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.

Wells gets A+: New Amex Partnership

WFC is brilliant here. By leveraging their primary asset (customer relationships) they have jumped to the top of the line in a new ability to deliver services, and capture unregulated payment revenue. Think they need to work quickly to ensure retailers see an upside to expanded Amex transaction volume (see payment enabled CRM).

7 August

Press today on WFC/Amex plans for WFC to Issue Amex Cards (also see WSJ Blog, CNBC Clip with WFC Exec on deal overview). Key items:

  1.  WFC to issue credit cards accepted on Amex Network
  2. New and existing WFC customers
  3. New loyalty platform

Why is this big new for INVESTORS? 2015 will see reissue of EMV compliant cards (blog). Issuers are therefore assessing what brand/plastic to reissue. Top analyst question for Amex/WFC is will WFC reissue on Amex plastic/brand? If WFC moves this direction, will other banks as well? Is Visa’s golden goose on the menu? Will EU regulatory developments (suggested 30bp rate for credit supported last week in US by Dick Durbin) prompt additional banks to move to 3 party network?

Deal History/Drivers

There is tremendous history around this transaction, as well as the business drivers for it. Amex has been seeking mass market opportunity for almost 15 yrs. For example, within Amex, few know that back in 2002, American Express was contemplating an acquisition of Wachovia, then the #3 US retail bank, now part of WFC.

transaction-volume-2006-2010

Within the large retail banks, there is broad recognition that:

  • #1 three party networks have substantial advantages (blog),
  • Durbin has killed the profitability of a vast segment of mass market retail (40%). Durbin’s impact was on Debit, and the PR on the WFC/Amex deal focuses on credit… so view this as attempt to generate fee revenue from mass market (only 30% of WFC retail consumers have credit card). See Barron’s article on latest Durbin bank EPS Impact
  • Pre-paid cards are proving to be real option, and banks face prospect of loosing core relationships (Blog, and Future of Banking)
  • Three Party networks (Amex/DFS) have no Durbin or EU constraints
  • Future of “payments” is about data, and enabling value added orchestration, Amex is the clear innovation, and business model, leader,
  • Chase has constructed unique Visa deal in attempt to create 3 party,
  • Visa and Mastercard are ineffective at “change” and have alienated both Retailers AND Banks.  I asked one CEO about EMV and he said he found out about it same way I did, in a press release (and he was top 3 issuer)…  Gives you idea of partnership “health”.
  • Retailers are working to establish their own payment network (see Battle of Cloud, MCX Blog)
  • Apple, Google and others are investing billions in this space

Top banks are working on a new token scheme to build a new “Visa” from within (see Tokenization). It now seems, BAC, WFC and JPM have separate plans from this centrally led TCH initiative… but all are consistent with disintermediating V/MA

WFC is brilliant here. By leveraging their primary asset (customer relationships) they have jumped to the top of the line in a new ability to deliver services, and capture unregulated payment revenue. Think they need to work quickly to ensure retailers see an upside to expanded Amex transaction volume (see payment enabled CRM).

I also believe this is a tremendous win for Amex, not only in their efforts to grow transactions riding on their rails, gain broader acceptance, grow in mass market but primarily as a way to unlock new value in mass consumer payment “data”. This is yet another “Cluster”…

Network Clusters

The street should watch for M&A activity around DFS…. The only subscale 3 party network left standing.

Take a look at new Amex service, working as a back door to get line item detail from retailers.

https://www.americanexpress.com/us/small-business/openhome/receiptmatch