Walmart Pay


As I’ve stated before, there are 3 industrys that enable mobile payments: grocery, gas, transit (frequency of use). Given WMT’s scale, consumer loyalty, mobile success, cards on file and acceptance cost efficiencies this is a no brainer. My summary is that they have used their unique assets in a new and innovative way, with superb timing. Continue reading “Walmart Pay”

ApplePay in Browser by Summer 2015

Very short blog

Today ApplePay is limited to in-App purchase and at the POS (using NFC). Per my blog last week, mCommerce is one of the fastest growing trends in the industry right now. Apple will be extending the “touch ID” payment experience to all Safari browsers (with merchant support). Contrary to the poor POS/NFC uptake.. this will be a MASSIVE SUCCESS!!

Pre-requisite/Set Up

  1. Merchant implements new ApplePay API that looks for supporting browser/device. Similar to what Google Checkout, Stripe, Braintree have done for accepting a token in lieu of card and cardholder data
  2. There is likely some other device/browser information going to merchant (like applePay plug-in on browser)
  3. Consumer has at least one touch ID compliant device (iphone 5s or 6)

UC 1 – ApplePay on MacBook – Easiest one to explain

  1. Consumer Checks Out
  2. Merchant checkout page finds supporting device/plug-in and displays “pay with Applepay”
  3. Consumer selects pay with Apple Pay
  4. Consumer’s iPhone 6 comes up with tough ID prompt (touch ID to complete purchase with Merchant X). Side note somehow Apple Keychain management is involved in exchange between devices
  5. Merchant receives token(s) for user ID and for card. User ID token is resolved through Apple service, Card Token is routed through TSP in current iPhone 6 AP model.

Merchant  Benefits

  1. conversion
  2. new CNP  rate tier for “tokenized” eCommerce (see my blog above from last week)
  3. fraud liability shift

Significantly it was announced that EMVCo just took over the next version of the 3DS spec. Remember when this happened for tokens?


  1. Paypal’s US take rate is around 340 bps, Apple will enable merchants to accept payments at a new rate tier and shift liability unto banks for 140-160.. wow..
  2. I believe Google is also in good shape to capitalize here, as is Visa Checkout. Perhaps Visa Checkout morphs into ApplePay online from a CYBS perspective. (CYBS becomes AP acquirer)



My confidence in this prediction 95%.


Payment in the OS – eCommerce/mCommerce Converge

28 Dec 2014

I hope everyone is having a wonderful holiday. Sorry for the delay in blogging, capital raising takes much more time than I had anticipated. Hope to tell you more about my NewCo in January. So much has happened since Money 2020, next week I will write a recap blog in prep for my 2015 predictions. Today’s blog is focused on “mobile” payments and platforms (iOS/Android)

I define 4 categories of mobile payments:

  1. Point of Sale. The phone used at a physical retailer
  2. mCommerce. eCommerce on your phone: buying something from a website in your mobile browser
  3. In App Purchase. Normally a subcategory of mCommerce, payment within an App (think Uber on iPhone). Only worth breaking out because ApplePay does this today.. and not above.
  4. Digital Goods. Games/Ringtones/Music/Apps (not in scope for today)

Point of Sale

Think NFC.. Not a focus for today.. but a great article from David Evans Apple Pay is Fizzling provided some key numbers. Only 4.6% of iPhone 6 users in a store that accepted NFC/ApplePay used it. Do you realize how small a percentage of use this is (4% of 3% of customers)!? If only the mainstream press realized that “50 new banks joining ApplePay” does NOT equate to usage. My bank issuer friends have confirmed what I’ve been saying.. there is no value proposition here.. and my volume estimates are accurate. Why? ApplePay does nothing beyond what your current plastic card does today.. Consumers just don’t care and Apple has made no effort to work with retailers (to promote at POS).

It would be great to know what NFC payment volume actually is, but the numbers are so low no one wants to talk about them. Overall NFC payment volume has gone DOWN in 2014 (from 2013) due to CVS, Best Buy and 7-11 “terminal configuration changes”. There are approximately 270,000 US locations which accept NFC, of which 100,000 are vending machines. My estimate for US Contactless Payment volume

  • 10% of consumers (20M active phones/wallets to 200M Adults)
  • 4% usage (very high)
  • 2.5% of retailers accepting (150k/6M, excludes restaurants)
  • $2.4T US Retail spend (ex Auto, oil/gas, Fin Ser, Restaurants, Travel)


            $240M (1/100th of a % of retail sales)

I can’t believe I’m wasting time even writing about this number (my real guess is $100M). Can you imagine finding a way to make this PROFITABLE across 12 different suppliers?!

If Apple had 100% of this volume their total ApplePay revenue would be $600,000!! (25 bps). No wonder banks signed that agreement. When I went to Google in 2011, the first thing I told Osama was “run away from NFC”.. everyone I’ve known and loved has lost their lives in this NFC stuff. You could do everything right and it still wouldn’t work (see 12 party fur ball). NFC/Contactless may be very Hot in London, New York, Hong Kong, and a few other Cities (high density, mass transit, cabs, high affluent…) .. but the rest of the world is very very cold.

My analyst friends are telling me that 5 retailers will “bolt from MCX” to allow ApplePay. I told them what we will probably see is a few of them adding the option within select markets (like New York and SFO.. ) but obviously the retailers are telling the truth.. Apple consumers are not beating down the door because of the service. Consumers just don’t care (4.6%).. ApplePay .. just like all things contactless… is only “buzz”. My rule of thumb holds: Behavior Change requires at least a 20% increase in value (unless you live in NYC).


What is the difference between mCommerce and eCommerce? If you bought batteries from Amazon on your iPad while sitting in your living room?… A: _____________? (mCommerce.. !!) It makes little sense to break mCommerce out as a separate category from a consumer behavior perspective.. but it makes TREMENDOUS sense to break this out for an analyst platform view.

Total eCom/mCom sales in the US are approximately $180B/yr (See US Census Data). Note that this is a MUCH bigger payment segment than the $0.24B POS market above. Within eCommerce, there are the BIG 3: Amazon, Visa/Cybersource, and eBay/Paypal/GSI which account for over 65% of volume (ex services, my estimate).

There is massive change of consumer behavior within eCommerce over the last 4 years, as reported today, Amazon see’s 60% if volume going through mobile! Quite a tremendous change from the 5% Amazon outlined just 4 years ago (see article). In 4 years we have moved from a model where 95% of  US consumers bought online on a Desktop.. to an environment where 60% are buying from an Android or iOS device. Now you start to see the strategy drivers for: Apple, Google, Paypal (Braintree), Visa (Checkout) and Amazon (firephone) moves here.

Historically eCommerce payment services focused on the ability to manage fraud, as merchants held all liability in a Card Not Present (CNP) transaction. As such, payment service providers managed card acceptance and also provided fraud management services (hence their pricing of ~340-~600bps vs the card present MDR for CP of 160-180bps).  Paypal’s service was the first of its kind to allow small merchants to accept cards, as the big banks had no tools to manage CNP fraud. All the large eCom specialists became VERY VERY good at managing fraud, building custom infrastructure to assess buyer patterns, and the device which the consumer is purchasing from to score transactions. Today most of their fraud rates are under 8bps (Paypal still charges 340bps).

Move from Fraud Management to Identity

In Europe, Visa and Mastercard shifted liability within eCommerce transactions onto banks in 2006 (see 3DS a Collaborative Path to Failure). This did NOT work out well for all, as the technology was highly flawed. The US never had this facility… a good thing.. and the state of the art in fraud management stayed within the big 3. For more background on this see Authentication in Value Nets. However the billions of dollars invested in building fraud management assets are being rendered useless by identity management and authentication. This is a HIGHLY disruptive force! Existing payment intermediaries have built their position on owning the consumer and managing risk. Mobile changes both!!  I will drill into this next week.

As I outlined in Perfect Authentication: A nightmare to Banks, and Who do you Trust, the ability to authenticate a consumer is far in advance of what fraud systems do. As Ross Anderson said at the Federal Reserve “if you solve for authentication in payments.. everything else is just accounting”. This statement does hold for the credit risk side.. but it does for the payments side. This is what is changing with mobile. From my blog: apple-biometric

The “KEY” [prerequisite] in value orchestration is owning the Consumer relationship. Therefore Identifying and Authenticating the Consumer is the first, primary, service that must be owned by a platform.  What was a separate “Trusted Services Manager” in the NFC world has been co-opted by platforms which will take a proprietary route. …etc. There is an all-out war going on for the Trust role: Banks (see Tokenization), MA/V, MNOs, Samsung, retailers… everyone realizes this is the “key” to unlocking future value in the convergence of the virtual and physical world.

The impact of mobile and identity on eCommerce is easy to see, as the more “platforms” know about you can be used within the device you use (and trust) the most. Mobile’s impact is also hitting the offline physical retail world, but in a much more experimental phase as the platforms, online retailers and aggregators don’t work within this space (yet).

A new rate tier: Cardholder present

This “new” form of mobile authentication will enable networks to create a MUCH improved version of VBV/MSC, shifting liability onto the bank with an interchange rate between CNP and CP. Who can take advantage of this rate and liability shift? Entities that can authenticate the consumer on the mobile device (Apple, Google, ?MNOs), securely manage a token and broker identity with other parties (see Authentication in Value Nets).

How will Visa/MA roll this out? There are many, many lessons learned in the prior 3DS (VBV/MSC) roll out. Already V/MA have been talking to major issuers and eCommerce service providers. Token issuance is currently a bit of a hang up as the issuers want to get their own TSP services up and running, and the Google/Amazon, … want to run their own TSPs. If everyone would agree to use the V/MA TSP services this could happen quite quickly. But because this is NOT the case, ApplePay and Visa Checkout seem to be the only services positioned for this move.

As I stated previously in my ApplePay blog, when this new rate tier hits, it will free Apple (and others) to transfer the token to the merchant across a greater number of protocols. In store this means that NFC will compete with a BLE experience, with NFC carrying a CP rate and others carrying a Cardholder present rate (and bank liability) that is very close to the CP rate.

Paypal has no position here.. as payments move into the OS.. they don’t have one nor do they have the eCommerce “portal” of Amazon where consumer’s begin their product search.NFC Change

2014 – Payments Part of OS:

Per my July 2013 blog Payments Part of OS, both Apple and Google are integrating payment capabilities into the OS. Where Google Wallet detractors deride Google because of its lack of progress in payments, I believe they are shifting focus to what really matters: establishing Android as the core commerce platform. In this future world you don’t really care about payments.. they just happen. With great authentication your information is stored in the cloud and you choose what information and payment instruments you want to exchange with a retailer.

We see the first hints at what this will look like in this WSJ article Google Shopping to Counter Amazon.  Note that this is not Google payment… this is Google SHOPPING. Let me emphasize.. the battle is NOT about payment but about delivery value to consumer within Commerce. The focus for innovation investment TODAY across banks, retailers and service providers is Android as the iPhone platform is locked down. Sure Amazon and Bank of America are leveraging Touch-ID but this requires little effort. The key for Commerce Innovation and Value Orchestration is to get 1000s of companies engaged … Apple’s efforts are 95% consumer

This consumer focus is paying off for Apple as they are 3-5 years ahead of Google (and Android OEMs) in handset hardware/SW. However, Google and Amazon are 5+ years ahead of Apple in orchestrating commerce value. Value orchestration is a network business and entails enabling millions of partnerships where consumers and businesses are incented to participate. Apple isn’t exactly known for making money for anyone but themselves. Apple has a MUCH greater ability to manage identity and trust and should be pursuing a strategy of consumer focused identity brokering (see Brokering Identity, and iPhone 6 – Apple’s Platform Opportunity) but are challenged organizationally as payments/identity are deep within a hardware culture, a world where neither are capable of creating partnerships.

Bank “payment” strategy seems to center on control or redesign of existing networks and nodes. For example, Issuers are attempting to leverage old nodes (Cards) and current market position to form a new orchestration role (see Card Linked Offers). Jamie Dimon  created a new Data Division at Chase run by Len Laufer with a bifurcated visa*net. What banks forget is that their role is that of a neutral broker, they were NEVER the starting point for commerce (their network and nodes are weak). The harder banks work to build barriers to entry, the greater the value of finding ways around them….(think bitcoin).  Or in the case of payment in the OS.. making unique assets (fraud) a commodity… the NATURE commerce is changing and the role of payments, how they deliver value, is changing too.

Think about it this way: did you buy an Uber ride on your iPhone because it took your Visa card? Did you even think about Payment? Same with Amazon… did you shop there because of payment? Payment is becoming a back end commodity service and the mechanisms for banks to differentiate are getting smaller. There are many implications for small business. For the last 20 years much expertise has been needed to create an online store, particularly in accepting payment. All of that is changing, if I solve for fraud, integrate my inventory into search and product discovery, merge customer contact and loyalty into advertising and payment, all with standard services… it becomes EASY.

For too long banks have leveraged your relationship to create value for themselves, hitting you with a mind numbing array of products and fees. This is their network legacy.. it is bred with inefficiencies. The bank goal was not simplicity, it was complexity and margin. Products like Apple, Square, Stripe, Paypal, Amazon, Poynt, Tesla are beautiful in that they make the complex appear simple.

ApplePay Expands to Browser

As I outlined above, the key trend in commerce and payment is the move to “mobile”. Today Google wallet works with Google chrome and app store for auto fill and checkout. Expect to see Google make authentication within Chrome, android, and apps much tighter, with Chrome becoming a cross device focus.

Today 90% of my payment friends agree that Apple’s REAL win within the next 2 years will be ApplePay in eCommerce/mCommerce. Today ApplePay’s focus is on in App purchases only. I expect to see ApplePay expand into browser based payments within 6 months or so. Apple may be first to market with the “Cardholder present” function given that tokens, authentication and bank agreements are already in place. From a merchant perspective Apple will offer a free API (akin to autofill) where Apple tokens and necessary consumer information is passed. Amazon Payments and Google already have this capability, but have not yet implemented tokens, biometrics or have bank agreements.

Apple’s greatest asset is its ability to change consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). Apple’s reputation is well deserved and earned “the hard way” by remaking: phones, music, mice, computers, apps, …etc.  Through consistent delivery of value within fantastic hardware delivering great (and fun) consumer experiences they earned trust for their products and brand. Consumers using Apple’s in app (today) or in browser (future) don’t even think about using payments… it just works.

mCom/eCom Convergence

When will we know it happened?

  • When neither consumer nor merchant had to do anything unique to support an online sale.
  • On phone, in app, in browser.. they all just worked and no one even thought about it.
  • We used the payment instrument of our choice.

Apple has already arrived at this state with in-app ApplePay. From a technical perspective, key convergence measures are:

  • Payment is treated the same regardless of channel.
  • Handets, platforms, and networks can pass information, identity and trust.
  • Banks accept that consumers can be authenticated without physical presences.
  • Developers leverage platform payment services with ease.

Who is impacted?

Paypal. What are paypal’s assets today? Risk management, consumer accounts, DDA Funding,  a few merchants. Apple, Google, Amazon, Facebook already have the consumers. The paypal risk management assets are worthless in a new environment. DDA funding looses importance as merchant costs for CNP fall from 340bps to 150bps. What do they have left? Let me know your answer..

MA/Visa. Visa/MA wins when there is card volume. Making payments part of the OS and giving consumers choice of payment instrument is a HUGE win for Visa/MA. As payments move into the OS so does V/MA. They become infrastructure. The losers? Well card issuance costs, risk management costs, fraud management costs, merchant integration costs all start moving to 0.. which means big margin compression for everyone else on the

With respect to eCommerce. Visa checkout/CYBS has substantial volume. They can adapt to tokenization quickly, but unclear how they would manage authentication.

Issuers. Imagine loosing all the airline CNP revenue? I don’t see an upside for issuers in this. They have a very poor ability to influence the network and are not well placed to serve in the trust identity role as consumers leave the branch and interact with the bank less often through remote channels. Banking is becoming a commodity service as well (see blog). You should have heard the squeal on the ApplePay agreement.. never before have Banks had something like this handed to them “take it or leave it”. Given the NFC volume above banks may have written if off. But this could turn out to be a big Trojan Horse as this tokenization expands into CNP/Card Holder Present. I believe their biggest fear is that Google will look to follow the model.

Merchants. Merchant that can sell or engage on mobile: Big winners.. mobile conversions, decreased fraud, liability shift to banks, changing consumer behavior. Merchants that are stuck in bricks and mortar.. no change.

Google. Big win. The only company that is cross platform/device. Buying in Chrome or in Android is seamless. Challenge is to move buying “search” back into Google from Amazon. The other advantage to convergence is the ability to close loop on behavior within the mobile/ecom process.. helping google advertising become even more effective. Google’s challenge is in Enterprise integration. Their engineers don’t like working with anyone else’s code. This is where Microsoft and Oracle are headed… helping enterprises engage consumers.

I propose the following metrics to measure/rate “Commerce Platforms” :

  1. Frequency of consumer touch (per day)
  2. Commerce transactions $/day
  3. Number of businesses you work with * the average time spent in managing in store experience…
  4. ??

Other Blogs

Payments Part of OS: What does that Mean?

Big Changes to NFC: Payments as Part of the OS

Stage 4 Evolution – Distributed Innovation,

ApplePay – eCommerce Distruption

iPhone 6 – Apple’s Platform Opportunity


Apple iBeacon Payment Experience

14 May 2014ibeacon

Last week I outlined what was coming out in the iPhone 6 from a capability/payment perspective. Today I will cover my best guess at the user experience, a 50% confidence guess…


First a little about Beacons: Qualcomm is the technology behind Beacons and they just spun out Qualcomm Retail Solutions last week with external investors to form Gimbal. My bet is that Apple was in the mix, as Apple’s iBeacon is the brand and handset side of what QCOM developed and owns. Apple’s iBeacon appears to be dependent upon QCOM license (see Patently Apple). You can see the similarity in Apple’s patented logo with QCOM’s logo.


Think of beacons as proximity devices with context. From QCOM

Gimbal proximity beacons complement GPS by allowing devices and applications to derive their proximity to beacons at a micro-level not currently afforded by GPS technology on consumer devices. A user’s mobile app can be enabled to look for the beacon’s transmission. When it’s within physical proximity to the beacon and detects it, the app can notify the customer of location-relevant content, promotions, and offers.

Here is a fantastic blog by beekn outlining how beacons operate and the advantages of the QCOM Gimbal platform. Beacons only transmit…they do not listen. Beacons can operate in a private mode where the UUID is dynamic and resolvable only within the Gimbal cloud, be public (Static UUIDs) where any application can read them, or registered as iBeacons  (see Gimbals as iBeacons).apple bump

Apple Patents

In January, the USPTO published a new Apple patent application: Method to send payment data through various air interfaces without compromising user data (see Patently Apple). PCT/US2013/049622. US20140019367

[0002] Devices located in close proximity to each other can communicate directly using proximity technologies such as Near-Field Communications (NFC), Radio Frequency Identifier (RFID), and the like. These protocols can establish wireless communication links between devices quickly and conveniently, without, for example, performing setup and registration of the devices with a network provider. NFC can be used in electronic transactions, e.g., to securely send order and payment information for online purchases from a purchaser's mobile device to a seller's point of sale (POS) device.
[0003]Currently, payment information such as credit card data in mobile devices is sent directly from a secure element (SE) located in a device such as a mobile phone through proximity interfaces, such as near field communications (NFC), without an associated application processor (AP), such as an application program in the device, accessing the payment information. Preventing the AP from accessing the sensitive payment information is necessary because current payment schemes use real payment information (credit card number, expiration date, etc.) that can be used to make purchases through other means, include online and via the phone, and data in the AP can be intercepted and compromised by rogue applications.
[0004] Thus, there exists a need for a secure method of executing a commercial transaction that is both secure and user friendly.

I believe the patent above describes what Apple is going to market with this October. There are several potential payment experiences depending on the merchant integration and the consumer handset. Specifically the patent seems to be written broadly enough where NFC is NOT a requirement for the “secure commercial transaction” referred to as the second secure link. As I stated Payment via BLE/Beacons will Still Happen, the issues are around:

  1. Issuer certification of tokens,
  2. bluetooth as the transport in the new EMVCo spec
  3. who will provide token assurance information and how will they be compensated, and to what degree will interchange be discouneted
  4. Treatment of token in Card Not Present (interchange)
  5. Merchant Adoption of NFC, Beacons and BLE

In the scenario of a new BLE capable point of sale, with a “second secure link” operating as BLE with the POS there is no need for a payment terminal at all.. and all iPhones with Bluetooth could interact directly with the POS (think Micros/Starbucks). Here is my short list of customer experience use cases

apple ibeacon options

Optimal Payment Experience

Here is my best guess and what Apple would like to have happen:

Set up

  • Consumer has BLE capable phone
  • Consumer enables Apple wallet and permissions payment with physical merchant
  • Banks have loaded tokens into Apple wallet for each registered card (see blog)
  • Merchant installs iBeacons near multi lane checkout, and registers location with apple merchant application. Another option would be to allow payment terminals to broadcast MID/TID beacons.
  • Merchant installs POS Bluetooth capability to receive consumer identifier and send total amount due, as well as eReciept.
  • Merchant payment terminals are upgraded to receive tokens through Bluetooth or other “Air Interface”


  1. Consumer walks up to cash register, beacons determine close proximity and wake up Apple payment application,gimbal-beacon-series10
  2. Consumer preferences are checked and approved merchants receive apple identifier, consumer loyalty card information, applicable discounts/coupons to the point of sale
  3. Merchant scans goods for purchase and processes loyalty, coupon, discount information
  4. Merchant POS (or payment terminal) sends total amount due to consumer phone directly via BLE based upon apple identifier
  5. Consumer receives notice on phone “Pay $100 to Merchant? Please confirm with fingerprint”
  6. Consumer validates transaction with fingerprint biometric
  7. Phone submits Card token to Payment Terminal via Bluetooth (not happening in October.. it will be NFC)
  8. Merchant processor routes token to payment network which translates and routes to bank for authorization
  9. Payment is authorized (as happens today).

October Launch Experience

Since Banks won’t support tokens over Bluetooth, Apple is stuck with NFC. The process is very similar to above, but my guess is that merchants will not be prepared to support the exchange of consumer information.. so it is iBeacon plus NFC only.

  1. Consumer walks up to cash register, a payment terminal beacon provides information to Apple payment application that it is close proximity to payment terminal ID xxxxx (TID),
  2. Merchant scans goods for purchase. No mobile processing of loyalty, coupon, discount information
  3. Merchant payment terminal cannot send total amount due since it does not have Apple handset information/UUID. So how will Apple do it? My guess is Apple will provide UUID to the Payment Terminal via BLE at application wake up to perform a “lite” checkin with payment terminal. Good news is that there would be no data connectivity requirements, but it requires a new payment terminal… For everyone else.. there is no total amount due (99% at launch).
  4. Legacy NFC. At application wake up,  phone asks “pay merchant with Apple wallet”?
  5. Consumer validates transaction with fingerprint biometric
  6. Consumer taps phone (NFC) and Card token presented Payment Terminal via NFC Merchant processor routes token to payment network which translates and routes to bank for authorization
  7. Payment is authorized (as happens today).

Apple’s biggest challenges?

  1. Merchant NFC adoption. Much of it is caught up in the fact that there are no debit cards in the mobile wallets (see blog Forces against NFC)
  2. Merchant adoption of Beacons and new payment terminals. No wonder Verifone is excited.. big merchants know this can all work without ANY payment terminal.. this is the big leap. The decision on payment terminal is now just nuts. EMV, EMV+PIN, EMV + PIN + BEACON, EMV+ PIN + BEACON + BLE…
  3. No business case for Apple in payments. Perhaps one of the reasons they are struggling to get an exec to lead this over there. Apple’s product people should ensure that their Treasury guys aren’t going to kill this thing. Banks know if consumers can’t choose their payment product that wallets will die. Apple should be focused on getting every single one of their 800M cards on file into the wallet, and ensuring the debit cards are added. This is key to making this work
  4. Organizational. No one leading
  5. Bank certification of Tokens in a Bluetooth transfer
  6. Token assurance information
  7. Merchant POS integration (see the optimal example above)


That is how I see it… comments welcome

Another good article on the overall Beacon/Retail Experience.,2817,2425052,00.asp

Payments.. global growth.. with controlled chaos

6 April 2014

Sorry for the poor flow here. jumping on a plane and wanted to get some of this out. feedback appreciated.


A brief view on what is happening in global payments growth, debit, banking and data. Why moves here are so important to banking, commerce and payments.


Nothing will dent the 20%+ CAGR of Visa/MA, as 92% of electronic transactions are completed by less than 10% of the world’s population. Perhaps the best analysis done on global payments is from Cap Gemini (2013 World Payments Report). Markets like Asia and CEMEA are growing electronic payment volumes by over 22% CAGR. The network effects are enormous, it is like mobile in the late 90s, or the internet since the mid 90s. No investor can stay out of payments.


Payments is a rather complex environment. I’m not speaking from a technology standpoint, but from a value, control, political and regulatory one. Just as electronic payments are exploding internationally, there are several forces that are acting against established payment networks in OECD markets. For Example

Thus, It is important to view the changes occurring in payments with changes in other networks: social, telecommunication, retail, mobile, supply chain, demand chain, advertising, banking, commerce, education…etc.  The lines that separate retailers, advertisers, platforms, MNOs, Banks, … are beginning to blur much more substantially. For example

Historically Banks supported commerce by providing access to capital, support of markets, specialized instruments, all of which created value through their unique ability to manage risk (using their information advantage).  Consumers chose banks based upon their physical presence to support  the interaction with (and transformation of) different forms of value: cash, check, electronic, …etc, as well as gain access to credit, and provide return on assets.  Bank strategists created retail financial “supermarkets” where transactional accounts acted a loss leader to cross sell 100s of other consumer financial products. The majority of consumers never participated in this cross selling effort, and therefore the mass remains unprofitable to these “supermarket” banks.

As cash, and check are displaced by electronic payments, the value of the branch and “supermarket banking” has shifted to the value of electronic payments for a large majority of the population. The information advantage that best positioned banks to manage risk has decayed. Further, the billions of dollars spent in transactional risk management has been eliminated by mobile authentication (see Perfect authentication a nightmare for Banks). Regulators are working globally to open up payments to non-banks (ex EU ELMIs), but conversely holding banks responsible for everything. Governments and Banks have grown addicted to data surrounding electronic payments, leaving many consumers to search for anonymity (ie Bitcoin).

The entities that are currently best equipped to deliver consumer value and monetize data are companies that the consumer most frequently chooses to interact with (Apple, Amazon, Google, WalMart, …). Banks are working from a position of control, and must pivot to a position of value, trust and choice.

A Story….

Most of you know that today’s Google wallet has a central transactional account of a non-Durbin Mastercard (see blog). Google pays each issuer with a card in its wallet the FULL rate on its cards (example 210 bps to FDC/Visa/Chase) and the merchant incurs a debit fee of 105bps. Google eats the cost.. In this model the bank wins, and the merchant wins. The consumer wins because they can put their preferred payment instrument in the wallet (ie Debit). In fact Google is the ONLY wallet that has debit cards in it.
You would think everyone would like this right? NOPE. Banks want Google to stop wrapping their cards. What are Banks upset by?
#1 Banks don’t like Google seeing the data,
#2 Banks don’t want debit use on mobile.. they want mobile to be a premium credit service
#3 Banks want part of GOOGLE’s revenue in addition to their full interchange.
This story should scare the pants off investors in the payment space, Google has invested a billion dollars, takes a loss on every transaction and has a value proposition for everyone.  (see blog)

My recommendation to Google? Tell the banks that they can shut you off whenever they want to. It is in their control to decline your transactions. I can just imagine the customer message from Google  to a consumer “your bank has decided they don’t like you using your credit and debit card with us, here are a list of banks that you can use, ….” .My recommendation to the Banks? Don’t trust Google with your data, find a way to work with them to accomplish your objectives. I have several ideas for you if you want to chat.

Five important takeaways from this section:

  1. There are no technology problems in Payments
  2. Mobile handsets and authentication are a threat to banks
  3. Banks are running away from the mass market, and Retailers/MNOs are running to fill the gap
  4. Google has done all the right things, invested a billion, takes a loss on every transaction and still can’t get traction with retailers or banks.
  5. Customer CHOICE is a threat to established players

Durbin – What Happened?

As reported Friday (see Bloomberg), the 3 judge panel at the US Court of appeals upheld the Federal Reserve rules, overturning Judge Leon’s ruling that “The court concludes that the [Federal Reserve] Board has clearly disregarded Congress’ statutory intent by inappropriately inflating all debit-card transaction fees by billions of dollars.” and the Federal Reserve failed to ensure that merchants enjoy access to “multiple unaffiliated networks” to process each debit-card transaction, as also required by the Durbin Amendment. Senator Durbin reacted to this Friday stating that the appeals ruling was “a giveaway to the nation’s most powerful banks and a blow to consumers and small businesses across America.”

Retailers and Senator Durbin argue that the clear language of the law directed the Fed to set the price of Debit at “reasonable and proportional to the cost incurred”. The Fed’s internal team came up with $0.12, but the Fed then came up with $0.21+5bps. Judge Leon had struck that fee down in July 2013 (see analysis here). For more background on Durbin and Fed see this this Federal Reserve Article.E:\Pictures\Blog\2013 number of payments in US.PNG

Debit – Industry Perspective

Debit is the most frequently used payment product in the US, with the lowest fraud rates (see Charts, and Federal Reserve 2013 Payment Study). Debit is a product that evolved from your Bank’s ATM network. This is why you have all of those logos like NYCE, PULSE, STAR, Interlink, … on the back of your card, and why you also use the card to get cash out of the ATM. I covered this topic 2 years ago in Signature Debit is Dead. Visa’s big innovation was turning their 1987 interlink win from a PIN debit acceptance network to a signature network. By placing the Visa log on the debit card, and forcing the “honor all cards” rule on merchants, they successfully drove network expansion. As the NYTimes outlines

Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.

Why all the regulation? A picture is worth a thousand words

E:\Pictures\Blog\interchange rates US Fed 2.PNG

Clearly the pricing here does not seem to indicate that effective market forces are at work, as debit network expansion was followed by tremendous fee increases.

Canada, Australia, UK, most of Europe have debit pricing of around $0.12.  A fantastic analysis of all these countries was done by Europe-Economics in The Economic Impact of Fee Regulation in the UK – June 2013. The universal regulatory goal is to establish (or retain) debit’s role as the central access point for transaction accounts.  As in the Australian example, the hope was that the removal of debit fees would result in merchant savings, which would in turn result in consumer savings. Unfortunately, banks successfully recovered most of the lost interchange through new bank fees, and merchants did not pass along the cost savings.

In Australia, 85 per cent of debit card transactions are processed using an EFTPOS terminal. Interchange Fees (IFs) for such transactions are imposed in inverse direction to that of credit cards as they are paid by the issuing bank to the acquiring bank. [Post regulation] Issuing banks suffered from a revenues reduction from IFs worth AU$647m for 2006. However, as in the Spanish case, banks responded to the reduction in their revenue from IFs by increasing the level of other fees. Annual fees increased by AU$40 on average, which for 2006 represent an estimated AU$480m in issuer revenues. As a result, issuing banks recovered 74 per cent of the lost revenue from IFs.

Beyond debit, Europe is considering caps on credit card as well (see Digital Transactions – Europe’s Fee Conundrum). Visa Europe Fee structure provided below for background.

E:\Pictures\Blog\Visa Europe Fees.PNG

For more detail see my blog Debit Wars. My summary view is that debit payments are going toward a common bank owned service operating at cost (Average $0.12 globally). Visa is impacted slightly here as 19% of revenue is from debit. Thus banks are working aggressively to move payments to high margin credit.

Retail Banking Impact

This debit dynamic plays heavily into a larger retail banking strategy (see Future of Retail Banking, and theFinancialBrand). The business of managing your transactional account was never a great business for a bank. Gallup estimates that retail banking is unprofitable for 80% of consumers, McKinsey’s analysis shows it is over 40%.    Durbin’s impact on debit fees cost US Retail banks over $7B (see Forbes).

E:\Pictures\Blog\retail banking branch transactions.PNG

Branches have historically been the #1 factor in consumer acquisition. During my time at Wachovia, over 80% of our customers selected us because we were the closest branch to home or office. This branch convenience is still the primary factor, although actual use of the branch has gone down dramatically.

This, together with the maturing of digital channels, has led to a culling of branches with banks like Chase looking to take upwards of $1B from branch cost.E:\Pictures\Blog\branchesA.jpg

The US is progressing along the lines of Australia, as the non-exempt banks add new fees to make up for the debit loss (see American Banker). However, unlike Australia, the US has 2 alternatives: Exempt Banks/Credit Unions (CUs), and Pre-paid Cards. Deposit growth in the exempt banks is growing 5-6% YoY, but the real winner seems to be pre-paid with growth over 36% (See 2013 Fed Payment Study and Bank Innovation ).

My simplistic analysis of pre-paid is that the growth is driven more by a need for access to electronic payments (by the unbanked), than a need for “banking”.  Example.. need to buy something on Amazon. This seems to fit well with experience of other unbanked success stories globally. A way to view this is that value of traditional “banking” is shifting to the value of electronic payments for a large majority of the population.

What we have seen is that the Value of a big bank brand is diminishing very quickly. The brand, infrastructure and data advantages that banks held are rapidly diminishing in value. The big buildings and beautiful vaults have no advantage over an Amex Bluebird card in a box (deposit insurance levels the field for everyone). Retailers, MNOs, and Platforms have better brands, better pricing and more physical distribution and/or direct consumer “touch” than banks could ever hope for.

Nothing in this area changes quickly. But here is what I see as the most likely strategies by key players.

Non Exempt Banks (Citi, JPM, BAC, WFC, …)

Strategy #1 – Try to leverage data advantage, and grow data services (JPM)

Strategy #2 – Go up market (Citi)

Strategy #3 – Be the best retail bank (BAC/ WFC). Protect consumer information

Strategy #4 – Get into the Mobile/data/advertising space

Strategy #5 – Develop new bank lite product (ex Chase Liquid). Seems to be going poorly as they just killed the product

The modern form of retail banking envisioned a “financial supermarket” (see Forbes Sandy Weill) where the transactional account was a loss leader for cross selling 50 odd other products, the new “banking like” product is centered around electronic payments with an access network (think Greendot, WU, ATMs, …) to get money into and out of the system. Ubiquitous merchant acceptance, and employer direct deposit further drives out the need to provide “cash out” facilities (branch like services) within the network. This simple payments product fits nicely into retail environments with regular foot traffic.

The Non-Exempt Bank dilemma now becomes apparent. A classic “innovators dilemma” where the loss leading core deposit account has been undercut by pre-paid for a majority of consumers, as the services surrounding electronic payments has made branch distribution a significant millstone in cost to serve. As if that weren’t enough, 90% of the money supermarket products must be sold face to face (need a branch).  While the retail bank could adapt to compete, the rest of the organization is forcing it to keep the branches and move upstream to the affluent high margin clients.

Tech Companies

The biggest news for payments investors is that Apple, Google, Amazon DO NOT want to have their own payments network. They are all consumer CHAMPIONS.. They all want the consumer to have their CHOICE of payment instruments “Let the consumer decide how they want to pay” is their common mantra. I heard again this week that Google wanted to buy paypal and I spit out my coffee laughing.. “where did you hear that bullshit?” Not only is this a regulatory headache, it is not the centerpiece of how any of them make their margin. Customer choice is highly disruptive barrier to entry in a commerce/mobile platform. This is why Apple’s BOD decided not to buy Square in Jan/Feb.

Apple: Consumer Champion and Gatekeeper

See Apple in Commerce

Apple is setting itself up as the consumer champion. They are not great at partnerships, advertising, data… but they are great in just about everything else. Apple’s will keep your data safe in the phone, in the store and in the cloud. Consumers anonymity will be protected… even wi-fi tracking will be nearly impossible. UUIDs are a thing of the past for advertisers. If you want to know who an apple iPhone customer is.. you will need to work with Apple.

Apple is well positioned to benefit from the future tsunami of issues concerning data privacy. They are most focused on adding value to the consumer.. rather than retailer, advertiser or bank. They have the best consumer demographic on the planet and you will work with them in their model if you want to play.

Funny story here. The big banks were approached by Apple a few months ago to “pay” for getting their cards into the new iPhone wallet. The banks immediately called up V/MA and said “you guys are going to let Apple PATENT the process by which my card goes from their phone to the POS!!?”. Hence the rushed joint announcement on tokens (see PR here). Yep.. Apple made that happen.  The funny part comes in later.. Apple now has some small changes to accomodate new V/MA standard but the banks ask apple.. “we would really like that biometric.. can you send it to us”… my guess at Apple’s response “price is the same as card registration we told you before announcement”.


Consumer Champion.. but with all of your data too.  Much less robust security plan, but the best in class company for orchestration. See blog for detail.  Google is attempting to work with Retailers, banks and advertisers. They are proving their value to consumers everyday with services that help them gain more consumer insight which in turn feeds better services. Google has no desire to be a bank, or a retailer… their value is in bringing everyone together. Just like apple, their fist priority is to the consumer.. everything else flows from that.


… will need to make this a part 2. Obviously retailers differ on consumer choice just a little..

Rewiring Commerce: Four Phases

18 Feb 2014

One my most often repeated lines is mobile payments are not about payments.. but about everything else. We have no payment problems today. When was the last time you left a store without your goods because the merchant doesn’t take your form of payment? Payments are the easy part, and experience has shown that it takes a VERY VERY long time to change consumer payment behavior (20 yr plus, see my blog on Behavior Change).  My personal bets are all around mobile’s future role in commerce….  I call it Rewiring Commerce (previous Blog).

As an engineer I like to take a control volume approach to systems. To some extent, marketing is a measure of inefficiency… heat or friction in a mechanical sense. Marketing spend makes up almost 19% ($750B) of total US Retail sales (around $4T), with most of that spend untargeted and non digital. Even these astounding numbers do not begin to touch the total opportunity in Commerce Efficiency (ie  transportation costs, spoilage, mark downs, discounts, and inventory write offs). Rewiring Commerce is much more than Apple’s beacons talking to you when you shop, it’s about how local suppliers/producers could meet needs locally, providing manufactures with tools to better estimate demand (eliminating waste and transportation), mass customization,  resource optimization, value orchestration..  yada yada yada.

Who is impacted by rewiring commerce? Everyone that buys or sells. What is key? Data, trust, identity, platform.

rewire impact

I see disruption of Commerce (ie rewiring) occurring in 4 phases.

rewire commerce phases

The First phase of mobile commerce disruption was focused on improving information flow (ie Showrooming).  Second phase is underway, experimental and highly fragmented with one my favorite companies being Blue Kangaroo. In this phase there is context to the mobile interaction without the consumer’s direct input. This is where Apple’s beacons will play (see blog Apple and Physical Commerce earlier this month).  Perhaps the best categorization of Phase 2 is in shopper marketing from Booz & Company.

shopper marketing

Third Phase: Intent

Theme here is consistent with a physical world version of Google’s search word marketing advantage. In this phase retailers and manufacturers work to influence your behavior before you are in the store (as opposed to in store beacons in phase 2). One of the start ups I’m incubating is focused on helping any company purchase intent information.  For example, when someone turns their car off in a mall parking lot they may be intent on shopping. Or when you buy suntan lotion you may be intent on a beach trip. Google is light years ahead of everyone in physical intent… why do you think they want to put up all those free wi-fi hot spots. But their information is extremely limited.. much more location based than behavioral.  In this phase retailers use their consumer insight in combination with others to provide relevant information to specific consumers.


In order for consumer adoption to take place there must be real value. Value requires:

  • knowing the customer (historically),
  • knowing the customer now (intent),
  • having the ability to touch the customer before they shop (publishing),
  • trust (consumer permission),
  • ability to run an advertising campaign,
  • ability to target consumers based upon insight,
  • ability to track consumer behavior after the campaign (redemption/purchase)
  • tracking requires ability to work with retailers

Yep.. that is a long, long list. What companies can do this today? Google, Apple, Amazon and Facebook.. with Google and Amazon 3-5 years ahead.

There are several strategies at play here today, but the biggest challenge is in obtaining real world intent. Several “Omni Channel” plays leverage online intent to create off line behavior to get around the real world data challenge (only if the consumer starts online).

  • Platform: Amazon, Apple, Google, Facebook
  • Retailer Focused: Square, Amex/Loyalty Partners PayBack Card, OminChannel, Paypal
  • Big Data: IBM, …
  • Big Government: NSA (meant for a laugh, please don’t add me to Echelon/PRISM)

Third Phase Summary

In this phase the Retail environment is not changing substantially, we are better using mobile to interact with consumers within the current retail and advertising constructs. Junk mail and random push messages are gone. Consumers are choosing to “trust” entities that consistently deliver RELEVANT VALUE. Services will be focus toward affluent consumers, as the focus of value will be around discretionary purchases. As efficiencies improve, we will begin to see a massive shift in advertising spend toward digital channels and specifically mobile.  The key for mobile monetization will be in Consumer Identity Arbitrage.. with Apple’s framework the clear leader.

Fourth Phase – Value Orchestration

I discussed this in Value Creation and Distributed Innovation, Static Strategies and the Rewiring of Commerce and in Future of Retail.

In this phase we will see real world changes to how Commerce is conducted, including: store formats (footprint, layouts, inventories), advertising, online/omni channel, customized products (by region and individual), local sourcing of goods, new intermediaries, brokering of: trust, identity, anonymity,…..etc.

Retailers and Mobile Network operators will begin to translate their distribution and data advantages into new platforms. Big data will be used to project your behavior, and recommendations will be targeted to you. I’m not going to go into much detail here, as this is where most of my big bets are…..

This is not a good wrap up.. but I have work to do.

Next Blog: Targeting and Attribution

Token Activity – 10 Approaches?

11 December 2013

I’m preparing for a few institutional investor chats next week in NYC and thought it was time to update my view on the payment landscape. Summary: much chaos and noise, with existing players throwing sand in everyone else’s gears… lots of energy.. but NO HEAT. This blog contains a brief inventory of initiatives I’m aware of. One of the reasons I do this is to solicit further dialog from blog readers.. so your thoughts are always appreciated. It is very difficult for small companies to identify activities which will impact them.. turns out that most non banks and even Visa and MA are ill informed on some of these as well.

In my June Blog Tokens: Merchant Options, and September blog Money 2020: Tokens and Networks I laid out 5 token initiatives.. we have now almost doubled..

The key differentiation between these Token initiatives is WHERE the translation occurs (Wallet, POS, Processor, Network, Issuer).  Translation is also referred to as DIRECTORY, which I define as the mapping of consumer information to payment information (see blog Battle of Cloud Part 1). The owner of the consumer directory is the winner in all of this, as the value of payment pales in comparison to the value of data and the consumer relationship. This is the core of the token battle

Inventory is for POS payments only. 

Token schemes

  • Form A (TCH Pilot – Processor Translation)
    • Consumer Directory: Bank
    • Token is presented to Merchant at POS (QR code, NFC, Barcode, …)
    • POS forwards token to Merchant processor (ie Elavon)
    • Elavon translates token into card through TCH service
    • TCH can resolve token directly (switch to network), or forward to participating bank for resolution (switch to network)
    • Issuer sends Authorization to Elavon
    • POS settlement
    • Patent issues surrounding merchant processor translation of tokensTCH Scheme
  • Form B – Wallet Translation (Push Payments)
    • Consumer Directory: Wallet
    • Token is presented by Merchant and read by Wallet. Token represents MID, TID, Processor and Amount
    • Merchant POS is awaiting authorization as if a card was swiped
    • Wallet sends token to Issuer (circumventing Visa/MA). Note this is WEAK LINK as data connectivity required for Consumer’s phone at POS
    • Issuer translates token into authorization, sends to processor
    • Processor passes authorization through to TID as if card was swiped
    • SMS based payments done in this model for years. Form of tokens could be beacons, QR, biometrics. Difficult to patent as core for operation is consumer directing bank to make payment.
    • Key differences (globally) are how consumer IDs the merchant and amount, and how does issuer pass the auth
  • Form C (C for Chase with their unique VisaNet deal)
    • Consumer Directory: Bank
    • Token is card number, Presentment is TBD.
    • If Merchant is a CMS merchant, Card routes through JPM’s version of Visa net for offers/incentives (given merchant participation.. of which there is none).
    • If Consumer card is JPM then deliver Card Linked Offers. Again.. not much here.
    • Unique capabilities, but all based upon Visa’s network. Barrier to replication is the unique deal that JPM constructed to “branch” VisaNet
    • JPM Visa flow
  • Form E – EMV/NFC
  • Form G (G for Google’s old Mastercard proxy model)
    • Consumer Directory: Google
    • Token is a card number – Issuer is google (See blog)
    • A plastic version of this was planned in 2012 as reported by Android Police, but was pulled because of high stakes war involving top issuers and Mastercard.
    • Merchant runs transaction as normal
    • Google acts as issuer receives authorization request and routes to selected card (using facilities of TXVIA).
    • After receiving authorization from funding card, google authorizes transaction
    • Issuers make all of the interchange they did before, but don’t like being wrapped. They also don’t like the data leakage and the fact that this impairs their ability to offer unique services (10% off at Kinkos).
    • Note: this scheme has a value proposition for everyone.. and banks still don’t like it… Google loses money on every transaction.
    • Another little known fact is that early versions of GW ran in this model due to limitations within NXP’s chip (only supporting one card emulation app)
    • No Patent issues, few other companies could afford to take a loss on every transaction (buying data). Network rules are the primary issue.
  • Form H – Host Card Emulation  (Google, MA, SimplyTapp) I like – this one
    • Consumer Directory: Issuer
    • HCE Blog
    • Blend of NFC and Form V below. Simplifies the NFC supply chain
    • No dedicated hardware, NFC just another radioExposure: 000 : 00 : 00 . 156 %Accumulated%=0
    • Issuer Creates One time use tokens for EMV key generation
    • Merchant acceptance hurdle CURRENTLY same as NFC
    • Can be leveraged for non EMV purposes (Beacons, QR, wi-fi, …)
    • HCE is GPL, but ability to generate one time use tokens for EMV generation is unique.
  • Form M – MCX/Target Redcard
    • Consumer Directory: Wallet/Retailer
    • See Gemalto/MCX Blog
    • Very similar to Model S (Square) below except wallet is owned by the retailer and form factor is QR code
  • Form P – Paypal/Discover
    • Consumer Directory: PayPal
    • OK… this is not mobile yet.. but since I have Square down below, I thought I would be fair
    • Consumer registered for Paypal Card running on Discover network.
    • Consumer enters phone number at POS + PIN
    • Processor translates phone + PIN into Discover transaction
    • Discover routes to Paypal for authorization
    • Very similar to Model G above
    • Transaction authorized
  • Form S – Square/Starbucks/LevelUp – POS translation
    • Consumer Directory: Wallet/Square/Starbucks
    • Consumer account mapped to phone, ID, voiceprint, card, picture, location
    • POS translates ID to Card
    • POS request authorization as a card not present transaction
    • Consumer Authorization was taken during service registration
    • Consumer receives digital receipt for transaction
    • See Square Stand, LevelUp
  • Form V – Visa/Amex/MA – Network Tokens (TBD)
    • Consumer Directory: Network (Issuers don’t like this)
    • Press Release
    • See blog on Battle of the Cloud Part 4 – Clusters Form
    • Tokens will evolve to a very long number which will be translated to an issuer/account number. This is what Visa/MA do today.
    • Patents will be around generation, use and validation of token. In the future, merchants will not store your card numbers on file (COF), each merchant will have a unique token based upon your actual account number and their own ID.

From Business Implications of Tokens

Business Drivers

As I outlined in New ACH System in US, my view of Bank business drivers for Tokenization are:

  1. Stop the dissemination and storage of Card numbers, DDA RTN and Account Numbers
  2. Control the bank clearing network. Particularly third party senders and stopping the next paypal where consumer funds are directed to unknown destinations through aggregators.
  3. Own New Mobile POS Schemes to protect their risk investment
  4. Improve ACH clearing speed (new rules, new capabilities to manage risk). In a token model the differences between an ACH debit and a debit card will blend as banks leverage common infrastructure.
  5. Create new ACH based pricing scheme somewhere between debit ($0.21) and credit cards
  6. Regulatory, Financial Pandemic, AML controls (per  blog on HSBC)
  7. Take Visa and MA out of the debit game (yes this is a major story)
  8. Maintain risk models (see both sides of transaction)
  9. Control Retailer’s efforts to form a new payment network

What banks seem to be missing is that mobile payment is not just about payment (seeDirectory Battle Part 1). Payments SUPPORT commerce, Banks therefore do not operate from a position of control but rather of enablement. Most retailers recognize that Consumer access to credit has resulted in improved retail spending, however most would also say consumer addition to bank rewards has been detrimental to their margin.

Commerce and Banking – What is the Difference?

21 Nov 2013

Warning… long blog.. random unstructured thoughts

This is the question I came up with in a lunch chat with my friends at Omidyar Network and not exactly something I can adequately address in a blog, a book, or a lifetime.. but hey some idiot like me may as well throw it out there.

Why am I asking this question?

My investment hypothesis is that Banking and Commerce will be undergoing a fundamental rewiring. Therefore I’m wondering who the winners will be? What needs to be built? What are the signs that progress is coming? These are my selfish drivers.

On the altruistic side, how can we massively expand the global economy? Enable millions of businesses and billions of consumers to participate in the world economy? Within emerging markets, which is more important to invest in? Banking or Commerce (see blog Expanding Global Economy).

Where am I coming from? Network View

Well I’m certainly no economist, but I do know a few things about networked businesses. How are Banking, Commerce, Society, Government influenced by network effects? How has it evolved?

One of the most influential books I’ve read on this topic is Weak Links by Peter Csermely (viewable on Google Books here). If I had one book for you to read during the Holidays this is it. This book is tremendously arcane, detailed, technical, deep.. but I guarantee you that you will have a new view of commerce, banking, advertising, social networks, payments, and society after reading it. Example below on Peter’s insights into how the creation of money altered society, established “weak links” and Capital Markets (p 263)


Wow… just when I thought I knew everything about payments. The advent of money led to the development of concept of PERSONALITY!? (Certainly a new way of thinking about networks). The idea that increasing use of money drove new social and economic structures is obvious; less obvious are the connections formed, the “weak links”, beyond the flow of funds: non monetary data, relationships, reputation, …etc. I prefer to think of this “personality” dynamic, within weak links, as behavior (as influenced by Malcolm Gladwell).

These “weak links” represent the world’s most complex network, and this network is going through a FUNDEMENTAL change as communications networks have greatly improved the efficiency of network creation to a near frictionless flow information. There are 2 fundamental questions for me here:

  1. What is the cognitive limit to networking (ie. associations, data, ..etc)? and what are the tools to improve them (ie Platform which I will cover later), and
  2. How do we connect the unconnected?

Most surprising to me, within Peter’s work, was the idea that scale free distribution (completely open networks) is not always the optimal solution to the requirement of cost efficiency. For example, Peter states in his book

in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks.

Therefore, there is a case to be made for specialization and “semi open” networks when it comes to COST efficiency. Logically, the boundaries for star network size are associated with the value of connection exceeding the cost.

Given the complexities of weak links discussed above, we can see (from a networked view) why managed economies (like the old USSR) lost to social structures where dynamic networks could be formed on value.  We can also see how consumers at the bottom of the pyramid are more heavily influence by the the few links they have (ex social programs, corrupt dictators, populists, …etc).

This all leads to a question for us, as a society, where should we try to “centralize” services and functions? Would it be better to provide the tools to “connect” and educate the mass market on how to discover services (ie value, reputation, price, …)? Or force everyone into a network with no other options? (Sorry for the Healthcare tangent).

Star networks naturally occur, but they also occur artificially. Banking has both dynamics, as connectivity and strong links are required for efficiency. Banking System’s network dynamic is also strongly influence by regulation that manages the connection and the information flow. What would an unmanaged banking system look like? This is what we see today in BITCOIN.

US Bank regulation impacts participation, services, value, location, communication, … etc. In a world of free information flow, should consumers have a choice? What choices should they have? The need of government is to track financial information for the purpose of taxes and management of economic activity. The need of consumers is to connect to the economy efficiently.  Thus star networks exist both as natural (self organized communities) and unnatural (regulated services, dictatorships) phenomena.

How do consumers select a Bank? Well back in 2006 we commissioned an analysis and found that branch location (convenience to home/office) was the number one factor in consumer bank selection. In the last 2 years we have seen a SEA CHANGE as US banks now work to thin out their branch network. Many drivers here, but it certainly doesn’t help that the fee restrictions from Durbin led to a consumer banking environment where the bottom 40% of consumers are no longer profitable (see Future of Banking).

Where are these bottom 40% going? Pre-paid (see Bluebird). Although Banks don’t want the bottom 40%, they also don’t want Walmart to succeed. Retailers like Walmart love these consumers, as they are their core. Banks products are becoming “banking lite” services productized and sitting on a retail shelf to buy. Pre-paid “specialists” have thus materialized, and established players hate the idea that consumers will to think of bank services in this light (a product which can be bought.. and switched). Of course it makes sense to ask your regulator from protection against consumer choice, but this is certainly not to benefit the consumer.

How do consumers select a retailer? Not all commerce is retail, and I can’t possibly do justice to answering this question. The CEO of Safeway also outlined how 80% of any given Store’s customers were within a circular proximity of his stores, and that store location was driven by density/competition/demographics.  However, this is convenience selection process is NOT the dynamic with Amazon or Walmart. It would seem that the value of connecting to Walmart and Amazon is different for certain population groups. (see Future of Retail).

Quantitative Data

Big picture first. How can we measure “networks”? Perhaps the real question is what are we trying to find. We could look for efficiency of the network itself, or the financial health of the nodes, or the scale (number of nodes). The last one makes little sense as everyone participates in Commerce and Banking to some extent.

With respect to Banking and Networks, NYU’s Thomas Philippon published jaw dropping research detailing how Payments and Banking are one of the few network businesses in the HISTORY OF MAN to grow less efficient (rail, telecom, energy, …). Consumer banking examples are plentiful: is how can the banks justify paying 0.2% interest on your savings, but charge you 15% on your card? (See Future of Banking: Prepaid..?). Obviously regulators are protecting bank margins, with some Bankers ACTIVELY discouraged from rate competition. This is the DEFINITION of regulatory capture (regulators DISCOURAGING philippon_newfig1consumer competition).

Commerce is far too broad to generalize. It encompasses manufacturing, services, retail, infrastructure, rules, codes, …etc. Logically improved information flow should improve transparency, improved transparency should lead to improved consumer choice and growth of specialists focused on serving ever smaller niches of demand. We certainly see this dynamic today in HighTech manufacturing (Cisco, Samsung, Apple, …), US capital markets, telecommunications, professional sports, ..etc. How can we measure this? One of the best scholarly articles I’ve read on networks and global commerce is from Humels, Ishii and Yi (See paper as published by US Federal Reserve). From the abstract

Using input-output tables from the OECD and emerging market countries we estimate that vertical specialization accounts for up to 30% of world exports, and has grown as much as 40% in the last twenty-five years. The key insight about why vertical specialization has grown so much lies with the fact that trade barriers (tariffs and transportation costs) are incurred repeatedly as goods-in-process cross multiple borders. Hence, even small reductions in tariffs and transport costs can lead to extensive vertical specialization, large trade growth, and large gains from trade

From a Commerce (Manufacturing) network view, over 30% of export growth was fueled by network effects associated with specialization. These effects (growth) were highly correlated to trade barriers (ie, network friction) and  infrastructure (payments, commercial banking, transport, logistics, communications, …etc).

How has information flow impacted Retailers? Net Margin in retail has taken a nose dive (from 4.2% in 2006 to 2.8%, see data by industry from CSI market). Retailers have no one to protect them from the forces of competition (ie Bank regulators) and therefore have a much tougher job as they work to sell commodity goods at the highest possible price, in a world where they don’t know the consumer’s name (see Retailer CRM).  It seems obvious that data transparency (ex show rooming) and new networks provide price and reputation information and that consumers are changing behavior.retail margins 2

Commerce and Banking

Summary: the only difference between Commerce and Banking is REGULATION. Banking is a highly regulated activity…. Commerce is not. Providing access to financial services is a much harder problem to crack because of local regulatory hurdles (see my notes on MPesa and Reaching the Unbanked).

If commerce, networks, banking, government and society are evolving how SHOULD we change our artificial structures (ie regulation, government, …etc.) to support? Have we reached an apex where the pendulum will swing quickly from centralization to hyper democracy? And hyper capitalism? Where SOCIETY creates and evaluates rules which are established based upon their aggregate network effects, not on lobbyists, politics and junk science?

The most immediate areas impacted are those networks that do not deliver value, as barriers to entry and switching costs are overcome value and scale of alternative networks and new business models. 200 years ago we could walk into our local country store and ask the shop keeper to put our purchase on our account. We could barter for goods and services.  Today, the regulatory hurdles for a store to provide this simple service are substantial.

Banks, manufacturers, retailers, service providers are all capable of issuing credit based upon identity, reputation, history, use, …etc. A home builder could take on the ability to sell, lend, lease and repair a home. Yet the enormous regulatory requirements on selling, lending, leasing inhibit the viability of this vertical service integration.

With respect to payments, as my friend Osama outlined to Tim Geithner, what if the future of payment profitability was driven not by interchange, but by the flow of data? What if Apple were to give away new iPhones, with free connectivity, with the provision that they share data on preferences and behavior? This is NOT some future state, these discussions are happening today. We tend to view these discussions in context of the companies, products and structures that exist today (ex. how could Visa enable this?). Yet existing networks have proven an inability to adapt, as they were formed around an existing value proposition in which each node became “attached”. If you change the core service, you change the entire network.

The inability of other networks to adapt is FAR less concerning to me than regulation that will destroy innovation and create artificial PROTECTIONS around existing structures. In the example above, what if the government mandates controls around PII making the prospect of free phones and free data non-viable. Who wins? Consumers gain increased protections on their PII, but loose a service. Should they not be able to make this trade themselves?

Another example is Prosper in social lending. A great example of innovation which was “guided” by the SEC to become a securities dealer (see Wikipedia, Crowd Sourced Credit, and my blog on Reputation). Now every loan must be registered as a security (see example) . This may be the right thing for us to do as a society, transparency and auditing are valuable functions which increase the flow of capital and efficiency of a market. But must we be required to submit to these regulations when we want to take on another type of risk? Having the government certify “accredited investors” or “accredited borrowers” may be best as an optional service that must prove its value.

In the emerging markets we see the MASSIVE success of MPESA. With few exceptions (Philippines, PK, Colombia, Peru, Ghana), we see every other country working to ensure this DOES NOT happen in their market. India is at the top of my list of offenders, where entrenched bureaucrats and regulators work to protect domestic banks at every level, regardless of the potential macro economic benefit (review IMPS for example).  Beyond banking the same dynamic plays out in Commerce as well capitalized companies like WalMart are hammered for making unapproved INVESTMENTS in infrastructure (see WSJ).

Clearly the pain point is around banking, but it is not something that banks alone can address as they themselves are regulated, it is a regulatory issue (see US Payment Innovation and Regulation).  Europe has done a fantastic job addressing the regulatory issue (within the ELMI construct, SEPA, …etc.), their problems are around nanny state consumer protections and EU rules do not make their way into domestic law or regulations. A government that protects against everything, inhibits free association, consumer choice and the assumption of risk. (now I sound like Milton Freedman).

“Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.”
― Milton Friedman

“Government has three primary functions. It should provide for military defense of the nation. It should enforce contracts between individuals. It should protect citizens from crimes against themselves or their property. When government– in pursuit of good intentions tries to rearrange the economy, legislate morality, or help special interests, the cost come in inefficiency, lack of motivation, and loss of freedom. Government should be a referee, not an active player.”
― Milton Friedman

“The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with a great measure of both”
― Milton Friedman


Just as use money enabled a specialization and concept of “personality”, telecommunications is opening up a new world of free form association, both business and societal.

Open Source is a model most of us are well familiar with. (further reading… I ran across a very nicely done paper from 2 MIT students: Implication of Open Innovation and Open source to Mobile Device Manufacturers).  Given that mobile, advertising and payments are all networked businesses… business models supporting distributed innovation should advance at a faster pace than those controlled by a single entity. For example, Amazon, Samsung, Motorola, LG, HTC, Verizon, ATT, Vodafone, .. all make much larger investments in the Android platform (than in IOS). (I would love to see an analysis of combined capital investment in android platform)

From my blog Stage 4 Value Shift

…this distributed innovation hypothesis is NOT playing itself out (ie Apple). Apple’s 1Q12 showed iPhone revenue alone was $24.4B, which is bigger than all of MSFT revenue combined.  Analysts have shown that Apple now garners 75% of mobile handset profits, with only 9% of handset market share.  So while Samsung alone has outsold Apple in Units this quarter (41M vs. 32.6M), and Android just topped 50% market share (vs Apple’s 30.2%).. Apple’s handset business PROFITABILITY dwarfs that of all of the competition (COMBINED).

So… What are the factors of competition today? Can someone else change the game?

The big downside in distributed innovation is complexity, there is a need for a “channel master” or chaos reigns. Many Android users witness this chaos when an app won’t work on a new hardware/OS combination.. Distributed innovation is not something that established businesses are good at. It has proven most successful in product PLATFORMS where the pace of change in each component is changing at a rate where no one company can make the capital investment to remain competitive (ex. Moore’s Law, PC architecture through present day). Intel played a very important role in this process, as it worked outside the scope of the CPU in areas such as: Intel Architecture Lab (IAL, developed common standards like PCI),  stimulated external innovation (developer training, testing, Intel Capital), industry marketing, patent/licensing. Intel defined what the PLATFORM was.. something that is common sense to us today.. but rest assured it was not given to them, rather it was something that they stepped into and took leadership of.

From Delivery to Discovery

Commerce and banking have many effective platforms to coordinate supply chains and payments. Today the nature of commerce competition is on quality, price and distribution (delivery). What if the nature of competition shifts from delivery to discovery? Shifting the model by which “weak links” are established today.  Today an individual must sift through mountains of search results and travel sites to find the best deal. We see complete garbage in banner ads and TV.

Who can proactively help you form networks of value, and expand how consumers manage their network, identity, personality? Most would agree that Google is best positioned here. I’m also very excited about the prospects of a company I’m incubating in this space. Ok.. this is getting off track quickly

Summary (I just finished reading a few of the federalist papers last night.. so pardon in advance).

The key for global economic growth is allowing individuals, and companies, to assume risk. The lines between Commerce and Banking SERVICES should blur, and start from the Commerce side as regulated intuitions have an unfair advantage in their protection. New networks provide for free form associations, and will improve in their ability to organize as platforms mature. These networks are capable of higher forms of risk mitigation, but are throttled by bespoke institutions and regulations.  Bitcoin is perhaps the best example of a disruptive force to hit banking. Europe is proving to be a role model in banking regulation, but their innovation in financial regulation has been offset with a local enforcement and complex environment where consumers cannot assume risk.

My message here is for Governments and regulators as much as it is for innovators. We must allow consumers to make decisions for themselves, and avoid regulating every behavior or government centralization and control will tend toward tyranny that is unaccountable and unchangeable.

Static Strategies and the REWIRING of Commerce

30 Sept

Warning… unfinished thoughts from a non linear thinker with typos. Feedback appreciated.

Why did IBM choose to outsource DOS to MSFT?  How did US auto makers miss the small car market? Anyone remember WorldBook encyclopedia? How did Research in Motion loose its dominant position? What happened to Kodak (it had digital patents it didn’t use)?  Why is Uber so successful?

The nature of competition is changing in MANY industries, this short post focuses on consumer commerce. What is driving the change?

  • Information/Transparency
  • Social/Reputation
  • Data/Targeting
  • Consumer Behavior and Expectations
  • Advertising
  • Non-Price Product Factors
  • … etc

Make no mistake Commerce is being REWIRED..  How do you rewire 25% of your Economy?  (US Retail Sales of $4T is 25% of the US $15.68T GDP). Unfortunately most of the “rewiring” is not by design… Today we see existing companies and business models working to “bolt on” changes to their models rather than transforming products, processes and systems. example infrastructure

For example, imagine you are a Retailer, how do you compete? A) You sell commodity goods at the highest possible price (see Retail 101).  B) Sell unique goods at the highest possible price. How do you achieve this? Well there are 100s of strategies here (ie. loyalty, market downs, coupons, loss leaders, price optimization, promotions, trade spend, …). These strategies have people assigned, budgets allocated, systems and reports that have been “tuned”.  This organizational momentum makes pivoting very hard.

The consumer  strategies above may be best summarized as: getting consumers to spend more with you, and leverage that loyalty for profitability.  These strategies have been in place for 100 years!   Where is the innovation and data? Product insight? A digital  version of a loyalty card is NOT innovation… similarly electronic coupons are just automation of an existing (broken) paper process. Is it any wonder we see so few successes in mobile anything? Most innovation is thus “bolt on” with little incremental VALUE.

There is SO MUCH opportunity for restructuring retail Commerce that I’m challenged to provide examples that are broad enough.

  • When was the last time you clicked on a banner ad?
  • Every year almost 30% of fresh fruit and vegetables are discarded for spoilage (see USDA),
  • US Apparel sees 30% of its inventory go in mark down fire sales (See Forbes).
  • What if a store could more accurately estimate consumer demand? Would you commit to purchase for a 30% discount?
  • How can Banks justify all of those branches and employees when all I use is the ATM?

Today much of retail is about location, convenience, impulse. What if consumer behavior shifts from convenience to community reputation where shopping is completed on mobile? What if  customized versions of any product could be at your door the next day? What if products weren’t all disposable, but rather assigned to approved reconditioning and repair specialists? My favorite example of a store of the future is Korea’s Tesco. (note pic below is a poster of a dairy case in a subway).


png ad spend

Commerce is ripe for a MASSIVE rewiring. The business drivers behind the rewiring are complex as is the technology. Today OMNICHANNEL is a myth.. most consumers finish the purchase in the channel in which they began. Mobile stays in mobile, online stays in online, physical stays in physical… Ad spend has thus been “stuck” as well. In 2008, less than 10% of P&G’s $3.2B Ad budget went to digital, last month Lafley said that 35% will of a $4.8B budget will go to digital, spend not even tracked by Advertising Media/Analysts.

What is changing?

  • Consumer Insight and Trust
  • Consumer Behavior
  • Use of Data
  • Mass Marketing to Targeted
  • Physical Retailer as Publisher
  • Custom Pricing (no one knows that another person paid)
  • Finer grained products
  • Entertainment/Product
  • Distribution and demand planning
  • Complex incentives by products, community, social group, inventory, availability…
  • CMO as Real Time “mission control” of the organization
  • Consumer interaction with merchandise and advertising (through mobile)
  • Transition of Commerce from Transaction to Consumer Interaction (see shopper marketing).
  • Mobile significantly impacts everything… it will be your new consumer touchpoint

Change Process

How will change manifest itself? Organic? Evolutionary? Instantaneous? What I look for is for someone to solve a problem, and meet a need. Uber is my example of the decade.. using information to meet a need that benefits both consumer and driver. If you mapped the information flow of Uber, the value over the existing system would be obvious.. eliminating the need for a central dispatcher, plus the benefit of “reputation”.  I would suggest that we take a look at the data flow in retail to see where we could add value, but the problem is that there are many “dispatchers” each refusing to share their own data. This is why Amazon and WalMart win… their supply chain is integrated.. and consumer value propositions well understood.

Why didn’t anyone think of Uber before? the need was obvious!! History shows again and again that people are biased by life experience and hence tend to see things from a biased view. In other words, outsiders providing analysis on Apple Passbook and Google wallet see them from the perspective of today along the lines of what exists today… a static view.  This is why IBM did not see the potential of the PC and commit needed investment in DOS (margin was terrible), why RIM did not understand what the iPhone did to an integrated “digital life” (we are more secure … who needs music), or why WorldBook didn’t build a wikipedia community. Product ignorance, hubris, momentum, complexity, cannibalization all make pivoting very hard.

I’ll be adding onto this blog later in the week in order to add depth to the following points below.

  •  The pending changes in Retail are TECTONIC, yet Banks/MNOs are still working to solve YESTERDAY’s problems. Retail margins have compressed from 4.2% in 2008 to 2.4% in 2012 and Banks are proposing mobile payments solutions that increase costs. It’s like trying to sell water to a guy drowning in a lake.
  •  Large organizations are terrible at strategy; most are challenged to coordinate internally. In a dynamic environment businesses must partners with the entities driving the change in order to influence it and to stay connected to it. (see Apple blog)
  •  Retailers are driven to identify means to compete (beyond price). Who can help them? My bets are on Partners must have a proven track record of delivering value to MERCHANT and to CONSUMER.
  •  I see a $750B US Total Addressable Market. Much of the “new” value will need a new network and platform. At the merchant level, we see leaders like Square Register, in the phone we see Google Wallet, in networks we see MCX and Visa/JPM. The losers? Any entity that can’t use data to describe precisely what it achieved (ex TV Advertising).
  •  …

Start Up Advice

  • Take a dynamic view of strategy through scenarios.
  • Focus on delivering a commerce value proposition to Merchant And Consumer
  • Avoid automating old broken processes
  • Address a pain point in a new way
  • Help consumers understand a new value proposition, in a way that makes sense (financially, environmentally, and socially).
  • Use Social data in some new way.
  • Find greenfield players and partner with them (avoid cannibalization issues)
  • shopper marketing

Payments: So What is a Start up to do?

As a Payments start up, the objective of Banks is to make your life difficult. Particularly when it comes to POS payments!  They are particularly wary of payments “brand” at the POS, but even when your product is a Mastercard banks are well positioned to make your life miserable (ask Google).  The primary rules “changes” are forcing POS payment providers into a Stored Value Account model. This means account has to be funded.. which practically means a move toward  ACH (given CNP rates), hence NewCos face the challenge of settlement risk, a prepaid account, and/or backup funding instruments. As soon as you move in this direction you will add many regulatory hurdles associated with obtaining 47 State Money Services Business (MSB) Licenses ($50k+/yr per state in maintenance costs alone). Even if you pass these hurdles.. banks are likely to put new ones up around ACH Debit and KYC (see blog and also Origination Risk, Square’s Cease and Desist in Illinios). Moving away from ACH and V/MA creates problems with acceptance and clearing (ie Dwolla, or Paypal/Discover).

My top recommendation… stay away from POS payments (in the US) unless you can raise $500M on $50M in revenue (Square). If you are intent at pursuing, I think Paypal/Discover is the best model.. Discover has the potential to evolve into a common clearing network for all start ups… The “friction” that banks are creating in V/MA, ACH, … is making DFS the dance partner of Choice. DFS has told analysts that their relationship with PayPal is NOT exclusive.. which is a good thing for the Valley. Note if you go this route that acceptance is much, much worse than V/MA.. particularly for small independent retailers.

Owning a bank solves the regulatory MSB issues, but not the customer acquisition issues and the new challenges that ODFIs will have in ACH debit (KYC requirements).

My informed view is that top retailers have now recognized they must “let the consumer decide” what payment instrument to use. Many new opportunities exist for helping retailers “steer” consumers to the lowest cost payment instrument.. combining loyalty, payment, and incentives.


update 21 Aug 2013

It looks like PIN debit “rails” provide the most flexibility in rules..  See my blog post on Winners/Losers