The critical difference is that in China, the apps effectively are the banks, whereas in the US, regulatory capture ensures that the banks stay the banks and it's the app's problem to figure out how to interface with them.
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.
The critical difference is that in China, the apps effectively are the banks, whereas in the US, regulatory capture ensures that the banks stay the banks and it's the app's problem to figure out how to interface with them.
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.
>They're scared because these apps have successfully vertically integrated to become banks.
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.
It makes sense. We're seeing more and more "middle men" being removed from the economy (travel agents, publishers, broadcasters, retailers); banks are about as pure "middle men" as you can imagine. Whether this is good or bad isn't as relevant as whether or not it's inevitable and, long term, I think it is.
"The critical difference is that in China, the apps effectively are the banks, whereas in the US, regulatory capture ensures that the banks stay the banks and it's the app's problem to figure out how to interface with them."
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".
I'm not sure about the US, but in Canada, these companies would not be allowed to accept deposits or facilitate withdrawals; they could never "become banks". Our banking act and recent revisions are in place to protect a foreign entity from holding Canadian citizen's money hostage and shielding them from exterior economic impact (We fared very well in 2008 because of these regulations!).
The most they could do is be a fancy wrapper around the bank's own software.
as i understand it second-hand, you can effectively no longer get a federal charter to be a bank if that’s not your sole purpose, because of the high regulatory burden that comes with it.
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.
Anecdotally, I've only seen a few people using apple pay in the UK. Everyone now has contactless card (which you just tap on the machine to pay almost instantly), which as very popular.
A lot of places seem to support apple pay, but it's much less convenient than contactless (obviously some people disagree).
I think you've nailed the way Richard Fairbanks (CEO of Capital One) thinks with this part:
>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.
>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.
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.
From India here. Same can be said for India. I do my all banking transactions from my phone. Also there are couple of banks who are only app based like DBS. I rarely visit bank.
The banks have been pushing for a cashless society for awhile now.
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.
>The banks have been pushing for a cashless society for awhile now.
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.
Regulation in the US makes it harder for this to happen but 3 stepping stones will let the tide turn and Amazon is very close to crossing them.
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.
$2 million in reserves seem like peanuts, any serious attempt to enter this business would imply investing enough money that mere $2 million is just a reasonable cost of doing business. Paypal needed $200m of venture capital to get started, a $2m requirement isn't prohibitive.
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.
Even the first line of illustration is kind of misleading - "Paycheck is deposited into employee's bank account"; there's no such thing as a paycheck in most places worldwide, no checks get involved. The employers pay out the salary with free or cheap bank-to-bank payments, and have done it long enough that the term 'check' has no colloquial relation to your salary.
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.
I believe “paycheck” is now understood as a catch-all term for the periodic payment of wages or salary. It doesn’t have to mean a literal check - paychecks can be direct-deposited too, in which case they go through precisely the bank-to-bank transfer that you mention.
This has been like this for at least 2 years over there now. This is facebook/whatsapp best's and only strategy to stop living off consumer data and start living off an actual service industry. Very poor management decision from my perspective, perhaps they had trouble gathering political support.
> stop living off consumer data and start living off an actual service industry.
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.
Not to be overly pessimistic but this sentiment seems to be one of the the default themes at the moment. Fear of not getting a cut whether you offer value in that space or not.
I applied to YC to bring this idea to the US (rejected). Credit cards are our primary form of digital money and their fees are excessive.
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.
> Credit cards are our primary form of digital money and their fees are excessive. The basic design was ACH money into the wallet, transfer money between balances for ultra low cost (1%), ACH money out of the wallet.
2% (credit card fee) is "excessive", but 1% is "ultra (!) low cost"?
So its more expensive than debit cards (0.05% + 21c) to the merchants, and has no reward incentive for the consumer (1-1.5% back in cash or points is typical). Who was it supposed to appeal to?
The claim is that the fees primarily cover fraud and fund various consumer protections. It would be interesting to know how much of the 3% that actually is.
there are a couple important things to consider here
- 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.
They will reimburse you for fraud, after fraud already happens. It would be much better if they worked proactively to prevent fraud. Then they'd be offering a service for a fee, rather than, essentially, selling insurance.
Is there any evidence these chat based payment apps (venmo, apple pay, facebook messenger, snapchat...?) are replacing credit card transactions in the US? They seem to replace person to person cash transactions instead.
Should Apple Pay be on that list? AFAIK, it's not possible to pay someone directly Apple Pay to Apple Pay. It's more like the standard stand-in for a credit card.
Don't get me wrong, I'd love for Apple Pay to be that convenient, but it's not there yet.
Venmo takes a loss just to get people into the PayPal ecosystem. The other P2P options are just there in hopes they take off. My understanding of Apple pay was that it's just a pass through for credit card transactions.
Those P2P apps need to branch into physical retail.
All the payment stuff aside, how does money get into the Alipay/Wechat ecosystem? How do I add money to the account?
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?
You sign up to the Alipay/Wepay services using a bank card. Money is transferred from the card to the payment account using the transfer credit interface in the app.
Its interesting how they didn't mention Paypal as a wannabe Alipay tech company, last time I used Paypal, its basically functioned as an alternate bank account that just doesn't accrue interest whenever I use it to buy stuff on the internet or sell stuff. I can also see the similarities between the UI of my actual online bank account and Paypal account. Users (like me) will also really appreciate if they took on more banking stuff because I already have cash in the account. I think Stripe is similar in that aspect too.
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.
>Western bankers and credit-card executives who travel to China keep returning with the same anxiety: Payments can happen cheaply and easily without them.
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 anxiety probably stems from the scale of wechat pay; you can pay basically everywhere with it now. Even in places that do not officially accept it, the store clerk will usually just accept on his private phone and put money in the till for you.
In China you can spend Alipay/WeChat at offline as well as online merchants. And not just larger merchants but also at micro-businesses like mobile food stalls and hole in the wall eateries. Because both the equipment and fees for the merchant are much cheaper than those required for traditional credit/debit card processing.
Two different products tbh, we all throw it into (retail) 'banking' but, payment processing and savings/investments are different products that needn't exist under the same umbrella.
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.
If money has to flow in the economy through limited hubs then hubs automatically grow rich.
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.
I think the fear is that without this "license", you would have a bunch of "banks" that collect customers and then exit scheme to the Southeast Asia similar to the frequent ICO scams you see with cryptocurrencies
I don’t know why our society hasn’t fully realized that everything is 3% more expensive specifically because of these fees. Europe at least has far lower upper limits on these fees. I hope someone is able to replace the banks here one day.
"I don't know why our society hasn't realized that everything is X% more expensive specifically because of these [things that are required to pay for the service you're getting]"
Personally I avoid, and eventually forget, places that don't take credit cards. Also, dealing with huge piles of cash is a huge pain. As a business owner, I'd go cashless if I could just to avoid the overhead of dealing with trips to the bank, getting coins, etc.
I have noticed that Bloomberg won't wall off their longform or graphic-design articles, I'm thinking because they're from Businessweek and not regular news you could get on the Bloomberg Terminal.
chatmasta|7 years ago
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.
stcredzero|7 years ago
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.
fauigerzigerk|7 years ago
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.
commandlinefan|7 years ago
s73v3r_|7 years ago
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".
jbob2000|7 years ago
The most they could do is be a fancy wrapper around the bank's own software.
clairity|7 years ago
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.
nicoburns|7 years ago
A lot of places seem to support apple pay, but it's much less convenient than contactless (obviously some people disagree).
joncrane|7 years ago
>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.
forgottenpass|7 years ago
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.
amrx101|7 years ago
kevin_b_er|7 years ago
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.
mixmastamyk|7 years ago
s_dev|7 years ago
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.
dzink|7 years ago
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.
PeterisP|7 years ago
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.
PeterisP|7 years ago
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.
nneonneo|7 years ago
bas|7 years ago
ams6110|7 years ago
hclalpha|7 years ago
chii|7 years ago
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.
awat|7 years ago
TACIXAT|7 years ago
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.
jboles|7 years ago
2% (credit card fee) is "excessive", but 1% is "ultra (!) low cost"?
ac29|7 years ago
pishpash|7 years ago
gamblor956|7 years ago
[deleted]
solotronics|7 years ago
- 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.
pishpash|7 years ago
drb91|7 years ago
drivingmenuts|7 years ago
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
TACIXAT|7 years ago
Those P2P apps need to branch into physical retail.
sevensor|7 years ago
MrsPeaches|7 years ago
mwexler|7 years ago
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?
cmplxconjugate|7 years ago
intrasight|7 years ago
forkLding|7 years ago
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.
steve19|7 years ago
gruez|7 years ago
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.
tluyben2|7 years ago
em500|7 years ago
the_watcher|7 years ago
IkmoIkmo|7 years ago
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.
gruez|7 years ago
ISL|7 years ago
xstartup|7 years ago
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?
frockington|7 years ago
azinman2|7 years ago
khuey|7 years ago
kerbalspacepro|7 years ago
amorphid|7 years ago
Fjolsvith|7 years ago
https://stripe.com/docs/sources/alipay
ksec|7 years ago
lainga|7 years ago