American Express: Innovation Leader

Happy New Year! Football is on my plate today so this blog will be short.

American Express is cranking out innovation at a tremendous pace. I’m very impressed at what Ken and Dan have done here in last 3 years. For example I just received a note in the mail yesterday that all of my Amex transaction receipts will be in my Apple passbook (don’t know why they used the USPS to tell me). Here are a few other innovations

Retailers don’t like the costs of Amex… but they love Amex customers. Amex has a very heavy bias toward business and T&E spend. Although Amex has only 12% of global card payment volume, each Amex customer spends more than 4x the amount of a typical V/MA holder. In full disclosure I own Amex stock, and I’m an Amex points junkie.

Amex is working to expand its consumer base (into mass) through Bluebird and Serve, but I won’t go into that here.. What I’m most impressed with is that they are the first card network that is beginning to deliver value to advertisers and retailers…. Yes, through its massive trove of consumer insight, Amex is beginning to show signs that it can deliver value to retailers.

Following on from my Nov Blog: Retail CRM Enabled by Payments, Amex’s recent loyalty partners acquisition is showing signs of success in coupling merchant transaction data with its DataInsights business. Through this, merchants have new mechanisms to identify customers, incent loyalty and market specific products.

In my view, Amex is at least 5 years ahead of any other issuer/network. Of course they have the benefit of operating as a 3 party network and regulated bank. This allows them to own: the consumer, the merchant and the rules of the network. As such they have many “innovation” advantages over the V/MA networks and issuers; Amex’s network is much more pliable, where the 4 party networks are very hard to change.

This same dynamic is why Discover is the “dance partner” of choice for anyone working to do something unique at the POS. It is also why I see a 3 party network as the winner of MCX (?a NEW 3 party network?).  As I stated previously, innovations at the POS will be less about payments and more about data and re-orchestrating commerce to create new experiences. There are 3-4 entities that each have unique data, none of which have shown interest in pulling it together: retailers, bank, advertiser, telecom.

Amex is the first to start breaking down this data “log jam” with willing participation from retailers. Although their consumer segment is very narrow, margins are tremendous in this top tier.. which means Amex could be in a position to further accelerate its affluent value proposition without mainline retailer participation (ex focus on T&E).

Random thoughts for Investors

  • Data business revenue, enough to move the needle?
  • Affluent card – Net new customers
  • New 3 party network for MCX. Will it kill 40-60% of Visa’s debit revenue (in 10 yrs)
  • Why did Amex buy Serve again? It seems it can justify higher margins through data…
  • Bluebird growth. Can Amex manage value proposition for affluent and a lower mass segment?

Sorry for typos and short blog

Payments Innovation in Europe

So in Europe see the consequences of ubiquity. While SEPA was designed to increase competition and create new European schemes, there are few business models capable of supporting investment. Hence Europe is not the place to start a retail payments business. This is why I look to Asia, LATAM and Canada as great places to start a payments business (my picks: PH, HK/China, Brazil, Malaysia, SG, Colombia, Indonesia and New Zealand).

8 March 2011

Why do I like the Payments business? It is ubiquitous, sticky, with good margins and strong annuity revenue.

What do I hate about the payments business?

In the US, it is over regulated, concentrated, difficult to change and frustrating enigma driven by large FSIs with unlimited resources…. Within Europe the situation is little different.

After coming back from last week’s trip the Valley, I was attempting to develop an investment hypothesis on Europe, mobile, payments and innovation in general.

While Europe’s individual talent is second to none, and capital is plentiful, the European market is designed to resist change and thus impedes the development of early stage ideas and companies. Early stage companies can incubate within a single country but are challenged to expand beyond, due to complex regulatory and market dynamics. Navigating these dynamics causes early stage companies to develop more slowly, thus a requiring a higher risk premium on invested capital.

                   – Tom’s European Venture Capital Hypothesis

SEPA Overview 

(European colleagues can skip this section). 

SEPA and PSD (SEPA’s enabling legal framework) attempt to create harmonization of payment schemes across the EU (See SEPA Blog, and excellent PodCast). The result?  837 pages of detailed and contradictory EU law with no business incentive. SEPA has been plagued with delays and issues, as should be expected given that there was no business incentive nor a PAN EU regulator to enforce it. SEPA Credit Transfers and SEPA Card Framework have been in place for a few years (2008). While the SEPA framework commoditizes payments, and while this is consumer friendly, there is no business incentive to for large banks to implement it (see Barclay’s consumer support on SCT).  The same can be said for the SEPA Card Framework (See MA’s Self Assessment). The main points from ECB’s regular status report:

  1. Banks must create greater awareness of SEPA, and must offer better products, based upon the SEPA infrastructure. Government should accelerate programs to adopt SEPA as the standard for its disbursements.
  2. The banking industry must commit to work together to remove obstacles which might compromise the Nov 1 2009 launch date of the SEPA Direct Debit. Debates on the launch date, the validity of existing DD mandates, and interchange fees must be closed out rapidly.
  3. Bank systems need to be improved to enable end-to-end straight-through-processing, originated by files submitted or by e-payment, e-invoicing, and m-payments.
  4. The ECB wants to see a target end date for migration to SEPA products, and for exiting out of older credit transfer and direct debit.
  5. The SEPA card framework in its current form has not yet delivered the reforms which the ECB wants. In particular, ECB wants to see a European card scheme emerging.
  6. The ECB perceives a lack of consistency in card standards. It wants to ensure that a clear set of standards are adopted and promoted throughout the industry.
  7. A common, high level of security for Internet banking, card payments and online payments is needed.
  8. Clearing and settlement organizations in many countries have made good progress on SEPA, and several are upgrading from national to pan-European.
  9. The banking industry, and its representative body, the EPC have not sufficiently involved other stakeholders.

 SEPA’s Impact on Innovation

European harmonization is a fantastic objective, but translating EU guidance in to country law, with each country’s banking regulators responsible for interpretation and guidance, is problematic. This becomes even more difficult when Banks (who were not included in the SEPA design) have an inverse adoption incentive. An analogy in the telecom world would be telling the land line carrier that the must open up the switch to anyone that wants it at no cost.. and they have to assume all of the risk and operational responsibility.

Early stage companies and “payment innovators” are left with a complex set of constraints.

  • Dependent on local national relationships to launch a product,
  • SEPA creates harmonization, but country specific laws and regulatory guidance are unique
  • ECB initiatives (ex. See ELMI) create opportunities for non-bank participation in payments,  but SEPA has removed all margin from the business

So in Europe we see the consequences of over regulation.  While SEPA was designed to increase competition and create new European schemes, there are few business models capable of supporting investment. Hence Europe is not the place to start a retail payments business.  Hence Asia, LATAM  and Canada are all great places to start a payments business (my picks: PH, HK/China, Brazil, Malaysia, SG, Colombia, Indonesia and New Zealand).

Europe and Advertising

I don’t have time to finish the thought here. For those of you that read my blog you know I’m very enthused about the prospect for advertising to be a future payments revenue driver. Unfortunately for the EU, consumer privacy regulations (and subsequent “tracking” issues) are the most onerous in the world. In Germany for instance, my Citi team was forced purge the web log of IP addresses every 30 minutes.. for our own customers. The point here is that we could not even maintain loosely correlated consumer information in regulated accounts. Google has similar problems today (see Das ist verboten).

Where is the EU opportunity?

Where there is an intersection of: low margin payments, businesses with frequent cross border (within EU) transactions, without need or desire for banking relationship. MoneyBookers is an excellent example of this model in gaming.

Other possible  investment drivers relate to when payment transaction infrastructure is a commodity:

Arbitrage – Move intelligence to new regions or countries where the cost of maintaining it is lower

Aggregation – Combine formerly isolated pieces of dedicated infrastructure intelligence into a large pool of shared infrastructure that can be provided over a network

Rewiring – Connect islands of intelligence by creating a common information backbone

Reassembly – Reorganize pieces of intelligence from diverse sources into coherent, personalized packages for customers

 Thoughts appreciated.

Random Thoughts

Banks that help educate customers stand a very good chance of building better relationships, and increasing wallet share. Today I’m left with an “apply” button on my brokerage tab for Wachovia, Citi, Chase, Wells.. the average customer doesn’t want to apply for an account until they understand how this “product” will serve them and gain insight into how BankX’s services compete.

7 June 2010

Rumor Mill

Paypal’s new virtual terminal may be just in time. Rumor is Visa is planning a slew of new product announcements in next month.. from NFC, to mobile coupons to bringing down the barriers of card acceptance. Perhaps this is the primary driver for the CYBS acquisition, there must have been a dependency given the multiple paid.

Thought for the day: What  is “banking innovation”?

How many times per day do you really want to check your bank balance? From how many different devices? Is comparing yourself to others innovation?

From my perspective a “killer” customer value proposition (in any market) is making “up market” premium services available to the masses. How would you like to be treated like a client of a private bank? Your bills are paid, your lawn is mowed and your dog is walked… You have a relationship with the banker, he is invited to your children’s wedding. He actually knows your name when you walk into the office or call him on the phone…. and he also consistently delivers superior market returns to your portfolio.

As a bank customer.. does your bank know who you are? your history with them? What your goals are? Is it any wonder that bank customers are rate driven? There is no relationship (or trust) in the average mass market portfolio of a large national bank. Why do customers select a bank today? (sorry for stale data)

Banks know that Customer Satisfaction strongly equates to profitability, and retention. Customer focused innovation starts with focusing on what your customers need… I’m surprised at the lack of effort here…. What would my top area be?  That’s easy.. financial education. Banks that help educate customers stand a very good chance of building better relationships, and increasing wallet share. Today I’m left with an “apply” button on my brokerage tab for Wachovia, Citi, Chase, Wells.. the average customer doesn’t want to apply for an account until they understand how this “product” will serve them and gain insight into how BankX’s services compete.

Who will take on financial education 301? I don’t really want banking to be “fun” (aka Virgin).. I want it to be serious and thoughtful.. US retail banking is just plain backward when it comes to innovative products (Foreign currency accounts, structured products, international equities, …). Perhaps there is a “catch 22” with our collective financial literacy.. or lack thereof.

Examples

The banks above have obviously invested time thinking about this, however my guess is that few current customers know about (or use) any of these services.

What would a private banker do for a new relationship? He would probably try to find out my risk tolerance and develop a plan to better manage cash (ex sweep account) and investments with consideration for taxes and personal plans. Why are banks outsourcing this to a CFP?  Of course the answer is that banks are product focused (as opposed to customer focused), there is great margin in that 0.25% CD that grandma buys.. also a great source of liquidity which drives Tier 1 capital and my bond rating (cost of capital).  All of this seems to point to great opportunities for small banks, particularly those that cater to affluent (Aquestabank and their 1.2% CD).

It seems that the ABA and OCC are frowning on deposit competition right now, a heavy price for consumers.. take a look at rates in the UK this week (http://www.moneysupermarket.com/savings/) . The incentives for the large banks is to act as a “late follower”… after all until balance run off occurs there is little incentive to change.. US branches (and their sales teams) continue to excel in generating margin.. with consumers poorly equipped to evaluate options.

Make no mistake, the consumer market will change..  Will banks that depend on customer illiteracy for success will have adapting? US banks are very fortunate that the average consumer is not a British replica… where  consumer “rate hopping” is at an extreme … perhaps Mint, bank rate, and money supermarket will get more traction and bring greater transparency..

Thoughts appreciated.

SEPA: Chicken or the Egg?

The over arching goal of SEPA is to make the EU a single market on “payment” par with the U.S. Perhaps the best way to start is not by incenting changes to “payments”, but to open the EU retail banking market. (Think of the US banks operating under a Fed charter). “All banking is local” can be the mantra ascribed to the EU today, with each country maintaining tight regulatory control over domestic financial institutions (i.e. M&A and Liquidity). Significant market forces could be unleashed when local banks can operate throughout the EU, and a German consumer can seek the best rate and apply for an account at a “Spanish” bank.

4 January 2010

I was reading an update on SEPA : New Alliances Required to Tip the Market. The report gave me new perspective on how challenging it is to change a networked business. This challenge is exacerbated by the ‘well intended’ EU political compromises in SEPA (specifically) and EU regulation of retail finance (more broadly). Clearly “payment networks” can benefit from innovation, but as Juergen correctly states “In a network industry, cost reductions and/or additional revenues that can be realized by applying the new standards have to exceed the network effects currently realized with the old standard”.

SEPA is struggling to resolve issues in cost/benefit allocation given the slow growth and adoption for SDD and SCT. The greater growth in SEPA Cards Framework can be attributed to the “control” and investment from Visa/MA as they manage compliance (and marketing) or the new SCF brand. An excerpt from the report above:

Key strategic decisions have to be made almost simultaneously in organisations that are in competition with each other, follow different strategies and have different abilities to innovate or prepare for an industry change. Only if consensus on a new business model can be reached – among stakeholders who represent significant market shares and hold key positions in the industry– will it be possible to generate the synergies promised by SEPA. As already described, the cross-border business within SEPA represents only a small share of the payments market. The dominant national standards, which all would have to be replaced by the new SEPA standards, are built around national market requirements.

International banks (for example, Deutsche Bank) have separate organisational units in several European countries that run their own national payments engines. They maintain different payment infrastructures in Europe. Modifications in response to new compliance requirements (for example, money laundering or new requirements of the PSD) create several similar projects [for this single bank]..

The costs for SEPA (estimated at €10B) fall heavily on the banks, and the benefits (ex. e-invoicing, cross border competition in payment products, …etc) are expected to be realized by the consumers of bank payment services (with and estimate €7B revenue hit to banks). Fortunately for the Banks, in 2002 the approach decided on by the EPC was to create SEPA in a market-driven and self regulated process.

The over arching goal of SEPA is to make the EU a single market on “payment” par with the U.S. Perhaps the best way to start is not by incenting changes to “payments”, but to open the EU retail banking market. (Think of the US banks operating under a Fed charter).  “All banking is local” can be the mantra ascribed to the EU today, with each country maintaining tight regulatory control over domestic financial institutions (i.e. M&A and Liquidity). Significant market forces could be unleashed when local banks can operate throughout the EU, and a German consumer can seek the best rate and apply for an account at a “Spanish” bank.  Today the regulatory hurdles for this retail competition are significant.

The EU, ECB and the EPC started with payment standards and “infrastructure” as it did not alienate any of the existing participants (market driven.. .not mandatory). What we have is the fruit of this compromise, standards for payments across the EU without the ability for companies to compete for business across the EU domain. The unrealized value of the “SEPA Innovations” are thereby constrained by the market in which banking operates. Perhaps integrating EU retail financial markets would be a better first step. This “openness” would certainly provide an attractive carrot for bank led investment in common payments. Which comes first? The Chicken or the Egg?

See data here

CapCo Analysis

Googlization of Financial Services

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

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

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

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

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

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

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

Customer Value

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

Customer Requirement

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

Bank Value

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

Bank Requirement

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

Merchant Value

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

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

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

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

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

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

Other reading

http://www.theinnovatorssolution.com/

Citi – Bank of the Future?

Even by Citi standards it is very strange to have 2 people with no retail bank experience driving a retail bank strategy. Liza came from the card group under David Simon in Customer Experience. Liza took over from one of Citi’s best internet leaders Rob Rosenblatt (now at Chase Cards).

September 2009

Travelocity CEO Michelle Peluso was hired by Teri Dial to run “Citi Forward”, with Liza Landsman running the mobile and internet team…

http://www.bloomberg.com/apps/news?pid=20601109&sid=alIEXQt0mqFQ

Citi has proven the ability to get deposits as Citi’s US Direct Bank under Direct CEO Steve Kietz was the fastest growing bank (not just online bank) in the history of the US, collecting over $8B in 6 months. Steve’s marketing genius was not enough to overcome the lack of investment. The fact remains that building a deposit book requires investment, (a 20 month payback at best).  You either build a book or milk it.. (take a look at the balance run off in CitiDirect since the dropped the rate from 2.75%.. )
http://seekingalpha.com/article/18843-citigroup-q3-2006-earnings-call-transcript.

Even by Citi standards it is very strange to have 2 people with no retail bank experience driving a retail bank strategy. Liza came from the card group under David Simon in Customer Experience. Liza took over from one of Citi’s best internet leaders Rob Rosenblatt (now at Chase Cards).

Issue for “bank of the future” is not collecting deposits.. it’s determining how you acquire and retain customers separate from a rate driven product play. The key “Strategy nut to crack” is how to build a profitable retail bank business in the US without branches. Chase, Wells and BAC have all done extensive studies that show customers select a bank based upon the proximity of the nearest branch to home/office.

Internationally, employee direct deposit (aka salary domiciliation) has been the most effective way to gain deposit customers with a minimal branch footprint.

Citi senior management continues to fuel the churn of executives here… lessons are learned and relearned in each new management appointment and each country. Understand that Michelle has very little appetite for the job…. perhaps she’ll gain perspective after her 4 month leave starts next month.