Clash of the Titans

Today I was in a day long meeting and did not have a chance to follow the Fintech activities in Twitter. However, this shaped  to be one of the interesting days where two Fintech friends who I respect decided to dish it out on the Future model of Banking.

My good friend Bradley Leimer did an excellent coverage on this issue with quotes and links from American Banker’s original article followed by Ron Shevlin’s commentary which was followed by a rebuttal from Jeanine Skowronksi.

I have to say I am very much in agreement with Leimer’s analysis. However, I still personally feel strong about some of the points Ron made and some which Jeanine did.

The way we see olden days of banking are changing. It is like getting into an airplane and expecting a three course meal. (Maybe in business class you still get it, but I fly coach). Its good when you get upgraded and get a taste of this excellent customer service. However, due to the nature of how banking is changing and evolving, the good old days of banking as some might reminisce may be a thing of the past.

Like every other person out there, I would like to be treated well by a customer service associate. Almost all banks provide decent customer service when you walk into a branch. Question here really is will this old fashioned human interaction be replaced with automated servicing tools.

Most folks are starting to agree that a service interaction which can be simplified like depositing a check can be easily fit into a self service channel which customers seem to adopt and like since it saves them time whereas they are more inclined to use the branch for complex financial transactions.

Not to beat this to pulp, I think the original bankthink article showed one view point of a specific customer journey of her banking expectation. Ron was correct to point that it is an outlier scenario which may not jibe well with general populace. At the same time, I also get Jeanine’s point that there are still a whole lot of customers who place so much value in human interaction and walking into a branch to get their financial needs serviced.

Is the glass half full or half empty ?  Depends on how you see it 🙂

Mobile Payments – Are we there yet?

Mobile Payments is the hottest topic in the market now. If you are following the payments industry you would be pleasantly surprised to see the amount of interest in this area from various players which include Financial Institutions like Banks, Card Networks, Processors, Telecom providers, Silicon Valley Giants,  small payment startups, retailers and pretty much everyone you can think of.

It’s all Steve Job’s fault:

The iPhone for all we know started a mobile revolution where upgrading the latest OS firmware is something you see customers discussing at coffee shops in the morning. (Did you upgrade to iOS7? I hate the color themes. I am still at iOS6 and love it!). Not to digress too much, but the iPhone opened up a cottage industry of all the things you could do with the device and Google couldn’t sit there and let Apple have all the fun. Thus Android was born (which opened up its own industry of phone makers). The latest browser stats show Chrome and Android browser leading the pack in usage while Firefox, IE and opera losing market share.

Facebook was fun with mobile, so was Instagram, Twitter and all the lifestyle apps which “made” you more productive. It was quite natural  that mobile devices evolved to add payments as the next killer app – except the existing payment initiatives in mobile have quite underestimated one fact.  The customer didn’t find the idea of paying with a plastic card too hard on the first place. What is the mobile wallet value proposition? Just replacing the leather wallet with a mobile wallet app which can store payment and other credentials does it for customers?

The mobile payments landscape is quite fragmented with a lot of confusion of what really constitutes the ecosystem. Here are the major categorizations:

Mobile at the Point of Sale (Pay using your phone)

–Consumer payment method utilizing NFC, QR Code etc.

–Google Wallet, ISIS, Square Wallet, PayPal Wallet

Mobile as the Point of Sale (Accept payment with your phone)

–Merchant utilizes mobile device to process transaction(POS)

–Paypal, Square, Intuit, ProPay

The Mobile Payment Platform

–Broader mobile payment  platform, typically a mobile wallet

–Utilizes NFC, Cloud, QR Code, GeoLocation,  GeoFencing and Proximity

–Google Wallet, PayPal, FIS Paydiant, Level Up, Dwolla, Square

Direct Carrier Billing

–Purchases made via mobile phone – charged through wireless carrier

–Zong, Boku, Mopay, Any Telco issued payment app.

Closed Loop Mobile Payments

–In-store only transactions

–Utilize QR codes, Proximity payments

–Starbucks, Level Up, Square Wallet, PayPal (Closed Loop Offers)

What does this mean to the average consumer on the street who wants to pay with their mobile? A lot of confusion.  Most of this arises from the fact that there is no standard way to make a payment from the phone.  If the GPS technology we use on the phone was similar to what we have in mobile payments today, we probably won’t have most of the location aware apps which make our lives easy(Maps, Yelp, Offers, FB, the list goes on). A good Fintech friend (Matt West) once said he will validate the success of any consumer technology if his mom finds it easy enough to use. Do the Mobile payments solutions today pass the Matt West’s mom test?

What is the primary issue in adoption?

Really the primary issue here is – Do you want one wallet to store all your credit cards and hope that the POS terminal merchant has a way to recognize it? Or do you want to have individual closed loop solutions like Starbucks Mobile app? (Rated as the #1 mobile payments app).  An average customer would probably have certain shopping preferences of where they would shop. Existing usage trends have shown that customers download and use Starbucks app and Target RedCard app  more due to their  richer closed loop experience.   A generic mobile wallet can still be a attractive value proposition in locations where they shop infrequently (A gas pump for example).

In a twitter conversation I had with Guillaume Lebleu and Brad Leimer about payments Guillaume mentioned the idea that The mobile wallet is your “transaction browser”, something you’ll use for transactions you don’t have a dedicated app for.  I agree with his idea of having dedicated apps for most frequent use and have a generic payment wallet for merchants who do have a native app combined with a wallet.  Brad mentioned the fact that there should be a unified backend to make payments simpler.

Integrating Mobile Payments at the Mobile OS Layer:

A truly well thought out mobile wallet would arise only if the major mobile OS players decide to build that as part of a new payments API.  Currently these providers (Apple, Google, Amazon, Microsoft) have provided ways to do in-app billing(mostly used for games and digital subscriptions) but to my knowledge they do not have a way for a closed loop wallet application to securely process a payment. All of these successful closed loop systems have their own cloud based payment/auth mechanism which are custom built.

Unified Payments API hooks:

If the mobile OS can provide a payment API hook that an app can utilize, retailers can build their version of a closed loop rich app similar to Target or Starbucks that can be customized with their specific offers and loyalty programs. To make something like this to work, the mobile OS has to provide a payments API infrastructure which is present in the cloud (and not on the device). This may use the Secure Element or shouldn’t have to. It can store most of your wallet information in the cloud and let you manage the cards in the cloud (Similar to Google Wallet or PayPal). This card on file information can be represented as a secure payment token within the mobile device (not the actual card details themselves, but a reference to the card in the cloud store). In case of Apple, this could be iCloud, Wallet for Google, Xbox Live for Microsoft.

When a retailer built closed loop custom app wants to utilize payment information,  it requests access to this wallet from the underlying OS. (Similar to how they now request permission to use your GPS, Microphone etc).  The OS provides a list of payment methods to the app which can be selected by the app’s payment handler (either set that card as a default mechanism or allow to change payment as required). If the workflow is built with the right hooks for extension, providers like Wallaby can inject value by recommending the the most optimal payment card which maximizing the user’s loyalty options. (Eg. Use the Discover card at electronics store to get 5% cash back type schemes).

An app built in this manner can enrich the in-store shopping experience  by providing a view of the full inventory. What if an item you are looking for is not in that store? The mobile version of the retailers app may allow you to order and pay for it from the app and have it shipped to your home directory. The primary difference between what we have now in the likes of Amazon and iTunes app is, the customer gets to store more than one primary card on file, as well as have the liberty to choose where their wallet will reside and the OS will secure the storage and provide a uniform way to access payment apps within its platform.

Generic Wallet: 

Many consumers may still find the generic mobile wallets like Google Wallet, ISIS, PayPal and Square quite attractive for their usage patterns. Any merchant who may not have a closed loop scheme can decide to be part of one of these generic wallets to accept mobile payments. Even these generic wallets can start utilizing the underlying OS Payment API hooks in a similar fashion explained above. Google Wallet already has a great way to inject Offers and Loyalty programs for merchants who decide to go through this route using their Wallet Objects API.  Other players are offering their own way of launching these value add-ons to the generic wallet.  (Level Up  has launched its white label, PayPal  with its Beacon, Dwolla with its POS payment option).

So who gets to manage this cloud wallet?

This is an interesting question. The payments landscape is big enough to accommodate more than few players.  Some people are comfortable with their Banks storing this wallet information. Some are comfortable with Apple, Google, Paypal, Amazon handling this cloud store. Some may trust Visa/MC/Amex/Discover with this function. This will once again be a turf war where once you get locked into an ecosystem of Apple or Amazon or Google, you may decide to stay with them due to the convenience factor.

The next generation Payment API/Wallet?

Add the ability to store Bitcoin and other alternative digital currencies in this infrastructure and we maybe truly looking at a next generation wallet which can be the payment wallet of the future.  A lot of innovation is happening at the payments space and its a gold rush. The OS providers wield a considerable amount of power by acting as the gatekeepers of mobile commerce which are facilitated through the mobile devices used by consumers. As long as they can keep the payments functionality simple and pass the Matt West’s Mom Test, we should see mobile wallets playing an integral role in the future of payments.

The latest Android edition (KitKat) has released with new Host Card Emulation (HCE) feature which is a great first step in providing OS level integration for Payment apps. Read more about it here.

Update 2:

Cherian Abraham has done it again with an excellent analysis of Android/Google’s strategy on HCE. You can find it here.



PFM – A mystical rainbow-colored magic Unicorn?

Personal Financial Management (PFM) is probably the most misunderstood acronym in Fintech (next to NFC).  A fun exercise is to ask what PFM means to a banker, an analyst or a Fintech consultant. You will be surprised at the variety of answers you get from them. After following PFM for the last three years, my opinion is this – PFM is a mystical rainbow-colored magic Unicorn which is out there – but no one has seen it yet. 🙂

Now lets flip the question and ask the same to Joe or Jane,  a consumer on the street. There is a good chance that you would get a blank stare at the mention of the acronym.  Since we are not totally clear what PFM means, let us ask some questions to clarify this:

  1. Do you budget your finances? If yes, do you use tools like Quicken?
  2. Do you use an online aggregation services like to see all your finances in one place?
  3. Do you monitor your income and categorize your expenses to track spend?
  4. Do you set financial goals and follow through it with a help of a tool?
  5. Do you have any tool/service which helps you in planning to make the right financial decision when it comes to life events? (Lets not consider your CPA here).

If the answer from Joe or Jane is yes, then they have been exposed to a Personal Financial Management(PFM) tool or service is some shape or form. The real question now is how valuable do they find this?  Is there one tool or solution which manages to answer all of the above questions without making any compromises?

Problems with existing PFM solutions:

PFM industry today comes in two flavors – direct to consumer and white labeled solutions offered by Financial Institutions.  Some  players in the direct to consumer market are the likes of Quicken,, Personal Capital etc.  The white labeled solutions players include Yodlee, Intuit (parent company of Quicken), MoneyDesktop, Meniga and Strands to name a few.  To my knowledge I have seen consumers more exposed to likes of Quicken and Mint since it gives them direct control of managing their financial lives .  The white label solutions do have a stigma that you are locking yourself with the FI which provides them. Some consumers question that approach and prefer not to go that route (What if I have to switch my bank? Do I have to set up all of my accounts again with a new bank?)

FIs would love to have their customers use the white labeled solution as this gives them a nice 360 degree view of the customers finances and what their wallet share is. Some of the FIs also use this to promote their products to these customers based on this aggregated view.

However, the big challenge in this approach is PFM has always been relegated to the role of a second class citizen within the online banking experience (A tab within online banking instead of being the primary landing page). In my opinion, this severely hurts adoption. Due to the nature of the way these white label solutions work , there is definitely some lag (at least a day) in getting the most current information populated within the PFM tab. I have always argued that this is a bad idea and PFM should “be” the online banking experience. Moven has taken this approach and integrated this from the get go on their banking user experience.

Apart from the fact that PFM gets a secondary tab, many FIs come short at providing good PFM integration into their mobile apps.  Jim Bruene from Net Banker writes that Mint is the only Pure PFM Player which provides basic PFM functionality addressing the questions I listed above.  Here some issues with the Pure PFM categorization:

1. Mobile Apps are a great way to have users start using PFM. If you hedge your bets that apps are the holy grail for PFM adoption, then I implore you to look at budgeting and other financial applications of the past (Microsoft Money anyone?).  Apps are just a modality to consume insights about your financial behavior. Like any other technology, they will find their natural demise.  PFM should be focused on data of consumer’s financial behavior and the insights you can derive from it agnostic to the delivery mechanism.

2. Even a Pure Player like Mint does a less than impressive job when it comes to basic functionality like expense categorization.  I have a hard time understanding with all the machine learning, neural networks and intelligent computing available out there, we are still faced with tools struggling to categorize our spending the right way. If Siri and Google Now can interpret our voice and translate them to text (accounting for various languages and accents), isn’t about time that we expect an expense categorization system which works and improves over time?

3. Analyzing overall financial health – Ron Shevlin calls this out his blog where the basics like budgeting, expense categorization and goals will only get you to a certain extent.  The real value of PFM comes in understanding your spending behavior over the long-term and be able to predict your financial future.  Allow me to illustrate – an ideal PFM should have the capability to not just look at your sliding window of income and expense over a limited time period – It should be able to look at this from the point when you started a real job over multiple years. A persons financial health is not just determined by their credit score or current  balance but a holistic view of their savings, earnings, future earning potential and other assets in the mix.

4. Imagine if a PFM can look at your income since you started working and the actual spend and savings you did over the period of time, it should be able to make a pretty good guess about what kind of financial personality you have and provide insights based on that knowledge. Projecting this further, the PFM should be able to tell when you can retire based on your retirement goals. There are PFMs out there which try to do this, but fall short in delivering it. A wealth of information is now available out there – this include the performance of your investment and retirement accounts, your savings, your asset values (depreciating vs appreciating) and the overall earning potential.

5. Here is where we start to move towards the grey area of  financial modeling which can go boom or bust depending upon your assumptions.  A well designed and thought out PFM should be able to interact with the user and make course corrections to reflect any changes to your financial behavior due to unforeseen events (like losing your job, divorce etc).  I tried using the goals feature in Mint. Even with a master’s degree, I cannot figure out how this works. Call me dumb but if I am kept in the dark of how Mint figured out how much  I should save for emergency fund or for retirement without an explanation, I am reluctant to trust that recommendation.

PFM re-imagined:

What would it take to capture consumer financial history over the lifetime? I am looking at the most unlikely place here for inspiration – Healthcare. A person’s health record over time is a trackable collection of data. Microsoft HealthVault tries to solve this problem by allowing an individual or a family to store their health records. Why can’t a PFM solution try to do the same? If a person’s financial interactions can be shared and stored in a vault like system, that would be a treasure trove for PFM analysis. Credit bureaus have a credit file which shows your credit cards/lines and loans but don’t have any information about your other assets or deposits/savings. As newer tools, technologies and players come into the market, dealing with a consumers financial DNA is a big data problem which is begging to be solved.

Will OFX be a standard way to solve this issue?

Maybe. Looking at OFX specs, it seems to me that it is purely conceived from the notion of opening up and solving data interchange issues between FIs. It doesn’t seem to address the issue from an individual’s perspective. Maybe its time the Yodlees, MoneyDesktops, Geezeos and Intuits of the world come up with an open PFXML format to store this unified customer financial data. Ideally a customer should have an option to port their financial history from the vault of one PFM provider to the other similar to transferring our health records. A HIPAA level standard to exchange this information in a secure fashion should also be in place.

Closing thoughts

Most of the PFM solutions today provide some help in managing financial lives of their users. They are very good at solving some of the issues and not generic enough to be adopted for all our needs. What is the point in having Mint  to look at bank accounts/credit cards/loans, use Credit Karma to track credit scores and Sig Fig to monitor my investments? The more tools I need to keep track of various aspects of my financial behavior, the lesser I am inclined and disciplined to stick to the financial resolutions I make.

An ideal PFM should be able to provide the following advice automagically:

1. Based on balances on the asset mix, provide advice on how to rebalance portfolio based on age. Many people think they have a balanced portfolio but end up buying mutual funds and stocks in the same category which skews diversification.

2. Provide advice on optimal number of credit products to own. Display the ratio of credit balance to overall credit limit for the individual to show what a healthy borrowing limit is and when the user is breaching this limit. (Stop nagging about how much they spent on coffee, instead provide more actionable insights).

3. If the user ends up carrying over balance in a card  and has enough money in savings to pay if off, notify them.  (Like Suze Orman advice in real-time).

4. If a user has a mortgage with a higher interest rate, advise them of available  lower rates and refinancing options based on current market conditions.

5. If a customer has a loan and enough savings and disposable income, display the interest they can save by prepaying the loan.

6. Provide financial projections and advise of how to save for college education and how small savings over a period of time will grow when junior is old enough to get into ivy league.

7. Analyze cash flow of user income and expenses and advise how much they can afford to save.

8. Provide ways to promote healthy savings behavior where parts of direct deposits are funneled into named target accounts like “Down payment for Next Home”, “Pay off Mortgage”, “Wedding at Mexico”, “College Fund” etc. Saved Plus allows you to impulsively save when you spend which I think is a neat way to promote healthy savings behavior.

9. When a user wants to spend money on binge purchases, show how that would affect their other savings goals in the long run. (MoneyDesktop has implemented this feature called “Guide Me” in a fantastic way – Video here).

FIs have a great opportunity to win over their customer base by providing relevant money management advice as part of their core offering – After all, that is the primary reason why someone decides to bank with them. Recognizing this and using this to win over customers is a must in the long run to stay in business. PFM players have the great opportunity of redefining money management and taking over the role of next generation of Online Banking.

Square Cash – P2P on Steroids?

With much excitement, I welcomed the news that Square had joined the P2P game with other players like PayPal. I am a big fan of the Square Dongle . I admire the simplicity of how it solved the problem for a niche market of small merchants who could not process credit cards.

Once I dove into the announcement and started reading the details of how this worked, I got a little queasy.  With some knowledge of email marketing and how it can get abused, I am a little weary of a P2P scheme that tries to use email as an orchestration mechanism for sending money from one party to the other.

In the meantime, many of my FinTech friends were raving about the simplicity and beauty of the service. I therefore decided to give it a test drive. I downloaded the iOS app, launched it and was greeted with a screen to enter the amount I wanted to send. Square cash, by default launched the mail program and created a mail template where the recipient email and message can be customized.

Without diving too much into the mechanics of how this works, I would like to present my observations below. (If you are interested in reading how it works, you can find it various places like this one).

I tried sending $10 from one of my Gmail account to another using my Bank A Debit card to my Bank B Debit card. Once I opened my mobile mail app, I saw quite a few emails from Square.  Since this was a test, having an unified inbox app that had access to both the email accounts I used for testing was a mistake.

I ended up getting a total of 8 emails from Square, which added some element of confusion. (I do understand this will not be the case in a real world scenario when you try to pay someone else).  After sorting through the emails and completing the required steps from the sender’s perspective, I was able to transfer the money to the other party.  From a receiver’s perspective, I got an email from Square instructing me to either use a debit card or to set up a bank account to receive the funds.

Interestingly Square cash runs the whole transaction on a Visa/MC debit backbone API. This scheme seems to work very similar to how you would pay at a POS terminal using your debit card. (More details of this API can be found in this Quora thread).

I got a purchase alert SMS from Visa that my debit card was used at SQC*”DEVA ANNAMALAI in San Francisco US” for the amount I sent as a Card Not Present Transaction.

I logged into my receiving account and saw something interesting – the $10 showed up as a pending transaction.  Note the description shows up as a “REFUND”. This further confirmed my suspicion that Square processed this transaction as merchant refund into a debit card.

Screen Shot 2013-10-16 at 10.13.51 PM

While the common user on the street would quite not care about the mechanics of how all of this works, this did raise some questions which I wish Square would provide answers to get more transparency/clarity on this service:

1. Square Cash Terms and Conditions dictates that as an end user, you can only create one account. (I am assuming it is a debit card/email combination to create the new account).

2. The T&C  frequently mentions the term Square Cash Account. My interpretation of this is Square creates a Card on File Account for the email address which is being used to send the money along with the Debit card.  The T&C does not clearly state that, but my best guess is Square is using this as a strategy to compete with PayPal and Google Wallet in increasing its consumer user base. (Check Cherian Abraham’s excellent analysis on his blog post about this topic.)

3. Now the big issue I have with this approach is PayPal and Google Wallet allow you to manage the account by allowing you to store various payment cards in the wallets. With Square Cash, the user seems to be stuck with one debit card to their account. I have no idea what it takes to switch this card on the file to a different card (Or) How someone would go about asking Square to remove their stored card/account. (Some folks are not comfortable for merchants to authorize a direct pull from their bank accounts).

4. The legal age to use Square Cash is 18. I wonder how many under age users who have debit cards will be using this service to send money to their friends. I don’t think most folks in this demographic would even bother to read the terms and conditions.

5. I tried sending money to two of my friends at the same time using the  Square Cash app.  The app informed me that cash was sent (allowing me to type in two email addresses at the recipient field). However I got an email from Square Cash informing that they could not understand the request and I need to send money to only one recipient at a time. Gmail interface to send money via email is clear about the fact that you can only send money to one recipient at a time. It also lets you pick your funding source, the list of credit cards you have on Google Wallet as well as the Wallet Balance.

6. I believe email as a medium to communicate with friends and family is losing its popularity.  When was the last time your friends or family members sent you an email? I am sure we use emails to receive statements, notifications and other random marketing emails. Using emails to keep track of P2P transactions seems weird to me. This is my personal opinion and Gen-Y may prove me wrong 🙂

7. I am also worried about the security aspects of trying to send money via email. Square has informed that they take security very seriously and have extensive fraud monitoring in place. However, mail service providers like Gmail and Yahoo by default have users signed in for extended periods of time  in a web browser(Chrome being a good example). What if a malicious user who may have access to your computer sends themselves money and deletes the email thread? Square does mention you can add dual authentication using a mobile phone number but it is not a mandatory step. This probably is the most riskiest aspect of using the service IMHO.

8. Phishing emails – Most users who still open emails click on a phishing scam without thinking twice. Expect to see a lot more Nigerian royals sending money to your account  🙂

9. Gmail also starts categorizing some emails from Square in your Inbox and some in your Promotions tab. Not a deal breaker but something to be aware of.

10. With so many issues plaguing email in general, it leaves room to questions about why Square chose to use email as a protocol to orchestrate money movement. Email has an inherent benefit of being in the address book for all your contacts. Launching the app to build the email template seems redundant. Since they already have an app, they could have taken a secure network route like Dwolla to initiate and complete the funding request. The app could also have access to the address book! (I get it, at that point it becomes Venmo/PayPal/Dowlla 🙂

There are some interesting possibilities like paying a group of friends and adding multiple payments accounts.  For the initial launch, Square has decided to attack the basic use case.  If Square had partnered with a company like Fiserv to provide real time P2P, it would have been a killer proposition.

Square Cash may be successful in demography of techno-savvy crowd in metro cities and college communities. It would be interesting to see how long it would take for something like this to hit mainstream adoption. I am intrigued by Square Cash and would love to see the usage and its evolution. God forbid we all know that the US Payments system needs a reboot to enable more modern user friendly real time ubiquitous P2P options. Innovations like this would help us get there even if this is a first step.

Update 1: Marcelo Cortes was kind enough to share the link where you can update or unlink your debit card from Square Cash Service. When I tried using it, I had to perform a password reset to register myself. I appreciate minimalism, but this needs a little more clarity.

Update 2: Ron Shevlin raised an interesting question about Account to Account (A2A) money movement using Square Cash. This would be a very useful use case, but if we go by the Terms and Conditions, a customer can only create one account which may prohibit it.

Update 3: Another possible interesting use case is Bill Pay. If Square manages to partner with Billers, a statement email sent from the biller can be replied to pay the bill by CCing  Obviously some details need to be worked out about how to track the payment amount and account number details but I am sure the smart folks at Square will figure it out 🙂 – Now that is something which eliminates friction and opens up a new market!