1 April 2012 (sorry for typos, 2 hour quick blog here…you get what you pay for)
Remember the BIGGEST Retailer challenge is to know WHO THE CUSTOMER IS. A PL card combines loyalty card + customer information + payment information (closed loop) + possible payment information open loop. What Retailers gained by giving up their PL cards was access to credit without credit risk.. what they lost was the ability to know who the customer was. We now have models where they can have their cake and eat it too.
Most Retailers spend very little of their own money on marketing… it is the manufacturer that provides credits in form of “trade spend” to help Retailers advertise. Retailers thus seek new innovative tools to channel this spend. It is an arms race as retailers work to compete in selling commodity goods at the highest possible prices. A Retailer that has a new fun way to engage the customer will have a quantitative edge… and attract greater trade spend if they can engage customer. Manufactures want brand loyalty, Retailers want retailer loyalty, Platforms want platform loyalty, Banks want Card Loyalty. Best case study by far is Target Redcard (read great Mercator Report) which now accounts for 6%+ of sales (debit) from nothing just 2 years ago “net cost of offers”. To restate above, with respect to Retailer “marketing spend” it is not the Retailer’s money.. it is the manufacturers. Few people understand this game.. which is why most Retailers laugh at silicon valley types with no retail background. The macro effect of new payment networks will be to shift AD spend from less efficient channels (TV, Radio, …) to more effective channels (?Trade spend). The money does NOT come from the Retailer.. but enables the RETAILER TO BE A BETTER MARKETER by using their data.
What is the business driver of the JPM deal?
Institutional investors constantly tell me that the Visa is efficient and that the overall network “costs” are very small in proportion to the benefits of universal acceptance. Well there are very big assumptions in this statement of efficiency….
- That all parties are benefiting from universal acceptance
- There are no competitors operating in a different model
Both of these assumptions are wrong. If we look at it from a macro view, a 2% tax on sales is not very “efficient” at all, particularly when combined with a 15-20% interest rate on ANR of a typical card. The “value” of credit cards is highly biased toward banks and affluent customers. As the Fed Study below illustrates, Affluent customers receive a benefit of $1,133 from consumers that pay with cash.
Reward levels and retail prices affect the welfare of each individual consumer differently. Although typical U.S. consumers use payment cards as well as cash and checks, some consumers use payment cards more exclusively, while others use cash or checks more exclusively. If more generous rewards imply higher prices for all consumers regardless of their payment methods, then they may make consumers who tend to use cash and checks worse off.
Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year.
The very nature of card are changing, a disruption based on mobile ($0 issuance cost, improved identification/fraud) and data/advertising (see GoogleWallet).
How would you design the OPTIMAL Merchant friendly payment network?
- Merchant Brand – Merchant’s brand
- Cost of Payment – $0.05 for Debit
- Risk Management – Allow for use of merchant data, mobile data and bank data.
- Enable Merchant CRM – See blog
- Consumer Credit – Available. Banks compete for lowest rate.
- Payment Processing/Acceptance. Accepted in merchant, can be used off network as well. Minimal changes to existing systems
- Consumer Support Services – Dispute resolution
- Mobile Services
- Product Selection – Buying guide/research
- Community – Reviews
- Social – Facebook/Twitter integration
- Loyalty Services – Support merchant loyalty programs, points, incentives
- Advertising Services – Touch customer prior to purchase, during shopping, at checkout
- Coupon/redemption services – Enable all incentives to be stored/presented/managed
- eReciept – Supports customer requirements
This is certainly much beyond what Visa is currently delivering. As I’ve stated previously, Google and American Express are by far the leaders here, as top 5 banks struggle to deliver these services within a 4 party network.
The private label card industry is hot (See December American Banker, Mercator on Target RedCard). JPM is now uniquely positioned to deliver a platform which can support multiple private label payment products… from MCX to Google. It would seem that their unique Visa relationship allows them to benefit from Visa’s larger acceptance network when their private label card operates beyond a “closed loop” merchant community. An open question is whether a given private label merchant will choose to have a Visa bug on their card or not, and if the bug is not on the card.. will it still operate as a visa card? This seems to be the only reason for a “switch” of transaction from VisaNet to JPM VisaNet.. so it seems to be a planned feature. Regardless of approach on Bug and Switching transactions, JPM is in a class by itself in competing for business of merchants, payment platforms, and delivering value around Visa.
In the mobile world the cost of issuance is now $0.. why wouldn’t every merchant want their own private label card? With a punch list of available features above? Giving every merchant “Cluster” the ability to strike agreements with other clusters (example Wal-mart accepting Exxon cards, see blog). Merchants that currently give their consumers loyalty cards, could exchange them for multi function virtual cards in a mobile wallet at no cost. Target is the clear leader here.
My view is that banks tend to look at private label as a division of their Card’s group. Banks have no other way to monetize the card platform beyond fees and rates. The winner here will look at these new private label initiatives, not as a payments initiative, but rather as CRM and advertising. A very challenging task that goes against both organization, and consumer behavior. During my time running 2 of the world’s largest online banks, consumers don’t spend time shopping for deals. In retail banking they log on, check their balance, pay their bills 2-3 times a week. In Card it is much worse, coming on 2-3 times per MONTH.
Clearly there are opportunities for new retailer friendly networks. The new incremental value TO BE delivered is centered around influencing and rewarding the (consumer in partnership with merchants). Given that retailers compete with each other, loyalty is thus useless for retailers which don’t offer competitive products at competitive rates. Thus a “community” of retailers is not as valuable as a “community” of consumers (ie Facebook, Twitter, Android, Apple). Thus platforms which serve the community of consumers will be much more effective. Banks seem ill suited to “drive” this new network as they have demonstrated a very poor history of “partnership” with retailers. For example current CLO initiatives are focused on using retailer data against them (Blog). We thus see banks working on a defensive token strategy to ensure that no one can operate on payment rails but them.
Future Scenarios for POS Payments
- Private Label Bank Platform. Amex in lead, JPM #2. Keys for success: delivering value beyond affluent, reaching consumer before they buy, delivering merchant CRM, helping merchants “own” the consumer.
- Retailer led payments. Target is role model, blog here. As Mercator reports, RedCard now accounts for 8% of sales.
- Retailer led financial services. Either through Pre-Paid as in the Amex/WMT relationship, or as in Tesco’s bank. Retailers (or MNOs) leveraging their physical distribution and foot traffic to deliver bank services. Keys for success: expanding beyond the Mass to the Affluent, consumer value proposition, consumer acquisition, bank licenses/regulatory, CRM, Advertising
- Neutral Party Platform. Square, Google, Level Up, ?Apple, ?Amazon… Consumer friendly… the means getting both merchants and banks on board. Overview in blog on TXVIA, and Digital Wallet Strategies.
None of these will be successful in isolation.. my bet is that we will continue to see complete chaos until we find parties that can partner… or gain traction in a segment of the market that is not in view of 800lb Gorilla’s. Retailers, banks all view the customer as uniquely theirs. Once these entities realize that consumers migrate toward value and entertainment, they will begin to align their services to channels where consumers reside.. NOT to where they WANT their consumers to reside. (I’m not looking for diaper coupons on bankofamerica.com). Similarly, Private label cards are a key element of a broader CRM and price promotion strategy… they do not exist in isolation and cannot be outsourced in part.
My top example this month is Restaurants. There are over 800,000 restaurant locations in the US. 474,000 of them are part of companies with less than 500 employees (independents). This is a perfect ground for Square, Fisbowl (CRM) and LevelUp (Payments).. Square gives them a cash register that integrates existing card payments at a significantly lower cost on day one, and there is new functionality for advertising and buying experience (pay with Square).