The Payments Networks’ Next Real Threat

I’ll bet that very few people paid much attention to last week’s launch of Paym in the UK. Paym is a mobile payments network that enables registered users to send money to each other, funds that are drawn from their checking accounts. It’s now available to 30 million people in the UK who bank with Bank of Scotland, Barclays, HSBC, Lloyds, Santander, Cumberland Building Society, Dankse Bank, and TSB. Paym’s operator, The Payments Council, says that there are plans to soon expand it to include 90 percent of UK bank accountholders or some 40 million people.

Mobile phone numbers activate payments thru Paym. In order to receive money, a bank account at one of the aforementioned banks must be registered to a mobile account number. Senders don’t need to register a mobile phone number if they have an existing mobile banking or payment app with any of those banks.  At the moment £250 (about $422) can be sent daily, although some banks have set higher daily limits. Payments made using Paym are said to “happen at the same speeds as current account, online and mobile payments services.”  So far, there’s no charge to senders or receivers.

Say hello to a new set of payments rails, folks, and a platform that could give existing payments rails a migraine.

Paym connects via ACH everyone, at least potentially, with a bank account in the UK – everyone. Now, of course, consumers have to opt-in and register their account to use the service, and a recent survey said that many UK consumers were a little squeamish at the thought. But, Paym and the Payments Council has created the infrastructure, the rules, and the platform to enable payment among anyone with a bank account – people and businesses. Use cases are the usual P2P ones like paying the babysitter but could conceivably expand to include those P2SMB use cases like paying the math tutor, handyman, dog walker, piano teacher, landscaper, electrician and just about every small business owner who’d like money deposited directly into their bank accounts without having to mess around with card acceptance and/or mPOS solutions and network-mandated merchant discount fees.

Here’s the kicker.

At the moment, according to the UK Cards Association’s latest report (February 2014), 32.5 percent of spend in the UK was done on debit cards, up 8.3 percent from the year before. That’s compared to 13.6 percent of spend done on credit cards. The biggest increase in the debit numbers is attributed to services – the electricians, plumbers, tutors, manicurists, restaurants – in other words, non-retail small businesses.

Let’s suppose Paym gets a head of steam, and a good portion of those 30 or 40 million account holders get over their current heebie jeebies and start to use it and use it to pay the math tutor and landscaper. Maybe the math tutor is next door neighbors with a pubmaster who wants in and figures that all he has to do to avoid paying debit card merchant fees is set up a mobile phone number linked to his pub’s bank account to enable those customers to pay their bar tabs using Paym at his pub. At the moment, the Payments Council refers inquires about using Paym to pay businesses to individual banks, I suppose, because they don’t want to implement rules at a network level that could cannibalize bank’s merchant acquiring businesses until they get a business model in place. But my guess is that they’ll at some point create a scheme that keeps whatever “merchant discount” is assessed from Paym transactions in the Paym network and off the Visa/MC debit network rails. If that were to happen for SMBs, it probably wouldn’t take long for the interest to escalate to larger merchants who might like to an alternative that breaks their ties to the established networks’ payments rails.

See what I mean about the potential for a massive headache?

Now let’s travel across the pond to the U.S.

There are a bunch of things going on here in the P2P space as well. We have Square Cash, as I wrote about last week, doing its thing with email and registered debit accounts (which Visa/MC probably really likes). You have clearXchange with its federation of banks (Bank of America, Chase, Wells Fargo and Cap One), and some 50 percent of U.S. checking accounts with the potential to be wired up in some way via a clearXchange network. The Fed, no doubt, is watching the Payments Council Paym launch with great interest and there might even be other players that have associations of banks as members looking too.

clearXchange, as you know, is well down the path of organizing their federation of banks and registered accountholders tied to existing online or mobile bank accounts and initiates payment using the recipient’s mobile phone or email address. I sort of speculated on clearXchange’s MO  back in February when CapOne joined forces with them and said that it wasn’t out of the realm of possibility that they become an alternative set of rails, powered by ACH, that could both enable payment beyond the traditional P2P use cases and even become a network acceptance mark at physical and online point of sale.

The irony in the clearXchange and Paym models is that the very bank-owned business model that the networks ditched to become publicly traded companies could be reborn to potentially cut them out of the debit picture. That’s not as crazy as it may sound. Banks own the DDA accounts and control them. So, why would they want to continue to issue debit cards on a Visa/MasterCard network when they can replicate the same function with an ACH-powered network that they own and control?

All that’s missing is the business model.

Innovators have fantasized about an ACH-powered network for like forever in an effort to reduce the cost of payments and break their dependence on the existing payments networks and the interchange fee structure associated with it. It’s what MCX is clearly interested in doing, it’s why PayPal wants its customers to register their bank accounts to their PayPal accounts instead of their credit card accounts, and it’s what every mobile app with a payments account registered to it wants too. The trick for these new potential “networks” will be how acceptance is priced. If it’s too high, and merchants won’t have any incentive to adopt; too low and banks won’t be able to monetize their precious asset – the bank account.

It will also be interesting to watch how such a potential network development will impact partnerships and influence the incentives for those partnerships to take shape.  Remember, any new network, ACH network notwithstanding, still needs merchant acceptance. And, that can be a big pain and take time.

Could such a scheme give banks the digital wallets “legs” that they’d like to have? I still don’t think so, since consumers, in my opinion, will still want one “digital container” into which their various payments instruments are assembled, including any new ACH-powered ones. But, this could make banks a more formidable partner since the third parties who seek to access those accounts would be competing with them for customer preference.  They’ll certainly have a mechanism to monetize access to the funding resource that they own and incur costs to service – and a platform that could unleash all kinds of interesting innovations.

What’s more is that these potential new ACH-enabled schemes just extend behavior that people already do in their mobile and online accounts – pay people and pay bills. Nielsen did a survey of consumers in November of 2013 that said that 82 percent of consumers have banked online at least once in the last 30 days. The Fed’s survey of consumer payments habits reported that 21 percent of mobile phone users had adopted mobile banking and used it in the last 12 months, with 42 percent of mobile phone owners reporting that would definitely or probably use it in the next year. With the right user interface, consumers wouldn’t have to go thru unnatural acts to use their phones to extend payment to merchants – larger, small and anywhere in between – online or at the physical store.

Collectively, banks probably have more mobile and online banking customers than anyone has registered accounts in digital wallets, and certainly more than the incumbent networks since they are just now getting their online/mobile wallets wings. Enabling payment for bank customers via an ACH-powered debit-like alternative would be quite disruptive and potentially hurt Visa in the US a whole lot more than MasterCard given Visa’s dominant share of debit volume – not to mention creating some awkward moments as payments network  customers start competing with them. At that point, it could just be Katie-bar-the-door as the existing networks develop their own strategies to compete with these new ones and replenish lost debit volume.

Who would have ever thought that mobile banking could grow up to become one of the biggest threats to the payments networks since Judge Leon?