Tokens and the Trojan Horse

I can’t believe I’ve been writing about this stuff for almost 10 yrs. If any of you have suffered through my 20 blogs (on tokens) I certainly don’t want to rehash anything.. just bring everyone up to speed on what I see as major issues on the horizon for V/MA, Issuers and Merchants.trojan-horse-small

Headline: Visa and Mastercard have made it easy for millions of businesses and billions of consumers to work together consistently. V/MA are a thing of beauty, creating incentives for multiple parties to invest in payments (and grow network). Banks, consumers, merchants, networks all benefit here. The “war” banks should focus on IS NOT with the V/MA, rather energy should be focused on how banks can take part in great consumer experiences (like Alibaba, weChat, Google, Facebook). A Trojan horse is on the Horizon, and it will impact both ISSUERS and NETWORKS if it is not snuffed out quickly.

Quick recap

  • Visa and Mastercard provide a level playing field for Issuers and Merchants (with few exceptions). Per my blog Payments Civil War, V/MA are a fantastic creation that have experienced profound success (and growth). As I outlined in the Changing Economics of Payments, the beauty of the V/MA model is that it creates incentives for millions of businesses to invest billions of dollars. For investors, the attraction of V/MA is that it is scale free.. with minimal effort required to add volume. While there are MANY more logical ways to deliver payments.. there are none with more profitable incentives for investment.
  • Tokens are an enormously powerful control point for the payment networks. 9 years ago the banks were working to “build a new Visa” within an initiative launched by The Clearing House. The idea was to create a new scheme that “wrapped” account numbers with another number (token) and avoid network routing (see wrapping). The networks smartly came down and issued clear guidance, if you wrap my card number with another number …. It is still a Mastercard/Visa.
  • Visa and Mastercard created their own token services (VDEP/MDES) that are in operation today for ApplePay. Their extension into eCommerce will create the 2.0 version of 3DS (ie VBV/MSC) with the subsequent shift of liability onto the issuer AND a rate reduction. Issuers have complete control of what gets tokenized, in essence they are able to “permission” each wallet. This was very important for them in the NFC world.. but doesn’t work for them as well in the Cards on File (COF) world.
  • Chase IS WINNING, as they have been gaining market share both as issuer and acquirer. ChaseNet strategy looks to take advantage of the “on us” economics between their two assets (see my in-depth recap). The Networks token services (VDEP/MDES) undercut this value proposition by forcing all tokenized transactions to go through the networks (ie VDEP kills ChaseNet for those transaction that are tokenized). Chase fought to have The Clearing House (TCH) create an alternative token vault and force open VDEP through EMVco (and convinced other banks to pay for it). JPMC not only needs to create an alternative to VDEP, they must stop its growth (see Google Pay below).
  • Payments are moving into the OS, consumers don’t think about payments… its just something that works. Like using ApplePay to refill your starbucks account or buy a new song. The W3C open payments initiative is a tremendous move to expand this mobile metaphor into the browser/desktop world.
  • Last month Google had a major payments release in GPay. “We’re currently working on bringing Google Pay to all Google products, so whether you’re shopping on Chrome or with your Assistant, you’ll have a consistent checkout experience using the cards saved to your Google Account.” This is the W3C implementation in Chrome browser sync’d with Google’s mobile NFC and In-App payments. Merchants only need a simple line of code to enable a seamless checkout experience (in browser).
  • For GPAY, the obvious token question is that while the NFC side of Google needs to operate with a VDEP/MDES token to be EMV compliant, the eCommerce side of things does not. IT would make most sense in Chrome GPAY to have a VDEP/MDES token flow to the merchant acquirer, particularly when it could ride within a 3DS set of rules. I believe (and hear) that Google wanted this to happen, and I also hear that the issuers threw a fit of expanding VDEP/MDES to cover GPay/ W3C. Google had no choice but to develop a new custom “standard” by which the encrypted FPAN flows to the merchant acquirer. I view this as a substantial lost opportunity for the networks to strongly influence both the W3C activities, and the expansion of their token services. For those interested in the truly arcane.. ApplePay in App runs as an MDES token for Mastercard, while it does not run as token for Visa.

The Trojan Horse: TCH Tokens led by JPMC

You would think that the broad industry success of V/MA would breed cohesion; as a rising tide lifts all boats. What is the business case for creating a V/MA “competitor”? As I outlined in ChaseNet there is no mechanism to INCREASE INTERCHANGE. In other words, Issuers will never create a model that is more expensive to the merchant. Thus, the all alternative networks will have inferior economics. Most of the Card CEOs understand this explicitly. For example, Walmart threw JPMC’s ChasePay under the bus 6 weeks after announcing at Money 2020 in 2016. Chase gave up the store to win footprint in MCX.. (0 bps ChasePay AND ~50bps Chase Cards) to Walmart. Then  Walmart announced WalmartPay. Perhaps the greatest Mike Cook move of all time…

The result? CPT received no incremental volume beyond 0bps ChasePay, gave up 80% of economics on their credit card, and actually had to buy the “MCX Assets” so that no one would see their agreement.

Going back to an earlier point. Visa/MA provide a ‘level’ playing field. For JPMC to gain share in issuing or acquiring they must create a competitive advantage beyond interchange and brand. ChaseNet is their attempt with focus today on the merchant value proposition. My view is that ChaseNet makes payments a loss leading business to other services (Cash management, lending, investment banking, online risk management).

To be clear, network fees make up a very very small part of the issuer’s costs, acquiring at the POS is highly price driven. ChaseNet certainly gives them an advantage with merchant pricing (I don’t begin to understand what consumer advantage ChaseNet brings). CPT has been gaining marketshare consistently by underpricing the competition.

Tokens enforce routing, and consistent network standards. Tokens are in control of the issuing bank, but the rules under which tokens are exchanged are owned by the networks (ex EMV for POS, VBV/MSC 2.0 for CNP, … etc). trojan-horse-small. I see the TCH token effort as a clear attempt by “One Bank” to create a unique advantage and throw sand in the gears of all network attempts to innovate (GPay is example). As if this weren’t bad enough, the other banks are actually paying to help another bank create the competitive advantage.

Issuers gain no benefit or cost savings here. Increasing the complexity of rules and routing (creating friction) only creates a “squeezing Jello” effect for companies that must drive change. Banks benefit by keeping payments volume within networks… the enemy is NOT within the gates.. harness your resources to collaborate (see blog).

Issuer recommendations

  • Reconsider funding/support for TCH tokens.
  • Work to establish consistency in the USE of tokens across Google/Apple. Example Apple is able to make an in app transaction run with liability shift under MA, but not with V.
  • Encourage and sponsor innovation around token use (ex GPay, W3C and your Merchants). The W3C opportunity alone would allow every merchant acquirer to “become the Stripe” if there was a liability shift (no need for risk/fraud).
  • Focus on integrating payments where your consumers spend time.
  • Partner with V/MA. They spend too much energy answering your demands, treat them like partners and you should both win. The economics are NOT changing.. your win is growing use.
  • Recognize competitive threats for what they are. Protect the Acquiring network (ex Acquirers, VisaNet) that you are a part of
  • Build NEW products where you have unique competency and data. Zelle is the best new bank payment product since the debit card. Why? The organization has both the data, product expertise, issuer support.
  • Find a way to educate your CEO before he goes into another TCH meeting… ISSUERS ARE COMPETITORS and One of them has a Trojan horse for you.





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