Archive for the ‘Payments Industry Stuff’ Category

Bernanke: Debit Interchange Proposal May Cause Banks to Fail

In Payments Industry Stuff on May 13, 2011 at 11:18 am

May 12, 2011

Bloomberg reports that Federal Reserve Chairman Ben Bernanke told lawmakers that there was “reason to be concerned” that the debit interchange exemption for smaller financial instructions wouldn’t be effective and may even result in bank failures.

“I can’t say with certainty, but I think there is good reason to be concerned about it,” responded Bernanke at a Senate Banking Committee hearing.

The Fed’s proposed debit interchange regulation caps swipe fees at 12 cents for transaction except for issuers with assets under $10 billion. If the exemption doesn’t produce the intended results, Bernanke warned, “it’s going to affect the revenues of the small issuers, and it could result in some smaller banks being less profitable or even failing,” he said.

Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair also commented at the hearing that, should the exemption be ineffective, it will “stress” smaller financial institutions and result in more fees for customers, American Bankers Association CEO and President Frank Keating wrote in a press release.

“We had suggested that the Fed perhaps could use authority under Reg. E to require that the networks accept two-tier pricing, and our lawyers probably have a different perspective on that, and obviously that’s the Fed’s call as it is the Fed’s rule,” ABA reports that Blair responded. “So, if their view is that there is no reasonable authority to require that, I think it does become even more problematic. I do think that this is going to reduce revenues at a number of smaller banks and they will have to pass that on to customers in terms of higher fees, primarily for transaction accounts. That’s going to happen and again, is that the right result, is that the result Congress wanted? You need to determine that but I think that’s going to happen.”

Smaller financial institutions, including community banks and credit unions, have expressed concern they would be forced to accept the same debit swipe fees caps in order to stay competitive.

“The ABA has long held the view that the small-bank exemption will not work and cannot be made to work because having two prices for the exact same product is simply not sustainable in a free market.  As much as some in Congress might like to, they cannot overturn this basic law of economics,” wrote Keating following the hearing. “The potential harm to community banks and the consumers they serve resulting from the Fed’s debit interchange rule were not fully explored by Congress before it passed the Durbin amendment, which was never the subject of any hearings or studies. If the rule is allowed to go forward, the consequences for everyday Americans – especially lower-income consumers – will be detrimental to their financial bottom-line.” (Click here to read the full press release.)

The Electronic Payments Coalition commented that both Chairmen Bernanke’s and Bair’s testimony reinforces statements made in previous hearings this year expressing concern about possible consequences for community banks and credit unions.

“The nation’s senior economic policymakers continue to express concerns that small financial institutions and their customers will be harmed by the Durbin amendment, on the eve of intended implementation,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition. “Why the rush? Slow this down and get it right before it’s too late.”

Also opposed to the Fed’s debit proposal are some of the country’s biggest banks and lenders, such as Bank of America Corp. and JPMorgan Chase & Co., which Bloomberg reports could lose more than $12 billion in annual revenue if the limit is enacted.

The Fed pushed back the initial April 21 deadline for completing its debit interchange proposal in order to fully review the deluge of public comments on the regulation that were submitted. A bipartisan group, led by Sen. Jon Tester (D-MT) have submitted a bill that would delay implementation of debit interchange caps in order to allow the impact of any potential changes to be further examined.

When asked about the issue of further study, the National Retail Federation reports Bernanke stated, “We have plenty of information. That is not a problem.”

“Chairman Bernanke has made it clear not once but twice now that there is no need to delay swipe fee reform and the savings it will bring to American consumers this summer,” NRF Senior Vice President and General Counsel Mallory Duncan said. “The big banks claim they want a study, but the truth is that they want to kill reform. The Federal Reserve and the merchant community are committed to carrying out Congress’ intent to bring these fees under control. Big banks should not be allowed to take these savings away from retailers and their customers.” (Read full statement)


Bernanke Says Fed Won’t Meet April Deadline on Interchange Rule

In Payments Industry Stuff on March 30, 2011 at 10:54 am

Federal Reserve Board Chairman Bernanke told Congress yesterday that the Fed won’t be able to meet the April 21st deadline set by the Dodd-Frank Act for regulating the debit card business. Unlike the student who turns her homework in late, the Fed should be applauded for taking more time to get its job done right rather than adhering to the rushed deadlines set by Congress.

It’s clear to anyone who has read the many questions that the Fed put out for comment in late December or listened to the Board hearing that—not surprisingly—regulating the highly complex, multi-trillion debit card market isn’t something mortals could do responsibly in nine months from an almost standing start. The additional time will hopefully enable the Fed to sort out how to compensate debit card issuers for fraud prevention before imposing any possible rate caps.

Chairman Bernanke has assured Congress that the Fed will meet the July 21st deadline for imposing the rules. Perhaps before then, Senator Durbin will agree that enough questions have been raised—even if they haven’t all been answered—over whether his bill is really in the public interest that he will do the right thing and take the time out, mandated by the Tester Debit Card Study Act, to make sure that consumers, especially lower income ones, don’t get the short end of the stick.

Consumers Look to Credit Cards for Time, Not Money

In Payments Industry Stuff on March 23, 2011 at 9:54 am

Theodore Iacobuzio (Vice President, Global Insights at MasterCard) | March 15, 2011

(From MasterCard’s “The Heart of Commerce” Blog)

You heard it here first, folks.

The New York Times reported March 2 that “American shoppers did not shed their reliance on credit cards over the year-end holidays.”

As to why they used credit cards, The Times notes that “retailers tend to benefit from credit card spending, as it often means people are spending beyond their budgets.”

Let’s park the question as to whether retailers “tend to benefit” from selling goods their customers may have trouble paying for.

The reality is, U.S. consumers used credit cards last Christmas to manage their money. Every piece of market research that comes into MasterCard indicates that U.S. consumers-all of them-had the living daylights scared out of them over the past two and half years. They understand that credit cards give them the flexibility and convenience of extra time to pay their bills, for a price. That consumers are willing to use credit cards to pay for Christmas gifts doesn’t mean they’re “spending beyond their budgets.” In most cases, it means they are trying to manage their money better.

The Times’s point that, yes, consumers still do use credit cards, echoes my earlier post which took issue with press reports back in December indicating that consumers were going to use cash-legal tender, greenbacks-to pay for Christmas gifts.

Consumers, though they used the word “cash” when talking to reporters, weren’t talking about tender; they were talking about their commitment to financial responsibility. In other words, their intention was to pay in full, or in installments, rather than revolve into the ozone. They were always planning to pay with plastic. And they paid not just with any plastic, but with credit cards. At least that’s what the data say.

It could hardly have been otherwise for holiday spending to be as robust as it was. MasterCard SpendingPulse reported holiday spending rose 5.5% last year over the 2009 season. So the notion of people counting out twenties at checkout for holiday gifts does not bear scrutiny. The degree to which e-commerce performed last Christmas belies the notion altogether.

At point of sale, or online, U.S. consumers as a group are trying to manage expenses versus income. And credit cards help them perform that task.

Consumers Open Wallets, Hike Spending 5.5% in Run-up to Christmas

In Payments Industry Stuff on January 4, 2011 at 10:40 am
Dec. 28, 2010
Consumers brought holiday cheer back to merchants and payment processors in the run-up to Christmas this year, spending 5.5% more during the period than they did last year and giving signs that they are opening wallets and purses again after a long recession and rocky recovery. Especially noteworthy were sharp increases in spending in the e-commerce channel and in big-ticket categories like jewelry.

That’s according to MasterCard Advisors, whose SpendingPulse service tracked consumer holiday-season spending from Nov. 5 through Christmas Eve, a 50-day stretch. The service, which includes traffic on the MasterCard payment network as well as survey data capturing spending on cash, checks, and other instruments, released percentage changes but not the raw numbers on which those percentages are based. “If last year’s holiday story was about gaining some stability, this year’s is about getting back to growth,” said Michael McNamara, vice president of research and analysis for SpendingPulse, in a statement.

In an indication that consumers continue to flock online, e-commerce sales jumped 15.4% over last year’s holiday season, the report found. It also revealed an 8.4% increase in jewelry volume, while luxury sales outside the jewelry category rose 6.7%. One big-ticket category that lagged, however, was electronics, which increased just 1.2%. The report says the modest increase may have been due to falling TV prices.

The SpendingPulse report also looked at the apparel category, which racked up an 11.2% gain. The report says the strong performance might have been the result of cold weather and snowy conditions around the country this year.

Latest Fed study underscores strength of electronic payments

In Payments Industry Stuff on December 27, 2010 at 11:25 am

On Dec. 8, 2010, the Federal Reserve released its latest take on U.S. consumer payment habits, indicating that electronic payments accounted for more than three-quarters of all noncash payments in 2009.

In total, the Fed reports, Americans made 84.5 billion electronic payments last year and wrote about 24.4 billion checks. The Fed’s data show that the electronic share of noncash payments grew 9.3 percent between 2006 and 2009, while the number of checks paid by banks fell 7.2 percent. The Fed’s data include automated clearing house (ACH) transactions but not large-dollar wire transfers.

The biggest increase was charted by debit cards: 14.8 percent annual growth between 2006 and 2009. Debit card use now tops all other forms of noncash payments, accounting for 35 percent of total noncash payments, according to the Fed’s data.

More efficient payments

“The results of the study clearly underscore this nation’s efforts to move toward a more efficient electronic clearing system for all types of retail payments,” said Richard Oliver, Executive Vice President of the Federal Reserve Bank of Atlanta, and the Fed system’s resident payment maven.

While the Fed and the industry deserve credit for the trend, it is “also likely that the results reflect changing consumer behavior during difficult economic times,” Oliver suggested.

The Fed collects retail payment data about every three years. The 2010 Payments Study, its latest compilation, includes three separate sets of data, collected from financial institutions; payment networks, processors and card issuers; and electronic clearing houses.

Here’s a quick rundown of what the 2010 study reveals about payments in 2009:

  • There were 24.4 billion checks valued at $41.6 trillion processed by banks.
  • ACH transactions totaled 19.1 billion and were valued at $37.2 trillion.
  • 21.6 billion credit card payments worth $1.9 trillion were made by consumers.
  • Consumers made 37.9 billion debit card payments valued at $1.5 trillion.
  • 6 billion prepaid card payments worth $0.1 trillion were made by consumers.
  • Consumers made 6 billion ATM withdrawals valued at $0.6 trillion.

A detailed summary of the 2010 Payments Study is available online at .

Debit Interchange Would Get a 12-Cent Cap Under Fed Proposals

In Payments Industry Stuff on December 17, 2010 at 12:50 pm
Dec. 16, 2010
Debit card interchange fees would take a draconian cut under two proposals that the Federal Reserve Board floated on Thursday. Both would set caps of 12 cents per transaction, caps that would take most of the profit out of many transactions, especially signature debit. The board also left open the possibility that a debit card could access both the Visa and MasterCard networks for signature transactions, a far-reaching option large retailers sought.

The Fed offered the proposals as part of its mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act that President Obama signed last July. The law’s Durbin Amendment calls for the Fed to devise regulations that would ensure “reasonable and proportional” debit card interchange applicable only to banks and credit unions with more than $10 billion in assets. The law also says debit card issuers must offer so-called unaffiliated network options for transaction routing and bans issuers and payment card networks from limiting merchants’ choice in routing debit transactions.

The National Retail Federation, which strongly supported the amendment sponsored by Senate Majority Whip Richard Durbin of Illinois, praised the Fed’s proposals. “Any reduction in debit card swipe fees at all, large or small, is a benefit for consumers because retailers are highly competitive and will share that savings with their customers, but the law requires a major reduction,” NRF senior vice president and general counsel Mallory Duncan said in a statement.

But those opposed to interchange regulation were disappointed. “My forecast from the get-go that debit interchange would be reduced on the order of 90% because the Fed would adhere to what Congress instructed it to do in the text of the legislation was borne out,” says consultant and former Visa executive Eric Grover of Menlo Park, Calif.-based Intrepid Ventures. “The chorus of analyst wishful thinking that the reduction would be only 50% because that was ‘reasonable’ has been shown to be just that: wishful thinking.”

MasterCard Inc. general counsel Noah Hanft said in a statement that, “This type of price control is misguided and anti-competitive, and in the end is harmful to consumers.” Statements from Bank of America Corp., the largest debit card issuer, and Visa Inc. and were not immediately available.

Minneapolis-based TCF National Bank, a big debit issuer that is suing the Fed in a challenge to the Durbin Amendment’s constitutionality, said its average debit card yield is 1.35% of the sale (Digital Transactions News, Oct 12). With a 12-cent cap, TCF on a typical $40 debit sale would seemingly sustain a cut of 42 cents, or 78%, on a transaction that would have generated 54 cents without regulation.

In their first-ever Webcast meeting, the Fed’s governors, headed by chairman Ben S. Bernanke, heard proposals their staff developed after months of meetings with banks, merchants, payment networks, consumer groups, and others. The staff also surveyed debit-industry players about their expenses. The proposals will be published in the Federal Register as part of a 60-day comment period before the Fed takes final action.

In accordance with the parameters set by the law, the staff recommended allowing issuers to recover costs directly related to the authorization, clearing, and settlement of electronic debit transactions, but not other costs, such as card production and distribution, general costs of deposit accounts, branch costs, and other overhead. (The Fed is asking for comment on a proposed adjustment for fraud-control expenses.)

Under what the Fed staff calls Alternative 1, each issuer could calculate its average variable cost for authorizing, clearing, and settling a transaction, with a cap of 12 cents. If they didn’t want to do so, an issuer could invoke a “safe harbor” of 7 cents. The staff report says 7 cents is the median issuer’s average variable cost for authorization, clearing, and settlement. Issuers with costs in excess of the safe harbor would be permitted to recover those expenses up to the cap, but they’d have to report their expenses. The 12-cent mark corresponds to approximately the 80th percentile of allowable costs of issuers that responded to the survey.

“Setting a cap ensures that no issuer is able to receive an interchange fee at an unreasonably high level,” the report says. “Without a cap, issuers that choose to report their costs to receive an interchange fee above the safe harbor would not have an incentive to control cost, compared to those issuers that accept the safe harbor, because they would receive no mark-up on costs. With a cap however, these issuers would have an incentive to control their per-transaction costs to keep them below the cap.”

Alternative 2 is simpler—any interchange fee at or below 12 cents would be permitted.

The Fed also proposed two provisions to implement Dodd-Frank’s ban on exclusive network affiliations and restrictions by issuers or networks on merchants’ freedom to route debit transactions as they wish. (An example of an exclusive affiliation is a card that only offers Visa for signature transactions and the Visa-owned Interlink network for point-of-sale PIN-debit.) Under Alternative A, each debit card could access one signature and one unaffiliated PIN-debit network. In those increasingly rare types of cards that don’t offer both a signature and PIN choice, a card that didn’t offer PIN-debit could access two signature networks, and a PIN-only card could access two such networks.

The disadvantage of that rule is that it would do little to promote network competition because 6 million of the 8 million U.S. merchant locations that take debit cards do not accept PIN debit, according to Mark D. Manuszak, economist in the Fed’s Financial Structure Section. Thus, a card with just one option for both types of debit would limit merchants’ routing choices.

Under Alternative B, each card offering a signature and PIN option would have to offer access to at least two unaffiliated signature networks (effectively Visa and MasterCard, though Discover might be an option for some banks) and two unaffiliated PIN-debit networks. The Merchants Payment Coalition, a consortium of big retailers, proposed just such a radical option (Digital Transactions News, Dec. 14). But staff members acknowledged that Alternative B has drawbacks. “Such a requirement would entail substantial operational changes by debit card networks, issuers, merchants, merchant acquirers, and their processors,” Manuszak told the board.

ZYWICKI: Durbin regulations are aimed at your wallet

In Payments Industry Stuff on June 4, 2010 at 11:08 am

They’ll cost us all money and convenience.

By Todd J. Zywicki

Late in the Senate’s proceedings on the financial regulatory reform bill, the Senate adopted – with no hearings and minimal debate – a controversial provision proposed by Sen. Richard Durbin, Illinois Democrat, that imposes price controls on interchange fees for debit and prepaid cards. The amendment also allows merchants to override several rules of payment card networks that currently protect consumers from abusive practices by merchants. While big-box merchants and convenience stores are declaring this a victory against the financial services industry, if the amendment survives in conference committee, consumers and small banks will be the real losers.

thThe Durbin amendment seeks to regulate interchange fees on debit transactions. This fee is an element of the price a merchant pays whenever a consumer uses a credit or debit card. It partially compensates the cardholder’s bank for the cost and risk of offering payment cards to consumers such as clearing costs, billing and collection, fraud recovery and customer service. In a provision reminiscent of Soviet-style economic planning, the Durbin amendment requiresthe Federal Reserve to determine interchange transaction fees for debit that are “reasonable and proportional” to the “actual cost” to issuers with respect to the transaction. But the amendment does not permit recovery of the actual cost to issuers from debit transactions, only the “incremental” cost of a particular transaction. The massive fixed costs of running the network and servicing cardholders would be excluded, guaranteeing that debit card issuers will lose money on their debit card operations. That’s not sustainable.

This means, inevitably, costs will be shifted from merchants to consumers. Consumers will see new fees or greater restrictions on their use of debit cards – reminiscent of times past when banks imposed a limit on the number of free debit transactions a consumer was permitted in a given month, after which consumers had to pay a fee. Consumers can also expect to see deterioration in customer service and investments in security, and efforts by banks to cross-subsidize debit card transactions through other bank services. Issuers may also try to steer consumers toward greater use of credit cards, whose interchange fees – although generally higher than those on debit cards – are not regulated by the Durbin amendment. Moreover, while the Durbin amendment excludes banks with assets of less than $10 billion from its price control regulations, payment card networks will be forced by competitive pressures to equalize its interchange fees across its various issuers, thereby nullifying this purported safe harbor for small issuers and their customers.

But the pernicious reach of the Durbin amendment goes beyond price controls. It also overrides several provisions of card network contracts that relate to credit cards as well as debit cards, such as rules that restrict merchants from setting minimum or maximum charges in order to use a card. Those provisions exist primarily to protect consumers, who will be the big losers if those contract terms are nullified.

Card network rules prohibit merchants from establishing minimum purchase floors in order to guarantee universal acceptance of cards. Merchants can request that consumers refrain from using cards for small transactions, but prohibiting card use below a minimum threshold is a violation of their agreements with the card networks. Does the profitability of Citi or Chase’s credit card operations turn on whether cardholders can purchase coffee and a donut with their card? Hardly. But those provisions matter a lot to consumers who value cards because of their universal acceptance. Universal acceptance matters especially to tourists, business travelers and residents of high-crime areas who find cash inconvenient or dangerous to obtain and carry. Merchants would instead force them to buy additional products in order raise their overall spending enough to use their card. Many states issue unemployment, welfare and retirement benefits through prepaid cards, meaning that some families who want to buy only a gallon of milk might be turned away unless they buy more. It is easy to see why merchants like this arrangement; it is less obvious how the rest of us benefit. Merchants argue that they lose money on consumers who don’t purchase enough to make a card sale profitable to the merchant. Perhaps, but merchants engage in all kinds of activities that guarantee that they don’t make money on every customer who walks in the door – from the customer who uses a sales clerk’s services without eventually buying anything, to free returns, to operating during hours when few customers shop. Yet even though merchants lose money on those who browse but don’t buy, they make a business decision that those occasional losses on some customers are justified by the overall business value of providing helpful service and free returns. The decision whether to accept payment cards is no different.

But the provision that exposes the Durbin amendment as a merchant-driven money grab at the expense of consumers is that which permits merchants to override network rules on maximum charge levels. The only apparent rationale for this provision is to enable merchants to steer purchases of bigger-ticket items to their in-house or proprietary credit plans, thereby giving merchants an effective monopoly for those credit sales. Consumers won’t benefit from restricted competition and reduced credit choice, especially when financing more expensive purchases.

The purpose of the financial reform bill purportedly is to prevent another financial crisis from happening. Price controls on debit cards, much less prepaid cards such as gift cards, have nothing to do with that goal. But they have much to do with a powerful special-interest group seizing the anti-bank mood in the country to ram through new mandates that will allow them to impose their business costs on consumers. Maybe next they’ll try to persuade Congress to outlaw free parking and friendly cashiers in order to reduce business costs.

Todd J. Zywicki is a George Mason University law professor and a scholar at the Mercatus Center.


Credit cards reward bargain hunters

In Payments Industry Stuff on June 3, 2010 at 10:21 am

June 3, 2010 –

A few months back, I got airline tickets for $50. Here’s how I did it.

Several banks and airlines were offering airline credit cards with a $50 annual fee. Sign up, spend $700 on the card, and they would give you 30,000 frequent flier miles. That’s more than enough for a one-way ticket anywhere in the United States, and a round trip if you plan far enough ahead.

Get the Chicago Tribune delivered to your home for only $1 a week >>

I’ll use my free flights, then I’ll cancel the card before the next annual fee comes due.

Credit cards remain the best way to rob a bank, if you pay the bill in full every month. Do that, and the bank gives you an interest-free loan until the due date. To top that, many cards will throw in extra goodies, or cold cash. They will pay you for the privilege of lending you money for free.

There are hundreds of “rewards” credit cards on the market. They’re a fine deal, so long as you pay the bill in full every month. If you carry a balance month to month, the freebies are much less important than landing a card with a low interest rate. The average card charges 14 percent interest.

“The rewards you get will be eaten up by the APR (annual percentage rate),” says Bill Hardekopf of, a Web site that tracks credit card offers.

Cash-back cards

Some cards are generous, others aren’t. The simplest way to sort it out is to opt for cold cash. A decent cash-back card has no annual fee. It will rebate at least 1 percent of what you spend on anything, plus more for specified purchases. The Chase Freedom card, for instance, gives 1 percent on all purchases, plus 5 percent on a list of other items that rotate by season.

“Anytime you can get 5 percent back, it’s nothing to sneeze at,” says Hardekopf.

If you have a Fidelity investment account, the no-annual-fee Fidelity American Express Card will add $100 to your account for every $5,000 you spend on the card — a pretty good offer.

Less generous cards use a tiered system for rebates. The Discover More card, for instance, pays only 0.25 percent on until you’ve spent $1,500, then 0.5 percent until you hit $3,000 and 1 percent after that.

Non-cash rewards

Things get more complicated when you opt for a card with goodies other than cash.Look at the payout ratio, says Greg McBride, a senior financial analyst at, which tracks both bank lending and deposit rates. How many points do you get for a $1 purchase, and how many will you need for that official NASCAR Jeff Gordon jacket? (13,700 points on the NASCAR Racepoints Web site.)

Look at your spending pattern, says McBride. If you’re driving a gas guzzler on a 50-mile daily commute, a gasoline credit card might look sweet. The no-annual-fee Exxon Mobil MasterCard, for instance, gives you a 15-cent-per-gallon rebate at Exxon and Mobil stations, plus between 0.5 and 2 percent on other eligible purchases.

Credit score impact

My tactic of taking the airline miles, then canceling the card? Hardekopf and McBride note that I might do some damage to my credit score.

When I cancel the card, I’ll be lowering my available credit. Credit scores are based in part on the percent of available credit I’m using. Less credit can mean a lower score. Scores also count the amount of time I’ve held my accounts, and canceling a card counts against me.

Don’t do it if you plan to borrow money in the next six to 12 months, says McBride. I don’t, so I’m happy to be flying cheap.


Payment by phone app a growing trend

In Payments Industry Stuff on June 3, 2010 at 9:20 am

By Scott Duke Harris – 06/02/2010 –

Over at Ramona’s Pizza in Palo Alto, customers are asking when FaceCash will be ready, says Mario Tejada, owner of the pizzeria. Those early-adopter techies, it seems, have been intrigued by reports of a new mobile-phone payment app developed by one of Ramona’s regulars.

To envision FaceCash, think of an app on an iPhone, Android or BlackBerry that features the user’s photo and a bar code as a substitute for credit cards, providing an electronic record of the transaction linked to a bank account.

“They’re still trying to fix a few bugs,” Tejada said.

With only four Palo Alto eateries now listed on its roster of merchants, FaceCash is a tiny player in the fast-growing mobile-payments industry. If it catches on, it could have a sliver of a market that could grow beyond $600 billion globally by 2014, according to one recent study. Even a modest success could prove profitable.

FaceCash is part of a wave of startups challenging a payments industry that is still dominated by banks and credit card companies, which analysts say are loath to alter a business model that provides handsome fees.

Tejada is excited by the prospect that FaceCash would halve the merchant fees now paid on credit card transactions. That’s one reason he hopes his customers embrace FaceCash.

While FaceCash for now is focused on Palo Alto, Boku, a mobile-payment startup based in San Francisco with a roster of A-list venture backers, boasts of a


global footprint with a presence in 60 countries. Boku executives travel the world inking deals with telecommunications carriers, not small merchants. Boku and its Palo Alto rival Zong, both of which announced Android apps Wednesday, are focused on payments for online virtual goods, such as games and digital flowers.

Boku, which recently added Andreessen Horowitz to its roster of investors, was launched by seasoned tech entrepreneurs and used some of its $38 million in announced venture funding to acquire rivals Paymo and Mobillcash.

“We’re definitely not the two guys in the garage hoping to start something and sell it for $15 million,” said co-founder Ron Hirson. He envisions Boku as a billion-dollar company that will perhaps move beyond virtual goods to enable online purchase of physical merchandise in 2011.

FaceCash’s back story beats the usual two guys in a garage. The Ramona’s regular is Aaron Greenspan, founder of a small company called Think Computer but better known as one of Facebook founder Mark Zuckerberg’s rivals at Harvard. Greenspan should not be confused with the ConnectU founders who sued Zuckerberg. But last May, he did reach a trademark settlement with Facebook over who first actually used the name “the Face Book.”

If FaceCash catches on, Greenspan may have a better claim to fame. “As with anything brand new, there are indeed always bugs, but thanks to Mario and our other merchants, I think we’ve got basically all of the really terrible ones resolved,” he said.

“I was able to pay my rent this month with FaceCash, and so was my roommate.”


Payments 2010: The revolution has arrived

In Payments Industry Stuff on June 2, 2010 at 9:28 am

NACHA – The Electronic Payments Association was formed in 1974 to coordinate disparate efforts to replace checks with electronic debits. NACHA is the traffic cop; it writes the operating rules and regulations for using the automated clearing house (ACH) system, which was originally designed to process very large batch files of recurring small-dollar items. NACHA’s annual payments conference is now the largest such meeting of payment professionals in the United States

While there has been a lot of talk about expanding the ACH system to “make checks obsolete,” it is important to note that the ACH is still a batch, store-and-forward, next-business-day settlement system. Transactions received by banks during the day are stored and processed later in a batch mode, where they are sorted by destination for transmission during a predetermined period.
Over the last decade, NACHA has come up with new payment types, and many people believe that in the near future most payments will clear as ACH entries. This is why you should attend NACHA’s annual event. This year’s show, Payments 2010, held April 25 to 28 in Seattle, offered seven tracks, plus workshops, plus a large vendor exhibit hall.

For many years, most growth in the ACH world came incrementally from government transfer payments. Things started to change about 10 years ago, when NACHA came up with a new code to allow checks to be converted to ACH at points of purchase. This was not a resounding success, and some industry professionals believe NACHA has been on the fringe of payment innovation.

Predictions of ACH usurping check proved shortsighted; this year there will be 25 billion checks written in the United States, and Electronic Data Interchange has, for my 25 years in cash management, been the “next big thing.”

Nine of 10 payments worldwide are still made in cash. A recent study by Packaged Facts called Consumer Payment Trends in the US found that “54 percent of U.S. adults cite cash as their preferred form of payment.”

Based on data from the Experian Simmons Spring 2009 Adult Consumer Survey, the report notes that “68 percent of American adults have a debit card in their wallet, and 67 percent have a credit card; though only 53 percent of adults may be considered active credit card users with transactions in the last 30 days.” So how are they making their payments? (The answer is debit card, cash and check.)

Americans have recently shifted their preference from credit to debit, and merchants are studying decoupled debit, to convert what started out as a debit card transaction to an ACH debit. So, while there are changes in the wings, they use the existing payment channels and, until now, there have been no big changes to the existing platforms and networks.

In a recent article called “Why Banking Technology Sucks,” the Banksimple blog identifies the root of the problem. It says, “back-end technology is constrained by legacy systems – core processing is done on a nightly batch basis in a mainframe, using code that was written 30 years ago.

“Given the large number of existing users, and the network effects inherent in payment systems, it’s going to be a long time before the majority of banks switch to better technology.”

And it’s not just technology: Brett King, the author of Bank 2.0, said that “legacy organizational structures and metrics are why technology is held back – not just because of investment in legacy systems.” But now I am not so sure.
This year’s conference proved that things are changing, and fast. I came away convinced we will see big changes in the next five years, and they will involve new devices, new channels and less reliance on interchange.

These new channels will feature “immediacy, transparency and approachability,” the new payments mantra. Since interchange is the lifeblood of the card industry, and the source of the ISO revenue stream, it is important to pay attention to these developments if you work in the card industry, because your world is going to change. The first hint was “The Future of Money: It’s Flexible, Frictionless, and (Almost) Free,” by Daniel Roth in the March 2010 Wired magazine.

You can read it, at Revolutions begin with a series of small, unrelated events.

Roth wrote that “hundreds of software developers and entrepreneurs are attacking the payment ecosystem, seeking out ways to tear down the stronghold the banks and credit card companies have built.” This is a comprehensive, well funded, wide ranging movement initiated by newcomers to the payment system. One event was the decision by PayPal Inc. last summer to allow developer access to its code, allowing them to work with its transaction framework.

Two months later, 15,000 developers had used it to create new payment services. And developers can write apps to solve business problems and leave the regulatory and risk management issues to PayPal.

In November 2009, PayPal released a new platform that charges about one third of traditional credit card rates. And PayPal executives said they won’t have to convince American consumers not to use their credit cards online; people will make that choice on their own.

One developer linked users’ Twitter accounts to their PayPal accounts and created a new company, Twitpay. The featured speaker at Payments 2010 was the creator and co-founder of Twitter, who launched a new channel he calls “Square.”

Square is a smart phone terminal that allows anyone to accept payments. You can take physical card payments by plugging in a free, sugar-cube-sized device – without a card reader.

Obopay (funded by Nokia) lets people transfer money on their phones with just a PIN. Amazon and Google are distributing their shopping cart technologies across the Internet. Rumors are that Facebook is building its own network. A year ago, Apple Inc. gave iTunes developers the ability to charge sub-fees through their applications.

Driving this is a change in the way merchants perceive the value of accepting credit cards. The fees for card acceptance have increased significantly, and yet, as Roth noted, “the service provided [has] hardly grown any better, faster or easier to access.” Entrepreneurs see this as a “massive inefficiency.”

Roth added that “an army of engineers and entrepreneurs is rushing in, hoping to do what has been done in the music, movie and publishing businesses – unseat a legacy industry built on access and distribution, drive the costs to zero, undercut the traditional middlemen, and unleash a wave of innovation.”

Many exciting ideas were presented at Payments 2010. Some presentations were excellent. For example, Steve Mott’s presentation “Reinventing the Bankcard Payments Business” and Lee Wetherington’s “Getting Payments Wrong: Top 10 Ways to Drive Customers Away.”

On the other hand, the presentation on “same day ACH” was so confusing it was obvious the few hundred bankers in the room couldn’t even make sense of it. In the past, that might have been a hurdle, but going forward, it won’t be, because the driving innovation will not come from banks and card companies. The payments revolution has begun.