Credit Card Processing Blog

JPMorgan Chase, Bank of America and Wells Fargo are the latest financial institutions to launch a person-to-person (P2P) payment service in a direct challenge to PayPal’s dominance of this market. The WSJ tells us that the new venture, called clearXchange, will be open to other banks to join later.

How clearXchange Works

The joint venture will enable consumers to use their checking accounts for sending money into another person’s checking account by providing their email address or cell phone number. The recipient’s checking account can be at another bank. Currently, such transfers, if supported, require that the sender enters the recipient’s routing and account numbers.

clearXchange customers will not have to create a new account to use the service, however it has not yet been decided whether they will be charged any fees for the money transfers.

Why Are Banks Doing This?

I think that the biggest reason why three of the largest U.S. banks have now decided to integrate their payment platforms and simplify money transfers among each other’s customers is that none of them want to be perceived as being out of touch with current developments in payment processing.

Of course, there is the added incentive that the P2P payments market is huge and growing. The WSJ article cites a report by the Aite Group, a consultancy, according to which last year Americans have made $865 billion of P2P payments through 11 billion transactions.

However, the huge size of the market alone does not tell the whole story. Another Aite Group report reveals that half of all P2P payments conducted in the United States, United Kingdom, and Australia were cash transactions, which will not be affected all that much by current payment processing developments, at least in the short term. 28 percent of the balance are check, bank transfers and online banking / bill payments, all bank transactions. This is the segment that banks have control over and are most anxious to preserve and expand. The rest is split among various types of payment cards and other methods, which is the segment that is directly affected by the current payment innovation wave and is rapidly expanding. Banks would love to get a piece of the action there as well, but so far have been too timid in testing the new technologies.

The Takeaway

The first question that comes to my mind is what took them so long? After all, PayPal has been around for more than a decade now, enabling consumers to easily, quickly and cheaply send each other money. Still, unlike American Express with its Serve offering, the banks have a distinct advantage over eBay’s subsidiary, which may yet make their joint venture a success. It is that clearXchange will not require users to create a new account, instead enabling them to make bank-to-bank transfers from their existing accounts. If they also decide to offer the service for free, or at least no more expensively than PayPal’s, the banks will have a clear advantage.

Of course, clearXchange’s model has its disadvantages too. Firstly, it restricts the service to customers of the participating banks. Additionally, it only facilitates bank account transfers, leaving out card payments, which both PayPal and Serve support. On balance, clearXchange is a move in the right direction and may well meet with some success, but it does not go far enough.

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The Chinese mobile payments market is expected to explode, according to a new report from Celent, a research and consulting firm for the financial services industry. The researchers predict that China is set to become the world’s largest mobile payments market by 2013.

The report, titled “Mobile Payments in China: Emergence of a Mega-Market,” forecasts that the number of mobile payments users in China will be growing by 48 percent per year until it reaches 410 million by 2013.

Celent identifies three distinct types of mobile payments providers in China:

• Mobile networks,
• Banks and
• Third-party payments companies.

Mobile networks provide services based primarily on near-field communication (NFC) technology, which enables users to make payments at participating merchants by waving their phones by a NFC-enabled card reader.

Banks enable users to make remote payments with their mobile phones. Typically, financial institutions handle larger transaction amounts, according to the report, and can provide more complex financial products. The researchers predict that a huge market will be created if China UnionPay, an association for China’s banking card industry, manages to link SD cards to credit and debit cards.

Third-party payments providers are the most innovative among the participants, the report says, and can offer more competitive terms of service.

The Celent report states that the growing popularity of mobile payments is the result of successful cooperation among the various players:

“Currently, the best business model in the Chinese market focuses on cooperation between operators and banks,” says Hua Zhang, one of the report’s authors. “Mobile operators and third-party payment companies are also strengthening their cooperation with the banking industry for increased success.”

The growing adoption of mobile payments is not confined to China. According to Gartner, an information technology research and advisory firm, worldwide the number of mobile payments users to grow to 108.6 million in 2010, a 54.5 percent increase from 2009, when the number was 70.2 million. Mobile payments users will amount to 2.1 percent of all mobile users in 2010.

The Gartner report shows that the Asia / Pacific region leads the world in both the absolute number of mobile payments adopters and in their proportion of the total number of mobile users. In absolute terms, the number of Asian consumers making mobile payments will grow to 62.8 million this year, up from 41.9 million in 2009. The 2010 number represents 2.6 percent of all mobile users.

North America ranks last in the Gartner report in both categories. It will only have 3.5 million mobile payments users in 2010, representing 1.1 percent of the total number of consumers with mobile phones. Western Europe is just above North America in this table, which begs the question why developed countries fall behind emerging markets in mobile payments adoption. According to Sandy Shen, research director at Gartner, the lag is “due to the plentiful choices of payment instruments that consumers have,” she said. “Developing markets have found the right formula for mobile money services – functions that users want and an ecosystem that can sustain the service.”

However, Americans seem to be finally waking up to the potential of mobile payments. A slew of start-ups are vying for a piece of the huge market that is projected to soon materialize. Most large banks already offer some type of mobile banking and the rest are sure to follow suit.

So the North American numbers are sure to grow quickly. Whether the global gap will be closed as swiftly is another question entirely, as the rest of the world is unlikely to stand still.

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Billing Revolution, a mobile payment start-up, has unveiled a new mobile credit card checkout service for Android at the Open Mobile Summit in San Francisco. The new “Single-Click Checkout” app has been endorsed by Citibank.

The Single-Click Checkout app will enable users to complete credit card purchases from their mobile phones from any web- or mobile-based merchant. When it launches for consumers on November 29, the new service will be the first to provide in-app checkout capabilities, according to the company. That means that users can make a payment through Billing Revolution’s app for a purchase made on another app.

Somewhat surprisingly, users are not required to enter a user name and password, before completing a payment through the app. Billing Revolution believes that the card issuer’s fraud prevention system to provide sufficient protection. Even more surprisingly, Citi has nevertheless sponsored the app, apparently convinced that it is secure enough.

We believe, however, that this is a weak spot in the Single-Click Checkout process and expect that Billing Revolution will eventually introduce password protection for its users. It is just too easy for an unauthorized user to complete a purchase with a stolen phone. Issuers authorize payments based on the information submitted with each transaction. As this information will be pre-stored into the application, there will be no reason for an issuer to decline a transaction. Moreover, as Billing Revolution will find out, an issuer authorization does not protect the merchant against liability for fraud and chargebacks.

The Single-Click Checkout process is fairly simple. When completing a purchase at a participating merchant, the user clicks on the Single-Click “Buy” button and pop-over window appears on top of the merchant’s page. The pop-over window presents the user with the option of selecting the card he or she wants to use (see video). Similarly to PayPal, Billing Revolution allows users to store multiple cards into their accounts and will store payment history.

Billing Revolution is not exactly straightforward about its pricing and this is an issue that will also need to be corrected. Their website does not list the fees the company will be charging for its service. A press release only goes as far as to state that Single-Click Checkout will provide “a low-cost, widely accepted, standardized way of processing transactions.” From other sources we learn that the company will be charging no monthly fees and then $0.05 for processing transactions under $5 and $0.10 for transactions over $5. This information will have to be prominently displayed on Billing Revolution’s website.

Has anyone used the app? If so, please share your experience in the comments below.

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PayPal will be launching later this year a new micropayments service for processing transactions in the range $0.10 – $12, the company announced at its conference in San Francisco. The new payments platform was immediately endorsed by Facebook. The social network’s Chief Operating Officer Sheryl Sandberg announced at the conference that her company will integrate PayPal’s service to enable Facebook users to make purchases for small-ticket digital products.

PayPal’s new micropayments program will be available to all merchants and will cost users 5% + $0.05 of the transaction amount, which sounds pretty steep, especially for smaller amounts. However, as costly as the service is, it will be significantly cheaper than most existing competing platforms, some of which charge as much as 40% – 50%.

The micropayments platform will allow merchants selling very low-ticket items – like a $0.99 digital song or a ringtone – accept credit cards and make a reasonable profit. PayPal’s regular credit card processing fee structure – 2.90% + $0.30 for merchants with volumes below $3,000 – is just not suited for such small amounts.

PayPal has recently opened its platform to developers, hoping that their applications will help the company stay ahead of the competition. Since last year, when programmers were first given access to PayPal’s system, their applications for smart phones, televisions and websites have generated $1 billion in payments volume for the company.

“PayPal for digital goods is an ideal solution for game developers, newspapers, bloggers, media companies, and anyone who is looking to monetize premium digital content around the globe,” said Sam Shrauger, PayPal’s vice president of global product strategy.

Facebook also finds PayPal’s new program an “ideal solution” for its users. The social network giant already allows users to use their PayPal accounts to make purchases for virtual products, but the new platform will add flexibility to the process. Currently, users can only buy Facebook items at increments of $15. The micropayments service will make it possible for users to make individual purchases.

As the payments industry is transforming and transactions processed on smart phones and social networks are growing quickly, PayPal is trying to keep pace with rivals Visa and MasterCard. Overall, its PayPal X app platform has attracted 50,000 programmers and 1,000 applications since last year. The company hopes that the number will grow quickly.

Mobile commerce is expected to grow to $119 billion in 2015 from just $1.2 billion in 2009, according to ABI Research, a market intelligence company. It is small surprise that traditional payments companies are trying to best position themselves to take advantage of the trend and a host of start-ups are vying for a piece of the action.

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.

Twitter and Square could merge some of the two services’ functionalities, Jack Dorsey, the co-founder of the 4-year old social micro-blog and the new mobile credit card acceptance platform, said at a conference in Dublin.

Dorsey was attending the Dublin Web Summit, where 600 executives from technology companies gathered to talk about business opportunities.

Dorsey is no longer involved in day-to-day operations at Twitter, focusing instead on Square, which went live last week after several months of beta-testing involving 50,000 users in the U.S.

Square enables consumers to accept credit card payments by swiping their customers’ credit cards through a small square (hence the name) card reader that plugs into the phone’s audio outlet. Once the card is swiped and the payment authorized, the cardholder signs a sales receipt on the phone’s screen to complete the transaction. The sales receipt can then be emailed or texted to the cardholder. Currently Square works on the iPhone, iPod and some Android devices.

Dorsey believes that Square’s potential is huge and expects the start-up’s processing volumes to exceed $1 billion in 2011. “I’m only interested in building large impactful companies,” he said at the Web Summit. “It has potential to match if not surpass Twitter’s growth.” Square is currently shipping 10,000 card readers per month.

By Dorsey’s own admission, his latest project has met with a lot of skepticism by the financial services industry and that’s not at all surprising. Square’s business model is simply different. Moreover, it is one traditional processors have deliberately stayed away from.

First, there is the issue that existing credit card processing services are largely inaccessible to consumers. Right now, you can only apply for a merchant account – the generic term for a credit card acceptance service – as a business entity, either an incorporated one or at least a sole proprietorship. Square, on the other hand, lets individuals accept payments, after checking their credit history.

Moreover, Square charges no monthly fees and there is no long-term contract. That is great for both consumers and most small businesses that may only accept a credit card payment once or twice a month. Typically, traditional processors charge at least one fixed monthly fee (about $10 on average), place a monthly processing minimum requirement ($15 – $40), which works as a fee if you don’t reach a specified transaction volume, and require a long-term commitment (two years is the industry norm, but it can be longer than that). So if you only used your merchant account to accept a credit card payment for a couch you sold for $75 on Craigslist, you may end up paying $25 or more in monthly fees, provided you got approved for the service in the first place, which is doubtful.

That is the reason why Square can get away with charging rather high processing fees. At 2.75% + $0.15 per transaction (or 3.50% + $0.15 if you key-entered the payment information), Square’s fees are about 40% higher than the industry average (about 1.65% + $0.20). Yet, if using Square, you would only pay about $2.21 for selling your $75 couch on Craigslist, even at such high processing rates.

So to traditional payment processors Square is not necessarily a competitor, not for the time being that is. They are going after a market segment that is currently underserved, to put it mildly. There already is plenty of competition to fill this niche, coming mostly from a seemingly incessant stream of start-ups working on wildly diverging concepts, but plenty of established companies are entering the fray as well. A year or two from now one of them will be well on its way to becoming the PayPal of mobile payments. It is too early to say who will win the race, but the payoff will be huge.

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.