China’s Payment Apps Give U.S. Bankers Nightmares(bloomberg.com) |
China’s Payment Apps Give U.S. Bankers Nightmares(bloomberg.com) |
The reason the banks are scared is not because "banks" are not involved. They're scared because these apps have successfully vertically integrated to become banks. This is the logical next step for Apple / Google Pay and I'm sure it has consumer banks shaking in their boots, because there's no way they can outcompete those companies in tech. So instead they focus on regulatory capture and making it as difficult as possible for tech companies to play in their sandbox without banker supervision.
One only needs to look at the adoption rate of Apple Pay outside the US to see this system at work. In parts of Europe and the UK it's extremely popular because the banking systems have much friendlier regulations and fewer integration points. In the US the uptake has been slow because the integration is so cumbersome and the banks / payment networks control the entire cycle from point-of-sale to deposit.
My wife works in banking, for a small local bank. The regulations are heavily skewed against smaller banks. Regulations around consumer mortgages seem to be designed to keep smaller banks out. Unless you have the resources to engage in sizeable software projects, you will have to write your own software, spend a lot of money on software licensing, or engage in a lot of manual work while risking draconian penalties for little mistakes.
So regulatory capture doesn't just mean rigging the game for banks. It's only the large corporations that do the rigging and gain the benefit.
Tech needs to figure out how to combine the power of small community banks. Small community banks can only survive through having superior local intelligence. That superior local intelligence is worth a heck of a lot in aggregate.
I'm not sure tech companies really want the core banking business, which is to lend money (taking on credit risk in the process) funded by deposits.
I can imagine Amazon doing it for smaller consumer purchases as they know their customers well. But who will make loans to SMEs and larger retail loans? Google and Apple? I doubt it.
Eventually interest rates will rise and then bad loans will increase, and tech companies will start to wonder if that's really the business they want to be in (like GE has been "wondering" for many years now).
And then there's the regulatory aspect. Do tech companies really want to be regulated as banks? I get the impression that they have daily run-ins with all sorts of regulators already and they're running scared.
Also presumably Alibaba and Tencent are earning quite a bit off their payments/banking and customers love it because they dont have to carry cash and do all the other steps etc. (talked to Chinese people about it).
http://money.cnn.com/2017/02/22/investing/atm-overdraft-fees...
And check out page 38 of BoA's annual report: http://media.corporate-ir.net/media_files/IROL/71/71595/BOAM...
Interest income was $44.7 billion, non interest income (aka fees, trading, and services) was 42.6 billion.
Are you sure it's that? Or is it that the apps don't want to have the responsibility of safeguarding people's money? Cause really, payments and money are things where you really do not want to "move fast and break things".
The most they could do is be a fancy wrapper around the bank's own software.
nordstrom, for example, is/owns a bank (until recently, it seems it’s been sold to charles schwab) but that’s because they got their charter in the 90’s before the regulatory burden became prohibitive (and was grandfathered in).
so i’m not sure tech companies can easily verticalize into banking.
A lot of places seem to support apple pay, but it's much less convenient than contactless (obviously some people disagree).
The massive centralization of our life is a huge problem.
Like we said "don't give everything to facebook" 10 years ago and people only wake up now, I wish people realized it's not about a particular brand. It's a general advice.
The worst part is that the power you give to them is invisible, so it doesn't seem that much. It feels harmless. But the potential for controlling ones life is huge.
I prefer Apple Pay over contactless as you can often go over the £30 limit of contactless. Eg I’ve spent £80+ at Waitrose and paid using Apple Pay. Plus it is more secure- you must authenticate to use it- and that added security doesn’t take long at all (under 1 second to Touch ID). I’ve got 3 cards (two debit, one credit) linked to Apple Pay.
I only have one contactless card, which is just to replace my Oyster card for tube/public transport travel, and that’s only because it’s quicker to pay with when going through the gates. I explicitly called the banks and told them to send me non-contactless versions of all my other cards.
Oh, and Apple Pay doesn’t suffer from card clash. Which is one of the other reasons why I only have one contactless card in my wallet.
>it has consumer banks shaking in their boots, because there's no way they can outcompete those companies in tech. So instead they focus on regulatory capture
That's why COF is doing the whole "we're a tech company that also happens to be a bank" spiel. They are doing their best to back that up, as well. Lots of modern practices and of course they're all in on Cloud.
Google and Apple don't have to (and the banks won't get to) compete on tech if they enter the space. They'll compete on their ability to vertically integrate. Good news for google and apple, they're already in every pocket.
So once they achieve their goal of preventing me from paying someone else $10 without a 3rd party getting a 2-3% fee for the privilege of exchanging money between two private parties, it won't be them getting the 2-3%? Cry me a river.
1. Money transmission regulations require at least $2 million in reserves and 2 years to get a license to transmit money in all 50 states.
2. Knowing the credit and identity of your customers is critical in preventing fraud, illegal transactions, and other issues which cost huge $$$ to payment ecosystem providers with the current consumer guarantees in the US. Only a company with mass market deep data on every user’s consumer patterns can pull this off cheaply, and Amazon is far closer to this than anyone else.
3. Getting plugged into the trusted banking ecosystem for deposits to consumer accounts and the whole ACH process is a total mess. Banking regulation puts a wide number of restrictions on anyone who tries to act like a bank to get access to those payment networks. A mass market company could probably replace that, but it has to have a way to do what it does whiteout being regulated as a bank.
These will be broken down one at a time.
As for the delay, a common practice to enter a new market in finance is to "just" buy an existing bank that has all the required permits and all the legal and technical connections to the settlement infrastructure. There are thousands of banks, many of them small and relatively affordable for any investor trying to make a serious entry into the market. E.g. if some foreign financial company would want to start business in a new market, they usually would not start from scratch and bother with the licensing delays but buy some existing institution to absorb, rebrand and grow. If Amazon or Google or a new VC-backed company would want to enter the market, they're likely to do the same. If Amazon can spend a dozen billion on WholeFoods, then spending ten or fifty million on a small bank to get a banking operation running much faster is just natural, and not even a waste of money, as they'd likely need tens of millions of capital reserves anyway to justify holding immense amounts of customer money.
The main difference for accessibility of such payments is that, unlike cards, there's no percentage fee involved; and that, unlike paper checks, processing them can be so automated and cheap that payments can be offered for free or nearly so.
the apps in china boomed due to the fact that credit cards weren't popular nor available at the time, and the opportunity for the app (wechat) to become the payment method presented itself.
This can't happen in the western world, because credit cards are so ubiquitous, and displacing it is high neigh impossible.
Also those payment apps are like PayPal in the sense it provides very little fraud detection and protection. You are petty much on your own. They process almost no chargebacks, for example.
The Chinese consumers have vastly different expectations when it comes to money because the lack of protection throughout history. To them, it looks very unsafe to just swipe a card without a PIN, and chargeback is an alien concept.
The basic design was ACH money into the wallet, transfer money between balances for ultra low cost (1%), ACH money out of the wallet.
The difficulties are regulation. Doing this would make you a money service business and banks really don't want to touch that. Plus it costs a nice chunk of change to register in every state.
If card processing companies are taking around 3% + 30 cents of each transaction, they've effectively devalued our money by that much. I think you could skip all the NFC terminal nonsense and just do QR code based payments with the camera. Make low fee transactions a reality. Then you could pay for individual news articles online, support forums monthly (no way to pay a fraction of a cent for a page view), or tip your favorite streamer. It would be beautiful. It could also set us free from the ad based tracking economy.
Maybe one of the big players will implement it (Google, Apple, Walmart), or at least figure out the business model for someone to copy. I think it could really change the US economy.
2% (credit card fee) is "excessive", but 1% is "ultra (!) low cost"?
- who is liable or who will make it right when your money is stolen? - retail banking in the US sucks in every way except that they will reimburse you for fraud
if it was up to me all my payments would only happen on a cryptocurrency layer and all my cash storage would happen in an account you could only withdraw from in person to the crypto account. the pull model without credentials banks work under is totally flawed and wont last much longer.
Don't get me wrong, I'd love for Apple Pay to be that convenient, but it's not there yet.
Ed: changed easy-to-use to convenient
HOWEVER, that’s backed by a real bank account at a real bank Apple chose for the purpose (in the US). Transfers involving credit (paying as credit card or using a credit card to move money in) still hit the standard fee. Other transfers are just normal US debit transfers.
So Apple Pay Cash isn’t bypassing anything, at least in the US. It’s further entrenching them. Don’t know how it works in other countries.
Those P2P apps need to branch into physical retail.
In the US, where the single purpose Starbucks wallet is outpacing Apple Pay (https://techcrunch.com/2018/05/22/starbuckss-mobile-payment-...), most users pay into the thing with a credit card, so the banks still get their cut. Sure, they aren't getting the cut when it's spent on coffee like they would with a credit card, but in some ways, they already got it on the front end.
Is the bank totally out of the picture in the Ali/Wec version? Do people put cash money into Ali/Wec via top-up shops or other experiences? Direct deposit salary? Or is it a free transfer from a bank?
This is basically Paypal's dream scenario to become a bank because they already deal with the regulatory stuff but don't get the full money earning potential of a bank.
but there are plenty of "bank -> wallet -> merchant" services in US as well. most notably paypal: you deposit money to your paypal wallet, and spend that money at various online merchants, no credit cards involved.
>the store clerk will usually just accept on his private phone and put money in the till for you
is that really a thing people do? the risk-reward ratio is all off. you take on the risk of possibly getting a chargeback (maybe the phone/account was stolen), in exchange for... nothing? it's not like the cashier is getting paid commissions.
Here in NZ I pay in cash (I kind of like the idea of an anonymous payment system) but these days younger cashiers often trigger ATM payment while I'm standing there holding cash and have to reach around and cancel it on the ATM terminal - it's the same in China but more so
Moreover, the median American has around $3000 in his bank account and a lot of people have negative cash balances. FDIC insurance isn't a big deal in the lives of many millions of people. And even if it was, there's no reason you can't have a bank account with FDIC insurance for your cash savings, and a WeChat like payment system for day to day payment processing.
It should be a fundamental right in the capitalist country, right to process payment for any party. Today, we need special license/approval for this which limits the "access to disrupt" to few lucky people who have a connection in the big banks. Startups like stripe have to give away a chunk of their equity to old guards at big banks in return of access to a market.
Is this the best a capitalist country may offer?
Since the first loan was regulated banks have been pushing for a cashless society. Your comment is very much an understatement. It is the holy grail of the financial industry.
Because of the liquidity ratio. Banks are supposed to have 10% of their total lending in cash. This is to prevent a run on the bank.
No cash means banks can lend an infinite amount of money as they aren't bound to the liquidity ratio.
Basically it removes the ceiling from what a bank can earn as there can never be a run on the bank.
A cashless society is about the former, and as far as I know, the 10% limit is about the latter?
(EDIT: I believe in some systems the banks do technically have physical currency in the form of special high value notes, but they're not really cash in any practical sense)
that's not how fractional reserve works. banks have capital requirements (some of which may be cash), not cash requirements. moreover, even if it was somehow cash requirements, they're not obligated to hold physical cash.
Also, most of the other segments are not exactly what I imagine tech companies will want to do either. In the case of BoA that includes the entire business of the former Merrill Lynch.
So kind of agreeing with you - Apple Pay is great because then I don’t need to take my card (whereas I’ll always take my phone) and it has added security of Face Recognition.
However, the poor adoption (ie, all those places that don’t have contactless, don’t take cards, money transfers to friends, parking meters....). Contactless vs ApplePay is 50:50.
Plus, if my card is stolen, it can’t be abused on multiple cheap contactless purchases. Sure the bank will refund, but it’s still a pain of a process to go through, especially if the bank pushes back at all.
This is the kind of thing you should know off the top of your head if you're interested in competing with them.
I opened years ago a Schwab checking account with 4% interest. Now it’s something like 0.04%.
Regardless, the merchant never got their 3-4% back! Which means everyone has to pay 3% more for their items, cash or credit card.
As I understand it, it doesn't matter if they are Chase, or BECU - most banks don't actually own any of the mortgages they issue.
The problem in 2008 was the fraud, the irrational exuberance, and really dumb investments by the investment branches of a few investment banks. The retail arm of, say, Wells Fargo, which issued a whole bunch of shitty mortgages was fine.
Whether or not you think that investment branches of banks deserve to be bailed out is an exercise for the reader.
Not being funny, but Guiliani forced the whole mortgage banking business into insolvency to make a point that some still think was Vendetta. Whatever the case, Guiliani forced a vast capital market to halt, for no reason I've ever learned, and handed a four trillion dollar bill to the taxpayer, for kicks. No wonder Trump likes his advice.
One-day ACH has been standardized and has begun to be rolled out.
These debit cards very low fees, sometimes they work as both debit and visa card, so you can use them abroad too.
In the US, you only get a piece of the action if you use a credit card. Otherwise you still pay the higher, transaction-fee-included price, but you don't get any part of the transaction fee.
Or I guess the seller pockets the fee.
In NZ for example, folks have their bank account # proudly displayed over a plate of cookies for purchase at 25 cents on a whim.
>free transfers between bank accounts
does it really matter if it was done through some third party service?