Google Creating Platform for a New Mobile ECONOMY

16 March 2015

How can Google, Samsung or anyone else ever hope to catch Apple? It depends on what they are chasing!

My view is that Google has just begun a major transformation to the physical (offline) world with Android as the key enabling “platform” (beyond search to orchestration) for a new business network. This transformation involves 5 primary vectors:

  1. Enable Android as the secure platform (SE Linux, Trustzone)
  2. Create participant incentives for commerce “network” to invest and transact on “platform” (Advertiser, MNO, Bank, Retailer, …)
  3. Improve physical world insight/data collection to enhance targeting and attribution
  4. Capture and manage consumer identity
  5. Create/enhance consumer engagement platform for commerce

Mobile Industry vs. Mobile Economy

Apple is the #1 company in the world. (A very BIG period). Apple’s position is well earned through focus and hard work. Operating as a  consumer champion that captures a mind numbing 93% of the mobile industry’s profits.  The most obvious question to address in this blog: what could ANYONE do to dent this? (operating from a basis of under 7%). In other words, what could Google do that would possibly matter?

Answer: The “Mobile industry” is not what Google is chasing (nor are Amazon, FB, Twitter, …). “Industry” is an old world classification that does not account for most aspects of the MOBILE ECONOMY (advertising, beacons, shopping, shipping, social, payment, identity, …etc). The mobile economy is about commerce. Perhaps my favorite “stat of the year” to exemplify the impact of mobile outside of the traditional “industry” came from January in Tech Crunch. Amazon’s business has shifted from 5% mobile to 60% mobile in 5 years!! (see Convergence Blog for more detail).star network

As mobile and IOT encompass ever larger roles/touches which impact our behavior, Google is moving to support both: Android as the embedded OS (connected everything) and Google core as the center of commerce (the orchestrator).  This blog focuses on mobile commerce and I will try to outline a few of Google’s strategic moves that are redefining the mobile economy.

Google’s core is centered on connecting businesses  and consumers, delivering services to all.  At the center of this star network is the indisputable “data” utility which becomes more efficient with every insight they gain on both sides (consumer and merchant).  Today millions of businesses and billions of consumers are investing “energy” to connect to Google (all with unique incentives)

Businesses, Banks and Consumers are all wondering if the beautiful simplicity of Google’s bright shining star [network] is a Faustian Bargain, much worse than Apple’s walled garden. Google’s position today is quite a feat given its humble beginnings as a free Open Source mobile OS that Google bought in 2005.

How is Google building platform and network? Moving to a model of shared incentives and partnerships?  Before we go deep here, let me first attempt to paint the picture of Apple’s dominance (and weakness).

Apple

Apple’s success is completely driven by the consumer, logically this means their organization and investment are focused on delivering great consumer products which operate within a giant walled garden. This walled garden works well in a small world (individual’s control: telephone, music, calendar, pictures) where Apple can control, but not very well in coordinating interactions outside of the garden. Stated differently, Apple’s approach of “my way or nothing”, means it has few friends.

As I outlined 2015 Predictions blog, competition is no longer about camera resolution, storage, and screen size, that enable you to manage items in your small world.  The visible (obvious) attributes of mobile competition have become a commodity; as well as the small world problems that your phone solves.  My view is  Apple’s greatest assets are consumer trust and its unique ability to change consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). These assets allow Apple to assume a leading role in connecting and orchestrating consumers in the real “connected” world , however they are 5 years behind Google, Amazon and Facebook in their ability to execute here.

Why is Apple falling down in IOT/Connected Commerce? Apple has 4 primary strategic weaknesses: 1) it does not partner well (closed network and proprietary standards) and 2) it relies primarily on hardware for revenue, 3) its entire organizational culture and focus is on hardware 4) it locks consumers into its walled garden. Today pointing out these weaknesses is like telling Peyton Manning that his singing was out of tune, or Albert Einstein’s flaw as dancing. These shortcomings just don’t matter in a world where Apple is 3 years ahead of everyone else in profitability, quality, loyalty, integrated OS and Hardware.

Apple’s business model is perhaps the best example of how closed networks win through the domination of a benevolent “channel master” (see iPhone 6 – Apple’s Strategic Opportunity). Cisco, Microsoft, Intel all operate in this model. Apple’s star network is much smaller (ie connected business) but its bonds are much stronger. However, their success may become a hindrance.. as merchants, banks and others want to “own the consumer” too.

Compared to Apple, Google’s world is much more democratic, it wins by delivering value through customer choice every day (search, maps, mail, play, HCE, …).  Google is a commerce enabling, which tilts toward the consumer (on the phone) and toward the merchant (in advertising). Where Apple has a walled garden; Google is a semi open platform that supports many gardens and clusters.  Where Apple’s business is driven by hardware margin; Google’s is driven by daily consumer and merchant choice. Where Apple delivers value to consumers and itself; Google delivers value to every merchant, bank, MNO and almost every consumer (even on iOS). What other businesses are enablers of consumer and merchant? My list is fairly small…

Apple’s inability to make the iPhone work outside their garden, means that they are dependent upon device only margin (currently a fantastic business model). Critics will point out that Apple runs a fantastically successful App Store Platform that is 8x-20x more profitable than Google’s (with less than one quarter of the handsets).  However this is Apple’s walled garden.. where Apple made 30% from $2B from App store sales benefiting 500k odd top app developers, Google’s US Ad sales last year were $30B driving at least 20% of $185B in US eCommerce Sales. Google’s role was much more impactful to the overall economy (and almost all businesses).

Platform is turning out to be an opportunity lost for Apple. The iPhone 6’s security has made it the first “convergence device” with the ability to broker interaction in virtual world and the physical world (NSA, CIA and everyone else are still working to break industrial grade security). Yet Apple has no plan to leverage this identity management outside of their platform (see Brokering Identity), or even use basic identity information to assist banks with identifying ApplePay fraud (until very recently).

How to combine assets in the new Mobile Economy?

We need collaboration! The last 10 years has seen every major fortune 100 build big data facilities that work with nothing else. Banks, MNOs and others have all invested billions in an attempt to build an advertising business to rival Google’s. JPM Chase has a new data division on par with the investment bank, Verizon has built PMI, Walmart has WMX. All are constrained by their partial views of the consumer. Advertisers are challenged to work within these new proprietary efforts. The market need surrounds incremental insight engaging consumers in the channel which they prefer .. which means combining data.Data options

US MNOs spent over $600M+ trying to make their NFC play work. As my good friend Osama said at a recent MNO event “in order to create value sometimes we must let go of the assets we treasure most knowing that value is only created when they are combined with the assets and interests of others”.

Google provides a massive closed market (Ad Words) with unsurpassed consumer insight and trust. No company can choose NOT TO participate in Google’s economy, after all advertisers and retailers must go to where consumers are (not where they want them to be). Google operates in discovery, awareness, engagement, selection, sales, delivery and support.

Google is perhaps the only company in the world that is both loved and feared by merchants, banks and consumers. Particularly as their traditional open source, closed market, and “do no evil” approaches become more proprietary and less transparent. Google’s insurmountable advantage is in using data and insights within its own organization, where everyone else must be diligent with sharing (externally).

Today that fear is not well placed. Few understand just how myopic Google’s current data dominance is. While Google knows most about you online (search, mail, maps), they know very little about you in the real world. Google indexed the internet to create a common directory of public data, yet it has very little insight into private data (even your actual identity).  Facebook, Apple and Amazon all have far greater consumer identity insight.  Physical world (off line) data is of far greater value than online data, and online eCommerce sales are only $185B (US) comparted to $2.4T in offline Commerce.

Google

Perhaps it’s easiest to start this section by outlining what has changed in the last 12-18 months?Google economics

As stated in intro paragraph, I believe Google has begun a major transformation to the physical (offline) world with Android as the key enabling “platform” (beyond search to orchestration) for a new business network. This transformation involves 5 primary vectors:

  1. Enable Android as the secure platform (SE Linux, Trustzone)
  2. Create participant incentives for commerce “network” to invest and transact on “platform” (Advertiser, MNO, Bank, Retailer, …)
  3. Improve offline insight/data collection to enhance targeting and attribution
  4. Capture and manage consumer identity
  5. Create/enhance customer engagement platform for commerce

Android as Secure Platform

Android is transition from open source Linux to SE Linux (which was oddly enough created by the NSA).  One of Androids major shortcomings was its dependency on OEMs (minimal say on hardware). While Apple worked to create innovations like touch ID that is stored within the secure enclave within the A7/A8, Google had to work with prime OEM vendors like ARM to build the equivalent (both Apple Secure Enclave and Google’s new equiv are based upon ARM’s Trustzone/TEE).  Android is making big bets in security, as managing information (and authenticating consumer) is key to orchestration (see  Authentication – A Core Battle for Monetizing Mobile).

Poor SamsungPay. These guys obviously don’t read my blog or they would have clearly seen the implications of Google’s new MNO deal. SamsungPay will not be pre-loaded onto Samsung’s own phone. Samsung not only lost in payments, but also in owning a proprietary security construct that secured the token (Samsung’s proprietary Arm TrustZone implementation). Even if a consumer loaded SamsungPay onto their phone, it will not work without Samsung leveraging the new Google/ARM firmware for secure credential management.

Apple’s biggest lead (with no apparent threat) is in touch ID. While SE Linux and Secure Storage are important… you must know WHO is coming in the front door. The Android approach seems to be more about behavior and forensic identification than biometric.

Incentives for participation

In 2011, the US carriers wanted an estimated $3B from Google for the “rights” to NFC (and the secure element). Google correctly responded.. “how about we figure this out together and see if we can make it work” (skin in the game approach). Last month we saw Google’s purchase of ISIS/Softcard for $60M with a new strategic partnership, with unknown revenue share, and unknown mandatory Android features (ie Wallet/Play/ ?) with the Carriers that redefines the “secure” standard of a new Android platform.

Whereas Apple has complete control over every aspect of iOS. Google has created a network for revenue/sales. Retailers advertise/engage/create, MNOs rev share, Banks manage payments.  You can only guess which platform Banks and MNOs would prefer to invest. This common platform may be a turning point for collaboration and Commerce 3.0 (my year of partnerships).

Offline insight

Google’s mission is to use the phone to cross the chasm into offline. The reason a new platform is needed has to do with offline data. For example, Mobile advertising will never work without an understanding of intent and behavior. This [private] information is locked up in millions of businesses (with a copy at the NSA).  data evolution

Today’s data business is just insane. Take a look at someone like CVS, Catalina is one of my favorite data companies (along with ADS), and Catalina works well with Nielsen to target and measure television ads. However they don’t work well digitally, thus CVS has to provide Datalogix (now Oracle) will all of it loyalty data (your SKU level purchase data) to play with Facebook (see my blog for background). Can you imagine having all of your data in multiple locations? Trusting these aggregators use it appropriately? Combining is with their proprietary models and other external data sets? What are they “gleening” from this data?

Google’s approach is to own the data and insights created from their services. Google now wants to create mechanisms to “share”.. the problem is that this “sharing” involves giving data to Google and getting customers back. This allows Google to create great experiences, but the price for data owners is loss of control.

Logically, nothing in biology or in capital markets has this amount of centralization. The title of this section is “combining assets”, is the only answer to combine assets giving them to someone else for unstructured use? This is what my NewCo Commerce Signals does: providing the plumbing for federated data where data owners retain the control over their data, determining not only who they should share data with, but also for what use (next blog). I’m fortunate to have a few big retailers, banks and MNOs that share this view (within Commerce Signals).

Capture Consumer Identity

Remember when you purchased that new iPhone? You couldn’t activate it until you created an iTunes account. That iTunes account required a credit card. What a brilliant Apple move!!  This year Google will finally catch up, as I believe a key facit of new MNO agreements is to make the Google Play account mandatory (with CCN/Token).

Knowing the identity of the consumer is important, authenticating them is quite a bit more difficult.  I believe third parties like Payfone will play a leading roll here. Payfone is jointly owned by top 6 US Banks, Amex, Verizon, RRE and a few other investors. They are tying together identity information of carriers, banks and platforms to score transactions and enrollment.

Customer Engagement

Google has many, many efforts here:

Retailers and Banks are loathe to give Google data, or let them assist directly in consumer engagement. However as long as Consumers choose Google’s services first, Google is in the driver’s seat. Companies that share data more effectively with them will reap greater benefits.

Wrap up

EVERYONE works with Google… it is where consumers are. Consumer behavior on mobile is changing much faster than anyone has anticipated. No one company can ever hope to compete with Google, they are moving fast to reshape the mobile economy.. where consumers spend 3 hr/day.

mobile_vs_tv_1_v1b-1

Android is a much easier platform to make investment. It’s a more predictable standards based environment compared to Apple (ex Sapphire glass or that darn lightening connector), with a strong partnership track record. Google’s democratic nature allows for experimentation. The path toward rewiring commerce is much easier in a Google world.

Having Google at the core of data is not without risks. Companies must work with many parties after all. How do you track the interaction between all of your partners today? Who has your consumer data? What will you share with whom? How can you accelerate trials and tests?

How do you combine your assets to create value in this new future? Without loosing control. This is the problem I am focused on.

 

 

2015 Predictions

3 February 2015

Payments, commerce, data and mobile is this blog’s focus. I’m very very fortunate to have so many great friends, customers and partners in this area. My thoughts are not my own, as I’m greatly influenced by my “environment”.

I’ve made many new friends because of this blog. The funny story that comes to mind was in August of last year when the CEO of a Fortune 50 company comes into the room and says “ahh.. the INFAMOUS Tom Noyes”…  (never a good way to start off a first date.. but we had a good laugh and thrilled he reads my blog.. ). Honest dialog has a way of creating great friendships. Thanks to all of you for providing such a fantastic environment! You make writing this thing fun.

2014 Prediction Eval

Before you bother reading my 2015 predictions you should probably see if it is worth your time. Best way is to evaluate what I projected last year in my 2014 Predictions

  • Consumer Privacy. Grade – C. Not much happened in 2014 on consumer side. I’m holding with my prediction, just not certain of timing and “tipping point”. How will we know when it happens? Imagine a Sony like incident with consumer data.. Regulated businesses like MNOs and Banks are highly attuned, Apple is the best in class here (consumer champion of privacy see Blog). The Ad industry is dependent upon tracking and data sharing in a very, very grey market approach. There is a better way… 2014 is perhaps the year of “awareness” with Snowden, DEA tracking license plates, State department keeping all of our phone records, to new super cookies on mobile. The next logical phase is ACTION.
  • Retail banking. Grade – A. Huge transformations going on. Prepaid and GPR products are segments growing at over 35% CAGR, US branch footprints are shrinking (see Blog)
  • Debit Volume. Grade – D. Not much going on here, after the DC court of appeals struck down Judge Leon’s ruling on debit interchange (March 2014).  Not much consolidation in PIN debit either. I do believe US debit will evolve to look like Canada’s Interact and Australia’s EFTPOS.
  • Mobile BEACONS. Grade – F. Nothing happening in 2014. Looks like more of a 2016 thing. I’m holding to my projection.. but missed timing completely.. thought Apple would launch beacons at their Sept 9th
  • mCommerce Payments. Grade – B. Summer 2015 is where we will see substantial progress. We see that the networks have turned over the new 3DS CNP scheme to EMVco last month (see link). As Payments move into the OS (see blog), Paypal doesn’t have one. Amazon, Google, Apple, will make SIGNIFICANT dents in Paypal as the platformcontrols authentication and authorization. Amex/Visa/MA’s new rules on tokens, combined with consumer privacy concerns, will accelerate the trend.
  • Specialized HardwareGrade Gives way to Commodity Hardware- Grade A.. makes way for commodity hardware and software. Launch of POYNT and CLOVR are best examples.
  • Host Card Emulation. Grade – B (for 2014), Grade A (by August 2015). Google did indeed push HCE into Android. With the death of ISIS and SEs in US phones.. things will be heating up in 2015 with a new Google launch.
  • EMV. Grade – D?. It appears to be happening.. I bet it would have been pushed back… I have the cards, but don’t yet see the retailer infrastructure. The chip and signature (vs Chip and PIN) is still a very strange one. It would take me 3 days to explain the politics behind it. What really baffles me is Samsung’s planned launch of LoopPay this summer (with Visa support).
  • Banks have given up on payment innovation. Grade – A+. I have a copy of the ApplePay issuer agreement (Sept 2014). Just can’t believe the banks have taken it on the chin like this.. not only ceding mobile to Apple, but Tokens to the Network and 15bps. What do they have left?
  • ISIS WILL DIE.. Grade – A+. Money ran out in Dec 2014, sale will be complete by March.
  • Apple will have NFC. Grade A+ … ApplePay 9/9/2014.. I was wrong on 3 things.. I projected October (it was 9/9) and there would be no SE, and Beacons would be part of launch (to wake up payment app). Big news (below) is that ApplePay will be in browser by summer 2015.. Paypal will be crushed with a double whammy on “value”: usability and a new rate tier (20-40bps off credit) for tokens in CNP.
  • Unlocking the cloud and authentication. Grade – B+ . Apple has done an amazing job here. See my blog on brokering identity.

Summary Grade: B+ . Looks like I’m a little aggressive in projecting the new stuff (Beacons, Identity, EMV, HCE). Except for EMV and Debit, I’m still confident in the predictions (philosophically) but my timelines are too aggressive in most cases.

2015 Predictions

These predictions based upon the Structural Changes in Payments which I discussed last month.

Big Picture Predictions

  1. The Year of Partnerships, new Clusters and multi-tenant walled gardens (forced by Apple/Google Dominance).
  2. Mobile moves from Small World organization to Real World Orchestration (my next blog)… starting with merchant friendly value propositions. You must be where customers are, or influence them in the real (offline) world. We have spent the last 10 years enabling a handset that does more than take calls and connecting it to the virtual world. We will spend the next 10 connecting it to the physical world. From POS Payment, Google Shopping Express and Beacons to Door opening and document signing.
  3. Tipping point of Privacy (Apple Defines Best Practice)
  4. Politicization of networks. Government regulation in internet prioritization, payment networks, social networks, advocacy networks and advertising networks. Networks are needed for the efficient life of a firm. Star network resembles dictatorships in social networks, and “channel masters” in business networks. Star networks are optimal for business, however we have grown quite used to the state of `organized criticality’, the scale-free, democratic and highly complex social net. Government involvement in networks usually does not improve efficiency and can lead to significant disruption.  Take a look at what Europe has created in SEPA.. a standard that no one will invest in.
  5. Collapse of “wallets” into Payment in the OSmCom trumps eCom. Tokens take over in eCommerce w/ ApplePay, Visa Checkout and Google Wallet
  6. Marketing… the year of measurement… and beginning of pay for performance
  7. The most trusted consumer brands will remain: Apple, Google and Amazon… with banks suffering most as their products become commodities and mobile rendering physical footprints moot.

Tactical/Deal Predictions

  1. Apple will launch aggressive effort to bring ApplePay into Browser by Summer 2015
  2. We will have a new rate tier from Visa and Mastercard based upon tokens in CNP (see EMVCo 3DS PR)
  3. Google will GO BIG in launch of new wallet in an HCE model akin to ApplePay. It will have dynamic tokenization. Google will excel in getting retailers private label and loyalty cards integrated, and pass Apple in BLE integration (in store).
  4. Alliance Data will be bought by JPM, C, Paypal, Hedgefund+Acquirer or Amex. ADS is my top stock recommendation for 2015, V/MA are my long term.
  5. Samsung will Launch LoopPay with support from Visa by September 2015.
  6. Visa will complete purchase of Visa Europe (hopefully at a 2015 discount) with strong dollar and weak EU growth.
  7. MCX will pivot to a payment instrument within another wallet (think Target Redcard) vs a wallet unto themselves .
  8. Beacon pilots will launch in top 20 retailers. In store navigation, product location, couponing and gamification will be first uses.
  9. Facebook payment will go live and be integrated into a new form of social advertising, where you are paid based upon your ability to influence your network, will see first pilots. Facebook will remain king of CPG advertising
  10. Behind the scenes there is tremendous progress in the collaboration of Banks, Telecos, and Mobile Platforms to Validate Identity. Short term impact is near elimination of mobile payment fraud. 2015 will be year of formalizing an identity verification infrastructure (in the cloud).

2015 the year of Partnerships

Google and Apple against Everyone Else?

I don’t have time to go over all 15 of my projections.. will do so in coming weeks. Over the last 6 months network and system design has consumed my thoughts like nothing else: proprietary networks vs. open networks, integrated vs modular, distributed innovation vs controlled platform, Apple vs. Google, Amex vs Visa, net neutrality vs. prioritization. At what point does OPEN win? My blogs on the subject was Value Creation and Distributed Innovation, Banks non-Banks and Commerce Network and my two favorite books are Platform Leadership and  Weak Links by Peter Csermely (viewable on Google Books here).

Any analysis of this area must focus on Apple. Wow! What a machine! The most loved brand, the most profitable, highest in consumer satisfaction, most sales per square foot, creator of new categories, inventors of new consumer experiences, trusted by the most affluent demographic, champion of privacy… on and on. Is Apple an exception?  Can any company ever aspire to replicate their success in any industry? How can anyone else compete in areas they touch? Do the rest of us just pick up the crumbs? Apple’s latest results show that their model is improving, garnering over 86% of the “mobile” industry’s profits (see Forbes).

network evolution nodes to consortium

Open networks are harder to build, and are certainly less profitable than closed. My prediction on “year of partnerships” is due to necessity, NOT the efficacy of collaboration. Few companies can compete with the data advantage of Google, Amazon and Facebook. Apple’s trust and reputation advantage is perhaps even more insurmountable. For large companies it may take 2-5 partnerships in a focused area. Imagine the data challenges small companies face.  This is not a technical challenge as much as a business one. How many successful partnerships have you seen (elephants dancing).  Remember that are injured elephants facing as structural changes in consumer behavior, mobile, information, distribution, trust … impact products and strategies. CommerceSignals is working to help bridge this gap, but that is for another blog.

Where Google, Apple and Amazon are self sustaining Stars (networks), clusters and multi-tenant walled gardens are forming to compete in a quasi open model.  The challenges here are not technical, but organizational and value creation. History reveals few consortiums renowned for their efficiency.  Value is best created where it can be controlled and monetized in “small worlds”.  Networks in business are functional in 2 areas: around a specific function with broad use (Visa/MA, Credit Bureaus, ?Android?) and where market forces can take operate (NASDAQ,  …). This is my big hypothesis… would greatly appreciate input here.

2015 must be the year of merchant friendly value propositions. Logically, the majority of commerce happens in a retailer.. and hence the “solutions” must as well. The inability to partner will give way to platforms that enable partnership… optimally platforms that would allow millions of “lightly structured” interactions to test 1000s of value propositions until something sticks (this is Commerce Signals). Take beacons for example.. we know that Apple can maintain security and confidentiality.. but the retailer must install beacons that work for everyone and have a business case (consumer insight). Consumers want to know how insights will be used. How do you manage the agreement between Manufacturer, Beacon Provider, Apple, Retailer and Consumer?

iPhone 6 – Tipping Point for Platforms

As I outlined in iPhone 6 – Apple’s Strategic Opportunity, I believe the iPhone 6 represents the dawning of a new age of mobile “platform”. What was a music manager with a phone has turned into the most secure, easy to use device ever created. The factors of competition have changed, it is no longer about camera resolution, storage, and screen size. The visible (obvious) attributes of competition have become a commodity; as are the “problems” that your phone solves (telephone, music, calendar, pictures).  Where previous phones helped you manage items in your “small world”, the iPhone 6 has become both the secure key to the cloud with the ability to broker interaction in the physical world (NFC, BLE, identity, tokens). The “convergence device”. See my blogs Brokering Identity and Authentication in Value Nets.

Unfortunately, Apple is so focused on the consumer it has no ability to partner. While there is no company better in creating devices that thrill a consumer, there is perhaps no company worse at building partnerships and business models where value is shared. Given Apple’s cash hoard, my top recommendation.. create a new division focused on network.. helping connect consumers to the physical environment they live in (thermostats, health, retail, cars, advertising, …). This is NOT a handset function.

Abrupt end here.. this blog has been in partial completion mode for 6 weeks. I had to get it out. Will articulate my views on the other “Top 5” predictions this month.

What do Retailers Want in Mobile?

1 Nov 2014

Money2020 is next week, and I’m moderating the ApplePay session on Tuesday at 5pm… hope you guys can come. I’m more than a little sad that I can’t get any retailers up on stage with me. Why? The top 60 retailers are in MCX, and it makes little sense for them to get on stage and tell the world what they are NOT going to do and why. As I’m preparing to leave for Las Vegas tomorrow, was thinking “what could I write about? What unique perspective can I offer?” Well given I can’t get them on stage with me, let me try to articulate the Retailer’s view of the world. My twitter feed is blowing up as I work to explain why CVS and Rite-Aide turned off NFC. Please know I’m only trying to give perspective…

Payment Services are a brokering activity between two entities engaged in commerce. Logically, a broker must have the trust of both parties, and deliver some sort of value in managing the financial risk associated with the transaction.  Within Consumer Retail, Visa and Mastercard evolved from Bank owned exclusive networks of the 1960s (see History) to ubiquitous independent payment networks. Few remember that back in the 1960s, merchants took either Visa or Mastercharge but not both as the Merchant’s acquiring bank could only be a member of one of the networks. For merchants, the value proposition was clear: consumer credit.

Payment networks thus evolved from a closed and focused value proposition, to a settlement “infrastructure”. However the rules and governance process by which many parties (merchant, acquirer, processor, issuer, network, VASP, …etc) participated in defining operation of this “brokering” activity did not evolve. This is the central issue restricting the future growth of Visa and Mastercard. One I believe both are acting on. My firm belief is that rebalancing network rules will unleash a massive new phase of value creation for these networks.

Let me take a quick side bar here..

Network Theory – Openness

As I’ve stated many times, closed networks always precede open networks until scale is reached (Building Networks and “Openness”, 2011). Weak Links (nodal affinity) influences network creation, and there are VERY few open networks which exist in Nature. This is logical as Networks form around a function rendering generic open networks less “efficient” than specialized networks around any given specialized need.

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

-Weak Links

Networks NATURALLY form around a function and other entities are attracted to this network (affinity) because of the function of both the central orchestrator and the other participants. Open networks (internet/TCPIP, Visa, NASDAQ, … ) succeed where a common infrastructure benefits MANY NETWORKS.

Visa and MasterCard have transitioned to become common network infrastructure, a position FAR MORE valuable than that of a closed credit delivery system. They are a network of networks. However their rule making and governance processes do not match the other open networks listed above (NASDAQ, Internet, …). Most Banks, have also lost their traditional role of “brokering” and risk management (in retail) by creating a card rewards system that encourages card use paid by the merchant. This creates a brokering incentive separate from the commercial transaction… impacting brokering independence.

What do merchants want? A neutral broker!!

A top 5 merchant told me a few months ago “Retailers like Starbucks have proven that we are best placed to deliver value and influence consumer behavior. I don’t want to force my consumers to do anything, but similarly I want to networks that let me play on an even field. These next 5 years are going to be complete chaos for consumers. What do we want them to do? Swipe, dip, chip, pin, tap, QR…? We have been planning for EMV for 3 years… am I really supposed to jump to Apple in 4 weeks?”

MCX

These guys are good friends of mine, and I think their business vision is well placed. They want a network where they can play on an equal footing. A neutral broker.. or at least one where they can have a seat at the table when rules are set. Will MCX be a massive success? It depends on the consumer value proposition. Are the merchants motivated to work together in creating a neutral broker? Hell yes.

One merchant said it this way “Tom I didn’t think we would ever have someone more difficult to work with than Visa and Mastercard, but I was WRONG. Apple is a nightmare! At least we knew what was coming with Visa and Mastercard, with Apple they don’t talk to us, respond to our letters, or offer any kind of value proposition. Why on earth would I want to let another brand in my store without understanding what it will do for me? They are a great company, with great products, and certainly have a much better approach to data than Google.. but anonymity is NOT a value proposition, in fact Apple makes our efforts to deliver value to the consumer even harder as we have no defined way of using Apple to engage our consumers”. See Brokering Identity – Part 1, ApplePay and Merchants, Digital Transactions ApplePay Issuer Agreement.

Getting a card number from consumer to merchant is NOT innovation. There is just no problem here. My payment friends are already rolling their eyes. Apple does have great security and great ability to manage fraud.. but fraud losses for CP are 3.2 bps. What about store data losses? That is not “fraud”, and certainly a problem for merchants that keep PANs. Tokens do solve this problem… but so does better security, and more intelligent approach to tracking loyalty. Apple must move to create a merchant value proposition, and define how they will help with consumer engagement. I believe Google will far outpace Apple here.

Retail is a zero sum game.. I’m not going to buy MORE gas and groceries.. differentiation is about switching, product selection and pricing on data, ..the fluxonce this flux dies.. steady state resumes.  Perhaps all iPhone owners will only shop at whole foods, but data shows that consumers don’t make decisions this way. In fact payment is not in the top 5 reasons for consumers choosing a new iPhone.

Why are MCX merchants turning off NFC? To give themselves a little breathing room, make Apple create a merchant value proposition (engagement), get a seat at the table in a new network, and help to establish a consumer behavior that works for them too (Most Important Payment Race: Consumer Behavior, Apple’s Platform Strategy: Consumer Champion ).

What do Retailers want in Mobile?

Following from my big blog Static Strategies and the Rewiring of Retail.

  • Consumer Engagement
  • Consumer Acquisition
  • Consumer Loyalty
  • Allow Retailer to be in control of data
  • Partners that allow Store’s brand front and center
  • A Partner either IN CONTROL of the consumer experience (Apple/Google) or one that already has massive consumer adoption (ie Facebook).
  • Creating a fantastic customer experience from end-end
  • Ability to manage campaigns, data or your business
  • A Partner that can reach/influence consumers WHERE THEY ARE.. not where you want them to be.
  • Payment..? I guess if that comes too… 

shopper marketing

How will this play out?

  • Much has been made of the MCX contract provisions that prohibit participating retailers from allowing other forms of mobile payment. This is just not accurate. Any retailer can choose to turn on NFC, any retailer can sign up for MCX. Can an MCX retailer turn on NFC? Yep.. Large retailers are not participating in ApplePay because Apple has completely failed in a merchant strategy, they have not articulated one, nor have they worked directly with merchants. This is really no different than Apple’s failure to work with Banks. Banks are just fuming over the take it or leave it terms Apple offered to them. Merchants had no terms…
  • Apple will rollout a merchant friendly beacon product, and loyalty product for consumer engagement in next 6-9 months, this will also include a renewed focus on BLE. The product will fall flat until they can create an new merchant organization. Google has 4,000 sales people working with merchants, apple has around 16… so it is a big task.
  • Apple will ROCK in App payments.. it will be their homerun… I will make a further bet: Apple will WIN in every situation where they can control the consumer experience from beginning to end.
  • Visa and Mastercard are beginning a shift toward the merchant. They may not win the top 60, but Visa has 36M merchants.. that leaves 35,990,940 that will be open to new ideas. These are my biggest personal holdings, and I know both of the CEOs. Everything I’ve written here they know already.
  • Consumer authentication is VERY disruptive to retail and banking. As Ross Anderson said “if you solve for authentication in payments.. everything else is just accounting”. The need for an independent broker and their services are dramatically different if either the consumer or payment can be authenticated (ie cash, bitcoin). Why do you need a payment product at all? Just present the identity to the bank. This is what Sofort/Klarna does… Why not do this? Because the banks have no ability to MONETIZE the transaction (no merchant agreement). There are many better ways to leverage authentication, but no other ways to currently MONITIZE IT (outside card). Perfect Authentication… A Nightmare?
  • Apple is pursuing an “anti-google” approach: keep no data, closed platform, control everything. Google is 2-4 years behind on platform security.. but is catching up. The Google platform is much easier to build in and control (ex HCE), but consumer adoption lags as each Android participant must move consumer to their vision. Apple has successfully delivered security and authentication, but has not laid out a way for many apps to leverage it. Retail is a REALLY big business, with 1000s of specialists. It cannot be throttled by one company.. thus Apple will work fantastically in environment it can control. (sorry to restate).
  • ApplePay and overall contactless adoption will begin with small merchants and infrequent purchases. Most phones have the capability today. MCX will not stop contactless.. but it will impact consumer behavior substantially

ApplePay Vs Google

  • Is NFC/Contactless Acceptance required as part of EMV rollout? NO!!  This is the most widely held mis-understanding. While the large terminal manufacturers have no products in their official product list without contactless, the top 60 merchants order bespoke or custom terminals to fit their needs.

Apple Pay- eCommerce – Disruption

30 September 2014

ApplePay/eCommerce/Tokens/Card Not Present

Quick blog, based on Apple Pay in eCommerce.. following on to my March Blog Tokens and Card Not Present (NOT the POS NFC stuff). I won’t do this topic justice, but hey half the fun is getting comments. I’m heads down on a few things.. so this will be my last post for at least 3 weeks.. and I want to make a few key points prior to money 2020.

Summary

  • So much for Paypal being acquired.. wow!! Dan Schulman is the right guy here, and I must congratulate the eBay BOD. This thing can NOT survive without a major change. Dan is a “direct to consumer” Innovation Superstar: Priceline, Virgin mobile, Serve/Bluebird, .. etc. He knows how to run a global organization, he knows mobile, he knows payments, he knows retail. His biggest challenge will be rebuilding a house on fire during a Hurricane.
  • Apple and eCom: No change in CNP rates with Tokens.. Tokens in Apple Pay are used for both POS and eCom, but the issuers revolted at the prospect of a CNP revenue loss. I do see “next phase” where we will see A NEW RATE TIER for tokens in eCommerce.. for any online merchant replacing their Cards on File (99% confident). Funny battle here is “who” will lead this. Visa/MA have the TSP up and running now. 3-5 issuers should have theirs running in next 5-7 months. Can you imagine having to work with each and every issuer separately to tokenize? NO WAY. But they just don’t get it..
  • Big issuers are concerned that the Apple Pay launch was a watershed “freedom” moment for V/MA. However Issuers did win a very important battle.. keeping a primary control point: token binding (deciding when and where their cards can reside), and the also have the ability to create their own token authority.. but they have work to do.
  • ApplePay’s focus is 1) POS $15-$20B and 2) “in app” payments $5B 2015 GDV.. US eCommerce payments will remained locked in the status quo battle among the giants of Amazon, Visa/CYBS, Paypal..  with Google, Off Amazon On Click and Alipay as 3 of the new challengers here.
  • Apple Pay Tokens: Visa and Mastercard did 90% of the work to get this scheme from concept to reality in 12 months. The fastest time to market for a new scheme IN HISTORY. It is a thing of beauty.. seriously. I believe the networks learned many lessons here (like build it first then bring the Banks on board to tweek it).
  • There will likely be a new rate tier for tokens in eCommerce with liability shifting back onto the banks, but issuers must support in order for this to gain traction and merchants learned from VBV that you don’t get into a scheme where issuers don’t support (ie declines matter more than interchange).
  • iPhone 6 is a revolutionary product, which will impact identity, trust, retail, banking and payments. I see the revolution beginning outside of payments, where value can be created.
  • eCommerce wallets are an aggregation function. There are only 4-5 companies that can possibly make this work, each having a different value proposition. Visa and Google are the leaders here.

What did I get wrong on Apple Pay?

  • I did not see the NXP SE. I thought that Apple would encapsulate the SE functionality within the Secure Enclave. While the Secure Enclave has secure storage, it did not have secure execution, nor did it have a way for a third party to update applications and data in secure storage/execution. Hence the SE, with First data running the “TSM” function.
  • The tokens within Apple Pay are NOT provisioned at time of manufacture (not burned). They are provisioned by the Visa/MA after a binding process. The token issuance/binding process is just fantastic, leveraging the existing AUTH message set to avoid network changes. Issuer process to ApplePay: sign an agreement, turn on the Visa services (most are not EMV enabled), decides who’s BINs you want (your own or Visa’s), and prepare to respond to auth requests for binding/tokenizing cards.
  • There does not seem to be a beacon/BLE experience within Apple Pay (yet). My guess is that there is a 3 phase road map. Phase 1 traditional NFC, Phase 2 Merchants enhance the checkout process with Beacon at the POS to improve application “wake up” and perhaps another loyalty app that can interact, Phase 3 All BLE, with perhaps an NFC handshake to “sign”.
  • Issuers giving up 15bps. I can’t believe they went for this.. Issuers only sustainable business case for this is around shifting spend to credit cards.
  • Visa and Mastercard did and amazing job in this token design. Getting all this done from concept to production in 12 months is just incredible. There is much to celebrate here, and it could be the most successful network accomplishment in 20 years. There are major implications here, shifting roles of control, managing consumer identity, and of course a new “model” process for change in the future (no design by committee, let the banks comment after it is complete).
  • Paypal was thrown out of the Apple Pay deal… They were in, but they were thrown out. My guess (and this is purely an informed guess) is that the Issuers and V/MA gave Apple an ultimatum: you can launch with us, or with them.. your choice..  Enabling Paypal allows Apple and consumers to end run the card network.

Apple Pay and eCommerce

This Custora blog provides an excellent economic view of Apple Pay’s eCommerce impact. Today I wanted to comment on a few additional items which influence the dynamic:

  • Macro Environment – eCommerce
  • In app vs browser
  • Future: What if Tokens in eCommerce had card present rates/Liability Shift
  • Tokens + Identity kill fraud, but they also create a whole new biz strategy for CONTROL
  • Wallet = Trust
  • Platform: Partners and acquirers for acceptance
  • Other Strategies

Macro Environment – eCommerce

What is eCommerce? eCom is normally defined as buying physical goods in a browser. However, if your browser is an iPad or phone, this is typically categorized as mCommerce. I break mCommerce down into 3 major categories:

  1. Physical goods/services in a browser,
  2. Physical goods/services in an app, and
  3. Digital goods (songs, armor, movies).

eCommerce sales in the US are around $185B, while all mCommerce sales are about $20B. In a perfect world I would love to label ALL browser, and in-app purchase of physical goods/services as “eCommerce” and just track the consumer preferences in the app/browser that led to purchase.. but I might be alone in that quest.

The Apple Pay buy button is only available within approved iOS 8 applications (on iStore). This means that Apple will be focusing within the rather small “in-app” sub-segment of overall mCommerce market. This means that Apple Pay will have minimal impact Paypal, Visa Checkout/Cybersource , Masterpass, Checkout by Amazon, Google Wallet  or any of the other eCommerce payment specialists .. …at least not in 2015 (estimate is $5-10B max). Apple is the dominant mobile platform for “purchase” even though it represents only 18% of handsets), accounting for over 70% of purchases.. wow talk about a great consumer base!! Of course this “in app” only could all change in 2 ways: 1)  IF most retailers shift “sales” to APPs (like Target and Amazon) that exceed the functionality of browser based experience (ie App vs HTML 5), and #2 if Apple creates an eCommerce Apple Pay Button for the Safari Browser.

Custora_MobileShare_Brand_Aug2014_570px2

If online Fraud costs were the only justification for card not present (CNP) interchange, then logically the new EMVCo token process should eliminate the “barrier” between card present and card not present rates. But CNP rates are not based upon fraud, for example Google, Apple, Amazon, Paypal all have fraud rates hovering around 3bps, whereas the CNP to CP delta can be over 100bps. If you were in the room with one of these big eCom guys you would hear them tell issuers they want risk based interchange (aligning costs of acceptance to ability to manage risk). However, aligning the cost of payment acceptance to the cost of payment (and credit) provision is the crux of the merchant issues with card payment networks, particularly when the costs include loyalty schemes that do not deliver loyalty for the merchant (even though they pay the cost).

Banks are not keen to support Apple in creating great consumer experiences which they can’t control. For example, if tokens in eCommerce were treated at card present rates, they could be transmitted and exchanged in many different protocols (QR Codes, BLE, Wi-Fi, …). Tokens + authentication enables uncontrolled innovation in presentment and acceptance, thus destroying MERCHANT Incentives to support the bank driven uniform NFC contactless acceptance (ie BLE vs NFC) and uniform behavior (credit card, tap and pay), and limiting Banks ability to influence consumer behavior.

eCommerce Wallet?

eCommerce in US is a lumpy business where the big 3 rule over 60% of spend and processing: Amazon, Cybersource (Visa), Paypal/GSI (eBay). To re-emphasize, Apple Pay does NOT impact the battle for a ubiquitous eCommerce wallet, which explains why we see all those cool Visa Checkout commercials on the NFL games this week. The INDUSTRY’s eCommerce problem is eliminating card numbers stored in 100s of locations.

With respect to eCom wallet.. most consumers just scratch their head.. “Why do I need one of those”. Amazon’s one-click, Chrome’s auto fill, Paypal checkout, iTunes buy.. it just works. Why do I need something that spans across merchants when 90% of my spend is with one of these 4 already? Additionally, consumers don’t really care about security, because they don’t bear the costs of fraud. So we have a situation where Banks want to solve for cards stored everywhere, and consumers won’t take part. This means that banks must develop a merchant value proposition to TOKENIZE their cards on file (COF). Hence the prospect of a new rate structure for tokens in eCommerce.

Merchants may RUN toward tokenizing Cards on File if the recipe is right, however tokens by itself may not be enough to overcome the terrible history of VBV/MSC launch in EU (see my blog Authentication in Value Nets for detail). In addition to rates, Google has potential to bundle eCom payments with advertising (consumer acquisition),  Amazon could do the same, and Apple.. . Consumer win for eCom tokenization? Anonymity, consistency, security, ease of use, more targeted advertising. A funny battle over tokenizing cards on file is taking place right now. Each issuer is trying to work with Amazon, Google, Apple, WMT… to tokenize. Can you imagine trying to do deals with each issuer? with seperate proprietary “on ramps”.. This issuers are concerned that Visa and MA will take this token issuance/binding process away from them .. but I don’t see another way.

Who else could win the eCom “wallet” war? Visa! Their advantage? Brand, reach, marketing, Cybersource assets, rule making and acting as one of the only TSPs. Their challenge? signing up consumers.. and they seem to have the marketing muscle (and intent) to do it (V.me blog). Innovating in a 4 party network is normally next to impossible (see blog), but they have gained tremendous momentum in learning a “new way” to innovate through the Apple Pay experience.

This is a very, very major point.. and should lead V/MA investors to take a new fresh look at what these networks could accomplish beyond their traditional switching role. These are my largest personal holdings, so I am a little biased here.. there is so much upside.. but most of the future is dependent on tilting toward consumer and merchant.  In emerging markets, I expect these network will assess their regulatory structure: do they become a bank? An MSB? An acquirer? in OECD 20 markets.. An advertisers? A merchant friendly loyalty provider?… YES!!. This is the YEAR for a network pivot away from issuers toward consumers and merchants.

Strategies in eCommerce

I think about eCommerce with the context of an acquisition funnel. Where did the consumer start? Where did they finish? Today more product purchases start with Amazon than with Google.  Does anyone really thing Amazon wants to let another brand come in and help them (Sorry Chase Wallet). Where can anyone add value here? Amazon and Google may position that same day distribution of goods is far more important than payment (and I would agree). But perhaps the barrier for every mom and pop shop having their own self managed eCom sales site is fraud and payment acceptance. If Tokens solve for this, and help broker identity/preferences.. then EVERYONE could compete with Amazon, online retail becomes disrupted by taking away the advantages of scale. This model would be a huge boon to Google and Alibaba (they see a world of a million merchants and billions of products).

  • Payment Networks are working to take risk out of payment acceptance, solve for consumer anonymity and improve on their only weakness: no direct consumer relationship. Thus they endeavor to directly enroll consumers in a direct service offering to serve the eCommerce wallet role (see Battle of Cloud Part 3). I am very high on these efforts. Why? Because they have ability to create a new value proposition when coupled with their tokenization efforts. I predict within 2 years that we will see a new rate structure for use of Tokens in eCommerce .. something near CP rates.
  • Issuers are working to improve value to card holder and keep consumers within a Branded experience. JPM has created a new data division and purchase a card linked offer company. Banks are working to create their own “wallets” (Why on earth would a Amazon add a Chase Wallet button.. just plain stupid). Banks love the NFC and ApplePay token model where cards must be “provisioned” into a wallet. Banks thus control of which wallets to “authorize” and hide purchase data from the wallet provider.  Why would any merchant accept this? EXACTLY!
  • Apple, Google, Samsung, Microsoft working to make payments part of the OS (see blog). Payments in OS will impact “In App” first, eCommerce “browser” next.. authentication removes risk. This enables unstructured retail and disrupts marketplace concentration. I moved their strategy to the next section below (brokering trust)
  • Marketplaces like Amazon, Rakutan, Alibaba have integrated payment into their platform and are not keen to exchange Cards on File (COF) for tokens without a liability shift and risk based pricing. I’m slowing down here.. should be able to put a few more things in..
  • Paypal? Well.. let’s give Dan a little time here.

Brokering Trust (Platform strategy)

The ability of a mobile handset to authenticate consumers, and allow the consumers to delegate trust to 3rd parties (identity and secure data) will have major implications to retail, loyalty, payments, healthcare, social, MNOs, government, access management (see Brokering Identity). To understand the different strategies in this area, we must look at how tokens impact the existing model, who controls platforms/OS, who sees the data, where do consumers begin their product search (ie Amazon), who bears the cost of fraud, who is regulated?, what restrictions does entity have in collaboration/data? what is the consumers current behavior?, and who does the consumer trust to manage identity (see Who do you Trust?, Perfect Authentication – Nightmare for Banks, Token Assurance, KYC – $5B Opportunity, Authentication – Core to monetizing mobile).

Banks have historically played the central role in brokering commerce. They created the payment networks, and are central to many commercial payment processes we don’t see. Perfect authentication of consumers will completely disrupt payments, as the many new intermediaries can participate in risk (ex clearing and settlement). This is all happening at a time where retail banking is being turned upside down (WMT/GDOT Checking, Future of Retail Banking). The winner in this risk/identity battle will have the trust of the consumer and the ability to broker it against all possible market participants.  Merchant “trust” can NOT be won without a merchant friendly value proposition.. hence the problem for any of the eCom wallet providers. My view is that Apple and Google are better placed to execute here, not because they are more trusted, but because they know how to partner and move more quickly.

 

Brokering Identity – Part 1

12 Sept – Big Update Noon Eastern

I’m not going to do this justice.. I just don’t have time…

Previous posts on topic: Authentication in Value Nets, As I stated

Assume Apple has the best biometrics system on the planet, and Consumers trust Apple with all their credentials. How can non-Apple Service Providers use Apple’s Authentication service (pay them)? As I outlined in Who do you Trust(Sept 2013)

The “KEY” [prerequisite] in value orchestration is owning the Consumer relationship. Therefore Identifying and Authenticating the Consumer is the first, primary, service that must be owned by a platform.  What was a separate “Trusted Services Manager” in the NFC world has been co-opted by platforms which will take a proprietary route.

Apple just created a massive challenge for itself in retail by branding payments ApplePay (see yesterday’s blog). They have assumed the consumer – merchant broker role in a way that conveys with 100% certainty that consumers want to be anonymous. They took an “old world” view of payments vs a new world view of Value Orchestrator and Identity Broker. Yes it would be completely wierd to launch a consumer brand call AppleIdenityBroker.. But ApplePay doesn’t quite capture the #1 retailer challenge: knowing WHO their consumers are and interacting with them!?(see Rewire Commerce).

For example, Apple must deal with private label cards and store loyalty cards. In these models the retailers know everything about the consumer. Apple could just store these cards.. and act as a traditional container.. But that does not allow them to add value based upon the “trust authority” role they can now assume…. at least not in a primary capacity (appending a bio score/token assurance). In a trust broker role, Apple needs to think about allowing consumers CHOOSE to identify themselves and their data.. beyond just a token. My favorite commerce experience of all time is Square (sure they haven’t yet delivered.. but it is beautiful). Consumer doesn’t take the phone out of their pocket, but rather recognized at the POS and merchant greats them. Square Register checkout vision is just fantastic.. much better than a 8 year old “tap model”.. .

Apple should allow merchants to know consumer presence, within the control of the consuemr.. thus brokering a form of ID that is unique to every consumer-merchant combination. This would allow merchants to access past spend history, private label cards on file, loyalty cards, offers, …  They could also deliver an authentication service if the merchant wanted it.. some merchants think seeing someone’s face is good enough. The other side of ID broker is that the broker MAY NOT know the purpose of the exchange. For example, if Google did this, they may not know that it was to resolve a private label card, and the amount of the transaction. The Identity broker role is also free to create terms with the requestors of identity. Obviously consumers would see the terms and brokers that request too much will loose in the market compared to brokers that are more consumer friendly. These natural market mechanisms will support many types of economic relationships and retail business models. It is not one size fits all, and it also accommodate functions FAR beyond payment.

Now think about this identity broker role in the context of beacons. I can deliver static content with beacons (where I don’t know the recipient/destination) and deliver CUSTOM content (where I do know the consumer). Let the consumer make this decision… and make the merchant create enough value to make the consumer WANT to give up their identity. This is the way a platform should work. In the context of the Cloud, it is about bringing together the consumers “cloud” in 1000 different ways with the environment (merchants, doctors, … ). APPLE YOU CAN’T CONTROL this.. but you can intermediate the connection.

One of the primary reasons that banks gave into the ApplePay brand and 15bps is that Apple agreed to anonymity and they also agreed not to look at the transaction. Banks want to be in the trust broker role, and working to build significant data businesses. Here is my BIG MESSAGE: the transaction is OWNED by the consumer and the merchant, it is NOT owned by the bank. Either the consumer or the merchant can choose to let the platform know. The merchant has richer knowledge of what was bought, the consumer has richer knowledge of who bought it. Platforms should look to create this kind of open, flexible interaction (an approach that will make my bank friends have kittens). Here is another BIG Message. The platform could be ANYONE involved in the transaction (Square, Apple, Google, Verifone, FirstData, Visa, Mastercard, Amex). It is exactly what Amex is doing today with Loyalty Partners. Merchants are CHOOSING to give up data to Amex. The key for these new platforms: MERCHANT FRIENDLY AND CONSUMER FRIENDLY

Who is best placed? In the online world it is already happening…as we see Login with Amazon, Google, Facebook.. What about in physical world? Not yet.. a platform that is neutral to consumer and neutral to merchant is hard to monetize.. therefore.. I give the big advantage to Google…

Apple can pivot here, but they need a serious refresh on their team and approach… find a way to help your platform intermediate between merchant and consumer.. merchants have all the data and value.. consumers have all the behavior, decisions and payment..  payment is the easiest part. If you can’t move on the other parts.. you can’t get this thing to move at all. This is the problem with “mobile payments” .. no value creation beyond what the core cards do already today. Stop thinking about your revolutionary new platform does in today’s world (payment) and start thinking about how in can reshape it and a way that benefits EVERYONE (Consumers and merchants). Building a brand on top of legacy payment instruments with 10 year old technology.. sure… do that .. but make it just a feature.. the easy part.

There is a reason I’m spending so much time here.. the world needs a neutral party … (more to come on CommerceSignals)

 

 

 

ApplePay and Merchants

11 Sept 2014 – Remembering our loved and lost

Think about Apple: the world’s greatest consumer products company, maker of the world’s best most secure phone, coolest new watch, the best physical retailer ($/sq ft), holder of the most profitable handset, and the most profitable handset owners (demographic), the #2 brand in the world, the remaker of music, the inventor of new product categories, the platitudes could go on and on….  Apple did so many things right this week! Wow.. what a device! I mean devices.. !

What is the stupidest thing I could do here in this blog… really. Teach Apple a branding lesson!? Yep .. and I’m an engineer. Apple, please make sure that the Apple brand stops at the device.. Today “ApplePay” is accepted at any merchant that accepts Visa PayWave, MasterCard PayPass, Amex … There is no ApplePay acceptance mark that we know of.. so please lets keep it that way. My guess is that Apple is considering something here, this is the reason for the post. Logically, the reason Apple wants to brand payments, is that they want to change the payment process. As I pointed out previously, Apple has created a wonderful BLE experience, which the banks were not yet ready to support (with CP rates). My strong recommendation to Apple is to keep focused on the phone’s presentment of payment products across many protocols.. don’t create an acceptance brand.

As I stated in my blog this week, phones are becoming a commodity and evolving beyond how you orchestrate an individual’s life (music, photos, books, documents, mail, contacts, …) to how phone can help consumers INTERACT in their environment: Commerce, Healthcare, Fitness… With respect to the former.. Apple really doesn’t do much for retailers today. They don’t advertise, they don’t do much in maps and communication, they don’t do payments. In short, today Apple doesn’t bring a consumer into a store, improve engagement while shopping, build loyalty (to the store), or help with payment. Who helps the store with these activities? NCR, IBM, Micros, Oracle, IBM, Toshiba, Catalina, Datalogix, dunhumby, and a thousand others.

Given that Apple is one of the smartest companies in the world, my hope is that they have plans here that will become more fully known. Perhaps ApplePay was the consumer launch and that iBeacons and Accept ApplePay will be a new merchant launch. We can see from the enormous patent flow that Apple and Gimbal have put tremendous thought to physical commerce and iBeacons. But even if this is the case, Retail is a REALLY REALLY big space ($4 Trillion), for Apple to be successful in “Commerce” they must create a model where participants invest and other companies can make money too… After all, who would want to do business on the NASDAQ stock exchange if they captured 70% of the market’s value? Partnerships and extra-Apple value creation has been the KEY weakness of Apple.

Commerce Platform

When you build a commerce platform, the objective is to interconnect everyone. To interconnect everyone, you must have a case for “everyone” to connect, and a few open/defined standards. There are three basic approaches: a critical mass of buyers, a critical mass of sellers or remain neutral. Obviously, Apple operates on the consumer friendly “buy side” of commerce, and is consumer focused to its CORE. But buy side markets and networks are hard to maintain. Tilting too heavily toward any party is difficult (network effects), unless the consumer has already chosen your brand based upon the value you are currently creating. Amazon is the leader and great example here.. they are also buy side focused. Consumers GO TO Amazon to buy and Amazon CAN brand everything because the consumer entered their store with the objective of shopping.

The ApplePay rollout in eCommerce looks fantastic, with vendors like Stripe ready to help online retailers move today. ApplePay at the Point of Sale however is a big branding mistake (for Apple, banks and for retailers).  Retail is between a consumer and a merchant. Retailers attract consumers through product, promotions, price, or convenience.. each is different. Introducing a new consumer brand in retail that is BEYOND the retailers control is not something that makes sense..   not for a commerce orchestrator (Apple, Google, ..) or for the Retailer (in less than 18% of handsets). Whereas online, consumers entered the “virtual store” through their Apple device.. in the physical world.. Apple did nothing.. the consumer is not going through the Apple device. Thus my view is that ApplePay works online.. but not at the POS.. Whereas all other NFC solutions acted as a wallet “container” where a consumer purchased with the card of their choice, apple has branded the payment process..

Think about it this way: would starbucks throw out the most successful mobile payments application in the US in favor of ApplePay? No way! Why? Their consumers are using it..? sure that is one reason. But Starbucks demonstrates that merchants are best placed to deliver value, loyalty and drive consumer interaction in a way that benefits them. Apple has a rather poor reputation in working with partners, and agreeing to industry standards. Retailers considering ApplePay should talk to a few Apple peripheral manufactures on interfaces, standards, stakeholder influence and firewire. Apple can’t create an industry standard in ApplePay, it is probably not trying to either. In fact, for payments ApplePay is operating on the Visa/MA standards. Why would merchants want to allow Apple to build brand here? What is the FUTURE of allowing this brand in? Visa and MA don’t control it.. Retailers don’t control it.. and there is no commitment to industry standards where retailers can influence it.

As a commerce platform you can’t be biased. To create consumer value, you can’t push a consumer to a product, to a retailer, toward a payment method.. let the consumer decide. To create merchant value, you can’t push brand and proprietary connections in an area where you do nothing today. Remember the ApplePay product does NOTHING new that a current plastic card can’t do.. Visa and Mastercard acquired merchants with a new product 50 years ago.. cards delivered tremendous value: instant credit, open acceptance, defined standards, multi stakeholder rule making. Do you (merchants) want to give all this up for something that just holds the card?

What do merchants want? The MCX team are friends of mine. Their new CurrentC app may not make much sense to outsiders, but they are operating as an “Intel Inside” kind of model, a white label, “in the guts” kind of service that each MCX member can build around. Each retailer can customize how payments are done, how loyalty is done, how data is shared. ADS and Amex Serve also operate in this whitelabel merchant friendly model.. MCX may be a little bit dreamy.. and I don’t see a future where retailers will stop accepting Visa and Mastercard… but I certainly don’t see retailers jumping over themselves to let another brand come between them and their customer (unless it is VERY VERY neutral). Remember, payment works REALLY WELL .. there is no problem here (payment).

Merchants will want to have Beacons, but they want to support all consumers.. not just iPhone 6 consumers.. therefore Retailers will manage beacons they control (which will work across Android too). This means standards and open-ness. Merchants want mobile to work for EVERYONE in the store. From a platform perspective, support storage and transaction signing for any product/app. When I sign a transaction with biometics.. do I really need to call it ApplePay? Don’t you want everyone to build on your platform?

Apple recommendations

Apple, I strongly recommend adapting your commerce platform strategy to be much more like Intel’s. Open up iPhone 6 capabilities for others to use.. start talking up your APIs,  win in the handset.. create an ecosystem.  Think about it this way.. if ApplePay is the brand, who else will invest in making this work beyond you? Merchants will invest if it drives more sales,  higher margins, or if not doing it means loss of these. But retail is a zero sum game.. I’m not going to buy MORE gas and groceries.. so it is about switching in the flux.. once this flux dies.. so does your product.  This is not a long term commerce strategy.  Apple doesn’t need to build more loyalty with its consumers, and there is certainly very little upside (15bps) for the transaction. What Apple  needs to do: become the platform for commerce.

My recommendations for Apple

1) Break with rules and give strong hints that your merchant value proposition is coming.. soon

2) Hire some retail execs that can run with a commerce platform strategy, and move on the message

3) Create an IAL equivalent, and start working with MCX and other major retailers around the world.. LISTEN first..  find a way to make the iPhone work in Commerce.

4) Recast the ApplePay Brand as something that stays in the iPhone, and you are not going to push it on retailers…

Google..

Yes I have drunk the Google cool aide, yes I am one of their biggest fans, and they have been my absolute best client. So you can brush this off as pundit platitudes, but this is one of the few companies in the world I have ever seen where Fortune 100 companies CALL INTO and ask to meet with. Google is “in the Kimono” with every major Chief Marketing Officer on the planet, they have STRONG retailer relationships because they deliver value to retailers and manufacturers TODAY.    Thus, I maintain that Google is 5 years ahead in ABILITY to deliver value to merchants today: influencing consumers before they shop, engaging consumers while they shop, checking out, paying, support of private label cards, open platform for any app, no emphasis of Google’s brand in the store.   Google’s weakness.. retailer fear of data use.

This is actually the focus of my new company: CommerceSignals.. I want to find a way to enable 1000 new start ups, helping millions of retailers, MNOs and banks interact with consumers via mobile. Getting real time data is hard.. I want to make it easier.. for MCX, for Facebook, and for the next 1000 start ups. We are still in stealth mode, but more to come here shortly. (My investors not super excited I maintain this blog for fear of me pissing people off).

Banks

Congrats on tokenization.. what was rolled out yesterday was the best, most secure payment product in history.. I can’t wait to see this roll out in 100 other products and bank applications. Visa, MA and Issuers are winners here no matter what.

As a former Citi and Wachovia payments, mobile, internet guy I can assure you that banks were none to happy about the ApplePay brand. Remember Banks saw this future, and had a reason for resisting EMV chip and PIN. They created a tokenization initiative 4 years ago in the TCH to deal with this, with the hope of creating a new Visa. The bank mantra “if we have a token in the phone, we don’t want it to be a V token, or a MA token, .. we want it to be OUR token”. Logical … but I completely agree with Charlie and Ajay, that a token that wraps a V/MA card is still a V/MA card.. and there was no way for the TCH initiative to deal with the acquiring/acceptance.

The last time banks allowed a brand to tackle a new area of payments.. was PAYPAL.. and banks said “NEVER AGAIN”.. so much for that. My G2 says that banks took this same “Never Again” approach to the ApplePay brand until as recently as 3 months ago..  Apple won the game of chicken. I just can’t believe that banks are allowing Apple to BRAND payments.. it makes no sense for Apple either.. Unless perhaps they are buying FDC from KKR (this is a joke).

ttfn

 

iPhone 6 – Quick Thoughts

Super short blog.. will do better job tomorrow.

Wow.. Apple has just launched the greatest new consumer product since the first iPhone.. Per my blog, there is so much more to the iPhone 6 than what we saw. The iWatch was just a thing of beauty.. I think the entire presentation was a an A+ with one be fat D.  While the rest of the videos were world class works of art, the payment video was like they put it together yesterday… and we had to see it TWICE. Quite frankly it was the worst mobile payment announcement I’ve ever seen.. particularly for a feature that has been around for 7 years. It wasn’t until after the event that I read https://www.apple.com/pr/library/2014/09/09Apple-Announces-Apple-Pay.html and saw that the iWatch had an SE and could do payments too.. Why didn’t they lead with that.. seriously!! my guess is that this was the primary video but got pulled for sequencing the “One More Thing”. applepay

I had a nice call with Visa, and I know the MA team as well. The network planning on the tokenization is just tremendous.. No changes to the network, using auth messages as the mechanism for Issuers to approve and bind token. Apple token assurance information in the existing card data fields.. all just fantastic stuff.  Apple is the first implementation of the new EMVCo tokenization specification. In my view this is a giant LEAP beyond EMV chip and PIN, and is now (by far) the most secure PAYMENTS scheme on the planet. (Wish Apple said this instead of showing that old lady 2 times).

What are my big payment surprises?

#1. Apple branded PAYMENTS. Where Google and ISIS have a wallet. Apple has ApplePay.. they just wrapped the card network brands. I can’t believe that anyone allowed them to do this (rebrand payments).. but this is a BIG win for Apple, particularly as they work to “enhance” NFC acceptance with an eventual move toward BLE POS processes.. Yet, do Retailers really want to introduce yet another brand in store between consumer and merchant?

#2. Miserable fail for ApplePay in merchant value proposition and merchants on board. Google had all of these merchants on board 3 years ago.. all the acceptance numbers were just the generic NFC Contactless acceptance numbers. Apple did nada to loop in merchants today, and it will cost them. They could have highlighted terrific new consumer buying experiences with beacons, and BLE, .. but we got some old lady fumbling with her wallet. They showed NOTHING new that Google, Samsung, ISIS don’t do today (and 3 yrs ago). The only new merchant I saw on the list was Disney.. and I don’t think they will drive much high frequency (behavior changing) volume. Remember, Apple doesn’t really know how to play with others very well.. they are consumers first.. everyone else .. .who cares. Not great attributes of a value orchestrator. Also I, anxious to see how the Macy’s/Nordstrom/Kohls private label cards will be accommodated in token model (Citi/ADS are key).

#3 I LOVE ApplePay online.. the target demo was the only save from a solid F. Makes complete sense.. who will help 1000s of eCommerce merchants integrate? The PR says Visa/CYBS are on board..  BIG issues for eCommerce specialists.. as this new iPhone 6 takes on authentication and fraud in a brand new way.

Where I was wrong..

  • Looks like the 15-25 bps is at the low end of 15 bps..
  • I didn’t see Apple announcing a separate secure element chip.. I’m not the smartest knife in the drawer. Thought for sure the Secure Enclave would be the place for this.. someone enlighten me.
  • No Paypal.. anywhere.. so much for my consistent G2.
  • Where are the Beacons?  I’m very confident that beacons will be used to “wake up” the payment application on launch. Don’t know why not demoed. ApplePay merchants will likely get a pack of beacons and instructions for registering them (location)

Clarification.. I never, ever said that Apple would get Card Present rates for ApplePay eCommerce.. I said it was logical for them to ask, and that the banks said no. ApplePay at the POS is a network certified card present transaction. ApplePay for eCommerce is a Card Not Present transaction. Merchant costs DO NOT change for accepting a card at the POS. It is TBD if Apple wants to put a fee on the eCommerce transaction.

 

Will Merchants Adapt to Apple?

Guys… There needs to be trust building, value creation, and pump priming for this to take off. Merchants have to understand the value to them before jumping on board.. and anonymity… its not a great merchant value proposition.  Google was in a place TO PAY MCX to TAKE GOOGLE WALLET.. that’s right.. google had pitched an idea that would have brought all card acceptance costs to ZERO (as opposed to the full 180-240bps for ApplePay).. the merchants STILL DID NOT WANT Google to do it..  I’m telling you the story to help you realize how GIANT the merchant acceptance problem is. Can it be fixed? yep.. but it is a 5-10 year thing..

I don’t see any scenario where there is a fast start to contactless in the US, not without billions of investment in helping retailers build a platform to interact with the consumer.

I do think all handsets will have it (go buy NXP) and I see contactless winning at the periphery (coke machines, QSR, convenience). Why is it working in Europe? Their banks jumped on the EMV bandwagon long ago… interchange rates are more tightly regulated, and debit is accommodated more broadly (less merchant resistance).

START UP OPPORTUNITIES

  • Bring Apple Pay to Merchants..
  • Help retailers construct consumer engagement experiences with the iPhone 6
  • …?

 

Apple iPhone 6 – Winners and Losers

8 September 2014

Day before the big event tomorrow, therefore a good point in time to make some predictions and then see where I fall down. How did I get all this G2? Remember, payments is the worlds second oldest profession.. there are very few new ideas. This blog broke the news of ISIS/Mercury 1 year before launch, predicted Apple’s role in payments, … talked about why MCX was forming.  My G2 was not someone telling me what was going on.. it was looking at the pieces on the floor and predicting how it will work by making logical deductions surrounding constraints (and learnings) of each participant. Networks are very, very big and sticky businesses. Participants learn lessons and apply them to the next project.

Authentication, secure storage (in the cloud/phone) tokenization and a mechanism for allowing exchanging information (iOS Extensions) allow for so many new processes. Apple is the KEY (security pun)… perhaps that should be the blog title

  • Apple will have payment capability, but won’t spend too much time on it. Afterall, this feature has been in market with other handsets for over 3 years. Its not important to them financially, nor is it in the top 5 reasons a consumer would buy their phone. NFC is not their ideal use.. Apple had a fantastic BLE experience defined (and patented).. this is what they may demonstrate. With Square??
  • Apple will demonstrate other uses of the phone/security. For example opening a hotel room door with Starwood or Intercon
  • The iWatch will be capable of doing either of these through secure integration with the phone
  • Apple will have a “buy button” for eCommerce/mCommerce.. Paypal will be a key merchant acquiring partner here. Consumers that want to buy online and have iOS 8 will see a buy button and everything else will happen seamlessly (address, card information). Merchants will be able to keep their current processor.
  • Significant focus on consumer security and anonymity. Apple will be the “consumer champion” here, protecting your confidentiality online and in store.
  • Apple will announce new program to help merchants with loyalty. The job postings just coming out this week.
  • Apple will have a set of 5-10 merchants talking about why they are excited about iPhone 6.
  • Apple payments will be the most secure POS payment scheme on the market, supported by the new EMVCo tokenization specification.
  • I sure would like to see more merchant friendly solutions announced.. a long shot would be MCX within Apple’s wallet.

Winners in all of this

  1. Apple.. perhaps the most important handset launch since the first iPhone
  2. Consumers.  fantastic new platform for security, better screen, iWatch, payment, door opening, …
  3. Visa, Mastercard, Amex and Issuers. They needed someone to kick start mobile payments
  4. NXP, Broadcom, Qualcom/Gimbal. A new platform for hardware sales
  5. Application developers, a brand new way to access secure consumer information
  6. eCommerce/mCommerce sites.. a brand new way to pay for the most valuable consumer segment
  7. Retail system providers.. what do you tell a consumer in Aisle 12 looking buy X.. Retailers need that answer

Likely Winners

  1. Verifone/Ingenico. Contactless Terminal Adoption
  2. ?Carriers?. Tremendous iPhone demand is a double edged sword, particularly for a phone where MNOs don’t control a SE
  3. Affluent merchants. Ability to construct fantastic consumer experiences with Beacons (ie Nordstroms/Macys)
  4. Advertisers.. how will advertisers work with Apple in their new consumer champion role?

Losers

  1. Gemalto and the GSMA.. Their version for NFC is gone
  2. Payment specialists/startups. Payments are going to the OS.. there is a “different need” for specialists
  3. Samsung/HTC, … The only way for them to compete is to move closer to Google..
  4. Any company that uses a Mac Address or a card PAN to track a consumer…
  5. ?? I don’t like to focus on losers..

iPhone 6 – Apple’s Strategic Opportunity

8 September 2014

We are likely to see much innovation in the iPhone 6, but I suspect there is even more innovation that we won’t see. Purpose of blog today is to help my friends navigate through the coming tsunami of press, to what really matters. What are the things I’m looking for? If you are looking for a list of new iPhone 6 features in this blog.. you will be sadly disappointed.. I’m much more attuned to payments, network strategy, commerce, security/Auth.. admittedly myopic. Note payments stuff is in last paragraph

Tomorrow

Don’t get caught up in buzzwords like NFC, payments, tokens, BLE, Secure Enclave. Will it have a new security architecture? Yes, industry leading from hardware through firmware, OS and Apps.. Will the iPhone be able to do payment? Sure… Emulate a hotel door room key? Yep, in fact it could virtualize and emulate any chip card including the GSM SIM. Yet focusing on this stuff is kind of like talking about what the internet could do…  can I email my Aunt in Singapore? Buy a book from a seller in Seattle… The key questions for investors and start ups in the Valley is: HOW WILL THE iPHONE 6 CHANGE COMMERCE?.

Why am I excited about the iPhone 6? It is the dawning of a new age of mobile “platform”. This leads to the obvious question of: what is a platform, and how can anyone lead it? My favorite book on platforms is Platform Leadership: How Intel, Microsoft and Cisco Drive Industry Innovation. The authors provided a great model to assess the 4 Levers of Platform Leadership

  1. Scope of Firm: What is done inside, how they encourage outside investment and focus
  2. Product Technology: Architecture, Interfaces, Modularity, What do they expose to partners?
  3. Relationship with Complimentors: Support of Complimentors, acting on ecosystem needs, path to consensus and standardization, profitability
  4. Internal Organization: What is the “core”, and how are resources allocated to core activities vs support for partners.

Apple has a massive check mark in #2 (Product Technology), as they are 3-5 years ahead of every handset maker (integrated hardware thru OS and Software). How do we measure this lead? Admittedly technology is a little harder to quantitatively measure than financials and market share, so for the later: Apple captures 70% of industry profits (from 18% market share), #2 in consumer brand (behind Google), and #1 in retail sales per square ft. Most would agree its hard to get to these stratospheric numbers on crappy hardware.

On the technology side, Apple is the only vendor (since RIM) to have developed a secure mobile platform for biometrics, encryption, smart card emulation, …etc. All using a proprietary architecture from A8 Processor, Secure Enclave, OS, Apps and integrated into cloud services. For example, Apple has thrown the GSMA’s NFC under the bus in favor of their own unique design. I think of it this way: RIM started with security in mind and then tried to bolt on a browser and other features consumers wanted beyond secure e-mail. Apple started with the consumer and is now (with the iPhone 6) rolling out the most secure mobile platform in history. I believe Google is 18mo-3yr behind (with ARM/TEE and SE Linux) primarily because they don’t have the same HW control as Apple (see Secure Element, NFC, HCE, EMV, Tokens and Cards).

From a platform perspective the REAL question is Can Apple pull levers 1, 3 and 4?

Platform Leadership

Most all of us know the Microsoft/Intel Story (see reference). WINTEL’s pace of innovation crushed Apple by creating industry standards (ex PCI Bus) and allowing hundreds of companies to specialize on many subcomponents (dives, processors, applications) which further increased performance, decreased price and expanded usage… which in turn drove more investment. Intel’s Architecture Lab (IAL) was centerpiece of this success: an investment in defining and supporting the platform (ex the common infrastructure “bus”) that allowed for specialization and defined interaction (and accelerated Intel’s dominance). No one asked Intel to lead.. they TOOK IT (with great success). Leadership is not creating APIs and taking a 30% cut of revenue, it is recognizing that a business where 100s of companies can succeed is a much bigger business. This is particularly true in Commerce.

In physical commerce, I look at Visa and Mastercard as the best “commerce” platforms. This comment will draw ire from all my merchant friends, but it is factual (total volume processed). The beauty of the V/MA business model is that 1000s of banks invest (and merchants pay) billions of dollars to make this work. They have struck a tremendous balance between bank, consumer, and merchant. They have become the standard for interaction. One that will start to shift significantly toward merchants in next decade (for another blog).

With respect to platforms and mobile, I was in Hong Kong last year constructing scenarios with a major investment bank, with the key question: Where will value flow in mobile once handset hardware is a commodity? (Battery life, processors, screen resolution, are all good enough). What are the FACTORs of competition today? Can someone else change the game? I went through this analysis in my blog on Stage 4 Value Shift.

As we look for where the form of mobile competition may change, it would seem to be outside: hardware, software and network bandwidth. If hardware is good enough, and not the primary factor of competition, it must be software, services or data that will drive competition in the next phase… If platform is decided on software only.. then software platform with most open standard and most users (ANDROID) should dominate as any connected devices (handsets and everything else) have lower cost and more ability to “specialize”, particularly if intelligence is in the network (not the device).  But software is currently not the point of competition either… If not DEVICE software, or hardware, or network connectivity.. then what?

 

… Orchestration and Trust:  mobile phone transforms into the networked device “bridging” the virtual and physical world then value (and profitability) will shift from platforms executing transactions to coordinating interactions.

Apple’s greatest asset is its ability to change consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). Apple’s reputation is well deserved and earned “the hard way” by remaking: phones, music, mice, computers, apps, …etc.  Through consistent delivery of value within fantastic hardware delivering great (and fun) consumer experiences they earned trust for their products and brand. The greatest NEW opportunity for Apple to influence consumers beyond the individual (music/contacts/calendar) and eCommerce (browser, apps) to the real world: Commerce. Apple’s core gap? How will it allow for investment, specialization and define interaction of aligned participants.

Commerce Platform

I’m assuming Apple will get its consistent A+ in hardware, and there will be a bundle of new capabilities in the phone and connected devices (ie iWatch). But commerce is between a consumer and a merchant/manufacturer. What “platform” will exist to assist Merchants? What is Apple’s role in mediating platform (and consumer) with the merchant (beyond the app store)? How will Apple enable 100s of other companies to invest billions of dollars to make its Commerce Platform the centerpiece of value orchestration? Beacons (see Apple iBeacon Payment Experience)?

Google, Amazon, Facebook, all organize millions of businesses, and billions of consumers. Apple is missing the business side… in a BIG way (remember iAd). From a network strategy perspective, Apple has created a consumer focused nodal platform (vs hub centered orchestration). They certainly have the opportunity to create a hub (ie iCloud), but their hardware centric organization may keep this from maturing (Lever 4). Thus Apple is 5 years behind Amazon, Google, Facebook in delivering value to merchants, and orchestrating Commerce. As I stated above, handsets are becoming a commodity, Apple’s new handset will not lead in screen resolution or battery life.. consumers will start to look at the VALUE it provides in connecting to other REAL WORLD businesses.

A January 2001 Harvard Business Review Article: Where Value Lives in a Networked World put it this way:

In more general terms, modern high-speed networks push back-end intelligence and front-end intelligence in two different directions, toward opposite ends of the network. Back-end intelligence becomes embedded into a shared infrastructure at the core of the network (cloud), while front-end intelligence fragments into many different forms at the periphery of the network, where the users are. And since value follows intelligence, the two ends of the network become the major sources of potential profits. The middle of the network gets hollowed out; it becomes a dumb conduit, with little potential for value creation. Moreover, as value diverges, so do companies and competition. …. In a connected world, intelligence becomes fluid and modular. Small units of intelligence float freely like molecules in the ether, coalescing into temporary bundles whenever and wherever necessary to solve problems.

where value lives

Apple’s strategic opportunity is to orchestrate these information bundles and consumer insight in a way WHICH THE CONSUMER CONTROLS. This was the focus of my previous Apple Strategy Blog: Apple’s Platform Strategy: Consumer Champion.  Unfortunately, it seems that Apple’s management team may be so hardware focused that they are missing this opportunity. Retailers like Nordstrom, Macy’s, CVS, and Starwood will show (tomorrow) how excited they are to work with Apple. But Apple needs a version of Intel’s IAL, that is focused on Retailers, Gimbal and Commerce.  Actually, I believe Apple’s gap here is so large that they must find a way to partner/acquire someone else in this space (not paypal). This is a $100B opportunity, and if Apple doesn’t move on it, it will be left competing on screen resolution, and hyper sensitive affluent consumers seeking data privacy.  (Note to Apple, one of my companies would love to pitch you a few ideas here).

My top strategy questions for tomorrow

  • Does Apple see strategic growth for iPhone as working in real world (Commerce)?
  • What level of investment/support will Apple give to “community”? How (IAL)?
  • Where does Apple “Stop” and partners “stop”
  • Apple’s organization.. anything changing? Is it still H/W dominated?
  • Apple’s phone is no longer differentiated by external features.. so what is different and why is it valuable to consumers? Merchants? (Can Tim articulate)
  • Does Apple see itself as the Consumer data/privacy champion? How do you monetize anonymity?
  • How will retailers work with Apple?
  • How will beacons be supported?

Security, Authentication and Anonymity

The biggest features we will see (IMHO) surround  how Apple is completely reworking the role of authentication and security in the platform (see iPhone 6 Secure Enclave, great article from Networked World). Apple’s proprietary mechanisms for “smart” card emulation (credit card, hotel door key, transit pass) will impact many, many industries (see Authentication in Value Nets).  Apple has ROCKED THE CART substantially with this capability. My guess is that they will demonstrate the obvious tomorrow with contactless card emulation (V/MA/Amex) and security keys (Starwood hotels). The much more sensitive area is virtualizing the GSM SIM. I believe the iPhone 6 is capable of virtualizing the SIM, I have no idea if they will demonstrate the capability.

From a consumer perspective, the big changes will surround Apple’s efforts to limit ad tracking will significantly impact advertisers (see Tech times ). I believe there is hidden genius here as they turn themselves into the ultimate consumer protector… both online and in the physical world.  They are the gatekeeper and orchestrator… the only entity that can know what a consumer is doing. Question is can anyone else work with Apple (and the consumer) to request that the gate be opened. For example, will Apple be the primary publisher (please send phone ID 187349387 the following message .. and Apple approves).

Payment Stuff

Most of my readers are in this area.. so sorry for saving this till last. I described how payments will work in the new iPhone back in March: Apple’s iPhone 6: GSMA’s NFC thrown “Under the Bus”. The key innovation in iPhone 6 should be credited to Visa and Mastercard: tokens. No longer will Primary Account Numbers (PANs) be sent in the clear as we have with EMV, and NFC today (I know, hard to believe.. see this blog for background). Now if someone steals your phone.. and breaks Apple’s unbelievable security.. they have a number.. that is COMPLETELY worthless.. they can’t use it anywhere.  At time of manufacture and OS load, Apple has loaded 6 tokens: Visa credit, Visa Debit, MA Credit, MA Debit, Amex, China Union Pay, (and perhaps a few backups).  These numbers are locked up in the secure enclave, they are 16 digits long and are BINs that processors can route to the appropriate network. The networks operate as TSPs (Token Service Providers) and map the Tokens to the Actual Bins. The primary key for the mapping is Token, plus Token Assurance Information, plus Phone ID.  Technically.. everyone of us could have the same exact 16 digit token and Visa/MA/Amex could still map the correct card based upon the other unique information.

My biased view is that the networks emulated what Google (under Osama Bedier) put in place 3 years ago as Google also operates this Token environment within their TXVIA acquisition. The big plus for Google is that the consumer can register any card they want, as Google does not charge the banks anything.

The biggest “surprise” over last 2 months is that Apple has squeezed 15-25bps from the 5-6 participating banks at launch (C, BAC, COF, JPM, Amex and perhaps WFC). The challenge for phone wallet companies has always been there is no economic model for them. Banks know that wallets will not work without cards.. for example Apple has little chance of success if Chase, Citi and Cap One don’t participate. Thus someone must have “blinked” and the others followed. No one wants to be left out of the Apple launch. Thus to participate in the Apple wallet, Issuers will need to cough up the fee to Apple. There are 3000+ issuers in the US.. so this may be a little challenging on the consumer side. I also have firm G2 that BAC, C and possibly WFC will enable debit cards (have no idea how these will be priced).

My G2 tells me that the Issuers refused to give on CNP interchange, so even though Apple has tokens and can sign them with same assurance information a “tap” at the POS will have a different rate than an eCommerce/mCommerce CNP transaction. One of my bigger unknowns is how Paypal will play in all this launch. I understand Apple is near launch of an “off Apple” eCommerce payment scheme (?EasyPay?).. will Paypal be the merchant acquirer and white label a PayPal like button (pay with “Apple”).

Strategically, Payments are moving to be part of the Operating System. What does that mean? See blog. My favorite payment quote is from Ross Anderson at a Federal Reserve meeting. If you solve for Authentication in payments, everything else is just accounting. This is a key example of how Apple has the potential to completely turn the world of payments upside down. For start ups this means that payment is no longer a specialized function, just as TCP/IP was not in Windows 95 launch.. and became part of the standard stack.. so are payments with iOS and Android. There will be no more Paypals in the future.. A key WIN for Visa, Mastercard and Amex is that Amazon, Apple, and Google are all of one mind: Let consumers pay they way they want to pay.

Arcane payment stuff. I’m more than a little interested in how Apple will actually get paid beyond the honor system. Card emulation applications have no idea who they presented the card to, or size of transaction. Visa/MA/Amex will be able to track transactions, but don’t know of any formal facility to pay a wallet company within the settlement stream, meaning that the issuers will be cutting the check based upon data that only V/MA and/or the issuer themselves have. So beyond the pure “TSP” role, is there also a role for wallet settlement in the overall V/MA scheme. Optimally, issuers would have one way to register cards for participation in any given wallet, this was a significant flaw in the NFC TSM card provisioning flow. It would be very smart for V/MA to take this on. In other words a new V/MA process for registering card/token scheme/Assurance information/approved wallet (ex HCE).

Merchant Acceptance

My view is that the MUCH larger problem for Apple is merchant acceptance. As I outlined in Apple Payment Experience, Apple did not want to launch within network contactless specifications, they wanted certification of BLE.  Apple presented its solution back in August of 2013 and the issuers went “nuts”.. going to V/MA telling them “You are going to let Apple own the PATENT for how a card goes from phone to merchant.. I thought that was your job”. Thus we see the press release on tokenization in Oct 2013 that came out of no where.  The networks did not want to fragment acceptance infrastructure and give merchants the opportunity to accept Apple BLE and not NFC.

There will be 2 or more merchants moving from MCX to Apple tomorrow, one rumored is CVS. Of course they could still accept MCX, but rumor is MCX agreement precludes other forms of mobile payment acceptance. Payment acceptance is no peripheral battle to merchants. This is a VERY VERY big deal and I don’t believe Apple understands it at all. Net margin in retail is around 2.6%, so taking a 225bp card is VERY MATERIAL. Retailers tell me that mobile is the #1 thing they think about in strategy, and they are quite confident that they are in the best position to influence consumer adoption and value creation (ala Starbucks). My hope is that Apple can work out its desired BLE experience directly with MCX retailers.. and let the merchant/consumer decide how all this works. See  Value Creation and Distributed InnovationStatic Strategies and the Rewiring of Commerce and in Future of Retail

How will the iPhone 6 Change Commerce?

Remains to be answered pending Apple’s platform support strategy. Where does Apple see its role in value creation? (Or does Apple just see a role in consumer protection?) The Google, Amazon roadmap is much clearer to me.. I don’t want to buy into a hardware company.. hardware is becoming a commodity, value orchestration is the $100B+ opportunity.

This is not a clean wrap up.. but my football game is on and I want to watch it.

 

 

 

iPhone 6 – Payment Update – Sept 2014

Super short post that summarized my 20 odd tweets this week. Frequent readers should skip to last section “New G2”

Feel 100% comfortable with my March Predictions iPhone 6 – Payment Predictions, only thing I missed was release date (September 9th… not October).

Looks like Apple got squeezed into the bank box. As I related in Apple… Payment via BLE/Beacons will still happen (but when is issue) Apple wanted to launch the payment product with BLE (not NFC) but existing payment networks didn’t want to cause merchant chaos in fragmentation of acceptance infrastructure.. so pushed apple back into the NFC mold.  The payment experience is as I outlined in May Apple iBeacon Payment Experience. I don’t see ereciepts as part of launch.

Also confident in my predictions that Visa and MA are running the TSP (see iPhone 6 – Payment Predictions)

 

  1. Consumer walks up to cash register, a payment terminal beacon provides information to Apple payment application that it is close proximity to payment terminal ID xxxxx (TID),
  2. Merchant scans goods for purchase. No mobile processing of loyalty, coupon, discount information
  3. Merchant payment terminal cannot send total amount due since it does not have Apple handset information/UUID. So how will Apple do it? My guess is Apple will provide UUID to the Payment Terminal via BLE at application wake up to perform a “lite” checkin with payment terminal. Good news is that there would be no data connectivity requirements, but it requires a new payment terminal… For everyone else.. there is no total amount due (99% at launch).
  4. Legacy NFC. At application wake up,  phone asks “pay merchant with Apple wallet”?
  5. Consumer validates transaction with fingerprint biometric
  6. Consumer taps phone (NFC) and Card token presented Payment Terminal via NFC Merchant processor routes token to payment network which translates and routes to bank for authorization
  7. Payment is authorized (as happens today).

NEW G2

  • Launch customers in payment likely to include Macy’s and Nordstrom
  • Apple will also likely launch with Starwood Hotels for hotel room door key provisioning (as I tweeted last week)
  • Apple was able to get 15-25bps from top 5 issuers (JPM, C, COF, BAC, Amex). These are the only issuers that will work at launch. As part of this fee, Apple will release token assurance information (see Token Assurance – Updated)
  • Apple will also launch an eCommerce/mCommerce buy button in EasyPay. This will NOT receive any card present or preferential rate. This is less a function of in App purchases and more a function of 3rd party ecommerce sites having a EasyPay button for fast IOS checkout. Will in App purchases have this as well? Good question, seems logical
  • The following cards are provisioned into Apple’s secure enclave at time of manufacture/OS loading: Visa Debit, Visa Credit, MA Debit, MA Credit, Amex, China Union Pay.  (NO DISCOVER)

Unknowns

  • What will apple do for all the iTunes cards not from one of the top 5 issuers. That will be a rude experience. How will they enroll 3000+ issuers into this scheme and get each one to cough up 25bps
  • What is pricing on debit. Technically everyone will support debit, but no one is incented to make it work.
  • Don’t know how Paypal will run in this model.. so this is a mystery, particularly with launch of EasyPay.. will Paypal be a whitelabel here? I am confident that Paypal will be part of launch.. what I don’t know is how..
  • How will Apple ensure they get 25bps from the banks, they have no insight into the transaction.. the card is presented and that is the last Apple sees of it. This has been a problem for other wallets as well. It is one reason why google created the proxy card.. to see all the transactions.

Updates Sept 8

  • Enrollment, looks like Banks will be supporting a BarclayCard/Google Wallet like enrollment process from within online banking.. This is very, very smart.
  • Bank of America, Citi and Wells are all rumored to be supporting Debit card inclusion in Apple wallet day one..

barclaycard-save-to-google-wallet