Paypal to Begin Processing Payments in India Again

4 weeks after PayPal announced that they would stop processing payment sent to and from India, Paypal began processing "business payments" in India again. However, personal or P2P payments are still not allowed. It seems like the issue was primarily because PayPal did not comply with local rules and guidelines governed by the Reserve Bank of India (RBI).

On 3rd March, Electronic payment gateway PayPal has said that it would allow new bank withdrawals for its customers in India after receiving a 'Purpose Code' for the transaction.

In his blog, PayPal's business head for Asia-Pacific, Farhad Irani said, “When you select the ‘Withdraw Funds’ option on your PayPal account after 3rd March, we will ask you to fill out a new field entitled ‘Purpose Code’. This information is required under the laws of India in order to identify the nature of cross-border merchant transactions." He went on to clarify that personal payments will remain suspended for the time being.

I am surprised why PayPal was not able to take corrective action and had to suspend the service, even it was for a short period of 4 weeks. The introduction of "Purpose code" seems to be a way to comply to export laws in India. The purpose code will help banks in India to furnish information required by the Reserve Bank of India to identify the nature of cross-border transactions

I am not surprised that "personal or P2P payments" remain suspended. Independent payment processors such as PayPal, Obopay and others have been at loggerheads with the RBI for a while now. Current regulations in India only allows banks to hold funds and since both PayPal and Obopay require the consumer to create another account where the funds are stored, it is clearly in violation. It remains to be seen if the RBI is willing to relax the rules. But it is imperative that Banks leverage their favorable position to offer innovative services, such as P2P. There is a small window of opportunity and if they do not react fast enough, they might end up in the same place as the banks in the US, where they missed the e-commerce bus and PayPal ended up dominating the space.

Paypal to Process Payments for Facebook

On February 18, Facebook and PayPal announced a strategic relationship to offer PayPal in key parts of Facebook's advertising and developer systems.

According to this release, "As part of the relationship, advertisers around the world will soon be able to use PayPal to pay for Facebook Ads through the company's online advertising tool. For businesses in areas where the payment process can be difficult and expensive, the option to pay with PayPal makes it even easier for advertisers, particularly small international companies, to run campaigns on Facebook. Facebook reaches more than 400 million people, 70 percent of whom live outside the United States. "

PayPal will process payments for advertising on Facebook and will also handle payments for Facebook Credits, the virtual currency the site has been testing with a handful of sellers of digital goods.

This is an important step for Facebook as it attempts to monetize its assets. There were rumors about Facebook trying to develop its own payment system and have clearly decided to go the "partnership route". Paypal's international and multi-currency capability played an important role in the decision. Personally, I think its a smart choice for Facebook instead of trying to develop its own payment system. Payment is a complex business and this could have become a distraction for Faebook.

From Paypal's perspective, I think its a big win. They have been trying to expand aggressively in the e-commerce space. While they may not see a lot of volumes initially, social networking could well be the next area of growth for Paypal.

Will Free Checking Continue to Remain Free?

The Federal Reserve announced new rules regarding overdraft and ATM fees back in November, which could severely reduce the profitability of checking accounts for most banks. According to the release, "The Federal Reserve Board on Thursday announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.

Before opting in, the consumer must be provided a notice that explains the financial institution's overdraft services, including the fees associated with the service, and the consumer's choices. The final rules, along with a model opt-in notice, are issued under Regulation E, which implements the Electronic Fund Transfer Act."

The Opt-in model will obviously lead to fall off. The extent of the drop off remains to be seen. In 2009, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer’s balance, according to this article.

The question is how will banks react to the new regulations and how would they attempt to reduce the revenues shortfall. Will they begin charging fees for checking account again? I really don't see that happening. While some banks have created business models around fees for checking account, others have simply used it as a central or anchor account and use it to cross sell other products to the checking account customers. We might see banks becoming smarter at leveraging the checking account relationships. I can see rewards for signature debit going us as well, because most banks earn significantly more on each signature debit transactions.

It might also lead to other value added, innovative products being launched by banks such as expedited bill pay, P2P transactions etc., which could allow banks to charge a fee for value added service.

Artha Money - India's First Online PFM Offering

The Times Group recently launched "Artha Money", India's first online PFM offering. It seems to have all the features and functionalities of a typical PFM offering including:

Dashboard
Budgeting
Financial Calendar
Budget Goals etc.





Artha Money has partnered with Yodlee Inc., one of the leading vendors for account aggregation to allow consumers to aggregate their financial accounts. It will be interesting to watch whether account aggregation technology takes off in India. In my interactions with banks in India, there has been a lot of reluctance and push back because of security concerns. This is no different than what we experienced in the US a few years back but account aggregation has become a more mainstream technology now.

I am excited about the service and eager to see the adoption curve. In general, Indian consumers are culturally more savings oriented and I suspect some of the PFM features like budgeting goals may have more limited appeal in that market. However, there is a huge interest in Indian consumers investing in the stock market and features like portfolio analysis etc. which probably be more popular features.

I also expect leading financial portals such as Moneycontrol and Myiris to respond to similar offerings.

Use of Social Engineering to Commit Online Banking Fraud On the Rise

Out of band authentication was considered more secure than some of the other security measures within online banking. The idea was that by incorporating another channel such as a cell phone or landline, even if a consumer's login credentials were compromised, as long as the fraudster did not get access to the consumer's phone, they will not be able to authenticate an activity or transaction and hence a victim will be protected. This was supposed to effective for cases where a consumer's login credentials were compromised.

Fraudsters are now using social engineering to get authentication calls or texts intended to be sent to a consumer's phone, redirected to the attacker's phone, and then approving fraudulent transactions.

The attack involves a fraudster using social engineering to convince a phone company's customer service representative to forward a victim's phone calls to a number controlled by the fraudster. Then, when the fraudster uses consumer's credentials and log into his or her bank account - similar to a spear phishing attack - the fraudster can confirm a suspicious transaction if called directly by the bank, and transactions can proceed.

The only good news about social engineering is it's hard to do in bulk. This clearly goes on to prove that no technology is completely safe. Fraudsters have always found a way around the system. Consumer education is an important part of the security system. Many banks have focused on educating their customers on security measures. Now the banks must also work on educating the Telecom companies.

This of course is easier said than done. Banks and Telecom companies are engaged in a battle to control mobile banking and the lucrative mobile payments space. It is going to be hard for them to figure out a way to co-operate to help mitigate fraud and manange risk more effectively. This is crucial as they try to get consumers to adopt mobile banking and payments applications which could provide growth opportunities to both banks and Telecom companies.

American Express to Acquire Revolution Money

Last week, American Express announced that they would acquire Revolution Money for approximately $300 million.

With a $300 million price tag, "we see Revolution Money as a small acquisition, but one with big potential," Kenneth Chenault, Amex's chairman and chief executive, told reporters on a conference call Wednesday. Revolution Money operates an alternative payments network, including an online person-to-person money transfer service and a credit card. The privately held Revolution, of St. Petersburg, Fla., said it has signed up 400,000 consumers but would not say how many of its cards are in circulation or share any of its financial results.

Revolution Money website lists merchants such as Walgreens, Marshalls, CVS,Duane Reade, Office Depot among others.

It seems like a logical extension for American Express, a truly closed loop network unlike Visa and Mastercard. While Revolution Money also has a P2P product, I suspect that is not the primary reason for the acquisition.

To me, the bottomline is that the need for a cost efficient, alternative payment network (closed or open) is obvious. While, Amex has made its move, its not clear how the other card networks such as Discover, Visa and Mastercard will react. Both Visa and Mastercard have been experimenting with P2P payments and have been trying to extend the usage of the card networks. But alternative payments for merchants is a different case altogether and could likely cannibalize some of the existing card transactions.

Is PFM the Future of Online Banking?

Geezeo, one of the leading free PFM providers to consumers has started offering its products to banks and credit unions. Their recent pitch however goes above and beyond simply convincing financial institutions to use their PFM product.Their pitch is that the financial dashboard should be the center piece of the online banking platform.

"There's a strong demand in the market for a next-gen online banking platform that has integrated personal finance management," Peter Glyman, a Geezeo co-founder, said in an interview. "At more and more clients that we talk to, people want that Geezeo dashboard … to be front and center, not secondary to the online banking experience.", according to this article.



While, not everyone is convinced about the strategy, they have surely found a way to differentiate themselves in the marketplace as the "next generation online banking platform." This will surely be debated over the next few years. In a lot of ways, it is not very different from Intuit's Financeworks product, which they are distributing through Digital Insight to their online banking customers.

I think there are a couple of challenges that Geezeo and other aspirants will need to think about:

1. Clearly, they will need to figure out a way to work seamlessly with other online banking applications such as online bill pay, bank-to-bank transfers etc. They already seem to be doing that, when they announced a relationship with iPay Technologies for integrating their online bill pay application.

2. More importantly, if they really want to take on online banking platform providers, they would need to figure out a way to monetize their offering and help banks identify additional revenue streams.

I do not see banks transitioning to a new online banking platform if the business case is not strong enough and is simply built on "consumer stickiness and loyalty."

Online Remittance - Banks Versus Non-banks

Wells Fargo has been offering a remittance service for some of the most common money corridors such as Mexico, Guatemala, Vietnam, China and India for a long time. The bank recently expanded its ExpressSend remittance service to the Internet, hopes the offering will combine easy authentication with additional customer retention strategies, such as connecting with expanding demographic groups of new arrivals in the U.S., increasing self service etc. The bank charges between $5 to $15 for these remittances.



It is surprising that Citibank and WellsFargo are really the only big banks that offer such remittance service from their checking or savings account.Among bank competitors, Wells is taking on Citigroup, which offers a mix of global transfers to Citi accounts outside the U.S., inter-institution and online transfers for fees ranging from $8 to $30.

The authentication and execution through bank offerings is easier than online remittance payments with nonbanks; Wells payments requiring navigation through three "screens" on the site and completed in a few minutes.

Interestingly, Western Union, the largest player in the remittance space has slowly started offering its service in partnership with banks. There is a growing recognition among banks can and need to participate in this lucrative business. Western Union has signed online remittance agreements with North American banks including Scotiabank and Fifth Third.

I see this as a growing trend with more banks leveraging their existing checking account relationships to expand in both domestic and cross-border remittance business in the US, especially since US is the largest originator of remittance payments.

Starbucks Tests Mobile Payment

Starbucks Corp.,is currently testing a bar-code payments system developed by mFoundry in 16 Seattle and silicon valley stores. The mFoundry system displays a unique image on the screens of Apple Inc.'s iPhones and iPod Touch devices. The images function like standard bar codes. They can be scanned with the optical checkout scanners in use at many retail stores. The software also allows users to reload their cards or lock them with a passcode.



Starbucks is the first company in the U.S. to have a dedicated app for a payments card. The mFoundry technology works with optical bar-code readers that, unlike laser scanners used for conventional bar codes, take a picture of the blocky code they are attempting to read.

I am not sure whether this technology will really take off, once the wow factor and the novelty wears of. Especially if it requires retail check outs to replace their existing scanners with the ones that can read bar codes off a cell phone screen.

Google to Enter Lead Generation Business?

According to this article in the American Banker, "Web search bloggers have been buzzing for weeks about Google's potential entry into loan lead aggregation, a move that could allow financial institutions to combine Web advertising, online branding and customer acquisition, as well as prompt a pricing war between the major players that could drive lead generation costs down."

Loans could only the beginning. Given Google's dominance and its relationship with most online advertisers, this will provide the ideal platform for the company to expand into other financial products such as checking, savings, CD accounts as well as other services such as brokerage etc. The players likely to be threatened most are aggregators such as Lending Tree, Bankrate.com etc.

This seems to be in-line with Google's strategy of diversifying its revenue beyond search. If you look at avenues for lead generation on the Internet, most advertisers prefer Adwords, display advertising (such as online banners etc) and rate tables such as bankrate.com. Google has already made its intentions clear to compete with yahoo in online display ads and this seems to be a continuaiton of the same strategy.

In a lot of ways, I think this will help streamline and hence optimize the online advertising dollars for banks. I think this will also rationalize the pricing for pay per click and pay per lead models because for the first time the advertisers will be able to buy and compare results for the different strategies very easily.

Intuit's Acquisition of Mint.com and Impact on PFM Landscape

Intuit's $170 million acquisition of Mint.com, an online consumer finance management tool, cemented Intuit's transition from a company built around software to one built around financial data.The idea is that Mountain View, Calif.-based Intuit will offer similar services for business finance functions as Mint does for the consumer market.

A lot has been written about the lofty valuation that Mint got for the acquisition. I am equally skeptical about the rationale. If the acquisition is primairly to get access to Mint's million plus consumer base, I just dont see a path to monetizing it.

If indeed, it was to get access to Mint's technology built on top of account aggregation, it becomes even more difficult to justify the valuation. "They developed algorithms that are patent pending that take the data that customers input and look for ways to help that consumer--or potentially that small business--save more money," said Intuit Chief Executive Brad Smith at an investor conference this week.

High or low, the valuation debate will continue for a while and we will not know the answer for a few years. But I suspect, its great news for other PFM providers out there - geezeo, wesabe, pageonce etc.

The acquisition will create an urgency for other financial technology providers such as Fiserv, Fidelity etc. to develop or acquire one of these PFM providers. And if this deal is any indicator, we will see a few more acquisitions at rich valuations in the coming month.

iPhone Gives a Boost to Mobile Banking - Enables Innovative Applications

The popularity of iPhone and its applications has given a major boost to mobile banking. We continue to see a lot of innovation in the space and they are driving consumer adoption.

Take the example of USAA, where the number of consumers using some kind of mobile banking reached 1 million. This is out of a total base of about 7million consumers. That's an amazing adoption rate. USAA recently launched an iPhone application that allows consumers to photograph both sides of the check with the phone’s camera and email it to the bank for check deposit. Customers will not have to mail the check to the bank later; the deposit will be handled entirely electronically, and the bank suggests voiding the check and filing or discarding it.

Three years ago, the bank introduced the option of depositing a check from home using a scanner. That laid the groundwork for the phone deposit feature, which USAA plans to offer on other phones this year.

Take a look at the demo:




A study released recently by comScore,found that more than 15 million people in the United States used mobile banking each month, a number that is expected to grow as networks become faster and more people migrate to smartphones. While only 3 percent of the mobile banking users use an iPhone application, the device is definitely playing a key role in enabling more sophisticated, action oriented applications unlike the first generation of applicaitons which were primarily information oriented- such as checking account balances, getting alerts for transactions, finding the nearest ATM etc.