The battle for supremacy in mobile person-to-person payments is raging. To date, its primary ordnance has been limited to the press release and the corporate event, most of them volleyed by big-name operators of existing payment networks, like PayPal, Visa, and MasterCard, among others - plus, um, Google. But as the presence of that last contender indicates, the stakes are high. The prize is a controlling position, or at least a first-mover advantage, in the consumer's mobile wallet. It goes without saying that gaining such a position would yield benefits well beyond payment fees.
Banks have for the most part been sitting on the sidelines of this war, watching carefully to see which side appears to be winning so they can pick a partner when the time is right.
But in the scorching Arizona desert, a more forward-thinking group of banks is quietly preparing the enter the fray. Since May, JPMorgan Chase, Wells Fargo and Bank of America have been developing a mobile payments platform of their own. The system, known as clearXchange, has just entered the testing phase. If all goes according to plan, clearXchange would let consumers send money to each other by mobile device, from one bank account to another, with no fee.
Mike Kennedy, Wells Fargo's executive vice president of enterprise payments strategy, is leading clearXchange's charge as the joint venture's chairman. In a rare interview, Kennedy talked about the project's ambitions and made the case for bank cooperation in the mobile payments arena.
"This is an innovative game-changer," he says. "We want our customers to be able to easily send money to anyone without having to establish a new account outside their primary bank. We're looking for ubiquity."
Until recently, "the means [of P2P] had been a computer at a desk," says Kennedy, who joined Wells Fargo in 2004 with the Wealth Management Group and has also served as head of strategy and implementation. "But mobile sites have become more secure, and people always have their phones with them. They don't always have their checkbooks."
ClearXchange lets customers use their mobile banking apps to send money via ACH to another party's mobile banking app after an initial registration - provided both parties have accounts at Bank of America, Chase or Wells Fargo. Each bank will decide on issues like fees and presentation. The service is expected to be free, a savings of the $12 or so charged for traditional wire transfers. Kennedy says the Arizona rollout has gone well so far and a national rollout is in the works for next year.
Challengers On All Sides
Kennedy and clearXchange are under pressure. ClearXchange is battling the Kleenex of P2P payments, PayPal, which already owns about 90 percent of the existing P2P market and is making aggressive tech moves of its own, including offering proximity "bump" payments and developing contactless payment technology. PayPal's maneuvers not only suggest a further penetration into other financial services, but also a burgeoning innovation spree that could allow it to compete with clearXchange's main competitive advantage - the ability to offer direct bank-account-to-bank-account mobile P2P transactions. Google has plans through its mobile wallet to chew on the $1 trillion yearly American P2P market as well. Telecom consortium ISIS, Twitter spinoff Square and startup mobile payment company Dwolla are just three of the newer formidable mobile payment competitors.
And while clearXchange is the first venture of its kind, a broad bank-led P2P market is not an entirely new concept. Other attempts to bring efficiencies to ACH payment processing - which could have eased the execution and cost burdens of the cash transfers involved in account-to-account payments - have stalled in the past. Citigroup's C2it, a low-cost international operation that allowed users to transfer money via the web, even if they didn't have a Citi account, closed up shop during the last decade, and most recently a joint Wells Fargo/Bank of America venture called Pariter, which was designed to make transfers more efficient via joint ACH processing, was discontinued a couple of months ago.
These combined challenges to clearXchange are drawing out the critics in full force. "The clearXchange concept looks great, you can make a payment to whomever has an account with these banks. But right now if you don't bank with one of these three banks, the transactions can't work. It's simply too limited to be a threat," says Andy Schmidt, research director at TowerGroup, who says a partnership or participation of the nine largest banks would provide the backing needed. "With [BofA, Wells and Chase] you get the top originating and receiving ACH banks in the U.S. But it's still not [accessing] the majority of the retail customers in the U.S."
Kennedy, who holds an undergrad degree in engineering from Stanford and an MBA from Harvard, is undaunted by the critics. He says advances in mobile technology give clearXchange a big advantage that didn't exist in the past. Not only are mobile apps getting better and more useful, smartphones will increasingly come packaged with near-field communication, a short-range connectivity standard that allows information to be passed wirelessly between devices, such as mobile phones and merchant terminals, that are brought within a few centimeters of each other. Most observers agree that NFC will be the technology that facilitates mobile payments, once a majority of phones and merchant devices support it.
Taking On PayPal
Beyond winning bank participation, clearXchange's obvious challenge is convincing consumers who have already adopted digital P2P - likely through market leader PayPal - that clearXchange is better than the system they're already using.
PayPal, which recently upped its mobile payments volume forecast for the year by 50 percent and executed nearly $30 billion in payments in the first quarter alone, is already striking back at clearXchange's fattest pitch - that it enables consumers with accounts at participating banks to send money to each other without requiring them to open a separate account for the purpose, as PayPal has traditionally required them to do.
"We're doing away with that, so that the [client] bank has one master PayPal account," says Dan Schatt, general manager of financial innovation at PayPal, which is currently extending an offer to its financial institutional clients to leverage a standardized messaging format to execute payments directly between bank accounts. The eBay subsidiary is also flexing its own considerable corporate muscle by "fronting" the cash to the payment's recipient, then settling with the bank a few days later - in effect making PayPal payments close to "instant" to counter the efficient execution advantage of clearXchange. "We have a good cash flow from eBay," Schatt says.
Additionally, PayPal is extending governance, risk and compliance capabilities to bank partners, on both security and fraud fronts, by using hundreds of algorithms that it's developed to track and assess levels of risk inherent in different transactions for compliance and security risk management. It also has 100 million accounts that participating banks can work with from day one, Schatt points out. "All of the other schemes are starting from scratch."
But Rick Oglesby, a senior analyst at Aite, counters that banks' pre-existing customer relationships work in clearXchange's favor. "P2P is a great place for banks to take a stand, they have a competitive advantage, they have consumers already enrolled," he says. "So if that's where your money already is, you can move it from one bank to another."
Another potential, yet unstated, clearXchange advantage is that bank-driven mobile P2P can give banks a head start on attracting consumers to other uses of mobile, such as check deposit, mobile bill payment and mobile POS payments.
Those benefits aren't lost on PayPal. eBay recently acquired Zong - a technology firm that allows users to charge digital goods to wireless phone bills. The purchase signals PayPal's dedication to broadening its own mobile-payments-driven cross-selling strategy, with the possibility of offering account transfers, mobile check deposit, remittance and other services in the future. And in July, PayPal announced plans to offer NFC.
"The mobile transaction can be monetized in a lot of ways," Schatt says, hinting at PayPal's ambitions. "Every single transaction [results] in the recipient getting an email from someone that's a customer of xyz bank. You have more of an opportunity to get in front of a consumer [for cross selling] than ever before...There are [trillions] of checks written in the U.S. each year, and a lot are business-to-business checks or low-value payment checks. Directly from the mobile phone, you can send money all over the place and have that money go out instantly without the need for a stamp."
It's these moves, more than PayPal's long-term dominance of P2P, that put pressure on clearXchange and other bank-led efforts to join forces in an interoperable effort to use P2P as a relationship-building springboard. "Let's assume PayPal gets accepted at the POS, and it has P2P and the web. Consumers could do a direct deposit into a PayPal account, so banks lose their [pre-existing account] advantage," Olgesby says.
The Google Threat
Another major source of competition for clearXchange comes from Google, whose new near-field communication-enabled wallet includes a planned development of NFC micropayments that can be executed between phones. Such a scheme would require agreements among mobile payments stakeholders to allow an exchange of payment credentials between phones.
"Merchant adoption of NFC has been strong, they're buying into the notion of decreasing friction at the point of sale," says Spencer Spinnell, director of emerging platforms for Google. "But people should also be able to use NFC to exchange cash."
Analysts say Google Wallet's use as a P2P tool suffers from some of the same "closed network" shortcomings as clearXchange. "The Google offering is interesting, but limited because it can only be funded through Google prepaid cards and MasterCards," Schmidt says.
Yet another new P2P alternative from Discover eschews the prepaid model entirely as a means to lure consumers. Discover's "Money Messenger" is a person-to-person payments joint venture with PayPal that allows users with an email address or mobile phone to move funds from a Discover account directly to a PayPal account for free.
In this case, the attraction is reward programs such as loyalty points and cash back offers for consumers, since the payments are funded from a credit account.
"A lot of P2P is debit funded...our insights group determined that one of the biggest needs for us is to tap transactions still being done with cash because there's no alternative, such as paying a baby sitter or paying for things in situations where you can't use a plastic credit card," says Mike Boush, vice president of ecommerce for Discover, who would not comment on clearXchange's potential to capture cash payments share, though he seemed to be less than bullish.
"There's always been a way to move money between banks," he says. "It's a wire transfer. If they thought it was a good way to move money, they could have continued to use that model."
Co-Opetition
The venture's founders acknowledge the necessity of expanding participation to other banks and vendors, but forging agreements on revenue sharing and processing continuity will make that easier said than done. For example, the details of how other bank-led P2P services could be integrated with clearXchange's system have not emerged yet.
Making the processing rails of clearXchange work with other bank-led P2P systems, such as those from banks using Fiserv's technology, would go a long way toward building interoperability. Fiserv just purchased CashEdge, giving Fiserv access to hundreds of CashEdge's PopMoney and its own ZashPay bank clients. PopMoney's clients include heavyweights like PNC, Citibank, Fifth Third, Huntington and Bank of the West.
Middleware that could provide connectivity between CashEdge/Fiserv and clearXchange would, from a technology perspective, make it easier for more banks to participate or connect to clearXchange, as well as execute the ancillary payment-enabled financial services relationships that could grow out of the initial P2P service.
Erich Litch, senior vice president and general manager of the consumer services division and president of digital channels for Fiserv, says all three banks in clearXchange are Fiserv clients. Regarding the IT of a bank-led P2P ecosystem, he says the endpoints of the payment platforms in the various institutions would have to be connected to enable smooth processing and ubiquitous reach.
"You have to design with interoperability in mind," Litch says, adding Fiserv uses a web services architecture to make the payment platforms of different banks and payment tech providers interoperate.
"We don't have an arrangement today to work together," he says of a potential technology project that would allow clearXchange to work directly with Fiserv to expand a workable P2P tech ecosystem. "We are talking."
Kennedy says expanding participation to other stakeholders is a priority, but he wouldn't share specifics. "Getting more people involved is the goal over time," he says. "We see a mutual benefit for customers and shareholders. We are in conversations with other banks about clearXchange, and are hoping to have agreements to make sure payments get delivered in a safe and reliable way."
