P2P lending makes it to main street?

Can old dogs learn new tricks? What about banks? Banks are trying; not only by making interesting bets around digital but also social. On the social aspect of banking, Banco Colpatria in Colombia offers credit cards to individuals using Lenddo’s social scoring. Lenddo has created and extensively tested an algorithm that analyzes the connections of people in their social networks to determine their character and willingness to pay. Lenddo is leaving behind its start-up origins as a micro-lender and entering into partnerships with financial institutions to take advantage of this scoring which can extend the traditional loan customer base to include new segments with no credit history (college students for example). In this same line, Banco Galicia in Argentina has a very interesting offering – Galicia MOVE – aimed to college students based on a totally digital proposition, underpinned by the use of digital channels and a targeted marketing strategy. Galicia MOVE includes a savings account, a debit card and a credit card. Jumping into social based propositions is just around the corner for them. Clearly, digital and social are terms that go together and could certainly benefit those banks that want to bet on these. Another look at the same issue is that it seems inevitable that banks begin to incorporate business models that otherwise threaten their own business from the periphery. Change or die. Peer to Peer (P2P) lending is one of those situations and banks have started to experiment with it, taking P2P lending to main street. Santander Bank through a lead generation model in partnership with Funding Circle’s and RBS using a 3rd party platform are perhaps the most significant cases right now, but we are aware of more movements in this direction. Banks are certainly not playing hide and seek with P2P lending. In our research, our conversations with key financial industry stakeholders and as collaborators at bringing together banks, fintech start-ups and VCs, P2P lending appeared as an area that banks should explore to attract customers through a different value proposition. P2P lending provides a way for the bank to acquire customers not covered by their traditional offering while making some money in the process and retaining a customer that can eventually move into financial products from traditional banking as their business / financial condition makes them a subject fit for bank credit. Regulation is an important issue for banks to get into P2P lending and depending the country, there may be restrictions. Perhaps the P2P lending company that has best understood and dealt with this issue so far is Afluenta; working with regulators in each country to adapt its model and operate under authorization of the financial regulator. For example in Argentina it was the first P2P lender to operate with the approval of the regulator, under a trust structure where Afluenta administers the trust and the money is out of its estate. Money is owned by lenders (peers), which is in the spirit of the P2P proposition. From my point of view in order for banks not to get trapped between their traditional business model, processes and restrictions imposed by the regulator there are some models that banks can explore before deciding to dive into P2P lending all by themselves: lead generation as Santander, a partnership to use the platform of an existing player or possibly an acquisition of an existing player (as BBVA did with Simple to speed up in the digital race). The end game will have banks incorporating services based on digital and social, leveraged by the use of data. I believe it will have them as main actors, therefor competing directly with the fintech-startups, such as the P2P lending companies. In the meantime, coexistance may be possible. Because I also wanted the view from someone working in the heart of this business I spoke with Alejandro Cosentino, a seasoned financial services executive and founder of Afluenta, who until now remained very skeptical about banks entering into the P2P lending space. Nevertheless he believes in its potential: since launching, Afluenta started to transform personal finances into the greatest and most participating peer-to-peer lending community across Latin America with AR$ 25M, 1300 loans, +90,000 investments transactions and covered +1,000 in social networks, blogs, news and traditional media. Afluenta originates loans at a cost which is 25% of the cost incurred by a bank. In Mexico he believes that loans could have a return of 12% against 3% which is the return for money invested by an individual in a bank. Following some of his impressions, which he gently accepted to share with you and me. P2P lending is first and furthermost a financial business and only then a technological business. Many P2P companies approach it the other way round and that is why they fail. P2P lending has to be played in a (highly) regulated and complex environment where you need to understand what risk management is about. This is why he works on 3 key issues (in order of importance):
  1. Regulation
  2. Credit
  3. Technological
He recognizes having been recently contacted by banks looking to enter the P2P space but in his opinion central banks, regulators and securities commissions will not easily allow banks to enter directly into this market. Authorities are not concerned about the systemic risk; their main concern is banks’ responsibility regarding delinquent or bad credit. In the heart of this issue is who owns the risk? who owns the money? the bank or the peers? Authorities’ view, he says, is that if a bank is in the business it will have to take the risk of delinquency or bad credit because they are trustees of that money. This is the view in Mexico, where P2P lenders have to constitute SOFIPOs (micro-finance institutions), not representing the true spirit of P2P lending because risk is taken by the financial institution and not the peer. With such a framework of legislation it is understandable that banks don’t find P2P lending attractive. The Mexican regulator is expected to review the legislation to provide a better framework to operate P2P lending by August 2015, though he believes it will take some more time than that. The issue of addressing the business without financial expertise, including poor risk management, has some P2P companies working with credit delinquency over 26 % (100 loans over 350 loan portfolio with debt for more than 90 days), making it unbearable . Afluenta instead has less than 3% with a much larger volume of loans. They have analyzed loan portfolios from banks and there have been cases where, based on their P2P lending underwriting, they would have not granted loans (which subsequently became delinquent), showing the level of intelligence and accuracy in risk analysis capable of being used in P2P lending. From his perspective banks are tepid regarding P2P lending. It is not a general trend or something that comes as a strong directive from top management, even though some banks are engaging for the sake of innovation or because they still have doubts about the future of P2P lending but don’t want to just watch the ship sail out of the harbor, in case the journey ends being successful, with them not on board. Alejandro believes that the way to go for banks interested in taking a shot to this market is through a model where they act as an online trading agent, going from lead generation to a more stronger partnership where they can direct their own institutional investments through the P2P platform. An Argentinean insurance company for example has agreed to use his P2P platform as a vehicle to directing investments, having a preferred option to finance the cases submitted by peers. An acquisition by a bank is possible if the P2P entity stays separate from the bank, otherwise it will face the regulation problems he described above. You can believe banks are still tepid about P2P lending as Alejandro does, or that it is already hitting main street, which is what I believe. Whatever you choose to believe, rest assure that banks will not play hide and seek about P2P lending. The time to get this bull from the horns has come.

What’s Next for Google Wallet?

Last week saw a number of important developments at Google Wallet. Let’s recap what we’ve learned:
  • Osama Bedier, the Head of Google Wallet, left the company.
  • Google Wallet scrapped its plans to introduce a physical card to support purchases at the physical POS.
  • Then, at Google I/O Developer conference, the company made a series of announcements about new features, such as:
    • Ability to send money to friends with Gmail and Google Wallet.
    • Instant Buy Android API designed for merchants and developers selling physical goods and services who are looking to simplify the checkout experience for their customers.
    • Storing of payment credentials in Chrome browser to speed up check out online.
    • Wallet Objects API to connect any loyalty programs, offers and more to Google Wallet.
So, what do we make of it all? Well, it seems that Google’s strategy for physical stores remains in limbo. When Google re-architected its wallet solution it solved some of the challenges, such as provisioning of payment credentials by moving them to the cloud. However, its continued reliance on NFC means that it remains difficult to scale rapidly. Google was widely expected to follow PayPal’s strategy of introducing a physical card for its account, but for whatever reasons that announcement never materialised. While Google is not pulling the plug on physical POS payments, it now appears to have re-directed its efforts to facilitating payments online, whether through desktops or mobile devices. Some observers likened its strategy as “death to PayPal by a thousand cuts.” But I think Google is taking on more than just PayPal. It seems to follow a “best of breed” approach by incorporate interesting ideas from various players:
  • With email payments, Google takes on PayPal, but also many other P2P players, from Popmoney to Dwolla.
  • Instant Buy Android API sounds remarkably similar to V.me and other digital wallets designed to help customers fill out their payment and shipping details at a click of a button.
  • Leveraging the browser to facilitate check-out reminds me of what Dashlane is offering via its browser API.
  • And Wallet Object API is almost a direct take on Apple’s Passbook down to notifications using the location services.
Google started its payments journey in the online space (remember Google Checkout?), went after the physical POS with Google Wallet and is now coming back full circle to payments online. Google’s multiple assets, such as the Android platform, Gmail and others, combined with these new ideas certainly seem like the right ingredients to succeed. However, as every cook knows, ingredients alone are not a gurantee of success. And it will be merchants and consumers that will decide whether they like the taste of the latest offering from Google Wallet.

The Power of Headlines

We are all familiar with the power of a good headline – it grabs our attention and compels us to read the rest of the story. In the world of printed newspapers, front-page headlines are there to sell papers. And it seems that ability to write a witty headline is a pre-requisite to getting a job at any of the UK’s tabloid newspapers. Headlines also have the power to mis-lead. Just a few days ago, a news story caught my eye, which implied that 42% of the US POS terminals were infected by malware. With a healthy dose of disbelief, I clicked on the link and sure enough, it became clear from the article itself that 42% of all known instances of a single malware type were detected on the US terminals. The story and the headline’s implication couldn’t be further apart. As someone who keeps an eye on the developments in mobile payments, naturally, I was intrigued by some other recent headlines announcing that “the UK banks were to launch mobile P2P network next year.” Did I miss something? No, there was indeed a new announcement by the UK Payments Council, but it was talking about the same initiative announced nearly a year ago on 21st Feb 2012. And it became clear shortly thereafter that the service would likely be launched in 2014. As far as I can tell, the main piece of news this time is the list of 8 banks who have now committed to launching the service. Again, given that it was expected to be an industry-wide initiative from the start, it is no surprise to see all the major UK banks signing up to this, including Barclays, which has its own P2P service, PingIt. For our non-UK readers who may have missed the story last year, The UK Payments Council has commissioned VocaLink to build a central database that will allow bank customers to link their mobile phone number to their bank account. Having done so, they will be able to send a payment from their mobile phone by simply entering someone else’s mobile phone number and would not need to know their banking details. The actual payment would run over Faster Payments, a system that’s run by VocaLink and settles payments in nearly real-time. Is P2P really that important in the UK? Despite some early successes of PingIt, I think the jury is still out. Obviously, it simplifies making a payment to another person (or potentially, business) which is a good thing. However, in the UK it is already quite common to tell someone your bank account details for them to make a one-off payment. As I pointed out in my blog commenting on the original announcement, the ever-popular “splitting a restaurant bill” example is over-used – most people in the UK would settle the bill by asking the waiter to split the total onto multiple cards right there at the restaurant. And the popularity of Direct Debit drastically reduces the need to proactively pay regular bills. Paying to a small business/ merchant/ tradesman appears the most promising scenario, but there this payment method is going to compete against the new mobile POS solutions, which enable those same tradesmen accept cards, and more realistically, cheque and cash payments, the ingrained practices of today. Having said all this, it’s a very welcome initiative and it could be just a start. As the service grows, I would expect it will allow use of other proxies in addition to the mobile phone number (e.g. email, Facebook account, etc.) and will enable them to be linked to multiple bank accounts. And once the infrastructure is built, other services (e.g. merchant payments) can be developed, which would help the UK banks maintain their leadership in payments. I am looking forward to the real news announcing the launch of the actual service in 2014.

The “P2P” Payments Battle is Raging

There are so many choices when it comes to P2P services offered by banks. Yesterday, clearXchange announced that it has finally gone live for payments being sent between Wells Fargo and Bank of America. This isn’t the first big move in this space in 2012 – Fiserv announced in late February that it is combining ZashPay and Popmoney. There’s a battle taking place, and it’s not going to be pretty, especially as clearXchange adds more banks into its mix. What does this all mean? There are several important questions to be answered regarding consumer payment solutions offered by banks:
  1. Can banks dominate the P2P payments landscape? Will customers go to banks or alternative payments providers?
  2. Is there really a difference to the customer between a “P2P” payment or a bill payment (a payment is a payment)?
  3. How do mobile and tablet devices factor into the picture?

There are going to be some significant changes over the next few years to the consumer payment options offered by financial institutions. I’m going to address these questions and more in an upcoming report – stay tuned! In the meantime, please weigh in with your comments and questions.

P2P Payments Come To The UK

There were two interesting announcements this week heralding the dawn of the bank account-based P2P payment era in the UK. The first announcement came from Barclays about the launch of a Pingit service, which allows consumers to send and receive money using mobile phone numbers. Five days later, the UK Payments Council announced that it has commissioned VocaLink to build a central database that will allow bank customers to link their mobile phone number to their account for person-to-person mobile payments. Until now, if I wanted to make a payment to another person in the UK, I typically would have to give them cash, write a cheque or make a bank transfer using their bank account details. The recipient would have to share their bank account details (sort code and account number) with me in advance. These new services link the bank account details to a mobile phone number and that’s all I would need to know. Sounds much better, doesn’t it? It does, and Barclays should be congratulated for continuing to innovate and push mobile payments frontiers in the UK. From the first credit card and ATM in the UK to contactless cards, from NFC payments to now mobile P2P payments, Barclays (and Barclaycard) have been spearheading the payments innovation in the UK. However, the first question is why have two initiatives? While Barclays application is targetted at the end consumers, the UK Payments Council and VocaLink database will be a service to banks. It would appear that the Barclays service does not rely on the UK Payments Council initiative and will be asking the customers to register separately. Does it mean these two services eventualy are going to be competitive and the other banks will have to make a choice which one to use? A centralised database is a technically elegant solution, although the requirements for securing such a database are immense. On the other hand, as an individual bank handling the registrations you also want to be absolutely sure that when someone is trying to link their bank account details to a mobile phone, they are definitely the legitimate owners of both. The initial signs that the registration process with Barclays is somewhat cumbersome, perhaps deliberately so, which could yet prove to be a barrier for consumers willing to try this service. According to Finextra, “Barclays claims to have logged 20,000 downloads of Pingit in the first three days after its launch.” It is very encouraging, but these are likely to be only application downloads; it’s not clear how many of these end up getting registered and activated. The actual transfers are done over the UK’s Faster Payments service, where the transfers are irrevocable and final. This puts the onus very much on consumers to make sure that they select the correct mobile number and enter the right amount, as mistakes may not be easily reversed. Finally, it will be interesting to see whether there is a genuine bank account-based P2P market in the UK. The traditional P2P example of “splitting a restaurant bill” is overused. In the UK, a group of friends after a meal would just ask the waiter to split the bill directly on their cards. The more likely users would be small businesses, such as mobile tradesmen (e.g. plumbers), but I suspect it will take some time to displace cash and cheques from that segment of the market.

ZashPay User Impressions

While attending Fiserv Analyst Day 2010 on Thursday last week, I unwarily volunteered to participate in a live demo as part of a presentation of Fiserv’s digital channels solutions. This was a bit risky since at the time, I had been an iPhone user all of twelve hours. Fiserv launched ZashPay in July 2010 and has commitments from over 400 FIs. It’s off to a very good start. After announcing my name and cell number to the entire crowd, I received a text message from ZashPay in seconds indicating “Steve Olson sent $25.00” and included a unique transaction identification number. Steve is Group President of Fiserv’s Digital Payments Group and was assisting with the demo. Taking all of about 10 seconds to receive the text, the demo seemed successful enough and for $25.00 it was an equitable transaction considering my risk of embarrassment. Then, I began thinking about how clearing and settlement would occur. The following day (Friday) I reviewed the message and visited the ZashPay website to see about making Steve good for his $25.00 promise. The website was simple and intuitive, with an obvious invitation to enter a unique transaction code provided within the SMS in order to receive payment. zashpay As expected, I was required to enroll in ZashPay in order to process the payment, since my primary depository financial institution does not offer the product. It took a strong stomach to enter such sensitive information as my social security number, birth date and address all in one place. This would likely dissuade some consumers from using ZashPay apart from being offered by their financial institution. Steve’s payment was credited to my DDA two business days later. Since I took action on a Friday, payment was not received until the following Tuesday. As a receiver of ZashPay payments, the experience was straightforward and did not carry a fee. I appreciated the immediacy of the SMS notification compared to PayPal which notifies using e-mail. If my primary financial institution offered it as part of its mobile banking suite, I’d be a regular user since I carry little cash and leave my check book at home. But sending carries a fee – 75 cents per transaction goes to ZashPay, plus whatever the ODFI charges for the ACH transaction. So, maybe I’ll keep sending money using PayPal.

P2P Going the Bill Pay Way (Well, Someday…)

Following Jacob Jegher’s recent post, I’d like to add some observations from the BAI conference, regarding P2P. This functionality, which has been talked about for years, is usually portrayed in “social” or “casual” P2P context (as American Banker puts it, the “let’s split the dinner bill” crowd). Usage has been low, partially due to consumers’ lack of awareness or of use case understanding. In fear of oversimplifying, there are a couple of systematic reasons for low usage too — the lack of a seamless network effect (i.e., anyone can send money to anyone, without registration processes), and the lack of a direct bank-to-bank (i.e., no intermediary) transfer capability. Among the rash of P2P announcements, there appears to be 3 distinct models adopted by tech vendors to overcome these systematic barriers. The first is a bottom-up model, creating a network among bank clients — Fiserv and CashEdge/Firethorn fall in this category. Another model is to help banks interface with PayPal, but without registration and intermediary requirements for P2P senders — FIS and S1 appear to be taking this route. The final model is to leverage the payment brands’ networks to move money directly between banks — Obopay tried a version of this with MasterCard and ClairMail is in now in a position to support Visa’s future efforts. It will take a while before we find out which model will win, or if there will be multiple models at the same time. A deciding factor will be the tricky (and expensive) matter of raising consumers’ awareness and understanding of use cases. Because of this, bank-agnostic large brands (e.g., MasterCard, PayPal, Visa) with healthy marketing budgets will be in the best position to to move the market. The question is how much they’re willing to do so — as consumers are extremely sensitive to pricing, it’s not clear how much revenue P2P holds for industry players (especially in comparison to traditional merchant markets). The recent wave of press releases may provide a hint of the future revenue opportunity and consequential marketing efforts. There was scant mention of consumer pricing in the releases, as most tech players will leave this up to the banks. This sounds to me like a recipe for fees initially being charged, but with eventual migration to near $0 pricing (“customer retention” being the argument to offset banks’ costs…). Hmmm, on-line bill pay redux?