Monthly Archives: March 2012

Digital Wallet Strategies

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Warning.. I ramble a bit in this one.

23 March 2012

Description: Mobile Market BreakdownDoes anyone remember Microsoft Wallet circa 1997 (See Wikipedia)? Digital wallets are certainly not a new phenomena. Today we are struck with eWallet saturation: Google Wallet, ISIS Wallet, Visa Wallet, iTunes accounts, Amazon Accounts, Square, PayPal, …  How many places must store all of my credentials?

For my own benefit I thought I would take a brief look at the history to determine what the future may look like (As the future holds the key for my investment decisions). With respect to Wallets, what are they? What are successes and why? What is the consumer value proposition? What are the risks? What does the future hold?

My last blogs on this topic were in November 2009, Investors Guide to Mobile Money, and in 2011 – Tough Start for Mobile Payments.

What is a Digital Wallet?

My all time favorite YouTube video definition is below (Courtesy of Google)

http://www.youtube.com/watch?v=gKGptWtzeaU

[youtube=http://www.youtube.com/watch?v=gKGptWtzeaU]

Proposed Definition: A consumer owned and controlled account that can store any electronic form of what is normally held in a physical wallet, including: payment, ID, coupons, loyalty, access cards, business cards, receipts, keys, passwords, shopping lists, …etc.

This definition sounds broad enough..

As a consumer, what would you think of having multiple physical wallets? I personally don’t have that many people I trust. Trust is a very important element to a consumer. Some of the information in my wallet is sensitive, and there is also a financial risk associated with loss of payment information (particularly outside of the US).  What kind of entity would want to assume the risk of holding all of this information?  Which reminds me of a story,

I was in a Board Meeting with a senior partner of a “Top 3” VC discussing consolidated sign on. A start up was proposing to hold all of the login credentials for all of your bank accounts. As the former internet head for both Wachovia and Citi I had some firm views on the topic and asked “who is going to take the risk if credentials are compromised”? I further explained “it is not a technology problem, but a risk problem.. Bank’s will not let someone keep their Customer’s keys if they can’t insure the risk”. As a side note, I also instituted a policy that if a customer discloses their credentials to anyone, they are responsible for any losses that result (sorry Yodlee).

Within a Digital Wallet, 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, for example Microsoft’s wallet has evolved to LiveID.  From a pure technology perspective, the mobile phone (with NFC) seems to present an opportunity to provide the Consumer with a device that can uniquely handle the security and authorization aspects of a holistic digital wallet. In my view, the challenges faced by the “phone as wallet” are business related. Per my definition above, a wallet should allow consumers to control what goes in and how it is used. Today we see the carriers (ex ISIS) create a platform based upon their control, allowing only cards that have paid a fee to enter into their wallet. I digress…

What makes for a successful wallet?

Customer Trust, Customer Control, Convenience, Ubiquity (opposite of lock in), Intuitiveness, Experience in Use (buying, redeeming, accessing, ..), Security,

If I have a wallet that only accepts 3 cards that are not accepted at any of the top 20 retailers (ie ISIS), it is of little value. Why not let consumers control what goes in? This is where carriers must get to in order for NFC to survive. Even then, NFC phones are far from my recommendation. After all if your payment information is locked in a mobile phone how do you use it when you are at your computer buying something on Amazon? Locking information in a phone is just plain stupid in the age of the cloud.. most agree that individuals should have a their information in a cloud they control. The NFC zealots reading this blog will respond that it NFC doesn’t require a network and is more reliable… my response, the POS and payment terminals are connected.. NFC doesn’t need to hold the card in the SE.. it just needs some sort of identifier.. or in the Square cardcase example no NFC at all just your voice print. After all if there is no auth from the payment network.. the transaction will not happen.. so something is connected in 99%+ of card transactions.

Consumer Value Proposition

Description: C:UserstomDocumentsPersonalblogIPP_3_clusters_labels.jpgMy primary digital wallet is Amazon, with Paypal as a close #2. The buying experiences are just superb, unfortunately neither extend well into the POS. I have a PayPal debit card I use here.. but I have a hard time justifying why I would use a paypal debit card that pulls money from a pre-funded account which is tied to my Bank of America Checking.. why not just use my BAC Debit Card? I don’t think I’m alone here.. The thought that comes to mind: why do I use PayPal at all? Convenience is certainly a key element, but I also really don’t like giving out all of my personal information to every vendor I do business with.  Why does any vendor need to know my name? Is there a business case for anonymity? For Readers in Germany I know your answer… of course there is.

Most Silicon Valley eWallet business cases are being built around data sharing and “closing the loop”. In a network analysis model, every step away from the optimal consumer experience (control, anonymity, ubiquity,..) impacts broad based adoption.  Alternatively, new value propositions (ex incentives, rewards, loyalty, …) can reverse entropy, but only within specific groups/clusters (that realize the value). Thus a highly fragmented world of wallets, each built around specific functions limited to narrow networks, where customers exercise only limited control and hence participate in a limited fashion.

Risks

My last blog on Payment Risk was associated with Square (I still don’t like the swipe, but I have eaten my shoe now that they have surpassed $4B GDV and have developed CardCase… which I love). Microsoft had grand visions for Wallet and Passport, and pulled back for a number of reasons. Globally, most consumers still have problems putting all of their information in one place. The Fed, OCC, FTC, CPFB, Banks have all been circling around the broad proliferation of consumer data.. what are the risks of having your payment instrument stored with 100s of vendors? While at the The Clearing House’s annual event, I was pinged by a JPM Chase exec.. what will be done to secure payment information?  At the policy level, many believe there is a national security risk in the compromise of our payment systems…  It is something all of the Banks are thinking about.

While cloud based storage of information sounds fantastic… there remains a gap in integrated controls, security and authentication. This is where I see both the US and EU taking action on consumer data access and controls much beyond what is now within PCI. Given today’s technology, there is little reason for any merchant to hold your actual credit card number.. yet it is still the case.

What business incentive is there for any entity to hold “unlimited” sensitive consumer information? If the information cannot be accessed without user consent? All of these factors will shape wallet functionality to either something focused within a given domain, or under complete control of the Consumer.

Wallet Strategies

1) Consumer Friendly.. Single store for all consumer information. Payment, loyalty, reciepts, … The players I see here are Google, Square. (note I acknowledge everyone at PayPal just rolled their eyes and point them to my Disclaimer above). Business case is around customer data access.

2) Marketplace focused. Obvious players here: Starbucks, Rakutan, Amazon, Apple, Paypal, Target Red Card. Objective: Deliver a fantastic customer experience in purchasing within a focused marketplace.

3) Form Factor/Device Focused. Mobile Operators, Card Networks, . Deliver technology and incent buyers/retailers to participate. This is not working out so well, exception is Edy.. may work in markets with dominant carrier.

4) Bank Consortium. We see this more in Europe at the moment, but I believe the US regulatory bodies are pushing banks to work together here.  Much more payment focused, and thus minimal consumer value… Banks/Fed must realize mobile is not about a new form factor, but a new value network.

5) Retail/Transit Consortium.  Transit is already clear leader here in Asia…. Transit actually resembles more of #2.  Where there is only one transit company provider I believe it is.. this Category is defined as one wallet working across multiple retailers.. I look at this as incentives tied to something like a decoupled debit.

6) Commercial. Example outbound payments, payroll distribution, global dividend payments – hyperWALLET.

7) Other???

Future of Wallets

“Limited Wallets” can obviously be very successful: Starbucks, PayPal, Amazon, Apple iTunes, Oyster, Edy, Suica, Octopus, hyperWallet…. But all started around an existing marketplace/system. In order for an independent wallet to thrive it must deliver value within a core network. My approach to evaluating retail payments evolves around a central hypothesis: payments support a commercial system, they are only the last phase of a long marketing, incentive, shopping, selection, and buying process.

Networks are resilient to change, this is both an asset and a hindrance. The value that is delivered within an existing payment network is tied to the commercial system in which it operates. This includes both business agreements AND technology, neither of which are easy to change. As the nature of retail changes (example payments, and incentives across virtual and physical channels) new “value exchange” networks will form. Existing payment networks will certainly attempt to change, but given their distributed ownership, nodal control over rules, and legacy infrastructure it will be “a challenge”.

In the US today, this is what is happening with Google Wallet, Bank initiatives to form “the next Visa” and Large US retailer’s plans to form a new payment network that they control. Today’s wallet initiatives are operating in a very dynamic landscape: retail is changing, technology is changing, new value networks are forming, new marketing platforms are emerging.. The margin is always better in orchestrating the interaction, than in coordinating the transaction. Thus I place my “wallet” bets in the short term with groups that can control the commercial marketplace (ie Apple, Amazon, eBay, Retailers, … ), and with groups that can orchestrate new value propositions (ie. Google, Square, hyperWallet, ..etc).

Have a great weekend… My Asia thoughts are next.

Back from Asia

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Back from AsiaDescription: C:UserstomPictures2012 NZMilfordSound and MtCookmtcook small2.jpg

23 March 2012

Just getting back from 4 weeks in Asia.. During my time there, I met with Capital (institutional investors, PE, Sovereign Wealth Funds, Banks, VCs), Companies (MNOs, Handset Manufacturers, card networks, retail) and Comrades ( my old teams from Citi and Oracle).

While stuck here in SFO (on my last leg home) I’m thinking about how to structure 5-10 blogs (as well as 4 weeks of expenses).  One of the reasons I write this silly blog is the act of writing seems to help me to structure my “raw data”(as well as having a community of great folks like you to give me feedback).  My primary goals are to identify: where investments are being made, business model innovation, and true market opportunities. For obvious reasons I don’t always highlight the gaps (in detail) as this is where I invest or look to get something else moving.

The Asia market is exciting and complex. I have to admit it was much easier staying on top of it when I had 10-20 people in each country competing locally (who could distill what I needed to know). Given my current focus on Early Stage companies, I’m particularly keen to stay abreast of the Asian “start up” economy as well as the local venture community.

What makes Silicon Valley so vibrant?  US Market Size, Human Talent, Companies, Capital, Regulation, Tax, Infrastructure, Legal, … The first item, US Market Size, continues to dominate my approach to Early Stage companies. This US is such a unique place.. $14.6T GDP, $4T in Retail Sales, $705B in Marketing Spend, 608M Credit Cards in the grasp of most of its 311M citizens. A start up could take just 1-2% of the US market (in any given area) and have some kind of sustainable success.. In the ROW… it would take 10-20% of the local market. This “market size” factor heavily influences the approach of local companies (specifically), and innovation (in general), within Asia.

Following the hypothesis for products originating in Asia: they must capture a very substantial share of the local market to become sustainable. Existing domestic institutions are better placed to both make the capital investment… and “shepherd” the product launch. This dynamic has existed for 100s of years, a form of “organized” innovation by a market leader. These market leaders are also organized into networks of suppliers as we see it in Japan/Keiretsu, Korean/Chaebol, … As you can imagine, large companies typically don’t innovate much beyond their core products. After all their managers must seek a place in the organization if the initiative doesn’t work out.  Today’s WSJ had a fantastic article that further detailed how this “innovation dynamic” created a destructive force in Japan’s consumer electronics industry.

WSJ Today: How Japan Blew Its Lead in Electronics

Previously I also wrote on Europe’s attempts to “standardize” payments infrastructure actually ended up killing all innovation in the area (note… Europe is NOT one market when it comes to banking and payments).

http://tomnoyes.wordpress.com/2011/03/08/payments-innovation-in-eurpoe/

Investors – Start in the US.. then expand

Thus most VCs correctly direct start ups to focus on the US for initial product launches (for now….). The key exception: China.   Most of you know my blogs are generally focused in 3 networked businesses: Banking/Payments, Advertising, and Mobile.  Starpoint’s general investment thesis is that the mobile phone will be key to linking all three of these networks… to become the point of confluence between the physical and virtual world (commerce, advertising, social, payment, …).  I have so many stories on China that I wouldn’t know where to start..  The 30 second summary:  You can’t compete without Guanxi , the opportunity is insane, the regulators are tough, US VCs can’t “experiment” in China and local partners are hard pressed to see what value you have to offer them in a domestic market.

Asia Blogs

Here are my thoughts on future blogs

  • China Market Dynamics.. Payments and Commerce
  • DoCoMo and the Japan NFC consortium
  • NFC bets in Asia – Transit Focus
  • Handsets – Future of commodity hardware?
  • SingTel’s Amobee Bet
  • US Start Ups: Penetrating Asia (picking resellers)
  • Emerging Markets – Payments/Regulatory Update
  • …?

Card Linked Offers Update

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27 March 2012

We see in the press that Google/MA have gone beta with Card Linked Offers, and Bank of America is  about to go live with “BankAmeriDeals”. I last gave an overview of this space back in November in my Card Linked Offers post. For those that haven’t seen it, there is also a must read blog by Reed Hoffman in Forbes on the subject: The Card is the new App Platform.

Here is my blog from 3+ yrs ago – Googlization of Financial Services – outlining data flow. My purpose is mentioning this blog is not to show how smart I am (as an alternate view is already firmly established), but rather to highlight how much my view on the opportunity has changed over the last 3.5 years. As I tell all of the 12 start ups in the CLO space.. if Visa couldn’t get this to work what makes you think that it will be easy for anyone else.

There is a CORE business problem I didn’t realize back then.. merchants don’t like cards and are VERY reluctant to create ANY unique content (offers) where card redemption is REQUIRED.  Further constraining the “capabilities” of CLO is lack of item detail information within the purchase transaction. IBM is the POS for 80% of the worlds to 30 retailers. Take a look at the 4690 overview here, notice what incentive solution is integrated? This was a 5 yr project for Zavers…

A story to illustrate my point on retailer reluctance. As most of you know POS manufactures like IBM, Micros, NCR, Aloha are implementing POS integration solutions similar to what Zavers has done. Most of the CLO companies above are paying the POS manufactures to write an “adapter” that will work within their POS and communicate basket detail information. (ISIS is rumored to have a 200 page Spec for this POS integration as well).  There is a very big difference between having integration capability, and a RETAILERS agreeing to use it (ie share data).  There must be a business value proposition for retailers to move… and I can tell you with a great deal of certainty.. Retailers don’t like the BANK card platform.

I emphasize BANK for a reason.. I was with the CMOs of 3 large retailers a few months ago. When asked what their payment preferences where, they answered without hesitation: Store Card. This is their most profitable product used by their most loyal customers (think private label). Do you think for a moment that a Retailer would deliver “incentives” to customers that are not in this group..  Remember, these PVL loyal customers also hold a number of other bank cards, and there is not much in the way of customer matching between data sets. I think you get my point.

As I stated previously, all offers businesses are highly dependent on targeting. Targeting is dependent on customer data, relevant content, effective distribution (SMS, e-mail, an App), campaign management (A/B testing, offer type, target audience, …). Campaign management is very dependent on feedback.  There are very few companies that can effectively TARGET and DISTRIBUTE.  The current group of CLOs is partnering with the banks to solve the targeting problem (example Catera/Citi, Cardlytics/BAC, …). This is further EXASERBATING the poor Retail adoption. Why? Here is what a CMO told me:

“Tom, lets say a consumer just shops at Nordstrom.. the card network and bank see that I just completed the transaction and now market to them … the advert is “go to Macy’s and save 20% on your next purchase”… Given that they can only offer basket level incentives this is how it must work… Tom do you know what will happen? The customer will return what they just bought and go to Macy’s and get it. How is this good for Retail?”

From an Ad Targeting/Distribution perspective, Mobile Operators certainly have an eye on this ball (mobile phone). But only a few companies like Placecast can actually deliver it for them. MNOs are truly messed up in this marketing space (within the US). If you had the CEOs of Verizon, ATT and ISIS in a room and asked “who owns mobile advertising”?.. ISIS would say nothing if both of the other CEOs were in the room.. They want it.. but no one will give it to them as they can’t execute with what they have in this space.  Verizon would say “many partners”… Their preference would be to sell the platform akin to their $550M search sale to Microsoft in 2009. So VZ wants a $1B+ Ad platform sale… who would compete for that business? I digress.. but what is in place today looks much more like a rev share… Internationally there are carriers with their act together: Telefonica and SingTel (just bought Admobi).

Let me end this CLO diatribe with a customer experience view. Let’s assume I have 12 CLO players.. each partnered with a different bank/network. Also assume that all are heavily dependent on e-mail distribution. I have 6 different cards.. and will be getting at least 6 e-mails per week with basket level discounts. Now assuming that I can keep track of which offer was tied to which card.. and use the card. I’m still left at the POS with a receipt that shows none of these basket level discounts (as they are “credited” to my account after purchase).

Without POS integration AND Retail data sharing this will not work.. the customer experience is terrible, as is the campaign’s restriction on basket level discounts. The ubiquity of cards is attractive.. as is bank data on Consumer “Store preferences”…. But both work to the detriment of retailers. What consumers will see in CLO for some time is the generic 10-20% off your next purchase that will also be available in direct mail campaigns… Let’s just hope that someone can work the double redemption problem…

My read on this for Google is a little different. Google is positioning itself as a neutral platform.. it can do Retailer Friendly.. Bank Friendly… MNO Friendly.. Manufacturer Friendly…  Each will have different adoption dynamics. Google’s objectives are likely: gain insight, be the central platform for marketing spend, be the most effective distributor of content, … . This offer beta would certainly seem to be a “bone” thrown to banks.. hey… here it is … good luck trying to make it work.

WSJ Article – A Retailer Wallet?

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3 March

Today’s WSJ Article – Retailers Join Payment Chase

What do Retailers want in mobile? Well they certainly DO NOT want a wallet which they can’t control and is restricted to a containing credit cards, at a cost of 350 bps cost (sorry ISIS). One retailer told it to me this way

“Mobile Operators know how to run dumb pipes, not create business platforms for marketing… their current wallet initiatives are akin to a toll bridge, NFC is their toll booth where they stop me before reaching my customer..  to cross their NFC bridge I have to wait in line and when I arrive at the gate they don’t want $0.50 they want 3.5% of what I’m carrying in my truck, and a copy of the shipping manifest (the customers names I’m going to see in my delivery). This model doesn’t work for me. “

Retail is under assault. Globally retailers have had their gross margins compress from 4.2% in 2006 to 2.4% in 2011. They view mobile as a principle tool that has led to this margin compression. When I go into talk to the majors and say ‘lets talk about mobile’ .. their response is usually something like “yes.. how do we stop it.. can we put disruptors in our store”? Of course there is much shock value here… particularly for Silicon Valley types where everything mobile is good. Read my previous post for more perspective here.

Few people know that ISIS is charging Bank issuers for the privilege of having their cards in the wallet. The only way issuers can make the up front investment is to have a product that pays for itself quickly. That product is a credit card. This means that the ISIS wallet is 100% credit..  for a retailer that has a transaction mix of 30% cash, 40% debit and 30% credit this means adding a payment type that is a 100% mix of its most expensive type. Retailers ask: will this ISIS wallet drive increased spend? Why on earth would I want to do this? For Consumers this means you have to pay with cards that are “privileged” and not the card you want to pay with.  A major advantage for Google is that it lets Consumer decide what is in its wallet. In the Google model, Issuers face no cost in getting their card in the wallet,  Stores can add their own private label or loyalty card.. and anyone can market..  Consumers are in control. Google Wallet is not just about payment.. but about advertising, loyalty and incentives. This point is missed in the mainstream press.

The WSJ article is off on a few points.. Retailers are not focused on the mobile payment side at all (..well perhaps agreeing not to allow bad ideas to get started is agreeing on a wallet strategy.. but in a negative sense).

What are Retailers looking for?

  • Mobile as a tool for enriching the customer marketing, shopping and purchasing experience.
  • Ability to deliver above to ALL Consumers.. not just ones with the latest phones
  • Retailer friendly protection of sensitive consumer information
  • Lowest cost payment (Google is the only entity that allows customer and retailer to store ANY card.. example paypal does not support store private label)
  • Integration with loyalty and marketing programs

A consortium of highly competitive Retailers face that same challenges that a consortium of highly competitive Mobile Operators do.. Neither will work unless they can deliver value.  Individual companies do not excel in designing business platforms that benefit others, and are therefore very myopic.  Consumer’s are very reluctant to use a retailer’s own app while they shop or checkout… For example if I was shopping in Target,  why would I use Target’s iPhone app for price comparison? will I get the same results as Amazon’s?

What should you expect from Retailers?

  • A defensive play.  Retailers are well positioned to slow adoption of technologies that don’t make sense for them. There is a high degree of collaboration among retailers here .. most of it resulting from their success in pushing back on interchange in various markets (recently Durbin in the US).
  • Something that makes financial sense for them.. FAST. Given their margins.. they have no flexibility in making investments that don’t have a solid plan. Just as the MNOs look to card interchange.. Retailers also look to 3rd parties like CPGs (think trade spend and coupons) to fund consumer facing initiatives.
  • Cost reduction is usually more of a focus than sales creation.. this is particularly true when competitors get together in a consortium. I’m not going to say much more here.. but I think you get my point. For example, if I enabled ACH payment on my loyalty card.. I would take interchange from $0.21 debit down to $0.04…  Target has done this with their Red Card.. a FANTASTIC product. http://tomnoyes.wordpress.com/2010/12/06/redcard/
  • Customer control. Retailers want to own the consumer shopping process… or at least feel like they own it.  Quite frankly Google has built the platform to enable this, but Retailers are concerned about data.

There is a tenuous balance to make mobile work in retail. This balance is between: Consumer, Retailer, Bank, Manufacturers, Mobile Operators, Advertisers, ..  “Platform effectiveness” or “Consoritum effectiveness” has a strong correlation to: data, reach (distribution), relevancy, effectiveness and control. Just as MNOs are not balanced, neither are Retailers.. Consumers will migrate to where value is delivered. In Retail, selling a commodity good at a higher price is not a winning business model.. I consider myself fortunate to work with many of these groups, what is most ironic is that each group views a consumer as 100% owned by them.  My position is that NO ONE owns the consumer… that consumers are driven by value and will change their behavior when value is delivered.

In my view, a neutral party ( like Google, Apple and MSFT) are much better positioned to bring participants together. Neutral Parties are akin to public highways with optional services.. They are not picking sides.. or forcing you to stop at the toll booth and hand over a percentage of your merchandise to complete a  “commerce” process.

—- Addendum

BTW I admit that I’m a fan of Google. It is my baseline because nothing else is in the US market (POS Payment with phone).. and Retailers love them. It is the only company I know of that has Retailers calling them to request a visit.. why? Google delivers sales.

Great example of collaboration is Google Local Product Search (http://www.google.com/intl/en_us/products/local.html).  Stores can choose to share store level product inventory. Think of how sensitive this data is.. what you are selling in which store (0r just a binary in/out of stock). Retailers love this function and enthusiastically share this data with Google because it improves the way consumers choose a physical retailer from an online search. It drives sales. Payment is only the last transaction in a long research, marketing, shopping, selection process.

Your feedback appreciated.