Visa – New Mobile Payment “Rails”?

Word on the street is that Visa is set for a major mobile payments announcement in next 6-8 weeks. Separately, US MNOs are also rumored to be collaborating on Near Field Communications (NFC) payments with acquirers. Could it be that the log jam on NFC is about to be broken? Is Visa developing new rails to support mobile payments?

25 November 2009

Word on the street is that Visa is set for a major mobile payments announcement in next 6-8 weeks. Separately, US MNOs are also rumored to be collaborating on Near Field Communications (NFC) payments with acquirers. Could it be that the log jam on NFC is about to be broken? Is Visa developing new rails to support mobile payments? Let me say up front that this blog represents “connecting the dots” more than a definitive market projection.

The US market is ripe for a break from the 6 party political “fur ball” that is hampering delivery of mobile payment (Card Issuers, Acquirers, Network, Merchant, MNOs, Handset Mfg). For those outside the US, MNOs have substantial control over handset features and applications, and have been leveraging this “node control” to “influence” direction of payments. The central US MNO argument being: “it is our customer, our handset, our network we should get a cut of the transaction rev”. Unfortunately existing inter-bank mobile transfers/ payments are settled through existing payment networks that provide limited flexibility in accommodating a “new” MNO role and the network rules leave much room for improvment in: authorization, authentication and consumer “control”. 

Outside the US, the situation is much different, as consumers have great flexibility in switching MNOs, have ownership of their handsets, and are largely on pre-paid plans. The MNO challenge for payments in this environment is largely regulatory. Many countries (EU, HK, Korea, Japan, SG) have open well defined rules for MNOs role in payments (example: ECB ELMI framework within the EU), while other countries are highly restrictive and are in the midst of developing their legal and regulatory framework. Even in the countries where MNOs participation is defined, they have largely benefited from the complimentary role that the service plays with pre-paid plans (not in interchange at POS).

Globally, MNOs are looking for a payment platform where they can benefit from interaction between consumer and merchant, with flexibility to deal with a heterogeneous regulatory environment. The competitive pressures on Visa/MC are much different then they were 5 years ago (when both were bank owned). The network fee structures and rules were written with banks and mature markets in mind. Emerging markets present a much different set of opportunities, as MNOs lead banks in brand and consumer penetration within every geography.

All of this leads to the case for a new “Mobile Payments Settlement” network, a network which will alienate many banks. I expect to see Visa roll out the initial stages of this network in the next 2 months with an emphasis on NFC. Quite possibly the best kept secret I have ever seen from a public company. I’m sure many Silicon Valley CEOs are crossing their fingers (with me) on this, as a “new wave” of innovation is certainly close at hand that will drive growth (and valuations).

For those not keeping up with the 50 or so product announcements a day on NFC, handset manufacturers committed to have NFC enabled phones to consumers in mid 2009 in the GSMA 2008 congress. NFC capabilities are numerous (Vodafone YouTube Overview), and may represent a true disruptive innovation surrounding payments. There have been many very recent product announcements that will enable existing phones to use NFC, and P2P Capability. All of which will blossom in a more “fertile” mobile settlement environment. See one example “future” Visa mobile service here: http://tomnoyes.wordpress.com/2009/09/24/googleoff/

Side note: This is not all bad news for Banks, as the structure will certainly provide for existing cards (debit/credit) and may deliver substantial revenue through cash replacement (small < $50) transactions. More details on structure of MNO in settlement 2 weeks….

Select Product/Alliances Below:

[youtube=http://www.youtube.com/watch?v=2AmeM33r7wM]

Googlization of Financial Services

For FSIs today the top issues in delivering new value propositions are: where is the short term revenue, what can be created that leverages current assets, what provides “true” customer value, how do I stop non-banks from creating value in my ecosystem and who internally can execute?

A managing partner at KPCB reminded me that when Google first started, it had no plan on how to generate revenue. It was great technology, and investors figured that the bright young founders would “figure it out”. My how they have, with 2Q09 revenues topping $5.5B.  Harvard Business Review put out a very thought provoking article in April 2009.

What’s Your Google Strategy? by Andrei Hagiu, David B. Yoffie

This brought about a little déjà vu relating to channel strategy for banks. The focus of the HBR article seems to be intermediaries and the value that platforms/MSPs provide. Another aspect to consider in Google’s success is how to use information to add value, and how to develop leaders capable of realizing it. For FSIs today the top issues in delivering new value propositions are: where is the short term revenue, what can be created that leverages current assets, what provides “true” customer value, how do I stop non-banks from creating value in my ecosystem and who internally can execute?

Since I’m not writing a comprehensive book on the subject.. lets follow the Google vein. Banks have tremendous customer information that goes un-used, including:  location, buying habits, credit worthiness,  brand preferences and even family/life “events”. Of course most FSIs don’t use this information because of challenges faced in regulatory compliance such as Reg E, FCRA, 2009 CCA. …etc.Anyone within a bank today knows the challenges of working across the organization to develop something truly new and innovative. Each new team that is brought in brings about an n2 problem in coordination. Developing a new customer value proposition that uses customer data is a mine field that is difficult to navigate.. but it could also be a gold mine.

Here is a thought provoking example which I discussed with the innovation team in my previous life. I’ve also discussed this same example w/ JPMC, BAC, Visa and a number of other FSIs.

Summary: Bank mines customer transactional information (card) and sends targeted advertisements to customers

Customer Value

  • Get free phone or payment chip
  • Preferred rates on card/or accounts
  • Targeted discounts/coupons at selected merchants
  • Accelerated rewards

Customer Requirement

  • Agree to Disclosure allowing use of your transactional information
  • Agree to Disclosure for bank to send marketing advertisements to your mobile phone number
  • Minimum card used
  • Maximum of x ADs per month

Bank Value

  • Generate new revenue Stream from targeted advertising
  • Increase revenue (transactions/interchange)

Bank Requirement

  • Technology. Mine data, manage advertisements, coupons and rebates
  • Develop merchant relationships (advertisements), or develop relationships w/ 3rd parties
  • New business line
  • Develop product incentives

Merchant Value

  • Finally a bank brings in customers.. as opposed to taking interchange

Example “Network” Pilot Overview – A high level directional overview

  1. Customer registers credit card for mobile ADs. Allows SMS AD x times per month
  2. Clairmail acts as agency, coordinating merchants, promos and marketing spend
  • Merchants pre-pay for campaign
  • Develop target promo and bid criteria: customer location, demographic, event transaction, …
  • Claimail server Sits at “Network”, listens to transaction traffic
  • Card transaction events are triggered based upon card registration status
  • Event gets sent to campaign engine. SMS AD triggered based upon criteria
  1. Customer gets SMS notification
  2. Example. Shop at EXAMPLESTORE in next 5 hours and get 10% back
  3. Clairmail server monitors transactions at “Network”.
  • If Card transaction is for registered card it is sorted
  • Campaign engine finds that it Ad was sent to it, determines if transaction at EXAMPLESTORE meets threshold
  • If it is met, Campaign engine kicks transaction to MerchantAdvert service which bills merchant for AD and debits account for 10% credit plus fee.
  • Engine issues 10% credit to customer’s card account
  • Engine debits merchant account
  • Notification message sent to customer that their card account has been credited for purchase and 10% discount.

Good news for merchants is that they pay only for purchases. Great CPA here. Bad news for banks is that someone is already creating a model to benefit from your transactions with your customer.

Banks must identify and incent leaders capable of working across their internal organizations to develop new models which deliver value to the customer. The challenge of delivering value in new ways cannot be delegated to the technology or internet teams.. it requires business leadership from seasoned executives well established in the organization. When GE looked to establish a new business line.. it didn’t hire an outsider with no tie to the existing business.  The same approach should be taken by leading FSIs.

The innovation team may be able to create the idea.. but you need to pull a star out of your stable to go run with it. The other option would be for Banks to start acting like VCs and give a few years for smart people to “figure it out”. However this is loose approach would be challenging for a bank, particularly for innovation surrounding existing customers and an existing business. Only leaders that are respected across business units can pull off coordination between them, particulalry when complex regulatory issues must be addressed.

Other reading

http://www.theinnovatorssolution.com/