Starve A Banker

Bump, POPmoney and Buxter are a few of the person-to-person (P2P) money transfer services introduced recently. They are preceded by a long line of failed attempts to beam money from one person to another that I have witnessed since my days in the smart card industry in the mid-90’s, when UK-based Mondex attempted chained electronic payments from an individual payer to the next.

As a particular category of payments, I am prepared to declare that P2P is hopeless, at least in the Western world.

There is no shortage of brilliant minds at PayPal, Obopay, Cashedge, Click & Buy or other market players jumping into P2P. It’s just that, when one of the two P’s is not a merchant trying to sell something to the other P, there are very few realistic use cases. And the barrier of requiring people to install software or sign up and remember a username and password is too high for most people, however cool the new P2P payment system may seem.

Even in the hyper-connected world of “Generation Y” consumers (teens and 20-somethings), I Owe You’s are usually settled with good old cash, and other modes of payment remain too infrequently used to justify new businesses.

At Plastyc, we have tens of thousands of customers using our more innovative features, such as suspending a misplaced card from a cell phone or sending paper checks to their landlord via our virtual checkbook. But our free, ultra-accessible Facebook P2P service for our UPside Visa cardholders is another matter. The service does not even require that the recipient of the money be a cardholder to start with, as we automatically offer him or her a new card to receive the money, if needed. The truth is: we have very little traffic with that service as compared with other features.

When I asked my own 20-year old son why he was not using it, he shrugged the question off as almost irrelevant: he buys online a lot, but he never has to send money to his friends.

So I can only imagine how little traction service providers may have when they charge for P2P money services, require more than just logging into a Facebook account, and perhaps insist on people installing an app on a mobile phone.

If one of the P’s is a “pseudo merchant” (over-used example: the piano teacher; more exotic example introduced recently by Square: the local glass-blowing artist), it’s a different story. Then we’re back into retail payment scenarios with the need for charge back rules and security compliance, which both require a trusted third party in the middle to ensure payment and resolve disputes.

If the two persons are in different countries, we are venturing in the world of international remittances. This is a huge market. But it is not for the faint of heart, because there are strict money transmitter licensing rules and anti-money-laundering regulations to comply with. There’s also a need to solve the “last mile” problem of making sure that the received money can be spent easily, usually in cash. Everybody wants to eat Western Union’s lunch in this market, but this will be an uphill battle.

Now, here is an example of a genuine P2P payment scenario that would make a difference and produce decent transaction volumes inside the US: parent-to-student allowances or emergency funding when the student is a few hundred miles away from mom and dad.

The US has 17.5 million people aged 18-20 who are too old for teen prepaid cards and too young now for their own individual credit card, since the CARD Act took effect last month.

Here are the issues and requirements for servicing these people:

• The transfer should not take days. At most a few hours: “Mom, my car broke down late last night and I need to get it towed to the garage this morning…” So bank transfers via ACH are out.
• The student should be able to spend the money in the brick-and-mortar world. Joe’s Towing does not accept PayPal.
• If Mom’s credit card is the source of transfer, it should really be Mom’s card, not someone else’s, which is difficult to verify because Mom probably does not live on campus and may have a different last name.
• If money is needed more frequently than in emergencies, then having both sides of the transfer walk or drive to a money transfer retail location like those operated by Western Union or Moneygram is too inconvenient and costly.

Solving the parent-to-student payment case is not as easy as it sounds. But because this is one of the few problems big enough to support innovative solutions, I expect new services to emerge soon to serve the Parent-to-Student (P2S?) market.

We often get asked by websites and portal operators: “could I offer a prepaid Visa card to my un-banked visitors?”

Until now, we would answer with an offer to link their pages to a prepaid card enrollment site like UPsideCard.

Now the team at Plastyc, headed by Justin Surman, has created aWeb Services API which allows businesses to display and process prepaid Visa card enrollment forms inside their own pages, without sending their visitors somewhere else.

The Card Enrollment & Account Management API running on the enrollment servers:

• accepts the user data captured in the forms
• validates the data for obvious formatting or entry errors
• passes the user data to a card processing platform to perform the Customer Identification Process (“CPI”) required by law
• returns an Identifier for the new cardholder and the ACH routing and account numbers corresponding to the card being newly created

This allows the site hosting the user enrollment form to know immediately if a visitor is eligible for a prepaid re-loadable Visa card, and, if positive, to know which bank transfer number is allocated to the imminent cardholder.

Of course, the actual card will take a few days to reach the cardholder by postal mail. Nevertheless, the card account can be immediately loaded with funds via:

• the ACH network, for example for tax refunds and unemployment benefits
• Green Dot MoneyPaks which can be purchased in cash at 50,000 locations across the US

even before the card has reached the card holder and been activated.

The Web Service API also offers several methods covering simple prepaid card account management tasks:

• Retrieving the complete list of cardholders enrolled via the EnrollCardholder method
• Retrieving the details of the cardholder account
• Retrieving a list of transactions from a cardholder account, during a set interval of dates
• Allowing a cardholder to share money with another cardholder
• Letting a cardholder suspend his/her card in case of suspected loss of theft

View the SlideShare above for a more detailed overview.

On Feb. 22, new first of many new financial regulations to protect consumers takes effect. It’s not a moment too soon. Banking, especially retail banking, is ripe for change, and the new regulations provides the catalyst that will help shift the power from the bankers to the consumers with technology fueling the reaction.

A key piece of new regulation, The Credit Card Accountability Responsibility and Disclosure Act of 2009, act includes important provisions that go into effect in three weeks. One important change makes it illegal to provide credit cards to people under 21 unless an adult over 21 co-signs for the card or the younger adults show proof that they can pay off the debt. Other provisions limit certain fee types and gee charging methods for most credit cards.

In response to this and other new regulations, traditional banks are scheming up new ways to charge customers, as Ron Lieber at the New York Times profiled here. The banks customer-unfriendly reaction will drive increasing numbers of individuals to discover that there’s a new game in town and embrace change.

That new game in banking is technology. It makes it possible to service people’s payment needs in new ways that are better, faster and more affordably than before,

In particular, people who have long been overlooked and underserved by the old banking establishment – the young and people with low balances — will adopt new products and services online, on cell phones and on cards that are more accessible, more affordable and that meet their needs better than the corner branch of a large bank.

It’s unlikely that people will see these innovative new products come first from large banks. Their overhead costs – including large executive salaries and real-estate leases — are too high, and they have too much to lose from change to undercut their existing business. But in response, over time, even the traditional banks will be forced to innovate without fee-gouging in order to compete for customers.

These new services will come in many varieties. There are good examples in a recent report by analyst firm Forrester Research titled “Hot Banking Banking Tech Companies to Watch In 2010” . For instance, Bling Nation works with community banks to provide local payment services using contactless tags affixed to the back of cellphones. And Econiq helps community banks and credit unions coach customers about financial services based on their life events such as a new child. (My company, Plastyc, Inc., is also mentioned the report. It has no commercial ties to Forrester Research.)

And in my conversations with industry innovators, I’m hearing exciting ideas for new ways to embed payment services into other products and services that people use on a daily basis.  Here are three examples:

• Merchant debit accounts. Rather than dragging consumers further into debt, some merchants of durable goods like appliances or used cars, are securing recurrent direct debits from un-banked but dutifully employed consumers, by encouraging them to sign up for a prepaid card account into which salaries can be direct-deposited by employers and from which monthly payments for access to the goods can then be directly debited.
• Paying for cell phone services. Consumers who use prepaid cell phones for themselves or their family will be able to top up those phones with airtime right from within a payment card account, instead of having to buy “scratch cards” or obtain a “PIN” and redeeming them over the phone
• Cause-related services. Non-for-profit organizations like the Economic Empowerment Initiative or Amar’e Stoudemire’s Each One Teach One foundation are coupling their financial literacy programs with prepaid cards for teens.

These examples are transformative because they flip the payment services model by aligning the vendor and the customers’ interests in finding effective, affordable, reliable payment options. This alliance is especially promising for customers who are not served well by traditional financing options.

In order for these next generation services to transform banking, people have to trust them. So many of them will be linked to safety nets such as FDIC insurance and payment networks such as Visa.

Even with those safety nets, change will stem from the early adopters and those feeling left out or angered by the old consumer banking establishment.

But very quickly, smart consumers across the economic spectrum will realize that there’s a new game in town and power balance is shifting from the bankers to the consumers.

On December 10, the Center for Responsible Lending has published a new report entitled “Dodging Reform: As some credit card abuses are outlawed, others proliferate”

It lists a pretty damning list of new fees and new ways of obfuscating them that have been created by banks to keep making money on the backs of consumers while circumventing the impending Credit CARD Act of 2009.

See also WalletPop for a good summary of what these new fees are.

OK, so I have been complaining about a lack of innovation in financial services in a prior post. Actually, I lamented the lack of innovation at the service of customers. It seems that there is plenty of innovation at the disservice of customers.

You have to love the cover illustration provided by Mark Fiore for the CRL report.

Illustration by MarkFiore.com

Where is my son’s free pizza? Or tee-shirt?

See, during the first weeks of college, banks with folding tables and chairs scattered around campuses used to feed (or dress) my kids for free. All the students had to do was apply for a credit card.

Alright, so the practice of merchandise giveaways to entice college kids to apply for credit cards at public universities in California was banned two years ago by Gov. Arnold Schwarzenegger.

This ban is now being extended nationwide by the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009: no freebies in exchange for credit card sign ups on or near campuses anymore. While the term “near” remains undefined, the new law goes well beyond the college campus: it forbids the marketing and issuance of credit cards to people under the age of 21 unless they have adult co-signers or show proof that they have the means to pay off the debt.

The good news is: with far less credit cards around college campuses, the debt burden on Generation Y is going to lighten up significantly over the next few years.

Is there a flip side to this coin? Will the macro-economic benefits of a less indebted youth be obtained at the detriment of the students’ financial freedom? What are college students and their parents supposed to do?

Here are some options:

• Deposit, say $1,000, as the security for a secure credit card. This would give the young cardholder a line of credit somewhere between $500 and $1,000. Regular payments are expected to be made, like with a regular credit card, but should the student default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The deposit would act as the “means to pay off the debt”, as stipulated by the law, although it is not yet proven that security deposits would be considered as such.The advantage of the secured card for a student with no credit history is that most issuers report regularly to the major credit bureaus. This allows for starting to build of positive credit history.The major drawback is that fees and service charges for secured credit cards exceed the already skyrocketing fees charged for ordinary non-secured credit cards.  If you think that banks will happily open new lines of credits to young users, think again: in the past 12 months, banks have reduced credit lines by $1 Trillion.

  Also, it is customary that the deposit is not used by the issuer when one or two payments are missed, but is used at the time of closure of a delinquent card, when the balance exceeds the credit limit, leaving the student cardholder with a debt AND losing the deposit.

• Get a credit card with the parent as a co-signer. Although this sounds quite straightforward, this is also quite dangerous: any mis-handling by the student can severely damage the parent’s hard-earned and long-standing credit record.It also is a double-edge sword with respect to transferring financial responsibility to the young user: while a longer parent-child interaction is probably good for building up financial savvy, it can have the opposite effect of reducing the young users’ motivation to become accountable and autonomous.
• Stay away from credit cards altogether and stick to a checking account with a debit card. Here, there is no risk to the parent, but the dreaded overdraft fees and other minimal balance and account maintenance fees are lurking.
• Get a prepaid card account, which is similar to a checking account coupled to a debit card, but without the overdraft fees. Of course, some prepaid cards are loaded with other fees, as discussed in an earlier post, but you can shop around easily for the lowest cost choices.  Some prepaid card accounts like iBankUP.com include the ability to create on-demand paper checks from an online interface, this offering the equivalent of a checking account.Some prepaid cards are specifically intended for students that receive financial support from their parents. They feature a dual online access, one for the student and one for the parent, including the ability for the parent to program an automatic allowance.Yet other prepaid cards offer a bill pay service with the option of reporting payments to second-tier credit bureaus; this allows the cardholder to start building a positive credit history.

Here is a summary of the pros and cons of each option: