Indian Bank Regulation Throws Roadblocks for Mobile Payments

The Reserve Bank of India (RBI) issued anxiously awaited guidelines on Friday detailing what banks in India must do in order to offer 'mobile banking' services. The RBI had previously issued a moratorium in July on the offering of such services while it finished its recently published guidelines.

Mobile payments companies have been springing up around the globe, including Europe, Africa and Asia, in addition to the American versions. Several companies, including, "mChek, Paymate and Obopay are in the final stages of developing their micro-finance offerings, while fine-tuning their tie-ups with various MFIs to launch mobile-based financial products."

The RBI draws a distinction between 'mobile banking' services that are being offered including "balance enquiry, stop payment instruction of cheques,
transactions enquiry, location of the nearest ATM/branch etc...Acceptance of transfer of funds instruction for credit to beneficiaries of same/or another bank in favor of pre-registered beneficiaries" For the purposes of its guidelines, "“mobile banking transactions” is undertaking banking transactions using mobile phones by bank customers that involve credit/debit to their accounts. It also covers accessing the bank accounts by customers for non-monetary transactions like balance enquiry etc. "

The Hoops & Limits

The RBI created a number of hoops that must be jumped through in order to begin offering 'mobile transaction' services:

• Only banks which are licensed and supervised in India and have a physical presence in India will be permitted to offer mobile banking services....Only banks who have implemented core banking solutions would be permitted to provide mobile banking services. This means that mobile banking operators outside the country of India will be unable to provide services to specific banks. Rather, they are likely to be forced to white-label or license their applications to the banks before the services may be offered. FURTHER, the service provider must actually be a bank regulated within the country of India rather than just an external service provider.
• The services shall be restricted only to customers of banks and holders of debit/credit cards issued as per the extant Reserve Bank of India guidelines. In other words, if you don't have an India-based account, you are out of luck.
• Use of mobile banking services for cross border transfers is strictly prohibited. This requirement will limit the attractiveness of the Indian market. Companies outside the country wanted to get into the remittance game of Indians working abroad and sending money home. The inability to offer cross-border accounts from banks in the US to banks in India limits the transaction volume.
• Banks shall put in place a system of document based registration with mandatory physical presence of their customers, before commencing mobile banking service. This will limit the use of the Internet to sign up customers for 'mobile banking' services.
• It is necessary that the mobile banking servers at the bank’s end or at the mobile banking service provider’s end, if any, should be certified by an, accredited external agency. This simply creates an added level of bureaucracy within the Indian government, and additional costs for the mobile banking service provider.
• A per transaction limit of Rs. 2500/- shall be imposed on all Mobile Banking transactions. Subject to an overall cap of Rs. 5000/- per day, per customer. In other words, <$100 per day per customer overall.

RBI Says 'Jump'

The RBI has set up obstacles to international services to provide mobile banking solutions, requiring payer and payee have Indian accounts at Indian banks, and the money is moved by an Indian-based service, prohibiting cross-border transactions. Combined with the transaction limit, the speed and size of the Indian-based market is likely to be hindered.

New Mobile Payments Services Revive Old Model

A number of new mobile payments services have been born recently, three of which have revived the model of Simpay - a defunct/reborn joint venture between Orange, Vodafone, T-Mobile and Telefónica Móviles - that attempted to create a pan-European text messaging payments standard.

Evolution of a Model

Simpay dissolved in 2005, when T-Mobile defected from the venture, but it reincarnated two years as PayforIt.

Simpay's business model is fairly simple - create a micropayments service that leverages the millions of mobile phone subscribers, allowing them to charge these sums (less than 10 Euros) to their existing cellular provider's bill.

SimPay never got off the ground because, "It was rumoured that the operator had concerns about the way the system was integrated with handsets and other payment systems," according to Finextra. As a result, Simpay went defunct, but Payforit has now emerged in its place.

PayforIt is now an option for online and mobile transactions for the 52 million mobile subscribers in the UK. New billers have to apply with each of the carriers to gain access to the new standard.



Micropayments of <10 Euros necessarily constrains purchase size and makes this purchase method most useful for digital content downloaded directly to the phone including song, premium data subscriptions, or potentially videos.

Newest Entrants

Three new companies have launched that mimic the model of SimPay/PayforIt.

Zong

Zong just launched at the TechCrunch50 conference in California. Zong's model is almost an exact replica of PayforIt's. Zong has created a REST API that allows developers to plug its payment system directly into their back ends.

Zong works with 55 carriers in 12 countries, but has two big drawbacks from what we can tell: revenue and time to collect. According to their site, you net $0.58 on the $1.00 for every payment through Zong. That is a painful amount of rent to extract before paying for any of your overhead (CAPEX, bandwidth), input costs, and labor. While it's true to some extent that digital content has limited marginal costs, where content is KING, it is expensive, and this increases the break-even sales point for whatever product you're selling.



The second problem is that Accounts Payable time period, and only once a site has reached over 100 Euros. According to their site,

"Payout is made once the amount payable has reached 100€ and around 75 days after traffic dates. Why so long?

Mobile network subscribers pay their mobile operator within 30 days. The mobile network operator pays Echovox within 30 days. Echovox pays you - a Zong client within 15 days. (30+30+15=75) "

Paymo/Mobile Merchant Services

Paymo/Mobile Merchant Services was founded by the mBlox executives. mBlox was one of the first "short code" text messaging marketing solution services. Paymo is virtually identical to Zong, with the same shortcomings.

According to their website,

" What are the costs ?

mMS charges a % of the transaction fee - typically 10% - depending on the volume of transactions you process each month. If you choose the Individual account you can get started today and there is no Setup charge and no Monthly fee.

The main costs of a mobile payment are the fees taken by the mobile carrier. In some markets the carriers take as much as 50% of the transaction value. With Paymo, you can choose to pass some or all of these costs to the consumer as a surcharge. In this way you can still get as much as 100% of the list price of the item you are selling.

How do I get paid ?

We will pay you the money for the transactions processed using Paymo. Payments are typically made monthly. The first payment will be made once you have passed a minimum revenue level and we have received the money from the mobile operators.

When do I get paid ?

We will pay you within 10-15 days of receiving money from the Paymo network. This timing is driven by mobile carrier payment cycles and varies by market. Some markets settle within 30-45 days, other markets can take several months."

mGive

mGive is a mobile donation service providing a tool to process mobile donations for non-profits and 501(c)3 organizations. The service is particularly useful in large groups, such as concerts, where Eddie Vedder says "Text DONATE to 12345" and raises tens of thousands of dollars within a few minutes.

mGive has virtually the same model as all of the companies mentioned above. However, the company's pricing model is more complex. Donations are limited to $5 per transaction, and the company takes $0.25-0.50 depending on volume. Then, the 'Mobile Giving Foundation' takes another $0.50. Add to this $100 setup fee, and a monthly service fee of $250-1,250 related to the text messaging and web features, and the non-profit is getting 80-85% of the donations minus more operating fees and their upside is limited to the $5.00 units, and the funds are held for 60-90 days for the same reasons as the other companies.

Mpayy Mobile Payments - Faster, Less Expensive & More Secure

Each of the companies listed above is an intermediary providing a mechanism for billing charges to users' cell phone bills. Their use of the cell phone carriers results in exhorbitant rents being extracted from the merchant or non-profit organization, and significantly eroding margins. Further, the time to collect for these solutions is likely to be unacceptable to many merchant/content solutions. The transaction size and volume will also continue to be limited by the carriers' willingness to float the credit risk.

Mpayy has one challenge vs. these companies - Mpayy requires a subscription before users can make payments to merchants or charities. However, once a subscription is opened, Mpayy is the least expensive, most secure, fastest solution out there. At just $0.20 + 2.00%, Mpayy Mobile Merchant accounts enable 0% fraud liability transactions from any mobile-web enabled cell phone. Further, those funds are available for withdrawal within just 48 hours from Mpayy's advanced Cash Management console.

Mpayy also offers enterprise ecommerce payment solutions as well as secure payments through social networks.

Mobile Phone Sales Not Insulated from Consumer Downturn

The NPD Group released data today revealing a 13% year over year drop in unit sales of mobile phones in the United States. 28 million units were shipped, though sales were down just 2% to $2.8 billion.

NPD's numbers confirm the data discussed here that there is a rotation towards SmartPhones. 28% of the phones sold in the second quarter had a QWERTY keyboard, vs. just 12% in the same quarter of 2007. Smartphones comprised 19% of all total phones sold in the quarter, up 9% from the same quarter a year ago.

The average selling price of handsets was up year over year, but down $3 from Q1 2008 to $84.

Two hypotheses for this change are as follows:

- Consumers are squeezing more out of their phone the same way they are with other parts of their wallets
- Phones are getting more sophisticated and durable

The move to SmartPhones continues to benefit Mpayy, as Mpayy's secure payment accounts can be accessed from Mpayy's website, Mobile website, or social networks like Facebook and MySpace.

Reconciling Consumer Crosswinds

Frequently, in his space, we discuss both the online and offline retail spaces as Mpayy's secure online shopping system relies first and foremost on the consumers' willingness to go shopping. However, beyond transactional data released by the Commerce Department and Comscore, there are other tea leaves that we can read to get a view into the consumer's plight.

Today we look at real estate and credit card transactions.

Underwater Real Estate

Zillow.com is an innovative online real estate research and data website that provides holistic views into cities and neighborhoods for consumers. Home-shoppers use the site to look at purchase data of homes near the addresses the potential buyer is considering. To do so, Zillow has to track publicly available purchase data nationwide.

Zillow released its Real Estate Market Report yesterday. According to Dr. Stan Humphries, Zillow's vice president of data and analytics, ""The second quarter is the sixth consecutive quarter of home value declines and we see little promise of turnaround in the short-term as the rates of decline have yet to slow and, in fact, actually accelerated in many markets. The high rates of negative equity are having a direct effect on home sales figures as we've seen considerable growth in foreclosure transactions and homes selling for a loss." His prognosis is not rosy, predicting that "most markets are likely to remain in negative territory for the next few quarters given the magnitude of current year-over-year declines."



Zillow's press release mentions, "For example, 32.7 percent of homes sold in the second quarter were sold for a loss and 18.6 percent were foreclosure sales compared to the year-ago quarter when the rates were 12.2 percent and 7 percent respectively."

In other words, the investment with the best track record of creating wealth, and most home-owners' largest investment is now a massive liability with exit scenarios that force a loss. Most home-owners save up for a substantial period of time before purchasing a home, and it will take time after those losses are booked before those folks are back in an equally financially healthy position they were before the purchase. This will have material consequences for discretionary spending for the foreseeable future.

Growth in Expenditures Benefits Payment Processors

Amidst the consumer damage resulting from the bursting of the real estate balloon, billions have been written off the balance sheets of banks related to illiquid auction rate securities, foreclosures, losses on home sales and defaults on credit card balances, there is significant strength among the payment processors. The American consumer continues to spend.

The chart below displays the payment processors versus the pure play credit card issuers.



However, the pure play payment processors are exhibiting unbelievable growth. MasterCard has skyrocketed over the last year, and Visa has demonstrated incredible strength since its IPO earlier this year. Visa demonstrated 8% year over year volume growth in its credit card volumes in the US and 28.5% in the rest of the world. Visa also reported more significant strength of 13.6% in its debit card volumes in the United States.

Mpayy's secure online payment processing system is a debit instrument that allows shoppers to pay online with their checking accounts. Mpayy saves the retailer money, guarantees payments and eliminates fraud liability. Shoppers receive enhanced security and cash back guarantees on top of expanding their ability to send money to their friends and family for free anywhere in the US.

Much Ado About eCommerce

With brick & mortar retail sales demonstrating a paltry 0.1% growth in June, artificially supported by rising gas and food prices, there is a concerted move among big box retailers to enhance their online sales presence.



Comscore reported last week that ecommerce sales continue to refuse to succumb completely to the weakness of the American consumer. The rate of growth has fallen by 50% year over year, but ecommerce spending continues to demonstrate growth in the low double-digits. There is faint hope that the stimulus checks will continue to provide further boost to online retail spending.

Retailers are demonstrating that the lesson of this divergence between the growth prospects of online and offline sales is not being lost on them. Internet Retailer notes that, "At Sears Holdings Corp., same-store sales at Sears and Kmart retail chains declined 8.6% for the quarter that ended May 3, the company lost $56 million and shuttered 62 stores, yet the company increased investment in its online and multi-channel operations by $10 million."

Shop.org, the online arm of the National Retail Federation & the e-tailing group have each published white papers concerning the focus of those eCommerce investments in "The State of Retailing Online 2008" and "Investing in eCommerce, Despite the Times", respectively. Universally, there is a great deal of focus on improving on-site merchandising tools, including search, personalization, and integration of product presentation for the online and internet spaces. From the e-tailing group's document:



Opportunity for Mpayy

According to Shop.org, which conducted the research in conjunction with Forrester Research, more than 75% of retailers cite the Checkout Process as a tactic and investment priority. Of that group, 80% want to improve their shopping cart page; 79% want to improve their checkout process; and, 57% want to include "Third-party Email Payment" capabilities.

Mpayy is in finishing stages of launching its Lightbox Checkout Window that will streamline the checkout process for its online retail partners. (Check back for sneak peeks.) Mpayy's offer for online retailers enables them to reduce cart abandonment and growth their sales online.

Mpayy is a secure online & mobile payment processing system that processes payments from shoppers' checking accounts at a 50+% discount to credit cards. Mpayy provides 0% fraud liability for retailers, and guarantees payments. The application is developed by and housed at US Bank (NYSE:USB) in an environment that meets PCI DSS standards, and is compliant with USA Patriot Act, OFAC, Reg E and Reg Z.

CardLine/CardForum Article

Below is the article that was featured in CardLine/CardForum.

MPAYY SEEKS GROWTH AFTER SECURING ADDITIONAL FINANCING
Mpayy Inc., a Chicago-based alternative-payments company, says it will use
additional funding from U.S. Bancorp to grow its e-commerce, mobile commerce
and widget-based payment services. Minneapolis-based U.S. Bancorp also
provided Mpayy with funding last year. ³We want to tap into larger
retailers,² Conrad Sheehan, Mpayy founder and CEO, tells CardLine. ³They
have not been as aggressive in adopting alternative payments, and for a lot
of good reasons. Any retailer should be extremely comfortable with running
high volume through our platform.² Launched in the first quarter, Mpayy says
it provides consumers, small businesses, Internet retailers and charities
with a variety of payment options. Consumers may make person-to-person funds
transfers through Mpayy¹s online and mobile Web sites and by using a
social-networking widget found on Facebook and MySpace. Consumers can pay
for goods by linking a checking account to Mpayy. Small businesses and such
independent salespeople as taxi drivers and flea-market vendors can use
Mpayy¹s mobile-payment capability to turn their mobile phones into
point-of-sale terminals. ³It works on all phones, but it¹s particularly
tailored to the most-popular devices,² Sheehan says. New York-based charity
Alliance for Lupus Research uses Mpayy¹s widget on social-networking sites
to obtain donations. Sheehan claims Mpayy offers retailers a processing
platform that is ³50% to 60% less expensive than card-based processing.² The
company also is touting Mpayy¹s security. ³We exceed all PCI standards,²
Sheehan says. ³Retailers don¹t have to worry about storing any data because
that information is hosted on servers by U.S. Bank.²

American Banker's "Mobile Banker" Feature

Mpayy is excited about a feature we received in the American Banker today. It can be found here. Registration is required, but they have a two week free trial with no need to input a credit card.

Enjoy!


American Banker
Its Testing Done, Alt-Pay Start-Up Faces New Tests

American Banker | Thursday, July 10, 2008

By Steve Bills

Mpayy Inc., a new entrant in the alternative payments space with backing from U.S. Bancorp, is hoping that its combination of e-commerce, mobile technology, and automated clearing house services will help it stand out in an increasingly crowded market.

The Chicago company announced Wednesday that it had closed a funding round led by the Minneapolis banking company.

Conrad M. Sheehan, Mpayy's founder and chief executive, said U.S. Bancorp had also led an earlier funding round, last year, but he would not disclose the amount of funds raised.

Mr. Sheehan said his company has intentionally been keeping a low profile. "We're very focused on designing and building a great product without putting too much attention on us too early," he said in an interview Wednesday.

But after testing its Internet and mobile commerce technology since early this year, Mpayy is now ready to begin promoting it actively, Mr. Sheehan said.

A U.S. Bancorp spokesman said the company would not discuss Mpayy, though Mac McCullough, an executive vice president at U.S. Bank and a director on Mpayy's board, said in the processor's press release that the banking company is "very pleased to continue with our role in Mpayy and continue to view it as an attractively positioned player in alternative payments with a compelling and unique value proposition."

Mr. Sheehan said that in addition to its financial backing, U.S. Bancorp is hosting Mpayy's applications in its data centers.

Mpayy is positioning itself primarily as a lower-cost alternative to credit cards for online merchants, using the ACH system as a way to beat payment card interchange expenses, Mr. Sheehan said. "It's more of an e-check platform. There's also a stored-value piece" for the unbanked.

Initial customers include Lawbooksforless.com and the Alliance for Lupus Research, which Mr. Sheehan said is using an Mpayy application known as a "widget" to add a payment system to social networking sites.

Mpayy's mobile payment capability uses the same secure Web interface but with a streamlined design, he said. "It turns your cell phone into a mobile point of sale."

Commercial users — such as taxi drivers, flea market sellers, and multilevel marketers who sell using the home party method — could save half or more compared to bank cards, and Mpayy offers free person-to-person transfers.

Big banking companies have begun placing some bets on alternative payment technologies. Bank of America Corp. last week took an equity stake in mFoundry Inc., a developer of mobile banking and payments software. Citigroup Inc. is pursuing a variety of strategies, testing mobile-phone payments with technology from Obopay Inc. and forming a joint venture with the South Korean wireless carrier SK Telecom Co. Ltd. to develop mobile technology.

Bruce Cundiff, a research analyst at Javelin Strategy and Research, said Mpayy could break through by offering its service online, on mobile devices and through social networking widgets.

"I like the fact that they are going after multiple markets here. They're not putting all their eggs in one basket," Mr. Cundiff said.

But like other entrants in the alternative payments market, Mpayy faces what Mr. Cundiff called a "chicken and egg" predicament in trying to develop both a merchant base and a customer base, similar to the issue that eBay Inc.'s PayPal unit faced in e-commerce in the early part of this decade before beating out rivals.

"Mpayy's key differentiator is being able to integrate with U.S. Bank's robust merchant services business," he said. "I think that dovetails nicely with U.S. Bank's merchant strategy."

© 2008 American Banker and SourceMedia, Inc. All Rights Reserved.