Google Wallet Goes Plastic

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2 Nov 2012

Android Police published a story on Google’s forthcoming plastic pilot yesterday.

What do we know? Very little beyond the photo above.. If the story does pan out, it could be a tremendous win for retailers, consumers and even banks. The only loosers? NFC and carrier led payment initiatives.

Solution overview:

  • Everything that Wallet 2.0 does today on NFC, only now you can do it with a swipe of plastic
  • In today’s NFC wallet, consumers scroll through their list of cards to choose the plastic they want. The picture from android police outlines how this will be the same for physical plastic “want to pay with a different card? Just open the app and choose another way to pay..  just as you can today only now there is no NFC dependency.
  • New for consumers? well a cool looking black card.. all of your tickets, incentives, coupons in one place (in the cloud). Don’t worry about loosing your offer e-mails..  Google also has POS integration working at 10+ grocers so your coupons automatically come off on the paper reciept.. and in the cloud. No one else has payment and incentives put together like this.
  • New for retailers? Integrated advertising.. look at performance of local search, adwords, offers, coupons across google properties.

Business Strategy Changes

  • Expand beyond NFC phones to any Android handset (and IOS according to article)
  • Allow offers to be redeemed on plastic
  • Allow Google to compete for payments business with retailers and consortiums (ie MCX)
  • One wallet for eCommerce, mCommerce, and a plastic card for POS. This is exactly what PayPal is doing with its own physical plastic, and American Express plans to do in SERVE 2.0.
  • Expand Google wallet into IOS? That will certainly crimp Apple’s plans here. Google will establish itself as both a payment network AND and Ad network
  • No more TSMs. Google will see the transaction data for every card used in the wallet. Just as Amazon, Apple, PayPal see every transaction for eCommerce.

My guess is that Google will proceed with a small scale pilot, just as it did with Wallet 1.0.

Why do retailers win? (see related blog)

Google will be in a position to drive the lowest cost payment (perhaps better than 0bps MDR) AND allow retailers to drive marketing to their consumers online and via mobile.

Why do consumers win?

With Google, use any card you want, use any phone you want … consumers get to CHOOSE.  (In ISIS the only card you can load today is a Visa credit card)

More to come this weekend.

Google sorry that some idiot spoiled your release plans.. but this is super stuff… I always wanted a black card.

My biggest questions?

  • Will Google integrate a direct ACH connection.
  • Who is the network?

Don’t Wrap Me

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26 Oct 2012

Today when you use iTunes, PayPal, Amazon or Google wallet do you think about which card in the back end your purchase will go on? Most of us take the view that “it just works”, and perhaps ensure that the default card is the one which allows you to accumulate the most points (Amex for me). When eCommerce started, there were few entities capable of managing card not present (CNP) risk hence specialists evolved (PayPal, Cybersource, GSI, …) that could manage this risk on behalf of the merchant/community. Payment cards/accounts had to be wrapped by these risk specialists in order for payments to be processed. As mCommerce evolved (think Apple iTunes), digital goods purchases where integrated into the “platforms” to allow seemless purchasing of content… thus starting the process by which cards were associated with “cloud” accounts accessed in mobile phones. Today, mCommerce sales are around $170B in the US, and mCommerce sales are around $10B (Digital Goods ~$4B and physical the rest .. which includes buying from Amazon on your iPad at home). Quite frankly card companies didn’t mind letting other entities like Amazon and Apple store your card information so that you could buy in either the eCommerce or mCommerce markets…. This is all changing for physical commerce because the PRIZE IS BIGGER.

With the Physical POS sales $2.4T (USA not including T&E, Auto, Oil/Gas)… The established networks and banks are saying “don’t wrap me”:

  • Amex’s new Serve product 2.0 is wrapping other bank debit and credit cards
  • PayPal’s new plastic is wrapping what they have already, Amex is threatening to cut both PayPal and Google down
  • Visa has reportedly issued a cease and desist to Google at the behest of Chase (See NFC Times)

All of these wallets (Virtual, NFC, Cloud, …) are causing issuers to wonder “who is top of wallet”?.. and how does a customer select my plastic. They seem much more concerned about one physical plastic card wrapping them (ie Serve and Paypal) than a virtual wallet, but they are also very concerned about data and letting any ONE intermediary see transaction data (and add offers/services on top of them). In other words “DON’T WRAP ME” (see blog Paypal at POS). Of course there is not much to worry about yet. Paypal is reportedly doing less than 5 transactions per WEEK per Store at HomeDepot..  But the established players want to stop anything before it starts.

How do cloud wallets manifest themselves? Well it could be NFC/Paypass, physical plastic, a QR code, or a voice print (Square).. all you need is a form of authentication (see Battle of the Cloud). Add to this the complexity of retailer data, issuer pricing, loyalty and incentives and the market is just nuts. Who is doing what to whom…? its like a 70s drug and sex movie.

Forces against NFC

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27 Sept 2012

Although I’m not known for short blog posts.. I thought I would try one. Like grabbing a cereal bar for breakfast instead of my normal 3 pancakes, eggs, bacon, OJ, coffee… it will of course leave me with a large empty place… but sometimes it’s good to be hungry.

I read Scott Loftness’ tweet on no need for dedicated POS terminals if phones take off. Also was thinking of Square’s strategy of enabling all consumers to have an account (think cloud wallet), and my blog earlier this week on EMV/Verifone’s imaginary vision of the future (contactless EMV).  As a side note Verifone is telling investors the retails will by a massive display payment terminal to market to their customers.. FUBAR! Take a look at how IBM values the POS business.

Forces against NFC

  1. Cloud Wallets. Much is made of NFCs ability to interact independent of network.. This is great.. but remember the POS system and payment terminal are always connected. How many of you remember the days where someone pulled the blue paper over the embossed card number? All that is needed is a key… voice print, loyalty card, qr code, …  There is no need for specialized hardware today.
  2. Credit card only. Issuers, Mobile Operators and Payment Networks worked to position NFC as a “premium service”. How many of you have seen contactless debit cards? Merchants are aware.. and top 20 retailers (with few exceptions) have walked away.
  3. POS systems. Why on earth would any small merchant want to buy a dedicated POS system with a cash drawer? I think we will see tablets really start to take over this space. Although I’m not a big fan of in aisle checkout… there are variants that could work. Even more so if you eliminated cash as a payment option.
  4. If tablets become POS systems…. Then Verifone is a short.. or a long short. In the next 3 years they will see a big bump in re-terminalization due to EMV. Here is a picture of a mobile chip and PIN reader my friends at Baclays put together. All of their UK consumers have one.
  5. Mobile phones.. there will be instances where consumers can pay for their purchases before they collect them, or for small merchants and small businesses where payment is to a sole proprietor  (remember there are 474,000 US restaurants with under 500 employees). IMHO THIS IS WHERE PAYPAL SHOULD FOCUS.
  6. UBIQUITY. No merchant is going to invest where only 2-3% of customers can use the product. There are not enough phones in the market, and not enough payment terminals (<200k in US) that support them
  7. No compelling value. NFC must do something else beyond payment… there are no payment problems. Therefore NFC must start with something like unlocking doors or beaming pictures..
  8. Supply chain chaos and standards. NFC will take off in homogeneous markets (or those dominated by a monopoly)  that can force a standard (Edy/Suica in Japan, Octopus, EZ-Link, The French, … ). Today’s phones largely feature an embedded NFC SE made by NXP. The carriers want SWP based solution but Gemalto can’t get the SIMs out the door. It also doesn’t help that NXP’s current chips can take only one card emulation application (only paypass, or only paywave.. but not both).. which means that the little sticker on my phone does just about everything I need.
  9. NFC is anti cloud.. everything is locked up inside this little secure vault.. it ONLY does POS payments. I can’t do a mobile checkout with an NFC phone….

Future of Retail… ?

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26 September 2012

(apologize for typos in advance.. send corrections to my editorial staff)

In last 2 weeks, I was with a fantastic group of payments people: execs, investors, innovators, advisors, speakers… It struck me that most of the people in payments have been in the industry for quite sometime.. just as the execs in telecom have stayed in that industry… likewise with the execs in retail. There is very little cross pollination of talent across industries. Thus ideas and innovation is very “biased” toward a market understanding of the company which is guiding it.  Sure business heads can bring in a consulting group like McKinsey to help them build an informed strategy, but the pace of change in mobile, payments, advertising, social, …etc has put the real cutting edge of innovation inside companies.. not within consulting groups. One reason: if any consultant had a really great understanding of the market and a new idea they would go start a company… after all the investors are willing and the personal wealth equation is much better.

Today’s thought for the day is Retail. I’m certainly no retail guru.. back when I was at Oracle (98-02) our ERP suite was much more geared toward discrete manufacturing with Cisco, Sony, Motorolla, TSMC as some of my key accounts. In banking I can only recall one direct retail conversation, it was with Jane Thompson (former CEO of WMT Financial Services, now a good friend) her team came to visit Charlotte and I can still remember someone asking WMT what they thought the right rate of interchange should be. Their answer: 0%.. all the bankers laughed… but then we suddenly stopped when we realized WalMart wasn’t joking.

Over the last few years I’ve taken a crash course in retail, both through my time with Google and with people like John Buchanan (former founder and CEO of Retek)…  I have new respect for the world of Retail. Certainly one of the toughest business I have ever touched. Many of my thoughts about retail, and investment hypothesis, were laid out back in January – Remaking of Commerce and Retail.

During my meetings this week, I was struck by the biased views in the room. For example, contactless will take off because it is part of the Visa mandate to retailers (see this week’s EMV blog), obviously the bank issuers were not aware that the top retailers are moving only with Chip and PIN.. not contactless. Why is information here so poor? Well it is certainly not in Visa’s best interest to advertise it… and the banks have other things to do.

Another example is Card Linked Offers (CLO); assume you own a brand restaurant like Applebee’s .. do you want to discount your food 10% every week to every customer? Of course not! What these restaurant chains want is customers.. loyal customers.. just like any business. Yet they are being approached by 6-10 CLO start ups every week for a “deal”.  Its like no one ever heard of CRM… No retailer wants to compete on price.. they want to compete on quality, brand, experience.. they want to move away from price as the basis for competition. Sure some retailers do want to manage excess inventory, or a loyalty program (see LevelUp), or mark downs, but they don’t want to compete on price.

Reid Hoffman is a brilliant investor, but I shake my head at the thought of the Card as the next App Platform (see Forbes Article).   Why? Well card companies have no understanding of what you bought (item level information).. only your merchant preference. One other piece of information (sorry for the repetition here), retailers spend very little of their own money on marketing.. it is manufactures that spend the ad dollars. 

So this results in a CLO focus on Restaurants and Services.. both of which are require tremendous execution in hyper-local sales. Ask Groupon how easy that is.. but its worse for CLO companies as a basket level discount offered through a card is not performing as well…  due to brand, value, redemption experience, …

Retailers have a CRM strategy… believe it or not they have a price promotion strategy as well with digital, direct, and mass media components. Retailers want customers.. but not at any price, and certainly in support of their brand (one of the few things they have left). When I look at any “offer” or “payment” company, targeting physical retail, I look at how it can fit within a Retailer’s existing business model. How can X improve Y’s execution. Good news is that there are 100s of opportunities out there.. as advertising is fundamentally broken for most retailers. As a corollary… PAYMENT IS NOT BROKEN.

Key questions I ask

  • Customer Acquisition
  • Customer Loyalty
  • Distribution of Incentives (reaching customer where they are)
  • Brand impact – improve retailers brand or not? Is it white label?
  • Consumer Value
  • Consumer Experience (Acquisition, In Store, Checkout, Support, …)
  • Merchant Value/Cost
  • Impact on Retailer Competitive Dynamics (ex increase price competition?)
  • Require change in consumer behavior
  • Flexibility (one flavor for all..? )
  • Existing footprint
  • Privacy/Data Protection (likely to change substantially)
  • Data flow/participation by key participants
  • Value shift (ex. From Mass media to targeted)
  • … I could go on (see the NRF.com or Shop.org for more details here)

Retailers all have very distinct strategies.. after all its very challenging to sell a commodity good based on anything but price. For example CVS has the top loyalty program in the country. They certainly don’t want to throw it out the door for someone else’s … their loyalty program manager is Catalina… one of the best data analytic companies in the world, run by former CEO of DoubleClick and meshed with Neilsen. Take a look at their participation in something like MCX. My guess is that they will want to enable payment on their CVS loyalty card.. to make it operate like Target’s Red Card. They don’t want PayPal running it.. or Visa… they want to run and control it themselves. MCX will provide dumb pipes (low cost payment routing/clearing) to a smart loyalty program. This goes to my last bullet above: Value Shift… If retailers are smart they will realize that their decisions on data are far more important than their decisions on payment. Data is key to orchestrating value.

For physical retailers to succeed the orchestration of value must move from a focus on price competition. A challenge for Retailers is that Orchestration requires a network… primarily a demand generation (advertising) network (although orchestration could also include other like: entertainment,  custom manufacturing, …etc). What else can physical retailers do? What does the future of retail look like? Well the NRF just completed its conference on the subject so you should chat with some of the attendees. My answer is that the market is: ripe,  highly complex, heterogeneous, with privacy and data as key.

My actionable recommendations to Retailers:

  • Start with demand generation, consumers that do not currently shop with you
  • Ensure your partner emphasized your brand front and center
  • Find a Partner either IN CONTROL of the consumer experience (Apple/Google) or one that already has massive consumer adoption (ie Facebook).
  • Focus on creating a fantastic customer experience from end-end
  • Minimize the number of partners involved
  • Throw out partners that don’t know how to manage campaigns, data or your business
  • Have a plan “post acquisition”.. how do you retain them?
  • Ensure your partner can reach/influence consumers WHERE THEY ARE.. not where you want them to be. Email address is not influence

[youtube=http://youtu.be/t49JkakYAoE]

Fantastic must see from Tesco Korea if you haven’t seen their virtual subway store

[youtube=http://www.youtube.com/watch?v=fGaVFRzTTP4]

PayPal at POS – Take 4

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24 September 2012

Previous Blog – Paypal at POS

Just met with an institutional investors who was really high on Paypal @POS..  here is his recap of Paypal’s pitch:

Amazon is the enemy let me help you compete with them. We can help you with our marketplace to position your product, with our payments to pay for it, with GSI to help you distribute your orders and manage it for you, with our new tools to help you engage the customer before or during their [physical] shopping. We don’t want to compete against Visa, we want to help you compete against Amazon.

Price?

–          180bps for payment

–          9% of sales on eBay marketplace

Wow what a great deal.. no wonder they have 6 sales people working full time on it at PayPal. I asked Fred how this works for JambaJuice or HomeDepot neither of which do much online sales..

Here are 4 scenarios… let’s see if PayPal works in any of them

1) Best Buy. $1000 big screen … but only $800 on Amazon

2) Home Depot. 8 2x4s, 5 bags of mulch and a new drill

3) Restaurant

4) Grocery store.

Scenario 1 – Best Buy

How did the customer decide on the product? Did the customer go into best buy to see it? Did Best Buy’s team influence the customer in the sale?

If the customer has decided on the product independent of best buy it will be hard for any retailer to win them separate from price. PayPal can’t possibly help BestBuy on price, actually its online marketplace competes with BestBuy.. as many other merchants sell there too. Does BestBuy really want it’s brand in the eBay flea market? Doesn’t a manufacturer direct model make more sense here? What value is Best Buy bringing?

It would also seem very difficult for eBay to help BestBuy EVER compete on price, particularly when it is charging 180bps for payment and up to 9% in sales fees (http://pages.ebay.com/help/sell/fees.html) for its marketplace.. It is actually 4x the cost of Visa.

The only circumstance I can identify, where eBay can assist in sales, is when a customer is searching for a product, and BestBuy has the lowest price, will they be able to assist. However, consumers don’t leverage eBay for price comparison shopping.. they use other tools like Google particularly when looking for merchandise in a nearby physical store (see Google Local Support).

Can eBay assist in guiding a consumer to a product? Keys are content, touch and brand. Do consumers normally go to eBay to research products? Do consumers normally trust the eBay brand to give them good shopping recommendations (online and offline)?  Again I don’t see how eBay or Paypal can play in the shopping experience until a consumer has selected a product. If selection is made what services do they have to help in completing the purchase? A: Payment… However payment does not drive product selection or purchase decision, it is a just the last phase of a long process.

Could Paypal uniquely deliver incentives to the consumer during the product selection process to influence them? sure… so could Santa Claus and ShopKick (both equally real) .. but this is not what PayPal does today so PayPal must first build credibility to establish a NEW customer behavior pattern. Paypal today does not do advertising, they do not do physical POS purchases, nor do they do enterprise sales, … in general consumers just don’t care about the PayPal brand off line. Sure, Paypal could invest to establish itself in each of these areas. But these are not trivial investments, it takes tremendous marketing investment to change consumer behavior. Little Square ($8B TPV) has more than 8x of PayPal’s POS volume… which today is primarily driven by their Masterdcard debit (only works against a balance with PayPal).

I was planning to go through 3 more scenarios.. but what is the point? How can PayPal help any physical merchant? eBay’s only asset here is a consumer account.. they may make the point that 100M consumers have a PayPal app loaded on their smart phone.. well that does not equate to usage for payment (rather balance checking)… and it certainly does not equate to usage for shopping.

Top 20 retailers take the view ” we just won Durbin.. we have $0.21 payments… we can steer… why on earth would we want to accept any other form of payments and confuse customer, or our efforts to encourage debit?”

Neither PayPal nor eBay drive sales of traditional retail. For small retailers they are a hero.. giving massive distribution to unique goods. To traditional retailers: they are a flea market that further dilutes your brand and puts emphasis back on price.

Why are retailers playing in the sandbox with paypal.. ? A: To experiment (at someone else’s expense)..

I’m open to comments..

Footnotes. Based on 2012 reporting earnings

  • Marketplaces on average charges 9% commission on transaction volume (for 2011, 10.4% in US and 8.2% International). Volume sellers will receive discount (could be 20% or higher) on final value fees (and other fees).
  • PayPal Regular rate is 2.9% + $0.30/transaction, can go down to 2.2% + $0.30

EMV Battle Impacts Mobile Payments

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20 September

Most of everyone knows of the EMV efforts in the US, with Visa implementing a liability shift on October 1, 2015. In this model, any merchant that is presented with a chip and pin card, but is not capable of processing it (as an EMV), will bear fraud loss.  There have been very BIG swings in strategy over the last 6-8 months. The big issuers were all dead set against EMV.. saying they could not afford the cost to re-issue. Now all are on board… why? This is what I’m thinking about today….

Merchants have always loved PIN Debit (see blog). PIN was the cheapest transaction type prior to Durbin, and post Durbin PIN still has the unique advantage of allowing the merchant to route without going to Visa at all. Remember PIN Debit leniage was from ATM networks. Merchants also like the fact that 96% of PIN Debit fraud losses are assumed by issuers..

Visa/MA hate PIN Debit.. the countries where it has taken off like Canada-Interac, Australia EFTPOS, China Union Pay… have domestic clearing networks. This means that transactions are no longer routed through Visa/MA. In the US we have 8 debit networks (see blog). It makes little sense to continue all of these separate PIN debit networks if merchants can route directly to banks… The banks were thus looking at consolidation similar to what was done in countires above. In other words, banks were planning to take Debit back from Visa/MA in a bank owned network. After all, Bank margin improves in the PIN model (post Durbin) when payments are routed directly to them (they don’t pay a network fee ~10 bps).

Visa read the tea leaves… So how can Visa/MA stop the bank and merchant love affair w/ PIN? Force EMV…

The Merchant Stick? How will Visa “force” merchant’s to accept contactless? (See Visa Document)

Domestic and cross-border counterfeit liability shift. Merchants that cannot accept an EMV or contactless card when presented one by a customer will bear the liability of a fraudulent transaction instead of the issuer after October 1, 2015.

The Merchant “Carrot”?  Visa TIP program

TIP program allows merchants to be excused from validating their PCI DSS compliance for any year that at least 75 percent of their Visa transactions come from chip-enabled point-of-sale terminals. There are also subsidies for terminal upgrades … To qualify, terminals must be enabled to support both EMV contact and contactless chip acceptance, including mobile contactless payments based on NFC technology. Contact chip-only or contactless-only terminals will not qualify for the U.S. program

Visa’s effort to include contactless in the TIP program is very strategic. To gain the benefits of TIP, merchants must reterminalize with both contact and contactless EMV capability. Why? Well for one reason there are no contactless debit cards out there… yes everything is a credit card. These of course carry much higher fees… The other advantage of TIP is that the PCI-DSS wavier is like a “get out of jail free” card. Merchants can’t get the card without contactless… If this weren’t enough… not only does VISA want contactless.. they also want signature.

Visa says PIN not necessary – Green Sheet

“There’s a lot of confusion around the myth that EMV means ‘chip-and-PIN,'” Stephanie Ericksen, Visa Head of Authentication Product Integration, said in a blog published Jan. 13, 2012. “It doesn’t in many countries, including the U.S. That’s because, in the U.S., we can rely on online processing where transactions are transmitted in real time to the issuer for approval. With that in place, there’s no need for the offline authentication that was the genesis of chip-and-PIN.

From Chip and PIN to Chip and Choose? Visa wants  encourage signature as these transactions must be routed through them.. my position (and that of most non network people) is that AUTHORIZATION and AUTHENTICATION are completely different problem sets. The availability of real time approval means nothing if you don’t know WHO you are approving for WHICH CARD.  PIN answers the “who” question and the chip is the account number or “how” you are going to pay. I just can’t believe that Visa has come up with this story.. but they must in order to support “contactless”. Most consumers don’t know that today contactless transactions have limits. These limits are set by the issuer, in Europe they are typically around $25. However the issuer can choose to increase the limit (no PIN required), or require a PIN with a contactless payment.  All of this is a little absurd for Visa as PIN is always viewed as key to authentication, AND Visa just waved the signature requirement for mobile payments. So no signature required for Square.. but Visa wants it optional at the merchant POS so it can retain the volume?….  Expect some Regulatory involvement here.

Large Merchants are very, very aware of this strategy to improve the credit transaction mix and make mobile/contactless payments a “premium” service. The top 20 retailers have put their foot down and said “no way” will we be putting contactless readers in our store (MCX members particularly). The terminals that they are ordering DO NOT have contactless capabilities.. only EMV chip and PIN. Most retailers agree that signature is a worthless authentication mechanism. Visa clings to signature in order to ensure transactions are routed through them. Expect MCX to look toward a PIN model..

So this EMV “battle” has many sides to it.. it impacts mobile payment adoption, EMV rollout, plastic re-issuer, consumer behavior, consolidation of national PIN debit networks, …

Comments appreciated.

Future of Phones.. Good Enough?

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16 Sept 2012

Quote of the week

It’s not clear that NFC is the solution to any current problem…

Apple Senior VP Marketing – Phil Schiller

A few months ago I was in Hong Kong speaking with institutional investors at CLSA’s annual event. One of my more memorable meetings was with James, a chief investment officer with a top 5 investment bank. The heart of the discussion was on the future of telecom. Although I’m not a telecom expert, James was interested in finding “the next killer app” in mobile. Was NFC it?

His investment thesis was that phones are starting to become commodities: screens, LTE connectivity, cameras, battery life, applications, …etc are all reaching a point of good enough. His time with me was spent drilling down into payments and NFC in order to see if I had any new data which would alter his view.  I did not….

What will happen in a world where handset hardware is no longer the basis for competition?  The same thing which occurs to any manufacturing area where a “good” becomes a “commodity”: margins compress for the commodity and migrate to the new area which is basis for differentiation/competition. Yesterday I outlined the implications, and investment opportunities, for the mobile operators.

This week we saw the launch of the iPhone 5.. better, brighter, bigger, lighter, clearer, faster, lasts longer, crisper, sturdier, takes better pictures, more tightly integrated to applications that Apple controls, …etc. A great new product.  An Evolution… not a revolution.  What Apple understands better than almost any consumer product company is: consumer experience matters.  While some handsets already exceed those of  Apple’s iPhone in feature/function (Samsung’s Galaxy S III)…  none can match it on consumer experience. Experience is where Apple is focusing its efforts, and the major shift in iPhone capabilities is NOT in hardware features.. but on orchestrating value in ways it can control.

Apple takes a Clayton Christensen approach to the iPhone: what problems does a customer have, and how do I solve them? For example, I hate typing in my name and address on a little mobile browser to order a good from lets say Gap.com.  Apple’s passbook will resolve this by allowing Gap to integrate to passbook to pull all of the “iTune’s account” information over .. so I don’t have to fill this out anymore.   Apple is moving to solve real consumer problems…  It is looking to orchestrate value delivery.. moving the “hub” of coordination from the phone to iCloud.

This is what I refer to as the Stage 4 Value Shift (see April Blog). Theoretically, an open innovation model (ex Google/Android, Java/Oracle, …) should be able to quickly surpass Apple, as 100s of small companies invest larger amounts (cumulatively) in expanding capabilities of a “platform” (see platform leadership). However, Apple has learned its lessons from its Mac days and has defined competition along the lines of “consumer experience”. In this model, it does NOT CARE about interoperability or standards… rather Apple is maniacally focused on delivering value to consumers with usability, reliability, intuitiveness, …  being core measures.  Apple’s brilliance is multi-faceted, but by defining product focus along the lines of consumer experience, the iPhone’s closed model of innovation can not only effectively compete, but win easily against open systems. In other words, while open systems compete more effectively in a feature/function war.. they loose in the qualitative measures of “experience”.

Apple will obviously monitor the environment for effective new features, to ensure that the core product hardware remains competitive. For example, the real world transaction data for NFC based payments is a complete joke. There are no phones, there are few terminals, and there is no consumer or merchant value proposition. Sure there are exceptions like Japan, but only closed systems with a monopoly leader have proven the ability to push the solution out.

Apple does see a need to improve device-device communication, as well as shrink the hardware footprint. With these drivers, and given the prototypes in market, I fully expect Apple to redefine phone hardware architecture with a new integrated chipset that would encompass functionality of: controller, radios (wi-fi, BT, 14443, …etc), secure element that would also enable the SIM to be virtualized and placed within the SE. If this is indeed Apple’s direction, it will not be a new basis for hardware competition on feature/function, but rather: battery life, footprint and control (ex. virtualized SIM).

Other players also have unique strategies and assets. For example, Google’s strategy: orchestrate value based on consumer data. In assessing investments I look for one key answer: what problems are platforms trying to solve and in what marketplace?

All about Commerce… and Entertainment

My major issue with Apple’s strategy is the degree to which other entities can participate. I see mobile phone revenue streams in 2 major buckets: Commerce and Entertainment.  Entertainment is not a focus for me.. Commerce is. Businesses operating within the retail sector are undergoing fundamental transformation. For 1000s of years, local merchants survived based upon distribution and availability. Today they are left trying to sell a commodity product at a higher price to consumers in a marketplace with near perfect transparency.

What is the roll of any intermediary in commerce? Not just in the selling, and purchasing, but in marketing, product selection, distribution, service, support, … What does the new face of retail look like? This is the focus of Amazon… they are the leader here from a “virtual commerce” (e and m) perspective.

As an investor, I believe we will see a massive new wave of companies redesigning retail. Five years ago I had a camera, an iPod, a PDA, GPS, phone, … today I have one device.  What will the bundling (or unbundling) of retail look like? What are the problems to be solved? In the past 15 years mobile has grown up along side of commerce, operating primarily as a replacement to fixed line and then migrating to a replacement for online. We will start to see phones leap into commerce in new ways.. but my firm position is that this leap does not start with payment (the last phase of a commerce) but with marketing (the first phase). Why? Because marketing and retail are fundamentally broken, and Payments is NOT.

It is in this context that I laugh at NFC solutions. My favorite quote on this topic was from head of strategy of top 5 retailer

“Mobile Operators know how to run dumb pipes, not create business platforms for marketing… their current wallet initiatives are akin to a toll bridge, NFC is their toll booth where they stop me before reaching my customer..  to cross their NFC bridge I have to wait in line and when I arrive at the gate they don’t want $0.50 toll.. they want 3.5% of what I’m carrying in my truck, and a copy of the shipping manifest (customers’ names). This model doesn’t work for me. “

Commerce will find another path… one of least resistance … of better “experiences”. This is what Apple is enabling in Passbook, and why Amazon is succeeding in commerce. NFC is just a radio… one who’s standards are largely controlled by banks, mobile operators and card networks. Why would retailers want to participate here at all?  We should not act to enrich the complexity of payment networks, or wireless ones, but rather form new networks.

Sorry for the typos.. and re-hash of past blogs.. hope it was useful.

Mobile Operators – Where to Invest?

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2

13 September 2012

Mobile Operators should be quite happy with 2012.. it is turning out to be a good year for them. Wireless data revenues are climbing by around 20% YoY and 4G phones are just coming to market. This means your LTE investments should really start to pay off (if you get your data plans right). Motorola indicated that median usage of a 4G device is 11x more than a 3G device – 89MB/ day vs. 8 MB/ day. Also, 4G users are 62% more likely to check their phones than their 3G counterparts… As Jim Patterson notes, more checks mean more opportunities to display an ad.  If you can establish that business.

In 2Q2012, AT&T had 69.6 million postpaid customers driving. Operating income margin of 30.3 percent; EBITDA service margin of 45 percent. Wireless data revenues rose by $1.0 billion, or 18.8 percent, from the previous year, to $6.4 billion

For same quarter Verizon had 94.2 million total retail wireless customers, with a 7.3 percent year-over-year increase in wireless revenues; Data revenues were $6.9 billion, up $1.1 billion – or 18.5 percent; 30.8 percent operating income margin and 49.0 percent segment EBITDA margin

Apple – A Faustian Bargain?

Eating 50% of the cost of a new iPhone will certainly help wireless data growth, but will MNOs develop any other business that can take advantage of this investment?  Raymond James analyst Tavis McCourt shows that Apple (AAPL) is expanding  its share of  profits generated by the mobile industry to 77% in the second quarter of 2012, while also accounting for 43% of its total revenues.

I may be naïve, but I don’t see Apple as the 800lb Gorilla eating everyone else’s lunch. I see Apple as a company executing against a strategy focused on delivering exceptional customer experiences with a solid brand and a fantastic product. Apple is successfully monetizing an environment they control: iTunes, Apps, iOS, iCloud, iPhone, Mac, … They didn’t start with a “control” strategy.. they started with by delivering customer value (and did not go out of their way ease switching costs).

A Strategic Guide to MNO Investment

MNOs, why do customers choose you? This question more than anything else should frame your strategy. Investments in LTE certainly align here, as faster bandwidth improves a key customer requirement and enhances your core revenue.

However, it should be no surprise that consumers don’t want to use your applications and  services… your indigenous applications, or your approval (ex control over apps allowed) is not part of their buying decision (except in a negative context). Customers believe that Apple, Google, RIM, … create the platform.. and hold them accountable for delivering value. Customers want freedom to choose how the device works. They make this decision usually before they enter your stores.

These “platforms” will dominate the world much beyond what we witnessed in WINTEL. There is a unique convergence between the mobile and physical world: consumers interaction time,  global penetration, portability, connectivity…. The most substantial business impact we have seen due to this convergence (last 5 years) is impact to retail profit margins ( price transparency while shopping – see showrooming). The ability for consumers to check price in the store has been a key driver of retail margin compression, which has decreased from 4.2% in 2006 to 2.4% in 2010 (ref: IMAP’s Retail Industry Global Report 2010).

Even if MNOs could develop applications and services of the quality seen in the core platforms, or by small start ups, MNOs cannot possible coordinate and interconnect at the speed and scale of the platform providers. Google and Apple are quickly moving beyond isolated applications and into the cloud, thereby further accelerating their roles as Orchestrators of Value (See Blog – Stage 4 Value Shift).

MNO opportunities

I’m running out of time here.. need another cup of coffee .. may come back and polish this up. But here are the top areas I see

#1 Empty Space – Mobile Advertising

Leverage your assets in physical distribution, network ownership and consumer PII to reach well beyond anything google could provide. Mobile operators, you have data Google could only dream about… from ISP information (everything done in the mobile browser), to location, to direct customer billing agreements. You could target advertising like no other entity in the world.. plus you now have great 4G assets to deliver unbelievable content.

Mobile advertising is fundamentally broken. There is no one executing well here.. its because this space should belong to you. Go at this strong, hire a strong exec CEO and be willing to pay through the nose for a team comprised of less than 10% industry insiders. This is an advertising company.. not a mobile operator division. If done correctly, the revenue here will dwarf your mainline business in 3-5 yrs. I’ll be glad to quit what I’m doing and run it for you…

#2 Mobile – Physical connection

See my blog KYC $5B Opportunity. Many current businesses (finance, advertising, payments, …) require a physical touch with customer. In emerging markets we see telecom sales “agents” taking on licenses of bank/MSB agents so they can certify documents and take role in opening new accounts. I can tell you first hand as the exec running Citi’s remote channels globally I would love for VZ/Vodafone to take on a role in opening accounts. Additionally, think of the mobile phone operating as a form of digital signature for any type of business.. Or working to complete the biometric locks of Apple/Google/.. with an process that includes non repudiation and physical identification (VZ employee taking and witnessing the biometric registration).

I could think of many more that include Opt In/Opt out for advertising, ticket pick up, virtual concierge, or a cool and hip genius bar (renamed of course) where people are welcome to experiment with all the cool new apps and phones in your store… changing your store “experience” from volume dumb pipe and appliance sales.

#3 Service provider role

The first 2 were “leading roles”, this is “supportive”. Take a look at how your phones are  used in the real world, particularly in business. Create customer experience teams. How could your MNO support the business processes of others? In healthcare? In retail? In Airline/travel?

Take healthcare for example, although we have HIPAA, we still have few digital records agents. What could be done here?

You need a complete rework of your partnership strategy. Most MNOs have a model in partnership: buy exclusive rights.. Example is VZ’s deal to sell search to MSFT for $550M in 2009. This model deal continues to be the starting point in most discussions. Change happens rather fast in this industry, exclusive deals also don’t take consumer preferences into account. You must reworks your partnership strategy, away from a control mentality. Focus first on what the consumer wants.. how can you best support it? That can’t be radical… ??

#4 Business wireless

When I go to top 20 retailers to talk about mobile.. their immediate response is: “how do we stop it”? How can MNOs help retailers enhance their business?

Battle of the Cloud – Part 2

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11

29 August 2012

Previous Blog – Part 1 – May 11, 2012

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

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

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

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

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

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

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

Payment Networks:

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

Physical POS:

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

eCommerce/mCommerce:

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

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

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

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

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

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

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

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

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

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

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

Comments Appreciated (as always sorry for the typos…)

Interpreting Square-Starbucks Deal

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2

18 August

From Press Release, key deal points are:

  • Customers will be able to use Pay with Square, Square’s payer application, from participating company operated U.S. Starbucks stores later this fall, and find nearby Starbucks locations within Square Directory;
  • Square will process Starbucks U.S. credit and debit card transactions, which will significantly expand Square’s scale and accelerate the benefits to businesses on the Square platform, especially small businesses, while reducing Starbucks payment processing costs;
  • Using Square Directory, Starbucks customers will be able to discover local Square businesses — from specialty retailers to crafts businesses — from within a variety of Starbucks digital platforms, including the Starbucks Digital Network and eventually the Starbucks mobile payment application;
  • Starbucks will invest $25 million in Square as part of the company’s Series D financing round;
  • Starbucks chairman, president and CEO Howard Schultz will join Square’s Board of Directors

My interpretation: Starbucks is selling their customer base to Square for a revenue share and an equity upside.

  • Square is buying the Starbucks payment user base, with all stored “reload” cards. This customer directory will move from Starbucks to Square and support both legacy Starbucks payment and enable all Starbucks customers to be “PaybySquare” capable with acceptance of new terms. Square is “processor” in the sense that it is now responsible for pre-paid balance and reload.
  • Its about DATA.. payments will be free (for Starbucks), and SBUX hopes to enable Square incentives that are BOTH loyalty and line item based. Square’s driver is to find a way to monetize Starbuck’s payment and location data before it gets to Chase PaymentTech. This means increasing consumer network so that it can make better case to prospective merchants. My guess is that Square is processing payments at no cost Starbucks is paying a lower overall cost for payment acceptance through Square/ChasePaymentTech for all existing Starbucks customers, and will actually PAY Starbucks (revenue share) for any ad revenue they can generate from Starbucks customers. There are 3 consumer transaction tranches: Starbucks mobile payment, Starbucks card, and Pay with Square (Square Register). All will go through Square so they can use the data.
  • Starbucks will start to roll out a new service: SquareRegister (pay by voice, see my previous blog). This will eventually replace the bar code if all things go well. Again, my belief is that Square will bear all of the cost here.

Revenue implications?

Short term there is no revenue upside for Square in this deal, it is about growing network (primarily on consumer side). Starbucks will see costs decline slightly and open up a new revenue channel by monetizing its consumer network outside of its stores. I have some thoughts on precise numbers, but making my own bets right now so I can’t share them.