Category Archives: Delivering Value

NFC – ISIS has 12 months…

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2 Oct 2011

Loads of new press out related to NFC

–          ABI research estimates $100B GDV by 2015 (yeah.. and pigs fly)

–          EMVCo 47 page report on technical standards for contactless payments

–          Visa’s new mandate to retailers.. EMV (+ NFC) by 2015 or merchants bear the fraud loss

–          ISIS Handset Support

–          Launch of Google Wallet

–          PayPal dissing NFC (today)

Having been the first to break the news on ISIS in 2009 (Although I was wrong on Visa involvement… it was Discover), perhaps I should be the first to predict its demise.. UNLESS something big changes.  The problems with mobile money is 5% technology, 95% business model. Take a look at my diagram below… 11 parties that need to execute on a clear value proposition… No wonder MNOs like Verizon are hedging their bets, creating alternate payment solutions (see my Payfone blog).

What company can invest in something it can’t control? That has a value proposition that is unproven? That requires collaboration with competitors? That customers may not want or pay for? Please someone give me an example…

Payments  (in isolation) adds very little value to an overall commerce value proposition. Did you buy your big screen because they took Visa? No.. you chose your big screen TV because it was the right model for you and you expected the merchant to offer you payment alternatives. Most of you reading this would probably have accepted 2-3 options..  The most important value proposition for any commerce network is targeted to the retailer.

ISIS started off with a great retailer value play (see my previous pro forma financials), the Barclays/Discover instrument would have been a winner.. credit the involvement of WalMart with the strategy of ISIS here.. as WMT was key in ISIS’ participation and Abbott’s hiring (former GE Money Exec… GE services WMT’s pre-paid cards). But the card networks found a way to put the screws on… and destroyed a very innovative product.. and their merchant value proposition along with it. To compensate for the ISIS 50 bps “carrot”, Visa has constructed an EMV stick (see above) to force merchants to accept EMV.. (and in essence NFC). Retailers are frequently assumed to be a bunch of back water idiots.. as a former banker I admit my mistakes…  this simplified view of retail could not be further from the truth..  Retailers are on the cutting edge of competition. Competition drives data based decisions, customer centricity, daily focus on margins (as they are razor thin) and a toughness matched only in professional sports.  Retailers know customers like few others..  Few names generate a more intense visceral reactions among retailers than Visa and Mastercard. Today’s card networks are no friends of retail. It was no single factor.. but rather decades of choices all made to favor one group: issuers.

In this environment.. which retailers do you think are anxious to assist Visa and MA with a new generation of payments that is more expensive than what they have already? Specifically, NFC is a credit card transaction.. carrying a 300-350bps rate. Although there is nothing to prohibit NFC based debit card.. there are no banks (other than Discover/Barclays) that have stepped into this debit space. Visa and MA see NFC as the next great driver of CREDIT card transaction growth. Thus, Visa’s EMV moves are meant to accelerate this. Currently MNOs (and ISIS) are being taken for a ride by the banks as a tool to drive this.

Google was brilliant to include a pre-paid card in their wallet to balance the options for consumers, ISIS will likely do the same.  But the conundrum faced by ISIS is that there is no revenue for the ecosystem above without credit card fees and no merchant value proposition WITH them. The answer of course is for NFC to develop a new revenue model and value proposition (see my Googlization post), but building an Ad network is no easy undertaking.. and it even more complex for ISIS since their owners are each undertaking the development of separate ad network initiatives (VZ has equity stakes in Cellfire, mphoria, and a 200 person team).

Now add this dynamic to the complexity of executing against a business model (any business model) across 9+ parties and you see the NFC business enigma. As I stated in Nov 2009, MNOs know how to be successful in payments. ATT ran the most successful private label card of all time.. they have tremendous (non monetary) tools to incent consumer behavior (ex think free unlimited data).  Unfortunately they don’t have experience in working with retailers.. or in orchestrating commerce interaction. ISIS will execute on the charter given to them.. but that does not mean it will be successful.  Having a functioning NFC wallet does not mean that anyone will use it. Particularly if it is disconnected from everything else that I do use (mail, maps, search, Android Marketplace, …).  This is where Google excels. Not only does Google have the best engineers on the planet, they have the best retailer relationships AND customer relationships.

Remember NFC was a construct of the NFC Forum, a group formed in 2004 to design a new protocol that could be controlled by MNOs and Handset MFGs. Again.. it was designed for CONTROL….  ISIS is proving that it has fantastic facilities for control of the secure element, particularly in the US where post-paid handsets are subsidized. What ISIS fails in is a consumer and retailer value proposition.  If they do not find a way to work with other participants, the window of opportunity for NFC will fade. I give ISIS 12 months…

What are the alternatives to NFC? I told a start up CEO this week that NFC is but one alternative to identifying someone at a POS. I could use a card, GPS location, biometric, .. just about any form factor to achieve the same thing (as an example look at Square’s Card Case, or VZ/Payfone). Also.. we all know that locking card information inside the phone is just plain stupid.. It’s how Microsoft worked before the internet existed.. today we are in the world of cloud computing where information lives on the cloud.. (See my previous blog)

Messages for ISIS

  1. Improve your retail value proposition
  2. Get the carriers aligned on the “SUPER” Value proposition… or you will have a wallet that functions.. but no one wants. Take a look at Enstream in Canada for a use case here. Zoompass was the precursor to ISIS….
  3. Move beyond control focus to VALUE focus. Build partnerships which will help you orchestrate commerce. Of course this is not in your charter.. and very, very hard for competitors to do… so this will be a driver in your demise.
  4. You will not get the data on every transaction occurring on the phone.. so give it up now. Both ATT and VZ are ISPs as well as backbone providers, do you keep every piece of data flowing through the internet? Your plan here is FUBAR…

Message for Retailers

  1. NFC terminals will only drive expense growth until there is a consumer value proposition. The only entity that is coming close here is Google. Google does not care about transaction revenue.. they care about value creation.. this is a retailer friendly structure.
  2. Delay your EMV/NFC plans.. The big issuers will not be reissuing cards.. so even if Visa follows through on the liability shift it will only be for cards that could have been validated.. So your risk is of fake EMV cards.. Perhaps if you see an EMV card you just ask for a customers ID..  sound rather simple…?
  3. Ask very simple questions and get clear answers: how will this deliver incremental sales? What kinds of customers will be using this?

My prediction? ISIS and MNO initiatives will be successful in Transit. Retailers will migrate to a new commerce network that steers clear of Visa and MA.

Debit Fees – Newton’s third law in banking

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2016 – This post is 4+ years old now.. I wouldn’t take it too seriously.. but good historical context

1 October 2011

First… 2 paragraphs of venting and perspective.

I was quite surprised to see BAC’s $5/mo debit card fee on the national news today. Personally, I think it is a great thing.. customers should pay for services they want to use.. sticking the merchant with the cost of debit leads to some very poor incentives. One of the biggest “innovation stifling” problems we have in the US is that consumers don’t care about prices, for things they should (payments,  health care, fraud, education, … ). The cause? the direct costs are hidden. Once consumers bear direct costs for services, market forces can take hold.

This is not to say I’m a supporter for HOW the Durbin change came about.. Dodd-Frank, Wall Street Reform and Consumer Protection Act represent the most sweeping changes to financial regulations in the United States since the Great Depression. From my perspective the timing could not have been worse. Did Congress think  the banks would just sit on the sidelines and patiently suffer? After being forced by regulators to act in good faith and “acquire” ailing community members like Country Wide? To suffer again as State AGs and the CPFB go after them for a few billion more (robo-signing).  Retail banking is becoming a very unattractive business, particularly in the lower mass market segments.  For the recovery to take hold, we need banks to be healthy…  these are not a bunch of “fat cat” millionaires.. but a core component of commerce that is instrumental in managing the lifeblood of our economy.

Debit Reaction.. equal and opposite

Well the banks have reacted to the finalization of Durbin fees. As I related in my previous blog on Debt, the fee plans have been in the works for some time, and for good reason: the lower mass segments are no longer profitable. US banks are well capitalized…. with excess liquidity, and a cost of funds near zero. There is very little incentive for them to seek to increase their deposit base (improve liquidity ratio). The core issue in retail banking profitability is asset quality (few qualified people to lend to… who want a loan). This is even more true now that Dodd-Frank has virtually gutted retail banking fees.  Two excellent articles below detail the role of transaction revenue and service fees in retail banking.

http://www.bai.org/bankingstrategies/payments/general/protecting-dda-profitability

http://www.novantas.com/article.php?id=317

http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245235038776

Of course not all consumers will be paying this $5/mo cost. For example, the folks reading this blog will likely have account relationships that warrant a fee exception. Mass market customers will likely be up in arms and seek to move their accounts.. believe it or not.. this is what the large banks want to happen since many of the lower tier customer segments are no longer profitable.

See this American Banker Article for more detail on alternatives to mass market customers

In the next phase of bank plans, expect the Visa logo to disappear from the standard card issued for a base checking account. The card will operate as ATM card, just as it did 20 years ago. As a side note, the banks (and PIN Debit networks such as Star, Pulse, NYCE) will be working with merchants and processors to expand adoption of PIN Debit separate from the card networks.

Market Forces in Payment

Now that consumers have to bear the costs of using a Debit Card. They have new choices:

1) Use credit card. This would be best for the banks, and perhaps best for the consumer as they collect merchant funded card reward points. The looser here is obviously the merchant. An important point  to make here is that this is exactly the strategy behind new NFC based mobile payment types.. there are NO NFC enabled debit cards.. banks and the networks want you using your phone for payment to drive credit card usage.  This is also the strategy behind Visa’s new EMV mandate, to drive retailer reterminalization. This will be a subject of a future blog.

2) Leave the bank and use pre-paid cards. This will certainly be the path for many lower mass customers

3) Pay the fee

4) Improve your relationship with the bank to meet a threshold and avoid the $60/yr fee.

5) Shift your transactional relationship to new “non bank” structures like PayPal or Google Wallet (both of which are licensed MSBs in all 47 states).

Downside for banks

CEOs make decisions based on data they have. The first 4 options have all been through. I would profer that creating a market for new competitors has not. I outlined in my previous blog “Banks will WIN in payments.. but WHICH ones”  that banks are firmly in the position of control today.  However there is a strong correlation between control and value delivered. In my upcoming blog I’ll describe how to value a payment network. My view is that payments are on a course of a utility service (i.e. dumb pipes with least cost routing), and that payment services are only the last step of a much more important commerce interaction. Any network business is highly dependent on balancing a value proposition between participants. Today retailers and consumers are not pleased. I only wish I could tell of you the wonderful things I’m seeing in Silicon Valley… IT IS NOT about technology.. but about creating business value.

Within 5 years, I see the strong possibility that a new network which will be able to PAY merchants for accepting a payment method..  (see my 2009 Blog on Googlization of Payments).

BTW… sorry for the lack of content this last month.. I have 15 page blog I’m about to publish.. I will never again try to write so much in one article.

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

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Square $1B Valuation…  ?

29 June 2011

Today’s WSJ Story

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

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

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

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

Here is my guess on Square’s V3 Business Model

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

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

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

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

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

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

Visa’s Wallet Strategy – Part 2

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,,,

18 July (Updated from 17 June 2011

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

Previous Blog: Visa’s mobile portfolio

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

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

Here are the questions I’m trying to answer:

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

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

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

What is Visa’s investment Thesis?

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

Assets to Leverage?

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

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

Strategy to attack the G2P and Mobile Opportunities?

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

1. Increase number of transactions (customer use)

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

2. Replaces cash/other electronic (ex G2P)

  • Fundamo, Playspan, Visa Wallet, ..

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

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

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

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

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

New Content (18 July)

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

Value proposition to Merchant

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

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

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

Value Proposition for Banks

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

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

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

See related Visa Press Release here (RightCliq)

Clearxchange – Bank Strategy Perspective

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28 May 2011

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

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

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

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

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

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

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

–          New Visa Debit with BAMS/First Data

–          Visa Money Transfers (directly competes with CX)

–          CX

–          Internal Payment Warehouse (3 yrs in making)

–          Cashedge (A2A money transfers)

–          Pariter (On we w/ WFC)

–          NFC Credit w/ Visa and Device Fidelity

–          …

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

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

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

Happy Memorial Day

– Tom

Visa’s Mobile Strategy: Portfolio Manager

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Visa’s Mobile Strategy: Hedge your bets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why Visa, Apple and Chase are Square

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Visa formalizes mobile swipe security.. ” Visa’s guidelines lay out some of the more important security measures that should be taken, including encrypting all account data at the card-reader level and in transmission between the acceptance device and the processor.” just like the Verifone CEO said.. 

Why did they do this on same day as announcing Square investment. All of these non-compliant doggles. What is Square’s Plan?

http://www.visaeurope.com/en/newsroom/news/articles/2011/visa_europe_releases_mobile_ac.aspx

http://www.businessinsider.com/visa-square-investment-2011-4 

Why is Visa, Chase and Apple all aligning on Square?

1)       Apple does not have NFC in iPhone 5

2)       Chase is taking a portfolio approach. This one is a bet against NFC..  They also have plenty of bets in NFC

3)       Visa knows it cannot control NFC and is taking a 3 pronged card focused approach to mobile marketing independent of NFC. Too much to say in this short Blog

Digital Goods: Where to Invest?

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 17 Feb 2011

Digital goods are everything that can be sold and shipped online (music, movies, articles, ring tones). John Doerr (legendary KPCB Partner) certainly turned heads in Nov 2010 when he said Zynga is “our best company ever”.  What is driving the explosive growth in digital goods? Social gaming. The nice thing about running a credit card network is that you can see who is making money. No doubt a factor in last week’s $190M Visa acquisition of Playspan.

A key benchmark in the category of “digital goods” is Apple. Within Apple’s annual 10k digital goods revenue is accounted for within the  “Other Music Related Products and Services” category.  This category also includes app stores. For FY10 Apple saw a 93% increase in iPhone sales, but there was only a 23% uptick in “digital goods” (growth in line with previous 2 years). This makes intuitive sense given that Apple customers did not need to repurchase their iTunes library from iPod 1 to iPhone 4. But Digital Goods has certainly NOT been a key source of  growth for Apple. 

Lets take a look at Zynga. As I stated in previous blog,

…three years old with an estimated market value above $5 billion with more than 320 million registered users and estimated revenues above $500 million… From my perspective, Zynga’s secret sauce has been its ability to get 1-2% of their customer base to pay for game credits (see Gawker article). Although they have recently agreed to a 5 year deal with Facebook, this patent (if granted) will provide them leverage in future negotiations and extending their services outside of the Facebook platform.

For more info see TechCrunch / Steven Carpenter Zynga analysis (excellent)

The fortunes of Zynga have been tightly tied to the success of Facebook. Facebook’s new payment policy (mandating use of Facebook credits) will enable them to capture 30% of revenue. Zynga’s margins are obviously impacted in this move.. I’m sure many people immediately see the analogies here with today’s WSJ article (Apple Risks App-lash…) on Apple’s 30% digital goods tariff.  

As an investor, where do you place your social gaming bets?

A foundational digital goods investment question is your view on how social gaming can exist. Can social gaming survive in a model disconnected from Facebook and Apple? If you believe so, then possibly place bets in the Google model. Over the past 6 months, Google  has made five acquisitions in the field: SocialDeck, a mobile social gaming company; Angstro, a social networking search application; Like.com, a social fashion store; Jambool, a social gaming virtual currency; and Slide, a social game maker, and a $100M+ stealth investment in gaming giant Zynga.  Beyond Google, other views exist for social gaming in a mobile context  (MNO driven model).

Now that you have chosen the model (I’m tired of using the word ecosystem), where will your bet play? I see 5 categories:

  • Games (Zynga, EA, …)
  • Analytics/Incentives/Advertising
  • Distribution
  • Gaming Infrastructure. Example Payment, Hosting, Mobility, Support, …
  • Confluence. game-community, game-retail, game-mobile, game-mobile operator, … Example.. earn farm $$ by visiting a retail store and checking in..

Is social gaming a sustainable category? My personal preference is to place bets in common infrastructure until the next Zynga flourishes. Something I learned from Larry Ellison “when there is an arms race, don’t fight.. sell the guns”

Feedback appreciated..

2010 PayPal Analysis – Part 1

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11 February 2011

I finally got around to reviewing eBay’s 2010 results given that today is analyst day. PayPal is a machine! 24% Rev Growth on 28% increase in TPV (ex FX), with off e-Bay growth of 38%.. just tremendous!

 

I’m a very big fan of what they have done internationally, and the prospects the have at the POS (related blog). I encourage readers of this blog to take a read through their 10-k (http://investor.ebay.com/sec.cfm ).

One aspect of their business I don’t understand well is BillMeLater, given its 50% YoY growth,  $1B ANR, and 14.4% risk adjusted margin I thought is was time to get a little more in the details.

From eBay’s 10-K : BillMeLater

…Currently, when a consumer makes a purchase using a Bill Me Later credit product issued by a chartered financial institution (WebBank), the chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale and advances funds to the merchant. We subsequently purchase the receivables related to the extensions of credit made by the chartered financial institution and, as a result of that purchase, bear the risk of loss in the event of loan defaults. Although the chartered financial institution continues to own each customer account, we own the related receivable, and Bill Me Later is responsible for all servicing functions related to the account.

WebBank is a Salt Lake City, Utah based ILC operating as a subsidiary of Steel Partners Holdings L.P. 

From FDIC (http://www2.fdic.gov/idasp/index.asp). WebBank: 2010 Income $4.3M, Assets $84M, Liabilities $65.4, Equity Capital $19.2, Employees ~40.

WebBank provides similar services to Prosper (P2P Lending), From US Senate:

Loans arranged on the Prosper web site are physically made by WebBank, a Utah-based industrial loan company regulated by the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC).  Once bidding on a loan closes, WebBank funds the loan, the loan funds (minus the origination fee) are electronically deposited into the borrower’s bank account, and WebBank sells and assigns the loan to Prosper, without recourse, in exchange for the principal amount of the borrower’s loan.

eBay has $1B in BillMeLater receivables running through a company with $19.2M in Capital… I’m somewhat impressed that WebBank can do this kind of origination volume with 40 employees… But the margins certainly don’t look very good. 

Many retailers are thinking about instant credit…. is this the ideal retailer/bank model? Origination Risk would likely not have been something I would want to have taken on at Citi… certainly not at these margins. Is there something else in the Steel LP that makes this attractive?

See my previous blog on ILCs and Credit

Disrupting Payments at the POS

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7 February 2011

(Note: I apologize for the typos here in advance.. I really do need an editor)

At the end of the year, I try to do a little research… catch up on reading and relationships… all while updating my assumptions and predispositions. We are all creatures of our environment. Past experiences influence our views on current events and future expectations.

During this annual Holiday refresh process I try to develop some big picture “themes”. The questions I’m trying to answer: where are the opportunities? Where should I place my “bets”? What fundamental challenges that must be addressed? Are “fundamentals” changing (core innovation or at periphery)? Who has built a great team? Distruptive Innovations? The 3 areas I’m currently focusing on are: payments, mobile, and convergence (digital/real world).

Anyone that has read this blog knows I am a big fan of Clayton Christensen (author of Innovator’s Dilemma and coiner of term “Disruptive Innovation”).  From claytonchristensen.com:

An innovation that is disruptive allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill

 The litmus test for disruption involves delivering service in a substantially different cost structure. A key example is delivering simplified “good enough” product to a demographic that is “over served” by existing providers. From my (very limited) purview, there seems to be 2 core disruptive innovations that will influence payments at the Point of Sale (POS):

  1. NFC as a Payment Platform
  2. Mobile as an Incentive/Advertising Platform

There are numerous environmental forces that are shaping how these disruptive innovations will manifest themselves, for example:

  • Bank Ownership/Control of payment networks
  • Non Traditional Banks (Target, WalMart Mexico, Discover/Barclays)
  • Regulations
  • Specialization of Labor in Payment Services (Ops, Fraud, Risk, Platform, Support, Compliance, Banking, Acquiring, Processing, Authorization, … )
  • Handset Platforms (Android, iPhone, …etc)
  • Mobile Network Operator (MNO) platforms (NFC, ISIS, Advertising, Carrier Billing … )
  • Retailer Analytics (ie Price Optimization)
  • Advertising Analytics (ie. Adding location context)
  • Consumer Behavior
  • Price Transparency (Merchandise, Bank Fees, …)
  • Social Networks (Groupon, Facebook, … )
  • Consortiums and Partnerships

NFC as a Payment Platform

Mastercard’s PayPass was the first major contactless card program. Within the scope of the 2003 pilot program:

  • PayPass Technical Standards
  • PayPass Certification
  • Consumer PayPass Tokens
  • POS Terminals (which accept tokens)
  • Issuer Participation
  • Retailer/Transport Participation

Following MA, all of the other card networks have launched their own proprietary contactless products. They have numerous form factors, including: stickers, Key fobs, chips in cards, …etc.  Although most are based upon the same ISO 14443 technical specification… each payment process is proprietary and technology must be certified by each card network. Contactless cards ARE NOT a disruptive innovation, although pilots have been “successful” from a consumer use perspective, there were no new markets served nor was a more efficient cost structure developed. Many contactless issues remain unresolved today, these include: merchant POS costs, retailer/network/bank relationships, card reissuance, network effects/consumer demand, mobile application integration. (See previous blog for more detail).

NFC

Mobile Operators and the GSMA created an industry forum to define a broad set of standards surrounding Near Field Communications (see http://www.nfc-forum.org/aboutus/). This is a new “platform” where multiple applications can leverage an ISO 14443/18092 compliant radio/controller (Ex NXP’s PN544 which is in the Nexus S). In business speak, this means that the phone can run software applications which assume the roles of the any of the multiple card “tokens” above. In the NFC world, PayPass is just a software application which can be installed on an NFC enabled phone. The NFC architecture could also facilitate applications to act as a PayPass Reader (POS machine), Oyster Card, or on to take the place of your office badge to open secure doors (Previous Blog on NFC Ecosystem).

The 140 members of the NFC forum have done a superb job of creating a the specifications of a “platform”. Unfortunately, it takes strong business leadership to create a business model (and team) that can execute against it. Generically, key measures of platform success are “ecosystem revenue” and number of entities investing in it (see ISIS Blog). By these measures the ISIS consortium’s plans are severely challenged.  Today, Apple seems better positioned to execute in a “closed” NFC model (see Apple and NFC).

NFC as Payment Platform – Disruption

NFC thus enables a new “software” nature for both existing cards and payment at the point of sale.  Disruption occurs in: cost of customer acquisition, cost of delivering “new” payment services, cost of developing a payment network, cost of POS infrastructure, …etc.. As a side note, there is a separate case to be made that this same disruption exists in emerging markets separate from NFC (See MNOs rule in Emerging Markets).

Card Costs – Industry 101

Anyone in the credit card business knows that acquiring a new customer has 3 primary cost components: marketing, application, activation/use. Marketing is straightforward enough with card cost per acquisition (CPA) driven by marketing effectiveness (direct mail, online, referral, co-brand partner, …) to a specific demographic. CPAs in card can range from $10 to $200+.  Application encompasses collection of consumer data, credit scoring, pricing, acceptance of terms, approval and shipment of physical card. Activation and use is rather self explanatory.. with example costs relating to incentive programs driven on first use.. and continued use.

Future Scenario – PayPal/Bling

Let’s discuss a scenario involving a new payment instrument. Given that Paypal’s analyst day is Wed perhaps: PayPal and Bling at the POS. Today, Bling’s RFID based tags attach to your personal items and enable you to pay at a Bling enabled POS device (including Verifone’s new terminals). This model has a few problems, one is that tags must be mailed and activated. In a future scenario, PayPal has hired Zenius solutions to build a PayPal/Bling POS application within an NFC enabled phone. Now you just download the PayPal app to your iPhone 5 (complete with NFC). Merchant’s POS systems currently allow them to receive updates for each supported payment instrument. In this “future” case, PayPal has decided to eliminate the need for normal merchant agreements.. all that is needed for a merchant to accept a PayPal/Bling NFC payment is a paypal merchant account (with PaymenTech). What are PayPal’s costs in this model? Marketing (and paying the MNO for NFC access).

If PayPal could extend leverage their consumer footprint into the POS, with little cost, what does this mean for banks? It means that the banks could also build a new payment instrument that leverages their customer footprint. Why do you need a Visa or Mastercard brand at all if there is no cost to reissue? For consumers, what payment instrument do you choose? Is there a threat to the  entire concept of a credit card? Apple, Google and Amazon scenarios may also logically follow this example. Retailers like Target could also extend use of their payment instrument outside of their stores (see Target RedCard).

Bank Strategy in this model? See Banks Will Win in Payments

MNO Billing

Carriers in the US, EMEA and Asia are expanding into mobile billing services (provided by Bango, Boku, billtomobile, payforit, …etc). In this model, carriers are taking on some additional credit risk (for post paid accounts) and expanding use of pre-paid. Given that the carriers will be controlling the NFC platform (see related blog), they could also extend this payment capability to the POS with the appropriate processor relationships (ie. First Data, FIS, PaymenTech, …etc).

Disruptive Innovation – Mobile as Advertising Platform

This blog has gone on a little too long.. so will have to make this part 2. The basis for this section is my previous Blog: Mobile Advertising Battle. Disruption is cost to influence a customer prior to purchase. Influence includes targeting that is relevant to customer’s geography, preferences, demographic, transaction context, behavior, …etc

Summary

What does all this mean? What will 2014 look like? Unfortunately I don’t have a crystal ball.. what I would really like to do is charter some smart college team to create a “virtual option market” where we could all participate in pricing/evaluating various options (as laid out in the HBR article Strategy as a Portfolio of Options).

From an investor perspective, the prospect for these disruptive innovations altering the market is real, but with many dependencies and tremendous stakes. Clayton Christensen presented IBM/Intel/Windows as key example in dynamic of disruptive innovation. IBM chose to ignore the PC market.. as the margins were poor. Today, payment incumbents clearly see the threat and are reacting to it. Additionally, incumbents hold many of the “keys” necessary to execute and are well placed to construct new competitive barriers as well as ferment chaos and confusion. Small companies embarking on investments in this space must be versed in dancing with 800 lb gorillas… so ensure you have execs that can fill out the dance card and move swiftly while wearing iron shoes.