Social Payments: Paying the Blogosphere

19 February 2010

This could be the death knell for established news organizations. Having just renewed my subscription to the online Wall Street Journal last week, I was struck at how much of my news comes from informal social networks. I received a call today from a team investigating this space… quite frankly a fabulous payment idea: Paying the blogosphere.

Take a look at Flattr’s YouTube video to get the picture.

One of the many competing w/ Flattr is Kachingle (see patent application). My uninformed opinion is that services in this category can structure themselves as commercial services and avoid MTO regulatory burdens. Kachangle’s approach (described in patent app above) seems to be “billing as a service” … in essence users are buying a service for a fixed monthly subscription at $10/mo. Others “social payment providers” contemplating entry here should be very cautious to avoid used of “tokens” which can be “redeemed” (Big US issues here… See eGold and  US DOJ Final, US DOJ Indictment). The rule of thumb for operating in the US: regular payments for a commercial value added/reseller service.. Good.. flexible payments to anonymous end parties .. Bad.

Key payment considerations

• Where is NewCo legal entity and target customer base?
• Where is NewCo operating from?
• Where is NewCo’s bank account?
• Is it a commercial service or “money transfer”? You have a regulatory requirements with either, but money transfer services are much more burdensome. If commercial service, then commercial requirements typically dictate disbursement KYC as well as tax/revenue reporting.
• If service is money transfer, business will not only face regulatory hurdles, but also payment clearing hurdles associated with “payment aggregation”. Networks do not want intermediaries operating a payment network within their existing network as they loose their ability to manage regulatory control (ex. AML, sanctioned payments, …)
• How does NewCo move money in? Cross border? Who will bear regulatory risk? Clearing bank? Network? NewCo?
• Are there tokens or other stored units of value that can be exchanged?  

A great blog from a publishers perspective http://steveouting.com/2009/08/28/paycheckr-the-sharethis-for-donation-pay-options/

PayPal Shut Down in India

11 February 2010

NYTimes article from last night

India’s Central Bank Stops Some PayPal Services‎ - 

Simply put.. paypal has no license (See RBI list ) for Operating a Payment System in India under India’s Payment and Settlement Systems Act, 2007. The RBI published Annex I circular on November 27, 2009 (RBI/2009-01/ 236).

It Appears that RBI’s central issue is with PayPal’s role as an “unlicensed” Money Transfer Service. This issue is certainly not new to PayPal (see US Regulations – Online Payment/Transfer). As highlighted in the circular above:

All cross-border inward remittances under MTSS must be accompanied by accurate and meaningful remitter information (name, address and unique identification number of each remittance like, MTCN) on funds transfer and related messages that are sent and the information should remain with the transfer or related message through the payment chain. A unique reference number, as prevalent in the country concerned, must be included.”

Further, Paypal’s “agents must”:

Indian Agents should have effective risk-based procedures in place to identify cross-border inward remittances lacking complete remitter information. The lack of complete remitter information may be considered as a factor in assessing whether a cross-border inward remittance or related transactions are suspicious and whether they should be reported to the FIU-IND. The Indian Agent should also take up the matter with the Overseas Principal if a remittance is not accompanied by detailed information of the fund remitter.

Issue for PayPal is that its “agent” in this case is its commercial bank that initiaties the domestic ACH. My guess is that they are also in a bit of hot water for allowing this connectivity in light of the Nov 2009 circular (and subsequent inaction).

In order to resolve RBI’s issues, PayPal must:

1. Obtain an MTS License (or a Payment System License)
2. Renegotiate terms and services with its clearing bank(s) so that they will comply with “Indian agent” responsibilities above, namely PayPal must provide detailed information on remittance (above) to clearing bank and hold information in country so that bank can perform both AML sanction screening and other SAR reporting
3. Put the detailed technology plan in place capture and send information to bank
4. Review Plan with regulator
5. Obtain regulatory approval on end state plan and request exception process for operating until final (end state) is in place

India’s regulators are some of the toughest on the planet. They expect that organizations read their guidelines.. “Better to ask forgiveness than permission” is a regulatory approach that probably works best before you are public company.

Note that PayPal’s “merchant” transactions (where an eBay buyer is paid) are not covered within the MTS regs above, unfortunately for PayPal it is difficult to screen these commercial transactions from other payments,  hence the broader impact in clearing both commercial “merchant” ebay payments and P2P/Remittances. 

My related Post

Cash Replacement

NACHA on Aggregation

SEC AML/Patriot Overview Regs