Google I/O payment announcements: is a revolution with no insurgency possible?

Google’s megafest was happening last week, with big announcement for Hangout, Google +, Android and Search / Maps. Among these were a couple of announcements related to Payments (but no major push from Google since Wallet 2.0 last year  and no Google Card):

– The headline-grabbing announcement – send money via email.

Wow, dollar button in Gmail, massively sexy and headline worthy …..

Pay_by_Gmail

… with the main issue that, in my view, P2P payments do not drive behaviour changes. Various startups, established players (Obopay, ClearXchange, Popmoney etc..) have tried and not succeeded. I am betting Barclays Pingit has not found major traction with this use case. The main reason is not implementation quality. It’s just that people don’t do that many P2P transactions relative to Commerce transactions and are much less attached to those. Frequency is a major driver in behaviour changes (as with contactless cards) people just forget they have it if they don’t use it enough. Also this is currently limited to the US only and while free with a linked bank account or prepaid Google card, it will cost you 2.9% (minimum 0.30$) from a debit or credit card (note: Google is not willing to take a loss on these non-commerce transactions …)

Also, while I am sure Google is focused on this, this could become a massive risk challenge with compromised Gmail accounts. Extending it beyond US only (it could be really powerful in remittance markets) will require much more work

My prediction: in this current form this will have limited traction and remain relatively small. 

The more interesting announcement was in my view Google Instant Buy:

Per Google, 97% of mobile shoppers abandon their cart. The solution is broadly known, with a central point for registering Id, address and payment means. Google’s solution appears quite complex:

– It works on the existing credit card rails. In more details, it interfaces a virtualised Mastercard debit card with the users payment means to connect with the merchant processor as a Card Not Present Transaction. As a consequence, Google is taking a loss on every transactions made through the system.

– It still requires merchant / app creators on boarding. While it runs before the payment processor, it still requires implementation on the merchant side (though Google claims this is an easy implementation).

There are several issue with this solution:

– It leverages Android to help on adoption but this may not be as much of a strength position as it looks. Every app with a strong enough sign in infrastructure could  provide the same simplicity or has done so. Amazon is the main example. Airbnb, while part of the Google Wallet launch, uses Venmo Touch (from their payment provider Braintree) on the iPhone. iOS is just the start if we are to believe this: https://www.braintreepayments.com/company/careers/new-york-city/android-engineer-venmo-touch-venmo-p2p. Paypal can do this as well.

– Instant Buy may become major on the Android platform, for new mobile only services, but will face strong competition from other devices platforms and cross devices platforms (Amazon, Ebay etc…). For a strong enough merchant, driving customers through their payment system while not disclosing additional data to Google will become a major focus. It’s no surprise that Google Request full line items details in the Instant Buy implementation.

“The full wallet request specifies purchase details. You should include information such as the line items in the user’s shopping cart, purchase total, and a few other parameters. Google recommends that you include the description field so that you can use it in the receipt to describe purchases made with Google Wallet. This parameter describes the backing instrument with the last four numbers, such as “VISA-1234 via Google Wallet”.”

– Google is losing money on every transactions (on difference between cost of customer card and their rate of 160 bps), that should be compensated via advertising. This is not new for Google in terms of Business model but the difference here is they have no control over the costs. In every other services, their infrastructure cost structurally trends down (Moore’s law, etc..) but payment is one of the few area where this has not happened. Nothing in their current implementation shows a focus on addressing this problem (they are limited to Mastercard CNP). They still need to convince merchants to use Instant Buy (vs pushing a standard for checkout information), I hope they can leverage it in some ways to propose new payment rails.

My prediction: this will face strong competition even on the Android platform and will have difficulties expanding beyond.

Taken at first view, these two Google I/O announcements show a great potential … but appear limited, in some was because they are constrained by the payment platforms they are built on. Google’s “revolution” is a derivative on existing rails; I wish they would show a more insurgent approach and build to improve / replace those. They need to convince merchants to onboard Google Wallet, a radical approach could help was well.

Note: this post is indebted to Tom Noyes twitter exchange and blog post: http://tomnoyes.wordpress.com/2013/05/16/google-in-payments-why-yesterday-was-big-news/

Shadow banking: a platform for innovative financial services

Shadow banking has become a focus of media in the last years, with many headlines on its growing size, its supposed incomprehensible structure and how it was superseding the existing banking system . This view has often been biased toward rejection and misunderstanding. After all, one can argue an independent hedge fund has a better aligned risk-reward structure vs a tax payer propped up bank. (yes, this is an extremely pro-biased view, yes there is a question of size and systemic / structural impact)

Interestingly, the development of shadow banking (broadly) is one of the fundamentals in the development of innovative financial services. A very good example is LendingClub in the US. Structurally, Lending Club is an important securitisation company in the US. Each of the p2p loan is an unsecured obligation from LendingClub with the lenders being the pool of investors. Structurally, it fits very closely the definition of shadow banking.

shadow-banking

Other models are being explored, receivables based lending companies are structured using multi compartiments funds, crowdfunding platforms use multiple limited partnerships to simplify the impact of many shareholders on startups (see Fundersclub)

The development of prepaid products as a replacement of banking products can also be seen in the same light. In Europe, for example, the emoney licence is one of the leading platform for innovative financial services. The recent announcement of the Mangopay platform by Leetchi, on the back of of their acquisition of an emoney licence in Luxembourg proves it. In no way this would have been possible if they had pursued a full banking licence.

What is next? There is a risk that the regulator (under various pressure) will want to further restrict these structures (in the name of protecting the consumer). We may see this happening in the US where bank charters have become harder to acquire (Acquiring a bank charter is way harder in most European countries – ask Metrobank)

On the surface, the regulators might be satisfied with this, because the fewer the banks, the more healthy the remaining financial institutions. But this is a fallacy of epic proportions. The lack of bank charters is creating a myopic ecosystem, whereby existing banks — whether they are qualified or not — have an ever-reducing impetus to innovative or improve their service to  customers. Why regulators would want that is beyond me.

I think it is in the best interest of the market if regulators where trying to open the bank market, making it easier to acquire a bank charter (even if limited in some forms in the beginning). Its already fascinating to see the services born out of shadow banking structure, it would be even more interesting how entrepreneurs would leverage a bank charter.