Monthly Archives: August 2012

Battle of the Cloud – Part 2

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29 August 2012

Previous Blog – Part 1 – May 11, 2012

Let’s update the Cloud Battle story and discuss events since my last post on the subject

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).

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

Since May, the following “significant” events “in the battle” have occurred:

  • Retailers have launched MCX with Wal-Mart’s Mike Cook as the lead. I want to emphasize, this is not “mobile payments” but rather a low cost payment network (Cook talks about $0.05/payment). Some retailers will seek to integrate their loyalty card, others will create plastic (see Target RedCard), others will certainly couple with mobile. WMT will likely integrate with a virtual wallet that manages digital coupons (Coupons.com likely leading)
  • Apple has rolled out Passbook in June.. See my Blog, and hardware analysis from Anandtech of why there is no NFC.
  • PayPal had a marketing announcement with Discover. Why would you announce something like this with no customers? Paypal is expanding its network… but merchants are just laughing.. MCX wants a $0.05 payment, Durbin gave them a $0.21 payment and Paypal wants to get 180-250bps. As you can tell, I don’t think much of this, as the Merchants are still in control of their payment terminal. This is also not an exclusive deal with Discover. I expect 2 other major players to partner with Discover in next few months. Paypal just wanted to run with this announcement before the other products come out. I also want to emphasize that DFS is a BUY. They will be a partner of choice as they run a subscale 3 party network that can adapt much more quickly than V/MA. As a side note,  Paypal will likely expand distribution of their own plastic.  See related blog.
  • Google rolled out Wallet 1.5 on August 1 (see blog). This is one of the biggest moves in payments and provides an enormous retailer value proposition (aligned to MCX). Google didn’t follow PayPal, Passbook, or Microsoft.. they rolled out product that was 1.5 yrs in progress.  Google’s new cloud wallet allows the consumer to select any payment method, and provides the merchant with a debit rate (Bancorp non-Durbin 1.05% + $0.15 (note Google/Issuer can lower this for merchants, as any issuer could, this is a MAX rate). Google is CURRENTLY loosing money on the payment side of the business in hopes of making it up on the advertising side. This is no marketing announcement like Apple, Microsoft and Paypal.. this is a product announcement.. it is working today in my new Galaxy phone. This is also the first PRODUCTION cloud wallet for the POS. Apple, Amazon and Paypal dominate cloud wallets in eCommmerce and mCommerce. Google and Amex’s Revolution money are the only one’s doing it at the POS.
  • Square acquired all 30M Starbucks mobile payment customers (see Blog). Square has done a great job acquiring merchants.. but was hurting on the consumer side. Square wants to build network and needed a pop on the consumer side. Square’s business is pivoting toward marketing and consumer experience. Within the next year, the little Square doggle will be a thing of the past. Starbucks is committing to the Square register experience, and Square is relabeling “card case” to “Pay with Square”.
  • LevelUp is making payments “free” for merchants as part of a loyalty value proposition. This is an example deal.. expect more to follow. Issue is that different merchants have different priorities. LevelUp is focused in QSR/Casual Dining and is operating as part of a loyalty play. I’ve outline their revenue in this blog, don’t think it is sustainable unless they can move into acquisition.
  • ISIS has lost key executives in its product area, AT&T is rumored to have a NFC/Wallet RFP of its own out and even Verizon is planning to let Google go ahead and put its wallet on the Samsung Galaxy III phones.. after all what choice does it have?
  • Card linked offers and incentives in the cloud. No one is making money in this space, large retailers are not participating, hyper local merchants (who are interested) are very hard to sell to, and consumers don’t see relevant content (thus redemption rates under 2%).

Where are the cloud battle lines? Well most significantly the battle lines are forming away from NFC (as I stated in January). Even my old friends at Gartner have caught up and placed NFC in the trough of disillusionment. To restate, NFC is not bad technology.. but it delivers no “value” in itself beyond control. Mobile operators have consistently failed to build a business around a “control” strategy (see my Walled Garden Blog). In the  ISIS example they mandated use of credit cards only, as this higher credit interchange was the only way to make revenue. Well guess who pays the freight here? Yep the merchants…  Wal-Mart and its peers were not thrilled at giving issuers and MNOs 3.5% of sales for the privilege of accepting a mobile payment.

The Cloud battle is complex, as the strategies are about MUCH MORE THAN PAYMENT. Payment is the ubiquitous service that is the last phase of a successful marketing, engagement, shopping, selection, deliver, retention, loyalty process. Leaders from my vantage point:

Payment Networks:

  • Mastercard focused on acting in supporting role globally.
  • Discover similar to MA, but with much greater flexibility as it operates in a 3 party network and is both issuer and acquirer.
  • MCX – Not a leader yet, but has CEO mindshare of every top US retailer. They seem overly focused on the cost side. There is a very big whole in their customer acquisition strategy. MCX is bidding out its infrastructure now, my guess is that Discover or Target will win it.. and the the RFPs are just a way of keeping Banks “in the tent” to keep them from changing ACH rules to kill it like they did to Scott Grimes at Cap One (decoupled Debit).

Physical POS:

  • Google – has more consumer “accounts” than any company on the planet. Can it convert them to accounts with a linked payment instrument? Google also “touches” more customers, more times per day than any other company, its heavy influence in the shopping process positions it well with retailers. Also has the best retailer sales force of anyone on this list, as they bring in customers to retailers every day. Android/Google Wallet….
  • Square – Best customer experience hands down (register). It also has the most traction among small retailers

eCommerce/mCommerce:

  • Apple – expect Passbook to dominate mCommerce. It will be the killer app.
  • PayPal – Challenged in market adoption beyond eBay/GSI customer base. Top ecommerce sites like Amazon and Rakuten have their own integrated payment, also 50% of eCommerce/mCommerce goes through Cybersource which Visa acquired. Paypal’s future growth driven by international
  • Amazon – leading eCommerce/mCommerce player. When will it take one-click beyond Amazon? Amazon’s experience is best from end-end…. PayPal/Apple will operate around the periphery of non-Amazon purchases.
  • Rakuten – “Amazon of Japan” who now also owns buy.com. Fantastic experience and leading eCommerce loyalty program.

How many places do you want to store your payment credentials? Who do you trust to keep them? What data do you want providers to know about you?

From a macro economic perspective, total payment revenue for all major participants is just under $200B in the US. Total marketing spend in the US is over $750B. Total retail sales in the US is $2.37T (not including oil/gas, Fin services, T&E). Marketing is fundamentally broken… payments is not. Retail sales gross margin has been compressed from 4.2% in 2006 to 2.4% in 2010. Who is best able to execute on the combined retail and marketing pain points? Who can be retailer friendly? Consumer friendly? Marketing friendly?

I start my analysis with #1 the consumer value proposition, and #2 the merchant value proposition. Entities like Google, Paypal, Apple already have tremendous consumer relationships and traction. They thus have very few “acquisition” costs. However, these entities do bear the costs of changing customer behavior. There are many approaches for changing customer behavior:

  • Incent behavior – direct/indirect/merchant
  • Customer Experience (ex Square)
  • Service integration (reduce effort or # of parties)
  • Reduce risk – financial (security/anonymity…)
  • Reduce risk – purchasing (social, community reviews, …)
  • Value proposition in commerce process (indirect incentives)
  • Marketing
  • ..etc

Other groups like MCX and ISIS bear the cost of both customer “acquisition” AND behavior change for: Consumer, Merchant or Both. As I state previously. one of my favorite arcane books I’ve ever read was “Weak Links” I’m almost reluctant to recommend it because it is so good you may jump ahead of me on some of my investment hypothesis. One my favorite quotes from the book

Scale-free distribution (completely open networks) is not always the optimal solution to the requirement of cost efficiency. .. in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks.

Networks like V, MA, PayPal, Amex and DFS are working to participate in this new Macro economic opportunity. But established networks are hard to change

“The network forms around a function and other entities are attracted to this network (affinity) because of the function of both the central orchestrator and the other participants. Of course we all know this as the definition of Network Effects. Obviously every network must deliver value to at least 2 participants. Networks resist change because of this value exchange within the current network structure, in proportion to their size and activity.”

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).

The current chaos will abate when an entity delivers a substantial value proposition that attracts a critical mass of participants. Today most mobile solutions are just replacing a card form factor… this is NOT VALUE. I am currently placing my bets on solutions that merchants support (Square, Google, MCX, LevelUp, …) as this is a key “fault” of almost every other initiative.

Comments Appreciated (as always sorry for the typos…)

Interpreting Square-Starbucks Deal

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18 August

From Press Release, key deal points are:

  • Customers will be able to use Pay with Square, Square’s payer application, from participating company operated U.S. Starbucks stores later this fall, and find nearby Starbucks locations within Square Directory;
  • Square will process Starbucks U.S. credit and debit card transactions, which will significantly expand Square’s scale and accelerate the benefits to businesses on the Square platform, especially small businesses, while reducing Starbucks payment processing costs;
  • Using Square Directory, Starbucks customers will be able to discover local Square businesses — from specialty retailers to crafts businesses — from within a variety of Starbucks digital platforms, including the Starbucks Digital Network and eventually the Starbucks mobile payment application;
  • Starbucks will invest $25 million in Square as part of the company’s Series D financing round;
  • Starbucks chairman, president and CEO Howard Schultz will join Square’s Board of Directors

My interpretation: Starbucks is selling their customer base to Square for a revenue share and an equity upside.

  • Square is buying the Starbucks payment user base, with all stored “reload” cards. This customer directory will move from Starbucks to Square and support both legacy Starbucks payment and enable all Starbucks customers to be “PaybySquare” capable with acceptance of new terms. Square is “processor” in the sense that it is now responsible for pre-paid balance and reload.
  • Its about DATA.. payments will be free (for Starbucks), and SBUX hopes to enable Square incentives that are BOTH loyalty and line item based. Square’s driver is to find a way to monetize Starbuck’s payment and location data before it gets to Chase PaymentTech. This means increasing consumer network so that it can make better case to prospective merchants. My guess is that Square is processing payments at no cost Starbucks is paying a lower overall cost for payment acceptance through Square/ChasePaymentTech for all existing Starbucks customers, and will actually PAY Starbucks (revenue share) for any ad revenue they can generate from Starbucks customers. There are 3 consumer transaction tranches: Starbucks mobile payment, Starbucks card, and Pay with Square (Square Register). All will go through Square so they can use the data.
  • Starbucks will start to roll out a new service: SquareRegister (pay by voice, see my previous blog). This will eventually replace the bar code if all things go well. Again, my belief is that Square will bear all of the cost here.

Revenue implications?

Short term there is no revenue upside for Square in this deal, it is about growing network (primarily on consumer side). Starbucks will see costs decline slightly and open up a new revenue channel by monetizing its consumer network outside of its stores. I have some thoughts on precise numbers, but making my own bets right now so I can’t share them.

LevelUp Free Payments

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4 Aug

Levelup just completed a $21M round and announced last month that payments would be “free” for merchants.

Take a look at this youtube video to review high level customer experience.

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

In order for Level up to successfully complete a transaction:

  • Merchant must set up account
  • Teach servers how to “read a barcode”
  • Consumers create an account
  • Consumers set up payment instrument
  • Data connectivity in the store for consumer to generate barcode
  • Data connectivity in the store for merchant to read barcode (less of an issue as servers may be on internal private wi-fi).
  • Restaurant reconciles payments from levelup with cash register, payments from card processor, groupon, living social, …
  • Restaurant determines “value” of loyalty program vs other marketing forms.

My first question on seeing this is “why”!? why would restaurants want to do this? Why would consumers want an account? Why would Google Ventures and TMobile put money in this? (see rough start for mobile payments, Digital wallet strategies). What is the value proposition?

First, let me admit 2 very big biases I have (associated with this model).. they were formed by some very hard lessons learned

1) Building both sides of a network is very hard to do

2) Commercial buildings are a black hole for connectivity. My estimate is that 3G service is avail in less than 40% of all commercial buildings.

The primary value proposition is a loyalty, allowing a Starbucks like checkout  experience and loyalty program. As I stated in this blog, loyalty is a $48B business.. so can theLevelUp act as an effective loyalty program manager? What is their market?

Total Sales in US restaurants was $632B in 2011, of that $216B is for full service restaurants with the majority of restaurants (472,000 out of 474,000) operating with under 500 employees (independents and small chains). In the restaurant vertical, small businesses dominate.. compared to mainline retail (where the top 20 retailers capture about 60% of sales …ex gas, auto, restaurants).

LevelUp is currently focused on small restaurants. Top 20 retailers have already established very successful loyalty programs (CVS is #1 with over 60M members). Big chains are far less willing to let another company deliver value outside of their brand.

Loyalty program costs vary greatly, however program fees are typically below 5% of sales for participating customers.  Given a 5% participation rate and a 20% usage rate the total addressable market for loyalty program management (for small restaurants in the US) is $100M… a pretty small number

Can small chains benefit from a centralized loyalty program? Who is best positioned to execute on this? Loyalty programs are an important part of any acquisition plan: how do you keep customers coming back? Is it the product? They price? Experience? Every company has a strategy, and every customer is different.

Selling to 400,000 small businesses takes time. This would also seem to be something that either open table, paypal, Square, Google could do easily.

Free Payments may help LU find traction with small restaurants, but from what I hear restaurants have already been struggling to reconcile Groupon offers, LivingSocial Offers with their books.. taking payment through an alternate network (ie different processor) is likely to further challenge the book keeping of these small establishments.

Strong recommendation to restaurants:

1) See what kind of cell data coverage you have in your store before you roll this out. (Update. From notes below it seems that LevelUp does not generate a unique code at each use. Static QR code improves usability inside the restaurant, at the expense of fraud. LevelUp will be acting as a TPPA, so retailers will not bear fraud costs… My guess is that LU has the ability to generate unique QR codes, but has chosen not to roll them out while they build scale. Its a race to build scale before fraud develops, and they are required to generate unique QR codes. In this “future” scenario there will be a connectivity requirement. )

2) Get customer information yourself and use it…

3) Try the #1 restaurant marketing solution in the market: FishBowl.. unbelievable results.

Thought appreciated.

PayPal vs Google (at POS)

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3 Aug 2012

Paypal COULD do everything that Google wallet does today.. so why won’t they? (Note I’m talking about the Physical POS… not online)

I’ve had a PayPal debit MasterCard for 6 yrs, when I use it at any merchant PayPal deducts from any stored balance I have, and then hits one of my stored payment instruments. I use this card exclusively on international trips because they have always offered the best cross border fees (.. and just 3 years ago paid an interest rate higher than any of my banks). I looked on the back of my new PayPal debit card and see that JP Morgan Chase is the issuing bank. Given that Chase has over $10B in assets, this card costs the merchant $0.21 + 5bps in the US. This is a great deal for retailers. A REALLY great deal.

Why is PayPal pushing out its own Plastic? Unbranded? Obviously they really don’t like the standard debit interchange (above) and want a bigger cut (than $0.21 flat fee) from the retailer. (see PayPal at POS)

Why won’t PayPal expand its online wallet to allow me to select any card for any given purchase? In this I mean creating an app that works like Google wallet, prompting the customer “what card do you want to use”? The answer is that they want to drive the underlying account selection decision to ensure the instrument with the lowest cost is selected.

Take a look at your payment instruments in PayPal today, they let you define a DDA account as “primary” but NOT a card. In other words PayPal incents you to link DDA in order to get money out.. then PayPal looks to leverage this account whenever possible (sometimes taking take settlement risk). The most costly customer for PayPal would be an Amex customer with no linked DDA and a PayPal debit card (for ATM withdrawals). See my related blog on PayPal’s funding mix (estimate 150bps)

PayPal is a payments business.. not an advertising business. Their goal is to maximize revenue. This is not a bad thing…  But their recent moves are a “replay” of what happened to the bank payment networks as they pushed to ramp up merchant fees and grow interchange revenue at the expense of retailers.  Why on earth would any merchant agree to take on Paypal’s new plastic? If it is above $0.21 it makes no sense at all… UNLESS Paypal is driving incremental sales.

PayPal today could create a Virtual “wallet” tied to either a Sticker or a Card that would work across Android, iOS, Blackberry, … and do everything that Google has done.. Why won’t they? Because the instrument must operate as a debit card, and the interchange “arbitrage” could kill them. In other words they will bear the cost of 350bps for a CNP Amex transaction and only charge the merchant $0.21 flat fee.  If they rolled this out, I’m sure they would have MASSIVE success.. but if customers unlink DDAs and delete debit cards they would risk a funding mix that is “unsustainable” because they have no other revenue channel.

Google

The true “payment innovation” from Google has little to do with payment and much to do about risk management and monetization of data. Google drives business to retailers today.. google helps consumers find the right product… they also “know you” from your history. They can use this information drive value to consumers AND to retailers.. they are also willing to take a very big risk that the benefits of Google will out weigh the COSTS of WALLET. Google Wallet will likely loose money on every single transaction. If you never accept an offer, incentive or coupon.. never search.. never use maps to find a business, never use Zagat to find a restaurant, never watch you tube commercials… they will likely loose money on you.   However Merchants will ALWAYS win.. no matter what, they will have the lowest cost payment when accepting a Google payment.

This is either INNOVATION OR INSANITY.  From my perspective, what Osama and team have done is fundamentally game changing.. ! Bearing costs, giving consumers and retailers complete control.. in the hope that they can deliver value in other services. Payment is now just a small part of an overall Commerce Process. For example, a “new” feature of Google Wallet that has not received enough attention is the “saveto” API release at Google I/O . Google allows merchants to store 3rd party offers and payment types in the wallet. These offers don’t have to be created by Google.. it is a true “wallet” function. 

As I stated yesterday,  Visa, Mastercard, Amex, all of the banks are REALLY worried about data. Google will be in a position to deliver value to consumers independent (or dependent) on the card you use. Few other companies can do this… Consumers will always have a choice.. no one will be forcing them to use their Google wallet.  But why not? Why didn’t the banks use their information to help me earlier?  Why did the banks and payment networks stop retailers from passing their real costs along, of delivering incentives that they could control?

This “aggregate” model is something ANY company could do in short order.. Square is doing it, Revolution Money, LevelUp, … but no one else can make it profitable.

PayPal’s new POS “hope” is to re-engineer the customer experience at the POS, allow merchants to throw away their custom POS terminals.. As most of you know I believe Square Register was by far the best POS experience I have ever seen. From PayPal’s June Video it looks like they agree and have replicated the Square Register “voice” experience. While the customer experience is FANTASTIC.. it did not bring the customer into the store.. nor is payment cost competitive with Google.

[youtube=http://www.youtube.com/watch?feature=player_profilepage&v=CMByV-k9Oc4]

Investment take

PayPal has enormous runway left for them globally. I don’t see Google wallet denting current growth for 2 years. However this is VERY disruptive. IF google is successful in getting all Android users to register with a payment instrument (like Apple does in the App Store), and Google pushes Wallet out beyond NFC phones, it could result in a Tsunami wave which Paypal could not overcome in mCommerce.. This is a scenario where there are 3 primary mCommerce payments options: Apple Passbook, Google Wallet and Amazon.  For physical commerce.. nothing will impact this world in next 5 yrs if it does not entail a physical plastic card. NFC phones and payment terminals just aren’t materializing fast enough.  IF google creates physical plastic.. watch out…  In this scenario Google should  be pursuing an unbranded card.. “let the consumer decide”.. .”let the retailer influence” these are themes not heard in the payment world and would seem to resonate.

Google Wallet 2.0 – Who does not benefit?

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August 2, 2012

Yesterday I covered the winners… today I cover the flip side.

Mobile Operators

Most obvious is mobile operators payment efforts, at least those bent on controlling the NFC SE in a walled garden strategy. I covered this topic last month (Carriers as dumb pipes). As a refresh.. 5 years ago carriers were going to charge applications each and everytime they accessed the GPS.. you can see how that worked out…

Its really a shame.. Operators have tremendous distribution, brand, cash….  What they don’t seem to have is anyone that knows how to run a platform business (related blog). Running a platform is about creating a “sandbox where everyone can play and make money”.. Apple has it.. of course they also have 75% of mobile profits (related blog). Most of my frequent readers already know what I’ll say next: Control is NOT a value proposition.

The big problem with payments?  There aren’t any problems (and margins stink). Why focus on it? The mobile handset has the opportunity to do so much more. Google has an ad business which will greatly benefit from added payment information. It will be in a position to help retailers and consumers and deliver value (note I didn’t say banks). The MNOs don’t have a business that can leverage payments, and they are not the greatest at partnering. They couldn’t even work with Google… a company that built Wallet and Android for free. Just what were they trying to win? (related blog)

My STRONG recommendations to carriers: go partner w/ Google now.. If you thought Apple was a one time event you are sorely mistaken, google has more commerce assets (virtual and physical) than anyone in the world. Another recommendation? Focus where you can win easily, AND DELIVER VALUE (see KYC a $5B opp)

Big Banks

(At least the credit card divisions). Most of card teams were trying to position mobile as a “premium” payment service. Its not a total wash for you, given that Google is charging merchants regulated pre-paid rates while having to pay most of you full interchange… perhaps even CNP interchange. But while you see a quick win here remember that incentives can be tied to a card. If you don’t play nicely my guess is that you will see customers shift spend, particularly for small items.  Of course one big weakness of the Google wallet is the refund/return process.  Additionally, Google Mastercard consumer purchases will be covered under Reg E, vs the greater protections afforded consumers with a credit card under Reg Z.

The biggest bank loss however is Data.. not much of a problem today given the number of Samsung Nexus phones are in the market (.. with google wallet). But what if Google does issue their own contactless sticker.. like I have on the back of my iPhone? Why NFC at all… just a Google card to swipe would allow you to have all of the functionality. In the new Google wallet world, they will see all transaction data.. just like Paypal does. Difference Google knows how to use it in advertising.

Card Linked Offers

It just a guess.. but now I can have offers linked to any card I use.. For merchants TXVIA could create virtual pre-paid cards for you at no cost and let the “value” of the offer reside there. Basket level, or item level with POS integration. The writing is on the wall..

NFC Ecosystem

There are pros/cons here. If the carriers supported Google wallet it would be mostly a win.. We may actually see NFC handsets be common place… but not if people have to root their phone to install Google Wallet.  Apple will eventually put some sort of new combined SIM/NFC/BT radio in its phone (related blog). In this future Apple Passbook world I can guarantee the carriers won’t be keeping any version of the iPhone in a Garden.

Short term impacts with Google Wallet? The First Data TSM operates with Google as the SE owner and service provider, no SWP UICC chips, no OTA provisioning, …

Comments appreciated.

Google Wallet 2.0 – The Winners

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Today Google Wallet 2.0 launched (Google Blog announcement)

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

Google will now allow me to add any card I want.. my Bank of America Debit, Citi Credit, my business Amex… My cards sit in the cloud and I can access them on the device at the POS, online, or for a mobile purchase. The device has a single card that acts as an “ID” that points to your account in the cloud. The gateway/acquirer then resolves this ID to the card (stored in the cloud) which you want to use and then processes an authorization with the corresponding issuer. Not all that different than how PayPal and Amazon work today (which card do you want to use)?

Google’s approach has empowered consumers and destroyed the ISIS Walled Garden Strategy. Banks no longer have to queue up to do OTA provisioning.. consumers just add their accounts. Retailers no longer have to take credit cards in mobile payment…

My view is that this is a huge leap forward, but there are at least 2 more steps to go. Allowing consumers to control the wallet must be followed by an ability for retailers to deliver value (independent of the latest phones). After all there are no payment problems in the market today (none of us ever left a store because they would not take our form of payment). Retailers are more concerned about driving top line sales growth, than bottom line card costs.. but the tools to do either are limited.

The wallet has the opportunity to be the “hub” of many new commerce experiences. What other company has the tools to create advertising campaigns? Shopping experiences?

A key “unknown” benefit is how broadly Google will expand the functionality of wallet outside of NFC. Afterall if I have only one master account.. I really don’t need an NFC phone.. I could use plastic or one of those stickers.  TXVia can certainly add value here.

Who are the winners?

  • Consumers. They control what goes in…
  • Retailers. Every retailer today should be thinking of having a pre-paid/gift/loyalty card with Google. Why not? Issuance is 100% electronic and should cost nothing. The other immediate benefit is lower cost (blended) due to debit mix and a new “platform” to offer targeted incentives (google offers) that is integrated into the payment.  Updated.. it looks like all Google wallet transactions are at regulated pre-paid debit rates. With Google wallet.. every transaction is at the lowest transaction price. Bancorp Bank has assets of $3.011B and is thus not covered under Dubin. Hence my best guess at the interchange is 1.05% plus a $0.15 (see comments below).
  • Small banks. Now your cards can go in the wallet … TODAY. You don’t have to pay ISIS that $1M after all.

Hey.. I could write more.. sorry for the short note. My previous blog gives a few other hints http://wp.me/pv8i-uv

Note the good discussion below.. my read is that the Google Card is a debit covered by durbin.. So merchants win big on card costs here. Everything is a debit…

Apple and NFC

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Apple and NFC..

Nothing really new here for the NFC crowd. No new information..  Purpose is to paint a picture by which investors can make a call.

Most of the issues associated with NFC today are NOT technical.. but rather business: What value can it bring? Who controls it? Who makes the money? How is it shared? For payments… NFC has been a complete bust (with the exception of Asia). Retailers just aren’t excited about the prospect of paying credit card interchange (3.5%) for the privilege of accepting a mobile payment which funds a 12 party supply chain  (necessary to make NFC work).

The WSJ (July 6, 2012) and I both have consistent information that Apple will NOT be rolling out NFC in the iPhone 5. If true, I believe Apple’s exec team is taking a brilliant approach to be a late follower here. Let everyone else pay the freight to educate the customer, and establish a high level retailer POS value proposition (with associated retail infrastructure). Apple is much better positioned to extend the App Store experience into mCommerce.. and control the customer end-end experience. Apple will also likely expand “selectively” into physical commerce areas like ticketing.

To be clear, I’m not positioning that Apple has run away from NFC.. but there has been no success to date and there is no reason for Apple to run into this space. In order to monetize and sort of physical POS solution, Apple must have a business structure that can orchestrate a very complex “physical commerce” value proposition. Keep in mind Apple doesn’t have much of a sales force to cover advertisers AND retailers globally. Rather than “focus” on the POS, or implementing standard NFC chipsets, I see Apple doing something “unique”… What is it?

I was meeting with senior NFC execs this week, and the consensus view is that Apple will likely redefine phone hardware architecture.  Most of you have read about Apple’s recent patent application which would allow the SIM to be logically placed within the SE. Also there are rumors about expanding the capabilities of the Radio and Controller to also cover Bluetooth functionality. The “value” that an integrated hardware solution? Not that much different than what NFC alone is capable of.. but it would greatly reduce footprint, power, time, and perhaps even expand “throughput” (example Accelerating/bypassing BT pairing: NFC is  424kb/s while Bluetooth V2.1 is 2.1 Mbit/s).

Although far from being an expert in this area, my summary view is that Apple recognizes the need for a secure radio and data store in the device that it can control.  A metaphore for an ID.  How do they want to control this ID? Well they certainly need to secure the wallet access (AuthenTec $356M last week, plus rumored IRIS scanning).

This approach is opposed to that of the carriers all of which are working very hard to “standardize” on an NFC architecture (Single Wire Protocol – SWP) that they will control. Apple’s plans are firmly in the opposite direction, and a brilliant business move. Giving carriers the control over this utility would be akin to letting them run an app store that they control.

Apple may be running much faster than anyone in the industry knows toward this vision. Perhaps they have already indigenously created this new combined secure element/UICC/BT Radio. Although I see no need for them to run with this early… But if they did create this capability in the iPhone 5 they will certainly have the control to govern how it is used.

What does this means for investors? Perhaps you start by asking Vivotech’s .. as they just folded up shop after 12 years. A fantastic team with a rock solid product line.. their fault? Betting  NFC would take off sooner.  Given Apple’s unique ability to capture mobile ecosystem profits it is always tough to find areas to nibble.  On the software side, how can new companies help Apple orchestrate value propositions in the physical world? Retail? Ticketing? Healthcare?.. The times.. they are a changin…