Payments and Remittances Industries meld further into Digital Money as PayPal acquires Xoom

Posted on July 2, 2015 by Charmaine Oak

When I first entered the remittances industry the separation of these two industries was seen to be one of the laws of the universe, just as mobile was seen to be a desirable channel for which new silos were being built.

I wrote The Digital Money Game to address the issues I foresaw with the convergence of industries and services into a multi-trillion dollar space we at Shift Thought continue to map out as Digital Money through our research in each country, as it transforms industries we have so far taken for granted.

While the remittances industry is alone worth over $580billion, when you consider the melding of industries into Digital Money the prize increases exponentially as I prove in my book. Why would a consumer care to sign up to a new service (with perceived security, identity and operational inconveniences) for executing what is likely to be at most a single transaction a month? Would the consumers who choose to stay with cash as an economy goes digital really be the segment the brand wishes to deepen relationships with?

So it is no surprise that PayPal announced a few hours ago that it acquired Xoom for $890 million, as it prepares to leave eBay. As I see it, there was no option. When viewed from the Western perspective PayPal seems like a market leader, but as I studied each Asian country in depth, many challengers came to light as far back as 2011, when we announced that Alipay was claiming to have way more digital wallet users than PayPal. Since then Alibaba has grown substantially and Ant Financial Services has become a comprehensive digital money brand, as we report in our China analysis.

In our recent analysis of PayPal versus Alibaba’s ANT Financial Group we discovered that while PayPal, Paydiant and Venmo together form a strong capability this leaves a big gap to fill. To what extent will Xoom help fill this gap? This will depend on how soundly it goes international with PayPal’s help.

Xoom founded in 2001 today operates only to send money from the US, with 1.3 million active customers who send $7 billion to 37 countries, and this will have to change rapidly. Xoom has been recently entering emerging markets such as Mexico, India, Philippines, China and Brazil, but this has been in terms of receiving money electronically. What Xoom has capitalised on is the real-time payment infrastructure beginning to be established around the world, and this is how it entered India for instance. What is has yet to do is to establish Send operations from other markets.

So for me the success of this venture hinges on the question of whether with Xoom, PayPal has better success in the last mile in India and China, and other key emerging markets. To achieve the ubiquity of Western Union and MoneyGram PayPal will need to address remittance corridors in 200+ countries and territories, and do this rapidly.

As I’ve said before, brands are being built and broken by the trend towards Digital Money and we’ve entered the age of mega-groups, but it will not be easy to get this right. There are substantial differences between the market segments, as I’ve learnt through numerous studies, focus groups, interviews and research we carry out in each part of the world. However it is well worth attempting, and indeed as I repeat, I see no other option.

The War of the Red Envelopes in the Year of the Goat

Posted on February 3, 2015 by Charmaine Oak

From the land that brought some of the most remarkable inventions in the world between 2000 BC and 200 BC, such as cast iron and the suspension bridge, the new frontier for modern day innovation in 2015 is Digital Money.

There is a drama unfolding in China with continued strategies and lobbying between the top players – Alibaba, Tencent, Baidu, China UnionPay, the banks, the regulators and others. Like a jigsaw puzzle, each large group is assembling their “armies” – a number of different companies, groups of companies and partnerships that will help them obtain dominion over the fast evolving digital money market.

We will soon be in the midst of one of the greatest migrations in the world, as Chinese from around the world travel home to celebrate the Year of the Goat. While I wish my dear Chinese friends a wonderful New Year, I am keenly interested to see who will win the War of the Red Envelopes or 'Hong Bao' as it is called.

What is Hong Bao?

In China it is a very important tradition to gift money in red envelopes to children and younger members of your friends and family. The envelopes are red, as are most things associated with the Chinese New Year.

Last year, for the Chinese New Year, Tencent's WeChat (similar to WhatsApp) stole a march over Alipay by launching a viral and hugely enjoyable way to gift red envelopes electronically.

Tencent's WeChat got 5 million customers to send over 75 million red envelopes within 24 hours, through an electronic substitute for the centuries old tradition of Hong Bao.

This was just one in a string of digital money initiatives from the Internet Tech Giants of China. However it was highly significant in terms of gaining adoption for the WePay mobile wallet service.

What made Tencent's Hong Bao click?

In the year when the mobile internet overtook the PC internet in China, the market was just ripe for this service and Tencent pulled off a classic marketing promotion.

For me, the primary innovation was in the manner of embedding this into normal social interactions that had soared in popularity, not just in urban areas but across most of China.

The second innovation was in offering an alternative means of paying by getting people to link in their bank accounts, something we may find commonplace in the West but was quite an achievement in China at that time. Of course, now WePay had customers with means of paying, not just for the New Year but as a strong base for all the various services they launched subsequently. In 2014, China became the largest online retail market in the world, and many of the transactions now take place using smartphones.

And of course last, but by no means least was the way that the giving of Hung Bao was turned into a game. As my dear friend Michelle Zou explained to me, it was great fun for her to send money this way as an element of suspense was introduced in the way the allocated money was shared out between the designated receivers of red envelopes.

How did Tencent build on this success?

Soon after the New Year Tencent established the Weixin Group on May 6, 2014 and rebranded to create Weixin Payment services.

Last month WePay’s WeBank became the first online private bank to launch in China. One step led to another and an important first step was their New Year Hung Bao service.

So what could we expect this Chinese New Year?

So what may competitor Alibaba do this year? Their recently created ANT Financial Services Group (that includes Alipay) is well poised to counter this success. Alibaba has many significant achievements as I've described in my previous posts, and the group is shortly to launch their own private online bank.

How will competitors stay in the centre of Chinese New Year celebrations? And will one of the many other new third party payment providers (our report out this week describes 264 licenses/extensions) also have some tricks up their sleeves.

We'll know soon enough, and it is bound to be interesting.

Have you tried the new Hung Bao services?
Has anyone outside China thought of doing this for the extensive communities around the world?
What innovations do you expect to happen this year?
Have you seen a mobile wallet that achieved similar traction to what Tencent managed last year? I believe such adoption rates are very hard to achieve.
Would you use electronic red envelopes, or must it be cash?

I would love to hear your thoughts!

We are proud to announce that our latest Viewport “Digital Money in China 2015” has just been launched this week. Do drop me a line at contact@shiftthought.com to know more about this report that is not just relevant to those doing business in China but is a must-read for anyone interested in the fast evolving Fintech, Payments and Financial Services markets.

Check out our “Focus on China” posts created in honour of The Year of the Dog, Chinese New Year 2015. Happy New Year to all our valued Chinese customers and friends around the world!

A deep dive into China’s innovations in Mobile Payments, Internet Finance and Banking

Posted on February 2, 2015 by Charmaine Oak

It is easy to write-off what is happening in a market far away from you, and to believe that somehow your services are not affected. After working on our latest in-depth study of the People’s Republic of China (PRC), I believe this would be a fallacy. If you are offering or intend to offer digital money services of any kind, you really need to be aware of what’s happening in the most populous country in the world, and now the largest online retail market. Here’s Why ..

On a trip to Beijing a few years ago I found myself on a main road trying to hail a cab in the evening at rush hour. After moving to several different locations and not succeeding I finally walked the long distance to my hotel and put this down to one of the most difficult travel experiences ever. Now, though, you can simply order and pay for a cab from your mobile phone, and this is just one of a set of highly convenient mobile payment services now available.

An immense change has taken place in mainland China over the last 5 years over which we have carried out in-depth studies of this market. This has positioned China as the largest online retail market in the world, and a leader in the use of Digital Money. Services started strongly on the Internet and have now gone mobile and offline, in contrast to a number of African countries that grew on the M-Pesa Kenya model.

A strong focus on innovation

Over 2014, the downturn in traditional sectors such as real estate and slower growth in exports resulted in Q3 2014 economic growth sliding to 7.3%, the lowest growth level since the global financial crisis. This prompted the China State Council to promote innovation especially in the MSME sector, with a new 40 billion yuan ($6.5 billion) venture capital (VC) investment announced in January 20154. To place this figure in context, since first launch of the VC program in 2009, just 9.1 billion yuan was allocated.

Shift Thought sees this as one more indicator of how China is reinventing it’s positioning in the global business value chain, and digital money services are an integral part of this plan. Several large IPOs are expected as the large Chinese banks continue to restructure and go public, with a reported 5 banks doing so since Oct 2013.

Over the past 4 months Shift Thought has completed an immersive study and analysis of the highly complex China financial services market, leading to the publication of our 380 page in-depth report on every aspect of money going digital in China, including details on regulation and sizing of the various different sub-markets. I share a few highlights in this blog, as the first in our “Focus on China Series”.

Historic changes in regulations

As the market has demonstrated a voracious appetite for the new services, regulators have struggled to stay in control and also safeguard the existing licensed players in the market. In rapid succession we’ve seen regulations that brought in new third party providers, online banks and agent banking. New regulations are imminent that will have wide ramifications for start-ups and existing players alike.

First online private banks

Last month we saw the launch of the first private online bank WeBank, and there are a number of other newly licensed banks about to launch. What is interesting is the strategic potential this creates for the category Shift Thought terms as the ’Internet Tech Giants (ITG)’ of China: including groups such as Alibaba, Tencent, Baidu and others. We see huge M&A activity and rebranding activities that are readying these groups for the next level of strategic expansion over 2015.

Internet Finance

With the rapid increase in the use of the Internet, especially through smart devices, the most important trend we saw in 2014 was the meteoric rise of Internet Finance including a range of online financial services such as online payment, crowd funding, P2P Lending and others. This prompted the banks to jointly issue limits on the amount that could be transferred to investment funds such as Alibaba’s Yuebao, with P2P regulations expected shortly.

Third party providers deepen services

In 2010 the PBC released regulations to allow third party non-bank providers of payment services. Since then over 264 licenses or extensions were granted to third party payment institutions, of which over 97 supported online payment and over 30 (including the 3 mobile network operators) have permission for mobile payment services. Favourable tax treatment for online transactions has further ignited this market.

Online Payment market slows down after meteoric rise

Over the last 4 years along with massive growth, there has been stiff competition in the online payments market, with some of the providers already forced to close down. However the achievements have been phenomenal, leading to the creation of the largest online retail market in the world, and digital wallets transforming into mobile wallets.

The rise of O2O services

Both online payment and mobile payment grew strongly over 2014, with mobile payment substituting offline payment and new O2O services emerging that connect online and offline services in a manner that has been uniquely innovated in China. These O2O services allow consumers to find and use products online and offline in new ways that support their lifestyles and completely shake up the existing retail market, with strategic partnerships being formed to reposition and link retailers and online providers.

Financial inclusion

A key concern of senior Chinese Government, working with development groups this year has been for the 400 million unbanked/under-banked in China, and the 100 million under the poverty line residing largely in rural areas. Other underserved segments include migrant workers, MSMEs and unemployed workers, with recent lay-offs from state-owned enterprises (SEOs). We explore each of these segments at length, to look at the services now available to them and how these are changing – including domestic remittances, inward remittances, lending and branchless banking services.

Focus on rural areas

Some of the most interesting innovations we saw were those that are now going into rural areas, with the rapid spread of the mobile internet. In a manner that creates rich scenarios for The Digital Money Game as described in my recent book, providers are targeting multiple services over multiple channels in a bid to cement their market shares and create and grow new markets through their innovations. Our report details these innovations, such as a unique green telephone that has been adapted to support Point-of-Sale and banking transactions and was distributed free to rural households.

So why is this important to you?

This is not just important from the perspective of making an entry into the largest digital money market in the world – a feat not for the faint-hearted, I’m afraid.

As we saw Chinese goods flooding Western markets in the past, the new digital channels are enabled a new Chapter in Chinese export capabilities. We see a number of services already extending across South-East Asia. With the benefit of massive IPOs (such as Alibaba’s $25 billion, the largest IPO of it’s kind ever), providers are readying themselves to travel further afield, and you may need to compete against these new services in the US and European markets and not just in Asia Pacific.

Digital Money in China 2015

We are proud to announce the release of our globally unique report “Digital Money in China 2015”. This is essential reading for anyone who offers, or plans to offer any one the 32 key services we cover under Digital Money: including Online Payments, Mobile Payments, P2P Lending, Digital Banking, Remittances and more. Contact us today to look inside this report and learn more. Our team is ready to support you in your plans for China and elsewhere in the world. Drop us a line at contact@shiftthought.com to arrange for a call to discuss your unique requirements.

Why markets tumbled today on Global Economic Prospects report

Posted on January 14, 2015 by Charmaine Oak

According to the Global Economic Prospects annual report from World Bank just released, growth in 2014 was lower than expected. Global growth is expected to rise moderately to 3% in 2015, while high-income countries will see a smaller growth of 2.2%. Developing countries fare better with a 4.8% increase.

Having just studied the report I thought I should share highlights to help explain why today Asian markets sank in early trading, copper prices fell and shares plummeted across Europe. Markets reacted to the World Bank’s decision to cut its economic forecasts for this year and next, in the Global Economic Prospects report just out.

Global trade has been weak in post-crisis years, growing less than 4% a year during 2012-2014, well below pre-crisis average annual growth of around 7%. Major forces driving global outlook include:

Soft commodity prices
Persistently low interest rates and divergent monetary policies across major economies
Weak world trade

Recovery in 2014 in high-income economies was uneven. As many high-income grapple with fallout of global financial crisis, USA and UK have exceeded pre-crisis output peaks. The Euro Area and Middle-income economies face structural slowdown but low income economies are expected to enjoy a more robust growth.

Since mid-2014 the sharp decline in oil prices helps oil importing developing economies but dampens growth prospects for oil-exporting countries.

In the graph below I show last year’s forecasts in the dotted lines and this years (just released today) in solid lines. It is clear from this why markets reacted badly to the latest forecasts that show lower than expected figures across both high income and developing countries. Global growth is expected to rise moderately to 3 % in 2015. However high-income countries are likely to have a smaller growth of 2.2%. Developing countries will fare better i 2015 with a 4.8% increase.

The slowdown in global trade has been driven by cyclical factors such as persistently weak import demand in high-income countries and structural factors such as the changing relationship between trade and income.

Countries show divergent growth rates

But how does this potentially impact on your market selection plans and strategy for this year? In the chart below I’ve shown the projections for key countries, with estimates for 2014-2016 annual percentage change in GDP.

To my mind this further calls into question the BRIC categorisation we use to describe emerging markets. Jim O’Neill of Goldman Sachs first used this term in 2001 to describe a group of countries that expanded rapidly in the 1990s. Today though, these countries increasingly show very different growth trajectories noted by some experts recently, and as I see exhibited in their recent economic profiles.

While in 2016 both India and China are likely to have a 7% percentage change in Real GDP, China arrives here on a decline, while India works up to this. India is expected to show a steady increase while a “disorderly slowdown” is expected in China. Brazil faced a steep decline in growth due to declines in commodity prices, weak growth in major trading partners, severe droughts in agricultural areas, election uncertainty, and contracting investment. Recession in Russia further distances this country from the BRIC group. Activity slowed to 0.7% in 2014 with on-going tensions with Ukraine, sanctions, falling crude oil prices and structural slowdown.

Growth in Europe and Central Asia slowed to a lower-than-expected 2.4 % in 2014 due to slow recovery in the Euro Area and stagnation in the Russian Federation. In contrast, growth in Turkey exceeded expectations despite slowing to around 3.1 %.

Geopolitical tensions, currently concentrated in Eastern Europe, the Middle East, and, to a lesser extent, South East
Asia, could rise in the short- and medium-term. In low-income countries, growth remained robust at about 6 % in 2014 attributed to rising public investment, robust capital inflows, good harvests (Ethiopia, Rwanda), and improving security in a few conflict countries such as Myanmar, Central African Republic and Mali.

Remittance flows still resilient

The good news is that remittance flows are expected to continue to exhibit a much welcome upward trend. As the risk to private capital flows to developing countries increases, the relative importance of remittances continues to grow. World Bank notes that during past sudden stops, when capital flows to developing countries fell on average by 25%, remittances increased by 7 %.

The forces driving the global outlook and the foreseen risks pose complex policy challenges according to the World Bank. Developing countries face major challenges. For one thing monetary and exchange rate policies will need to adapt as conditions return to normal. They also need to implement structural reforms to promote job creation. This is expected to help mitigate long-term adverse effects from less favourable demographics and weak global trade.

More detailed analysis of the latest economic prospects for each country and region is available in our “Digital Money in 2015” country reports. Drop me a line at contact@shiftthought.com if you’d like more information. The full Global Economic Prospects report and other resources are available at the World Bank website.

Increasingly large businesses forming in China to serve the needs of increasingly smaller businesses

Posted on October 21, 2014 by Charmaine Oak

After Alibaba successfully floated a record-breaking $25 billion IPO one of it’s first initiatives is consolidation of a number of its financial services initiative under an umbrella private bank set up in China. The business is to focus on serving the needs of small businesses. MSME business is a largely unserved and promising area, but how will large groups such as Alibaba balance innovation as they scale to address this segment?

While a lot of focus has been rightly given to the unbanked and the under-banked, I believe not enough has been done to address the needs of businesses that have are growing increasingly smaller and have distinctive requirements. When Square brought out the Square reader in 2011 it opened the floodgates to a whole new set of MPOS services and rapidly commoditised that market. Yet businesses such as my own struggle to effectively take small payments in multiple currencies without the help of a massive organisation behind us with dedicated functions for this. Alipay spotted this opportunity and grew very rapidly, supporting such businesses in acquiring payments and managing the complexities that innovative entrepreneurs in China faced.

In China there is now a new trend towards the formation of private banks. Alibaba has recently received a license from CBRC, as one of three recently established private banks. This development stems from the Communist Party of China pledge in November 2013 to increase the competition in the Chinese banking sector.

Now Alibaba’s Ant Financial Services Group (rebranded this month from Ant Small and Micro Financial Services Company) will bring together it’s diverse financial services businesses, focussed on the huge opportunity from businesses that are growing progressively small. These include:

Alipay, their main payments service provider
Yu’e Bao, a money market fund
Zhao Cai Bao, a financial services platform
Ant Micro, a micro-loan provider
Huarui: Shanghai-based newly formed private bank addressed as MyBank but English name still pending

Alibaba helps companies in the US find and use the services of really small merchants in China, and caters to their needs for payments, escrow services, P2P lending and more.

Along with 249 other businesses (from across sectors and including China Mobile), Alipay received a license as a payments service provider. It has initially focussed on adding mobile and offline channels to it’s popular Alipay online digital wallet. Now it is pulling ahead of the pack with it’s own bank MYBank, and consolidation of six different businesses that will together focus on the MSME Opportunity.

To my mind this raises a number of questions that we answer in our Digital Money in China and other recent reports:

Will Alibaba succeed to keeping the dynamism that allowed it to grow, as it grows into such a large business, and how will it cope with the responsibilities of being a bank and still adapting and growing to meet the unique requirements of MSMEs?
So far China had one private bank, China Minsheng Bank. Alibaba’s main competitor Tencent has also set up a banke, Webank. Which of the other 248+ recently licensed PSPs are likely to follow suit, and how will being a bank help or hinder them?
As Chinese companies increasingly go international, how can global brands be protected? In Europe MyBank has just been investing heavily in setting itself up as a pan-European initiative. MYBank is not yet finalised as the English name that will be used by Alibaba, but are there sufficient deterrents to prevent it from using this existing brand name? I see this as yet another example of how consumers may be confused as they seek to use services from increasingly global players.
Where does this leave PayPal as it leaves the protection of EBay and must compete with the likes of Alibaba and Tencent?
And most important of all, perhaps – are the needs of increasingly small businesses best met by increasingly large conglomerates, rather than community co-ops and MFI institutions as in the past?

Will Open-to-SMEs continue to be Alibaba’s Open Sesame?

For more about developments in China see: Disruptions in Digital Payments in China - What does this mean for you?

Remittances remain buoyant but cross-border mobile remittance still less than 2%

Posted on October 7, 2014 by Charmaine Oak

World Bank’s recent reports on remittances indicate a welcome continued buoyancy. India remains the largest receiver, as growth in 2014 is led by East Asia and the Pacific, South Asia, Latin America and the Caribbean. However MENA flows are affected due to disturbances in the region, and ECA countries traditionally receiving inflows from Russia are badly affected. While mobile money has been adopted for domestic money transfer, 7 years on it has yet to make the inroads into cross-border remittances that was originally expected.

Good news as global cost of remittances falls from 8.9% to 7.9%

The global average cost of sending $200 fell from 8.9% in 2013 to 7.9% in Q3 of 2014, as remittances go online and digital. Account-based money transfer (cash-to-account is the lowest-cost method today). However although mobile money is being used for domestic money transfers, and is making an impact on sending money from urban to rural areas, its use for cross-border transactions remains limited. Less than 2% of remittance value took place through mobile phones. Yet with global remittance flows at $542 bn this even now represents a flow of $10 bn.

However Bill Gates believes that even with all the regulatory compliance it should be possible for pure digital to digital transactions to be moved at less than a percent. We are still far from achieving this goal. Is it a case of further enablers or something else that is needed to make this this possible?

Global remittance flows to developing countries are projected to reach US$435 billion in 2014

At a much welcome 5% increase over last year, the growth is expected to continue into 2015, though at a reduced rate of 4.4%. Total flows are expected to rise from US$582 billion in 2014 to US$608 billion in 2015.

Forced migration is at an all time high with 73 million forced to leave home

The main message from the latest World Bank report on migration is that forced migration due to conflict has reached the highest level since World War II. Of the 73 million who had to leave their homes, over 51 million were forced to move due to conflict, and 22 million moved due to natural disasters.

India remains largest recipient at estimated $71 billion

Highest receivers are India ($71 b), China ($64 b), the Philippines ($28 b), Mexico ($24 b), Nigeria ($21 b) and Egypt ($18 b). Yet these flows are not as high as they could be. The largest receiver, India, only receiver 3.7% of GDP in 2013.

Remittance flows respond to natural disasters

Remittances continue to offer a much-needed lifeline of support in times of natural disasters, rising by 16.6% for Pakistan in 2014, and 8.5% in the Philippines in 2013 in response to destruction from the super typhoon.

Regional trends

Remittances are projected to increase by 7% in the East Asia and Pacific region (EAP) with China and Philippines being the largest receivers. Remittances to South Asia have rebounded strongly in 2014, expected to grow by 5.5% to over $117 bn in 2014, with very strong growth for Pakistan, Nepal and Sri Lanka.

Growth in remittances to Sub-Saharan Africa is picking up in 2014, expected to reach $33 billion in 2014. Nigeria continues to dominate in terms of inward remittances flow, with $21.3 bn forecast for 2014.

Remittances to Europe and Central Asia (ECA) are slowing as compared to 2013 affected by conflict in Ukraine and sanctions against Russia. The figure shows how receivers of remittances from Russia have been affected as remittances received continue to decelerate.

Another affected region is the Middle East and North Africa, but despite the volatility, remittances represent substantially larger and more stable sources of inflows. Remittances to the region are expected to grow by 2.9% to reach $51 bn. Remittances to Egypt are expected to stabilize in 2014, after the 2013 decline of 7.3% in remittances to Egypt (biggest receiver in the region, 6th worldwide).

For the full World Bank report click here: Migration and Development Brief 23

Charmaine Oak, Practice Lead, Digital Money

Author of The Digital Money Game, co-author Virtual Currencies – From Secrecy to Safety

http://www.linkedin.com/in/charmaineoak

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Bitcoin – Fan it or Ban it?

Posted on December 13, 2013 by Charmaine Oak

As debates on the regulation of Bitcoin and cyber currencies continue to build up, Karena de Souza, Shift Thought distributor in Canada recently chatted with people involved in the rapidly growing Canadian Bitcoin ecosystem. She shares her thoughts here and we raise key questions to reflect on.

Background

News on Bitcoin alternates from viral growth to free fall. Fuelled by a meteoric rise in value based on announcements and events over November 2013, phrases such as ‘cyber currency’, ‘digital money’ and ‘virtual currency’ have entered the common vernacular. Press releases, announcements and senate hearings have all worked to keep it front and present in the public eye. The word ‘bitcoin’ made its official entry into the Oxford Dictionary in August 2013.

Bitcoin is now getting the visibility it has been struggling for since its inception, as Forbes reported 2013 to be the Year of the Bitcoin. The European Banking Authority has now warned consumers of the risks, as China’s PBOC barred financial institutions from handling Bitcoin transactions last week.

It is important to clarify that at Shift Thought we look at Bitcoin as just one example of a class of virtual currencies, not to be confused with our description of Digital Money, the term we use for describing innovations that move people away from paying with cash.

What is Bitcoin?

After the recent interest, most major financial news agencies have published an explanation of Bitcoin – how it is created and how it works. The Bitcoin community maintains a comprehensive FAQ. I recommend the Huffington Post: A three part series by Alexandra Berke as an easy introductory read. A Fistful of Bitcoins is a more in-depth discussion of algorithms and the concept of anonymity.

Value versus Volatility

Key announcements, particularly from China and the USA, have kept the focus on Bitcoin and other virtual currencies, causing a rise and fall in the value and sudden surges in demand. After trading within the $10-$200 USD bracket for most of 2013, the value of a Bitcoin jumped 400% within the month of November.

The graphs, sourced from OANDA Historical Exchange Rates show more volatility in the price of BTC based on daily announcements, primarily out of China, not so far a total reversal in value.

As more consumers get comfortable with the concept of a virtual currency, especially in markets as large as the USA and China, the opportunity for a digital currency with low transaction costs to succeed gets larger. As discussed in the Shift Thought webinar on Digital Money in China 2013, the online purchasing population of that country is bigger than the entire population of the 5^th most populous country in the world. Announcements out of China therefore have the ability to create huge swings in a cyber-currency still in its infancy.

Bitcoin operates as a cyber currency that provides users in many countries with a way to transfer value internationally at a nominal rate, without a bank account. The effect on remittance streams could be significant, causing leading global payment providers to consider whether and when to support it. However the potential effect on consumers could be catastrophic. Also of great concern to the regulatory community is the cash-like anonymity this method offers, and the potential for exploitation by money launderers and criminal elements.

To hoard or to trade?

Creating the expectation that there will only ever be 21 million Bitcoins helped its value to rise dramatically and also fuelled an instinct to hoard. Yet hoarding goes against the effectiveness of a means of payment.

VirtEx, The Canadian Virtual Exchange has been building a bitcoin ecosystem by working with merchants and customers.

At the Small Business Forum in Toronto on October 23, 2013 (1BTC=$183.69 CAD) CEO Joseph David encouraged small businesses to consider becoming a part of the Bitcoin network. They are attempting to take Bitcoin beyond cyber commerce, to make it viable tender at an expanding number of brick and mortar sites. They use the appeal of low transaction fees, quick access to money and the cash-like anonymous relationship to the transaction. VirtEx claims to have a rigorous identification process in place before it will establish an account. It supports a range of Bitcoin related activity and has expanded its portfolio of products most recently by launching a Schedule 1 bank-based debit card. This allows Canadians to use the Interac network to spend Bitcoin or withdraw the Canadian Dollar equivalent in cash, within the guidelines established. VirtEx stated aim is to provide the Canadian Bitcoin community with a secure place to trade in Bitcoin.

The increase in awareness amongst the general population, coupled with the growing value of BTC (the Bitcoin currency) has certainly got more merchants considering acceptance of Bitcoin as tender. But could the recent volatility scare smaller merchants who are dependent on a predictable cash flow? Will we start seeing protective hedging in the form of options and futures? Virtex Business Development Manager Reed Holmes hoped that by encouraging a robust and ever-increasing circle of suppliers that are willing to accept Bitcoin internationally, merchants will keep their transactions in BTC, opting to convert to fiat currencies only when necessary. While it is good to see BTC appreciate in value, there is hope that instead of hoarding, sufficient amounts of BTC will stay in regular circulation and like gold, be ‘on display’.

Bitcoin in Canada

Canada is a perfect incubator for ideas and innovation – the smaller, concentrated population with a high degree of technical and financial knowledge, is coupled with a conservative yet open-minded, internationally respected regulatory environment. The significant proportion of immigrants helps the osmosis of good ideas back to their countries of origin. This has created conditions for large numbers of Canadians to embrace Bitcoin. The world’s first bitcoin ATM was launched in Vancouver, with more planned. According to Isabell Boese, Executive Assistant at Bitcoiniacs, the second Robocoin ATM is to be installed in Calgary by year-end, and the first of two earmarked for Toronto will be in place by end of January 2014.

That should be well in time for the first bitcoin Expo to be hosted in Toronto April 11-13, 2014. At that event, Canada will look to establish itself as an innovator and leader in this space. It aims to attract merchants, start-ups, VCs and investors who are interested in fostering the ‘growth and development of Bitcoin communities worldwide with a focus on collaborative and decentralized models’. It features an international panel of speakers as per the post from Anthony Di Iorio, Executive Director of the organizer, Bitcoin Alliance of Canada.

There have been frequent announcements of Bitcoin related start-ups and ventures. At the Mobile Money Conference 2013 in November, Venture Capital Panelist Alex Baker forecast that the coming months and years would see Bitcoin play a more prominent and disruptive role in retail payment.

The Risks and Rewards

Bitcoin.org lays out the many risks with using this new payment method. Competitive cyber currency offerings, denouncement by sovereign countries and central banks and the fraud and embezzlements uncovered all conspire to affect the day-to-day value of BTC. Yet the international Bitcoin community and its supporters grow, as a new wave of digital payments joins the traditional cash, gold and credit remittance and payment streams.

For some hoping for a Bitcoin in their stockings, it seems they may have to be happy with a few Satoshi! I am taking the long view – I think virtual currency will be to payments what the smart phone was to the telephone and camera … it’s going to make new things possible!

Over to you …

What is the innovative and disruptive element of Bitcoin that is likely to change payments?
What effect do you see Bitcoin having on international remittances?
Will Bitcoin still be the hot topic at the end of 2014?
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Karena de Souza is a forward thinking and entrepreneurial professional with a special interest in payment streams for small business. Karena’s focus on mobile finance blends the challenges and opportunites she faced as a small business owner in Canada with her experience using technology to facilitate financial services while at Morgan Stanley in New York. She graduated from the University of Westminster with a BSc (Hons) Mathematics and Computing.

Q&A from our “Disruptions in Digital Payments in China” webinar

Posted on September 26, 2013 by Charmaine Oak

Thanks very much to all of you who helped us to make this live webinar (our first!) a great success. With representation from over 20 countries, we received a number of questions and were not able to answer all of them in the time available. The post below addresses these and we hope you will find this useful. There is never just one point of view, and we would love to hear your comments and your unique ways of approaching the questions. If you missed it, catch the free replay here.

Q1: Is it advisable to partner with a Chinese company when seeking to enter this market?

A1: In general you may not have a choice in this. The question is with whom to partner and how to set it up so as to remain in control. An example is Yahoo China and Alipay. In Jack Ma’s speech at Stanford on May 14, 2013 he mentioned that Alipay digested Yahoo – they simply ate Yahoo and would not have been able to do their P-2-P advertisement platform without that.

This is a great question and to do full justice would probably need a session in itself. As a guideline, it depends on your industry, your ambitions and the roadmap you plan. Suffice it to say that I have seen careers made and broken largely due to the manner of handling this issue.

Q2: In your experience what is the biggest threat to successfully entering the Chinese market?

Timing and partnerships. Possibly in no other market could I say more strongly that a 360 degree understanding and a watching brief is critical. You cannot afford to walk into this blindfolded without opening yourself and your company to high risks, neither can you afford to do nothing. Understanding, anticipating and planning is highly important. It is equally important to understand Chinese culture and history as much as you deeply absorbing knowledge on the payments ecosystem and timeline.

Products and services must be made fit for the unique expectation of the market. For instance the clean streamlined experience of Amazon is not what is preferred – online shoppers want a busy, “happening” website. Similarly, there is a very different online-offline-CSR engagement in the consumer journey that one needs to learn.

There is a window of opportunity that must be well understood. We have found that players who act too soon have faced problems. On the other hand due to the need for domestic partners, it is advisable to act before all the “good partners” are taken.

Q3: How stable is the regulatory landscape in China? Is it prone to sudden changes?

In general it has taken many years so far for changes expected and talked about to actually happen. For instance I recall I first studied proposed regulations for licensing third party payment providers way back in 2006. They actually came out in 2010.

Similarly it is not uncommon to have a mass rollout, big commitments and plans in a specific direction only to see it overturned (example RF-SIM). For players who have built these products specifically for the Chinese market this can represent a serious setback.

Q4: Who are the companies to watch in this space?

I touched on the main players in the China payments ecosystem during the webinar, so for those who have not heard it, it could be useful at this point to listen to the free replay here. Of course our 295 page “Digital Money in China 2013” viewport offers you the whole list of players, partnerships and initiatives with our best understanding of their importance and traction. There is so much happening in parallel and there is a high degree of cross-over. What we tend to do is to note how the payments gatekeepers are proceeding – CUP, CM, The big 4, the big 3 large PSPs and more.

Q5: What are the best partners to work with?

This depends on who you are and what is required by the regulatory environment. If you are to apply for a license there is a lead time involved.

A good example is Western Union’s recent thrust into China in partnership with ICBC and CUP.

Q6: How should we interpret Digital Payments in Hong Kong? How does the Chinese government and market incorporate the progress and regulation of that market?

The webinar only dealt with Mainland China. We plan a separate webinar that will address Hong Kong, China as also other countries in the region. In general the approach is One Country- Two Systems. This is why Hong Kong, China has a critical role to play in digital payments relating to Mainland China. More when we tackle this topic. Please register to our website (registration is free, takes seconds, only requires email address and provides you a much greater access to the overall content on our portal) so we can send on an invite to you once plans are in place.

Q7: Would you clarify your definitions for "digital wallet" and "digital money", thanks!

The Digital Money domain has been described by Shift Thought™ as a way to understand the ecosystem, products, services and infrastructure involved in the digitisation and transfer of value. We use this term to refer to a host of financial services that use innovative alternative channels, technologies, providers and payment instruments.

For a full definition and understanding of our approach please see Blog #3: What is digital money?

The Digital Wallet domain has been described by Shift Thought™ as a means of understanding the whole range of stored value products aimed at digitising value and enabling the owner to utilise it in a way that offers a superior experience as compared to traditional payment methods. Services utilise an account and stored value or e-money that may be utilised across various channels and services. This includes prepaid cards, vouchers, mobile wallets, e-wallets and more.

Q8: Is there any real digital money in China (I mean digital money that is not dependent on bank account or credit card)? All mobile payments solution are NOT based on digital money.

This is a good point. Please look at my response to Q7 on what is Digital Money earlier. We track an extended set of initiatives to do justice to our definition. However, specifically to answer yours, there is E-money that has been around for a while now. Prepaid cards, both open and close loop exist as discussed in our Webinar and covered in detail in our Viewport. More importantly, digital wallets and mobile wallets are very much in use.

You are right that all mobile payments are NOT based on e-money and a number of them require a connection to a bank account or card account. In the way we cover each of the 50 key initiatives on our portal, you’ll see our icon and descriptions that exactly show what payment instruments are supported for Senders and Receivers of each kind of service.

I hope this answers your question. Please feel free to reach out for a quick chat to discuss further. Also, this is not set in stone. We found an absence of accurate definitions in the marketplace and in those cases provided our own. Where possible we comply with the way in which CGAP, GSMA, Mobey Forum, NFC Forum and other key bodies and thought leaders already use these terms.

Q9: After utilising your China 2013 viewport, I also obtained your comprehensive Indonesia 2013 report. I noticed how in each country, both APAC members have approached and regulated differently - How would Shift Thought help a potential customer navigate these different markets?

That is a great question and thank you for the compliments on our viewports. Shift Thought is fortunate to have compared 19 different APAC countries in terms of regulatory approach as well as the predictor framework we use to project the growth of each of the 32 services we class as Digital Money.

We maintain a highly comprehensive knowledge base of regulations that impact on all these services, and understand how they may apply from each perspective. This, along with our deep understanding of player competencies puts us in a great place when we consult with large mobile operator, banking and money transfer groups in search of the right partners.

We’ll talk more on this in the Indonesia webinar. If you pop me an email on which countries you want to know about first I’ll consider this as we prioritise the webinars scheduled.

Q10: Charmaine - do you see an opportunity for mobile point-of-sale devices targeting Merchants in China much the same way that Square has addressed small Merchant needs in the United States?

Absolutely, and as is always the case in China, one of these providers currently cutting their teeth in the highest populated country in the world could well become a challenger to the Square, iZettle and huge number of mPOS providers currently starting of from the East. But it’s not just China. We’ve seen very interesting and innovative approaches elsewhere in APAC. This blog is getting too large, maybe a separate post later?

Q11: Sub Saharan Africa population is forecasted to reach China's in 20 years. What similarities if any do you see between these 2 markets and what learnings can Africa derive from China now to foster further successes in the contribution of digital money to more financial inclusion of unbanked populations.

Wow, this is a biggie. Thanks for this great question and sincere apologies that I can’t do justice to all of this today. However, I put it the other way, what can China learn from Africa including sub-Saharan Africa? – That is the real question. As the access that people have differs, I’d like to do fuller justice to this in a later post.

Q12: Hi - how pervasive are contactless payments in PRC? Thank you

For all the years I’ve worked with China there has always been something planned – most were trials, pilots. The real progress is in terms of installation of POS that supports contactless payments and cards. Once that is in place and China has elected to support the NFC standard, the people who currently use smart cards for travel all across China could very quickly change their behaviour to use of a mobile device instead. So to answer your question, contactless payments by card are already surprisingly pervasive!

I hope you have found this post useful. Again, this is just my perspective and I would love to hear from you as that is when the learning process really gets enriched. Thanks for the wonderful outpouring of support to me and thanks for being a valued member of our little fledgling Shift Thought community. Together we can make things better.

Disruptions in Digital Payments in China 2013 – what does this mean for you?

Posted on September 24, 2013 by Charmaine Oak

China, the world’s fastest growing major economy, is seeing high adoption rates of new technologies amongst the rising middle class and other key segments. Local and foreign companies across a wide spectrum of industries stand to be affected as this rapidly shapes digital payments locally, regionally and globally. If you missed this, you can catch the free webinar replay here. Also check out the Q&A from the event.

Jack Ma of Alipay threw down a challenge in his recent visit to the USA – Alipay plans to enter USA. Boosted by the largest markets in the world, Chinese providers are starting to set their sights on even larger and more distant prizes. At Shift Thought we have obtained many actionable insights from our recent in-depth studies across 19 key Asia Pacific emerging economies and truly believe that what we have found out could have far reaching impacts on businesses around the world. As part of our business of tracking the evolution of mobile payments and digital commerce around the world, we have spotted genuine opportunities beginning to present themselves in China for those who have ambitions of entering this lucrative market.

Shift Thought brings you a strategically important Webinar to share highlights of our latest report “Digital Money in China 2013”.

China, one of the largest and fastest-growing payments markets in the world, is undergoing rapid transformation. Renowned as a particularly difficult market to enter, recent developments make it a hard to ignore opportunity....

250 new third party non bank providers in place are offering mobile payment services
Mobile payment standards are being finalised
High speed mobile networks are more widely available than before
Low cost smartphones are common and ready for mobile payments
Regulators are now issuing payment licences which even include foreign companies

So how do you take advantage of this opportune time?

In this free webinar we will explore the Chinese payments ecosystem and digital money initiatives. We will offer some of the analysis and learning from our recently completed report “Digital Money in China 2013”. Additionally this webinar provides a valuable insight and robust intelligence into a complex and previously perilous market to enter, in order to help you identify, develop or refine your strategy.

When?	Instant replay now available of our live webinar Tuesday 24^th September at 2.00pm GMT (1.00pm CET, 9.00am EST). 20 minutes live presentation with 10 minutes Q&A to follow
Where?	To view the replay click here.
Presenter	Charmaine Oak, Payments and Remittances Expert, Digital Money Practice Lead, Shift Thought

We look forward to speaking to you then!

Mobile Money in China – a classic example of Digital Money

Posted on July 30, 2013 by Charmaine Oak

Many a brave pioneer has attempted to break into the highly desirable China payments market without success. Yet as the first foreign licenses are granted and PayPal awaits theirs, other global providers question whether it is once again time to venture east. The Shift Thought “Digital Money in China 2013” provides a guidebook to would-be marketers, with unique insights on the current state of play and potential navigation strategies for each category of player. It will not be possible to succeed in Mobile Payment and Mobile Money without understanding the larger context of Digital Money .

The size of the prize

It does not take long to convince any senior management team that the potential of the China payments market is massive. Homogenous, large segments do exist within the population of 1.35 billion. This major and rapidly growing economy is rapidly opening up to new technology and electronic commerce. Alipay, part of the mammoth Alibaba group has long ago claimed to have users in excess of the number of customers PayPal has world-wide, with a reported 550-700 million registered digital wallet holders.

Now they, along within an army of 250 other would-be payments providers equipped with third-party payments provider licenses are rapidly seizing key segments. Over 2013 the trend is for them to offer mobile wallets to their existing digital wallet customers. Historically Shift Thought believes this is the first time that new mobile services can start up with an existing captive base of hundreds of millions who can use the services on cheap smartphones through high speed mobile internet connections.

“Big hitter” providers hail from across multiple industries

The way this market has evolved is unique, as is the sheer variety of heavy-weight players bearing down on the alternative payments scene. The Chinese banks, now some of the largest companies in the world, are finding themselves at the starting line, as are the very large mobile operators. The relatively young and highly nimble payment operators grew beyond recognition, on the back of an SME market eager to do business on the Internet. Now they are using widely available, cheap smartphones and mobile internet technology to offer their digital wallets as mobile wallets to a captive consumer base of merchants and consumers shopping on the go.

Of the 32 services that we at Shift Thought monitor, there are many that present opportunities in China. Starting with Online Payment, we note large numbers of online banking, mobile banking and mobile payment users. Money transfer has been a highly desirable market, both within the country and internationally. The largest number of people in the world travel over the Chinese New Year, an indication of how many people live and work away from home and have a need to send money home.

The perils of the Chinese market

Since before 2005 many have attempted to break into the Chinese market. Large foreign banks and mobile operators made do with small shares in large companies, as the only foothold that could blossom into something larger. However let alone mobile wallets, even mobile payments and mobile banking progressed at a snail’s pace as the authorities experimented with multiple standards before determining which to back. Local companies enjoy multiple advantages. Regulations come from many directions, and not unlike the US, this is a country where you simply cannot count on a single standardised market.

So why is 2013 different?

Payment providers grew rapidly in the absence of regulation, reaching a point where they presented a threat to a number of incumbent players. New regulations have forced them now to obtain licenses. Already many tranches of licenses have been granted; the latest ones even include foreign companies.

Meanwhile mobile payment standards are being finalised, and this should address the current problems of highly fragmented markets. There has also been a rapid spread of high speed mobile networks, and cheap smartphone handset to utilise the services.

The role of Digital Money

China presents a classic example in support of the Shift Thought Digital Money approach. Services started strongly on the Internet and have now gone mobile, in contrast to a number of African countries that grew on the M-Pesa Kenya model.

Regarding the relative importance of digital money services, China currently has the largest number of online shoppers in the world estimated at $1.29 trillion for 2012, with 220.65 million users in June 2013. Unless would-be new entrants understand the various existing dynamics and key players, they stand to risk losing out as the mobile money market explodes over 2013 and beyond. With the need for local partners, it is possible that large global players find themselves having to sit out the dance while their competitors take to the floor.

A navigational tool for the complex China payments market

Having attempted to enter this market on behalf of large mobile operator groups, global banks and money transfer operators, we at Shift Thought recognised the need for a navigational tool to steer entrants in their ambitions relating to entry into the China Payments market. Our latest report “Digital Money in China 2013” was written at the request of some of the most renowned world payment experts who had no means of obtaining the knowledge elsewhere. It offers an introduction to the complexities of the China payment market, regulations and timeline. It provides a complete guide on the ecosystem, with details on each initiative, player and partnership.

Our goal has been not just to deliver actionable insights to mobile operators, financial institutions, payment providers and vendors world-wide, but to also offer practical, concrete ways to progress on the insights. There are links to the websites of all the important regulators, providers and players, as well as details required for building your business case. Market segment and services are explored in detail to track the progress of e-money in the Chinese market.