New payment apps and how to fund them

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It is easy to pay a utility bill nowadays in Israel – you can do it online. It is a bit cumbersome, but still not hard to pay the homeowner association fees for your apartment building – just don’t forget to sign six cheques every six months and bring them up to the chair’s flat. But any time the parent committee wants to throw a party, or when the colleagues at work pass around the hat for a baby shower, you had to pat your pockets for the exact change.

That is, until several apps popped up, such as PayBox (later acquired by Discount bank), Leumi/Pepper’s PepperPay and HaPoalim’s bit.

In comparison to the old ways, this was a gift from above. Not only you didn’t have to bring the exact amount of cash any more (or send it with your kids), now you didn’t have to bother about remembering it as well: an app on your phone did the work for you.

What is surprising, though, is the business model, or lack thereof. All apps allow free top-up and free withdrawal of funds to a card, charging no one-time or recurring fee for the service. But this is not how card business works.

In a typical set-up, a merchant (a store that accepts the card payment and has the funds from the cardholder transferred to it) pays a fee to the bank that series the store. The fee is then split between the merchant’s bank and the cardholder’s bank, so the cardholder sees the exact full amount as presented at the store, while it is the merchant that pays banks for their valuable services. Upon a refund, both banks re-settle part of the fees between them differently, but the merchant still covers their costs.

None of the fees apply in any of Israel’s most popular peer-to-peer mobile payment applications. So how are the banks going to see any return on their investment with these apps?

Well, as the experience teaches us, if you get something for free, you aren’t the customer – you are a resource.

There are several ways the banks can benefit from the use of their app: they can collect data about the user and then target some advertising, they can try and have the app user also open an account with them. The former is hard to profit from; the latter is not gaining traction so far.

The banks can turn to merchants and to get these peer-to-peer-collected funds accepted in stores. It would probably make sense for them to start with big department store chains and gift coupon networks. In fact, this is already happening – just last week Leumi announced that they are approaching several hundreds of large chains in an attempt to convince them to accept in-store PepperPay payments. In these cases, the merchants will pay some fees, but end users will still enjoy the app for free. Even if the fees are higher than usual, there should be at least one in-store payment for each top-up or withdrawal made with the mobile app to break even, which is not a likely scenario.

The banks could, technically, issue payment cards linked to an app account balance. If a cardholder was to use such a card in store, the merchant would pay a card fee which will mostly go to the bank. With EMV contactless technology, such a card could be fully functional while being hosted by user’s smartphone. While this technology is widely accepted in stores in Europe, it’s rollout in Israel is only starting, most in-store card terminals do not support it yet and the migration will take several years.

Finally, the banks can start charging a fee for the use of their application. Considering what we know about Israeli banks, this is not an improbable scenario. In fact, it is quite likely, but won’t happen any time soon.

All things considered, now is the time to enjoy the free and convenient mobile payments.

But it won’t be wise to leave a large outstanding balance with such an app – you never know which limitations or fees will be imposed on it one of those days, when banks decide they want to make a profit.

After all, if you want to pay your bank for everything you try to do with your own money, they already have your current account.

About the Author
Ilya Dubinsky is a VP in a leading Israeli fin-tech company. He participates in various global groups and bodies in the financial industry, including The Berlin Group banking industry standards initiative, the Payment Services User Group of Bank of Malta and the Fintech Forum of Bank of Israel. Capitalizing on his 20 years of experience in Telecom and Finance industries, Ilya teaches classes in Holon Institute of Technology and oversees joint research projects with Tel Aviv University.
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