A start-up transaction processor has developed an alternative payments network that it says will help community banks earn more revenue on local debit purchases.
Bling Nation Ltd., of Palo Alto, Calif., expects to charge merchants much less than Visa Inc. and MasterCard Inc., but said its model eliminates the need for several players in the current processing system, which will enable it to route more of each transaction fee to its bank partners.
"Payments are not profitable for many smaller banks," said Meyer Malka, a Bling co-chief executive, in an interview Tuesday.
When community bank customers make debit purchases at local merchants, a significant portion of the transaction fee is routed to acquirers, network operators, and processors. "You have a global network to process a local transaction," he said.
Observers said the company's economic model could be compelling, but Bling must offer more than just low fees to attract users.
Under the company's model, banks will act as the acquirers by persuading merchants to use the network; Bling will operate the network and process payments.
Mr. Malka said Bling expects to charge merchants a transaction fee of 1.5% of each purchase. It will keep 0.3%, and the rest will go to the bank. Mr. Malka said roughly 0.25% will cover bank costs, leaving 0.95% as profit for the bank.
This compares favorably with the economics of the established debit networks, he said. Of a typical 3% merchant fee, he estimated, 0.09% goes to the network, 0.92% to the processor, and about 0.25% to cover banks' costs. This leaves just 0.23% as profit for the banks.
He said this model does not generate much profit for small banks. "Many community banks don't realize that their debit card portfolios can be a profit center."
Bling is talking to five community banks, in California, Utah, Nebraska, and Florida, and hopes that one or two will agree to test it in the first quarter.
The ideal issuer would have assets of $500 million to $3 billion, with at least 40,000 customers and market penetration better than 20% in its region, Mr. Malka said; about 2,000 banks fit that profile.
Though the economics may be appealing, analysts said that Bling faces an uphill battle in persuading banks to use its network.
"They seem to be going about this in the right way. Their value proposition makes sense," said Nick Holland, a senior analyst at the research firm Aite Group LLC.
But "the ongoing problem is getting the terminals out there," he said. "Will people actually use it?"
Mr. Malka said the Bling payment mechanism is a sticker that includes a near-field communication chip, the same technology used in contactless payment cards; Bling will encourage consumers to affix the stickers to their mobile phones. Merchants will need a special reader to accept Bling.
Eventually, he expects the payment capabilities to be incorporated into handsets, and the acceptance capabilities to be included in the standard contactless terminals that merchants already use.
Mr. Malka said Bling is trying to make it as easy as possible for banks and merchants, and his company is subsidizing most of the cost of providing the terminals and marketing the program. He expects Bling to offer about $200,000 to $250,000 of incentives for each pilot test.
Bruce Cundiff, a director of payments research and consulting for Javelin Strategy and Research, said that consumers will be unfamiliar with payment stickers, and a potentially larger red flag is requiring merchants to use new readers.
The local merchants Bling is targeting are not usually as sophisticated about payments as the national chains, he said, and can be very protective of the limited counter space next to their registers. Low fees may not be sufficient incentive to use Bling.
"It will be tough to get a critical mass of merchants with the level of sophistication" that will be able to evaluate the value proposition of Bling's model, he said.
Mr. Malka said that signing up 50 to 100 merchants in a community will be enough to make the network profitable for a local bank issuer.
He gave this example: If a community bank gives Bling stickers to about 4,500 customers, and they make about 15% of their payments using the system, a bank could expect to earn about $730,000 in annual transaction fees. That assumes an average of 15 debit purchases per month, with an average ticket amount of $40.
"In today's economic environment, being able to get more fee income on transactions is a must," he said.