Google/ZetaWire

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22 Dec 2010

TechCrunch – Google Acquires ZetaWire

Why did Google acquire a 3-4 person Canadian company with no customers? The answer seems to lie in its patent application

… quite an interesting read. A ubiquitous wallet, online and mobile that provides for direct communication (bluetooth, Wi-Fi, NFC, …) to other wallets and POS terminals. Interesting vision.. google as center of the mobile universe…. who would have ever imagined. 

From a payment perspective, I thought paragraph 271 was rather interesting

[0271] Because the coupon and advertising system is integrated with the payment system, it is able to target and deliver advertising on an individual basis rather than on a demographic basis. The payment system has a complete record of all the purchases ever made by a user, and because the payment system is also integrated with a social network, it can also know the purchases made by all of the user’s friends. In addition, it has access to many other streams of data providing information about a user such as the user explicitly entered preferences and wish lists, which coupons the user’s friends have shared, which coupons the user currently has, etc. The system is therefore able to build a much more accurate user profile than standard advertising techniques, and this user profile can in turn be used to deliver advertising which is customized on an individual basis.

This seems to indicate a significant gap in the understanding of the applicants surrounding financial transactions (and data).  Merchants hold on to item detail information, the payment network receives merchant level data.. but does not get item information. ZetaWire attempts to address this gap by inventing a “coupon authority” entity in Paragraph 264.

All information related to coupons and their definitions is managed by a coupon authority, which can be an integrated subsystem of the transaction authority 102. All instances based on the coupon definitions are minted by the coupon authority. Whether coupons have been applied to transactions is recorded by the coupon authority, as are coupons’ chains of custody from the time they are minted to the time they are spent, including all data related to how and when they were share

For those of you unaware, merchants are rather stingy with their store data. The Visa’s team best effort here is with Monitise and the new iPhone application “Visa Offers” (link is my related blog). It results in a coupon with a bar code and you show your iPhone to the cashier. How does google intend to integrate to merchants and receive store level data? I can’t imagine Amazon being excited about this.. or Wal-Mart in that matter.

Visa and MA take a bath on proposed debit fees

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The banks knew it was coming, so don’t let anyone fool you that it was a “suprise”. The idea of a flat fee of $0.05-$0.15 has been floated for some time. As you can see from graph on right, Visa lost 10% of its value after the announcement. While Banks and Issuers are returning their Christmas presents tonight, the merchants are having a party.. particularly large ones like Wal-Mart who in 2009 had interchange costs of $1B.

As a banker, we invited Wal-Mart to come in and talk to us in 2005. They certainly did not mince words then, I remember a few quotes explicitly “what service do you provide that justifies taking 2% of my sales”?. Another memorable quote “we want to find a model where you pay us to take your card”.  Something we laughed off back then, after all who on earth in the bank wanted to design that model? Banks “had it coming”… The interchange rate creep bore too many signs of a

“network” run amok and NO ONE stopped the train.  Banks launching campaigns like “skip the PIN and win” to incent consumers to pursue signature debit transactions (200bps+) vs PIN debit.  We only need to look at the federal reserve chart on the right to see the lack of market forces here.

I believe this is a “tipping point” event in US cards. We will see merchants aggressively incent use of debit, and the Visa and MA logos will start to come off of our debit/ATM cards, as they do in Canada and Australia (Interac, and EFTPOS). What will the banks do about this revenue loss?

All are looking for new ways to drive other revenue streams into the payment services, particularly around marketing/advertising (see my Blog on Apple iAd). The Visa and MA relationships with the large banks was already showing signs of strain. The large banks will not wait for Visa and MA to develop an alternatives, most are assessing new networks and value channels which they can control (see Googlization of FS). I’m short on V/MA because of this dynamic.

The Federal Reserve’s proposal is open for comments, and there may be a change. But the starting point for the negotiations is quite a bit lower than what the banks were hoping for.  My message to Bank CEOs: drop the fight here and find a new model for payments. Don’t let Apple and Google eat your future as well. What will it take? Well for one thing it will take a little collaboration, re-energize a few of your existing consortiums like NACHA, The Clearing House, Early-Warning to develop new models for payments and seed these team with top executives. You can’t take your eye off of this ball, retail payments is less than sexy.. but it is core to your daily interaction with customers.

Square Up update

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11 Dec 2010 (updated)

Previous post http://finventures.wordpress.com/2010/03/02/squareup-take-4/

Today’s Telegraph (UK)

Dorsey is a marketing machine! It’s just amazing how much buzz he has been able to create (yes I am envious). The Square application is stellar from a customer experience perspective. Although appshopper shows them in the top 20 free finance apps (~1M downloads), I estimate they are sitting on only 5k-15k active customers (this is the nature of a “free” app).  It also seems that they are in a holding pattern until they resolve fraud and risk issues (I covered this in last blog). From their FAQ

Until recently, Square was facing a big hardware shortage, but that’s now coming to a resolution. The problem has transitioned to something we’ve been working on simultaneously, a credit processing and risk issue: we need to strengthen our underwriting infrastructure so that we can handle the huge demand for readers and still manage the risk of chargebacks and fraud. This is the last thing preventing us from shipping readers as fast as we’d like, and we have almost the entire team working on it. We look forward to sending you a Square!

My guess on the hold up? iPhone cannot be made PCI compliant without first encrypting the card BEFORE it gets into the iPhone (see the Verifone solution). As you can see from the Visa PCI DSS list, Square is certified in 3 areas:

  •  IPSP (E-commerce)
  • Payment Gateway
  • Process Magnetic-Stripe Transactions

 This means that Square’s data center is approved to handle card data in these areas (ex. not leaving card numbers sitting around unencrypted). This does NOT mean that the Square Application or Doggle have been certified. In fact, a search in the PCI org’s list of approved applications has no mention of Square. Where Verifone’s Payware is shown approved (below).

This is certainly a driver for PayPal’s recent partnership with Verifone to enable PayPal to act as merchant acquirer (see Verifone Press Release)

My (somewhat educated) guess is that Square must redesign the “Square” for encryption AND its Application AND get it certified by the issuers. This is a 12-18 mo process … as I said last year.  Of course I could be wrong on this.. perhaps they are indeed near certification. Assuming they do get the US mag stripe issues resolves it will not translate into any global adoption. I laughed quite a bit after reading the UK Telegraph article.. particularly given the EMV (Chip and PIN) requirements in EVERY country outside of the US.  So a new “redesigned” Square for magstripe won’t work in europe.. that is yet another design challenge with its own certification process. Who said payments was easy?

The card networks and issuers want Square to be successful, as increased card acceptance means increased payment volume. But there is a reason that acquirers and merchant agreements exist. Fraud usually is 18mo-2 years behind a new payment method as its not worth the fraudsters time (and resource) to invent a compromise. Square will face unique risks not seen before by any acquirer. For example:  merchants accounts denied by other acquirers, physical card fraud rings, skimmers looking to take the cards and auth codes for use off line, virtual card fraud rings looking to “pump” card data through 100s of easy to set up Square accounts.

Square has a use, but the market is small. I expect many small merchants to give the service a try, but once they realize that it takes 30-60 days to settle and that they have a new burden (under reg z) for returns and consumer transaction dispute (ex reserves) they will decide that the headache is not worth it.  In other words they will face the same barriers that the large acquirers have in moving down market.  Dorsey was in a WSJ video yesterday outlining potential benefits for issuers using square. This is a soft repositioning of his company for a potential exit. He knows that the market is limited and is hoping for alliance plays with large issuers/acquirers. Banks are certainly in a better position to roll this out.. particularly because of their ability to manage card risk (but customer support is a “little” more robust as well). As I stated previously, smart money would wait for Dorsey to gain adoption and struggle through the issues before investing.

The problem that Dorsey is trying to solve is core to the acquiring business: how to grow card use among small merchants. Question remains on whether this is this a “technology problem”, or a business problem? For banks wanting to dip their toes in the technology: it is already available through teams like Verifone. For Small Merchants with a need for a convenient easy to use method for accepting cards:  go to www.paywaremobile.com and sign up with FirstData. For consumers: think twice about giving your card to the hot dog vendor..   banks own the risk (in the US), but there is still a big hastle in shutting down your account.

As I stated in my Jan 2010 blog, Square presents a risk to the payment system

The acquirer that takes this on will likely have a few headaches when the first major craigslist merchant starts using the device to skim and resell card information (among other things). There is a reason for PCI compliance and for my “securing” my physical card and CVV. I can’t wait to see Square’s Payment Services Agreement (PSA). Operationally, the issuer’s have control over card authorization through systems like HNC’s Falcon or SAS Raptor. This means that if SquareUp is found to have contributed to a data loss, or has a high number of fraudulent transactions (see link) customer would see their card transaction declined, or the network (Visa/MC) would shut SquareUp down.

The great thing about the PayPal model is that the customer funded the account after agreeing to terms. In Square’s model, consumers are unregistered, Square is acting as an agent of the merchant. For Square’s investors, there is atypical risk which they will see through “unique” bonding/insurance requirements from the acquirer.  Just as with any company, Square will face unlimited liability associated with loss of consumer information (think TJX). To get an idea for potential mis-use see you tube video below.. crooks invest quite a bit in technology here… will SquareUp make it easier for every iPhone owner to become a skimmer?

[youtube=http://www.youtube.com/watch?v=svzZxB0o8J8]

Need for Bank Payment Councils

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10 Dec 2010

Bank Innovation

Much of this post is derived from my original Feb Post “Wanted: Payments Leaders”. The original was directed to small companies operating in this payment space, this article is for banks.

As an investor and banker attempting to connect capital to innovation I see $50B in investment capital focused in payments over the next 3 years.  Most banks do not treat “payments” as a line of business outside of cards, this is a mistake. Banks typically allocate resources by product lines: Assets, Liabilities, Card, Investments with some pricing provided by segment. Payments are managed as a common service across these product lines (if managed at all).  Banks like Wachovia managed this quite well, with the CEO and all LOB heads attending a quarterly “payments council” to discuss payment strategy, investment, and initiatives (led by a super exec: Lou Anne Alexander).  From an inter bank perspective, much “payment strategy” is discussed within the bank consortiums:

  • The Clearing House (TCH) Jamie Dimon Chairman
  • Early Warning
  • BITS
  • NACHA

However “discussion” is usually focused on existing business and processes. Also note that the inter-bank POS discussions which your CEO had with Visa/MA (during the days where you owned them) are now gone. If I asked your CEO what your top 3 payment initiatives were would they know? My guess is that all 3 would be card related, as it is the only LOB (and defined P&L) focused on payments.

Banks must reconstitute their payments councils, to drive incremental revenue and cement their role as gate keepers of customer information and payment settlement. The primary threat to them is pre-paid, decoupled debit and MNO led schemes at POS. In order to coordinate collectively, they must first organize internally. The business threat is beyond interchange, as revenue from new payment models will come from advertising and behavior based incentives. There is a coming convergence of the digital and real world.. and you must create teams that span your organization to execute against it. Today the bank model that you should follow? Citibank’s new organization under Paul Gallant. 

Within the next 3 years, we may see the birth of 1 or more new bank led payment networks (yes leaving Visa/MA) as well as a bank led acquisition of Discover, or Merger of Amex and a major bank (Amex attempted merger w/ Wachovia back in 2003).  Additionally we will see $2-5B investment by groups like ISIS.

The amount of activity is tremendous, but banks have a clear advantage in resources they can dedicate in coordinating a response. There is no shortage of innovative people within your banks today, but there is a need for structure through which their excellent ideas make it to market.

Key Skills

  1. Define and evolve a core value proposition
  2. Ability to define regulatory risks and operational approaches to address
  3. Attract and retain start talent
  4. Ability to manage a P&L
  5. GLOBAL Payment Operations experience (the regulators are shutting us down)
  6. Sales skills (direct to consumer and/or business sales)
  7. Network within the Industry (what is everyone else doing)
  8. Manage a BOD
  9. Ability to listen to the customer and adapt
  10. Historical knowledge of payment initiatives
  11. Ability to drive complex technical initiatives
  12. Understanding of competing networks and value propositions
  13. Comfortable in the details and the strategy
  14. Can coach a people and build a team

Other related blog

http://tomnoyes.wordpress.com/2009/09/24/googleoff/

MA buys Travelex Prepaid for $458M

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9Dec 10

Press Release

Great move by both MasterCard and Travelex. This gives MA a global platform for prepaid, by which their exisiting bank customers can launch branded, multi currency,  prepaid cards. Few banks today are able to compete with Citi’s pre-paid (http://www.citiprepaid.com/), a group that is seeing tremendous growth. Citi’s recent success here has certainly drawn attention.  On the product front, Citi prepaid had its genesis in the 3/2007 acquisition of eCount.  On the business side, Citi is hitting the ball out of the park with both governement and commercial disbursement, supporting new payment flows with existing customers and a high margin product.

The opportunities for MA growth are:

  • Commercial – White Lable Processor for corporate disbursement (ie Citi Prepaid )
  • Foreign currency card (Travelex Cash Passport). Important to note here that it is not just for travel, but also for cross border online transactions.
  • G2P Payments
  • Cross Border Remittance (Base of the pyramid).
  • …etc

With respect to a consumer “travel card”, the challenge that MA faces is that bank processors (TSYS ,FIS Prepaid) currently have much broader PRODUCT capability in this area already. Fortunately (for MA) these processors are dependent on multiple issuers for branding and marketing. Travelex has excelled in the branding and marketing of its products. Consumers (and businesses) all over the world associate the Travelex name with global travel, currency and FX. Can MA extend its brand here as well? They certainly have the A+ team to do it with.. but it will require some of the major banks to also jump on board. As an issuer, you have multiple choices for this today.. from the large processors (TYS/FIS), and Citi, to small global program managers like hyperWALLET.

From the press release

According to a 2010 Boston Consulting Group study commissioned by MasterCard, prepaid is expected to reach more than $840 billion in global volume by 2017, a compound annual growth rate (CAGR) of 22 percent. This same study estimates that the prepaid open-loop market in the travel sector is expected to grow at a CAGR of 31 percent over the same period.

MasterCard expects the transaction to be $0.04 dilutive to its 2011 earnings per share due to amortization and one time transaction and integration costs. For 2012, MasterCard expects the transaction to be neutral and accretive beginning in 2013.

Obopay Update – 4Q10 (update on 3Q)

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5 Oct 2010 (Updated 12/9)

For those that don’t read this blog often, I’m an Obopay cynic. A company that is the very definition of a hype machine (and I came from Oracle). The company has many awards, and very few customers (<20k see site analytics below) and only $3.8M in revenue as of Sept 2010 (no wonder the CFO left).

Why am I so cynical? They are focusing on emerging markets, and the rural poor.. a group than can ill afford to buy into vapor. Press release above shows them targeting US banks now. Good to see them change strategies. Three years ago they wanted to build a direct to consumer brand,  investing in money transfer licenses in all US states and alliance with MasterCard. Now they want to sell a new a “white label” P2P bank service?

Given their poor performance to date, MA is starting to step away from them as primary MoneySend platform (example is recent RIM announcement). Citi has also moved on from the limited Obopay pilot it launched in 2007, into a great new service delivered by Cashedge (POPMoney). The press release indicates quite a dramatic shift in the Obopay business model back to the US, with very little press relating to emerging markets (UPDATE NOKIA bought Obopay India). The bank shift may have been driven by cash burn as the $130M in invested capital is not enough to compete against the likes of Visa and AT&T in marketing a new consumer payment service. This strategy shift, and resulting financial implications, may have been a driver of Obopay’s CFO departure (never a good sign).  Message to Obopay.. you may want to update your management team page as Tyler’s name is still there.

With respect to a new “white label” strategy, there does seem to be thoughful expansion of their transaction network;  Obopay announced integration to both NYCE and STAR (allowing PINless debit) . This network structure follows in the footsteps of PayPal, and is not a bad strategy at all (if you are stuck to a card based money transfer paradigm).  Cards have many advantages in P2P use, top among them are the facilities for authorization and “instant” transfer. The word instant is in quotes here because authorization and posting of the transaction can be near real time, but settlement is up to the bank (1-2 days) and settlement network. The downside for Obopay’s card model is cost, particularly sensitive in a  sender pays model. Of course these initiatives will bring down transaction cost, but they neglect to address Obopay’s core issues: no consumer value and hence few transactions.

The problems with a bank White Label strategy is that they are late to this game with sales team not geared for banks. They have set themselves up for competition with vendors such as Cashedge, FIS and FISV who host bank infrastructure. Cashedge is the clear leader in mobile P2P here, with the recently launched Citi service and over 100 banks (including Wachovia, BB&T and Bank of America). Chase’s QuickPay is another example of a bank led mobile P2P initiative. As I told one of the major banks last week, the Obopay business case for P2P may look better (because of interchange), but the price is steep (consumer adoption, behavior change and limited use). In other words, there is no proof point for a card based P2P model, as demonstrated by Obopay’s adoption over the last 3 years.

Emerging Markets

Over the last 2 years, Obopay has been active in attempting to penetrate emerging markets (particularly India – See previous Blog on Obopay’s failure). India is a very tough business for any payment players. RBI is well known as one of the toughest regulators on the planet, Obopay (and local MNOs) have been hamstrung in pursuing any model that is NOT bank led. Their YES bank pilot shows the challenges of rolling out a solution that is bank led in a card model… all best described in this Nokia presentation. It would seem that Nokia is taking the lead from Obopay on India (UPDATE 12/9 Confirmed), as it is key to retaining their 60% handset market share. The Nokia team is stellar, and their leadership of India efforts will put them in a much better position to execute against complex alliance and regulatory issues. As a side note, I expect to see Nokia focus on a handset “wallet” (bank/MFI/BC agnostic) with Obopay as the “switch” to IMPS (see related blog) clearing and bill payment (perhaps a future blog on Obopay as the Checkfree/Cardlink of India?). Understand that a government pilot on this approach is under consideration.

Message to investors: make some big changes. You have lost the early lead, and your partners are running away. The risk in competing against the big networks and banks in P2P is not within your investment hypothesis. Banks do not need your core asset (money services licenses) and you do not have the right team to sell and service banks. Emerging markets have limited revenue prospects, and MNOs are capable of building mobile payments from scratch (ref MPESA). MasterCard is making alliances with teams that drive network (either customers or merchants) expect them to develop alternatives.

Investor Short Take – Payments

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7 Dec 2010

Summary for investors:

  • Ensure existing investments have plans to align to one of the emerging ecosystems. Go it alone will not work.
  • Expect $5-$10B of industry investment in payments over next 5 years as new networks develop.
  • Seed teams with people that have experience in payments and working across large players. Success will not come from “technology” ..
  • Focus on delivering value to one leg of the network. Merchant friendly value propositions are recieving new focus.. but retailers are not participating where there is “traditional” bank leadership.. new non-bank networks are forming.
  • Digital goods payments is red hot, and also likely to be focus of Google, Apple, Amazon, Visa, MA, PayPal, … Solutions will be driven from multiple players, the “channel masters” of: content, social network, consumer payment, consumer advertising, …
  • The relationships between the large banks and Visa/MA are deteriorating, particularly in the area of innovation. NFC is still an area for collaboration, but small and mid-size banks are more likely to align w/ Visa/MA plans than the large players.
  • Consumer payment behavior changes in 20 year cycles, largely because there is little differential value (beyond rewards). There are exceptions, as Target is attempting to prove through its REDCard. Other large retailers are assessing plans to buy a bank, replicating  Target, and WalMart (in Mexico and Canada)
  • As a rule, Banks are not collaborating with each other or internally and seem to be engaged in multiple initiatives in a hedge your bets strategy (to see what sticks). If your companies are working with a bank, don’t assume there is coordination internally.. your teams must learn to work across complex political lines.

Quite a few interesting “rumblings” this week.

1) Bank of America Merchant Services and First Data are assessing development of a new card network.

2) Google and a major bank (?Citi) are working heads down on a mobile payment platform network driven by mobile advertising revenue. Citi would make sense given its 110M cards and it’s key weakness in merchant acquiring (vs. Chase Paymenttech and BAMS). This team still would leave a large gap at POS…. So perhaps Discover is there as well? Yeah that is a very wierd prediction.. Citi rebranding all of its portfolio Discover so it could regain control.

3) Apple working on a 2Q11/3Q11 iAD platform, with couponing and purchasing. This is a rather big project as they also work to consolidate 4 internal payment systems (legacy apple store, iTunes, app store, and Treasury) with new mobile walled (Apple Patent) and a major bank as partner (?Chase?)

4) Wells Fargo and Bank of America retail teams assessing collaboration on a mobile P2P platform.. which was taken away from their Pariter JV.  See related Blog. I’m sure the cards groups must be shaking their heads a little given the anticipated volume, but banks cannot cede this space.. and it is critical to bank leadership. I just wish the banks would focus on the business and not on the technology.. just buy Cashedge and put it in The Clearning House or something.

5) Merchant acquirers and processors putting together more focused offerings for large retailers. See Target Red Card.

6) Visa and MA have M&A plans around pre-paid which are in flight, a focus more on the G2P and Cross border segments rather than mobile… re: mobile, Visa and MA have retrenched here after “learning lessons” in failures of Mastercard MoneySend (Obopay) and Visa Money Transfers. Funny that MA learned its lessons on a remittance focused Obopay, while VMT attempted to focus on domestic card-card and now is “refocusing” on remittance.

Target REDCard – Back to the Future?

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

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

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

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

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

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

(out of quarterly sales of $15.2B)

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

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

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

Note a) on Pg 17

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

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

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

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

Zynga Payment Patent Application

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30 November 2010

Short Take – Random Thoughts

To be perfectly clear, I am no Zynga expert.. I have no Zynga account… and have never played Farmville, but with Kleiner’s John Doerr saying “Zynga is the most-profitable, fastest-growing, and has the happiest customers of any company that Kleiner Perkins has invested in ” I thought I would spend a little time assessing how a company that is just three years old can have an estimated market value above $5 billion with more than 320 million registered users and estimated revenues above $500 million.

Zynga of course is the leader in social gaming, started in Facebook and now available on mobile. They have proved that the old axiom “payments is the lifeblood of commerce” also extends to social gaming and “virtual commerce” (essence of Farmville). Their virtual success is also embedding itself into retail and traditional payments. For example, this Christmas I have just bought FarmCash using my American Express rewards (just announced today).

From my perspective, Zynga’s secret sauce has been its ability to get 1-2% of their customer base to pay for game credits (see Gawker article). Although they have recently agreed to a 5 year deal with Facebook, this patent (if granted) will provide them leverage in future negotiations and extending their services outside of the Facebook platform. The patent application itself is focused on value transfer and ensuring that digital currency never makes its way out of the system. From patent app:

…the virtual currency cannot be redeemed for legal currency. Consequently, the purchase is a one-way transaction that provides a benefit to the purchaser only in the context of the virtual environment….

Zynga Terms of Service also support these restrictions http://www.zynga.com/about/terms-of-service.php

d) Transfers of Virtual Currencies and Virtual Goods are strictly prohibited except where explicitly authorized within the Service. Outside of the game, you may not buy or sell any Virtual Currency or Virtual Goods for “real world” money or otherwise exchange items for value. Any attempt to do so is in violation of these Terms and may result in a lifetime ban from Zynga Service and possible legal action.

Regarding expansion plans, it would seem Google’s $100M-$200M investment in Zynga will drive a new GoogleGames platform. Which makes me wonder how many social gamers there really are?

PayPal Micropayment http://venturebeat.com/2010/10/26/paypal-microtransaction-support

Visa Money Transfer

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22 November 2010 (updated 15 Dec, sorry for previous typos)

SUMMARY: VMT may by “Mandatory” but no one cares and is not acting on it.. As one bank told Visa “do you want my attorneys or yours to draw up the waiver”.

Correction (11 March) Chase and Bank of America are committing to it in next 6 months.

Visa Money Transfer Overview – Issuer presentation

I’ve been on the phone this month with several folks focusing on the unbanked and emerging markets. A clear theme has emerged: card based money transfer will not be successful except in very limited circumstances. This is true for both (pre-paid) cards tied to mobile phone plans and network initiatives (Visa Money Transfer, Mastercard Moneysend/Obopay).  Visa and Mastercard both have grand designs for taking part in the tremendous growth within emerging markets, but it looks like the growth will be at the top end (which is still substantial) rather than with the unbanked in areas like G2P payments.

In my previous blogs, I’ve certainly shared my views on Obopay/Mastercard. This blog focused a little attention on the Visa Money Transfer (VMT) service. In both the Mastercard MoneySend (MMS) and VMT models the networks own the switch of card/bin/mobile#/service provider/issuing bank. MasterCard’s MoneySend service attempted to focus Obopay in “mobile acquiring” of both senders AND beneficiaries (come pick up your money).  VMT’s AFT/OCT transaction set (see Patent)  attempted to bypass this “registration” intermediary and go directly to issuers.  Technically, the solution is excellent and the comments below are not meant to detract on Visa’s substantial lead on MA in developing this service. The problem with VMT is the business model. Unfortunately for Visa, global card issuers (particularly in OECD 20 countries) are taking a pass. The adoption challenges are particularly acute on Debit and within Western Europe (business case, conflicting services, pricing, fraud, customer support, agreements, Visa Europe and bank control… ).

VMT also suffers from 2 widely held misperceptions: it is “instant” and mandatory. With regard to the first item, just as with any debit transaction funds can “post” to the account but actual clearing and settlement is at best next day. It therefore remains up the each bank when to show the “post” and when to make funds available (within the Reg E guidelines it can be up to 2-3 days). With respect to VMT’s “mandatory” status, I’m surprised that this issue has not been picked up in the mainstream press. Visa has lost its ability to force issuers to do anything, particularly when a contract addendum is required. I can tell you with certainty that 4 out of 6 large US banks DO NOT plan to implement VMT on the debit side. These banks like being in control of their liabilities run off and payment channels. Visa has much better adoption prospects on credit side, but the “mandatory” date has slipped from Oct 2010 to something more “flexible”.

Retail Banks are very reluctant to provide Visa/MA an avenue for service and product growth that they neither own or control. Visa’s attempted to “force” issuer’s hand by making the AFT/OCT transaction set mandatory is rather amusing and makes for good theater (see Visa Money Transfer Overview – Issuer presentation). The “incentive” for issuing bank to accept new agreement is a $0.50/tran revenue share (beneficiary). Market data clearly shows lack of participation and hence Visa is attempting to adapt and shift focus of VMT to narrow market opportunities. I’ve listed three example efforts and probability of success (reaching $10B+ TPV).

1 – Large Bank (<10% probability of success)

Work with a large bank (like Bank of America) to lead adoption and create a critical mass with a focused value proposition (example: USBANK mobile phone/NFC).  We all understand the convenience strategy for the NFC/POS/Phone focus, but for P2P? If you are scratching your head, join the crowd. Why would banks outsource P2P payments to Visa? If Visa only gets 1-2 “a major banks” to join them, what will be the P2P proposition? I can just see the Visa commercial “with Visa Money Transfers, you can instantly transfer money to some other cards some times and funds will show up in 2 days”….

Beyond the issuer adoption issues, yhy would you pay $0.50 to send money to a domestic bank account when you could do it for free online? The problem here may be that the bank’s card team doesn’t talk to the retail team… Banks need to think strategically about this and stop Visa’s P2P efforts in their tracks. Card-Card transfers present consumers with a very confusing option and forsake the enormous bank investments in shared infrastructure (ACH, RTGS, Clearing House, Early Warning …).

Message for smaller banks.. Visa is NOT getting commitment from the majors to adopt this “mandatory” transaction set. The “Mandatory” Oct 2010 date has been pushed back to April (and will probably be pushed back again). To be clear, the credit side of the house loves the idea of VMT, the debit/deposit side does not. The “value” of VMT is on the Debit side. Can you imagine the customer experience of any solution using VMT.. it only works for 50% of the cards. Message to vendors: don’t build your solutions around VMT.

2 – Domestic Payments – Emerging Market (<10% )

Solve specific problem in emerging market (India domestic money movement). Few people realize that (within India) Western Union and MGI are licensed to receive only. They cannot transfer money within India. Hence banks like ICICI and HSBC are offering VMT. As noted in a previous blog, each bank may choose to act as either remitter and/or beneficiary. Citi for example allows VMT receive, but not send. The VMT service fills a small gap in India today, but this gap should recede as banks accommodate recent updates to NEFT/RTGS process . In fact only today, India’s RBI launched Instant Interbank Mobile Pmt Service. VMT’s consumer value proposition is built around gaps in bank services and requires bank (issuer) sponsorship.

With respect to VMT as a cross border money transfer service, Visa will have no trouble signing up beneficiary banks in emerging markets. What they lack is origination network (above). They will see some progress with mid tier banks in specific markets (MEA), as they extend thier role as cross border processor (from P2B to P2P). Enabling beneficiary banks to nudge out the MSBs. This is why RBI approved the VMT service in India.. it was good for banks and bad for MSBs.

3 – NON BANK partners (40%, if emphasis is on prepaid)

MoneyGram Example. Following in the theme above, Visa is a network business and the strategy of any network business is to increase volume. Given that issuing banks are not signing up for originating AFTs, Visa is moving aggressively to create partnerships with MSBs, post offices and other non-banks for “cash in” services. These non-banks can also sell pre-paid cards through additional partnerships. This is not a “bank friendly” strategy, but market focus seems to be non-banked.

If card based money transfer is not the future what is?

The answer really depends on what problem we are trying to solve. Remittances? POS? P2P?  In the unbanked world, interchange and sender pays does not work. Regulators will not let US based companies derive revenue from G2P payments to the rural poor. Visa has many assets to create a successful solution, specifically in its Monitise unit, but ACH payments do not provide a great business model for Visa (or its bank partners). Again reinforcing the axiom that retail payments is a very low margin business (in steady state). This is why MFI and MNO models present a better opportunity, payments supports the profitability of their existing business models to a segment of customers that they already serve.

Will Visa find growth in VMT? Absolutely, growth from 0 is always and easy achievement.

Will it be a $50M revenue business for them? Not that I see, neither in emerging markets nor in OECD 20. Visa’s 10+ innovation initiatives are a mystery and a nuisance to issuers, banks no longer want Visa to control and view P2P as an encroachment on their core deposit relationship. In emerging markets, the regulators will not let Visa succeed beyond the top end of the market (not the base of the pyramid). Since writing this, Visa announced that Indian regulators approved the VMT scheme for inbound remittances. There will be some success here, primarily with regional banks looking for a focused partner (UAE Bank looking toward India remittance service).

What should Visa do? Instead of attempting to develop customer facing services and brand (ie payclick, VMT, …) that compete with bank offerings, it should focus on expanding the capability of the network to handle additional data types (fraud info, POS items, coupon, location, …).  Make the rails more robust and new ecosystems will form to take advantage. Of course the downside of this approach is that it takes agreement of 4 parties to make this type of change, hence the change cycle is over 20 years. This is one of the reasons that new networks are forming which support new business flows and switch data to Visa only when necessary (business remittance/invoicing is excellent example, eCommerce another). This cycle further isolates the card networks, and drives innovation outside of the “card process”.

See August 2010 White Paper from US Federal Reserve

http://www.frbatlanta.org/documents/rprf/rprf_resources/wp_0810.pdf

Thoughts appreciated.