Payments Innovation in Europe

So in Europe see the consequences of ubiquity. While SEPA was designed to increase competition and create new European schemes, there are few business models capable of supporting investment. Hence Europe is not the place to start a retail payments business. This is why I look to Asia, LATAM and Canada as great places to start a payments business (my picks: PH, HK/China, Brazil, Malaysia, SG, Colombia, Indonesia and New Zealand).

8 March 2011

Why do I like the Payments business? It is ubiquitous, sticky, with good margins and strong annuity revenue.

What do I hate about the payments business?

In the US, it is over regulated, concentrated, difficult to change and frustrating enigma driven by large FSIs with unlimited resources…. Within Europe the situation is little different.

After coming back from last week’s trip the Valley, I was attempting to develop an investment hypothesis on Europe, mobile, payments and innovation in general.

While Europe’s individual talent is second to none, and capital is plentiful, the European market is designed to resist change and thus impedes the development of early stage ideas and companies. Early stage companies can incubate within a single country but are challenged to expand beyond, due to complex regulatory and market dynamics. Navigating these dynamics causes early stage companies to develop more slowly, thus a requiring a higher risk premium on invested capital.

                   – Tom’s European Venture Capital Hypothesis

SEPA Overview 

(European colleagues can skip this section). 

SEPA and PSD (SEPA’s enabling legal framework) attempt to create harmonization of payment schemes across the EU (See SEPA Blog, and excellent PodCast). The result?  837 pages of detailed and contradictory EU law with no business incentive. SEPA has been plagued with delays and issues, as should be expected given that there was no business incentive nor a PAN EU regulator to enforce it. SEPA Credit Transfers and SEPA Card Framework have been in place for a few years (2008). While the SEPA framework commoditizes payments, and while this is consumer friendly, there is no business incentive to for large banks to implement it (see Barclay’s consumer support on SCT).  The same can be said for the SEPA Card Framework (See MA’s Self Assessment). The main points from ECB’s regular status report:

  1. Banks must create greater awareness of SEPA, and must offer better products, based upon the SEPA infrastructure. Government should accelerate programs to adopt SEPA as the standard for its disbursements.
  2. The banking industry must commit to work together to remove obstacles which might compromise the Nov 1 2009 launch date of the SEPA Direct Debit. Debates on the launch date, the validity of existing DD mandates, and interchange fees must be closed out rapidly.
  3. Bank systems need to be improved to enable end-to-end straight-through-processing, originated by files submitted or by e-payment, e-invoicing, and m-payments.
  4. The ECB wants to see a target end date for migration to SEPA products, and for exiting out of older credit transfer and direct debit.
  5. The SEPA card framework in its current form has not yet delivered the reforms which the ECB wants. In particular, ECB wants to see a European card scheme emerging.
  6. The ECB perceives a lack of consistency in card standards. It wants to ensure that a clear set of standards are adopted and promoted throughout the industry.
  7. A common, high level of security for Internet banking, card payments and online payments is needed.
  8. Clearing and settlement organizations in many countries have made good progress on SEPA, and several are upgrading from national to pan-European.
  9. The banking industry, and its representative body, the EPC have not sufficiently involved other stakeholders.

 SEPA’s Impact on Innovation

European harmonization is a fantastic objective, but translating EU guidance in to country law, with each country’s banking regulators responsible for interpretation and guidance, is problematic. This becomes even more difficult when Banks (who were not included in the SEPA design) have an inverse adoption incentive. An analogy in the telecom world would be telling the land line carrier that the must open up the switch to anyone that wants it at no cost.. and they have to assume all of the risk and operational responsibility.

Early stage companies and “payment innovators” are left with a complex set of constraints.

  • Dependent on local national relationships to launch a product,
  • SEPA creates harmonization, but country specific laws and regulatory guidance are unique
  • ECB initiatives (ex. See ELMI) create opportunities for non-bank participation in payments,  but SEPA has removed all margin from the business

So in Europe we see the consequences of over regulation.  While SEPA was designed to increase competition and create new European schemes, there are few business models capable of supporting investment. Hence Europe is not the place to start a retail payments business.  Hence Asia, LATAM  and Canada are all great places to start a payments business (my picks: PH, HK/China, Brazil, Malaysia, SG, Colombia, Indonesia and New Zealand).

Europe and Advertising

I don’t have time to finish the thought here. For those of you that read my blog you know I’m very enthused about the prospect for advertising to be a future payments revenue driver. Unfortunately for the EU, consumer privacy regulations (and subsequent “tracking” issues) are the most onerous in the world. In Germany for instance, my Citi team was forced purge the web log of IP addresses every 30 minutes.. for our own customers. The point here is that we could not even maintain loosely correlated consumer information in regulated accounts. Google has similar problems today (see Das ist verboten).

Where is the EU opportunity?

Where there is an intersection of: low margin payments, businesses with frequent cross border (within EU) transactions, without need or desire for banking relationship. MoneyBookers is an excellent example of this model in gaming.

Other possible  investment drivers relate to when payment transaction infrastructure is a commodity:

Arbitrage – Move intelligence to new regions or countries where the cost of maintaining it is lower

Aggregation – Combine formerly isolated pieces of dedicated infrastructure intelligence into a large pool of shared infrastructure that can be provided over a network

Rewiring – Connect islands of intelligence by creating a common information backbone

Reassembly – Reorganize pieces of intelligence from diverse sources into coherent, personalized packages for customers

 Thoughts appreciated.

Investor Short Take – Payments

VCs can expect $5-$10B of industry investment in payments over next 5 years as new networks develop. Its important to ensure existing investments have plans to align to one of the emerging ecosystems. Go it alone will not work…

7 Dec 2010

Summary for investors:

  • Ensure existing investments have plans to align to one of the emerging ecosystems. Go it alone will not work.
  • Expect $5-$10B of industry investment in payments over next 5 years as new networks develop.
  • Seed teams with people that have experience in payments and working across large players. Success will not come from “technology” ..
  • Focus on delivering value to one leg of the network. Merchant friendly value propositions are recieving new focus.. but retailers are not participating where there is “traditional” bank leadership.. new non-bank networks are forming.
  • Digital goods payments is red hot, and also likely to be focus of Google, Apple, Amazon, Visa, MA, PayPal, … Solutions will be driven from multiple players, the “channel masters” of: content, social network, consumer payment, consumer advertising, …
  • The relationships between the large banks and Visa/MA are deteriorating, particularly in the area of innovation. NFC is still an area for collaboration, but small and mid-size banks are more likely to align w/ Visa/MA plans than the large players.
  • Consumer payment behavior changes in 20 year cycles, largely because there is little differential value (beyond rewards). There are exceptions, as Target is attempting to prove through its REDCard. Other large retailers are assessing plans to buy a bank, replicating  Target, and WalMart (in Mexico and Canada)
  • As a rule, Banks are not collaborating with each other or internally and seem to be engaged in multiple initiatives in a hedge your bets strategy (to see what sticks). If your companies are working with a bank, don’t assume there is coordination internally.. your teams must learn to work across complex political lines.

Quite a few interesting “rumblings” this week.

1) Bank of America Merchant Services and First Data are assessing development of a new card network.

2) Google and a major bank (?Citi) are working heads down on a mobile payment platform network driven by mobile advertising revenue. Citi would make sense given its 110M cards and it’s key weakness in merchant acquiring (vs. Chase Paymenttech and BAMS). This team still would leave a large gap at POS…. So perhaps Discover is there as well? Yeah that is a very wierd prediction.. Citi rebranding all of its portfolio Discover so it could regain control.

3) Apple working on a 2Q11/3Q11 iAD platform, with couponing and purchasing. This is a rather big project as they also work to consolidate 4 internal payment systems (legacy apple store, iTunes, app store, and Treasury) with new mobile walled (Apple Patent) and a major bank as partner (?Chase?)

4) Wells Fargo and Bank of America retail teams assessing collaboration on a mobile P2P platform.. which was taken away from their Pariter JV.  See related Blog. I’m sure the cards groups must be shaking their heads a little given the anticipated volume, but banks cannot cede this space.. and it is critical to bank leadership. I just wish the banks would focus on the business and not on the technology.. just buy Cashedge and put it in The Clearning House or something.

5) Merchant acquirers and processors putting together more focused offerings for large retailers. See Target Red Card.

6) Visa and MA have M&A plans around pre-paid which are in flight, a focus more on the G2P and Cross border segments rather than mobile… re: mobile, Visa and MA have retrenched here after “learning lessons” in failures of Mastercard MoneySend (Obopay) and Visa Money Transfers. Funny that MA learned its lessons on a remittance focused Obopay, while VMT attempted to focus on domestic card-card and now is “refocusing” on remittance.

Chase QuickPay and Quick Deposit

Chase has a stellar eCommerce and mobile team in both their retail and cards organization, and they are poised to deliver tremendous payment innovation across both of these business units. This innovation that has been “in the works” over the last few years, and Jack Stephenson (PayPal’s former head of strategy) is fortunate to have a joined at a time where both the payment platform and team is gaining traction. This month the JPM retail team has delivered new capability in its iPhone versions of QuickPay and Quick Deposit products.

25 July 2010 (Updated 20 Aug)

Chase has a stellar eCommerce and mobile team in both their retail and cards organization, and they are poised to deliver tremendous payment innovation across both of these business units. This innovation has been “in the works” over the last few years, and Jack Stephenson (PayPal’s former head of strategy) is fortunate to have  joined at a time where both the payment platform and team is gaining traction. This month the JPM retail team has delivered new capability in its iPhone versions of QuickPay and Quick Deposit products.

QuickPay Overview:

QuickPay is a JPM’s money movement “pay anyone” service that provides registration for both Chase and non Chase customers. Chase was very late to the money movement game, rolling out its first QuickPay service in 2008 (whereas Bank of America and Citi have been providing this since 2002  through CashEdge). From a strategy and organizational perspective, JPM is well known for their “preference” to develop applications internally. It may have taken some time for JPM to complete the QuickPay internal build, but in the current release it has surpassed the domestic capability (and usability) of all other banks. JPM is now the leader in retail online payments.

Non-Chase customers can register for QuickPay before or after receiving funds. For non customers, registration for QuickPay is similar to PayPal (or CashEdge’s PopMoney), with the QuickPay wallet currently constrained to single linked checking account. Chase customers have a streamlined enrollment process and the QuickPay functionality is integrated into their existing online experience (demo above). This differs substantially from BAC, where the same capability to transfer funds exists but the usability is very poor. BAC is missing a substantial opportunity to capture beneficiary phone/e-mail information, an unnecessary miss since the capability exists (BAC is Cashedge’s largest US customer but has not yet signed on with CashEdge’s mobile POP money service).  Beneficiary information is critical to maintaining an accurate directory.. the key element in any payment system. Chase’s QuickPay maintains e-mail, phone and other information which gives it a head start in the directory battle (subject of future blog).  Given Chase Paymentech’s role in acquisition (for card, paypal, …) you can see potential for further directory synergies internally.

Quick Deposit

The articles above provide a great overview of the new iPhone App, with Chase following in the footsteps of USAA’s Deposit@Mobile. Application is from Mitek Systems and it is just super, and for small merchants this may become the payment method of choice (when compared to card):

Merchant benefits:

  • No transaction costs (savings of 150-350bps)
  • Usability and simplified enrollment
  • Same day availability of funds
  • Fits existing consumer behavior pattern (checks)
  • Legal protections/enforceability (paper checks vs. electronic signature)
  • Instant verification, risk and fraud management
  • Leverages bank imaging systems and processes (regulatory and consumer receipt)
  • Notification/receipt to consumers

JPM Business Case

  • Check imaging (op expense)
  • Small business acquisition (Customer Net Revenue for SME = $3-$5k)
  • NRFF for non-customers (NIM on settlement funds held)
  • Future “directory” business case, cards growth
  • Prevention of DDA Account Number Breach

The JPM Quick Deposit application was reportedly built in-house, other Vendors such as EasCorp’s Depozip provide similar functionality. As for the success of this application, NetBanker reported USAA’s recent numbers for Deposit@Mobile. (update 20 Aug, my friends at BAC tell me that they have been trialing the Mitek application for almost 3 years now, fine tuning the app and the support process and are set for launch any day) .

Given that the audience for this blog (investors, start ups and innovators), you might ask why it takes 2 years for a bank to roll out this type of innovation. An excellent question! The iPhone app itself is the easy part, perhaps consisting of less then 20% of the overall budget. The “hard work” is in integrating it into existing systems and risk controls. For example, the primary value proposition, for QuickDeposit, is improving check acceptance and funds availability. At the teller line, banks have tools like DepositChek which allows the bank to determine if information on the check is correct and the account is in good standing (stopping check fraud before the check image gets into the system). These same tools must be integrated into the online and mobile process to reduce risk. I’ve picked this particular example because it is a tool unique to bank entities (not available to non-banks). In addition to the technical integration costs, banks have become very prudent in testing, and accessing impact of new functionality to call center support costs. Given the wide availability of both of these applications, it is essential that they are intuitive to JPM customers.

These applications are a great retail success. I understand that the JPM cards team is also poised for a major release in mobile soon (with multiple alliance partners). Well done JPM!

Enroll for QuickPay – www.chase.com/QuickPay

Overview of Quick Deposit  – www.chase.com/quickdeposit

Thoughts appreciated

Firethorn gets new CEO

Great news for QCOM this week. Firethorn gets a new executive with payments experience… AND has tremendous start up experience. QCOM is one of the best run, most innovative companies on the planet.. they are everywhere in mobile.

9 March 2010

Press Release

Previous Post “Obopay and Firethorn”

Great news for QCOM this week. Firethorn gets a new executive with payments experience… AND has tremendous start up experience. QCOM is one of the best run, most innovative companies on the planet.. they are everywhere in mobile.

Rocco has a clean slate given that Firethorn’s current customer list is rather sparse (?US Bank?). My recommendations for Rocco:

  • Dual track org: Short term quick hit and a strategic initiative
  • Short term: find some low hanging fruit and attack and forget about the banks in short term (they take too long)
  • Long term: better to “enable” 1M+ of businesses than to “own” a single product…. that is the model of QCOM. Example: Authentication. http://finventures.wordpress.com/2010/03/11/5b-mno-opportunity-kyc/
  • Leverage existing assets and relationships, listen for key opportunities
  • HR: Look at the team you have in place and shake it up… substantially. Start cross pollenating with the rocket scientists at the parent company.
  • Financial: I’m sure Rocco worked this out w/ Dr. Paul already.. but there are few path’s to revenue in 2010 unless there are some reallocation of assets.  Example, QCOM is investing in integrating NFC into chipsets. Should this be owned by firethorn? or should just the software that runs on the chipset?
  • Go global. The only alarm bell on Rocco is that he is lacks much international experience. Most of the innovation in mobile (payment) is taking place outside of the US. He needs a solid global team that can ensure that Atlanta prioritizes the global need.

– All the best Rocco