China Payments – Field Trip with Russ

Guest post today from my General Counsel and Chief Privacy Officer Russell Schrader. For those of you who don’t know Russ, he spent 18 yrs with Visa as their first Chief Privacy Officer.Russ just got back from almost 3 weeks in Asia and had a terrific view (from the field) on payments there. Given his deep knowledge of payments I thoroughly enjoyed his perspective.

July 11–
Just back from 3 weeks in China: Beijing to Tibet to Shanghai. Payments guys never sleep or just vacation, so here’s my report.

The phone is king.  It started the first day when the guide out his mobile number and said to call if there was anything we needed.  Some said they didn’t have roaming plans or want to pay the Verizon or ATT $10 per day. The guide’s quote–“everyone has a phone, even cats and dogs. Mime a phone and show them the number and they’ll call it for you.”  The New Yorkers responded with “yeah, right,” but darned if those who needed help didn’t get it quickly and easily.

It’s about social mobile payments regardless of age.  WeChat and Alipay QR codes are everywhere and used in stores, taxis and vending machines.  One of the few panhandlers had a sign around his neck with a QR code on it! The phone is the wallet.

It’s not about Apple Pay. After a tour of the Three Gorges Dam on a hot day, I went a vending machine that had the QR codes of 3 different systems and Apple Pay. I whipped out my phone–I’m an Apple Pay fan–but no Coke for me.  The locals tried and one bought me a soda with WeChat, saying, “No one takes Apple Pay.  They came too late.”

It’s not about Credit.  Even more than Apple Pay, I like the Sapphire Reserve card.  But merchant penetration is still a huge problem. The tailor agreed to take it for my deposit, with a 6% surcharge.  The shop actually has an assistant whose duties include escorting customers to a nearby ATM to get cash and return quickly and safely.

It’s not about Debit.   The ATM wouldn’t access my account and give me $100.  Not to worry, my guide said, she knows another.  Still no luck with the second local bank’s system.  Finally, I found a Citi ATM that worked, and my bank refunds foreign ATM fees.

The phone really is king, Part Two.   Shanghai Disneyland has a Preferred Access program that lets you dodge the 2-3 hour wait for the main attractions. But to keep the passes from being sold or transferred, I had to present a photo of myself taken at the time of purchase standing next to a Disney employee holding a sign.  Without the photo, the passes were worthless.  The catch? The photo is taken on MY phone, and they have no record or copy. What if someone doesn’t come with a phone?”  She laughed: “Everyone has a phone!”

And as a privacy guy, I really liked Disney’s approach. But to buy a ticket online, they insist on having my passport number as well as presenting the original passport for scanning at the ticket booth. But that’s another post…

Russ

 

Chase Net 2017

Its tough to find time to Blog as a CEO…. Most of you my blogs are sometimes snarky and tactless (making NOT offending someone a new consideration).

I was taking a look at JPMC’s latest investor presentation and noticed that ChaseNet is gone.. Why? I’ve written on JPMC and ChaseNet a number of times over last 6 yrs. Today I’ll cover my views on the latest developments and my views on JPMC’s ChaseNet strategy. Lets recap first: Continue reading “Chase Net 2017”

Trust – Part 1

No one reads my long blogs.. so my 2017 resolution is to break them up into smaller thought “chunks”.

I can’t believe its been 2.5 yrs since I wrote Brokering Identity. The central element of that blog, and today is to take a “trust” view of Network and Platform strategies. The rules, standards and processes by which trust is managed are critical to the success of networked businesses and markets from eBay to Visa/MA to the NYSE. Continue reading “Trust – Part 1”

Commerce Signals Launches databridge

Press Release

I’m excited to announce the launch of our first product, databridgeTM. It’s no secret that banks, retailers and mobile operators have great data. The challenge for these companies has been in how they let their data “play” in a privacy-centric model that controls both WHO can use the data and HOW the data is used (see Data Leakage). This is the core of databridge, with an initial focus on enabling transaction data to measure marketing effectiveness. Continue reading “Commerce Signals Launches databridge”

The Ledger.. and a new SWIFT Killer?

Money 2020 was a little short on big announcements. My #1? Visa/Chain announcement. Chain will open its entire platform (software core) to developers enabling distributed innovation (ie investment) by hundreds of start-ups and bespoke networks looking to connect.  My #1 bet is that the first focus area for Visa/Chain will be in replacing SWIFT.  For those not familiar with the intricacies of global commercial money transfer via SWIFT see my youtube video.

SWIFT is a global messaging network that enables all member banks to communicate in common language, it handles no funds, nor does it manage settlement. Swift sends standard messages to banks to settle funds. In the SWIFT model the instruction is normally sent by the originator of the payment to a beneficiary. Originating banks can determine which set of correspondent banks to use (think routing control).

Visa and Mastercard are also messaging networks (see Structural Changes in Payment, and Real Time Payments). The short summary of these blogs:

  • Real time gross settlement (RTGS) is only possible if all parties have funds in a common settlement entity.
  • Fedwire, NYSE, ..have real time settlement as all “members” have funded accounts for a net settlement (think daily margin calls)..  but all other US payment networks are messaging only, with settlement handled as a (daily) back end process.

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The idea of Blockchain “replacing” SWIFT is not new, Ripple has been working with Santander, Bank of America and others (see Finextra). Ripple is both messaging, and real-time gross settlement system (RTGS in XRPs). Ripple’s messaging is called the Ripple Transaction Protocol (RTXP) or Ripple protocol, it is built upon a distributed open source Internet protocol, consensus ledger and native currency called XRP (ripples). Think of Ripples as a private bitcoin. One of the most common criticisms of Ripple is that Of the 100 billion XRPs created, 20 billion XRP were retained by the creators, who were also the founders of Ripple Labs.

Chain on the other hand is blockchain infrastructure (great WSJ article) open for innovation. Chain powers distributed ledger(s) for multiple uses. Think of Chain as enabling each bank to have a local copy of a indisputable record… an incorruptible and infallible accounting ledger. Fund transfer certainly needs such a record, but for “accounting” to be effective there must be trust and settlement. Note that Ripple handles this settlement problem (XRP ownership ledger) trust, but has issuess in conversion to the “common XRP currency”.

Trust among financial intuitions is historically managed by networks and operating rules. For example there are operating rule for NACHA, Visa, Mastercard, … etc. Operating rules also are governed by laws and regulation (ex WHO can transact, how are transactions reversed, how are participants certified).  I would argue that a payment network’s greatest asset is Trust among parties (and devices, form factors), with each participant governed by complex sets of rules, terms, certifications, operations, standards.

Important to note that Blockchain doesn’t require trust to properly record transaction, but rather rules to take action upon the ledger’s data. In other words, it is technically feasible to give a copy of the transaction ledger to every participant (who owes what to whom every day). However it is very hard for banks to take action on the ledger’s data (Transferring money – ex net settlement) without a trust/settlement network. The common ledger is a must improved messaging approach, that still requires a operating rules (Trust) and a Settlement Approach.

Mastercard’s acquisition of Vocalink (the UK’s Settlement network) enables them to lead in commercial (and debit) transactions for both UK and US. This is a brilliant move, but certainly much more of a traditional technology/architecture approach. The challenge with Vocalink is that innovation is constrained by existing customers and services.

Chain/Visa has the opportunity to disrupt the commercial payment landscape, particularly when viewed in combination with Visa’s existing card network and a new settlement system. For example, most Visa transactions were settled at end of day through JPM Chase (every Visa member had settlement account).  For cross border transactions, Visa’s settlement “hubs” have correspondent relationships.

If Visa created a new Chain settlement infrastructure, or had member Bank support to leverage current infrastructure, it could quickly replace SWIFT with a far superior product which would offer transaction clearing times in 24 hrs (vs the 2-7 days with Swift). The biggest unknown is what part of Visa’s current operating rules could be leveraged to create this new settlement infrastructure. For the economic opportunity see this Fed Study

Money 2020 – What to expect

Each year, I make predictions about what to expect during the Money20/20 Conference in October. This year, I expect to see innovation in the following areas:

  • New merchant value propositions
  • Delivering value beyond the payment transaction
  • More collaboration
  • Payment in the OS
  • Transformation of commercial networks

My blog was upgraded to recode today.. see link below

http://www.recode.net/2016/10/13/13243500/mobile-payments-ecommerce-money2020-zelle

PayPal to Tokenize and Eliminate Steering

Looks like I was wrong… I’m now 80% confident that Paypal has struck deal with at least one network to tokenize. Congrats to the Paypal team for reducing risk and creating opportunity to compete at parity with Apple, Google, FB and others.

What to expect Thursday? Paypal will tokenize, commit to no steering and share transaction data.

PayPal Win

  • Elimination of the staged Digital wallet fee (or equiv circa MA 2012)
  • Ability to benefit from 3DS 2.0 (Shift liability, and Reduced Interchange)
  • Reduced risk and certainty in Network/Bank relationships

Paypal Loss

  • Transaction Economics/Take Rate as consumers will chose default payment option
  • Each issuer can decide to tokenize per VDEP/MDES. If no issuers take part there is not 3DS 2.0 benefit

Network Win

  • Consumer Choice in Payment (Increased Volume)
  • Reduced Risks from Cards on File
  • Standardization of Tokens

Network Loss

  • Competition to Network Wallets at Parity (Visa Checkout/Masterpass)

Issuer Win

  • Consumer Choice/Volume (Card vs ACH)
  • Control over tokenization/rate to Paypal
  • Ability to structure bilateral deals with PayPal (risk and rate)
  • Reduced ACH

Issuer Loss

  • Issuer branded wallets

Summary

My guess is that Paypal moved earnings call to articulate the take rate implications to steering elimination. Paypal must give up steering and transaction economics in the hope that Issuers will agree to tokenize. This puts Paypal at Parity with others like Google. Whereas Apple has been able to extract 15 bps from issuers to gain the privilege of being in ApplePay, Google continues to work to convince issuers such as Chase to be part of Android Pay. JPMC actually asked google for payment to tokenize.

Summary here is that issuers have a new control point in pricing with Paypal. My guess is that Paypal will come out with at least one major bank supporting them. Given JPMC is Paypal’s acquirer I would expect a deal here.