Glenbrook's QuickTake: TextPayMe

Now in beta, TextPayMe is a new person-to-person payment service that helps people send money from cell phone to cell phone. Most of the online coverage of this new system has been a rehash of the the company's press release, so we wanted to take a quick look at its initial positioning and some of the more interesting features.

At first blush, the system could be described as "PayPal for cell phones". But there are some important distinctions that are worth noting. The most obvious is the fee structure. Unlike PayPal, which is straight-across-the-board free to the consumer, TextPayMe bifurcates the fee structure between the payor and the payee. Consumers pay fees to load their TextPayMe account with a credit card (although they are able to load from their bank account for free.) Interestingly, they pay fees again every time they send money to a friend. Payees then pay fees on each payment they receive. Thankfully, payees are able to move funds into their bank account without paying another fee.

In some ways, this reminds me of the fee-fee-fee-fee banking spoofs you see on television. Almost all the fees are waived during the beta period, but this is still a fee-heavy approach that will blunt any hopes for viral adoption. I can appreciate the cost to get good funds loaded into the system, but asking consumers to carry the water isn't a recipe for success. I think the ill-fated C2IT system from Citibank (the banking industry's response to PayPal) also tried to soak consumers with fees.

To be fair, loading funds and withdrawing funds from TextPayMe are free when done against a bank account. But I'm not sure how many individuals (in the early going) are willing to give their DDA information (usually referred to by USA Today as "sensitive personal financial information") to a startup without any management team bios on the website. Who are these guys anyway? How do we know they're legitimate?

On the other hand, if users really are enthralled using their cell phone to send and receive money, the business model might be a winner. Assuming that a consumer puts $50.00 into their TextPayMe account using their credit card, it costs the firm about $1.40 to get the funds in hand. In this example, they charge $0.67 to load the account. Every $10 payment nets another $0.30 in revenue (split 50/50 between the payor and payee). To make five $10.00 payments, that's $2.67 in fees against a $1.40 cost of funds. To the extent that consumers do eventually fund their TextPayMe accounts through ACH debits, it's just that much sweeter of a business.

A couple of additional points worth noting at first blush:

1. The "click-to-sign" license grants TextPayMe the right to pull a credit report on the user. Huh? Ouch!

2. To verify the bank account ownership, TextPayMe uses the well-known twin-deposit technique to verify the consumer actually controls the bank account. This technique, originally developed and deployed by PayPal, is quite effective.

3. By agreeing to the licensing terms, consumers agree not to charge back any disputed transactions with TextPayMe. Others have learned that consumers have very selective memories when it comes to remembering any agreement to not charge back transactions they don't recognize on their statements.

Are any of these problem insurmountable? Of course not. That's the whole point of the beta period. We believe the market just might be ready for cell phone payments. But don't be surprised to see TextPayMe adjust their fee structure, adjust their terms and conditions, enter into licensing negotiations with PayPal or others, have to invest heavily on fraud detection and mitigation, and spend a ton of effort (and money) on building consumer market demand for their service.

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