Portals and Rails

February 16, 2010

Haitian crisis: Are mobile payment discussions an unexpected consequence?

The earthquake in Haiti caused massive destruction that ultimately leveled the capital city of Port-au-Prince and resulted in the deaths of thousands of people. As charitable assistance has poured in from around the world, an unexpected revelation has come to light with respect to the potential for mobile phone–enabled payments. Within a matter of days, wireless network operaters facilitated millions of dollars in donations, demonstrating how quickly people all over the world could assemble to adopt a single payment method for a specific purpose. Through the use of text messaging, or SMS (short message service), via the mobile phone, consumers could send payments to a variety of charitable organizations providing aid to Haiti.

Convenience of text messaging can drive adoption
I heard someone say recently that "convenience is like a drug for consumers." This convenience is possibly why texting is outpacing e-mail messaging as a mainstream form of communication—the ubiquity of mobile phones makes texting increasingly easier, cheaper, more convenient, and perhaps a natural vehicle for sending payment instructions. According to research released by Nielsen Mobile, the typical U.S. consumer sends and receives more SMS text messages than telephone calls. Mobile SMS is already widely used in developing countries to facilitate mobile money transfers for domestic person-to-person payments and cross-border remittances.

What if something goes wrong?
In many developing countries, mobile money transfer payments are transmitted via SMS without a bank partner to facilitate clearing and settlement. As described in an earlier post, Safaricom's M-pesa service provides mobile phone–enabled payments through text message instructions, with cash-out needs accommodated by agents, typically a village store or wireless retailer. But many of the payments are peer-to-peer in nature and funded by topping up the consumer's mobile phone bill. In the Haiti example, customers also could fund the payment by adding the value of the donation to their phone bills or by debiting a bank account.

Of course, the legal and regulatory environments in the United States differ markedly from developing markets like Kenya, where the M-pesa mobile payments service has grown so rapidly. The risk environments also differ significantly. In Kenya, a consumer faces less risk of loss in a mobile-enabled payment environment than the cash-based system that prevailed only a few years ago. U.S. consumers have many choices in payments and enjoy legal protections if service providers fail to consummate the payment transaction.

So what happens if the $20 donation instruction you sent to Haiti appears as a $200 or even a $2,000 charge on your bill? What if there is a disagreement about the error between you and your wireless carrier? What else could go wrong?

Protection for consumers
One of the growing challenges created by payment innovations is the creation of new laws and rule sets, which provide different protections depending on the payment type. This challenge is further complicated as payments converge and assume different formats along the supply chain. For example, a payment initiated via a credit card on a mobile device is subject to error resolution procedures and consumer protection standards established by the card networks. Similarly, Regulation E covers electronic transactions initiated from a bank deposit account. But if you disagree with a charge to your phone bill for a payment, it is questionable whether the error resolution provisions of Regulation E would even apply. As telecom firms become more important participants in retail payments, what laws and rule sets can consumers look to for protection when things go awry?

Of course, these issues are highly hypothetical but also very possible. Telecom firms and mobile payment service providers are filling new roles in mobile payments, forcing business models that we know today into a new paradigm. Perhaps the crisis in Haiti will serve as a catalyst for proactive thinking on risk issues so that all industry participants can work together to build a safe and trusted mobile sector of commerce.

By Cindy Merritt, assistant director of the Retail Payments Risk Forum

February 16, 2010 in Collaboration, Emerging payments, Innovation, Mobile Network Operator (MNO), Mobile payments, P2P, Telecom | Permalink

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February 01, 2010

New prepaid card functionality: Card-to-card funds transfer

Innovators now have developed a new prepaid card feature that facilitates a seamless transfer of funds from one card to another, providing a more efficient person-to-person (P2P) payment process that includes remittances. Prepaid cards, also known as stored value cards, are another alternative to paper-based P2P payments and have been a boon to underbanked consumers, allowing them to participate in the electronic economy.

The question is, will this enhanced convenience help drive the adoption of prepaid payment card products?

Prepaid cards were first introduced in 1994 by retailers as proprietary gift cards that could be used only at the stores of the issuing merchant. These are referred to as "closed system" cards and include the popular "loyalty" cards typically issued by one or a group of merchants. Other early uses of stored value cards in the United States included prepaid telephone calling cards, mass transit cards, public benefits payments, and even child support payments. In contrast, "open system" cards are typically issued by a bank under branding of the major card networks and functional wherever they are accepted.

Popularity growing but still lagging traditional debit and credit
Today pre-paid cards are increasing in popularity, but a recently released survey conducted by the Boston Fed shows most consumers still prefer credit or debit cards over prepaid cards.

ENLARGE

However, changes in fee and interest programs among banks issuing credit cards may change consumer preferences. As card legislation limits the interest and fees that card companies can impose on borrowers, many banks have started to implement across-the-board increases in interest charges and eliminating loyalty programs for borrowers with higher credit quality.

State of adoption
Prepaid card users can now transfer funds from one card to another through the Internet or by phone. MetaBank is a major U.S. issuer of prepaid open-loop products licensed through the major card networks. Many of these products are marketed to underbanked communities. Also, many of these products may be used for cross-border remittances in addition to domestic person-to-person transfers. Prepaid card products in other markets throughout the world are offering this feature as well. For example, this service is offered in India free of charge to bank customers of DBC (Development Credit Bank Ltd.). Visa Europe offers cards with this feature, allowing recipients to receive funds in all major currencies directly to their Visa card using the global Visa network. If the recipient does not have a Visa card, he or she can collect the cash from a nominated bank branch. In all, Visa Europe’s money transfer operates as card-to-card, card-to-card via email, and card-to-cash.

Convenience as a driver
In a final analysis, technology is driving the development of myriad alternatives in the P2P space, as with other retail payments. How prepaid instruments evolve, in whatever physical form they take — be it a plastic card, a fob, or a cell phone — will ultimately depend on consumer preference. Expanding the functionality of the prepaid instrument for money transfer could be a driver of a new type of prepaid product.

By Ana Cavazos-Wright, payments risk analyst, and Cindy Merritt, assistant director in the Retail Payments Risk Forum at the Atlanta Fed

February 1, 2010 in Card-to-Card, Credit, Debit, P2P, Prepaid | Permalink

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December 28, 2009

Mobile money transfers: Benign P2P or hawala money?

Informal value transfer systems (IVTS) such as traditional trade and barter have existed since the beginning of time and still serve legitimate purposes today. While informal payments may provide benefits such as improved reliability and convenience to users over formal systems, they may also create regulatory and risk management challenges. Person-to-person (P2P) payments via the mobile phone, also known as mobile money transfers (MMT), represent an innovation with the potential for use in informal channels as nonbanks, many of which are start-up firms, extend services in a cross-border enviroment.

IVTS were defined by Nikos Passas to describe "any network or mechanism that can be used to transfer funds or value from place to place either without leaving a formal paper trail of the entire transaction or without going through regulated financial institutions." One of those systems is hawala, which has its origins in classical Islamic law and is mentioned in texts of Islamic jurisprudence as early as the eighth century. Hawala drew interest from the U.S. government after 9/11 because payments are exchanged on the honor system without a paper trail. With this arrangement, it could be difficult to determine if a transfer of funds was for legitimate purposes.

In addition to hawala, Passas identified other important IVTS to include gift and money transfer services via Internet sites, Internet-based payments and transfers, and stored value cards, such as prepaid telephone cards, to name a few. IVTS systems and mechanisms range from basic and traditional exchanges to modern and sophisticated ones.

ENLARGE

Passas' initial work predated the recent developments in the mobile payments channel and certainly came before the growth in mobile enabled P2P and the use of prepaid airtime for remittances, as described in an earlier edition of Portals and Rails. When P2P payments are conducted by mobile carriers in a bank-agnostic ecosystem, do they potentially represent a more sophisticated, modern-day informal payment system?

MMT: The fastest-growing mobile payment
P2P payments represent possibly the fastest form of financial transaction enabled by mobile phones, driven by the steady growth in remittance markets, the ubiquity of cell phones themselves, and the desirability for an electronic P2P payment alternative in developed countries like the United States. Research firm Gartner recently identified mobile money transfer as the first of the top 10 consumer mobile applications in 2012, made possible by developments in smart handsets like the iPhone. Separately, ABI research predicts that almost three times as many consumers worldwide will use mobile phones to conduct P2P payments than those who will use them to conduct mobile banking functions by the end of 2011.

Formal versus informal
GSMA (Global System Mobile Association), the alliance of mobile network operators, launched the Mobile Money Transfer Programme initiative to promote the mobile channel and formalize international remittances. With low barriers to entry, roaming capacity, and a growing unbanked market in developed countries, start-up firms may offer informal MMT services, including international and domestic P2P in cross-border markets to expand their customer reach and network opportunities. While informal payment systems can provide means for legal transactions, the lack of transparency could potentially provide bad actors the opportunity for money laundering and other financial crimes.

Nonbanks, like telecom firms and others, are rapidly entering the financial services arena, creating an uncertain regulatory environment as laws and regulations vary from country to country. Will mobile P2P innovation permit service offerings that are characterized as informal payments with the potential for misconduct? Will violators of money-laundering laws go undetected as stored-value mechanisms move from the plastic card to the mobile device? These questions will no doubt be the focus for regulators in many markets going forward as they attempt to understand both the operational and regulatory risks money transfer services have the potential to introduce.

By Cindy Merritt, assistant director of the Retail Payments Risk Forum

December 28, 2009 in Emerging payments, Innovation, MNO, Mobile payments, Money laundering, P2P, Remittances, Risk, Telecom | Permalink

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