Clearxchange – Bank Strategy Perspective

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 use on Debit? Because of Durbin making Debit “almost free” is there an incentive to create a new payment network?

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

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.

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.

Coupon Overload?

Well, FSIs and Card networks have finally gotten in the coupon/rebate game.. well sort of. Most have implemented along the lines of what I wrote about 2 years ago (See Googlizaiton of FS). Exception is Bank of America.. they have the best bank service by far. Merchant level incentives (ex 15% off your next purchase) seem to be the focus of Visa and Amex’s new service. Cardlytics provide a generic white label service along these lines to over 50 banks today (with much better usage than Visa/Amex).

Best Bank Coupon Service? Bank of America wins hands down

FSIs and Card networks have finally gotten in the coupon/rebate game..  sort of. Most have implemented along the lines of what I wrote about 2 years ago (See Googlizaiton of FS). Exception is Bank of America.. they have the best bank service by far.  Merchant level incentives (ex 15% off your next purchase) seem to be the focus of Visa and Amex’s LevelUp service. Cardlytics provide a generic white label service along these lines to over 50 banks today (with much better usage than Visa/Amex). From my previous blog above, the general flow:

1. Customer registers for service (credit card, mobile, ..) Accepts terms that allows for delivery of x advertisements  per month

2. Card Network acts as agency, coordinating merchants, promos and marketing spend

  • Merchants pre-pay for campaign settlement account
  • Cardlytics develop target promo and bid criteria: customer location, demographic, event transaction, …
  • A campaign function sits at “Network Switch”, listens to transaction traffic
  • Card transaction events are triggered based upon card registration status
  • Event gets sent to campaign engine.  AD triggered based upon criteria (Example. Shop at EXAMPLESTORE in next 5 hours and get 20% back)

3.  Redemption/ notification – Redemption server monitors transactions at Switch or at Bank Issuer Auth server

  • If Card transaction is for registered card it is sorted
  • Redemption engine finds that it Ad was sent to it, determines if transaction at EXAMPLESTORE meets threshold
  • If it is met, Campaign engine kicks transaction to MerchantAdvert service which bills merchant for AD and debits account for 10% credit plus fee.
  • Engine issues 10% credit to customer’s card account
  • Engine debits merchant account for fee + redemption amount
  • Notification message sent to customer that their card account has been credited for purchase and 10% discount.

Good news for merchants is that they pay only for purchases. Great CPA here. But a very poor customer experience.. getting credit either directly to your card.. or in Amex’s new program to a separate pre-paid card. Other limitation is that there can be no item level discounts.

Quite frankly I like Bank of America’s service much, much better. They are light years ahead of the other banks thanks to the efforts of people like Joe Giordano. Today, Bank of America customers can click on a coupon in coupons.bankofamerica.com and when you go to the grocery store, the discount item comes right off your bill. The company behind this is Zave Networks. Just fantastic stuff. Zave was the only company in IBM’s booth at the National Retail Federation (NRF) show. Given that IBM has 19 of the world’s top 20 retailers using its POS;. it is little wonder that IBM has embedded Zave in their OS.

Having run the online channel at 2 of the top 5 banks, I have a little idea of customer behavior and preferences. Banking customers visit frequently and may be able to have uptake of incentives, card customers have terrible online usage.. (1-2 times per month).. which is why the card companies are launching mobile services in cards so aggressively: they are trying to establish a new mobile behavior (ex mobile alerts on balances). The card coupon/incentive approach seems to have substantial risk, particularly when considering the poor customer interaction (on credit card), together with the very narrow market for incentives (apparel, restaurants), the competencies of the bank teams groups (campaign management) and customer preferences for debit.

Colloquy.com estimates that Banks and travel related industry spend about $48B per year on loyalty. Banks are running coupons programs primarily out of their existing “rewards” groups… with the hope of juicing rewards, as they reduce costs. With Debit interchange going down to $0.12 you can see the importance here.. either no rewards program at all, or one that is funded by another source. With Credit, loyalty programs are the primary customer driver both for card selection and use. Bank driven loyalty programs typically focus on redemption, not on the front side of selection. In other words, banks do not touch a customer prior to a purchase, but incent them afterwards.

From a retailer’s perspective what is the value of participating in a bank run a loyalty program?  Segments like apparel may gain traffic, but do you want your bank sending you an SMS ad for 10% off a nearby retailer/resturant everytime you pump gas? Possible, but more likely you will use the offerings from Google, Apple, Microsoft integrated with maps and comparison pricing. 10% off what? What do they have that I need? Most retailers are not big fans of banks, or their “incentive” plans. There are exceptions, particularly in apparel and restaurants (note restaurants are not considered retail). Overall this is less than $5B of $750B in US Marketing spend. I give the bank led initiatives about 6 months. When Google, Apple and MSFT come in with much richer services and focused teams. How many banks do you know with an campaign management group? … exactly. Visa had a tough time expanding into eCommerce (hence the CYBS acquisition), what makes them think they can run an advertising agency?

Sorry Amex, Visa, Cardlytics, FreeMonee, … Card driven models will have a very short life span. Exception is BofA both because of the bank (deposit) driven model and because of the item level integration with a partner (Zave/IBM) that knows retail. BAC will likely continue reign as  king of debit.. and even gain momentum.

Visa Digital Wallet

So what does Visa plan to do that PayPal doesn’t do already?

http://venturebeat.com/2011/05/11/visa-unveils-new-digital-wallet-for-electronic-commerce/

I look at this as 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. If they had CYBS and PayPal would have never developed. I see little hope for them doing any better in mobile. They don’t own the customer and can’t really deliver any value.. but hey.. they have a tremendous number of nodes that they want to use.. too bad that the rules are so heavily driven by banks.

CYBS is a great company, in 2009 it processed one out of every 4 purchase transactions online, with over $120B in GDV. Small and mid size merchants flock to them because they are a one stop shop with great service. CYBS and PayPal both came to exist because card networks were incapable of helping either issuers or merchants manage the unique transaction risks associated with CNP transactions… as well as support for taking a card online. Visa has spent enormous sums trying to create improved authentication approaches (remember Verified by Visa?).  Their problem was not just technology and user experience, but business model. In the UK, VBV received substantial traction when merchants signed on to the liability shift. But then the issuers were left holding the bag for a broken technology with a merchants also suffering from drop off in completed purchases as customers saw a pop up ask for their PIN..

Rather than go through this terrible learning experience yet again they did the right thing and bought CYBS. Of course there were other synergies as well…  They now have an eCommerce acquirer. So the model is somewhat like DPS.. Get member banks to sign up their merchants, Visa gets a service fee, banks get a new revenue stream… ? Have you spoke to a happy Visa DPS customer?

Take a look at the banks that have signed on here. From the announcement: Barclaycard US, BB&T, Card Services for Credit Unions (CSCU), ICBA Bancard, First Financial Bank of Ohio, Nordstrom, Pentagon Federal Credit Union,  PNC Bank,  PSCU Financial Services,  Regions Bank, Royal Bank of Canada, Scotiabank, TD Bank Group (US and Canada) and US Bank.

Notice anyone missing? Top 5 issuers? Banks with significant merchant business?  What I would really like to see is the growth projections of this new service vs. what CYBS/Playspan would have done normally.

Digital Goods. Let me digress in an example. Why was Playspan so successful? Many reasons, but for one it had a substantial in store presence for gamers (with no bank account). Guess how much Playspan had to pay the card distributor? 15%. Will be interesting to see how Visa integrates a digital wallet with a cost of funds of 1500bps and then evolve to letting this same wallet be used for eCommerce. This may be why Visa is emphasizing card funding.. but guess what.. gamers (digital goods) don’t thrive on this model.

As a consumer, will I create a visa wallet to pay for goods? Why should I? What is in it for me after the bank has scaled back my loyalty programs and hit me with new fees.. ?

As a merchant will I switch to CYBS? Only if CYBS offers great service..

I just don’t see the value here.. someone please enlighten me. I do give Visa credit for dumping a VBV 3.0 strategy in favor of CYBS. What I love best is Visa taking out 2 great companies.  Now another round of start ups can develop to provide cutting edge service to retailers. The last great innovation from Visa was Debit.. well it wasn’t really from Visa.. … this does not feel like Debit.

I look forward to next 12 months when we will see 2 large issuers pull the Network brands off of their debit cards. In 5 years Visa will be left with credit only.. They do need a growth business.

Why Visa, Apple and Chase are Square

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

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

Visa and Cashedge

Visa is getting decent traction in Asia/ME in receiving VMT, problem is that there are no send capabilities, and the majority of banks are telling Visa to “pound sand” with their OCT transaction set mandate (see previous).

16 March (updated 17 March)

http://www.prnewswire.com/news-releases/cashedge-and-visa-to-expand-network-offerings-118071239.html

Visa has been chasing after any party with direct links to DDA accounts. This in an attempt to “end run” around poor OCT adoption (see previous blog).  I understand that Obopay is also set to announce support of VMT. What a change from their MasterCard approach!

Visa is getting decent traction in Asia/ME in receiving VMT, problem is that there are no send capabilities, and the majority of banks are telling Visa to “pound sand” with their OCT transaction set mandate (see previous). I was told yesterday that the OCC is looking into both the mandatory nature of Visa’s OCT and the AML controls.

It will be interesting to see how Visa explains the loss of international wire fee revenue to their member banks. Why pay $40 for an international wire when you can use CashEdge to send to Visa, then VMT to send to India/Mexico, …? As I ran Citi’s online properties I can tell you this completely overlaps with my Citi Global Transfer service and I would not be happy at all.

As a banker, I’m mad as hell at Visa. Why don’t I like this VMT?

  • Visa will keep the directory of cards, mobile numbers, and DDAs. The last 2 really really make me mad. Who says they can hold my customer information?
  • Visa runs it..Continues to build Visa brand on your ACH
  • You own the risk, Visa develops new services
  • Circumvents all of the industry controls on ACH (ex. Early Warning)
  • Unfunded Reg E research burden and consumer support reqs.
  • Confusion in online services
  • Cannibalizes existing bank products (wire transfers)
  • Customer service/research nightmare .. all unfunded
  • Visa may have a much smaller role to play in debit.. why would I want to add new services to their group?
  • it will be very, very hard to shut down once it gets moving.

Fortunately for banks, CashEdge is a bank friendly vendor. Actually, it wins the prize for  best bank vendor (I signed 2 contracts w/ them).  Visa will not do enrollment, nor will they have directory of DDA/Debit. CashEdge is providing multiple service/pricing  options t0 participating banks:
– Send to DDA
– Send to phone
– Send to e-mail
– and new option.. send to Visa Debit Card (w/ fee)

Each bank has flexibility in determining IF they want these services and how to price them. As you can tell.. I would never let the Visa option happen.. but then again I don’t run the online bank anymore.

I’m beginning to wonder if I’m just a pessimistic nag. I’m tired of being negative on things… What do I like this quarter? Google and NFC, the Chase QuikDeposit app, PayPal at the POS, .. oh and I loved (past tense) ISIS until they fell on their own sword.

No blogs next week.. will be out of pocket…

Square “Violations”

Issuer Top 4 reasons to decline Square

PABP/PCI compliance
Collection and use of ancillary customer information
Paper Signature requirement
Chase has all of the equity upside

16 March 2011 (Updated 17 Mar)

My top issue w/ mobile swipe is clearly customer behavior and potential data loss.  I’ve been asked to provide a basis to decline Square transactions (debit particularly) so, rather than sending out multiple e-mail responses, I thought I would share. Issuer Top 4 reasons to decline Square

  • PABP/PCI compliance
  • Collection and use of ancillary customer information
  • Paper Signature requirement
  • Chase has all of the equity upside

Visa developed the Payment Application Best Practices (PABP) in 2005 to provide software vendors guidance in developing payment applications that help merchants and agents mitigate compromises, prevent storage of sensitive cardholder data.

http://usa.visa.com/download/merchants/validated_payment_applications.pdf

 

Phase V of PABP went into effect on July 1, 2010. This phase required all Acquirers to ensure that their merchants and agents use only PABP-compliant applications. A list of payment applications that have been validated against Visa’s PABP /PCI DSS is available at www.visa.com/pabp. Note Square is missing, how can Chase acquire for merchant/aggregator that is in clear violation?

UPDATE 17 Mar (Thanks Bob Egan) Evidently PCI has revoked certification of all mobile swipes until new rules have been created. See related post  http://storefrontbacktalk.com/securityfraud/pci-council-confirms-multiple-mobile-applications-delisted/2/

From the Visa Operating Reg, (pg 428)

While Square does not “require” mobile number or e-mail address, it is collecting it at time of transaction (plus your location). As this information is associated with the transaction, it must be managed within PCI. The business risk here is that Square will use address and location information for something else.. or Chase gets the e-mail address of all of your card customers. This is why the rules were created.. so this does not happen.

Last is Visa requirement for paper receipts. From Visa’s Transaction Acceptance Device Guide

Chase bears all of the burden here, I hope they have taken a holistic view of the fraud and data compromise risk.. not just approving their own cards… but for every card ever swiped by Square.  Advanced fraud schemes take 18mo-2 years to develop.. so it may take some time for risk to materialize.. and for them to pull back.  Chase.. these future losses will easily wipe out the 15% of Square equity that you hold.  Perhaps they are moving so aggressively here because one of their key partners (ie Apple) is falling down in NFC.  Which brings to mind the larger question: Is Chase Anti NFC? 

Remember just 4 weeks ago that all of the US banks were looking at a future where ISIS would control NFC on the handset. Perhaps this is Chase’s way of developing an alternate strategy to address NFC’s biggest weakness: infrastructure.  If this is true.. then Chase I apologize.. your strategic play here was indeed valid. As of this month, we are looking at a ISIS crash and burn and NFC control with RIM, Google and Nokia. My hope is that Chase will abandon Square once the threat, of MNO control over payments, has been eliminated. 

Recommendation for banks

  1. Educate your customers. DO NOT give your personal information out when you use your card
  2. Start to educate your customers on mobile payments in general.. how will it work?
  3. Encourage use of credit over debit.. greater consumer protection and better margin for you
  4. Set some common sense rules .. use your card with trusted vendors (Apple, Grocery, … )
  5. Educate your customer facing employees from branch to call center..
  6. Think about your small business value proposition, how can you help small businesses accept cards?
  7. Issuers, think about declining Square transactions.. particularly for debit

OpenNFC – Game Changer

OpenNFC has a tremendous impact on MNO NFC business models. MNOs invested tremendous effort in developing NFC, now they are having their legs taken out from under them by a contactless vendor and the handset manufacturers. For ISIS to succeed they must run much faster and expand scope from a narrow payment pilot (over next 18 months) to building a platform that can compete AND interoperate against Android

24 February 2011

Monday I wrote about Apple’s “NFC Twist” and how a multi SE environment impacted MNO’s NFC business case. From Monday (I hate to quote myself.. but it keeps from following the link)

The champion of Multi SE architecture is Inside Contactless (OpenNFC).. a very very smart “Judo” move that leverages NXP’s substantial momentum (in integrated NFC/controller/radio) against itself. Inside’s perspective is that there is no reason for the ISO 14443 radio to ONLY be controlled via NFC (treat it like a camera). Inside’s OpenNFC provides for “easily adaptable hardware abstraction software layer, which accounts for a very small percentage of the total stack code, meaning that the Open NFC software stack can be easily leveraged for different NFC chip hardwalet multiple applications and services access it”. Handset manufactures love this model.. MNOs hate it. As I stated previously, closed systems must develop prior to open systems as investment can only be made where margins and services can be controlled. OpenNFC changes the investment dynamics for MNOs, and provides new incentives for Google/Apple/Microsoft, … to transition their closed systems into NFC platforms.

For Banks, Handset Manufacturer and Startups…

I cannot understate the importance of this approach.  My guess is that Apple, Motorola and RIM are all planning to pursue “OpenNFC” .  Multiple applications can now leverage the 14443 radio IN ADDITION TO the MNO controlled (SWP/SE) environment. Applications can then ride “over the top” independent of carrier controlled (TSM Managed) OTA provisioning.

In business terms, what does this mean? ISIS was founded under the assumption that it controlled the radio and all applications accessing it under NFCs  secure element (SE)  single wire protocol (SWP). Nothing could use the radio unless the ISIS TSM (Gemalto) provisioned it. Visa, Mastercard, Amex were all looking at a future where the BEST they could do was exist as a sticker on the back of the phone. In the OpenNFC model, the radio can be accessed directly through the handset operating system (assuming the OS integrates to the Inside OpenNFC controller).  This provides the ability for applications on Android and iPhone to access the radio. In this model, Mastercard DOES have the ability to get PayPass into the phone. My guess is that one driver of MasterCard’s hiring of Mung-Ki Woo from Orange was his unique perspective on how to make PayPass work within this InsideContactless model.

For ISIS? This is a tremendous impact to their business model. Perhaps something they cannot recover from. MNOs invested tremendous effort in developing NFC, now they are having their legs taken out from under them by a contactless vendor and the handset manufacturers. For ISIS to succeed they must run much faster and expand scope from a narrow payment pilot (over next 18 months) to building a platform that can compete AND interoperate against Android. Yeah.. that big. Their advantage is in control, security and provisioning. Unfortunately, because they have focused on the “control” aspect as the centerpiece of their  business model, they have developed no alliances. In this, ISIS may well follow the failure of Canada’s Enstream. A group that got all of the technology right but failed to develop a sustainable business model.

Start-Ups

Start building to OPEN NFC. Game IS ON. Assume that Android and iPhone will let you access the radio…. For a fee.

For Consumers

CHAOS. What do you do when 5 applications all want to submit your payment.. .or read an RFID.. which one do you use?  For a view on the mess this will cause, see the Stolpan whitepaper

I believe this approach benefits Apple much more than Google. Apple’s platform “control” and QA testing will be essential to getting this off the ground. My guess is that Apple will have only ONE NFC payment option.. APPLE PAYMENTS. Perhaps a gatekeeper model where multiple cards can be store but Apple collects a fee.

Although Apple has an advantage in control. Google has the opportunity to deliver a much better value proposition to consumers, businesses and application developers. I’ll stick by my Axiom that new networks must start as closed systems delivering value to at least 2 parties. But can Apple compete with its Gosplan (USSR State Planning) like controls against open Android?

Background

NFC Background for non-techies reading the blog, there have been many, many global pilots of NFC.. but no production rollouts. From my previous blog

What is NFC? Technically it operates on the same ISO/IEC 14443 (18092) protocol as both RFID and MiFare so how is it different? I’m not going to get into the depth of the technology (see Wikipedia), but the biggest driver was  GSMA/NFC Forum’s technical definition (UICC/SWP) that ENABLED CARRIERS to control the smart card (NFC element). This in turn enabled carriers to create a business model through which they could justify investment (See NFC Forum White Paper).

“Real Time” Funds Transfer in the US

I’ve had quite a few questions from start ups on this subject, so I thought I would address here. In the past few months we have seen press from Obopay on Star/NYCE integration that would allow for “instant” transfers. Only FedWire offers real time transfers between all financial institutions. All other solutions have sporadic coverage unless balances are held within the same institution (bank, paypal, … ).

8 Feb 2011

I’ve had quite a few questions from start ups on this subject, so I thought I would address here. In the past few months we have seen press from Obopay on Star/NYCE integration that would allow for “instant” transfers, yesterday there was a press release from Cashedge/NYCE on the same subject. In my previous blog on Visa Money Transfers I discussed the top 2 fallacies: Instant and Mandatory. These same issues plague NYCE’s and Star’s PIN Debit “credit push”.

For the non-bankers, there are 5 basic payment networks that surround a typical US DDA account:

  1. PIN Debit/ATM (Interlink, Pulse, Star, NYCE)
  2. Signature Debit
  3. ACH (example The Clearing House, Jamie Dimon Chairman)
  4. FedWire (the US RTGS system run by the Fed)
  5. SVPCo (Check Images)
  6. Optional (ex. SWIFT, Western Union, …)

For further information see the FFIEC’s Examination Guide on Retail Payment Systems.

From a global perspective, we are quite a few years behind the UK and most of EMEA. While consumers in the UK can expect that 98% of domestic payments to clear in “real time”, most ACH “payments” in the US clear in the 3-5 day horizon. This blog is focused on “instant” payments. Important to note that the definition of “instant” is relative to both bank and consumer. For example, each bank has its own policy on funds availability and posting (vs clearing). A consumer could see funds posted to their account, but the funds may not be available for withdrawal. Other banks choose to show the consumers available funds to avoid confusion.

FedWire is a Real Time Gross Settlement (RTGS) system run by the federal reserve. Each bank in the US maintains funds with the federal reserve, and FedWire performs real time exchange of funds between member banks. Consumers and Commercial Businesses know of this service as a “wire”, and it is the only real time payment network in the US with universal adoption. FedWire Fees (~ $.52) are paid by the sending bank.

PIN Debit

The other “real time” payments systems (surrounding a US consumer DDA) are PIN Debit and Signature Debit. PIN Debit Networks evolved from ATMs, connecting ATM nodes to bank run authorization systems. Bank Authorization processes for PIN Debit/ATM systems are rather straight forward: validate the PIN  and funds available (I emphasize this authorization process as it is key to understanding why a “credit” is difficult to process on this debit system). PIN Debit fees are typically paid by the merchant and average around 85bps + $0.10. For ATM use, banks control fees and can assess surcharge for use of bank or foreign ATMs.

ATM Networks grew as groups of banks banded together to monetize ATM infrastructure, and further expand network into the retail POS. This expansion led to further change in structure, from bank ownership to independence. The driver of any independent network is to add volume, nodes and services. ATM Networks evolved into PIN Debit Networks, with Visa’s 1987 contract to operate Interlink  serving as a key milestone. Today, Pulse is owned by Discover, Star by First Data, Interlink by Visa (these 3 make up over 83% of PIN Debit Volume).

PIN debit networks have been working to fill the real time “hole” in DDA payment services for many years. Star’s Expedited Transfer, NYCE’s A2A Money Transfer , Visa’s VMT all attempt to EXTEND their respective PIN Debit networks to handle credit transactions. In EVERY CASE, the networks must sell their members banks and get them to extend a PIN based network (which processed only debits in a simplified authorization process), into a funds transfer service. Who owns fraud? Compliance? Reg E burdens? Consumer Support? Returns? Reporting? Integration into online banking? Statements? .. yep the banks.. Oh and by the way.. the other “benefit” to a bank is that once you implement it you can forget about those expensive wire fees. The result of their efforts is what you would expect… VERY poor adoption.

Today, PIN debit networks are looking at a very bleak future. Signature and PIN debit rates will be moving to a flat fee of $0.21 as a result of the recent Dodd-Frank Act (pending completion of the comment period). As a result, my guess is that we will likely see consolidation and bank ownership of shared PIN network infrastructure as with any commodity payment service.

Signature Debit

Signature Debit varies from PIN Debit in that it evolved from Credit Card (as opposed to ATM). Visa was and has always been the leader in signature debit penetration, a look back at this 2003 article provides much insight into the history here. Most US consumers today don’t understand why their debit card has both a PIN and signature feature… many books could be written on this subject alone… but oddly enough consumers prefer PIN (see Pulse Federal Reshttp://3dmerchant.com/blog/how-can-i-reduce-american-express-transaction-fees/erve Presentation 10/10).

In the signature debit model, transaction authorization is much more complex, with most banks leveraging either network shared infrastructure (example Visa DPS), or their credit card systems. The complexity arises as the lack of PIN requires the banks to risk score transactions in a manner akin to credit card (absent the credit risk). There are limited facilities for a credit transaction within most Signature Debit systems, and most relate to a merchant credit relating to a previous transaction (ex. Overcharge, returned merchandise). DPS, Mastercard IPS, and most other platforms perform usually perform a daily net settlement with member banks (multiple settlement files are sent throughout the day.. but netted just once) .  Just as with PIN Debit, Signature Debit is also designed as a DEBIT ONLY system…

In VMT, Visa is attempting to enhance signature debit network into a quasi RTGS transfer service by leveraging its DPS hosting and authorization role. The QUASI is very important… as DPS, Interlink or any of the debit systems are “real time” ONLY in the instruction, NOT the Settlement.  To suggest that any of these services are an actual RTGS system is a significant stretch of the imagination and thoughtful invention. A payment system cannot be faster than its underlying settlement system.  The PIN and Signature Debit Networks DO NOT SETTLE, but rather depend on existing bank settlement processes (which are daily batch runs). The “message” to post or credit a transaction to the customer can be “instant” but the funds will not clear into the customers account until settlement occurs (dependent upon each bank’s policy).

What does this all mean for real time transfers in the US?

Only FedWire offers real time transfers between all financial institutions. All other solutions have sporadic coverage unless balances are held within the same institution (bank, paypal, … ).

How should you view NYCE, STAR, Visa “credit” Capabilities?

It works at some banks, with many provisions. I estimate that combined coverage of NYCE, Star and VMT “credit” covers less than 5% of all US deposit accounts. As you can see from WSJ graphic below, the top 5 banks account for 80%% of debit volume…. given that these banks have not adopted the credit services (in debit), there is little likelihood of success.

It is likely that independent PIN debit networks will go the way of Canada’s Interac… a bank owned service.

Messages for banks

Keep bank control of transfer facilities.. new services that give consumers real time transfers compete with wire, increase fraud exposure and enable rate hoppers… Why role this out today when you will likely get it from a bank owned network in 2-3 years.. ?

Disrupting Payments at the POS

From my (very limited) purview, there seems to be 2 core disruptive innovations that will influence payments at the Point of Sale (POS):

Mobile as a Payment Platform
Mobile as an Incentive/Advertising Platform

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.