Short Blog – Paypal / Vodafone

News today

Vodafone-PayPal Payments Go Mobile in The UK

My summary view

  1. Vodafone is linking all cards in Google like “Proxy model” w/ card issued by  R. Raphael & Sons plc
  2. Vodafone is able to see all transaction data and deliver rewards/loyalty separate from card issuer.
  3. Paypal is virtual card (?Mastercard) at POS
  4. Vodafone has enabled a contactless SIM that can operate separately from the VodafonePay application with one default card (see Vodafone Smart Pass)
  5. TFL/Oyster accepts various external networks (see list). Paypal operates as a virtual V or MA in this circumstance.
  6. Revenue for PP is 30/40 bps less Vodafone and program manager costs.

The Vodafone Pay Terms give most of the meat

“For each funding source you wish to use with Vodafone Pay, we’ll issue you a prepaid virtual card (which we will store securely on your SIM card). By ‘funding source’, we mean a UK sterling denominated debit or credit card that was issued to you by a UK-authorised bank or an account
that you hold with a UK-authorised bank or your PayPal e-wallet. You can link up to 5 funding sources via the Add a Card feature. The virtual card expires when your funding source does. […]

Because the payment goes from your funding source to your virtual card before it is completed, you may not get the same benefits (like loyalty points, discounts and card protection) as you get when paying directly with your funding source. The funds loaded onto your virtual card will not earn any interest”[…]

We, the issuer or your virtual card, are R. Raphael & Sons plc (Company Registration No. 1288938) with our head office and registered office at 19-21 Shaftesbury Avenue, London, W1D 7ED.”

Acceptance – Part 1

I haven’t written much on acceptance over my 9 yr blogging career for one simple reason.. I was never “in” that side of the business. Given how much is going on in here I can’t leave it out any longer. Acceptance at the POS is a big topic, I see the following areas: Continue reading “Acceptance – Part 1”

Browser Tokens – Payments in OS Part 4

My last articles on this topic were
I’ll forgive you if you didn’t see the big news out of Google I/O. There is a MUST READ article in Android Police that is spot on. Summary? Google (Chrome/Android) and Apple (Safari) are ready to integrate payment tokens in the browser.. Buy buttons will be integrated into ads, product listings, or a single “pay” button with no subsequent user information to fill out “quasi one-click”. From Android Police

Continue reading “Browser Tokens – Payments in OS Part 4”

Payment in the OS – eCommerce/mCommerce Converge

28 Dec 2014

I hope everyone is having a wonderful holiday. Sorry for the delay in blogging, capital raising takes much more time than I had anticipated. Hope to tell you more about my NewCo in January. So much has happened since Money 2020, next week I will write a recap blog in prep for my 2015 predictions. Today’s blog is focused on “mobile” payments and platforms (iOS/Android)

I define 4 categories of mobile payments:

  1. Point of Sale. The phone used at a physical retailer
  2. mCommerce. eCommerce on your phone: buying something from a website in your mobile browser
  3. In App Purchase. Normally a subcategory of mCommerce, payment within an App (think Uber on iPhone). Only worth breaking out because ApplePay does this today.. and not above.
  4. Digital Goods. Games/Ringtones/Music/Apps (not in scope for today)

Point of Sale

Think NFC.. Not a focus for today.. but a great article from David Evans Apple Pay is Fizzling provided some key numbers. Only 4.6% of iPhone 6 users in a store that accepted NFC/ApplePay used it. Do you realize how small a percentage of use this is (4% of 3% of customers)!? If only the mainstream press realized that “50 new banks joining ApplePay” does NOT equate to usage. My bank issuer friends have confirmed what I’ve been saying.. there is no value proposition here.. and my volume estimates are accurate. Why? ApplePay does nothing beyond what your current plastic card does today.. Consumers just don’t care and Apple has made no effort to work with retailers (to promote at POS).

It would be great to know what NFC payment volume actually is, but the numbers are so low no one wants to talk about them. Overall NFC payment volume has gone DOWN in 2014 (from 2013) due to CVS, Best Buy and 7-11 “terminal configuration changes”. There are approximately 270,000 US locations which accept NFC, of which 100,000 are vending machines. My estimate for US Contactless Payment volume

  • 10% of consumers (20M active phones/wallets to 200M Adults)
  • 4% usage (very high)
  • 2.5% of retailers accepting (150k/6M, excludes restaurants)
  • $2.4T US Retail spend (ex Auto, oil/gas, Fin Ser, Restaurants, Travel)

———————

            $240M (1/100th of a % of retail sales)

I can’t believe I’m wasting time even writing about this number (my real guess is $100M). Can you imagine finding a way to make this PROFITABLE across 12 different suppliers?!

If Apple had 100% of this volume their total ApplePay revenue would be $600,000!! (25 bps). No wonder banks signed that agreement. When I went to Google in 2011, the first thing I told Osama was “run away from NFC”.. everyone I’ve known and loved has lost their lives in this NFC stuff. You could do everything right and it still wouldn’t work (see 12 party fur ball). NFC/Contactless may be very Hot in London, New York, Hong Kong, and a few other Cities (high density, mass transit, cabs, high affluent…) .. but the rest of the world is very very cold.

My analyst friends are telling me that 5 retailers will “bolt from MCX” to allow ApplePay. I told them what we will probably see is a few of them adding the option within select markets (like New York and SFO.. ) but obviously the retailers are telling the truth.. Apple consumers are not beating down the door because of the service. Consumers just don’t care (4.6%).. ApplePay .. just like all things contactless… is only “buzz”. My rule of thumb holds: Behavior Change requires at least a 20% increase in value (unless you live in NYC).

mCommerce/eCommerce

What is the difference between mCommerce and eCommerce? If you bought batteries from Amazon on your iPad while sitting in your living room?… A: _____________? (mCommerce.. !!) It makes little sense to break mCommerce out as a separate category from a consumer behavior perspective.. but it makes TREMENDOUS sense to break this out for an analyst platform view.

Total eCom/mCom sales in the US are approximately $180B/yr (See US Census Data). Note that this is a MUCH bigger payment segment than the $0.24B POS market above. Within eCommerce, there are the BIG 3: Amazon, Visa/Cybersource, and eBay/Paypal/GSI which account for over 65% of volume (ex services, my estimate).

There is massive change of consumer behavior within eCommerce over the last 4 years, as reported today, Amazon see’s 60% if volume going through mobile! Quite a tremendous change from the 5% Amazon outlined just 4 years ago (see article). In 4 years we have moved from a model where 95% of  US consumers bought online on a Desktop.. to an environment where 60% are buying from an Android or iOS device. Now you start to see the strategy drivers for: Apple, Google, Paypal (Braintree), Visa (Checkout) and Amazon (firephone) moves here.

Historically eCommerce payment services focused on the ability to manage fraud, as merchants held all liability in a Card Not Present (CNP) transaction. As such, payment service providers managed card acceptance and also provided fraud management services (hence their pricing of ~340-~600bps vs the card present MDR for CP of 160-180bps).  Paypal’s service was the first of its kind to allow small merchants to accept cards, as the big banks had no tools to manage CNP fraud. All the large eCom specialists became VERY VERY good at managing fraud, building custom infrastructure to assess buyer patterns, and the device which the consumer is purchasing from to score transactions. Today most of their fraud rates are under 8bps (Paypal still charges 340bps).

Move from Fraud Management to Identity

In Europe, Visa and Mastercard shifted liability within eCommerce transactions onto banks in 2006 (see 3DS a Collaborative Path to Failure). This did NOT work out well for all, as the technology was highly flawed. The US never had this facility… a good thing.. and the state of the art in fraud management stayed within the big 3. For more background on this see Authentication in Value Nets. However the billions of dollars invested in building fraud management assets are being rendered useless by identity management and authentication. This is a HIGHLY disruptive force! Existing payment intermediaries have built their position on owning the consumer and managing risk. Mobile changes both!!  I will drill into this next week.

As I outlined in Perfect Authentication: A nightmare to Banks, and Who do you Trust, the ability to authenticate a consumer is far in advance of what fraud systems do. As Ross Anderson said at the Federal Reserve “if you solve for authentication in payments.. everything else is just accounting”. This statement does hold for the credit risk side.. but it does for the payments side. This is what is changing with mobile. From my blog: apple-biometric

The “KEY” [prerequisite] in value orchestration is owning the Consumer relationship. Therefore Identifying and Authenticating the Consumer is the first, primary, service that must be owned by a platform.  What was a separate “Trusted Services Manager” in the NFC world has been co-opted by platforms which will take a proprietary route. …etc. There is an all-out war going on for the Trust role: Banks (see Tokenization), MA/V, MNOs, Samsung, retailers… everyone realizes this is the “key” to unlocking future value in the convergence of the virtual and physical world.

The impact of mobile and identity on eCommerce is easy to see, as the more “platforms” know about you can be used within the device you use (and trust) the most. Mobile’s impact is also hitting the offline physical retail world, but in a much more experimental phase as the platforms, online retailers and aggregators don’t work within this space (yet).

A new rate tier: Cardholder present

This “new” form of mobile authentication will enable networks to create a MUCH improved version of VBV/MSC, shifting liability onto the bank with an interchange rate between CNP and CP. Who can take advantage of this rate and liability shift? Entities that can authenticate the consumer on the mobile device (Apple, Google, ?MNOs), securely manage a token and broker identity with other parties (see Authentication in Value Nets).

How will Visa/MA roll this out? There are many, many lessons learned in the prior 3DS (VBV/MSC) roll out. Already V/MA have been talking to major issuers and eCommerce service providers. Token issuance is currently a bit of a hang up as the issuers want to get their own TSP services up and running, and the Google/Amazon, … want to run their own TSPs. If everyone would agree to use the V/MA TSP services this could happen quite quickly. But because this is NOT the case, ApplePay and Visa Checkout seem to be the only services positioned for this move.

As I stated previously in my ApplePay blog, when this new rate tier hits, it will free Apple (and others) to transfer the token to the merchant across a greater number of protocols. In store this means that NFC will compete with a BLE experience, with NFC carrying a CP rate and others carrying a Cardholder present rate (and bank liability) that is very close to the CP rate.

Paypal has no position here.. as payments move into the OS.. they don’t have one nor do they have the eCommerce “portal” of Amazon where consumer’s begin their product search.NFC Change

2014 – Payments Part of OS:

Per my July 2013 blog Payments Part of OS, both Apple and Google are integrating payment capabilities into the OS. Where Google Wallet detractors deride Google because of its lack of progress in payments, I believe they are shifting focus to what really matters: establishing Android as the core commerce platform. In this future world you don’t really care about payments.. they just happen. With great authentication your information is stored in the cloud and you choose what information and payment instruments you want to exchange with a retailer.

We see the first hints at what this will look like in this WSJ article Google Shopping to Counter Amazon.  Note that this is not Google payment… this is Google SHOPPING. Let me emphasize.. the battle is NOT about payment but about delivery value to consumer within Commerce. The focus for innovation investment TODAY across banks, retailers and service providers is Android as the iPhone platform is locked down. Sure Amazon and Bank of America are leveraging Touch-ID but this requires little effort. The key for Commerce Innovation and Value Orchestration is to get 1000s of companies engaged … Apple’s efforts are 95% consumer focused.google-shopping

This consumer focus is paying off for Apple as they are 3-5 years ahead of Google (and Android OEMs) in handset hardware/SW. However, Google and Amazon are 5+ years ahead of Apple in orchestrating commerce value. Value orchestration is a network business and entails enabling millions of partnerships where consumers and businesses are incented to participate. Apple isn’t exactly known for making money for anyone but themselves. Apple has a MUCH greater ability to manage identity and trust and should be pursuing a strategy of consumer focused identity brokering (see Brokering Identity, and iPhone 6 – Apple’s Platform Opportunity) but are challenged organizationally as payments/identity are deep within a hardware culture, a world where neither are capable of creating partnerships.

Bank “payment” strategy seems to center on control or redesign of existing networks and nodes. For example, Issuers are attempting to leverage old nodes (Cards) and current market position to form a new orchestration role (see Card Linked Offers). Jamie Dimon  created a new Data Division at Chase run by Len Laufer with a bifurcated visa*net. What banks forget is that their role is that of a neutral broker, they were NEVER the starting point for commerce (their network and nodes are weak). The harder banks work to build barriers to entry, the greater the value of finding ways around them….(think bitcoin).  Or in the case of payment in the OS.. making unique assets (fraud) a commodity… the NATURE commerce is changing and the role of payments, how they deliver value, is changing too.

Think about it this way: did you buy an Uber ride on your iPhone because it took your Visa card? Did you even think about Payment? Same with Amazon… did you shop there because of payment? Payment is becoming a back end commodity service and the mechanisms for banks to differentiate are getting smaller. There are many implications for small business. For the last 20 years much expertise has been needed to create an online store, particularly in accepting payment. All of that is changing, if I solve for fraud, integrate my inventory into search and product discovery, merge customer contact and loyalty into advertising and payment, all with standard services… it becomes EASY.

For too long banks have leveraged your relationship to create value for themselves, hitting you with a mind numbing array of products and fees. This is their network legacy.. it is bred with inefficiencies. The bank goal was not simplicity, it was complexity and margin. Products like Apple, Square, Stripe, Paypal, Amazon, Poynt, Tesla are beautiful in that they make the complex appear simple.

ApplePay Expands to Browser

As I outlined above, the key trend in commerce and payment is the move to “mobile”. Today Google wallet works with Google chrome and app store for auto fill and checkout. Expect to see Google make authentication within Chrome, android, and apps much tighter, with Chrome becoming a cross device focus.

Today 90% of my payment friends agree that Apple’s REAL win within the next 2 years will be ApplePay in eCommerce/mCommerce. Today ApplePay’s focus is on in App purchases only. I expect to see ApplePay expand into browser based payments within 6 months or so. Apple may be first to market with the “Cardholder present” function given that tokens, authentication and bank agreements are already in place. From a merchant perspective Apple will offer a free API (akin to autofill) where Apple tokens and necessary consumer information is passed. Amazon Payments and Google already have this capability, but have not yet implemented tokens, biometrics or have bank agreements.

Apple’s greatest asset is its ability to change consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). Apple’s reputation is well deserved and earned “the hard way” by remaking: phones, music, mice, computers, apps, …etc.  Through consistent delivery of value within fantastic hardware delivering great (and fun) consumer experiences they earned trust for their products and brand. Consumers using Apple’s in app (today) or in browser (future) don’t even think about using payments… it just works.

mCom/eCom Convergence

When will we know it happened?

  • When neither consumer nor merchant had to do anything unique to support an online sale.
  • On phone, in app, in browser.. they all just worked and no one even thought about it.
  • We used the payment instrument of our choice.

Apple has already arrived at this state with in-app ApplePay. From a technical perspective, key convergence measures are:

  • Payment is treated the same regardless of channel.
  • Handets, platforms, and networks can pass information, identity and trust.
  • Banks accept that consumers can be authenticated without physical presences.
  • Developers leverage platform payment services with ease.

Who is impacted?

Paypal. What are paypal’s assets today? Risk management, consumer accounts, DDA Funding,  a few merchants. Apple, Google, Amazon, Facebook already have the consumers. The paypal risk management assets are worthless in a new environment. DDA funding looses importance as merchant costs for CNP fall from 340bps to 150bps. What do they have left? Let me know your answer..

MA/Visa. Visa/MA wins when there is card volume. Making payments part of the OS and giving consumers choice of payment instrument is a HUGE win for Visa/MA. As payments move into the OS so does V/MA. They become infrastructure. The losers? Well card issuance costs, risk management costs, fraud management costs, merchant integration costs all start moving to 0.. which means big margin compression for everyone else on the network.visa-checkout-ios-devices

With respect to eCommerce. Visa checkout/CYBS has substantial volume. They can adapt to tokenization quickly, but unclear how they would manage authentication.

Issuers. Imagine loosing all the airline CNP revenue? I don’t see an upside for issuers in this. They have a very poor ability to influence the network and are not well placed to serve in the trust identity role as consumers leave the branch and interact with the bank less often through remote channels. Banking is becoming a commodity service as well (see blog). You should have heard the squeal on the ApplePay agreement.. never before have Banks had something like this handed to them “take it or leave it”. Given the NFC volume above banks may have written if off. But this could turn out to be a big Trojan Horse as this tokenization expands into CNP/Card Holder Present. I believe their biggest fear is that Google will look to follow the model.

Merchants. Merchant that can sell or engage on mobile: Big winners.. mobile conversions, decreased fraud, liability shift to banks, changing consumer behavior. Merchants that are stuck in bricks and mortar.. no change.

Google. Big win. The only company that is cross platform/device. Buying in Chrome or in Android is seamless. Challenge is to move buying “search” back into Google from Amazon. The other advantage to convergence is the ability to close loop on behavior within the mobile/ecom process.. helping google advertising become even more effective. Google’s challenge is in Enterprise integration. Their engineers don’t like working with anyone else’s code. This is where Microsoft and Oracle are headed… helping enterprises engage consumers.

I propose the following metrics to measure/rate “Commerce Platforms” :

  1. Frequency of consumer touch (per day)
  2. Commerce transactions $/day
  3. Number of businesses you work with * the average time spent in managing in store experience…
  4. ??

Other Blogs

Payments Part of OS: What does that Mean?

Big Changes to NFC: Payments as Part of the OS

Stage 4 Evolution – Distributed Innovation,

ApplePay – eCommerce Distruption

iPhone 6 – Apple’s Platform Opportunity

 

Paypal at Crossroads (? buying Blackhawk)

25 June

Big things are in store for my favorite eCommerce payments company. Really, I do like Paypal. I may ding them on their POS strategy… as it makes no sense at all… but I love Paypal online.. the “original” ecommerce payments solution that adds value to merchant and consumer. In 98/99 Thiel and Levchin were the first to dream up digital wallets, and first to solve a REAL problem of card acceptance online for small retailers. Perhaps even better than the great Paypal PRODUCTS, were the great PEOPLE that grew out of PayPal.. that have done soooo many great things: Peter Theil, Max Levchin, Elon Musk, Keith Rabois, Premal Shah, Osama Bedier, Amy Klement, Steve Chen, .. (list too long sorry to those I left off).

As its early leaders went on to do great things, the company “evolved” from an innovative start up to take on a bank flavor. Scott Thompson came from Visa and all his direct reports had bank backgrounds… the top tier of the organization led to a culture change (in a bad way) and it went from the coolest company in the valley… to … errrr… something else.  Pierre and the BOD recognized this and tried to get the mojo back with putting David Marcus in at the helm. They wanted to recapture what made Paypal great (people).. to reset the culture. David is a great guy, as he says this week he was an innovator.. but one that never ran a team larger than 200.. and certainly not a global one which was highly regulated.  It didn’t help that eBay’s CEO essentially undercut David by allowing Don Kingsborough and Gary Marino end run and make decisions directly with John. How could any CEO make it in that kind of environment!?

Now that David is gone (see Venture Beat) who can lead them (today) and what is their new strategic imperative.. their vision for growth beyond eCommerce?

Next 12 months

I believe Paypal will see competition in its core business like never before, As I stated previous Payments are moving into the OS… and Paypal doesn’t have one. Apple, Amazon, Google are new competitors in core eCommerce… all with an OS.

Paypal’s new competitors?

  • Apple will own payment presentment and authentication on all iOS devices.
  • Amazon will begin to get off Amazon traction (example today is Gogo wireles)
  • Google’s massive success in Shopping Express (Free shipping and payments). Google also just launched wallet in iOS (see google’s blog)
  • Bank Token Schemes and forthcoming rules for cards on file

As a side note, Paypal did squeeze itself into the Apple wallet (for NFC/POS transactions), but Apple will be expanding the iTunes buying experience very soon, and it won’t be looking to drive Paypal merchant adoption, as it is in the process of negotiating card present rates for CNP transactions (See my Apple blog).

Paypal at the POS is a complete joke (see blog). The business guys that have been running the show (or end running David) are focused on a Visa/Mastercard like strategy… not on one that delivers value to their core constituents (merchants and consumers).  Paypal was the company best positioned to execute on a Braintree/Stripe product 5 years ago (remember X.com) and also the best company to have built a Square/Clover like solution. They missed all these things because their business heads were focused on quick transaction volume deals and solutions.. NOT ON VALUE.

POS – Buying Blackhawk?

This is my big theory today. With eBay repatriating $9B and taking a 30% tax hit, we all know that acquisitions are planned. But what?

Obviously Carl Icann, David Marcus and the BOD have had some disagreements. Rather than guess the strategy, lets take a look at WHO is staying at Paypal. Don Kingsborogh is the former CEO of Blackhawk and head of Paypal’s POS strategy, and Discover Network strategy/relationship.

Paypal has promised its institutional investors progress at the POS.. and they have NONE. Jamba Juice and Home Depot numbers are terrible. The Discover partnership did nothing for them, as MCX merchants REFUSED to accept Paypal (routed as a Discover Card) or new processor agreements (that ran as high as 210 bps). Paypal has “learned” it cannot sneak in payment products within an existing network (Discover), nor can it deliver enough value to push merchants toward a new agreement. Few eBay investors realize that the Discover relationship is yielding NO FRUIT.  Even IF they could convince a merchant to TRY paypal at POS.. they first have to line up the Processors to support, and big ones like First Data were not playing (WSJ Article). This Paypal was paying $50k-$250k+ for merchant to SWITCH to Vantiv just to do a pilot.

Paypal at POS needs a ubiquitous merchant acceptance solution and a physical connection to all major merchants. They also have learned how both Google and Apple have developed strategies to end run the traditional payment terminal and integrate directly with the POS (see the brilliant Google/TXvia Patent US 8676709 B2. )

Blackhawk may fit the bill, as it has a merchant network and POS integration solution today. Every time you pull one of those pre-paid cards off the shelf the SKU bar code is tied to the card Primary Account Number.  The Retailer’s POS system sends the SKU to Blackhawk upon payment and Blackhawk activates the card.

Blackhawk is working to leverage this transaction flow to create its own scheme to fund the transaction.See Blackhawk’s patent US8676709 B2. An item in the shopping card becomes a payment instrument. This could be “THE” enabler to someone like Apple too.. a new payment “gateway” that end runs the traditional payment stream. For Apple, all they would have to do is get a secure “TOKEN SKU” to the POS and the POS would leverage Blackhawk to route. Of course items in a basket usually have a cost, but settlement could be accomplished through a 100% discount, or by capturing the merchant ID and terminal ID to push the payment back through their current processor.

I think this is THE most brilliant scheme EVER!! I love it.. If implemented via ACH.. and MCX. I just don’t love Paypal delivering it because of “cost” and ability to coordinate/execute in delivering value from  all merchant data.

I’m only 50% confident here.. just put a small $10k bet along these lines for fun.  But at a $1.4B market cap.. this would not be a bad bet for PayPal.. problem is that merchants will never go for it.. this does NOT solve the VALUE problem (for consumers or retailers).. it only solves the network acceptance problem. This approach continues the “we will sneak it in” approach. It may “solve” a short term problem of Processors.. but it creates a new one for the merchant in having to deal with multiple processors (one for swipe one for … something else).

IF the merchants would go for this, it may be the best payment design on the planet.. as it would give a way to provide discounts and rebates within the POS system. Integrating with the POS would completely disrupt the processor/payment terminal process, and we would begin to realize the “power of tokens”.

Paypal buys Braintree for $800M

26 Sept

See Venture Beat Article on Transaction today

I love Braintree… the people, the product, the DEVELOPER COMMUNITY. What does Braintree do? They make payments easy for every mobile and eCommerce developer looking to create a “store” that accepts payments.  They have a very rich developer tool kit, support and payments processing infrastructure which enables payment acceptance in days (from ground 0). Making things easy is actually a very hard thing to do…. which is why Braintree has been so successful.. and their developer community so loyal.

Braintree’s moniker customers include Airbnb and Uber.. Braintree provided much of the generic payment infrastructure so that these companies could focus on their core business value proposition (not on payments). It is VERY important to note that Braintree does NOT own the customers, or have control of the Wallets for Uber or Airbnb.. they are the PROCESSOR.  In other words Paypal will have to work hard to convince every one of Braintree’s customers to accept Paypal as a form of payment, and can’t do anything with the data without specific merchant consent.

I see this acquisition as reinforcing the “core” of Paypal: eCommerce/mCommerce. Paypal had much of Braintree’s vision back in 2009 with the launch of PayPal X. However, it lost significant focus on creating a developer friendly community and platform, particularly 18 mo later with the acquisition of GSI . Given Braintree’s TREMENDOUS human talent, this acquisition could put Paypal back on track: a company that everyone likes and that solves real problems… no more of these wacky physical POS payment solutions driven by former bankers working in Paypal….

I hope eBay can leverage the culture of Braintree to reinvigorate Paypal… and create a mobile payments “platform” that every start up in the valley runs to. Payments should be dumb pipes…  and Paypal should be the no-brainer switch…  The challenge I see for the new combined entity is adapting to the “shifting” value proposition around data, advertising and loyalty.

For example, what if users allow Google maps to include uber car locations and airbnb open rooms? Payments is the easy part .. and margin will deteriorate accordingly.. the REAL money is in bringing retailers customers… Paypal and the other networks have much work to do here.

Also… sorry if there is any ad below this line.. WordPress just started this.. guess I need to upgrade.

Payments Winners/Losers?

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

21 Aug 2013

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

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

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

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

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

top reasons for selecting

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

PIN DEBIT.. the Dumb Pipe Switch

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

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

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

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

Credit Cards

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

This brings me to Winners.

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

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

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

PayPal under attack.. Not just Facebook…

Existing research (such as Morgan Stanley) are keen on Paypal’s chances as they survey merchants likely to use Paypal’s new services. This research is backward looking, as merchants don’t understand what new services will do for their business, and new value propositions are not yet in market. In my view Paypal’s entire eCommerce revenue is at risk.. with their only advantage (DDA integration/cost of funds) lost because of new Debit pricing of $0.07 cents. This is not just a US thing, or a mobile thing, or a POS thing.. this is EVERYTHING. They have no competitive differentiator… and are not positioned well to compete in ORCHESTRATING COMMERCE.

eBay shares were down 3% on news that Facebook has launched a new payment service (see article). Facebook came out later the next day to emphasize it was a small test and it has a “great relationship” with Paypal (see Businessweek article).

Paypal is a cluster unto itself (see Battle of the Cloud 5). The negative “cluster” connotation (ie heard with respect to Vietnam) seems to stick well with Paypal’s current US prospects in several segments.  Last week we heard of Facebook’s payment pilot.. the future of which presents a just one of the many real threats to Paypal’s “core” eCommerce (off eBay) volume.Network Clusters

The nature of payments is changing… and I’ve stated often: the stength of networks is their resilience and resistance to change; they were formed around an defined value proposition where participants were aligned… The  strategic threat for Paypal is that the nature of competition is changing as advertisers and channels couple payments with other services (social, community, advertising, …) to deliver a better COMMERCE experience through insight into customer data.  Merchants gain CUSTOMERS… For example, both Google (instant buy) and Facebook payment will offer merchants an API that allows them to pull consumer information into the checkout page. This means a greatly improved checkout experience, improved ad targeting, improved lead attribution, improved consumer analytics, improved mobile conversion, and of course much more data for Google and Facebook. The MNOs also have a service in place with Payfone, (to launch in next month or so.. see blog).

The entities most capable of delivering on mobile payments (in order of likely success)

#1 Touch the consumer BEFORE the purchase (ability to add value and couple w/ advertising)

  • Channels: Google, Facebook, and Amazon

#2 Have a direct consumer “mobile relationship”, with payment history, and can authenticate/manage Fraud

  • MNOs (Payfone), Braintree/Venmo

#3 Have a physical POS relationship (or part of existing POS network)

  • Retailers, Visa (V.me), Mastercard (Masterpass), Amex/Serve (Payfone)

Online merchants are asking themselves where do my customers come from? how can I improve customer experience? customer conversions? Reduce cost of payments. The answers all point to very poor PayPal’s prospects. Paypal does NOT bring customers to the merchant, they can add no value to merchants beyond Autofill, a task much better suited to channels that already have authenticated the consumer before they enter the merchant’s virtual store.

Look at Google’s Instant Buy, Google’s delivers one click mobile buying AND financial savings to the online merchant in EVERY transaction with a  160bps (non Durbin regulated debit) taking a LOSS on EVERY transaction. Paypal’s cost of funds is around 80-110bps, and average merchant cost is over 240bps.

eBay’s 2012 10-k reports that $13B of TPV was assigned to marketplace mobile Commerce (page 5). On page 7 we see

In 2012, PayPal’s net total payment volume, or net TPV, for transactions using mobile devices reached nearly $14 billion, up from approximately $4 billion in 2011. PayPal’s mobile products are designed to deliver an end-to-end mobile shopping experience in a safe and secure environment. PayPal’s mobile checkout solutions offer a convenient and easy way for merchants to accept payments from mobile devices, and for consumers to pay, through a mobile-optimized user experience

This leads us to assume just $1B of “mobile payments” was off eBay commerce related.  In other words, all “mobile payment” growth from eBay participants finishing transactions on mobile/iPad.

Paypal’s core is in improving the eCommerce checkout experience, and will NOT extend into mobile as mobile participants are better able to leverage their channel positions, consumer insight and existing services to better deliver both a merchant and consumer value proposition. Beyond mobile.. what are Paypal’s prospects?eBay 2Q13

POS – FAILURE

Paypal is going absolutely no where with POS payments. For example, I had two separate industry experts tell me that FirstData has refused to route any Discover/Paypal traffic (see my May 13 Blog).  Paypal’s approach to this network roadblock is to partner with processors (like Vantive) and offer a spiff (say $500k) to switch from FD to Vantive.  Can you imagine the laughter.. I’m going to switch from FirstData to accept a Paypal payment product that is more expensive than anything other than a premium Visa credit card? Why?? exactly what is the consumer adoption. It all makes no sense at all… Thus, I hear internally that Don Kingsborough’s continued POS push may be short lived (product and person?).  Given Home depots experience of 5 transactions per WEEK, it would seem obvious.

eCommerce

This is Paypal’s core.  How do consumers find products online (see Forbes Article). With more product searches initiated on Amazon than Google, what if Amazon is well positioned for both: Retail/aggregator/reseller/distributor role AND the payments/advertising role.

eCommerce is very, very LUMPY, with eBay/GSI, Visa/CYBS, Amazon accounting for over 60% of Sales in US. In Japan, Amazon and Rakuten have similar shares, with similar concentrations in other markets.  An obvious investor question is to ask: what is PayPal’s penetration is within these other “networks”?  for example, within CYBS merchants, what have been PayPal wins within last 2 years.

Paypal has won here historically because of its ability to manage fraud and deliver great consumer experience.. it was a consumer facing value proposition. It will now be under attack as the same “channel” dynamic described for mobile above takes shape.  Google, Facebook and Amazon will change the nature of “payments” competition. No longer is it about experience and cost… payments is just part of a long commerce process. Channels are much better positioned to bring consumers to retailers (consumer’s search, select and shopping online). Payments is the last (easiest) part of this cycle.

Analysts (such as Morgan Stanley) are keen on Paypal’s chances as they survey merchants likely to use Paypal’s new services. This research is backward looking, as merchants don’t understand what new services will do for their business, and new value propositions are not yet in market. Paypal won market adoption because of its ability to make commerce easier (consumer) AND deliver benefit to Merchant. It is no longer cost competitive in EITHER as other entrants can offer service at BREAK EVEN costs to support their overall PLATFORM business.

Investor Impact

PayPal Competitors will:

  • Drive reduction in off e-bay take rate.
  • Introduce new P2P products
  • Take lead in orchestrating commerce
  • Destroy Paypal’s funding mix advantage through use of debit

Paypal generates 64% gross margins from online transactions. PayPal’s blended cost of funds is 104bps, with fraud costs of 30 bps. For total cost of funds = 134 bps.  2Q13 Take rate was 379bps, of which cross border was 22% (250bps fee for cross border).  Standard Merchant fees are published and tiered (See pricing), with average domestic of approximately 300bps.

Google’s merchant pricing for InstantBuy currently brings pricing down to 160bps, with Facebook, Amazon and MNOs/Payfone capable of matching.paypal take rate 3

2012 Off eBay payments revenue was $5,146 (on $97.2B TPV), which includes both remittance and commerce volume. I don’t have good numbers on breakout here, so lets assume Commerce represents 80% of off eBay payments revenue = $4B , with US taking approximately 50% ($2B).

Revenue at risk is US eCommerce revenue * (competitor take rate/current take rate ) =

$2B * 160/300 = $1.07B  ( 7.6 % of total 2012 revenue of 14,072MM)

Google has also announced a rollout of a Gmail P2P money transfer service, as will Facebook.. In my view Paypal’s entire eCommerce revenue is at risk.. with their only advantage (DDA integration/cost of funds) lost because of new Debit pricing of $0.07 cents.  This is not just a US thing, or a mobile thing, or a POS thing.. this is EVERYTHING.  They have no competitive differentiator… and are not positioned well to compete in ORCHESTRATING COMMERCE.

in 3Q13 we will see at least 3 major eCommerce initiatives launch which will impact Paypal

#1 Google InstantBuy (keep your processor and save on every transaction)

#2 ATT/Verizon Payfone

#3 Visa/Mastercard V.me/Masterpass

Networks are also changing the rules to make Paypal’s life more difficult. Example is Mastercard’s 35 bps staged digital wallet fee which ONLY impacted Paypal.

I’m short on eBay…. the reasons are above.

Payment News for May.. What a Month!

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

15 May 2013

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

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

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

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

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

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

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

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

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

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

PayPal at POS again?

Lets assume that every merchant looks past the cost, and runs to PayPal. As I outlined in Paypal at POS, there is NO CONSUMER VALUE to the PayPal card.. why on earth would I use a PayPal card that wraps my BAC debit, Citi credit or Amex card.. why not just use the card in my wallet…

3 May 2013

This week the WSJ reports that Discover “has deals with 50 merchant acquirers, which handle card transactions for retailers, to offer eBay’s PayPal service as a payment option at checkout counters”, with First Data holding out.

I like DFS, I own DFS stock… it is likely to be the dance partner of choice for many new payment start ups..  as they are a bank operating a 3 party network.  Their network revenue is paltry ($218M rev out of $3,753 EBIT). DFS looks like a bank, with profitability driven by credit quality of their cash back cards. Logically DFS is the ummm “hand maiden” of choice for entities looking to extend to extend products to the physical world. DFS has nothing to loose, as they don’t serve many of the demographics that are part of “mobile wallets”. discover flow

Discover has a very poor ability to “push” products into market, as they perform less than 40% of their own acquiring (“direct merchant” in Discover terminology is account in top 100, with indirect merchants handled by other processors). PayPal’s current POS economics just don’t work for merchants, particularly large merchants that have already negotiated steep discounts with issuers. A top 5 retailer’s quote on the topic

“why on earth would I want to take a PayPal card that wraps a bank account at 200bps when I JUST WON DURBIN and have my own new product coming out. The last thing I want to do is change consumer behavior to my detriment.”

The average merchant fee for Discover today is about 197bps. If Paypal kept this rate I estimate their margin at 10-20bps max (PayPal’s transaction cost is around 107bps (2012), Loss rate is 26 bps, a network fee to Discover is rumored to be 50bps which leave 14 bps as total fee available to split WITH ACQUIRERS).    Let’s just assume that 197bps is the fee that acquirers run with, as they certainly can’t make the case to INCREASE the cost of accepting a PayPal card. So merchants are left with the value of accepting a Paypal card at 197bps instead of taking my BAC debit card which cost them $0.21 + 5bps.

My point is that NO major merchant will go this route… only the poor little independents that don’t know enough to assume ISOs are working on their behalf and don’t even accept PIN debit. The press release on acquires “supporting” paypal means nothing. Each and every merchant has the ability to turn this off.  As a side note, it is estimated that 60% of processor revenue comes from small shops that don’t know what to ask for.. hence the Square value proposition.paypal take rate 2

Lets assume that every merchant looks past the cost, and runs to PayPal. As I outlined in Paypal at POS, there is NO CONSUMER VALUE to the PayPal card.. why on earth would I use a PayPal card that wraps my BAC debit, Citi credit or Amex card.. why not just use the card in my wallet… ? Consumers obviously feel the same way, hence HomeDepot’s experience of less than 5 transactions PER WEEK per store. For anyone in payments, I encourage you to experience a return using PayPal at the POS. My experience is something for another blog. For more on this topic, I encourage you to read the slightly dated Philly Fed Acquiring Overview (2007)