Divide and Conquer: Commerce Battlefield

What “standards” are there in commerce?

Do we advertise in the same way? Locate in the same geographies? Price products the same way? Have the same eCommerce or mobile “store” and services?

What about Payment?

Payment is perhaps one of the few “standards” that retailers have in commerce. I had an “ah hah” moment at Money 2020. It was from a presentation by Jim McCarthy of Visa.. the theme: Visa is a model where everyone wins, and participants can monetize their respective roles. Of course I should know this.. but it really just struck me on WHY the Banks want to work within the Visa model.. if they break it.. they will no longer be able to monetize payments.

Mobile is a platform which enables a radically improved customer experience. With respect to payments it also offers a unique ability to authenticate a consumer (fingerprint, GPS, cell tower location, voice, camera, …). Yet, no banks are looking to leverage these “new” capabilities in a “new” payment system. After all, given a clean sheet of paper, no one in their right mind would design a payment system like we have in Visa/MA: present a credential to a merchant, who passes to a processor, who passes to network and routes to issuer to approve a customer transaction… giving the auth to everyone in the chain again.. and getting back another message. If everything is connected why not just ask the consumer to send the money from their bank (ex Sofort,  Push Payments also read Banks will Win in Payment ).

Why? Well because Banks can’t make money in a Sofort model.. (would need to create all new merchant agreements). This is why Banks are going through contortions to stay within Visa/MA, yet attempting to alter it fundamentally (ie Tokens). A top 3 Retailer provided me a great example “if tokens are not created by Visa/MA do I have to accept all tokens like I have to accept all cards”?

Defining the Battlefield

My real “ah-hah” came when thinking about how the Card “standard” has been managed for the last 50 yrs. Quite frankly the Banks have been playing Chess while everyone else has been playing checkers (quote from a Retail Client).

This reminds me of Sun Tzu

Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted

Hence that general is skillful in attack whose opponent does not know what to defend; and he is skillful in defense whose opponent does not know what to attack.

Sun Tzu – Book 6

Retailers have been playing on someone else’s field.. they have been so distracted in competing with each other.. that they did not even identify a common enemy. This has shifted significantly in the last 5 years. The payment burden has become so substantial that Retailers realize they must define their own rules and create a new network (aka field).. thus we now have MCX in the US, SEPA in EU, EFTPOS Australia, CUP/China, Interac/Canada…  This is not just the US, take a look at what is happening in the UK last week, or with Card EU regulation cross border.

Implications of Tokens

I cannot understate the business implications of tokens to Retailers, Processors, Wallet Providers, eCommerce/mCommerce companies, and Start Ups(also see Money2020 and Tokens). It will impact every company that keeps cards on file (COF), or processes transactions electronically.  What is most concerning? These entities have few existing mechanisms to coordinate/collaborate … a coordinated Bank/Network consortium is battling a bunch of unorganized tribes… and setting them against one another. The hectic activity in payments has caused a fog of war which serves to obfuscate the primary advances of the opposition. While everyone is focused on litigation, debit, mobile, MCX…  banks are moving 3 steps ahead.

Banks have wrapped tokens in secrecy (per Sun Tzu) with motherhood and apple pie stories pertaining to protection.  I can assure you that Banks are not dropping over $1B+ to protect consumers.. they are spending this to protect themselves from competition. As I said previously, Banks know they cannot innovate at the pace of Google, Square, Cardspring, Braintree, … thus they must control the battlefield. Tokens enable them to recast the battle.

The new battle surrounds data. As my friend Osama told Tim Geithner, the value of data exchange may quickly outweigh the value of risk management and clearing in payments. JPMC has even created a new DIVISION run by Len Laufer to focus on data, as Jamie would say “we have better data than Google”.  Bank Card CEOs are furious at the thought of anyone delivering value on their cards, particularly efforts by the networks themselves (V.me, Visa Offers, …). Other token drivers:

  • Control who can be a wallet provider
  • Control who can add value to a card number
  • Control how a merchant can identify a customer via a card number (See payment CRM)
  • Control how payments are cleared (ex. What they did to Google Wallet).
  • Control how and WHEN mobile payments succeed
  • Control what payment instrument is used in mobile POS payments (ie Credit)
  • …etc

Banks are so far ahead on strategy….. I’m concerned Retailers will have no idea of what hit them.

How to respond?

  • Coordinate on a plan of action (glad to assist)
  • Create a new Battlefield.. create a new set of rules that Retailers control (thus the brilliance of MCX)
  • Join MCX.. just to ensure Banks know they must take this seriously
  • Frustrate the Banks on their Battlefield… Visa/MA and the issuers are not on the same page.. help to further the rift.. ensure new rules work to the Retailer’s benefit. For example, push V/MA to create a “certified wallet provider” that can translate cards to tokens WITHOUT THE ISSUER.
  • Regulatory… push payments into DUMB PIPES. Let innovators own the risk.. give banks a pass on payment compliance, open non bank owned pipes (Fed wire)…
  • Find Banks that will partner with Merchants to deliver value. On my short list are: Barclays, AMEX, Discover and Bank of America..
  • Help Banks solve their problems through you.. help Banks leverage their data for your benefit….instead of the other way around. Amex is FAR ahead in this.. 5 yrs ahead (see blog)
  • Break the Card revenue model…. Beyond what Chase did to VisaNet
  • Ensure you are viewed as fighting for the consumer.. NOT for yourself. Banks don’t exactly have a stellar reputation these days.
  • Banks also rightly fear that Debit will move from $0.21 to $0.05 or even $0.03.. making debit the equivalent of a quasi real time ACH system. How can you incent increased use of debit today?

I have a few others that I’m not going to share.. but we have got to stop falling on the same sword over and over again.  Banks are NOT the center of commerce, just as my ISP or MNO is not the reason I shop at Amazon.

Investors.. I’m not saying to short V/MA.. I see nothing to dent their global growth.. but in US/EU.. we will see their revenue drop substantially in 5 yrs.

My predictions

  • Visa/MA will create a rule that no one can wrap their card in a token but them… after all a card is really a token for an account number in the first place. Bank token efforts will die in next 12 months.. unless they can force a strategic change… or they make a move toward a 3 party network like discover.
  • Visa/MA will start off getting feedback from all participants.. but banks will win on their rules like they always do.  Merchants will resist efforts unless carrots are substantial (card present and fraud liability shift). If issuers are NOT on board merchants know (from VBV/MSC experience) that issuers will just tweak the decline rates to make for a terrible customer experience. In the end issuers have control over how any new scheme works for its consumers.. they have an unlimited ability to frustrate Visa’s rules… or leverage networks against each other.
  • Take a look at how long EMV, NFC, … have taken. I would make the case that EMV only succeeded because of regulatory pressure.  I see no impetus for change… no business case for either merchant or consumer.  PCI costs and Fraud are already managed…
  • Mobile successes will work around today’s plastic.. This is the beauty of Square..
  • Merchants have reached beyond the tipping point of collaboration on common payment services. It will happen… and there will be implications to V/MA volume (in 5 years)
  • There is only one entity that has the POWER to change consumer behavior on mobile: Apple. It took them over 20 years to earn consumer trust through their maniacal focus on quality and consumer experience. If Apple makes a move in mobile payments.. we should all “think different”
  • Merchant friendly solutions and big data.. are red hot areas. My favorite case study here is a little restaurant marketing company (Fishbowl).. will write a blog on them this month.

Customer Centered Design … Why is it SO Hard?

I have now learned that I don’t know what the customer wants or needs.. and the direct customer interaction is VERY beneficial to all involved.. from product to engineering to the call center. Communicating to the customer (if done correctly) is a great thing.. great customers love you and they want to know what you are working on.. find ways to share it with them. If customers perceive they are getting value they want to HELP you. It is imperative to build facilities to get this feedback.

7 Nov 2011

I woke up this AM thinking about consumer value. Why is it that so few existing companies can deliver disruptive consumer value propositions? Execute innovation? It seems as if big companies are more interested in imitating what their competitors are doing … as opposed to focusing on customer (to deliver value). Steve Jobs was one of the few big business CEOs that focused on Customer. He knew that creating a fantastic customer experience was essential in anything to be “sold” to consumers, whether that was Apple or Pixar . Everything flowed from a consumer DESIGN and experience which then evolved to product and subsequently to engineering. Apple was fanatical about customer experience and customer centered design, obviously quality (hardware and software) and connected services were also essential in driving the experience to establish behavior.  How many products in the market start with customer centered design? How many of your product heads know their customers and how they differ by segment?  My time at Gartner and Oracle led me to a few hypotheses on software products:

  • Every Software product usually starts with a customer in mind… but customer focus typically fades fast as other objectives (financial, competitive, alliances, big “special” customers, timeline: execution on “something”…) move the product off of the initial customer centered goal.
  • Delivering any consumer value proposition requires either a killer value proposition or a killer distribution channel.  Consumer adoption is “unpredictable” at best…  be highly skeptical of any initial success (acquiring early adopters of a product) never resembles the broader launch when the product goes mainstream.
  • Small companies (leading delivery of a visionary consumer service) require alliance partners… Alliance partners require financial incentives that quickly erode the original value proposition. “when you dance with an 800lb Gorilla, you can expect to have your toes stepped on”. Give equity and it biases your board (focus on their problems/customers), give cash and it kills the consumer or the distribution channel. Equity is better.. but structure in a way you can take them out.
  • New Software products within large companies (ie MSFT, SAP, Oracle) are either poorly integrated into the core, or not integrated at all.  Product teams can spend over 50% of resources focusing only on internal integration… which further distracts from original  customer centered design. There is usually a case for 2 product teams here.. one focused externally on customer and market, they other focused internally on integration requirements.
  • Customer testing and trial is a 9 month+ process… no exceptions. Few companies go out of their way to solicit negative customer feedback on a new product. They are much more concerned about “secrecy”…  Companies may have justification for short-circuiting (Example: “what are we supposed to do with the engineering team while we wait for feedback”) usually come back to haunt as products in market are much more difficult to change AND effect consumer perception/adoption.  Cloud based services are no exception , “lets throw our product out there and see what happens, we will fix bugs later” is not a great business plan. This model makes your early adopters unpaid quality assurance participants..
  • Few companies can survive by tackling a niche in the consumer market. There are only 3 markets (US, EU, China) where a 10% market share equates to a sustainable business
  • Large companies may not be able to “win” in delivering a new value proposition, but they can muck it up for everyone else. Their game plan is one of “control” over value. They leverage their existing network, infrastructure, products, communication and market power to influence potential customers.
  • Consumer visionaries and innovators play a distant second to executives driving financial performance. There are exceptions. For example, Google is also a fantastic innovator, a result of having the best minds working round the clock with pressure to do something great.. not to drive a revenue target.

Story.. my lessons

My lessons learned on customer centered design are many… After Oracle I went back to my old team at Wachovia (which had just bought First Union) our team had launched the world’s first major online bank in 1995 (Cyberbanking).. I was fortunate to return to oversee the complete remaking of our online and payment services infrastructure… a $200M project (2002). As an engineer.. I have many faults..  among them thinking that I know what the customer wants without ever talking to them… We had 2 excellent execs at Wachovia that completely changed the way I thought about customer centered design.  We brought customers into the product design process at every stage.. hand drawn screen mock ups.. asking them obvious questions… Why do you do this? what are you looking for? When do you typically do this? What does this mean to you? Jason Ward’s amazing team took this customer feedback and analyzed it to prioritize product design changes.  When I started at Wachovia…. we had no facilities or process for including customer feedback, it was the call center’s problem to deal with. After development was complete, we did extended “dog fooding” with employees and customers.. then brought that feedback into refine final release. We also communicated with ALL customers.. why are we upgrading? what will be changing? We explained what things will look like. 3 months before it happened (believe it or not customers don’t like surprises in their bank).

What happened next was something that still amazes me.. During upgrade customer call volume went DOWN.. we transitioned customers from one system to another… completely changed screen flows … and they did not call to ask questions, they did not call to complain..  We had budgeted for extra call center staff.. and we didn’t have anything for them to do..  What was more amazing is that our customer satisfaction went up… DURING the transition to the new system. This is unheard of..

I have now learned that I don’t know what the customer wants or needs.. and the direct customer interaction is VERY beneficial to all involved.. from product to engineering to the call center. Communicating to the customer (if done correctly) is a great thing.. great customers love you and they want to know what you are working on.. find ways to share it with them. If customers perceive they are getting value they want to HELP you. It is imperative to build facilities to get this feedback.  In Wachovia there was only 2 regular standing meetings that the CEO would attend… financial and customer listening.  Although Wachovia failed on many other grounds.. it taught me the importance of keeping eyes on the customer and ensuring I received the RAW customer data. My priorities became my teams priorities.

Sorry to ramble… I have quite a few peers and former employees read this. Wells Fargo just completed the last migration off of our $200M Wachovia platform. The migration was very well done.. but quite frankly I miss what we had. WFC’s online banking is too clumsy.. too much information.. The difference between using an iPhone and flying the space shuttle (photo below). … although I miss that too.