Tag Archives: payment

Google/ZetaWire

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22 Dec 2010

TechCrunch – Google Acquires ZetaWire

Why did Google acquire a 3-4 person Canadian company with no customers? The answer seems to lie in its patent application

… quite an interesting read. A ubiquitous wallet, online and mobile that provides for direct communication (bluetooth, Wi-Fi, NFC, …) to other wallets and POS terminals. Interesting vision.. google as center of the mobile universe…. who would have ever imagined. 

From a payment perspective, I thought paragraph 271 was rather interesting

[0271] Because the coupon and advertising system is integrated with the payment system, it is able to target and deliver advertising on an individual basis rather than on a demographic basis. The payment system has a complete record of all the purchases ever made by a user, and because the payment system is also integrated with a social network, it can also know the purchases made by all of the user’s friends. In addition, it has access to many other streams of data providing information about a user such as the user explicitly entered preferences and wish lists, which coupons the user’s friends have shared, which coupons the user currently has, etc. The system is therefore able to build a much more accurate user profile than standard advertising techniques, and this user profile can in turn be used to deliver advertising which is customized on an individual basis.

This seems to indicate a significant gap in the understanding of the applicants surrounding financial transactions (and data).  Merchants hold on to item detail information, the payment network receives merchant level data.. but does not get item information. ZetaWire attempts to address this gap by inventing a “coupon authority” entity in Paragraph 264.

All information related to coupons and their definitions is managed by a coupon authority, which can be an integrated subsystem of the transaction authority 102. All instances based on the coupon definitions are minted by the coupon authority. Whether coupons have been applied to transactions is recorded by the coupon authority, as are coupons’ chains of custody from the time they are minted to the time they are spent, including all data related to how and when they were share

For those of you unaware, merchants are rather stingy with their store data. The Visa’s team best effort here is with Monitise and the new iPhone application “Visa Offers” (link is my related blog). It results in a coupon with a bar code and you show your iPhone to the cashier. How does google intend to integrate to merchants and receive store level data? I can’t imagine Amazon being excited about this.. or Wal-Mart in that matter.

Zynga Payment Patent Application

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30 November 2010

Short Take – Random Thoughts

To be perfectly clear, I am no Zynga expert.. I have no Zynga account… and have never played Farmville, but with Kleiner’s John Doerr saying “Zynga is the most-profitable, fastest-growing, and has the happiest customers of any company that Kleiner Perkins has invested in ” I thought I would spend a little time assessing how a company that is just three years old can have an estimated market value above $5 billion with more than 320 million registered users and estimated revenues above $500 million.

Zynga of course is the leader in social gaming, started in Facebook and now available on mobile. They have proved that the old axiom “payments is the lifeblood of commerce” also extends to social gaming and “virtual commerce” (essence of Farmville). Their virtual success is also embedding itself into retail and traditional payments. For example, this Christmas I have just bought FarmCash using my American Express rewards (just announced today).

From my perspective, Zynga’s secret sauce has been its ability to get 1-2% of their customer base to pay for game credits (see Gawker article). Although they have recently agreed to a 5 year deal with Facebook, this patent (if granted) will provide them leverage in future negotiations and extending their services outside of the Facebook platform. The patent application itself is focused on value transfer and ensuring that digital currency never makes its way out of the system. From patent app:

…the virtual currency cannot be redeemed for legal currency. Consequently, the purchase is a one-way transaction that provides a benefit to the purchaser only in the context of the virtual environment….

Zynga Terms of Service also support these restrictions http://www.zynga.com/about/terms-of-service.php

d) Transfers of Virtual Currencies and Virtual Goods are strictly prohibited except where explicitly authorized within the Service. Outside of the game, you may not buy or sell any Virtual Currency or Virtual Goods for “real world” money or otherwise exchange items for value. Any attempt to do so is in violation of these Terms and may result in a lifetime ban from Zynga Service and possible legal action.

Regarding expansion plans, it would seem Google’s $100M-$200M investment in Zynga will drive a new GoogleGames platform. Which makes me wonder how many social gamers there really are?

PayPal Micropayment http://venturebeat.com/2010/10/26/paypal-microtransaction-support

India: Instant Interbank Mobile Pmt Service

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National Payments Corporation of India (NPCI) launched the instant interbank mobile payment service (IMPS).

From MyDigitalFC

To use the IMPS service, customers have to register their mobile number with the banks where they hold an account. When the customer registers, he will be assigned a three digit code that will be their mobile money identity (MMID) and each bank will be assigned a four digit national bank identification number (NBIN).

Both the sender and the receiver needs to get their NBIN and MMID in order to facilitate the transaction. The funds transfer can take place in seven seconds by using the MMID and NBIN numbers of both the banks.

This is a concerted effort by RBI to take a leadership (control) role in mobile payments as the MNOs continue to work for necessary regulatory change.  RBI and the banks are under substantial political pressure to develop services to the rural poor, and create mechanisms/licenses for agents (and MNOs) to serve this demographic. Announcements like this just further a “delay game” by which RBI seeks to create an image of progress.  

RBI constituted the NPC in 1999. This instant mobile “press release” is more hype than substance particularly given the adoption of NEFT and processes surrounding electronic transfers today. For example, in A2A (Transfers between domestic accounts that I own at 2 financial institutions) transactions, many financial institutions still require customer sighting and a paper documents FOR EACH TRANSFER. Within India, the NEFT system is just beginning to get traction (NEFT FAQ) as banks are reluctant to give customers control. India’s RTGS system, is also in its infancy (list of bank branches here) with only 60k transaction/day. Indian bank A2A  “controls” are similar to those in the US as banks like Chase and Wells,  as barriers to move money (to another FI) prevents deposit run off. These controls also allow the banker to call and ask “why are you moving money out.. we can offer that rate as well”.

Just as in the case of the MPFI group RBI is attempting to build a standard (ie platform) by which everyone must play, and therefore exert control. These central bank platforms will continue to fail, as there must be at least one group with a sustainable business case (see MNOs will rule).  IMPS does nothing to address the unbanked needs and IMPS seems to be an outgrowth of RTGS and MPFI..  I certainly hope that the unbanked and the MNOs continue to work toward influencing real regulatory reform, as today I have a system for banked account transfers which is “instant” but may require a customer to come into the branch to sign a document first.

Digital Goods Payment

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8 Nov 2010

There is a wealth of new payment types (and currencies) brought on by digital goods. Companies like Zynga, Boku, PlaySpan, Bango, Zuora, SocialGold (see list here) are being assessed at multiples exceeding 100x revenue. Social gaming is the focus of many of these companies, with estimated transaction volume of around $2.2B and expected market growth of 50-80% CAGR.

Quite exciting. Is it a “fad” and will these notional currencies be able with withstand the light of regulatory review?

Apple and Google after Boku?

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2 Nov 2010

TechCrunch: Apple’s next strategic move

Yesterday: AT&T inks deal w/ Boku

http://news.cnet.com/8301-13577_3-10265243-36.html

What is Boku’s core asset? Technology? MNO billing relationships?

Hope that Apple and Google look long and hard at the MNO contracts as the “secret sauce” that has driven Boku’s growth. Boku’s MNO friendly approach and neutrality allows any customer to buy digital goods and charge it to their carrier bill.  Neither Google, nor Apple would seem to have a strategic fit here. Why would carriers allow Google/Apple to bill to goods to their customers? Or perhaps I should ask at what cost will carriers allow this to happen?

All of this is even more relevent as ATT/Verizon/TMobile/Discover,.. etc. build their own payments business.

Boku is a great business, but it operates on a precipice much the way PayPal did in its early days.  Carrier billing can certainly be  a much more cost effective infrastructure for mobile digital goods purchases. But what drives this efficiency? Isn’t it the carriers and their relationship to mobile customers?

On the “buy side” digital goods stores use Boku because of its independence. So if Apple buys Boku will Android still support Boku payments (http://www.boku.com/android/)? I do think Boku is in play.. but the real acquirer may look more like the Mercury NewCo than google.. as the MNO synergies are the core of the Boku business model. Unfortunate that the Mercury NewCo still has no CEO.

Debit Card in Peril?

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27 October 2010

The biggest story of the week has largely gone unreported. Bank of America (BAC) has taken a $10.3B goodwill impairment charge in 3Q.

The Merchant Payments Coalition responded to the impairment charge (reference above)

“With a Federal Reserve decision on debit interchange rates not expected until mid-2011, today’s claims by Bank of America dramatically overstate reality and represent a feeble attempt to divert attention from its mortgage foreclosure problems,” said Doug Kantor, counsel to the Merchants Payments Coalition.

In the 8-K, Bank of America said it plans to take (ref The Street)

 “a number of actions that would mitigate some of the impact when the laws and regulations become effective,” but it didn’t provide details about what those actions might be.

Will write more later, but I can assure you BAC is looking for debit alternatives. Given their size, most anticipate a new product driven from both their retail and global card team (including merchant services). So in addition to AT&T/Discover, we will now have another major bank led team developing a new payment product with a multi billion dollar incentive.

What does this mean for MA and Visa? Not good news for US growth.

Related Article

Mercury NewCo – Winners and Losers

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26 September

Previous Posts

Last week I found myself in NYC and was fortunate to meet with several payment leaders. Change is not something we see often in payments as it is historically known for its galacial pace. The most interesting topics centered around new investment and consolidation, with the rumored $500M capital commitment for ATT/Discover Mercury NewCo at the top of the list. I greatly appreciated the dialog, and this blog is a follow up to a few of the discussions. My view is that Mercury will be present a completely new payments value proposition that existing networks will have trouble competing against, with the revenue driver of mobile advertising. As stated in previous blog, mobile advertising may well exceed Google’s precedent set with online…. perhaps a completely different dynamic with established fortune 50 organizations leading the way in collaboration with old line Madison Ave Ad Agencies. The MNO payment strategy seems to be driven by a recognition that mobile advertising is key to future revenue growth, and payments is an outgrowth of this larger strategic plan (see previous blogs above). Why do I like Mercury’s prospects given the dim history of “change” in payments?

  • Enhances an existing value chain (mobile operators) that is well established with sufficient investment capital and patience (deep pockets)
  • Addresses a new market opportunity in a way that can deliver disruptive value to multiple stakeholders
  • Existing payment providers can not adapt. The great thing about networks are their resiliance. The negative is that they are also resiliant to change.. even when necessary
  • There is significant short term merchant pain in the card payments. Merchants have been in effective in influencing Interchange rates.
  • Consumer behavior is changing, and the pace at which adoption of new tools and technologies are “mainstream” are also accelerating.
  • Payments is an “infrastructure service” to every business and every country. Traditional banking is becoming decoupled from the business of payments in both mature and emerging markets.
  • …etc

Its hard to genericize the antagonist view of Mercury.. but the following are key points I frequently hear:

  • Consumers have tremendous card loyalty and will not use a different payment instrument just because it is available.
  • Discover is a failed network with over $2B invested in infrastructure
  • Existing cards can compete on rates. There is nothing that Discover (or Mercury NewCo) can offer which existing issuers can not compete with
  • Changing consumer behavior is unpredictable and takes tremendous marketing investment
  • Investment in POS infrastructure is expensive and time consuming
  • Merchants are happy with the existing payment networks, and will not spend additional money on marketing or interchange 

All are excellent points (with exception of merchant attitudes toward V/MA). Below I have laid out a scenario for NewCo success (some of which is based upon industry intelligence…). Following the scenario, there is an outline of the value propositions for the parties involved.

New Scenario 1 – Pre-Paid Card/Mobile Marketing (AT&T Example)

  • All AT&T customers are issued a pre-paid Discover card with $10 pre loaded
  • AT&T establishes incentives for use and incentives for user acceptance of mobile marketing agreement whereby personal data can be used to market you 10 times per month.
  • Customers accepting agreement also receive NFC MicroSD cards
  • Mercury commits to $200M in advertising spend to kick off program
  • Mercury establishes mobile advertising group in collaboration with major Madison Ave firms, goal of directing $2B in marketing spend by Year 2. Get back at Google (Own Mobile).. is motivation for Madison Ave firms.
  • Mercury establishes Merchant division in collaboration w/ Discover. Mercury will over all transactions at 50bps with minimum marketing spend and/or POS updates. Mercury will also provide marketing incentives/discounts for early adopters. Customer and campaign analytics will be key selling point. Mercury will also seek item detail in transactions.
  • Google makes investment in Mercury to serve as ad serving engine and direct existing spend. Agreement ensures that google does not have exclusive rights so that Madison Ave firms can work directly with large corporates.
  • Mercury/Discover develop common shared wallets and common marketing processes/standards that are used across MNOs (analogous to Apple iAD). Mercury retains directory of customers that have accepted disclosure and campaign engines bid for ad placement based upon demographics, analytics, and location.
  • Customer receives advertising via mobile. 4-8 Categories
  1. Brand level marketing
  2. Store discounts
  3. Product discounts
  4. Coupons
  5. Free Trials
  6. Cross sell/Upsell…
  • Incentives for card use drive merchant and consumer behavior. Durbin allows merchants to “direct” consumers to preferred payment methods. Discover is used for small purchases, and also acts as “decoupled debit” once history is established. Customers begin to think of Mercury card as new debit with benefits.

Process Flows – From GAO

 

 

NewCo Revenue Model – Year 1 (in Previous Post)

  • 85M subscribers (7M iPhone)
  • Year one penetration of 10% (8.5M or 60% of iPhone base),
  • Average purchase amount $40
  • Interchange 50bps

Revenue

  • Annual TPV = 50%(85M*10%*$40*5*12) = $10B  (note: 50% ramp up)
  • Transaction Revenue $50M
  • Digital Goods/Usage $50M
  • Retention                                    $50M
  • Ad Revenue $300M
  • Total Revenue $350M

Expense

  • Processing expense (30% of Rev, 100% ACH funding) – $15M
  • IT Build (one time) – $200M
  • Marketing spend – $200M
  • G&A – $80M
  • Total Expense – $495M

Value Proposition

Thoughts appreciated

– Tom

ATT-Discover Prepaid

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15 March 2010

Previous Post NFC Break Out – VISA/FirstData/AT&T

My updated prediction is now first week of April. This is real.. and it is imminent.

Q: What will it mean when every AT&T subscriber receives a pre-paid Discover card with an NFC sticker? (Note back in March I did incorrectly guess it was Visa instead of Discover)

Answers

  1. Tipping point for mobile commerce, ushering in a new era where the mobile phone can transact with a wallet that spans the virtual and physical world, aggregating every other account type and payment instrument.
  2. A new business for AT&T which could drive 30-60% growth in LT revenue
  3. Software REVOLUION. The “Next wave” for iPhone AND the entire mobile commerce ecosystem (see googlization)
  4. New mainstream marketing channel as couponing integrates with payment, location awareness and detailed knowledge consumer behavior/preferences
  5. Card business killer for Bank/Issuer revenue as MNO Pre-paid encroaches on the consumer relationship AND issuer debit/credit products (Decoupled Debit)
  6. Cash replacement for small value payments as merchants of all types adapt POS to accept NFC, and small merchants take out POS terminals in favor of making their phone a cash register
  7. .. would love to hear from you on the next 100…

Business Model

Retention or revenue play? AT&T Universal card changed the credit card landscape in 1990. ATT demonstrated it could both create a card business AND leverage  distribution muscle as it attracted over 10M card holders in under 2 years. Citi acquired the AT&T Universal card for $3.5B+ in 1997 and it remains the largest affiliate card in Citibanks’s portfolio.

The biggest variable with anything “consumer facing” is the marketing investment needed to push it into critical mass. Example, will AT&T develop some program to incent “pay by phone” use like a $50 credit with $200 of spend? Discounted airtime rates? Rewards program? AT&T has proven it can deliver new technology and ecosystems (iPhone and Universal card)… and subsequently has many options.

AT&Ts pre-paid revenue model will likely see MUCH lower margins than their 90s card business, perhaps something of a split between a pre-paid card and a “decoupled debit” (which the US banks have long feared). How will customers “load the funds”? How will they encourage bank funding? Will Citibank get its act together and partner to extend credit (existing universal card holders)?

Given that there are many unknowns, here is my high level estimate on year one financials. Assumptions:

  • 85M subscribers (7M iPhone)
  • Year one penetration of 5% (4.25M or 60% of iPhone base),
  • Average purchase amount $40
  • Annual TPV = 50%(85M*0.05*$40*5*12) = $5B  (note: 50% for linear ramp up)
  • Take rate 120bps (Note there are current issues w/ NFC interchange, see BestBuy)
  • Revenue $60M
  • Processing expense (30% of Rev, 100% ACH funding) – $18M
  • Marketing spend – $50M
  • G&A – $3M
  • 12 mo EBITDA – $(11M)

$11M loss obviously doesn’t take into account many unique one time expenses, but it does provide some insight into the dynamics. It seems as though AT&T is spreading out the other “investment costs” through a consortium of First Data, Visa and a number of smaller companies. I would also expect to see a number of new revenue streams (marketing) as merchants experiment with other new Visa sponsored services like mobile coupons. The tech industry needs an initiative like this to expand the “mobile app” world consumer base beyond its current iPhone demographic.

Related Posts

Obopay and Firethorn

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2 March 2010

Related posts

Spoke to most of the top 5 US banks this week. Interesting to note that Firethorn is out of all of them.. even in the model where Firethorn paid one of the majors $1M to take the application and integrate it. As of the latest QCOM 10-Q we can now see that total Firethorn revenue was $3M for the 2009 YEAR!  Wow.. no wonder Len lost his head for buying this thing and making it a separate division.

QCOM and Firethorn have a new product planned:  SWAGG (www.swagg.com). Good luck trying to figure out what this thing is.. could this be associated with Visa/ATT? (Youtube here). There seems to be a pre-paid debit card associated with it (from Dr. Jacobs CES presentation). Hey QCOM is one of my favorite companies… the people there are absolutely brilliant. But the Firethorn team is adopted.. and therefore the  genes do not extend here. They need a top exec to drive this thing.

On another note, Obopay showed up to at least one of the top 3 banks last month (BankX) touting its mobile payment solution. Undoubtedly with “millions” of subscribers (actual estimated at less then 20k). Always interesting to see spin here, they also reportedly told BankX that Citi’s departure was only temporary. Other banks should ask them to get specific.. very specific.. (probably not the US and there is no commitment on use).

From compete.com (Hard to spin facts..8,000 unique visits last month .. estimate only 20% use the service)

The “big secret” in mobile payments is that there aren’t any… (with very few exceptions). Those exceptions usually deliver “payments” as part of an existing value proposition (see  MNOs will rule in Emerging Markets). Banks know that changing consumer behavior is a 20 year effort. Card based payment schemes have particularly high hurdles in emerging markets due to interchange rates and rules that are ill suited for low value payments by unbanked. Toward this end countries such as India are contemplating the development of new domestic payment networks.

Thought for the day

RBIs Payments Vision 2012

SEPA: Chicken or the Egg?

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4 January 2010

I was reading an update on SEPA : New Alliances Required to Tip the Market. The report gave me new perspective on how challenging it is to change a networked business. This challenge is exacerbated by the ‘well intended’ EU political compromises in SEPA (specifically) and EU regulation of retail finance (more broadly). Clearly “payment networks” can benefit from innovation, but as Juergen correctly states “In a network industry, cost reductions and/or additional revenues that can be realized by applying the new standards have to exceed the network effects currently realized with the old standard”.

SEPA is struggling to resolve issues in cost/benefit allocation given the slow growth and adoption for SDD and SCT. The greater growth in SEPA Cards Framework can be attributed to the “control” and investment from Visa/MA as they manage compliance (and marketing) or the new SCF brand. An excerpt from the report above:

Key strategic decisions have to be made almost simultaneously in organisations that are in competition with each other, follow different strategies and have different abilities to innovate or prepare for an industry change. Only if consensus on a new business model can be reached – among stakeholders who represent significant market shares and hold key positions in the industry– will it be possible to generate the synergies promised by SEPA. As already described, the cross-border business within SEPA represents only a small share of the payments market. The dominant national standards, which all would have to be replaced by the new SEPA standards, are built around national market requirements.

International banks (for example, Deutsche Bank) have separate organisational units in several European countries that run their own national payments engines. They maintain different payment infrastructures in Europe. Modifications in response to new compliance requirements (for example, money laundering or new requirements of the PSD) create several similar projects [for this single bank]..

The costs for SEPA (estimated at €10B) fall heavily on the banks, and the benefits (ex. e-invoicing, cross border competition in payment products, …etc) are expected to be realized by the consumers of bank payment services (with and estimate €7B revenue hit to banks). Fortunately for the Banks, in 2002 the approach decided on by the EPC was to create SEPA in a market-driven and self regulated process.

The over arching goal of SEPA is to make the EU a single market on “payment” par with the U.S. Perhaps the best way to start is not by incenting changes to “payments”, but to open the EU retail banking market. (Think of the US banks operating under a Fed charter).  “All banking is local” can be the mantra ascribed to the EU today, with each country maintaining tight regulatory control over domestic financial institutions (i.e. M&A and Liquidity). Significant market forces could be unleashed when local banks can operate throughout the EU, and a German consumer can seek the best rate and apply for an account at a “Spanish” bank.  Today the regulatory hurdles for this retail competition are significant.

The EU, ECB and the EPC started with payment standards and “infrastructure” as it did not alienate any of the existing participants (market driven.. .not mandatory). What we have is the fruit of this compromise, standards for payments across the EU without the ability for companies to compete for business across the EU domain. The unrealized value of the “SEPA Innovations” are thereby constrained by the market in which banking operates. Perhaps integrating EU retail financial markets would be a better first step. This “openness” would certainly provide an attractive carrot for bank led investment in common payments. Which comes first? The Chicken or the Egg?

See data here

CapCo Analysis