Retailers Discourage Credit Cards

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9 July 2012

WSJ Article Today: Price of Plastic Going Up?

Merchants may soon begin to impose a surcharge each time a customer pays with credit card, a practice Visa Inc. and MasterCard Inc. currently prohibit…. [But provision will likely go away as part of impending settlement].

The “accept all cards” rule is likely to undergo a huge change, with implications for Visa/MA earnings, new retailer led payment networks, mobile wallets, issuer loyalty programs, EMV reissue, and “new products” (ex. Instant credit, pre-paid, decoupled debit, …).

Take a look at this excellent GAO Report to gain detailed insight into the battle being fought.

 Several of the large merchants that we interviewed attributed their rising card acceptance costs to customers’ increased use of rewards cards. Staff from these merchants all expressed concerns that the increasing use of rewards cards was increasing merchants’ costs without providing commensurate benefits. For example, one large merchant provided us with data on its overall sales and its card acceptance costs. Our analysis of these data indicated that from 2005 to June 2009, this merchant’s sales had increased 23 percent, but its card acceptance costs rose 31 percent. Rewards cards were presented as payment for less than 1 percent of its total sales volume in 2005 but accounted for almost 28 percent of its sales volume by June 2009.

This will have an impact on Visa’s volumes if card issuers don’t start immediately renegotiating the rates with the top retailers. This taken together with Durbin (see previous blog), retailer driven payment networks (ex See Target RedCard), Retailers acting as banks (see GDot/WMT), Google/PayPal at POS (as MSBs), Pre-paid cards, …etc. We have a VERY exciting time in payments that the banks will be challenged in responding to.

Why will this impact Visa’s US volumes? Well if signature debit it dead, consumers will use PIN debit (just like Canada and Australia). In the Post Durbin world, Retailers don’t have to route PIN debit transactions through Visa at all. If retailers aggressively reprice credit card transactions (adding fee of 1-2%) we will have consumers shift spend back to debit.. a PIN debit… This also is happening at a time when consumers aren’t exactly fond of banks and fees. If the top 20 US retailers add fee to credit card use, this could impact Visa’s growth buy 2-6% in 2 years. The main dependencies here are Issuer’s ability to lower interchange for these retailers and survival of Signature debit (over bank controlled PIN Debit).

Certain merchants obviously benefit from access to ubiquitous consumer credit facilities, and these merchants are unlikely to add on any fee. But retailers in non-discretionary and low margin segments will likely move aggressively to stem the growth of loyalty driven credit card use. I would also expect retailers to add lower cost payment options, instant credit (ex paypal’s BillMeLater) and new products which may replace some of the “lost” loyalty benefits (ex Target RedCard).

I maintain that Banks have the facilities to win in payments (see blog).. but winning is more than leveraging your user base and ubiquity to extract tolls from merchants.. and more about delivering value. Unfortunately Banks are working to restrict growth of new payment mechanisms by enhancing control points (ie ACH) .. they have seen this coming and are looking to lock any door they can. If you lock the door.. someone will just jump through the window.

BIG winners if there is a settlement on passing credit card costs:

  1. Payment service providers not dependent on credit, or offering alternative PayPal, Google, Square,
  2. Instant Credit
  3. Retailer Led payment networks
  4.  Pre-paid,
  5. PIN Debit

Loosers:

  1. Anyone dependent on a credit card (NFC, issuers, loyalty, …).

For my mobile friends.. this may give you additional context on why many merchants don’t accept NFC?

Apple Passbook: No NFC Here…

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I’ve covered this topic quite a few times

As most of us have known Apple has been out of the NFC game for some time (18mo+). It’s just amazing that the mainstream press can be so caught up in a disinformation hype cycle that seemed to have been started by some kind of patent application. Yesterday’s WSJ had a fantastic article on Apple’s plans.

What makes for a “successful” consumer wallet? From previous post:

Customer Trust, Customer Control, Convenience, Ubiquity (opposite of lock in), Intuitiveness, Experience in Use (buying, redeeming, accessing, ..), Security,

If I have a wallet that only accepts 3 cards that are not accepted at any of the top 20 retailers (ie ISIS), it is of little value. Why not let consumers control what goes in? This is where carriers must get to in order for NFC to survive. Even then, NFC phones are far from my recommendation. After all if your payment information is locked in a mobile phone how do you use it when you are at your computer buying something on Amazon? Locking information in a phone is just plain stupid in the age of the cloud.. most agree that individuals should have a their information in a cloud they control. The NFC zealots reading this blog will respond that it NFC doesn’t require a network and is more reliable… my response, the POS and payment terminals are connected.. NFC doesn’t need to hold the card in the SE.. it just needs some sort of identifier.. or in the Square cardcase example no NFC at all just your voice print. After all if there is no auth from the payment network.. the transaction will not happen.. so something is connected in 99%+ of card transactions.

I’m very impressed that Apple’s exec team has kept the iPhone away from NFC… strategy brilliance is an understatement. By expanding Apple’s ownership of Digital Goods (old blog here with financials) into mCommerce (ie physical goods bought via phone) and narrowly aligned Physical commerce (ex. Ticketing) they can maintain ownership of the entire consumer process.. from marketing, sales, purchase and “delivery”.

Apple’s unique ability to garner 75% of mobile handset profits is shifting from DESIGN to VALUE ORCHECTRATION (see blog). No one can orchestrate value in NFC (see 12 party mess).  What is truly ironic is that as the carriers spend hundreds of millions of dollars on NFC and their walled garden strategy to “force control”, Apple and Google will be further ahead in coordinating value in new networks. This value delivery outside of the mobile network will further cement carriers roles as dumb pipes (related blog).  This seems to support my hypothesis (often stated) that it is nearly impossible for legacy networks to adapt in delivering new value propositions.

MSFT has a Wallet too?

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23 June 2012

From the Window’s Team Blog

Wallet: Windows Phone 8’s new digital Wallet feature does two great things. It can keep debit and credit cards, coupons, boarding passes, and other important info right at your fingertips. And when paired with a secure SIM from your carrier, you can also pay for things with a tap of your phone at compatible checkout counters.

From PC Magazine

Microsoft is taking a somewhat unusual approach to a digital wallet by introducing a Wallet hub app and APIs that let third-party developers build applications to process transactions. What makes this so unusual is its use of “Secure SIM” cards.

Microsoft has some very interesting assets and experience (see Wikipedia on wallet, passport, liveID).

  1. Microsoft has 3 POS systems (see overview) with Dynamics as their “go to”.
  2. Passport “experience”
  3. Phone OS
  4. Developers (will leverage core Win 8)
  5. Cash to compete
  6. Skype
  7.  aQuantive (digital advertising)
  8. MSN Money
  9. Global sales/distribution
  10. Patents

MSFT Hurdles (Wallet focus)

  • No phone OS adoption
  • Brand
  • Consumer Demographics of Phone 8 buyer
  • No “killer” apps/capability compared to Android/IOS
  • Minimal credit cards stored w/ LiveID
  • Current phone “app” footprint
  • Handset manufacturer commitment (See HTC article)
  • Time for Nokia to support
  • How on earth are they going to Sync a card in the NFC SWP SIM with the Wallet Hub?
  • US MNO Support
  • Time to complete large scale pilot
  • Subscale digital Advertising platform

Why announce at the developers summit?  My guess is it has to do more with MSFT’s desire to turn on a developer community for the digital goods. MSFT is in control of the platform here, while the POS and NFC is far in the future. So this announcement is really aimed at competing with Apple’s Passbook in areas such as in app billing and mcommerce purchases.

I will be very impressed if MSFT can get 100k handsets active w/ Orange, and over 20k a month using NFC in a SWP SIM.

MSFT.. are you doing something unique this time? My recommendation: build a Platform team that crosses your organization. Task them to build  end-end reference architecture(s) from phone to POS from mobile advertising to redemption,  … etc. Then give it away… Take a look at what Square Register has done and reinvent the POS experience. Be original.. again.

Nokia and MSFT: 2 Mobile Turkeys?

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Today’s WSJ Article

http://online.wsj.com/article/SB10001424052702303822204577465771376539532.html

My detailed analysis in April

http://tomnoyes.wordpress.com/2012/04/11/nokia-apple-android-and-the-stage-4-value-shift/

Rumor is that when Google’s Andy Rubin was told Elop spurned the Google opportunity he responded: 2 Turkeys don’t make an Eagle.  Nokia is a tremendous engineering organization, just like RIM was, and Apple still is. What sets Apple apart? Marketing Genius and business planning that DRIVES engineering (not the other way around). When the “value” equation shifts from feature/function to “experience” engineering is stuck.. as few companies can lead the vision that excites customers.

Elop needs to be taken out.. 92% of Nokia’s value has been destroyed … he has led them toward a huge miss in perhaps their last opportunity to restructure.  What a shame.  There are many growth opportunities in this market where Nokia could compete (if they still have any of those great engineers left). However the current path for Nokia resembles a HTC style contract manufacturer that only builds Windows phones (and low cost handsets for emerging markets).

What would I recommend? something distruptive.. leveraging existing handsets. Example:

– Leverage MSFT and Skype to create solid urban phones no longer dependent on carriers.  Enable local wi-fi providers to be paid for their bandwidth in early stage to encourage them to set up stations. Create integrated backhaul to ensure that the ISP Carriers to not influence pricing.

– Integrated Retailer. Big stores are a black hole for bandwidth… retailers don’t want to enable 3g/4g services as consumers only use it for price comparison (a slight exageration). How can Nokia/MSFT create integrated retail experiences.. example femtocells in all retailers (Samsung is market leader here), integrated into new mobile POS systems (MSFT does own  RetailDynamics) and some new ad platform.

– Integrated Home.

– Integrated Auto.

Thoughts appreciated.

 

Google Wallet Thoughts

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13 June 2011

Please see my disclaimer at top.. this is a biased blog.. (comment necessary because the PayPal folks don’t like me this week)

The rumors of my death have been greatly exaggerated…

–       Mark Twain

To restate from my tweet yesterday… Google Wallet Dead? Come on.. Just draw a simple chart 50 engineers working on a May 2011 go live.. and now 13 months later Google just stops working on it ?… just goes away? The Wallet team has only gotten bigger.. Do honestly think 50+ engineers are are all working support? Obviously something new is coming up..

What will the “new” wallet address? Well let’s look at the obvious issues:

  • Consumers don’t use the wallet after an initial “novelty phase”. I could have saved Google quite a bit of money on this one.. this is what my NFC pilots in 7 countries taught me at Citi. This problem is not unique to Google… it effects all NFC pilots.  Customers just don’t care whether they tap or swipe. This is the central problem that must be addressed.. there IS NO VALUE in the payment itself.. but rather the COMMERCE PROCESS. (see my previous posts)
  • Carrier control of the NFC element. This is just a mess, as is the entire supply chain (see 12 party fur ball). It is beyond repair. The carriers want to charge for each and every access of the secure element. That’s right, they want to charge credit card companies $1M a pop to get their cards in, and Hotel room providers for the right to enable phone as door key. This is a replay of their “walled garden” strategy they have tried many, many times (see Carriers as Dumb pipes).
  • Ubiquity (what goes in the wallet). Do Consumers really want to use a wallet that only accepts 3-4 specific issuer cards? Google wants customers to put whatever they want in the wallet, at no cost.. loyalty cards, debit cards, prepaid cards. Their “problem” is neutrality.. they appear to be a competitor to everyone (see related blog). Google wants to “enable” everyone.. if banks can create value… fine.. if merchants can create value.. fine. .but they are not taking sides. After all it is the consumer that chooses what works for them. For example, I don’t use Target’s iPhone app for price comparison inside a Target store…
  • Ubiquity (phone types). There is a limit on number of NFC enabled phones available for consumer use. You can’t create momentum by forcing people to upgrade phones.. that plays into Carrier control. The objective of any Wallet is not to force a phone upgrade, but to deliver consumer value.. to every consumer.. online and offline (my Blog on TXVIA). You must feel sorry for the carriers.. they would love to ship 2M+ SWP enabled phones.. but there is no supply chain cranking them out.. (yet I digress).
  • Ubiquity – Acceptance. The big retailers are not jumping over themselves in a rush to support tap and pay. Who pays for all of this new infrastructure? How can small merchants bypass stand alone terminals from Verifone and specialize cash registers (ex Square’s Register solution is superb)?
  • The most important element:  VALUE PROPOSITION. Take a look at Google’s merchant list for launch (http://www.google.com/press/pressrel/20110526_wallet.html), now take a look at ISIS (http://news.paywithisis.com/2012/05/15/isis-adds-first-merchant-partners/).. Notice a difference? The big retailers are running away from the carrier/bank back mobile payments initiatives because #1 they don’t drive customer acquisition/sales  #2 have higher cost payment instruments (credit only). New value propositions must impact both.. See blog on Retailer’s Wallet plans

As I’ve stated before, pretend you are a retailer and draw a Venn Diagram. Put yourself in the middle. Now think about how you are going to influence customers before (or while) they shop with you. What % of customers does Verizon or ISIS currently influence? How about the banks? PayPal?  Draw a circle for each… base the size of the “influence circle” on number of times these companies influence with YOUR consumers every day. INFLUENCE.. NOT SERVE or INTERACT?

Folks, the challenge is NOT PAYMENTS.. but Value in COMMERCE.. Value requires supporting consumer and retailer interaction in 100s of ways.

I have no idea of what Google will release, or when they release it.. but I do have a great deal of confidence that it will be a major step forward in addressing the issues above.

BAC – Offers Success?

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4 June 2012

I’m using my new BankAmeriDeals and I like it.. really cool. Here is my WalMart redemption. What is success here? For Bank of America? For Wal*Mart?

10 Years ago I was a banker in the room with Wal*Mart and they asked “what justifies any card taking a percentage of my sales”? “What customer have you ever brought me”?

Will Card linked offers be the vehicle by which banks finally deliver value to retailers?

As I mentioned in my previous CLO Blog the average gross margin in Retail (globally) has gone from 4.2% in 2006 to 2.4% in 2010 (ref: IMAP’s Retail Industry Global Report 2010). Given this margin compression, and the fact that retailers spend very little of their own money on marketing, you can see why basket discounts are not widely used, but rather targeted. Given that this Wal*Mart incentive is for 5% cash back, it would seem to be somewhat unsustainable. Even worse.. it was given to every Bank of America Customer.

For this 5% cashback offer, Walmart receive no incremental spend, it was my wife’s normal trip to the grocery store. She didn’t even know I registered for this program.

Quiz time. Who funded the BAC WalMart offer?

1) Wal*Mart

2) Cardlytics

3) Bank of America

Yes it is #3 according to my sources. Bank of America is funding almost half of the incentives in their program, and they are not alone. Retailers are not advertising in the CLO space because of issues associated with “lift”, “reach”, targeting and distribution (outlined in my previous blog). BAC is not alone, rumors are that almost 50% of all CLOs are actually funded by the participating banks or even the venture money received by the “platforms”.  Wow..  I had no idea it was this bad.

My guess is that BAC will now have data to take to Wal*Mart and show what incremental spend they drove. Although 0 incremental spend for me, BAC will be able to show WMT that some consumers chose to switch their grocery purchase because of this 5% incentive. This will in turn lead to “targeting” of incentives to particular audiences and also lead PERHAPS to Wal*Mart participation.  I think this is a very smart move by BAC, and they are 3+ years ahead of this on debit.. all of the other banks are chasing the credit side.

The downside is that the retailers know this is a VERY SLIPPERY SLOPE.  Now that WMT participates.. the banks will go to the other grocers to switch them back.. and then these incentives will be an added cost of doing business for all who wish to influence highly elastic customers. The alternative is to target product level incentives to customer (item level) elasticities. This is what the retailers are planning to do outside of the CLO space, and why BAC will find few “takers” for this. Coupons.com is the leader in grocery space with Safeway and WMT, google is close behind with its recent Zave Networks acquisition and Inmar with recently purchase mdot.

Outside of grocery the same dynamic exists.. cards can indeed motivate a switching behavior with some customers.. but is this a Faustian bargain for retailers?

Take aways:

  • Card Linked Offers have a very long way to go
  • CLO Companies and the banks are paying for the incentives
  • BAC is only bank active for CLO on debit
  • … all of the other issues on value proposition mentioned in previous blog

 

 

Groupon Cash Register?

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31 May 2012

As reported in today’s WSJ, and 6 days ago by Bloomberg, Groupon is working on a Square competitor… So the list of companies that now enable any mobile phone/tablet to be converted into a POS to 7?

  1. Square, $4B GDV Run Rate
  2. Intuit/VZ, goPayment
  3. FirstData mobile pay
  4. PayPal + Roam?
  5. Groupon?
  6. Google?
  7. +10 other small start ups leveraging hardware from Verifone, RoamPay, MagTek

I joked in a tweet that perhaps this is why IBM sold its RSS division to Toshiba for $850M (a $1.15B revenue business).

What is value here? It is card acquiring? POS systems? Advertising? or something else?

Most of us would agree that it makes little intuitive sense for a small business to have multiple pieces of specialized hardware. A specialized, locked down, PC acting as a cash register connected to a specialized locked down payment terminal.

Did you know that retailers like WMT and Safeway have teams of over 500 customizing IBM’s 4690 ECRs? What on earth could these people be doing? A: Multiple tax jurisdictions, discounting rules, loyalty programs, regulations, hardware upgrades, software upgrades, new products, coupons, …  a rather messy business. Similarly few people realize that the payment terminal which we swipe our card is actually owned and delivered by the retailers acquirer.. the retailer just plugs it in. This helps them solve PCI compliance issues by keeping the store completely removed from unencrypted card info.

As my 8+ square blogs have indicated, the real “macro” opportunity many of these companies are chasing is in orchestrating commerce. Commerce is a process that includes marketing, incentives, shopping/selection, purchase, and after sales support. Square has evolved from a payment acceptance doggle to a retailer commerce solution.  Groupon has come about their POS from a different direction.. they need to improve the retailer and customer experience at time of use.  Both will be heavily into advertising (offers, incentives, …) by end of year.

What retailers want are tools to drive customers into their store (acquisition), fill empty seats (yield management),  get existing customers to buy more (basket size) and improve margin (price different customers differently).

Mainline POS manufacturers like Micros, NCR, Aloha, … have a list of companies requesting that they pre-integrate incentive solutions into their software..  By integrating incentive solutions into the POS, advertisers (and intermediaries) are hoping to close the loop in advertising. Closing the loop means allowing the advertiser to determine if a given advertisement resulted in a purchase. This would in turn allow for “performance based” advertising as opposed to cost per million, or cost per click. Today, there are very few performance based advertising solutions, as most advertising is completely untargeted.

But software availability does not equate to usage… as each retailer has their own marketing objectives. Believe it or not, retailers want to spread their campaigns across multiple advertisers, with many different programs to reach different audiences. The incentive for a new acquisition to my coffee shop will look much different than the program to retain customers (Starbucks being #1 here). Also customers are spread across multiple channels, and retailers sometimes operate as franchises that each market separately.

Case Study: Fishbowl

Fishbowl is a 10 yr old Washington DC based company 100% focused in Restaurants. Fishbowl gets its name from the fact that we drop our business cards in a fishbowl.. and the store wants to do something with them. CEO Scott Shaw is both a restaurateur, and serial entrepreneur. He and his team have done an unbelievable job constructing a campaign management tool that allows local franchisee’s to launch specific campaigns to specific customer segments (with a response rate ABOVE 10%) together with an integrated redemption package. Beyond the campaign management function at the hands of the local stores, there is an integrated “offer manager” that resides within the store’s POS systems (example Micros).  If you guys saw this in action your jaws would drop.. but it was no 12 month project.. Retailers want to test it… see what it does.

Most readers can see the obvious problem here with card linked offers (previous blog ). Retailers do not want to give 15% off to every customer weekly. They want specific incentives.. to specific customers that are not necessarily in a single issuers card portfolio. Add to the complexity the fact that 80% of advertising $$ flow from manufactures and the dynamics further cloud as retailers use trade spend $$ to incent specific product purchases. GM pulled it’s Facebook spend because of this dynamic.

Every network begins with a closed loop system delivering value between at least 2 parties. The solutions in this POS space are not “pure play” electronic cash registers.. but BRIDGE devices hoping to switch transactions within existing networks, while adding new features.  This seems complex for all but the smallest merchants.  I like Fishbowl’s approach better.. starting with a campaign tool that would allow the retailer to touch any customer in any “ad network”.  In the Groupon model, they can only reach their registered customers.. in offer models that they support.  If Groupon had a killer value proposition (for both retailer and consumer) this could work well, if not they suffer from the problem of distribution and targeting (relevant offers).

The Directory Battle PART 1 – Battle of the Cloud

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11 May 2012

This week we had both Finnovate and CTIA going on, and behind the scenes the battle lines are being formed in a forthcoming “BATTLE OF THE CLOUD” wallet. I didn’t include wallet in the quote because Battle of the Cloud sounds so much more ominous. Perhaps I should take a page from George Lucas’ playbook and start with Chapter 4.

I’ve been talking about the directory battle for some time now (see Clearxchange post).  Who keeps the directory of consumer information? As I outlined in Digital Wallet Strategies: “ securing information AND giving Consumers the exclusive ability to control what is shared with whom is a challenge (beyond technology and trust). We thus have many limited “Wallets” that are constructed around specific purposes”.

This week we had Visa’s President tell the CTIA audience that Visa has moved beyond NFC to V.me (see my previous post on Visa Wallet). What is really going on? What is the battle of the cloud?

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. (V.me is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc.   But what few understand is the implication for the physical payment world. This is what I was attempting to highlight with PayPal’s new plastic rolled out last week (see PayPal blog, and Target RedCard). If all of your payment information is stored in the cloud, then all that is needed at the POS is authentication of identity (see blog). Remember US  online commerce is $170B/yr, physical commerce is $2.37T (not including FS, Travel/Entertainment).

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives (new digital coupons).  Another example is Paypal’s ability to selectively assume settlement risk on some transactions as they route through low cost ACH, or even allow customers to use BillMeLater to selectively convert certain purchase to loans AFTER THE FACT.  In these 2 examples, traditional payments revenue will be significantly disrupted by: lower cost transactions, competitive credit terms (each purchase), and incentives tied to payment type.

But do consumers really want to store all of their information in one place? With one entity given the ability to see all of your spend? For an mCommerce transaction, there is nothing I hate more than having to type in my name, address and card number in that tiny little screen.  Most of these mCommerce solutions (like V.me) are little more than an “autofill” where the merchant checkout page leverages API integration to the cloud service to retrieve user information (see diagram here). If I’m on my phone, my carrier already knows who I am, so seems fairly logical for them to help me with the autofill. This is a reason I’m now a big fan of Payfone. I could also see why it makes sense for Apple and Google. But why Visa? Does it make any sense at all for Visa to hold my Amex card?  Oh.. let me cast a few more stones on ISIS/NFC.. that payment instrument that locked in your phone.. yeah it can’t be used for the online purchase. Perhaps someday someone will write a secure NFC mobile browser plug in to extract data from the SE.. but that opens up a whole new can of worms.

Today’s online merchants are getting a very small taste of the war as they are asked to integrate auto-fill plug ins (Paypal, V.me/CYBS, Payfone, Google, soon to be Apple). Merchants should get on board with all of them, as they do represent a tremendous improvement in customer experience, and you may be able to squeeze some free marketing/implementation money from each of them. However, the cloud battle at the physical POS is still a few years off, as existing card products have a substantial advantage in risk modeling/fraud. This is where Square is taking a lead, as it has the best consumer experience hands down. Low volume merchants really should assess whether they need a specialized POS system, as the parameters for selecting one have shifted from ISO/Processor/Cost/Acct Recon/Book Keeping to Sales, incentives and customer experience.

Battle starts in mCommerce/eCommerce

My guess on timing of V.me is driven by knowledge of Apple’s impending plans to “extend” its iTunes account to payment outside of the Apple ecosystem. Visa sees this network risk and is in an all out war to protect its network, by leveraging its CYBS asset online. The banks have worked on a directory concept for quite some time. The Clearing House (TCH) built a working system called UPICK to solve the problem of consumers giving their RTN/ACCT# out in the open.. assigning a virtual number to the account. A sort of “virtual account number” that could only be translated by TCH.  It never took off, because ACH fraud was low and banks were much more excited about having merchants accept cards as payment.

Retailers are not silent participants to this war.. their champions are Target, Tesco, Amazon, and Rakutan. I hope Amazon will finally dust the plans off of One Click expansion. Other retailers are also aligning to assess creation of shared cloud infrastructure.  Sorry I can’t comment more. Similarly MNOs are also in the cloud game, for example Payfone may be one of the best services in the market..

Who are the players in the Cloud [Payments] War?

The initial battle will be in mobile/online purchases.

  • Banks: V.me, Mastercard,
  • Platforms: Apple, Google, PayPal
  • Retailers: Amazon, Rakutan,
  • MNOs: Payfone, Boku, payforit, billtomobile, …

Most confusing is that there are few alliances.. it is many against many.

http://tomnoyes.wordpress.com/2011/10/26/apples-commerce-future-square/

Banking the Masses… Prepaid?

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9 May 2012

Today’s WSJ outlines JPM’s plans to issue a new pre-paid debit card out of their branches. In January I discussed the tremendous impact that WMT/GDOT will have on mass market banking, where I outlined that the Fed is concerned 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.

There has never been a better time to be in prepaid!

This is beyond interchange and plastic, we are beginning to see the early stages of an “overhaul” of what banking (and payments) is. The next 3-5 years will be a period of much experimentation. A few of the active initiatives:

  • Retailers as banks
  • Retailers constructing their own payment network
  • Retail pre-paid products (ex GDOT/WMT)
  • Bank’s monetizing data through card linked offers and merchant funded rewards (ex. BankAmeriDeals)
  • New Direct Bank models (ex Barclay’s from yesterday’s WSJ)
  • Phone/Virtual Wallets

…I could go on…

I apologize in advance if this sounds pompous.. but hey it is my blog.. and I want to give you background on how I came to this perspective. I’ve been very fortunate to have been either on the technology side, or as business head of most new banking models: Worlds First Online Bank – FirstUnion’s Cyberbanking  (1995 see wikipedia), First instant account opening and funding US (Wachovia 2002), First International Account opening and funding (Citi UK – 2006), Google Wallet….

The change happening today is many orders of magnitude more complex: consumer value propositions, distribution, technology (ex NFC), regulatory (… for example how do you accomplish KYC in a GPR card sold at a retailer… or mobile operator).

Where do I invest? Its all based upon 2 simple questions:

#1 what value do you get out of your Bank today (compared with alternatives)?

#2 who has a brand Consumers trust?

Most retail banks have rested on very stale product constructs. Why do we have a checking account, savings account and card… with fees on each? Why not have one account where I pay interest if I owe money.. and earn interest if I have a positive balance? Why must I pay $25 for a wire at the branch when it costs the bank $0.05 with the fed? The fee and service nightmare of understanding sweeps, lending, payments, cards, savings, checking, … is just insane. Even the simple products are not simple (particularly when it comes to understanding fees). I’m no fan of the CPFB.. but the Bank’s brought this on themselves… there is real consumer anger.. all of which damages brand and trust. Which of course makes the ground more fertile for competing schemes.

As the WSJ article alluded to… banks actually want the bottom 40% of their customer base to leave.. they are no longer profitable..  This is what the Fed is concerned about.. where do they go?  Most concerning is where will the liquidity go (for non bankers liquidity is the Liability or balance of funds that is stored in its accounts, Assets are loans made by the Bank). Liquidity impacts capital ratios, and lending..  For example, many of you have read my notes on Kenya’s MPESA, that evolved from nothing to holding 10% of Kenya’s GDP in a single settlement account in just over 3 yrs. Money in a settlement account is not available for lending (typically), this was a central point of concern for Kenya’s central bank and other emerging markets as bank liquidity ratios in emerging markets are very compressed.  In the US, major banks are not at all concerned with liquidity… in fact many would  say that they are overly liquid and would like to see the run off. The problem for US banks is Asset quality (qualified lending opportunities).

Wow.. these are exciting times. Companies to watch: retailer friendly plays, as this is where the distribution and data sit.

BTW.. if you agree with any of this.. how on earth can bank’s continue to justify stand alone bank branches.. ? something must change there soon…

NFC and Consumer Choice

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7 May 2012

Thinking about consumer choice today. As the MNOs think about how to lock up the SE and SE Management.. when does a consumer get to choose what is on their phone?

As most of you are aware, ISIS is charging each and every issuer for the “right” to put their cards on the phone. In a tweet 2 weeks ago I mentioned that all of the phones in market have a major problem: they can only support one card emulation application at a time. Although I’m not completely sure if this is a firmware issue or “silicone/memory” issue it relates to the storage on the NXP’s chip. Apparently the latest version’s of NXP’s chips don’t conform to Amendment C of Global Platform’s 2.2 Specification (supporting multiple card emulation apps).

http://www.globalplatform.org/mediapressview.asp?id=777

What this means is that your new NFC phone could have hundreds of Visa cards loaded.. or hundreds of MasterCards.. but the phone can’t support the signed java applets (card emulation apps) from Visa (paywave), Mastercard (paypass), Discover (zip), Amex (expressPay), Transit (…).. you get the picture.

Doesn’t everyone want a wallet where all of your cards can get stored? Visa, MA, Amex, .. plus loyalty, gift, … ?

My hope is that the market (and regulators) will push to keep consumer choice at the center of mobile phone wallets. If the carriers can’t lock down the SE, consumers will be able to choose the most effective option. Retailers know that the only cards willing to “PAY” to get in the ISIS wallet are credit cards.. which obviously impact their interest in accepting a 350bp payment product.

The mobile wallet that “wins” will be the one that offers consumers the most control. Letting consumers load any card they want.. without that card issuer first having to pay some sort of toll to the mobile operator. Also letting the consumer decide who gets access to what data. This last area is something that needs improvement beyond data that is stored in the SE. Right now apps are taking the approach of “take it or leave it” agreeements:.. we get your location, e-mail, contacts, usage, …  This terrible approach is leading to an unbelievable dissemination of data that is completely out of control. This is why HTML 5 will win.. Apps are becoming the paradigm by which companies obtain almost unlimited customer information.. and consumers will wake up soon.

As a side note, isn’t it amazing that this topic hasn’t been covered more broadly? Of course it speaks to the true uptake of mobile payments (at POS) in general..

My funny story: I went to the Duane Reade directly across from Penn Station last month. DR was a Google wallet launch retailer in NYC, with all of the beautiful marketing logos. I waved my phone to check out..  and the store manager was there behind the 8 cashiers.. he said “is that Google Wallet”.. I said no it was a Citi Sticker glued to the back of my iPhone.. I asked him how many purchases he has seen from people using their phones.. Answer “none in the last 2 months”… Across from Penn Station… wow..