Now, though it maybe hard to predict what innovations PayPal’s platform will enable, it’s safe to say that the payment industry is going to change dramatically. As money becomes completely digitised, infinitely transferable, and friction-free, it will again revolutionise how we think about our economy.
The author talks excitedly about PayPal’s new open platform X.com and how it is poised to change the current payments landscape which continues to be dominated by the credit card companies. PayPal launched this new approach late last year with their first developers conference Innovate09. Here’s what PayPal President Scott Thompson had to say about the conference:
As you might imagine, given my views on both the enormous opportunity that exists to disrupt an increasingly anachronistic financial services industry and my enthusiasm for “platform-based” business models, it is quite satisfying to see someone like PayPal take on this opportunity in such an aggressive manner. Not only do they help to validate the opportunity – bringing both human and financial capital to bear – but they can capture the attention and imagination of a generation of engineers and entrepreneurs in a way that we simply could not (at least not yet), even if we had a very large amount of capital to deploy. And that can only be good news, except perhaps for the management and shareholders of dominant incumbents like Visa:
“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”
Of course payment networks are classic “two-sided” markets, with strong natural tendencies towards monopoly providers (due to strong network effects and high barriers to entry. Further the structure of these markets allows providers to levy charges on only one side of the market (merchants) while seemingly offering the other side a free or inexpensive service. Last fall The Economist explained why, in such a market, regulation is often ineffective and can often actually produce worse outcomes in some cases:
The case for tight regulation seems strong, at first glance. In rich countries, where paying by plastic is now commonplace, the firms that run card-payment systems look like other utilities, which have long been subject to price caps. Visa and MasterCard are associations run on behalf of their member banks. Competition officials are usually wary of such shared ventures but accept that it is more efficient for rival banks to band together in one network in order to process payments and settle accounts. A common fee structure stops members from abusing the rule that retailers must take all cards issued with the association’s brand. It also obviates the need for countless bilateral deals between thousands of banks. Even so, regulators still fret that banks might use their combined heft to overcharge.
They need to tread carefully. Judging how much credit-card firms ought to charge for their services is trickier even than setting the right price for water or energy supplies. That is because the payment-card system is a “two-sided” market. What sets this type of enterprise apart is that it caters to two distinct groups of customers and each sort benefits the more custom there is from the other sort. Consumers will sign up for a credit-card brand if it is widely accepted as a means of payment. Merchants will more willingly accept a card if lots of consumers use it.
In my opinion, the best way to ensure good value to all the participants in the payments value chain is to encourage and facilitate competition: new approaches, new ideas, new entrants. PayPal has long been the poster-child for “start-up” innovation in financial services, but had seemed to have lost its way in stuck in the corporate bureaucracy of eBay. It’s great to see them breaking free of that and striving to re-ignite their creative and entrepreneurial juices. (Although I still think they would probably be better off independent of eBay…even better, how about a merger of an independent PayPal and an independent AWS: now that is a stock I would love to own!)
For several years now, it has been dead obvious to me that new and exponentially improving information and communications technologies would create the foundation upon which bright, ambitious entrepreneurs would build new companies and business models that will disrupt the moribund incumbents and their 20th century business models. And that’s why I started Nauiokas Park. We’ve made some good decisions along the way, and we’ve learned a lot. But one thing we got spectacularly wrong was our naive belief that leading incumbents in the financial services sector would embrace our vision and our proposition as an opportunity to hedge the strategic risk of continuing to rely (exclusively) on their existing business models. That they would look at the management failures and massive value destruction suffered by the traditional media and telecommunications companies and look to deploy multiple strategies to mitigate the risk of being caught unawares in the same way. But it would seem that they are uninterested. A toxic cocktail of hubris, myopia, inertia and institutional politics seems too often to blind them to the risks posed to their continued hegemony. As if admitting Christmas exists – let alone voting for it – would make it’s inevitable arrival more likely.
All this will no doubt help Nokia come up with better, if not magic, products. The firm may even reach its goal of 300m users by the end of 2011 because its efforts are not aimed just at rich countries, but at fast-growing emerging economies where Nokia is still king of the hill, such as India. There, services such as Nokia Money, a mobile-payment system, and Life Tools, which supplies farmers with prices and other information, fulfil real needs, says John Delaney of IDC, another market-research firm.
Which only strengthens my view that their path to salvation lies in (yet another) complete re-invention, this time to a 21st century, sixth paradigm, retail financial services platform (built on a mobile substrate.) They might even want to keep (at least some of) their handset engineering know-how: it might come in handy for building handsets that are particularly well adapted to mobile financial services.
In any event, if Nokia want their share price to go up, they better hurry up and change their frame of reference. I mean really, who would you rather compete with? Apple? Google?
One of the downsides of having a reasonably ‘international’ life is having to manage foreign exchange risks and effect international currency transfers and payments reasonable regularly. If you only do this once every few years for a few thousand pounds/dollars/euros/etc., you may not notice or care that your bank generally makes this quite hard to do and charges you an arm and a leg for the pleasure (no commission is just dishonest marketing-speak.) If however, you need to make a few foreign currency payments or transfers each year; and/or you have more significant sums at stake, your bank is probably not the best place to do your FX business.
You could (and perhaps do, as I did) use one of the literally hundreds of FX brokers, and if you have the time, knowledge of spot rates and inclination to haggle and shop around, you will get a good price. For a transfer of £10,000 for example you could easily save on the order of £100 or more compared to your bank. However (aside from needing the time, skill and energy to haggle and shop around), in my experience that is the easy part. It is only once you have traded that the fun really starts. Faxes, printing pdfs, clunky websites… getting your money to the broker and then back out in the new currency to the destination account is all too often a long and painful experience. Not completely surprising given the traditional business culture found in financial services: the trade is done (and revenue is booked), the rest is just ‘back office’, paperwork…boring. But from a customer point of view, this is upside-down: the trade is the easy part, undifferentiated, relatively painless (notwithstanding the see-what-you-can-get-away-with pricing algorithms of most of the industry.) Your time (and mental health!) is valuable, being able to trade painlessly in just seconds is often times as valuable or more than a tight price. In any event, you shouldn’t have to choose between them, and now you no longer need to.
So when an ex-colleague of mine Nigel Verdon came to me with a new concept in FX payments and broking, one that was predicated on transparency, simplicity and automation, I listened. I liked what I heard and I became one of the first guinea pigs customers. I liked it so much, I bought (a stake in) the company. The company of course is FX Capital Group which I’ve written about previously, here and here. Nigel and his team have built an extremely robust and technologically modern FX payments platform that essentially acts as middleware between any end user and their bank accounts and the enormous and highly efficient wholesale, interbank currency markets. On top of this platform, they have built two applications: FX Capital – adapted for corporate customers, and RabbitFX for private clients. In the coming weeks, they will also release their API, with the clear objective of allowing anyone to embed FX and international payments into their website, workflow or application. Indeed, one of the first target markets for their platform technology is the hundreds of FX brokers who currently struggle with poor or non-existent technology. By allowing them to focus on what they do best (generally distribution – client acquisition and relationship management) and improve the level of service to their customers by outsourcing the technology to FXCG, everyone – client, broker, FXCG – is a winner. Think of it as FXaaS (FX as a Service.)
…[FX Capital Group provides] FX-as-a-Service.
The reason for today’s post however is to announce the new RabbitFX website, which I hope you will agree looks fantastic and even more importantly is easy to use and understand. It’s not perfect (still lots of improvements and features in the pipeline) but we think it is ‘good enough’: we are confident that the user experience is better than any other specialist FX broker in the market. And this starts right from the beginning: sign up for an account today and you’ll see what I mean. For UK customers, you should be able to get everything done online; customers based outside the UK (and some UK customers) can do 90% online and will need to send some identity documentation (in order for RabbitFX to fulfill its ‘know-your-customer’ regulatory requirements.) And once your account is open, I’m sure you’ll find like I did that making a FX payment has never been easier.
I first wrote here about Ken Banks and FrontlineSMS a little over a year ago, after having seen him speak at Supernova in San Francisco where he made a tremendous impression. I remember immediately being excited by the obvious possibility of leveraging the Frontline:SMS platform to provide financial services, not only in developing countries but also in more mature markets. I put ‘try to set up meeting with Ken to discuss’ on my to do list, but it never quite made it to the top as the myriad challenges of setting up our business (and moving house) in the midst of generalized global financial calamity conspired to keep it from becoming an urgent priority. Of course (and thank goodness) the world does not wait for me and an enterprising young man, Ben Lyons, spotted the same opportunity and (much) more importantly has moved to action, teaming up with Ken and FrontlineSMS to create FrontlineSMS:credit:
FrontlineSMS:Credit aims to make every formal financial service available to the entrepreneurial poor in 160 characters or less. By meshing the functionality of FrontlineSMS with local mobile payment systems, implementing institutions will be able to provide a full range of customizable services, from savings and credit to insurance and payroll.
Launching FrontlineSMS:credit a few weeks ago, Ben wrote:
Our mission is simple: leverage the mobile space to extend access to affordable financial services to rural, disconnected and impoverished communities. To achieve this end, we are constructing a series of free and open source financial modules that will allow FrontlineSMS to communicate with mobile payment systems in real time, turning FrontlineSMS in to a microfinance management information system, a payroll center for small & medium enterprises (SMEs), a collection and distribution center for micro-insurance premiums and payouts, and a detailed center for individual credit histories and scores.
Now if this isn’t a massive opportunity, well I don’t know what is. At the risk of sounding churlish, it’s an order of magnitude more substantial and important (socially, financially, economically…) than half the me-too start-ups chasing funding and customers amongst the western digerati. Take another look at Ben’s mission statement:
… leverage the mobile space to extend access to affordable financial services to rural, disconnected and impoverished communities.
I suspect the first time you read that you thought “in Africa”, or perhaps India, or developing countries more generally. But these same under-served communities (alas) exist in every country in the world, and one could even make a case for saying that for those living in a developed economy, the relative disadvantage of not having access to basic financial services is even more damaging. It seems inevitable that the approach taken by FrontlineSMS:credit will become the primary channel through which universal access to basic financial services is delivered in any country or economy. Which leaves the politicians of many European states very little time to figure out what the hell to do with all the postal employees currently cashing cheques and taking payments for utility bills, who will soon need to find more productive work. And I’m not sure how complacent I would be as a shareholder in an incumbent retail banking operation (the top executives I doubt will lose much sleep as the timeline for this kind of transition is probably 10-15 years or so, much longer than their expected tenure…) as this bottom up, platform approach to delivering financial services has the very real potential of blowing a giant hole right in the middle of their business and revenue model.
To further whet your appetite here is an excellent 10 minute introduction to FrontlineSMS:credit by Ben at Africa Gathering in London a couple weeks ago:
Bankers like to talk about channels – branches, call centers, internet, mobile. Sell the same products via multiple channels: adapt to individual customer preferences. Horses for courses. In wealthy developed economies, this way of thinking is mostly correct; or more precisely the resolution of the market renders the fallacies (of this way of thinking) invisible. To see the fundamental differences, to understand why – at sufficiently high resolution – these channels cease to be simply distribution mechanisms and become integral to the service being offered, one needs a better economic lens.
Developing and emerging economies provide just that: a high resolution lens on economic activity: in a developing (ie relatively poor and resource constrained) economy, the concept of a ’rounding error’ is ridiculous: micro-everything matters: pricing, transaction costs, payment media, etc. ‘Newtonian’ economics and finance is insufficient to understand how these economies work; you need to look at “quantum” effects. You need high resolution. Why do I find these markets so fascinating and important? Yes, there are many investment opportunities and this is exciting; but we are not yet in a position to really explore these and take advantage and so that’s not the main reason. Yes, it is clearly rewarding to encourage and marvel at human ingenuity that so often leads to success in what are often enormously challenging conditions. But that’s not it either. The main reason I think these markets – especially ‘frontier’ markets – are important, is that by observing the world through the lens of these economies and markets, one cannot help but gain a deeper, more granular, fundamental understanding of how markets work (or don’t work.) The fundamental forces – the risk quarks – that are invisible to the naked western eye are revealed by the tunneling electron microscope of emerging frontier economies.
Nowhere is this effect more obvious than in the cambrian explosion of innovation in markets and services built on the substrate of mobile networks in emerging markets. From the point of view of someone concerned with envisioning and understanding the future of financial services, one of the most pertinent and exciting laboratories is the explosion of mobile trading, payments and banking systems in Africa and other poor, developing economies. I first wrote about this a few years ago, and since then, many of my expectations have been borne out and the potential for disruption – both at home and abroad (ie in the West) – if anything has grown. Indeed one company I wish I had invested in – Obopay – was founded by Carol Realini (who I would love to meet one day) after having spent some time in Africa where she saw first hand how powerful a mobile approach to payments could be.
Of course, although I may have been among the first, I’m by no means alone in seeing mobile financial services as an enormous opportunity, or in seeing the developing world as a key driver of innovation. This is great news as hopefully it will encourage people and institutions with more capital than I to look seriously at investing in developing innovative business models in this space. A few weeks ago CGAP (a very interesting organization, check them out) published a report predicting that:
The market of mobile financial services to poor people in emerging markets will surge from nothing to $5 billion in 2012.
There are about one billion people in emerging markets who have cellphones, but no bank accounts. CGAP expects that number to rise to 1.7 billion to 2012, with around one in five of them picking up mobile money — and creating the $5 billion market.
Most optimistic researchers expect more than a billion people in emerging markets to start using mobile money within a few years, while some are more cautious than CGAP.
Now a billion potential customers – even if they are relatively poor – is a market opportunity even the most jaded venture capitalist should be able to get excited about. But it gets better. I figure if you can figure out how to profitably provide basic payment and banking services to this billion, you probably have a pretty decent business model with which to take on the billion or so people who already consume banking services in more developed countries (and who by the way all have a mobile phone…) These potential customers in the developing world are a dream come true in the sense that if you solve their problems, you’ve solved everyone’s problems (via Reuters:)
“The Grameenbank model works, but the scalability is limited,” said Hannes van Rensburg, chief executive of mobile financial services provider Fundamo said on Wednesday.
“The problem is about the inertia of money. It’s very difficult to move very small amounts of money fast,” he said in an interview with Reuters at the GSMA’s Mobile Money summit in Barcelona.
Access to financial services could not only remove the need for long, costly and risky journeys to move money around, but also reduce the burden of constant, active money management endured by those living on tiny amounts and in constant danger of financial crisis.
“Poor people are doing a tremendous amount of financial transactions just to survive,” says Stephen Rasmussen, who runs a mobile banking program for CGAP, an association of non-profit organizations under the auspices of the World Bank that seeks to help to increase financial access for the poor.
“People at the very bottom spend far more energy and mental time on managing these systems than we do,” Rasmussen told Reuters.
Mobile money deployments have huge momentum, with the number expected to double to 120 by the end of the year, according to the GSMA.
The more cynical amongst you might say: “..yeah, ok. But so what? The big telecom and financial services providers are just going to carve this up and so where’s the opportunity?” I don’t have all the answers but I am fairly certain that most – especially western – large incumbent industry players (from both sides) are structurally and evolutionarily poorly adapted to harness this opportunity. They already have, and I suspect they will continue to frame this opportunity through the low resolution historical lens of their existing business models and approach. Phrases like “We are a bank. We do ‘x’.” or “We are a telecom operator. We do ‘y’.” will continue to be all too prevalent. And so while the giants sit around haggling amongst themselves as to how they can and will divide this market, there will be ample room for the nimble, energetic and open-minded entrepreneur to make her mark.
…there’s incredible power in a device that knows where it is and that can purchase stuff based on its location…We already have an example of this power in the form of iPhone-friendly Starbucks outlets. Walk into such a Starbucks and a new Starbucks entry appears within the phone’s iTunes application. Tap it and you can learn what’s recently been played in the store and then purchase one of these tracks simply by tapping a Buy button…
It’s 11 a.m. and time for your coffee break. Leave the office and stroll the 14 steps to the café next door. Your iPhone vibrates and asks if you’d like the usual double-wet cappuccino. Of course you do, so you tap Yes. Within a minute your name is called and you have your caffeine-rich libation in hand. Again, no cash or credit card necessary because your iPhone automatically picked up the tab.
It’s not (yet) as sophisticated, but the success of mobile-based payment systems like M-Pesa in Kenya is not only very exciting but is a precurser to much much more. (I first wrote about M-Pesa in November 2006; seeing opportunities like this with no way to ‘participate’ was a significant motivator in developing my current venture.)
(from the CGAP technology blog:)
Since its introduction in March of 2007, the M-PESA application has had great success all over Kenya. There are currently over 2.3 million registered users. Over 18 Billion Ksh had been moved through the system, via person-to-person transfers.
Some of the work that I have been doing makes several arguments as to why M-PESA has become so popular. Firstly, it is the young, male, urban migrants who are driving the uptake of services – customer adoption. These migrants are what innovation researchers call ‘early adopters’ of a technology. They are usually better educated and earn higher incomes than those in the village. Because these migrants are the senders, they can choose the channel for money transfer…
…Despite these cash float problems, the majority of customers in both the urban and rural areas assert that they prefer M-PESA over other money transfer services. This means that M-PESA must be offering them some kind of substantial benefit. In Bukura, this benefit comes in the form of savings on transport. Customers do not need to travel into Kakamega, the nearest town, to access the service. One elderly farmer commented that “I can just walk from my shamba (farm) and get money. I don’t have to spend and go into town. If the agent does not have cash today, then I will come back tomorrow. It is cheaper to wait”. Finding strategies to manage the cash float problem will undoubtedly be one of the greatest challenges for Safaricom. For now, however, it seems like customers are willing to accept the inefficiencies of the service. It is, after all, cheaper to wait.
One of the revelations (to me at least) of this year’s Supernova conference was Ken Banks of kiwanja.net. For anyone interested in the innovative use of mobile communications in developing markets, his essay “Mobiles in Africa: A Travellers Perspective” is a must read. (Sadly, I didn’t get the chance to meet him as I had to rush off but hopefully I will get a future opportunity.) An exerpt:
When it comes to mobile innovation, the gap between developed and developing countries is not much of a gap at all. Mobile innovation in the West, largely technology-lead, sits in contrast to that in the developing world where combating the geographic, economic and cultural constraints of users is considered a more sensible way to go. This explains the emergence of the torch phone, for users who live in areas with little or no regular light, or multiple phone books for users who share their phones with family members. On the heavyweight side, a plethora of financial applications have hit the streets, with Safaricom’s m-Pesa service getting by far the biggest press to date…
…Innovation is not always as official or formalised as this, however. People in developing countries are rarely simple, passive recipients of a technology, and rarely wait for outsiders to provide solutions to their problems. The entrepreneurial spirit is alive and well, evident by the masses of thriving small businesses you find on the street corners of every village, town and city.
Many developing countries for all intents and purposes have ‘skipped’ the fixed-line telephony paradigm. Wanna bet that they ‘skip’ the branch banking/atm paradigm in retail financial services?
I know it’s not their typical market target, but I’d love to see Apple (or RIM) develop a ‘rugged’ iPhone (analogous to ‘rugged’ mobile hard drives), targeting emerging markets. Not as a competitor / replacement for existing mobile phones, but as a substitute to personal computers: effectively giving traders and business people an effective web appliance (ideally with Skype pre-loaded!)