Payments Views

Bank of America

It’s About Time: clearXchange and Bank P2P

I’ve been inundated with messages and calls from friends in the industry – including many Payments Boot Camp alumni – asking for an opinion on the significance of clearXchange, the P2P service announced recently by a collaboration of Wells Fargo, BofA, and JPMorgan Chase.

I spoke on Friday with Mike Kennedy, head of Wells Fargo’s Enterprise Payments Strategy group, and the chairman of the clearXchange board.

So What Is clearXchange?

Using what is clearly a well-practiced metaphor, Kennedy said that clearXchange would be the “air traffic controller” for the banks.  One bank’s customer will use online or mobile banking to send a payment to another bank’s customer – and they will only need to know the recipient’s email address or mobile phone number. The clearXchange service will receive the instruction from the sending bank and look up the phone number or email address in its database.

It then does one of two things:  if the phone number or email address is already registered with clearXchange, it facilitates a payment transaction between the two banks, to transfer funds from the sender’s account to the receiver’s.  If the phone number of email address is not yet registered, the recipient gets a message, essentially saying “you’ve got money”, and instructing them on how to arrange for a deposit of the funds into their account.

The exact transaction flows and mechanics are not yet disclosed, but there are two important points.  One is that the financial transaction is between the two banks – clearXchange is not a financial participant.  The other is that it is an ACH transaction – the system which virtually all U.S. depository financial institutions participate in.  Given clearXchange’s stated intention of expanding the service to include other financial institutions, this seems to be a shrewd move.

My overall reaction?  “It’s about time”.

Banks in the U.S. have a powerful utility infrastructure in the ACH system – which they own and control.  Up until now, they have allowed third parties to use the system to effect P2P transactions – either as service providers to the banks themselves (Fiserv’s ZashPay, CashEdge’s Popmoney) or as competitors to the banks (PayPal).  All of these other services have used a model I think of as “dual ACH”:  an ACH debit transaction by which the service provider “pulls” money from the sender’s account, accompanied by an ACH credit transaction which “pushes” money to the receiver’s account. The service provider in the middle manages the risks (primarily of NSF in the sender’s account, but also fraud).  This dual structure is clumsy in comparison to the straightforward, “end to end” transaction which will occur with clearXchange.  (Note: some of these services also allow other funding sources, such as credit or debit cards.)

Why has there been so much delay in developing something like clearXchange?  After all, the Canadian banks introduced this more than five years ago (with Interac Online), and the ACH capability has been there basically forever.  I think the answer is a combination of previous lack of motivation (domestic P2P has a notorious “no business case” problem; neither senders nor receivers want to pay a transaction fee) combined by a reluctance among the large banks to cooperate with their competitors.  What’s changed?  I’d guess it is a newly awakened fear of nonbank competitors –  PayPal, keep in mind, registered more than 1 million downloads of their new iPhone App in the first three weeks after its release in April 2010.  The ease with which mobile consumers can use these apps was no doubt a contributing factor as well.

My interest in talking to Kennedy was twofold.  First, I wanted to understand the role of the intermediary company itself.  As Kennedy explained, it’s important to note that clearXchange is not a participant in the financial flow – that process is directly between the banks – thus the air-traffic-controller metaphor.  I asked about interbank compensation (interchange, anyone?).  Kennedy said that clearXchange does not, of course, specify the charges that either bank may (or may not) assess their customers.  Each bank will pay clearXchange a transaction fee, but clearXchange will not specify any bank-to-bank, interchange-like compensation in its rules.  “This is a different model” than a card network, Kennedy said.  However, like a card network, clearXchange will have rules that participating banks must comply with. I was curious about the situation in which an unregistered recipient of funds doesn’t respond to the “you’ve got money” message for a week or two.  Are the funds still secured from the sender’s account, and if so, how?  “We’re not disclosing that at this point”, Kennedy said.

What’s Next?

My second interest was in how the service might be extended in the future.  I’m particularly interested in the use of a service like this for payments to micro-businesses.  Both CashEdge and Fiserv are promoting their services as a good way to pay the nanny/gardener/flea market seller/Craigslist seller.  With no network interchange built into any of these services, it seems unlikely that the recipient of funds in these situations would pay anything like a merchant discount fee:  it is far more likely that the recipient would pay nothing, or perhaps a simple deposit transaction fee to their bank.  This positions all of these services as directly competitive with the micro-merchant card acceptance services such as Square.

Think about it:  if you are a hot dog vendor on a New York City street corner, would you rather get a clearXchange transaction for free, or a card swipe for 2.75%?  Kennedy was clear in saying that the banks participating in clearXchange were firmly focused on the P2P use case to start with.   I got the same answer when I asked about connecting a sender in a clearXchange bank to a recipient participating in a P2P scheme in another country.

So I didn’t bother to ask the biggest question.  If this service really gets rolling, why can’t I use it at the point of sale to make payment to a merchant?  Especially if I’m a habitual debit card user – that is, someone who wants to pay out of “ready funds”?  That possibility, by the way, is particularly intriguing if the Fed’s “same day ACH” program takes off and gets decent adoption by the banks.

Bankers Taking Action

There are also interesting similar developments around the world.  Glenbrook partner Scott Loftesness noted the parallels to India, where the Reserve Bank of India is taking aggressive steps to ensure that banks stay central to payments:  they are supporting the bank-provided P2P Interbank Mobile Payment Service.  In the U.K., bankers have collaborated on the development of the bank-provided “Faster Payments” service, used primarily for bill payment and purchases.

As a former banker, it does my heart good to see banks stepping up the plate to take control and ownership of these types of payments.  This has been a big week for news in the payments industry – with the Google Wallet making a big, loud splash.  It’s nice to see banks using the power of their collaborative action to demonstrate that innovation can come from the bank side of the payments world as well.