Plaid – Quick Take

My quick read on Visa’s acquisition of Plaid

I’m back to blogging after a successful exit last month. The Plaid acquisition is a great way for me to jump back in. Why read this? A key to understanding payments, banking and data is to balance historical knowledge with a network of people that know what is really happening behind the scenes. As the former head of two direct banks, former Senior Director of Oracle’s advanced technology solution’s practice and Yodlee’s first customer I have an informed perspective on the market for this one. 

First congratulations to Plaid, going from a 2019 recap with around $40-60M in revenue to a $5B exit is just amazing. 

Visa had to move here, as my numerous blogs outline, the KEY to creating a successful network is enabling 1000s of business to invest. Plaid enables “open innovation” where small companies can build on consistent APIs (see 2013 blog). For the non-techies think about how Apps were created before there was in iPhone App Store or Android marketplace (blog on how bank “apps” were created in 2008). 

Core banking and payments are complex (see Oracle Flexcube Banking Architecture below). Internally, it took my online team 18-24 months to make significant changes. For example, in 2009 Visa issued a “mandatory” requirement for banks to implement to Visa Money Transfer APIs (AFT and OCT).  11 years later, and AFT/OCT has less than 40% adoption in the US. If it was hard within a bank (as head of channels) to implement change, you can be sure it is challenging for a 3rd party to drive it (without a business case). 

Oracle Flexcube Architecture 12.0 – A great example of Best In Class banking infrastructure

For this reason, I’ve been told there are only 3 US banks that have active integrations with Plaid’s API. The majority of integrations are screen scraping (like Yodlee) or sit on top of existing APIs (like AFT/OCT). I’m not knocking PLAID, as working with banks is just about the hardest thing a start up can do.. And there are few choices for start ups that want to move a ball (beyond scraping). In screen scraping, I ask the consumer for credentials, log in on behalf of them and extract the contents of the HTML. 

In this process, Plaid most likely obtains explicit consumer permissions to use the data. This is perhaps their biggest asset, as most consumer banks usually maintain permission within a defined set of banking services. Thus Plaid’s APIs are used (by Apps or permissioned data users) to querry against this warehouse (or request real time updates from screen scraping). 

This dynamic creates a massive revenue problem. There is no bank direct revenue channel (ie can’t charge banks for screen scaping). The primary beneficiaries are 3rd party app developers and data products. If data products are the key path toward monetization, the banks have the power to cut off access.  Additionally, key revenue services like account verification are moving away from screen scraping and into direct access (ex Early Warning).

Opportunities for Visa

  1. Create an open innovation platform for hundreds of start ups globally
  2. Gain direct consumer permission for use of data
  3. Gain access to debit data to enable new data products
  4. Resell Plaid’s platform to banks (Small to mid)
  5. Establish a new set of services to serve consumers and merchants directly (beyond payments)

Challenges ahead for Visa

  1. Banks are not keen on “open innovation” and want to own the consumer interaction
  2. Visa issuer relations could suffer given Plaid’s “back door” access to transaction data.
  3. Banks are very concerned about consumer data, and have the tools to “cut off” Plaid at any time
  4. Direct to consumer services diminish the “neutrality” of Visa’s payment network
  5. Managing the permissions and privacy/compliance of a massive new consumer data set
  6. Creating a consumer support group

Data Tipping Point.. Good things will happen

Recent issues with Facebook, Equifax, GDPR compliance, … have brought us to a tipping point in data. The basic structure of how data is: permissioned, shared, used, accumulated, analyzed, sold, regulated, … must change. Google and FB operate in a Big Data 1.0 architecture powered by the “virtuous cycle”. Edward Snowden showed us how the NSA also acts in this centralized model as a data vacuum (not so virtuously). Literature and entertainment have created broad awareness of the dangers of centralization and loss of privacy: 1984, the Borg, The Circle, Black Mirror, … etc.   Continue reading “Data Tipping Point.. Good things will happen”

Banks as a Data Business – Example Amex Advance/Acxiom

Traditionally the core of bank margin is in risk management. The core of risk management is data.. thus Banks have been the among the best data businesses (as IBM knows). Banks “learn” about their customers through bank interaction: payroll, card transactions, lending. This has helped banks make better risk decisions (both credit and fraud/identity). Within the bank data cycle the traditional use of data is for an internal benefit: risk and cross sale of the bank’s products and services (not that of consumers or merchants).  However the “virtuous cycle of banking data” is very different from that enjoyed by Amazon and Google, both in the scale and type of data and consumer facing use.  Continue reading “Banks as a Data Business – Example Amex Advance/Acxiom”

Rewiring – Part 2: Walmart+Goog, Amazon+Whole Foods, …

I’m taking a rather abbreviated approach to blogging today.. as most of my key points have more detail in my other posts. I’ll just link to my old posts and focus on a few new thoughts. Continue reading “Rewiring – Part 2: Walmart+Goog, Amazon+Whole Foods, …”

Payments Data and Google Attribution

Great articles yesterday

This year, the iab (interactive advertising bureau) labeled 2017 as the Year of Measurement. Understanding why, and what is changing here is key for retail, banking and advertising. Most of us know the adage “measure what you want to manage”. As an engineer, I view measurement as the key feedback loop in any system or process. In order to gain feedback (close the loop), you must know what happened. Continue reading “Payments Data and Google Attribution”

The New Economy: Small Wins

I’m more passionate about this topic than anything I’ve ever written about. As an eternal optimist I don’t see a world dominated by Google, Amazon, Chase and Walmart…. But rather a new economy where millions of small businesses thrive. Where every person can employ their creative talent in collaboration focused on value creation. A world where capital flows to great ideas across geographic boundaries lifting the stifling poverty of most emerging markets. Continue reading “The New Economy: Small Wins”

“One Click” for Ads

I was hoping to see rollout of a long rumored payment innovation at Facebook. All I can gather is that they must still be in testing.. but the idea is just brilliant.

Facebook has a tremendous advantage over just about every other advertiser.. its consumers log in before use. Facebook is rumored to be in the midst of  integrating payment tokens into advertising. This means when you click on that beautiful North Face Jacket, or those Climbing shoes that the payment instrument (and even the authorization) is integrated. The only thing that the consumer would need to do is confirm shipping address. Wow.. talk about end running the payment specialists.. this is “one click” for ads.

The very idea that there is a “payment specialist” needed between the ad and the seller is going away.. payments are becoming a generic infrastructure services that no one cares about. See Payments in the OS. In this case IDENTITY TRUMPS everything.. if I know who you are.. everything else is just accounting. Someone should go out and write a patent on a similar flow using blockchain.

My guess is that Facebook would be the beta launch for VBV/MSC and the new 3DS 2.0 spec. So not only would this be a great experience, merchants using this would have a liability shift onto the bank and a 20-30bps rate advantage over traditional eCommerce payment acceptance.  (see my blog on Civil War). This flow would hold on both mobile and desktop.

The other implication here is for the banks using TCH token vault.. sure you can vault your own tokens.. but this also means that you must keep up with the fast changing specs in EMVCo and the other users of the specs in MasterPass and Visa Checkout.. doing your own vaulting may mean that consumers can’t do some of this other really cool stuff.

Transformation of Commercial Networks: Unlocking $2T in Value

 18 Feb 2016

I’m in a network state of mind…  We are in the midst of a massive economic transformation and I can’t quite put my finger on it.  What influences how consumers and businesses are organized? What is changing? Who creates value? What new domains, networks and markets are being created? Where is margin flowing to and from? The hypothesis from Paul Graham’s Refragmentation blog has been keeping me awake at nights.

“that all these trends are instances of the same phenomenon. And moreover, that the cause is not some force that’s pulling us apart, but rather the erosion of forces that had been pushing us together.” Refragmentation

Continue reading “Transformation of Commercial Networks: Unlocking $2T in Value”

Changing Economics of Payments

2 Dec 2015

Happy ‘After’ Thanksgiving everyone, I’m coming out of my tryptophan coma and thought I would go for a mental stretch. This is a pretty big topic, and I won’t do it justice. Thanks in advance for your comments and perspective. [Note I’m not naming the titles of my reference blogs and used only URLs.] Continue reading “Changing Economics of Payments”

ChasePay Thoughts (Don’t sell Visa Stock Just Yet)

09 Nov 2015 Updates

  • I did a Morgan Stanley call this week with Smittipon Srethapramote, ChasePay was a central topic. Evidently Chase is positioning this as a way for CPT to gain volume. Value Prop: we will clear ChasePay transactions at 0bps. Given that ChasePay and MCX don’t exist yet it may be a little pre-mature to take a bet against First Data. What is actually happening is that MCX retailers will be switching ChasePay transactions to Chase. So.. CPT may gain a few merchants.. and a little bit of incremental volume.. but it will be at 0bps. Also remember that FD has Citi, BAC and WFC as customers.. and they can do anything that CPT can do.
  • Problems with a merchant switch. The merchant switching on debit is outlined below.. not much issue here given Durbin’s requirement for dual routing. In essence debit can not be treated as PIN debit and routed directly to issuers/retail banks. However there are BIG problems with ChasePay as credit IF IT IS A VISA ACCOUNT.
    • ChasePay as a Credit must be routed through Visa and then to Chase’s ChaseNet. Merchant switching does not appear to be allowed. In other words ChaseNet Credit in an “on us” would only work if MCX merchants moved 100% of volume to ChaseNet.
    • ChasePay at MCX must be an approved card present method (CHIP or NFC). QR code is not an accepted method therefore it would be treated as CNP. Now Chase could set new unique rules on this transaction that would enable them to own the fraud, but they would need to own the acquiring as well. To own the acquiring they need more than just a “switch” from the merchant for ChasePay transactions only.
    • Tokens, VDEP and MDES. Chase is prohibited from discriminating against wallets in the new VDEP/MDES rules. Chase cards will be in ApplePay, SamsungPay and Android Pay. So consumer confusion will abound.. but also the advantages (liability shift, ubiquity, consumer experience) will make ChasePay on MCX hard to gain traction.
    • Creating ChaseNet as a new Visa. The issues above could disappear if Chase was able to create a completely new 3 party network (per section below).  But Chase has many hurdles to cross, as merchants AND CONSUMERS would both have to accept the terms of the new network and forsake the benefits of Visa. Chase is nibbling on the periphery and trying to enable a new semi closed network within an open 4 party one.
    •  Chase can deliver 0 bps payments anytime it wants to with any card it owns today. Issuers have always held this pricing flexibility. Now acquirers will pass on their fees, but this is only 20-30bps.
  • Chase has created a Visa war plan and I don’t understand why. Chase is the only major bank pushing The Clearing House to develop a token facility, they were also a driving force behind Early Warning’s purchase of ClearXChange… which is well positioned to be an EXTRAORDINARY new debit network.

As background, back in 2011 I told Gordon and Todd that they didn’t understand the dynamics of MCX. They believed they would win MCX because of relationships.. my prediction has turned out to be accurate. I said that I went in as Google and offered MCX 0bps payments with a potential of PAYING MCX to take GoogleWallet and MCX still said no . The margin in payments is in the long tail. The driver of ANY INVESTMENT here is in changing consumer behavior OR in delivering services beyond Payment.  Chase certainly has no credibility here. Payments and banking are ENABLERS to commerce.. they are NOT THE CENTER (see blog Tilting the Networks… a MASSIVE Change)

My top questions/unknowns

  1. Will ChasePay Credit be a Visa Card. If not will they acquire both consumers and merchants?
  2. Does chase believe that a ChasePay credit can run on 2 networks at once?
  3. Does Chase believe merchant based switching/LCR is permitted under its Visa Agreement
  4. What volume does Chase believe it will obtain through this product (BEYOND 0bps payments).

 

29Oct

This quarter Chase has been a favorite target of my blog (ex What should JPM do). Coming out of money 2020 it looks like my timing was pretty good. branding nascar

I just don’t get it…. WHY!?

  1. Why would JPM want a consumer to pay through ChasePay in MCX and not use their Visa card?
  2. Why would any consumer want to accept new terms of a new network (ChaseNet) to use their account in new wallet (CurrentC) with another new network (MCX). Why not just use your Visa card?
  3. Why would I want yet another acceptance brand when Visa’s network fee is so incredibly small (5-15 bps). Branding at the POS is beginning to look like a NASCAR

Back in March 2013 I wrote 2 blogs: Visa’s Golden Goose on the Menu, and JPM/V Scenarios… Which one is it? This was only 4 months after Charlie left JPM and took the top job at Visa. Most of you know I’m very high on Visa now (see Tilting the Networks a MASSIVE change).  As I’ve stated before, the story (all pure speculation) is that Chase was furious with Visa in 2011 and either buying discover or moving their entire portfolio to Mastercard or buying Discover. JPM’s BOD found out about this and threw out Saunders/Buse, hired in Charlie and gave JPM everything they wanted in a DFS purchase (thus bi-forcating VisaNet).. hey but what do I know.. (go ask the CFOs of DFS and MA.. ). Visa must feel pretty screwed over here.. after giving JPM everything they wanted, JPM still looks to create their own brand, product and network.

Value of OPEN

JPM looks caught in a “I want to be AMEX” moment… at a time where Amex itself is looking to re-invent. The value of OPEN is huge.. and it is unfathomable that the largest issuer in Visa doesn’t see it. (See Building Networks and Openness)

The funny thing is that JPM’s efforts are only crystalizing other banks to work MORE CLOSELY with Visa. Quote from top 3 issuer “FU*^& Chase, makes me want to work with the existing networks even more…”. Now we know why Visa worked with Citi on Costco and not their “friends” in Columbus. MCX will not allow any network branded cards in their wallet.. and ChasePay certainly gives chase better interchange than ACH.. but do I really want to encourage a new acceptance method that is at a lower cost? I would if I’m facing prospect of 0 fees.. but is JPM really that circumspect on the value and behavior of Visa card use?

For the model of interaction, looks like I was close in estimating what the product would look like

2013

MCX JPM

2015 (post Money 2020)

ChasePay flow

 

Chase Pay? An account with two identities?

chasepay Options

I must admit to total confusion to ChasePay.. Hopefully the community can help in the comments. The only way this can bypass visa (see blog on wrapping) is to have it run under completely new rules. Will a consumer really understand that a single account runs under 2 different rule sets? On my Apple Phone with CurrentC installed what do I use at an MCX merchant that accepts NFC (ex CVS)? Or worse if Chase does indeed allow Chase cards on SamsungPay they have created yet another conflict with MCX (because of MST mag stripe emulation).

Chances of ChasePay Success?

The MODEL above makes complete sense for PayPal, Amex and MCX. To be clear I am very very high on MCX.. but this product? Perhaps Chase cards have a loyalty I just don’t know about. Or there is something missing in my assumptions. There are 3 models of ChasePay Interaction

  1. ChasePay within MCX Wallet
  2. ChasePay within the Chase Mobile App via MCX QR Code Directly (I think this will be prime)
  3. ChasePay presented via NFC/MST (ex Samsung Pay??)

Will Consumers accept new terms for a new product operating in a new wallet with a new network? Is that really innovation? Innovation is NOT ABOUT rewiring your assets, it is about designing a great experience for the consumer.

Sorry for the short blog, spent all my time drawing the pictures.