2015 Predictions

3 February 2015

Payments, commerce, data and mobile is this blog’s focus. I’m very very fortunate to have so many great friends, customers and partners in this area. My thoughts are not my own, as I’m greatly influenced by my “environment”.

I’ve made many new friends because of this blog. The funny story that comes to mind was in August of last year when the CEO of a Fortune 50 company comes into the room and says “ahh.. the INFAMOUS Tom Noyes”…  (never a good way to start off a first date.. but we had a good laugh and thrilled he reads my blog.. ). Honest dialog has a way of creating great friendships. Thanks to all of you for providing such a fantastic environment! You make writing this thing fun.

2014 Prediction Eval

Before you bother reading my 2015 predictions you should probably see if it is worth your time. Best way is to evaluate what I projected last year in my 2014 Predictions

  • Consumer Privacy. Grade – C. Not much happened in 2014 on consumer side. I’m holding with my prediction, just not certain of timing and “tipping point”. How will we know when it happens? Imagine a Sony like incident with consumer data.. Regulated businesses like MNOs and Banks are highly attuned, Apple is the best in class here (consumer champion of privacy see Blog). The Ad industry is dependent upon tracking and data sharing in a very, very grey market approach. There is a better way… 2014 is perhaps the year of “awareness” with Snowden, DEA tracking license plates, State department keeping all of our phone records, to new super cookies on mobile. The next logical phase is ACTION.
  • Retail banking. Grade – A. Huge transformations going on. Prepaid and GPR products are segments growing at over 35% CAGR, US branch footprints are shrinking (see Blog)
  • Debit Volume. Grade – D. Not much going on here, after the DC court of appeals struck down Judge Leon’s ruling on debit interchange (March 2014).  Not much consolidation in PIN debit either. I do believe US debit will evolve to look like Canada’s Interact and Australia’s EFTPOS.
  • Mobile BEACONS. Grade – F. Nothing happening in 2014. Looks like more of a 2016 thing. I’m holding to my projection.. but missed timing completely.. thought Apple would launch beacons at their Sept 9th
  • mCommerce Payments. Grade – B. Summer 2015 is where we will see substantial progress. We see that the networks have turned over the new 3DS CNP scheme to EMVco last month (see link). As Payments move into the OS (see blog), Paypal doesn’t have one. Amazon, Google, Apple, will make SIGNIFICANT dents in Paypal as the platformcontrols authentication and authorization. Amex/Visa/MA’s new rules on tokens, combined with consumer privacy concerns, will accelerate the trend.
  • Specialized HardwareGrade Gives way to Commodity Hardware- Grade A.. makes way for commodity hardware and software. Launch of POYNT and CLOVR are best examples.
  • Host Card Emulation. Grade – B (for 2014), Grade A (by August 2015). Google did indeed push HCE into Android. With the death of ISIS and SEs in US phones.. things will be heating up in 2015 with a new Google launch.
  • EMV. Grade – D?. It appears to be happening.. I bet it would have been pushed back… I have the cards, but don’t yet see the retailer infrastructure. The chip and signature (vs Chip and PIN) is still a very strange one. It would take me 3 days to explain the politics behind it. What really baffles me is Samsung’s planned launch of LoopPay this summer (with Visa support).
  • Banks have given up on payment innovation. Grade – A+. I have a copy of the ApplePay issuer agreement (Sept 2014). Just can’t believe the banks have taken it on the chin like this.. not only ceding mobile to Apple, but Tokens to the Network and 15bps. What do they have left?
  • ISIS WILL DIE.. Grade – A+. Money ran out in Dec 2014, sale will be complete by March.
  • Apple will have NFC. Grade A+ … ApplePay 9/9/2014.. I was wrong on 3 things.. I projected October (it was 9/9) and there would be no SE, and Beacons would be part of launch (to wake up payment app). Big news (below) is that ApplePay will be in browser by summer 2015.. Paypal will be crushed with a double whammy on “value”: usability and a new rate tier (20-40bps off credit) for tokens in CNP.
  • Unlocking the cloud and authentication. Grade – B+ . Apple has done an amazing job here. See my blog on brokering identity.

Summary Grade: B+ . Looks like I’m a little aggressive in projecting the new stuff (Beacons, Identity, EMV, HCE). Except for EMV and Debit, I’m still confident in the predictions (philosophically) but my timelines are too aggressive in most cases.

2015 Predictions

These predictions based upon the Structural Changes in Payments which I discussed last month.

Big Picture Predictions

  1. The Year of Partnerships, new Clusters and multi-tenant walled gardens (forced by Apple/Google Dominance).
  2. Mobile moves from Small World organization to Real World Orchestration (my next blog)… starting with merchant friendly value propositions. You must be where customers are, or influence them in the real (offline) world. We have spent the last 10 years enabling a handset that does more than take calls and connecting it to the virtual world. We will spend the next 10 connecting it to the physical world. From POS Payment, Google Shopping Express and Beacons to Door opening and document signing.
  3. Tipping point of Privacy (Apple Defines Best Practice)
  4. Politicization of networks. Government regulation in internet prioritization, payment networks, social networks, advocacy networks and advertising networks. Networks are needed for the efficient life of a firm. Star network resembles dictatorships in social networks, and “channel masters” in business networks. Star networks are optimal for business, however we have grown quite used to the state of `organized criticality’, the scale-free, democratic and highly complex social net. Government involvement in networks usually does not improve efficiency and can lead to significant disruption.  Take a look at what Europe has created in SEPA.. a standard that no one will invest in.
  5. Collapse of “wallets” into Payment in the OSmCom trumps eCom. Tokens take over in eCommerce w/ ApplePay, Visa Checkout and Google Wallet
  6. Marketing… the year of measurement… and beginning of pay for performance
  7. The most trusted consumer brands will remain: Apple, Google and Amazon… with banks suffering most as their products become commodities and mobile rendering physical footprints moot.

Tactical/Deal Predictions

  1. Apple will launch aggressive effort to bring ApplePay into Browser by Summer 2015
  2. We will have a new rate tier from Visa and Mastercard based upon tokens in CNP (see EMVCo 3DS PR)
  3. Google will GO BIG in launch of new wallet in an HCE model akin to ApplePay. It will have dynamic tokenization. Google will excel in getting retailers private label and loyalty cards integrated, and pass Apple in BLE integration (in store).
  4. Alliance Data will be bought by JPM, C, Paypal, Hedgefund+Acquirer or Amex. ADS is my top stock recommendation for 2015, V/MA are my long term.
  5. Samsung will Launch LoopPay with support from Visa by September 2015.
  6. Visa will complete purchase of Visa Europe (hopefully at a 2015 discount) with strong dollar and weak EU growth.
  7. MCX will pivot to a payment instrument within another wallet (think Target Redcard) vs a wallet unto themselves .
  8. Beacon pilots will launch in top 20 retailers. In store navigation, product location, couponing and gamification will be first uses.
  9. Facebook payment will go live and be integrated into a new form of social advertising, where you are paid based upon your ability to influence your network, will see first pilots. Facebook will remain king of CPG advertising
  10. Behind the scenes there is tremendous progress in the collaboration of Banks, Telecos, and Mobile Platforms to Validate Identity. Short term impact is near elimination of mobile payment fraud. 2015 will be year of formalizing an identity verification infrastructure (in the cloud).

2015 the year of Partnerships

Google and Apple against Everyone Else?

I don’t have time to go over all 15 of my projections.. will do so in coming weeks. Over the last 6 months network and system design has consumed my thoughts like nothing else: proprietary networks vs. open networks, integrated vs modular, distributed innovation vs controlled platform, Apple vs. Google, Amex vs Visa, net neutrality vs. prioritization. At what point does OPEN win? My blogs on the subject was Value Creation and Distributed Innovation, Banks non-Banks and Commerce Network and my two favorite books are Platform Leadership and  Weak Links by Peter Csermely (viewable on Google Books here).

Any analysis of this area must focus on Apple. Wow! What a machine! The most loved brand, the most profitable, highest in consumer satisfaction, most sales per square foot, creator of new categories, inventors of new consumer experiences, trusted by the most affluent demographic, champion of privacy… on and on. Is Apple an exception?  Can any company ever aspire to replicate their success in any industry? How can anyone else compete in areas they touch? Do the rest of us just pick up the crumbs? Apple’s latest results show that their model is improving, garnering over 86% of the “mobile” industry’s profits (see Forbes).

network evolution nodes to consortium

Open networks are harder to build, and are certainly less profitable than closed. My prediction on “year of partnerships” is due to necessity, NOT the efficacy of collaboration. Few companies can compete with the data advantage of Google, Amazon and Facebook. Apple’s trust and reputation advantage is perhaps even more insurmountable. For large companies it may take 2-5 partnerships in a focused area. Imagine the data challenges small companies face.  This is not a technical challenge as much as a business one. How many successful partnerships have you seen (elephants dancing).  Remember that are injured elephants facing as structural changes in consumer behavior, mobile, information, distribution, trust … impact products and strategies. CommerceSignals is working to help bridge this gap, but that is for another blog.

Where Google, Apple and Amazon are self sustaining Stars (networks), clusters and multi-tenant walled gardens are forming to compete in a quasi open model.  The challenges here are not technical, but organizational and value creation. History reveals few consortiums renowned for their efficiency.  Value is best created where it can be controlled and monetized in “small worlds”.  Networks in business are functional in 2 areas: around a specific function with broad use (Visa/MA, Credit Bureaus, ?Android?) and where market forces can take operate (NASDAQ,  …). This is my big hypothesis… would greatly appreciate input here.

2015 must be the year of merchant friendly value propositions. Logically, the majority of commerce happens in a retailer.. and hence the “solutions” must as well. The inability to partner will give way to platforms that enable partnership… optimally platforms that would allow millions of “lightly structured” interactions to test 1000s of value propositions until something sticks (this is Commerce Signals). Take beacons for example.. we know that Apple can maintain security and confidentiality.. but the retailer must install beacons that work for everyone and have a business case (consumer insight). Consumers want to know how insights will be used. How do you manage the agreement between Manufacturer, Beacon Provider, Apple, Retailer and Consumer?

iPhone 6 – Tipping Point for Platforms

As I outlined in iPhone 6 – Apple’s Strategic Opportunity, I believe the iPhone 6 represents the dawning of a new age of mobile “platform”. What was a music manager with a phone has turned into the most secure, easy to use device ever created. The factors of competition have changed, it is no longer about camera resolution, storage, and screen size. The visible (obvious) attributes of competition have become a commodity; as are the “problems” that your phone solves (telephone, music, calendar, pictures).  Where previous phones helped you manage items in your “small world”, the iPhone 6 has become both the secure key to the cloud with the ability to broker interaction in the physical world (NFC, BLE, identity, tokens). The “convergence device”. See my blogs Brokering Identity and Authentication in Value Nets.

Unfortunately, Apple is so focused on the consumer it has no ability to partner. While there is no company better in creating devices that thrill a consumer, there is perhaps no company worse at building partnerships and business models where value is shared. Given Apple’s cash hoard, my top recommendation.. create a new division focused on network.. helping connect consumers to the physical environment they live in (thermostats, health, retail, cars, advertising, …). This is NOT a handset function.

Abrupt end here.. this blog has been in partial completion mode for 6 weeks. I had to get it out. Will articulate my views on the other “Top 5” predictions this month.

Payment in the OS – eCommerce/mCommerce Converge

28 Dec 2014

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

I define 4 categories of mobile payments:

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

Point of Sale

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

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

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

———————

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

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

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

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

mCommerce/eCommerce

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

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

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

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

Move from Fraud Management to Identity

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

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

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

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

A new rate tier: Cardholder present

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

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

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

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

2014 – Payments Part of OS:

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

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

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

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

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

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

ApplePay Expands to Browser

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

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

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

mCom/eCom Convergence

When will we know it happened?

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

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

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

Who is impacted?

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

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

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

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

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

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

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

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

Other Blogs

Payments Part of OS: What does that Mean?

Big Changes to NFC: Payments as Part of the OS

Stage 4 Evolution – Distributed Innovation,

ApplePay – eCommerce Distruption

iPhone 6 – Apple’s Platform Opportunity

 

CEO View – Battle of the Cloud Part 5

There is a payment cluster war going on right now and it is the subject in the C Suite in Banks and the Payment industry. The battle is happening at every level. I’ll be leading a panel at Money 2020 which addresses several of these items, with participation from V/MA… should be interesting. Here are a few updates.

22 July 2013

This post is a continuation/update to my post back in March Network War – Battle of the Cloud Part 4. Sorry for typos.

There is a payment war going on right now and it is the subject of C Suite strategy talks. The battle is happening at every level. I’ll be leading a panel at Money 2020 which addresses several of these items, with participation from V/MA… should be interesting. Here are a few updates.

Network Clusters

Network/Routing/Rules

  • $8B Revenue Impact. I apologize to my EU readers for my constant US focus. Let me break the mold now to emphasize the earth shaking changes going on in the EU (See today’s NYT blog, and today’s WSJ). Going from 250bps + cross border fees to 30 bps will be tremendous, and may set a precedent for the US litigation between Visa/MA and top retailers.
  • EU provides a glimpse at what a world of payment “dumb pipes”  and least cost routing looks like (see Blog Payments Innovation in Europe).  Canada and Australia also follow these lines in debit (see Blog). Also see my favorite case study in Europe  Sofort – ECB analysis, and Push Payments.
  • Networks, and their members are reacting to regulation and positioning themselves (individually) to “push” their respective vision of innovation in order to protect their brand and network (see Visa Money Transfer, and Visa Portfolio Manager). I don’t mean to limit this to just Visa and Mastercard (see picture, and blog).
  • New networks are forming (see Blog on Clusters)
  • Large issuers like JPM have successfully forced Visa to break/segment its Visa net, and run under unique JPM/CMS rules with new capabilities. Visa’s CEO comments to investors: “rules must be consistent with Visa”..  My view is that this is a major crack in Visa’s network ownership (see Golden Goose on the Menu).payments pyramid
  • From a wallet perspective the rules on “wrapping” are killing much innovation (see don’t wrap me). Top issuers are actively working to inhibit wrapping of their payment products (ex Mastercard’s staged digital wallet fee of 35bps on PREVIOUS years volume of over $50M..  which only impacts paypal).  Similarly Amex and Visa are working to ensure their cards are not wrapped.
  • Rules are being issued and ignored, from Visa Money Transfer to EMV (see below). Banks tell Visa “do you want me to write the waiver or will you send it over… as we are not going to do this”.. which is one reason JPM just created its own unique rule set. Similarly US merchants face a liability shift (on to them) if they do not accept EMV cards (chip and pin). All are playing a game of chicken as no one wants to re-issue plastic. Visa has created a new type of EMV, chip and SIGNATURE, which makes absolutely no sense at all, but helps them keep customers away from PIN (which Visa despises, but everyone else loves).
  • Cross boarder fees (see blog). As 20%-30% of network revenue moves to these fees, it is becoming a substantail pain point for global banks like Citi, HSBC, Barclays, .. A big topic I can’t fully cover here

Issuance

  • US Banks are spending 90% of their time in innovation around Credit Cards. Exception is Bank of America and to some extent my old team at Wells. In either case the banks have hit a wall, and recognize that innovation can’t happen in a 4 party network. American Express is 5 years ahead of them and they can’t catch up.. they must change.
  • The NATURE of card completion is changing in both credit and debit. Traditional Payment revenue is being REGULATED AWAY as payments become “dumb pipes”. The goal most have recognized is that the real value to be unlocked is in commerce data, particularly Payment Enabled CRM (see blog). Examples of just how focused this effort is: 22 Banks working in Secure Cloud, ~$1B in Google Wallet Investment,  ~$500M in ISIS investment,  JPM just hired Len Laufler (former CEO of Argus Data) to be the new CEO of Data in Chase.
  • Banks thus need to build a network which can accommodate both payments and “other data” which they own and control (like Amex)… hence “tokenization” (see Blog, and TCH Announcement).
  • Tokenization is currently going nowhere.. but it is “impacting” the industry and many start ups as banks and networks position themselves (see JPM/Visa Blog, Start up implications).
  •  Visa and MA also have their own secret token efforts. Merchants have a much better short term win in this approach with a liability shift and reduction in interchange, but they also know from past experience that if the issuers are not on board, there will be a much broader business impact in declines (see VBV post, and Visa’s Token Strategy).
  • Retailers are attacking from below. Bottom 40% of mass market customers are not profitable for banks (Durbin related items ranging from NSF fee changes, to debit interchange) . These customers are profitable for retailers like Walmart, Tesco, Target, .. (see Blog).
  • Telcos have a chance to own a new payments network, as they have both physical distribution, customer relationship, connectivity and device.. but they are focused on controlling a handset in a walled garden strategy. To succeed they must refocus efforts on COMMERCE, which means partnering with all participants to construct a value proposition (see blog).

Acquiring

  • The first hurdle of any “New” network is to get the merchants and acquirers on board.
    1. This is NOT going well for companies like Paypal … hence the complete failure of their DFS partnership (see blog). Specifically, there is at least one major acquirer which is refusing to route traffic on any of these new Discover/Paypal BINs, as well as at least 2 major retailers. Although Discover is a 3 party network, they only acquire directly for their top 100 merchants. Therefore Paypal must “incent” and negotiate with every single other acquirer AND merchant.
    2. Chase is working to build a new CMS acceptance brand, which will be different from Visa.
    3. Retailers are building their own network (MCX), and have hired Dekkers Davidson, a tremendous executive, to lead it.
  • Roughly 60% of acquiring profits come from bottom 30% of merchants. There are small independent merchants that are paying over 5% in acceptance fees thanks to the poor transparency within the ISO sales process. Companies like Levelup and Square are changing this (2.75% flat, or free if you commit to marketing). I’ve eaten my shoe on Square, as I never fully understood how badly the ISOs were treating small independent retailers. Their solution solves a short term pain point and also improves customer experience.
  • Acquirers are making POSITIVE headway in merchant friendly services (see blog), particularly helping merchants “merge” consumer data to gain new insights for loyalty and incentives. They are challenged to quickly ramp up this services revenue, in order to overcome the new aggregators acting on the side of small independents (ie Square).

POS Acceptance

  • Has anyone seen the graph of Verifone’s stock? Market cap of under $2B. A hardware company that could not adapt to a software world. At the bottom end they are being eaten by free Roam/Square dongles at the top end are facing integrated POS Terminals from IBM/Toshiba and Micros. Dedicated payment terminal are commodities, and thus suffer from commodity like competition. Grand hopes for re-terminalization with EMV and NFC are not happening (see blog). New dongles and mobile acceptance infrastructure is developing even in the complex EMV space (see Tedipay.com )stand
  • POS strategy centers around data as well. Google’s Zave purchase has given them opportunity to help retailers focus advertising and eliminate paper coupons independent of payment network. Other leaders like Fishbowl and Open Table in Restaurants have integrated into the POS. The BIG idea here is to integrate the POS to the cloud and Google is now 5-7 yrs ahead of everyone (2 yrs engineering, 2 yrs IBM Certification, 3 yrs to sell and test w/ retailers, +++ yrs in content/ads/targeting).
  • Square’s new Stand is an integrated payment, POS, inventory management, CRM, marketing and loyalty system.. all on an iPad.
  • Payment Terminal “software”. Verifone’s Verix architecture and equivalent schemes have failed. Idea was to allow 3rd party developers to create “apps” for a non-secure space in the payment terminal. For example, 2 years ago, Google’s first version of wallet leveraged NFC to communicate “coupons” to the payment terminal, which then relayed to the POS.  Problems are obvious..  A grocer like Safeway has 2,000 person development team around their IBM 4690 POS, guess how many engineers support the payment terminal? NONE. They don’t want apps on a PCI compliant payment terminal.. it goes beyond question of who will manage them. Also note that payment terminal interaction with the POS is simple today (payment request and authorization).  There is also significant development work to RECEIVE coupons from a PAYMENT Terminal.

Services

  • This section could fill a book, so I will make this brief. All network participants are working to deliver services. The 4 party networks cannot innovate. For example, take a look at my very first blog, topic was Googlization of FS. Visa built an offers services with Monitise and Clairmail 3-4 yrs ago, but the large issuers refused to use it, preferring to innovate themselves. Another example is V.me, a topic which makes Card CEOs red faced. These points exemplify the dynamic w/ V/MA and the large issuers.. Issuers want to dumb down the pipes and limit services, V/MA want to grow them and relationships with consumers.
  • Current state is myopia.. everyone is working as if they uniquely own the customer. Banks and Card Linked offers are top example. When you go into a bank branch, do you want to buy socks? dog food? Of course not! Banks have great data but they are in no position to run an advertising campaign. I’ve run 2 of the largest online banks in the world (Citi and Wachovia) and can tell you retail customers spend about 90 seconds with me, they log on check their balance make a payment and leave. They don’t stay around to click on coupons. Commerce, and retail, is in the midst of a fundamental restructuring as online and off line worlds converge in new ways (beyond show rooming).
  • Payments are just a small part of the overall commerce value chain, yet they have by far the highest cost. The proposed 30bps EU fee cap may occur in other markets, thus banks are working feverously to build services to replace this revenue (primarily around credit cards), with CLOs largely failing to deliver value (see blog). Yesterday we say Ally Bank discontinue Card offers, following Amex last week.

Google in Payments: Why Yesterday was BIG News

For eCommerce/mCommerce merchants this may be the biggest “no brainer” since Cybersource offered to offload card processing/fraud risk management. This is a V.me killer… from both cost, and advertising perspective.

16 May

—- Correction — MA rate for non-regulated debit is 160 bps (not 105). My old Google card in the NFC wallet was card present.. I forgot to make the change to card not present…  Rate table below —-

Yesterday Google rolled out InstantPay, and a new planned P2P service integrated with Gmail, wallet, … etc. Although this is a step back from the physical card revealed by Android Police in November.  This is a VERY BIG DEAL for payments. Why?

Merchant Value Proposition

  • Reduce payments cost. No matter what card customer uses, everything will be priced as a non Durbin Debit (160 bps). This marks the First Time Ever a provider will take a LOSS on every payment, to get the data.
  • Customer uses whatever card they want, credit, debit, Amex.. or even ACH.
  • Merchant keeps current processor. The payment metaphor is a 16 digit PAN.. a Google MA that wraps everything else (see don’t wrap me).
  • Increased Conversion (particularly mobile). One button (pay with Google) and everything is filled out.
  • New performance measurement tools in google analytics
  • New offers and ad types possible (dependent on redemption, and/or number of purchases)
  • Possible loyalty programs
  • New physical merchant use cases (buy on mobile pick up in store).instant buy

Consumer Value

  • Centralized payment instrument/fraud protection. I’m not giving my card number out to all merchants
  • Ease of use.. no more form filling
  • Centralized e-reciepts
  • Use any payment instrument I want
  • Store coupons/incentives in wallet
  • Wallet on Android no longer NFC dependent

Consumer “downside”

  • Google gets to see more of your data.. but who do you trust with it? Google vs. Banks vs. none of the above.ma rates non-regulated

Core INNOVATIONS

  • Expanding the google master account (GAIA) to manage verified identities and making new services available (to these consumers it has verified)
  • Ad delivery: Leveraging customer insight and “touches” to influence consumer
  • Ad quality: closing the loop with payment.. what ads contributed to what ACTUAL behavior
  • PAY FOR PERFORMANCE Advertising!??  No more CPC? one obvious future is if Google can see transaction then the could bill merchant for advertising based upon the purchase (not on the click). This is the Holy Grail of advertising and if there are indeed plans here.. it is beyond a moon shot. As an advertiser I would only pay for marketing that led to customers buying from me. This would spawn an entire new industry of campaign managers. More on this in future blog.
  • Phone as tool for Authorization of a given identity.
  • Business model… big win for merchant (cost, conversion, experience and reach) and consumer (protection, convenience)…

For eCommerce/mCommerce merchants this may be the biggest “no brainer” since Cybersource offered to offload card processing/fraud risk management.  This is a V.me killer…  from both cost, and advertising perspective. The primary challenge Google faces is that 70% of eCommerce sales are controlled by Amazon, eBay/PayPal/GSI, and Visa/CYBS… They can make it difficult for smaller brands to turn this on.. but it will happen… Amazon may even want to let Google eat 1% interchange on all their sales.

Osama and the Google team have done great work getting this out to market. Congrats.

P2P

On the P2P side.. not quite sure. Sending money in gmail is certainly better than a stand alone service.. but EVERY SINGLE P2P effort money with gmailhas failed: Obopay, Visa Money Transfer, ClearXchange, POPMoney, Zashpay, paybox, ..  Consumers just don’t pay other people (like babysitters or golf bets) electronically, nor do they PAY FOR PAYMENTS. There is a strong social element in giving and receiving something of physical value (ie cash). Remember when your Grandmother sent you a birthday card with $20 in it? It just wouldn’t be the same if Granny sent me an email with an electronic notice..

With respect to Google’s new service, I will certainly say that Google has done a great job with integration, and there is no more highly used service in the world than Gmail.. so if anything had potential.. this is it. Google is not exactly a culture that seeks operational folks.. more of CREATORS.. not regulatory, payment ops, KYC, dispute, … experts. This will be one GIANT headache of a service to manage (globally).  If they can make this work, and extend to android.. it could be the LINCHPIN to ubiquity and payment success in emerging markets. Payments for “free”!!?? If cross border were enabled, what would this do to Xoom? PayPal? WU? See my blog on Growing the world’s economy and poverty alleviation.

 NFC Thoughts

Is Google walking away from NFC? Don’t think so.. there are probably markets where it makes sense. US doesn’t seem to be one of them.  Remember the NXP chips only just recently allowed more than one card emulation application.. so for last 5 years everything had to be Visa, or MA, or Amex.. ISIS is facing delays because of lack of Gemalto SWP SIMs and the handsets to support them… and consumer “demand”.  The NFC ecosystem is dead in the US… the only people that win are banks and telecos.. Merchants are not enabling contactless.. for a reason. As I told Google 2 yrs ago, to establish consumer behavior, you must use it 5+ times per week. There are 3 critical payment areas for this: Grocery, Gas and Transit.  Without participation here.. no payment change will occur.   See my note on Apple and NFC, and Google Wallet.

My top recommendation is to integrate this tightly with KYC/Authentication initiatives..  See blog on reputation.

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 V.me 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/V.me. 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.

Least Cost Routing – Part 1

25 Feb

I did a google search on least cost routing and found very little written about payments (much  telecommunications). LCR seems like a rich blog area.. however today is just a tickler for a future part 2 (I’m slammed). LCR in payments is similar to telecommunications.. how do I route information through an optimized route that considers speed, cost and risk (a pmts only consideration)…

My jaw dropped as a start up CEO sent me this link below. This is a brilliant business patent… It also provides a very interesting “future view” on Bank’s plans with respect to Tokens and Routing http://www.google.com/patents/US20120265680 . Author of Patent is a good friend Dickson Chu, and former product manager of PayPal. Tokenized least cost routing.. Dickson seems to have designed LCR for the bank side… from his PayPal experience…

…  eligible payment transactions are routed, using the payments interface processor, to an internal payment transaction processing path of the first party. In such cases eligible transactions are settled without routing the transaction to external card processing networks. Alternative payment processing paths are identified for non-eligible payment transactions. In addition, transaction costs of such alternative payment processing paths are determined. Non-eligible payment transactions are routed, using the payments interface processor, to a payment processing path other than the internal payment transaction processing path.

From a bank perspective this is brilliant… enabling cross border, cross network clearing and settlement.  My top question: how can banks get tokens adopted by consumers, merchants and processors in the first place? My guess: Banks will work to influence consumers directly through a new brand and capability. Similar to the V.me, and google wallet API, banks will work to push consumer tokens into mobile wallets. In other words there will be  a button in online banking where you push your payment account into selective wallets.. as opposed to consumers entering the card information directly into the merchant’s platform. Remember this model is 100% analagous to how cards were “provisioned” into NFC wallets.. but we are replacing encrypted card emulation with a unique token and a common interbank token directory. This model continues current card “merchant anonymity  by abstracting from merchant consumer identity.

There would seem to be significant implications to the Visa/MA relationships if this one works out…

lcr

 

 

 

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 V.me 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.

Summary

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?

Payment Tokenization

Banks don’t really want consumers to choose… not really… they will make their favored option seamless and ensure friction with everything else. This is normal business behavior, but payments are a networked business. Banks SHOULD be neutral here.. they DO NOT direct commerce but support it.

From blog yesterday I had several friends ring me. Turns out the card networks and individual banks are SEPARATELY pushing Token ideaS..  unfortunately none of the token schemes has individual adoption, no less interoperability.

Per my blog yesterday, ACH debit tokens can work, particularly if the consumer doesn’t have to enter them. Also in ACH, banks are in a position to influence acceptance.  Consumers could even go to the online bank to permission the payment instrument in the first place. This is the model of V.me and Google wallet (w/ the new Saveto API). In this model the consumer never enters anything.. the BANK enters the customer information in the wallet. Of course banks DO NOT want consumers to use ACH.. there is no revenue here.

Therefore Banks don’t really want consumers to choose… not really… they will make their favored option seamless and ensure friction with everything else.  This is normal business behavior, but payments are a networked business which supports Commerce. Banks SHOULD be neutral here.. they DO NOT direct commerce but support it. Their partnering approach is thus completely broken…

Thus the conundrum. The network where banks have the most influence is ACH, yet they don’t want to encourage ACH use as there is no revenue. We have a world where consumers can enter information directly, or ask their bank to enter it for them (V.me and Google).

One bank even seems to be creating a scheme that blends both ACH tokens AND Credit card tokens… in the hopes of being the “master directory” of payment information in a consumer’s wallet. Their dependency: consumer, merchant and wallet participation (ie. when pigs fly).

Why would any merchant want to give up card information and exchange it for tokens? Well there could be some incentive with reduced CNP rates.. and fraud liability shift… but isn’t that 16 digit card number already a token? Any approach must start out by being invisible to consumers (like V.me.. yes I am saying something nice about Visa).

I was talking to the KC Fed a few months ago.. brainstorming a little.. like what if you opened up Fed Wire to non-banks (ie regulated MSBs). That would really throw a wrench in all these future token plans… well I guess there would be one little problem… fraud.. but if an entity could crack the authentication/authorization nut this would be a great approach.

vme enrollment

V.me: Issuers please give me your customers

Banks.. get serious about this. Why would you want to let Visa step all over your brand and start delivering services to consumers directly? This is the start of a major tipping point for Visa… the Top issuers are fuming… but Visa may be able to build consumer adoption ahead of banks pulling the plug on it.

16 Nov

Visa is an independent for profit company… they are on a tear with adjusted earnings up over 19% and the stock up over 40% for the year. Who are Visa’s customers? They are a network, created by banks.. but they only set rules.. historically they don’t have direct relationships with merchants or consumers; the issuing bank owns the consumer, and the acquiring bank owns the merchant. Their primary customer is therefore banks (issuing and acquiring).

With the CYBS purchase, Visa gained direct merchant relationships. CYBS at one time handled over 25% of eCommerce transactions. The “big 3” in online merchant services are now eBay (Paypal+GSI), Visa (CYBS) and Amazon. Visa is looking for ways to expand its network, services and revenue base. The expansion is very hard to do if you are dependent on your member banks, hence Visa is looking to establish a direct consumer touchpoint in line with Cybersource’s merchant capability.

In my very first blog (2009 Googlization of Financial Services),  I outlined both the alert service that Clairmail built for Visa, and the advertising/offer engine they had put in place. Neither the alert service nor the ad service had taken off as issuers were not exactly thrilled with expanding Visa’s services or opening the door to Visa’s efforts to communicate directly to consumers. Clairmail has since been acquired by Monitise ($173M in March 2012).  Monitise is the entity that build “Visa Offers” and initially was “the mobile horse” which Visa intended to ride … until they upgraded to Fundamo. Now Monitise seems to be focused on the offers product… (See Visa Mobile Strategy). Visa wants to get into the card linked offers business (Visa Offers, FreeMonee, Monitise,…), and has had the technology working for sometime, they also want to get into the wallet business. (see Battle of the Cloud)

Neither of these services are to the best interest of issuers, which is why we see a hodgepodge of small banks without the resources to properly digest the strategic impact, or build the technology themselves in this recent V.me “50 bank pilot”. Let me be crystal clear on what I believe Visa’s strategy is:

  1. establish direct consumer service
  2. start with eCommerce (autofill) functionality to speed checkout and improve conversion
  3. add alerts to give consumers knowledge of card transactions
  4. add incentives/offers in 18 months (they already have built the service)

This is why Visa hates the Google service.. it steps all over their plans online.. as well as at POS (not in scope for this blog).

Take a look at V.me terms and conditions. They have done a great job in obfuscating their strategy in this document, as it clearly states that issuers have control

These Terms do not amend or otherwise modify the cardholder agreement or any other terms and conditions of your Issuer. In the event of any inconsistency between these Terms and your cardholder agreement with your Issuer, these Terms govern as to the relationship between you and Visa solely with respect to V.me and your cardholder agreement with your Issuer governs as to the relationship between you and your Issuer. You are responsible for ensuring that your use of the Services complies with your cardholder agreement with your Issuer.

Visa Alerts is the service where banks should start to become concerned. For the first time, visa is creating a list of consumer names, emails (above) and mobile phone numbers. Alerts will start with card usage, and then they will morph into incentives and offers based on spending patterns. These incentives will be offered completely separate from the issuers. In the V.me privacy policy “We share some information, but not your full card number, with merchants you pay with V.me” and “We may contact you about your V.me account, service updates, and new V.me features”.

I’ve got news for the V.me participating banks.. why don’t you just give Visa your customer list and give them permission to use it as they want? You have just given Visa much more.. They can now act on transactions they see on the switch.

I see Visa quickly expanding the service beyond eCommerce to physical commerce primarily around offers and alerts. You will be able to redeem offers across any card stored in your V.me wallet.  This means that V.me will work without eCommerce merchant adoption… and could be a stand alone offers platform. Of course they don’t want to lead with this… but it is indeed where Visa sees the best margin.

Banks.. get serious about this. Why would you want to let Visa step all over your brand and start delivering services to consumers directly? This is the start of a major tipping point for Visa… the Top issuers are fuming… but Visa may be able to build consumer adoption ahead of banks pulling the plug on it.

There is certainly no reason to worry.. take a look at the participating merchants https://www.v.me/shopping/  not exactly a whose who of online merchants. Why is this? well my merchant friends are also aware of Visa’s efforts to do the incentive business and the last thing they want is another entity switching consumers to the lowest cost provider. V.me on an eCommerce perspective is fine.. but what Visa doesn’t realize is that Google, Paypal an Amazon all have this today. (ex Google has autofill in Chome browser and Android…). If Visa has trouble signing up its own CYBS merchants.. what issues do you think they will have in signing up with those on GSI?

Battle of the Cloud – Part 2

Where are the cloud battle lines? Well most significantly the battle lines are forming away from NFC. The Cloud battle is complex, as the strategies are about MUCH MORE THAN PAYMENT. Payment is the ubiquitous service that is the last phase of a successful marketing, engagement, shopping, selection, deliver, retention, loyalty process.

29 August 2012

Previous Blog – Part 1 – May 11, 2012

Let’s update the Cloud Battle story and discuss events since my last post on the subject

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

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives

Since May, the following “significant” events “in the battle” have occurred:

  • Retailers have launched MCX with Wal-Mart’s Mike Cook as the lead. I want to emphasize, this is not “mobile payments” but rather a low cost payment network (Cook talks about $0.05/payment). Some retailers will seek to integrate their loyalty card, others will create plastic (see Target RedCard), others will certainly couple with mobile. WMT will likely integrate with a virtual wallet that manages digital coupons (Coupons.com likely leading)
  • Apple has rolled out Passbook in June.. See my Blog, and hardware analysis from Anandtech of why there is no NFC.
  • PayPal had a marketing announcement with Discover. Why would you announce something like this with no customers? Paypal is expanding its network… but merchants are just laughing.. MCX wants a $0.05 payment, Durbin gave them a $0.21 payment and Paypal wants to get 180-250bps. As you can tell, I don’t think much of this, as the Merchants are still in control of their payment terminal. This is also not an exclusive deal with Discover. I expect 2 other major players to partner with Discover in next few months. Paypal just wanted to run with this announcement before the other products come out. I also want to emphasize that DFS is a BUY. They will be a partner of choice as they run a subscale 3 party network that can adapt much more quickly than V/MA. As a side note,  Paypal will likely expand distribution of their own plastic.  See related blog.
  • Google rolled out Wallet 1.5 on August 1 (see blog). This is one of the biggest moves in payments and provides an enormous retailer value proposition (aligned to MCX). Google didn’t follow PayPal, Passbook, or Microsoft.. they rolled out product that was 1.5 yrs in progress.  Google’s new cloud wallet allows the consumer to select any payment method, and provides the merchant with a debit rate (Bancorp non-Durbin 1.05% + $0.15 (note Google/Issuer can lower this for merchants, as any issuer could, this is a MAX rate). Google is CURRENTLY loosing money on the payment side of the business in hopes of making it up on the advertising side. This is no marketing announcement like Apple, Microsoft and Paypal.. this is a product announcement.. it is working today in my new Galaxy phone. This is also the first PRODUCTION cloud wallet for the POS. Apple, Amazon and Paypal dominate cloud wallets in eCommmerce and mCommerce. Google and Amex’s Revolution money are the only one’s doing it at the POS.
  • Square acquired all 30M Starbucks mobile payment customers (see Blog). Square has done a great job acquiring merchants.. but was hurting on the consumer side. Square wants to build network and needed a pop on the consumer side. Square’s business is pivoting toward marketing and consumer experience. Within the next year, the little Square doggle will be a thing of the past. Starbucks is committing to the Square register experience, and Square is relabeling “card case” to “Pay with Square”.
  • LevelUp is making payments “free” for merchants as part of a loyalty value proposition. This is an example deal.. expect more to follow. Issue is that different merchants have different priorities. LevelUp is focused in QSR/Casual Dining and is operating as part of a loyalty play. I’ve outline their revenue in this blog, don’t think it is sustainable unless they can move into acquisition.
  • ISIS has lost key executives in its product area, AT&T is rumored to have a NFC/Wallet RFP of its own out and even Verizon is planning to let Google go ahead and put its wallet on the Samsung Galaxy III phones.. after all what choice does it have?
  • Card linked offers and incentives in the cloud. No one is making money in this space, large retailers are not participating, hyper local merchants (who are interested) are very hard to sell to, and consumers don’t see relevant content (thus redemption rates under 2%).

Where are the cloud battle lines? Well most significantly the battle lines are forming away from NFC (as I stated in January). Even my old friends at Gartner have caught up and placed NFC in the trough of disillusionment. To restate, NFC is not bad technology.. but it delivers no “value” in itself beyond control. Mobile operators have consistently failed to build a business around a “control” strategy (see my Walled Garden Blog). In the  ISIS example they mandated use of credit cards only, as this higher credit interchange was the only way to make revenue. Well guess who pays the freight here? Yep the merchants…  Wal-Mart and its peers were not thrilled at giving issuers and MNOs 3.5% of sales for the privilege of accepting a mobile payment.

The Cloud battle is complex, as the strategies are about MUCH MORE THAN PAYMENT. Payment is the ubiquitous service that is the last phase of a successful marketing, engagement, shopping, selection, deliver, retention, loyalty process. Leaders from my vantage point:

Payment Networks:

  • Mastercard focused on acting in supporting role globally.
  • Discover similar to MA, but with much greater flexibility as it operates in a 3 party network and is both issuer and acquirer.
  • MCX – Not a leader yet, but has CEO mindshare of every top US retailer. They seem overly focused on the cost side. There is a very big whole in their customer acquisition strategy. MCX is bidding out its infrastructure now, my guess is that Discover or Target will win it.. and the the RFPs are just a way of keeping Banks “in the tent” to keep them from changing ACH rules to kill it like they did to Scott Grimes at Cap One (decoupled Debit).

Physical POS:

  • Google – has more consumer “accounts” than any company on the planet. Can it convert them to accounts with a linked payment instrument? Google also “touches” more customers, more times per day than any other company, its heavy influence in the shopping process positions it well with retailers. Also has the best retailer sales force of anyone on this list, as they bring in customers to retailers every day. Android/Google Wallet….
  • Square – Best customer experience hands down (register). It also has the most traction among small retailers

eCommerce/mCommerce:

  • Apple – expect Passbook to dominate mCommerce. It will be the killer app.
  • PayPal – Challenged in market adoption beyond eBay/GSI customer base. Top ecommerce sites like Amazon and Rakuten have their own integrated payment, also 50% of eCommerce/mCommerce goes through Cybersource which Visa acquired. Paypal’s future growth driven by international
  • Amazon – leading eCommerce/mCommerce player. When will it take one-click beyond Amazon? Amazon’s experience is best from end-end…. PayPal/Apple will operate around the periphery of non-Amazon purchases.
  • Rakuten – “Amazon of Japan” who now also owns buy.com. Fantastic experience and leading eCommerce loyalty program.

How many places do you want to store your payment credentials? Who do you trust to keep them? What data do you want providers to know about you?

From a macro economic perspective, total payment revenue for all major participants is just under $200B in the US. Total marketing spend in the US is over $750B. Total retail sales in the US is $2.37T (not including oil/gas, Fin services, T&E). Marketing is fundamentally broken… payments is not. Retail sales gross margin has been compressed from 4.2% in 2006 to 2.4% in 2010. Who is best able to execute on the combined retail and marketing pain points? Who can be retailer friendly? Consumer friendly? Marketing friendly?

I start my analysis with #1 the consumer value proposition, and #2 the merchant value proposition. Entities like Google, Paypal, Apple already have tremendous consumer relationships and traction. They thus have very few “acquisition” costs. However, these entities do bear the costs of changing customer behavior. There are many approaches for changing customer behavior:

  • Incent behavior – direct/indirect/merchant
  • Customer Experience (ex Square)
  • Service integration (reduce effort or # of parties)
  • Reduce risk – financial (security/anonymity…)
  • Reduce risk – purchasing (social, community reviews, …)
  • Value proposition in commerce process (indirect incentives)
  • Marketing
  • ..etc

Other groups like MCX and ISIS bear the cost of both customer “acquisition” AND behavior change for: Consumer, Merchant or Both. As I state previously. one of my favorite arcane books I’ve ever read was “Weak Links” I’m almost reluctant to recommend it because it is so good you may jump ahead of me on some of my investment hypothesis. One my favorite quotes from the book

Scale-free distribution (completely open networks) is not always the optimal solution to the requirement of cost efficiency. .. in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks.

Networks like V, MA, PayPal, Amex and DFS are working to participate in this new Macro economic opportunity. But established networks are hard to change

“The network forms around a function and other entities are attracted to this network (affinity) because of the function of both the central orchestrator and the other participants. Of course we all know this as the definition of Network Effects. Obviously every network must deliver value to at least 2 participants. Networks resist change because of this value exchange within the current network structure, in proportion to their size and activity.”

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives (new digital coupons).

The current chaos will abate when an entity delivers a substantial value proposition that attracts a critical mass of participants. Today most mobile solutions are just replacing a card form factor… this is NOT VALUE. I am currently placing my bets on solutions that merchants support (Square, Google, MCX, LevelUp, …) as this is a key “fault” of almost every other initiative.

Comments Appreciated (as always sorry for the typos…)