I’m more passionate about this topic than anything I’ve ever written about. As an eternal optimist I don’t see a world dominated by Google, Amazon, Chase and Walmart…. But rather a new economy where millions of small businesses thrive. Where every person can employ their creative talent in collaboration focused on value creation. A world where capital flows to great ideas across geographic boundaries lifting the stifling poverty of most emerging markets. Continue reading “The New Economy: Small Wins”
Money 2020 was a little short on big announcements. My #1? Visa/Chain announcement. Chain will open its entire platform (software core) to developers enabling distributed innovation (ie investment) by hundreds of start-ups and bespoke networks looking to connect. My #1 bet is that the first focus area for Visa/Chain will be in replacing SWIFT. For those not familiar with the intricacies of global commercial money transfer via SWIFT see my youtube video.
SWIFT is a global messaging network that enables all member banks to communicate in common language, it handles no funds, nor does it manage settlement. Swift sends standard messages to banks to settle funds. In the SWIFT model the instruction is normally sent by the originator of the payment to a beneficiary. Originating banks can determine which set of correspondent banks to use (think routing control).
- Real time gross settlement (RTGS) is only possible if all parties have funds in a common settlement entity.
- Fedwire, NYSE, ..have real time settlement as all “members” have funded accounts for a net settlement (think daily margin calls).. but all other US payment networks are messaging only, with settlement handled as a (daily) back end process.
The idea of Blockchain “replacing” SWIFT is not new, Ripple has been working with Santander, Bank of America and others (see Finextra). Ripple is both messaging, and real-time gross settlement system (RTGS in XRPs). Ripple’s messaging is called the Ripple Transaction Protocol (RTXP) or Ripple protocol, it is built upon a distributed open source Internet protocol, consensus ledger and native currency called XRP (ripples). Think of Ripples as a private bitcoin. One of the most common criticisms of Ripple is that Of the 100 billion XRPs created, 20 billion XRP were retained by the creators, who were also the founders of Ripple Labs.
Chain on the other hand is blockchain infrastructure (great WSJ article) open for innovation. Chain powers distributed ledger(s) for multiple uses. Think of Chain as enabling each bank to have a local copy of a indisputable record… an incorruptible and infallible accounting ledger. Fund transfer certainly needs such a record, but for “accounting” to be effective there must be trust and settlement. Note that Ripple handles this settlement problem (XRP ownership ledger) trust, but has issuess in conversion to the “common XRP currency”.
Trust among financial intuitions is historically managed by networks and operating rules. For example there are operating rule for NACHA, Visa, Mastercard, … etc. Operating rules also are governed by laws and regulation (ex WHO can transact, how are transactions reversed, how are participants certified). I would argue that a payment network’s greatest asset is Trust among parties (and devices, form factors), with each participant governed by complex sets of rules, terms, certifications, operations, standards.
Important to note that Blockchain doesn’t require trust to properly record transaction, but rather rules to take action upon the ledger’s data. In other words, it is technically feasible to give a copy of the transaction ledger to every participant (who owes what to whom every day). However it is very hard for banks to take action on the ledger’s data (Transferring money – ex net settlement) without a trust/settlement network. The common ledger is a must improved messaging approach, that still requires a operating rules (Trust) and a Settlement Approach.
Mastercard’s acquisition of Vocalink (the UK’s Settlement network) enables them to lead in commercial (and debit) transactions for both UK and US. This is a brilliant move, but certainly much more of a traditional technology/architecture approach. The challenge with Vocalink is that innovation is constrained by existing customers and services.
Chain/Visa has the opportunity to disrupt the commercial payment landscape, particularly when viewed in combination with Visa’s existing card network and a new settlement system. For example, most Visa transactions were settled at end of day through JPM Chase (every Visa member had settlement account). For cross border transactions, Visa’s settlement “hubs” have correspondent relationships.
If Visa created a new Chain settlement infrastructure, or had member Bank support to leverage current infrastructure, it could quickly replace SWIFT with a far superior product which would offer transaction clearing times in 24 hrs (vs the 2-7 days with Swift). The biggest unknown is what part of Visa’s current operating rules could be leveraged to create this new settlement infrastructure. For the economic opportunity see this Fed Study
Each year, I make predictions about what to expect during the Money20/20 Conference in October. This year, I expect to see innovation in the following areas:
- New merchant value propositions
- Delivering value beyond the payment transaction
- More collaboration
- Payment in the OS
- Transformation of commercial networks
My blog was upgraded to recode today.. see link below
My summary view
- Vodafone is linking all cards in Google like “Proxy model” w/ card issued by R. Raphael & Sons plc
- Vodafone is able to see all transaction data and deliver rewards/loyalty separate from card issuer.
- Paypal is virtual card (?Mastercard) at POS
- Vodafone has enabled a contactless SIM that can operate separately from the VodafonePay application with one default card (see Vodafone Smart Pass)
- TFL/Oyster accepts various external networks (see list). Paypal operates as a virtual V or MA in this circumstance.
- Revenue for PP is 30/40 bps less Vodafone and program manager costs.
The Vodafone Pay Terms give most of the meat
“For each funding source you wish to use with Vodafone Pay, we’ll issue you a prepaid virtual card (which we will store securely on your SIM card). By ‘funding source’, we mean a UK sterling denominated debit or credit card that was issued to you by a UK-authorised bank or an account
that you hold with a UK-authorised bank or your PayPal e-wallet. You can link up to 5 funding sources via the Add a Card feature. The virtual card expires when your funding source does. […]
Because the payment goes from your funding source to your virtual card before it is completed, you may not get the same benefits (like loyalty points, discounts and card protection) as you get when paying directly with your funding source. The funds loaded onto your virtual card will not earn any interest”[…]
We, the issuer or your virtual card, are R. Raphael & Sons plc (Company Registration No. 1288938) with our head office and registered office at 19-21 Shaftesbury Avenue, London, W1D 7ED.”
Looks like I was wrong… I’m now 80% confident that Paypal has struck deal with at least one network to tokenize. Congrats to the Paypal team for reducing risk and creating opportunity to compete at parity with Apple, Google, FB and others.
What to expect Thursday? Paypal will tokenize, commit to no steering and share transaction data.
- Elimination of the staged Digital wallet fee (or equiv circa MA 2012)
- Ability to benefit from 3DS 2.0 (Shift liability, and Reduced Interchange)
- Reduced risk and certainty in Network/Bank relationships
- Transaction Economics/Take Rate as consumers will chose default payment option
- Each issuer can decide to tokenize per VDEP/MDES. If no issuers take part there is not 3DS 2.0 benefit
- Consumer Choice in Payment (Increased Volume)
- Reduced Risks from Cards on File
- Standardization of Tokens
- Competition to Network Wallets at Parity (Visa Checkout/Masterpass)
- Consumer Choice/Volume (Card vs ACH)
- Control over tokenization/rate to Paypal
- Ability to structure bilateral deals with PayPal (risk and rate)
- Reduced ACH
- Issuer branded wallets
My guess is that Paypal moved earnings call to articulate the take rate implications to steering elimination. Paypal must give up steering and transaction economics in the hope that Issuers will agree to tokenize. This puts Paypal at Parity with others like Google. Whereas Apple has been able to extract 15 bps from issuers to gain the privilege of being in ApplePay, Google continues to work to convince issuers such as Chase to be part of Android Pay. JPMC actually asked google for payment to tokenize.
Summary here is that issuers have a new control point in pricing with Paypal. My guess is that Paypal will come out with at least one major bank supporting them. Given JPMC is Paypal’s acquirer I would expect a deal here.
Most of you have read that Walmart, Home Depot and Kroger have launched new litigation against Visa for “PIN” and Debit. This issue is so complex it makes my head spin… For those unfamiliar with some of the basics see this article, my prior blog on PIN debit consolidation, AT Kearney, Digital Transactions: PIN Debit Claw Back and Pinless PIN Debit. Continue reading “PIN Debit at the POS”
I haven’t written much on acceptance over my 9 yr blogging career for one simple reason.. I was never “in” that side of the business. Given how much is going on in here I can’t leave it out any longer. Acceptance at the POS is a big topic, I see the following areas: Continue reading “Acceptance – Part 1”
- mCom/eCom Convergence – Payment in the OS
- ApplePay in Browser
- One Click for Ads – Facebook Pay??
- eCommerce Thoughts – What is fundamentally changing?
I was hoping to see rollout of a long rumored payment innovation at Facebook. All I can gather is that they must still be in testing.. but the idea is just brilliant.
Facebook has a tremendous advantage over just about every other advertiser.. its consumers log in before use. Facebook is rumored to be in the midst of integrating payment tokens into advertising. This means when you click on that beautiful North Face Jacket, or those Climbing shoes that the payment instrument (and even the authorization) is integrated. The only thing that the consumer would need to do is confirm shipping address. Wow.. talk about end running the payment specialists.. this is “one click” for ads.
The very idea that there is a “payment specialist” needed between the ad and the seller is going away.. payments are becoming a generic infrastructure services that no one cares about. See Payments in the OS. In this case IDENTITY TRUMPS everything.. if I know who you are.. everything else is just accounting. Someone should go out and write a patent on a similar flow using blockchain.
My guess is that Facebook would be the beta launch for VBV/MSC and the new 3DS 2.0 spec. So not only would this be a great experience, merchants using this would have a liability shift onto the bank and a 20-30bps rate advantage over traditional eCommerce payment acceptance. (see my blog on Civil War). This flow would hold on both mobile and desktop.
The other implication here is for the banks using TCH token vault.. sure you can vault your own tokens.. but this also means that you must keep up with the fast changing specs in EMVCo and the other users of the specs in MasterPass and Visa Checkout.. doing your own vaulting may mean that consumers can’t do some of this other really cool stuff.
Today we see in the press that most of the employees have been let go, and TechCrunch predicting “MCX to focus on Bank Deals”. Translation: MCX is dead, but we got a sweetheart deal from Chase on free payments (ChasePay) and discounts on all chase branded cards.. so we will keep the shell of MCX alive to capture these discounts (seem my ChasePay blog). I believe Target and WMT will accept ChasePay in 2 yrs (after they complete their custom POS/CPT switch work….).
MCX was a great idea.. I’m not joking. Retailers “touch” consumers far more often than the average bank, and they must deliver value in every interaction (as stickiness is low). Retailers are in a unique position to unlock value (ie coupons), use transaction data AND create great in store experiences. My personal bets are all lined up behind retailer friendly value propositions…. MCX is not alone in failure.. (yes I have blogs for each one).
- Google Wallet $600M+
- SOFTCARD/ISIS $600M+
- Paypal POS/Paydiant $400M+
- Bank Led Paydiant Consortium – $800M
- Card Linked Offers – $1.5B
- LevelUP/Tabbed Out/
- Shop Kick, ….
The history of MCX is not linear.. it involves many starts and drivers across current and former participants. I’ve traced itself way back to the early days of mobile 2008/9 with Discover, Barclays, Verizon, GE Money/SYFS.. all had some early involvement here. Payment was always the core focus.. it is the common thing that 60 fierce competitors all agree to collaborate on. The problem is that payment has no value proposition.. none of us leave the store today without our merchandise because the retailer didn’t take our form of payment. Wallets must have a value proposition that expands beyond payment. My good friend Dekkers knows much more about mobile, retail, and payments than I do.. and saw this early. But it is very hard to pivot a consortium of competitors from payments to the area they compete.
While payment is a common “infrastructure service” that all retailers agree to reduce.. marketing and data are NOT common services.. The mechanisms Retailers leverage to engage consumers, use data and market products is the core of retail competition (see my WalMart Pay Blog). Target is the leading payment innovator in retail.. by far. The entire MCX product began to resemble Target RedCard. However Target’s real advantage was Cartwheel… (see my video overview). Redcard was good, Cartwheel made it great. How many other retailers could create a Cartwheel from Scratch?? This made for a dynamic where MCX was the [small] payment ingredient in many custom mobile experiences..
Walmart and Target marketing/mobile teams were the principle teams guiding mobile decisions.. with MCX taking the much smaller payment only role. The launch of Walmart Pay is certainly what killed MCX (in my view). I think Walmart’s mobile/marketing team is 100% right for making this decision.. but it had huge implications. The CORE TENANT of MCX was NO CARDs and nothing about 35-50bps in cost of payments. Walmart Pay allowed the consumer to pay however they wanted to..
Future? While there is a small 10% chance, that MCX will indeed jump on board the Apple and Bank backed Clearxchange remake.. I think that it is likely to remain largely a payments routing shell with core LCR assets at FD and FIS focused on debit routing (and chase credit discounts).
Lessons learned for MCX are similar to those learned by Google, ISIS, Banks and others:
- Payments is a poor place to start a mobile value proposition
- Merchants are best placed to unlock value, and mobile is core competitive differentiator (Target Cartwheel, Walmart Mobile, …)
- Retail, banking, mobile, consumer behavior are all undergoing tremendous change… with much experimentation. Small teams are the only construct capable of supporting the pace of change.
- Consortiums need to move fast to establish first success and internal momentum… Starbucks offered MCX the option to use everything they had back in 2011.. Where would MCX be if they had started with something that worked and consumers knew…
- Chase learning: while there are many better ways to design a payment system, there is NO WAY to earn more money than sticking with the existing networks. Also watch out when you bend over to win business.. you might get stuck in that position.
- Paypal.. Paydiant arghhh.. What was a periphery app that retailers would give to 3rd party.. is becoming core “must have” with large retailers building their own. Paydiant will be alternative for next tier.