Start Ups in a Downturn: Key Actions

Thought I would share the recommendations I’m making to the companies I advise. To be clear we aren’t in a downturn yet, but you may want to consider some actions today. A start-up is like a small boat on the ocean: the highs are higher and the lows are lower (and you feel it in between). We are in for some rough weather and it’s important to prepare for the storm and particularly new lows that have never been experienced by anyone in your organization. 

Open to your thoughts here. Sorry for typos..

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2013: Payment Predictions – Updated

2 January 2013 (updated typos and added content on kyc, cloud, and push payments)HypeCycle

Looking back to my first “prediction” installment 2 years ago, 2011: Rough Start for Mobile Payments, not much has changed. Although I am personally approaching the “trough of disillusionment”.  Lessons below are not exclusively payment (ie mobile, commerce, advertising) but seem relevant .. so I mashed them together. Key lessons learned for the industry this year:

  • Payment is NOT the key component of commerce, but rather just the easiest part of a very long marketing, targeting, shopping, incentive, selection, checkout, loyalty … process. Payments are thus evolving to “dumb pipes”.
  • Value proposition is key to any success for mobile at the POS. There are no payment “problems” today. None of us ever leave the store without our goods because the merchant did not accept our payment. There are however many, many problems in advertising, loyalty, shopping, selection, …
  • There is no value proposition for the merchant or the consumer in NFC. NFC as a payment mechanism is completely dead in the US, with some hope in emerging markets (ie transit).
  • 4 Party Networks (Visa/MA) can’t innovate at pace of 3 party networks (Amex/Discover). See Yesterday’s blog.
  • Visa is in a virtual war with key issuers, their relationship is fundamentally broken.   This is driving large US banks to form “new structures” for control of payments and ACH. Control is not a value proposition.
  • US Retailers have organized themselves in MCX. They will protect their data and ensure consumer behavior evolves in a way which benefits them. Key issues they are looking to address include bank loyalty programs, consumer data use, consumer behavior in payment (they like chip and PIN but refuse to support contactless).
  • Card Linked Offers (CLO) are a house of cards and the wind is blowing. Retailers don’t want banks in control of acquisition, in fact retailers don’t spend much of their own money on marketing in the first place. Basket level statement credits don’t allow retailers to target specific products and it also dilutes their brand without delivering loyalty. Businesses want loyalty… Companies like Fishbowl and LevelUp are delivering.
  • Execution. This may be subject of a future blog… Fortune 50 organizations, Consortiums, Networks, Regulated Companies all share a common trait: they are challenged to execute. Put all of these groups together (isischoicewithout a compelling value proposition…) and we have our current state (see my Disney in a desert pic). Take a look at who is executing today and you will see product focus around a defined value proposition. My leaders: Square, Amex, Amazon, Sofort, Samsung, Apple, SKT, Docomo and Google.  Organizations can’t continue to stick with leaders that are focused solely on strategy, or technology, or corporate development… You should be able to lock any 3 people in a room for a week and see a prototype product. The lack of depth in most organizations is just astounding. Executives need to bring focus.
  • In a NETWORKED BUSINESS, it’s not enough to get the product right. You must also get retailers, consumers, advertisers, platform providers, …etc. incented to operate together. Today we see broken products and established players throwing sand in the gears of everyone else in order to protect yesterday’s network. Fortune 50 companies have shown poor partnership capabilities. Their strategies are myopic and self interested. For example Banks DO NOT DRIVE commerce, but support it. Their “innovation” today is self serving and built around their “ownership” of the customer. Commerce acts like a river and will flow through the path of least resistance. There can only be so many damns… and they will be regulated.
  • The Valley and “enterprise” startups. There are billions of dollars to be unlocked at the intersection of mobile, retail, advertising, social. Most of the value requires enterprise relationships. Most investment dollars have flowed to direct to consumer services. I expect this to change.
  • Consumer Behavior is hard to change, particularly in payments, it normally follows a 20 yr path to adoption. For example, in every NFC pilots through 7 countries we saw a “novelty” adoption cycle where consumer uses for first 2 months then never uses again. My guess is that there are fewer than 1-2 thousand phone based NFC transactions a week in the entire US. (So much for that Javelin market estimate of $60B in payments).
  • Consumer Attention. Who can get it? They don’t read e-mails, watch TV adverts, click on banner ads. My view is that the lack of attention is due to a vicious cycle relating to relevant content and relevant incentives.
  • Hyperlocal is hard. The Groupon model is broken, CLO is broken.. Large retailers have a targeting problem AND a loyalty problem. Small retailers have a larger problem as the have no dedicated marketing staff. Their pain is thus bigger, but selling into this space requires either a tremendous sales team or a tremendous brand (self service).
  • My favorite quote of the year, from Ross Anderson and KC Federal Reserve. [With respect to payment systems].. if you solve the authentication problem everything else is just accounting.


Here are mine, would greatly appreciate any comments or additions.

  • Retailer friendly value propositions will get traction (MCX, Square, Levelup, Fishbowl, Google, Facebook,  …)
  • MCX will not deliver any service for 2 years, but individual retailers will create services that “align” with principals outlined by MCX (Target Redcard, Safeway Fastforward, …etc). The service which MCX should build is a Least Cost Routing Switch to enable the most efficient transaction across payment “dumb pipes”. This will enable merchants who want to take risk on any given customer the ability to do so..
  • Banks will build yet another consortium in an attempt to control payments. They will work to “protect consumers” by hiding their account information and issue “payment tokens”. I agree with all of this, yet this is a very poorly formed value proposition and Banks will find it hard to influence consumer behavior.
  • We will see more than one bank start a pilot around Push Payments (see blog).
  • Facebook and Google will gain significant traction in mobile ad targeting…. following on to targeted incentives… which will lead to mobile success. Bankers, please read this again.. success in mobile will begin with ad targeting and incentives. Payments are an afterthought…
  • Retailers at the leading edge will begin to see that their consumer data asset is of greater value than their core business.
  • Banks will follow Amex’s lead in creating dedicated data businesses. What is CLO today will morph into retailer analytics, offers and loyalty.
  • Apple will put NFC in their iPhone.. but usage is focused on device-device communication… not payment. NFC will be just another radio in the handset, there will be multiple SEs with the carriers owning a SWP/SIM based one.. and the platform provider managing the other. Which will succeed? A: the group that can best ORCHESTRATE value across 1000s of companies.
  • Visa will lose a top 5 issuer to MA, and they will see a future where their debit revenue is gone (in the US) as MCX and bank consortiums take ownership of ACH and PIN debit.
  • We will see 100s of new companies work to create new physical commerce experiences that include marketing, incentives, shopping, selection. Amazon is the driving force for many, as retailers work to create a better consumer experience at competitive price.
  • Chaos in executive ranks. Amex, Citi, MCX, PayPal, Visa all have new CEOs.. all will be shaking up their payment teams.
  • Retail banking is going through fundamental change. Bank brands, fee income and NRFF are declining, big dedicated branches will be replaced by more self service. Mass market retail will see significant leakage into products like pre-paid. Retailers and Mobile Operators are better able to profitably deliver basic financial services, to the mass market, than banks…. see my Blog Future of Retail: Prepaid.
  • Unlocking the Cloud… and Authentication. KYC is a $5B business. Look for mobile operators to build consumer registration services that will tie biometrics with phone. Digital Signatures on contracts, payment through biometrics, .. all will be possible in a world without plastic. Forget NFC…  See previous Blog on KYC and Cloud Wallets.

Structuring a Bank Groupon – 101

30 Nov 2011 (as always pardon the typos)

My post yesterday resulted in some good feedback. Theme was “are you bank friendly…? Stop telling me about what does not work.. how about recommending what does!”  My previous blogs covered a number of lessons learned.. so today I’ll give my view on What Does Work as Banks attempt to extend their existing business models. Your feedback is certainly appreciated..

As background.. here are my previous related blogs

What Works?

Well perhaps the first step is to frame the objective.. what does the Bank want to accomplish? For simplicity let’s reuse yesterday’s example: a Bank Groupon.  What is the Bank’s objective? Maximize revenue? Of the Groupon Unit? Of the Corporation?   Given the recruiters response..  it would seem that maximizing the revenue of the Corporation is the focus and their method is control. The Bank emphasizes control because it has significant uncertainty on entity and outcome.

Example BankGroupon Conversation “we have no idea how this thing will play out.. we have a number of the assets necessary to make BankGroupon a success and should be able to put something together.. so hey lets give it a try.. get some leader in here that has some experience in a big bank.. and some with start ups.. lets see what he proposes”.

Banks are the best institutions in the world at managing investment and risk.  When a bank contemplates an investment in another company, it is certainly appropriate for them to assess the business model, the team, the environment and price the risk.  This ability to make and manage investments is much different than an ability to run a NON CORE business and react to market forces (Elephants don’t dance).  While banks may have individuals in their company with these skills.. these employees did NOT develop the skills within the bank.

There is an obvious need to decouple the Bank Asset (customer data), Capital, and Entity that executes the plan. Commercial and Investment banks have tremendous experience in structuring entities that separate a bank asset and capital. Bonds, SPVs, CDSs, CDOs, … these vehicles not only allow banks to move assets off balance sheet, but they also allow investors to take different tranches of risk and even insure/hedge against loss.  The first stage of these commercial bank activities is defining the underlying asset (with appropriate continuity and underwriting in portfolio).

“Asset Definition” is the critical piece I believe is missing in structuring most bank owned NewCos. If the business is core.. keep the asset in house. If it is non-core.. define it and let someone else go maximize it within covenants.

CEO Prospect – Approach

In the BankGroupon example, if I were a prospect CEO here is how I would approach the task.

1) Define the bank asset (non monetary).

What is the bank contributing? BankGroupon is a separate company. What is the operating agreement between the 2 entities. Optimally this asset would be a 10 yr exclusive agreement to sell pre-paid offers leveraging bank data. Just as with Bonds, SPVs, the agreement would have covenants to protect the bank in certain events, as well as MUTUAL performance guarantees. This operating agreement would be the central asset around which the business would be formed. The focus of a NewCo CEO would be to ensure that this operating agreement is sustainable and fine tune the covenants.  Can I build a sustainable business off of this asset?

Operating agreements are NOT easy to create, they require much thought and planning. However, these agreements HAVE BEEN the core asset of many successful bank driven entities (Visa, MA, Early Warning, Clearing House, …). Quite simply, it defines the asset, how it can be used and also governs the roles of other entities in participation.  If you happen to meet one of the bankers/lawyers that were involved in the creation of any of the operating models above.. they would probably say it was like 2 years in North Korea.  By not creating these agreements, the Bank has shifted the burden of defining the asset AND building the business to NewCo.  Ask any recent bank spin off CEO and they will tell you their lives were like 2 years in a place much hotter than North Korea.  Spin offs have very little leverage to influence asset definition AFTER they have taken the capital.

This is my central point.. and should probably stop here.. but let me finish up a few other thoughts. I see the prospect bank CEO and the bank investment lead (future BOD member) working on this for a year or so. During this time.. the CEO comp is heavy on cash with an incentive if bank cancels or funding is successful.  Just as with Capital markets folks.. lining up investors for a $200M offering.

2) Capital to start the business.

My next job after obtaining the right operating agreement is to get Capital. What is the path toward revenue and what will it cost me to get there? Most Banks have taken approach of supplying all of the capital.. or perhaps partnering with one other big organization. Since the source of capital drives the direction of the business it is very important to have CEO drive source and mix. For example, BankGroupon needs to attract retailers.. Retailers don’t like banks.. and Banks don’t understand Retailers. Having an entity that is 100% controlled by a bank is not a great sales asset. I would want a clear path to reducing Banks control to under 50%…  and gaining investors who are retailer friendly. I would do this by either converting Bank stock to non-voting, non bank investors, or other commitments.

Wrap up for now

I could probably write a book on this.. but won’t bore you with the diatribe.  There is no shortage of talent interested in running a bank owned Groupon. But most of these CEO prospects haven’t had to survive in a bank owned company/consortium before.  The high failure rate of bank driven start ups is because banks have not taken the time to define the asset and separate it from the capital.  If a BankGroupon is core to the business.. it should remain in the business. If it is not core, and you have assets to leverage.. define the asset and let someone else grow it.

Your feedback is appreciated..  I’m sure there are several of you that think this viewpoint is insane.. but hey.. sometimes great ideas are generated from dissecting insane ones.