Exclusive interview with Nabil Kabbani, founding partner of Kabbani Associates

Kabbani Associates started with the mission of helping companies leverage emerging payment technologies on a global basis. Our main focus is to cause remittance companies to evolve their profitability by integrating new developments in the payments space and increasing the breadth and depth of their relationship with their customers. We have also helped emerging companies define their go-to-market strategy and find the right partners to gain real-world traction.Nabil Kabbani, the founding partner of Kabbani Associates, has spend 17 years in the cards, processing, banking and money transfer

P2P electronic payment transfers are expected to experience accelerated growth over the next years, according to research. In your opinion, what are the main factors that will drive the growth of this segment?

There are several factors that will accelerate the development of P2P transfers:

• The increasing penetration of communication technology through connected devices: mobile phones, PCs, POS devices, and others.
• The process of mass familiarization spawned by the success of early pioneers (Kenya, Philippines) and aided by the viral component of P2P electronic payments
• The generational shift that is occurring: Recent entrants to the work force have grown up ‘umbilically connected’ to their cellphones and constantly seek new uses for them, including payments. Furthermore, research shows that 62% of people between 18 & 34 old are interested in using mobile phones for payments, and that is a very wide age band.
• The investment in infrastructure that is coming from both large initiatives driven by financial institutions such as Visa/MasterCard (Isis in the US) , BICS, Western Union, Moneygram,… as well as new ventures that are working hard at their go-to-market strategy: Mozido, Yellow Pepper, etc. and cash-in networks such as Greendot and others.
• The maturity of some technologies and security protocols. Be it NFC that is now being integrated in POS terminals and cell phones, SIM-based applications, secure smart phones apps, etc.
  vi. The shifts occurring in existing payment methods: Example, in the US, we expect a backlash on new debit fees imposed by banks following the Frank-Dodd act. BofA just introduced a $5 monthly fee, right after Wells Fargo and Chase started charging $3 in certain markets. Some may feel that $60 a year for the privilege of using a bank’s product is excessive. Combined with the negative sentiment against banks after the bailout, this may cause consumers to seek alternative payment methods. Such method are more than likely to support a P2P protocol.
• The efforts on the retail side: We cannot expect a P2P method to be successful on a mass market level, if it does not also allow you to pay at your favorite store or on your favorite website. Indeed, a large part of the success of MPesa in Kenya is due to the fact that they have signed-up close to 30,000 store to accept payment and cash-in/cash-out the wallets. NFC is making slow but steady in-roads in the US. Such a factor will surely differentiate the winning P2P solutions.

The convergence of these factors is getting us to a tipping point, where we will see increased activity on the part of the service providers as well as increased acceptance from users.

Online payments continue to be dominated by credit cards, but as the e-commerce market and the volume of online sales grow, merchants should broaden the array of payment options they offer. In your opinion, what are the emerging alternative methods of payment that would best meet the needs of consumers and merchants and why?

With the globalization of internet purchases, e-merchants are quickly realizing the limited reach of international cards as a payment method. E-commerce is increasingly global: Amazon international sales in Q2 2011 were $4.51bn, or 45% of total sales and are growing at 51%, however penetration of international payment cards is still limited. While the average American holds 2.5 cards, this number falls to 0.5 in countries like Germany, Italy, France and the Netherlands, goes down to 0.2 in Mexico and it’s even lower in other developing economies. That’s 4 out of 5 people, who cannot pay with a card. It is true that card usage globally is increasing, but still, not everyone around the world can shop on-line using cards.

Recognizing such needs, some companies proposing alternative payment methods, such as bank direct debit or e-vouchers, are spurting up in different places, in-spite of the complicated and expensive nature of such methods (need to go to a store, difficulty in validating account numbers upon capture, no clear refund/chargeback methods, and fees that are much higher than card merchant discount fees). Let’s not forget paypal, who built a significant part of their international business on settlement of international e-commerce.I am actually moderating a panel at the IMTC conference (Oct. 11-14 in Miami), on this very same topic of alternative payments.

So in essence, something else is needed. When one looks at the penetration of mobile phones (5bn vs. 2bn bank account globally) the case for mobile payments is compelling.

The appeal of payment by mobile, as an alternative to international credit cards, is so strong that there are companies now who are prospering by allowing you to bill a purchase to your phone account. Boku and Zong are notorious examples, but so are Allopass, Paymentone, billtophone, and many more. This payment method is popular for digital content and game vendors, mainly because they target teenagers. One of the shortcomings is that mobile billing carries fees to the merchants ranging from 15% up to 50% of the purchase amount, making them inadequate for tangible goods, where the merchant margins are much smaller. Another shortcoming is that there are none of the well-honed refund/chargeback procedures that the card companies have in place, and there is no international standard for processing or integration. Rather, merchants need to work with aggregators/payment processors who charge an additional fee. Therefore I expect this method of payment to remain confined to digital goods.

With these trends in mind, I fully expect a secure, standardized mobile payment method to encounter good success. The ubiquity of mobile, the increased security, enabled by physical and virtual authentication, the convenience, the standardization due to the commonality of cell phones types and protocols globally, and the low-cost of information transfer between phones support and facilitate the proliferation of such a payment method. Not to mention the increased popularity of shopping directly from mobile devices. 15MM e-merchants today have mobile optimized sites, compared to 3MM 2 years ago.

Now, if a phone can generate a payment, and rides on a network that is less costly and more secure to the merchant, it makes a compelling case for said merchant to accept this payment. All that is needed to empower the merchant is a communication/authentication protocol directly or through their PSP and this can be achieved through the cloud with 2 factor authentication protocols. This case can even be extended to brick-and-mortar merchants through a proximity technology such as NFC rendering the application even more ubiquitous.
 

Some voices trumpet the arrival of an ideal world where there would be no need for cash and cheques for payments. Debit and credit card use varies between countries, while mobile payments are thriving in countries that have previously lagged behind the rest of the world in terms of payments innovation. In this context, retail banks have to adapt, shift focus and evolve. In your opinion, do banks have either the appetite for risk or the budgets to innovate?

Let’s start by debunking a myth, the world without cash, cards or checks is not likely anytime soon. Cash was predicted to all but disappear when checks came, then cards, yet it still it accounts for more than 50% of the world’s transactions.

Banks are not particularly strong innovators. While they do possess large budgets, they do not spend them on R&D. The average bank will spend 1% of their sales on R&D, while IT companies will average 12-13% according to a study conducted by the Financial Times. Large banks are not very entrepreneurial, they tend to wait for a promising technology to be developed, and then participate in, or acquire, said technology. This prudent approach saves them the costly mistake of mass marketing an unproven model or technology. Hence the proliferation of banking technology vendors, processors and other providers. Such entrepreneurial companies are very present in mobile ventures.

On another hand, banks already have a role in the any P2P or mobile eco-system: They are the backbone of settlement methods for all payments between eco-system members, including prepaid debit marketed by non-banks or cash money transfer methods prevalent in the remittance market. In addition, in some countries, local regulations mandate that banks run payments methods. So banks will have a role in-spite of themselves in the mobile eco-system.

With these premices established, the question remains whether banks will take a pro-active role in defining technology, marketing and managing innovative payment programs.

Banks individually have rarely been able to create a global technology standard because their market is so compartmentalized and competitive. When it comes to exchanges of messages and value, banks had to resort to the creation of bank associations to impose any sort of standard or technology. SWIFT, MasterCard and Visa are the most notorious embodiments of this phenomenon. SWIFT established the messaging standard that powers international wire transfers between banks while the card companies created the payments card system.

Another example of failing to innovate lies in the remittance model. Remittance companies of today, such as Western Union and Moneygram, prospered by creating a global system of P2P remittance, as customers grew frustrated with the lack of transparency and high fees associated with bank transfers. Banks never saw the need to create such a system themselves, and did not even seek to replicate it as it gained momentum. They were content with joining the system as Agents of the remittance companies.

Therefore, if past behavior is any indication of the future, I don’t expect any individual bank to take a leading role in the innovation part, nor do I expect a bank to take the lead on a global standard. However, they may acquire, adopt and market innovations more or less aggressively depending on the case. So they will have a prominent role in the ecosystem, just not that of an innovator.
 

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