The Directory Battle PART 1 – Battle of the Cloud

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. (V.me is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc. But what few understand is the implication for the physical payment world

11 May 2012

This week we had both Finnovate and CTIA going on, and behind the scenes the battle lines are being formed in a forthcoming “BATTLE OF THE CLOUD” wallet. I didn’t include wallet in the quote because Battle of the Cloud sounds so much more ominous. Perhaps I should take a page from George Lucas’ playbook and start with Chapter 4.

I’ve been talking about the directory battle for some time now (see Clearxchange post).  Who keeps the directory of consumer information? As I outlined in Digital Wallet Strategies: “ securing information AND giving Consumers the exclusive ability to control what is shared with whom is a challenge (beyond technology and trust). We thus have many limited “Wallets” that are constructed around specific purposes”.

This week we had Visa’s President tell the CTIA audience that Visa has moved beyond NFC to V.me (see my previous post on Visa Wallet). What is really going on? What is the battle of the cloud?

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. (V.me is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc.   But what few understand is the implication for the physical payment world. This is what I was attempting to highlight with PayPal’s new plastic rolled out last week (see PayPal blog, and Target RedCard). If all of your payment information is stored in the cloud, then all that is needed at the POS is authentication of identity (see blog). Remember US  online commerce is $170B/yr, physical commerce is $2.37T (not including FS, Travel/Entertainment).

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives (new digital coupons).  Another example is Paypal’s ability to selectively assume settlement risk on some transactions as they route through low cost ACH, or even allow customers to use BillMeLater to selectively convert certain purchase to loans AFTER THE FACT.  In these 2 examples, traditional payments revenue will be significantly disrupted by: lower cost transactions, competitive credit terms (each purchase), and incentives tied to payment type.

But do consumers really want to store all of their information in one place? With one entity given the ability to see all of your spend? For an mCommerce transaction, there is nothing I hate more than having to type in my name, address and card number in that tiny little screen.  Most of these mCommerce solutions (like V.me) are little more than an “autofill” where the merchant checkout page leverages API integration to the cloud service to retrieve user information (see diagram here). If I’m on my phone, my carrier already knows who I am, so seems fairly logical for them to help me with the autofill. This is a reason I’m now a big fan of Payfone. I could also see why it makes sense for Apple and Google. But why Visa? Does it make any sense at all for Visa to hold my Amex card?  Oh.. let me cast a few more stones on ISIS/NFC.. that payment instrument that locked in your phone.. yeah it can’t be used for the online purchase. Perhaps someday someone will write a secure NFC mobile browser plug in to extract data from the SE.. but that opens up a whole new can of worms.

Today’s online merchants are getting a very small taste of the war as they are asked to integrate auto-fill plug ins (Paypal, V.me/CYBS, Payfone, Google, soon to be Apple). Merchants should get on board with all of them, as they do represent a tremendous improvement in customer experience, and you may be able to squeeze some free marketing/implementation money from each of them. However, the cloud battle at the physical POS is still a few years off, as existing card products have a substantial advantage in risk modeling/fraud. This is where Square is taking a lead, as it has the best consumer experience hands down. Low volume merchants really should assess whether they need a specialized POS system, as the parameters for selecting one have shifted from ISO/Processor/Cost/Acct Recon/Book Keeping to Sales, incentives and customer experience.

Battle starts in mCommerce/eCommerce

My guess on timing of V.me is driven by knowledge of Apple’s impending plans to “extend” its iTunes account to payment outside of the Apple ecosystem. Visa sees this network risk and is in an all out war to protect its network, by leveraging its CYBS asset online. The banks have worked on a directory concept for quite some time. The Clearing House (TCH) built a working system called UPICK to solve the problem of consumers giving their RTN/ACCT# out in the open.. assigning a virtual number to the account. A sort of “virtual account number” that could only be translated by TCH.  It never took off, because ACH fraud was low and banks were much more excited about having merchants accept cards as payment.

Retailers are not silent participants to this war.. their champions are Target, Tesco, Amazon, and Rakutan. I hope Amazon will finally dust the plans off of One Click expansion. Other retailers are also aligning to assess creation of shared cloud infrastructure.  Sorry I can’t comment more. Similarly MNOs are also in the cloud game, for example Payfone may be one of the best services in the market..

Who are the players in the Cloud [Payments] War?

The initial battle will be in mobile/online purchases.

  • Banks: V.me, Mastercard,
  • Platforms: Apple, Google, PayPal
  • Retailers: Amazon, Rakutan,
  • MNOs: Payfone, Boku, payforit, billtomobile, …

Most confusing is that there are few alliances.. it is many against many.

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

PayPal and Home Depot

There are few “payment problems” at the POS. For example, how often do you go to Home Depot and forget your wallet? Or go home empty handed because Home Depot wouldn’t accept your form of payment. Payment in and of itself is only the last phase of a long: product, marketing, retailing, pricing, selection, distribution and delivery buying process.

10 Jan 2012

Historically I’ve been a big PayPal fan, and still am. I have a PayPal Debit card that I used this morning… and use PP every chance I get online. The online checkout process is just fantastic. In the good old days I earned more money from my PayPal money market then I did from my bank (savings and DDA), so my preference was always to keep a balance with them. Sadly this is no longer the case.

In my last post on PayPal (PayPal at the POS – Nov 18, 2011) I described PayPal’s challenges at the physical POS:

PayPal has no tools in its shed to deliver incremental value within a PHYSICAL commerce orchestration role.

There are few “payment problems” at the POS. For example, how often do you go to Home Depot and forget your wallet? Or go home empty handed because Home Depot wouldn’t accept your form of payment? Payment in and of itself is only the last phase of a long: product, marketing, retailing, pricing, selection, distribution and delivery buying process. Most retailers strongly believe that the cost of this last “payment” process has been disproportionately high relative to the value it brings. This is the key strategic battle being fought today in “mobile payments”. Banks and the card networks are trying their best to make “mobile payment” a premium service tied to 300bps+ cards… while retailers and manufactures are looking for solutions that will enable them to create new buying experiences. PayPal’s solution may bridge this transaction cost gap (blended rate), but does very little  to address the physical buying process.

In the virtual world eBay is the lead orchestrator in this process (on its marketplace), as is Amazon. Key to Amazon’s and eBay’s ability to serve, as virtual world orchestrators, are their ability to control the buying process (end-end) AND the data.

However in the physical world, the buying process  is highly fragmented. The value that PayPal brings to Home Depot today is based upon their current product capabilities (payment + ?) and customer base (100M+ globally). If you were running store operations at Home Depot, what are you trying to accomplish with PayPal?

  • Decrease transaction cost? Perhaps Home Depot has a high credit transaction mix and PayPal’s 200bps (my guess) cost is a net savings
  • Increase basket size? Can Paypal incent customers to buy more
  • Increase total annual sales? Get existing customers to buy more over the year
  • Increase gross margin? Example set prices higher on shelf, as PayPal customers will get unique custom pricing
  • Increase marketing effectiveness? Drive sales of targeted merchandise?
  • Increase Loyalty? Decrease trips to competitors, increase share of wallet, …etc

I’m fortunate to have led teams at Oracle and 41st Parameter (a KP start up) that worked with some of the World’s largest Retailers (online and physical)….. It is based on this perspective that I see the following business issues with PayPal-Home Depot approach:

1. Incentive to use payment instrument. As a consumer why would I want to pay with my phone number? I know if I use my Amex card I get points.. what do I get here?

2. Home Depot value. What are the metrics around the pilot and what is success? I can’t imagine how this will drive sales or margin. eBay does not market, and if they did will consumers see the price for item on eBay? eBay is a competitor to most physical retailers.. a hyper efficient marketplace. eBay has few tools to market and influence a customer during the buying process..  I’m sure PayPal has develop some very cool instore tools.. but hey Home Depot could do that themselves.

3. Consumer protections. The reason I use a credit card at Home Depot are my Reg Z consumer protections. What happens if I have a dispute? Or want to return merchandise?

4. No need for PayPal. This is actually my number one reason.. Home Depot will eventually wake up and realize that they can keep the phone number based checkout.. but use it to ask the customer if they would like to pay with the same payment instrument they used last time. There is no need for PayPal anywhere in this process. This is what happens for me at my local grocery store today (Food Lion).

Make no mistake, I do like the idea of customers giving their phone number at the POS…  but it is the retailers that should use this data to make an informed decision on payment instrument choice AND loyalty incentive (example Target’s decoupled debit 5% back, or Payfone/Verizon with VZ incentives).

As a side note, Patrick’s comments on my Galaxy Nexus blog led me to update my disclosure, and restate the obvious: my views are biased (no secret to my Obopay and Square friends). Today’s blog is consistent with what I have been telling eBay’s institutional investors.. there is plenty of runway for PayPal globally.. but physical POS is a distraction and they don’t have the physical retail team to tackle it. There are no payment problems at the POS.. per yesterday’s blog, the REAL opportunity is in rewiring commerce in ways which enable manufactures, consumers and retailers to interact.   eBay’s virtual marketplace is a negative to most physical retailers.. as is Amazon’s.  Retailers are looking for solutions which will increase sales and decrease transaction cost. A platform which begins with a new marketing  paradigm (ex. Google) is much more likely to draw participation, particularly in a pay for performance model.  If this hypothesis holds, what companies are best positioned to influence a customer before they buy?

Also see Googlization of Financial Services.. 

Payfone.. Verizon’s new mCommerce phone number based credential storage and authentication service

So why do I call this service “mCommerce phone number based credential storage and authentication service”? Verizon already has one wallet (ISIS).. they don’t want to confuse the market…

MoPoNuBaCreSAS (explained at end of post)

update Aug 2013

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General architecture below is correct. Think the first deployed “use case” will be around mCommerce. An “autofill” function similar to V.me and Google Chrome. MNOs are in a much better place to deliver this as they have information on EVERY handset.. and they can AUTHENTICATE with handset information. This is my FAVORITE MNO led payment effort in the US. Online merchants should adopt this without pause.. think you will see immediate conversion impact. See overview here http://payfone.com/1-touch-checkout/

payfone

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5 August 2011

Previous Post

I ran into a Payfone exec last month.. while stuck together in an elevator…“hey you look familiar”.. “I’m Tom… “ “You’re the guy writing bad stuff about us”… “I’m never afraid of being told I’m wrong.. tell me what is wrong”…   After spending a little time with Payfone, I’ve changed my view.. If US users can be convinced to pay with their phone numbers, and merchants can be convinced to implement the Payfone mobile payment API.. this may be a very good way to go.

What did I get wrong in previous post?

  • It is not only about P2P (at least in US).. but about mCommerce. Don’t know if I got it wrong, or whether their strategy has evolved… but today their focus is on mCommerce leveraging phone number for payment.
  • Buying physical goods with their phone number.. hey in the UK payforit is big… particularly for small purchase. VZ probably wants to have this happen because they see a very rough road ahead for ISIS.. not only will it take consumers buying handset.. it will take 6 parties to align on the value prop.. AND execute.
  • Substantial advantage in risk/fraud when carrier is involved in validation of credentials. Remember, my previous post estimated that MNO KYC could be a $5B market opportunity. Will Payfone take out other SMS verification solutions like Authentify?

My picture is based upon general market G2 (.. note I did not say “intelligence” as it may infer I have some).

What did I get right? The merchant integration challenge … I don’t see how AMEX, Payfone or VZ will be able to offer a compelling merchant value proposition. Amex is not exactly a processor of choice… Ticket sales seems like a sweet spot but hardgoods?  Re: Digital Goods.. My sources tell me that the carriers are currently doing about $600M a year in old fashion digital goods (think ringtones). Apple is doing about $1.6B in App Store, and $4.8B in other Digital Goods (previous post). Given that neither legacy digital goods (ring tones) nor App Stores need this functionality what are the physical goods use cases? Best Buy? Gap? Payforit found a great sweet spot in subscriptions and paid content (read the newspaper, video), ticketing,   …. Similar services in Japan also extend into vending.

So why do I call this service “mCommerce phone number based credential storage and authentication service“? Verizon already has one wallet (ISIS).. they don’t want to confuse the market… (great.. really great attempt here.. we would never call storing payment instruments and sending them to a merchant a “wallet”..  )

Oh.. BTW.. Citi and Verizon are both working on something substantial.. I will have to think of a new acronym for it.. how do I innovate a new word for “Offers”? Digital discount delivered by an MNO with redemption verified by a large multi-national bank? …. question remains who will actually create campaigns.. so need to put those words in there too somewhere. Suggestions appreciated.

Verizon and Payfone (update)

Message to MNOs. Start with a value proposition to a customer.. NOT with a product. If you can’t deliver the product (which is very likely), then focus on taking a role in orchestrating the value delivery (examples: service discovery, authentication, merchant mobile enablement, community ratings, ) . Verizon’s strategy is product focused… when they loose in products their brand deteriorates and they start to become a dumb (fast) network.

Updated 15 June

WSJ Friday: Payfone and Verizon

I’m trying to imagine life as a Verizon customer. From a customer experience perspective, I have to register my credit card in the Google Android Marketplace for app purchases.. but now I also have to register it again at Payfone if I want to pay for physical goods on a mobile phone.. and again for the mobile NFC wallet (to give the TSM access to the card for registration in SE), I also need to register for Bill to Mobile. Thats 4 different payment types on one carrier.

  • ISIS – Physical Goods at POS through NFC
  • Bill to Mobile – Digital Goods
  • Payfone – Physical Goods in mobile browser
  • Android Marketplace – Android Apps

I doubt if there is much of a payment strategy behind all this.. It looks to me as if Payfone strategy has morphed just in last 2 months, from digital goods to physical goods. Payfone has completely underestimated the merchant integration challenge.  Competing in this mobile browser physical purchase space:

  • PayPal
  • CYBS/Visa Wallet
  • Google Checkout
  • ?Amazon (they have the capability and the user base..)
  • Moneybookers
  • payforit (UK consortium), Belgacom’s BICS, Bharti’s pre-paid card, …

What is the value prop that Payfone will offer merchants? Do merchants really want the digital ecommerce payment process to be completely differently than a digital mcommerce payment process? HECK NO.. little things like fraud, settlement, reconciliation, customer support, returns, … Payfone has no clue on what it will take to run the merchant side (which is why they probably don’t have a reference customer here). Payfone’s team has offered me a chat to set me straight on all of this… which I will take them up on at end of June… I told Rodger that I’ve been wrong before.. and not afraid to admit it. On this merchant piece… perhaps Amex will do the merchant acquisition for them. If this is true then there is a real strategy issue… merchants love for Amex is at the same level as their fondness for the IRS or tax regulations…

Payfone looks great on paper and I’m sure Verizon wanted to get something moving they could control and gain leverage with. Little Sprint is now 12 months ahead of Verizon.. and ISIS. It must be frustrating.

Message to Verizon: the real challenge for you is managing customer behavior.. and creating a well designed payment product that works across all of these areas. You are not a payment organization.. Apple will win this design war on iPhone.. and Google will win it on Android…. Win means delivering real consumer value (and retailer value) in an integrated cross channel experience.  This Payfone partnership will create a real headache for ISIS in merchant integration…. You will have ISIS working with top retailers to integrate NFC … then your Payfone (and bill to mobile) partners requesting another integration for mCommerce… each with separate settlement processes.  I can’t imagine how you will manage the customer communication and marketing…

Message to MNOs. Start with a value proposition to a customer.. NOT with a product. If you can’t deliver the product (which is very likely), then focus on taking a role in orchestrating the value delivery (examples: service discovery, authentication, merchant mobile enablement, community ratings, ) . Verizon’s strategy is product focused… when they loose in products their brand deteriorates and they start to become a dumb (fast) network.

As a side note. I just heard today (need to find the source) that 40% of all mobile purchase transactions were done via wi-fi. This would intuitively make sense as its hard to do this while you are walking around.. and given network coverage of AT&T/ iPhone in NYC alone no one would have the patience to complete multiple screens.

Amex: Payfone and Serve

Most of my contacts are just shaking their head at this one… Payfone? Not in the US.. no way. The carriers have complete control to shut this down. If Payfone would have just spent a little time with the MNOs they would have seen the flaw here. The only option I see for them is to give this thing to Roamware and let the carriers brand it and attempt to integrate it within their current wallet plans OR focus on merchant acquisition for billtomobile payment.

Updated 7pm Eastern (last paragraph on AML)

Amex: What are they “Serving” up? Marketing Hype

NFC Times: Amex Mobile Checkout Service

Jim McArthy, Visa’s Global Head of Product gave an excellent overview of the market in his analyst call last week (see here). His quote on Serve  “Virtual pre paid card” from Revolution money… I completely agree. Serve is a small evolution for revolution money.. and for background see previous post.

What about Payfone? Well the only unique thing about Payfone is its clearing network, most likely Roamware’s inter-carrier settlement network. Roamware, Mach, Belgacom BICs , … etc have agreements with most carriers globally to allow for roaming access, payment and clearing (aka SS7, B-ICI). I love Roamware.. a tremendous company growing at 500%+ per year with a stellar team. IPO should be happening this year. None of their growth is dependent on this Payfone thing.. but it is a good idea.. ON PAPER.

While all the technical and architecture pieces are there to make Payfone viable (example all of Roamware’s carrier agreements), NONE of the carriers are anxious to let another brand and another service ride on their rails. Remember Inter Carrier Settlement (ICS) is for phone charges.. one of the biggest carrier headaches in mobile billing is customers calling to complain that Zong put a premium SMS on their bill for some gaming top up.. of course it was actually your 12 year old that did it.. The US carriers got fed up with this and all committed to billtomobile (see related post), I just had dinner w/ Paul Kim Tuesday.. tremendous executive. The summary of this post is that Billtomobile killed the Boku/Zong models.. and created commonality across US carriers. Carriers take almost 40% of premium SMS fees.. can you imagine a physical goods merchant paying 40% interchange.. ? on a Pizza?

The picture I’m trying to paint is that carriers love digital goods, they have committed to billtomobile (in the US) and are just starting to “think” about expanding on the $25 limit and physical goods. What makes Payfone think that any carrier on earth would let them lead this? This is NOT a technical problem for the carriers.. they already have all of the capability to turn on mobile payments to any merchant. They have the wallets as well. Not only would this create mass customer confusion.. it would also impact carrier led initiatives for NFC at POS.

Most of my contacts are just shaking their head at this one… Payfone? Not in the US.. no way. The carriers have complete control to shut this down. If Payfone would have just spent a little time with the MNOs they would have seen the flaw here. The only option I see for them is to give this thing to Roamware and let the carriers brand it and attempt to integrate it within their current wallet plans OR focus on merchant acquisition for billtomobile payment.

UPDATE

ICS/SS7 has well defined transaction types (SMS, Data, voice, …). Payfone does not just “throw” a transaction on the SS7 network without either the sending carrier and the recieving carrier agreeing to the transaction. There is first an “authorization” process before any transactions are even allowed. Example: does this customer have an international plan? are they a pre-paid? what is their limit? Voice only?

Recieving carriers can deny payfone transactions. Of course a sending carrier may be successful in “masking” the transaction so that they look like a voice charge.. but this would certainly fall afoul of both regulators and the ICS agreements. Remember this is money transfer cash out, which will ALSO be covered by numerous banking/MSB regulations. As with any money transfer business, KYC is required on both sender and reciever in most jurisdictions. Who maintains regulatory responsibility for KYC? Carriers? NO WAY.. is Payfone doing a KYC on its senders? RECIEVERS? Again, this is the beauty of PayPal.. both senders and recievers have registered and accepted terms.

There are few short cuts in payments.. this solution is technically elegant, but complicated when taking into account carrier plans and regulatory issues.