2015 Predictions

3 February 2015

Payments, commerce, data and mobile is this blog’s focus. I’m very very fortunate to have so many great friends, customers and partners in this area. My thoughts are not my own, as I’m greatly influenced by my “environment”.

I’ve made many new friends because of this blog. The funny story that comes to mind was in August of last year when the CEO of a Fortune 50 company comes into the room and says “ahh.. the INFAMOUS Tom Noyes”…  (never a good way to start off a first date.. but we had a good laugh and thrilled he reads my blog.. ). Honest dialog has a way of creating great friendships. Thanks to all of you for providing such a fantastic environment! You make writing this thing fun.

2014 Prediction Eval

Before you bother reading my 2015 predictions you should probably see if it is worth your time. Best way is to evaluate what I projected last year in my 2014 Predictions

  • Consumer Privacy. Grade – C. Not much happened in 2014 on consumer side. I’m holding with my prediction, just not certain of timing and “tipping point”. How will we know when it happens? Imagine a Sony like incident with consumer data.. Regulated businesses like MNOs and Banks are highly attuned, Apple is the best in class here (consumer champion of privacy see Blog). The Ad industry is dependent upon tracking and data sharing in a very, very grey market approach. There is a better way… 2014 is perhaps the year of “awareness” with Snowden, DEA tracking license plates, State department keeping all of our phone records, to new super cookies on mobile. The next logical phase is ACTION.
  • Retail banking. Grade – A. Huge transformations going on. Prepaid and GPR products are segments growing at over 35% CAGR, US branch footprints are shrinking (see Blog)
  • Debit Volume. Grade – D. Not much going on here, after the DC court of appeals struck down Judge Leon’s ruling on debit interchange (March 2014).  Not much consolidation in PIN debit either. I do believe US debit will evolve to look like Canada’s Interact and Australia’s EFTPOS.
  • Mobile BEACONS. Grade – F. Nothing happening in 2014. Looks like more of a 2016 thing. I’m holding to my projection.. but missed timing completely.. thought Apple would launch beacons at their Sept 9th
  • mCommerce Payments. Grade – B. Summer 2015 is where we will see substantial progress. We see that the networks have turned over the new 3DS CNP scheme to EMVco last month (see link). As Payments move into the OS (see blog), Paypal doesn’t have one. Amazon, Google, Apple, will make SIGNIFICANT dents in Paypal as the platformcontrols authentication and authorization. Amex/Visa/MA’s new rules on tokens, combined with consumer privacy concerns, will accelerate the trend.
  • Specialized HardwareGrade Gives way to Commodity Hardware- Grade A.. makes way for commodity hardware and software. Launch of POYNT and CLOVR are best examples.
  • Host Card Emulation. Grade – B (for 2014), Grade A (by August 2015). Google did indeed push HCE into Android. With the death of ISIS and SEs in US phones.. things will be heating up in 2015 with a new Google launch.
  • EMV. Grade – D?. It appears to be happening.. I bet it would have been pushed back… I have the cards, but don’t yet see the retailer infrastructure. The chip and signature (vs Chip and PIN) is still a very strange one. It would take me 3 days to explain the politics behind it. What really baffles me is Samsung’s planned launch of LoopPay this summer (with Visa support).
  • Banks have given up on payment innovation. Grade – A+. I have a copy of the ApplePay issuer agreement (Sept 2014). Just can’t believe the banks have taken it on the chin like this.. not only ceding mobile to Apple, but Tokens to the Network and 15bps. What do they have left?
  • ISIS WILL DIE.. Grade – A+. Money ran out in Dec 2014, sale will be complete by March.
  • Apple will have NFC. Grade A+ … ApplePay 9/9/2014.. I was wrong on 3 things.. I projected October (it was 9/9) and there would be no SE, and Beacons would be part of launch (to wake up payment app). Big news (below) is that ApplePay will be in browser by summer 2015.. Paypal will be crushed with a double whammy on “value”: usability and a new rate tier (20-40bps off credit) for tokens in CNP.
  • Unlocking the cloud and authentication. Grade – B+ . Apple has done an amazing job here. See my blog on brokering identity.

Summary Grade: B+ . Looks like I’m a little aggressive in projecting the new stuff (Beacons, Identity, EMV, HCE). Except for EMV and Debit, I’m still confident in the predictions (philosophically) but my timelines are too aggressive in most cases.

2015 Predictions

These predictions based upon the Structural Changes in Payments which I discussed last month.

Big Picture Predictions

  1. The Year of Partnerships, new Clusters and multi-tenant walled gardens (forced by Apple/Google Dominance).
  2. Mobile moves from Small World organization to Real World Orchestration (my next blog)… starting with merchant friendly value propositions. You must be where customers are, or influence them in the real (offline) world. We have spent the last 10 years enabling a handset that does more than take calls and connecting it to the virtual world. We will spend the next 10 connecting it to the physical world. From POS Payment, Google Shopping Express and Beacons to Door opening and document signing.
  3. Tipping point of Privacy (Apple Defines Best Practice)
  4. Politicization of networks. Government regulation in internet prioritization, payment networks, social networks, advocacy networks and advertising networks. Networks are needed for the efficient life of a firm. Star network resembles dictatorships in social networks, and “channel masters” in business networks. Star networks are optimal for business, however we have grown quite used to the state of `organized criticality’, the scale-free, democratic and highly complex social net. Government involvement in networks usually does not improve efficiency and can lead to significant disruption.  Take a look at what Europe has created in SEPA.. a standard that no one will invest in.
  5. Collapse of “wallets” into Payment in the OSmCom trumps eCom. Tokens take over in eCommerce w/ ApplePay, Visa Checkout and Google Wallet
  6. Marketing… the year of measurement… and beginning of pay for performance
  7. The most trusted consumer brands will remain: Apple, Google and Amazon… with banks suffering most as their products become commodities and mobile rendering physical footprints moot.

Tactical/Deal Predictions

  1. Apple will launch aggressive effort to bring ApplePay into Browser by Summer 2015
  2. We will have a new rate tier from Visa and Mastercard based upon tokens in CNP (see EMVCo 3DS PR)
  3. Google will GO BIG in launch of new wallet in an HCE model akin to ApplePay. It will have dynamic tokenization. Google will excel in getting retailers private label and loyalty cards integrated, and pass Apple in BLE integration (in store).
  4. Alliance Data will be bought by JPM, C, Paypal, Hedgefund+Acquirer or Amex. ADS is my top stock recommendation for 2015, V/MA are my long term.
  5. Samsung will Launch LoopPay with support from Visa by September 2015.
  6. Visa will complete purchase of Visa Europe (hopefully at a 2015 discount) with strong dollar and weak EU growth.
  7. MCX will pivot to a payment instrument within another wallet (think Target Redcard) vs a wallet unto themselves .
  8. Beacon pilots will launch in top 20 retailers. In store navigation, product location, couponing and gamification will be first uses.
  9. Facebook payment will go live and be integrated into a new form of social advertising, where you are paid based upon your ability to influence your network, will see first pilots. Facebook will remain king of CPG advertising
  10. Behind the scenes there is tremendous progress in the collaboration of Banks, Telecos, and Mobile Platforms to Validate Identity. Short term impact is near elimination of mobile payment fraud. 2015 will be year of formalizing an identity verification infrastructure (in the cloud).

2015 the year of Partnerships

Google and Apple against Everyone Else?

I don’t have time to go over all 15 of my projections.. will do so in coming weeks. Over the last 6 months network and system design has consumed my thoughts like nothing else: proprietary networks vs. open networks, integrated vs modular, distributed innovation vs controlled platform, Apple vs. Google, Amex vs Visa, net neutrality vs. prioritization. At what point does OPEN win? My blogs on the subject was Value Creation and Distributed Innovation, Banks non-Banks and Commerce Network and my two favorite books are Platform Leadership and  Weak Links by Peter Csermely (viewable on Google Books here).

Any analysis of this area must focus on Apple. Wow! What a machine! The most loved brand, the most profitable, highest in consumer satisfaction, most sales per square foot, creator of new categories, inventors of new consumer experiences, trusted by the most affluent demographic, champion of privacy… on and on. Is Apple an exception?  Can any company ever aspire to replicate their success in any industry? How can anyone else compete in areas they touch? Do the rest of us just pick up the crumbs? Apple’s latest results show that their model is improving, garnering over 86% of the “mobile” industry’s profits (see Forbes).

network evolution nodes to consortium

Open networks are harder to build, and are certainly less profitable than closed. My prediction on “year of partnerships” is due to necessity, NOT the efficacy of collaboration. Few companies can compete with the data advantage of Google, Amazon and Facebook. Apple’s trust and reputation advantage is perhaps even more insurmountable. For large companies it may take 2-5 partnerships in a focused area. Imagine the data challenges small companies face.  This is not a technical challenge as much as a business one. How many successful partnerships have you seen (elephants dancing).  Remember that are injured elephants facing as structural changes in consumer behavior, mobile, information, distribution, trust … impact products and strategies. CommerceSignals is working to help bridge this gap, but that is for another blog.

Where Google, Apple and Amazon are self sustaining Stars (networks), clusters and multi-tenant walled gardens are forming to compete in a quasi open model.  The challenges here are not technical, but organizational and value creation. History reveals few consortiums renowned for their efficiency.  Value is best created where it can be controlled and monetized in “small worlds”.  Networks in business are functional in 2 areas: around a specific function with broad use (Visa/MA, Credit Bureaus, ?Android?) and where market forces can take operate (NASDAQ,  …). This is my big hypothesis… would greatly appreciate input here.

2015 must be the year of merchant friendly value propositions. Logically, the majority of commerce happens in a retailer.. and hence the “solutions” must as well. The inability to partner will give way to platforms that enable partnership… optimally platforms that would allow millions of “lightly structured” interactions to test 1000s of value propositions until something sticks (this is Commerce Signals). Take beacons for example.. we know that Apple can maintain security and confidentiality.. but the retailer must install beacons that work for everyone and have a business case (consumer insight). Consumers want to know how insights will be used. How do you manage the agreement between Manufacturer, Beacon Provider, Apple, Retailer and Consumer?

iPhone 6 – Tipping Point for Platforms

As I outlined in iPhone 6 – Apple’s Strategic Opportunity, I believe the iPhone 6 represents the dawning of a new age of mobile “platform”. What was a music manager with a phone has turned into the most secure, easy to use device ever created. The factors of competition have changed, it is no longer about camera resolution, storage, and screen size. The visible (obvious) attributes of competition have become a commodity; as are the “problems” that your phone solves (telephone, music, calendar, pictures).  Where previous phones helped you manage items in your “small world”, the iPhone 6 has become both the secure key to the cloud with the ability to broker interaction in the physical world (NFC, BLE, identity, tokens). The “convergence device”. See my blogs Brokering Identity and Authentication in Value Nets.

Unfortunately, Apple is so focused on the consumer it has no ability to partner. While there is no company better in creating devices that thrill a consumer, there is perhaps no company worse at building partnerships and business models where value is shared. Given Apple’s cash hoard, my top recommendation.. create a new division focused on network.. helping connect consumers to the physical environment they live in (thermostats, health, retail, cars, advertising, …). This is NOT a handset function.

Abrupt end here.. this blog has been in partial completion mode for 6 weeks. I had to get it out. Will articulate my views on the other “Top 5” predictions this month.

Consumer Behavior: Discerning and Capturing Value

I can’t help but think of the Steve Jobs book, and all of the stories on his product focus.. from the curved lines around icons, to the curved back of the iPad. What do CEOs focus on today? How many of them really know why their customers use their product?

11 May 2013

Thought I would take a few moments before my Saturday Tennis match to discuss a top “success indicator” as a prospective investor: Consumer Behavior. I probably entertain 5-10 calls per week on new payment ideas.. my worst experiences are from individuals that start “I have a patent around…”… my eyes close I take a breadth, try to appreciate their personal energy in putting themselves out there, and then go on to encourage them to find a customer and ring me again.flock of migrating canada geese birds

For the calls that go through the next stage, I like to start with an understanding of the customer experience.  Why? Well establishing a great experience can build adoption like wild fire… but most new founders make very poor assumptions on how consumers will change behavior.  For example, consumers taking mobile phones out of their pocket, launching an app, connecting to wi-fi, and walking around a store looking for deals (every time they shop). When it comes to making assumptions on consumer behavior, Big companies suffer from the same problem. Where is the experience in bringing big new consumer offerings to market?

A few of my Fortune 50 examples hail from online banking (I was fortunate to have teams responsible for online at both Citi and Wachovia).  One of my biggest learnings by far was focus on customer at Wachovia… what do they do? What do they like? What don’t they like?.. what are the primary behaviors? By customer segment? Why do they bank with us? What do we do better?  Its just amazing what you can learn from your customers!

In the online banking space, my teams always faced a wall on the limited time consumers spend on banking sites. In retail banking (where you move money and pay bills) consumers log on an average of 4 times a week. They typically spend about 3-4 minutes as they.. check a balance, pay a bill.  Customers with self directed brokerage accounts have much higher interaction (perhaps 4-8 min), and Credit Card only customers have much lower interaction (Less than once per month, with active users of around 40-50%, compared with 80%+ for retail). One thing remained constant across all banking segments.. customers DO NOT explore the site… or expand beyond the task which they want to accomplish. 90%+ of all consumer interaction proceeds along 3-5 core behaviors. Customers come to online banking with an objective.. NOT TO SHOP.

This is one reason I’m very suspect of card linked offers. Consumers don’t go to their bank for “deals”, to check reviews, … to poke around what they could possibly get. Of course that could change..  if consumers were able to receive some sort of substantial value.. something they could get no where else.. .  But the effort to CHANGE BEHAVIOR is SUBSTANTIAL. It is much more than delivering a fantastic consumer experience, and delivering differential value, AND doing this consistently, it involves MUCH MORE (ex. existing behaviors, loyalty, Social factors) . In the CLO example, the consumer behavior change entails BOTH an online behavior (navigating offers), and a physical behavior (selling offers to merchants, assessing effectiveness vs. alternative, targeting, redemption, loyalty). Consumer PROFITABILITY for the merchant is also VERY DEPENDENT on consumer demographic. (See my CLO Blog).

Social factors are the primary drivers of commerce related behavior change (IMHO). What do your friends say? Community? This is the core of what makes Amazon and eBay great. The importance of Social factors shouldn’t be much of a shock, as we see this in how bees swarm, how ants find food, how birds fly.. all patterns that have a significant social component. This is why I remain very high on Facebook’s valuation.. as they have much room to leverage social networks for BEHAVIOR CHANGE.

Speaking of change, if you were going to influence someone: A) would you want them to come to you? Or B) would you go to where they already are? This is the key to evaluating any new concept…. Business plans that reach customers within their current patterns of behavior have a much lower risk. Where do you spend “open” time today? time that could be used more effectively? Airport? Google? In the Car?

This is why I love Square.. they aren’t telling the customers to carry something new, or to go somewhere they haven’t shopped before.. they work to make established behaviors stronger.. with a better customer experience.

Another example in the payments world is Payfone… consumers already use their connected devices to pay for things.. why do I have to type in all of my address, card information, …etc into a little mobile screen.. why can’t the carrier just send it over and fill it out for me.. they know my phone.. they know my information.

On the negative side I would put NFC. Consumers must buy a new phone, get their banks to provision a card, depend on a new merchant terminal type to wave their phone… Oh.. and the BIG ELEPHANT.. there are no NFC enabled debit cards.. which happens to be the primary way consumers pay for goods in the US. Also the only banks within the ISIS wallet are the ones that paid $1M to have their cards in the wallet. In the end NFC is slower, more expensive, harder to use, and has fewer options.. why is this a good thing for the consumer? Like a toll bridge with a 5 hour wait.

The best quote on the NFC topic was from a Top 5 global retailer “Tom NFC is like a toll bridge, but the telecos don’t want $2 to cross their bridge, they want 3% of what is in my truck.. and the entire shipping manifest… I think I’ll just find another way to cross…”

I can’t help but think of the Steve Jobs book, and all of the stories on his product focus.. from the curved lines around icons, to the curved back of the iPad. What do CEOs focus on today? How many of them really know why their customers use their product? At Wachovia, our CEO Ken Thompson called over to our team to tell us he had problems logging in.. It turns out he didn’t know the difference between his User ID and his Password.. as he transposed them.. yes this should have been an indicator, this same  brilliant man who bought Golden West with no due diligence (subsequently forcing liquidation to WFC).

For entrepreneurs, there are 100s of opportunities to build value where the consumer already is. Much of this revolves around helping existing entities build better relationships (like Square, Fishbowl, Payfone, Payments Enabled CRM, …). Along these lines there has been a sea change in the Valley over the last 18 months.. B2B is in, while NEW consumer brands and app companies are facing a much more challenging funding environment.

Even in this space, companies with stellar funding and boards can make terrible business decisions. My top example would be ShopKick.. why on earth would any retailer want to support little speakers in a store to help consumer’s earn kickbucks.. ? Am I really going to keep my phone on, and load an app when I walk in to Target .. looking for “deals”?  Why would Target or BestBuy want to let consumers earn value outside of their own brands? Both of these retailers would probably say.. “we were just playing around to learn some lessons”.. which makes perfect sense.. unless you were a ShopKick investor.

There is enormous Value in existing patterns.

A WalMart exec provided my top retail insight for the year. “Tom it doesn’t matter what ad our consumer sees, or where they see it.. when they decide to buy the product.. they will come to us.. “.

Walmart’s Everyday Low Prices (ELP), has helped them establish tremendous loyalty with their consumer base. They have been able to expand upon this trend and offer other services, from telecom (straightTalk), to Financial Services (Bluebird, moneygram, greendot, check cashing, …).

Before you run out with a business plan to help WalMart, remember they are the rocket scientists of retail.. and their procurement group are all from the Manhattan project. As they all excel in ensuring the value which is captured remains in WalMart. They have established a behavior pattern where consumers TRUST them for every retail interaction.

Thus not every pattern is valuable, or can be influenced easily. One of the things my online and payments team did at Wachovia was PFM. In fact we were the largest PFM bank in the world at one time (as we gave out the software for free to certain consumer segments). The consumers loved the software.. they were addicted to it.. problem was that it did nothing for me (Wachovia).. I wanted people to come online. It also turns out that consumers that use quicken are VERY literate financially. In fact, they were one of our least profitable consumer segments (with exception of wealth and self directed brokerage).

Their loyalty was to Quicken, over and above my bank… I needed that to change. In order to get them online I stopped the OFX connection service and told consumers that download was available only through the website.. online was my “virtual branch” and a a very important interaction.. I didn’t want consumers to think their bank was like a water utility..  we actually had a store (where we wanted to see them).. and thus wanted to reinforce an ONLINE relationship. Consumers who had historically used PFM used online banking very infrequently.. but when we forced the behavior change…  they realized that we offered much of the “PFM lite” capability… and were successful in converting most.. We did loose some.. (although we did not  touch wealth or small business customers).. others that were furious, but they were not profitable to begin with. Therefore it was a necessary change, we had to deliver value through our brand, not Quicken (or the now defunct MS Money), we had to disintermediate them.

I had a chat with the head of mobile at one of the banking teams… building a great new mobile offers service. He spoke about all of the alerts, the UI, the content..  I  said you are competing with: Facbook, Google, Groupon, Cardlytics, Shopkick, Foursquare, Visa, MA, ISIS, … and every other bank. All have alerts.. all have the same content. When I’m walking down the street am I going to have 8 different apps that all alert me to the latest deal? Is that really your vision? He said “no… honestly of course not.. but hey I’m only compensated to get this project done.. “ That certainly gives perspective on how Fortune 50s attack the problem.  In fact they are not solving any problem, but rather take a view on CAPABILITY (“we can do this”) vs. Strategy.. imitating just one facet of a successful business plan.

I could go on and on in stories.. but let me wrap this up with some of my Rules of thumb

  1. Consumer change not possible without a 20-30% change in the value proposition.
  2. Delivering consumer “Value” for free is much easier than making money at it (ie Twitter). Consumers don’t like to pay for anything. So how do you monetize the service? Can you really execute an advertising model?
  3. Who will deliver the “value”? How is value created? How will it be sustained? What can one of the 800lb gorillas do to crush you? How will you respond?
  4. What are your data dependencies? Who owns your data? Companies which add value on data they do not own resemble service provider revenue.. companies that own their data can exponential rev multiples.
  5. Loyal customers are by far the most profitable. Customer acquisition is just the first, easiest phase.. loyalty means delivering value everyday.  Is there a new value “chain” or does current success mean just reaching a new audience with current value proposition. How is loyalty established (although not every business is dependent on loyalty… ie gas station).
  6. Customers are not “Owned” by a bank, a business, or a service. Every entity claims a customer is “uniquely” theirs. The next phase of innovation will see greater collaboration between non-competitors around a common customer (Coke and McDonalds, Google and Everybody, …)
  7. Time to Market. Multiply number of parties that must do something new by 2 yrs to get total time to execute (Consumer, retailer, teleco, bank, payment network, …). This is the Apple advantage… NFC has 12 parties.. so that means 24 yrs.
  8. Consumer Facing. It takes $10M in marketing to acquire every 1M during early stage. Exception is around socially led change, or existing services that expand.
  9. Payments and Other Networked behavior involve much longer “Trust” behavior change on a 20 yr cycle. The early adopter “techie” demographic is under 10% of consumer base and NOT an accurate representation of all consumers
  10. Dependency on demographic alignment with business. Different consumers matter to different businesses. WalMart has very broad offering, Neiman Marcus a much narrower one.. The processes by which consumers are reached (advertising), select goods, develop loyalty, and purchase is complex. Few entities can deliver value to all consumers or to all retailers. Thus what is their focus, and how can it mature?
  11. Experience in rolling out direct to consumer offerings. Is the business looking at their customers? What else do they do? What other problems do their customers have?