Building Networks and “Openness”

8 Dec 2011

I’ve been reading some off beat stuff lately. One book “Weak Links: Stabilizers of Complex Systems from Proteins to Social Networks” was very thought provoking. As Mark Stefik (PARC Fellow) said ‘Something magical happens when you bring together a group of people from different disciplines with a common purpose.’ The combination of people, experience and approaches often leads to unexpected consequences.

As an engineer I like to solve problems.. I usually learn more from mistakes than I do from successes… but it is the learning that is fun. As an investor and entrepreneur I don’t like making mistakes… my preference in the start up environment is to have the learning cycle counted in minutes and days (vs customers and capital). I was speaking with a US Central Banker last month and the concept of “openness” was discussed. A hypothesis was laid out by the Fed “Mobile payments are not taking off because of a lack of common standards”.  The Fed team is very good, the best way to encourage a good dialog is to lay out something radical; as for this hypothesis I disagreed completely. As stated in my numerous blogs: history has clearly showed that closed systems must form before open ones.  I also told the Fed that the problem in US mobile payment IS NOT lack of standards but lack of a value proposition to consumers and retailers. In other words existing payment instruments solve all of my problems.. mobile payment simply does not add additional value (in isolation) compared with existing products (See Mobile Advertising Battle). In order to stimulate a change in behavior (merchant and consumer) there must be a strong value proposition. Two years ago I discussed the implications for broad payment standards in SEPA: Chicken or the Egg and in March of this year I outlined how SEPA has depressed payment innovation in the EU.

Given all of the chaos in NFC at the moment, I woke up this morning asking myself what is the “right amount” of openness and standards? How do successful networks form and mature? What are successful “open” networks? What is the first “open” standard you think of ? TCP/IP? Linux? Java? RosettaNet? EDI? Open Network? Internet? GSM? US Interstate system? SEPA? The Weak Links book opened my eyes to many new concepts, one was on how affinity influences network creation, and another on how few open networks exist in Nature. Networks form around a function and open networks are not necessarily the most efficient.

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

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. 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, …)

Mobile Payments Standard?

If we take a look at today’s payment networks what are the biggest problems to be solved? I have a perspective, but its certainly biased. How about payment routing and speed? These seem to be common merchant and consumer concerns. Keeping with an internet analogy, can you imagine if there were no DNS servers to route IP traffic? Every router would have to keep the directory for the entire internet not only of the final destination, but also the most effective route to forward traffic. What if the internet were not indexed? No ability to find information (thanks Google for fixing this).  In the payments environment, the central assets of Visa and MA is 1) A Directory and 2) the rule that EVERY participant must route traffic through them (with a new PIN debit exception in US).

Outside of card transaction’s banks maintain their own directory for routing retail and commercial payments; this is called “least cost routing”.  A key bank service I would propose (note: I’m not the originator of this idea) is a universal directory service mapping e-mail, phone and account numbers.  In Australia, the banks have this today run by my friends at Cardlink and completed under project Mambo. In the US, The Clearing House (TCH) has had the UPick service completed for a number of years.. without much interest.

My thought here, is that rather than facilitate a EU mistake in mandating a change in all rules.. decrease the switching costs between networks so that market forces can take hold. I’m not proposing to take the directory public.. but at least give regulated entities equal access. In Australia the driver was to decrease bank switching costs, also note that Australia has no Signature debit.. just as in Canada.  A common directory could also follow rule that non-regulated institutions could not hold account data (or card number).. Just as I don’t have to know my Bank’s IP address.. I could use another identifier (email, mobile, …) for online transactions. The danger for banks is that this would certainly open up the world of least cost routing to non-banks. Payments would become “dumb pipes”.. which is perhaps what it should be.

Mobile payments is certainly not critical government infrastructure. So what is Government’s proper role? Consumer data protection, transparency, regulatory requirements, equal participation/access..  ? I don’t know the answer. I like the idea of the Government creating a model service for R&D purposes.. perhaps based on Fedwire and letting non-banks have access to it… I also like the idea of a common directory.


For 2.5 years I’ve been writing about ISIS.. I’ve always have been a huge advocate.. until lately. What has changed? My position, and that of retailers, is that today’s payment networks are heavily tilted in favor of the banks. The opportunity I originally saw for ISIS was constructing a new merchant friendly network that was an “extension” of the current mobile network which the carriers run (The original business case for ISIS is outlined in ISIS: Moving Payments from Rail to Air).

Keeping with my theme of openness and standards how is ISIS creating a platform for other to invest in? What value is an ISIS mobile payment to a retailer? Yesterday’s blog talked about the complex supply chain necessary to deliver on NFC. Don’t get me wrong, there is nothing wrong about NFC technology.. it is a very well defined specification. But it is complex.. if it was a NEW WAY of doing payments (or better yet commerce) perhaps it should have started a little less ambitiously. The team seems as if it prudently sought to reduce risk, but it also gave up on a central element to its value proposition. My analogy for today is that ISIS project is like Vanderbilt’s skipping steam and going straight for high speed mag lev in 1880…. While the entire country was growing at a 10x pace and he had no right of way..

Big projects are tough in normal times.. but mobile is changing at an unbelievably fast pace. Small focused projects are certainly lower risk when innovating at the cutting edge. Everything is changing.. how could anyone architect an open system in such a fast changing environment? It would seem that technical standards like TCP/IP or GSM were successful because of their ubiquity and distributed control. They could be used by all to create different networks with different value propositions.. which incented millions of companies and consumers to invest.  I just don’t see how MNOs can create a business platform based on NFC. Their best shot may be to work with someone like Sequent Software to create an architecture for 1000s of applications to access secure element data.. instead of the one single CSAM wallet coming out in Pilot Dec 2012.

Your thoughts are appreciated

Previous Blogs (Nokia NFC Ecosystem, ISIS Ecosystem or Desert, Banks will win in Payments.. but WHICH ones?)

PayPal at POS?

The most frequent question I get from eBay’s institutional investors and start ups is about PayPal’s opportunity to win at the POS. I met with 3 top Retailers who have been pitched PayPal’s new service. Quite frankly they were laughing.. it goes something like this

18 Nov 2011

The most frequent question I get from eBay’s institutional investors and start ups is about PayPal’s opportunity to win at the POS. I met with 3 top Retailers who  have been pitched PayPal’s new service. Quite frankly they were laughing.. it goes something like this

“we [Retailers] just won Durbin and are in the midst of planning how we incent customers to use their debit card … and we get presentation from PayPal with a rate of 150-200 bps..  am I going to loose any customers because I don’t have paypal payment? Will Paypal bring me new customers that would not have shopped here in the first place? Is there going to be a 100% conversion of credit card customers to paypal? Why on earth would I want to do this?”

PayPal of course is also pitching a gaggle of new mobile tools that let people scan in aisle and shop online to pick up in store.. but does a retailer really want to outsource this?  PayPal’s core value was built around commerce, specifically the new form of commerce that eBay marketplaces brought. Buyers and sellers flocked to a tool that met their needs. No one came to eBay because of PayPal.  Payments are just the last phase of a successful commerce interaction. PayPal still has tremendous global opportunity, but their opportunity is an evolutionary one driven from their COMMERCE core. Their business model (and cost of funds) does not adapt well to the physical world.

PayPal has no tools in its shed to deliver incremental value within a PHYSICAL commerce orchestration role. They simply do not touch consumers or influence them prior to purchase. Facebook, Apple, Google, MSFT all have a much better chance of orchestrating commerce..  This is why Google’s Wallet will win against ISIS… the business opportunity is commerce orchestration…NOT about mobile payments. Never before has a customer had the ability to interact real time in store with products and offers.  Who will win? Which company above has a sales force of over 2000 globally selling to retailers today? Driving business growth? There will be no contest here.

How can PayPal use its tremendous consumer network to deliver value off of eBay?  The answer revolves around what they “could” orchestrate.. perhaps in a junior capacity.  What problems can they solve? If PayPal’s biggest asset is Consumers.. and objective is physical commerce… why not create a “reverse auction” for goods? Let consumers describe what they are in the market for and have sellers bid for the privilege to sell (and service) it. Give consumers option to buy it now in store down the street. This would relegate physical retailers to competing on price alone.. and certainly would not make them many new merchant friends…but they could start off doing this for excess inventory or mark downs.  This could be a very stupid idea.. but PayPal’s efforts to go head to head with Visa and MA in an area where they add no value at a high cost is not much better.

One corollary here is that Payments will become dumb pipes. Banks had a traditional role as the intermediary in commerce. They have fouled the well.. and continue to cry against the harm done to them by Durbin instead of engaging in an honest assessment of the future of their business.  Banks believe they have a lock on payments.. and similarly to ISIS engage in a strategy of control instead of value delivery. This dynamic will push “Commerce orchestrators” to find the path of least resistance (least cost routing) for payment. Not all payments are the same, for example Credit card payments are much different.. because they extend financing to benefit merchant consumer and bank. However there is no reason to force everything through this CREDIT card channel, which is precisely what the banks are trying to do with NFC (for example there is no debit NFC product.. it is not a technical issue but a business one).

Even if payments are dumb pipes they must have a reservoir to pull from, either in a DDA, stored value account or credit line. During my meeting with the Kansas City Fed last week, I discussed the McKinsey report describing how the bottom 4 deciles of retail banking customers are unprofitable. In other words the big 5 banks are trying to find a way to sponsor “switch your bank day” for 40% of their customers.  Many will leave the banking system all together, and this reservoir of funds will translate to cash, pre-paid or some other non-bank product. Banks loss of control over DDA is a slippery slope. If every American has a PayPal account, an iTunes account, an Amazon account, a Google Wallet and a pre-paid card they could find their control strategies are no longer effective.

I apologize in advance for the brevity of this note, and I certainly appreciate comments.. but this is how I see it.

Long time… no blog

I don’t disagree that Visa would love to create a platform where they are the trust authority.. but the banks and mobile operators have different plans. Visa’s CAP plan is a poor attempt to build a platform where they have additional control over merchants, consumers and banks. Mobile is causing tectonic shifts in where and who performs: risk, authentication, KYC, mobile provisioning, clearing and settlement. These are all threats to Visa’s network, CAP is there attempt to put barbed wire around their decaying model.. to keep customers from leaving…

I’ve been meaning to post this super long blog on network profitability.. 8 weeks ago. I’m almost finished.. to encourage completion I promised myself not to post anything else until it was done. Well.. I’m breaking my promise.

For frequent readers, most of you know that I love PayPal. They just rolled out their latest “vision” today

I thought it was some sort of joke.. PayPal.. if you are listening.. please take it down. Do you really plan to penetrate large multi-lane retailers?!  That POS demo with someone keying in their phone number and password.. yeah a grocery store would LOVE letting their customers spend 2 min on a payment terminal. Come on guys. Why not focus on your existing small merchants? Maybe you are but wanted to show something different. I almost spit out my lunch as I laughed when the lady self scanned in the aisle, put the items in a bag and walked out of the store by waving her phone above her head to the cashier busy with another customer. Yeah…. store of the future.

My hope is that PayPal outsourced the video to a 3rd party and forgot to review it..  With Sig and PIN interchange both sitting at $0.21 + 5bps what would motivate a merchant to take PayPal?  Do you go after merchants that do not accept cards (ie Square’s market)? existing merchant customers? big retailers? There is no way I see big retailers going your way.. too much change in customer behavior at POS.. I do use my PayPal debit card … but typing in my phone number? Heck I don’t want to do that and I love you guys.

On another front.. I just read the ABA journal article on Visa’s CAP initiative.

These experts are all wrong. I can tell you why the big banks will not go with this.. it is about risk management. Currently the big banks can manage fraud with custom infrastructures.. banks compete on ability to manage risk (including fraud), putting this technology out puts all banks on a level playing field and wipes out all of their investment edge. Take this together with a $1B+ plastic reissue cost and a $5B+ re-terminalization AND a rotten bank environment and you have a very poor environment for adoption.  I do believe banks will selectively reissue to global travelers. I can’t even use my mag stripe cards in Canada anymore.  The ABA analysis is all wet. The worst line in the article has 2 major hypothesis which are completely unsubstantiated.

1) … they [Issuers] may push for shifting more of the fraud losses and fraud prevention costs to merchants.

2) As is the case in some countries and as proposed by Visa, merchants would only get the current guaranteed payment if they adopt the new chip technology.

ABA.. come on!! Merchants and Issuers both have legal agreements in place. What dark crevasse did you pull these ideas from? For point 1), Durbin allows for future adjustment (to rate) if banks can show that fraud costs are not being covered. What we will see is the death of signature debit. PIN Debit rates have been show to one fouth that of signature ( … so the change will be toward PIN only transactions at merchants.  This PIN model combined w/merchant ability to route transactions is a very big threat to Visa’s network.. How will Visa address? By creating a Chip.. everyone must validate it with Visa.. THIS IS THE PRIMARY STRATEGIC POINT. What banks and merchants will agree on is that Visa has no place in a debit transaction.. as we will see later in the year 2 large banks will roll out their own network…

For point 2) FORCED re-terminalization? … yeah that will win friends. As you can see from Durbin merchants have the power this year.  So Visa will force merchants to accept a new agreement and incur additional expense?   In the EU, Visa used the carrot.. not the stick. So please, please give me an example of Visa pursuing this approach in any country. For history, I ran channels for Citi in 47 markets.. and didn’t see this.. but perhaps they did it in last year or so.

ABA’s next point caused me to choke

Not only will chip technology accelerate mobile innovations, it is also expected to secure payments into the future through the use of dynamic authentication

Have you heard of NFC? I don’t disagree that Visa would love to create a platform where they are the trust authority.. but the banks and mobile operators have different plans. Visa’s CAP plan is a poor attempt to build a platform where they have additional control over merchants, consumers and banks. Mobile is causing tectonic shifts in where and who performs: risk, authentication, KYC, mobile provisioning, clearing and settlement. These are all threats to Visa’s network, CAP is their attempt to put barbed wire around their decaying model.. to keep customers from leaving…

Square will “do better” than PayPal? Yeah.. and Pigs Fly

Keith Rabois has been around payments a long time.. and given his PayPal background, his view shouldn’t be ignored. $1B TPV sounds like a big number.. but equates to only $3M in revenue (30bps take rate). PayPal has a 330-390bps take rate driven by its 3 party model (both merchant and consumer have accounts). Yes, that’s right… Paypal makes 10x more revenue for every dollar processed than Square. So for Square to Surpass PayPal, they need $1T in TPV

May 25, 2011 (Updated.. I was 25% off on TPV)

TechCrunch Today (Square has 95% chance to do better than PayPal)

TechCrunch – Square Register (May 24)

Keith Rabois has been around payments a long time..  and given his PayPal background….  his views shouldn’t be ignored. $1B TPV sounds like a big number, but equates to only $3M in revenue (275bps take rate, 30bps margin). PayPal has a 330-390bps take rate (230bps margin) driven by its 3 party model (both merchant and consumer have accounts). Yes, that’s right… Paypal makes 7x+ more revenue for every dollar processed than Square. So for Square to surpass PayPal, they need $700B in TPV… (in their current revenue model). Given that total US Credit Card TPV is $1.3T (Visa $781B , MA $515) that seems a little unrealistic.  (for more detail see

So what is “do better”? Number of accounts? Square is sitting on about 20k active customer accounts.. this is a long way from PayPal’s 100M..

The new Square register is a decent idea.. but Square is NOT competing in a vacuum. During PayPal’s early days there was a problem that needed a solution (CNP). PayPal delivered a strong value proposition.. a 3 party payment platform for online purchases. Solving this problem was critical for commerce (on eBay) to take place. The online payments problem, which PayPal solved, was a roadblock to delivering commerce value.

What are the problems that Square is attempting to solve?

  • Help Visa drive credit card volume
  • Help small merchants accept cards
  • Help small merchants communicate to consumers (Square registers)?
  • Provide Consumers a Wallet on their phone?
  • Help a Craig’s list seller use a card next time they sell something?

Square has done a great job in consumer experience, across all of their applications,  but their challenge remains value delivery. Chase and Visa have billions of reasons for sustaining CREDIT card TPV, but this is NOT a retailer friendly value proposition. As I’ve stated, the challenges of increasing card usage with small merchants is not a technology problem, it is a business (value proposition) issue. Square is doing a great service to many small merchants in bringing down the cost of accepting the card, and improving the consumer/merchant experience.

What is their opportunity?

Retail Sales in US is about $2.4T (excluding Auto, Gas, Resturants). This is certainly a larger market than the $176B spent in US eCommerce. What is your guess on % of merchants that do not currently accept cards, and their categories? Take a look as the US Census data, and I would say total sales for “square prospects” are around $100B.

Take a look at the recent Micros/Verifone announcement as an example. Existing POS and terminal manufactures are not sitting on their hands. Who would want to invest in Square? What kind of platform are they building? This is not a group which will rally the industry, but rather spur it to action (or isolate it to individuals/small businesses).

We will soon see mobile value propositions that contain payments.. but payments are just a supporting mechanism of a larger commerce related value proposition.  Square is making card acceptance nice and neat for small merchants.. this is a good niche opportunity. I will shave my head when Square “does better” than PayPal.. I give this a .0005% chance..

Do SquareUp’s $$ Square?

My guess is that Square sees the light at the end of the tunnel and knows it will not be a pretty collision. They want to grow the merchant base as fast as possible in hopes to attract an acquirer.

Update 1May

Dorsey just tweeted Square’s numbers. See here on Tech Crunch

Looks like analysis below is directionally accurate, actually a little kind.  TPV moved to $2M on that day (of Tweet).

Note that Square revenue is $59k for the $2M TPV, or 295 bps. Transaction Margin is revenue less Square’s processing expense: issuer fees, processor fees. As listed below, this should translate into net square transaction revenue of $10k (note on my post last night I was wrong.. never post at 2am.. error rate is high).

Dorsey picture shows 9k active customers (merchants) on this particular day, which is again consistent with estimates below. Total Active is probably 3x-4x of this, so average transaction amount is probably around $10-$15.

Funny that Visa bought into Square on the same week that it rolled out new mobile swipe security standards. Visa is highly sensitive to Chase needs, and given Chase’s equity stake here they wanted to show support.

Could Square work out? sure it could.. but it is an intermediary solution at best as it is US only (No EMV), and will compete with new mobile solutions which we will see rolling out by fall.

Original post below

24 Feb 2011

Today’s TechCrunch Article

Following Square is a Hobby. My alarm bells go off whenever a non-payment team “innovates” in payments. My December blog Square Up Update  estimated that Square had 5-15k users. Today’s TechCrunch says Squares 1Q11 TPV is $40M and that they are “signing up” 100k merchants per month. My guess is that “signing up” means downloading Square on your iPhone.

From this TPV we can derive Square’s revenue and their “active” customer base

Rev = TPV * Transaction Margin

Transaction Margin = Merchant rate less cost of funds = 275bps – 225bps = 50bps

Square 1Q11 Rev = $40M* 50bps = $200,000

Rev lost from eliminating $0.15/tran fee = 0.15* 40M/$10 = $600k

Active Customers (Merchants)

Lets assume that average ticket size is $10 and average square merchant accepts 50 transaction per week (10/day, $6,000/ quarter).  This means that Square has 6.7k active merchants. For other iterations see chart below

Is Square really shipping out 100k doggles every month, while only 6-7k merchants are active? I have no idea, but it cannot be a good thing if they are.. see


  • Square’s active merchant numbers are likely to be around 5k-30k
  • Eliminating the $0.15 fee is a very big revenue hit… 1Q Rev looks like $200k now
  • Square’s doggle is still not on the PCI compliance list (see PCI org’s list of approved applications )
  • Just as in any merhant account, settlement funds are held to mitigate risk. Does a small merchant want to wait 60 days for payment and pay 3% for the priviledge of accepting a card? This is not a Square issue, but an industry issue in moving down market into cash replacement.  PayPal solved a real problem (CNP Transactions) for a real community of buyers and sellers that coordinated (eBay).

My guess is that Square sees the light at the end of the tunnel and knows it will not be a pretty collision. Evidently Square is burning through its newly received $27.5M (courtesy of Sequoia and Khosla) to grow the merchant base as fast as possible in hopes of attracting an acquirer. Square’s last round closed on a $240M valuation, assuming trailing revenue of $2.5M on $100M TPV, valuation is 16x revenue. However now that the /transaction fee is eliminated.. we are looking at 75% reduction in revenue and valuation on forward revenue is near 240x.  Believe or not.. OBOPAY was still more highly valued.. In both cases, investors have just doubled down and created valuations driven toward an exit strategy.. not on a sustainable biz plan.

The only entities that would be interested in Square are large card issuers who could unilaterally charge a different interchange rate for their own cards (ex Chase and BAC). But the bank business case for an acquisition would be very tough, as a single bank could only reduce interchange for the cards it controls, resulting in a 10% improvement in transaction margin (at best).  A Visa or MA acquisition would alienate the acquirers and processors. I just don’t see a logical exit for them with anyone. Issuers don’t want to pick winners in this space.. they want broad adoption. If JPM and BAC cut special interchange deals w/ Square then they will be pressed to do the same for PayPal.

eBay’s analyst day conference 2 weeks ago showed how aggressively paypal plans to move in the POS space. PayPal’s Virtual terminal not only lets merchants take cards with NO CARD READER, it has partnered with Verifone to act as an acquirer. Next month, we will see some super applications at APSI conference. One of which will demonstrate the current Nexus S operating as an NFC acquiring terminal. .. You don’t even need the doggle or the “signature”..

Disrupting Payments at the POS

From my (very limited) purview, there seems to be 2 core disruptive innovations that will influence payments at the Point of Sale (POS):

Mobile as a Payment Platform
Mobile as an Incentive/Advertising Platform

7 February 2011

(Note: I apologize for the typos here in advance.. I really do need an editor)

At the end of the year, I try to do a little research… catch up on reading and relationships… all while updating my assumptions and predispositions. We are all creatures of our environment. Past experiences influence our views on current events and future expectations.

During this annual Holiday refresh process I try to develop some big picture “themes”. The questions I’m trying to answer: where are the opportunities? Where should I place my “bets”? What fundamental challenges that must be addressed? Are “fundamentals” changing (core innovation or at periphery)? Who has built a great team? Distruptive Innovations? The 3 areas I’m currently focusing on are: payments, mobile, and convergence (digital/real world).

Anyone that has read this blog knows I am a big fan of Clayton Christensen (author of Innovator’s Dilemma and coiner of term “Disruptive Innovation”).  From

An innovation that is disruptive allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill

 The litmus test for disruption involves delivering service in a substantially different cost structure. A key example is delivering simplified “good enough” product to a demographic that is “over served” by existing providers. From my (very limited) purview, there seems to be 2 core disruptive innovations that will influence payments at the Point of Sale (POS):

  1. NFC as a Payment Platform
  2. Mobile as an Incentive/Advertising Platform

There are numerous environmental forces that are shaping how these disruptive innovations will manifest themselves, for example:

  • Bank Ownership/Control of payment networks
  • Non Traditional Banks (Target, WalMart Mexico, Discover/Barclays)
  • Regulations
  • Specialization of Labor in Payment Services (Ops, Fraud, Risk, Platform, Support, Compliance, Banking, Acquiring, Processing, Authorization, … )
  • Handset Platforms (Android, iPhone, …etc)
  • Mobile Network Operator (MNO) platforms (NFC, ISIS, Advertising, Carrier Billing … )
  • Retailer Analytics (ie Price Optimization)
  • Advertising Analytics (ie. Adding location context)
  • Consumer Behavior
  • Price Transparency (Merchandise, Bank Fees, …)
  • Social Networks (Groupon, Facebook, … )
  • Consortiums and Partnerships

NFC as a Payment Platform

Mastercard’s PayPass was the first major contactless card program. Within the scope of the 2003 pilot program:

  • PayPass Technical Standards
  • PayPass Certification
  • Consumer PayPass Tokens
  • POS Terminals (which accept tokens)
  • Issuer Participation
  • Retailer/Transport Participation

Following MA, all of the other card networks have launched their own proprietary contactless products. They have numerous form factors, including: stickers, Key fobs, chips in cards, …etc.  Although most are based upon the same ISO 14443 technical specification… each payment process is proprietary and technology must be certified by each card network. Contactless cards ARE NOT a disruptive innovation, although pilots have been “successful” from a consumer use perspective, there were no new markets served nor was a more efficient cost structure developed. Many contactless issues remain unresolved today, these include: merchant POS costs, retailer/network/bank relationships, card reissuance, network effects/consumer demand, mobile application integration. (See previous blog for more detail).


Mobile Operators and the GSMA created an industry forum to define a broad set of standards surrounding Near Field Communications (see This is a new “platform” where multiple applications can leverage an ISO 14443/18092 compliant radio/controller (Ex NXP’s PN544 which is in the Nexus S). In business speak, this means that the phone can run software applications which assume the roles of the any of the multiple card “tokens” above. In the NFC world, PayPass is just a software application which can be installed on an NFC enabled phone. The NFC architecture could also facilitate applications to act as a PayPass Reader (POS machine), Oyster Card, or on to take the place of your office badge to open secure doors (Previous Blog on NFC Ecosystem).

The 140 members of the NFC forum have done a superb job of creating a the specifications of a “platform”. Unfortunately, it takes strong business leadership to create a business model (and team) that can execute against it. Generically, key measures of platform success are “ecosystem revenue” and number of entities investing in it (see ISIS Blog). By these measures the ISIS consortium’s plans are severely challenged.  Today, Apple seems better positioned to execute in a “closed” NFC model (see Apple and NFC).

NFC as Payment Platform – Disruption

NFC thus enables a new “software” nature for both existing cards and payment at the point of sale.  Disruption occurs in: cost of customer acquisition, cost of delivering “new” payment services, cost of developing a payment network, cost of POS infrastructure, …etc.. As a side note, there is a separate case to be made that this same disruption exists in emerging markets separate from NFC (See MNOs rule in Emerging Markets).

Card Costs – Industry 101

Anyone in the credit card business knows that acquiring a new customer has 3 primary cost components: marketing, application, activation/use. Marketing is straightforward enough with card cost per acquisition (CPA) driven by marketing effectiveness (direct mail, online, referral, co-brand partner, …) to a specific demographic. CPAs in card can range from $10 to $200+.  Application encompasses collection of consumer data, credit scoring, pricing, acceptance of terms, approval and shipment of physical card. Activation and use is rather self explanatory.. with example costs relating to incentive programs driven on first use.. and continued use.

Future Scenario – PayPal/Bling

Let’s discuss a scenario involving a new payment instrument. Given that Paypal’s analyst day is Wed perhaps: PayPal and Bling at the POS. Today, Bling’s RFID based tags attach to your personal items and enable you to pay at a Bling enabled POS device (including Verifone’s new terminals). This model has a few problems, one is that tags must be mailed and activated. In a future scenario, PayPal has hired Zenius solutions to build a PayPal/Bling POS application within an NFC enabled phone. Now you just download the PayPal app to your iPhone 5 (complete with NFC). Merchant’s POS systems currently allow them to receive updates for each supported payment instrument. In this “future” case, PayPal has decided to eliminate the need for normal merchant agreements.. all that is needed for a merchant to accept a PayPal/Bling NFC payment is a paypal merchant account (with PaymenTech). What are PayPal’s costs in this model? Marketing (and paying the MNO for NFC access).

If PayPal could extend leverage their consumer footprint into the POS, with little cost, what does this mean for banks? It means that the banks could also build a new payment instrument that leverages their customer footprint. Why do you need a Visa or Mastercard brand at all if there is no cost to reissue? For consumers, what payment instrument do you choose? Is there a threat to the  entire concept of a credit card? Apple, Google and Amazon scenarios may also logically follow this example. Retailers like Target could also extend use of their payment instrument outside of their stores (see Target RedCard).

Bank Strategy in this model? See Banks Will Win in Payments

MNO Billing

Carriers in the US, EMEA and Asia are expanding into mobile billing services (provided by Bango, Boku, billtomobile, payforit, …etc). In this model, carriers are taking on some additional credit risk (for post paid accounts) and expanding use of pre-paid. Given that the carriers will be controlling the NFC platform (see related blog), they could also extend this payment capability to the POS with the appropriate processor relationships (ie. First Data, FIS, PaymenTech, …etc).

Disruptive Innovation – Mobile as Advertising Platform

This blog has gone on a little too long.. so will have to make this part 2. The basis for this section is my previous Blog: Mobile Advertising Battle. Disruption is cost to influence a customer prior to purchase. Influence includes targeting that is relevant to customer’s geography, preferences, demographic, transaction context, behavior, …etc


What does all this mean? What will 2014 look like? Unfortunately I don’t have a crystal ball.. what I would really like to do is charter some smart college team to create a “virtual option market” where we could all participate in pricing/evaluating various options (as laid out in the HBR article Strategy as a Portfolio of Options).

From an investor perspective, the prospect for these disruptive innovations altering the market is real, but with many dependencies and tremendous stakes. Clayton Christensen presented IBM/Intel/Windows as key example in dynamic of disruptive innovation. IBM chose to ignore the PC market.. as the margins were poor. Today, payment incumbents clearly see the threat and are reacting to it. Additionally, incumbents hold many of the “keys” necessary to execute and are well placed to construct new competitive barriers as well as ferment chaos and confusion. Small companies embarking on investments in this space must be versed in dancing with 800 lb gorillas… so ensure you have execs that can fill out the dance card and move swiftly while wearing iron shoes.

Paypal at the POS?

PayPal is best positioned of any major player to link the virtual and physical payment worlds (see here for detail): they have a consumer base, merchant base and a phenomenal fraud/risk team of 300+ with commensurate tech and ops. However their ability to execute is not without challenges. For example, what % of their current merchant base does POS transactions? Will there be a need for merchant terminals? If so who will pay?

18 August 2010

Great WSJ Article TodayPaypal looks to real world commerce

First Draft…. final tomorrow.

As stated in my previous blogs about Apple, Bling, and the Mercury NewCo we are in the midst of a revolution in consumer payments, driven by large non banks, with new value propositions. For example, we see established organizations like AT&T, Verizon, and Discover collaborating (Mercury NewCo) with a payment value proposition driven by mobile advertising, Card networks attempting to develop PayPal killers (see Visa PayClick) and mobile handset manufactures attempting to create models for payments separate from banks (see Nokia and Apple NFC).

The worst kept secret in mobile payments today is: there aren’t any (except for MNO unbanked solutions). Efforts like Mastercard/Obopay have failed globally because they have focused on P2P (no existing volume). Alternatively, PayPal’s efforts are focused on the POS. Enabling any “merchant” to accept any card either at POS or virtually (see previous blog on PayPal’s virtual terminal). This approach is a win for banks (card acceptance), a win for consumers (convenience/loyalty), and a win for merchants (reduced merchant fees and interchange).

PayPal is best positioned of any major player to link the virtual and physical payment worlds (see here for detail): they have a consumer base, merchant base and a phenomenal fraud/risk team of 300+ with commensurate tech and ops. However their ability to execute is not without challenges. For example, what % of their current merchant base does POS transactions? Will there be a need for merchant terminals? If so who will pay? As discussed in the article above, Bling has been mentioned as a potential approach. Issuing Bling tags to PayPal’s employees is certainly a useful way of testing the consumer issues associated with issuing (and using) a payment tag.

My guess on PayPal’s “focus”?

Given PayPal’s strengths I would see a “phone as POS” approach as the most logical.  As consumers we focus on our individual accounts, but PayPal is one of the few “2 Party” payment networks (others are Discover, Amex) that also include merchant acquisition. 2 Party systems are uniquely positioned to control the costs and value proposition between the merchant and the consumer. One of the major NFC challenges is POS infrastructure: who will pay for it? The phone as POS would certainly address this Gordian Knot for small merchants. Small merchants are a group that also feels the most pain in interchange and card acceptance fees due to their lack of negotiating leverage. Oddly enough large banks seem to be supportive of PayPal’s efforts here with the view that their actions will help drive cash replacement. In other words, if PayPal’s innovation is indeed focused on NFC acquisition then they will be able to process all cards..

On the merchant side, PayPal has already completed much of the heavy lifting with its existing virtual terminal service. This service equips PayPal merchants with ability to accept any card at the POS (see Virtual Terminal blog). NFC or RFID form factors are just another abstraction for this card.  On the consumer side, I would expect to see PayPal working to link PayPal accounts to multiple form factors. Expect PayPal to make an acquisition in this space.

As of today, here is my view of the teams competing in mobile payments at POS

  • Mastercard/Citi/Obopay/Nokia
  • Visa/Monitise
  • Apple
  • AT&T/Verizon/Discover/?Google/First Data
  • PayPal/?

More to come tomorrow.

Visa Payclick

Summary on Visa Payclick: “Partnering with banks” is very challenging…. do banks want Visa to deliver a “bank friendly” paypal competitor.. or would banks prefer to create something they can control? View Payclick today as an Australia “test market” of something Visa intends to grow, with an initial consumer focus on digital goods.

30 June 2010

Summary on Visa Payclick: “Partnering with banks” is very challenging…. do banks want Visa to deliver a “bank friendly” PayPal competitor.. or would banks prefer to create something they can control? View Payclick today as an Australia “test market” of something Visa intends to grow, with an initial consumer focus on digital goods.

Visa just launched Payclick ( with plans to expand globally. I see this service competing more with Bango (see and payforit ( than PayPal. There is no way for a consumer to withdraw funds placed in the wallet, or to be paid..  (it is not a wallet), it allows for the addition of current account funds through BPAY integration (note BPAY is a bank owned consortium in Australia providing common services like telephone and online bill payment). Allowing multiple funding instruments provides for a lower cost of funds, and BPAY penetration is over 80% in online customers. However the inability to credit the wallet, while  simplifying risk and fraud operational challenges, limits the consumer value proposition and the addressable market. Given these wallet restrictions, Visa has chosen an initial market focus on teens buying digital content… this narrow market focus may provide Visa the opportunity to “kick the tires” on the system before expanding it (geographically and demographically).

Re: Expansion.  I understand that Visa is “in flight” with expanding the AFT/OCT transaction set (See Patent) which is the heart of the Visa Money Transfer service. My global card contacts tell me that Visa is attempting to get issuers on board with credit push in an updated issuer agreement (see Visa Money Transfer Overview – Issuer presentation). The “incentive” for issuing bank to accept new agreement is a $0.50 revenue share. Banks are not biting on this (subject of another blog on Visa and card remittances).. hence my guess is that the Payclick service has “visions” for being bi-directional.. but not until issuers sign off on accepting OCT transactions.

We should not assess Payclick based solely upon current functionality, given Visa’s substantial investment here there must be plans for additional transaction types. The CYBS acquisition gives Visa assets to develop something much more comprehensive. For example, with the CYBS could serve as an acquirer for Payclick as a “light” tool for small merchants selling digital goods in mobile market places and app stores.  On the consumer side, Visa has a steep hill to climb in creating a value proposition which would drive consumers to store card information with Payclick (particularly given the competing payment methods above).

Risks I see for Visa in Payclick:

  • Initial target demographic is well served by both Bango, Paypal, iTunes Wallet, prepaid card (for my teen), payforit (UK), MNO billing, …
  • “Send only” functionality will not create critical mass in either consumers or merchants
  • Banks will not bite on OCT transaction set and service functionality will not be able to expand
  • Visa will loose focus after core innovation team departs
  • CYBS can acquire and service… but it will take serious marketing dollars to create a new consumer brand… as well as a solid value proposition.

Add these risks to Visa’s existing “dynamic” with  retailers (a group that is not favorably inclined toward assisting Visa nor any card network) in creating another payment type  (issues w/ interchange, compliance, fraud, payment system integrity, ..). Since Visa’s IPO,  Banks are no longer in control and also view Visa’s efforts through a new competitive lens. Banks also like the idea of having their own brand on payments. Thus, Visa is stuck managing a complex 4 party system with limited ability to create an innovative value proposition which all parties can agree on.

Visa is facing head on competition from “unshackled” teams like PayPal. In fact PayPal just launched mobile instant checkout today .

Feedback appreciated

PayPal Virtual Terminal – Accept Cards at POS

I can’t help but wonder how this pricing will effect Chase Paymentech (PayPal’s partner and merchant acquirer). Small merchants may indeed think twice of having their own merchant services agreement and specialized terminals.

PayPal Virtual Terminal

6 June 2010

Great job PayPal…. bringing down the cost of card acceptance to $30/mo. No hardware, no special agreements.. just add the service to your existing merchant account.

The only downside seems to be for the 5+ Valley start ups like SquareUp that were targeting physical POS acceptance in a “Craigslist” type environment. The head of payment strategy at a top 3 bank told me that making merchant acquisition easier was a priority for driving new card volume. Looks like VT can both drive TPV growth and address potential down market competitive threats at the same time.

I can’t help but wonder how this pricing will effect Chase Paymentech (PayPal’s partner and merchant acquirer). Small merchants may indeed think twice of having their own merchant services agreement and specialized terminals.

Thoughts appreciated

Bumping payments? Paypal Bump

What I’m most impressed with is Paypal’s ability to extend itself in niches like this. Their open APIs and ability to extend “their rails” beyond internet merchants is 5-10 years ahead of what any other payment network can do.

26 March 2010 (updated April 13)

Excellent Video overview below (30 sec commercial)


I’m reading the CTIA press and see this come out, wondering how my iPhone communicates with another iPhone. The bump application listens to the iPhone accelerometer and when it reads a bump (when running) it sends time and event to the bump cloud. The bump cloud looks for 2 events and then requests that your bump user information be shared (from bump)

When you bump, if we find a match with a phone that felt the same bump, our servers ask each phone to send up the contact information each user chose to share, but nothing more. If and only if both users then confirm that the match is indeed correct will the contact information be sent down to the other person. None of your personal data is ever stored on our servers.

Very ingenious…. What I’m most impressed with is Paypal’s ability to extend itself in niches like this. Their open APIs, ability to manage risk and extend “payment rails” beyond internet merchants is 5-10 years ahead of what any other payment network can do. Beyond the technology side, it certainly helps that  Paypal’s user penetration within the iPhone’s customer base is “rather high”.

This application also highlights the opportunity for NFC in Apple’s platform. For those that aren’t familiar with my previous posts, industry G2 indicates that Visa and AT&T are going without Apple. Obviously a good strategy for AT&T as Apple already has significant leverage in the “relationship”. Of course, NFC P2P will require an intermediary to own “risk” of card acceptance and work through (payment network related) merchant and third party payment aggregator (TPPA)  issues.

From a regulatory perspective, it is fortunate that PayPal has already gone through the “heavy lifting” in obtaining money service licenses in the 50 states (see related post).

What other vendors/payment networks could compete here? A: CashEdge and Money Bookers. In the UK I could almost envision the video clip for a money bookers “Bump Bet”. In the US CashEdge is a 3rd party service provider with 60-70% of US retail deposit accounts in their footprint (BAC, Wachovia, Citi, …). CE has  a much more efficient (low cost) ACH network and is one of the few US companies with proven operational risk management in “remote” payments. CE should look into riding PayPal’s marketing wave and leverage bump technology to allow me to do everything PayPal does,  only directly from my bank account (at no cost). On the regulatory side, Cashedge runs as a bank service provider… in essence you are dealing with your bank to “push” funds (ACH debit) when you use POPMONEY.

Great job Paypal.