Acceptance – Part 1

I haven’t written much on acceptance over my 9 yr blogging career for one simple reason.. I was never “in” that side of the business. Given how much is going on in here I can’t leave it out any longer. Acceptance at the POS is a big topic, I see the following areas:

  • Open Loop Payment Acceptance
    •   ISO Agreement (small Merchants)
    •   Processor Agreement
    •   Network Acceptance Agreement
    •   Bi-Lateral Agreements (Issuers discount fees directly with merchants)
  • Private Label Acceptance (includes retailer Wallets)
  • Other Acceptance (ie ChasePay, MNO/Transit wallets)
  • Coupon Acceptance
  • Loyalty Acceptance
  • Infrastructure
    • Payment Terminal
    • Payment Terminal – POS
    • POS – Back End
      •    Coupon Processing
      •    Loyalty Processing
      •    Rebate/Returns
      •    Pre-paid Activation (ie Blackhawk/Inmar)
      •    CRM Processing
    •    Coupon Redemption (ex NCR Copient Cloud)
    •    Data Partners (ie Catalina, DLX, Saving Star, and of course Commerce Signals … )
  • Payment Processing
    •    EMV
    •    Prepaid
    •    Private Label
    •    Debit Routing
  •  Payment Data

Is it any wonder that companies like Safeway and Walmart of teams of over 600 working within the IBM/Toshiba 4690 environment? You can also see why “innovation” takes a long time here, as this infrastructure is enormously important to store operations. Normally there is a year testing cycle and very gradual rollout to ensure that changes don’t disrupt the consumer experience.Store Systems

Where to start?

My intention is to paint a world of tremendous complexity in retail. The challenge of moving Retailers to do ONE thing consistently is next to impossible, this fact alone may be a reason to bet against any competitor to Visa and Mastercard. Add to this challenge the hurdle of getting ALL consumers to use something different and you can start to see the hurdle. A new network must construct an INCREMENTAL value proposition to merchant, consumer, processor and issuer. While there are many more logical ways to perform payments, there is no model where issuers will increase their margins (see Paypal/DFS blog for more detail).

Big picture stories of success and failure are a great way to help understand the complexity and the focus for change. One of my objectives is to educate payment geeks on the things outside of their realm.. other networks that they may not know about.. so lets start here.

Coupon/Loyalty Processing

A coupon is a financial instrument presented by the consumer to the merchant and paid for by the manufacturer. SKU level data is captured by the POS (note not the payment terminal) and validated against a promotion system (ex NCR’s Copient Cloud) which then applies the manufacturer discount to the consumer’s purchase. This entire financial settlement takes place before any consumer payment. Most will find this hard to believe, but manufacturers reconciliation of payment and coupons is done by weighing bundles of paper coupons presented at end of month and validating with previous month’s payment to retailer.

There are substantially different tax treatments for promotions, rebates and discounts just ask the card linked offer folks about their hard lessons here.

Loyalty processing is very similar to coupon processing in that loyalty information is captured by the POS (not the payment terminal) and discounts are applied based upon items purchased. The primary retailer objective in loyalty is to tie consumer identity to the transaction. Many retailers have data businesses that deliver EBIT of 20-30% of their core store earnings.

Here is a big picture thought.. if I can discount $1 off of a tube of toothpaste, or give 10% discount to the entire basket.. why can’t I debit 100% of the balance to another party? Yes I am implying that payment can be done outside of the payment terminal… AND PAYMENT CAN BE PART OF THE LOYALTY SCHEME.  If I solve for identity.. it solves for fraud.. and a number of new avenues open for retailers to institute a “store card” that can be settled on immediately (ie ACH) or on credit (ie Private Label). Note that this is not a new thought.. I’m just articulating what leading retailers already know.

This is also why I believe that the Square Cardcase concept was the greatest consumer checkout experience ever designed (courtesy of Keith Rabois and 2011 team).. phone never comes out of your pocket.. and the merchant knows your name and preferences.. a personalized experience. 2011 Video

Retailers want to move beyond price competition in order to differentiate.. their primary problem is knowing WHO the customer is.. This is also another example why Perfect Authentication is a Nightmare for Banks and value orchestration is best done by the company closest to the customer (Mobile OEMs, Retailers, …). See What Do Retailers Want in Mobile?

Payment Terminal

I started with coupons/loyalty to highlight SKU and data integration into the back end and also to ensure everyone understood the complexity and capabilities of the POS vs the payment terminal. The payment terminal is typically owned by the processor or ISO with a set of encryption keys that lock it into the relationship. This solves a PCI DSS problem.. there are normally only 2 data flows 1) the payment terminal sending payment data to the processor, and 2) the payment terminal sending payment confirmation to the point of sale.  This keeps the retailers away from payment data.. or at least it should.

Retailers have a right to use payment data for the purposes of loyalty and marketing (within network rules). Larger retailers thus buy their own payment terminals and route payment information to their in house facility for processing (gateway/routing/CRM/Data) before passing along to processor(s). This also gives larger retailers the ability to route based upon payment type (example Durbin allows debit to be directly routed to issuer).

Payment terminal manufacturers also attempted to innovate here with Verifone’s Verix architecture (10 yrs old) providing both the traditional secure processing and a separate infrastructure for loyalty and other “apps” in a separate infrastructure within the same Payment terminal.   The goal of this infrastructure was to allow for consumer interaction at the payment terminal, vs a loyalty card within the POS (ex IBM, NCR, …).

Net-net, although the capability exists to innovate in the payment terminal.. NO ONE DOES IT! Why? #1 Payment terminals are typically owned by the ISO/Processor and no retailer wants ‘lock in’.  #2 requires custom integration and testing between POS and Payment terminal for each use #3 opens up all kinds of new concerns with PCI DSS as you can see from TJX and Target that even retailers with tremendous teams have challenges when customizing the payment terminal, #4 consumer behavior.. many retailers do not want to open a channel where the banks (or Mobile) could inadvertently participate in loyalty (one reason why MCX loved the Paydiant architecture).

Mobile Wallets and the POS

ApplePay, Google Wallet, Softcard/ISIS, Samsung Pay have all been flops at the POS… The success of Google and Apple have been in App, now moving to browser/eCom. Payment at the POS has never been a problem, and if payment is intuitive .. then incremental value is required to incent consumer behavior. We are in the midst of complete CHAOS at the POS.. do I want the consumer to swipe, dip/chip, PIN, tap, scan, open a bank app, open Apple, paypal, …? Guess what happens in times of chaos.. ? Consumers use what is known to work. I would characterize the last 10 years of mobile wallets as technology demonstration… (as there were no sustainable value propositions).

Google Wallet 1.0 was a great idea.. you can still see the Google Wallet stickers in NYC at places like Duane Reed. Not only could it do payment, but they also demonstrated coupon integration. Technically it worked, but the experience was bad.. not just because you had to be a Sprint and Citi customer (Verizon wanted a $1B to allow.. )… but also because you had to “Tap and Hold” as the NFC infrastructure had to make 2 transactions.. first to the payment secure side, then to the loyalty “open” app side.  You had to hold your phone very still for 6-10 seconds.

Apple has an unbelievable team.. and knew both retailer needs and technology constraints. Specifically, I believe they correctly saw the problems of NFC and Payment terminal integration, which drove them into BLE (see blog). The payment network control point here was in defining a CP transaction, which thus drove apple back into ISO 14443/NFC, but with an embedded SE that killed all the MNO/GSMAs hopes. In 5 years I see the BLE/Beacon vision taking hold, but in a much more open “Google HCE like model” where retailers can build capability and leverage data.

Payments as Loss Leader in a Bundle

Per my pervious blogs on Google, MCX, Paypal, Apple, ChasePay and Internet 3.0 payments are moving to a loss leader. Anecdotally the margin in Advertising is 900-1200 bps of sale where payments are 200bps.  Payment geeks need to understand this: retailers spend MUCH more time thinking about consumer acquisition, loyalty and experience than they do about payments..  Every retailer wants their brand in Google and Apple..  why? They realize that they must GO WHERE THEIR CUSTOMERS ARE.. (not where they want them to be). See What do Retailers Want..

Retailers see Amazon as their principle competition. Amazon’s prime customers don’t think about payment or shipping. Google’s shopping express + Advertising is designed to help retailers compete…. I believe Facebook will also compete here.  What payment companies have great retailer relationships? Merchant acquirers are best positioned here, but have much work to do (see blog).


Recap of my 2013 blog PayPal at POS again? Note this is before my friend Dan took over…

Discover has a very poor ability to “push” products into market, as they perform less than 40% of their own acquiring (“direct merchant” in Discover terminology is account in top 100, with indirect merchants handled by other processors). PayPal/DFS POS economics just don’t work for merchants, particularly large merchants that have already negotiated steep discounts with issuers. A top 5 retailer’s quote on the topic (2012):

“why on earth would I want to take a PayPal card that wraps a bank account at 200bps when I JUST WON DURBIN and have my own new product coming out. The last thing I want to do is change consumer behavior to my detriment.”

The average merchant fee for Discover in 2011 was about 197bps. If Paypal kept this rate I estimate their margin at 10-20bps max (PayPal’s transaction cost is around 107bps (2012), Loss rate is 26 bps, a network fee to Discover is rumored to be 50bps which leave 14 bps as total fee available to split WITH ACQUIRERS).    Let’s just assume that 197bps is the fee that acquirers run with, as they certainly can’t make the case to INCREASE the cost of accepting a PayPal card. So merchants are left with the value of accepting a Paypal card at 197bps instead of taking my BAC debit card which cost them $0.21 + 5bps. In 2013 I was stopped in the halls of Money2020

“Tom you said that First Data was blocking Paypal/Discover.. well that is me.. I’m not malicious or anything.. in fact if I could find just one of my merchants that wanted this Paypal/DFS thing I would do it.. but they just laugh.. not only that.. but Paypal/DFS can’t create any economics for me”

Parting Thoughts

I haven’t even begun to scratch the surface of acquiring.. the goal of this part 1 is to show how HARD it will be for any new network. I had a comment in my blog today “won’t blockchain disrupt V/MA?” My response:

Take a look at a merchant agreement with Visa.. the problem isn’t trust, it is rules. What happens when I return a purchase? What rights do I have when using Credit (Reg Z) debit (Red E)? Consumers like having their accounts credited when there is a dispute.

Blockchain can certainly disrupt everything.. particularly when value can be stored outside of a bank (ie bitcoin). Blockchain can’t replace the legal agreements
– Issuer to consumer
– Network to Issuer
– Network to Acquirer
– Merchant to Acquirer

All of these dictate consumer rights, pricing and commercial transaction rules.. Would you play football with a new team and they just made up the rules as they go.. trust and identity is only part of the problem in commercial transactions..

Where do I invest? Anything that is merchant friendly, as they are absolutely key to unlocking consumer value. Small merchants represent a very “long tail” in payments, and are also the source of profitability. There is a huge opportunity to help retailers simplify the chaos, reduce costs and achieve their real goals of acquiring and servicing consumers. Who can create the “Android for SMB Commerce?” The leader here IMHO is Osama’s Poynt.

One thought on “Acceptance – Part 1”

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