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…

Beacons

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.

info_graphic29.24.13

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”

Experience

  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.

http://www.pcmag.com/article2/0,2817,2425052,00.asp

Retailer as Publisher

What do you think the advertising budget is of the New York Times? If you were a VC, would you fund a start up whose business plan is: get publishers to pay you to advertise their product, and give you their customer list? Oh you also want to know what articles they read.

13 Aug 2013

When you think of publishers what name comes to mind? Wall Street Journal? New York Times?

What do you think the advertising budget is of the New York Times? If you were a VC, would you fund a start up whose business plan is: get publishers to pay you to advertise their product, and give you their customer list? Oh you also want to know what articles they read.

Sound ridiculous…? This is the world of Card Linked Offers. Think of Retailers as publishers, their shelf space is akin to columns in the newspaper.  Starbucks is a great example of a retailer as publisher. They publish physical product (coffee) which they own and control, but also publish virtual product (music) and are a channel for advertising. This is what is behind the Google/Starbucks broadband deal.

Can you imagine asking the New York Times to fund 5% off a big screen TV? Sure they want people reading their newspapers.. but they don’t own the products they publish.  The REAL opportunity is for entities to HELP RETAILERS BE BETTER ADVERTISERS.  This is what I referred to in Payments enabled CRM. Google and Amazon are the run away leaders here. With Square and Amex a distant second (based upon ability to influence/reach a consumer base).retailer ad share

I love the potential of Social to impact Retailer as publisher. Social advertising (not published), loyalty/incentives for “connectors” and influencers, community reviews, …  Facebook has enormous potential here.

Who can help retailers become better “publishers”? Big opportunities for companies that can help retailers improve in the physical channel, compete w/ Amazon in virtual channel, and join the two (mobile at center).

 

 

The Directory Battle PART 1 – Battle of the Cloud

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. (V.me is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc. But what few understand is the implication for the physical payment world

11 May 2012

This week we had both Finnovate and CTIA going on, and behind the scenes the battle lines are being formed in a forthcoming “BATTLE OF THE CLOUD” wallet. I didn’t include wallet in the quote because Battle of the Cloud sounds so much more ominous. Perhaps I should take a page from George Lucas’ playbook and start with Chapter 4.

I’ve been talking about the directory battle for some time now (see Clearxchange post).  Who keeps the directory of consumer information? As I outlined in Digital Wallet Strategies: “ securing information AND giving Consumers the exclusive ability to control what is shared with whom is a challenge (beyond technology and trust). We thus have many limited “Wallets” that are constructed around specific purposes”.

This week we had Visa’s President tell the CTIA audience that Visa has moved beyond NFC to V.me (see my previous post on Visa Wallet). What is really going on? What is the battle of the cloud?

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. (V.me is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc.   But what few understand is the implication for the physical payment world. This is what I was attempting to highlight with PayPal’s new plastic rolled out last week (see PayPal blog, and Target RedCard). If all of your payment information is stored in the cloud, then all that is needed at the POS is authentication of identity (see blog). Remember US  online commerce is $170B/yr, physical commerce is $2.37T (not including FS, Travel/Entertainment).

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives (new digital coupons).  Another example is Paypal’s ability to selectively assume settlement risk on some transactions as they route through low cost ACH, or even allow customers to use BillMeLater to selectively convert certain purchase to loans AFTER THE FACT.  In these 2 examples, traditional payments revenue will be significantly disrupted by: lower cost transactions, competitive credit terms (each purchase), and incentives tied to payment type.

But do consumers really want to store all of their information in one place? With one entity given the ability to see all of your spend? For an mCommerce transaction, there is nothing I hate more than having to type in my name, address and card number in that tiny little screen.  Most of these mCommerce solutions (like V.me) are little more than an “autofill” where the merchant checkout page leverages API integration to the cloud service to retrieve user information (see diagram here). If I’m on my phone, my carrier already knows who I am, so seems fairly logical for them to help me with the autofill. This is a reason I’m now a big fan of Payfone. I could also see why it makes sense for Apple and Google. But why Visa? Does it make any sense at all for Visa to hold my Amex card?  Oh.. let me cast a few more stones on ISIS/NFC.. that payment instrument that locked in your phone.. yeah it can’t be used for the online purchase. Perhaps someday someone will write a secure NFC mobile browser plug in to extract data from the SE.. but that opens up a whole new can of worms.

Today’s online merchants are getting a very small taste of the war as they are asked to integrate auto-fill plug ins (Paypal, V.me/CYBS, Payfone, Google, soon to be Apple). Merchants should get on board with all of them, as they do represent a tremendous improvement in customer experience, and you may be able to squeeze some free marketing/implementation money from each of them. However, the cloud battle at the physical POS is still a few years off, as existing card products have a substantial advantage in risk modeling/fraud. This is where Square is taking a lead, as it has the best consumer experience hands down. Low volume merchants really should assess whether they need a specialized POS system, as the parameters for selecting one have shifted from ISO/Processor/Cost/Acct Recon/Book Keeping to Sales, incentives and customer experience.

Battle starts in mCommerce/eCommerce

My guess on timing of V.me is driven by knowledge of Apple’s impending plans to “extend” its iTunes account to payment outside of the Apple ecosystem. Visa sees this network risk and is in an all out war to protect its network, by leveraging its CYBS asset online. The banks have worked on a directory concept for quite some time. The Clearing House (TCH) built a working system called UPICK to solve the problem of consumers giving their RTN/ACCT# out in the open.. assigning a virtual number to the account. A sort of “virtual account number” that could only be translated by TCH.  It never took off, because ACH fraud was low and banks were much more excited about having merchants accept cards as payment.

Retailers are not silent participants to this war.. their champions are Target, Tesco, Amazon, and Rakutan. I hope Amazon will finally dust the plans off of One Click expansion. Other retailers are also aligning to assess creation of shared cloud infrastructure.  Sorry I can’t comment more. Similarly MNOs are also in the cloud game, for example Payfone may be one of the best services in the market..

Who are the players in the Cloud [Payments] War?

The initial battle will be in mobile/online purchases.

  • Banks: V.me, Mastercard,
  • Platforms: Apple, Google, PayPal
  • Retailers: Amazon, Rakutan,
  • MNOs: Payfone, Boku, payforit, billtomobile, …

Most confusing is that there are few alliances.. it is many against many.

http://tomnoyes.wordpress.com/2011/10/26/apples-commerce-future-square/

2012: Remaking of Commerce and Retail

Unlocking the “commerce” capabilities of mobile will reshape the $2 Trillion advertising market and $14 Trillion retail landscape, as new customer shopping experiences are created which leverage consumer data. 2012 will be a key year where retailers, mobile operators, handset ecosystems, banks and consumers make choices which will affect outcomes in future years.

8 January 2012

I’m recovering from a nice Holiday.. successfully marrying of my only daughter.. keeping a smile on my wife’s face (most important) as well on those of my children. I never thought all of that family time could make me look forward to work..  Many of my bank friends seem to be making new year’s resolutions to do something different and I’m fortunate to have them share their opportunities. What are the really big opportunities?

For those that read my blog.. I’ve been very locked-in to the concept of value proposition, and the challenges of creating a new “network” for exchange of value… with my often repeated “every successful network begins with exchange of value between at least 2 parties”. In addition to sharing ideas on new opportunities with former colleagues, I’m also about to take a trip to the Far East to meet with institutional investors.  In Asia, I’m preparing for discussions which will be focused on: What are the REALLY BIG opportunities out there?  Where are the sustainable bets? Where are the risks? My bias in this new year is Commerce.. and the influence that mobile will have in reshaping it.

My Investment Hypothesis:

Unlocking the “commerce” capabilities of mobile will reshape the $2 Trillion advertising market and $14 Trillion retail landscape, as new customer shopping experiences are created which leverage consumer data.  2012 will be a key year where retailers, mobile operators, handset ecosystems, banks and consumers make choices which will affect outcomes in future years.

In the US alone, we spend over $750M in marketing. Any guess how much of that is “targeted” to a specific consumer? Less than 10%.. !!

It’s not that top advertisers don’t WANT to target, but that they have no Platform to do so in the Physical World. In the virtual eCommerce world, there are many facilities for engaging influencing, incenting and paying (for performance). Data is shared from the first click… to the point of purchase across many intermediaries. In the physical world, life is much different. For those interested in this space, let me strongly recommend reading the Booz Shopper Marketing paper (just fantastic).

$14T of retail represents over 22% of the $61T global GDP.. How often do we get to talk about rewiring 25% of the global economy? This is why I’m so high on Google right now. Google currently gets only $14B of the US $750B in marketing spend, and is making strong inroads to the physical POS.  (please see my legal disclosure above).

As I’ve stated before, Retailers are frequently assumed to be a bunch of back water idiots.. as a former banker I admit my mistakes…  this simplified view of retail could not be further from the truth..  Retailers are on the cutting edge of competition. Competition drives data based decisions, customer centricity, daily focus on margins (as they are razor thin) and a toughness matched only in professional sports.

Retailers had to be tough and innovative… after all how do you sell a commodity on more than just price? This week’s WSJ story on Best Buy perfectly illustrates the challenges ahead for many retailers.

“I will buy it in your store…use it while I order another one for 75% less on Amazon and then return the new in the box one at your store,”

The mobile handset is uniquely capable of serving as a bridge between the virtual and physical world.. giving individual consumers access to unlimited information while they shop, not JUST price transparency, but information on quality, fashion, community reviews, availability, AND the opportunity for merchants and manufactures to reach the customer in the buying process BEFORE AND DURING their shopping experience.

What companies have the platform today? Amazon, Apple, Google, eBay, Visa.. all have elements, but the value propositions of each are widely disparate. If Commerce is to be remade, there must be a new value proposition to manufacturer, retailer and consumer. Notice I left out banks..  The problem with virtually every platform on the list below is that they have started life as bank friendly.. which destroys their merchant value proposition. Groups like ISIS are focusing on payments.. and not on a larger mobile value proposition (focusing on advertising for example, also see ISIS: ecosystem or desert).

How will commerce (and retail) be remade? I have no idea… but this will be the year which we see platforms start to gain momentum. You can guess what I’m telling my bank friends…..

Card Linked Offers

Retailers will respond to banks loyalty spend initiatives, but “redemption” will largely be online (restricted merchandise lists) because retailers do share data at the point of sale. Banks and the Networks are attempting to expand Card Linked offers into the advertising space, but this means someone will have to sell retailers and construct campaigns. Neither Banks nor the Networks are adept at selling retailers anything, there will be need for 3rd party ad exchange (ex freemonee) where advertisers can bid to place across multiple issuers (ie each issuer control cards). These Ad Exchanges will be slow to mature because there is no proven CPA for card linked offers and merchant profitability

28 November 2011

pdf version here (sorry for previous Typos.. I need an editor.. so pardon the mess)

I’m fat and happy from all the Turkey.. and was thinking of what to blog about.  I’ve decided to link a funny story… with a complex market. Earlier this month I was called by a recruiter to lead a new company. Here is the abbreviated dialog

  • What is it? “a bank Groupon”..
  • How is it structured? A separate company? A Bank Division? “Both, it is a separate company 100% owned by bank”
  • Are they looking to spin it out? Will there be other investors? “no”
  • So CEO (with no equity upside) building a business from Scratch within a complex bank? “yes”
  • Where will it be based? “right here in NYC next to the Bank”
  • Did you know the COO of Groupon was given about $xxM in options… how are you going to compete with that? “we are not looking to compete on compensation.. but we do want to compete with Groupon”
  • Good luck with that!  (See my previous blog for lessons learned on bank spin offs)

Message here is that top banks and payment networks are getting into the “offers” space. I haven’t seen an industry analysis of CARD LINKED OFFERS…. So I thought I would create one. Today I was reading 2 month old post in All Things Digital: Will the next Groupon Killer be your Bank.. ? One of my first Blog posts (2.5 yrs ago) covered this subject as I saw in back in 2008/09 “Googlization of Financial Services”.  Here are a list of current leaders in Card Linked offers

Not all of the companies above are the same. Here are a few basic strategies behind these start ups

Strategy #1 – Improve Existing Loyalty Effectiveness. Colloquy.com is the industry leader in research on loyalty programs. Two recently published white papers by Colloquy.com display a macroeconomic view of the size and value of loyalty programs for U.S. consumers. Colloquy estimates the total value of loyalty currency issued to U.S. consumers in 2010 is a $48 billion dollar industry across financial, travel and hospitality, and retail sectors of U.S.

economy in 2 billion U.S. household loyalty program memberships. Edgar Dunn provide a great graphical view on the purpose of loyalty programs

Why do banks want to improve Loyalty?

A) Credit cards carry a much improved interchange (250-350bps vs $0.21 flat of Debit)

B) Loyalty Programs are highly effective card use AND retention tool. From Edgar Dunn

Strategy #2 – Redemption Network. Improve the way redemption works. Enable redemption of specific items. Catera and Cardlytics are leaders here. Great Article on Clovr (now Linkable Networks).

Banks used to see card offers as part of a large revenue stream.  Now banks need to find unique technologies in order to capture the customers’ attention again.  Some of that technology comes from mergers such as Cartera and Vesidia to form a new more innovative merchant network platform.  Other pieces of the card-linked offer space is coming from companies that are focused on card-linked offers, such as Boston-based Clovr Media.

… The card-linked offer company wants to make sure that promotions they are powering are meaningful.  They do that by getting down to the SKU level (the long number on products that identifies a unique product within a store. Tom said, “we can go right down into a particular product within a store, get right down into the SKU level.  Instead of 10 dollars off at Staples, it’s 10 dollars off a cannon printer at Staples.  We see that as a very powerful concept.

CONCEPT is the key word here as “networks” are minimal beyond eCommerce store fronts capable of redeeming offers for specific products. In the physical world, none of the participants above have cracked the code on the scenario above. POS integration is too hard AND retailers will not give up their data.  Entities like Catera are using other parties (ex SavingStar in Grocery) to give item level credit hours, days or weeks  after the sale.

Strategy #3 –  Advertising.  The first 2 strategies above are about leveraging the $48B in loyalty “value” to incent merchant participation. A third strategy is geared to attract retailer participation in an advertising network. The primary value proposition: target card customers with specific offers.  This strategy usually driven by card NETWORKS and Issuers looking to expand “value delivery” on existing networks (the  googlization article above provides an example). Although Banks certainly have the data to make this work, this is NOT a merchant friendly platform. Can you imagine using your Amex card at Macy’s then getting an incentive at Neimen Marcus? This is one reason why retailers are loathe to share any item detail information.. it would only help banks/networks more accurately target their customers.

Apparel, QSR, Furniture and a few other niches could be served in this model (few other retail categories have significant ad budget), but the price is credit card interchange.

Summary

Retailers will respond to Banks’ loyalty spend initiatives ($48B), but “redemption” will largely be online (restricted merchandise lists) because retailers do not share data at the point of sale.  Banks and the Networks are attempting to expand Card Linked Offers into the advertising space, but this means someone will have to sell retailers and construct campaigns.  Given that neither Banks nor Networks are adept at selling retailers anything, there will be a need for 3rd party ad exchange (ex freemonee) where advertisers can bid to place across multiple issuers (ie each issuer controls their respective cards).  These Ad Exchanges will be slow to mature because there is no proven CPA for card linked offers (and associated merchant sales lift/profitability). In other words the Merchant cost of accepting a credit card, paying for an offer, and tracking profitability is not a home run today. We need only to look at Visa Offers to see the confusing and bleak future. Consumers are overloaded with e-mail and messages.. behavior will not change until there is compelling value. Value cannot be delivered until there is a critical mass of ads which can be targeted. Targeting can not be done effectively because issuers only have merchant level preferences (not item level/brand). … Only certain categories of retailers have substantial marketing budgets… the majority of marketing is spent by manufactures.  Manufactures don’t know their customers.. (hence is why Shopper Marketing is red hot). … and so on

A logical extension of card linked offers is card linked pre-paid offers. This goes back to “Bank Groupon” listed above. Banks want to run a pre-paid program for retailers.. a “pay before” you eat… at a discount. Keeping it on the card so consumers don’t loose the offer and redemption is a seamless process within the existing card settlement flow. Hey this is a great idea for consumers and merchants. Problem is business model for banks. If this pre-paid was sold by a regulated bank entity I doubt if they would be able to take advantage of the breakage which drives Groupon’s profitability. Banks will also be responsible for things like escheatment..  this is where state regulators come looking for unclaimed funds.

Your thoughts and feedback are appreciated.

A related blog on Visa’s activities is listed below.

http://tomnoyes.wordpress.com/2011/05/20/visas-mobile-strategy-portfolio-manager/

Square’s $1B Valuation.. its not a payments business any more

Square’s future model depends on both the consumer and the merchant giving up consumer data at the line item level in the POS. I see apparel and large department stores as possible candidates.. perhaps even electronics.. but the challenges are tremendous.

Square $1B Valuation…  ?

29 June 2011

Today’s WSJ Story

What shocked me most about Square today? Kleiner’s lead in the round. I know the KPCB team well, and they are the best VC I’ve ever worked with. Given my negativity… a re-evaluation is in order. Both to protect my reputation with my KPCB friends.. and for my own sanity.

There is no way that Square can justify a $1B valuation as a payment company. At $1 billion in annual processing volume, Square would be roughly the 70th largest merchant acquirer/ISO in the country. Global, the largest pure play, processes $135 billion annually, has other businesses, and has a $4 billion market cap. See data below from my friends at FT Partners (a great Advisory team in payments).

3 years ago, Jack pitched KPCB on the idea of Square as the PayPal of Craig’s list… KPCB passed. The business model has changed substantially, and is now on V3+.

Why did KP invest in this last round? I haven’t spoken to them, but my guess is that it is no longer about payments.. but about changing the checkout process at the POS.

Here is my guess on Square’s V3 Business Model

1) Create a path to exit the transaction business.. they don’t want to manage sub prime acquiring risk.

2) Create a software/platform business for mainstream retail. Work with major retailers to use Square register as the way retail (and retail sales agents) interact with consumers. In other words re-engineer the buying experience at the POS. KP always looks for “big bets”.. this would certainly be one of them.  In this Version 3 business model, Square will interact/integrate to legacy POS systems. They will also attempt to own the mid market and replace current POS vendors in the mid tier. At the low end they may still be working deploying the Square we see today, but it will be challenged by PCI Rules. For a more detailed look at current plans (they evolve rapidly) see this excellent post:http://mashable.com/2011/05/23/square-card-case/

3) Create an advertising/incentive business. We hear them working on this today, but their current customers are dry cleaners and hot dog stands.. obviously they need to move upstream. Advertising and incentive will be the primary basis for their new revenue model.

Perhaps this is why Square is working their employees 20 hours a day.. they know that the big guys are also all over this.  IBM, Cisco, Nokia, NCR, Micros, Oracle, SAP, MSFT … I doubt if they will just sit back and let Square throw out a new POS system. What competency does Square have in Campaign management and advertising? Who owns their current data? This last point is very relevant.

Consumer transaction data collected by Square today is property of merchant. Although hot dog vendors may not care… Large retailers know how sensitive it is..  Square’s future model depends on both the consumer and the merchant giving up consumer data at the line item level in the POS. I see apparel and large department stores as possible candidates.. perhaps even electronics.. but the challenges are tremendous.

Can all of this work? It depends on the retailers.. having Visa on board may actually be a drag on their merchant adoption. One thing is for certain.. their valuation is certainly not based on their success as a payments business.

Apple and NFC

Take Away for Investors/Start Ups: Apple will be a very, very hot platform for mobile applications. Do not assume that there will be substantial volume in next 4 years. In short term look to complimentary services.

26 Jan 2011

Today’s Article in TechCrunch: Apple Aims to take NFC Mainstream

Previous Blogs

To summarize from my previous blogs (regarding Apple’s NFC moves)

  1. Not about payment but about advertising. The mobile device will be the top advertising platform for the next century. It provides a unique opportunity for convergence of the online and physical worlds (with the commensurate customer data). In the virtual world there is a “click” by which google can bill. There is also an “order” by which online retailers track channel advertising effectiveness. Apple’s moves in NFC represent the combination of the click and the order AT THE POS so that advertising effectiveness can be managed. It is ALSO a platform for many, many other services through which Apple SEEKs to control (and monitize).
  2. Apple’s desire to control the secure NFC element is not aligned with carriers (in the US) or internationally. How will Apple’s NFC integrate with the SIM? Will they follow the GSMA approach? Most interesting is whether Apple will support Single Wire Protocol /UICC model or will it have a unique architecture (SE NFC) with Apple acting as TSM and managing the secure applications outside of the SIM?
  3. Apple has 4 separate payment infrastructures today: Legacy Apple Store, iTunes, App Store and global treasury. They are indeed building a new payment infrastructure to support their wallet. Rumors are they are working with a big bank (?Chase?) as well as considering acquisition (ex. GlobalCollect). It seems that they are confident that they have capability to support US market rollout.
  4. TechCrunch is well off base in its assertion that the Debit interchange provides an opportunity for Apple. Actually, the reverse is true (in US Market). As discussed in the ISIS blog above, the key for NFC adoption is merchant POS infrastructure investment. ISIS is working with several large retailers to subsidize POS infrastructure. ISIS is doing much heavy lifting in its payment system incentives. Discover/Barclays relationship allows ISIS to build a merchant friendly value proposition and gives ISIS a unique ability to “control” the NFC/PCI certification process. Given that Apple is currently outside of ISIS, it must have another payment network to support it at the POS. Apple has typically partnered with Visa (given that MA has partnered with RIM this would make sense). In either case the merchant transaction costs for an Apple/NFC transaction will be higher (Visa controls the MDR) and Visa will control the NFC certification process. Apple may create a package of marketing incentives that will offset the merchant costs, but marketing effectiveness will be poor in the early stage (prior to NFC at POS). A classic chicken and egg problem.

Take Away for Investors/Start Ups

  • Apple will be a very, very hot platform for mobile applications.
  • Do not assume that there will be substantial payment volume in next 4 years
  • Assume there will be iAd “advertising views” but few mechanisms to track effectiveness until payment is captured
  • Important: even after payment is captured, the item detail will not be available to Apple.  Apple will be able to track that customer clicked on iAd, and visited store, but NOT what item was purchased.  There are a few companies addressing this… but not going to spill the beans here as I really like this space.
  • Apple’s ability to capture mass media spend will be driven more by Steve Jobs and the demographic of the iPhone user base.
  • Apple will have continue w/ interim CPC model on iAd until tracking through POS.  They will likely attempt to develop a couponing system, but bar codes on iPhones are viewed very negatively by retailers.
  • Expect to see many “four square” like start ups which try to leverage store visit check ins. But less than $2B in marketing spend shifting to platform until POS integration.
  • Look for Investment hypotheses that align to Apple core services (acquisition/exit)
  • Payment will take some time, DeviceFidelity spent almost 2 years in certification with Visa. In short term look to complimentary services. Examples
  1. NFC to Open Doors
  2. Physical advertising with NFC (NFC in a store display through coupon redemption)
  3.  NFC “Four Square” like Check In (ex shopkick)
  4.  POS Infrastructure (VivoTech, Verifone, Vending Machines, …)
  5. Retailer friendly applications that attempt to marry iAd data with retail POS data (think KSS Retail, DemandTec, ….)

Google/ZetaWire

Why did Google acquire a 3-4 person Canadian company with no customers? The answer seems to lie in its patent application

22 Dec 2010

TechCrunch – Google Acquires ZetaWire

Why did Google acquire a 3-4 person Canadian company with no customers? The answer seems to lie in its patent application

… quite an interesting read. A ubiquitous wallet, online and mobile that provides for direct communication (bluetooth, Wi-Fi, NFC, …) to other wallets and POS terminals. Interesting vision.. google as center of the mobile universe…. who would have ever imagined. 

From a payment perspective, I thought paragraph 271 was rather interesting

[0271] Because the coupon and advertising system is integrated with the payment system, it is able to target and deliver advertising on an individual basis rather than on a demographic basis. The payment system has a complete record of all the purchases ever made by a user, and because the payment system is also integrated with a social network, it can also know the purchases made by all of the user’s friends. In addition, it has access to many other streams of data providing information about a user such as the user explicitly entered preferences and wish lists, which coupons the user’s friends have shared, which coupons the user currently has, etc. The system is therefore able to build a much more accurate user profile than standard advertising techniques, and this user profile can in turn be used to deliver advertising which is customized on an individual basis.

This seems to indicate a significant gap in the understanding of the applicants surrounding financial transactions (and data).  Merchants hold on to item detail information, the payment network receives merchant level data.. but does not get item information. ZetaWire attempts to address this gap by inventing a “coupon authority” entity in Paragraph 264.

All information related to coupons and their definitions is managed by a coupon authority, which can be an integrated subsystem of the transaction authority 102. All instances based on the coupon definitions are minted by the coupon authority. Whether coupons have been applied to transactions is recorded by the coupon authority, as are coupons’ chains of custody from the time they are minted to the time they are spent, including all data related to how and when they were share

For those of you unaware, merchants are rather stingy with their store data. The Visa’s team best effort here is with Monitise and the new iPhone application “Visa Offers” (link is my related blog). It results in a coupon with a bar code and you show your iPhone to the cashier. How does google intend to integrate to merchants and receive store level data? I can’t imagine Amazon being excited about this.. or Wal-Mart in that matter.

Visa’s new iPhone App: Is this success?

Visa’s release a new iPhone app last month. One Bank has signed up (US Bank) the rest are holding back (more on this below). The application has been a 2 year effort driven by Monitise, and the UI looks very good. However, I’m afraid that Visa’s latest mobile effort is doomed to failure because of the "last mile" issue at the POS.

Visa’s iPhone app is available on Apple’s App Store (but not advertised)

www.visa.com/mobile

The application has been a 2 year effort driven by Monitise, and the UI looks very good. However, I’m afraid that Visa’s latest mobile effort is doomed to failure because of :  “last mile” issues at the POS, and issuer data ownership.

From Visa’s website (http://usa.visa.com/personal/using_visa/visa-mobile/faq.html)

 **Offers: Receive merchant discounts and special offers directly on your iPhone. The offers are stored on your iPhone and can be redeemed at physical merchant retail locations, online, or by telephone …

**In-store redemption:
Visit the merchant’s physical retail location and show the cashier the offer displayed on your iPhone. The merchant discounts the price in accordance with the offer and you pay for your purchase using your enrolled Visa card.

Great customer experience… click on an offer and “SHOW THE CASHIER” your coupon. My guess is that the cashier will gladly give you the discount with a cash purchase as well.  There is certainly the opportunity for a social network aspect to sharing discounts (think groupon) and location aware mobile advertising.. but the banks are not on board. Why?

  1. Visa makes it clear they can register up to 5 Visa cards. Hence they have 1 Participating Issuer – USBank.
  2. Visa is beginning to use customer data for advertising. Current Visa rules do not provide for them to advertise directly to the customer.. it is the issuer that owns the relationship. Perhaps this is the driver of the marketing annoucement

Mobile Advertising Battle: Beyond the Internet

We may be seeing the beginning of a seismic change in advertising spend, and the way consumers are tracked and targeted. The “addressable market” for mobile advertising should not be viewed as a subset of online spend, both because of POS opportunities and the media richness (and now multi-tasking) of the iPhone. Apple’s strategy is brilliant, I would imagine them taking a regulatory position that all ad networks are welcome to work through their standard…. Apple is protecting customers’ privacy.

10 June 2010

Apple is brilliant!

Having just read today today’s WSJ Article- Google Blasts Apple on iAd Rules, a few random thoughts started to coalesce (which doesn’t happen as often as it used to) into a new ‘‘investment perspective’ on mobile advertising.

Yesterday Magna estimated that online advertising will climb 12.4% in 2010 to $61.0B and surpass $100B by 2013. For perspective, AFP reports that advertisers will spend $59.6B on TV ads and around $600M on mobile advertising (eMarkerter, $1.3B by 2013). The growth here is just astounding, there is little wonder for the transactions over the last 3 years:

  • MSFT aQuantive $6B (May 2007)
  • Google DoubleClick $3.2B (April 2007)
  • Google AdMob $650M (May 2010)
  • Apple Quattro Wireless (Jan 2010)

In my experiences as global buyer, online was by far the most cost effective way to acquire a customer (with SEM the most cost effective). From my perspective, Online Advertising brought a solution to the challenge faced by marketers for decades: data. Finally I could relate marketing spend to customer acquisition. Marketing went from throwing a blanket.. to a shotgun.. In 2005-2007 this shotgun was very hard to use.. particularly outside of the US. Although most agencies were well versed in spending through Ad Networks for display ads, few had any experience in SEM across search providers. Those Agencies that did still did not provide tools for my teams (buyers) to calculate CPA (determining which ads resulted in customer acquisition). Hence, large companies had to develop their own internal expertise or manage their spend directly with a chosen few suppliers (eg. GOOGLE). Internal marketing thus took on the form shown below.

The Ad industry recognizes that the ability to track a customer is key to measuring effectiveness, target ads and thereby key to greater marketing spend. There are a number of technical solutions which have developed over the last 3-4 years, tagging customers with cookies is all something we are familiar with.  Apple’s strategy in defining standard for “tracking” is challenging Google’s unique position as the “starting point” of a customer’s online activity. It moves the starting point to the iPhone device. This is a brilliant move by Apple given its 50M iPhones (and 30M iTouches), particularly when you look at the demographic of the owners and the media capabilities of this killer mobile appliance.

Apple’s plans to take ownership of the iPhone’s “Ad Ecosystem” will not end with these standards. In the online advertising model, the objective was an online acquisition. In the mobile ad model the objective is for either an acquisition online or at a physical point of sale (POS). The mobile device is in a unique position as a point of convergence between the virtual and physical world. In this model the iAD/mobile market expands from mobile advertising (as a sub category of online advertising) to generating store traffic at the POS. The challenge for a iAD at POS is similar to the “customer tracking” challenge described above.. how do I know the customer went to the store? Answers: coupons, payment, geolocation, …

Expect Apple and the MNOs to become very active in linking mobile advertising to these activities (ex Apple’s NFC patent, MNO prepaid consortium). The linking of card data to mobile advertising (consumer behavior and preferences) also provides a tremendous opportunity Banks/Issuers to monetize consumer information (see Googlization of Financial Services).

We may be seeing the beginning of a seismic change in advertising spend, and the way consumers are tracked and targeted. The “addressable market” for mobile advertising should not be viewed as a subset of online spend, both because of POS opportunities and the media richness (and now multi-tasking) of the iPhone. Apple’s strategy is brilliant, I would imagine them taking a regulatory position that all ad networks are welcome to work through their standard…. Apple is protecting customers’ privacy.

Related Content

April 2010 online ad spending report

Thoughts appreciated