Traditionally the core of bank margin is in risk management. The core of risk management is data.. thus Banks have been the among the best data businesses (as IBM knows). Banks “learn” about their customers through bank interaction: payroll, card transactions, lending. This has helped banks make better risk decisions (both credit and fraud/identity). Within the bank data cycle the traditional use of data is for an internal benefit: risk and cross sale of the bank’s products and services (not that of consumers or merchants). However the “virtuous cycle of banking data” is very different from that enjoyed by Amazon and Google, both in the scale and type of data and consumer facing use. Continue reading “Banks as a Data Business – Example Amex Advance/Acxiom”
I’m taking a rather abbreviated approach to blogging today.. as most of my key points have more detail in my other posts. I’ll just link to my old posts and focus on a few new thoughts. Continue reading “Rewiring – Part 2: Walmart+Goog, Amazon+Whole Foods, …”
Great articles yesterday
- AdExchanger – Google Tracks Path to Purchase
- Washington Post – Google now knows when its users go to the store and buy stuff
- Seattle Times – Google Aims to Connect Online Ads
- Advertising Age – Google Plans to Kill “Last Click” Attribution
This year, the iab (interactive advertising bureau) labeled 2017 as the Year of Measurement. Understanding why, and what is changing here is key for retail, banking and advertising. Most of us know the adage “measure what you want to manage”. As an engineer, I view measurement as the key feedback loop in any system or process. In order to gain feedback (close the loop), you must know what happened. Continue reading “Payments Data and Google Attribution”
I’m more passionate about this topic than anything I’ve ever written about. As an eternal optimist I don’t see a world dominated by Google, Amazon, Chase and Walmart…. But rather a new economy where millions of small businesses thrive. Where every person can employ their creative talent in collaboration focused on value creation. A world where capital flows to great ideas across geographic boundaries lifting the stifling poverty of most emerging markets. Continue reading “The New Economy: Small Wins”
I was hoping to see rollout of a long rumored payment innovation at Facebook. All I can gather is that they must still be in testing.. but the idea is just brilliant.
Facebook has a tremendous advantage over just about every other advertiser.. its consumers log in before use. Facebook is rumored to be in the midst of integrating payment tokens into advertising. This means when you click on that beautiful North Face Jacket, or those Climbing shoes that the payment instrument (and even the authorization) is integrated. The only thing that the consumer would need to do is confirm shipping address. Wow.. talk about end running the payment specialists.. this is “one click” for ads.
The very idea that there is a “payment specialist” needed between the ad and the seller is going away.. payments are becoming a generic infrastructure services that no one cares about. See Payments in the OS. In this case IDENTITY TRUMPS everything.. if I know who you are.. everything else is just accounting. Someone should go out and write a patent on a similar flow using blockchain.
My guess is that Facebook would be the beta launch for VBV/MSC and the new 3DS 2.0 spec. So not only would this be a great experience, merchants using this would have a liability shift onto the bank and a 20-30bps rate advantage over traditional eCommerce payment acceptance. (see my blog on Civil War). This flow would hold on both mobile and desktop.
The other implication here is for the banks using TCH token vault.. sure you can vault your own tokens.. but this also means that you must keep up with the fast changing specs in EMVCo and the other users of the specs in MasterPass and Visa Checkout.. doing your own vaulting may mean that consumers can’t do some of this other really cool stuff.
18 Feb 2016
I’m in a network state of mind… We are in the midst of a massive economic transformation and I can’t quite put my finger on it. What influences how consumers and businesses are organized? What is changing? Who creates value? What new domains, networks and markets are being created? Where is margin flowing to and from? The hypothesis from Paul Graham’s Refragmentation blog has been keeping me awake at nights.
“that all these trends are instances of the same phenomenon. And moreover, that the cause is not some force that’s pulling us apart, but rather the erosion of forces that had been pushing us together.” Refragmentation
2 Dec 2015
Happy ‘After’ Thanksgiving everyone, I’m coming out of my tryptophan coma and thought I would go for a mental stretch. This is a pretty big topic, and I won’t do it justice. Thanks in advance for your comments and perspective. [Note I’m not naming the titles of my reference blogs and used only URLs.] Continue reading “Changing Economics of Payments”
09 Nov 2015 Updates
- I did a Morgan Stanley call this week with Smittipon Srethapramote, ChasePay was a central topic. Evidently Chase is positioning this as a way for CPT to gain volume. Value Prop: we will clear ChasePay transactions at 0bps. Given that ChasePay and MCX don’t exist yet it may be a little pre-mature to take a bet against First Data. What is actually happening is that MCX retailers will be switching ChasePay transactions to Chase. So.. CPT may gain a few merchants.. and a little bit of incremental volume.. but it will be at 0bps. Also remember that FD has Citi, BAC and WFC as customers.. and they can do anything that CPT can do.
- Problems with a merchant switch. The merchant switching on debit is outlined below.. not much issue here given Durbin’s requirement for dual routing. In essence debit can not be treated as PIN debit and routed directly to issuers/retail banks. However there are BIG problems with ChasePay as credit IF IT IS A VISA ACCOUNT.
- ChasePay as a Credit must be routed through Visa and then to Chase’s ChaseNet. Merchant switching does not appear to be allowed. In other words ChaseNet Credit in an “on us” would only work if MCX merchants moved 100% of volume to ChaseNet.
- ChasePay at MCX must be an approved card present method (CHIP or NFC). QR code is not an accepted method therefore it would be treated as CNP. Now Chase could set new unique rules on this transaction that would enable them to own the fraud, but they would need to own the acquiring as well. To own the acquiring they need more than just a “switch” from the merchant for ChasePay transactions only.
- Tokens, VDEP and MDES. Chase is prohibited from discriminating against wallets in the new VDEP/MDES rules. Chase cards will be in ApplePay, SamsungPay and Android Pay. So consumer confusion will abound.. but also the advantages (liability shift, ubiquity, consumer experience) will make ChasePay on MCX hard to gain traction.
- Creating ChaseNet as a new Visa. The issues above could disappear if Chase was able to create a completely new 3 party network (per section below). But Chase has many hurdles to cross, as merchants AND CONSUMERS would both have to accept the terms of the new network and forsake the benefits of Visa. Chase is nibbling on the periphery and trying to enable a new semi closed network within an open 4 party one.
- Chase can deliver 0 bps payments anytime it wants to with any card it owns today. Issuers have always held this pricing flexibility. Now acquirers will pass on their fees, but this is only 20-30bps.
- Chase has created a Visa war plan and I don’t understand why. Chase is the only major bank pushing The Clearing House to develop a token facility, they were also a driving force behind Early Warning’s purchase of ClearXChange… which is well positioned to be an EXTRAORDINARY new debit network.
As background, back in 2011 I told Gordon and Todd that they didn’t understand the dynamics of MCX. They believed they would win MCX because of relationships.. my prediction has turned out to be accurate. I said that I went in as Google and offered MCX 0bps payments with a potential of PAYING MCX to take GoogleWallet and MCX still said no . The margin in payments is in the long tail. The driver of ANY INVESTMENT here is in changing consumer behavior OR in delivering services beyond Payment. Chase certainly has no credibility here. Payments and banking are ENABLERS to commerce.. they are NOT THE CENTER (see blog Tilting the Networks… a MASSIVE Change)
My top questions/unknowns
- Will ChasePay Credit be a Visa Card. If not will they acquire both consumers and merchants?
- Does chase believe that a ChasePay credit can run on 2 networks at once?
- Does Chase believe merchant based switching/LCR is permitted under its Visa Agreement
- What volume does Chase believe it will obtain through this product (BEYOND 0bps payments).
This quarter Chase has been a favorite target of my blog (ex What should JPM do). Coming out of money 2020 it looks like my timing was pretty good.
I just don’t get it…. WHY!?
- Why would JPM want a consumer to pay through ChasePay in MCX and not use their Visa card?
- Why would any consumer want to accept new terms of a new network (ChaseNet) to use their account in new wallet (CurrentC) with another new network (MCX). Why not just use your Visa card?
- Why would I want yet another acceptance brand when Visa’s network fee is so incredibly small (5-15 bps). Branding at the POS is beginning to look like a NASCAR
Back in March 2013 I wrote 2 blogs: Visa’s Golden Goose on the Menu, and JPM/V Scenarios… Which one is it? This was only 4 months after Charlie left JPM and took the top job at Visa. Most of you know I’m very high on Visa now (see Tilting the Networks a MASSIVE change). As I’ve stated before, the story (all pure speculation) is that Chase was furious with Visa in 2011 and either buying discover or moving their entire portfolio to Mastercard or buying Discover. JPM’s BOD found out about this and threw out Saunders/Buse, hired in Charlie and gave JPM everything they wanted in a DFS purchase (thus bi-forcating VisaNet).. hey but what do I know.. (go ask the CFOs of DFS and MA.. ). Visa must feel pretty screwed over here.. after giving JPM everything they wanted, JPM still looks to create their own brand, product and network.
Value of OPEN
JPM looks caught in a “I want to be AMEX” moment… at a time where Amex itself is looking to re-invent. The value of OPEN is huge.. and it is unfathomable that the largest issuer in Visa doesn’t see it. (See Building Networks and Openness)
The funny thing is that JPM’s efforts are only crystalizing other banks to work MORE CLOSELY with Visa. Quote from top 3 issuer “FU*^& Chase, makes me want to work with the existing networks even more…”. Now we know why Visa worked with Citi on Costco and not their “friends” in Columbus. MCX will not allow any network branded cards in their wallet.. and ChasePay certainly gives chase better interchange than ACH.. but do I really want to encourage a new acceptance method that is at a lower cost? I would if I’m facing prospect of 0 fees.. but is JPM really that circumspect on the value and behavior of Visa card use?
For the model of interaction, looks like I was close in estimating what the product would look like
2015 (post Money 2020)
Chase Pay? An account with two identities?
I must admit to total confusion to ChasePay.. Hopefully the community can help in the comments. The only way this can bypass visa (see blog on wrapping) is to have it run under completely new rules. Will a consumer really understand that a single account runs under 2 different rule sets? On my Apple Phone with CurrentC installed what do I use at an MCX merchant that accepts NFC (ex CVS)? Or worse if Chase does indeed allow Chase cards on SamsungPay they have created yet another conflict with MCX (because of MST mag stripe emulation).
Chances of ChasePay Success?
The MODEL above makes complete sense for PayPal, Amex and MCX. To be clear I am very very high on MCX.. but this product? Perhaps Chase cards have a loyalty I just don’t know about. Or there is something missing in my assumptions. There are 3 models of ChasePay Interaction
- ChasePay within MCX Wallet
- ChasePay within the Chase Mobile App via MCX QR Code Directly (I think this will be prime)
- ChasePay presented via NFC/MST (ex Samsung Pay??)
Will Consumers accept new terms for a new product operating in a new wallet with a new network? Is that really innovation? Innovation is NOT ABOUT rewiring your assets, it is about designing a great experience for the consumer.
Sorry for the short blog, spent all my time drawing the pictures.
29 Sept 2015
Money 2020 in 4 weeks! My session is on Tuesday at 11:35. We are talking data and collaboration. Look forward to seeing all of you.
I’ve been on the hunt for a good article on the impacts to “eCommerce acquiring” from tokenization, new rate tiers, authentication, mobile… and I’m still looking. Payments is a very enigmatic space! Its just hard to believe that top 10 payment players have no idea of what each other are doing. Industry consortiums and utilities are much more political than they are threatening.. as their support at the CEO level and at the operating level are completely different. Example “Real time payments”.. A regulatory driven initiative that no top 10 bank wants to say no to.. but with no business case. So it just plods along on a 10-15 year cycle. Why would anyone in their right mind want to work on this initiative? Particularly when Square, Facebook, Google and Paypal all do real time payments for free through debit networks.. NOW.
As I outlined earlier this year in Structural Changes in Payments, there are 6 key areas that are impacting all payments:
- Risk and Identity
- Data/Commerce Value
- Consumer Behavior/Trust/Acceptance
- Issuance/Customer Acquisition/HCE
- Regulatory/Rates/Rules (Fees)
- Mobile/Payment in the OS
Today’s blog is on how these structural changes, and new solutions, are driving changes within eCommerce (payments). eCommerce is a “lumpy” business with 4 “payment” players managing 70%+ of the $190B in eCommerce transaction volume:
- Cybersource US $80-100B
- PayPal + GSI $50-60B
- Amazon $90B
- Walmart.com $14B
Obviously adding these figures up shows volume greater than the $190B in eCommerce sales, so a little more detail is necessary (Example I believe Chase Paymentech clears for Amazon, part of WMT and PYPL). What do each of these players do? For example Cybersource nits together acquirers, fraud services and methods of payments. Amazon and GSI layer on Logistics, shipping and website hosting. These are 4 very different companies. There will be some VERY large changes in eCommerce Payments which positively impact merchants, but will be detrimental to pure-play intermediaries. What was a specialized service (fraud mgmt, cards on file, checkout hosting, … etc) is becoming a commodity. Due to the improved ability to authenticate and consumer moves toward mobile.
I was amazed that I couldn’t find any articles that go through eCom intermediary services, and the impending changes that will impact payments in eCommerce. The payments industry is certainly one of the most opaque… not only is there a lack of academic courses on the subject, you can’t find any public articles that articulate what is happening. For example, a logical question for investors: What will impact PayPal US margins in next 3 yrs? How does Cybersource compete against PayPal? How do the services compare? I challenge you to find this in the press.
Before I start a discussion of the disruption and margin, I’ll give you my view on the history of eCommerce. The entire founding team of Paypal knows this much better than I do.. but let me attempt to summarize. In mid 90s consumers could buy things on the web.. the challenge was that banks had no way to manage card no present risk and fraud. Paypal and CYBS created CNP risk models. The key change here is that perfect authentication destroys the need for most risk and fraud (exceptions are credit risk and 1st party fraud… like taking your grandmothers card and using it).
Early stage companies don’t have time (or capital) to invest in large payments teams. In the eCommerce world, online stores went to gateway providers, In the mobile world Stripe and Braintree serve this function. What do Gateway’s do?? I would love to see a service matrix for the industry.. but since I couldn’t find one .. here is my list:
- Checkout page (hosting)
- Fraud services
- Management of cards on file
- Distribution of merchandise (example GSI)
- Acquirer integration
- Payment acceptance
- PCI compliance
As small companies grow up their needs change. In phase 0 most start ups can’t afford to create a payments team. As they mature and go global they can’t afford not to. How do I accept multiple currencies? Paypal? Alipay? JCB? Qiwi?… Then there is global cash management, tax, compliance, … AND THE TECHNOLOGY CHANGE.
One of the big lessons we learned at 41st Parameter (now part of Experian) was that the market for eCommerce fraud services was very small. The big merchants (Amazon, Walmart, …) created their own tools, as did the big Gateways (Cybersource, Paypal, Digital River, etc) to serve the SMALL MERCHANTS. It was the medium size businesses that were too big to outsource to a specialist, and too small to create their own tools, where there was a market (example Airlines, Banks, Top Retailers, …).
eCommerce Service Providers – Long Tail Impacts
Of all the areas of payments, eCommerce is undergoing the most radical transformation. The reasons? All of the structural items listed above AND new entrants.
I like PayPal!
I am not a paypal hater, however I will continue to poke them for silly moves (like Xoom and Paydiant, and Kingsboro’s POS push). They are well positioned for 25%+ CAGR for years…. But they must change focus back to their core SMBs and “long tail” merchants.
Why long tail? Frequent readers of my blog know that roughly 60% of Acquiring profits are generated by the bottom third of the merchant base. Small merchants are where the margins are. If I were CEO of Paypal this is where I would focus my complete attention, as this is where Paypal has excelled (and it is where profitability resides). No one has proven an ability to acquire SMBs at scale other than Paypal in eCommerce.. NO ONE. Most of their competitive threats deal with consumer “Front End” components of the gateway value propositions (ex ApplePay). This does NOT address the merchant side (back end).
Paypal is by far the best in class SMB eCommerce Acquirer…. BUT
1) traditional acquirers are beginning to break in as the barriers to entry are disappearing AND
2) front end solutions like Apple Pay/Microsoft One Pay and VPP are coming to market AND
3) consumer behavior mobile shift
4) Payments are costs are moving to 0 and being bundled (ex. Google offering free shipping too)
5) Authentication is killing their core risk management asset
6) Networks are creating a new rate tier and shifting risk to banks for eCom (160 bps and no risk, vs Paypals 375 bps and merchant borne risk)
All these are threatening their existing base and growth. However most of these items DO NOT impact Paypal’s merchant acquiring directly. Paypal is a natural alliance partner of: MERCHANTS, CHASE, AMEX, and Private Label. I believe that something will happen here… the issue isn’t financial it is focus/alignment. Paypal is a super efficient on us network, that prices at Amex rates. Chase and Amex have this same strategy. Merchants want payments for free.. hence the challenge in working their directly without some other massive value proposition (see paypal at POS). My recommendation to Paypal is the same as the original founders: Stay focused on long tail merchants… forget about dragon slaying wal-mart… there is no margin at the high end merchants.
Networks – Card holder present
Tokens in Mobile, will make their way to tokens in browser and create a new form of mobile authentication which will enable payment 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 outlined in December 2014 mCommerce/eCommerce Converge, there will be a new rate tier: Cardholder present. When? Next 12 months is my guess. What does this mean. Merchants that accept tokens in eCommerce will get a reduction in fees (assuming acquirer/gateway passes on) AND liability will shift onto issuing bank (aka VBV/MSC circa 2006). In the US this means 140-180 bps AND liability shift….
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.
I must end here.. I have been working on this silly blog for 4 weeks (part time).
Sorry for typos
As I wrote back in my May blog Internet 3.0 Collaboration in Commerce, Communities and Networks, we are transitioning to a new era of collaboration. The industry buzz word is “sharing economy” but this is a little too altruistic a moniker for my liking. If an elephant was taken down by 1 million ants there would indeed be sharing… of the carcass!
Indeed the implications of collaboration and reduced Transaction Cost Economics (TCE) are much broader than “sharing”. As Uber demonstrates, existing industries will be taken apart and re-assembled through external orchestrators. How can companies deal with the “unstructured complexity” of new market based orchestration, open APIs with unstructured requests for their data across thousands of new partners? This is our focus at Commerce Signals.
I’m currently reading the works of 2 Nobel prize winners in economics: Oliver Williamson (2009) and his mentor Ronald Coase (1991). Both were focused on the factors governing the “nature of a firm”. (particularly Transaction Cost Economics). Here are a few of the books I’m reading (for those interested):
- The Nature of the Firm: Origins, Evolution, and Development
- The Transaction Cost Economics Project: The Theory and Practice of the Governance of Contractual Relations
- Misbehaving: The Making of Behavioral Economics
- Wikipedia – Theory of Firm and Transaction Cost
There is no way to summarize the work of 2 Nobel prize winners in a blog, but I would like to focus on one element: Transaction Cost Economics (TCE).
Transaction Cost Economics (TCE) dictates the structure of a company
Ronald Coase, used a TCE framework for predicting when certain economic tasks would be performed by firms, and when they would be performed on the market. From this Williamson Paper
Ronald Coase posed the problem more sharply in his classic 1937 paper, “The Nature of the Firm.” He, like others, observed that the production of final goods and services involved a succession of early stage processing and assembly activities. But whereas others took the boundary of the firm as a parameter and examined the efficacy with which markets mediated exchange in intermediate and final goods markets, Coase held that the boundary of the firm was a decision variable for which an economic assessment was needed. What is it that determines when a firm decides to integrate and when instead it relies on the market?
Today, our network, and services, are evolving in a way that supports new mechanics for transacting: Authentication, reputation, coordination, contracts, risk, discovery, trust, …etc. Uber is the best example of this. We all agree that Uber’s success is reallocating the “assets” of production in a more efficient form.
As stated in my blog, the boundaries of [established] organizations will be changing as a result of changes in TCE and common facilities to construct agreements and partner outside of their organization. Modularity is the key technical term describing how business must structure boundaries (specifiability, measureability, predictability). What services do you want to make available? The answer to this question is NOT a technical problem, but a business one. Amazon is one of the clear leaders in modularity. The rules in which modules operate are “platforms” (technically) and “markets” (from a business perspective). After if everyone built their “API” in a different technology with no common directory it would be useless. For those interested, CommerceSignals is this neutral directory, never looking at the data.. but switching it as directed.
Collaboration what does it mean?
I guess it depends on your point of view (the elephant or the ant). Look at the Google Buy Now Button (see my Blog). Google gets everything I’m saying in this blog (guess they listen well). Google Buy Now is a Partnership Platform (see blog on Google’s Strategy) for advertisers and physical retailers. Local retailer uploads store inventory, google helps them get customers to buy.. and ships the goods to the customer’s door twice a day with an Uber like delivery services (shopping express). With all of these services Google will be in a position to guarantee sales.. For example if I’m a local specialty retailer Google could propose: I will drive $100k in sales for $1500… This is a MUCH bigger deal than Uber.
Who do you work with? Are you the lead? Are you the follower? Who decides? Who sets the rules? My favorite collaboration story at Commerce Signals is from the Chief Marketing Officer of a National Movie Theater chain. Brent said “Tom I’m the anchor tenant at 500 locations, I’m surrounded by 10-15 restaurants and 20-40 retailers in each of them, when I win they win. It is my community that competes with my competitor’s community, yet I have no facilities for collaboration. My data just falls into the trash can, how can you help us”?
For example every Fortune 100 company wants a “big data team”. These companies have internal plans based upon internal data driven by internal teams. While I agree that determining what products and consumers are profitable is a key area for everyone, the REAL VALUE to be unlocked is at the intersection of your data with something else. Afterall what company can compete with Google, Amazon and Facebook in consumer insight!?
One of the MOST SIGNIFICANT developments in last 5 years is that there is now a broad recognition that collaboration is necessary. For example Bank’s spent over $400M (EACH) trying to make CLOs work, MNOs spent $600M trying to make payments work, .. I could go on. Commerce is about markets. Markets are about connections. We are moving from an era where every Fortune 50 built their own closed market (where no one showed up) to a model where at 2 or more work together (Closed to semi open to …??open). The early battle in this shift to collaboration is Google, Amazon and FB (GAF) vs Everyone Else. What ONE COMPANY could possibly compete against GAF?
Collaboration is more than just advertising and demand how do you work with specialists? What parts of your organization are not best in class? When should you have your own internal team, vs an external one? When should you build and when should you buy? Technically we see this dynamic in great companies like Salesforce and Amazon Web Services. Uber and Google Buy Button have given us business led examples. The challenge for existing enterprises to adapt is tremendous. From a management perspective how do you manage a collection of suppliers vs a hierarchy of employees? If you have challenges managing internal compliance, how do you do it across many external organizations? How do you specify the “unit of work” to be performed and how do you measure it? What is a 1099 employee? In which country/State?
This is where trust, reputation, markets and the strategies of (distributed) modularity come to play.
My Fortune 100 recommendations (from previous blog)
1) List out your most valuable consumer insights
2) List your top growth opportunities
3) List the top sources of new revenue from existing customers
4) Where are your greatest threats?
5) What are you not acting on?
6) Who can act on them more effectively?
7) How can you partner one time?
8) How can you enable 100 companies to run with the opportunity?
9) What needs to be measured?
If you don’t take action.. the swarm will …