Monthly Archives: November 2010

Zynga Payment Patent Application

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30 November 2010

Short Take – Random Thoughts

To be perfectly clear, I am no Zynga expert.. I have no Zynga account… and have never played Farmville, but with Kleiner’s John Doerr saying “Zynga is the most-profitable, fastest-growing, and has the happiest customers of any company that Kleiner Perkins has invested in ” I thought I would spend a little time assessing how a company that is just three years old can have an estimated market value above $5 billion with more than 320 million registered users and estimated revenues above $500 million.

Zynga of course is the leader in social gaming, started in Facebook and now available on mobile. They have proved that the old axiom “payments is the lifeblood of commerce” also extends to social gaming and “virtual commerce” (essence of Farmville). Their virtual success is also embedding itself into retail and traditional payments. For example, this Christmas I have just bought FarmCash using my American Express rewards (just announced today).

From my perspective, Zynga’s secret sauce has been its ability to get 1-2% of their customer base to pay for game credits (see Gawker article). Although they have recently agreed to a 5 year deal with Facebook, this patent (if granted) will provide them leverage in future negotiations and extending their services outside of the Facebook platform. The patent application itself is focused on value transfer and ensuring that digital currency never makes its way out of the system. From patent app:

…the virtual currency cannot be redeemed for legal currency. Consequently, the purchase is a one-way transaction that provides a benefit to the purchaser only in the context of the virtual environment….

Zynga Terms of Service also support these restrictions http://www.zynga.com/about/terms-of-service.php

d) Transfers of Virtual Currencies and Virtual Goods are strictly prohibited except where explicitly authorized within the Service. Outside of the game, you may not buy or sell any Virtual Currency or Virtual Goods for “real world” money or otherwise exchange items for value. Any attempt to do so is in violation of these Terms and may result in a lifetime ban from Zynga Service and possible legal action.

Regarding expansion plans, it would seem Google’s $100M-$200M investment in Zynga will drive a new GoogleGames platform. Which makes me wonder how many social gamers there really are?

PayPal Micropayment http://venturebeat.com/2010/10/26/paypal-microtransaction-support

Visa Money Transfer

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22 November 2010 (updated 15 Dec, sorry for previous typos)

SUMMARY: VMT may by “Mandatory” but no one cares and is not acting on it.. As one bank told Visa “do you want my attorneys or yours to draw up the waiver”.

Correction (11 March) Chase and Bank of America are committing to it in next 6 months.

Visa Money Transfer Overview – Issuer presentation

I’ve been on the phone this month with several folks focusing on the unbanked and emerging markets. A clear theme has emerged: card based money transfer will not be successful except in very limited circumstances. This is true for both (pre-paid) cards tied to mobile phone plans and network initiatives (Visa Money Transfer, Mastercard Moneysend/Obopay).  Visa and Mastercard both have grand designs for taking part in the tremendous growth within emerging markets, but it looks like the growth will be at the top end (which is still substantial) rather than with the unbanked in areas like G2P payments.

In my previous blogs, I’ve certainly shared my views on Obopay/Mastercard. This blog focused a little attention on the Visa Money Transfer (VMT) service. In both the Mastercard MoneySend (MMS) and VMT models the networks own the switch of card/bin/mobile#/service provider/issuing bank. MasterCard’s MoneySend service attempted to focus Obopay in “mobile acquiring” of both senders AND beneficiaries (come pick up your money).  VMT’s AFT/OCT transaction set (see Patent)  attempted to bypass this “registration” intermediary and go directly to issuers.  Technically, the solution is excellent and the comments below are not meant to detract on Visa’s substantial lead on MA in developing this service. The problem with VMT is the business model. Unfortunately for Visa, global card issuers (particularly in OECD 20 countries) are taking a pass. The adoption challenges are particularly acute on Debit and within Western Europe (business case, conflicting services, pricing, fraud, customer support, agreements, Visa Europe and bank control… ).

VMT also suffers from 2 widely held misperceptions: it is “instant” and mandatory. With regard to the first item, just as with any debit transaction funds can “post” to the account but actual clearing and settlement is at best next day. It therefore remains up the each bank when to show the “post” and when to make funds available (within the Reg E guidelines it can be up to 2-3 days). With respect to VMT’s “mandatory” status, I’m surprised that this issue has not been picked up in the mainstream press. Visa has lost its ability to force issuers to do anything, particularly when a contract addendum is required. I can tell you with certainty that 4 out of 6 large US banks DO NOT plan to implement VMT on the debit side. These banks like being in control of their liabilities run off and payment channels. Visa has much better adoption prospects on credit side, but the “mandatory” date has slipped from Oct 2010 to something more “flexible”.

Retail Banks are very reluctant to provide Visa/MA an avenue for service and product growth that they neither own or control. Visa’s attempted to “force” issuer’s hand by making the AFT/OCT transaction set mandatory is rather amusing and makes for good theater (see Visa Money Transfer Overview – Issuer presentation). The “incentive” for issuing bank to accept new agreement is a $0.50/tran revenue share (beneficiary). Market data clearly shows lack of participation and hence Visa is attempting to adapt and shift focus of VMT to narrow market opportunities. I’ve listed three example efforts and probability of success (reaching $10B+ TPV).

1 – Large Bank (<10% probability of success)

Work with a large bank (like Bank of America) to lead adoption and create a critical mass with a focused value proposition (example: USBANK mobile phone/NFC).  We all understand the convenience strategy for the NFC/POS/Phone focus, but for P2P? If you are scratching your head, join the crowd. Why would banks outsource P2P payments to Visa? If Visa only gets 1-2 “a major banks” to join them, what will be the P2P proposition? I can just see the Visa commercial “with Visa Money Transfers, you can instantly transfer money to some other cards some times and funds will show up in 2 days”….

Beyond the issuer adoption issues, yhy would you pay $0.50 to send money to a domestic bank account when you could do it for free online? The problem here may be that the bank’s card team doesn’t talk to the retail team… Banks need to think strategically about this and stop Visa’s P2P efforts in their tracks. Card-Card transfers present consumers with a very confusing option and forsake the enormous bank investments in shared infrastructure (ACH, RTGS, Clearing House, Early Warning …).

Message for smaller banks.. Visa is NOT getting commitment from the majors to adopt this “mandatory” transaction set. The “Mandatory” Oct 2010 date has been pushed back to April (and will probably be pushed back again). To be clear, the credit side of the house loves the idea of VMT, the debit/deposit side does not. The “value” of VMT is on the Debit side. Can you imagine the customer experience of any solution using VMT.. it only works for 50% of the cards. Message to vendors: don’t build your solutions around VMT.

2 – Domestic Payments – Emerging Market (<10% )

Solve specific problem in emerging market (India domestic money movement). Few people realize that (within India) Western Union and MGI are licensed to receive only. They cannot transfer money within India. Hence banks like ICICI and HSBC are offering VMT. As noted in a previous blog, each bank may choose to act as either remitter and/or beneficiary. Citi for example allows VMT receive, but not send. The VMT service fills a small gap in India today, but this gap should recede as banks accommodate recent updates to NEFT/RTGS process . In fact only today, India’s RBI launched Instant Interbank Mobile Pmt Service. VMT’s consumer value proposition is built around gaps in bank services and requires bank (issuer) sponsorship.

With respect to VMT as a cross border money transfer service, Visa will have no trouble signing up beneficiary banks in emerging markets. What they lack is origination network (above). They will see some progress with mid tier banks in specific markets (MEA), as they extend thier role as cross border processor (from P2B to P2P). Enabling beneficiary banks to nudge out the MSBs. This is why RBI approved the VMT service in India.. it was good for banks and bad for MSBs.

3 – NON BANK partners (40%, if emphasis is on prepaid)

MoneyGram Example. Following in the theme above, Visa is a network business and the strategy of any network business is to increase volume. Given that issuing banks are not signing up for originating AFTs, Visa is moving aggressively to create partnerships with MSBs, post offices and other non-banks for “cash in” services. These non-banks can also sell pre-paid cards through additional partnerships. This is not a “bank friendly” strategy, but market focus seems to be non-banked.

If card based money transfer is not the future what is?

The answer really depends on what problem we are trying to solve. Remittances? POS? P2P?  In the unbanked world, interchange and sender pays does not work. Regulators will not let US based companies derive revenue from G2P payments to the rural poor. Visa has many assets to create a successful solution, specifically in its Monitise unit, but ACH payments do not provide a great business model for Visa (or its bank partners). Again reinforcing the axiom that retail payments is a very low margin business (in steady state). This is why MFI and MNO models present a better opportunity, payments supports the profitability of their existing business models to a segment of customers that they already serve.

Will Visa find growth in VMT? Absolutely, growth from 0 is always and easy achievement.

Will it be a $50M revenue business for them? Not that I see, neither in emerging markets nor in OECD 20. Visa’s 10+ innovation initiatives are a mystery and a nuisance to issuers, banks no longer want Visa to control and view P2P as an encroachment on their core deposit relationship. In emerging markets, the regulators will not let Visa succeed beyond the top end of the market (not the base of the pyramid). Since writing this, Visa announced that Indian regulators approved the VMT scheme for inbound remittances. There will be some success here, primarily with regional banks looking for a focused partner (UAE Bank looking toward India remittance service).

What should Visa do? Instead of attempting to develop customer facing services and brand (ie payclick, VMT, …) that compete with bank offerings, it should focus on expanding the capability of the network to handle additional data types (fraud info, POS items, coupon, location, …).  Make the rails more robust and new ecosystems will form to take advantage. Of course the downside of this approach is that it takes agreement of 4 parties to make this type of change, hence the change cycle is over 20 years. This is one of the reasons that new networks are forming which support new business flows and switch data to Visa only when necessary (business remittance/invoicing is excellent example, eCommerce another). This cycle further isolates the card networks, and drives innovation outside of the “card process”.

See August 2010 White Paper from US Federal Reserve

http://www.frbatlanta.org/documents/rprf/rprf_resources/wp_0810.pdf

Thoughts appreciated.

India: Instant Interbank Mobile Pmt Service

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National Payments Corporation of India (NPCI) launched the instant interbank mobile payment service (IMPS).

From MyDigitalFC

To use the IMPS service, customers have to register their mobile number with the banks where they hold an account. When the customer registers, he will be assigned a three digit code that will be their mobile money identity (MMID) and each bank will be assigned a four digit national bank identification number (NBIN).

Both the sender and the receiver needs to get their NBIN and MMID in order to facilitate the transaction. The funds transfer can take place in seven seconds by using the MMID and NBIN numbers of both the banks.

This is a concerted effort by RBI to take a leadership (control) role in mobile payments as the MNOs continue to work for necessary regulatory change.  RBI and the banks are under substantial political pressure to develop services to the rural poor, and create mechanisms/licenses for agents (and MNOs) to serve this demographic. Announcements like this just further a “delay game” by which RBI seeks to create an image of progress.  

RBI constituted the NPC in 1999. This instant mobile “press release” is more hype than substance particularly given the adoption of NEFT and processes surrounding electronic transfers today. For example, in A2A (Transfers between domestic accounts that I own at 2 financial institutions) transactions, many financial institutions still require customer sighting and a paper documents FOR EACH TRANSFER. Within India, the NEFT system is just beginning to get traction (NEFT FAQ) as banks are reluctant to give customers control. India’s RTGS system, is also in its infancy (list of bank branches here) with only 60k transaction/day. Indian bank A2A  “controls” are similar to those in the US as banks like Chase and Wells,  as barriers to move money (to another FI) prevents deposit run off. These controls also allow the banker to call and ask “why are you moving money out.. we can offer that rate as well”.

Just as in the case of the MPFI group RBI is attempting to build a standard (ie platform) by which everyone must play, and therefore exert control. These central bank platforms will continue to fail, as there must be at least one group with a sustainable business case (see MNOs will rule).  IMPS does nothing to address the unbanked needs and IMPS seems to be an outgrowth of RTGS and MPFI..  I certainly hope that the unbanked and the MNOs continue to work toward influencing real regulatory reform, as today I have a system for banked account transfers which is “instant” but may require a customer to come into the branch to sign a document first.

Visa’s new iPhone App: Is this success?

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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

Decoupled Debit

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8 November 2010

Winston Churchill may have been referring to Payment systems in the US when he said:

It is a riddle, wrapped in a mystery, inside an enigma

The macro economic impacts of the recent US card legislation portend substantial business change for Visa and Mastercard. The US debit card market is soon to resemble Australia and Canada with other countries soon to follow (See China and India). Retail Payments over the next 20 years are likely to morph substantially from their current issuer/network dominance. In addition to regulatory changes, new technologies and new value networks are creating a new competitive dynamic which will bring more than $5-10B in capital investment into the payments within the next 2-3 years.

My wife’s visit to Target this week prompted a revisit to the decoupled debit space. Target’s value proposition: hand me your check and sign a release form, you will then receive a RedCard linked to your checking account and good for 5% off all future purchases. Will we see more of this type of value proposition (which Durbin enables through its steering provision)?

From TSYS

Decoupled debit is interesting for several reasons:

  1. The issuer is not required to be a bank in order to offer an account and issue a card
  2. The products can exist as private label products or co-branded products
  3. The products can potentially build significant loyalty
  4. The products reduce costs when delivered and managed correctly
  5. The products leverage the existing payments infrastructure and standards

Retail Business Case

Retailers have a different mindset when it comes to alternative or decoupled products because they are stakeholders in the product, not just the transaction. They look at the product as a way to help them:

  • Reduce cost of payments
  • Build loyalty
  • Offer merchant-designed promotions
  • Drive more store sales
  • Segment and target customer groups
  • Leverage ‘spend information’

For those outside the US I recommend reading:

Digital Goods Payment

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8 Nov 2010

There is a wealth of new payment types (and currencies) brought on by digital goods. Companies like Zynga, Boku, PlaySpan, Bango, Zuora, SocialGold (see list here) are being assessed at multiples exceeding 100x revenue. Social gaming is the focus of many of these companies, with estimated transaction volume of around $2.2B and expected market growth of 50-80% CAGR.

Quite exciting. Is it a “fad” and will these notional currencies be able with withstand the light of regulatory review?

Apple and Google after Boku?

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2 Nov 2010

TechCrunch: Apple’s next strategic move

Yesterday: AT&T inks deal w/ Boku

http://news.cnet.com/8301-13577_3-10265243-36.html

What is Boku’s core asset? Technology? MNO billing relationships?

Hope that Apple and Google look long and hard at the MNO contracts as the “secret sauce” that has driven Boku’s growth. Boku’s MNO friendly approach and neutrality allows any customer to buy digital goods and charge it to their carrier bill.  Neither Google, nor Apple would seem to have a strategic fit here. Why would carriers allow Google/Apple to bill to goods to their customers? Or perhaps I should ask at what cost will carriers allow this to happen?

All of this is even more relevent as ATT/Verizon/TMobile/Discover,.. etc. build their own payments business.

Boku is a great business, but it operates on a precipice much the way PayPal did in its early days.  Carrier billing can certainly be  a much more cost effective infrastructure for mobile digital goods purchases. But what drives this efficiency? Isn’t it the carriers and their relationship to mobile customers?

On the “buy side” digital goods stores use Boku because of its independence. So if Apple buys Boku will Android still support Boku payments (http://www.boku.com/android/)? I do think Boku is in play.. but the real acquirer may look more like the Mercury NewCo than google.. as the MNO synergies are the core of the Boku business model. Unfortunate that the Mercury NewCo still has no CEO.