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 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”.

Apple and Physical Commerce (not Payments) – Part 4

28 Jan 2014

The mainstream media is hooked on “mobile payments” like Doritos to the Super Bowl… we all like to talk about it…  Difference is Doritos have real consumers.. while “mobile payments” at the POS are a laughable over-buzzed ethereal dream. I continue to be amazed at how badly this is covered, from over blown projections by Javelin ($20 B by 2012), to reports of NFC’s wonderful future from the GSMA. For readers of my blog, this hype is nothing new..HypeCycle

What is Apple doing?

Creating a Commerce Platform that will enable 1000s of Retailers to rewire commerce. Apple is the ONLY COMPANY in the world where Retailers will CHANGE THEIR BUSINESS to create a unique APPLE EXPERIENCE . Why? Apple’s biggest asset is their ability to change consumer behavior.. It is the only company in the world that can move: Retailers AND Consumers AND Manufacturers. There is enormous TRUST in the Apple brand; they have earned this trust (with THE MOST AFFLUENT consumer base) by consistently delivering the best product experience (A very very big PERIOD). They have proven to be THE leader in digital goods, physical retail AND eCommerce. Payments may be a starting point.. but Apple’s patents, technology, products and applications are completely missed if you only look at them from a payment perspectiveiPhone-6-Fingerprint-Detection-And-Apple-Release-Date-Rumors

Sorry to sound pompous here guys, but I’m pretty decent in predicting Apple in Payments, and the role of the Handset in Physical retail. Take a look at the consistency of my previous blogs…

Product First

Apple is a tremendous company, with the best product design teams in the world. They care deeply about their brand and the consumer experience, particularly as it relates to the iPhone. Apple also knows physical retail VERY VERY well, with the most profitable stores per square foot in the world (over $5,600 per square foot).  Let me restate this again, Apple is #1 or #2:

  1. Ability to Change Consumer Behavior (see blog)
  2. Handset Profitability
  3. Customer Demographic/Profitability
  4. Product Design
  5. Consumer Experience
  6. Sales of Digitial Goods (App store)
  7. Sales of Physical Goods online (Mac Store)
  8. Physical Retail Sales (Apple Retail Stores)
  9. other (Authentication, developer community, cloud, fraud, security, …)

NOT About Payments

Do you think Apple would risk any of this on something that they could not control or has proven to be a failure? OF COURSE NOT!!

Physical Retail is a  complex business that is undergoing a complete restructuring (see Blog), we are talking about $2.4T in sales (does not included Auto, Gas, Fin Services) vs. eCommerce sales of $180B. Apple has been very well served in acting as a late follower, the key for Apple to add value in retail is their role in changing consumer behavior (See Blog).

Apple’s Strategy

It is to make the iPhone a platform for Physical Retail, to enable retailers and manufacturers to create 1000s of fantastic consumer experiences. Apple will do NOTHING it cannot control, it knows that Banks and MNOs will look to leverage its brand and gain a controlling foothold. Apple and Google are very consistent in the battle to control the consumer (authentication)… the ability to authenticate is critical to bringing together the virtual (cloud, social, pictures, music, payment, ID) and physical worlds ( Blog Who do you Trust, and Authentication Battle ).

I have to run and catch a plane, but as a quick example. What if you were in a shopping aisle and the products could talk to you? They could tell you their reputation, what your friends thought of them, what they tasted like, or how they could best be used? What if you allowed certain retailers to know you were in the store (a form of checkin) and the retailer could give you a special deal on a package of 2 or more things you were looking at, or offer to meet Amazon’s price if they could package a warrantee and same day installation.  When you walk up to the POS, they know your name and ask if you would like to put the purchase on the same card you used last time?

The business case for Apple is not making 10-30bps in payments, it is about making 500bps in advertising and retailer services. It is about cementing iPhone’s role as a platform for both Consumer and Retailer… adding services, adding transactions, adding loyalty and creating a behavior chain with APPLE AT THE CORE.



—————- update

Most of you know I deal with the institutional investor community.  Today I had a funny quote.. “Tom we heard that Paypal is working to be part of the Apple product”. My answer “I’m sure they are… but they have absolutely NOTHING to give them”. Apple would be nuts to include Paypal here, Paypal has NO Physical presence, no merchant relationships, no consumer traction in off line, … Should Paypal let consumers choose to a Paypal “product”? Why? Perhaps linking their debit accounts.. but Paypal is not merchant friendly… it would be a VERY bad way to start a platform business.

As I said before as Payments move to the OS, Paypal does NOT have one.


POS Integration: Build it and they will xxxxx?

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

8 Sept 2013 (sorry for typos)

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


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

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

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

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

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

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

Cloud is where Payment belongs

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

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

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

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


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 (, 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


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.


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

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)

JPM/V Scenarios… Which one is it?

A central problem facing any token is “where to start”. If JPM can do this with CMS.. why can MCX do this with First Data. It is precisely what FirstData was doing in 2006 prior to their settlement with Visa.

27 March 2013

I’m still trying to get my head around the V/JPM deal (see prior blog). As I outlined in Business Implications of Tokens, New ACH and the Visa/JPM Deal, US bank token efforts are clearly focusing on POS payments. Mastercard and Visa’s strategies are focusing on all digital wallets.JPM Visa flow

A central problem facing any token is “where to start”. What merchant would invest in capability to accept a token if consumers don’t use them? Similarly what consumer would want a token if there are no merchants that accept them? What problems do tokens solve? For Bank? Merchant? Consumer?

I think most of us clearly get the bank value proposition. If the only way to “interpret” a token is to ask your bank to resolve it.. this interaction establishes a very clear path to control.

Since I don’t have the new JPM/V agreement in front of me, I thought I would look at a few scenarios.. (which I would appreciate your comment on). Note these scenarios are not mutually exclusive.

Scenario 1 – Issuer Solution

Description: JPM takes ownership of all Visa BINs. These Unique BINs become the “token” by which JPM can assign them to either debit or credit or both. All JPM bins now get routed through JPM’s own unique VisaNet regardless of acquirer. If JPM is acquirer then it takes on-us. Represented by flows 1 and 4. JPM moves to put 100% of cards through Visa for consistency of routing. I like to think about this scenario as JPM just put its services on the Visa switch for all of its consumers… as opposed to delivering those services as an “issuer”. In one of my very first blogs (Googlization of FS, 4 years ago), I outlined how an advertising service would work from Visa’s switch.

Consumer Impact: None.. consumers have no idea anything happened. Of course in a mobile or “private label” scenario, JPM could “pre-load” a wallet with its cards.. or give its existing consumers a unique “private label” card, all with no issuance cost.  Banks will refuse to accept non-tokenized cards in wallet (see blog), and networks will restrict usage of aggregators (see blog).

Merchant impact POS.  ?What card am I accepting? A credit card? a debit card? a private label card? a direct link to another account type? No one knows but JPM.  How can the merchant route this payment type?  There are durbin rules for dual function “hybrid” cards but if card acts primarily like a credit then there is no problem.

Visa Impact. 2-4% revenue impact by 2015. Loss of JPM network fees, switching domestic payments off traditional VisaNet. Biforcating VisaNet, Loss of Rule control.  On the plus side, Visa may leverage CMS services for cards they service within its hosted transaction processing.

JPM Impact. Consumer value independent of merchant agreements. Control of customer, control of card number, multi function card, new advertising capabilities, new value added services, new product differentiation, mobile wallet control, position CPT/CMS for wallet provider role (PayPal, Square, MCX, …)

Scenario 2 Merchant Only Solution

Description: Chase PaymenTech/Chase Merchant Services (CMS) work to strike special arrangements with retailers that go beyond acceptance cost to data sharing. Represented by flows 1 and 2. Currently issuers can set interchange rates for merchants (strike unique deals), however this will allow retailers to combine data and keep retail transaction data off VisaNet (Flow 1 Red Arrows).  Focus is on value added services to merchants and white label programs with unique features.

Consumer Impact: None.. consumers have no idea anything happened

Merchant impact POS.  Chase Merchant Services becomes new acceptance brand. Merchants that use CMS have new features available and new white label products.  If JPM can do this with CMS.. why can MCX do this with First Data. It is precisely what FirstData was doing in 2006 prior to their settlement with Visa.

(American Banker 2006)

… on-us transactions are becoming more common among issuing banks that also operate merchant acquiring businesses. “Large banks like JPMorgan Chase, Citigroup, and Bank of America are currently doing on-us transactions now, and always have,” he said. “The more consolidation you have in the banking industry, the more on-us transactions you’ll get.” Bank of America is also rumored to be interested in creating its own card processing network.

Visa Impact. Dependent on success of new CMS acceptance network takes off and whitelabel/co brand. MAY be consistent with a strategy by allowing customers to participate directly in data sharing (non JPM banks would not like this model). Loss of CMS “on us” network fees, switching domestic payments off traditional VisaNet. Biforcating VisaNet, Loss of Rule control.  On the plus side, Visa may leverage CMS services for cards they service within its hosted transaction processing.

JPM Impact. Differentiation. JPM can now compete w/ Amex in virtual 3 party network for some Merchants. New white label/co brand value propositions. New retailer services (example Payment enabled CRM).

Scenario 3 – Mobile only

Description: New VisaNet is restricted to switching Chase mobile tokens. Chase does not have ownership of their Visa BINs, but rather has an “interoperability pact” with Visa to ensure Visa can route new “tokens” (see blog). The tokens operate same as BINs, but may be of different format (not 16 digits). Objective is to ensure all mobile wallets have tokens instead of PANs. Note this is very similar to scenario 1, but scope is focused on mobile POS to stop wallet providers (PayPal, Google, Square, LevelUp, MCX) from gaining traction. I also believe tokens must initially take the format of PAN in order to minimize technology risk for the ecosystem. Turnkey mobile solution to enable credit, debit, ACH, Offers, platform for other wallet providers.

Consumer impact: Number of mobile payment schemes, how your account is provisioned into a mobile wallet, bank control and protection of your information, no account number you can use.. all hidden.

Visa impact: Same as above, getting out of mobile payments at the POS… focusing on eCommerce/ No revenue impact at all.

Merchant impact. Loss of consumer data, bank control, new data sharing agreements, loss of access to ACH system for settlement, payment mix cost.

JPM impact. Uniquely compete for Platform business, retailer business, become the retailers, consumer, 3rd party platform of choice.

Thoughts appreciated.

Controlling Wallets – Battle of the Cloud Part 3

The networks are now in the midst of defining new rules to ensure they can “influence” wallets. Banks have legitimate concerns surrounding ability support consumers and adjust their risk models. But the real business drivers here control and customer data.


14 MAR 2013

Short blog today.. patent law changes tomorrow and need to get something filed.

Efforts to “control” have unintended consequences.. like holding onto your Jello by squeezing it..

The networks are now in the midst of defining new rules to ensure they can “control” wallets. I wrote about this a few months ago in Don’t Wrap Me – October 2012 and Battle of the Cloud – Part 2. The threat to banks from “plastic aggregation” at POS from solutions like Amex/Serve, PayPal/Discover, Square/Visa, MCX, Google is real. Make no mistake, Banks have legitimate concerns surrounding ability support consumers and adjust their risk models. But the real business driver here is to “influence” mobile payment solutions that do not align to their business objectives. Key areas for bank concerns:

  • Top of wallet card (how does card become default payment instrument)
  • Credit card ability to deliver other services (like offers, alerts, …)
  • Ability for issuer to strike unique pricing agreements w/ key merchants
  • Brand
  •  …etc

Each network is in midst of creating rules which will ensure it has control and can see merchant/consumer transaction.

The buzz this week is surrounding Mastercard’s new Staged Digital Wallet Operator Annual Network Access Fee (MA detail reference not avail).

  • What is it? Well since I don’t have the Dec 20 rule in front of me I have to go off my notes.
  • Applies to wallets that facilitate POS commerce between merchants and consumer (not ecommerce)
  • Who is responsible? It is largely a new processor responsibility. They are responsible for identifying wallet transactions
  • New transactions sets? Yes. Currently aggregators can be the merchant of record, but new rules require the MID of purchase and a new WID (WALLET ID) to be transmitted.
  • New fees? Yep.. looks like around 35bps on LAST YEARS volume
  • Timing? Goes live June 2013. Processor technology complete by April 2013

This is a brilliant move by Mastercard… but there may be some unintended consequences as issuers will have control over how it is applied.  MA’s objective?  “influence”  PayPal/Discover, Amex/Serve and Square/Visa, MCX…  NOTE eCommerce is NOT the focus (Apple/Amazon). However MA seems to be tying themselves in knots trying to differentiate a ecommerce aggregator (Amazon) from plastic aggregator (ex. PayPal/Discover).

These changes are already having “material” consequences. In eBay’s 2013 10k Page 19

MasterCard has recently announced a new Staged Digital Wallet Operator Annual Network Access Fee which would apply to many of PayPal’s transactions if the buyer uses a MasterCard to fund their payment, and will be collected starting in June 2013. PayPal’s payment card processors have the right to pass any increases in interchange fees and assessments on to PayPal as well as increase their own fees for processing. Changes in interchange fees and assessments could increase PayPal’s operating costs and reduce its profit margins.

Also see the long discussion by Amex’s Dan Shulman

UNIDENTIFIED AUDIENCE MEMBER: Thanks. I have a question for  Dan Schulman.  MasterCard recently revealed that they’re introducing this digital wallet that I’ll read it’s called the staged digital wallet operator annual network access fee. It’s one of his famous acronyms.  I was going to ask has Amex contemplated a digital wallet fee as well? And generally do you think the optics of digital support merchant discount rates, are they going higher or lower in a card not present world?

DAN SCHULMAN : So I think you’re seeing a lot of different players whether it be traditional or non-traditional start to think through the digital wallet strategy. And we’ve said this and it’s still absolutely true, this is the very early innings of this play out with digital wallets right now. We’re beginning to get some very nice traction in the back half of the year. It’s kind of on our digital platform right now.  We have looked very hard at the different fee structures that are out there. We’ve looked at the embedded infrastructure that we have. As Ken mentioned we have a kind of fixed infrastructure that we can leverage. We have a lot of assets that we can leverage that are very different than other players out there right now.

So I wouldn’t expect that fee structures are necessarily going to mimic each other because each of us come to the market with different assets and different profiles. If you look at some of the kind of newer players that have come into reloadable prepaid, they’ve got very different infrastructures and therefore have to have very different fee structures if you look at a  NetSpend  or a  Green Dot  they charge on their, kind of what they are beginning to try and call wallets, they’re charging monthly fees that can be $4.95

A new WID  has multiple uses. It enables MA issuers to enhance their risk models and “decline” both individual transactions from a wallet, as well as decline wallet providers that are not “certified”.  Amex already has similar rules in place, their summary view seems to be that Serve can wrap everyone else’s card… but no one can wrap theirs (for physical commerce).

Banks love the original NFC model where cards had to be “provisioned” into a wallet. Banks were in complete control of which wallets to “authorize” and completely hid the card number (purchase data) from the wallet provider.  This perfect world broke down quickly as the first NFC wallets had space for only one card emulation application (see Forces against NFC) so there were 2 options: allow only one card type, or enable a single card to represent multiple cards (See Blog). Now that NFC in payment is dead just about everywhere (except Asia), banks are looking to enable this “provisioning” control within the network level. MA is just the first visible instance, as I outlined in NEW ACH SYSTEM the Banks are also doing the equivalent to ACH debit through tokens probably 18mo- 2 yrs away.

And we wonder why mobile payments aren’t taking off.

Retailers look at this change and see complete imbalance… Networks which will change rules in weeks to satisfy banks. V/MA you may want to consider a new transaction set which would force issuers to define price of a specific card for that specific merchant (interchange), and acquirers their fees (MDR)… then share that information with other retailers.  Then allow retailers to decline based on price… (as opposed to accept all cards). That would certainly level things out…

I do think there are many ways to get around this.. but  I will not be putting them in this blog ($$).  All surround who owns the customer… and 5 “LAWS OF Commerce”:

  • Commerce will always find the path of least resistance
  • Consumers are NOT owned, but rather migrate where there is value
  • Value can be delivered by price, product and also through great consumer experience
  • Most Retailers face life selling commodity goods at a higher price… experience is all they have left
  • Banks have never held a sustained role in controlling commerce, they influence and support it.

In all of this bank control.. where is there value? What does a JPM Sapphire Card actually do that is differently than a platinum Amex or a sub-prime Capital One? Brand, points, loyalty… these are qualitative attributes.. but what if there were REAL value differences? Where is the customer relationship. Note that Retail Banking is going through many FUNDAMENTAL changes (see blog)

Tim Geithner visited a friend of mine prior to his departure. My input question to him was what if core “Bank accounts” morphed from Net Interest Margin (NIM) profitability to “Trust Accounts” where the key to profitability was consumer data? (See blog Payment Enabled CRM)

With respect to squeezing Jello… as the banks angle for control EVERYONE else is looking toward least cost routing (see Blog). The payments system is not a set of 5 pipes.. Just as the internet backbone is not run on a single piece of fiber. Changing all of the rules for everyone and stopping the leaks is hard work…

payments pyramidI would love to set up a Wiki site where we could list the features differences and customers of all of these digital wallets.

.. back to my patent app .. oh and corporate taxes due tomorrow too. Yuck.

Business Implications of Payment Tokens

US mobile payments will have a new “network”, a system to use tokens which are neither V or MA card numbers. Thus Banks need not route these transactions through either V or MA, but will be able to leverage same acceptance infrastructure. Virtual card numbers will be bank numbers that banks resolve. JPM’s is first to align w/ plastic, leveraging common authorization authentication and other services

21 Feb 2013 (pardon the typos as always)

US mobile payments will have a new “network”, a system to use tokens which are neither V or MA card numbers. Banks’ position is that the need not route these transactions through either V or MA (in order to leverage same acceptance infrastructure), whereas V/MA clearly say that an account can’t be both a network account and a XPAY account (see no wrapping).

The banks desire in 2011 is that Tokens will be bank numbers that banks resolve.  JPM’s is first to align w/ ChaseNet and ChasePay.  Banks are putting in place “controls” around ACH debit and card rules which will “encourage” token adoption.  Watch out payment start ups.. rough seas ahead. As I stated: Banks will WIN in payments.

In the US, merchants own liability for Card Not Present (CNP) fraud which aligns online merchants to the risk of using a payment instrument for a consumer they cannot physically verify (see VBV exception). However well an individual online merchant manages their own payment risk, their remains extraneous indirect risk to banks, as card data loss could result in: counterfeit plastic, identity theft, other first party fraud, …etc. Thus the fallibility of the current card “token” which relates Bank to Consumer relationship. Through this NEW token initiative, Banks are seeking to expand the account identifier by making it unique to: consumer, bank AND merchant.token

Today merchants receive an authorization for use of the card and behind the scenes Banks use very large sophisticated risk models (ex software HNC’s Falcon) to make authorization decisions. As eCommerce merchants are responsible for fraud, they perform their own risk management either directly or through payment specialists (Cybersource, PayPal, Amazon, Digital River, …etc). Banks have few problems approving online transactions.. as they bear none of the loss… and hence a game is played. Banks have little incentive to share their fraud data and merchants have little incentive to share theirs. Remember that within banking, margins are driven by the ability to manage risk and banks therefore incented to differentiate capability (not harmonize it). Which leads to other interesting dynamics (perhaps a topic for a later time).

At the Physical POS, the situation is different. Merchants bear little fraud and with EMV (Chip and PIN) the US will further reduce fraud where plastic is presented (if EMV in the US does happen). As I described in EMV Battle Impacts Mobile Payments, Retailers love EMV and are biased toward PIN and Debit. Retailers are continually looking for a way to reduce payment costs and influence consumers AWAY from Bank reward schemes.Payment-Gateways-growth

Mobile payments remain “green field”  and may be significantly disruptive at the POS. One of my favorite quotes around payments ” if you solve authentication.. everything else is just accounting”  (Ross Anderson @ KC Fed). The mobile device can provide a much richer set of information which to authenticate (vs a piece of plastic). Banks have invested billions in their card risk and authentication infrastructure. Mobile could render most of this investment moot, thus Banks are working to control and influence mobile payments at POS, particularly given NFC’s complete failure. Additionally, new payment providers like LevelUp, Google Wallet, MCX, Passbook, …etc all present large challenges to banks efforts to own the consumer relationship and payment choice at the POS (See MCX Blog).  Banks have some latitude to create incentives around mobile. For example is an MCX QR code backed by a Visa Debit card a CNP Visa transaction? Card Present? Or will MCX try to encourage consumers to back with DDA like the Target RedCard model?  Mobile payments are a key battle ground for many parties.. it is imperative to recognize that mobile payments are not just about payments.. but also about loyalty, relationship, data, influence, banking… etc.

In architecting incentives, banks have diminished ability to force V/MA to change acceptance rules. The same is true for retailers. Thus both are looking to create networks based on direct consumer accounts with account numbers (tokens) they can control. This is a very big statement.. if the banks can create a “token” which represents a credit account or a debit account.. they have “wrapped” Visa and MA (see blog Don’t Wrap Me). If successful, they could subsequently change networks anytime they wanted… or create their own. Why on earth would they want to route any debit transaction through V or MA if the token represented a debit card that represented a DDA? Or similarly doubtful: a token that represents a credit card which represents a credit account? (see  PayPal at the POS). Taking card number out of merchant (and consumer) possession, and replacing it with a token, enables banks enormous flexibility.

Yes my head is spinning too. I am implying that banks could leverage their entire acceptance and authorization infrastructure without routing anything through V or MA. No direct consumer involvement would be necessary in this token scheme since something like an MCX QR code could be mapped to multiple tokens in a single back end process. Banks are looking to make ACH changes as a defensive play to ensure that ACH rails are protected against funding a Retailer/3rd Party wallet directly (as PayPal, Target RedCard, Safeway Fastforward do today). This was my point in yesterday’s blog on ACH Debit.

Business Drivers

As I outlined this week in New ACH System in US, my view of Bank business drivers for Tokenization are:

  1. Stop the dissemination and storage of Card numbers, DDA RTN and Account Numbers
  2. Control the bank clearing network. Particularly third party senders and stopping the next paypal where consumer funds are directed to unknown destinations through aggregators.
  3. Own New Mobile POS Schemes to protect their risk investment
  4. Improve ACH clearing speed (new rules, new capabilities to manage risk). In a token model the differences between an ACH debit and a debit card will blend as banks leverage common infrastructure.
  5. Create new ACH based pricing scheme somewhere between debit ($0.21) and credit cards
  6. Regulatory, Financial Pandemic, AML controls (per  blog on HSBC)
  7. Take Visa and MA out of the debit game (yes this is a major story)
  8. Maintain risk models (see both sides of transaction)
  9. Control Retailer’s efforts to form a new payment network

What banks seem to be missing is that mobile payment is not just about payment (see Directory Battle Part 1). Payments SUPPORT commerce, Banks therefore do not operate from a position of control but rather of enablement. Most retailers recognize that Consumer access to credit has resulted in improved retail spending, however most would also say consumer addition to bank rewards has been detrimental to their margin.

Tokens for Mobile POS?

Why would any merchant or wallet provider choose to exchange consumer payment instrument(s) for token(s)?  Reduction in CNP rates, liability shift are significant. But the mobile device has many additional “identifiers” that far exceed what is available on a piece of plastic (IMEI, location, history, password, interaction for challenge). IMHO the bank business case for tokens must be built on CNP rates and Customer Choice. If Banks directly assist consumers provision their account into a mobile wallet, every wallet provider should support it. In other words the bank has done the work to integrate and “push” the customer’s choice into a given wallet from their online banking site (ex yesterday and SavetoAPI).

But this bank led provisioning does nothing for the millions of accounts that consumers have already provisioned themselves in: PayPal, Apple, Amazon, Google, Target, Safeway… All of these companies have worked to deliver consumer value and obtained a direct consumer relationship, which subsequently resulted in the consumer choosing to store payment information directly. I can’t imagine a scenario (or business case) for them to part with that asset, particularly prior to 100% acceptance of tokens by all merchants (online and offline).

Token Acceptance

The value of a bank issued token is completely dependent on: ACCEPTANCE, cost and Risk Mitigation. At the physical POS Retailers are firmly in control of acceptance, unless the tokens perfectly mimic existing card schemes. Banks will likely work to ensure that any non-tokenized payment (QR Code) will be treated as a CNP transaction with merchants bearing fraud responsibility. If tokens are in the format of a 16 digit account number than there will be very little change necessary to the payment terminal. However, the downside of using 16 digit account numbers is that it would not enable banks to firmly separate from V/MA bin routing (and network fees). It will certainly be interesting to see the plan here.

Retailers, Banks, Networks, Consortiums… are all at odds… all trying to own the consumer relationship and control a directory which they can resolve.Payment Value

In general I see the token initiative as a distraction for banks. They are far too focused on control and throwing sand in the gears of commerce. Commerce will find the path of least resistance in an open market.


My guess is that many Card CEOs are skeptical of all this network tokenization strategy. Banks card teams have tremendous assets in their consumer relationship, established consumer behavior, brand, network of acceptance, merchant white label relationships. Why not work to partner and extend today’s model in a way that benefits consumer and merchant? Example Payment enabled CRM.

This tokenization project’s ability to positively impact mobile payments and retailers may be like squeezing Jello… American Express can only be laughing to themselves. As US Card issuers are 5 years behind them in innovation  Amex is extending their lead as they endeavor to “pull their weight” by while helping retailers obtain new insights on their customers. This sounds like a much better idea than tokens.. probably one that investors will understand better as well.

My message to Bank CEOs: stop trying to lock in your market position and start trying to justify it through value.  Tokens will provide you more control, but it is significantly detrimental to your acceptance network (V/MA). You have brilliant payment executives.. there is true genius in the token design here, but it is completely myopic. If you had a cross functional team with experience in retail, advertising, data, processing, CRM you would realize that mobile will change the way consumers interact with their environment. Banks will NOT be the intermediary in every interaction. The barriers you are constructing will only further inhibit your ability to partner and take part in processes which add value.  Remember your customer is not yours exclusively, we also are customers of Google and WalMart and Verizon…. Banks have an OPPORTUNITY to orchestrate commerce IF they deliver VALUE.  Payment people design payment solutions to payment problems. Banks must redefine the problem and the opportunity.

The questions banks must answer (for a retailer): when was the last time you brought me a customer and helped me build my brand, and consumer relationship?

Another scenario Card CEOs should consider: if Payments become “dumb pipes” …. where retailers and non bank intermediaries can perform Least Cost Routing (LCR)… how do we compete? How strong is your customer relationship?  Why did the consumer choose you as the bank in the first place?

EMV Battle Impacts Mobile Payments

20 September

Most of everyone knows of the EMV efforts in the US, with Visa implementing a liability shift on October 1, 2015. In this model, any merchant that is presented with a chip and pin card, but is not capable of processing it (as an EMV), will bear fraud loss.  There have been very BIG swings in strategy over the last 6-8 months. The big issuers were all dead set against EMV.. saying they could not afford the cost to re-issue. Now all are on board… why? This is what I’m thinking about today….

Merchants have always loved PIN Debit (see blog). PIN was the cheapest transaction type prior to Durbin, and post Durbin PIN still has the unique advantage of allowing the merchant to route without going to Visa at all. Remember PIN Debit leniage was from ATM networks. Merchants also like the fact that 96% of PIN Debit fraud losses are assumed by issuers..

Visa/MA hate PIN Debit.. the countries where it has taken off like Canada-Interac, Australia EFTPOS, China Union Pay… have domestic clearing networks. This means that transactions are no longer routed through Visa/MA. In the US we have 8 debit networks (see blog). It makes little sense to continue all of these separate PIN debit networks if merchants can route directly to banks… The banks were thus looking at consolidation similar to what was done in countires above. In other words, banks were planning to take Debit back from Visa/MA in a bank owned network. After all, Bank margin improves in the PIN model (post Durbin) when payments are routed directly to them (they don’t pay a network fee ~10 bps).

Visa read the tea leaves… So how can Visa/MA stop the bank and merchant love affair w/ PIN? Force EMV…

The Merchant Stick? How will Visa “force” merchant’s to accept contactless? (See Visa Document)

Domestic and cross-border counterfeit liability shift. Merchants that cannot accept an EMV or contactless card when presented one by a customer will bear the liability of a fraudulent transaction instead of the issuer after October 1, 2015.

The Merchant “Carrot”?  Visa TIP program

TIP program allows merchants to be excused from validating their PCI DSS compliance for any year that at least 75 percent of their Visa transactions come from chip-enabled point-of-sale terminals. There are also subsidies for terminal upgrades … To qualify, terminals must be enabled to support both EMV contact and contactless chip acceptance, including mobile contactless payments based on NFC technology. Contact chip-only or contactless-only terminals will not qualify for the U.S. program

Visa’s effort to include contactless in the TIP program is very strategic. To gain the benefits of TIP, merchants must reterminalize with both contact and contactless EMV capability. Why? Well for one reason there are no contactless debit cards out there… yes everything is a credit card. These of course carry much higher fees… The other advantage of TIP is that the PCI-DSS wavier is like a “get out of jail free” card. Merchants can’t get the card without contactless… If this weren’t enough… not only does VISA want contactless.. they also want signature.

Visa says PIN not necessary – Green Sheet

“There’s a lot of confusion around the myth that EMV means ‘chip-and-PIN,'” Stephanie Ericksen, Visa Head of Authentication Product Integration, said in a blog published Jan. 13, 2012. “It doesn’t in many countries, including the U.S. That’s because, in the U.S., we can rely on online processing where transactions are transmitted in real time to the issuer for approval. With that in place, there’s no need for the offline authentication that was the genesis of chip-and-PIN.

From Chip and PIN to Chip and Choose? Visa wants  encourage signature as these transactions must be routed through them.. my position (and that of most non network people) is that AUTHORIZATION and AUTHENTICATION are completely different problem sets. The availability of real time approval means nothing if you don’t know WHO you are approving for WHICH CARD.  PIN answers the “who” question and the chip is the account number or “how” you are going to pay. I just can’t believe that Visa has come up with this story.. but they must in order to support “contactless”. Most consumers don’t know that today contactless transactions have limits. These limits are set by the issuer, in Europe they are typically around $25. However the issuer can choose to increase the limit (no PIN required), or require a PIN with a contactless payment.  All of this is a little absurd for Visa as PIN is always viewed as key to authentication, AND Visa just waved the signature requirement for mobile payments. So no signature required for Square.. but Visa wants it optional at the merchant POS so it can retain the volume?….  Expect some Regulatory involvement here.

Large Merchants are very, very aware of this strategy to improve the credit transaction mix and make mobile/contactless payments a “premium” service. The top 20 retailers have put their foot down and said “no way” will we be putting contactless readers in our store (MCX members particularly). The terminals that they are ordering DO NOT have contactless capabilities.. only EMV chip and PIN. Most retailers agree that signature is a worthless authentication mechanism. Visa clings to signature in order to ensure transactions are routed through them. Expect MCX to look toward a PIN model..

So this EMV “battle” has many sides to it.. it impacts mobile payment adoption, EMV rollout, plastic re-issuer, consumer behavior, consolidation of national PIN debit networks, …

Comments appreciated.