Quick Thoughts – Implications of SnapCash for ACH and Person-to-Person (P2P) Payments

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With its announcement of Snapcash on Monday, Snapchat (with a $10bn valuation in its last funding in August[1]) enters the market for integration of social media and person-to-person (P2P) payments in competition with PayPal’s Venmo (which handled over $300mm in consumer payments in FQ12014 putting it on a par with the SBUX mobile app – see Chart); the back-end for Snapchat is provided by Square which expands the potential reach of its Square Cash product to the 100mm MAU’s of Snapchat. These direct-messaging services compete with bank P2P applications that use e-mail addresses or telephone numbers (through text-messaging) as tokens including PeopleMoney and PopMoney (white-labeled to banks from FIS and FISV respectively) and clearXchange (owned by BAC, JPM, WFC, and COF).

The Square Cash, and hence Snapchat, solution is distinctive because it uses the Visa and MasterCard networks while the other solutions use either: ON-US clearance (where the sender and receiver share the same bank); proprietary networks such as those run by FIS, FISV, clearXchange, and PayPal[2]; or the ACH network). The advantage for Square Cash is that it can promise next-day funds-availability whereas solutions that may need to use ACH often only promise funds within 3-5 days. The reason for the delay is that, while ACH is a next-day settlement system if a debit transaction is accepted by the receiving bank (“RDFI”), it can take 3 days for the originating bank (“ODFI”) to learn that the RDFI has returned, rather than accepted, a transaction (because, for example, the target account for the debit does not have funds available).  Zen Payroll provides a masterful explanation of the finicky return process that affects ~5% of ACH transactions.

SquareCash, however, can promise funds within 1-2 days because it uses the Visa or MasterCard networks rather than ACH and because the issuing bank in a Visa debit transaction (equivalent to the RDFI in an ACH debit) provides surety of payment at the time the transaction is authorized; as a result, the next-day settlement is not subject to a return. The challenge for SquareCash is that this faster settlement comes at a price: each debit transaction generates a cost of 30-35 cents (of which 25 cents is paid to the issuing bank as “interchange”) and , given neither Square Cash nor Snapchat are currently looking to recover the cost through a customer fee, the P2P offering is therefore a loss-leader. ACH involves a far lower fee of 1-2 cents paid by the ODFI.

The challenge for the banks is that their brands are being wrapped by app-providers whether Snapchat or Square in the case of P2P transactions or Apple Pay in the case of POS transactions. This is at a time when a strategic priority is to extend consumer engagement with bank-branded mobile apps beyond the initial use-cases of balance-checking and remote-deposit capture. As a result, the banks are looking to make the ACH-based solutions on which their P2P services are based (whether through clearXchange or white-labeled solutions from FIS and FISV) more competitive in terms of the timing of settled funds; the plans announced by NACHA this March to move ACH from next-day to same-day settlement would reduce the gap by one day and, combined with Secure Vault Payments which leverages the ACH network to offer real-time guarantee of good funds for participating banks, could make ACH-based solutions as fast as Visa-based solutions.

As discussed in our note of Monday “The Migration to Real-Time Payments in the US and Opportunity for ACIW”), we expect the NACHA plans to be ratified by year-end (in contrast to similar plans that were presented in 2012 and vetoed by large banks that November) catalyzing ACH-based solutions including from vendors such as ACIW, eFunds (acquired by FIS in June 2007) and Alaric (acquired by NCR in December 2003). While these will not provide issuing banks with the interchange revenue of a Visa-based solution, they will allow greater control of the bank brand and drive traffic to bank mobile apps. In addition, there is a potential revenue opportunity from customer fees with USB, for example, charging $3.50 for an instant payment, $0.75 for a next-day payment, and no fee for a standard payment within 3-5 business days[3]. The “instant” and “next-day” solutions require a bank to take settlement risk by irrevocably posting debits and credits to a customer account ahead of final inter-bank settlement although this risk will decline as ACH builds capabilities around same-day settlement and real-time funds verification through Secure Vault.

[1] http://online.wsj.com/articles/snapchat-fetches-10-billion-valuation-1409088794?tesla=y

[2] Of course, a customer’s PayPal account may ultimately be funded by a Visa or MasterCard account

[3] http://thefinancialbrand.com/43203/paypal-venmo-social-mobile-payments/

 

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