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Why is it so Difficult to Transfer Money? Swiftcoin May be the Answer to this Problem

Posted on Wednesday, 22nd August 2012 @ 11:38 PM by Text Size A | A | A

Why It’s So Hard to Transfer Cash to Your Friends


A few weeks ago, at a dinner with a dozen or so friends, the check arrived and the usual payment scrum ensued, with cash being passed back and forth across the table.

Except for one person, who whipped out the little plastic device made by Square, plugged it into her phone and offered to swipe the credit card of anyone who wanted to give her exact change for their portion of the bill.

Square’s service, which makes anyone with a smartphone into someone who can accept credit or debit cards, does not come free. You must pay it 2.75 percent of the transaction for the privilege of accepting plastic, though the person who swipes the card pays nothing.

But the fact that people — at least 100,000 so far, according to the company — are willing to give up $2.75 on every $100 to avoid this particular hassle is a sure sign that people desperately want an easy way to make electronic payments to other individuals.

And at long last, banks have finally taken notice. While they have given companies like PayPal a decadelong head start, nearly all of the big institutions offer some sort of person-to-person service, and three of the biggest — Bank of America, Chase and Wells Fargo — have joined up to create their own back-end system for processing the money.

“Person-to-person is the last use case that still tends to be paper,” said John Feldman, the general manager of that tri-bank joint venture, called clearXchange.

And the “use cases,” in banker speak, go way beyond reimbursing people for your share of dinner. Nearly two-thirds of Americans give money both for birthday and holiday presents at least once each year, according to a 2010 study by Aite Group, a research and advisory firm. Another quarter handed off financial support, often to a relative. All told, this adds up to 11 billion transactions and $865 billion annually.

You can see why banks want a piece of that action. And sure enough, an all-out war is unfolding behind the scenes to make sure you will still use your bank and not some app or other third-party service from the likes of Google or Facebook or Apple to make those payments five or 10 years from now.

The banks would also like you to pay for it, each and every time, as recipients of money now do with the Square device. But what would actually be worth paying for? To understand the answer to that question, let’s start with a bit of history.

PayPal emerged in 1999 as a way for people to transfer money from one Palm Pilot to another. That was a service ahead of its time, and eventually PayPal became a payments platform for eBay auctioneers that fueled the company’s growth.

The PayPal person-to-person payment service, however, survived and did eventually move to the Web. Javelin Strategy and Research counted at least 15 start-ups and bank services that tried to ape it in the early years of the last decade. Most of them went out of business after finding few users or experiencing fraud. I still chuckle at the memory of the marauding gang of frequent-flier mile collectors who exploited Citi’s now defunct c2it service by using credit cards to “pay” spouses and others, thereby piling up miles for themselves.

In Canada and Europe, which have far fewer financial institutions that need to agree on standards, person-to-person payment services emerged with little hassle and have been up and running for several years. People who move to the United States and are told to write a check are often baffled by the backward state of affairs on these shores.

United States banks eventually (albeit reluctantly) did make it easier for people to move money electronically from accounts at the bank to savings or brokerage accounts with competitors. “People came to see the benefit of me-to-me transfers,” said Emmett Higdon, who worked at Citi on its c2it project and is the founder of the consulting firm Prizm Strategy. “And they realized that it would be great to send money the same way to somebody else.”

A few years ago, two companies called Fiserv and CashEdge started offering banks the ability to help customers do that. Fiserv acquired CashEdge last year, and today they serve about 1,400 banks and credit unions, including Citi, BBVA Compass and Regions Bank. You may be familiar with the two companies’ brand names for their services: ZashPay and Popmoney.

In those services, you pay someone by logging in to a bank’s site or your mobile app and entering an amount and an e-mail address, cellphone number or bank account information for the recipient. Then, the recipient gets a text or e-mail message prompting him or her to enter their bank account information at a Web site. The money lands in the bank account a few days later.

Even PayPal, alternately an object of scorn and fear by banks in its early days, has gotten into the bank partnership game and is working with a couple of hundred of them, including USAA, to offer a similar service. With its offering, recipients end up with money in a PayPal account, and they can transfer it to their checking account if they so choose. “We definitely believe that people are going to do this from where they are most comfortable and that is likely going to be where they have their direct-deposit relationship,” said Dan Schatt, general manager of financial innovations at PayPal.

The big banks don’t fear PayPal today as much as they do iTunes, Google or Facebook. Given the huge numbers of younger users of those services, it is possible that one of them may try to build a platform for easy person-to-person payments. That may be the biggest reason clearXchange, the joint venture by Bank of America, Chase and Wells Fargo, emerged.

Those three companies claim to have about half of all online and mobile banking customers, so they can certainly throw their weight around. The clearXchange offering hasn’t amounted to much so far, however, given that users in the test markets can’t even send money to any banks outside the joint venture yet, something that ING Direct customers have been able to do for more than five years. (In fairness, customers of those three banks do have other bank-offered services for moving money to friends and family, including Chase’s QuickPay service, which it advertised during the Super Bowl.)

All of these interoperability issues aside, though, the person-to-person payment services still have ease-of-use challenges.  Recipients may not know their bank account information offhand when they’re out for dinner or at work, or they may be wary of entering their bank information into an unfamiliar site.

Also, people who don’t already have a PayPal account may be annoyed if they’re told to sign up for one to collect on a birthday present or the money a friend owes them, or they may just prefer a check rather than deal with remembering to log on to PayPal to move the money over to their checking account.

“The consumer still has to think about it,” said Mr. Higdon, the former Citi banker. “They should get a text message and should just have to say yes or no, and then the money is there. Until we reach that point, we’re not going to see widespread consumer adoption.”

One thing that might get consumers on board faster is if the money moved instantly from one bank account to another at a different bank. But because these payments move along the same electronic railroad tracks that checks do, it can still take a couple of days. That is profoundly irritating to people who think they’re handing money across the table with a cellphone only to find that the money is actually caught up in a decades-old intrabank system that desperately needs updating.

The big hope here is that banks will find a way to solve this, even if means effectively extending people credit and taking on risk to deliver instant money transfers between individuals. Once they do this, more of them can try charging for the service with a straight face — a per-transaction fee that they won’t have to share with Visa and MasterCard the same way banks do with debit and credit card transactions.

“They all want to know ‘Can we charge, and if so, what will the market bear?’ ” said Beth Robertson, director of dynamic payments at Javelin.

Plenty of consumers seem ready to pay at least 2 or 3 percent for the privilege, as evidenced by the scene I witnessed at the restaurant. The question is, how many more years will it take for banks to make person-to-person, account-to-account transfers truly instantaneous?

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