Payments – Wrapping, Rules, Acquiring and Tokens

if Google had challenges pulling off POS innovation (after ~$1B in investment), rest assured you will too. Banks are well positioned to throw sand in your gears … focus on delivering value within merchant –consumer relationship.

18 June 2013 (sorry for typos)

Thought it was time for blog this week. Primary objective is to inform the venture community of changes which may impact payment related start ups. Sorry that the title isn’t a little more polished (you can tell I’m rather left brained). The exec summary of this blog: don’t ever bet your business on someone else’s rules… particularly if they themselves don’t own them.


All Networks are working on unique token schemes (as I outlined in: Payment Tokenization, “New” ACH System, Visa’s Token Plans and Business Impact of Tokenization). The business drivers here are: #1 Control, #2 Mobile Payments. The US Banks have gotten together in The Clearing House (TCH Tokens) and are in the midst of piloting with 2 providers. In this TCH token initiative, the banks have logically determined that if a customer doesn’t need to see their Primary Account Number (PAN), then they will provide a number which they can uniquely resolve. For example, in mobile payments Citi could put in a unique Citi 16 digit number that is not a MasterCard, not a Visa card, not an ACH account number.. its just a Citi “token”.  Citi can decide how to resolve this number adaptively.. based upon what the customer wants, or what products they have with them.  There are MANY benefits to this approach:

  • Banks control account
  • Banks control DATA (transactional and account information)
  • Banks own network rules
  • No fees to other networks
  • Set unique (NON DURBIN) pricing for a NEW payment product.
  • No restrictions on “Routing”
  • Enables banks to “switch” providers of any payment service or network clearing
  • more detail here…etc

This is a BRILLIANT move by banks. I believe that this central bank “facility” within The Clearing House will be their centerpiece for consolidating all of Debit, in addition to the mobile play.

TCH Tokens are not the only game. Visa, Mastercard and Amex (through Serve) are also in this token game, and others like Payfone (through phone number as token at VZ/ATT), Google (through TXVIA) are also on the periphery. My view is that the BEST tokens are ones you don’t have to issue (ie Square/Voice, Apple/Biometric, Google/Facial Geometry, Payfone/Phone #…).  I outlined dynamics of the strategies in my blog last year “Directory Battle Part 1 – Battle of the Cloud”.  Its amazing that this topic is not covered more broadly in the mainstream… of course most of these efforts above are not discussed at all, and sometimes denied.

Of all the token initiatives, I believe Visa is most likely to succeed. This is not a typo… I’ve been very negative on Visa in the past.. as they have alienated everyone. But Charlie has started to change the culture, he has pulled the JPM relationship out of the toilet and has made a tremendous hire with Ryan. Why do I like Visa’s token prospects? They failed in their first initiative (non 16 digit PAN required big changes by everyone), and learned their lessons. However, most importantly, they can change the rates through rules on CNP and risk “ownership” creating a “new” version of VBV, with the best payment brand.


Currently the networks are at war with anyone attempting to wrap their product and add incremental value. As I outlined in Don’t Wrap Me, and Battle of the Cloud Part 3

The threat to banks from “plastic aggregation” at POS from solutions like Amex/Serve, PayPal/Discover, Square/Visa, MCX, Google is real. Make no mistake, Banks have legitimate concerns surrounding ability support consumers and adjust their risk models. But the real business driver here is to “influence” mobile payment solutions that do not align to their business objectives. Key areas for bank concerns:

  • Top of wallet card (how does card become default payment instrument)
  • Credit card ability to deliver other services (like offers, alerts, …)
  • Ability for issuer to strike unique pricing agreements w/ key merchants
  • Brand
  •  …etc

Visa, MA, Amex, DFS are in a great position to “stop” wrapping. What does this mean? They have initiated new rules, fees, cease and desists, threats of litigation …etc. Banks are thus looking to circumvent these restrictions by placing their “token” with the customer. This token is thus a new quasi acceptance “brand”.

Acceptance is therefore the new battle arena (who can convince merchants to accept their tokens, rules, rates, …). eCommerce may have slipped away from the banks and networks (PayPal), but they are determined not to let this happen in mCommerce, or at the POS.  JPM has structured its new agreement with Visa  to give them the flexibility on rules in acquiring and network routing for a new acceptance brand (Chase Merchant Services – CMS).


Retailers are not the dumb mutts that banks assume. The MCX consortium realizes that greater bank control does NOT benefit them unless the Visa ratesservice is ubiquitous and standard so that banks can compete against each other, with no switching costs. Analogy here is internet traffic routing…They just want the payment cleared, with transparency/control in price, speed, risk.  Retailers also want the death of bank card rewards schemes, and if they can’t kill them instantly, want the ability to deny “preferred” cards. I told a major retailer yesterday that they should offer an “X Prize” to anyone that can make sense of Visa’s rate structure in a youtube video.

Many Retailer’s also have a “token” in form of a loyalty card.. with Target’s Redcard, and Starbucks demonstrating the model in which a retailer led payment scheme could work. For retailers, their loyalty program is fundamentally about selling data, and trade spend.

As a side note, the “big” secret in acquisition is that most (~60%) of profits come from the bottom third of retailers.. specifically the small independents that don’t know enough to negotiate (hence the ISO business). Companies like Walmart negotiate heavily with the top issuers to reduce rates from “standard”.. and still end up paying over $1B a year.Square fees

I see a substantial opportunity for acquirers to participate in what I would discussed within Payment Enabled CRM. This would change their profitability from one driven by small merchants to data/analytics. This is undoubtedly what JPM sees within CMS. Retailers know that they can’t further empower the big bank with their data, but rather need an independent party to run the CRM platform for them.


I’ve already spent a little more time than I was anticipating here. For start ups my message is quite simple, if Google had challenges pulling off POS innovation (after ~$1B in investment), rest assured you will too. Banks are well positioned to throw sand in your gears … focus on delivering value within merchant –consumer relationship. The Mobile-retail interaction is greenfield, and there are 1000s of different flavors.. no one company will be the centerpiece here. Avoid POS payments.. or be the “arms provider” to the big institutions as they duke it out. My view is that the key for MNOs, Apple, Amazon, Google and Samsung’s future value is

#1 Authentication (Linking the Physical and Virtual World)

#2 Orchestration (Coordinating Virtual and Physical World Processes, Data and Value Chain)

PayPal at POS again?

Lets assume that every merchant looks past the cost, and runs to PayPal. As I outlined in Paypal at POS, there is NO CONSUMER VALUE to the PayPal card.. why on earth would I use a PayPal card that wraps my BAC debit, Citi credit or Amex card.. why not just use the card in my wallet…

3 May 2013

This week the WSJ reports that Discover “has deals with 50 merchant acquirers, which handle card transactions for retailers, to offer eBay’s PayPal service as a payment option at checkout counters”, with First Data holding out.

I like DFS, I own DFS stock… it is likely to be the dance partner of choice for many new payment start ups..  as they are a bank operating a 3 party network.  Their network revenue is paltry ($218M rev out of $3,753 EBIT). DFS looks like a bank, with profitability driven by credit quality of their cash back cards. Logically DFS is the ummm “hand maiden” of choice for entities looking to extend to extend products to the physical world. DFS has nothing to loose, as they don’t serve many of the demographics that are part of “mobile wallets”. discover flow

Discover has a very poor ability to “push” products into market, as they perform less than 40% of their own acquiring (“direct merchant” in Discover terminology is account in top 100, with indirect merchants handled by other processors). PayPal’s current POS economics just don’t work for merchants, particularly large merchants that have already negotiated steep discounts with issuers. A top 5 retailer’s quote on the topic

“why on earth would I want to take a PayPal card that wraps a bank account at 200bps when I JUST WON DURBIN and have my own new product coming out. The last thing I want to do is change consumer behavior to my detriment.”

The average merchant fee for Discover today is about 197bps. If Paypal kept this rate I estimate their margin at 10-20bps max (PayPal’s transaction cost is around 107bps (2012), Loss rate is 26 bps, a network fee to Discover is rumored to be 50bps which leave 14 bps as total fee available to split WITH ACQUIRERS).    Let’s just assume that 197bps is the fee that acquirers run with, as they certainly can’t make the case to INCREASE the cost of accepting a PayPal card. So merchants are left with the value of accepting a Paypal card at 197bps instead of taking my BAC debit card which cost them $0.21 + 5bps.

My point is that NO major merchant will go this route… only the poor little independents that don’t know enough to assume ISOs are working on their behalf and don’t even accept PIN debit. The press release on acquires “supporting” paypal means nothing. Each and every merchant has the ability to turn this off.  As a side note, it is estimated that 60% of processor revenue comes from small shops that don’t know what to ask for.. hence the Square value proposition.paypal take rate 2

Lets assume that every merchant looks past the cost, and runs to PayPal. As I outlined in Paypal at POS, there is NO CONSUMER VALUE to the PayPal card.. why on earth would I use a PayPal card that wraps my BAC debit, Citi credit or Amex card.. why not just use the card in my wallet… ? Consumers obviously feel the same way, hence HomeDepot’s experience of less than 5 transactions PER WEEK per store. For anyone in payments, I encourage you to experience a return using PayPal at the POS. My experience is something for another blog. For more on this topic, I encourage you to read the slightly dated Philly Fed Acquiring Overview (2007)

Other Drivers of Debit Consolidation

If you were going to create a new BIN range… and need was NOT to maximize interchange, but to maximize adoption of a new product.. one that was very focused on data… where would you build it? on Visa? on Signature Debit? on PIN debit?

Good discussion in yesterday’s blog led to spin off this thread separately. What are the drivers of debit consolidation?

  1. The new tokenization project focused on mobile at the POS. There is NO VISA in this project.. mobile wallets hold a token that can only be resolved by the consortium. Token could be a debit, token could be credit… My guess is Token is routed via the debit network (one that banks control)… authorization is also sent via bank owned “consortium” debit network. JPM seems to be only bank with another option… routing through their own version of Visanet. This seems to protect JPM’s interchange and is a backstop to any regulatory issues surrounding a new token pricing scheme which is dependent on debit.
  2. Post Durbin Margin is not sufficient to support 6+ players. There are no anti trust issues from my perspective because the rates have been set. Banks also have the right to choose with who and how they settle, just as the choose membership in ACH today.
  3. Merchants AND top issuing Banks both want to kill signature debit. There will be moves now to encourage consumers to use PIN Debit (I can’t believe this is coming full circle). See the KC federal reserve note from yesterday on dynamics.
  4. Banks need flexibility of a 3 party system at POS without going through creating a new acquisition brand. PIN Debit solves this problem today.
  5. Its not all about interchange…. the battle is around data, data, data. Did you see that MA was caught with hand in the cookie jar.. selling data for retargeting?  If I were going to create a new BIN range… and need was NOT to maximize interchange, but to maximize adoption of a new product.. one that was very focused on data… where would you build it? on Visa? on Signature Debit? on PIN debit? Merchants are already starting to take advantage of services from FirstData, TSYS, FIS, … that allow them to sort through hashed card numbers to look for trends. Banks view this as a key threat.. tokenization would further abstract card numbers.. both for mobile wallet providers AND for processors.. Top issuers want to stop the data leakage. From regulatory perspective they are pitching this as “consumer protection” … which is certainly true.. but doubt if this is the true center of the bank business case.
  6. PIN debit is already the fastest growing payment type. Visa is pushing “chip and signature” through strange incentives.. the rest of world thinks they are bonkers.. banks and merchants are now aligned.. PIN is the behavior they want.
  7. Merchant nirvana: Canada’s Interac
  8. New revenue streams. BAC’s debit card fee efforts didn’t fare well. All of the CLO programs are also struggling… but banks are still working to make merchant funded rewards a reality.

Again, I can’t help but be struck at how insane all of this is. The paradigms of debit and credit networks are ripe for disruption. Why do I present a payment instrument that requires the merchant to ask its bank if it could obtain money from my bank? In the connected age, why don’t I just tell my bank to pay the merchant? This is what Sofort brought about in Europe… of course this is also why US banks are not keen to enable real time transfers..

As I told the KC federal reserve.. I absolutely think that the FED should either extend FED WIRE to regulated non bank FIs (MSBs). Enabling a SOFORT type solution in the US would help break the log jam in mobile payments and this bank “control” mindset.

SOFORT Overview

US PIN Debit Consolidation

18 April

Fed Pin Debit

Two years ago, top 5 bank CEOs met every week during Durbin to discuss response. I believe they probably had a good plan as Debit is a very very popular payment product. Unfortunately BAC’s Moynihan jumped the gun and announced a “fee” for debit.  Consumers and press went ballistic.. I wish that BAC had just waited another few months to roll out it’s card linked offers product to show the new “value”  and tie the pricing to this new “value”. As the Chinese say

If you are patient in one moment of anger, you will escape a hundred days of sorrow

There have been quite a few excellent Fed studies out on Debit since my last blog on the topic (Real Time Transfers – Feb 2011):

From the Reference 2 aboveDebit bank loss - EPC

The network exclusivity provision and the merchant routing provision of Regulation II both give merchants more control in routing transactions to preferred networks. However, most banks’ way of complying with the prohibition of network exclusivity arrangements is to enable more than one PIN network on their debit cards, but not more  than one signature network. As a result, those merchants that accept  only signature transactions generally have not gained any increased  scope to choose from among different networks.

Among merchants that accept PIN debit transactions, many have taken advantage of their new control. The routing kc fed before and after reg 2provision of Regulation II allows them to pick the PIN network they prefer from among  those enabled on a given card. Their exercise of this control has altered  PIN debit networks’ market shares. Many merchants now avoid Visa’s Interlink network, the largest PIN network prior to the regulations, and  instead choose other PIN networks whenever possible. As a result, in  terms of transaction volume, Interlink has lost significant market share  to other PIN networks such as Maestro, Pulse, and STAR (Finkle; Daly). Through their new control over routing, merchants’ emerging influence over the market shares held by different PIN networks is likely  to increase competition among PIN networks for merchants….

Consumers appear to have shifted to some extent from signature debit to PIN debit as a result of the regulations. Regulated banks now have an incentive to promote PIN debit over signature debit, though that same incentive does not apply to exempt banks…Many regulated banks stopped offering rewards to debit card users, especially to signature debit users, and they may also have eliminated the PIN fees that were assessed in the past to some consumers for each PIN debit transaction. Merchants have also taken steps to steer customers toward the use of PIN debit.

From Reference 1 – with respect to PricingKC Fed small large merchant debit fee

Merchants’ new freedom to offer discounts based on payment method, brand, and product allows them to steer customers toward the payment methods that the merchants prefer—and thus to affect the market shares held by networks. For example, if signature networks set their interchange fees for exempt banks higher than those set by PIN networks, merchants may offer greater discounts to customers who use PIN debit. To retain transaction volume, signature networks may avoid setting their interchange fees significantly higher than those of PIN networks. In this way, merchants’ new flexibility in offering discounts causes networks to compete for merchants. Most merchants, however, have not yet taken advantage of this new power. Given the many different payment methods, brands, and products that merchants accept and the complexity of the fee structures, it will take time for merchants to determine whether and how to offer discounts based on payment method. For example, Kroger,
one of the nation’s largest grocery store chains, considers payment based discounts a very powerful tool for influencing customers’ payment choices (Clifford and Strom), but has not decided how to offer the discounts.

Thus we see a world where big merchants push PIN debit, small merchants are getting taken by ISOs who don’t even know to ask for PIN capability, with competition in pricing…. With signature debit going down, PIN debit use going up.. Visa’s Interlink hemorrhaging volume. For perspective, my estimates are that somewhat Approximately 15% of Visa’s Revenue comes from US debit (just 2% from PIN Debit Interlink). Does anyone now wonder why Visa wants “Chip and Signature”?kc fed before and after reg

Banks have lost over $7.7B annually because of this change. Remember that PIN debit is just an extension of the Bank’s ATM network..  why on earth would they want to continue to use 8 different independent networks to continue here? What if there were new products they could deliver on the PIN debit networks…. ?

PIN Debit seems to be ripe for consolidation and bank control. I have a strong bet that the US banks will consolidate around a single PIN provider within the next 18 months. Why? Probably more for defensive purposes.. Its also nice to be able to control the rules on your own network..

Perhaps more on this subject in a future blog.

Private Label.. “New” Competitive Environment?

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.

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?

If you were a bank which had all of the technical assets to run a 3 party network, but were constrained by rules in which your assets operated.. what would you do?Interchange Rates US Fed

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….

  1. That all parties are benefiting from universal acceptance
  2. 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.

Card Rewards US Federal Reserve

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.

Who Loses in from Credit Card Payments? Federal Reserve Bank of Boston

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
    1. Product Selection – Buying guide/research
    2. Community – Reviews
    3. Social – Facebook/Twitter integration
    4. Loyalty Services – Support merchant loyalty programs, points, incentives
    5. Advertising Services – Touch customer prior to purchase, during shopping, at checkout
    6. Coupon/redemption services – Enable all incentives to be stored/presented/managed
    7. 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.JPM PL Example

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.ven goog reach

Future Scenarios for POS Payments

  1. 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.
  2. Retailer led payments. Target is role model, blog here. As Mercator reports, RedCard now accounts for 8% of sales.
  3. 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
  4. 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 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. price promotion

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).

Thoughts appreciated.

JPM/V Scenarios… Which one is it?

A central problem facing any token is “where to start”. If JPM can do this with CMS.. why can MCX do this with First Data. It is precisely what FirstData was doing in 2006 prior to their settlement with Visa.

27 March 2013

I’m still trying to get my head around the V/JPM deal (see prior blog). As I outlined in Business Implications of Tokens, New ACH and the Visa/JPM Deal, US bank token efforts are clearly focusing on POS payments. Mastercard and Visa’s strategies are focusing on all digital wallets.JPM Visa flow

A central problem facing any token is “where to start”. What merchant would invest in capability to accept a token if consumers don’t use them? Similarly what consumer would want a token if there are no merchants that accept them? What problems do tokens solve? For Bank? Merchant? Consumer?

I think most of us clearly get the bank value proposition. If the only way to “interpret” a token is to ask your bank to resolve it.. this interaction establishes a very clear path to control.

Since I don’t have the new JPM/V agreement in front of me, I thought I would look at a few scenarios.. (which I would appreciate your comment on). Note these scenarios are not mutually exclusive.

Scenario 1 – Issuer Solution

Description: JPM takes ownership of all Visa BINs. These Unique BINs become the “token” by which JPM can assign them to either debit or credit or both. All JPM bins now get routed through JPM’s own unique VisaNet regardless of acquirer. If JPM is acquirer then it takes on-us. Represented by flows 1 and 4. JPM moves to put 100% of cards through Visa for consistency of routing. I like to think about this scenario as JPM just put its services on the Visa switch for all of its consumers… as opposed to delivering those services as an “issuer”. In one of my very first blogs (Googlization of FS, 4 years ago), I outlined how an advertising service would work from Visa’s switch.

Consumer Impact: None.. consumers have no idea anything happened. Of course in a mobile or “private label” scenario, JPM could “pre-load” a wallet with its cards.. or give its existing consumers a unique “private label” card, all with no issuance cost.  Banks will refuse to accept non-tokenized cards in wallet (see blog), and networks will restrict usage of aggregators (see blog).

Merchant impact POS.  ?What card am I accepting? A credit card? a debit card? a private label card? a direct link to another account type? No one knows but JPM.  How can the merchant route this payment type?  There are durbin rules for dual function “hybrid” cards but if card acts primarily like a credit then there is no problem.

Visa Impact. 2-4% revenue impact by 2015. Loss of JPM network fees, switching domestic payments off traditional VisaNet. Biforcating VisaNet, Loss of Rule control.  On the plus side, Visa may leverage CMS services for cards they service within its hosted transaction processing.

JPM Impact. Consumer value independent of merchant agreements. Control of customer, control of card number, multi function card, new advertising capabilities, new value added services, new product differentiation, mobile wallet control, position CPT/CMS for wallet provider role (PayPal, Square, MCX, …)

Scenario 2 Merchant Only Solution

Description: Chase PaymenTech/Chase Merchant Services (CMS) work to strike special arrangements with retailers that go beyond acceptance cost to data sharing. Represented by flows 1 and 2. Currently issuers can set interchange rates for merchants (strike unique deals), however this will allow retailers to combine data and keep retail transaction data off VisaNet (Flow 1 Red Arrows).  Focus is on value added services to merchants and white label programs with unique features.

Consumer Impact: None.. consumers have no idea anything happened

Merchant impact POS.  Chase Merchant Services becomes new acceptance brand. Merchants that use CMS have new features available and new white label products.  If JPM can do this with CMS.. why can MCX do this with First Data. It is precisely what FirstData was doing in 2006 prior to their settlement with Visa.

(American Banker 2006)

… on-us transactions are becoming more common among issuing banks that also operate merchant acquiring businesses. “Large banks like JPMorgan Chase, Citigroup, and Bank of America are currently doing on-us transactions now, and always have,” he said. “The more consolidation you have in the banking industry, the more on-us transactions you’ll get.” Bank of America is also rumored to be interested in creating its own card processing network.

Visa Impact. Dependent on success of new CMS acceptance network takes off and whitelabel/co brand. MAY be consistent with a strategy by allowing customers to participate directly in data sharing (non JPM banks would not like this model). Loss of CMS “on us” network fees, switching domestic payments off traditional VisaNet. Biforcating VisaNet, Loss of Rule control.  On the plus side, Visa may leverage CMS services for cards they service within its hosted transaction processing.

JPM Impact. Differentiation. JPM can now compete w/ Amex in virtual 3 party network for some Merchants. New white label/co brand value propositions. New retailer services (example Payment enabled CRM).

Scenario 3 – Mobile only

Description: New VisaNet is restricted to switching Chase mobile tokens. Chase does not have ownership of their Visa BINs, but rather has an “interoperability pact” with Visa to ensure Visa can route new “tokens” (see blog). The tokens operate same as BINs, but may be of different format (not 16 digits). Objective is to ensure all mobile wallets have tokens instead of PANs. Note this is very similar to scenario 1, but scope is focused on mobile POS to stop wallet providers (PayPal, Google, Square, LevelUp, MCX) from gaining traction. I also believe tokens must initially take the format of PAN in order to minimize technology risk for the ecosystem. Turnkey mobile solution to enable credit, debit, ACH, Offers, platform for other wallet providers.

Consumer impact: Number of mobile payment schemes, how your account is provisioned into a mobile wallet, bank control and protection of your information, no account number you can use.. all hidden.

Visa impact: Same as above, getting out of mobile payments at the POS… focusing on eCommerce/ No revenue impact at all.

Merchant impact. Loss of consumer data, bank control, new data sharing agreements, loss of access to ACH system for settlement, payment mix cost.

JPM impact. Uniquely compete for Platform business, retailer business, become the retailers, consumer, 3rd party platform of choice.

Thoughts appreciated.

Visa’s own token strategy

So Visa doesn’t have the full view of bank plans.. but neither do the banks have full view of Visa’s

My guess is that the banks don’t know that Visa also is making plans for tokens.. in a new Super TSM model. My guess on Visa’s objectives

  1. Bet against bank effort
  2. Carrot of lower interchange by reclassifying compliant tokenized cards within wallets as Card Present.
  3. Confuse everything
  4. Focus on digital and getting Amazon/Apple converted

Crazy times for anyone holding a card on file. Today’s WSJ article may be referencing this “new lane”.

My view is that this is a much better idea than VBV.. (links below), but in the VBV model the issuer owned the consumer registration and validation. Could V do this from a merchant (ie CYBS, AMZN, AAPL) side? Get them to part with all of their card numbers on file and substitute with Visa tokens.. then given them card present rates and a liability shift? Wow.. that would take off quickly…  This would also enable in a brand new way… particularly if the CONSUMER registered their card or validated their token.

This is pure conjecture… but if this were the case, big issuers would go ballistic. Which is perhaps why it is in the silent planning stages. Visa just proved it has more tools in the shed than I initially thought. This is an example of making their network merchant friendly.

Visa Digital Wallet

3DS: Collaborative Path to Failure

Network War – Battle of the Cloud Part 4

Visa’s network is fragmenting into the clusters. They must work therefore work to deliver value added services. Could we see a “rebalancing” of network rules to favor the merchant? I would challenge all participants to think about the credit card product… what delivers value?

Clusters Form

———————– Update July 2014

I no longer believe in this fragmentation with the exception of JPM. The banks are trying to create an alternative to no avail (over last 5 yrs). I agree with Visa and Charlie here. This bank driven initiative is now dead.. so only read this if you are interested in history of why banks started this thing in the first place.. and worked to keep it a secret from V/MA for 3-4 yrs. The big announcement that changed this entire landscape came in Oct 2013 (Visa, MA, Amex EMVCo token announcement).

— Update

Guys I welcome updates.. If I’m wrong I’ll update. I’m not writing this to destroy Visa, I’m writing this because many businesses are going to be impacted by this change.

Visa itself does not have a complete picture of all of member bank plans, but the obvious assumption is that the banks are looking to create an acceptance and issuance infrastructure which circumvents them. For example, we now see through the secure cloud announcement that Banks are working to replace card numbers with “tokens” (16 digit PAN that is not a V or MA number, but an ISO number owned by the bank and not affiliated with any network).

Visa will continue to own Visa PANs, but are facing new restrictions on routing/switching (data sharing),  AND a world where the issued instrument is NOT their number (ie NFC, TCH “token”). JPM and other banks must consider how the POS operates with their new token network, for multiple form factors (card, mobile QR code, voice print, …). There are many complexities. For example a new Chase card (with no V bug) with a JPM owned PAN.  Does the merchant treat this as a Visa card? Of course not.. JPM wants the merchant to “resolve” this token for another card which is accepted. But in this “resolution” process is Merchant under a new agreement? What control does the merchant have to ensure that they instrument is not resolved to their detriment (ie debit vs. credit)? Why as a merchant would I take a token to a card and not the card?

Visa’s PR implies that they will participate and “support” ChaseNet.  They only have a partial view on what that is.. primarily that there will be new tokens.. JPM is allowing Visa to “switch” these tokens onto a new network. Visa may own Visa transactions.. but they will not own Tokens… it is a give and take. Tokens are NOT V or MA numbers, but issuers can use their same acceptance infrastructure in processing them. The lack of clarity by V is certainly not all of their fault.. as the token project is not quite announced. I doubt if V is full party to bank plans here, as some members may work to have these tokens embedded in plastic. A dual function card? Yes my head is spinning.

(Updated from Visa’s Barclay presentation). Charlie quotes on the new “Chase Net”

  • “Run through the Visa Network, an instance which they can say is theirs. “
  • “we control the network, we control the IP”
  • “Its the Chase acceptance mark, Chase will be on the card, Chase will be the name at the POS,.. but these transactions run through the visa network, an instance that Chase can say is theirs, but they run on the Visa network. “
  • “Its our network… we are not white labeling anything…”


21 March 2013

Battle of the Cloud 4 – Network War

Those that are frequent readers know I’m not a linear thinker. The cloud battle story just took a detour from my earlier note this month Battle of the Cloud Part 3 …the story line of wallets has jumped to shattering changes going on in the networks. .Network Clusters

Biggest news by far is the Visa/JPM deal which I covered earlier. The key “break” here is that JPM will no longer be paying transaction fees for on-us, no longer routing on-us transactions to Visa (note this is disputed) , and will have ability to create their own network with their own rules. You must parse Visa’s public statements very carefully to discern deal terms. Visa’s PR and IR teams get an A+ as they have proven to be masters at obfuscation here. My best guess on deal terms is that JPM has committed to “license” of VisaNet which has NO transactional component. Visa plans to treat this licensing fee as “transaction revenue”, but the revenue has no variable component.  This is where the PR/IR “art” comes in.. JPM’s “licensing of VisaNet” has given VisaNet a double meaning. This new JPM “version” of Visa Net is likely to operate this way in Name only. Visa told analysts that this new version will run within its infrastructure. Ok, but which transactions will run on it? On Us Transaction? “Transactions which conform to a new JPM rule set“? Both? How long will this take place?

Publicly Visa states that transaction revenue will increase. Which is true, at least for next 2 years, as the license revenue will more than cover current “on us” JPM volumes to yield a premium with the addition of non Visa volume (for a net volume increase at a lower per tran cost). However I have yet to see Visa project JPM’s “on us VisaNet” revenue against expected JPM ON US transaction volume. I have 90% confidence we will see a flat line.

Why am I so confident? If there was a 1:1 match of Visa Net transaction rate to JPM On-Us …. the other issuers wouldn’t be beating down the doors of Visa and MA over the last 2 weeks. Everyone in the industry knows what is going on this month.. and also knows what JPM received from Visa…  and they want it toChase Pricing

The Visa Network just shattered. Hence my article yesterday on Visa- Golden Goose is Now on the Menu.  We are evolving from a “star network” to one of clusters. Clusters are Bank led (ie JPM, new US Bank Consortium, EU Bank Consortium, ..), Merchant led (MCX, Amazon, PayPal, Rakuten, WalmartPay, TargetPay,  ..), Platform led (ISIS, Google, Apple, Samsung, …). Each clustering strategy considers relationship w/ consumer, merchant and bank (or clearing). Each cluster performs “on us” transactions and routes selectively (see Least Cost Routing and Business Implications of Tokens, Wallet Strategies).

An institutional investor asked yesterday “Why would Visa do this?” Well they certainly did NOT want to. I know first hand that JPM was quite upset with Visa (Joe Saunders 2011) and were planning to either buy Discover or move their portfolio to Mastercard. Visa’s BOD found out about how badly the Saunders/Buse team were screwing up …. and put in someone that Jamie Dimon trusted, FURTHER giving JPM everything they wanted in a Discover Acquisition with an new “ChaseNet” that allows JPM to keep on us transactions with PaymentTech (less than 17% of acquired volume). (also see Future of Retail Banking, new US ACH system, and  Rewiring Commerce).

Visa did not want to let on us go, or give away its transaction pricing.. and they have gone through extreme contortions to explain away this deal. But it is a major crack in their model.. and every other major issuer must pursue the equivalent. Visa kept them in the tent… well at least they kept JPM wearing the same jersey..

“It allows us to go to merchants and strike our own [deals] with merchants,” Jamie Dimon, chairman and chief executive of J.P. Morgan, said during an interview at the bank’s annual investor day in New York. “We just think it will be a better relationship between us and the merchant.” – Feb 26, WSJ

Implications for the industry

Visa is facing no revenue impact I can see through 2014 because of this. As transaction volumes from on-us will be covered by license revenue (at least in year one). This is how I would construct the deal.. it is my best guess… and it is a guess. I am personally short on Visa.. which may bias me… There are 3 primary drivers which would lead to significant revenue impact for V post 2014

  • On Us volumes will increase (JPM and others) and Visa will receive no incremental revenue. Other issuers will demand similar treatment or go to competing network.
  • New payment networks (Tokens) will form with alternate rules (JPM, MCX, Bank Consortium, EMEA Banks, …). The Consumer and merchant adoption curves of each will be different.
  • On Us will morph into “On We” where clusters route CREDIT outside of Visa. This is place today within the debit world, both US (post durbin) and EU Debit (SEPA DD)

Visa’s long term strategy. Own tokenization and acceptance mechanics.  I see this as rebuilding a generic “TSM” that can support NFC, Tokens or anything else that requires a non-card payment. Visa’s carrot is certification and card present rates.. this may be stronger than anything that bank consortiums could assemble in short term.

We could also see a “rebalancing” of network rules to favor the merchant. Wouldn’t that be funny. My top idea would be for Visa to change rules to force Acquirers and issuers to quote MDR to merchant and allow them to decline cards (or pass along costs) based upon rate. Ok that is my most extreme idea..  Visa can’t continue to live life as an entity that is despised by banks and merchants.. so where will it anchor? Visa’s EMEA news is much more complicated.. yesterday’s WSJ is a good read.

Mobile Payments. As I outlined in business implications of tokens, US mobile payments will have a new “network”, a system to use tokens which are neither V or MA card numbers. Thus Banks need not route these transactions through either V or MA, but will be able to leverage same acceptance infrastructure. Virtual card numbers will be bank numbers that banks resolve.  JPM’s is first to align w/ plastic, leveraging common authorization authentication and other services. THE CONCEPT OF A CARD IS CHANGING in MOBILE.

Every Cluster for themselves.. Each group is working to “lock out” others. Banks are working to lock up the ACH rails, V/MA are placing new network fees and controls, issuers are requiring tokens, retailers are locking up data and delivering financial services, MNOs are pushing SWP NFC. Who owns what rails? who owns customer? who owns data?IPP_3_clusters_labels

Mastercard’s phones are ringing off the hook. Visa subtly told institutional investors this month that JPM was a “special case” and that they had no plans to replicate deal. Top 5 banks don’t like being told they are not special. Pandora’s box has now been opened. The future is brighter for MA as they can only gain in US and international is not currently impacted.

Issuers/Retail Banks. JPM and other top banks really had no choice but to move in this direction. Payments are essential to their business (Banks will WIN in Payments), they created Visa once.. why not do it again? The cost of issuance is dropping to zero, retail banking is fundamentally changing, AMEX and Google are creating retailer value propositions where they can no longer compete, regulators have killed their fees, their brands are tarnished and they are beginning to lose the customer.

Very important to note that the large issuers/retail banks own the rules of most networks. There is a mature strategy here to stop non-bank mobile payments for example (see New ACH).

My belief is that we will see M&A and strategic partnership activity with acquirers and processors, as they become “the belle of the ball” which would enable other entities to compete w/ Amex and JPM/ Chase Paymentech. Clusters will be rather “lumpy” and rather messy but will eventually coalesce into a world where payments look much more like dumb pipes. Processors also have new opportunities in servicing new payment networks and new non-bank customers (retailers).

Platforms. We will see heavy investment to “own” the customer at point of interaction. Apple, Google, Samsung, Amazon should attempt to own customer identification and data needed to authenticate at all costs.

Retail financial services leaders Tesco, Target and Wal-Mart have defined a template which other retailers will follow. Retailers are poised to deliver banking services more cost effectively to the mass market than the banks. (Future of Retail Banking). I expect to see retailers work to acquire banking licenses or operate their consortium within a bank.

Mobile operators have chance to own customer mobile identity and deliver financial services… but must completely reorganize to do so. (see Stage 4 Value ShiftWalled Gardens, Future of Phones – Good Enough)

Start ups are facing life as food trucks driving around in a WWI battle field filled with trenches, landmines and mustard gas. Look at the neat stuff I have to sell.. as the big global powers fight each other. Just look at the impact that Mastercard’s new rules are having on PayPal.

Investors.. ensure your payment start up has a committed partner bank.. forget about MSBs unless you have 100M+ to sink in it.. MSBs still require you to have a bank account and banks are running from this space (in the US). Take a look at Square’s recent issue. Taking credit cards into a pooled account, issuing gift cards or credits..  Assume 100k per year per state in maintaining licenses. Best legal group to help you work through these things is Card Compliant.

I would challenge all participants to think about the credit card product… what delivers value? what about it is unique? how do consumers view it? how is it part of a great consumer experience? When you leave Disney World do you think wow.. buying the ticket with my card was just fantastic? How are new customers acquired? Who benefits when cost of issuance is $0? Is charging the average consumer 12-16% on a card, paying them 0.2% on their savings charging merchant 2% a great model?  Do you think that there is room for improvement? What if credit were free if you shared your data? What if the basis for competition in cards was no longer bank brand and bank loyalty points but retailer loyalty? What makes a consumer loyal?

My favorite example of a future vision is still Square.. even though Starbucks has had a few bumps in the road in implementing it…. It will be a great customer experience… Everyone loves to be recognized.. like walking into the Cheers Bar and hearing “NOOOORRRMMMM”.  I’ll have the same drink I had last time.. and pay with the same card. This is a great consumer POS experience that retailers will jump to support. How does this payment settle? However the consumer and merchant agree.. I expect to see significant degradation in the value of the card product and “plastic”. The metaphor is changing in physical commerce.   Credit access and clearing will become ubiquitous… customer insight and experience will differentiate merchants and product providers.

Visa – Golden Goose is Now on the Menu

The golden goose that was Visa is now on the menu.

Note that my Views on Visa have changed substantially.. Charlie just joined 4 months prior.. and that Visa’s issues (described here) were driven by his predecessor.

March 2013

Todays WSJ article

I’m working on a much more detailed assessment with an analyst team.. this one is short.  I just can’t believe the market hasn’t reacted to what is going on.

1)      EU banks setting up own network (per article above) .

2)      US banks setting up own network

3)      JPM setting up own network

4)      EU banks selling Visa brand to Visa Inc … and may have no cards

I just can’t believe there is no market reaction, or how this could be positive for Visa.. and their 26x+ P/E trailing earnings

Their world is shattering into on us least cost routing. Visa is currently a “star” system and it is evolving to a multi switch “cluster” system where large hubs (Banks like JPM) act as a “star” network to their own cluster/community. From a pure network theory perspective this is much more efficient. (See multipath routing). My view is that MCX would take this a step further by allowing any node point to point access to consumer.  tn_colliding_galaxies

From WSJ

The financial groups that own the European business are exploring a plan to set up their own payments business that would compete against Visa and MasterCard to process credit- and debit-card transactions, according to people familiar with the matter

I believe banks are operating brilliantly here. Banks central execution challenge is to rework the acquiring relationships.. a much bigger challenge in US than in rest of world. In the US it was resolved by allowing JPM to “license” visa net (probably a very low fixed fee for optics). JPM will take every transaction off Visa it can (where Chase Paymentech owns the acquiring relationship). This may be only a 2-3% revenue hit.. but now that the other issuers are clamoring for same deal THIS WEEK, they will either get what they want or shift business to Mastercard. Giving the top US issuers “on us” capability akin to JPM may also only result in a 4% rev hit (cumulative).. but if on us starts to become ON WE then we are talking about 20% cumulative. On we means that the on us banks clear their own, and then also collaborate to clear between themselves in their own consortium.  If you take away US Debit card we could see another 10-12% revenue hit..

Back in 2007 Visa prepared for IPO by mandating all transactions route (or report to) VisaNet (American Banker). This of course made sense, from AB in 2005

On Tuesday the association told members that it would require the use of Visanet for any transaction made with a card that bears its logo and is not authorized using a personal identification number. The primary effect of the rule is to remove an exception that Visa had extended for “on-us” transactions, in which the same bank is the card issuer and the merchant acquirer. Prior to the change, the association had permitted in-house processing….

“Processing every Visa transaction is important … to ensure that Visa is in a position to stand behind all Visa-brand transactions,” Mr. Steele said in an interview Tuesday.

…Some processors, most notably First Data Corp., have used the “on-us” construction to skip Visanet for card transactions in which it represented both the issuer and the merchant acquirer. When First Data announced in 2002 that it planned to conduct as many as 15% of its payment card transactions that way, Visa sued and called for a moratorium on the practice. The case is still unresolved.

Visa Inc. has fouled the well in managing bank relationships. You can’t exist as a star network by alienating all your nodes you must have an anchor (gravity). The golden goose that was Visa is now on the menu.

In Europe, the banks already have “on us” least cost routing.. Europe has also made many attempts at a EU plastic payment network. The dynamics there are very, very complex as the central governing bodies (EPC) have limited ability to make local law or enforce/influence local regulations.  But the dynamics here are changing. My guess is that EU bank efforts have less to do about improving payment profitability and more about new product and local control.  Europe would love to have what China has today in China Union Pay..   (SEPA Card)

See links below for more EU background


All this talk of stars, clusters and destruction makes me think of Black Holes… hope we are not close to that event horizon…

Business Implications of Payment Tokens

US mobile payments will have a new “network”, a system to use tokens which are neither V or MA card numbers. Thus Banks need not route these transactions through either V or MA, but will be able to leverage same acceptance infrastructure. Virtual card numbers will be bank numbers that banks resolve. JPM’s is first to align w/ plastic, leveraging common authorization authentication and other services

21 Feb 2013 (pardon the typos as always)

US mobile payments will have a new “network”, a system to use tokens which are neither V or MA card numbers. Banks’ position is that the need not route these transactions through either V or MA (in order to leverage same acceptance infrastructure), whereas V/MA clearly say that an account can’t be both a network account and a XPAY account (see no wrapping).

The banks desire in 2011 is that Tokens will be bank numbers that banks resolve.  JPM’s is first to align w/ ChaseNet and ChasePay.  Banks are putting in place “controls” around ACH debit and card rules which will “encourage” token adoption.  Watch out payment start ups.. rough seas ahead. As I stated: Banks will WIN in payments.

In the US, merchants own liability for Card Not Present (CNP) fraud which aligns online merchants to the risk of using a payment instrument for a consumer they cannot physically verify (see VBV exception). However well an individual online merchant manages their own payment risk, their remains extraneous indirect risk to banks, as card data loss could result in: counterfeit plastic, identity theft, other first party fraud, …etc. Thus the fallibility of the current card “token” which relates Bank to Consumer relationship. Through this NEW token initiative, Banks are seeking to expand the account identifier by making it unique to: consumer, bank AND merchant.token

Today merchants receive an authorization for use of the card and behind the scenes Banks use very large sophisticated risk models (ex software HNC’s Falcon) to make authorization decisions. As eCommerce merchants are responsible for fraud, they perform their own risk management either directly or through payment specialists (Cybersource, PayPal, Amazon, Digital River, …etc). Banks have few problems approving online transactions.. as they bear none of the loss… and hence a game is played. Banks have little incentive to share their fraud data and merchants have little incentive to share theirs. Remember that within banking, margins are driven by the ability to manage risk and banks therefore incented to differentiate capability (not harmonize it). Which leads to other interesting dynamics (perhaps a topic for a later time).

At the Physical POS, the situation is different. Merchants bear little fraud and with EMV (Chip and PIN) the US will further reduce fraud where plastic is presented (if EMV in the US does happen). As I described in EMV Battle Impacts Mobile Payments, Retailers love EMV and are biased toward PIN and Debit. Retailers are continually looking for a way to reduce payment costs and influence consumers AWAY from Bank reward schemes.Payment-Gateways-growth

Mobile payments remain “green field”  and may be significantly disruptive at the POS. One of my favorite quotes around payments ” if you solve authentication.. everything else is just accounting”  (Ross Anderson @ KC Fed). The mobile device can provide a much richer set of information which to authenticate (vs a piece of plastic). Banks have invested billions in their card risk and authentication infrastructure. Mobile could render most of this investment moot, thus Banks are working to control and influence mobile payments at POS, particularly given NFC’s complete failure. Additionally, new payment providers like LevelUp, Google Wallet, MCX, Passbook, …etc all present large challenges to banks efforts to own the consumer relationship and payment choice at the POS (See MCX Blog).  Banks have some latitude to create incentives around mobile. For example is an MCX QR code backed by a Visa Debit card a CNP Visa transaction? Card Present? Or will MCX try to encourage consumers to back with DDA like the Target RedCard model?  Mobile payments are a key battle ground for many parties.. it is imperative to recognize that mobile payments are not just about payments.. but also about loyalty, relationship, data, influence, banking… etc.

In architecting incentives, banks have diminished ability to force V/MA to change acceptance rules. The same is true for retailers. Thus both are looking to create networks based on direct consumer accounts with account numbers (tokens) they can control. This is a very big statement.. if the banks can create a “token” which represents a credit account or a debit account.. they have “wrapped” Visa and MA (see blog Don’t Wrap Me). If successful, they could subsequently change networks anytime they wanted… or create their own. Why on earth would they want to route any debit transaction through V or MA if the token represented a debit card that represented a DDA? Or similarly doubtful: a token that represents a credit card which represents a credit account? (see  PayPal at the POS). Taking card number out of merchant (and consumer) possession, and replacing it with a token, enables banks enormous flexibility.

Yes my head is spinning too. I am implying that banks could leverage their entire acceptance and authorization infrastructure without routing anything through V or MA. No direct consumer involvement would be necessary in this token scheme since something like an MCX QR code could be mapped to multiple tokens in a single back end process. Banks are looking to make ACH changes as a defensive play to ensure that ACH rails are protected against funding a Retailer/3rd Party wallet directly (as PayPal, Target RedCard, Safeway Fastforward do today). This was my point in yesterday’s blog on ACH Debit.

Business Drivers

As I outlined this week in New ACH System in US, my view of Bank business drivers for Tokenization are:

  1. Stop the dissemination and storage of Card numbers, DDA RTN and Account Numbers
  2. Control the bank clearing network. Particularly third party senders and stopping the next paypal where consumer funds are directed to unknown destinations through aggregators.
  3. Own New Mobile POS Schemes to protect their risk investment
  4. Improve ACH clearing speed (new rules, new capabilities to manage risk). In a token model the differences between an ACH debit and a debit card will blend as banks leverage common infrastructure.
  5. Create new ACH based pricing scheme somewhere between debit ($0.21) and credit cards
  6. Regulatory, Financial Pandemic, AML controls (per  blog on HSBC)
  7. Take Visa and MA out of the debit game (yes this is a major story)
  8. Maintain risk models (see both sides of transaction)
  9. Control Retailer’s efforts to form a new payment network

What banks seem to be missing is that mobile payment is not just about payment (see Directory Battle Part 1). Payments SUPPORT commerce, Banks therefore do not operate from a position of control but rather of enablement. Most retailers recognize that Consumer access to credit has resulted in improved retail spending, however most would also say consumer addition to bank rewards has been detrimental to their margin.

Tokens for Mobile POS?

Why would any merchant or wallet provider choose to exchange consumer payment instrument(s) for token(s)?  Reduction in CNP rates, liability shift are significant. But the mobile device has many additional “identifiers” that far exceed what is available on a piece of plastic (IMEI, location, history, password, interaction for challenge). IMHO the bank business case for tokens must be built on CNP rates and Customer Choice. If Banks directly assist consumers provision their account into a mobile wallet, every wallet provider should support it. In other words the bank has done the work to integrate and “push” the customer’s choice into a given wallet from their online banking site (ex yesterday and SavetoAPI).

But this bank led provisioning does nothing for the millions of accounts that consumers have already provisioned themselves in: PayPal, Apple, Amazon, Google, Target, Safeway… All of these companies have worked to deliver consumer value and obtained a direct consumer relationship, which subsequently resulted in the consumer choosing to store payment information directly. I can’t imagine a scenario (or business case) for them to part with that asset, particularly prior to 100% acceptance of tokens by all merchants (online and offline).

Token Acceptance

The value of a bank issued token is completely dependent on: ACCEPTANCE, cost and Risk Mitigation. At the physical POS Retailers are firmly in control of acceptance, unless the tokens perfectly mimic existing card schemes. Banks will likely work to ensure that any non-tokenized payment (QR Code) will be treated as a CNP transaction with merchants bearing fraud responsibility. If tokens are in the format of a 16 digit account number than there will be very little change necessary to the payment terminal. However, the downside of using 16 digit account numbers is that it would not enable banks to firmly separate from V/MA bin routing (and network fees). It will certainly be interesting to see the plan here.

Retailers, Banks, Networks, Consortiums… are all at odds… all trying to own the consumer relationship and control a directory which they can resolve.Payment Value

In general I see the token initiative as a distraction for banks. They are far too focused on control and throwing sand in the gears of commerce. Commerce will find the path of least resistance in an open market.


My guess is that many Card CEOs are skeptical of all this network tokenization strategy. Banks card teams have tremendous assets in their consumer relationship, established consumer behavior, brand, network of acceptance, merchant white label relationships. Why not work to partner and extend today’s model in a way that benefits consumer and merchant? Example Payment enabled CRM.

This tokenization project’s ability to positively impact mobile payments and retailers may be like squeezing Jello… American Express can only be laughing to themselves. As US Card issuers are 5 years behind them in innovation  Amex is extending their lead as they endeavor to “pull their weight” by while helping retailers obtain new insights on their customers. This sounds like a much better idea than tokens.. probably one that investors will understand better as well.

My message to Bank CEOs: stop trying to lock in your market position and start trying to justify it through value.  Tokens will provide you more control, but it is significantly detrimental to your acceptance network (V/MA). You have brilliant payment executives.. there is true genius in the token design here, but it is completely myopic. If you had a cross functional team with experience in retail, advertising, data, processing, CRM you would realize that mobile will change the way consumers interact with their environment. Banks will NOT be the intermediary in every interaction. The barriers you are constructing will only further inhibit your ability to partner and take part in processes which add value.  Remember your customer is not yours exclusively, we also are customers of Google and WalMart and Verizon…. Banks have an OPPORTUNITY to orchestrate commerce IF they deliver VALUE.  Payment people design payment solutions to payment problems. Banks must redefine the problem and the opportunity.

The questions banks must answer (for a retailer): when was the last time you brought me a customer and helped me build my brand, and consumer relationship?

Another scenario Card CEOs should consider: if Payments become “dumb pipes” …. where retailers and non bank intermediaries can perform Least Cost Routing (LCR)… how do we compete? How strong is your customer relationship?  Why did the consumer choose you as the bank in the first place?