US Payment Innovation and Regulation

A core “investment assumption” by TCH banks was that “regulators” were going to force the use of tokens in the US. As a primary means for meeting obligations under BSA/AML. The “value proposition” pitched to pilot participants was thus “regs are coming which will drive PayPal out of business.. everyone will be required to tokenize.. pilot participation means you can have a jump on everyone else.” Obviously this has not been the case..

29 Oct 2013

Short Blog.. will update next week. Sorry for Typos

Is anyone else struggling to see the logic of Bank led token initiatives? These folks are smart people.. we obviously see why they want to do it (control)… but they are smart enough to construct some kind of value proposition. It’s not as if they can MAKE every merchant and wallet service convert.

Well… this is NOT necessarily a good assumption (value proposition). I met with a few folks this week, each touched TCH SecureCloud.  A core “investment assumption” by TCH banks was that “regulators” were going to force the use of tokens in the US. As a primary means for meeting obligations under BSA/AML. The “value proposition” pitched to pilot participants was thus “regs are coming which will drive PayPal out of business.. everyone will be required to tokenize.. pilot participation means you can have a jump on everyone else.”  Obviously this has not been the case..

The Banks wanted to start with tokenizing eCommerce Cards on File (COF), as this enabled them to keep the favorable credit card mix (75%+ credit) in a new mobile world. If would have been much easier if they just pushed all of the consumers approved payment products down to Apple, Amazon, Paypal, Google… but Banks don’t really want consumers to have a choice.. they want friction and fear in debit.  This Credit on Mobile Strategy may not be a STATED goal of TCH tokens.. but it is certainly a corollary which Banks don’t care to address.

Visa/MA/Amex did an end run on Bank token plans with a proposed interoperable standard. It thus seems that the 20 odd Bank TCH token participants will give the utility to the networks, with the hope that there will be a continued credit focus. What will TCH do? Probably be a standards body of some sort, and be the token authority for things like ACH.

The ACH LOCKDOWN strategy had 3 prongs: NACHA Rules, Regulation, and an alternative. See related Post around NACHA Rules. With respect to alternative.. this is the driver of Clearxchange, a real time ACH that circumvents NACHA…

One of the Bank leaders quipped “in 5 years we hope to put Paypal out of business in the US”… implying banks could lock out non-banks in riding ACH rails. This would also have significant implications to MCX… My view is that there are ways to get around all of these grand plans IF they ever materialize (ie Bank partnerships).

All of this seems a little too smart, too complex, too dependent on regulations by a regulator that isn’t really doing much to help Banks these days.

Message to Regulators.

PLEASE DON’T FORCE TOKENS.. but rather allow risk to be owned by non-bank entities (ex MSBs) originating transactions. There are so many new ways to mitigate risk and authenticate a customer. Mandating tokens will kill innovation and keep control locked inside intuitions that innovate at the rate of glaciers.

Reminds me of a joke. Did you hear about the Bank mobile SVP that tried to commit suicide? He threw himself in front of a Glacier.

Authentication is key to unlocking billions of dollars in revenue and bringing enormous efficiency to the market… allowing for the REWIRING of Retail, Advertising, Commerce.

Regulators should not focus on payment tokens, but facilities for managing distributed TRUST and AUTHENTICATION. Allowing other entities to assume risk in payments. This may mean creating new quasi bank licenses (regulated trust authority) or a new federally approved MSB that does not hold any deposits. A first start may be to open up Fed Wire to non bank participants. With ability to take risk on settlement funds.

I actually agree with Banks in their token plans.. IF they are ultimately accountable for EVERYTHING.. they must control EVERYTHING.


Authentication – A Core Battle for Monetizing Mobile

Those of you with more than 15 yrs in the industry will remember dedicated T1 lines that moved data in secure pipes from one location to another. We now have VPNs, transaction signing and encryption that allows for use of generic pipes between COMPANIES. Authentication at a USER LEVEL will now permit yet a finer grained LEVEL of Secure Services and Data ACROSS companies. Today we have Cloud services from Apple, Amazon, Google but how do you navigate amongst them? How can a Start Up develop services that SPAN them? Authentication and is Key…. And MNOs may be best placed to deliver this service.

16 October

I was delighted to see yesterday’s announcement on Verizon’s updated authentication efforts (UIIS), the American Banker Article pointed to a consumer focus,

“We want to be the world’s largest identity provider,” says Tracy Hulver, chief identity strategist at Verizon Enterprise Solutions.

I’ve always held this is a tremendous opportunity for MNOs given their distribution, ability to physically site and verify both consumer and phone, as well as their network management capability (ex. know where the device is). In fact one of my oldest blogs (4 years ago) laid out the high level opportunity.

What are some of its problems on web today? Junk mail, Spam, Phishing, Pharming, Trust, Fraud, Passwords everywhere, card numbers everywhere, consumer data/cookies, beacons, …  much of this is caused by ubiquitous anonymity. Consumers should have the right to be anonymous, after all I don’t give a physical store my ID when I walk in to shop.  But what if I wanted to be known?

Remember the early visions of “web services” A technical panacea where I could combine distributed processes from multiple providers acting on distributed data. Much of this never came to fruition because there was little trust, no service levels, and no way to distribute revenue.  Web service architecture took off fantastically within an organization… but corporate success required  resolving the issues above (as well as securing the pipes).

Those of you with more than 15 yrs in the industry will remember dedicated T1 lines that moved data in secure pipes from one location to another. We now have VPNs, transaction signing and encryption that allows for use of generic pipes between COMPANIES. Authentication at a USER LEVEL will now permit yet a finer grained LEVEL of Secure Services and Data ACROSS companies. Today we have Cloud services from Apple, Amazon, Google but how do you navigate amongst them? How can a Start Up develop services that SPAN them?  Authentication and is Key…. And MNOs may be best placed to deliver this service.

What problems could authentication (via mobile) “solve”?

#1 Payments – Of course this is the top of my list. My favorite quote from Ross Anderson “if you solve for authentication.. everything else is just accounting”. Think of how much bank infrastructure is dedicated to authentication of the consumer and risk/fraud management. This infrastructure was built over last 30 years because there was VERY poor ability to authenticate a consumer (ex. signature and possession of card) AND inconsistent CONNECTIVITY at each commercial “node” touching the transaction. Today we have complete connectivity, but the MODEL has not evolved from its archaic past. I could write a book on this topic alone. A key REQUIREMENT for authentication to IMPACT payments is that ALL ACTORS (Bank, Retailer, Regulators) must RECOGNIZE and TRUST the services of the AUTHENTICATION PROVIDER. I would love to see the Fed lead here in creating a certification process…

In a perfect world, the following happens

  1. Legislation to create requirement (by Banks) to: recognize independent authentication services which comply w/ Fed, clear authorized payments in under 24 hrs, absolve banks of compliance responsibilities for authenticated payments (if they don’t own authentication).
  2. Fed creates Payment Authentication certification, requires banks to keep Auth at transaction level and absolves banks from compliance issues for authenticated transactions (assuming authenticated party was NOT on an AML list).
  3. Banks adapt systems to comply, or Fed enables transactions directly in a new real time service (with integrated authentication per transaction).  This is what happens when international banks provide remote consumers wire transfer capabilities (as in James Bond)
  4. … 10 yrs later…

#2 Fraud. Medicare, Obamacare, Welfare, Pension, …  A phone with integrated biometrics could make a very significant dent in $80B of false claims (FBI estimate).

#3 Better Auth leads to DUMBER PIPES. Look at what happened to our economy the last time we had a generic network where anyone could build.  Better authentication will allow us to REWIRE COMMERCE… with the Banks as a primary loser (note I spelled it correctly today).

#4 New Services. A corollary to #3. Integrating cloud and data across providers and across platforms.  The realization of an early web services vision… Consumers could have control over provisioning and “orchestration” of their data. For example allowing health care data to be shared with doctor (for second opinion), or allowing merchant transaction data to be shared with Google or Proctor and Gamble for a fee.  The receiver must be able to trust both the consumer’s permission and the source (3rd party validation). … Possibilities are endless (and exciting).

#5 Digital Signatures. Applying and COMPLETING a loan application, college application, commitment to purchase, contracts, licenses. Enabling the US to catch up with Singapore on eGovernment, and making our lives easier. Improving the ability to open new accounts also increases competition as intuitions must compete for our business daily.

Other thoughts appreciates.

Not on my Rails

We now see network resistance “Not on my rails”. Why on earth would Visa or MA want to let a Token ride on their rails? Perhaps the best example of “Rail” ownership is First Data’s refusal to support routing and processing of any Paypal/Discover BINs

In last year’s post “Don’t wrap me“, I described how issuers were responding to having their cards “wrapped” by Digital wallets and new Plastic aggregators (Serve and Paypal). Examples:


  1. Paypal’s plastic. MA established a Staged Digital Wallet fee of 35bps, when its card brand was not used at the POS, but was the funding instrument for the transaction.  Amex and Visa also pushed back, although I don’t have details on rule changes here, they made clear that they wanted their brand at the POS.
  2. Serve. Hit by similar issues above,
  3. Google Wallet/Plastic. Visa reportedly issued a cease and desist to Google at the behest of Chase (See NFC Times)

All of these wallets (Virtual, NFC, Cloud, …) led issuers to wonder “what card is top of wallet”?.. and how does a customer select my plastic. Issuers have been (to date) the drivers of rule changes and resistance. They seem much more concerned about one physical plastic card wrapping them (ie Serve and Paypal) than a virtual wallet, but they are also very concerned about data (see blog). Letting a new intermediary see transaction data (and add offers/services on top of them). In other words “DON’T WRAP ME” (see blog Paypal at POS).

Issuers subsequently got together and developed the concept of tokens (see Business Implications of Tokens). The summary: IF issuers had the opportunity to give the customer an account number in a digital wallet. Why would it be a Mastercard, or a visa card number? They are thus working on a system for distributing 16 digit tokens which they own and control (see Secure Cloud PR from TCH).

We now see network resistance “Not on my rails”. Why on earth would Visa or MA want to let a Token ride on their rails? Perhaps the best example of “Rail” ownership is First Data’s refusal to support routing and processing of any Paypal/Discover BINs.  This means that every new “Home Depot” or “Jamba Juice” Paypal signs up must be serviced by a supporting processor (like Vantive).  Making your merchants switch processors in order to accept a more expensive payment instrument (240bps compared to debit pricing of $0.07-0.12) would seem to be a difficult sale. Quite frankly I didn’t see the weakness of Discover’s 3 party network until now.. it only acquires directly for top 100.. and is dependent on many other acquirers. Amex does not have this problem… paypal home depot

My guess is that Visa and MA will also throw up walls soon, but not sense in doing it now.. let the banks work feverishly to build a token machine.. only to find out that the tokens don’t fit in any “slots”.  The only bank globally to have worked all this out is JPMC with its new Visa deal, which bifurcates VisaNet to a new Chase version. Of course the other issuers will eventually ask for same… but these are 5 yr cycles.. All of this means V and MA will continue to rule the mainstream, and that any new competitor must have network control, issuer control and merchant control.

End Game

These rule and ownership battles make my head spin. Investing in this space is not for the faint of heart.  Perhaps the best way to really “change” payments is to first ride existing rails and establish a fantastic consumer/merchant value proposition .. THEN move that solution to a different network… or better yet enable a switch where payments are cleared on a least cost routing basis (like switching IP traffic).

Hopefully the Venture Community is aware of these pitched control battles: Network, wrapping, secure element, trust, card present, tokenization, … But information certainly does not flow well here. Just this week I learned of a start up about to launch a new P2P service built around Visa Money Transfer … allowing a user to “instantly” move money to another account.  Unfortunately they didn’t read my 2.5 yr old VMT Blog, or ensure it would work at ALL of the top 5 retail banks.

… I don’t have time to lay out the scenarios here.. but I like investment thesis that recognize DEBIT as equivalent to ACH…new rules may bring cost down from $0.21 to $0.07… Although PIN Debit and Signature debit both cost the same),  PIN debit is not routed through Visa/MA and operates under separate rules. For example, I love the way First Data and Cardspring are leveraging STAR for non payment data.. without any issuer participation. a VERY good model. Thus I see PIN debit as a ripe area for both for merchant led payment products, and for new bank products.

Issuers are just fuming over the fact that AMEX is completely untouched by Durbin and EU SEPA pricing.  Which is why I see Wells Fargo’s move to Amex as “possibly” strategic… is wells switching railroads? with a first “test” of affluent?.

Payments Part of OS: What does that mean?

Payments in the OS is perhaps best described as the intersection of the 2 major disruptive forces at work: Connectivity of Consumer and Merchant during shopping and purchase, Authentication. As I outlined in Cloud Wallet, it makes little sense to store anything in the mobile phone. If everything is connected, I should just need to authenticate my identity and payments, promotions, reminders, receipts, … everything else could happen in the background. If everything is connected, the nature of payment settlement risk changes (see credit push).

28 July 2013

Continuation of Friday’s Blog BIG Changes to NFC: Payments Part of the OS.

In 1996, I remember launching the first Client Server application for FirstUnion (Smalltalk, OS/2, Win 95).  I had left NASA just 2 yrs prior, and having a Sun Sparc, connected to Arpanet on my desk since 1987 had spoiled me..  The Win95/LAN environment was not designed for engineering… it was a poorly assembled toy for business. It didn’t have native TCP/IP in the OS, actually Microsoft itself didn’t even offer the protocol, I had to install a third party vendor stack on over 2000 PCs around the bank.  Hard to believe this was just 15 yrs ago.. MSFT seems to have embraced a few changes since then, and what was “outside” its platform is now part of it.

The same platform “integration dynamic” can be seen in: video boards, laptops (remember the external slots), mobile phones (Cameras, Bluetooth, Wifi,…), and now NFC from a dedicated NXP chipset to Integrated chipset (ex Broadcom BCM43341, plus firmware).  Most of my readers are not hardware people, so in layman’s terms.. dedicated hardware and software are merging into integrated “platform”.  Mobile phones are thus evolving. from telecom, to Toy, to entertainment, to COMMERCE CAPABLE, connected, devices beyond the browser.  For those interested in reading further, one of my top 10 business books is PLATFORM LEADERSHIP, a tremendous read.

The title of the book above is a great transition into the meat of this blog: Platforms require leadership.  Apple needs no lessons here, as they view stewardship of hardware, design, OS, app store, experience as core to their company. The “distributed” innovation model is akin to WINTEL, where generic industry standards were set, and again we see a core group (this time Google/Samsung/MOT) leading definition of a new platform, against a vision of MNOs (who customize and subsidize Android).  As hardware becomes a commodity, differentiation shifts to orchestration and network applications, this requires a central “orchestrator”.   MSFT itself shifted into this role in PCs, but Orchestration success is dependent on the number of nodes you touch.. and MSFTs nodes are still PCs, thereby allowing Google and Apple to more rapidly gain on their already advantageous positions.   

One way of look at the chaos in payments is to see existing players attempt to create an orchestration role across platforms. Google did this in PC search in 02. Payment Clusters attempt to leverage old nodes (Cards) and current market position to form a new orchestration role (or platform) where others will coalesce (ex: See Network War). Examples: Telecom and ISIS, Visa, Amex, US Banks, Retailers and MCX, Google, Apple, Qualcomm (old),  (links for each of my blogs discussing).  For example, existing beneficiaries of current interchange model are working to retain their 2% tax on commerce (in consumer credit). Among Payment Players, Amex is furthest along here, as they can uniquely help merchants know who their customers are … and market to them.  Visa is working to build services around cards to increase “stickiness” and barriers to entry/change, Banks and retailers are working toward the same goals. All participants realizing that payments in and of itself is a rather ubiquitous service with many different options. The central problem for all of these initiatives: a SUCCESSFUL PLATFORM must deliver value to ALL participants. For Payments, the problem to be solved is COMMERCE.. a rather long process of which payments is only the last, easiest part.  Network Clusters

Focusing on payments, the NFC “platform” provided a way for a telecom/TSM to “control” a user’s data, and a radio on the phone. NFC is great “walled garden” strategy for the MNOs.. but why would anyone want to support an MNO holding the “Key” to mobile commerce? MNOs created a great technical solution without a supporting business model (see Carriers as Dumb Pipes). Mobile is uniquely positioned as the point of confluence between the virtual and physical world, a platform of untapped value to date.

Commerce Services

As I stated Friday, Mobile Platforms (Apple/Google/?MSFT?) recognize the key to margin in an undifferentiated hardware world is in Orchestration/Services. Platforms can’t afford to give the keys to this Platform away to anyone, and are thus integrating all commerce functions into the platform.  Take for instance the service of AUTHENTICATION, this function is critical to both physical world commerce and virtual world (cloud access, pictures, music, online services). Commerce services from advertising, to in-store marketing, and obviously to payment. Thus Google/Apple’s M&A and R&D activity in the space.  Diagram_android

Many of my own “bets” are locked up in the “other services bucket” within the platform, and therefore I’m not able to comment much further here. But as an example, think of the primary categories: infrastructure HW/OS (legacy telecom, embedded SIM/HW mgmt, authentication, location, connection management, secure storage, data management, authorization…), Platform Services/APIs (Administration, Service provisioning, data access, hardware access, service access, location, preferences, payment, …), Core Platform Apps (ie Passbook, Maps, Wallet, …), 3rd Party Apps,

Example Future View – Transit

Today, the top success stories in Transit are Octopus/HK, Oyster/UK, EZ-Link/SG, and Suica/JP. All have a version of mifare compliant interface in transit station gates, with a dedicated card (Japan/Suica  can do mobile top up/reload).  Today all are experimenting with NFC/TSM model. In future “platform” all will be able to create an app on phone to access radio capable of MiFare communication, simplifying the creating and testing process without a hardware NFC dependency or TSM.  A GREATLY simplified development process. Further, given that Platform’s like Apple have existing payment instruments stored, funds could be either transferred into a dedicated stored value account prior to ticket purchase, or authorized on the underlying payment instrument at time of purchase. NFC solves NONE of these funding problems.. it only solves a single secure “presentment” problem.

Example: Store Checkin

Today with Square, Foursquare and others you “check in” to a business, either though GPS, wi-fi or QR code scan.  Similarly Target, Macy’s and other retailers have developed custom apps to enhance in store experience. Its hard to imagine loading an app for every retailer you deal with, or even using the app for any one of them. With future platform services, consumers could publish rules for merchants and store applications leverage a broader set of “platform” services which may include customer insight.  When you walk into any store, a future retail application would give you relevant information depending on your preferences. Platforms will support store branding and communication, enabling a much broader reach (no app install) and capability (insight, payment, ). In this future, the “Platform” is taking on an orchestration role independent of the store you are in. The platform is a working on your behalf, but also transparently supporting retailer objectives. Today, we see Target mobile delivering a price comparison application that doesn’t compare prices. Is there any wonder that usage suffers.. ?

Not Mobile Payments…  CLOUD PAYMENTS

Payments in the OS is perhaps best described as the intersection of 2 major disruptive forces: Connectivity of Consumer and Merchant during shopping and purchase, Authentication. As I outlined in Cloud Wallet, it makes little sense to store anything in the mobile phone. If everything is connected, I should just need to authenticate my identity, allowing requestors cloud access to: payments, promotions, reminders, receipts, … everything else could happen in the background. If everything is connected, the nature of payment settlement risk changes (see credit push).  iPhone-6-Fingerprint-Detection-And-Apple-Release-Date-Rumors

Payments in the OS presents a disruptive opportunity for banks. If there is going to be a PAN (“number”) in the iCloud or iOS why on earth would Banks want to make it a Visa or Mastercard? This is yet another reason they are working on Tokens.. to ensure control of the process.  Problem is that for a new “token” scheme to gain adoption, is must deliver increased benefit to: merchant, consumer AND to the Platform. Bank token advocates will say that the benefit of mobile payment is that the consumer would never need to see the PAN, and thus Consumers do not need to be incented.  Even if this is the case, they must still incent merchant and Platform, particularly when Apple ALREADY HAS the PAN.  In their tokenization efforts, Banks are attempting to resurrect the TSM role, to justify their payments revenue.

However, my view is that IF authentication is owned by the platform, there is very little that banks can do to retain their fee. Just imagine a world where the retailer could proactively offer store credit based upon an individual’s data and behavior (accessed through platform). Where open loop cards displaced store credit 25 yrs ago, the forces could be easily reversed, enabling a new breed of consumer credit companies which support merchants. Banks are working to add value to their existing 16% interest premium credit product which costs merchants 250bps. Merchants may be well positioned to capture all of this revenue, if they had the data (and platform) to make this a seamless experience.  My personal bet is that we will first see a new credit card product which will offer a greatly enhanced value proposition to both consumer and merchant in exchange for consumer data sharing. This product would completely disrupt existing cards.

POS –> CRM and Digital Marketing

We can also see the new opportunities for Payment Enabled CRM when a platform can work with retailers. Leaders here are Square, Levelup and Fishbowl.   The “platform” works before the checkout.. here the key is consumer insight for targeting and relevance. Consumers will only pay attention to “items” which deliver value.

Closing Thoughts – Commerce a very BIG and Broken Market

Commerce is a very, very big market (see $1.46T non-grocery US retail sales, 2013 Deloitte Global Retail Study). US eCommerce sales last quarter were $61.2B, or an annualized $245B, making eCommerce just 17% of non-grocery and 5.5% of total Retail Sales (see US DOC).  Digital Ad Spend is over $100B globally, with the US taking about 40% of that. Google alone accounts for over 40% (eMarkter) and over 50% of mobile (eMarketer), with self reported revenue of $14.1B for 2Q13, (US 45% of Rev).digital ad spend

Looking at US numbers alone, there is ~$750B in total marketing spend (see Chart). Why is digital marketing only 5% of total non grocery sales? Note that this figure is off by 2x as a very large portion of online spend is by service providers (banks, tree cutting, accounting, ..) and restaurants. These 2 categories are not part of Retail sales.

My view on why more marketing spend is not digital:

  • There is no CROSS CHANNEL marketing.  Online ads are most effective when there is an online purchase (or at least most effectively tracked).  Advertisers typically don’t advertise online when products aren’t sold online.
  • Amazon/eBay and other large companies have locked up a substantial portion of eCommerce.
  • Digital advertising is fundamentally BROKEN (when was the last time you clicked on a banner ad).
  • Madison Ave is bypassed as most companies go direct, or use specialized agencies. “Brand Advertising” is big and sticky… big corps like to spend about what they did the year before.. independent of what value it is providing to the organization


US Marketing Spend



How to Deregulate Payments (like Telecom)

The US needs open access to a RTGS system, where any party can assume risk. Giving non-banks the opportunity to participate in Fedwire may be the quickest way to move the ball. For EU, perhaps giving open access to a common settlement service would be faster than mandating protocols/services. In other words.. build a new system for settlement which banks must participate.. and let non banks in as well. Build the Future vs. fixing the past.

23 July 2012

This will be a new blog type.. perhaps a little offbeat .. a living blog that “iterates” based upon community feedback. Idea started yesterday in a few of my informal chats. I’m no telecom expert, but fortunate to know some very good people who are. Yesterday I was having a chat on the EU’s Proposed Interchange Cap with a telecom friend and He drew several analogies to what happened in Telecom back in the 70s when AT&T was forced to open up its network.

Example: Telecom

MCI took AT&T to court to get interconnection, and that put them in a position to offer universal switched service, which they proceeded to do. When the FCC tried to stop them, the circuit court of appeals refused to sustain its order, essentially on procedural grounds. The upshot of this series of discrete decisions, which none of the responsible parties-except maybe Bill McGowan-either foresaw or intended, was the transformation of the long distance business from one of franchised monopoly to open competition. In MC/ Telecommunications Corp. v. FCC, 561 F2d 365 (D.C. Cir. 1977), the U.S. Court of Appeals authorized competing uses of microwave systems serving business and data communications markets; the court also concluded that the FCC had no general authority to insist on approval of new services without a finding of “public convenience and necessity.” In a later proceeding in the MCI case, 580 F2d 590 (D.C.Cir. 1978), the same court held that the previous decision’s mandate required AT&T and the FCC to provide interconnections to MCI. – Telecommunications Deregulation: Market Power and Cost Allocation Issues, 1990 edited by John Robert Allison, Dennis L. Thomas

Several interesting points in this story:

  1. Telecommunications regulator (FCC) was captured by AT&T and wanted to protect them from competition. The deregulation was unintended.
  2. Investment in this sector was throttled by a monopoly which controlled end-end distribution.
  3. Unlocking the monopoly allowed others to compete, take risk and invest. Consumers benefited, telecom costs  decreased, capacity and quality increased, and are now a commodity (ie dumb pipe) business. For example Jim Patterson wrote in this Sunday’s brief “Verizon has a wireline unit that, despite continued investments in fiber, cannot manage to offset its losses from legacy technologies to earn a profit.  With the exception of FiOS Internet and Video, the rest of the business is largely a victim of increased wireless substitution, VoIP (as opposed to traditional TDM voice) penetration, cable competition, and the cloud”

The EU can be credited with attempting to deregulate payments through SEPA (see SEPA – Chicken and the Egg  , Payments Innovation in Europe). As I stated in Building Networks and Openness

The network forms 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. Of course we all know this as the definition of Network Effects. Obviously every network must deliver value to at least 2 participants. Existing networks resist change because of this value exchange within the current network structure, in proportion to their size and activity. Within the EU, SEPA undertook a rewrite of network rules and hoped that existing networks would go away or that a new (stronger) SEPA network would form around its core focus areas (SCT, SDD, SCF, ..). It was a “hope” because the ECB has no enforcement arm. In other words there was a political challenge associated with ECB’s (and EPC specifically) ability to force an EU level change on domestically regulated banking industry.. given that SEPA rules destroyed much value in existing bank networks, the political task was no small effort. We have seen similar attempts (and results) when governments attempt to institute major change in networks (Internet NetNeutrality v. Priority Routing, US Debit Card Interchange, …)

Managed Deregulation

Managed deregulation seems to have problems… particularly when there is an attempt to force a “product/Service” like SEPA CF or SEPA DD. While there are no technical issues w/ SEPA there are issues around incentives, local/regional policy and lawmaking, regulatory enforcement, …etc. Like ATT/MCI case above, Local Country banking regulators are “captured” by the entities which they regulate. This is not unique to Europe at all.. As I’ve stated many times with respect to India, RBI has attempted to “manage” innovation in mobile payments to ensure that banks are in control (vs. MPESA Success in Kenya success was “accidental”).

“Unmanaged” deregulation seems to have a much better track record in telecom, payments, and other areas such as “internet” services (ex UBER and the NYTLC). With respect to Payments, what is the switch that needs to be opened up? Perhaps the best example is Sofort (SOFORT Overview) and “opening” ACH/iBAN transfers.  US banks are proceeding in the opposite direction (see ACH System in US), and have generally resisted changes to improve ACH “speed” for this very reason, as any RTGS system possess a risk to them (see Real Time Funds Transfer in US). Payment Value

Although some readers will be highly offended at my suggestion that success was not guided by government directives and oversight (ie Internet – Al Gore’s invention, Glosplan, The French), it is important to note that a company with a business plan was ALWAYS behind success…  pushing for the change, against regulators who largely work to protect the industries they regulate.

Dodd-Frank V2

Dodd Frank has had tremendous repercussions for the industry (Bloomberg estimates $22B). In my view future regulation should avoid any price setting, as effective markets are the proper mechanism to align price to value. However payments is not a competitive market, and Dodd-Frank has not changed this. Lawmakers should endeavor to kick start a new wave of investment from 100s of companies in payments and commerce. Working to make payments a competitive market, just as Telecom is today.

Here is my simple framework for unlocking a new wave of competition.

#1 Settlement.

The current card schemes are insanely complex. No one in their right mind would start off with a design of a debit request to an account holders financial institution if everyone is connected (my design is in blog Push Payments). In order to maintain flexibility in risk management, the clearing mechanism must let any participating party assume risk on the transaction. Therefore my recommendation is to enable the participation of non-banks in local country RTGS systems (FedWire in the US)…. creating a certification process by which new participants (like MSBs Amazon, PayPal, Google, WMT) could establish a settlement account with the Fed just as the banks do. There is real time funds transfer here (only RT option in the US), once funds are moved there is no reversal. This puts the onus on the participating entity to manage risk and Fraud. It also keeps from having the banks do any technical work at all…

#2 Issuance and Value Storage.

We need to look no further than BitCoin to see the need for new regulations surrounding issuance. Transfer of funds between entities is covered above, and my view is that non-bank participants should be licensed and agree to abide by current money transfer  regs (ie. Fincen/AML, ..). Issuance of “credentials” and storage of funds is another matter. Long term storage of funds is a banking function, and should be regulated, settlement funds face state escheatment issues (but largely unregulated unless interest is paid), while storage of “Value” is completely unregulated (ie Coupons – a form of legal tender, Pre paid offers, bitcoins)?

From above, if we allow non-banks to participate in real time funds transfer (like Sofort), then third parties are acting as agents (on behalf of consumer, merchant or bank) to direct the funds. If a good/service is purchased immediately (commerce) then there is no regulation, however if the value is “held” for future use it is generally regulated (hence MSB, eGold, bitcoin issues). Thus the rules under which third party senders operate (as agents), are different from the entities at the end of the transactions (banks, merchants, consumers).

Most know the story of MPESA and how telecom minutes became a form of value exchange which evolved to over 10% of Kenya’s GDP. There is an obvious need for issuance to more closely resemble cash in its ease of exchange, verification, anonymity and storage.

Our current need is for simplified laws surrounding account under a given value amount (say $2000). Providers of service should be lightly regulated through self reporting, “transparency”, and the need to keep settlement funds with the Fed. In this proposed model, a bitcoin exchange must ensure that no single individual has processed more than the threshold in a given time period. Hence the need for KYC of exchange participants (when converting to cash).

#3 Authentication

Most are aware of my favorite payment quote

…If you solve authentication.. everything else is just accounting”  (Ross Anderson @ KC Fed).

Sharing and validating of identity is critical to a functioning payments system. 3rd parties which have consumer permission must be able to participate in common infrastructure (credit bureaus) and share data on bad actors with other participants without fear of repercussions. eSignatures, eVerification, remote KYC should all be defined within law.

Would love more input here.

#4 Acceptance.

No Change Necessary. Just as MCI forced its way into the switch, other providers must be able to participate in the payments “network”. For a merchant to accept a new payment type, the following must happen

  • Merchant agreement (with merchant Acquirer)
  • Network Agreement (between Payment Issuer/Network)
  • Processor Agreement
  • Acceptance device
  • Consumer Instrument
  • PCI Certification (in some cases)
  • POS Integration

The Pipes between a merchant and its processor are owned by the merchant, they can decide what flows through those pipes with one major exception: accept all cards. Dodd-Frank allowed market forces to take effect here through steering and incentives… although few merchants have acted, as they hope to keep pressure on a credit settlement. To accelerate acceptance market forces, there must be “open-ness” in the connection. I believe this is largely in place, as merchants face few challenges IF THEY WANTED to add a new payment type like PayPal. They have chosen not to because it offers no benefit (vs a debit card).


Innovating on the existing networks is hard. The core to any payments success is access to the transactional account. There are several successful approaches today:

  1. Sofort (my favorite example). Operating as agent on banks web site to initiate payments on consumer’s behalf. This can’t work in the US as there are no “wires” or direct RTGS system which correlate to IBAN in Germany.
  2. Amex/Bluebird “bank in the box” account. With direct deposit, bill pay, electronic payments, ATM, … but getting consumers to adopt a new account is not really “open”
  3. Bitcoin/eGold. Consumers buy item of value which can be exchanged
  4. Solutions which work off of PIN debit (a very cool area that is overlooked). Best examples are Acculynk, Star’s Expedited Transfer, NYCE’s A2A Money Transfer Visa’s VMT, Dwolla,

The US needs open access to a RTGS system, where any party can assume risk. Giving non-banks the opportunity to participate in Fedwire may be the quickest way to move the ball. For EU, perhaps giving open access to a common settlement service would be faster than mandating protocols/services. In other words.. build a new system for settlement  which banks must participate.. and let non banks in as well.  Build the Future vs. fixing the past.

CEO View – Battle of the Cloud Part 5

There is a payment cluster war going on right now and it is the subject in the C Suite in Banks and the Payment industry. The battle is happening at every level. I’ll be leading a panel at Money 2020 which addresses several of these items, with participation from V/MA… should be interesting. Here are a few updates.

22 July 2013

This post is a continuation/update to my post back in March Network War – Battle of the Cloud Part 4. Sorry for typos.

There is a payment war going on right now and it is the subject of C Suite strategy talks. The battle is happening at every level. I’ll be leading a panel at Money 2020 which addresses several of these items, with participation from V/MA… should be interesting. Here are a few updates.

Network Clusters


  • $8B Revenue Impact. I apologize to my EU readers for my constant US focus. Let me break the mold now to emphasize the earth shaking changes going on in the EU (See today’s NYT blog, and today’s WSJ). Going from 250bps + cross border fees to 30 bps will be tremendous, and may set a precedent for the US litigation between Visa/MA and top retailers.
  • EU provides a glimpse at what a world of payment “dumb pipes”  and least cost routing looks like (see Blog Payments Innovation in Europe).  Canada and Australia also follow these lines in debit (see Blog). Also see my favorite case study in Europe  Sofort – ECB analysis, and Push Payments.
  • Networks, and their members are reacting to regulation and positioning themselves (individually) to “push” their respective vision of innovation in order to protect their brand and network (see Visa Money Transfer, and Visa Portfolio Manager). I don’t mean to limit this to just Visa and Mastercard (see picture, and blog).
  • New networks are forming (see Blog on Clusters)
  • Large issuers like JPM have successfully forced Visa to break/segment its Visa net, and run under unique JPM/CMS rules with new capabilities. Visa’s CEO comments to investors: “rules must be consistent with Visa”..  My view is that this is a major crack in Visa’s network ownership (see Golden Goose on the Menu).payments pyramid
  • From a wallet perspective the rules on “wrapping” are killing much innovation (see don’t wrap me). Top issuers are actively working to inhibit wrapping of their payment products (ex Mastercard’s staged digital wallet fee of 35bps on PREVIOUS years volume of over $50M..  which only impacts paypal).  Similarly Amex and Visa are working to ensure their cards are not wrapped.
  • Rules are being issued and ignored, from Visa Money Transfer to EMV (see below). Banks tell Visa “do you want me to write the waiver or will you send it over… as we are not going to do this”.. which is one reason JPM just created its own unique rule set. Similarly US merchants face a liability shift (on to them) if they do not accept EMV cards (chip and pin). All are playing a game of chicken as no one wants to re-issue plastic. Visa has created a new type of EMV, chip and SIGNATURE, which makes absolutely no sense at all, but helps them keep customers away from PIN (which Visa despises, but everyone else loves).
  • Cross boarder fees (see blog). As 20%-30% of network revenue moves to these fees, it is becoming a substantail pain point for global banks like Citi, HSBC, Barclays, .. A big topic I can’t fully cover here


  • US Banks are spending 90% of their time in innovation around Credit Cards. Exception is Bank of America and to some extent my old team at Wells. In either case the banks have hit a wall, and recognize that innovation can’t happen in a 4 party network. American Express is 5 years ahead of them and they can’t catch up.. they must change.
  • The NATURE of card completion is changing in both credit and debit. Traditional Payment revenue is being REGULATED AWAY as payments become “dumb pipes”. The goal most have recognized is that the real value to be unlocked is in commerce data, particularly Payment Enabled CRM (see blog). Examples of just how focused this effort is: 22 Banks working in Secure Cloud, ~$1B in Google Wallet Investment,  ~$500M in ISIS investment,  JPM just hired Len Laufler (former CEO of Argus Data) to be the new CEO of Data in Chase.
  • Banks thus need to build a network which can accommodate both payments and “other data” which they own and control (like Amex)… hence “tokenization” (see Blog, and TCH Announcement).
  • Tokenization is currently going nowhere.. but it is “impacting” the industry and many start ups as banks and networks position themselves (see JPM/Visa Blog, Start up implications).
  •  Visa and MA also have their own secret token efforts. Merchants have a much better short term win in this approach with a liability shift and reduction in interchange, but they also know from past experience that if the issuers are not on board, there will be a much broader business impact in declines (see VBV post, and Visa’s Token Strategy).
  • Retailers are attacking from below. Bottom 40% of mass market customers are not profitable for banks (Durbin related items ranging from NSF fee changes, to debit interchange) . These customers are profitable for retailers like Walmart, Tesco, Target, .. (see Blog).
  • Telcos have a chance to own a new payments network, as they have both physical distribution, customer relationship, connectivity and device.. but they are focused on controlling a handset in a walled garden strategy. To succeed they must refocus efforts on COMMERCE, which means partnering with all participants to construct a value proposition (see blog).


  • The first hurdle of any “New” network is to get the merchants and acquirers on board.
    1. This is NOT going well for companies like Paypal … hence the complete failure of their DFS partnership (see blog). Specifically, there is at least one major acquirer which is refusing to route traffic on any of these new Discover/Paypal BINs, as well as at least 2 major retailers. Although Discover is a 3 party network, they only acquire directly for their top 100 merchants. Therefore Paypal must “incent” and negotiate with every single other acquirer AND merchant.
    2. Chase is working to build a new CMS acceptance brand, which will be different from Visa.
    3. Retailers are building their own network (MCX), and have hired Dekkers Davidson, a tremendous executive, to lead it.
  • Roughly 60% of acquiring profits come from bottom 30% of merchants. There are small independent merchants that are paying over 5% in acceptance fees thanks to the poor transparency within the ISO sales process. Companies like Levelup and Square are changing this (2.75% flat, or free if you commit to marketing). I’ve eaten my shoe on Square, as I never fully understood how badly the ISOs were treating small independent retailers. Their solution solves a short term pain point and also improves customer experience.
  • Acquirers are making POSITIVE headway in merchant friendly services (see blog), particularly helping merchants “merge” consumer data to gain new insights for loyalty and incentives. They are challenged to quickly ramp up this services revenue, in order to overcome the new aggregators acting on the side of small independents (ie Square).

POS Acceptance

  • Has anyone seen the graph of Verifone’s stock? Market cap of under $2B. A hardware company that could not adapt to a software world. At the bottom end they are being eaten by free Roam/Square dongles at the top end are facing integrated POS Terminals from IBM/Toshiba and Micros. Dedicated payment terminal are commodities, and thus suffer from commodity like competition. Grand hopes for re-terminalization with EMV and NFC are not happening (see blog). New dongles and mobile acceptance infrastructure is developing even in the complex EMV space (see )stand
  • POS strategy centers around data as well. Google’s Zave purchase has given them opportunity to help retailers focus advertising and eliminate paper coupons independent of payment network. Other leaders like Fishbowl and Open Table in Restaurants have integrated into the POS. The BIG idea here is to integrate the POS to the cloud and Google is now 5-7 yrs ahead of everyone (2 yrs engineering, 2 yrs IBM Certification, 3 yrs to sell and test w/ retailers, +++ yrs in content/ads/targeting).
  • Square’s new Stand is an integrated payment, POS, inventory management, CRM, marketing and loyalty system.. all on an iPad.
  • Payment Terminal “software”. Verifone’s Verix architecture and equivalent schemes have failed. Idea was to allow 3rd party developers to create “apps” for a non-secure space in the payment terminal. For example, 2 years ago, Google’s first version of wallet leveraged NFC to communicate “coupons” to the payment terminal, which then relayed to the POS.  Problems are obvious..  A grocer like Safeway has 2,000 person development team around their IBM 4690 POS, guess how many engineers support the payment terminal? NONE. They don’t want apps on a PCI compliant payment terminal.. it goes beyond question of who will manage them. Also note that payment terminal interaction with the POS is simple today (payment request and authorization).  There is also significant development work to RECEIVE coupons from a PAYMENT Terminal.


  • This section could fill a book, so I will make this brief. All network participants are working to deliver services. The 4 party networks cannot innovate. For example, take a look at my very first blog, topic was Googlization of FS. Visa built an offers services with Monitise and Clairmail 3-4 yrs ago, but the large issuers refused to use it, preferring to innovate themselves. Another example is, a topic which makes Card CEOs red faced. These points exemplify the dynamic w/ V/MA and the large issuers.. Issuers want to dumb down the pipes and limit services, V/MA want to grow them and relationships with consumers.
  • Current state is myopia.. everyone is working as if they uniquely own the customer. Banks and Card Linked offers are top example. When you go into a bank branch, do you want to buy socks? dog food? Of course not! Banks have great data but they are in no position to run an advertising campaign. I’ve run 2 of the largest online banks in the world (Citi and Wachovia) and can tell you retail customers spend about 90 seconds with me, they log on check their balance make a payment and leave. They don’t stay around to click on coupons. Commerce, and retail, is in the midst of a fundamental restructuring as online and off line worlds converge in new ways (beyond show rooming).
  • Payments are just a small part of the overall commerce value chain, yet they have by far the highest cost. The proposed 30bps EU fee cap may occur in other markets, thus banks are working feverously to build services to replace this revenue (primarily around credit cards), with CLOs largely failing to deliver value (see blog). Yesterday we say Ally Bank discontinue Card offers, following Amex last week.

Payments – Wrapping, Rules, Acquiring and Tokens

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

18 June 2013 (sorry for typos)

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


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

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

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

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

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


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

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

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

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

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


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

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

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

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


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

#1 Authentication (Linking the Physical and Virtual World)

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

Payment News for May.. What a Month!

I’m actually starting to change my attitude on Visa. Its not just that Jim McCarthy is down the street from my in North Carolina… but rather Charlie is changing the culture there from one that alienated everyone.. back to a network that wants to add value to all.

15 May 2013

I’m in overload on information this week. Just don’t know what to comment on..

In an effort to conserve energy, let’s just say that there are MANY announcements.. but little real progress…  If you were a retailer.. would you exclusively advertise through Groupon? Through Visa? Through anyone? Of course not you have a price promotion strategy and multiple marketing programs which to accomplish objectives in each.  You would choose your channel based upon the ability to REACH the customer (ie Radio, TV, ?email…). As a retailer you also want loyalty to YOUR BRAND.. not some card, bank or start up…  Most of these entities have NO REACH.. having customers is MUCH different than being an effective CHANNEL TO INFLUENCE them.

With respect to POS.. the world needs change. Both Square, and Paypal have the merchant value proposition about right. Their respective terminals solve a short term cost/complexity issue. Square’s product is much further ahead as it also solves inventory management and marketing problems.  PayPal’s value proposition may be higher as they could manage payment costs more effectively (given consumer paypal account penetration), and many merchants already have a merchant account. Perhaps Paypal is taking my advice from 2 yrs ago.. focus on the merchant side first.. I hear that the paypal card is Don K’s pet project.. but John and Marcus may be finally tiring of the poor performance.

I’m actually starting to change my attitude on Visa. Its not just that Jim McCarthy is down the street from my in North Carolina… but rather Charlie is changing the culture there from one that alienated everyone.. back to a network that wants to add value to all. One example is emerging markets, where Hannes of Fundamo has done some REAL work in creating new VisaNet transaction sets to support emerging market solutions. Unfortunately their offers platform is stunted, as the mix of issuer “permission” and consumer experience makes this unworkable basket level program that I have already discussed many times (See CLO). Visa does not keep transaction history (with exception of debit hosted service of a few DPS banks), thus any offer targeting would be driven off a visit to a single store, or single event. This enables it to be a switching service..  Buy something at Macy’s and BOOM get a 10% back offer from Neiman Marcus. From the PR:

Most importantly, the Visa POS Offers Redemption Platform provides real time ticket reduction as part of the offer redemption during the authorization process, delivering an alternative option to the need for statement credits or paper coupons. This functionality streamlines the checkout process by enabling instant redemption of rewards and has the potential to drive incremental transaction volume. Once the reduced transaction amount has been approved by the card issuer, consumers are immediately notified of their savings via receipt printout and SMS text, or email message. (The Next Web)

Customer Experience? The Visa “POS Offers Redemption Platform” is really a “credit” that COULD be given on the receipt if the retailer’s POS interprets the message, and IF the issuer allows it. Thus the entire platform suffers from targeting, basket level redemption, consumer experience, POS integration, Issuer permission, … (need I go on)? American Express’s focus is completely different. They work with the retailer to help them gain insight into their most valuable customers and work with them to create programs to reach them. Visa can’t do this.. as they don’t own the customers.. nor does Vantive.. NO WONDER JPM wanted to opt out of VisaNet.

Google.. lets wait 2 weeks here (after I/O). I already discussed what was reported on Android Police in November. My guess is that the cost of this program was going to be pretty big… even for Google.. If it was successful. Eating 100-150bps in physical commerce ($2.4T) can be quite a big hit, even if you take only 1% of the market ($240M-$360M in US alone).

WMT’s Pre-paid success.. and impending MCX efforts are making the banks itchy. Somewhat ironic, as banks really don’t want WMT’s mass consumer customers in their branches.. while WMT loves them in their stores. Think the banks really don’t like having their “banking lite” services productized and sitting on a retail shelf to buy. They don’t want consumers to think of them as a product which can be bought.. and switched. Of course some banks have seen the light (Amex, Discover, GreenDot, BankCorp, Meta, …). Competition, transparency, and product selection are core elements of efficient markets. Of course it makes sense to ask your regulator from protection against consumer choice. But this is certainly not to benefit the consumer.

Bitcoin? where to begin.. ? Unlike most currencies, bitcoin does not rely on a central issuer, like a central bank or government. Instead, bitcoin uses atransaction log across a peer-to-peer computer network to record transactions, verify them and prevent double spending. It is a VERY INNOVATIVE mathematical crypto innovation (that is used extensively in illegal activities). Bitcoin stands in dramatic contrast to all of the data sharing, bank controlled, transparent stuff above. Its success demonstrates that there is a tremendous need for anonymity in payments.  There is no centralized authority here.. which is what alarms governments..  Thus there will be very strict controls on how coins can be converted into currency. Thus Amazon’s coins can only be used to purchase games/apps.  For those investing in this space, you should thoroughly research eGold.

Payment is still a red hot market.. expect significant M&A activity over next 12 months.

Future of Retail Banking: Prepaid?

Today’s pre-paid dynamics may be the tipping point by which 3 party networks begin to overtake V/MA in growth. A trend that will accelerate when other business models require “control”. This next phase will be centered around merchant/consumer transaction data, which will begin to unlock the advertising revenue pool, which is almost 4 times larger than that of payments.

Payments and core banking will become a “dumb pipe” business unless Banks create value and assume a larger orchestration role. POS Payments are the central feature of a transaction account, if banks loose this relationship they will be in a poor position to orchestrate. 4 party networks are very, very hard to change.

Nov 7 2012 (updated for typos)

Warning.. long monotonous blog. Sorry for the lack of connectedness, written over 7 days and my editor is rather slammed. You have been warned, so don’t complain….


  1. The competitive dynamics surrounding a “transaction account” (ie DDA) are shifting. For example, Retailer banking/prepaid products (Wal-Mart, Tesco, ..) offer significant fee advantages to most lower mass customers. Three party networks like Amex and Discover have unique advantages when combined with Retailers distribution/service capabilities. This means prepaid has become a disruption: a new good enough product…
  2. Net interest income is 64% of total US retail bank revenues, yet the bottom four deciles of mass market customers are no longer profitable. Given that the transactional account is the #1 factor for retail bank profitability, what are implications if banks loose it?
  3. There is a high probability for disruptive value propositions in Payments, as advertising replaces merchant borne interchange.  Payments and core banking will become a “dumb pipe” business unless Banks create value and assume a larger orchestration role. POS Payments are the central feature of a transaction account, if banks loose this relationship they will be in a poor position to orchestrate.

Does anyone else have trouble keeping up with state of the art? Who is doing what? My method of keeping up with change is to immerse myself in a given area for a day or two. It also gives me a reason to call my friends and colleagues.  This week the theme is retail banking. I’ve spent too much time thinking about payments and how it relates to mobile, advertising, …etc.   I thought I would dust off my banking hat and think in terms of a banker.

Retail Banking

I’m struck by how odd retail banking is. Why are banking services not more simple? Why do I have a separate savings, checking and card account? Why not one account? if the account runs in a arrears I pay interest and if it runs in credit the bank pays me interest? Why does a bank take 3-5 days to move money? How on earth do the banks afford all of those stand alone branches when I visit them perhaps once or twice a year?  Why all of the regulation? What does my bank do for me? What problems do retail banks solve? Can someone else solve these problems more efficiently?

There is certainly no single answer. Retail banking serves many demographics, from the college student to the billionaire. Historically retail bank relationships were very important relationships, as banks only lent money to people they “knew”, based on the deposits they had. Younger consumers need to borrow, older consumers …  savings. Banks focused on things like college student accounts to lock in that relationship as early as possible. Today’s modern financial markets provide for the securitization of loans, thereby spreading risk among various investors willing to assume it. Does a banking relationship matter anymore? to Consumers? to Banks?

I’m struck by how little change has occurred (in the US) on the liabilities side of the banking business? Quite frankly US consumers are treated like idiots who sacrifice “protection of capital” over risk. We now have an entire agency working to protect US consumers from banks.. (BTW what is predatory lending?). Other markets let consumers take on risk.. and hence have many more choices, and innovation, in savings. For example, I’m very fortunate to have worked with so many fantastic people over the years. The great thing about running Citi’s channels globally is that each and every country had a somewhat unique competitive and regulatory environment. It was like running 27 different banks. There were many different strategies for deposit acquisition, for example:

  • In Spain we had a 10/2 product that paid 10% interest on deposits for the first 2 months.. then went to 1%.
  • In Japan Citi leveraged its global footprint, and the poor local consumer rate environment, to create foreign currency (FCY) accounts which allowed consumers earn higher returns by assuming currency conversion (FX) risk in uninsured accounts.
  • The UK is perhaps the most competitive retail bank environment in the world. Consumers in the UK can switch banks almost as easily as changing shoes, it was thus essential to enable consumers to switch quickly and then get them into other products quickly. Take a look at today’s UK savings rates from MoneySuperMarket (8% on a fixed $30k deposit) vs the US (1.05%  Rate differences on this scale helped fuel the carry trade in Japan.

In the US, it is well known (inside the banking community) that banks are highly discouraged from competing on rates. Not that it matters, this amazing study by the Chicago Fed (Chicago Fed – Checking Accounts What Do Consumers Value – 2010) shows that US consumers are rate inelastic.. and care much more about fees. You have read this right, consumers don’t care about interest rates on their deposits.. which is certainly NOT intuitive. Perhaps rates are all so close to 0% that 5-10bps doesn’t matter. Or perhaps  because the average US consumer does not save at all, and those that do have their money in another place.

Retail Bank Profitability. Net interest income (2011, represented more than 64% of total US bank revenues) is the rate spread between borrowing short and lending long, or more broadly the differential between asset yields and funding costs. Net interest margins (defined as net interest income over average earning assets) were 3.6% at year-end 2011, just 11% higher from the 20-year low of 3.2% in the last quarter of 2006.

From DB Research

As low rates persist, loan-to-deposit spreads fall as prices adjust, and longer-term securities, held as assets, roll over to lower-yielding securities (the same holds true on the funding side, of course, helping to extend the positive impact of falling interest rates into the future). The net impact on banks’ net interest levels may be negative, though. In previous recoveries, this effect has been offset by increased loan volumes, allowing banks to return to sustainable growth levels. Furthermore, as an economy recovers, banks may quickly benefit as short-term assets roll over at higher rates

To summarize: Bank net interest income is important (64%), and falling. Banks have had a key revenue source taken away from them (Debit interchange) and are also facing another merchant led suit on credit card interchange. Bank brands and reputations are on a steady downward trend. Consumers don’t care about rates, but react strongly on fees. … A new regulatory agency to protect consumers is just now forming and looking to make its mark. What are banks to do?

Transaction Account

What is the purpose of a bank provided transactional account today? Well certainly our mattresses are a little less lumpy, and the relationship factors have largely gone away. So what is left? Transactionality?

The banks have long recognized that the transactional account is the #1 factor driving a consumer relationship. Virtually every other banking product and service hangs from this account. Most retail banks view direct deposit (internationally known as Salary Domiciliation or Sal Dom) as the key indicator of the transactional relationship. Consumers have limited “energy” to connect to more than one network (as outlined in followed my previous blog on Weak Links). 

This financial supermarket concept, authored by Sandy Weill and John Reed, has not exactly been a slam dunk success. Nonetheless every retail bank starts selling with a checking account, even if nothing else is attached. What are the key factors influencing the selection of a transactional account?

  • Why are deposits important to banks?
  • Driver of overall relationship à Customer Net Revenue
  • Liquidity ratio ->Risk ->Agency Rating -> Capital Costs
  • How do consumers select a bank?

The public compete data above is completely consistent with previous proprietary studies I’ve commissioned. Consumers tend to pick their bank based on how convenient the branch and/or ATM is.

Is there something fundamentally changing? What if consumers don’t visit a branch… or no longer use cash? Are there new value propositions? Where will consumers (and their deposits) go?

Recent market developments/Announcements

The Amex Bluebird product is revolutionary in terms of fees. It is the lowest cost reloadable card in the market today. Beyond the product, I’m even more impressed with WalMart’s business strategy here. They seem to be willing to break even on payments/banking in order to win the overall consumer relationship and increase foot traffic and loyalty in their stores. Take a look at the suite of products offered by WalMart. While banks are pushing out the bottom forty percent of mass consumers, WalMart has made a bet that it cannot only serve them, but do so profitably.

There are many different types of pre-paid cards (more below), however most are not regulated as bank accounts. In almost every geography, consumer deposits (interest bearing, insured) are regulated because they drive both bank liquidity (which drives lending and cost of capital) and profitability. Remember before capital markets existed to securitize assets (loans) retail banks could only lend to the extent of their balance sheet (deposits). Consumers put their money with banks in order to earn interest (the carrot) with the downside of fees on usage (the stick).  In the US consumers are beginning to ask themselves “is the carrot big enough”?

In emerging markets many banks have a poor reputation, additionally access to legal resources are limited, as are consumer protections. How would you feel if you showed up to your bank for a withdrawal and your bank said “sorry your money is gone” and you had no recourse? This dynamic has propelled other banking models in emerging markets. For example my friend Nick Hughes and his Vodafone/Safaricom team created MPESA in Kenya which provided enormous value to consumers. However MPESA caused an apoplectic reaction from the banking regulators as 10% of Kenya’s GDP sat in a non-interest bearing Vodafone owned settlement account. MPESA therefore impacted bank liquidity (IF the funds would have gone into a bank account as opposed to just M1/cash). Visa and MA have worked hard to try to make prepaid the underlying account for mobile money in emerging markets, to very little avail. The problem is not connecting people to the V/MA network.. and giving balances to an approved bank. The problem is first transferring money to entities currently not on any network, then paying a very small number of billers.  

Why are consumers defecting in the US? Ernst and Young just published a phenomenal global study on this subject. The result of their analysis was that consumer confidence in banks is degrading. E&Y outlined a call to action by banks: reconfigure your business models around customer needs. My hypothesis is that consumers have reached a tipping point where they view banking services as commodities… In the UK, this is already well established.


I haven’t spent much time thinking about prepaid cards so I thought it was time to refresh myself, particularly in light of MCX and the prospect of retailers acting as Banks.

From the US Fed

Prepaid cards offer much of the functionality of checking accounts, but that does not mean the underlying economics are the same. A typical prepaid card in the data is active for six months or less, a small fraction of the longevity seen with consumer checking accounts. As a result, account acquisition strategy and the recovery of fixed and variable costs are likely different than for checking accounts. …. prepaid cards with [direct deposit are uncommon but] remain active more than twice as long and have 10 times or more purchase and other activity than other cards in the same program category. As a result, these cards typically generate at least four times more revenue for the prepaid card issuer

Similarly Pre-paid cards also face a complex web of regulation (See Philadelphia Fed Paper 2010), across 31 different types of cards.

31 types of cards? Did anyone else realize the diversity here? Wow… For the sake of this blog, let’s focus on reloadable (GPR) open loop cards (references to prepaid below are on this card type only). It would seem that GPR pre-paid is following the general disruption pattern of serving a lower tier of the market at a more attractive price point. According to Mercator, In 2009, consumers loaded $28.6 billion onto prepaid cards. By 2015, prepaids will hold $168 billion.

Last month’s WSJ ( Prepaid Enters Mainstream) outlined this dynamic

Traditional leaders in GPR pre-paid have been Green Dot, NetSpend, . The Durbin amendment exempted most prepaid cards. This means that pre-paid is largely example from the Durbin interchange restrictions… (with several conditions). Thus the business case for pre-paid is rather strong, and Banks themselves are assessing if they can make this the new “starter” account (ex Chase Liquid). However Three Party Networks (Discover and Amex) have a significant advantage.

From Digital Transactions, March 2012

While the Federal Reserve’s rule implementing the Durbin Amendment has its greatest effect on traditional debit cards, it affects prepaid cards too, especially its provision that banks’ prepaid cards can avoid Durbin price controls only if cardholders can access the funds exclusively through the card itself. That provision thwarted banks’ efforts to make prepaid cards more like demand-deposit accounts and led them to scale back or end bill payments through prepaid card accounts.

But American Express and Discover are not subject to Durbin’s controversial provisions, Daniel and Brown noted. Both companies are so-called “three-party” payment systems that function both as merchant acquirer and card issuer. In contrast, Visa and MasterCard debit and prepaid cards are part of “four-party” systems in which the issuer and acquirer are usually different companies and rely on the Visa and MasterCard networks to route transactions among them. The Durbin Amendment exempts, or “carves out” in industry parlance, three-party networks from its provisions, including interchange regulation.

“There’s no restriction on what AmEx can pay itself” for prepaid card transactions, said Brown. Thus, AmEx and Discover have a new opportunity to grow their prepaid businesses, the attorneys said.

Clearly Discover (DFS) and American Express (Amex) have an opportunity to “Kill” prepaid cards, what are they missing? Physical distribution, service and reach in the mass market. These are the very things that retailers like WalMart can provide, and in fact economically benefit by providing them.

As you can tell, regulations are driving the business models here. Most large US retailers leverage a fantastic team of attorneys from Card Compliant that specialize exclusively in prepaid cards (run by my friend Chuck Rouse). WalMart’s move to Amex is brilliant both from a regulatory and business model perspective.  

Today’s pre-paid dynamics may be the tipping point by which 3 party networks begin to overtake V/MA in growth. A trend that will accelerate when other business models require “control”. This next phase will be centered around merchant/consumer transaction data, which will begin to unlock the advertising revenue pool, which is almost 4 times larger than that of payments.

Payments and core banking will become a “dumb pipe” business unless Banks create value and assume a larger orchestration role. POS Payments are the central feature of a transaction account, if banks loose this relationship they will be in a poor position to orchestrate. 4 party networks are very, very hard to change.

I see a battle where 3 party networks work to branch into orchestration and advertising, and existing orchestrators (ie Apple/Google) integrate legacy dumb pipes (payments and telecommunication) to deliver value to the consumer. What do consumers value today? This is the call to action for bankers… who are not always the best at creating alliances.

Here is one idea, focus on trust and helping consumers solve problems they don’t face frequently. For example,

  • Make financial planning easier and less of a sales job.
  • Help manufactures and retailers connect to target consumers.
  • Become a buyers agent?
  •     Help navigate the college application and loan process,
  •     Help  buy a new car for the lowest possible price…

I know this is not a clean finish.. but that’s all the time I have.


Thank you Kansas City Fed for the fabulous brief from the: CONSUMER PAYMENT INNOVATION IN THE CONNECTED AGE. Bill Keeton and Terri Bradford were nice enough to invite me, but unfortunately I couldn’t attend. In my last visit to the KC fed we spoke about future payments types, but we also spent quite a bit of time discussing where mass market consumers will go if banks view the bottom 4 deciles of retail banking as unprofitable (according to proprietary McKinsey Study).  Today I thought I would pull together a compendium of my learnings on retail deposits, MSBs and pre-paid… the “transaction account” by which payments flow.

Green Dot Bank: Finally Wal-Mart gets to Play

16 Jan 2012

GDOT Bank – Federal Reserve Authorization

GDOT bought Bonneville Bancorp for $15.7M + $14M Capital Infusion on 8 Dec 2011. Bonneville was a Utah licensed state bank and a  Fed member (regulated by Fed). This is a very significant deal for several reasons:

  • Sets a new regulatory guidepost in the creation of “national” bank with a pre-paid focus. See Bank Talk article on how GDOT was able to get Fed Approval, specifically around CRA responsibilities.
  • Is essentially WMT’s retail bank for consumer services (WMT owns ~15% of GDOT)
  • Model for future deals in State Chartered banks (particularly for retailers)
  • Highlights need for reassessment of “pure play” banks in pre-paid space (ex. Meta)
  • NEW PRODUCT potential in interest bearing pre-paid accounts targeted to the lower mass market

This is a brilliant move by the Fed, and by GDOT. The Fed is rightly concerned about the fact that the bottom 4 deciles of customers are no longer profitable for the big banks.. and there is an exodus. How does the US financial system retain customers in the lower mass? GDOT and WMT believe it is not through the typical branch model. Just as with Tesco in the UK, Retailers are proving to be excellent distributors of banking services. Retailers do not need to make their margins on bank services alone, in fact banking services improves the overall retail value proposition, brand and loyalty. The same holds for mobile operators internationally.  Why should I pay for all of those branches and sales people if all I need are basic payment services?

I joined Citi in 2006 with the mandate to grow the retail business without growing the number of branches. Creating the ING direct competitors.. the HOOK was high yield savings. GDOT bank could be catalyst for a new retail banking model, with a HOOK associated with “payment”, retail convenience, loyalty and data use.

What are the core product innovations? Here is my list:

  1. Combining a GPR card with retailer brand and distribution (WMT). Banks normally have to seek charters that enable them to operate nationally (ex. Fed, the now defunct Thrift, …) when doing business in multiple states. Virtual GPR cards don’t have this problem as consumers are buying a banking product in another state.
  2. Stand alone consumer value proposition. GPR card that can earn interest on funds held on balance. GDOT/WMT also have a established a rate structure that is one of the best in the business.
  3. WMT’s integrated value proposition. International transfers ( WalMart owns part of MGI they are 30% of MGI’s TPV), International Banking (Mexico, Canada, GDOT, …), StraightTalk prepaid mobile, … they have all the components to deliver value. Can they bring it all together?

Banking is a network business.. the GDOT opportunity is to build the network quickly through key retailers (as physical distribution). What other innovations can they bring to market? At the top of my list would be instant credit (Paypal BillMeLater does this through a WebBank a Utah ILC). Or real time transfers to any bank (using  $0.58 Fed wire…).

Today, MSBs are restricted in both offering interest on accounts and the length of time they can hold a balance (escheatment). There will be some regulatory scrutiny by the State Regulators on how cash in/out is performed at the physical retail outlet, and what constitutes a “bank”. From the Retailer’s perspective, the GDOT card is a product which can be bought (buy $100 GDOT reload), with cash out from ATM or through a Mastercard purchase. GDOT is a licensed MSB in 39 States (according to their 10-k) with a network of 50,000 cash in/out locations. Previously GE Money was the US bank for the WMT MoneyCard. A single state licensed bank owned by an MSB network may face some state regulatory scrutiny. GDOT can probably address by keeping as separate legal entity with its own BOD and capital.

If I were thinking of starting the next PayPal… I would skip getting MSB licenses in 47 states and start looking for a Utah bank I could buy.

What to look for:

  • Retailers following this model (including ISIS, Amazon, …). Particularly retailers serving lower mass market
  • Salary d0miciliation (direct deposit) onto a card
  • Future of GE Money. GE has been looking to sell Mark Begor’s business for some time. It is subscale, and WalMart is its largest US customer. My guess is that WMT had to develop fall back plans in case GE did sell the business. I would not be surprised to see GDOT bank be the primary bank behind the MoneyCard.. but it hasn’t happened yet.
  • Pre-paid processors and platforms looking to create their own brands.. or change their relationships to retail branded banks
  • MSBs moving toward a state bank license. Issue is cash in/out. MSBs that require their own branded physical distribution will keep MSB license… those that are virtual will move to GDOT model.
  • Consumers making switch to a “new” banking model centered around payments.
  • Semi closed payment networks with integrated loyalty and incentives.
  • New Payment Banks which make money on marketing and data (not interchange). See Googlization

For those interested in a Utah Bank.. please call my favorite Utah Banker.. Crawford Cragun..

Your thoughts are appreciated. As always sorry for the typos and the brevity.