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This story appears in the Nov. 26, 2008, issue of ISO&Agent Weekly.
A start-up transaction processor has developed an alternative payments network that it says would help community banks earn more revenue on local debit purchases.
Bling Nation Ltd. of Palo Alto, Calif., expects merchants to pay much less than with Visa Inc. and MasterCard Worldwide transactions. It says its model eliminates the need for several players in the current processing system, enabling it to route more of each transaction fee to its bank partners.
Banks participating in the Bling Nation network will issue contactless stickers for their customers to affix to a device such as a mobile phone. Banks also will be the transaction acquirers. Bank customers will not be issued a card for Bling Nation transactions.
"Payments are not profitable for many smaller banks," says Meyer Malka, a Bling co-chief executive. 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, he says.
"You have a global network to process a local transaction," Malka says.
The new network, dubbed the Community Payment Network, also could mean revenue for ISOs, but the first step is get it operational with banks, Malka says. The company's economic model could be compelling, but Bling must offer more than just low fees to attract users, according to observers.
Under the company's model, banks would act as the acquirers by persuading their existing merchant customers to accept Bling payments; Bling will operate the network and process the transactions.
Bling expects to charge merchants a transaction fee of 1.5% of the purchase amount, Malka says. It will keep 0.3%, and the rest will go to the bank. Roughly 0.25% will cover bank costs, leaving 0.95% as profit for the bank, he says.
This compares favorably with the economics of the established debit networks, Malka says. Of a typical 3% merchant fee, he estimates, 0.09% goes to the network operator, 0.92% to the processor and about 0.25% to cover banks' costs. This leaves 0.23% as profit for the banks.
For community banks, which have far fewer debit cardholders than the national-bank giants, the current model does not generate much profit. "Many community banks don't realize that their debit card portfolios can be a profit center," Malka says. Bling is talking to five community banks, in California, Utah, Nebraska and Florida, about the network and hopes that one or two will agree to test it in the first quarter of 2009.
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, and about 2,000 U.S. banks fit that profile, Malka says. Though the economics may be appealing, analysts say Bling faces an uphill battle to persuade banks to use its network.
"They seem to be going about this in the right way. Their value proposition makes sense," says Nick Holland, a senior analyst at the Boston research and advisory firm Aite Group LLC. However, "the ongoing problem is getting the terminals out there," he said. "Will people actually use it?"
How It Works
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, says Malka. Merchants will need a special reader to accept Bling.
Eventually, the payment capabilities will be incorporated into mobile phones, an idea that several payments companies are testing now, says Malka. Acceptance capabilities eventually probably will be included in the standard contactless terminals that merchants already use to accept payment cards using the four major networks, Visa, MasterCard, Discover Financial Services, and American Express Co.
Bling is trying to make it as easy as possible for banks and merchants, and the company is subsidizing most of the cost of providing the terminals and marketing the program, says Malka, who expects Bling to offer about $200,000 to $250,000 of incentives for each pilot test.
Help From ISOs
Asking consumers to use a payment sticker, which would be unfamiliar to most, would be a significant challenge. But a potentially even bigger red flag is requiring merchants to install new readers, says Bruce Cundiff, director of payments research and consulting of Javelin Strategy and Research in Pleasanton, Calif.
The local merchants Bling is targeting are not usually as sophisticated about payments as the national chains, and they can be very protective of the limited counter space next to their registers, he says.
"Local merchants are focused on working with their service providers. They want no muss, no fuss," and low fees may not be sufficient incentive to persuade them to use Bling, he says.
"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 the Bling model, Cundiff says.
That is where ISOs could help, Malka tells ISO&Agent Weekly.
"Community bank don't have the street force to go out and talk to [merchants directly]," says Malka. "Banks are trying even harder to get closer to the merchant relationship," but they lack the staff to canvass their entire market, he says.
"They may run an account for the merchant, but the banks don't have the payment piece," Malka says.
Approximately 75% of all the banks in talks with Bling Nation envision using an ISO that dominates the local market to reach merchants, Malka estimates.
Though the Bling Nation network does not charge as much for transactions as established debit networks, Malka says it will generate enough transaction revenue for ISOs to make some money.
Malka expects ISOs to earn residual revenue from Bling Nation transactions, but he does not know how much, and whether it is doled out at all depends on the bank.
"They can decide to keep [revenue from Bling Nation transactions], share it with local ISOs or use it to fund a better rewards program," he says.
About 60% of debit purchases fall into one of four categories—groceries, gasoline, restaurants or quick-serve retailers such as convenience stores and fast-food outlets—and Bling will focus on these, Malka says.
Bling claims that signing 50 to 100 merchants in a community will be enough to make the network profitable for a local bank issuer.
Malka gives 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," Malka says.
Kevin Woodward also contributed to this story.
