resident Evil.

And Spare Change is a simple little Facebook app, that allows me to buy things in Facebook gameworlds. I blogged about this app, and others such as the QQ coin, a year ago if you want to know more.

And these gameworlds are growing into big business.

According to current estimates, the worldwide market for virtual goods is expected to approach $5 billion this year.

That’s $5 billion worth of exchanging stuff that doesn’t exist ... but it’s fun.

And it’s also incredibly quick to build a business.

For example, within a week of its launch, game company Zynga's new Café World game in Facebook had garnered ten million players.

Farmville, another game from Zynga that started this summer, already has over 60 million monthly users.

And analysts reckon that about a tenth of these players buy stuff so, if a tenth of Zynga’s 60 million farm players buy a cow or tractor for $5 this month, then Zynga are banking $3 million a month.

That is why another social game developer, Playfish, was acquired by the more traditional computer games developer, EA Games, for $275 million in cash last week.

This is big stuff.

Even bigger is the idea of using virtual worlds and social gaming to bling your profile.

That’s how China’s QQ coins started and soon became a phenomena. Today, QQ international boasts over a billion users and more than 500 million active monthly users. That’s four times the number of users of Facebook and six times more active users than PayPal!

Add on the microtransactions of iPhone apps, with over 1.5 billion iPhone downloads and over 100,000 apps now developed, and we start to see the world changing.

After all, if I charge $0.01 per download for an iPhone app, and get a 100 million downloads ... that makes me a millionaire. And with the SuBo effect, where a woman (Susan Boyle) appears in a UK talent show and is watched by over 300 million people globally via the internet in less than two months, 100 million downloads is not unreasonable for a good app.

These experiences, along with others such as Second Life’s Linden Dollar economy, indicate that the future of money is not money itself. We do not wake up and think about making payments and buying money, we think about waking up and thinking I’m going to use my money to buy something.

So money is purely there for the value exchange.

And if that value exchange can be achieved by using virtual coins, fantastic.

Conclusion: expect the world of the next decade to morph into a myriad of payment mechanisms that supplement, supplant and supply fun and games on top of the traditional banking network.

Oh yes, and expect billions of microtransactions to occur person-to-person globally.

 

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Is there any innovation here? Nope

After the innotribe stuff, it was off to a panel debate about “payments innovation”.

This session was described as follows:

“The crisis has put the emphasis back on traditional banking and sources of revenue, with payments coming to the fore again. Yet payments are also seen as a commoditised, legacy business where scale is everything. Into this business come a series of new market demands which might change this such as same day retail payments, e-payments, mobile payments, contactless cards and real-time finality. How will these new opportunities develop and will they be profitable new forms of business? Can banks afford to develop new channels individually or will they need to co-operate further? Will non-bank players use technology to challenge banks for their new payments service business?”

Bearing in mind that innotribe was all about innovation, it is obvious why this session was of interest to me.

This session was chaired by Robert Heisterborg, Global Head of Payments and Cash Management at ING, with a panel comprising:

• Rajesh Mehta, Managing Director, Head of Treasury and Trade Solutions, EMEA Global Transaction Services, Citi ;
• David Sear, Divisional Managing Director, Travelex Global Business Payments ;
• Marcus Treacher, Head of electronic banking and e-Commerce, Global Transaction Banking, HSBC; and
• Russ Waterhouse, Executive Vice President of Products and Development, The Clearing House.

Here's a summary of how it went:

Robert Heisterborg:

Who’s driving innovation?

Rajesh Mehta:

The innovation drivers I can see include:

• the miniaturisation of payments - especially as there’s more P2P taking place;
• government’s needs, especially in current economic climate;
• banks seeing payments as a product rather than looking at payments as a business in its own right, which is what non-banks do;
• regulatory change; and
• risk management.

Citi in particular is focusing upon prepaid cards and mobile as key new innovation areas.

Marcus Treacher:

Often the idea of the innovator is not the way it works in reality. My favourite example is the ATM which was introduced as an automated teller in branches and it failed. In desperation, the developers decided to try the machine outside the branch and it took off. That was an accident, but one that created success.

Russ Waterhouse:

As a market infrastructure we’re the last place people would normally look for innovation, but we have to do this because it is required, expected and needed amongst our clients and community. The challenge to do this is that many of us benefit from the inconsistencies in the markets, and we have to rethink our business models if we are to take advantage of creating innovation through more consistency.

David Sear:

When we refer to payments innovation, the only example normally mentioned is PayPal and I’m a little tired of hearing about PayPal. They’ve been around over ten years now, so get over it. PayPal have a billion dollars of revenue in Europe alone so their innovation has happened, they have achieved change and they’re here to stay.

Now, as a consumer, I may not want PayPal because I find it difficult to use. It’s clunky and doesn’t provide me with the security I want. For example, a recent US survey by Nielsen found that 81% of consumers would prefer a P2P payment instrument provided by their bank. So we have to do a little better particularly as there is a trillion dollars of ecommerce out there each year, and 20% of that is cross-border.

Prepaid cards are becoming a mainstream in the payments landscape, and that’s another key innovation we are tracking.

Equally, I’ve heard lots of people talking about convergence this week and I’d like to see that. In particular, I would like to see the end of the back street money transfer agent. Bank2Bank and Card2Card services, such as Visa money transfer cards, should mean that AML will go away into a different place.

Robert Heisterborg then asked the audience: “We have been here for a week, is there enough innovation at SIBOS?” and over 80% of the audience said ‘No’. Where were all of you when the innotribe sessions were running all week????

We then started looking forwards to the future of payments.

Rajesh Mehta:

The future landscape for payments will fall into three camps:

• Large global players with the advantage of scale;
• Niche specialist players with a vertical focused advantage, e.g. payment practitioners for the health industry or the pensions industry; and
• Hybrids who are capable of innovating themselves but acquire capability, distribution and technologies from partners who do this better than we do

Robert Heisterborg then referenced an ING trial in m-payments in Romania that found the average transaction value of a mobile payment to be €2.44. Therefore, is mobile the cash killer?

David Sear:

A decade ago we talked about micropayments killing cash on the internet and it hasn’t happened. For example, Google has announced a micropayment service for content recently but these sorts of developments are all about ‘if we build it, they will come’. It’s not what consumers want though. Consumers don’t want to pay for content and Google’s announcement of micropayments for content will therefore not necessarily work.

Rajesh Mehta:

How can you say that David when, in Africa you have four times the number of mobile telephones than bank accounts? How come you don’t think m-pay will happen?

David Sear:

Because consumers are asking for other forms of payment that are more traditional, such as prepaid cards in Africa rather than mobile.

Rajesh Mehta:

What will drive the mobile is banking the unbanked rather than the payment itself. However, once banked, then mobile payments will come.

The audience were then invited to ask questions and the first was about the fact that Nokia have 1.3 billion telephones out there and relations with all the carriers. The fact that they’ve partnered with Obopay should be seen as a threat should it not?

Rajesh Mehta:

No, as they are working with the banks on this. We’ve created a financial cloud at Citi for example, as a super settlement mechanism for the kind of needs of Nokia. It’s a settlement and clearing role and there’s always going to be collaboration with a bank on these things, so the question is really about the last mile. The last mile is all about who wants the connection for something as ubiquitous as a toothbrush, which is what the mobile is these days. For this, do I need to own the last mile? Do I need to compete with others there? Or do I enable that capability and collaborate? There’s always room for collaboration.

All in all, it was an interesting discussion but the fact that the panel talked mainly about prepaid and mobile, but no real discussion of SEPA innovations around einvoicing or contactless payments was an oversight, so I asked about contactless.

Of course, the panel said that it was not purposefully missed off the list, and that this is going to be embraced.

My take on this: for ING, Citi and HSBC, contactless technology is still off the radar or it would have been referred to more strongly. Would have been interesting to see Octopus or Barclaycard or Visa PayWave or others, as thee form factor of contactless mobile or contactless watches (forget cards) is far more innovative as a consumer payment service than a mobile payment using SMS or something (which is where most banks focus first).

Net:net, and being honest, there was no real discussion of innovations here but the panel talked more about stuff that has been bubbling away for years in the form of prepaid cards and mobile payments. Even if they had talked about SEPA einvoicing and contactless, it’s not really innovatory.

What would be truly innovatory would have been to discuss the next generation of payments using wireless technologies to pay without any physical devices involved.

Now, that is revolutionary and I’ve got a whole nine yards on that innovation.

Anyone wanna hear it?