Durbin: Not so Bad… No change in PIN Debit

Posted on by
3

Fed just rolled out the final Durbin caps

http://www.federalreserve.gov/newsevents/press/bcreg/20110629a.htm

$0.21 + 5bps + $0.01… effectively leaving PIN Debit untouched for an average $38 transaction. What changed? Economics behind Signature Debit.. Sig Debit is dead…

From the Fed

Interchange fees. Networks reported that debit card interchange fees totaled $16.2 billion in 2009. Of this interchange-fee revenue, $12.5 billion was for signature debit transactions, $3.2 billion was for PIN debit transactions, and $0.5 billion was for prepaid card transactions. The average interchange fee for all debit card transactions was 44 cents per transaction, or 1.15 percent of the average transaction amount. The average interchange fee for signature debit transactions was 56 cents, or 1.53 percent of the average transaction amount. The average interchange fee for PIN debit transactions was significantly lower, at 23 cents per transaction, or 0.58 percent of the average transaction amount. Prepaid card interchange fees averaged 40 cents per transaction, or 1.28 percent of the average transaction amount.

Square’s $1B Valuation.. its not a payments business any more

Posted on by
3

Square $1B Valuation…  ?

29 June 2011

Today’s WSJ Story

What shocked me most about Square today? Kleiner’s lead in the round. I know the KPCB team well, and they are the best VC I’ve ever worked with. Given my negativity… a re-evaluation is in order. Both to protect my reputation with my KPCB friends.. and for my own sanity.

There is no way that Square can justify a $1B valuation as a payment company. At $1 billion in annual processing volume, Square would be roughly the 70th largest merchant acquirer/ISO in the country. Global, the largest pure play, processes $135 billion annually, has other businesses, and has a $4 billion market cap. See data below from my friends at FT Partners (a great Advisory team in payments).

3 years ago, Jack pitched KPCB on the idea of Square as the PayPal of Craig’s list… KPCB passed. The business model has changed substantially, and is now on V3+.

Why did KP invest in this last round? I haven’t spoken to them, but my guess is that it is no longer about payments.. but about changing the checkout process at the POS.

Here is my guess on Square’s V3 Business Model

1) Create a path to exit the transaction business.. they don’t want to manage sub prime acquiring risk.

2) Create a software/platform business for mainstream retail. Work with major retailers to use Square register as the way retail (and retail sales agents) interact with consumers. In other words re-engineer the buying experience at the POS. KP always looks for “big bets”.. this would certainly be one of them.  In this Version 3 business model, Square will interact/integrate to legacy POS systems. They will also attempt to own the mid market and replace current POS vendors in the mid tier. At the low end they may still be working deploying the Square we see today, but it will be challenged by PCI Rules. For a more detailed look at current plans (they evolve rapidly) see this excellent post:http://mashable.com/2011/05/23/square-card-case/

3) Create an advertising/incentive business. We hear them working on this today, but their current customers are dry cleaners and hot dog stands.. obviously they need to move upstream. Advertising and incentive will be the primary basis for their new revenue model.

Perhaps this is why Square is working their employees 20 hours a day.. they know that the big guys are also all over this.  IBM, Cisco, Nokia, NCR, Micros, Oracle, SAP, MSFT … I doubt if they will just sit back and let Square throw out a new POS system. What competency does Square have in Campaign management and advertising? Who owns their current data? This last point is very relevant.

Consumer transaction data collected by Square today is property of merchant. Although hot dog vendors may not care… Large retailers know how sensitive it is..  Square’s future model depends on both the consumer and the merchant giving up consumer data at the line item level in the POS. I see apparel and large department stores as possible candidates.. perhaps even electronics.. but the challenges are tremendous.

Can all of this work? It depends on the retailers.. having Visa on board may actually be a drag on their merchant adoption. One thing is for certain.. their valuation is certainly not based on their success as a payments business.

Visa’s Wallet Strategy – Part 2

Posted on by
3

,,,

18 July (Updated from 17 June 2011

). Corrected significant error on scope of Visa Wallet. It is much more than an autofill (point 4 below)

Previous Blog: Visa’s mobile portfolio

I’ve been thinking about Visa’s wallet strategy this week. From my last blog (Visa Digital Wallet)

… a non-announcement, a rebranding of what CYBS and PlaySpan already have. Too many teams are angling to create the wallet (mobile, online, …), and not enough focusing on the value of what is in it. Google, Apple, and RIM will win the mobile wallet wars. I guess I can’t blame Visa for trying.. however it would have been nice if they could have been successful at eCommerce to start with. 

Here are the questions I’m trying to answer:

  • What is their investment thesis?
  • What assets are they trying to leverage and what opportunity do they plan to attack?
  • What is their strategy in attacking the opportunity?
  • How will the banks react/support this strategy?

For those that haven’t read my blogs for 2 years.. let me restate a few points that I’ve made previously:

  • Visa has a very big hole in their earnings with Durbin.. not only will they loose substantial debit revenue.. they could be loosing debit forever… as member banks assess whether signature debit makes sense to continue… and create a centralized bank switch for PIN debit (ala SVPCo or TCH). Merchants and consumers both prefer PIN today. I don’t believe Visa has adequately described this debit driven financial risk to the investment community.
  • Visa is attempting to fill the debit void with new transaction types, services and “cash replacement”. The top 2 prospects are G2P payments (payments by a government to people.. from pensions to welfare) and “mobile payments”.
  • There are 5 classes of mobile payments: 1) mobile initiated bank payments (ex. Monitise, , Cashedge, send your bank a message to transfer funds as in bill pay). 2) mobile commerce payments – digital  (ex iTunes, PayPal, BilltoMobile, Boku, Bango, …), 3) mobile commerce payments – physical goods (ex Square, Amazon, Visa Wallet, PayPal, Bango, ..) 4) Mobile phone as a wallet – Physical device at point of sale (ex, NFC Google Wallet, 5) Mobile Money for Unbanked (MMU) (ex MPesa, GCash).
  • Any initiative above is profitable for Visa only if: it replaces cash/other electronic (ex G2P), drives a transaction into higher margin product (Debit to Credit), increases number of transactions (customer use), or increases use of processing services (ex CYBS). Monitise obviously did none of these.
  • The big issuers are not fans of Visa’s moves in mobile and innovation. Visa is beginning to walk on toes and create “universal services”, many of which overlap with the large issuers have competing plans (alerts, offers, mobile, P2P).
  • Visa’s wallet value proposition (and solution) go something like this: Here is an API for your online banking.. consumer clicks on Visa Wallet and their card(s) get automatically stored in our digital wallet for use at any merchant site.. and a new Visa wallet account is created. Bank, you benefit by increased card transaction fees (use) and enable your customers to pay for digital goods with their Visa card in a one click service that delivers better consumer experience. Issues are that Visa has not signed up any of the top issuers and are also very dependent on PlaySpan’s existing consumer base. Most merchants don’t like the idea of helping out banks.. or Visa.. In order to change consumer behavior, and drive usage, a value proposition is needed.  Are consumers doing digital goods payments today? Yes.. what does Visa do for merchants that BTM, Zynga, PayPal.. and others don’t? Options: 1) Use our CYBS processing, 2) use API only and “form fill” to leverage your existing processor, 3) Liability shift and reduced interchange for attempted VBV use. This last one has not be covered significantly .. may delve into with future blog.
  • Visa is attempting to evolve its debit network from “debit” to bi-directional (see my VMT blog) with the OCT transaction set. This would enable it to compete with ACH and deliver services like P2P with little bank involvement.

What is Visa’s investment Thesis?

My guess is this “ replace the debit hole by leveraging our existing customer footprint into new transaction types, expand card acceptance and create customer stickiness with new products and services that work in every channel”

Assets to Leverage?

  • Consumer account holders. I don’t call them Visa customers because they are not.. they are customers of the issuing bank. If a bank wants to rebrand their portfolio (to Mastercard, Amex, or a new white label) they are no longer Visa card holders.. Visa holds no consumer agreements. … BUT they want to..
  • Payment Network: Acceptance and services (Bank, merchant, consumer).
  • VBV Agreement where liability shift and interchange reduction possible (for ecomm/mcom CNP transactions)

A rather short list. Note that prior to CYBS, Visa held very few merchant agreements… it was the acquiring bank and processor that held the merchant agreement.

Strategy to attack the G2P and Mobile Opportunities?

Visa probably sees the lack of NFC handsets and POS terminals as a deciding factor in delaying any push here. The $600M-$800M in NFC GDV is too small to impact more than 5% of the Durbin hole. I believe they have initiatives lined up against the following business drivers

1. Increase number of transactions (customer use)

  • Increase merchant acceptance locations: Square, CYBS, Visa Wallet
  • Increase Consumer Use: Visa Wallet, Visa Money Transfer, Marketing,

2. Replaces cash/other electronic (ex G2P)

  • Fundamo, Playspan, Visa Wallet, ..

3. Drive transactions into higher margin products (Debit to Credit),

  • ?NFC? It would seem this is a “stage 2” plan.. They first need to get consumer’s using the wallet in high volume/frequent transactions. After they get usage.. they can migrate.. It may even line up with another partner like Apple who isn’t quite ready for NFC anything. Visa actually doesn’t seem to like the idea of a card in the phone wallet.. a wallet they don’t control.. they want the card in a VISA Wallet.. a Visa Cloud wallet that they do control..

4. Increase use of processing services… I not going to touch on this now..

Visa’s wallet strategy is a two pronged approach. Consumers will have accounts “auto created” by their issuing bank (at least the ones that implement the wallet API) and

( Old Content 17 June) all by implementing a simple form fill API where Visa’s wallet pre-populates all of the consumer information and payment items on a merchant’s checkout page.  

New Content (18 July)

Visa is looking to build a consumer footprint to compliment its CYBS online merchant footprint. To be clear, Visa is looking to grow its eCommerce processing business AND create additional lock in (stickiness) with Visa Issuing banks. Visa will first ATTEMPT to roll out this service first with all CYBS merchants… then get additional merchants to either convert to CYBS or at least Add Wallet as an additional payment type. Chase PaymentTech is expected to take a lead roll.

Value proposition to Merchant

– Merchants will be given a fairly attractive option to reduce CNP interchange with 2 Components: Attempted VBV verification (Visa can reduce merchants rates for attempted 3DS verification) and #2 reduced interchange in volume discounts with key partner banks like Chase.

– Processing Package (cost). Expect Visa/CYBS to aggressively price for non-CYBS merchants

– Single Wallet for online, mobile and perhaps even physical goods

Value Proposition for Banks

– Lock in to Visa (I can’t really think of another one)

This is not a bad strategy… IF the world were standing still.. and if Visa had a positive reputation with merchants.  The value proposition here is all built around convenience. It is a good plan.. but merchants have many other options and they know that accepting a new Visa product has always proved to be a Faustian Bargain (aka deal with the Devil).

As a side note, I saw Square’s COO today in a conference. His quote was something like “Square is much more than about swipe.. I wouldn’t have invested if that were the case”. None of us know what this grand plan is.. but obviously it must involve merchants.. and I would hope a better profit margin (from 20-30bps). After he spoke a CEO came up to me and said “the major processors love square (and Chase PaymentTech). Now there is a place for all of the sub prime merchants to migrate toward…  Can Square monetize a base of merchants that were outside of the ISO focus and processor interest? They are not doing it today..  How could they possible morph their value proposition into something with higher margin?  Keith certainly seemed to imply that Square had a merchant incentive/Groupon/foursquare model in mind. A deal of the day only redeemable at a square merchant? Hmm.. seems like a little bit of a stretch.

See related Visa Press Release here (RightCliq)

Verizon and Payfone (update)

Posted on by
2

Updated 15 June

WSJ Friday: Payfone and Verizon

I’m trying to imagine life as a Verizon customer. From a customer experience perspective, I have to register my credit card in the Google Android Marketplace for app purchases.. but now I also have to register it again at Payfone if I want to pay for physical goods on a mobile phone.. and again for the mobile NFC wallet (to give the TSM access to the card for registration in SE), I also need to register for Bill to Mobile. Thats 4 different payment types on one carrier.

  • ISIS – Physical Goods at POS through NFC
  • Bill to Mobile – Digital Goods
  • Payfone – Physical Goods in mobile browser
  • Android Marketplace – Android Apps

I doubt if there is much of a payment strategy behind all this.. It looks to me as if Payfone strategy has morphed just in last 2 months, from digital goods to physical goods. Payfone has completely underestimated the merchant integration challenge.  Competing in this mobile browser physical purchase space:

  • PayPal
  • CYBS/Visa Wallet
  • Google Checkout
  • ?Amazon (they have the capability and the user base..)
  • Moneybookers
  • payforit (UK consortium), Belgacom’s BICS, Bharti’s pre-paid card, …

What is the value prop that Payfone will offer merchants? Do merchants really want the digital ecommerce payment process to be completely differently than a digital mcommerce payment process? HECK NO.. little things like fraud, settlement, reconciliation, customer support, returns, … Payfone has no clue on what it will take to run the merchant side (which is why they probably don’t have a reference customer here). Payfone’s team has offered me a chat to set me straight on all of this… which I will take them up on at end of June… I told Rodger that I’ve been wrong before.. and not afraid to admit it. On this merchant piece… perhaps Amex will do the merchant acquisition for them. If this is true then there is a real strategy issue… merchants love for Amex is at the same level as their fondness for the IRS or tax regulations…

Payfone looks great on paper and I’m sure Verizon wanted to get something moving they could control and gain leverage with. Little Sprint is now 12 months ahead of Verizon.. and ISIS. It must be frustrating.

Message to Verizon: the real challenge for you is managing customer behavior.. and creating a well designed payment product that works across all of these areas. You are not a payment organization.. Apple will win this design war on iPhone.. and Google will win it on Android…. Win means delivering real consumer value (and retailer value) in an integrated cross channel experience.  This Payfone partnership will create a real headache for ISIS in merchant integration…. You will have ISIS working with top retailers to integrate NFC … then your Payfone (and bill to mobile) partners requesting another integration for mCommerce… each with separate settlement processes.  I can’t imagine how you will manage the customer communication and marketing…

Message to MNOs. Start with a value proposition to a customer.. NOT with a product. If you can’t deliver the product (which is very likely), then focus on taking a role in orchestrating the value delivery (examples: service discovery, authentication, merchant mobile enablement, community ratings, ) . Verizon’s strategy is product focused… when they loose in products their brand deteriorates and they start to become a dumb (fast) network.

As a side note. I just heard today (need to find the source) that 40% of all mobile purchase transactions were done via wi-fi. This would intuitively make sense as its hard to do this while you are walking around.. and given network coverage of AT&T/ iPhone in NYC alone no one would have the patience to complete multiple screens.

Thoughts for the week – June 9

Posted on by
2

June 10 2011

I read a fabulous survey of acquirers in Digital Transactions today: Forget PayPal And Google. Acquirers Are Most Worried About Visa, MasterCard. My favorite quote?

55% of the respondents agreed with the statement, “Larger issuers and acquirers will increasingly seek to disintermediate the card networks in the years to come,”

So much to write on this week.. so little time. So here are my abbreviated views:

PayPal going after Google.. core issue really seems to be that PayPal’s culture is changing and working for card execs is a big change from working in a young growth start up. Hence the original “valley” team is running for the exits. PayPal is upset at the exodus.. but they should probably look in the mirror for the cause.

Visa paying 22x revenue for Fundamo. Visa is hyper aggressive in mobile.. and they should be. But they have done a very poor job of articulating their strategy to the market. The only way to hold them accountable for progress is to get them to be very specific on transaction volume in emerging payment types. What is their NFC GDV? Mobile Transfer (VMT)? Offers? Active Wallets? PayPal excels here and hence has much market credibility because they are transparent with their numbers. How can investors hold Visa accountable for the investments they are making.

My favorite Visa division? PR! These guys are masters.. did you notice that the Fundamo announcement was coupled with a sustaining investment in Monitise. Just last year Monitise was their emerging market strategy. This goes along with the Square investment on the same day that Visa rolled out new mobile security standards (which Square did not comply with but are “committed to”.. going forward)… You can’t make this stuff up.

Google wallet. Great product, great team… no further comments. Funny that ISIS didn’t see this coming or they could have saved a bundle on building a wallet of their own.. humor is amplified by fact that google/android will be only mass produced NFC handset over next year or so.

Clearxchange. Finally! A bank initiative with some legs. I really like the fact that the top 3 banks are getting together on this. P2P is a no win for any non-bank.. I wish that they just bought Cashedge as opposed to building it themselves.. but hey getting 3 banks to agree on something is close to 8th wonder of the world.

Square.. Billion dollar valuation!?. See the electronic transaction article above for more detail… I wrote a blog showing that PayPal is 7x more profitable per transaction than Square. Talking to several Square employee prospects I understand that they want to get the MSB licenses to enable ACH funding.. my eyes squint on this one.. they are a TPPA… they don’t have  consumer solution.. they are a merchant solution. Perhaps they have some new secret sauce I’m not privy to.. BANKS.. this is what happens when you let an acquire capture customer contact information and why you should shut them down (see related post).

NXP Reports that they anticipate 100M+ NFC chips in next year.. WOW!! Given that Apple is not in this game.. RIM and Samsung/Android will have a great new market for devices if this projection holds. (see NXP CEO quote)

Verifone building a new business plan to support enhanced POS terminals. This is not a terrible plan.. on paper. But most merchants view the payment terminal as a nice little processor controlled device that enables them to stay away from all those nasty PCI compliance issues. Doug’s earnings chat last week indicated he was building a business around keeping these new devices fresh with applications (on the Payment Terminal). I wonder what IBM, NCR and Micros think about this? Or even the store CIO? Most stores at least actively manage their cash registers.. can you imagine creating a whole new IT team to manage version control, release planning and testing on the terminals.. Heck this is why retail stores freeze these things.

Durbin.. banks are down in the dumps this week as $12B in debit revenue goes down the tubes.. the final rate may be above $0.21.. but its not a win for the banks. There are some very big investments being made by the banks to further reshape products. In this I completely agree with the Electronic Transactions article above.. I see consolidation of the 6 debit networks.. and at least 2 banks experimenting with their own branded ATM/Debit card. Why should Visa get any cut of the $0.21?

Rumor mill .. instant offers..?

Posted on by
Reply

Update June 9

Visa Acquires Fundamo for $110.. Visa.. if you want to keep these things confidential … best not to do a road show before the announcement. Nice of you to throw Monitise a few crumbs in the PR as well ..

Strategically Monitise is set up to serve mature markets and existing customers. Fundamo will focus in emerging markets. This actually makes some sense..  Fundamo is a great little company. Hope Visa can leave it alone so they don’t kill it.  I’m sure Visa wants to integrate the remittance/VMT service in there.. and would love to take part in the upcoming “wave” of G2P payments.  Of course global banks have the real edge here.. more thoughts on this later.

——————————————————-

 

Many rumors floating around about the big card network based in California.

1) Instant offers. Merchant.. if you send us all of the line item detail in level 3 we can send your customers instant offers. Funny I should hear this rumor today.. I just got an SMS text from Visa on my offer of the day: 15% off Rocky Mountain Chocolate. Yeah.. great deal… I DON”T EAT CHOCOLATE

What is the merchant’s upside? reduced interchange? Nope… issuers get to set that.

I get the “privilege” of Visa talking to my customers directly? Yep.. I also get the honor of giving both Visa and the issuer my detailed pricing information!! As a merchant do I really want Visa and the banks to hold my price list? Remember I’m a banker.. so my friends (if I have any left) whom are  reading this are probably saying “Tom will you please shut up”.  My hope in writing this is that many banks will just skip the hassle of participating in yet another failed initiative. This business model does not work.. it is not retailer friendly and Visa has NO EXPERIENCE in running an ad network or communicating to consumers BEFORE the sale.

To summarize, there is nothing wrong with Visa’s technology here.. but this is not a technology problem. Retailers will give their consumer data up very selectively.

Rumor #2

Visa  has a new strategic relationship with Fundamo.. My friends in India and ME tell me that Visa and Fundamo are making the rounds together. What about poor Monitise?

Rumor #3

Obopay is a partner in Visa Money Transfers.. Another marketing announcement with no business value.

All of these seem to further the impression that Visa is pushing many strings up hill in the hope that something sticks in mobile. My recommendation from my last blog holds.. Create a new company and let your innovation group spin out. You will not be able to effectively deliver innovation in your current 4 party model. You must establish a new payment network which you can control…. perhaps you should think about buying Discover…

Clearxchange – Bank Strategy Perspective

Posted on by
4

28 May 2011

As I related in last week’s Post, Clearxchange (let’s call it CX) evolved out of the online/mobile payment groups at Wells and BAC.  I also described how bank’s will “Win in Payments” along with a high level view on internal bank dynamics which drive Debit/ACH vs. Credit payments strategy, as well as the fragmentation that is occurring in “unprofitable” payments like ACH, carrier billing and P2P… etc.

Consortiums are not the most nimble of creatures. Banks also have the tendency to follow the lead of the big 3 (BAC, WFC, JPM) in all things retail. BAC/WFC are well positioned to execute in CX, and certainly have a sufficient customer base to make CX work. Their addition of JPM (and associated QuickPay) and the creation of a separate entity also aligns well with getting something done quickly. Developing CX within an existing bank consortitum could have taken much longer than 2 years to get a common bank service built… This “build it and they will come” approach is how many of today’s bank services get their start (visa, interlink/debit/ , clearing house, …).

Unfortunately, CX does not have a sustainable “stand alone” business case. Because it was completed within the channel organizations, business strategy (with the LOBs) was not well coordinated with the other LOBs (exception is JPM, the top bank in payments strategy). I’ve actually made 5 CX payments on launch day already. In BAC, just go to internal transfers and fill out the form on the left (did you receive a transfer). I clicked yes as it did not require an accurate answer in the Ts&Cs..

The service is very solid, but I do wonder what the retail wires group must think. Most bank services today allow for transfers to and from accounts I own at other FSIs (we call this A2A). Now I can transfer money to anyone via mobile with no fee (p2p). What about P2B and impact on Debit? For example, eBay purchase? Or how about at a store? If I can send money to a person with no fee.. what prevents cannibalization of Debit? Because of Durbin making Debit “almost free” is there an incentive to create a new payment network?

My sources tell me that there has been very little planning around CX (outside of JPM) to answer these questions. Not only were people with the big 3 banks scrambling to explain the service internally, their CEOs were getting called by peer banks about why their bank had not been asked to join? While banks are not free from anti-trust concerns.. payments is a network business that requires broad participation. The CX announcement comes at a rather sensitive time for them, as Jamie Dimon chairs The Clearing House meetings, there is little doubt that TCH has also served a forum for coordination on all retail payment “industry matters” like Durbin.  Can you imagine working with JPM, BAC and WFC in TCH meeting on retail debit strategy.. then hearing they have a new service rolled out without your knowledge? Not the most polite thing to do.

It certainly was not Jamie’s fault (my favorite bank CEO by far.. fellow Citi alum).. but rather the poor “payments” coordination within banks. In my previous blog Bank’s Need Payment Councils, I laid out how these bank teams had worked historically. CX is a fantastic idea.. and it could even evolve into a profitable service if banks can improve the way the coordinate internally. This is a CEO level decision.. no one wants to tell the CEO that he needs to create a cross LOB council to coordinate payment strategy.. The Citi approach is much more “get a guy to own it”.. like Wayne at Citi, Vin at Chase, or Steve at WFC. But decisions that impact multiple LOBs are very challenging to coordinate across the organization.. CX is the manifestation of just such a dynamic (better to get something done.. then work in a bank committee that never makes a decision).

I’ve been getting called this week on “what is the CX strategy”? The answer depends on who you talk to. BAC has a number of debit/retail payment initiatives.. and there are certainly overlaps..

–          New Visa Debit with BAMS/First Data

–          Visa Money Transfers (directly competes with CX)

–          CX

–          Internal Payment Warehouse (3 yrs in making)

–          Cashedge (A2A money transfers)

–          Pariter (On we w/ WFC)

–          NFC Credit w/ Visa and Device Fidelity

–          …

If banks have trouble coordinating internally.. the situation certainly does not improv

e when 20+ of them get together to set a strategy. Of course this “least common denominator” is why today’s existing payment network is both rigid and resilient. What the banks really need is a firm “platform” vision for payments that they own. For example, what if I broke payments into 3 broad categories: pay before, pay now, pay later? Having multiple products that compete in these categories is a sign of a good healthy market.. having multiple networks process the payment is NOT (only some of which are bank owned). As a side note, there is little reason to doubt that there will be SUBSTANTIAL consolidation surrounding the 6 major debit networks (Visa, Pulse, Star, NYCE…)

My top idea for CX to drive a little incremental revenue?  2 years ago, Metavante (now FIS) negotiated a PayPal deal that would provide for revenue sharing for eBay merchant payment.. PayPal collects 3%+fees and would share 30-50% with FIS. Why would the banks not want to do this? The original plan had more to do with this happening over bill pay.. but a transfer probably makes more sense.  Either way, the banks should jump on this kind of opportunity. My #2 idea.. well I’m only telling my customer this one.. (my poor attempt at a tickler).

Happy Memorial Day

– Tom

Square will “do better” than PayPal? Yeah.. and Pigs Fly

Posted on by
2

May 25, 2011 (Updated.. I was 25% off on TPV)

TechCrunch Today (Square has 95% chance to do better than PayPal)

TechCrunch – Square Register (May 24)

Keith Rabois has been around payments a long time..  and given his PayPal background….  his views shouldn’t be ignored. $1B TPV sounds like a big number, but equates to only $3M in revenue (275bps take rate, 30bps margin). PayPal has a 330-390bps take rate (230bps margin) driven by its 3 party model (both merchant and consumer have accounts). Yes, that’s right… Paypal makes 7x+ more revenue for every dollar processed than Square. So for Square to surpass PayPal, they need $700B in TPV… (in their current revenue model). Given that total US Credit Card TPV is $1.3T (Visa $781B , MA $515) that seems a little unrealistic.  (for more detail see http://tomnoyes.wordpress.com/2011/02/24/do-squareups-square/).

So what is “do better”? Number of accounts? Square is sitting on about 20k active customer accounts.. this is a long way from PayPal’s 100M..

The new Square register is a decent idea.. but Square is NOT competing in a vacuum. During PayPal’s early days there was a problem that needed a solution (CNP). PayPal delivered a strong value proposition.. a 3 party payment platform for online purchases. Solving this problem was critical for commerce (on eBay) to take place. The online payments problem, which PayPal solved, was a roadblock to delivering commerce value.

What are the problems that Square is attempting to solve?

  • Help Visa drive credit card volume
  • Help small merchants accept cards
  • Help small merchants communicate to consumers (Square registers)?
  • Provide Consumers a Wallet on their phone?
  • Help a Craig’s list seller use a card next time they sell something?

Square has done a great job in consumer experience, across all of their applications,  but their challenge remains value delivery. Chase and Visa have billions of reasons for sustaining CREDIT card TPV, but this is NOT a retailer friendly value proposition. As I’ve stated, the challenges of increasing card usage with small merchants is not a technology problem, it is a business (value proposition) issue. Square is doing a great service to many small merchants in bringing down the cost of accepting the card, and improving the consumer/merchant experience.

What is their opportunity?

Retail Sales in US is about $2.4T (excluding Auto, Gas, Resturants). This is certainly a larger market than the $176B spent in US eCommerce. What is your guess on % of merchants that do not currently accept cards, and their categories? Take a look as the US Census data, and I would say total sales for “square prospects” are around $100B.

Take a look at the recent Micros/Verifone announcement as an example. Existing POS and terminal manufactures are not sitting on their hands. Who would want to invest in Square? What kind of platform are they building? This is not a group which will rally the industry, but rather spur it to action (or isolate it to individuals/small businesses).

We will soon see mobile value propositions that contain payments.. but payments are just a supporting mechanism of a larger commerce related value proposition.  Square is making card acceptance nice and neat for small merchants.. this is a good niche opportunity. I will shave my head when Square “does better” than PayPal.. I give this a .0005% chance..

Clearxchange

Posted on by
8

25 May (updated)

WSJ: Bank launch Clearxchange

Banks take back mobile momentum!! Everyone else.. stay away from P2P because this team will own it.

BAC, JPM and WFC launch Clearxchange .. a mobile pay anyone service.  This is a very solid idea by the 3 top US retail banks… after all why should PayPal route funds between banks? Banks have always had the capacity to make this work, but have lacked the structure (and business case) to pull this together. Their real risk was banks loosing the “directory battle” (referred to in my previous blog on Chase QuickPay). The last Bank driven initiative of this scale was Spectrum in 1999 where banks decided that acting together in electronic bill payment was the right thing to do..

A short history on this initiative. WFC and BAC got together and created Pariter Solutions a few years ago for “on we” clearing of ACH and images. Pariter initially received the charter to also move toward developing “on we” clearing for mobile/online P2P transactions, but this was pulled late last year as Pariter was having challenges executing against its core mission. Subsequently BAC and WFC got together and created Clearxchange to develop a common “directory” and online/mobile application infrastructure for P2P routing (ACH processing is TBD, but likely to be handled by host organization with clearxchange as a 3rd party sender).

Chase was an early leader here.. QuickPay delivers all of the functionality of Clearxchange… plus some. At one level, I view clearxchange as building what Chase (and Cashedge) already have.  Chase has agreed to participate in directory sharing, so that Chase customers can send/receive to Clearxchange customers.

I’m a very big supporter of ClearxChange’s bank led P2P model, banks must own this for this service to take off. Remember, retail payments are a money looser for banks, the WSJ article did an excellent job describing the dynamics.  By taking the lead, I would hope other banks also participate directly with ClearXchange or through Cashedge’s PoPMoney service (described here in blog).

Moving money via ACH is technically simple, the real challenge is in risk/fraud management. On this level, there are only 2 organizations with substantial fraud management skills in cross bank P2P: Cashedge and PayPal. Both have 10+ years of ACH history.  In the last few years banks have collaborated in developing shared fraud models (can’t really discuss specifics for obvious reasons) that now allow them to substantially reduce risk without prior transaction history. The long term objectives of CX are rather vague (bank control of ACH rails, and balance retention in DDA). Their short term plan is to move consumers to a  “push” model, where funds are sent from a bank authenticated log in. Banks want to be the starting point of a transfer. This positions them as the trusted intermediary, with benefits in fraud and cementing consumer behavior. This is a significant announcement with over 3 years of planning behind it.. but scope is narrow.

The push (ACH Credit) P2P model, where customer initiates transfer from their bank, has a poor history (search on “Paybox success”). The historical issues here have nothing to do with technology, but rather business model: simple and free funds transfer is not a great business. I’m very curious to see what CX’s revenue model looks like.. At one level I do laugh.. just 5 years ago, the only top 5 Bank to allow online transfers out of the bank was BAC. I ran online and payment services at Wachovia (now part of WFC) which included all the online payment operations. The other bank retail heads were very reluctant to launch online transfers because of the risk of deposit run off.. or rate hopping. … wow have things changed.

Every year the banks delayed this service was another year that PayPal could develop a directory of mobile phone numbers, e-mail addresses and ACH information…  this is the real battle… retail payments are a terrible business when viewed as a stand alone product.. but are essential to retail banking.  (See Banks will win in Payments).

The only “cons” I have for ClearXchange are:

  • It involves a technology build.. and clearly Chase and Cashedge have already built these functions. The banks should have gotten together and bought Cashedge.. particularly since BAC is Cashedge’s biggest customer.. they could have been running with this for 2 years
  • The structure. Why not put this in The Clearing House?  or Early Warning Services?  another bank owned consortium does not make sense given their charter unless they plan on involving non-banks
  • BAC, JPM, WFC.. will you please walk away from Visa Money Transfer.. they are attempting to walk all over what you are building here. My guess is that your Visa relationship managers are not talking to your P2P teams..

Visa’s Mobile Strategy: Portfolio Manager

Posted on by
7

Visa’s Mobile Strategy: Hedge your bets

I frequently write this blog just to provide a little structure for my own thoughts. While I attempt to avoid “stream of consciousness” writing.. my efforts are not always successful. Top of mind today is the question: what on earth is Visa doing and why? Any time you see a major company come out with a press release with no customers, or proof points it bears a little research. Last week I wrote on Visa’s mobile wallet announcement (or non-announcement). Why would they do this?

Here is a short inventory of Visa’s (and Visa EU) mobile “related” announcements over last year

Clearly Visa has been thinking about mobile for quite some time (listen to Bill Gajda). As I’ve stated many times the great thing about a (well designed) global network is resiliency.. it is resistant to failure.. the challenge in running one is the same: resistance to change. Every network evolves around delivering value to the core constituents (nodes) who are CURRENTLY using the network.  Networks also evolve around a business and revenue model, as a network matures value evolves out from the process of coordinating transactions to managing interactions (HBR Where Value Lives, Jan 2001)

modularization takes hold, the ability to coordinate among the modules will become the most valuable business skill. Much of the competition in the business world will center on gaining and maintaining the orchestration role for a value chain or an industry. … Connected by networks, different companies can easily combine their capabilities and resources into temporary and flexible alliances to capitalize on particular market opportunities. As these “plug-and-play” enterprises become common, value shifts from entities that own intelligence to those that orchestrate the flow and combination of intelligence. In other words, more money can be made in managing interactions than in performing actions.

Why is it so hard for Visa to change? Visa’s history is that of a bank owned consortium and although they are a public company today, their legacy and network was built around a bank centered model.  The banks were very thoughtful in constructing Visa and its rules, to attract smaller banks the majority owners (Chase, BAC, WFC, C, USB) created a structure to ensure no single bank could take advantage of the network, and a rule making process that was optimized for “stability” not “adaptability”.

For those outside of the payments business, Visa operates like the NFL League Office. It cannot make rules in a vacuum, nor does it own the teams, the network rights or the ticket sales. Innovation teams in Visa are more like “advocates” and “evangelists”, they can not force change on their member banks, but rather paint a picture on what is possible. The Visa “franchise” thus has tremendous difficulty adapting to a new game just as if the NFL would have a challenge in coordinating a new sport like snow boarding. Although the fan base may be the same.. and the team owners are interested in generating additional revenue.. it’s a stretch for their network to adapt.  This dynamic correlates to why Visa failed in eCommerce and companies like PayPal and Cybersource excelled.  Both POS and CNP were payments, but the environment of the transactions were very different, particularly in fraud and required new “rules”. To stick with my NFL analogy, both POS and CNP required fraud services to surround transaction authorization.. just as both snow boarder and football player need safety equipment.

So what is Visa’s strategy? Internally, they know they missed out on eCommerce.. but it wasn’t their fault, they were bank owned until 2008. What they see is a new wave of mobile that will effect all of commerce (US $4T .. excluding Auto) not just eCommerce ($176B). They can’t afford to miss this boat.

The problem is that Visa’s existing, bank centered, network is rigid and ill suited for more than POS payments. The mobile revolution at the POS will be much more than payments, particularly as both the POS and the Mobile phone are each able to coordinate across many different networks. Technologies like NFC will also provide much greater potential for authentication and authorization separate from any single network (note I didn’t say payment).

The biggest challenge for Visa to overcome is value delivery. With the prospect of Durbin killing upwards of 20% of overall revenue (70%+ of Debit Rev) Visa is “squeezed” between preparing for a new world order driven by a new network (not yet profitable) and driving its existing business growth (moving along at a respectable 15% clip). The TOP ISSUE with Visa’s mobile NFC Payment is VALUE. Banks are looking to drive NFC to drive CREDIT volume (as opposed to Debit). This is why certain retailers with narrow margins (ex Grocery) are not supporting NFC (See my blog on BestBuy’s experience). The ISIS consortium in the US was leading with a “debit like” payment product that received strong interest from retailers.. with prospect for very low interchange. Alternatively, bank and Visa led schemes have the merchants paying for the “privilege” to take NFC.

If Visa’s mobile efforts were removed from the revenue pressure of the parent we would undoubtedly see Visa work to establish a new, more cost effective network built around Debit (See my previous blog on the “evolution” of debit networks) and they have worked to some extent on this with VMT. Or even build “new mobile rails”, as they attempted to do with Monitise and are now rumored to be investing in Fundamo for same (targeting emerging markets).

As it stands today, Visa is playing the role of a portfolio manager and evangelist. Selectively supporting and investing in mobile initiatives in an attempt to leverage their network. This is a “services” approach to their existing network. The structural challenge is that new services on Visa’s existing network equates to lipstick on a pig (or a snowboard on a running back). How can Visa deliver value to a POS transaction when it is forced (by issuers) to be credit only (250-350bps). To be perfectly clear this is NOT a technical challenge, it is a business model challenge. Bank/Retailer/Card relationships are very strained right now. A good example is “coupons”, Visa has their own coupon service (referenced in PR above) and has every technical capacity to offer a great experience. Visa could actually deliver a killer app in this space if retailers would only give up line item detail on what was actually purchased. The technical capacity for Visa’s network to deliver “level III item detail” has been in place for many years. Do you know how many merchants give up this information? Almost none.. (example Office Depot has it on their Chase co-branded card). Merchants trust neither the networks, nor the issuers with their price list or customer information. Visa is not able to “pay” for this information as it does not own the customer and cannot leverage this either. This all goes back to why Visa took 3+ years to roll out the offers service in the first place.. it had to get issuer permission for each consumer.

Every network begins with delivering value to at least 2 parties. My bet on mobile payment is based on a history. A history where banks (and Visa) have demonstrated poor competency in retaining their role as intermediary between consumer and retailer. A new retailer friendly network, that conveys much more than payment information is needed.

Visa for you to execute in this space, spin out Bill Gajda and team to build a new network. You certainly have the capital and intellectual horsepower to do it.. Don’t think of mobile as a service on VisaNet.. We will know this is moving when we see PayWave Debit volumes taking off.

Analysts.. lets start making Visa publish transaction volumes for NFC, VMT, eCom, Offers.. shining the light on this investment “hole” will help them in the long run.