1 Nov 2014
Money2020 is next week, and I’m moderating the ApplePay session on Tuesday at 5pm… hope you guys can come. I’m more than a little sad that I can’t get any retailers up on stage with me. Why? The top 60 retailers are in MCX, and it makes little sense for them to get on stage and tell the world what they are NOT going to do and why. As I’m preparing to leave for Las Vegas tomorrow, was thinking “what could I write about? What unique perspective can I offer?” Well given I can’t get them on stage with me, let me try to articulate the Retailer’s view of the world. My twitter feed is blowing up as I work to explain why CVS and Rite-Aide turned off NFC. Please know I’m only trying to give perspective…
Payment Services are a brokering activity between two entities engaged in commerce. Logically, a broker must have the trust of both parties, and deliver some sort of value in managing the financial risk associated with the transaction. Within Consumer Retail, Visa and Mastercard evolved from Bank owned exclusive networks of the 1960s (see History) to ubiquitous independent payment networks. Few remember that back in the 1960s, merchants took either Visa or Mastercharge but not both as the Merchant’s acquiring bank could only be a member of one of the networks. For merchants, the value proposition was clear: consumer credit.
Payment networks thus evolved from a closed and focused value proposition, to a settlement “infrastructure”. However the rules and governance process by which many parties (merchant, acquirer, processor, issuer, network, VASP, …etc) participated in defining operation of this “brokering” activity did not evolve. This is the central issue restricting the future growth of Visa and Mastercard. One I believe both are acting on. My firm belief is that rebalancing network rules will unleash a massive new phase of value creation for these networks.
Let me take a quick side bar here..
Network Theory – Openness
As I’ve stated many times, closed networks always precede open networks until scale is reached (Building Networks and “Openness”, 2011). Weak Links (nodal affinity) influences network creation, and there are VERY few open networks which exist in Nature. This is logical as Networks form around a function rendering generic open networks less “efficient” than specialized networks around any given specialized need.
Scale-free distribution (completely open networks) is not always the optimal solution to the requirement of cost efficiency. .. in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks.
-Weak Links
Networks NATURALLY form around a function and other entities are attracted to this network (affinity) because of the function of both the central orchestrator and the other participants. Open networks (internet/TCPIP, Visa, NASDAQ, … ) succeed where a common infrastructure benefits MANY NETWORKS.
Visa and MasterCard have transitioned to become common network infrastructure, a position FAR MORE valuable than that of a closed credit delivery system. They are a network of networks. However their rule making and governance processes do not match the other open networks listed above (NASDAQ, Internet, …). Most Banks, have also lost their traditional role of “brokering” and risk management (in retail) by creating a card rewards system that encourages card use paid by the merchant. This creates a brokering incentive separate from the commercial transaction… impacting brokering independence.
What do merchants want? A neutral broker!!
A top 5 merchant told me a few months ago “Retailers like Starbucks have proven that we are best placed to deliver value and influence consumer behavior. I don’t want to force my consumers to do anything, but similarly I want to networks that let me play on an even field. These next 5 years are going to be complete chaos for consumers. What do we want them to do? Swipe, dip, chip, pin, tap, QR…? We have been planning for EMV for 3 years… am I really supposed to jump to Apple in 4 weeks?”
MCX
These guys are good friends of mine, and I think their business vision is well placed. They want a network where they can play on an equal footing. A neutral broker.. or at least one where they can have a seat at the table when rules are set. Will MCX be a massive success? It depends on the consumer value proposition. Are the merchants motivated to work together in creating a neutral broker? Hell yes.
One merchant said it this way “Tom I didn’t think we would ever have someone more difficult to work with than Visa and Mastercard, but I was WRONG. Apple is a nightmare! At least we knew what was coming with Visa and Mastercard, with Apple they don’t talk to us, respond to our letters, or offer any kind of value proposition. Why on earth would I want to let another brand in my store without understanding what it will do for me? They are a great company, with great products, and certainly have a much better approach to data than Google.. but anonymity is NOT a value proposition, in fact Apple makes our efforts to deliver value to the consumer even harder as we have no defined way of using Apple to engage our consumers”. See Brokering Identity – Part 1, ApplePay and Merchants, Digital Transactions ApplePay Issuer Agreement.
Getting a card number from consumer to merchant is NOT innovation. There is just no problem here. My payment friends are already rolling their eyes. Apple does have great security and great ability to manage fraud.. but fraud losses for CP are 3.2 bps. What about store data losses? That is not “fraud”, and certainly a problem for merchants that keep PANs. Tokens do solve this problem… but so does better security, and more intelligent approach to tracking loyalty. Apple must move to create a merchant value proposition, and define how they will help with consumer engagement. I believe Google will far outpace Apple here.
Retail is a zero sum game.. I’m not going to buy MORE gas and groceries.. differentiation is about switching, product selection and pricing on data, ..the flux… once this flux dies.. steady state resumes. Perhaps all iPhone owners will only shop at whole foods, but data shows that consumers don’t make decisions this way. In fact payment is not in the top 5 reasons for consumers choosing a new iPhone.
Why are MCX merchants turning off NFC? To give themselves a little breathing room, make Apple create a merchant value proposition (engagement), get a seat at the table in a new network, and help to establish a consumer behavior that works for them too (Most Important Payment Race: Consumer Behavior, Apple’s Platform Strategy: Consumer Champion ).
What do Retailers want in Mobile?
Following from my big blog Static Strategies and the Rewiring of Retail.
- Consumer Engagement
- Consumer Acquisition
- Consumer Loyalty
- Allow Retailer to be in control of data
- Partners that allow Store’s brand front and center
- A Partner either IN CONTROL of the consumer experience (Apple/Google) or one that already has massive consumer adoption (ie Facebook).
- Creating a fantastic customer experience from end-end
- Ability to manage campaigns, data or your business
- A Partner that can reach/influence consumers WHERE THEY ARE.. not where you want them to be.
- Payment..? I guess if that comes too…
How will this play out?
- Much has been made of the MCX contract provisions that prohibit participating retailers from allowing other forms of mobile payment. This is just not accurate. Any retailer can choose to turn on NFC, any retailer can sign up for MCX. Can an MCX retailer turn on NFC? Yep.. Large retailers are not participating in ApplePay because Apple has completely failed in a merchant strategy, they have not articulated one, nor have they worked directly with merchants. This is really no different than Apple’s failure to work with Banks. Banks are just fuming over the take it or leave it terms Apple offered to them. Merchants had no terms…
- Apple will rollout a merchant friendly beacon product, and loyalty product for consumer engagement in next 6-9 months, this will also include a renewed focus on BLE. The product will fall flat until they can create an new merchant organization. Google has 4,000 sales people working with merchants, apple has around 16… so it is a big task.
- Apple will ROCK in App payments.. it will be their homerun… I will make a further bet: Apple will WIN in every situation where they can control the consumer experience from beginning to end.
- Visa and Mastercard are beginning a shift toward the merchant. They may not win the top 60, but Visa has 36M merchants.. that leaves 35,990,940 that will be open to new ideas. These are my biggest personal holdings, and I know both of the CEOs. Everything I’ve written here they know already.
- Consumer authentication is VERY disruptive to retail and banking. As Ross Anderson said “if you solve for authentication in payments.. everything else is just accounting”. The need for an independent broker and their services are dramatically different if either the consumer or payment can be authenticated (ie cash, bitcoin). Why do you need a payment product at all? Just present the identity to the bank. This is what Sofort/Klarna does… Why not do this? Because the banks have no ability to MONETIZE the transaction (no merchant agreement). There are many better ways to leverage authentication, but no other ways to currently MONITIZE IT (outside card). Perfect Authentication… A Nightmare?
- Apple is pursuing an “anti-google” approach: keep no data, closed platform, control everything. Google is 2-4 years behind on platform security.. but is catching up. The Google platform is much easier to build in and control (ex HCE), but consumer adoption lags as each Android participant must move consumer to their vision. Apple has successfully delivered security and authentication, but has not laid out a way for many apps to leverage it. Retail is a REALLY big business, with 1000s of specialists. It cannot be throttled by one company.. thus Apple will work fantastically in environment it can control. (sorry to restate).
- ApplePay and overall contactless adoption will begin with small merchants and infrequent purchases. Most phones have the capability today. MCX will not stop contactless.. but it will impact consumer behavior substantially
- Is NFC/Contactless Acceptance required as part of EMV rollout? NO!! This is the most widely held mis-understanding. While the large terminal manufacturers have no products in their official product list without contactless, the top 60 merchants order bespoke or custom terminals to fit their needs.
Great info.
“Apple will rollout a merchant friendly beacon product, and loyalty product for consumer engagement in next 6-9 months, this will also include a renewed focus on BLE.”
I know their patents on this issue, but do you have a concrete info on this, or just an expectation?
“Money2020 is next week, and I’m moderating the ApplePay session on Tuesday at 5pm… hope you guys can come. ”
No! I’m moderating a rival session on mobile identity. Damn. You will blog though, right Tom?
Hi Tom
Hope the panel session goes well next week.
I think the point you make about closed loops preceding open networks is a great one. If you look at the mobile money schemes that have been built to date they are nearly all closed loop – it’s only once they have achieved a certain scale that open loop becomes a relevant consideration, typically to unlock the next stage of growth. In my mind that’s because MNOs already have scale for P2P use cases within their own customer base and can deliver valuable services to their customers via very simple propositions. Trying to apply the same across competitors networks or integrate merchant payments begins to test the viability of closed loop ecosystems however.
Running what is often argued the most successful store based mobile experience to date – Starbucks -against your criteria as to what merchants want is an interesting exercise. Again it’s a closed loop system, but what is striking is that it actually achieves very few if the items on your list. Yes they own it, so have control, but look how they’ve wielded it – in the most part all it does it take a plastic Starbucks card and put it on a mobile phone.
The experience isn’t perfect, the loyalty system is very basic. It’s hard to argue that it’s a customer engagement or acquisition tool. They don’t target customers with offers or notifications. In fact I’m not sure they use the transactional data at all.
So why is it so popular? It just makes things ever so slightly easier for a customer – regardless of what that means to a given individual (pay with phone, faster checkout, auto top up, manage multiple gift cards etc.). That’s all that matters. Most importantly, it’s not complicated and it’s not intrusive.
So there’s only one bullet in my mind that should make the “what do merchants want from mobile” list – Serve customers better. Too many organisations – payments, technology or otherwise – have lost sight of this.
James
Tom — any speculation as to why Apple has seemingly overlooked the merchant value proposition? Surely there must be some contribution to that communication pattern from the merchant side? And if not, how much money will it cost Apple to build a bridge to merchants?
In general, Tom, I’m hesitant to call a system set up by retailers, for retailers, “a neutral broker.”
Customer engagement, acquisition, loyalty, control of data — these are all buzzwords for, basically, spyware. This is exactly, to the T, what many consumers don’t want. Or at least they want a chance to explicitly opt in or opt out, on a purchase-by-purchase basis. Maybe I’m fine buying soda on my loyalty card, but does the average consumer really want their pregnancy tests going in a database?
Apple (and Google, to a lesser extent) offer consumers exactly what they want: control. And in order for consumers to be in control, retailers must be deprived of it. Control goes beyond data, too: consumers have very broad chargeback powers with credit cards, especially American Express and higher-end Visa cards. It’s one of the few areas where a regular consumer has genuine leverage over a retail behemoth, and consumers who are in the know are loathe to give up on that last remaining power they have.
So in both senses of the word control, the zero sum game is that in order for consumers to win, retailers must lose.
In terms of things like the store’s brand, and a user experience, I can assure you that I do not believe retailers like Best Buy care one iota about user experience. Not when it means etching out every last penny of short-term revenue. Some retailers do care about user experience, like Target, but that attention to aesthetics is hardly common in an industry where stores trigger epilepsy in shoppers.
At any rate, as a consumer, my conditions are this: I want any transaction to go through American Express, I want it anonymized, and I want to not miss out on any specials or rewards because of that. If those demands aren’t met, I will be the market, and it will have spoken. CVS, RiteAid, and Walmart can hopefully join the likes of Circuit City, where they belong.
I don’t disagree on the neutrality point.
Oh, FFS. How can these guys fail to understand Apple’s approach here?
They’ll get all the things they want. They already have most of it, just not quite in the form they want it. Right now I walk to certain retailers and on my lock screen their app icon appears. I swipe and their app loads front and center. If I pay using Apple Pay through their app, they get all of the user information, loyalty, engagement that they could possibly want. They have complete control, but it’s shared with me, the end user. Apple doesn’t want to control this, they want the endpoints in control – the consumer and the merchant. The problem is that NFC doesn’t allow the phone to filter whether you are a trusted merchant or not with my data – your app is my opt-in mechanism. If I don’t want to share, I delete it. If I want to share, I install it and flip all the appropriate switches – including a whole bunch that you could never get without my consent.
Apple is adding retargeting to iAd so you can push out an ad that sniffs your app for data and incorporates it into the ad. Apple is adding Apple Pay to the ad, so that you can be in one app and get an ad from a retailer advertising an item you have on your wish list in their app, along with a ‘Buy Now’ button. Apple will hook all of this together through Passbook. It’ll do what Google offers but all local to the device, using apps that the user has voluntarily installed. The user is in control, not Apple and not Google.
What’s missing in all of this is that the merchants have dragged their feet and failed to provide any mechanism for this to take place from anything other than a magstripe card, so Apple needs to invent that infrastructure (BLE/iBeacon) and then hook it through Passbook so the phone can marry the NFC transaction with the BLE one. They would have preferred skipping NFC, but that was obviously not going to happen.
How retailers can fail to see what Apple is offering them through the app interface is beyond me. The obvious goal is feature parity at POS, but a lot more technology needs to be applied. The retailers could at least try to help…
With Apple Pay NFC, I don’t quite get what changed in the merchant value system other than a customer essentially started using NFC with a new card number. Sure, can they be upset that they didn’t get anything more (and solve their wishes that they pay less in processing fees) but Apple sough to solve a different problem. Apple Pay is built on existing platforms so it’s not like they are now paying for fees that didn’t exist before. Correct me if I am wrong, but my understanding is that if I go to a store and use Apple Pay multiple times, they can at least tell that I am the same customer, that a new card number is not created each time I tap.
I think what the MCX merchants fear the most is that Apple essentially created such an easy mobile payment solution that by the time they finally roll out their new platform (which solves a different issue of lower fees) users will just be annoyed that it is not as easy to use — that you have to unlock your phone, open an app (enter a PIN?), scan a photo, get a QR reader to scan your phone — and that no one would then switch to it. In my mind, the largest hurdle towards the use of EMV/NFC/Mobile (whether it is Google Wallet, the Starbucks app, etc) in the USA is the fact that swiping (as long as it remains an option) is just so easy and quick. I can pull out my credit card, my Starbucks card, etc. all faster than I could have pulled out my phone, unlocked it and opened an app. Apple Pay finally solved that problem and leapfrogged the merchant “solutions”.
Great article ! I’m learning more every day – what an exciting time for the payments industry.
I do have a follow-on question after reading the article.
Does the merchant get charged a different rate if the credit card payment is done via any of the 3 methods:
i/ NFC/Contactless (I would assume it doesn’t matter whether this happens via Apple/Google/ISIS wallet or “tap’n’pay on your credit card), ii/ credit card swipe, or
iii/ credit card chip’n’pin (EMV).
Thanks.
(apols, a few typo spotted whilst in moderation – corrected version here)
Retailers look set to get more than they want, most likely far more than they can handle from mobile in fact. I can’t agree that retail is a zero sum gain or that it’s just about shifting more gas or groceries …and YES people do buy more, c’mon Tom. The gold is in the hills, no, it’s in the Apps and that’s surely a much more interesting discussion than the clumsily staged reactions of MCX to ApplePay of late, isn’t it?!
Merchant Apps and the ble-conisation of retail environments could be, should be, hugely lucrative for almost every merchant and the effect broader and deeper than MCX/US. Driven by consumer demand: Apps that cleverly and cooly put power back into consumers hands (literally and metaphorically) and deliver mass market convenience. More activity and behavioral data than merchants can handle and a multitude of attractions to beguile the customer: opt in flick-switches, transaction history pop ups, targeted coupons they actually want flying in, plus…. “oh, we see you’re in store, hey thanks for coming back! Listen you’re a regular, a bit hitter with us we know that – so here, feel free to pick up a free latte or snack of your choice from our coffee bar or, WTH, how about 5% off your entire basket today?”. A genuinely new and fresh opportunity (for merchants that get it right first time) to intimately engender customer trust: “they don’t pester me, they don’t sell my data, they don’t waste my time chucking crap at me I don’t want …”
So at long last merchants get their customer relationships and loyalty connects back from the card schemes. Fabulous. Another worthy disintermediation brought about by new tech with the bonus of lovely rich, real-time, small data experiences which have the potential to significantly boost sales and loyalty. There’s a loyalty shift coming which retailers should be supa supa excited about, it plays back into their hands (they are their customers after all, not V/MA’s) and it’s worth far far more to them potentially than a few bps reductions to transaction charges. Are MCX asleep at the wheel? Apple is their friend.
The value proposition of the schemes is changing and credit interchange is getting downward pressure from all sides (props to Apple and MCX, they are both playing their part in this).
It looks like Apple will be first to mass market tokenisation using V/MA’s token vaults. That’s a big dent in the fraud protection argument that’s propped up higher credit than debit fees in the US for so long now. TouchID a further bullet in the chamber. Nice work! Are the scheme going willingly? I suspect not, but they needed to stay involved and co-branding with Apple is irresistible even to the largest of megabrands isn’t it.
What Apple has done is what MCX set out to do – they have used their might to lower credit interchange. What’s more I don’t expect Apple to stop at CP rates: in-App purchases at CP rates has to be in sight. Apple aren’t storing the transactional data and are weakening the card schemes’ grip on it and insodoing prising loyalty back from card schemes, which captured loyalty thru purchase aggregation, to the merchants. The list of positive disruptions Apple are enabling in retail by actually deploying these innovations is growing. ApplePay (POS and in-App), iAd and iBeacon: all provide new and significant value proposition streams for merchants. Are these hiding in plain sight? Wouldn’t it be better for your friends at MCX to let down their guard and get involved? I truly love your insights Tom but I think Martin makes a very valid point here … and there is plenty of gold to go round.
Apple has lowered interchange? BLE “could”… ? Retailer will see a net sales increase? I can’t image you having spent many years in retail.. “new value streams”? how do I target 40 year olds that buy my competitors product in the apple world? Perhaps I missed something.
Retailers who elect to embrace ApplePay can provide their customers with access to an improved purchasing experience that didn’t previously exist. Is it significant whether members of a merchant cartel (who choose not to engage) miss out or that those retailers that harness the new technologies have a great new way to get much closer to their customers, deepen the consumer trust bond and sell more product.
The CP interchange rebate dented the schemes might. It was unprecedented, right? As ApplePay builds volume they accumulate greater leverage and the drive for CP rates for in-App purchases surely provides an opportunity for retailer (and customer) to benefit financially in the future.
Whilst retail as a whole might be zero sum, it’s not within its sub-clusters and the purchase experience differential has the potential to change store loyalty/ buying habit and move customers around … just as it did to music. There will be losers.
Steve Cheney put all this far more elegantly than I on Forbes this week. https://www.google.co.uk/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=forbes%20steve%20cheney%20power%20of%20local%20commerce
My thrust here Tom is that Apple has ALREADY moved to create a value proposition for retailers (as open and available to those in MCX as any others) and if forthcoming releases around ble-conisation layer on top next year, as expected, then perhaps things will be more evident. Beyond that shouldn’t it be down to, and left with, the retailers to be imaginative with how they use these new channels to enhance customer engagement?
Tom, I respect your thinking, and this post clarifies for me WTF is wrong with retail. Let’s look at your list, “What do Retailers want in Mobile?”
* What IS customer “engagement”?? This is a hand-wavy word used by executives who haven’t thought long enough or hard enough about the variety of contexts in play. Engagement for a teen is different than for a 20-something than for a parent than for a busy executive, but all of them need groceries, gas, and prescriptions. Does anyone really think one size fits all here? “Engagement” is the goal of a campaign, not of a technology like mobile.
* Is customer acquisition a problem for “mobile” to solve, or a problem for retail to solve? Here’s an fun acquistion algorithm for MCX to implement:
– IF customer is near a Rite-Aid
– AND a CVS store is within 1 mile
– OFFER the (Rite-Aid) customer a CVS coupon valid for one or two hours
Do you think MCX will want to implement this algorithm? Probably not. Again, I see “acquisition” as the goal of a campaign, not of a technology like mobile.
* How does the customer define “loyalty,” compared to how retailers define loyalty? Here’s one take: I’m loyal to companies who respect me, my business, my time, and my resources. Don’t waste this loyalty by patronizing me in your marketing, frequently changing the loyalty redemption rules, understaffing check-outs, or price-gouging, respectively.
* Sophisticated customers don’t want retailers in control of their data, period. It’s going to take a little longer, but eventually it will be clear to customers that this data has real value, and then customers can and will SELL it to retailers. MCX is already proposing this with coupons and discounts, but the value proposition isn’t nearly enough for a sophisticated customer.
* “Creating a fantastic customer experience?” The customer is STANDING IN THE STORE, Experiencing The Brand with their whole being. That’s fairly front and center. Not “mobile’s” problem, lol.
* Apple is in control of the customer experience, completely. Hard to complain on this point.
* Apple is the only company currently considered a leader in “fantastic customer experience” from end-to-end. Hard to complain on this point.
* Managing campaigns, data, and business is a back-end systems issue, not a customer mobile device issue. Retail executives who think like this are conflating technology platforms. Yes, they want that all integrated, but it’s not “mobile’s” problem.
* Here’s “where I am:” This Jan or Feb, when it’s freezing and snowing in New England, will I be able to walk into my local department store (Kohls, Pennys) and buy new turtleneck shirts, or sweaters? Or will they be stocking spring and summer clothes already? In August, when I actually get around to noticing it’s hot outside, and take a few days off, will I be able to go to local retail and buy a new bathing suit? Or will they be pitching back-to-school and get-ready-for-winter?
If retail wants to Engage me for Acquisition and Loyalty, gathering my Customer Data while I Experience their Brand, how about if they stock some stuff when I want to buy it, instead of when they want to sell it? Radical, I know.
Apple doesn’t need a Value Proposition for merchants, merchants need a value proposition for customers. Apple might throw a few bones here and there, but fundamentally it’s not mobile’s problem to solve.
As Martin said above, retailers dragged their feet for so long, not wanting to invest in systems or upgrade POS terminals, that now they have to deal with other companies motivating technology adoption. Cry me a river.
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