The innovation can help financial services companies and multi-nationals send money globally in a low-cost, low hassle manner, and in accordance with anti-money laundering and anti-terrorist financing best practices.    The software behind the patent permits a person to receive funds electronically without having to be a member of the system responsible for transferring the funds or being a member of the same system as the person sending the funds.

Probably the best way to explain the innovation is by way of example. Bob in the United States is sending money to Sally in Singapore.

Sender-Directed Payments work like this:
Bob provides Sally’s SWIFT bank account identifiers to his U.S. bank or Foreign Exchange Service Provider.  At the bank, He’ll pay a hefty international wire sending fee.  Sally receives no indication that the funds are on their way.  If everything goes well, Sally will see the funds in her Sing bank account in 2-3 days, less a hefty international wire reception fee.  If things don’t go well, (the SWIFT instructions are incorrectly entered by Bob, or incorrectly transposed by a correspondent bank along the SWIFT trail), Sally’s money won’t arrive and Bob and Sally have a painful, time consuming, relationship-impacting, and expensive experience ahead of them playing the trace game.  And for sender-directed first-time SWIFTS, “things don’t go well” 20% of the time!

Recipient-Directed Payments work like this:
Bob emails money to Sally through a 3^rd party payment service like PayPal, Western Union,  hyperWALLET. He’ll pay a nil or modest sending fee to his provider. The provider notifies Sally in real time that a payment has been received from Bob and is available for delivery.  Sally provides her local bank account identifier to the service.  If everything goes well, Sally will see the funds in her Sing bank account in 1-3 days, less a nil or modest local delivery fee.  If things don’t go well, (Sally’s instructions are incorrectly entered by Sally, or incorrectly processed by the provider) Sally’s money won’t arrive and Sally must deal with the provider to sort the issue out.  For recipient-directed first time instructions, “things don’t go well” in about 3% of cases.

Recipient-directed cross-border payments are:

• easier for senders to initiate,
• much less expensive, particularly for lower-value payments
• provide similar or often superior end-end settlement timing to SWIFT services,
• provide better payment status transparency for both parties via email/text notifications,
• incur 6-fold lower error/exception/return rates

The BIG problem with recipient-directed payments is that both the sender and the recipient must be members of the same service in order to benefit from these advantages: banks or 3^rd party providers which are licensed and regulated in only the sending jurisdiction can’t offer services to Sally.

hyperWALLET’s innovation solves this problem, allowing  Bob’s bank or FX provider to offer international email payments which yield all the benefits of recipient-directed payments, but without requiring the foreign recipient to register for a 3^rd party (or any new) service. From a regulatory perspective, our solution allows Bob’s provider to receive and act upon instructions only from Bob, not the foreign beneficiary.

We’ve been utilizing this software for our own corporate customers for some time now, and are pretty excited about making the solution available to banks and other payment brands in 2012.

According to the Boston Consulting group, the global payments industry is approaching 500B in revenue.

According to my math, this implies that payments industry’s revenues alone represents a 0.67% tax on human effort.

Global Tax of Payments

If payments industry revenue, as summed by the Boston Consulting group, were the true and total cost of exchanging value, then the world would have something to celebrate, because a 0.67% tax on human output to redistribute the fruit of that output doesn’t seem too bad.

But the fact of the matter is quite different. I was talking to a CEO in an eCommerce industry a while ago, who told me that the metric he and other CEOs in his sector use is 10%. Yes that’s right – - – the “cost to cash” for him is 10%. Note that he doesn’t think in terms of his merchant discount rate for CNP vs POS, normalized by the distribution of loyalty and premium cards over his client base, adjusted for the absolute value of rolling reserve/incremental cost of his bank’s adjustable operating line charges. Nope, he just knows that payments takes 10% from the top line. Kind of makes you understand why one merchant reserved the www.wayTooHigh.com url, doesn’t it?

I’m happy that the Dodd-Frank bruhaha in the USA is focusing media attention on our sector, and don’t agree with Karen Webster’s article at pymnts.com that this legislation, if passed, will threaten payments innovation by throttling investment incentives.  Her logic is valid, because innovation ‘as we know it’ may have to revisit its obvious revenue model if interchange undergoes a step function change. But I don’t think this is a bad thing – I don’t believe the world been well served by payments innovation as we know it. In my opinion, the Fresno Drop represents the last time there was true innovation in payments, and that was over 50 years ago. Despite half a century of human progress, massive reductions in communications costs, massive improvements in computing power, and now almost continuous ubiquitous human connectivity, the payments innovations attracting venture interest in new economy might actually be sending the cost-to-cash higher: iTunes, BillmeLater, FaceookCredits, BOBO taxes range from 10% to 30%. Even exciting new services like paypal and now square are fundamentally layering additional small data processing taxes on top of existing card association tarifs – - – As Galen Gruman points out in his insightful infoworld article, none of these, and likely not NFC either, will represent a new payment paradigm: they will only be a faster, shinier route to the set same 2-4% Fresno-Dropped discount fee.

I believe that a new service model which interlink banks, regional switches, and ACH scheme services with low-cost corporate payable and receivable apps, and which can be extended to consumer payment acceptance scenarios will set the stage for the next few decades of innovation.

I like QR codes and I have since the first time I saw one and wasted 2.3 hours figuring out how to scan it with my iphone 1. Since then @ hyperWALLET we’ve used QR codes as a training ground for rookie software developers and business analysts alike – to pitch new business plans in contests and theorize on what’s next at the POS.

From the payments industry perspective, there is a seductively subversive quality about a QR code: it is open sourced, the technology required to harness it is already in the hands of millions of consumers, and merchants are free to choose the application provider whom provides them with the most value, rather than an externally-imposed ‘value chain’ service order.

But the big bonus is: the travel industry is training consumers how to use QR codes, so the payments industry doesn’t have to. All over the smartphone world, travellers first try QR codes out  in order to save some precious time and personal dignity as they negotiate the queue-on-queue and checkpoint charlie hell of airline travel in the post 9/11 world. They tend to become enthusiastic and immediate prophesying converts, due partly to mobile boarding coolness.  After all there isn’t a whole lot to be smug about when you are 3 laps to go in the cattle cross queue;  holding your smartphone and pushing refresh obsessively on the screen snapshot you saved of your boarding pass is one of the few ways to pass the time and simultaneously look a little cooler than the loser with the paper in the slot ahead of you. While only nerds like me decode their Air Canada boarding passes on http://zxing.org/w/decode.jspx, (btw if you do this you will see to your horror that the whole thing is in plaintext), the public does know that if a trusted institution issues you one of these QR things, it will likely jet the job done when you need it to.

Even bankers are getting into the game – well not the payments people, its the marketing guys at least for now.  But this is awesome because real soon now DDA account holders will cease to be nonplussed when presented with a QR code to scan with their phone after they next login to internet banking. Maybe that QR would be an encrypted form of something like this, eh?

scan me or click me for a secret message.

The market needs a simple application service on top of recurring ACH debits (which are called PADs here in Canada). It would be a money maker for the banks, a boon for billers, and put control and transparency back in the hands of consumers. If you want to skip the editorial and get to the point just click here. If its Monday or you have a bagel and coffee, read on:

Just got back home from the big smoke, where I met with several national Financial Institutions talking up hyperWALLET’s newest global SWIFT<–>ACH interlinking service. The bankers were wowed by our product because it was ready to go: already built and already processing cross-border transactions. I made some lame dig along the lines of “its been ready to go for 4 years now”, and took a few more low shots @ lack of international payment product and service innovation coming out of retail banks.

The insult was picked up on during a break – a career payments expert within the bank noted that there are more innovative ideas and initiatives originating at major banks than one might think. The problem for banks isn’t that their staff lacks imagination or an understanding of what their customers want – its that a bank’s internal costs for validating/developing/launching would end up pricing the resulting service out of the market. The specific example cited was bill payments and real-time notification services for billers: would a utility company be willing to pay “more than $10 per message, because when we looked at adding this service, that’s how we’d need to price it.”

Silently to myself I thought (a) Well correct, Watson. Nobody in their right mind would be willing to pay $10 for a message (b) how could a simple add-on to an existing infrastructure be tortured so badly it needed to be priced @ $10? (c) What’s the right price for credit notifications? I know of several approaches that utilize proprietary online banking add-ons to detect payments in advance of settlement (POLI in Australia/NZ, Citadel commerce in Europe, and Yodlee-variants in the US). They charge a discount rate to merchants, typically about 100-200 basis points, depending on the sector. So for a $100 cell phone payment, either the payor or payee will cough up $1. Smells about right.

But I’m bored with real-time notification add-ons for one-off payments initiated via online banking. Philosophically I’ve crossed the floor and switched party allegiance, from full membership in the “credits will rule the world!” party, to grudging acceptance of the “just grow up and execute debits” world view. Don’t get me wrong, credits are great and have their place – hyperWALLET was founded on the premise of good-funds, credit-push, anonymous wallet funding via online banking 11 years ago. But somehow along the way, like young idealistic socialists, the operational reality of almost all online-banking credit-push solutions have sullied the beauty of the idea: The check-out process is awkward (as VerifiedbyVisa abandonment rates attest to), and the services haven’t migrated well to the mobile channel. The payment experience is unsatisfactory for both payor and payee.

So merchants have started turning to private solutions and taken matters into their own hands by adding ACH debit-based payment options for their customers. The additional settlement risk ACH debit acceptance introduces for payees can be mitigated by 3rd party identity-verification and risk scoring processes, and are further justified by their vastly lower fees, and greatly improved merchant control over the customer checkout experience.

And finally, if I am a really large utility, (I mean the kind of merchant all banks actually care about because of the cash management business…), I need to process millions of recurring payments per month. And I really prefer a batchable debit-based product, since my systems have legacy components, and I want to be able to process my batch runs on my own schedules, not the banks. I certainly don’t want to invite a nightmare of cascading missed notification issues if I need to take a server down for and hour of maintenance. So I encourage my customers to register for recurring debits today, since paying the card associations 200+ bp for a recurring payment grinds my gears. @ $0.20/item, ACH debits looks pretty damn good to me, even if the resulting NSF and closed account operational hassles add up internally to another 100 bp in costs.

Banks should love debits, too, because they don’t bear any of the authentication responsibility or settlement risk. If a customer disputes a payment made by a merchant, they can just call-in and the transaction is immediately reversed. But banks hate pre-authorized debits, and they hate them a lot. Banks hate pre-authorized debits because they lose money on them, and they also lose customer goodwill.

ACH debits as perceived by consumers - Billers reach out and grab money from DDA accounts in the dead of night!

The #1 complaint at banks’ call centres is around billers who have taken more money than they should have, who have billed for an amount after a relationship has been terminated by the customer, have billed the wrong customers, etc.

Pre-authorized debits put the banks in the unfortunate situation of acting as the referees in disputes where they weren’t even on the field to see which party committed the foul. And as referees, banks are seriously underpaid for their services and are in fact subsidizing the game: A single debit reversal can easily incur $50 in expense by the originating/receiving F.I.s, negating the profits of hundreds of other debit items.  I love the graphic below – see all those disconnected arrows?  They depict ACH debits for what they are:  an 80s anachronism with completely separate silo’d information flows.

Neither the ODFI nor the RDFI has any clue as to the Receiver/Originator agreement here!

And so finally this blog gets to the point: why not just make recurring debits work right? The regulatory and settlement processes do not need to change at all. It is not necessary to build a new infrastructure. The service does not need to touch any core banking platform. It is not necessary to introduce a service requiring adoption by a significant number of F.I.s before it is attractive and useful. Just add 5 lines of code to online banking and drop newCo’s patented pre-processing ACH debit server into your payment centre to bring web3.0 ACH debits to life.

Here’s how newCo’s web3.0 debitsDoneRight service works:

Use Case 1: Registration
(1) The consumer logs in to her online banking system, and selects “recurring payments”
(2) Just like today, she’ll see the list of billers. But instead of making a one-off or recurring fixed-amount payment to the electric company, she executes a simple wizard authorizing XyZCompany to debit up to $Z/month from her account.
(3) She is presented with a new SINGLE USE BANK ACCOUNT NUMBER, and told to give this account # to XYZCompany. This is a dynamically-generated ACH account #, which is unique to the biller-consumer. It is the ACH equivalent of a disposable credit card #.
(4) She goes to XyZcompany and enters that ACH number with them. To XyZcompany, it looks like a normal ACH account.

Here’s how the recurring ACH debits work:
(5) The biller processes the debit AS NORMAL, to the (aliased) ACH account of the consumer.
(6) The ACH file is pre-processed by newCo’s server at the consumer bank’s payment processing centre**. Each debit that hits an aliased account generates an email and SMS alert to the Consumer: “XyZ company has just taken $50 from your account, per your rule allowing up to $75 / month in payments from XYZCompany. You can change or revoke the privileges granted to XyzCompany on our online banking!”. Obviously, if XyZCompany attempts to take out more than the registered amount, the ACH debit is IMMEDIATELY declined by the consumer’s bank, and the consumer gets an appropriate email/sms alert.
(7) Importantly, settlement to both the consumer’s ACTUAL ACH account and the biller’s processes are completely unchanged.

Here’s the value-added bits which drive revenue at the Issuers:
(8) This service also includes a real-time web-services interface. So merchants can interrogate the newCo’s service to debit “instantly” for one-off purchases, digital goods, etc. It is the ACH equivalent to a credit card auth-capture process. Merchants will pay 150bp for this.
(9) Banks win even if not too many merchants utilize the 150bp discount-rate service, since their consumers will now finally be able to self-serve and manage their recurring debits. Banks who implement the service have just solved the #1 problem at their customer care centres.

Note 3) NewCo could patent its hashing algorithm per country using biller-Id/ACH numbering scheme for extra bonus points.

Note 6) Could also be a SAAS rather than on-premises deployed, of course. The registration and generation of the ACH account alias is a no-brainer for a web service, but ACH pre-processing or file redirection might not be attractive for the largest F.I.s since they would be asked to send pretty-large and sensitive ACH files to some startup. So offering both hosted and F.I.-deployed options recommended.

If the banks are serious about freeing themselves from the clutches of the card associations then they need to start offering market-viable competing solutions. NewCo’s web3.0 DebitsDoneRight is one such solution – this idea is so obvious and simple even a couple of Stanford grads and $500K from the Y-combinator fund could build the prototype. It’s kind of like facebook’s application access-granting/access-revoking service, except for banks as facebook and billers as applications wanting access to the goods. But banks, please don’t try this stunt at home. You’ll spend $80M and someone’s likely to get hurt.

Is globalization accelerating the pace of convergence to payment network homogeneity?

My guess is that EFTPOS needed to take this action if it didn’t want to see issuers start to abandon the EFTPOS product as a standard component of their DDA accounts. Still, it is kind of sad to see another unique thing about a place go away – I lived in Sydney in the late 80s/early 90s, so I remember EFTPOS introduction at the POS.  One acquiring processor spent a bit of time with me explaining the history of card payments in Australia.  After the introduction of ATMs, it was natural that a debit service would be expanded to shops. But who to pay? Evidently the industry got together and decided on a 25 bp (est) -ve POS interchange because “the largest merchants, and their acquirers were the ones who bore the most costs setting up and running the service”. i.e. device deployment, POS system changes, etc. This struck me as eminently sensible logic. But still slightly trippy, since its an unalloyed tenet of North-American payment practitioners that the merchant shall pay.

Every Australian now carries an EFTPOS card, just like INTERAC here in Canada. Every merchant accepts it. Credit cards are and have been extremely widely deployed, but were really credit cards, and not typically used to buy things like groceries, etc. Fast forward to 2009 and Visa/MC enter the Australian market with prepaid and debit products.  Issuers began distributing dual-badged EFTPOS + Visa/MC cards, and promoted the use of Visa/MC over EFTPOS at the POS to consumers, since of course this choice is more profitable for the issuing bank.

In retaliation, Merchants start surcharging for scheme card use, and changed their POS devices to promote the use of EFTPOS.  The other interesting difference about Australia vs Canada, is that every POS processor in OZ detects dynamically the ‘type’ of card swiped, and looks up its corresponding discount fee.  This information is passed back to the POS device in real time, so the surcharge presented to an individual consumer for choosing to use his scheme card over EFTPOS will vary depending on whether his Visa/MC card is one of those ‘evil’ premium cards.  Wow – Australian merchants really do have control over their processing costs.

At the Canadian Payments Association conference last summer, I recall distinctly Canadian scheme association representatives warning about what a terrible situation they have down under. Their message was that dynamic POS prompts in Australia have resulted in horrible confusion for the poor brainless consumer, who is overwhelmed with complexity at the POS when having to decide whether to use EFTPOS or Visa/MC.  Worse, the consumer is unfairly penalized by merchants gouging with surcharges ‘way beyond’ the interchange rates for the use of their products, up to 8%.  (Total interchange fees can not exceed 50 basis points by regulation).

These assertions are at variance with my experience when I was in Sydney 2 weeks ago.  I paid an average of 2% POS surcharge for using my North American-issued Mastercard everywhere.  I also closely observed as many natives paying as I could, without calling attention to myself.  My conclusion: the average Australian consumer possesses the intellectual capacity necessary to negotiate the POS choice complexity challenge presented to him when paying his bar bill.  Even after a few beers!   I concede that Australians are indeed a clever people.  But imho no more clever, on average, than the rest of us.

The conference was notably more low key than previous events in Dubai, but my impression is that the potential to tap into the enormous USA-Mexico remittance flows through the mobile channel is bringing more than just ‘the usual suspects’ to the table.

I decided to speak on the lack of correlation between a project’s budget and its ultimate impact, using our field experiences with unbanked people here in Canada.

The flash movie (with audio) is below:

(1) they are or come from a reliable source; and (2) they are publicly available for free.

While some of these sources may seem self-evident, it is worthwhile actually taking the time to browse through the entire list of publications on their websites, as you can find real gems including a statistic or two that can possible assist you with a payments-related business decision.

1. The Bank for International Settlements (http://www.bis.org/) is an excellent source for research, statistics, and in-depth publications. One of my favorite reports from this site is called Statistics on Payment and Settlement Systems in Selected Countries – Figures for 2008” that was published in December 2009. Prepared by the Committee on Payment and Settlement Systems of the Group of Ten Countries. This report presents a variety of interesting payments related statistics on a per country basis with comparative tables at the end. The focus is on developed countries (13 included). Statistical data include items such as settlement media used by banks and non-banks in each country, electronic money institutions, available payment card functionality and indicators of the use of payment instruments.
2. The World Bank (http://www.worldbank.org/) currently has 913 reports on payment systems and infrastructure available for free download on its site. This is in addition to the country specific reports and other data and research you can find there. I recommend making this site a permanent feature of your radar screen. Some outstanding reports worth mentioning include:
   • Payment Systems Worldwide: A Snapshot, Outcomes of the Global Payment Systems Survey 2008. This report contains extremely valuable information on payments systems and instruments in over 200 countries. Need to find out what retail systems are prevalent in India or what ATM availability is like on Fiji? You can find it here.
   • General Principals for International Remittance Services – if you’re a remittance provider, this report provides useful insight into the aspects of the remittance business that the World Bank suggests in-country regulators focus on.
   • Remittance Prices Worldwide. This is actually a website in and of itself and not a report (http://remittanceprices.worldbank.org/). Here you can find data on the cost of sending and receiving small remittances from one country to another complete with lists of remittance providers, their fees and the average FX margins that they charge.
3. The International Monetary Fund’s site (www.imf.org) contains some payments related data (including their country specific Financial System Stability and Financial Sector Assessments both containing date on payment systems.
4. Regional organizations such as APEC (www.apec.org), EBRD (www.ebrd.com) often publish region specific payments data and reports on their sites.Central Bank websites are excellent sources of free information concerning aspects of the payments industry in their respective countries. More often than not these sites are in English as well as the local language. Examples include Central Bank of Russia (www.cbr.ru), Banco de Mexico (http://www.banxico.org.mx/sitioIngles/index.html) and the People’s Bank of China (http://www.pbc.gov.cn/english/).
5. Local Clearing and Settlement System sites are a good place to browse if you are researching a country’s settlement capabilities or whether you want to know, for instance, if your bank is a member of a particular in-country clearing system. Some examples are MEPS (Malaysian Electronic Payment System) www.meps.com.my, the Korean Financial Telecommunications and Clearing Institute (www.ktfc.or.kr/end), and of course we shouldn’t neglect to mention the Canadian Payments Association (www.cdnpay.ca) or NACHA (www.nacha.org).
6. Last but not least don’t forget to check out professional and industry-related blogs such as the Association for Financial Professional’s “Payments” blog (http://blogs.afponline.org/blog/tag/payments/), Global Treasury News (http://www.gtnews.com/payments/default.cfm), and Payments News (http://www.paymentsnews.com/payments_blogs/index.html).

So we wish you happy information hunting! As you come across new gems during your own research processes, we’d be delighted if you’d care to share them with us.

As most in the payments space are aware, the concept of mobilizing financial services has been around for many years now, and even successfully deployed in some key markets around the world (Safaricom’s M-Pesa service in Kenya being the most notable).  The dramatic uptake in mobile phone usage the past few years, particularly in consumer markets that are largely “unbanked”, has spurred renewed interest on the part of Mobile Network Operators (MNOs) to investigate the introduction of such services, and has also opened the door to a wide spectrum of suppliers who believe their technology can service the requirements of the industry.  While opinions vary on where we are at in the product lifecycle of mobile financial services to both unbanked and banked demographics, what seems abundantly clear on the supplier side of the industry is that this opportunity is quite possibly the biggest land grab going in the payments space in recent past.  The buzz and interest with this opportunity is reminiscent of the ERP glory days of the late ‘90s when the fear of the Y2K bug was omnipresent, and corporations of all sizes were upgrading their management information systems.     

With the number of technology participants that filled the exhibit hall, each offering the same types of solutions on the surface, I can’t help but think how any MNO embarking upon a solution evaluation process might be challenged with the solution providers to even include in their list of ones to look at.  As most MNOs will realize early on, there is a significant difference between those providers that simply offer a slick mobile application, to those who provide a robust underlying financial services technology platform, to those who bring with them the operational expertise to guide and support the operator in such a capacity once the service is “live”.  The list of viable technology partners out there becomes even more narrow in cases where the financial services model requires sophisticated transaction settlement either between financial service partners (such as partner banks), or other 3^rd party settlement networks. 

These types of solution differentiators also became glaringly apparent in a recent meeting with a large regional MNO.  After spending the best part of a day in a detailed collaborative session on payments with the project team, at the end of it they came to the collective realization that what they are about to embark on has more to do with financial services than it had to do with “mobile specifically”.  As a technology provider that has been delivering payment solutions and infrastructure in the Financial Services industry for as long as hyperWALLET has, it really highlighted the importance and value this background brings to customers who are going down this path for the very first time.