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 …..

… 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.

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.

Bank hacking: power to the financial services makers

With the Maker Faire movement growing over the last few years, Hardware hacking has finally been making the headlines. It is one of the root causes of the recent startup hardware trends that are also fueled by platforms such as Kickstarter. What is interesting to me is that independent, smart  and techno savy people put the same effort in building hacks around financial services to make them fit. It’s not always pretty, but it gives strong indication of where things could be going.

Hacking hardware. For people living in a card contactless environment, getting to one platform via mobile can’t happen soon enough. The solution? Cutting and soldering.

From this post on RFID transplantation in Singapore.

Rooting Android to support more NFC scenarios. Cherian Abraham has an excellent post on the limitation of NFC in native Android (linked to a controlled Secure Element) and how a rooted Android Environment can help make NFC more open for payment for example with SimplyTapp

SimplyTapp appealed to an early segment of Android enthusiasts who abhorred having been told as to what functionality they are allowed to enable on their phones – by Google, Carriers or anyone else. And to any who dared to root an NFC phone (supported by CyanogenMod) and install the Cyanogenmod firmware, they were rewarded by being able to use both SimplyTapp as well as GoogleWallet to pay via NFC – the former where credentials were stored on the cloud and the latter – within the embedded SE.

Scrapping Personal Banking Data. Truth is, it’s not easy to acces your own banking data. Most of the bank websites have an average to bad UI, non-existing archiving functionalities (being upgraded to 9 months archive is considered amazing) and API access does not exist in 99% of the cases. If you want to automate movements between your bank accounts, get your bank account balanced pushed by email to you every morning then start by building your own scraper: https://github.com/tubaman/bankscrape . You can also find wrappers to access swedish banks: https://github.com/klr/bank and many more.

Bank account simulation. https://github.com/search?p=2&q=bank+account+management&ref=searchresults&type=Repositories I was looking for more of these examples and I am sure they exist as this is an area where I expect an increase in interesting work. Accounts management is currently a very manual activity and there is no reasons it will not become automated in the future. 

In my view the financial services industry should keep a close eye on the fringe of banking personal hacking. These are early signs and indicators of major trends and innovative services. Hacking challenges, idea crowdsourcing, clients on-boarding are essential tools for the future bank.

2013 – First Notes

2013 starts very strong and time is already a precious resource. Some notes on what I am interested in:

- Redefinition of Employment: 
Crisis may recede, but long term changes to employment structure will not. Rise of the Robot Economy.
http://ftalphaville.ft.com/2012/12/10/1303512/the-robot-econ…
Information employment less stable (as detrimental to knowledge expansion)

Possible impacts: Underwriting, Lending Structure

Robots distrupt music (courtesy of parkparadigm)

- Redefinition of Ownership: 
As employment is less stable, alternative source of revenue in leveraging existing assets. Compounded with diminution of Marketplace costs. Implies rise of the Sharing Economy / Collaborative Consumption:

http://blogs.hbr.org/cs/2013/01/from_zipcar_to_the_sharing_e…

Possible impacts: Underwriting, Lending Structure, Redefinition of Merchants and their Financial Services, Increase importance of Insurance

- Redefinition of Commerce
Physical Goods becoming Digital (books as best example), Distribution of remaining Physical Goods becoming mostly Digital. Physical distribution frictions reduced for Advice to compete.

Death of the existing physical retail structure:http://qz.com/39035/the-largest-retailers-in-the-us-do-not-l…

Possible impacts: Acquiring and POS systems, Risk Management, Payment Pricing Structure, Digital Pricing, Real Estate Financing, Currencies

- Redefinition of Production
3D printing, direct sourcing in Asia, lowered production costs (?). Will we see same change in hardware startups as in digital startups?

http://www.wired.com/business/2012/12/hardware-funding/

Possible impacts: Alternative forms of financing, Embedding of id and payments, International Payments and FX, Escrow services

- Rise of Alternative currencies
Gap between existing currencies, underlying payment/compensation systems and digital age potential is becoming too important to remain for a long time. While existing and imperfect payment methods are commoditized, alternative currencies will strive on their capacity to challenge existing status quo of imperfect payment.

http://spectrum.ieee.org/tech-talk/telecom/internet/bitcoinc…

Possible impacts: Payment, Merchants, Risk Management, FX, …

Fortune 2.0 – small assets management

I have highlighted in the past several major trends affecting financial services :

- Digitization of transactions, especially receipts from purchases.

- Improvement and democratization of marketplaces, lowering the cost of liquidity on transactions

- Improved leverage of assets from the emergence of collaborative consumption (Airbnb, Getaround)

Private Banking is sometimes offering to their high net worth clients the management of both their financial and non-financial assets. Is a similar approach possible for retail clients?

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