Are you familiar with the buzz around workers’ remittances? Prominent institutions such as the World Bank, the Inter-American Dialogue and even Swift have devoted significant resources to studying workers’ remittances. Why all the commotion?  The attention?  The effort?

First, remittances are important.  Countless people around the world rely on remittances for clothing, food and shelter.  That’s powerful stuff.

Second, there’s money in remittances.  Everyone has heard of Western Union and MoneyGram.  These are big companies that send massive amounts of money around the world each year.

But what about the smaller players? iREMIT is publicly traded and reported approximately $21.66 million Canadian dollars in cash and cash equivalents for the period ending March 31, 2011?  Have you heard of UAE Exchange?  If you haven’t, you will soon.  This supercapitalized remittance provider out of the UAE is making a strong entry around the globe, and operating in the U.S. under the name Moneydart.

And that’s just the tip of the iceberg.  Banks from remittance receiving countries are establishing an ever-growing network of outposts in remittance sending countries to leverage their name and brand familiarity among immigrant communities.  Visa and Mastercard are getting into the remittance business, and so are many, many others.

hyperREMIT Launches in Oct. 2010.

With so many payments companies trying their hands with workers’ remittances, hyperWALLET elected to join the fray, because we think our service approach is unique and represents the future of remittance.

Our hyperREMIT service ( http://www.hyperremit.com ) targets Filipino Canadians and Filipino overseas foreign workers (OFWs) living in Canada.  For purposes of this article, I will refer to the group collectively as “Filcans.”  Filcans sent almost $2 billion home in 2010.

From humble beginnings with virtually no marketing or branding initiatives other than word of mouth, we have seen and maintained tremendous month-to-month growth by focusing our efforts on an underserviced market segment – Filcans wishing to send funds to a bank account in the Philippines conveniently, and for a small service fee.

We focused our efforts on supporting the three legs of this stool:  (i) limit deviation from bank to bank transfers; (ii) make the service convenient; and (iii). charge low fees to win the approval of credible sources such as the World Bank as well as the Filcan community.

The First Leg of the Stool:  Bank to Bank Transfers.

Focusing on bank to bank transfers meant charting a different course from that taken by most of our competitors.  Accepting payment by credit cards exposes the merchant to high interchange fees and chargeback penalties, costs which generally need to be passed through to the consumer.  Credit card payments were not consistent with our mission.  Also, as an Internet company at heart, we did not wish to open up stores or kiosks, or build a large agent network to accept cash, at least in the short term.

Therefore, we elected to accept payment in only two forms:  (i) bill payments from the customer’s online banking account, and (ii) pre-authorized debits (PADs) from the customer’s checking account.  Bill payment adds an extra day or two for clearing and settlement, but it gives the customer an added sense of security.

PADs can be sent instantly, and are inexpensive, costing hyperWALLET about $.08 per transaction.  To date, PAD is by far the most popular means of payment for our customers.  While we offer cash pickup, door-to-door delivery and Smart Money payment services to our customers, our market research accurately predicted the most commonly used payout method: the safe and reliable bank deposit.

The Second Leg of the Stool:  Convenience.

Most Filcans live in Canada’s big cities, especially Toronto and Vancouver.  These Filcans have a wide number of stores servicing their remittance needs.  Nearly every Asian grocer offers at least one remittance program.  Nevertheless, the Canadian winter is long and cold.  In many cases Filcans may wish to avoid trudging through the snow or rain if their only errand is to send money home.  In addition, smaller towns and cities offer fewer remittance services to their inhabitants.

Before hyperREMIT, Canada’s web-based remittance offerings were generally second rate.  Have you heard about the Filcans from BC’s gulf islands that spend hundreds of dollars per year traveling to Vancouver to send remittances once per month?  We have.

Canadian Filipino Community Outreach

According to our analytics report, last week visitors to hyperREMIT’s web page came from almost 150 towns and cities across Canada, demonstrating hyperREMIT’s broad geographic appeal.

SMS Remittances

When developing a convenient service, we drew from the models of existing online remittance providers and improved on them.  We based the send function of our platform on the mobile phone, and we made it simple.  Filcans can send remittances by calling us toll free.  For those too busy to wait on hold and respond to security questions from our call center staff, we also accept remittance requests by SMS text message.

Yes, the humble text message – the tube steak of modern communications – can now be used to authorize financial services transactions.  When a Filcan sends us a message saying “Send 2500 PHP Mama”, we send the remittance in accordance with their previously specified parameters, e.g., to Mama’s bank account, home address, Smart Money account, or to a cash pickup location (usually it’s a bank account).

hyperREMIT's SMS Remittance service

We filed a provisional patent on this sending method because it just may revolutionize the remittance business.  I would like to buy and sell stocks using the same format, but that’s another blog altogether.

The Third Leg of the Stool:  Low Cost.

Finally, we had to find a way to support our desired low cost structure. For a $6 flat fee to enable a direct to bank remittance, we had to keep our costs down if we were going to make any money.

As noted above, our costs to take in customer funds are very low.  We already operate a call center, and handling additional volume for hyperREMIT is essentially a fixed cost, at least for the time being.

Therefore the biggest expense is delivering the ACH payment locally in the Philippines, which is a relatively modest sum per transaction.  We expect to reduce this sum over time as our volumes increase.

The Result.

How is hyperREMIT doing?

The charts below denotes a number of key indicators, including new accounts per month, total accounts per month, total remittances per month and the number of accounts that complete a transaction per month (sorry, the actual numbers are confidential).

To learn more about hyperREMIT (a service of hyperWALLET Systems Inc.), visit http://www.hyperremit.com

Canada rolled out chip+pin for our national debit scheme in 2010 and we’ve all just about gotten the hang of it at the POS now, even cranially-challenged consumers like me. chiping+Pining debit purchases wasn’t a huge leap since Canadians have been swiping+PINing our debit cards for the past 15 years (we’ve never had signature debit up here). Plus, debit cards issued by a primary financial institution are easier to manage. Its the same one that you use for online banking, smartphone banking, payroll deposit, recurring debits, and even those dwindling number of visits to the branch. So if you forget your PIN or lose your cards your have multiple accessible ways to get service and help.

But the migration to chip+PIN for Credit Cards its taking us Canucks bit longer – somehow setting/remembering another PIN for the average 3.7 credit cards we carry in our wallets is harder. In my case, 2 of the 3 credit cards I carry are issued by institutions other than my primary F.I, and I dont access online banking for either one. One of these cards is only used for company expenses, and the other one is personal but only for backup, like 2 weeks ago when on a trip to L.A. when my primary card was suddenly rendered useless. I think TD’s fraud robot trip may have taken offense with the poor nutritional choice I made @ 30,000 feet (granted, buy-on-board Alaska airline snacks are junk), but for whatever reason the card hasn’t worked since then. Thank goodness the USA hasn’t gone to chip+PIN, because I had no clue what the PIN was for my backup non-TD VISA card, having not used it in 6 months, but happily I could still remember my name and sign with it so I wasn’t left washing dishes at the happyThai palace on Sunset Blvd.

There is no way consumers are going to be able to set and remember unique secure online passwords, VBV/MasterCard Secure Codes, a mobile access code, and now a POS PIN for each card they carry, so better access to set/reset/panic services for cardholders is going to become important. This is why the announcement a few months ago that Canada Post launched a chip/pin reset service caught my attention: http://www.canadapost.ca/cpo/mc/business/productsservices/pinservices.jsf . Very cool – I don’t need to worry about where is the nearest x-bank branch to set my backup card PIN – I can just pop in to the Canada Post outlet on the corner and do it!

Canada Post Chip PIN reset Service

At hyperWALLET we starting mulling the possibility of Post offices as the ultimate real-world customer onboarding solution for electronic financial services providers which lack brick and mortar presence. That’s why this announcement, which I missed at the time, really knocked my socks off: http://www.amlcompliance.ca/2010/09/08/canada-post-presents-face-to-face-authentication-in-canada/

Post offices are natural partners for Financial Service providers – the largest MTOs like Western Union and Money Gram have known this for a while – they vie for tie-ups with Postal Services in each jurisdiction for prime remittance agent presence.

Isreali Post Office Offering Western Union Services

Consumers and businesses are of course used to trusting post offices, signing for parcels and presenting Ids, and Post Offices are desperate to find new revenue models if they want to survive and service their unionized workforce pension obligations.  Everywhere we see examples of Post Offices trying to “go Virtual”, leveraging their trusted brand with electronic services like bill payments and SME payable applications. But post offices governance structure and unionized public institution cultures strike me as being at odds with this approach – their offerings will be annihilated in the market by private companies orders of magnitude more innovative and more nimble. I think a smarter strategy for Post Offices to make in Financial services would be to leverage the one asset they have that neither ADP, nor VISA, nor paypal, Amazon, etc will ever have – physical global neighbourhood presence. Offering identity verification, risk management, customer onboarding and secured device access points to the industry as a whole would be a better bet.

On the Picket Line with a Coldie

Starting with Employee Screening, AML KYC, and Credit Card CHIP/PIN reset services, it will be interesting to see how Canada Post’s 2010/2011 initiatives play out over the next few years, and whether or not they are mirrored in other jurisdictions.   Regardless;  those friendly CUPE workers at Canada Post, (once they get back on the job), have made the playing field for Consumer and small business financial service providers in Canada just got a whole lot more level!

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.

At the event hyperWALLET was pleased to announce an exciting new offering that credit unions in Canada can now offer their members – online global money transfer services.  hyperWALLET was also on hand to introduce attendees to the opportunity that exists for them in the global money transfer services market, and how hyperWALLET can assist with a successful launch of the new remittance service.   

According to Aite Group, “cross-border transfers will grow 8% between 2006 and 2010…. by 2010, global workers’ remittances will amount to US$456 billion, up from US$369 billion in 2007”. With such strong growth statistics being reported, hyperWALLET sees a significant opportunity for the Canadian credit unions to tap into the international remittances market by offering competitive global money transfer products, particularly to ethnic communities that send money home on a regular basis.

Despite strong consumer demand for such services, Canadian credit unions have previously not had a cost-effective way to offer these services in order to compete with similar offerings from the Canadian banks, or even against traditional retail money transfer operators.  Instead, credit union members have been forced to seek out these alternative service providers that are in most cases more expensive and less convenient. 

Through hyperWALLET, any credit union member can now make global electronic funds transfers from their online banking to over 30 countries worldwide for just $7.00 (CAD) per transaction.  The recipient receives instant electronic notification and can direct the payment to the destination bank account of their choice. 

At that price point, the service provides significant cost-savings and convenience for both the sender and recipient compared to wire transfers, remittance services offered by banks (such as Royal Bank’s International Remittance service at $13.50/per transaction) and other retailers of money transfer services. 

Going forward, hyperWALLET will be expanding the reach of the service even further to include more countries and cashout options for recipients on a worldwide basis. Check back with us regularly for more product announcements regarding this and other new services.

While we are there, I’m looking forward to meeting the operators of next-generation services like M-Pesa and Zap in Kenya,  Wing in Cambodia, and PayMate in India.   These initiatives represent great correspondent partners for hyperWALLET  as we march toward our goal of commerce-enabling humanity.   The banking industry has employed a correspondent-clearer relationship model for decades – its time for electronic and mobile payment services operators to develop similar strategies, which will yield service benefits to their customers and commercial benefit to themselves.

But I’m keen to also meet with technology platform and service competitors as we vie for the attention of the largest multinational mobile operators.  My motivation doesn’t arise from the usual “keep your enemies close” mentality, either.  Its because after 9 years in the payments industry, I’ve come to appreciate that today’s cut-throat competitor is next-week’s RFP collaborator, or could very well be one’s processing saviour when a policy change at a clearing bank leaves one in a lurch.