Trends & Tactics

 

Keeping a Wary Eye on the Networks

 

Forget about Google and PayPal. Merchant acquirers are more worried about competitive threats from their long-time spouses by forced marriage, the payment card networks.

 

That intelligence comes from an Aite Group LLC survey of 20 industry executives, including 17 chief executives or other so-called “C-level’ officers, at May’s Electronic Transactions Association annual conference in San Diego. The sample group was too small to make statistically valid inferences from the findings, but the results still give some interesting insights into industry thinking.

 

Some 95% of respondents agreed with the statement, “Card networks are increasingly going to compete in merchant acquiring in the years to come” . The source of such fears is a fast-changing landscape in which bank card networks Visa Inc. and MasterCard Inc. as well as rivals American Express Co. and Discover Financial Services are all looking for new revenues and markets.

 

Visa and MasterCard in the past five years have transformed themselves from bank-owned associations into publicly traded stock companies, making it easier for them to encroach on territory held for decades by their old owners.

 

“Some of my clients are freaking out, without naming names,” says Adil Moussa, an analyst at Boston-based Aite.

 

Card networks are already direct acquirers in foreign countries, Moussa notes, and Visa moved closer to acquirers’ turf in the U.S. with its 2010 acquisition of e-commerce processor CyberSource Corp., which provides acquiring services. On the issuing side, networks are offering services to commercial card issuers that compete with those from third-party processors, Moussa adds.

 

Fifty-five percent of Aite’s respondents agreed with the statement, “Larger issuers and acquirers will increasingly seek to disintermediate the card networks in the years to come,” while 30% disagreed and 15% were neutral.

 

Despite their suspicions, acquirers clearly see the bank card networks as holding strong positions as payments rapidly change. Ninety percent believe Visa’s digital wallet will compete successfully with online-payments leader PayPal Inc. And three-fourths of the respondents believe the networks will remain the dominant payment brands in the mobile-payments era.

 

While they think Visa can give PayPal a good run for its money, acquirers see the eBay Inc. subsidiary and Apple Inc. as formidable mobile-payments players even though the latter has yet to make an overt move in the space. Asked to pick two names from a list of non-traditional payments companies that they believe will be major players in mobile payments, 65% of respondents named PayPal, followed by Apple, 60%, and Google, 55%.

 

The rest of the companies listed weren’t even close: Amazon.com at 10% and Facebook and Verizon, both 5%. Isis, the AT&T/Verizon Wireless/T-Mobile joint venture, scored a zero, as did AT&T itself and Nokia, the big but struggling cell-phone manufacturer in danger of becoming a smart-phone also-ran.

 

 

 

Hey Google,  How Open Is Open?

 

 

 

One of the big reasons the idea of mobile payments at the point of sale remains mostly an idea is that there are a lot of players involved in making it happen, including banks, networks, carriers, merchants, and acquirers.

 

That’s a lot of mouths to feed, leaving not a lot of margin for each player. And, with so many interests (and egos) involved, it’s hard to get projects off the ground.

 

Little wonder, then that Google Inc. made such a splash late in May with its much-anticipated mobile-payments announcement. The Web search giant may not ultimately succeed, but it gets points for corralling many of the key constituencies needed to make mobile payments work.

 

Right off the bat, Google has enlisted a big network (MasterCard), a money-center bank (Citigroup), a carrier (Sprint-Nextel), a huge processor (First Data), and at least 16 retail chains to participate in Google Wallet and Google Offers, the payments and daily-deal programs it has engineered to work on its Nexus S smart phone and then on other Android-powered devices.

 

Google’s move to the point of sale is also widely seen as breathing new life into near-field communication, a promising technology that has been hobbled by endless squabbling between banks and wireless carriers.

 

“We’ve seen with Google jumping into this one of the biggest announcements in my career in payments,” says Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group, a consultancy with a focus on mobile payments.

 

The gambit also lets Google steal a march on archrival PayPal Inc., which has huge mobile ambitions of its own. Both Google and PayPal see mobile as their ticket to the physical world, where the bulk of transactions still take place.

 

PayPal wasted no time firing back. On the same day as Google’s announcement came word PayPal had sued its rival for alleged misappropriation of trade secrets by poaching a key executive who’s now spearheading Google’s mobile effort.

 

But while Google has been at pains to stress how open its new venture is to the so-called ecosystem of payments players, it remains unclear whether the system will at some point work on non-Android devices. If not, it will exclude a significant subset of users who carry, for example, iPhones and BlackBerry handsets. “There are no current plans for different operating systems, but we’ll keep you posted,” says a Google spokesperson.

 

Experts are split on the question of non-Android systems will ultimately be enabled. “I haven’t seen anything to say anything other than Android, and that will be a limitation,” says Beth Robertson, managing director of Javelin Strategy & Research, Pleasanton, Calif.

 

But Aaron McPherson, practice director for financial services at IDC Financial Insights, argues non-Android systems will have to be included. “It would be inconsistent with Google’s strategy to make it Android-only,” he says. “The name of the game is to get [Google Wallet and Google Offers] on as many devices as possible.”

 

Still, the question may not be entirely Google’s to resolve. The inclusion of iPhones and other mobile devices running iOS, for example, would require the cooperation of Apple Inc., the system’s creator, as much as any impetus from Google, Ablowitz points out. “It’s less about what Google wants than about what Apple says,” he notes.

 

Also unclear is how the new system will overcome the paucity of retail locations equipped to accept contactless, and hence NFC, payments. Just 124,000 merchant outlets currently accept contactless cards and so have the readers necessary for wave-and-pay transactions.

 

The rewards component may attract some merchants that shunned contactless cards because they didn’t offer enough value to offset the cost of the equipment. Already, big names like Bloomingdales, Macy’s, and Radio Shack have agreed to participate in SingleTap, a Google system that will let consumers pick up discounts or other deals simultaneously with a payment transaction.

 

But Robertson argues subsidies will likely be necessary to get many merchants to install readers. “Most merchants see [the Google system] as unproven and don’t want the added cost,” she says. “So it may be necessary to jump-start it.” While the Offers component may appeal to merchants, “there are no statistics yet on redemption rates,” Robertson points out, leaving many skeptical.

 

Still, given the shot in the arm Google gives NFC, many experts are suitably impressed. “There have been a lot of companies coming out with NFC schemes, but this is the first one I’ve seen with all the pieces in place,” says McPherson.

 

True, Visa Inc. isn’t on board, but the Google gambit remains the most comprehensive offering yet seen, says McPherson. “They haven’t got [all of the partners], but they’ve got more than anybody else does,” he says.

 

 

 

Bye-Bye Pariter,  Hello clearXchange

 

 

 

The failure of a joint automated clearing house venture isn’t stopping some of the nation’s biggest banks from joining forces in person-to-person payments.

 

Three years after introducing a joint venture called Pariter aimed at processing ACH transactions between the two banks, Bank of America Corp. and Wells Fargo & Co. disclosed in early June that they would abandon the operation.

 

“It will shut down over the next few weeks,” a Wells spokesperson said last month. “It was a mutual decision, amicable.”

 

Pariter’s demise came only about three weeks after BofA, Wells and JPMorgan Chase & Co. announced they would offer a joint person-to-person payments service called clearXchange. The Wells spokesperson said the decision to close Pariter was unrelated to clearXchange. And analysts said Pariter’s end doesn’t mean that big banks can’t successfully offer a jointly run service.

 

Wells and BofA rank among the top three originators and receivers of ACH transactions. The two had been largely silent about Pariter since the announcement in 2008, and that silence, combined with the intervening financial crisis, led many observers to conclude the banks were no longer focused on the venture. That made the abandonment decision no surprise. Both banks made big acquisitions during the crisis, which likely diverted management attention from Pariter.

 

“They just haven’t been able to focus enough on Pariter to make it happen,” says Aite Group LLC senior analyst Nancy Atkinson. “What happened was the timing was just bad.”

 

Some observers also had raised concerns about direct exchanges, or arrangements among banks to trade volume among themselves rather than through the ACH operators. While such exchanges can be cost-efficient, they also siphon volume out of the network, making risk management less effective.

 

“This [Pariter] could have been viewed as a potentially harmful factor developing” for the ACH, says Bob Meara, a senior analyst at Celent LLC. Now, he says, that specter has been put to rest.

 

The booming P2P market—an estimated $865 billion a year from 11 billion transactions, most of which are by cash or check, according to Aite—doesn’t suffer from such seemingly esoteric but important concerns. It’s extremely competitive, however. PayPal Inc., other alternative-payments companies, third-party processors, and wire-transfer firms have already staked their ground, and powerful companies such as Visa Inc. are moving in.

 

But Mike Kennedy, the Wells executive vice president who serves as clearXchange’s chairman, notes that his bank, BofA, and Chase bring to the table millions of online-banking customers and demand-deposit accounts.

 

“We said that is something we would want to be able to do,” Kennedy says. He adds, citing research from comScore Inc., that the three banks have about half of the nation’s online-banking customers.

 

The banks began talking about 18 months ago and quietly launched clearXchange in April in Arizona, with another market to go live soon. Nationwide availability will be complete in about a year. The banks are offering the service free in their Arizona test market.

 

To send a payment to another person, a BofA, Wells, or Chase customer using a computer or mobile phone needs only the e-mail address or cell-phone number of the recipient, who also must be a customer of one of the three banks. The sender logs into his online-banking site and clicks on a tab for transfers. He enters the recipient’s name or e-mail address, enters the amount and a short message, and then hits “send.” The system finds the recipient’s routing/transit number and account number. Funds are sent as ACH credits.

 

“Each of the banks will have the customer front-end,” says Kennedy. On the back end, “We will utilize clearXchange as the air-traffic controller.”

 

ClearXchange may not remain a semi-closed system for long. Kennedy says that in the interests of broadening the sender and recipient pool as much as possible, clearXchange has started “to contact other players in the industry.” He wouldn’t identify any, but one firm that says it had a chat with clearXchange is New York City-based CashEdge Inc., provider of the Popmoney P2P service now used by 200 banks.

 

ClearXchange will be based in BofA’s hometown of Charlotte, N.C., with BofA senior vice president John Feldman serving as general manager.

 

 

 

Clarification

 

In the “Annual Field Guide to Alternative Payments,” May, we listed the pricing for Boku (Paymo) and Zong as if it represented final pricing to merchants. In fact, while this pricing is accurate for the two programs, we should have noted that merchants also pay fees on each transaction to mobile carriers.