Random Thoughts: Settlement, NFC and CLO

16 July 2012

Retail settlement

As most of you have read a $7.25B settlement was reached with some US retailers (led by Kroger, Safeway, Payless, Rite-Aid). I’m not going into depth on the settlement but rather the likely response by retailers, and potential impact on Visa/MA earnings.  The big retailers have been assuming that this settlement would be reached and have been in the midst of a plan. What would you do if someone was taking 3% of your sales and your average profit margin was 2.4% (ref page Aii IMAP Study)?  Well the retailers have plans to leverage a portion of this $6B windfall and invest it in a payment network they can control. Perhaps they should turn around and buy Discover (DFS market cap $18B). This rumor has been in the market (perhaps a driver of 2012 performance).

The US has 2 other countries which serve as benchmarks for a shift away from credit card at POS: Canada (Interact – debit launched 1994) and Australia (EFTPOS). Unfortunately I have limited information on Visa/MA transactions in these geographies to generate a decent analysis of spend shift. From http://www.interac.ca/media/stats.php we see in Canada that roughly 80% of all retail card present transaction are done via Interact (2011 GDV was $182B). I’m not implying a 40% hit to Visa’s GDV is imminent (US is $507B out of global $956B GDV for quarter 31Mar12), particularly since there is no competing network like Ineract (YET). But there are certainly references for success.

I presented some of the Retail Drivers last week and also in my March post (Retailer Wallet). My bet on retailer plans? Well Retailers are not exactly a small group marching in unison, so response will likely differ by segment, ticket size, purchase type (ex non-discretionary gas) and influence.


  • Credit card use fee in 2-4 months nationally


  • Slower roll.. we will see marketing to inform customers of the costs of credit and plans to implement a fee for use of credit cards
  • We will also see tests of fees in isolated stores/geographies. Not only assessing customer issues, but also competitive responses.
  • Loyalty cards that will be integrated into a payment system
  • Loyalty cards that have integrated digital wallet (WalMart issued a Digital Coupon RFP over 18 months ago).
  • Incentives dependent on payment type
  • Push for PIN Debit.. as it allows the retailer to route away from Visa/MA directly to the bank.

Big Ticket Retail

  • No fee likely as they benefit from access to consumer credit
  • “Carrot Trials” of Rewards programs and targeted offers will be contingent on payment type
  • New loyalty cards

Apparel / Luxury

  • Least likely to implement a fee.. wait for other stores to establish customer behavior.


  • No fee likely…
  • Discounts for debit, particularly with airlines.
Visa/MA impact. Minimal through 2012, but could result in negative US transaction growth by 2014 unless networks are successful in delivering some sort of retailer friendly service.


I’m still just laughing at the mainstream press’ reaction to Apple iPhone 5 plans. Perhaps I should crying at the disinformation that mobile payments (at POS) are taking off. Everyone should ask: what kind of mobile payments?… Transit/ticketing is a slam dunk for NFC technology, yet NFC is having problems (witness London TFL’s decision to defer). Other mobile payments segments which are doing quite well: mCommerce with Amazon reporting around $2B, Digital goods with Zynga leading the category around $1.2B (investor relations).

But the mobile payments at the physical POS? This has not even started. (update.. Starbucks is clear leader here)

I don’t know how much more bluntly I can educate the NFC aficionados, but retailers have not gone gaga over mobile POS payments.. In fact I will state that Payment is not the killer app for NFC.. payment delivers NO VALUE to the Retailer.

For all of you looking at Apple’s patents and thinking they will eventually put NFC in… here is news for you: every one of the patent claims could be fulfilled by Bluetooth (replacing NFC). In order for NFC to take off, the carriers must let go of control (see my long blog here on MNOs walled garden strategy). There is nothing wrong with NFC technology, but unless the carriers are willing to front all investment for retailers, consumers, marketing , …  this will never take off. There is a value proposition problem (payments only) AND a control problem.  The US MNOs won’t even work with Google who has built everything for free.. free is not good enough for them….  They want control…

Card Linked Offers

I have new stories of just how bad the open rates are on these offers, but most revolve around a central problem. It goes something like this

1) Banks want to get consumers interested in offers. The consumer experience is TERRIBLE (no discount on the receipt) and banks are experimenting with 3 types of distribution. Integrated into online banking (Bank of America), e-mail, and secure messaging.

2) Retailers are not buying basket level discount advertising.. they never have. Retailers must pay for the offer (15% back), the revenue share (% of margin) AND the tax on the offer since it is technically treated as a retailer rebate. Total Retail cost for the offer is approaching 25%.

3) Given lack of retailer participation, Banks (and the offer companies) are thus forced to create offers themselves with no retailer participation (see my WalMart Story)

4) Banks do not want to let consumers go with “no offers” so all available inventory is distributed to “everyone”

5) The poor targeting (universal distribution) has a twofold effect: Consumers see garbage offers and start to tune out the channel, retailers see poor lift in performance as the offer redemption is done by existing customers that would have normally come to store

I could go on.. the exception to the rule of CLOs is Card Spring.. I like them quite a bit. Also Linkable just purchased the assets of Offermatic, which will enable them to link offers across card networks (using Yodlee)..

6 thoughts on “Random Thoughts: Settlement, NFC and CLO

  1. Great post, with excellent analytic insight!

    What exactly could Yodlee’s role be in that example (apart from the KYC-ish one)?

    There is some debate going on re Apple and Bluetooth (BT): the latter is not the best protocol for short ad hoc comm sessions. More importantly, if the retailers are not in a hurry to jump on the NFC bandwagon, how likely are they to jump on the Apple’s one. Will WalMart/Target equip all their stores with BT terminals just to serve iPhone users?.. Some are doing it for PayPal, but that’s not mainstream.

    P.S. 2.4% – that sounds more like net margin, rather than gross (even for the likes of WalMart).

    • You are correct on gross margin, will issue correction. Reference page Aii on http://www.imap.com/imap/media/resources/IMAPRetailReport8_23CB9AA9C6EBB.pdf

      Apple will not be alone in BT, there will be no “single solution” for some time. I see checkin services supported by wi-fi, GSM femtocell, Bluetooth, facial recognition, .. similarly for redemption services and payment.

      Here is a key: retailers want ubiquity.. they want solutions that are available for every consumer.. not just the 0.05% with the latest NFC phone. They will not invest until there is a tipping point of 20%+, they will however take subsidized hardware and services to “test” until they find a winner. Ticketing may be a great example. Airlines will be able to create a BT ticketing application that will work with either iPhone or most Android phones. Is that an Apple only solution? No.. is it an improvement over displaying a QR code of your boarding pass? I don’t know.. but it will certainly decrease the number of QR code readers that an airline has to buy.. BT is cheaper..

      Stores will not invest in a “apple only” solution with anything unique at the POS.. but they will invest in solutions with no POS component. Passbook can act like a piece of paper (ticket to scan).

      RE: Offermatic/Yodlee. Offermatic built a customer offer registration service. After you register you provide all of your card online bank credentials. Yodlee scrapes all card activity from all of your cards so you can “earn” rewards independent of card type used. Offermatic would also be able to trigger incentives based on spending on any of your cards. Not a bad idea IF you have marketing $$ to get consumers to use your service.. and the scraping works… and merchants want to provide incentives.. and consumers don’t mind the terrible redemption experience (no redemption on receipt and 3-5 days until you are credited).

      • Thank you for the feedback, Tom, much appreciated.

        “but they will invest in solutions with no POS component. Passbook can act like a piece of paper (ticket to scan).”
        That’s what I fail to grasp – simple barcode scanning works (rather well – as evidenced by Starbucks), and barcodes ARE ubiquitous, why do we need anything else?.. Why bother with NFC, BT, etc?

        Offermatic: cute idea indeed, and you hit the nail on the head there with “IF *and* IF” – one of the VCs called that “domino rally”, i.e. you get one domino misplaced and the whole rally comes to a standstill.

        • Barcodes work well where only one item is purchased. However retailers have said they are against any solution which increases time at checkout. They don’t like consumers fumbling with their phones. So in grocery it will never work.. in high end retail and movie ticketing it may work in every circumstance.

          The data rate on NFC is really really bad. Maximum data transfer rate of NFC (424 kbit/s, fastest rate http://www.nfc-forum.org/resources/faqs#data) is slower than that of Bluetooth V2.1 (2.1 Mbit/s). In the google wallet model where you had a few retailers supporting both NFC coupons AND NFC payment.. there were 2 handshakes and 2 data transfers.. it was not tap and go.. but tap and hold for 6-10 seconds. If you moved the phone at all the entire thing usually crashed.

  2. “The data rate on NFC is really really bad.”
    Apparently, that problem applies to transit too (in some cases), that’s why London Underground are not accepting NFC yet – http://bit.ly/KGDmG3

    Hm, makes one think…

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