Payment News for May.. What a Month!

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

15 May 2013

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

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

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

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

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

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

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

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

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

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

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)


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?


  • 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 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.

Random Thoughts: Settlement, NFC and CLO

My bet on retailer plans? Well they are not exactly a small group marching in unison, so response will likely differ by segment, ticket size, purchase type (ex non-discretionary gas) and influence.

16 July 2012

Retail settlement

As most of you have read a $7.25B settlement was reached with some US retailers (led by Kroger, Safeway, Payless, Rite-Aid). I’m not going into depth on the settlement but rather the likely response by retailers, and potential impact on Visa/MA earnings.  The big retailers have been assuming that this settlement would be reached and have been in the midst of a plan. What would you do if someone was taking 3% of your sales and your average profit margin was 2.4% (ref page Aii IMAP Study)?  Well the retailers have plans to leverage a portion of this $6B windfall and invest it in a payment network they can control. Perhaps they should turn around and buy Discover (DFS market cap $18B). This rumor has been in the market (perhaps a driver of 2012 performance).

The US has 2 other countries which serve as benchmarks for a shift away from credit card at POS: Canada (Interact – debit launched 1994) and Australia (EFTPOS). Unfortunately I have limited information on Visa/MA transactions in these geographies to generate a decent analysis of spend shift. From we see in Canada that roughly 80% of all retail card present transaction are done via Interact (2011 GDV was $182B). I’m not implying a 40% hit to Visa’s GDV is imminent (US is $507B out of global $956B GDV for quarter 31Mar12), particularly since there is no competing network like Ineract (YET). But there are certainly references for success.

I presented some of the Retail Drivers last week and also in my March post (Retailer Wallet). My bet on retailer plans? Well Retailers are not exactly a small group marching in unison, so response will likely differ by segment, ticket size, purchase type (ex non-discretionary gas) and influence.


  • Credit card use fee in 2-4 months nationally


  • Slower roll.. we will see marketing to inform customers of the costs of credit and plans to implement a fee for use of credit cards
  • We will also see tests of fees in isolated stores/geographies. Not only assessing customer issues, but also competitive responses.
  • Loyalty cards that will be integrated into a payment system
  • Loyalty cards that have integrated digital wallet (WalMart issued a Digital Coupon RFP over 18 months ago).
  • Incentives dependent on payment type
  • Push for PIN Debit.. as it allows the retailer to route away from Visa/MA directly to the bank.

Big Ticket Retail

  • No fee likely as they benefit from access to consumer credit
  • “Carrot Trials” of Rewards programs and targeted offers will be contingent on payment type
  • New loyalty cards

Apparel / Luxury

  • Least likely to implement a fee.. wait for other stores to establish customer behavior.


  • No fee likely…
  • Discounts for debit, particularly with airlines.
Visa/MA impact. Minimal through 2012, but could result in negative US transaction growth by 2014 unless networks are successful in delivering some sort of retailer friendly service.


I’m still just laughing at the mainstream press’ reaction to Apple iPhone 5 plans. Perhaps I should crying at the disinformation that mobile payments (at POS) are taking off. Everyone should ask: what kind of mobile payments?… Transit/ticketing is a slam dunk for NFC technology, yet NFC is having problems (witness London TFL’s decision to defer). Other mobile payments segments which are doing quite well: mCommerce with Amazon reporting around $2B, Digital goods with Zynga leading the category around $1.2B (investor relations).

But the mobile payments at the physical POS? This has not even started. (update.. Starbucks is clear leader here)

I don’t know how much more bluntly I can educate the NFC aficionados, but retailers have not gone gaga over mobile POS payments.. In fact I will state that Payment is not the killer app for NFC.. payment delivers NO VALUE to the Retailer.

For all of you looking at Apple’s patents and thinking they will eventually put NFC in… here is news for you: every one of the patent claims could be fulfilled by Bluetooth (replacing NFC). In order for NFC to take off, the carriers must let go of control (see my long blog here on MNOs walled garden strategy). There is nothing wrong with NFC technology, but unless the carriers are willing to front all investment for retailers, consumers, marketing , …  this will never take off. There is a value proposition problem (payments only) AND a control problem.  The US MNOs won’t even work with Google who has built everything for free.. free is not good enough for them….  They want control…

Card Linked Offers

I have new stories of just how bad the open rates are on these offers, but most revolve around a central problem. It goes something like this

1) Banks want to get consumers interested in offers. The consumer experience is TERRIBLE (no discount on the receipt) and banks are experimenting with 3 types of distribution. Integrated into online banking (Bank of America), e-mail, and secure messaging.

2) Retailers are not buying basket level discount advertising.. they never have. Retailers must pay for the offer (15% back), the revenue share (% of margin) AND the tax on the offer since it is technically treated as a retailer rebate. Total Retail cost for the offer is approaching 25%.

3) Given lack of retailer participation, Banks (and the offer companies) are thus forced to create offers themselves with no retailer participation (see my WalMart Story)

4) Banks do not want to let consumers go with “no offers” so all available inventory is distributed to “everyone”

5) The poor targeting (universal distribution) has a twofold effect: Consumers see garbage offers and start to tune out the channel, retailers see poor lift in performance as the offer redemption is done by existing customers that would have normally come to store

I could go on.. the exception to the rule of CLOs is Card Spring.. I like them quite a bit. Also Linkable just purchased the assets of Offermatic, which will enable them to link offers across card networks (using Yodlee)..

BAC – Offers Success?

10 Years ago I was a banker in the room with Wal*Mart and they asked “what justifies any card taking a percentage of my sales”? “What customer have you ever brought me”?

4 June 2012

I’m using my new BankAmeriDeals and I like it.. really cool. Here is my WalMart redemption. What is success here? For Bank of America? For Wal*Mart?

10 Years ago I was a banker in the room with Wal*Mart and they asked “what justifies any card taking a percentage of my sales”? “What customer have you ever brought me”?

Will Card linked offers be the vehicle by which banks finally deliver value to retailers?

As I mentioned in my previous CLO Blog the average gross margin in Retail (globally) has gone from 4.2% in 2006 to 2.4% in 2010 (ref: IMAP’s Retail Industry Global Report 2010). Given this margin compression, and the fact that retailers spend very little of their own money on marketing, you can see why basket discounts are not widely used, but rather targeted. Given that this Wal*Mart incentive is for 5% cash back, it would seem to be somewhat unsustainable. Even worse.. it was given to every Bank of America Customer.

For this 5% cashback offer, Walmart receive no incremental spend, it was my wife’s normal trip to the grocery store. She didn’t even know I registered for this program.

Quiz time. Who funded the BAC WalMart offer?

1) Wal*Mart

2) Cardlytics

3) Bank of America

Yes it is #3 according to my sources. Bank of America is funding almost half of the incentives in their program, and they are not alone. Retailers are not advertising in the CLO space because of issues associated with “lift”, “reach”, targeting and distribution (outlined in my previous blog). BAC is not alone, rumors are that almost 50% of all CLOs are actually funded by the participating banks or even the venture money received by the “platforms”.  Wow..  I had no idea it was this bad.

My guess is that BAC will now have data to take to Wal*Mart and show what incremental spend they drove. Although 0 incremental spend for me, BAC will be able to show WMT that some consumers chose to switch their grocery purchase because of this 5% incentive. This will in turn lead to “targeting” of incentives to particular audiences and also lead PERHAPS to Wal*Mart participation.  I think this is a very smart move by BAC, and they are 3+ years ahead of this on debit.. all of the other banks are chasing the credit side.

The downside is that the retailers know this is a VERY SLIPPERY SLOPE.  Now that WMT participates.. the banks will go to the other grocers to switch them back.. and then these incentives will be an added cost of doing business for all who wish to influence highly elastic customers. The alternative is to target product level incentives to customer (item level) elasticities. This is what the retailers are planning to do outside of the CLO space, and why BAC will find few “takers” for this. is the leader in grocery space with Safeway and WMT, google is close behind with its recent Zave Networks acquisition and Inmar with recently purchase mdot.

Outside of grocery the same dynamic exists.. cards can indeed motivate a switching behavior with some customers.. but is this a Faustian bargain for retailers?

Take aways:

  • Card Linked Offers have a very long way to go
  • CLO Companies and the banks are paying for the incentives
  • BAC is only bank active for CLO on debit
  • … all of the other issues on value proposition mentioned in previous blog



Commerce Network Puzzle

What are the puzzle pieces that will make “rewiring commerce” work? Small companies are very challenged in delivering value within networked business. They certainly do not have the heft to create their own, so they must choose sides. Within the card linked offers space, they align to the big card networks. This alignment has implications for attracting retailers and the targeting which can be done from bank data (store preference) vs the targeting which retailers can deliver (brand and price).

This is brief.. just something top of mind. This is an extension of my previous blog this month on Remaking of Commerce and Retail. I wrote today on linked in

POS and Payment Terminal mfgs have 30+ groups trying to add coupon and payment functionality. Their message.. FIRST get a retailer that wants it. Verifone’s Verix architecture provides retailers with capability to run 100s of POS apps… but retailers are skeptical.. will “apps” drive revenue? will it confuse customers? What will drive loyalty to MY BRAND vs. some start up? who is going to manage the mess when something doesn’t work?

All of the Card Linked Offer companies (see my blog), PayPal, ISIS, Google, Groupon, Living Social, Fishbowl, Inxent …are trying to integrate into the physical POS.  There are 2 primary options to integrate marketing into the checkout process: the Electronic Cash Register and the Payment Terminal.

I speak quite a bit with Verifone’s investors about their POS vision.. Will NFC drive reterminalization? Will payment terminals morph into a rich customer interaction environment? Big retailers like Safeway and WalMart have teams of 500-2000 developers around their core IBM 4690 ECR (ACE, GSA, SurePOS,…) and heavily customize it.  Take a guess how many people retailers have in managing their payment terminal? The answer is usually zero..  The reason the payment terminal (where you swipe your card) came into being was that retailers did not want to deal with PCI compliance, so their processors (like FirstData) came in with the terminals. The Cards get encrypted at the swipe and no one but the processor has the key to unlock the numbers. The ECR sends total amount and the payment terminal tells them it is paid with an auth number.  I thus find Verifone’s Verix architecture somewhat amusing…  I certainly see how retailers would benefit by taking electronic coupons from this terminal (and sending to ECR), but the terminal does not give receipts and certainly doesn’t allow for matching of UPC information.  Even if it did… the retailers don’t want to create a new IT team to manage this mess on a piece of hardware they don’t own.

Will Verifone sell new terminals because of NFC? YES. Perhaps even as much as a 20% reterminalization (over baseline) in next year… BUT my bet is that the POS  manufactures will win the battle long term both due to retailer IT competency and the tremendous capability for POS manufactures to deliver complex business solutions (IBM is 80% of top 20 global retailers).. Things like coupons are not some abstraction… they relate to pricing and loyalty and must be integrated into a retailers price promotion strategy. Currently we are in experimentation mode… with leaders like Google, Catalina and

What are the puzzle pieces that will make “rewiring commerce” work? Small companies are very challenged in delivering value within networked business. They certainly do not have the heft to create their own, so they must choose sides. Within the card linked offers space, they align to the big card networks. This alignment has implications for attracting retailers and the targeting which can be done from bank data (store preference) vs the targeting which retailers can deliver (brand and price).

In general, the Marketing and Shopping phase of a NEW commerce process requires the following

1) know the customer,

2) deliver an incentive that is relevant and prompts action,

3) in a way that is integrated to the retailers brand and price promotion strategy,

4) with a great redemption experience

5) and prove to the advertiser that the campaign was effective

The Business platform necessary to deliver on this?

1) Campaign Management

2) Customer Data

3) Advertising distribution (virtual, physical, … how do you get eye balls)

4) POS Redemption/Retailer Integration

5) Massive Customer value to change behavior (relevancy, value, usability, convenience, entertainment, social, …)

6) Global sales force that can sell to retailers

Notice that Payment is not listed.. Payment is not a problem in physical commerce. Now that Durbin allows for STEERING.. you can imagine what Retailers want to incent…

Green Dot Bank: Finally Wal-Mart gets to Play

16 Jan 2012

GDOT Bank – Federal Reserve Authorization

GDOT bought Bonneville Bancorp for $15.7M + $14M Capital Infusion on 8 Dec 2011. Bonneville was a Utah licensed state bank and a  Fed member (regulated by Fed). This is a very significant deal for several reasons:

  • Sets a new regulatory guidepost in the creation of “national” bank with a pre-paid focus. See Bank Talk article on how GDOT was able to get Fed Approval, specifically around CRA responsibilities.
  • Is essentially WMT’s retail bank for consumer services (WMT owns ~15% of GDOT)
  • Model for future deals in State Chartered banks (particularly for retailers)
  • Highlights need for reassessment of “pure play” banks in pre-paid space (ex. Meta)
  • NEW PRODUCT potential in interest bearing pre-paid accounts targeted to the lower mass market

This is a brilliant move by the Fed, and by GDOT. The Fed is rightly concerned about the fact that the bottom 4 deciles of customers are no longer profitable for the big banks.. and there is an exodus. How does the US financial system retain customers in the lower mass? GDOT and WMT believe it is not through the typical branch model. Just as with Tesco in the UK, Retailers are proving to be excellent distributors of banking services. Retailers do not need to make their margins on bank services alone, in fact banking services improves the overall retail value proposition, brand and loyalty. The same holds for mobile operators internationally.  Why should I pay for all of those branches and sales people if all I need are basic payment services?

I joined Citi in 2006 with the mandate to grow the retail business without growing the number of branches. Creating the ING direct competitors.. the HOOK was high yield savings. GDOT bank could be catalyst for a new retail banking model, with a HOOK associated with “payment”, retail convenience, loyalty and data use.

What are the core product innovations? Here is my list:

  1. Combining a GPR card with retailer brand and distribution (WMT). Banks normally have to seek charters that enable them to operate nationally (ex. Fed, the now defunct Thrift, …) when doing business in multiple states. Virtual GPR cards don’t have this problem as consumers are buying a banking product in another state.
  2. Stand alone consumer value proposition. GPR card that can earn interest on funds held on balance. GDOT/WMT also have a established a rate structure that is one of the best in the business.
  3. WMT’s integrated value proposition. International transfers ( WalMart owns part of MGI they are 30% of MGI’s TPV), International Banking (Mexico, Canada, GDOT, …), StraightTalk prepaid mobile, … they have all the components to deliver value. Can they bring it all together?

Banking is a network business.. the GDOT opportunity is to build the network quickly through key retailers (as physical distribution). What other innovations can they bring to market? At the top of my list would be instant credit (Paypal BillMeLater does this through a WebBank a Utah ILC). Or real time transfers to any bank (using  $0.58 Fed wire…).

Today, MSBs are restricted in both offering interest on accounts and the length of time they can hold a balance (escheatment). There will be some regulatory scrutiny by the State Regulators on how cash in/out is performed at the physical retail outlet, and what constitutes a “bank”. From the Retailer’s perspective, the GDOT card is a product which can be bought (buy $100 GDOT reload), with cash out from ATM or through a Mastercard purchase. GDOT is a licensed MSB in 39 States (according to their 10-k) with a network of 50,000 cash in/out locations. Previously GE Money was the US bank for the WMT MoneyCard. A single state licensed bank owned by an MSB network may face some state regulatory scrutiny. GDOT can probably address by keeping as separate legal entity with its own BOD and capital.

If I were thinking of starting the next PayPal… I would skip getting MSB licenses in 47 states and start looking for a Utah bank I could buy.

What to look for:

  • Retailers following this model (including ISIS, Amazon, …). Particularly retailers serving lower mass market
  • Salary d0miciliation (direct deposit) onto a card
  • Future of GE Money. GE has been looking to sell Mark Begor’s business for some time. It is subscale, and WalMart is its largest US customer. My guess is that WMT had to develop fall back plans in case GE did sell the business. I would not be surprised to see GDOT bank be the primary bank behind the MoneyCard.. but it hasn’t happened yet.
  • Pre-paid processors and platforms looking to create their own brands.. or change their relationships to retail branded banks
  • MSBs moving toward a state bank license. Issue is cash in/out. MSBs that require their own branded physical distribution will keep MSB license… those that are virtual will move to GDOT model.
  • Consumers making switch to a “new” banking model centered around payments.
  • Semi closed payment networks with integrated loyalty and incentives.
  • New Payment Banks which make money on marketing and data (not interchange). See Googlization

For those interested in a Utah Bank.. please call my favorite Utah Banker.. Crawford Cragun..

Your thoughts are appreciated. As always sorry for the typos and the brevity.