In last year’s post “Don’t wrap me“, I described how issuers were responding to having their cards “wrapped” by Digital wallets and new Plastic aggregators (Serve and Paypal). Examples:
- Paypal’s plastic. MA established a Staged Digital Wallet fee of 35bps, when its card brand was not used at the POS, but was the funding instrument for the transaction. Amex and Visa also pushed back, although I don’t have details on rule changes here, they made clear that they wanted their brand at the POS.
- Serve. Hit by similar issues above,
- Google Wallet/Plastic. Visa reportedly issued a cease and desist to Google at the behest of Chase (See NFC Times)
All of these wallets (Virtual, NFC, Cloud, …) led issuers to wonder “what card is top of wallet”?.. and how does a customer select my plastic. Issuers have been (to date) the drivers of rule changes and resistance. They seem much more concerned about one physical plastic card wrapping them (ie Serve and Paypal) than a virtual wallet, but they are also very concerned about data (see blog). Letting a new intermediary see transaction data (and add offers/services on top of them). In other words “DON’T WRAP ME” (see blog Paypal at POS).
Issuers subsequently got together and developed the concept of tokens (see Business Implications of Tokens). The summary: IF issuers had the opportunity to give the customer an account number in a digital wallet. Why would it be a Mastercard, or a visa card number? They are thus working on a system for distributing 16 digit tokens which they own and control (see Secure Cloud PR from TCH).
We now see network resistance “Not on my rails”. Why on earth would Visa or MA want to let a Token ride on their rails? Perhaps the best example of “Rail” ownership is First Data’s refusal to support routing and processing of any Paypal/Discover BINs. This means that every new “Home Depot” or “Jamba Juice” Paypal signs up must be serviced by a supporting processor (like Vantive). Making your merchants switch processors in order to accept a more expensive payment instrument (240bps compared to debit pricing of $0.07-0.12) would seem to be a difficult sale. Quite frankly I didn’t see the weakness of Discover’s 3 party network until now.. it only acquires directly for top 100.. and is dependent on many other acquirers. Amex does not have this problem…
My guess is that Visa and MA will also throw up walls soon, but not sense in doing it now.. let the banks work feverishly to build a token machine.. only to find out that the tokens don’t fit in any “slots”. The only bank globally to have worked all this out is JPMC with its new Visa deal, which bifurcates VisaNet to a new Chase version. Of course the other issuers will eventually ask for same… but these are 5 yr cycles.. All of this means V and MA will continue to rule the mainstream, and that any new competitor must have network control, issuer control and merchant control.
These rule and ownership battles make my head spin. Investing in this space is not for the faint of heart. Perhaps the best way to really “change” payments is to first ride existing rails and establish a fantastic consumer/merchant value proposition .. THEN move that solution to a different network… or better yet enable a switch where payments are cleared on a least cost routing basis (like switching IP traffic).
Hopefully the Venture Community is aware of these pitched control battles: Network, wrapping, secure element, trust, card present, tokenization, … But information certainly does not flow well here. Just this week I learned of a start up about to launch a new P2P service built around Visa Money Transfer … allowing a user to “instantly” move money to another account. Unfortunately they didn’t read my 2.5 yr old VMT Blog, or ensure it would work at ALL of the top 5 retail banks.
… I don’t have time to lay out the scenarios here.. but I like investment thesis that recognize DEBIT as equivalent to ACH…new rules may bring cost down from $0.21 to $0.07… Although PIN Debit and Signature debit both cost the same), PIN debit is not routed through Visa/MA and operates under separate rules. For example, I love the way First Data and Cardspring are leveraging STAR for non payment data.. without any issuer participation. a VERY good model. Thus I see PIN debit as a ripe area for both for merchant led payment products, and for new bank products.
Issuers are just fuming over the fact that AMEX is completely untouched by Durbin and EU SEPA pricing. Which is why I see Wells Fargo’s move to Amex as “possibly” strategic… is wells switching railroads? with a first “test” of affluent?.