NFC Game: MNOs 1, Banks 0

There is much written on the technology, standards, pilots and who is doing what.. this is an attempt to understand the business incentives within the ecosystem(s) and WHY key actors are pursuing/supporting different strategies.

2 February 2011

The actual scoring is probably a little more complicated. This blog is focused on investors and business heads that are not deep in the trenches with mobile payments. There is much written on the technology, standards, pilots and who is doing what.. this is an attempt to understand the business incentives within the ecosystem(s) and WHY key actors are pursuing/supporting different strategies. Getting NFC in a mobile handset was no “obvious” decision for MNOs or Handset manufactures, in fact just 18 months ago Apple told a major bank “we have enough radios in the phone, can’t we just use one of the existing ones?”  The point shouldn’t be missed, there are many, many ways which a consumer can store information and transmit it to another device (like a POS).  As an example: the US State department (in its infinite wisdom) decided to put an unencrypted RFID tag that contains your name and passport #… Another wacky example is Google Zetawire Patent.

Why NFC? Technically it operates on the same ISO/IEC 14443 protocol as both RFID and MiFare so how is it different? I’m not going to get into the depth of the technology (see Wikipedia), but the biggest driver was  GSMA/NFC Forum’s technical definition (UICC/SWP) that ENABLED CARRIERS to control the smart card (NFC element). This in turn enabled carriers to create a business model through which they could justify investment (See NFC Forum White Paper). 

(Sorry for the pedantic nature of this, but since blog readership is going up.. I’m taking some license in assuming that the style is not irritating too many people.. and besides getting right use of terminology is important. )

Banks and card networks have been circling mobile/contactless payments for sometime. Mastercard’s PayPass (2003) led the way for many of the current bank contactless initiatives. Visa later followed (and still trails) with PayWave in 2007, and Discover with Zip in 2008.  All card initiatives operate on the same ISO/IEC 14443 protocol as NFC, most with numerous “successful” pilots.  The issues with contactless card platforms are not technology, but business model.

As with any new “platform” it must support a business model for some… preferably for many … participants. Card focused models focused on either cash replacement (ex. Transit, Vending, P2P, …etc.) or “premium” convenience play (see Best Buy NFC Pilot). For those of you not in the card or retail business… there is little love loss between the 2 groups. Retailers are not about to invest in anything that helps either banks or card networks unless it improves sales or margins (see Banks will win in Credit). The NFC model allowed carriers to control the radio, and integrate it into the SIM (UICC) for management of secure applications and data (see Apple and NFC).

Prior to NFC, the “control” for contactless payment was with each contactless network. Visa and Mastercard took 12-18 months to certify every new device. That meant every single new POS Reader, handset, … had to go through multiple certification processes. What  manufacturer would want to invest in this contactless model? Alternatively, NFC contains standards and specifications operating within ISO 14443 with an independent certification process. The NFC specification does provide for an independent entity, called the Trusted Service Manager (TSM), to assume the role of gatekeeper (See Dutch Example). But MNOs are not likely to give up the keys prematurely. In the US ISIS model, this TSM will be run by Gemalto (for the MNO consortium).

What does this mean? Q: Can Visa develop a PayWave application on an NFC certified phone? Yes.. can Mastercard develop a PayPass Application? Yes.. that have already. Can TFL develop an Oyster Application? Yes. Vendors like Zenius design secure applications that do just that. NFC enables the phone to host multiple applications that can use the “radio” in different ways (example open secure doors). These mobile applications are secure and can be provisioned and updated remotely. This is the “beauty” of the NFC ecosystem. Investors note: In all of these examples, it takes the MNO and/or TSM to approve your application. In the case of Visa and MA… they are not approved.  This means your start up can build the slickest app in the world.. but someone else owns the keys to consumer use.  For Visa and Mastercard: their PayPass and PayWave brands are mere NFC applications that can be denied within the NFC enabled phone.

Another important control point (for NFC payment) is POS infrastructure. A new NFC payment instrument must be supported by both the POS (certfication) and the processor(s). POS terminals typically support multiple standards, protocols and payment insturments (see VivoPay 5000M). For each payment method  (PayWave, PayPass, Zip, Bling, ..) the POS terminal must undergo a proprietary certification process. POS terminals connect to one or more processors (ex. FirstData, FIS, …) and in addition to processing the transaction, the terminals can receive and process updates (example ISIS/Zip protocol which is still in definition). A recent example of POS payment upgrade: Verifone’s efforts to include Bling/PayPal acceptance at POS, a very big story that has received little attention.

The “downside” of NFC for many stakeholders is that they are no longer in control. In the NFC model, the “keys” to the NFC platform sit with the MNO who controls the UICC.  This control is necessary, as it is the MNO who fulfills the KYC (Know your customer) requirement linking a real person to a SIM (and hence to a transaction). In the NFC model, Visa will still need to certify their own NFC software application to be PayWave compliant.. but will NOT necessarily need to certify the chipset/OS and device in which the application runs. Of course the details are a little sketchy here because Visa has not tested their own application for this environment, as handset manufactures are still in flight with their designs (focused on ISIS compatibility). I believe the ISIS dynamic is also the driver of why the latest Android Nexus S had write functions disabled..

Stakeholders

In analyzing the Total Addressable Market (TAM) for any investment I always look at who are the existing stakeholders and their realative markets. Within the NFC Ecosystem I see the following:

 

MNOs have had very little experience in running a software platform ecosystem, or a payment network.. or a TSM. Closed systems usually precede open systems, and I would expect this trend to follow within NFC. The vendor most able to coordinate a value proposition which spans payments, software, mobile platform, advertising, … ? Apple. Say what you want about Apple’s penchant for control.. they are one of the few companies with the skills and experience to address all of the issues surrounding a new mobile platform.

Banks and card networks are the only group not to score in NFC because of their inability to create a new value proposition with MNOs and retailers, as such they loose.  Banks hold out hope that existing card loyalty programs hold, and consumers refuse to use payment instruments that are not currently in their pocket. History demonstrates that telecom operators have ability to sell and market cards (see AT&T Universal) to create compelling incentives…. Banks will likely begin pushing the benefits of Credit cards (Reg Z consumer protections). Will carriers respond by expanding their consumer credit risk through carrier billing initiatives (Boku, Bango, billtomobile)?

Message to banks.. stop depending on Visa and Mastercard for this.. develop your own payment network, with a unique POS integration.

Thoughts appreciated

ISIS: Moving payments from Rail to Air

Merchants love the ideas of ISIS, as much because of perspective value as the pain it will bring: Visa, MA and Amex. Historically, the card schemes have built up much ill will with merchants due to: interchange, payment system integrity, fraud controls, consumer influence, …etc. Two major issuers inferred that Discover is a failed payment “cash back” card network. I would proffer that their “success” is just delayed, and ISIS is the initiative which will drive transaction and network growth in a model that existing schemes can’t compete with.

9 January 2011

Previous Posts 

It’s the New Year, and thought it was time to touch on this again (last post 9/10). Quite frankly its hard to believe I’ve been writing about this for almost 18 months.. it was AT&T Newco, then Mercury now finally I have a name: ISIS, with a URL www.paywithisis.com (err… same reaction). Over the last 18 months or so I guessed wrong on the consortium around AT&T, it was not Visa, but Discover (See winners/loosers blog above) it was also all of the major US MNOs (Sprint was initially involved, but has delayed further participation).  Discover makes complete sense, as stated previously a 3 party network is the only one capable of developing a new payment type (with corresponding set of rules and fees). Visa/MA are constrained by existing agreements with card holders, issuers, acquirers. A principle example is Visa’s failure to force a “mandatory” payment type in Visa Money Transfer (VMT).

Top questions I hear today:

1) What is merchant value now that Durbin has pushed back debit to $0.12

2) Will ISIS work with Mastercard Paypass/Visa Paywave ?

3) Will Phase 1 have a mobile advertising component?

4) What are the economics for a merchant POS “upgrade”

A common basis for many of these questions is the ISIS value proposition, the entities driving it and their incentives. The high level value proposition is shown below, updated from the previous September version (prior to announcement of Barclays and Discover).

Merchants love the idea of ISIS, as much because of prospective consumer value … as the pain it will bring: Visa, MA and Amex.  As one former collegue put it: “Merchants have always loved the idea of instant credit and see value in giving customers the ability to buy regardless of the balance in their account, however merchants don’t buy into paying 1.5% of sales for a debit transactions that was $0.05 with a check”.

Historically, the card schemes have built up much ill will with merchants due to: interchange, payment system integrity, fraud controls, consumer influence, …etc.  Two major issuers inferred that Discover is a failed payment “cash back” card network. I would proffer that their “success” is just delayed, and ISIS is the initiative which will drive transaction and network growth in a model that existing schemes can’t compete with. (See American Banker Article).  I see a $200B-$600B TPV network evolving with Discover at its core. Perhaps this is why JPM is assessing a Discover acquisition.

In addition to Discover, I see 5 other entities capable of driving similar value propositions (in the US): PayPal, Amex, Citi+??, Bank of America/First Data, and Chase/Paymenttech.

From an MNO perspective the value proposition is clear (see previous blog). Payments not only supports their existing value proposition to customers, they have the distribution and incentives (airtime, data rates, discounts, advertising) to change customer behavior.

Question 1: Will ISIS take off in light of Durbin and $0.12 debit?

I interpret this as a merchant question. Certainly merchants want the lowest cost payment type used in purchase. What if merchants were “paid” to take the payment instrument? Merchant borne interchange has historically been the major source of revenue for current card products, is there a model where advertising can replace interchange? Googlization of payments?

ISIS has this potential, but will likely not execute against this element for 2-3 years as it develops the payment infrastructure and customer footprint. This may be an issue for ISIS, as merchants may take a “wait and see” approach before investing in POS terminals. This would obviously impact payment volume as merchant NFC POS terminals are just as important to a payment network as millions of NFC enabled phones. If I were Michael Abbott, I would focus on a few very large merchants and commit to a very low interchange (50bps) to drive POS economics that would then support further network expansion. Perhaps this is why we hear so little of ISIS’ merchant value proposition..

So to answer this question, YES it will still take off. I’ve spoke with 2 Fortune 50 retailers this month and they are very firmly committed to making ISIS successful. They see value extending beyond the payment cost itself. That said, there will not be a “big bang” roll out, but rather geographically focused.

Question 2: Will ISIS work with other Visa/MA?

There are many, many sub-questions here. So let’s start with some facts:

1) Discover Zip is different then ISIS NFC (see Story Here).

Geoff Iddison (MA head of mobile) is quoted in NFC times as saying “The challenge that Isis will have is to re-terminalize all of those merchants to a terminal specification which is proprietary”. This is false, ISIS is not using ZIP. They are 2 different initiatives (see ZIP pilot results). The details are best described in this American Banker Article (Jan 2011).

2) NFC and RFID are both based upon ISO 14443

For further info, see the NFC FAQ. And NFC Ecosystem.

3) Merchant POS terminals support multiple standards today

POS terminal decisions have always been independent of card issuers, except where there has been direct subsidies for a “pilot”. Today, POS terminals support multiple staandards (example:  VivoPay 8100).  Note from a scheme perspective, these POS terminals must be “certified”.

Perhaps this interoperability question should be rephrased to ask if ISIS is constructing any competitive barriers? Does ISIS have unique “standards”? Will ISIS be subsidizing merchant POS terminal? What are the “control” points for ISIS? 

The “real” barrier ISIS is constructing is NOT at the POS, but the handset. Specifically, ISIS has created a multi carrier TSM (serviced by Gemalto). For those unfamiliar with NFC ecosystems, the TSM is the entity that owns the “keys” to the secure applications within your handset. Banks want to be in the position to serve in the TSM role, a “DESIRE” best exemplified in FirstData’s TSM brochure:

Card associations believe they are excellent candidates to fulfill the TSM role, and it makes sense from their perspective. The TSM role would make it much easier for the card associations to support their member financial institutions in the issuance of new payment applications and the expansion of the number of accounts they have. In addition, they already have an infrastructure in place for supporting their card accounts.

Banks will not get this TSM role… at least not for NFC which is embedded within the handsets. In the US market, MNOs subsidize phones and already engage in a device “locking” strategy (GSM phones cannot be used with another carrier). US MNOs plan to leverage ISIS and Gemalto (as TSM) to extend this control model to the secure NFC element. In other words controlling which cards and applications can use the device’s NFC capabilities. Note that this dynamic is very “US” focused, as consumers in most other countries buy their handsets unlocked and will have a “choice” of TSM.

This ISIS TSM construct greatly concerns Visa, MA and the large issuers. In the Visa/MA model, NFC transactions are “premium” and can carry very high interchange (see BestBuy Pilot). Merchants are very reluctant to add NFC POS capability if it will increase costs. Although Retailers don’t have to worry about consumers using PayPass or PayWave in mobile phones (due to TSM constraint above), they may have to contend with NFC stickers, MicroSD cards and unlocked phones with NFC capability.

I have no visibility into ISIS, or retailer, plans here. My guess is that the large retailers (which ISIS is working with) will exclude Visa/MA NFC payment types unless there is a an agreement to match interchange. Merchants and ISIS will be emphasizing a new payments brand.. Will merchants allow an Visa PayWave transaction on the same POS? I would imagine that some will, but I would bet that ISIS launch partners will not support PayPass or PayWave. They will tell their customers “sorry … just swipe your card”.

The issuers may contend that agreements in place prohibit discrimination of NFC vs. Card Swipe (retailers beware of this point). I doubt if they will be successful with this argument, given that the merchant is not discriminating but rather accepting a new payment type in a new infrastructure (which the merchant pays for).  Durbin, also allows merchants to “steer” customers toward preferred payment types.

Question 3 – Mobile Advertising

I have limited visibility here, but it would seem this is not in scope for Phase 1 of ISIS. Michael Abbott has only been in the job for a few months, and would expect him to be the driver of plans here given his CMO role at GE Money.  One interesting tangent will be what role ISIS allows Apple iPhone to take. It is assumed that the ISIS TSM will still manage the secure element, but Apple will manage marketing. See Apple NFC Patent.

Question 4 – POS Economics.

From my perspective, this remains the biggest barrier to adoption (see Federal Reserve Study). Durbin’s reduced debit rates have made a challenging business case even more so. There is a normal refresh rate on POS infrastructure of about 4-6 years. Card networks have typically subsidized POS infrastructure within pilot geographies. It remains to be seen how ISIS will incent merchant participation beyond the marketing value proposition (above).

Summary

Most of you know the story of FedEx Founder Fred Smith, and the college term paper he wrote discussing the market for a next day package delivery service. His professor scoffed at the idea and gave him a “C”. Why would anyone want to ship goods via Air.. and there was no need for a “next day” service. Similarly with ISIS, the banks see no need for a MNO driven payment solution… after all they have all of the technology that ISIS has … and have been doing this for years. The market opportunity for ISIS is in shifting of control away from banks and card networks toward merchants and consumers to deliver a new value proposition that goes beyond payments. The mobile handset has the opportunity to be THE primary device for advertising, content and communication. Payment is only one element, but perhaps the central one as it is enables delivery and tracking of incentives necessary for effective advertising.

Will banks / networks be able to adapt their existing payment rails to the ISIS model? It sure is hard for trains to fly

Where can banks win?  Credit, Risk, Merchant Services, Consumer Preferences, Deposit, Customer Service, … etc.

Thought appreciated

Visa/BAC in Mobile Pilot

Looks like I was a little premature in the original version of this post. Looks like the pilot may be a field trial for NFC as in the Micro SD form factor.

20 Aug 2010 (update Aug 23)

(update – Was just told that the BAC pilot is NOT using the Monitise application. Wow.. what on earth is going on with the Visa team? They have at least 5 different pilot models.. in a positive light this is market experimentation. I’ll take the blame for being premature, but given that I saw the new application and was told it was July I connected the dots… albeit incorrectly.  Bloomberg’s story above is on target and trial is a field test of the newly certified DeviceFidelity MicroSD.  Purpose is to ensure all works as planned from enrollment, activation, OTA provisioning, application usage and NFC payment ).

Visa has a number of initiatives surrounding mobile and NFC. Certainly a challenge to get multiple parties aligned to make this happen:

  • Monitise, provider of a new iPhone application
  • Device Fidelity, NFC tech provider which
  • Bank of America (pilot agreement, marketing plans, focus demographic)
  • Advertisers.. currently part of existing visa discount program
  • Apple.. certification of the Moni iPhone application (submitted in June)
  • First Data. Trusted Service Manager (TSM) in the NFC role…
  • … I could go on

This activity represents a major investment by the entire industry team.. ( given equity stakes perhaps Keiretsu is more appropriate).

More to come … this is just a quick update

Previous Posts

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.

US Carriers Form New US Pre-Paid Venture

It seems as if AT&T has pulled together Verizon and Sprint to form a new venture to focus on pre-paid.

May 31

Previous Post http://tomnoyes.wordpress.com/2010/03/15/att-visa-prepaid/

Mobile Ad start ups… watch out… the big fish are coming …

It seems as if AT&T has pulled together Verizon and T-Mobile to form a new venture to focus on pre-paid. The large US Card Issuers are now aware (and quite suprised) of the move . It is doubtful that this new US entity (NewCo) will reach as far as Canada’s Enstream in mobile platform collaboration, but the focus of this initiative is mobile payment (NFC and P2P) and mobile advertising.

MNOs see a “Google like” future in mobile advertising, as they attempt to monetize their tremendous customer knowledge. For those that have ever purchased online advertising, we know that the biggest challenge in justifying spend is to move beyond “cost per click” to cost per customer acquisition or purchase. This Ad-Purchase disconnect is particularly true when purchase is made in the physical world. Mobile has the potential to bring together these two worlds, but a “key” is needed. MNOs and Banks see this “key” as a a common payment instrument available  to all customers. NewCo is therefore planning to control (issue or manage) a common pre-paid card which will serve as this transaction key and give MNOs the remaining tool necessary to coordinate focused mobile advertising.

Given that NewCo doesn’t yet have the CEO in place there is probably much left open (with respect to business plan and services). At a minimum I believe they will act as issuer, and create common services to address mobile advertising and payment.

Message for VCs and Start-Ups:

  • Assess risk of current path vs. supporting this new “collaborative” MNO ecosystem.
  • Investments “tied” to this new ecosystem will have different risk profile, particularly in navigating more complex environment.
  • Mobile advertising “pure plays” which do not touch financial transaction will be at a significant disadvantage. Ecosystems are forming based upon: Platform, Service (ie search), Network, Payment Instrument and bank.
  • Adapt.. A “dynamic” strategy which will keep your IP “in play” is necessary.
  • Winners will have the right talent that can navigate with the “big fish” and the right BOD that can help you evolve your strategy.
  • Think Global. Ecosystems will likely evolve differently globally, particularly in Asia.
  • Using financial information for advertising will touch privacy and regulatory issues. Regulated entities (Banks, MNOs, Payment Networks) are best positioned to deal with these. However, large MNOs and Banks have poor track records in “innovation” and moving collectively.

In short, it remains to be seen whether MNOs will be able to take on role as “orchestrator” of mobile advertising, or just a provider of location, reputation, authentication and transaction services.  How MNOs monetize these services will be driven as much by their ability to execute as investor expectations and competing models.

Visa Ooops – PR screw up on new Device Fidelity iPhone App

Device Fidelity is one of the premier MicroSD NFC players (other is Tyfone). Trying to beat Apple to market with their embedded NFC or enabling existing phones? My bet is that this one will have AT&Ts involvement. MicroSD is a great form factor for NFC, issue is who will pay the $15-20 for it and who will certify? AT&T has the best chance to make this successful and subsidize.. in order to bear this cost, AT&T must drive either transaction revenue (create a pre-paid card) or a new advertising service.

Looks like their PR came out a little ahead of time.
Device Fidelity is one of the premier MicroSD NFC players (other is Tyfone). Trying to beat Apple to market with their embedded NFC or enabling existing phones? My bet is that this one will have AT&Ts involvement.  MicroSD is a great form factor for NFC, issue is who will pay the $15-20 for it and who will certify? AT&T has the best chance to make this successful and subsidize.. in order to bear this cost, AT&T must drive either transaction revenue (create a pre-paid card) or a new advertising service.
More to come