Payments – Wrapping, Rules, Acquiring and Tokens

if Google had challenges pulling off POS innovation (after ~$1B in investment), rest assured you will too. Banks are well positioned to throw sand in your gears … focus on delivering value within merchant –consumer relationship.

18 June 2013 (sorry for typos)

Thought it was time for blog this week. Primary objective is to inform the venture community of changes which may impact payment related start ups. Sorry that the title isn’t a little more polished (you can tell I’m rather left brained). The exec summary of this blog: don’t ever bet your business on someone else’s rules… particularly if they themselves don’t own them.

Background

All Networks are working on unique token schemes (as I outlined in: Payment Tokenization, “New” ACH System, Visa’s Token Plans and Business Impact of Tokenization). The business drivers here are: #1 Control, #2 Mobile Payments. The US Banks have gotten together in The Clearing House (TCH Tokens) and are in the midst of piloting with 2 providers. In this TCH token initiative, the banks have logically determined that if a customer doesn’t need to see their Primary Account Number (PAN), then they will provide a number which they can uniquely resolve. For example, in mobile payments Citi could put in a unique Citi 16 digit number that is not a MasterCard, not a Visa card, not an ACH account number.. its just a Citi “token”.  Citi can decide how to resolve this number adaptively.. based upon what the customer wants, or what products they have with them.  There are MANY benefits to this approach:

  • Banks control account
  • Banks control DATA (transactional and account information)
  • Banks own network rules
  • No fees to other networks
  • Set unique (NON DURBIN) pricing for a NEW payment product.
  • No restrictions on “Routing”
  • Enables banks to “switch” providers of any payment service or network clearing
  • more detail here…etc

This is a BRILLIANT move by banks. I believe that this central bank “facility” within The Clearing House will be their centerpiece for consolidating all of Debit, in addition to the mobile play.

TCH Tokens are not the only game. Visa, Mastercard and Amex (through Serve) are also in this token game, and others like Payfone (through phone number as token at VZ/ATT), Google (through TXVIA) are also on the periphery. My view is that the BEST tokens are ones you don’t have to issue (ie Square/Voice, Apple/Biometric, Google/Facial Geometry, Payfone/Phone #…).  I outlined dynamics of the strategies in my blog last year “Directory Battle Part 1 – Battle of the Cloud”.  Its amazing that this topic is not covered more broadly in the mainstream… of course most of these efforts above are not discussed at all, and sometimes denied.

Of all the token initiatives, I believe Visa is most likely to succeed. This is not a typo… I’ve been very negative on Visa in the past.. as they have alienated everyone. But Charlie has started to change the culture, he has pulled the JPM relationship out of the toilet and has made a tremendous hire with Ryan. Why do I like Visa’s token prospects? They failed in their first initiative (non 16 digit PAN required big changes by everyone), and learned their lessons. However, most importantly, they can change the rates through rules on CNP and risk “ownership” creating a “new” version of VBV, with the best payment brand.

Wrapping

Currently the networks are at war with anyone attempting to wrap their product and add incremental value. As I outlined in Don’t Wrap Me, and Battle of the Cloud Part 3

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:

  • #1 CUSTOMER DATA
  • 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

Visa, MA, Amex, DFS are in a great position to “stop” wrapping. What does this mean? They have initiated new rules, fees, cease and desists, threats of litigation …etc. Banks are thus looking to circumvent these restrictions by placing their “token” with the customer. This token is thus a new quasi acceptance “brand”.

Acceptance is therefore the new battle arena (who can convince merchants to accept their tokens, rules, rates, …). eCommerce may have slipped away from the banks and networks (PayPal), but they are determined not to let this happen in mCommerce, or at the POS.  JPM has structured its new agreement with Visa  to give them the flexibility on rules in acquiring and network routing for a new acceptance brand (Chase Merchant Services – CMS).

Retailers

Retailers are not the dumb mutts that banks assume. The MCX consortium realizes that greater bank control does NOT benefit them unless the Visa ratesservice is ubiquitous and standard so that banks can compete against each other, with no switching costs. Analogy here is internet traffic routing…They just want the payment cleared, with transparency/control in price, speed, risk.  Retailers also want the death of bank card rewards schemes, and if they can’t kill them instantly, want the ability to deny “preferred” cards. I told a major retailer yesterday that they should offer an “X Prize” to anyone that can make sense of Visa’s rate structure in a youtube video.

Many Retailer’s also have a “token” in form of a loyalty card.. with Target’s Redcard, and Starbucks demonstrating the model in which a retailer led payment scheme could work. For retailers, their loyalty program is fundamentally about selling data, and trade spend.

As a side note, the “big” secret in acquisition is that most (~60%) of profits come from the bottom third of retailers.. specifically the small independents that don’t know enough to negotiate (hence the ISO business). Companies like Walmart negotiate heavily with the top issuers to reduce rates from “standard”.. and still end up paying over $1B a year.Square fees

I see a substantial opportunity for acquirers to participate in what I would discussed within Payment Enabled CRM. This would change their profitability from one driven by small merchants to data/analytics. This is undoubtedly what JPM sees within CMS. Retailers know that they can’t further empower the big bank with their data, but rather need an independent party to run the CRM platform for them.

Summary

I’ve already spent a little more time than I was anticipating here. For start ups my message is quite simple, if Google had challenges pulling off POS innovation (after ~$1B in investment), rest assured you will too. Banks are well positioned to throw sand in your gears … focus on delivering value within merchant –consumer relationship. The Mobile-retail interaction is greenfield, and there are 1000s of different flavors.. no one company will be the centerpiece here. Avoid POS payments.. or be the “arms provider” to the big institutions as they duke it out. My view is that the key for MNOs, Apple, Amazon, Google and Samsung’s future value is

#1 Authentication (Linking the Physical and Virtual World)

#2 Orchestration (Coordinating Virtual and Physical World Processes, Data and Value Chain)

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.

PayPal and Home Depot

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

10 Jan 2012

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Also see Googlization of Financial Services.. 

Target REDCard – Back to the Future?

Congrats to Target on a great launch. Is this the beginning of more store cards? What is the “tipping point” which makes this model attractive to other retailers? Will customers take one more piece of plastic in their wallet? Can Target sustain this level of rewards, or will they look to target incentives after critical mass of acquisition? Will merchant acquirers and processors respond with new services?

Target’s 10-Q was published Friday for quarter ending 10/30/10. I’ve started following Target’s financial services performance given the US launch of their new REDCard decoupled debit.  All of this seems a little like back to the future… 40 years ago each store had their own closed loop branded card, 100 years ago small stores offered their customers store credit. Target’s innovation is creating a card that couples 0% interchange, with loyalty program that they control, in an infrastructure that already exists (Target’s card group and Target bank).

Financial services execs within: big banks, retailers and the payment networks are keeping a close eye on this product. Target has a very unique competency in payments through its ownership of Target Bank and associate card processing. Historically, Target’s card portfolio has been either a millstone or a jetpack. REDCard takes out the majority of the credit risk (aka the millstone) and leverages the card processing infrastructure to provided a competitive advantage.

The REDCard launch looks like a smashing success, and through the 10-Q we can estimate the initial adoption for the 15 days within the national launch (adding a small base within the Kansas City test market).  On page 14 and 17 we see that Target accounts for REDCard’s 5% rebate as reduction in sales, with the card unit reimbursing a portion of this cost (operations and marketing). In other words the “net cost” of to the card unit: REDCard’s 5% less card processing costs (ie interchange, …etc). 

  • Reimbursed amount: $26M
  • Less 10% one coupon run off: $19M (Estimated).
  • Card Net Reimbursement for REDCard: $7M

Red Card TPV (Assuming 200bps average cost of payment)

REDCard 15day TPV = $7M/(500bps-200bps) = $233M

(out of quarterly sales of $15.2B)

Admittedly, I do not have a way to resolve the difference between this number and the market penetration number below (from 10-Q). As stated below REDCard includes Target Credit card, Target Visa Credit Card, and Target Debit Card. When will these cards recieve the 5% off? Perhaps after new terms are agreed to and deposit accounts are linked (comments appreciated).

Beginning April 2010, all new qualified credit card applicants receive the Target Card, and we no longer issue the Target Visa to credit card applicants. Existing Target Visa cardholders are not affected. Beginning October 2010, guests receive a 5 percent discount on virtually all purchases at check−out every day when they use a REDcard at any Target store or on Target.com. Target’s REDcards include the Target Credit Card, Target Visa Credit Card and Target Debit Card. This new REDcard rewards program replaced the existing rewards program in which account holders received an initial 10 percent−off coupon for opening the account and earned points toward a 10 percent−off coupon on subsequent purchases. These changes are intended to simplify the program and to generate profitable incremental retail sales.

We monitor the percentage of store sales that are paid for using REDcards (REDcard Penetration), because our internal analysis has indicated that a meaningful portion of the incremental purchases on our REDcards are also incremental sales for Target, with the remainder of the incremental purchases on the REDcards representing a shift in tender type.

Note a) on Pg 17

Loyalty Program discounts are recorded as reductions to sales in our Retail Segment. Effective with the October 2010 nationwide launch of our new 5% REDcard rewards loyalty program, we changed the formula under which our Credit Card segment reimburses our Retail Segment to better align with the attributes of the new program. In the three months and nine months ended October 30, 2010, these reimbursed amounts were $26 million and $60 million, respectively, compared with $19 million and $59 million in the corresponding periods in 2009. In all periods these amounts were recorded as reductions to SG&A expenses within the Retail Segment and increases to operations and marketing expenses within the Credit Card Segment.

Congrats to Target on a great launch. Already we see some of their strategic plans to refocus the across the board 5% incentive to something more “targeted” (pardon the pun). As reported in Mashable, ShopKick is being trialed in 242 stores.  I would hope Target looks to white label this to make it their own service, unless they have an equity piece to incent them to build ShopKick’s network. Issue here is that they checkout process is still rather complex. The great thing about ShopKick is that it is focused on keeping foot traffic in the store when a prospective buyer finds a lower price somewhere else, shopKick can help generate a specialized offer to keep them. This works well for big ticked items, but for more than 1-3 items it will be a nightmare as the POS integration is not there.

Is this the beginning of more store cards? What is the “tipping point” which makes this model attractive to other retailers? Will customers take one more piece of plastic in their wallet? Can Target sustain this level of rewards, or will they look to target incentives after critical mass of acquisition? Will merchant acquirers and processors respond with new services?

The competitive barriers are high, as bank licenses and card teams are not formed overnight.  How would I leapfrog Target? First tell me where I go to buy a Flux Capacitor?

Decoupled Debit

Retail Payments over the next 20 years are likely to morph substantially from their current issuer/network dominance. In addition to regulatory changes, new technologies and new value networks are creating a new competitive dynamic which will bring more than $5-10B in capital investment into the payments within the next 2-3 years.

8 November 2010

Winston Churchill may have been referring to Payment systems in the US when he said:

It is a riddle, wrapped in a mystery, inside an enigma

The macro economic impacts of the recent US card legislation portend substantial business change for Visa and Mastercard. The US debit card market is soon to resemble Australia and Canada with other countries soon to follow (See China and India). Retail Payments over the next 20 years are likely to morph substantially from their current issuer/network dominance. In addition to regulatory changes, new technologies and new value networks are creating a new competitive dynamic which will bring more than $5-10B in capital investment into the payments within the next 2-3 years.

My wife’s visit to Target this week prompted a revisit to the decoupled debit space. Target’s value proposition: hand me your check and sign a release form, you will then receive a RedCard linked to your checking account and good for 5% off all future purchases. Will we see more of this type of value proposition (which Durbin enables through its steering provision)?

From TSYS

Decoupled debit is interesting for several reasons:

  1. The issuer is not required to be a bank in order to offer an account and issue a card
  2. The products can exist as private label products or co-branded products
  3. The products can potentially build significant loyalty
  4. The products reduce costs when delivered and managed correctly
  5. The products leverage the existing payments infrastructure and standards

Retail Business Case

Retailers have a different mindset when it comes to alternative or decoupled products because they are stakeholders in the product, not just the transaction. They look at the product as a way to help them:

  • Reduce cost of payments
  • Build loyalty
  • Offer merchant-designed promotions
  • Drive more store sales
  • Segment and target customer groups
  • Leverage ‘spend information’

For those outside the US I recommend reading: