Who do you Trust?

Google and Apple are working to secure their platforms, and assume the central trust role in authenticating the consumer. I’m much more interested in the Apple’s new developer APIs than I am in the fingerprint app. How will they begin to “lock down” applications, what new authentication features will they expose to developers? How will they allow consumers to provision sensitive data to other apps?

9 Sept 2013

(sorry for typos.. on the road and will proof later)iPhone-6-Fingerprint-Detection-And-Apple-Release-Date-Rumors

WSJ article today on Apple’s biometric led me to believe the mainstream press is “missing” it. As I outlined in Payments as Part of the OS, generically for all handsets in Stage 4 Value Shift, and specific projections for Apple in Apple and NFC – Part 2:

  • Handsets are becoming a commodity, cameras screen resolution, battery life are no longer differentiators
  • New differentiator is “Value Orchestration” across physical and virtual worlds
  • Apple and Google are best placed to perform this service, and do so today from “cloud access” to music, pictures, calendars, documents, to storage of personal information like cards, social,
  • The “KEY” to value orchestration is owning the customer relationship. Identifying and Authenticating the customer 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.
  • Authentication is of little value if the platform is not “secure” and offers no unique services to Authenticate. IOS and Android started life as relatively unsecure operating systems, where “control” over individual app access to phone data was “regulated” by testing vs. enforced in platform security.NFCActors

Platform Future

Google and Apple are working to secure their platforms, and assume the central trust role in authenticating the consumer. I’m much more interested in the Apple’s new developer APIs than I am in the fingerprint app. How will they begin to “lock down” applications, what new authentication features will they expose to developers? How will they allow consumers to provision sensitive data to other apps?NFC Change

Hardware is evolving to software. From NFC to the SIM. Once security is in place, there is no reason Apple could not release a version of their phone with SIM virtualization/emulation. Could you imagine having 2-5 options at any given instant, using whatever carrier has best coverage and least cost given your current location… Perhaps even competing w/ Wi-Fi ? Of course this would destroy carrier subsidies.. but perhaps it may be worth buying an unlocked phone.. and carriers become dumb pipes competing to deliver the best service. There are a few regulatory roadblocks in the way.. but I am painting a future view that is already occurring in some markets (See dual SIM phones in India).

The implications for Android are much more significant than for IOS, given the number of Telecos that have leveraged Google’s baseline Android to create customized versions. If Google locks down Android with a new secure OS, they will be in a position to provision Google applications (Maps, mail, search, …), identities, and cloud based services (drive, Google Now, Commerce, …).  The “freeware” model could still exist, but without the cutting edge Google services it becomes a COMMODITY HARDWARE game.

Trust – Everyone wants to play

What we will see at Money 2020, is that 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.where value lives

Bank strategy seems to center on control of existing networks. What they don’t realize is that the harder they work to build barriers to entry, the greater the value of finding ways around them. A public example is Google’s acquisition of Zave Networks in 2011.  Prior to taking your credit card at the POS, there is another settlement process in place.. one around coupons (which are a legal form of tender). In this coupon environment, P&G or General Mills’ accounts are debited and the consumers account is credited. In this financial settlement system, there is no limit on what accounts can participate… This example perfectly represents the “innovator’s dilemma” where a “good enough” network supplants an incumbent as the nature of competition changes.

I was with a top 3 bank CEO this year, who was confident that they would win the MCX business. I asked why. Response was “we have these Retailer’s investment banking business and handle most of their processing today”.. My response “when did you bring them customers or help with them compete”? He just did not understand the nature of his competition, it was not about cost of processing… the NATURE of competition in payments is changing.  (See Retailer as Publisher)

Who do I trust?

I’m an ex banker and can tell you that Banks take the trust role very seriously. They are regulated and monitored.. I had to take 40 online tests a year to ensure I understood compliance, regs, …etc. What a nightmare! Is it any wonder why this environment is not ripe for innovation. Can you imagine what the CFPB would do to a big bank when it had customer data not related to an account? It would have to explain why they had the data, how they obtained it, the customer agreement terms, what they would do with it, the safegaurds around use, storage, retrieval, how they planned to make money from it..  Its like your mother in law sitting next to you everyday asking you what you are doing.  I certainly Trust a bank.. but they will never ever get anything done here.  They need partners, but they want to dominate the relationship.. The country w/ most advance model of Bank led “trust” authority is Korea (see link).

I love Google and think everyone of their employees is working to “do no evil”. They are the most well meaning and least “nafarious” fortune 50 I have ever worked with.. but they are use to getting data for free and selling it back in services. Consumer safeguards seem rather absolute.. and their data stores are so massive and intertwined its hard to pull it apart, particularly when a “consumer” relates to an account(s) and device(s)… Google knows things about me that I have not specifically permissioned them for, They have the capability to be secure, but few current services where that is an imperative (payments, Google Drive).

Apple is from another planet, there is just no one else like them in keeping secrets. How do they do it? Yes I trust Apple.. they only know what I tell them…. I like this model.. If I added healthcare info to my iCloud account.. I have confidence it would be secure.

MNOs. This is a breakout business for them (See KYC $5B opportunity). GREAT authentication means physical verification of customer/credentials. I believe US MNOs are in a position to deliver this service through Payfone… but it must be integrated to local physical distribution channels for a “new” account type. This is where digital signatures could really take off… from signing mortgage documents to account applications..  I believe MNOs are best placed for the Trust role because of their physical distribution channels and knowledge of consumer.  Forget about ISIS.. if you own authentication everything else is dependent on you.

Side Note: Paypal is getting far too much attention

They had a slew of new product releases last week. All focused on “convenience” not on COST or customer acquisition. As I outlined.. Paypal is nowhere in off-ebay mobile payments ($1B – see my 10k Breakdown), they are under attack as processors like FirstData refuse to route their physical payment. The only prospective customers of Paypal are services, or Branded retailers that restrict distribution, as the eBay marketplace encourages price competition for distributed CPG products. Jamba Juice, Dunkin Donuts, and Under Armor are example prospects.. Consumer adoption is driven by frequency of use.. If Paypal can’t make traction in Grocery, Gas or Transit their prospects are very bleak.

From a network perspective Physical POS was NEVER PayPal’s focus.. it is not what they do, or why their current consumers and merchants use them.

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.