Google+Softcard Levels Field Against Apple

24 Feb 2014

Well done Google. As predicted last month, Google announced last night that it had acquired “some exciting technology and IP from Softcard”. The price? My guess is around $50-60M, plus multi year revenue share (below). This is a FAR cry from the $3-$4 BILLION that these same Mobile Operators wanted for “NFC RIGHTS” in 2011. Google proposed a rev share back then too.. but MNOs were convinced they could go it alone. After dropping almost a billion in ISIS/Softcard with no future revenue of any kind in sight the drivers of the deal were obvious. Not only did carriers need an exit for their investment, they needed a partnership that gives them a role in the future of mCommerce.

What technology will stay? The SE Keys and the vending machine acceptance terminals.. seriously.. 98% of what ISIS/Softcard was is completely dead. My biggest unknown? I would love to see if Amex Serve could pick up the pre-paid card from Mastercard.. as the banks wanted to beat up my good friend Ed McLaughlin for doing what I still think was one of the best most innovative deals ever (Google pre-paid).SONY DSC

What did Google get? MANDATORY GOOGLE WALLET. That’s right, now EVERY ANDROID phone sold by the carriers will have wallet installed. This addresses a key advantage that Apple has in mandating an iTunes account (with credit card) for activating the iPhone. Apple’s brilliant registration process allowed it to know its customers (ID, card on file) where Android/Google did not. Many analysts believe that this ID/Payment deficiency is THE KEY reason why Apple’s environment is 8x-10x more profitable with less than 20% of the handsets. Now Google can compete in all things which require identity+payment. Not JUST in buying apps/music in Google Play, but in orchestrating commerce and brokering identity. I cannot understate the win here for Google. A brilliant move, and I firmly believe that this was the primary driver of the deal. Don’t look at this as a ApplePay competitive thing, it is about enabling Google to identify every Android holder as a default “opt in” during phone activation (iTunes Account Mandatory = Wallet Account Mandatory).

The Carriers? A partner that will share revenue. Where Apple takes 15bps for itself, my guess is that Google will give that to the MNOs, plus some revenue share for play services. My TOP 2015 prediction was that this would be the year of partnerships.. This is certainly my top new one for the year. MNOs are losing sleep about Apple’s unmatched “walled garden”, no one plays but Apple here. Google is developing an open model and this deal may be the first template for MNO/Platform revenue sharing.

Banks? Google will likely slowly “roll out” of its Google Wallet Card (also see TXVIA blog) which wrapped all other cards in a Mastercard Debit. Banks will be able to sign up for Google Wallet through network agreements just as they do for ApplePay today (at same rates/rules). This will mean that the networks will provision bank cards as tokens, and that Google will also benefit from forthcoming CNP token rules this summer. The primary difference in GW operation is HCE+Tokens (see blog). The Google Wallet model is not dependent on the SE Keys, or SD storage.. but it CAN operate in a non HCE model (from its GW 1.0 lineage).

Payment Networks. BIG WIN. Cards are the defacto standard for everything in mobile. I’m interested to see if the networks recognize (certify) the HCE card emulation application, as of 3 months ago it was still not certified. My belief is that they certify as part of tokenization scheme acceptance. This is a funny side story in itself. Most would ask how Google Wallet could run a non-certified card emulation app. Remember that the ONLY card being emulated was a Google owned mastercard debit.. just a brilliant work around. Note that in ApplePlay, Apple operates as a tier 1 token requestor in the current ApplePay model, and V/MA/Amex are tier 2 token requestors (see this excellent blog by SimplyTapp). In the Google model Visa and Mastercard will act as both Tier 1 and Tier 2 token requestors.

Big Losers? Samsung. OUCH!! No wonder they had to buy loop. Their new wallet strategy was to have a DUAL NFC/LOOP wallet. Google just got all the SE keys for the Samsung Phones. This means that Samsung’s wallet will only work on new phones.. a rather rough place to start.  Paypal.. with the birth of a new CNP scheme this summer driving ApplePay and Google Wallet beyond Apps to mCom checkout.. Paypal has no future in Mobile…  Except in emerging markets.

More to come.. but wanted to get this out today.

Software Secure Element – HCE Breaks the MNO NFC Lock

Visa and MA have both created HCE Apps which will REPLACE the SE based CARD EMULATION apps. This is a FANTASTIC development for BUSINESS and for Android. Now you can create apps that leverage payment, loyalty, … It is also a fantastic development for CUSTOMERS as you will be in control of the TSM and card provisioning. You will be able to load ANY CARD you want.. not just the Chase and Amex cards that are in ISIS.

News Today – WELL DONE GOOGLE!  (Note good comments below)

In my July post Big Changes to NFC: Payments part of OS I outlined the high level view of what is going on. In order for this blog to make any sense let me be a little less obtuse on the next shoe which will drop: Visa and MA have both created HCE Apps which will REPLACE the SE based CARD EMULATION apps. “Replace” is more from a business context than from a technical one. SE based applications (like a door key, or healthcare card) could still survive.. but why would anyone want to pay the MNOs RENT if you don’t need to.

I don’t have much time to delve into the technical details, but there are 3 core elements to NFC: Radio, Controller, Secure Element. They had been all residing on dedicated silicone from companies like NXP. I discussed in Apple and NFC Part 2 how companies like Broadcom have integrated these separate components into a single piece of silicone. In other words the NFC Radio is just another radio alongside GSM, CDMS, Wi-Fi, Bluetooth, … With Android 4.4 Google has now made Payments Part of the OS by enabling an application to bypass the SE and use the radio as directed by a OS. Another way of looking at this: in a world of integrated silicone, there is NO dedicated  controller… (the controller is in the firmware/OS).Exposure: 000 : 00 : 00 . 156 %Accumulated%=0

NFC zealots will HOWL that there is no TSM, or security. But SECURITY has DEGREES.. there is no such thing as 100% non-repudiation.  Visa and MA have both developed controls for how this will work, for example having a “token” that refreshes at a given rate based upon where the phone moves and how the phone transacts.

This model also addresses a key FLAW with NFC. HCE will allow for APPLICATIONS to access payment.. yes I am speaking of mCommerce (buying from an app or a web site). No longer will you have to key in your card information. NFC did NOTHING for this.

This is a FANTASTIC development for BUSINESS and for Android. Now you can create apps that leverage payment, loyalty, …  It is also a fantastic development for CUSTOMERS as you will be in control of the TSM and card provisioning. You will be able to load ANY CARD you want.. not just the Chase and Amex cards that are in ISIS.

I believe that banks had very limited view of this development, and that several of them will be calling V/MA to confirm that they are creating an new CERTIFIED Card Present scheme based on HCE. Bank control (push for credit use) has been as much of a drag on mobile payments (at POS) as telecom control. This approach BREAKS BOTH.

Bank Benefits

No one can fix EMV…. there are too many parties. New token rules together with HCE AND Network Enhancements (ex Wallet ID, Phone forensics, ..)  a much finer grain of control than exists today. For example, new structure will allow for any given issuer to turn off all tokens for any given wallet provider. When comparing EMV to HCE++ we can’t forget WHAT EXISTS TODAY (is mag stripe). No one can suggest that HCE++ is less secure than mag. Most banks realize that payments are NOT about security and authentication.. but about Fraud and Risk management. Not just “are you the person that controls the account”.. but “did you just loose your job and about to enter bankruptcy).

The mobile device has SO much more data on which to manage fraud and risk. For example at Citi, SMS PIN code completely eliminated risk in new transactions. When we saw a new payee, we sent the consumer a PIN code to their mobile that expired in 1 min.. In future HCE environment if bank sees risk they can PIN, or ask for finger print scan (from apple).

HCE actually ALIGNS to bank and network (V/MA) objectives: keep intelligence in network and control with issuers. Today big banks differentiate themselves on ability to manage risk. They have made multi-billion dollar investments here. Complete security and authentication in a platform decreases their competitive edge. Perfect authentication is a NIGHTMARE to banks because then anyone could do their job and ID risk would be eliminated (not credit risk)NFC Change

Big Technical UNKNOWNS

  • Tokenization, Network Enhancements, New Card Present Scheme, New V/MA Emulation App, POS Terminals, Fraud Services, Device Forensics, Authentication, all are needed in this future model. Much is built.. but this is not without challenges
  • Today’s NFC requires issuer keys to generate the dynamic codes required in a contactless transaction. IF this is reused, than issuers will be able to prevent HCE from working.
  • Will V/MA attempt to impose Authentication/Fraud Services standards impact consumer experience or conflict with issuer requirements
  • Who will create the HCE standards by which everyone can use? How long will this take? are we back to ground 0?

Other quick thoughts

  • This is not just PRESS.. HCE is actually all LIVE right now with a Canadian Bank.. RBC and SimplyTap (the Rocket Scientists of HCE). In this model an ISSUER has given its “NFC Keys” to the SimplyTap for use in an HCE model that circumvents NFC controller.
  • I expect that Apple’s iOS will also follow model within next 8-12 months.
  • Very positive for V and MA, Google, Businesses that transact with consumers
  • Very positive for mobile POS payment
  • Could create new differentiators for Android if Apple doesn’t follow quickly (I expect they will)
  • Positive for merchants as consumers can now load debit cards on their phones and you can create apps that incent debit card usage
  • Negative for companies that specialize in providing payment services to mCommerce or NFC
  • Negative for PayPal.. why use them at all? your cards are stored in the phone. If you are a merchant with a mobile store front or app you will integrate with 2 payment service providers: Apple and Google.
  • SEs will be going away. Connectivity and Authentication put data in the CLOUD.. not locked in a device with the carriers holding a key.
  • Google has alignment on HCE. Devices from the top handset OEMs announced in the next week+ with no SE on board, like the Nexus 5
  • Next BIG challenge? Certifying/standardizing authentication methods which provide for finer grained control of payments, cloud data, re-issuance of tokens…. 100s of new companies.
  • HCE actually ALIGNS to bank and network (V/MA) objectives: keep intelligence in network and control with issuers. Today big banks differentiate themselves on ability to manage risk. They have made multi-billion dollar investments here. Complete security and authentication in a platform decreases their competitive edge. Perfect authentication is a NIGHTMARE to banks because then anyone could do their job and ID risk would be eliminated (not credit risk).

Appreciate feedback.

POS Integration: Build it and they will xxxxx?

Read in the press today about ISIS’ new SmartTap protocol. I may be getting to an age where I feel everything is on replay.. as Yogi Berra said “Its Déjà vu all over again”. How many ways are there to integrate to the POS? My simple pic below outlines 10-12. Integration is NOT a technical problem.. it is a BUSINESS VALUE PROBLEM.

8 Sept 2013 (sorry for typos)

Read in the press today about ISIS’ new SmartTap protocol. I may be getting to an age where I feel everything is on replay.. as Yogi Berra said “Its Déjà vu all over again”.  How many ways are there to integrate to the POS? My simple pic below outlines 10-12. Integration is NOT a technical problem.. it is a BUSINESS VALUE PROBLEM.

RetailIncentiveLandscape

Given we are all biased by our life experiences, thought I would share mine. I was very fortunate to work for Oracle from 98-03 and had a very, very good team… one of the areas I led was the solution architecture practice. In order for Oracle to sell software we had to define how it worked with everything else. We may have had the best Advanced Planning and Scheduling (APS) or CRM in the business, but how does it work with SAP  SCM, or Peoplesoft Financials? Sometimes the challenges were all Oracle, I can still remember meeting the new Motorolla CIO in 2002, where he said “we have 124 ERP instances of different versions.. and they are all Oracle.. now it is our fault for buying the same product 126 times… but it is your fault for selling it to us… We can’t create a single integrated view of our company.. where do we start?”.

Perhaps my biggest “ah hah” moment came from working within HighTech Manufacturing (ex Cisco, Sony, TSMC, Samsung, …). The need for coordination in the supply chain was EXTREME (to avoid the bull whip effect).    RosettaNet was born… a set of XML messages that could be exchanged between participants communicating supply chain information like Work in Process, Shipment notifications, purchases, demand plans, …  There was nothing wrong with this specification… technically it was rock solid (much like NFC), but the adoption was terrible. Two reasons

1) Business. I was working with a supplier who was manually keying in WIP responses that they believed would placate Cisco (the Channel Master). When asked why he was doing this manually vs letting Oracle’s system do it he responded “if Cisco sees me falling behind in WIP they will shift demand immediately to another contract manufacturer…. I cannot risk having a system send this message to my most important customer”.  In essence there were no business incentives for participation. The “mandates” for participation were end run..  Thus demonstrating that technical integration is perhaps the smallest problem which exists in networking businesses.

2) Technical. To use our RosettaNet Connector you had to be on the latest version of our applications and Infrastructure (DB/Middleware). Less than 10% of Oracle’s HT customers were on a current release, as most heavily customized. Integrating a “connector” into the OS/Application was MUCH different than having a customer turn it on and use it. This dynamic seems to be forgotten by every enterprise software partnership/alliance.

With respect to ISIS, NFC and SmartTap. Everyone is learning the same lessons over and over again (business and technical).. For example, Micros is building “connectors” for ISIS, PayPal, Google, …etc. Verifone is also  building “applications” for the same.  There is a lost truism: Building technical capability is MUCH different than using it  (particularly if merchants must upgrade software and sign a new contract.. all for 2% of their customers that may have a new ISIS NFC phone). ISIS will also learn that partners like Micros do not sell the adapters they build.. nor do merchant have the latest version of their software. Merchant USE of an ISIS SmartTap adapter is MUCH different than building it.. Same holds true for Google, Paypal, … etc.

Take a look at the diagram above.. I didn’t even bother listing “integrations” from the payment terminal, yet Verifone established a Verix architecture to enable a segmented area where non payment applications could run (within a payment terminal).  Google built an adapter here in Wallet 1.0. Someone should ask Verifone how many applications run in this environment.. and how many merchants integrate back end non-payment data to a payment terminal (ex line items, loyalty, …). Answer is very close to 0…. the idea that a merchant would use a payment terminal as a consumer integration point is just ludicrous. The very existence of a specialized payment terminal is due to the need for “specialization”.

Cloud is where Payment belongs

As I stated in Battle of the Cloud  – Part 3, if everything is connected, why on earth would I want to store anything in the phone? Everything should be in the cloud.. and all that is needed it a form of authentication to pull in everything I know about the customer. For retailers why would you want a teleco to manage your loyalty program for you when a Starbucks/Square/Apple Passbook paradigms shows QR code options? For that matter why would you do anything that Apple is not supporting? (the best most affluent customers).

Riding existing rails seems like an obvious approach to circumvent some of these integration challenges. But current network rules and participation are based upon existing data flows, current rails are poorly equipped to handle new business models. For example I asked a top 3 Retailer if they would ever share transaction data with Google. They said if it was good for their customer and good for them then perhaps…. But this data would never ever flow though visa, the banks or any other payment network… as they have proven to be very bad partners in commerce.

Thus my view on why the problem is NOT technical.. just ask one simple question.. ISIS what does this do that Apple Passbook or Google wallet can’t do already? Isis should have asked micros… How many retailers use these kinds of integrations (of the type I’m building). Micros answer…. We have no idea. .. We don’t get paid when they are turned on…

On the technical front I will make a predictions.. not only will ISIS realize retailers don’t want to turn this on..  Customers will reject the solution as SmartTap requires 2 serial NFC transactions, first payment, then for “other” .. meaning a tap and “Hold” for up to 3 seconds. If the customer just wiggles their phone around during that 2-3 second time the second transaction is lost. This is what happened to Google wallet 1.0 2 yrs ago..

Square

Private Label.. “New” Competitive Environment?

Clearly there are opportunities for new retailer friendly networks. The new incremental value TO BE delivered is centered around influencing and rewarding the (consumer in partnership with merchants). Given that retailers compete with each other, loyalty is thus useless for retailers which don’t offer competitive products at competitive rates. Thus a “community” of retailers is not as valuable as a “community” of consumers (ie Facebook, Twitter, Android, Apple). Thus platforms which serve the community of consumers will be much more effective.

1 April 2012 (sorry for typos, 2 hour quick blog here…you get what you pay for)

Updated

Remember the BIGGEST Retailer challenge is to know WHO THE CUSTOMER IS. A PL card combines loyalty card + customer information + payment information (closed loop) + possible payment information open loop. What Retailers gained by giving up their PL cards was access to credit without credit risk.. what they lost was the ability to know who the customer was. We now have models where they can have their cake and eat it too.

Most Retailers spend very little of their own money on marketing… it is the manufacturer that provides credits in form of “trade spend” to help Retailers advertise. Retailers thus seek new innovative tools to channel this spend. It is an arms race as retailers work to compete in selling commodity goods at the highest possible prices. A Retailer that has a new fun way to engage the customer will have a quantitative edge… and attract greater trade spend if they can engage customer. Manufactures want brand loyalty, Retailers want retailer loyalty, Platforms want platform loyalty, Banks want Card Loyalty. Best case study by far is Target Redcard (read great Mercator Report) which now accounts for 6%+ of sales (debit) from nothing just 2 years ago “net cost of offers”.  To restate above, with respect to Retailer “marketing spend” it is not the Retailer’s money.. it is the manufacturers. Few people understand this game.. which is why most Retailers laugh at silicon valley types with no retail background. The macro effect of new payment networks will be to shift AD spend from less efficient channels (TV, Radio, …) to more effective channels (?Trade spend). The money does NOT come from the Retailer.. but enables the RETAILER TO BE A BETTER MARKETER by using their data.

What is the business driver of the JPM deal?

If you were a bank which had all of the technical assets to run a 3 party network, but were constrained by rules in which your assets operated.. what would you do?Interchange Rates US Fed

Institutional investors constantly tell me that the Visa is efficient and that the overall network “costs” are very small in proportion to the benefits of universal acceptance.  Well there are very big assumptions in this statement of efficiency….

  1. That all parties are benefiting from universal acceptance
  2. There are no competitors operating in a different model

Both of these assumptions are wrong. If we look at it from a macro view, a 2% tax on sales is not very “efficient” at all, particularly when combined with a 15-20% interest rate on ANR of a typical card. The “value” of credit cards is highly biased toward banks and affluent customers.  As the Fed Study below illustrates, Affluent customers receive a benefit of $1,133 from consumers that pay with cash.

Card Rewards US Federal Reserve

Reward levels and retail prices affect the welfare of each individual  consumer differently. Although typical U.S. consumers use payment cards as well as cash and checks, some consumers use payment cards  more exclusively, while others use cash or checks more exclusively. If  more generous rewards imply higher prices for all consumers regardless  of their payment methods, then they may make consumers who tend  to use cash and checks worse off.

Who Loses in from Credit Card Payments? Federal Reserve Bank of Boston

Merchant fees and reward programs generate an implicit monetary transfer to credit card  users from non-card (or “cash”) users because merchants generally do not set differential  prices for card users to recoup the costs of fees and rewards. On average, each cash-using  household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year.

The very nature of card are changing, a disruption based on mobile ($0 issuance cost, improved identification/fraud) and data/advertising (see GoogleWallet).

How would you design the OPTIMAL Merchant friendly payment network?

Features

  • Merchant Brand – Merchant’s brand
  • Cost of Payment – $0.05 for Debit
  • Risk Management – Allow for use of merchant data, mobile data and bank data.
  • Enable Merchant CRM – See blog
  • Consumer Credit – Available. Banks compete for lowest rate.
  • Payment Processing/Acceptance. Accepted in merchant, can be used off network as well. Minimal changes to existing systems
  • Consumer Support Services – Dispute resolution
  • Mobile Services
    1. Product Selection – Buying guide/research
    2. Community – Reviews
    3. Social – Facebook/Twitter integration
    4. Loyalty Services – Support merchant loyalty programs, points, incentives
    5. Advertising Services – Touch customer prior to purchase, during shopping, at checkout
    6. Coupon/redemption services – Enable all incentives to be stored/presented/managed
    7. eReciept – Supports customer requirements

This is certainly much beyond what Visa is currently delivering. As I’ve stated previously, Google and American Express are by far the leaders here, as top 5 banks struggle to deliver these services within a 4 party network.

The private label card industry is hot (See December American Banker, Mercator on Target RedCard). JPM is now uniquely positioned to deliver a platform which can support multiple private label payment products… from MCX to Google.  It would seem that their unique Visa relationship allows them to benefit from Visa’s larger  acceptance network when their private label card operates beyond a “closed loop” merchant community. An open question is whether a given private label merchant will choose to have a Visa bug on their card or not, and if the bug is not on the card.. will it still operate as a visa card?  This seems to be the only reason for a “switch” of transaction from VisaNet to JPM VisaNet.. so it seems to be a planned feature.  Regardless of approach on Bug and Switching transactions, JPM is in a class by itself in competing for business of merchants, payment platforms, and delivering value around Visa.JPM PL Example

In the mobile world the cost of issuance is now $0.. why wouldn’t every merchant want their own private label card? With a punch list of available features above? Giving every merchant “Cluster” the ability to strike agreements with other clusters (example Wal-mart accepting Exxon cards, see blog). Merchants that currently give their consumers loyalty cards, could exchange them for multi function virtual cards in a mobile wallet at no cost. Target is the clear leader here.

My view is that banks tend to look at private label as a division of their Card’s group. Banks have no other way to monetize the card platform beyond fees and rates.  The winner here will look at these new private label initiatives, not as a payments initiative, but rather as CRM and advertising. A very challenging task that goes against both organization, and consumer behavior. During my time running 2 of the world’s largest online banks, consumers don’t spend time shopping for deals. In retail banking they log on, check their balance, pay their bills 2-3 times a week. In Card it is much worse, coming on 2-3 times per MONTH.

Clearly there are opportunities for new retailer friendly networks. The new incremental value TO BE delivered is centered around influencing and rewarding the (consumer in partnership with merchants). Given that retailers compete with each other, loyalty is thus useless for retailers which don’t offer competitive products at competitive rates. Thus a “community” of retailers is not as valuable as a “community” of consumers (ie Facebook, Twitter, Android, Apple). Thus platforms which serve the community of consumers will be much more effective. Banks seem ill suited to “drive” this new network as they have demonstrated a very poor history of “partnership” with retailers.  For example current CLO initiatives are focused on using retailer data against them (Blog). We thus see banks working on a defensive token strategy to ensure that no one can operate on payment rails but them.ven goog reach

Future Scenarios for POS Payments

  1. Private Label Bank Platform. Amex in lead, JPM #2. Keys for success: delivering value beyond affluent, reaching consumer before they buy, delivering merchant CRM, helping merchants “own” the consumer.
  2. Retailer led payments. Target is role model, blog here. As Mercator reports, RedCard now accounts for 8% of sales.
  3. Retailer led financial services. Either through Pre-Paid as in the Amex/WMT relationship, or as in Tesco’s bank. Retailers (or MNOs) leveraging their physical distribution and foot traffic to deliver bank services. Keys for success: expanding beyond the Mass to the Affluent, consumer value proposition, consumer acquisition, bank licenses/regulatory, CRM, Advertising
  4. Neutral Party Platform. Square, Google, Level Up, ?Apple, ?Amazon… Consumer friendly… the means getting both merchants and banks on board.  Overview in blog on TXVIA, and Digital Wallet Strategies.

None of these will be successful in isolation.. my bet is that we will continue to see complete chaos until we find parties that can partner… or gain traction in a segment of the market that is not in view of 800lb Gorilla’s. Retailers, banks all view the customer as uniquely theirs. Once these entities realize that consumers migrate toward value and entertainment, they will begin to align their services to channels where consumers reside.. NOT to where they WANT their consumers to reside. (I’m not looking for diaper coupons on bankofamerica.com). Similarly, Private label cards are a key element of a broader CRM and price promotion strategy… they do not exist in isolation and cannot be outsourced in part. price promotion

My top example this month is Restaurants. There are over 800,000 restaurant locations in the US. 474,000 of them are part of companies with less than 500 employees (independents).  This is a perfect ground for Square, Fisbowl (CRM) and LevelUp (Payments).. Square gives them a cash register that integrates existing card payments at a significantly lower cost on day one, and there is new functionality for advertising and buying experience (pay with Square).

Thoughts appreciated.

MNOs giving away Billions to Banks.

March 6, 2012

If you can solve Authentication.. everything else is just accounting

–          Ross Anderson, KC Fed, March 2012

Good news: Someone is reading my blog.

Bad news for Mobile Operators…. It is the Banks.

3 years ago I wrote $5B Mobile Operator Opportunity: KYC.  If I were in control of ANY aspect of mobile.. I would work to ensure that privacy and anonymity reign. Google/Apple should work to ensure that mobile browsers and apps have VERY WELL DEFINED controls around user identity, tracking (ie cookies, fso, …), location, payment, … Similarly mobile operators should have VERY TIGHT controls around who can leverage tower information, customer information, .. for location and “hidden” identification of users.

Today I learned that one of the top 3 banks has struck a unique agreement with the ISIS telecos to do KYC, account opening, and really act as an agent. This is just brilliant for the bank… as it decreases its cost to acquire and cost to serve. However striking a one off deal with a big bank is short sighted.

The Mobile Operator KYC/Agent opportunity is TREMENDOUS if MNOs can focus a business around this and make KYC a generic service. As I stated in Future of Retail Banking: Prepaid?, Retailers and Mobile operators have a competitive advantage in their physical distribution. Retailers like WMT, Tesco and Target are doing a tremendous job here. International Mobile Operators like Docomo, Vodafone, Sing Tel, SKT, Bharti are also far in their planning. US Mobile operators are completely out of the game…. Perhaps things like this slip to “deal” because they “outsourced” the strategy to a dysfunctional consortium (ISIS, see Walled Garden) .

MNOs why would you want to be an agent for a SINGLE bank, when you could sell a service that could be used by every bank, every commerce company, every government agency… to the BENEFIT of your customer (example mobile esignature below).

Operators, let me be specific in my recommendations.

  1. The mobile device will become the key point of confluence between virtual and physical world. You can only take a role in the economics if you can retain the integrity of customer relationship (and data).
  2. Don’t look for a “deal” to distribute a single bank’s products. Create a business around KYC leveraging your distribution. Make the banks bid for your capabilities. This is akin to “agent” networks in emerging markets
  3. The critical piece of payment is authentication. You have many unique capabilities here for your post-paid plans. You ID, phyisically sight and credit check consumers. What if you also registered them for an “e signature” process… a generic security process which could be re-used in banking, commerce, government, health care
  4. You have a “token” today.. it is phone number. Please just go buy Payfone and make it your new payments AND KYC focus.
  5. Control customer data and location. My top recommendation is watch out who is using consumer location data.. just as banks want to own the payment rails.. ensure there are tight consumer protections around this.. YOU SHOULD BE THE TRUST ENTITY (hey that rhymes).

I believe that Apple gets this, as we can see from their acquisition of Authentec. Creating a digital storage locker for identity.. is much more important than creating one for music.. (hint).

I also think Square get this.. and has built a business around identity as the key for physical commerce AND payment. Given that Square and Apple are also all about creating great consumer experiences.. with a maniacal product focus.. I would love for them to get together..

Apple Passbook: No NFC Here…

I’m very impressed that Apple’s exec team has kept the iPhone away from NFC… strategy brilliance is an understatement. By expanding Apple’s ownership of Digital Goods (old blog here with financials) into mCommerce (ie physical goods bought via phone) and narrowly aligned Physical commerce (ex. Ticketing)

I’ve covered this topic quite a few times

As most of us have known Apple has been out of the NFC game for some time (18mo+). It’s just amazing that the mainstream press can be so caught up in a disinformation hype cycle that seemed to have been started by some kind of patent application. Yesterday’s WSJ had a fantastic article on Apple’s plans.

What makes for a “successful” consumer wallet? From previous post:

Customer Trust, Customer Control, Convenience, Ubiquity (opposite of lock in), Intuitiveness, Experience in Use (buying, redeeming, accessing, ..), Security,

If I have a wallet that only accepts 3 cards that are not accepted at any of the top 20 retailers (ie ISIS), it is of little value. Why not let consumers control what goes in? This is where carriers must get to in order for NFC to survive. Even then, NFC phones are far from my recommendation. After all if your payment information is locked in a mobile phone how do you use it when you are at your computer buying something on Amazon? Locking information in a phone is just plain stupid in the age of the cloud.. most agree that individuals should have a their information in a cloud they control. The NFC zealots reading this blog will respond that it NFC doesn’t require a network and is more reliable… my response, the POS and payment terminals are connected.. NFC doesn’t need to hold the card in the SE.. it just needs some sort of identifier.. or in the Square cardcase example no NFC at all just your voice print. After all if there is no auth from the payment network.. the transaction will not happen.. so something is connected in 99%+ of card transactions.

I’m very impressed that Apple’s exec team has kept the iPhone away from NFC… strategy brilliance is an understatement. By expanding Apple’s ownership of Digital Goods (old blog here with financials) into mCommerce (ie physical goods bought via phone) and narrowly aligned Physical commerce (ex. Ticketing) they can maintain ownership of the entire consumer process.. from marketing, sales, purchase and “delivery”.

Apple’s unique ability to garner 75% of mobile handset profits is shifting from DESIGN to VALUE ORCHECTRATION (see blog). No one can orchestrate value in NFC (see 12 party mess).  What is truly ironic is that as the carriers spend hundreds of millions of dollars on NFC and their walled garden strategy to “force control”, Apple and Google will be further ahead in coordinating value in new networks. This value delivery outside of the mobile network will further cement carriers roles as dumb pipes (related blog).  This seems to support my hypothesis (often stated) that it is nearly impossible for legacy networks to adapt in delivering new value propositions.

NFC and Consumer Choice

As most of you are aware, ISIS is charging each and every issuer for the “right” to put their cards on the phone. In a tweet 2 weeks ago I mentioned that all of the phones in market have a major problem: they can only support one card emulation application at a time.

7 May 2012

Thinking about consumer choice today. As the MNOs think about how to lock up the SE and SE Management.. when does a consumer get to choose what is on their phone?

As most of you are aware, ISIS is charging each and every issuer for the “right” to put their cards on the phone. In a tweet 2 weeks ago I mentioned that all of the phones in market have a major problem: they can only support one card emulation application at a time. Although I’m not completely sure if this is a firmware issue or “silicone/memory” issue it relates to the storage on the NXP’s chip. Apparently the latest version’s of NXP’s chips don’t conform to Amendment C of Global Platform’s 2.2 Specification (supporting multiple card emulation apps).

http://www.globalplatform.org/mediapressview.asp?id=777

What this means is that your new NFC phone could have hundreds of Visa cards loaded.. or hundreds of MasterCards.. but the phone can’t support the signed java applets (card emulation apps) from Visa (paywave), Mastercard (paypass), Discover (zip), Amex (expressPay), Transit (…).. you get the picture.

Doesn’t everyone want a wallet where all of your cards can get stored? Visa, MA, Amex, .. plus loyalty, gift, … ?

My hope is that the market (and regulators) will push to keep consumer choice at the center of mobile phone wallets. If the carriers can’t lock down the SE, consumers will be able to choose the most effective option. Retailers know that the only cards willing to “PAY” to get in the ISIS wallet are credit cards.. which obviously impact their interest in accepting a 350bp payment product.

The mobile wallet that “wins” will be the one that offers consumers the most control. Letting consumers load any card they want.. without that card issuer first having to pay some sort of toll to the mobile operator. Also letting the consumer decide who gets access to what data. This last area is something that needs improvement beyond data that is stored in the SE. Right now apps are taking the approach of “take it or leave it” agreeements:.. we get your location, e-mail, contacts, usage, …  This terrible approach is leading to an unbelievable dissemination of data that is completely out of control. This is why HTML 5 will win.. Apps are becoming the paradigm by which companies obtain almost unlimited customer information.. and consumers will wake up soon.

As a side note, isn’t it amazing that this topic hasn’t been covered more broadly? Of course it speaks to the true uptake of mobile payments (at POS) in general..

My funny story: I went to the Duane Reade directly across from Penn Station last month. DR was a Google wallet launch retailer in NYC, with all of the beautiful marketing logos. I waved my phone to check out..  and the store manager was there behind the 8 cashiers.. he said “is that Google Wallet”.. I said no it was a Citi Sticker glued to the back of my iPhone.. I asked him how many purchases he has seen from people using their phones.. Answer “none in the last 2 months”… Across from Penn Station… wow..

Carriers as dumb pipes?

Given Apple’s tremendous earnings yesterday, 80% growth in iPhone shipments (30M), 150% year-over-year growth in iPad shipments with margins improving to 47%…. what does the future hold for carriers? If consumers go to the Apple store to select product and network is just an afterthought? Retailers also loose when manufactures can create both an effective BRAND and EXPERIENCE (see related USA Today article and Forbes).

25 April 2012

I just bought a brand new Galaxy Nexus on Google’s new play store today (https://play.google.com/store), very excited to have an unlocked GSM phone that I can take with me around the world. Better yet, I can now take advantage of Google wallet and many new NFC based applications..  independent of any carrier (… although the Sprint people are A+).
Given Apple’s tremendous earnings yesterday: 80% growth in iPhone shipments (30M), 150% year-over-year growth in iPad shipments with margins improving to 47%…. what does the future hold for carriers? If consumers go to the Apple store to select THE product will The Network be an afterthought? Its not just the MNOs who are on the short end of the stick, Retailers also loose when manufactures like Apple create an effective BRAND, PRODUCT and EXPERIENCE (see related USA Today article and Forbes).
How are the carriers responding? What are they doing to deliver new value or help the industries impacted by this new dynamic? They have gotten together to create an environment where they completely control everything: NFC (in the US it is a consortium called ISIS).  I was one of the first to break news of this consortium back in 2009, with some strong recommendations on their strategy (see Ecosystem or Desert).  If you were a retailer, or small company with limited resources, where would you place your bets? With Apple..? or a consortium of mobile operators that have been working for 3 yrs trying to get a pilot working across 12 different suppliers.

This week, I was struck by how similar the carriers “walled garden” NFC strategy is to previous attempts to create a “Walled Garden” . Why are the MNOs recycling the same control strategy? Remember Einstein said “the definition of insanity is doing the same thing over and over again, but expecting different results”.  As background, VZ (and most MNOs) love the “walled garden” strategy.

Version 1(2004-Present). BREW platform from Qualcomm (dumb phones).

Version 2 Handset capabilities

  1. Verizon invested over $300M in GPS “platform”, an investment they planned to recover by charging for Apps that wanted to use GPS. RIM was the first to realize that it could not deliver consumer features at odds with what VZ would authorize.
  2. Firethorn was the first payment related application that VZ promoted. Objective was to limit all consumers to Firethorn as the only approved “signed application” where consumers could check their bank balance. Banks were each asked for $1M to allow for their customers to check their balances on this MNO controlled application.. yeah.. great idea (2007)
  3. Search. $600M exclusive deal w/ MSFT in 2009. Unfortunately for MSFT, Android was not included agreement and then VZ make “Droid” THE key marketing theme.
  4. I could go on.. but

Version 3 NFC

  1. Control SE (http://tomnoyes.wordpress.com/2011/02/03/isis-platform-ecosystem-or-desert/)
  2. ISIS. Consensus is that the carriers will keep plugging along at this for 10 years..  however without talent, retailers and handsets I don’t see how they can sustain investment.
  3. Create a new BREW.. handset platform that leverages NFC and secure customer data.. payment (ISIS) is just one of the applications. Note that most carriers are in midst of issuing RFPs for SE management (my vote is for Sequent here). The objective of this effort is to create a “secure platform” where applications can leverage customer data (for a fee).

Would you want to “play” in a walled garden? The owner gets to make the rules and take the rug out from under your feet (ie MSFT $600M). Where the star (ie Apple) is able to negotiate special treatment or go over the top without you ever being aware? No way.. you can’t run a business like this. I wouldn’t even want to play..

Carriers must think about value creation before they can think about control. Apple earns its margin from brand and experience… they are not forcing people into their store. For example, the Samsung Galaxy Nexus is an unbelievable phone… easily on par with the iPhone.. But the carriers won’t let it in the market unless Google give them the keys to the SE.  It’s just crazy…My 11 yr old son can guess what happens next.. Google starts selling the phone directly (which I bought today). As most readers know, the US handset market is a very strange place (handset subsidies and post paid plans). The rest of the world buys their handsets and selects the carriers based upon cost/coverage. What if Google and Apple were to subsidize handsets through marketing, as opposed to anticipated spend? If telephone calls and data were routed through wi-fi whenever available? What do carriers have left?

Every point of “friction” which carriers create.. FURTHER ERODES their future profitability as this friction improves the profitability and market opportunities for companies going above, around and under them. Carrier business culture and experience all surrounds the walled garden “control” approach. This control approach works well for Apple as it has developed an integrated value proposition.. It does not work for the carriers that offer connectivity. To expand beyond connectivity carriers must create new services.. the must become orchestrators of value.. not controllers of handsets. In other words they need to shift from a “permission/transaction/payment” paradigm to  one of discovery->need->->fulfillment. (see my previous blog).Attention US Mobile operators… today your trajectory is headed toward dumb pipes.  You cannot deliver value through control.. no one trusts you.. and you can’t sustain investments to compete against Google, Apple, Facebook, …

What should you do? Where is the revenue opportunity? It is in value orchestration. You have direct consumer relationships… leverage them for marketing, authentication, personalization, awareness. The good news is that Hardware will peak and reach a “good enough” stage. If hardware is a commodity, then brands will begin to deteriorate.. and value orchestration will shift further from the handset node into the Cloud. If any operator agrees with this.. then ask why on earth are you locking all of this customer data inside a phone (NFC) where it cannot be used or sync’d with the cloud.

I will get off my soap box now.

BTW.. AT&T I fully appreciate that you can disable my new Nexus.. please dont make me go to an MNVO.. just another point of friction.

Card Linked Offers Update

Without POS integration AND Retail data sharing this will not work.. the customer experience is terrible, as is the campaign’s restriction on basket level discounts. The ubiquity of cards is attractive.. as is bank data on “Store preferences”…. But both work to the detriment of retailers.

,,,,,,,,

27 March 2012

We see in the press that Google/MA have gone beta with Card Linked Offers, and Bank of America is  about to go live with “BankAmeriDeals”. I last gave an overview of this space back in November in my Card Linked Offers post. For those that haven’t seen it, there is also a must read blog by Reed Hoffman in Forbes on the subject: The Card is the new App Platform.

Here is my blog from 3+ yrs ago – Googlization of Financial Services – outlining data flow. My purpose is mentioning this blog is not to show how smart I am (as an alternate view is already firmly established), but rather to highlight how much my view on the opportunity has changed over the last 3.5 years. As I tell all of the 12 start ups in the CLO space.. if Visa couldn’t get this to work what makes you think that it will be easy for anyone else.

There is a CORE business problem I didn’t realize back then.. merchants don’t like cards and are VERY reluctant to create ANY unique content (offers) where card redemption is REQUIRED.  Further constraining the “capabilities” of CLO is lack of item detail information within the purchase transaction. IBM is the POS for 80% of the worlds to 30 retailers. Take a look at the 4690 overview here, notice what incentive solution is integrated? This was a 5 yr project for Zavers…

A story to illustrate my point on retailer reluctance. As most of you know POS manufactures like IBM, Micros, NCR, Aloha are implementing POS integration solutions similar to what Zavers has done. Most of the CLO companies above are paying the POS manufactures to write an “adapter” that will work within their POS and communicate basket detail information. (ISIS is rumored to have a 200 page Spec for this POS integration as well).  There is a very big difference between having integration capability, and a RETAILERS agreeing to use it (ie share data).  There must be a business value proposition for retailers to move… and I can tell you with a great deal of certainty.. Retailers don’t like the BANK card platform.

I emphasize BANK for a reason.. I was with the CMOs of 3 large retailers a few months ago. When asked what their payment preferences where, they answered without hesitation: Store Card. This is their most profitable product used by their most loyal customers (think private label). Do you think for a moment that a Retailer would deliver “incentives” to customers that are not in this group..  Remember, these PVL loyal customers also hold a number of other bank cards, and there is not much in the way of customer matching between data sets. I think you get my point.

As I stated previously, all offers businesses are highly dependent on targeting. Targeting is dependent on customer data, relevant content, effective distribution (SMS, e-mail, an App), campaign management (A/B testing, offer type, target audience, …). Campaign management is very dependent on feedback.  There are very few companies that can effectively TARGET and DISTRIBUTE.  The current group of CLOs is partnering with the banks to solve the targeting problem (example Catera/Citi, Cardlytics/BAC, …). This is further EXASERBATING the poor Retail adoption. Why? Here is what a CMO told me:

“Tom, lets say a consumer just shops at Nordstrom.. the card network and bank see that I just completed the transaction and now market to them … the advert is “go to Macy’s and save 20% on your next purchase”… Given that they can only offer basket level incentives this is how it must work… Tom do you know what will happen? The customer will return what they just bought and go to Macy’s and get it. How is this good for Retail?”

From an Ad Targeting/Distribution perspective, Mobile Operators certainly have an eye on this ball (mobile phone). But only a few companies like Placecast can actually deliver it for them. MNOs are truly messed up in this marketing space (within the US). If you had the CEOs of Verizon, ATT and ISIS in a room and asked “who owns mobile advertising”?.. ISIS would say nothing if both of the other CEOs were in the room.. They want it.. but no one will give it to them as they can’t execute with what they have in this space.  Verizon would say “many partners”… Their preference would be to sell the platform akin to their $550M search sale to Microsoft in 2009. So VZ wants a $1B+ Ad platform sale… who would compete for that business? I digress.. but what is in place today looks much more like a rev share… Internationally there are carriers with their act together: Telefonica and SingTel (just bought Admobi).

Let me end this CLO diatribe with a customer experience view. Let’s assume I have 12 CLO players.. each partnered with a different bank/network. Also assume that all are heavily dependent on e-mail distribution. I have 6 different cards.. and will be getting at least 6 e-mails per week with basket level discounts. Now assuming that I can keep track of which offer was tied to which card.. and use the card. I’m still left at the POS with a receipt that shows none of these basket level discounts (as they are “credited” to my account after purchase).

Without POS integration AND Retail data sharing this will not work.. the customer experience is terrible, as is the campaign’s restriction on basket level discounts. The ubiquity of cards is attractive.. as is bank data on Consumer “Store preferences”…. But both work to the detriment of retailers. What consumers will see in CLO for some time is the generic 10-20% off your next purchase that will also be available in direct mail campaigns… Let’s just hope that someone can work the double redemption problem…

My read on this for Google is a little different. Google is positioning itself as a neutral platform.. it can do Retailer Friendly.. Bank Friendly… MNO Friendly.. Manufacturer Friendly…  Each will have different adoption dynamics. Google’s objectives are likely: gain insight, be the central platform for marketing spend, be the most effective distributor of content, … . This offer beta would certainly seem to be a “bone” thrown to banks.. hey… here it is … good luck trying to make it work.

Apple and NFC?

Apple and NFC? I don’t think so.. my bet is 70% against. Great that Apple can keep us all guessing. Why put a 5th radio in the iPhone? AND hand carriers control of SE.

1 Feb 2012

Apple and NFC? I don’t think so.. my bet is 70% against. Great that Apple can keep us all guessing. Why put a 5th radio in the iPhone? AND hand carriers control of SE. There is just no upside for Apple here. NFC would not enhance their wonderful mobile customer experience…  it may even kill their Apple/App Store/Apple ID/Payment Instrument advantage.

It would be smarter if they would buy Square… payments belong in the cloud… not locked in the phone. All you really need at a POS is an Irrefutable ID. In a Square scenario, Apple could leap frog everyone in customer adoption and enable every iPhone owner to pay with their voice and GPS location ( Apple has payment instruments tied to every iTunes account). The gap in this scenario is merchant adoption, existing merchant processor agreements/hardware, and retailer reconciliation (if multiple processors). Apple, if I were you I would sit down w/ Square, FirstData, TSYS, … and see what could be done. NFC requires coordination of too many parties.. a late follower would be a much better place to be. Your top risk is that consumers will buy phones based on mobile wallet. Your short term strategy? I pay with my iPhone today (see pic). 

Don’t get me wrong, NFC can work.. but the carriers have proven inept at managing a platform business which would incent the participation of many businesses, allowing all to make money. Instead they operate as a toll bridge, but expect to take a portion of the goods in transit. If you operate as a toll bridge you are a dumb pipe… period.  It just does not take much intelligence to run a control business, sure it is complex to build the bridge..  But it even more complex to coordinate the logistics of the world’s commerce. The carriers focus on control is killing the prospects for NFC’s success, as they attempt to act like an orchestrator (requesting a % of goods in transit) but have the ability of a toll collector.

Commerce will find another path… one of least resistance. This is what Apple should do as well. NFC is just a radio… one whos 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 that are retailer and consumer friendly.  Bluetooth, wifi, gps, voice, facial recognition, sms, .. all can do the job NFC does.  We will not see harmony here over the next 20 years, particularly as the only payment instrument in a mobile wallet is a 300bps+ credit card.

Why is Japan successful? because they have a dominant carrier that built a business model..  same in Singapore and Korea… in the rest of world.. chaos will reign until someone delivers retailer and consumer value.

http://www.appleinsider.com/articles/12/01/30/mastercard_acknowledges_it_needs_apple_to_bring_nfc_payments_into_the_mainstream_.html

Related Blogs

 

Update 3 April 2013

My bet on next version of iPhone? Broadcom’s BCM43341 chip 

Broadcom has launched the industry’s first quad-combo chip. The BCM43341 combines NFC, Wi-Fi, Bluetooth and FM radio on one chip and, says Broadcom, “offers OEMs unmatched size, power and cost advantages.”

A second new product is a single card solution that pairs a BCM20793 NFC controller as used in the Google Nexus 4 with an 802.11ac (5G) WiFi radio and is aimed at high end mobile phones and devices.

Does that mean the next iPhone will have NFC? yep.. but not in the way we think about it today.

 

http://tomnoyes.wordpress.com/2011/02/03/isis-platform-ecosystem-or-desert/

http://tomnoyes.wordpress.com/2011/12/05/isis-delay/

http://tomnoyes.wordpress.com/2011/10/26/apples-commerce-future-square/

http://tomnoyes.wordpress.com/2011/01/26/apple-and-nfc/