Chase Bank’s Jot App Shows the Future of Mobile Transaction Processing

image image I’ve been waiting for something like Chase Bank’s Jot (see note 1). It’s part of the "second wave" of mobile apps that demonstrate why mobile banking will soon be better than online banking.
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Mobile banking phase 1: 2008 through 2011
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Mobile’s first wave was all about porting the most-used online functions, balance inquiry and statement viewing, to a smaller screen. That was convenient for smartphone owners on the go, but it didn’t add much to the overall user experience. 

The test of whether you’ve nailed the mobile UX is if that even if you are within arm’s reach of your laptop, you still pick up the mobile to perform a function. Most mobile banking systems fail that test, i.e. you only use mobile banking when online access is inconvenient or insecure.
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Mobile banking phase 2: 2011+
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The second wave is much more interesting. Your mobile phone can do financial chores that simply cannot be accomplished online, for example:

  • Deposit a paper check via mobile camera (USAA, Chase, PayPal and many more)
  • Transfer money to your friend by "bumping" phones (PayPal, ING Direct)
  • Alert you to special merchant offers in your exact location that are redeemable simply by using your bankcard (BankOns)
  • Pay your bill automatically by scanning the billing statement (Mitek)
  • Upload paper receipts and append them to expense reports (Expensify)

And the latest addition to that list:

  • Receive feed of transactions and tag them with categories for future reference and reporting (Chase Jot)

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How Jot works
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Chase’s new app (announced 1 June 2011) may not be as cool as remotely depositing a check, but it’s much more useful for most cardholders. The iPhone and Android app, which is currently available only for the bank’s Ink business credit card, sends push notifications of each transaction (see inset) and enables users to (relatively) quickly append transactions with category information, i.e. "tag" transactions. 

image One key Jot feature, missing in most mobile banking services, is a running list of the transactions waiting to be tagged (see right).

That way, when the business owner has a few spare moments, they can quickly get caught up with their categorizing work. This ongoing attention will reduce the quarterly game of "what’s that transaction" played when finalizing the company books.

So not only does Jot save time, it potentially improves the quality of the accounting data, always a good thing for business management. 

The app also includes other business credit card management functions such as basic reports by tag, the ability to change employee credit limits, and info on outstanding balances and payment due dates.

While the functionality is still pretty basic (e.g., there is no way to add more than one tag to a transaction), there are only 60 days of transactions available, and login needs to be simplified, overall Jot is a winner. We are tagging it with an A-.

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Notes:
1. The Jot landing page is well done and includes a series of four short demo videos.
2. For OBR subscribers, see our previous Online Banking Reports on mobile banking and payments.

PayPal Revives X.com Domain for its Lab Site

Last century, serial entrepreneur Elon Musk launched what he expected to be a top-10 bank by now. And in true late-1990s dot-com fashion, it was simply called X.com. In retrospect, maybe not the best name for a bank, but it certainly was more memorable than First Security Bank of Whatever. The company soon merged with PayPal, dropped the single-letter name, and eventually took over the world of alt-bank payments.

For most of the past eight years, if you typed X.com into your browser, you simply ended up on the PayPal homepage. But recently, PayPal has opened a new area under the X.com URL called PayPal Labs. This is a place where competitors, developers, analysts, and anyone with too much time on their hands can see the latest new "beta" services under development at PayPal.

With just two services listed (see below), it's no Google Lab, but it shows that PayPal still has Silicon Valley DNA at its core, despite five years working within the shadow of the larger eBay brand.

My take: More financial institutions should open "lab sites" to demonstrate their commitment to innovation. The only one I remember was JPMorgan's LabMorgan, which was really was part VC, part incubator. But its URL only shows an error message these days, a shame. 

Update (10 Oct): A reader reminded me about Fidelity's lab site, fidelitylabs.com.

In the PayPal Lab

  1. PayPal Request Money for Facebook (see previous coverage here)
  2. MySpace Fundraising Badge

 

JPMorgan Chase Launches New Corporate Payments Vehicle

Last week, JPMorgan Chase & Co. launched ExacTrac, a new card-based corporate payments vehicle designed to be integrated into a company’s purchasing systems.

The product issues users a unique credit card number, complete with spending limits, for particular events. The system automatically reconciles the transactions connected to that event and includes that special account number on all bills and payments connected to it, and populated within company books.

Bryan Clancey, chief financial officer of Embryon Inc., has been using ExacTrac for a year to control spending on his pharmaceutical marketing firm’s conferences and roundtables. Clancey says he likes the system because it allows him to closely track his expenses—and because it’s free.

“I like it because I have no administration,” he says. “When that record comes in, it goes right into my system. We send out a request for a unique card, and when that transaction is passed back to us and the transaction has occurred, Morgan passes the same meeting ID back to me, so I can automatically load it into my system.” Clancey describes that system as a financial supply-chain logistics program that was developed in-house seven years ago. Using the product, he adds, meant writing a lot of customized security software to protect the interface with the bank.

Clancey also likes the JPMorgan Chase product because of its perks. “I get rebates (when using ExacTrac),” he says. “I pay face value on the bills, and get 100 to 145 basis points back on total annual value spent.” Embryon was one of ExacTrac’s beta sites; it’s been using it since last July. Another, unidentified company has been testing the product for about 18 months. The product which JPMorgan Chase issues under both Visa and MasterCard branding is part of its PaymentNet core payments processing system.

Clancey says he pays for thousands of meetings in restaurants every year, and to have a major credit card issuer like Morgan Chase forgo a lucrative revenue stream like that may sound unusual. But Frank Dombroski, a Morgan Chase vice president of commercial card solutions, says one of the reasons for launching ExacTrac was to reinforce Morgan Chase’s card business.  He also confirms the rebates.

Because it would be a poor CFO indeed who carried an interest-earning credit card balance, clients would typically use it only as a transaction account, meaning that Morgan Chase earns only between 55 and 100 basis points per transaction—not much more than the program’s administration costs.

“We do make money on it,” says Dombroski. “The margins are thin in this business, much more so than four or five years ago, but for us, it’s a numbers game and (allows for) efficiency of processing and automation.”

That may be true, says Christine Barry, a research director at Aite Group, but it’s hardly the only reason Morgan Chase chose to promote a card system like this: It’s mostly a matter of shifting priorities, and of meeting the competition wherever it happens to be.

“There’s been a lot more investment by banks, recently, on the corporate side, instead of the retail side of their business,” she says. Barry estimates that until now, about 60 percent of bank technology expenditures have been on the retail side of the bank.

“They’re shifting focus, and a lot of the new investments they’ve been making don’t necessarily result in cost savings for the bank, or even new revenues being generated,” she adds. “It’s been a big focus on providing more service and convenience to customers. It’s the customers that are getting the benefits, and not the banks, except on paper.” (Contact: Embryon Inc., Brian Clancey, 908-231-6000; JPMorgan Chase & Co., Frank Dombroski, 212-270-7013; Aite Group, Christine Barry, 917-546-9180)

Paper Checks Remain “Business as Usual”

BizchecksWhen the last paper check is dropped in the mail, it will be a business check. All signs point to that day being over the horizon.

Not that no efforts are afoot to squeeze business checks out of the payments system. At least a dozen companies around the world are trying to automate business payments with so-called order-to-pay software systems, including, in the U.S., Bottomline Technologies, Harbor Payments, and Xign Corp.. Various business payment card systems continue to emanate from the nation’s banks. And advocates of routing business payments through the automated clearinghouse have been working diligently at the task for years.

But checks remain stubbornly alive: According to the Federal Reserve's landmark 2004 Payments Study, total check volumes between 2000 and 2003 only declined from 41.9 billion items to 36.7 billion items. And according to the US Census Bureau's 2005 Statistical Abstract of the United States, consumer payments made by check between 2000 and 2003 only declined from 28.8 billion items to 26.8 items. The 10 billion item difference, says a Fed spokesman, can be considered business checks. This suggests some little progress in squeezing paper out of the system, but no reason to write checks’ obituary.

The most progress in eliminating paper checks is seemingly being made in online bill payment. According to the American Banker’s Association, less than half of all consumer bills—49 percent—were paid by check in 2005, compared with 72 percent in 2001. Since bills represent a large fraction of consumer checks written, this suggests an accellerating trend away from consumer checks,.

But if civilians seem to be edging away from checks, business is apparently sticking to the tried-and-true. This is actually counterintuitive, since businesses would seem to have a lot to gain by giving up paper checks, if only for efficiency’s sake, while civilians, who get free checking, have no such incentives.

As usual, things look different once you’re in the weeds. In this case, a superficial analysis ignores simple balance-of-power and treasury-management issues, not to mention the tyranny of sheer habit.

Aside from sheer convenience, consumers have little to gain from paying their bills online, but as indicated by the numbers, that matter alone–combined with minor carrots and sticks from billers and banks–seems to have turned the tide.

Businesses, on the other hand, not only have a lot more power in their financial relationships than a typical consumer, but also are loath, to say the least, to abandon a treasury-management game that businesses have been playing since prehistory: demand immediate payments (even prepayment), but don’t pay yourself until the sheriff is coming up the driveway; meanwhile, use the float for a hundred purposes.

The irony is that the vendors of order-to-pay software systems can make a very good argument that discarding those old-fashioned treasury-management techniques is good business. Companies using order-to-pay systems, they say, free up working capital from their balance sheets, and that what they lose in float, they more than gain from being able to pinpoint exactly how much money they have on hand.

Tom Glassanos, for instance, president and chief executive of Xign Corp., points out that 19 Fortune 500 companies use his firm’s order-to-pay products, including Charles Schwab & Co., MetLife, Pacific Gas & Electric, and The Williams Companies.

But even he will concede that not every company thinks order-to-pay is a good thing. "There are good reasons why this hasn’t happened yet and continues to go slow,” he says. “There’s a certain (business) population that would like to get on board, but can’t get remittances across. And there’s a lot of work involved in telling your suppliers that you’re going to pay them via ACH instead of by check.”

The result, says Glassanos, is that “Just to get it to work, they find out, seems to them to be a lot more work than the value they get back, and they also have to deal with losing some float. So when they add the plus and negative columns, it doesn’t come out to be all that different, and they decide to go with what they’ve been doing.”

Banks are likewise not overly enthusiastic about the order-to-pay idea, except for US Bank, which has a patented order-to-pay product it calls PowerTrack. Even Glassanos concedes that only one bank uses his stuff, JP Morgan Chase & Co., which uses Xign in conjunction with Vastera, the trade receivables system which it bought early last year. Glassanos says two other big banks have recently signed on, but that he couldn’t disclose their names at NB’s press time.

Why the slow uptake at banks? The reasons are pretty simple. Banks make too much money from the various fees attached to business checking to embrace order-to-pay; for one thing, when you can charge your customer for removing every paper clip in a pile of checks, it’s a hard business to give up. For another, there’s no reason to expect checks to be disappearing anytime soon, so there’s little reason to close a profitable department, especially when most banks’ revenues are under pressure in the first place. And, banks tend to view change as something that has to be adapted to the bank’s interests, leading banks to come up with ideas that make sense for the bank, and not necessarily for the customer.

Card-based corporate payments systems, like Bank of America’s new ePayables product, are a good example. Cards would seem to answer a lot of problems for corporations, including digital data streams, easy tracking, and a means to mimic traditional pay-at-the-last-minute treasury-management games.

There’s only one fly in this particular ointment: The payee has to pay to get their money, in the form of interchange. The alternative would be to accept a discounted invoice in order to get paid early. “If you’ve been paying cash or check or anything for a transaction, the payor has been footing the bill, but here the recipient is paying for the transaction,” an unappealing prospect at best, says Penny Gillespie, president of Gillespie International, and one that payees can easily block.

Looked at this way, it’s not surprising that checks will likely linger—some would say malinger—for many more years. But there’s another reason, one that many overlook: Most businesses aren’t the Williams Companies or Pacific Power & Lights of the world. According to the U.S. Census Bureau’s 2001 Statistics of U.S. Business, only 26,000 companies had sales over $50 million, out of a total of 5.5 million; and only 103,000 of America’s 4.9 million firms that have any employees at all had more than 100 employees, although those larger companies employed 74 million of the nation’s 115 million workers.

That’s the real rub. There are some 5 million companies in the U.S. that have little time to  automate their accounts payable and receivables departments, which means that trying to sell them an order-to-pay system is a waste of time. At a minimum, the annual return on such a system is not enough to make a compelling case for expensive, complicated software. And payment cards likewise have little application, since smaller companies tend to pay higher discount rates.

This being the case, banks aren’t foolish to hold on to their business checking departments. And your local Postman probably isn’t headed for the unemployment line. (Contact: Xign Corp., 925-469-9446; Gillespie International Inc., Penny Gillespie, 703-815-0706)

 

Expect M&A to Stir the Pot in 2006

Dust off your resumes. Companies large and small will be embracing or fending off suitors this year, and since merger-and-acquisition (M&A)activity always means staff consolidation—also known as layoffs—some of the biggest beneficiaries of such deals will be outplacement firms and headhunters.

There’s plenty of money around to make this happen. Private equity firms have identified payments as an area ripe for their attentions, in part because the sector offers their investors predictable and recurring revenues, but also because it has high organic growth rates and, aside from a handful of giants, many small firms that can be picked up cheaply.

“Private equity companies pulled in something like $111 billion for this year, and they’ve got to use it somewhere,” says Richard X. Bove, a banking analyst with Punk Ziegle & Co. “They have to buy a lot of things, and a lot of big things, and they have to put that money to work.”

Another reason for accelerating M&A activity: Payments is a commodity business so competitive that almost the only way to grow is to buy companies for their customers. And larger, established companies need to grow, or suffer the wrath of Wall Street. That combination will prove deadly this year to attractive targets.

When they do put that money to work, expect long-established company names to disappear, along with many of their jobs. “They have to add value, and add value quickly, and since they don’t know how to build businesses, they strip them, so there will be a lot of pieces (of acquired businesses) available if they buy them,” says Bove.

There were 113 closed acquisitions of various sizes last year, according to Mercator Advisory Group, and while Mercator has no estimate of the dollar value of those deals, it expects the pace of this year’s M&A deals to be brisk in the payments space—especially those originating from private equity funds, which find such deals relatively easy to sell to their investors.

“They have a hard time finding businesses that have recurring and predictable revenues going forward, and payments companies are like that, so even if the growth rate (of individual companies) isn’t what it used to be because of the maturation of the industry, private equity firms are interested,” says Evren Bayri, who tracks deals as director for the company’s credit advisory service.

Predictable, recurring revenues play a useful role in smoothing investment results, an important quality for organizations like pension funds, which need reliable revenues to fulfill obligations to their pensioners. That smoothing effect is widely considered to be one reason Morgan Stanley decided to hold on to, and grow, its Discover Financial Co. unit, even if its performance trails its competitors.

This year’s deals may be largely emerging from private equity firms, but that’s hardly to say all those deals will be small; last year, a consortium of private equity groups bought IT giant SunGard for a reported $10.8 billion. Also last year, Texas Pacific Group and Thomas H. Lee Partners, both private equity investors, invested $500 million in Fidelity National Financial Inc.’s Fidelity Information Services unit, following a failed attempt to raise several billion dollars intended to buy the whole company. Later last year, Fidelity merged the unit with Certegy, effectively spinning off Information Services and, in what was widely viewed as a side-benefit, diluting the holdings of Texas Pacific and Lee, while giving them an exit if they wanted one.

Private equity-financed deals aside, expect some really big, traditional corporate M&A deals to make headlines this year, says Bove. Think J.P. Morgan Chase & Co. buying First Data Corp., he says, or Marshall & Ilsley Corp. spinning off Metavante.

First Data, thinks Bove, may sell itself off piece by piece and distribute the proceeds to its shareholders. There’s some indication this may occur: On March 7, First Data Inc. sold its BidPay.com unit to CyberSource for $1.8 million in cash—an admittedly tiny deal, but one that may promise more to come. But in his opinion, it’s more likely that Morgan/Chase will buy it.

“I’m convinced that Heidi Miller is going to do the next major acquisition—she took control of that operating division to prove she could run a company, and she’s proved it—and First Data would be right up her alley” because First Data would fit into Chase’s plans to dominate the payment processing space, says Bove.  Miller is a Morgan/Chase executive vice president, and ceo of its enormous Treasury & Securities Services unit. First Data and Morgan/Chase say they don’t comment on market speculation.

As for Metavante: Bove has long thought that Marshall & Ilsley needs to spin off its payments unit in order to realize its value. “M&I has reached the point where they can’t get the overall holding company stock to go higher, and I think the only rational solution is to spin out Metavante, which they tried to do before,” he says. Marshall & Ilsley says it has no plans to spin off the unit.

One other possibility for a big deal this year? Bove expects Mellon Financial Corp. to beef up its large and well-regarded payments business this year through acquisitions.
“I think Bob Kelly (Mellon’s new CEO) was put in place for the purpose of expanding that business through acquisitions,” says Bove. Mellon denies this, saying that “Bob Kelly’s focus at Mellon is on organic growth.”

Such headlines will be flashy if they appear, but the most disruptive force on day-to-day life in the payments space is more likely to be smaller, less ostentatious acquisitions by private equity firms or the companies they invest in, intended by those shops as the kernels of new businesses, built around newer technology and innovative business models.

“The whole idea is to make a small-margin business into a wide-margin business,” says Andrew Dresner of Mercer Oliver Wyman. “What (acquirers) are looking for is a scalable model, where if you add volume, you increase your margins.”

Payments has those characteristics, says Dresner, because the underlying payments sectors have high growth rates in and of themselves—whether individual companies are matching that growth or not—and because the areas with the highest growth rates are still the domain of relatively small, innovative companies.

“That offers opportunities to do rollups,” he says. “You buy a pretty good company, and use it as an acquisition engine to pick off a lot of small companies. So you turn a small company in a high-growth industry into a big company in a high-growth industry; they’re not looking at these companies for what they have on the table today.”

One such suspect: Pay By Touch, which has attracted $320 million in new investment capital since last September—much from private equity funds—for its biometrics-based payments model. The company says it’s using that money to, among other things, grow by buying customers.

Last year, for instance, Pay By Touch bought 120,000 merchants when it acquired the assets of CardSystems Solutions late last year for $47 million in cash and stock. And in January, it closed on an $82 million acquisition of Bio-Pay, a former competitor with more than 2 million customers.

Companies like Pay by Touch may be the beneficiaries of this phenomenon, but the companies they buy are not. “If it’s a vendor play, and they’re buying a smaller company with similar technology for its customer base, I certainly see people losing jobs,” says Bayri. Even in the case of a real merger, with both parties bringing something to the table, he adds, “You see engineering jobs being cut as they consolidate the R&D staff; then they beef up the sales staff.”

The companies doing the buying—or financing it—really shouldn’t be blamed for any job losses, though, even if they are the agents of it. It’s more in the nature of business:  The private equity companies, for instance, are under pressure to perform financially, so following an acquisition, they typically begin by claiming they are returning the acquired firm to its core competencies.

As a practical matter, however, they begin laying people off, avoiding new investment in areas like research and development, and selling off subsidiaries. “They strip down the company, eliminate the costs, and make it look profitable in the short term,” says Mercator’s Bayri.

Such activity isn’t common yet, but he expects it will, if more private equity firms enter the fray; in the last year, Bayri says most M&A activity was “mostly bigger players buying smaller players, or vendors buying specific products that target specific segments.” Likely sectors: Mobile payments, health care payments, micropayments, stored-value cards, and e-commerce generally, says Dresner.

When the dust settles, the result will be mushrooming companies apparently coming out of nowhere to dominate their niche and eventually get very big. “The forces for consolidation in payments are enormous,” says Dresner. “It’s a scale business with a heavy technology business, so they all go down that path, be it merchant acquiring or PIN debit or what have you.” (Contact: Punk, Ziegel & Co., Richard Bove, 727-545-0505; Mercator Advisory Group, Evren Bayri, 781-419-1700; Mercer Oliver & Wyman, Andrew Dresner, 646-364-8444)

Manhattan District Attorney and Money Laundering Regulations

Manhattan District Attorney Robert Morgenthau, together with federal and New York state banking officials, is on the verge of settling serious money laundering charges against the Bank of America Corp. with a reported $25 million fine, making this the second largest money laundering case the long-time DA has settled in three months. In December, the Manhattan DA, the New York State Banking Department, and the Federal Deposit Insurance Corp. settled a similar case with Israel Discount Bank of New York, also for a fine totaling $25 million, including the costs of the investigation.

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Len Heckwolf Moves from Morgan/Chase to Bank of America

Veteran payments executive Len Heckworth is leaving JP Morgan Chase & Co. to head Bank of America’s new payments and receipts product management group, part of BofA’s global treasury services unit. He’s responsible for all U.S. payments and receipts product management and development, and reports to Skip Heaps, global product management executive for global treasury services.

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Credit Card Portfolios: More Pressure, Less Profitability.

Graph_debit_credit_heqPeople have grown wary of credit cards. They’re paying them off faster; generally, debit cards are edging them out as payment vehicles. And at least for now, home equity loans are increasingly more popular than credit cards among consumers (click on inset for more details and see tables below).

The result? Credit card portfolios are losing profitability, even though net losses and delinquencies are down, and serious questions about the industry’s future are surfacing. So are questions about how wise banks were when they snapped up most of the monoline credit card operations last year. The business model needs an overhaul, says observers, but so far, issuers are just changing the oil. And there may be no way out.

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Data Security Standards Set by Major Financial Institutions

A consortium of six major banks and the country’s largest accounting firms said Wednesday that they were setting uniform computer-security standards, designed to ensure that the third-party computer providers they do business with are adequately protecting both their computer systems and the information those financial firms send them.

“This is good news,” says Avivah Litan, vice president and research director of Gartner Inc. “I don’t think it goes far enough, but it’s smart for them [the institutions] to do it in steps, if that’s what they’re doing. But they need to do it beyond the service providers. They need to do it themselves”

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Western Union Spin Off May Do Little for First Data

Last week’s news that First Data Corp. will spin off its Western Union operations to First Data shareholders and create a company worth an estimated $20 billion is probably good news for Western Union. Noting that the parent company will be keeping its card processing, card services, and international business lines, observers were asking what had otherwise changed.

The answer: Nothing. “The bottom line for me is that this doesn’t change the realities, which are that even though they’re going to reconstitute what First Data will be, it doesn’t change the facts that Western Union, while it’s a good business, is facing increasing competition around the world, that the card business is struggling mightily, and that merchant processing is a commoditized business,” says Scott Kessler, who follows First Data for Standard & Poor’s.

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