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.

Frankly, I was quite taken aback when I saw all the media buzz around “Kwedit” in the otherwise serious financial and payments trade press a few weeks ago.

While many of us are busy devising new products and services that allow people to be more responsible with their money, Kwedit essentially encourages young users to buy virtual goods with money they don’t have yet.

This is introduced the exact same month when the CARD Act finally starts making credit cards less accessible to users less than 21 year old with the hope of curbing student debt and reducing the abuse of young users by big card companies.

Given the pedigree of the founders and investors, there is no doubt that Kwedit will execute nicely on a product that is not only useless, but is pro-actively contributing to the disastrous level of financial illiteracy in this country.

So, I was delighted to hear that Stephen Colbert devoted his “The Word” segment to Kwedit.

Here its is: “Kid Owe”

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

From the Huffington Post, Monday Nov 23, 2009.

Forget bailouts. Forget regulations. Forget stimulus packages and executive pay caps. If we want to see real recovery, we need to see real innovation.

Yet the traditional financiers of innovation, venture capitalists (VCs) are fiddling while Rome is burning. A recent survey of US venture capital activity shows that the three sectors with the least investment in the second quarter of 2009 are:

• healthcare
• retailing/distribution
• financial services

Quick, what are three sectors of the economy that the U.S. depends on for a sustainable recovery? You got it.

Read the full article here :  Patrice Peyret: Unhappy With Your Bank? Blame Silicon Valley.