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DT, March 2017

Circling the Payments Industry
March 1, 2017

By Bailey Reutzel

Circle Internet Financial has moved beyond Bitcoin to social payments. But its ambitions don’t stop there.

Bitcoin remains a financial-services buzzword. But it’s becoming more and more clear that the cryptocurrency will be relegated to back-office processes outside the consumer’s awareness.

Seeing this movement, Jeremy Allaire, founder and chief executive of Circle Internet Financial, one of the few Bitcoin businesses to stay solvent over the years as the digital currency’s popularity waned, decided to pivot. He has turned the company’s product into a social-payment app and moved Bitcoin into the background.

“We don’t care about allowing people to buy and sell a speculative currency,” says Allaire. That opinion, as well as Circle’s decision to turn off the ability for users to buy and sell Bitcoin, didn’t make the startup’s existing users very happy. But Allaire expects Circle’s new focus to attract many more people than the customer base it lost.

Now, Circle’s mobile app allows users to send money via a messaging interface, adding text, emoji, pictures, and animated gifs to payment URLs. It’s a more private version of Venmo. On Circle, information is only visible to the sender and recipient, whereas on Venmo, a service of PayPal Holdings Inc., transactions are listed on a public feed.

“The increase in the daily use of smart phones and the services that smart phones make available are making people more open to using digital [peer-to-peer payment] services,” says Todd Ablowitz, president of Centennial, Colo.-based payments consultancy Double Diamond Group.

Build Bridges, Not Walls

Over the past year, Circle has obtained the necessary licenses to launch its product in the United States, the United Kingdom, and 14 other countries. This year, Circle will continue to expand, striking strategic partnerships with global market makers, hoping to make the app like a WhatsApp—instant, free, and global—for payments.

It may seem that Circle isn’t set on one specific mission, but the recent pivot away from running a Bitcoin exchange actually brings the company closer to the personal goal Allaire had for the startup. And that’s not social payments, either.

“Social payments ... is just the first thing we’re doing in building a consumer-finance franchise [that’s] focus is around the belief that by connecting the world together and making money work the way the Internet works, we’ll create a better world,” Allaire says. “To break down walls and connect the world financially, that’ll make economies better.”

For the past 20 years, Allaire has been interested in the Internet, the distributed networks it allows, and, most important, how that infrastructure integrates the world more closely. By adding monetary movement to that network, the opportunity for the impoverished to get into the bigger, global economy will be realized. Economies that are more deeply integrated will have less conflict, he thinks.

This idealistic goal has a model for success in the Internet’s democratization of communication. “That has also led to fear,” he says. “But even more people are interacting with [the Internet] and see it as empowering. An open, global, connected money system can continue to empower.”

And that’s where Bitcoin still plays a role.

Equality Through Bitcoin

Many industry experts would give a hat tip to Bitcoin for restarting the conversation about real-time P2P payments. And not only that these should be realized domestically, but should also exist globally without the hurdles and fees many payments businesses slip into cross-border transactions.

Although Circle isn’t marketing its mobile app as a remittance play, it’s using Bitcoin on the back end to allow international transactions without the delay and fees usually associated with cross-border payments. “The company for a long time has been a huge proponent of digital currency,” says Allaire, for just this kind of thing—an instant, global, secure, low-cost transaction network.

On Circle, Bitcoin is not used for Circle to Circle money transfers, that is for US dollars, UK pound sterling, and euro, which the company natively supports. But for currencies the company doesn’t maintain reserves of, Circle expects partners and digital wallet providers to use the Bitcoin blockchain to interoperate.

This will all be done through a platform of smart-contract protocols Circle launched in December under the name Spark. These open-source protocols allow digital wallets of varying types to interact with each other over the Bitcoin blockchain.

For Allaire, blockchain technology is all about providing interoperability. “We’ll continue to push forward with the ability to use blockchain as an open settlement network,” Allaire says. “We don’t want to build another closed network, but instead want the Internet of value exchange ... just like it doesn’t matter what Web browser or email client you use.”

But in terms of consumer-facing Bitcoin, says Allaire, “it’s missing a lot to become a mainstream consumer product, like Know Your Customer and Anti-Money Laundering regulatory mechanisms, other business rules, and a trust layer.”

Innovation Vs. Incumbency

Speaking of trust, banks definitely have an upper hand over startups in this domain. And Circle could have some stiff competition this year as a consortium of banks, led by the Scottsdale, Ariz.-based risk-management company Early Warning Services LLC, looks to launch the rebranded clearXchange P2P platform (“The Contest Over P2P,” February).

The new network, now called Zelle, is a response to the rise in mobile banking, says Melissa Lowry, head of product and marketing at Early Warning. According to a survey from Bank of America Corp. (one of the consortium’s founding banks), 62% of Americans use digital as their primary method of banking, up from 51% in 2015 and 47% in 2014.

“Consumers are looking for a faster, safer, and more convenient way to move money,” says Lowry. “In developing the Zelle network, we saw that an optimal consumer interface was possible by offering a ubiquitous payments experience that is embedded in consumers’ respective financial institutions.”

Talie Baker, an analyst at Boston-based research firm Aite Group, is interested in using one financial-services app to rule them all, and thinks other consumers will be attracted to the same if Zelle nails the user experience. “Having all my money in one place seems easier,” she says.

Zelle seems to be taking hints from popular P2P apps today, allowing users to associate a picture with their profile, select recipients from their phone’s contact list, and write messages to be attached to transactions. “However, integration with social-media platforms will not be a component of Zelle,” Lowry says.

And that’s likely because integrating with social-media sites opens the platform and its banking partners up to security vulnerabilities. Indeed, payment apps that have integrated social feeds have had some slip-ups.

In 2015, Venmo was lambasted for its less than ideal security precautions, plus, in January, Sean Spicer, President Donald J. Trump’s press secretary was trolled via the social-payments app. One of China’s largest payment providers, Alipay, also dealt with a gaffe when it launched a social feed called Circles. Soon after the launch, users began sending racy photos in exchange for money, sending the company into a frenzy to take down the pictures and block related accounts.

These snafus can sometimes mean disaster, especially since 70% of the U.S. population cites safety (data loss, identity theft) as the biggest obstacle to mobile-payment adoption, according to a Pew Research study.

Even so, bank-led P2P systems haven’t piqued much interest. ClearXchange is a prime example, never gaining much traction even though users only needed to know the recipient’s email address or phone number, similar to the social-payment apps attracting users today.

That history is one of the main reasons Allaire isn’t too worried about Zelle. “If you look at Zelle, it’s a consortium project that was outsourced to a business-to-business fraud company ... who then outsourced the development to another agency,” he continues. This complex hierarchy, in his mind, will make innovating quickly more difficult.

“Winning the consumer Internet is about daily software updates, data science, and new iterations,” Allaire said. “Does Zelle have that culture? Certainly, banks don’t.”

Bank defenders might counter that, though, since new technology is adopted and iterated on by the financial-services industry first because of the large amount of capital banking institutions have at their disposal.

Allaire concedes that Zelle will likely have an initial wave of success because the banks have broad distribution channels and will put a significant amount of marketing muscle behind the project. But still, in Allaire’s eyes, Circle’s openness to new technology such as blockchain and artificial intelligence will put it ahead. Machine learning, a form of artificial intelligence, has already allowed Circle to offer more efficient real-time payments.

Circle carries reserves in all the liquid currencies it allows users to transact in, which means the transactions are internal, with the company purchasing and converting within its own treasury. The AI engine Circle uses predicts how much of each currency the company should have in its reserves at any one time.

Plus, the AI helps the company make quick risk decisions. Because Circle doesn’t get the payment from a sender’s bank for sometimes up to a week, the company takes significant risk, granting users short-term credit in settling those payments instantly.

That’s a decision many payment providers are wary about, especially as the business scales. But Allaire is gambling on the AI engine to help the company avoid fraud. Currently, AI is making 90% of all the company’s risk and compliance decisions. Allaire hopes that will jump to 99% in the future, which in turn will allow Circle to cut overhead costs.

Chinese Influence

The inspiration for Circle’s shift came from a group of software companies in China that are taking financial services in the country by storm. Internet-based businesses Alibaba Group and Tencent have launched “super apps,” where consumers can do a variety of things—social media, P2P payments, shopping, and ordering taxis, to name a few—within a single application.

And, while Circle began its work in North America and Europe, the startup secured $60 million from Chinese investors last summer to expand the product into China.

“Messaging apps are the new operating systems, the new app stores,” Allaire says. “It’s about providing the [payments] capability right within the interaction a user is already having, instead of making a user leave one platform for another.”

With that, Allaire reworked Circle’s product around the premise that payments experiences are built around people, not the transaction itself. And, knowing that some people might prefer to continue using the messaging apps they’re already familiar with, Circle in September launched its capabilities within Apple’s iMessage platform.

“A bunch of technology came together and user experience came together over the past three or so years that make P2P value exchange a lot easier and more enjoyable,” Allaire says.

Just because Internet-based social-payments apps have taken off in China, though, doesn’t mean it’s a winning strategy in the U.S. Every country has its own idiosyncratic banking system. Whereas the financial-services infrastructure was lacking in China when the middle class began exploding and the smart-phone revolution was happening, banking and payments infrastructure in the U.S. has been quite advanced for many decades.

Because of this, startups will have a hard time completely displacing entrenched banks in the States, says Aite Group’s Baker.

But Allaire remains unfazed. “It’s not just P2P payments that’s at stake, but also the demand-deposit account,” he says.

And that’s how Circle sees itself making money in the future, by offering other financial services that people will pay for, such as money management and consumer-to-business payments.

“Once people have money in their account, Circle can find ways to monetize because it almost becomes like a bank account or a real wallet,” Baker says.


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