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

Payment News for May.. What a Month!

I’m actually starting to change my attitude on Visa. Its not just that Jim McCarthy is down the street from my in North Carolina… but rather Charlie is changing the culture there from one that alienated everyone.. back to a network that wants to add value to all.

15 May 2013

I’m in overload on information this week. Just don’t know what to comment on..

In an effort to conserve energy, let’s just say that there are MANY announcements.. but little real progress…  If you were a retailer.. would you exclusively advertise through Groupon? Through Visa? Through anyone? Of course not you have a price promotion strategy and multiple marketing programs which to accomplish objectives in each.  You would choose your channel based upon the ability to REACH the customer (ie Radio, TV, ?email…). As a retailer you also want loyalty to YOUR BRAND.. not some card, bank or start up…  Most of these entities have NO REACH.. having customers is MUCH different than being an effective CHANNEL TO INFLUENCE them.

With respect to POS.. the world needs change. Both Square, and Paypal have the merchant value proposition about right. Their respective terminals solve a short term cost/complexity issue. Square’s product is much further ahead as it also solves inventory management and marketing problems.  PayPal’s value proposition may be higher as they could manage payment costs more effectively (given consumer paypal account penetration), and many merchants already have a merchant account. Perhaps Paypal is taking my advice from 2 yrs ago.. focus on the merchant side first.. I hear that the paypal card is Don K’s pet project.. but John and Marcus may be finally tiring of the poor performance.

I’m actually starting to change my attitude on Visa. Its not just that Jim McCarthy is down the street from my in North Carolina… but rather Charlie is changing the culture there from one that alienated everyone.. back to a network that wants to add value to all. One example is emerging markets, where Hannes of Fundamo has done some REAL work in creating new VisaNet transaction sets to support emerging market solutions. Unfortunately their offers platform is stunted, as the mix of issuer “permission” and consumer experience makes this unworkable basket level program that I have already discussed many times (See CLO). Visa does not keep transaction history (with exception of debit hosted service of a few DPS banks), thus any offer targeting would be driven off a visit to a single store, or single event. This enables it to be a switching service..  Buy something at Macy’s and BOOM get a 10% back offer from Neiman Marcus. From the PR:

Most importantly, the Visa POS Offers Redemption Platform provides real time ticket reduction as part of the offer redemption during the authorization process, delivering an alternative option to the need for statement credits or paper coupons. This functionality streamlines the checkout process by enabling instant redemption of rewards and has the potential to drive incremental transaction volume. Once the reduced transaction amount has been approved by the card issuer, consumers are immediately notified of their savings via receipt printout and SMS text, or email message. (The Next Web)

Customer Experience? The Visa “POS Offers Redemption Platform” is really a “credit” that COULD be given on the receipt if the retailer’s POS interprets the message, and IF the issuer allows it. Thus the entire platform suffers from targeting, basket level redemption, consumer experience, POS integration, Issuer permission, … (need I go on)? American Express’s focus is completely different. They work with the retailer to help them gain insight into their most valuable customers and work with them to create programs to reach them. Visa can’t do this.. as they don’t own the customers.. nor does Vantive.. NO WONDER JPM wanted to opt out of VisaNet.

Google.. lets wait 2 weeks here (after I/O). I already discussed what was reported on Android Police in November. My guess is that the cost of this program was going to be pretty big… even for Google.. If it was successful. Eating 100-150bps in physical commerce ($2.4T) can be quite a big hit, even if you take only 1% of the market ($240M-$360M in US alone).

WMT’s Pre-paid success.. and impending MCX efforts are making the banks itchy. Somewhat ironic, as banks really don’t want WMT’s mass consumer customers in their branches.. while WMT loves them in their stores. Think the banks really don’t like having their “banking lite” services productized and sitting on a retail shelf to buy. They don’t want consumers to think of them as a product which can be bought.. and switched. Of course some banks have seen the light (Amex, Discover, GreenDot, BankCorp, Meta, …). Competition, transparency, and product selection are core elements of efficient markets. Of course it makes sense to ask your regulator from protection against consumer choice. But this is certainly not to benefit the consumer.

Bitcoin? where to begin.. ? Unlike most currencies, bitcoin does not rely on a central issuer, like a central bank or government. Instead, bitcoin uses atransaction log across a peer-to-peer computer network to record transactions, verify them and prevent double spending. It is a VERY INNOVATIVE mathematical crypto innovation (that is used extensively in illegal activities). Bitcoin stands in dramatic contrast to all of the data sharing, bank controlled, transparent stuff above. Its success demonstrates that there is a tremendous need for anonymity in payments.  There is no centralized authority here.. which is what alarms governments..  Thus there will be very strict controls on how coins can be converted into currency. Thus Amazon’s coins can only be used to purchase games/apps.  For those investing in this space, you should thoroughly research eGold.

Payment is still a red hot market.. expect significant M&A activity over next 12 months.

Future of Phones.. Good Enough?

As an investor, I believe we will see a massive new wave of companies redesigning retail. Five years ago I had a camera, an iPod, a PDA, GPS, phone, … today I have one device. What will the bundling (or unbundling) of retail look like? What are the problems to be solved?

16 Sept 2012

Quote of the week

It’s not clear that NFC is the solution to any current problem…

Apple Senior VP Marketing – Phil Schiller

A few months ago I was in Hong Kong speaking with institutional investors at CLSA’s annual event. One of my more memorable meetings was with James, a chief investment officer with a top 5 investment bank. The heart of the discussion was on the future of telecom. Although I’m not a telecom expert, James was interested in finding “the next killer app” in mobile. Was NFC it?

His investment thesis was that phones are starting to become commodities: screens, LTE connectivity, cameras, battery life, applications, …etc are all reaching a point of good enough. His time with me was spent drilling down into payments and NFC in order to see if I had any new data which would alter his view.  I did not….

What will happen in a world where handset hardware is no longer the basis for competition?  The same thing which occurs to any manufacturing area where a “good” becomes a “commodity”: margins compress for the commodity and migrate to the new area which is basis for differentiation/competition. Yesterday I outlined the implications, and investment opportunities, for the mobile operators.

This week we saw the launch of the iPhone 5.. better, brighter, bigger, lighter, clearer, faster, lasts longer, crisper, sturdier, takes better pictures, more tightly integrated to applications that Apple controls, …etc. A great new product.  An Evolution… not a revolution.  What Apple understands better than almost any consumer product company is: consumer experience matters.  While some handsets already exceed those of  Apple’s iPhone in feature/function (Samsung’s Galaxy S III)…  none can match it on consumer experience. Experience is where Apple is focusing its efforts, and the major shift in iPhone capabilities is NOT in hardware features.. but on orchestrating value in ways it can control.

Apple takes a Clayton Christensen approach to the iPhone: what problems does a customer have, and how do I solve them? For example, I hate typing in my name and address on a little mobile browser to order a good from lets say Gap.com.  Apple’s passbook will resolve this by allowing Gap to integrate to passbook to pull all of the “iTune’s account” information over .. so I don’t have to fill this out anymore.   Apple is moving to solve real consumer problems…  It is looking to orchestrate value delivery.. moving the “hub” of coordination from the phone to iCloud.

This is what I refer to as the Stage 4 Value Shift (see April Blog). Theoretically, an open innovation model (ex Google/Android, Java/Oracle, …) should be able to quickly surpass Apple, as 100s of small companies invest larger amounts (cumulatively) in expanding capabilities of a “platform” (see platform leadership). However, Apple has learned its lessons from its Mac days and has defined competition along the lines of “consumer experience”. In this model, it does NOT CARE about interoperability or standards… rather Apple is maniacally focused on delivering value to consumers with usability, reliability, intuitiveness, …  being core measures.  Apple’s brilliance is multi-faceted, but by defining product focus along the lines of consumer experience, the iPhone’s closed model of innovation can not only effectively compete, but win easily against open systems. In other words, while open systems compete more effectively in a feature/function war.. they loose in the qualitative measures of “experience”.

Apple will obviously monitor the environment for effective new features, to ensure that the core product hardware remains competitive. For example, the real world transaction data for NFC based payments is a complete joke. There are no phones, there are few terminals, and there is no consumer or merchant value proposition. Sure there are exceptions like Japan, but only closed systems with a monopoly leader have proven the ability to push the solution out.

Apple does see a need to improve device-device communication, as well as shrink the hardware footprint. With these drivers, and given the prototypes in market, I fully expect Apple to redefine phone hardware architecture with a new integrated chipset that would encompass functionality of: controller, radios (wi-fi, BT, 14443, …etc), secure element that would also enable the SIM to be virtualized and placed within the SE. If this is indeed Apple’s direction, it will not be a new basis for hardware competition on feature/function, but rather: battery life, footprint and control (ex. virtualized SIM).

Other players also have unique strategies and assets. For example, Google’s strategy: orchestrate value based on consumer data. In assessing investments I look for one key answer: what problems are platforms trying to solve and in what marketplace?

All about Commerce… and Entertainment

My major issue with Apple’s strategy is the degree to which other entities can participate. I see mobile phone revenue streams in 2 major buckets: Commerce and Entertainment.  Entertainment is not a focus for me.. Commerce is. Businesses operating within the retail sector are undergoing fundamental transformation. For 1000s of years, local merchants survived based upon distribution and availability. Today they are left trying to sell a commodity product at a higher price to consumers in a marketplace with near perfect transparency.

What is the roll of any intermediary in commerce? Not just in the selling, and purchasing, but in marketing, product selection, distribution, service, support, … What does the new face of retail look like? This is the focus of Amazon… they are the leader here from a “virtual commerce” (e and m) perspective.

As an investor, I believe we will see a massive new wave of companies redesigning retail. Five years ago I had a camera, an iPod, a PDA, GPS, phone, … today I have one device.  What will the bundling (or unbundling) of retail look like? What are the problems to be solved? In the past 15 years mobile has grown up along side of commerce, operating primarily as a replacement to fixed line and then migrating to a replacement for online. We will start to see phones leap into commerce in new ways.. but my firm position is that this leap does not start with payment (the last phase of a commerce) but with marketing (the first phase). Why? Because marketing and retail are fundamentally broken, and Payments is NOT.

It is in this context that I laugh at NFC solutions. My favorite quote on this topic was from head of strategy of top 5 retailer

“Mobile Operators know how to run dumb pipes, not create business platforms for marketing… their current wallet initiatives are akin to a toll bridge, NFC is their toll booth where they stop me before reaching my customer..  to cross their NFC bridge I have to wait in line and when I arrive at the gate they don’t want $0.50 toll.. they want 3.5% of what I’m carrying in my truck, and a copy of the shipping manifest (customers’ names). This model doesn’t work for me. “

Commerce will find another path… one of least resistance … of better “experiences”. This is what Apple is enabling in Passbook, and why Amazon is succeeding in commerce. NFC is just a radio… one who’s standards are largely controlled by banks, mobile operators and card networks. Why would retailers want to participate here at all?  We should not act to enrich the complexity of payment networks, or wireless ones, but rather form new networks.

Sorry for the typos.. and re-hash of past blogs.. hope it was useful.