Banking Up Blog

As a veteran of the wireless phone industry, I get irritated when new business partners start a discussion with a lecture on how fast the mobile world is expanding. The cellphone is the fastest-growing consumer device ever… African villagers are getting paid at the open air market through their cell phones… I know, I know.

But I have to admit being inconsistent: I get even more annoyed when other people presume that a large part of the potential customers for Plastyc’s prepaid-based banking services have either no cellphone or no data plan on it.

This week, I stumbled on a forecast by telecom giant Ericsson in the Special Report section of The Economist which illustrates how amazing the expansion of the mobile world really is, with stunning graphics.

Here it is:

(from the Oct 27th 2012 issue of The Economist)

While I have argued in a prior post that mobile wallets that allow people to pay at the point of sale are still not ready for widespread use by the general public, there is no doubt that the banking industry had better accelerate its deployment of mobile access for both its customers and employees. This includes:

• tablet and mobile applications for customers to access their accounts (or open new ones)
• tablet applications for branch employees to deliver customer support
• tablet and mobile replacement of counter-top point-of-sale terminals
• pushing brick-and-mortar check cashers out of business by offering mobile deposit capture of paper checks from mobile phones
• replacing the store racks full of plastic cards dangling from j-hooks with instantly-issued stored-value applications loaded into cellphones

I am going to buy some reprints of The Economist article to distribute around at some of my next business meetings.

You may have seen it. You’re standing in line at McDonalds, Starbucks, Home Depot or a local store, and the person in front of you waives her phone at checkout then walks out with her stuff. No cash, no card, just a waving phone.

That person in front of you is one of the 12 percent of Americans (according to the Federal Reserve) paying with a “mobile wallet”. Chances are good she is using a service from Google, PayPal, Square or Starbucks. You can expect to see more and more mobile wallet payments as companies start using the Passbook service in Apple’s IOS6 to distribute coupons and barcodes that you can redeem at certain stores, and as more stores back ISIS, the mobile payment joint venture backed by AT&T, T-Mobile, and Verizon Wireless, which will start to roll out, reportedly, on Oct. 22.

Mobile wallets are full of promise because they are always connected to the Internet and they know where you are (thanks to the geo-location feature of your smartphone), so they could have cool features. Wouldn’t it be great to have an app that warns you if that new TV you covet is beyond or  within your budget, or one that that pings you with local coupons for a store you’re visiting or one that lets you share restaurant deals with friends in the neighborhood?

Sounds good, right? So is it time to toss your faithful leather wallet and go mobile?

I don’t think so, and here’s why. So far the promise remains a promise; none of the apps I mentioned are available (other than in limited forms). Mobile wallets are just another way to pay with no substantial benefit over cards or even cash.

And there are some drawbacks. There are competing vendors, each with their own partnering stores. No one system has emerged as a standard, so a mobile wallet that works at Starbucks may or may not also work at Target.

In addition, tying your wallet to your phone has risks. What if, like me, you are among the 70 percent of people who do not use a password to lock their mobile phone and you lose it? Or what you don’t lose it but the battery needs a charge? Or what if the phone falls in a puddle and stops working? Also, I’ve yet to hear about using mobile wallets getting cash at the ATM. Until there’s a mobile driver’s license, you’ll need to carry a wallet anyway, so you might as well carry some plastic as well and wait until mobile wallets mature a little.

That said, if your bank or card provider offers a free mobile banking smartphone application to manage your account on the go, jump on it. Mobile banking apps are not like mobile wallets: they will not let you wave your phone to pay in the checkout lane, but they will let you stay on top of your budget on the go.

Only last November, I wrote about how 75% of our mobile customers were using a smartphone to access their account. Well, 2 months later, the number is now beyond 80%:

• 56.7% Android
• 24.2% iPhone

This penetration ratio is astounding. The technical team at Plastyc is getting itchy to release the applications we have prepared for both platforms.

Below is a sneak preview of the iPhone application:

Once released, anyone among the 80%+ with a smartphone will be able to manage the entirety of their account without touching a PC again.

Last week, Consumers Union (the non-for-profit publishers of Consumer Reports) provided an update to their September 2009 study of Prepaid Cards, somewhat provocatively entitled “Prepaid Cards: Second-Tier Bank Account Substitutes?”
Click here to download the new report.

What this report articulates overall is: even new, born-in-the-21st-century, financial services and products (like prepaid cards) can be more expensive and less people-friendly than they need to be, jeopardizing their potential to be a replacement for 19th-century services like checking accounts.

The report does not analyze the cause for this, but it is really what I have been talking about time and again on this blog: a lot of financial services suppliers are both greedy and incompetent.
Too many fat cats unwilling or unable to use innovation to improve the performance-over-price ratio of what they deliver.

If it was not for poor execution by many companies, here is why prepaid cards are actually a good substitution for checking accounts:

Pay by card

I do have a few specific issues with the Consumers Union report. In the interest of full disclosure, I run a company that provides prepaid cards, and am evidently disappointed that our product (the UPside Visa Prepaid Card) was not mentioned in it. I guess when you want to make a point that products are too expensive and not consumer-friendly enough, leaving out the lowest cost and most complete products available helps strengthen that point.
But, hey, product reviewers have to select a manageable subset and can’t include everybody. And why would I complain that our product is not listed in a rather negative report?

Back to what I think is not entirely justified in the Consumers Union report, in reference to their Policy Recommendations in paragraph V:

• Fees: for sure they ought to be limited and transparent. Overdraft and dormancy fees which are mostly punitive should go away (we don’t have any on UPside cards). However, requesting that paper statements be always provided at no fee or a nominal fee makes little sense in the days of Internet and increasing postage costs. Almost no cardholder is asking for paper statements.
• Rights to re-credits in case of lost or stolen cards: here Consumers Union is confusing the theory – i.e. what Terms & Conditions have to legally say- and the practice – i.e. what companies really do-. Most issuers will re-credit an account that was previously suspended following a loss or theft, rather than risking to lose the cardholder by waiting too long to do it. So most incidents are resolved well beyond what the T&C’s of a cardholder agreement typically say. Requesting that re-credits be systematic, generalized and the same as with bank accounts that often rely on minimum balances and other fees to cover operational costs, is unrealistic.
• Reduce Loss Cap to $50 on all cards, including prepaid. Same as above: most issuers will actually waive loss caps rather than losing a customer, even though they have a lot less headroom to do so with a prepaid card than with a debit or credit card. Forcing alignment of all cards without understanding the underpinning differences in profitability and business models will not work.
• Chargeback Protection. Well, this is not even discussed in the report, so not sure why that point is there, besides juste making the list longer. I am not aware that prepaid card issuers are behaving any differently than issuers of debit cards linked to a checking account.
• FDIC protection. What they mean here is what is called “pass-through” protection, i.e. making it clear that the protection applies to cards individually rather than all the cards in aggregate at the issuer. I agree with this, but let’s remember that no prepaid card reviewed in the report nor any prepaid card that I know of in the US, can exceed a balance of a few $1,000′s. So demanding a $250,000 protection per card is somewhat extreme. I am not sure what the Anti Money Laundering enforcers would think about prepaid cards with balances of up to a quarter million dollars…

Overall, the prepaid card industry has some progress to make and Consumers Union does a good job of keeping stakeholders on their toes. However, giving the impression that all prepaid cards are ‘second tier’ compared to bank accounts, is somewhat unfair to those of us who are trying hard to do better than checking accounts at a lower cost and without the risks of overdrafts.

For the sake of transparency, here is what the UPside Visa fee schedule, as formatted by Consumers Union in Appendix A of their report would have looked like if they had included it: (click on the image to download in PDF format)
And here is the same for the evaluation of the monthly cost: (click on the image to download in PDF format)

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.