ApplePay: Debit issues

Update Oct 1

Apple forced all the top 5 launch partners to launch debit and credit at same time. Right thing to do!!.. but debit is messy.

My bank friends are having kittens over Apple Pay debit compliance. Issue isn’t Apple, but forcing debit cards to EMV (industry not ready) and dealing with the conflict between EMV rules and Durbin. For example, EMV rules state transaction must be routed to primary AID as identified by issuer. This is fine for credit, but Durbin requires routing flexibility… this requirement just never bubbled up through the EMV specs. Tokens exascerbate the problem, particularly if the AID is from a Visa BIN.. Specs must be updated to address need for routing flexibility (using the secondary AID) …but this breaks network rules.. and there are no payment terminals that read secondary.


Previously I stated that debit cards in ApplePay are not Durbin compliant. I am retracting that comment completely.  The debit card in ApplePay seems to be Durbin compliant, as Bank of America spent significant time with First Data’s Star network to make it so. Problem is that the rest of the debit industry is scratching its head trying to figure out how to make this stuff work… so don’t expect to see any ability for all your debit cards to work in ApplePay anytime soon.. just the top 5.

The Challenges with Debit

Debit in the US is broken down into 2 primary segments: Signature Debit (processed through Visa) and PIN debit processed through 8+ PIN Networks. See this Federal Reserve note for more background. Retail banks exert almost complete control within PIN debit, after all it is their “ATM” acceptance infrastructure that allowed for this network.

PIN Volume2

While the new EMVCo token scheme is available to Debit, coordinating implementation across 8+ PIN Networks (and large Retail Banks) is a big chunk of work. Particularly when these same banks are working to consolidate PIN networks, and create their own centralized token solution (see blog).  I’m painting a picture of many companies and many moving parts in PIN debit and tokenization. Add to this picture Apple, who worked with networks to compartmentalize and maintain secrecy with a handful of partners.

To get anything done in this environment, it is best to work with the biggest gorilla, solve their problems, show the way, and hope everyone else gets in the boat. This seems to be what happened and the Gorilla is Bank of America. This is the only Debit card I’m confident is in ApplePay. I believe BAC has been working with Apple for over 4 years on this.

There are 2 essential problems with debit in mobile wallets

  1. Debit cards must be PIN capable
  2. Debit cards have complex routing requirements (more detail below)

Durbin Challenges – Routing

The Durbin amendment requires that Debit cards give merchants flexibility in the routing debit transactions (see this excellent Paul Hastings note). From Financial Reform Insights

As noted above, all banks, regardless of asset size, must comply with the prohibition on network exclusivity and routing requirements. The Fed has implemented requirements to prohibit network exclusivity arrangements on debit card transactions and ensure merchants will have choices in debit card routing. In addition, the network exclusivity and routing requirements apply to both debit cards and prepaid cards.

The final regulation requires issuers to make at least two unaffiliated networks available to the merchant, without regard to the method of authentication (PIN or signature). A card issuer can guarantee compliance with the network exclusivity regulations by enabling the debit card to process transactions through one signature network and one unaffiliated PIN network. Cards usable only with PINs must be enabled with two unaffiliated PIN networks. ATM transactions are not subject to routing and exclusivity regulations.

Note: A smaller payment card network may be used to help satisfy the two unaffiliated network requirements; however, if the second payment card network is unwilling to expand its coverage to meet increased merchant demand for access, that would trigger noncompliance with the network exclusivity regulations.

In real world terms, the Durbin amendment allows merchants to treat all debit cards like bank PIN debit cards (they can be routed around Visa/MA switch and switched through PIN networks Star, NYCE, Pulse, Cirrus, … etc). Large merchants have also started routing debit transactions DIRECTLY TO BANKS, skipping the PIN Networks all together.  This is all very straight forward in the world of a 16 digit PAN. The merchants (or their processors) use BIN routing tables that can be customized by issuer/debit network.

Within the EMVCo Token Scheme, the only way for the underlying card to be “resolved” is from the Token Service Provider (TSP) as described in part 3.2 of the EMVCo spec.  Visa and Mastercard are the only TSPs in the current version of ApplePay. Although, both networks have committed to allow Issuers to serve in the TSP role directly none appear to be ready October 2014. These unique TSP roles are probably due to the speed at which the EMVCo spec materialized (fastest new Scheme in history of V/MA), and also to the secrecy surrounding its first use (ApplePay). Thus, in the current ApplePay EMVCo token scheme neither the Issuers or PIN Networks are in control of the tokens, and hence cannot make “at least two unaffiliated networks available” without first resolving the token with the TSP.

To solve for token resolution, each and every processor must have the ability to work with a multitude of TSPs to resolve tokens into something that could be routed based upon the MERCHANT’s options (2 unaffiliated networks). The problems here are not insurmountable and resemble the problems associated with the Internet’s DNS system, where multiple copies of DNS routing tables exist to convert to an IP address. Tokens have an added advantage of identifying the owner/TSP through the BIN. For example, a Visa debit card within the ApplePay system could be a Visa Bin, a Chase Bin, a Wells Fargo bin.. So a token identifies its “owner”, or the TSP which can translate it.

To solve for this problem, Visa and Mastercard have made a “detokenization” service available, and other TSPs/PIN networks must do the same (running Vaulting / PIN transformation).  But to do this for all cards, all processors and all merchants takes a little time. There are technical and business issues here.

What is most surprising to me? I spoke to the head of debit cards at a top 5 banks, and he didn’t even know there was a problem..

PIN Capable

While it is great that they included debit in the launch, the debit issue had plagued other schemes as well. ISIS initially launched with a Chase Debit account to hold balance. Chase’s regulator told them that this card was not compliant (no PIN capability) and thus they had to pull weeks before the ISIS launch. ISIS had to run to Amex Serve for the solution, as Amex was not under durbin constraints. This PIN issue will also hit ApplePay, but the more immediate problem is routing.

Google solves the PIN problem by wrapping in a non Durbin debit. Specifically, banks with under $10B in assets, and non-banks (like Amex) don’t have to comply with Durbin. Google thus has one token (non Durbin debit), where they are issuer with Bancorp Bank (TBBK).

I am laughing a little bit on the PIN side, can you imagine, unlocking your phone, touching the ID, tapping to merchant, then also keying in a PIN. Merchants are in a place to “steer” toward PIN for every debit card. But downside is that if consumers get too frustrated with experience they will just use their credit card.

Merchants know…

A few months ago, “a merchant group” sent Apple a “formal notification” telling them that their scheme was not Durbin compliant. I don’t know if Apple’s team just sat on the notification, or hoped it would just go away once all the good launch activities came to pass.  I’ve been convinced over the last 2 days that there is a durbin compliant card in the wallet, but Apple Pay is certainly not ready for every debit card. Why didn’t Apple respond to the merchants and tell them they were investing to make sure this works? It is not a great way to start off a relationship… particularly when you have your own plans for engaging the consumer.

This is the graph that merchants see in their minds when they think of Apple pay

non cash payment

Notice the flat line on credit card spend.. and the 20%+ CAGR on debit. Merchants worry that the strong banker presence at ApplePay launch is a key message.

Industry Confusion

My friends in the Debit industry are scratching their heads this week: Retail Bankers (debit card owners), Processors, PIN Networks and Merchants. What do they do to get their debit cards in ApplePay? If only one of them is ready (meaning has ability to resolve and or issue PIN debit tokens) what does it mean for the other 7?. Is this the first path toward an industry PIN consolidation? Who “owns” the token resolution service, standards and approach? What are the service levels on directory synchronization and response times? No one told them about an industry body to standardize… Man this debit stuff is complicated.

The underlying PIN Network industry problem is there is really no single authority to coordinate EMVCo token implementation across 5000+ banks and 8+ PIN Debit networks. Perhaps there is really no single way to get debit cards into a wallet, and this mess just further helps the 800lb gorillas that can invest in semi-proprietary schemes to get it done.



Payments.. global growth.. with controlled chaos

6 April 2014

Sorry for the poor flow here. jumping on a plane and wanted to get some of this out. feedback appreciated.


A brief view on what is happening in global payments growth, debit, banking and data. Why moves here are so important to banking, commerce and payments.


Nothing will dent the 20%+ CAGR of Visa/MA, as 92% of electronic transactions are completed by less than 10% of the world’s population. Perhaps the best analysis done on global payments is from Cap Gemini (2013 World Payments Report). Markets like Asia and CEMEA are growing electronic payment volumes by over 22% CAGR. The network effects are enormous, it is like mobile in the late 90s, or the internet since the mid 90s. No investor can stay out of payments.


Payments is a rather complex environment. I’m not speaking from a technology standpoint, but from a value, control, political and regulatory one. Just as electronic payments are exploding internationally, there are several forces that are acting against established payment networks in OECD markets. For Example

Thus, It is important to view the changes occurring in payments with changes in other networks: social, telecommunication, retail, mobile, supply chain, demand chain, advertising, banking, commerce, education…etc.  The lines that separate retailers, advertisers, platforms, MNOs, Banks, … are beginning to blur much more substantially. For example

Historically Banks supported commerce by providing access to capital, support of markets, specialized instruments, all of which created value through their unique ability to manage risk (using their information advantage).  Consumers chose banks based upon their physical presence to support  the interaction with (and transformation of) different forms of value: cash, check, electronic, …etc, as well as gain access to credit, and provide return on assets.  Bank strategists created retail financial “supermarkets” where transactional accounts acted a loss leader to cross sell 100s of other consumer financial products. The majority of consumers never participated in this cross selling effort, and therefore the mass remains unprofitable to these “supermarket” banks.

As cash, and check are displaced by electronic payments, the value of the branch and “supermarket banking” has shifted to the value of electronic payments for a large majority of the population. The information advantage that best positioned banks to manage risk has decayed. Further, the billions of dollars spent in transactional risk management has been eliminated by mobile authentication (see Perfect authentication a nightmare for Banks). Regulators are working globally to open up payments to non-banks (ex EU ELMIs), but conversely holding banks responsible for everything. Governments and Banks have grown addicted to data surrounding electronic payments, leaving many consumers to search for anonymity (ie Bitcoin).

The entities that are currently best equipped to deliver consumer value and monetize data are companies that the consumer most frequently chooses to interact with (Apple, Amazon, Google, WalMart, …). Banks are working from a position of control, and must pivot to a position of value, trust and choice.

A Story….

Most of you know that today’s Google wallet has a central transactional account of a non-Durbin Mastercard (see blog). Google pays each issuer with a card in its wallet the FULL rate on its cards (example 210 bps to FDC/Visa/Chase) and the merchant incurs a debit fee of 105bps. Google eats the cost.. In this model the bank wins, and the merchant wins. The consumer wins because they can put their preferred payment instrument in the wallet (ie Debit). In fact Google is the ONLY wallet that has debit cards in it.
You would think everyone would like this right? NOPE. Banks want Google to stop wrapping their cards. What are Banks upset by?
#1 Banks don’t like Google seeing the data,
#2 Banks don’t want debit use on mobile.. they want mobile to be a premium credit service
#3 Banks want part of GOOGLE’s revenue in addition to their full interchange.
This story should scare the pants off investors in the payment space, Google has invested a billion dollars, takes a loss on every transaction and has a value proposition for everyone.  (see blog)

My recommendation to Google? Tell the banks that they can shut you off whenever they want to. It is in their control to decline your transactions. I can just imagine the customer message from Google  to a consumer “your bank has decided they don’t like you using your credit and debit card with us, here are a list of banks that you can use, ….” .My recommendation to the Banks? Don’t trust Google with your data, find a way to work with them to accomplish your objectives. I have several ideas for you if you want to chat.

Five important takeaways from this section:

  1. There are no technology problems in Payments
  2. Mobile handsets and authentication are a threat to banks
  3. Banks are running away from the mass market, and Retailers/MNOs are running to fill the gap
  4. Google has done all the right things, invested a billion, takes a loss on every transaction and still can’t get traction with retailers or banks.
  5. Customer CHOICE is a threat to established players

Durbin – What Happened?

As reported Friday (see Bloomberg), the 3 judge panel at the US Court of appeals upheld the Federal Reserve rules, overturning Judge Leon’s ruling that “The court concludes that the [Federal Reserve] Board has clearly disregarded Congress’ statutory intent by inappropriately inflating all debit-card transaction fees by billions of dollars.” and the Federal Reserve failed to ensure that merchants enjoy access to “multiple unaffiliated networks” to process each debit-card transaction, as also required by the Durbin Amendment. Senator Durbin reacted to this Friday stating that the appeals ruling was “a giveaway to the nation’s most powerful banks and a blow to consumers and small businesses across America.”

Retailers and Senator Durbin argue that the clear language of the law directed the Fed to set the price of Debit at “reasonable and proportional to the cost incurred”. The Fed’s internal team came up with $0.12, but the Fed then came up with $0.21+5bps. Judge Leon had struck that fee down in July 2013 (see analysis here). For more background on Durbin and Fed see this this Federal Reserve Article.E:\Pictures\Blog\2013 number of payments in US.PNG

Debit – Industry Perspective

Debit is the most frequently used payment product in the US, with the lowest fraud rates (see Charts, and Federal Reserve 2013 Payment Study). Debit is a product that evolved from your Bank’s ATM network. This is why you have all of those logos like NYCE, PULSE, STAR, Interlink, … on the back of your card, and why you also use the card to get cash out of the ATM. I covered this topic 2 years ago in Signature Debit is Dead. Visa’s big innovation was turning their 1987 interlink win from a PIN debit acceptance network to a signature network. By placing the Visa log on the debit card, and forcing the “honor all cards” rule on merchants, they successfully drove network expansion. As the NYTimes outlines

Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.

Why all the regulation? A picture is worth a thousand words

E:\Pictures\Blog\interchange rates US Fed 2.PNG

Clearly the pricing here does not seem to indicate that effective market forces are at work, as debit network expansion was followed by tremendous fee increases.

Canada, Australia, UK, most of Europe have debit pricing of around $0.12.  A fantastic analysis of all these countries was done by Europe-Economics in The Economic Impact of Fee Regulation in the UK – June 2013. The universal regulatory goal is to establish (or retain) debit’s role as the central access point for transaction accounts.  As in the Australian example, the hope was that the removal of debit fees would result in merchant savings, which would in turn result in consumer savings. Unfortunately, banks successfully recovered most of the lost interchange through new bank fees, and merchants did not pass along the cost savings.

In Australia, 85 per cent of debit card transactions are processed using an EFTPOS terminal. Interchange Fees (IFs) for such transactions are imposed in inverse direction to that of credit cards as they are paid by the issuing bank to the acquiring bank. [Post regulation] Issuing banks suffered from a revenues reduction from IFs worth AU$647m for 2006. However, as in the Spanish case, banks responded to the reduction in their revenue from IFs by increasing the level of other fees. Annual fees increased by AU$40 on average, which for 2006 represent an estimated AU$480m in issuer revenues. As a result, issuing banks recovered 74 per cent of the lost revenue from IFs.

Beyond debit, Europe is considering caps on credit card as well (see Digital Transactions – Europe’s Fee Conundrum). Visa Europe Fee structure provided below for background.

E:\Pictures\Blog\Visa Europe Fees.PNG

For more detail see my blog Debit Wars. My summary view is that debit payments are going toward a common bank owned service operating at cost (Average $0.12 globally). Visa is impacted slightly here as 19% of revenue is from debit. Thus banks are working aggressively to move payments to high margin credit.

Retail Banking Impact

This debit dynamic plays heavily into a larger retail banking strategy (see Future of Retail Banking, and theFinancialBrand). The business of managing your transactional account was never a great business for a bank. Gallup estimates that retail banking is unprofitable for 80% of consumers, McKinsey’s analysis shows it is over 40%.    Durbin’s impact on debit fees cost US Retail banks over $7B (see Forbes).

E:\Pictures\Blog\retail banking branch transactions.PNG

Branches have historically been the #1 factor in consumer acquisition. During my time at Wachovia, over 80% of our customers selected us because we were the closest branch to home or office. This branch convenience is still the primary factor, although actual use of the branch has gone down dramatically.

This, together with the maturing of digital channels, has led to a culling of branches with banks like Chase looking to take upwards of $1B from branch cost.E:\Pictures\Blog\branchesA.jpg

The US is progressing along the lines of Australia, as the non-exempt banks add new fees to make up for the debit loss (see American Banker). However, unlike Australia, the US has 2 alternatives: Exempt Banks/Credit Unions (CUs), and Pre-paid Cards. Deposit growth in the exempt banks is growing 5-6% YoY, but the real winner seems to be pre-paid with growth over 36% (See 2013 Fed Payment Study and Bank Innovation ).

My simplistic analysis of pre-paid is that the growth is driven more by a need for access to electronic payments (by the unbanked), than a need for “banking”.  Example.. need to buy something on Amazon. This seems to fit well with experience of other unbanked success stories globally. A way to view this is that value of traditional “banking” is shifting to the value of electronic payments for a large majority of the population.

What we have seen is that the Value of a big bank brand is diminishing very quickly. The brand, infrastructure and data advantages that banks held are rapidly diminishing in value. The big buildings and beautiful vaults have no advantage over an Amex Bluebird card in a box (deposit insurance levels the field for everyone). Retailers, MNOs, and Platforms have better brands, better pricing and more physical distribution and/or direct consumer “touch” than banks could ever hope for.

Nothing in this area changes quickly. But here is what I see as the most likely strategies by key players.

Non Exempt Banks (Citi, JPM, BAC, WFC, …)

Strategy #1 – Try to leverage data advantage, and grow data services (JPM)

Strategy #2 – Go up market (Citi)

Strategy #3 – Be the best retail bank (BAC/ WFC). Protect consumer information

Strategy #4 – Get into the Mobile/data/advertising space

Strategy #5 – Develop new bank lite product (ex Chase Liquid). Seems to be going poorly as they just killed the product

The modern form of retail banking envisioned a “financial supermarket” (see Forbes Sandy Weill) where the transactional account was a loss leader for cross selling 50 odd other products, the new “banking like” product is centered around electronic payments with an access network (think Greendot, WU, ATMs, …) to get money into and out of the system. Ubiquitous merchant acceptance, and employer direct deposit further drives out the need to provide “cash out” facilities (branch like services) within the network. This simple payments product fits nicely into retail environments with regular foot traffic.

The Non-Exempt Bank dilemma now becomes apparent. A classic “innovators dilemma” where the loss leading core deposit account has been undercut by pre-paid for a majority of consumers, as the services surrounding electronic payments has made branch distribution a significant millstone in cost to serve. As if that weren’t enough, 90% of the money supermarket products must be sold face to face (need a branch).  While the retail bank could adapt to compete, the rest of the organization is forcing it to keep the branches and move upstream to the affluent high margin clients.

Tech Companies

The biggest news for payments investors is that Apple, Google, Amazon DO NOT want to have their own payments network. They are all consumer CHAMPIONS.. They all want the consumer to have their CHOICE of payment instruments “Let the consumer decide how they want to pay” is their common mantra. I heard again this week that Google wanted to buy paypal and I spit out my coffee laughing.. “where did you hear that bullshit?” Not only is this a regulatory headache, it is not the centerpiece of how any of them make their margin. Customer choice is highly disruptive barrier to entry in a commerce/mobile platform. This is why Apple’s BOD decided not to buy Square in Jan/Feb.

Apple: Consumer Champion and Gatekeeper

See Apple in Commerce

Apple is setting itself up as the consumer champion. They are not great at partnerships, advertising, data… but they are great in just about everything else. Apple’s will keep your data safe in the phone, in the store and in the cloud. Consumers anonymity will be protected… even wi-fi tracking will be nearly impossible. UUIDs are a thing of the past for advertisers. If you want to know who an apple iPhone customer is.. you will need to work with Apple.

Apple is well positioned to benefit from the future tsunami of issues concerning data privacy. They are most focused on adding value to the consumer.. rather than retailer, advertiser or bank. They have the best consumer demographic on the planet and you will work with them in their model if you want to play.

Funny story here. The big banks were approached by Apple a few months ago to “pay” for getting their cards into the new iPhone wallet. The banks immediately called up V/MA and said “you guys are going to let Apple PATENT the process by which my card goes from their phone to the POS!!?”. Hence the rushed joint announcement on tokens (see PR here). Yep.. Apple made that happen.  The funny part comes in later.. Apple now has some small changes to accomodate new V/MA standard but the banks ask apple.. “we would really like that biometric.. can you send it to us”… my guess at Apple’s response “price is the same as card registration we told you before announcement”.


Consumer Champion.. but with all of your data too.  Much less robust security plan, but the best in class company for orchestration. See blog for detail.  Google is attempting to work with Retailers, banks and advertisers. They are proving their value to consumers everyday with services that help them gain more consumer insight which in turn feeds better services. Google has no desire to be a bank, or a retailer… their value is in bringing everyone together. Just like apple, their fist priority is to the consumer.. everything else flows from that.


… will need to make this a part 2. Obviously retailers differ on consumer choice just a little..

Debit Card Wars

5 Jan 2014

Happy New Year everyone. Short blog today on debit card and a new battle taking shape on debit card.payment trends 2013

Debit 101

From last month’s Federal Reserve Payments Study we see that the number of debit card payments increased more than any other payment type from 2009 through 2012. Given that the average transaction value is $39 for Debit and $94 for credit, debit has 64% share by number of transactions, but only 44% by volume.

For Non US readers, the Debit network is split between PIN debit and Signature debit (see US PIN Debit Consolidation). General-purpose PIN debit card purchase transactions at the POS, have roughly one third the fraud rate (0.45 basis points) of Credit (Note this is not shown in graph, this data point is from FED based upon exclusion of ATM fraud). This PIN fraud rate is as low as checks, a rate lower than for ACH (0.72 basis points), and a rate far lower than any other category of general-purpose card payment. In other words, PIN Debit is our “best” most secure card product which consumers PREFER to use for many small transactions.

Debit at Visa

Today Debit processing accounts for around 19% of Visa revenue. Visa famously won very big here over MA in the US starting in 2002, and as recently as 2009 Visa’s processed well over 50% of PIN and Signature Debit (Visa does not break out the categories). Post Durbin, Visa’s debit processing volume fell over 50% but has now recovered half of that loss as they acquire non Interlink PIN transactions and have established large merchant incentives (see Article, and Visa Policies). However I see this trend reversing again, the top 5 retail banks handles over 60% of debit transactions, and sources tell me that all of them are working with processors directly to route all debit transactions as PIN transactions (PINless PIN Debit) to avoid network fee AND DATA LEAKAGE. This is a MAJOR point.payment trends bar 2013

The Volume share picture on the right is from 2009 (not accurate). Durbin has shaken this industry up substantially, with Mastercard near parity to Visa in debit processing. Remember Durbin has set PIN and Signature rates the same.  Today, the most significant difference between PIN and Signature is routing, with merchant able to route PIN transactions directly to a Bank Issuer (avoiding network fee, a complex area still reworked Judge Leon’s ruling ). Visa’s advantage here is that DPS hosts many banks debit authorization services (they are the IT system provider for the Issuer’s Debit Product).

Push to Credit and Resistance on Real Time

With debit pricing dropping from 120bps to $0.21 (Durbin) and now likely to move toward $0.07 (Judge Leon), Banks have little incentive to push Debit cards. Particularly when the bottom 40% of mass consumer retail accounts are not profitable. Banks had a plan to institute fees on Debit, but Bank of America’s Moynihan jumped the gun in Oct 2011 and bore the consequences. Thus there is risk in moving aggressively toward Fees… so what are banks doing to encourage credit card usage?PIN Volume2

  • Throw Dirt on Debit (See ABA’s Target PR and the NRF Response)
  • Promote consumer protections on Credit
  • Enhance consumer rewards
  • Make ATM card the default card with your account, with a longer process to request Debit Card
  • Enhance Fraud prevention on Credit (EMV)
  • Focus all mobile initiatives on Credit only
  • Keep ACH slow moving (see WSJ Article)
  • Institute new “token” network that provides another form of Bank control
  • …etc

Retailers need to start being aggressive in supporting Debit.

Honor all Barcodes?

As I outlined previously, MCX is pursuing a Starbucks like Barcode approach. Most of you know that the MCX merchants have universally refused to accept contactless at Payment Terminal (with a few legacy exceptions in CVS/Walgreens). The reason? Bank led initiatives in contactless are 100% credit cards (200+ bps). Why would any retailer want to encourage their customers to use this product when they just won the Debit war.

The new news this month is that Visa (and perhaps MA) are working on a Barcode scheme as well. Why? The logic goes something like this,

  • Get consumer bar code version of card in mobile wallet (given NFC Failure and Starbucks success)
  • If MCX merchants support barcode payment, work to make Visa option, for example by allowing consumers to provision a Visa Debit bar code without issuer consent (or for DPS banks)
  • Create confusion at the POS, why won’t the merchant accept the Visa Barcode
  • Try to leverage the honor all cards rule
  • Steal market “ownership” of barcodes from MCX

I can’t believe I’m writing this… going from NFC, to Tokens, to HCE to Barcodes.. seems to be walking backwards technically.. but Visa can’t afford to miss a payments party. It is also consistent with what I wrote 3 yrs ago on their “Portfolio Manager” strategy.

Investor notes (January)

I see Visa’s debit revenue falling off much faster than anticipated.

I’m very negative on Paypal’s volume. Amazon, Apple, Google, Visa, and the MNOs will all be entering both the eCommerce and mCommerce space in a very aggressive way. As payments move to the OS, Paypal doesn’t have one.

Stay away from specialized hardware players (Verifone, Ingenico, Gemalto, NCR…) as dedicated hardware moves to commodity hardware and software.

Related Articles/Blogs


Accept all Barcodes?


Payments Winners/Losers?

If you are a BANK… you can do anything you want to on a PIN DEBIT network (you control).. For example, First Data owns STAR.. they are leveraging the Star network with Cardspring to transfer non payment information (offers/incentives). This is a great example of how to construct a solution within the constraints of existing networks

21 Aug 2013

Of course I can’t answer this question.. but it is THE question most frequently asked by investors. I certainly don’t see anything US Debit WSJthat would significantly dent Visa, MA or Amex’s growth internationally. The concentration of electronic payments is tremendous, fully 92% of all electronic transactions occurred in the top 10 OECD 20 markets. Internationally, as markets mature, banked consumers increase, market facilities like credit bureaus improve coverage, credit starts to flow…  I went to work for Ajay Banga at Citi after listening to his fantastic interview w/ Mike Mayo (then of prudential), Ajay talked about 600-800M new people gaining access to financial services globally. V and MA will be prime benefactors of this global growth.

Domestically? Well that is another story. OECD 20 countries have begun to price debit transactions at cost of ACH. EU (SEPA CF), Canada (Interac), Australia (EFTPOS)… now the US is following with a Durbin rate likely to be $0.07-$0.12/transaction (12c is the fee in Australia).  This rate change impacts $5-7B of bank fee revenue (see Reuters). Of course banks are not in the business of loosing money, and must find a way to make that up.. capgem1 noncash pmt

This brings me to the obvious loser in next 5 yrs: Retail banking in the US. Prior to this latest Durbin change, fully 40% of mass market retail bank customers were unprofitable.  This latest change to debit fees will accelerate bank moves to reduce cost to serve (Branch Infrastructure to Online channels).. Retail banks must either find something new to sell consumers (ex Amex/WFC), or charge them more. (see Blog Future of Retail Banking: Prepaid?), many are seriously considering what BAC did 2 yrs ago .. adding a fee.. (see CNN/Money Article).. remember the reaction back then?

This retail bank pricing pressure comes at a time when retailers are offering banking lite products (WMT/Bluebird) AND new bank aggregators are forming which would allow ANY company to deliver banking services. Best example here is Wirecard in Germany.. as a payments specialist and bank which enables MNOs to offer banking services.In the US we see early stage examples of this same model, OTC: IEBS Independence Bancshares (nD Bancshares) has been recapitalized w/ Bob Willumstad (former AIG CEO) as Chairman.

What is Credit? Debit? Charge? Pre-paid? How are they different? With debit costs moving toward $0.. consumers (and start-ups) have access to “real time” settlement at ACH “like” pricing..  This is the heart of Bank’s concern.. and their subsequent efforts to establish rule changes on “wrapping”.  Banks don’t want Paypal, Google, or anyone else using debit this way.

top reasons for selecting

As I stated in Controlling Wallets: efforts to “control” have unintended consequences.. like holding onto your Jello by squeezing it..  PIN Debit may be the first “break” where you can have your cake (Visa Bug) and eat it too (enhanced data w/ merchant).

PIN DEBIT.. the Dumb Pipe Switch

If you are a BANK… you can do anything you want to on a PIN DEBIT network (you control)..  For example, First Data owns STAR.. they are leveraging the Star network with Cardspring to transfer non payment information (offers/incentives). This is a great example of how to construct a solution within the constraints of existing networks and rules…. And KEEP your Visa logo.PIN Volume2

Unfortunately there are few PIN debit cards that are not also signature debit cards.. When the Visa logo is on the card.. it is the customer that decides. Merchants LOVE PIN.. as pricing was different. Now (in the US) PIN and Signature debit pricing is is the same (for banks over $50B in assets).. Offsetting this confusing PIN/Signature furball is the requirement that both signature and PIN debit must have at least 2 options (each) for routing AND several PIN networks are not owned by issuers (Pulse, NYCE, Star, …). This gives FIRST DATA, FIS, Discover opportunity to deliver services that SWITCH debit for the benefit of the MERCHANT (ex Cardspring).

Is “PIN debit” the baseline product for retail network consortium? It is how I would construct it.   Target’s Redcard is the model, but it is closed loop. Expanding a Target Redcard through a PIN debit network would provide for Open loop (multiple merchants participating). Operating in a PIN debit network also gives the PIN network control over rules on acceptance. Although there would be no real interchange cost savings here.. there would be a real advantage to retaining customer data.

The other advantage of processors which also own a PIN network.. is that they “see” all transactions for their merchants.  If McDonald’s processes a debit card transaction.. their processor (ex FirstData, FIS, CMS, …) has flexibility in choosing whether to process as PIN or signature.  PIN is not routed through Visa, Signature is..  First data could see if card is registered for any loyalty/incentive programs.  This is what what JPMC has done (partially) w/ the Visa deal.. without acquiring a PIN network. Allowing them to use signature debit and credit as rails for non-financial data and routing which will not go through Visa.

Credit Cards

Beyond Retail banking, the traditional Credit Card Product seems ripe for change. Why would consumers with good credit accept 18% rate on a credit card when the bank is paying them 0.1% interest? The top issuers know they must improve the merchant and consumer value propositions.. but are largely failing. Its hard to turn around large portfolios and create new value propositions that don’t cannibalize your core business.redcard

This brings me to Winners.

  1. Companies that can help retailers become better publishers and marketers (see blog)
  2. Company that can construct a better customer experience (Square, Apple, Payfone)
  3. Companies that and orchestrate COMMERCE, not manage payments (Google, Amazon, Facebook)
  4. Companies that can enable anyone to ADD ON banking services (Wirecard, GDOT, IEBS, )
  5. Companies that can CONTROL the mobile phone (Google, Apple, Samsung, ??MNOs)

Sorry for typos.. I publish these things before I proof them.. any corrections appreciated

See my disclaimer above. I have equity in GDOT, Wirecard, Goog, AAPL, AMZN

Debit Round 2 – Rates $0.21 to ?$0.05?

There is a school of thought that “pricing debit” for consumers will help banks increase credit transaction volume (ie credit cards are “free” and have points, debit cards will have monthly fee). Merchants must therefore act to build incentives around debit card usage, or a decoubled debit like product (see blog). Target Redcard is clear leader in the US.

1 Aug

Yesterday’s WSJ Merchants Notch Win in Feud Over Debit-Card Fees

Dodd Frank requires the Fed to set Debit interchange at a rate that reflects actual cost of processing. What the Fed did in 2011 was actually set rates at almost exactly the rate of PIN Debit. (see my 2011 blog).

US Retailers have been pushing for $0.05.. The Fed’s own internal team was recommending 0.12, but the final 2011 rate was $0.21 + 5bps. My view is that Governments should never set rates in an effective, competitive market. Their track record is just awful. But unfortunately payments are not competitive, but a form of 3rd party payor… a market type which is even worse than a government price controlled one.  Big Retailers know enough to negotiate great rates (as in health care) and swallow the “accept all cards” requirement. Small merchants get completely taken (just as in Health Care).

Visa/MA impact.. none. Visa’s revenue is not so much in the network fee on PIN or signature debit, it is in the DPS hosting of debit processing. Bank impact.. absolutely. If Debit interchange lands at less than $0.12, the forces behind debit consolidation (see blog) will accelerate, not because of M&A, but because the margins in this business cannot possibly sustain 6+ participants.

The Banks had planned a uniform march to add fees to debit card, but unfortunately Brian Moynihan at BAC could not wait for his peers and jumped the gun.. only having to pull back from the tremendous public reaction.  Adding fees to debit is a certainty if rates drop. The bottom 4 deciles of mass consumer are already unprofitable. Banks are a private enterprise and should not be obligated to do anything “at cost”. We thus shift costs from merchants, onto banks, who will then shift back to consumer. But quite frankly this is where they should be.. where the consumer can see them.

There is a school of thought that “pricing debit” for consumers will help banks increase credit transaction volume (ie credit cards are “free” and have points, debit cards will have monthly fee).    Merchants must therefore act to build incentives around debit card usage, or a decoubled debit like product (see blog). Target Redcard is clear leader in the US.

My idea for getting around regulation (which all parties agree is a bad thing), is 2 fold: Require transparency (by all participants), and enable competition (through access to core deposit accounts).  Imagine if Walmart, or United Airlines were required to publish their lowest interchange rate with each issuer, for every product (credit/debit). I believe retailers would support it wholeheartedly, but the issuers would go nuts.  Per the second point (account access), the UK led the way here in Faster Payments back in 2008 (see blog).  Consumer banks would need to be absolved of fraud loss responsibility if initiated as a debit by 3rd party (Onus on ODFI), but it would also allow a Sofort type model (Push payments) to prosper.

From a pure debit perspective, Australia and Canada have made Debit a common nationalized infrastructure service, part of a Bank’s requirement to have a license. Fedwire is our equivalent in the US, although only used for wires. You don’t see much payment innovation in Australia or Canada, as the common infrastructure works so well.. that there are no pain points.  The EU is also getting there with SEPA, although the inability for EU mandates to make their way into local law and requirements is proving to be a significant drag…

For innovators the message is simple.. payments are becoming dumb pipes. Go visit Canada and Australia to see why new payments schemes do not take off… Most know my view that payment is only the last “simplest” phase of a very long and complex COMMERCE PROCESS.

CEO of Tempo Interview

when governments intervene to set prices.. “innovation” can be impacted. John says Tempo is the “poster child” of government regs gone awry.

Great Interview w/ CEO of Tempo on how Durbin killed margins in Debit.. and killed Tempo

Just as I wrote in March (Sepa and EU payment innovation), when governments intervene to set prices.. “innovation” can be impacted.  John says Tempo is the “poster child” of government regs gone awry.  On the flip side.. third party payor processes are also disconnected from market forces (payments, health care, education, pension, …).  Bank of America’s response ($5 debit card fee) is the right response for america’s banks to take toward Durbin, customers that directly incur the costs for services they use can make more informed decisions (and change behavior) to optimize their own value equation.

In the US, bank debit cards will be evolving to what we see in Canada and Australia. It remains to be seen if we will see fall off in Debit transaction growth in favor of “free” credit card transactions.

Banks and Visa/MA certainly see things like mobile payments driving convenience of using credit.. while the “pain” of using debit increases…

Visa’s Wallet Strategy – Part 2


18 July (Updated from 17 June 2011

). Corrected significant error on scope of Visa Wallet. It is much more than an autofill (point 4 below)

Previous Blog: Visa’s mobile portfolio

I’ve been thinking about Visa’s wallet strategy this week. From my last blog (Visa Digital Wallet)

… a non-announcement, a rebranding of what CYBS and PlaySpan already have. Too many teams are angling to create the wallet (mobile, online, …), and not enough focusing on the value of what is in it. Google, Apple, and RIM will win the mobile wallet wars. I guess I can’t blame Visa for trying.. however it would have been nice if they could have been successful at eCommerce to start with. 

Here are the questions I’m trying to answer:

  • What is their investment thesis?
  • What assets are they trying to leverage and what opportunity do they plan to attack?
  • What is their strategy in attacking the opportunity?
  • How will the banks react/support this strategy?

For those that haven’t read my blogs for 2 years.. let me restate a few points that I’ve made previously:

  • Visa has a very big hole in their earnings with Durbin.. not only will they loose substantial debit revenue.. they could be loosing debit forever… as member banks assess whether signature debit makes sense to continue… and create a centralized bank switch for PIN debit (ala SVPCo or TCH). Merchants and consumers both prefer PIN today. I don’t believe Visa has adequately described this debit driven financial risk to the investment community.
  • Visa is attempting to fill the debit void with new transaction types, services and “cash replacement”. The top 2 prospects are G2P payments (payments by a government to people.. from pensions to welfare) and “mobile payments”.
  • There are 5 classes of mobile payments: 1) mobile initiated bank payments (ex. Monitise, , Cashedge, send your bank a message to transfer funds as in bill pay). 2) mobile commerce payments – digital  (ex iTunes, PayPal, BilltoMobile, Boku, Bango, …), 3) mobile commerce payments – physical goods (ex Square, Amazon, Visa Wallet, PayPal, Bango, ..) 4) Mobile phone as a wallet – Physical device at point of sale (ex, NFC Google Wallet, 5) Mobile Money for Unbanked (MMU) (ex MPesa, GCash).
  • Any initiative above is profitable for Visa only if: it replaces cash/other electronic (ex G2P), drives a transaction into higher margin product (Debit to Credit), increases number of transactions (customer use), or increases use of processing services (ex CYBS). Monitise obviously did none of these.
  • The big issuers are not fans of Visa’s moves in mobile and innovation. Visa is beginning to walk on toes and create “universal services”, many of which overlap with the large issuers have competing plans (alerts, offers, mobile, P2P).
  • Visa’s wallet value proposition (and solution) go something like this: Here is an API for your online banking.. consumer clicks on Visa Wallet and their card(s) get automatically stored in our digital wallet for use at any merchant site.. and a new Visa wallet account is created. Bank, you benefit by increased card transaction fees (use) and enable your customers to pay for digital goods with their Visa card in a one click service that delivers better consumer experience. Issues are that Visa has not signed up any of the top issuers and are also very dependent on PlaySpan’s existing consumer base. Most merchants don’t like the idea of helping out banks.. or Visa.. In order to change consumer behavior, and drive usage, a value proposition is needed.  Are consumers doing digital goods payments today? Yes.. what does Visa do for merchants that BTM, Zynga, PayPal.. and others don’t? Options: 1) Use our CYBS processing, 2) use API only and “form fill” to leverage your existing processor, 3) Liability shift and reduced interchange for attempted VBV use. This last one has not be covered significantly .. may delve into with future blog.
  • Visa is attempting to evolve its debit network from “debit” to bi-directional (see my VMT blog) with the OCT transaction set. This would enable it to compete with ACH and deliver services like P2P with little bank involvement.

What is Visa’s investment Thesis?

My guess is this “ replace the debit hole by leveraging our existing customer footprint into new transaction types, expand card acceptance and create customer stickiness with new products and services that work in every channel

Assets to Leverage?

  • Consumer account holders. I don’t call them Visa customers because they are not.. they are customers of the issuing bank. If a bank wants to rebrand their portfolio (to Mastercard, Amex, or a new white label) they are no longer Visa card holders.. Visa holds no consumer agreements. … BUT they want to..
  • Payment Network: Acceptance and services (Bank, merchant, consumer).
  • VBV Agreement where liability shift and interchange reduction possible (for ecomm/mcom CNP transactions)

A rather short list. Note that prior to CYBS, Visa held very few merchant agreements… it was the acquiring bank and processor that held the merchant agreement.

Strategy to attack the G2P and Mobile Opportunities?

Visa probably sees the lack of NFC handsets and POS terminals as a deciding factor in delaying any push here. The $600M-$800M in NFC GDV is too small to impact more than 5% of the Durbin hole. I believe they have initiatives lined up against the following business drivers

1. Increase number of transactions (customer use)

  • Increase merchant acceptance locations: Square, CYBS, Visa Wallet
  • Increase Consumer Use: Visa Wallet, Visa Money Transfer, Marketing,

2. Replaces cash/other electronic (ex G2P)

  • Fundamo, Playspan, Visa Wallet, ..

3. Drive transactions into higher margin products (Debit to Credit),

  • ?NFC? It would seem this is a “stage 2” plan.. They first need to get consumer’s using the wallet in high volume/frequent transactions. After they get usage.. they can migrate.. It may even line up with another partner like Apple who isn’t quite ready for NFC anything. Visa actually doesn’t seem to like the idea of a card in the phone wallet.. a wallet they don’t control.. they want the card in a VISA Wallet.. a Visa Cloud wallet that they do control..

4. Increase use of processing services… I not going to touch on this now..

Visa’s wallet strategy is a two pronged approach. Consumers will have accounts “auto created” by their issuing bank (at least the ones that implement the wallet API) and

( Old Content 17 June) all by implementing a simple form fill API where Visa’s wallet pre-populates all of the consumer information and payment items on a merchant’s checkout page.  

New Content (18 July)

Visa is looking to build a consumer footprint to compliment its CYBS online merchant footprint. To be clear, Visa is looking to grow its eCommerce processing business AND create additional lock in (stickiness) with Visa Issuing banks. Visa will first ATTEMPT to roll out this service first with all CYBS merchants… then get additional merchants to either convert to CYBS or at least Add Wallet as an additional payment type. Chase PaymentTech is expected to take a lead roll.

Value proposition to Merchant

– Merchants will be given a fairly attractive option to reduce CNP interchange with 2 Components: Attempted VBV verification (Visa can reduce merchants rates for attempted 3DS verification) and #2 reduced interchange in volume discounts with key partner banks like Chase.

– Processing Package (cost). Expect Visa/CYBS to aggressively price for non-CYBS merchants

– Single Wallet for online, mobile and perhaps even physical goods

Value Proposition for Banks

– Lock in to Visa (I can’t really think of another one)

This is not a bad strategy… IF the world were standing still.. and if Visa had a positive reputation with merchants.  The value proposition here is all built around convenience. It is a good plan.. but merchants have many other options and they know that accepting a new Visa product has always proved to be a Faustian Bargain (aka deal with the Devil).

As a side note, I saw Square’s COO today in a conference. His quote was something like “Square is much more than about swipe.. I wouldn’t have invested if that were the case”. None of us know what this grand plan is.. but obviously it must involve merchants.. and I would hope a better profit margin (from 20-30bps). After he spoke a CEO came up to me and said “the major processors love square (and Chase PaymentTech). Now there is a place for all of the sub prime merchants to migrate toward…  Can Square monetize a base of merchants that were outside of the ISO focus and processor interest? They are not doing it today..  How could they possible morph their value proposition into something with higher margin?  Keith certainly seemed to imply that Square had a merchant incentive/Groupon/foursquare model in mind. A deal of the day only redeemable at a square merchant? Hmm.. seems like a little bit of a stretch.

See related Visa Press Release here (RightCliq)

Ruminations: Durbin and Debit

Time for a blog with many questions and few answers. My natural perspective is that of a banker. Banks are created to act as trusted intermediaries of commerce, and I’m concerned when their ability to act on this charter changes. I want banks to win and to create products that satisfy the customer, build trust, and effectively serve in commerce.

Will Merchants loose sleep if debit goes away? Answer probably rests with what will take its place.

13 Aug 2010

Time for a blog with many questions and few answers. My natural perspective is that of a banker. Banks are created to act as trusted intermediaries of commerce, and I’m concerned when their ability to act on this charter changes. I want banks to win and to create products that satisfy the customer, build trust, and effectively serve in commerce.

A friend and I were discussing the impact of Durbin’s 2 tier debit structure (Excellent analysis by Mercator here) on the incentives for large banks to continue to issue debit. My perspective (as a banker) has been greatly altered from my time at 41st parameter working with the largest retailers in the world. I’ve developed a new view and a new appreciation for the pain felt by merchants. It would not be too extreme a statement to say that there is a deep hatred of the cards networks. The feeling is both visceral and reasoned. I remember when a senior executive from Wal*Mart came to Wachovia for a presentation and was asked what he thought were appropriate interchange rates for credit and debit. He said “0” dead pan.. then during the quiet of the audience, he said “actually we think we should be paid for accepting your cards” and emphasized that this was not a joke.  

Will Merchants loose sleep if debit goes away? Answer probably rests with what will take its place. The retail banks are very unorganized around payments. With few exceptions (Chase, WFC, USAA, ..) bank payment executives do not get the focus of their retail organizations.  In general, retail banks are challenged to relate payments to profitability (and hence the overall retail strategy). Debit was a clear exception to this challenge and a “killer product” for cash/check replacement.

The bank value proposition for debit was clear. However, what was the merchant value proposition? Certainly reduction in check fraud, funds availability… but at what costs? The federal reserve studied interchange rates in graph to the right. What exactly drove this step creep? How did it drive value? What were the economic forces that pushed back against it? What additional investments did Visa/MA make in their network?

Will banks develop a debit replacement? Clearly Durbin has reduced banks incentives to push debit (w/ assets over $10B). I project that the market is ripe for a merchant friendly payment method that is much different than the products available today. Instead of funding the card product on merchant interchange.. perhaps mobile advertising?

Can banks/cards regain the trust of merchants as intermediaries of retail commerce? Could the wholesale or merchant acquisition business which drives a new payment product (ie Amex Revolution Money)?

 Thoughts appreciated