Tag Archives: visa

Debit Fees – Newton’s third law in banking

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2016 – This post is 4+ years old now.. I wouldn’t take it too seriously.. but good historical context

1 October 2011

First… 2 paragraphs of venting and perspective.

I was quite surprised to see BAC’s $5/mo debit card fee on the national news today. Personally, I think it is a great thing.. customers should pay for services they want to use.. sticking the merchant with the cost of debit leads to some very poor incentives. One of the biggest “innovation stifling” problems we have in the US is that consumers don’t care about prices, for things they should (payments,  health care, fraud, education, … ). The cause? the direct costs are hidden. Once consumers bear direct costs for services, market forces can take hold.

This is not to say I’m a supporter for HOW the Durbin change came about.. Dodd-Frank, Wall Street Reform and Consumer Protection Act represent the most sweeping changes to financial regulations in the United States since the Great Depression. From my perspective the timing could not have been worse. Did Congress think  the banks would just sit on the sidelines and patiently suffer? After being forced by regulators to act in good faith and “acquire” ailing community members like Country Wide? To suffer again as State AGs and the CPFB go after them for a few billion more (robo-signing).  Retail banking is becoming a very unattractive business, particularly in the lower mass market segments.  For the recovery to take hold, we need banks to be healthy…  these are not a bunch of “fat cat” millionaires.. but a core component of commerce that is instrumental in managing the lifeblood of our economy.

Debit Reaction.. equal and opposite

Well the banks have reacted to the finalization of Durbin fees. As I related in my previous blog on Debt, the fee plans have been in the works for some time, and for good reason: the lower mass segments are no longer profitable. US banks are well capitalized…. with excess liquidity, and a cost of funds near zero. There is very little incentive for them to seek to increase their deposit base (improve liquidity ratio). The core issue in retail banking profitability is asset quality (few qualified people to lend to… who want a loan). This is even more true now that Dodd-Frank has virtually gutted retail banking fees.  Two excellent articles below detail the role of transaction revenue and service fees in retail banking.

http://www.bai.org/bankingstrategies/payments/general/protecting-dda-profitability

http://www.novantas.com/article.php?id=317

http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245235038776

Of course not all consumers will be paying this $5/mo cost. For example, the folks reading this blog will likely have account relationships that warrant a fee exception. Mass market customers will likely be up in arms and seek to move their accounts.. believe it or not.. this is what the large banks want to happen since many of the lower tier customer segments are no longer profitable.

See this American Banker Article for more detail on alternatives to mass market customers

In the next phase of bank plans, expect the Visa logo to disappear from the standard card issued for a base checking account. The card will operate as ATM card, just as it did 20 years ago. As a side note, the banks (and PIN Debit networks such as Star, Pulse, NYCE) will be working with merchants and processors to expand adoption of PIN Debit separate from the card networks.

Market Forces in Payment

Now that consumers have to bear the costs of using a Debit Card. They have new choices:

1) Use credit card. This would be best for the banks, and perhaps best for the consumer as they collect merchant funded card reward points. The looser here is obviously the merchant. An important point  to make here is that this is exactly the strategy behind new NFC based mobile payment types.. there are NO NFC enabled debit cards.. banks and the networks want you using your phone for payment to drive credit card usage.  This is also the strategy behind Visa’s new EMV mandate, to drive retailer reterminalization. This will be a subject of a future blog.

2) Leave the bank and use pre-paid cards. This will certainly be the path for many lower mass customers

3) Pay the fee

4) Improve your relationship with the bank to meet a threshold and avoid the $60/yr fee.

5) Shift your transactional relationship to new “non bank” structures like PayPal or Google Wallet (both of which are licensed MSBs in all 47 states).

Downside for banks

CEOs make decisions based on data they have. The first 4 options have all been through. I would profer that creating a market for new competitors has not. I outlined in my previous blog “Banks will WIN in payments.. but WHICH ones”  that banks are firmly in the position of control today.  However there is a strong correlation between control and value delivered. In my upcoming blog I’ll describe how to value a payment network. My view is that payments are on a course of a utility service (i.e. dumb pipes with least cost routing), and that payment services are only the last step of a much more important commerce interaction. Any network business is highly dependent on balancing a value proposition between participants. Today retailers and consumers are not pleased. I only wish I could tell of you the wonderful things I’m seeing in Silicon Valley… IT IS NOT about technology.. but about creating business value.

Within 5 years, I see the strong possibility that a new network which will be able to PAY merchants for accepting a payment method..  (see my 2009 Blog on Googlization of Payments).

BTW… sorry for the lack of content this last month.. I have 15 page blog I’m about to publish.. I will never again try to write so much in one article.

Long time… no blog

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I’ve been meaning to post this super long blog on network profitability.. 8 weeks ago. I’m almost finished.. to encourage completion I promised myself not to post anything else until it was done. Well.. I’m breaking my promise.

For frequent readers, most of you know that I love PayPal. They just rolled out their latest “vision” today

http://www.youtube.com/watch?v=V7q1jx8mYi8

I thought it was some sort of joke.. PayPal.. if you are listening.. please take it down. Do you really plan to penetrate large multi-lane retailers?!  That POS demo with someone keying in their phone number and password.. yeah a grocery store would LOVE letting their customers spend 2 min on a payment terminal. Come on guys. Why not focus on your existing small merchants? Maybe you are but wanted to show something different. I almost spit out my lunch as I laughed when the lady self scanned in the aisle, put the items in a bag and walked out of the store by waving her phone above her head to the cashier busy with another customer. Yeah…. store of the future.

My hope is that PayPal outsourced the video to a 3rd party and forgot to review it..  With Sig and PIN interchange both sitting at $0.21 + 5bps what would motivate a merchant to take PayPal?  Do you go after merchants that do not accept cards (ie Square’s market)? existing merchant customers? big retailers? There is no way I see big retailers going your way.. too much change in customer behavior at POS.. I do use my PayPal debit card … but typing in my phone number? Heck I don’t want to do that and I love you guys.

On another front.. I just read the ABA journal article on Visa’s CAP initiative.

http://www.ababj.com/tech-topics-plus/visa-announces-plans-to-accelerate-chip-migration-and-adoption-of-mobile-payments-2259.html

These experts are all wrong. I can tell you why the big banks will not go with this.. it is about risk management. Currently the big banks can manage fraud with custom infrastructures.. banks compete on ability to manage risk (including fraud), putting this technology out puts all banks on a level playing field and wipes out all of their investment edge. Take this together with a $1B+ plastic reissue cost and a $5B+ re-terminalization AND a rotten bank environment and you have a very poor environment for adoption.  I do believe banks will selectively reissue to global travelers. I can’t even use my mag stripe cards in Canada anymore.  The ABA analysis is all wet. The worst line in the article has 2 major hypothesis which are completely unsubstantiated.

1) … they [Issuers] may push for shifting more of the fraud losses and fraud prevention costs to merchants.

2) As is the case in some countries and as proposed by Visa, merchants would only get the current guaranteed payment if they adopt the new chip technology.

ABA.. come on!! Merchants and Issuers both have legal agreements in place. What dark crevasse did you pull these ideas from? For point 1), Durbin allows for future adjustment (to rate) if banks can show that fraud costs are not being covered. What we will see is the death of signature debit. PIN Debit rates have been show to one fouth that of signature (http://www.digitaltransactions.net/news/story/2845) … so the change will be toward PIN only transactions at merchants.  This PIN model combined w/merchant ability to route transactions is a very big threat to Visa’s network.. How will Visa address? By creating a Chip.. everyone must validate it with Visa.. THIS IS THE PRIMARY STRATEGIC POINT. What banks and merchants will agree on is that Visa has no place in a debit transaction.. as we will see later in the year 2 large banks will roll out their own network…

For point 2) FORCED re-terminalization? … yeah that will win friends. As you can see from Durbin merchants have the power this year.  So Visa will force merchants to accept a new agreement and incur additional expense?   In the EU, Visa used the carrot.. not the stick. So please, please give me an example of Visa pursuing this approach in any country. For history, I ran channels for Citi in 47 markets.. and didn’t see this.. but perhaps they did it in last year or so.

ABA’s next point caused me to choke

Not only will chip technology accelerate mobile innovations, it is also expected to secure payments into the future through the use of dynamic authentication

Have you heard of NFC? I don’t disagree that Visa would love to create a platform where they are the trust authority.. but the banks and mobile operators have different plans. Visa’s CAP plan is a poor attempt to build a platform where they have additional control over merchants, consumers and banks. Mobile is causing tectonic shifts in where and who performs: risk, authentication, KYC, mobile provisioning, clearing and settlement. These are all threats to Visa’s network, CAP is their attempt to put barbed wire around their decaying model.. to keep customers from leaving…

Signature Debit is Dead

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29 June

Death of Signature Debit

It’s hard for the banks to complain about yesterday’s Durbin caps. At $0.21 + 5bps, the caps provide no loss in revenue from a today’s average PIN Debit transaction (see yesterday’s blog). The loss is in Signature Debit. As I related in my post a few months ago, PIN Debit evolved from bank owned ATM networks while Signature Debit evolved from the card networks (and associated credit products).

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 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 as the 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).

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 Reserve Presentation 10/10).

Signature-based transactions currently have a lead on PIN Debit. In 2009, Fed reports signature as having 23.4 billion purchase transactions, and $837 billion of transaction value while PIN-based debit transactions totaled 14.5billion transactions, and $555 billion of transaction value.

However, PIN Debit enjoys a slightly higher growth rate (15.6% vs 14.3%), consumer preference (48% vs 34%), lower fraud rate (2009 fraud numbers: Signature $1.12B, $181M PIN debit card),  and obvious merchant preferences (interchange and fraud; 96% of PIN fraud losses assumed by issuers, vs 56% in Signature).

Retailer View

While yesterday’s announcement doesn’t impact average PIN debit rates (for average transaction), there are other elements of Durbin (routing and steering), which will eventually act to kill Signature Debit. Let’s first take a retailer view… Historically, retailers have been constrained in their attempts to deny signature debit transactions. Network agreements forced them to take “all cards”. The primary merchant “influence” mechanism was to default payment terminals to “enter PIN” and make it difficult to for a customer to use a signature debit card. While Durbin does not impact the “accept all cards” rule, it does allow for merchants to route debit transactions outside of the card network.

When I spoke with a few of Visa’s institutional investors last week, much was made about 30% PIN debit penetration. Its very important to note that this penetration is on merchant terminals, NOT as a percentage of total payments. Small merchants remain rather ignorant of their payment options. This merchant financial literacy issue, combined with ISO sales incentives, has led to an uneven PIN Debit adoption.. but this will change not only for small merchants, but also for ONLINE transactions. PIN debit has had no traction in eCommerce because retail banks (issuers) did not want the lower interchange and refused to accept PIN transactions from online merchants. This has also changed. (I have detail here.. but can’t really discuss in the blog)

Bank View

At least 2 of the major banks in the US are working with processors to establish direct “BIN routing” and circumvent all network fees. This makes complete sense for the larger banks like bank of America, with 10%+ of US Debit volume, as it would enable them to eliminate network fees. Merchants would also benefit with a lower cost (the purpose of this routing provision). The key activity necessary to make this happen is to enable major processors to sort and redirect transactions. Processors already perform BIN lookup, but instead of going to Visa or MA with a BIN.. they will be going directly to a large bank. Obviously BAC/BAMS, JPM/Chase Paymenttech, FifthThird, …etc would be the top teams implementing this model. With Durbin at $0.21 + 5bps they actually can improve their margin on PIN debit.

Future

The obvious corollary here is that once a bank is successfully routing transactions directly from the processor(s), what Value does Visa bring at all?  1) Merchants that are not using a processor that has not yet implemented the bank direct routing 2) International Debit Transactions, 3) ?Signature debit bank agreements?

As Bank “inertia” is directed toward maximizing bank margin, and merchants in decreasing debit processing costs, a new debit network is formed… and today’s Visa  debit network begins a slow death. First to go will be PIN debit, but closely following will be the removal of the Visa logo off of all debit cards. The 2 countries where this has happened are Canada (interact) and Australia (EFTPOS). The next phase of death will be begin when banks recognize the synergies of maintaining a common directory with centralized authorization and fraud controls. The model here for the US is SEPA Debit.

Tom’s Predictions (Market)

1) 2 major banks will launch their own PIN debit network… starting with processors they control

2) Signature debit, as we know it, will die

3) Visa and MA logo’s on debit cards will have a slow death over next 5-10 years. With little impact to affluent customers in short term.

4) Card issuing banks will look for new ways to grow credit use. (Mobile payments, juicing rewards, educating consumers on unique Reg Z protections, …)

5)  Merchant will be testing models to tie incentives to debit use and even create new products (Target Redcard is model)

6) Retail banks will be pushing out low end mass market customers. Pre-paid business will pick up the slack. Most of the major banks have solid plans on pre-paid card deployment.. but have delayed launch because they don’t want to be seen circumventing Durbin (see below)

7) Processors will pick up new fee revenue for “least cost routing”, but regulators will be keeping an eye on them to ensure that the bank owned processors are not acting in concert to circumvent cap definitions (see below)

8) Online PIN debit will begin to take off

9) PIN Debit merchant adoption will start to accelerate in 1-2 years

10) Visa’s US transaction processing volume will stay steady. Debit volume will go down, but processing margin will improve and pre-paid will begin to take off.

11) Banks will begin to couple payments with incentives in an attempt to avert retailer led models.. Look for BAC to be the leader here.

What does this mean for Visa earnings?

My summary view is that Visa has plenty of runway on international credit growth.. but their trajectory now has much greater risk ask it will be tied almost exclusively to credit. Visa’s recent success in processing services (ie DPS) wont suffer short term as the top 5 banks have minimal services with them.. but we will see erosion of debit revenue beginning as transaction volume further accelerates to PIN debit routed outside of Visa’s network and PIN debit adoption in small merchants accelerates.

Per final regs –  75 75 FR 81722, 81731 (Dec. 28, 2010).

Pre-Paid

ii. An issuer replaces its debit cards with prepaid cards that are exempt from the interchange limits of §§ 235.3 and .4. The exempt prepaid cards are linked to its customers‘ transaction accounts and funds are swept from the transaction accounts to the prepaid accounts as needed to cover transactions made. Again, this arrangement is not per se circumvention or evasion, but may warrant additional supervisory scrutiny to determine whether the facts and circumstances constitute circumvention or evasion.

Processor Fees

Merchant commenters voiced concerns that issuers may attempt to circumvent the interchange fee standards (applicable to those fees ―established, charged, or received‖ by a network) by collectively setting fees and imposing those collectively set fees on acquirers, and ultimately merchants, through the networks‘ honor-all-cards rules. For example, the largest issuers may collectively determine to charge interchange transaction fees above the cap and effect this decision by dictating to each network the agreed upon amount. The network, then,would permit each issuer to charge that amount, and because merchants would be required to accept all the network‘s cards, merchants would pay the amount determined by the issuers.

Section 920(c)(8) of the EFTA defines the term ―interchange transaction fee‖ to mean ―any fee established, charged, or received by a payment card network . . . for the purpose of compensating an issuer for its involvement in an electronic debit transaction.‖ Accordingly, interchange transaction fees are not limited to those fees set by payment card networks. The term also includes any fee set by an issuer, but charged to acquirers (and effectively merchants) by virtue of the network determining each participant‘s settlement position. In determining each participant‘s settlement position, the network ―charges‖ the fee, although the fee ultimately is received by the issuer. An issuer, however, would be permitted to enter into arrangements with individual merchants or groups of merchants to charge fees, provided that any such fee is not established, charged, or received by a payment card network. The Board has added paragraph 2(j)-3 to the commentary to explain that fees set by an issuer, but charged by a payment card network are considered interchange transaction fees for purposes of this part. The Board plans to monitor whether collective fee setting is occurring and whether it is necessary to address collective fee setting or similar practices through the Board‘s anti-circumvention

Square’s $1B Valuation.. its not a payments business any more

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Square $1B Valuation…  ?

29 June 2011

Today’s WSJ Story

What shocked me most about Square today? Kleiner’s lead in the round. I know the KPCB team well, and they are the best VC I’ve ever worked with. Given my negativity… a re-evaluation is in order. Both to protect my reputation with my KPCB friends.. and for my own sanity.

There is no way that Square can justify a $1B valuation as a payment company. At $1 billion in annual processing volume, Square would be roughly the 70th largest merchant acquirer/ISO in the country. Global, the largest pure play, processes $135 billion annually, has other businesses, and has a $4 billion market cap. See data below from my friends at FT Partners (a great Advisory team in payments).

3 years ago, Jack pitched KPCB on the idea of Square as the PayPal of Craig’s list… KPCB passed. The business model has changed substantially, and is now on V3+.

Why did KP invest in this last round? I haven’t spoken to them, but my guess is that it is no longer about payments.. but about changing the checkout process at the POS.

Here is my guess on Square’s V3 Business Model

1) Create a path to exit the transaction business.. they don’t want to manage sub prime acquiring risk.

2) Create a software/platform business for mainstream retail. Work with major retailers to use Square register as the way retail (and retail sales agents) interact with consumers. In other words re-engineer the buying experience at the POS. KP always looks for “big bets”.. this would certainly be one of them.  In this Version 3 business model, Square will interact/integrate to legacy POS systems. They will also attempt to own the mid market and replace current POS vendors in the mid tier. At the low end they may still be working deploying the Square we see today, but it will be challenged by PCI Rules. For a more detailed look at current plans (they evolve rapidly) see this excellent post:http://mashable.com/2011/05/23/square-card-case/

3) Create an advertising/incentive business. We hear them working on this today, but their current customers are dry cleaners and hot dog stands.. obviously they need to move upstream. Advertising and incentive will be the primary basis for their new revenue model.

Perhaps this is why Square is working their employees 20 hours a day.. they know that the big guys are also all over this.  IBM, Cisco, Nokia, NCR, Micros, Oracle, SAP, MSFT … I doubt if they will just sit back and let Square throw out a new POS system. What competency does Square have in Campaign management and advertising? Who owns their current data? This last point is very relevant.

Consumer transaction data collected by Square today is property of merchant. Although hot dog vendors may not care… Large retailers know how sensitive it is..  Square’s future model depends on both the consumer and the merchant giving up consumer data at the line item level in the POS. I see apparel and large department stores as possible candidates.. perhaps even electronics.. but the challenges are tremendous.

Can all of this work? It depends on the retailers.. having Visa on board may actually be a drag on their merchant adoption. One thing is for certain.. their valuation is certainly not based on their success as a payments business.

Visa’s Wallet Strategy – Part 2

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,,,

18 July (Updated from 17 June 2011

). Corrected significant error on scope of Visa Wallet. It is much more than an autofill (point 4 below)

Previous Blog: Visa’s mobile portfolio

I’ve been thinking about Visa’s wallet strategy this week. From my last blog (Visa Digital Wallet)

… 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. 

Here are the questions I’m trying to answer:

  • What is their investment thesis?
  • What assets are they trying to leverage and what opportunity do they plan to attack?
  • What is their strategy in attacking the opportunity?
  • How will the banks react/support this strategy?

For those that haven’t read my blogs for 2 years.. let me restate a few points that I’ve made previously:

  • Visa has a very big hole in their earnings with Durbin.. not only will they loose substantial debit revenue.. they could be loosing debit forever… as member banks assess whether signature debit makes sense to continue… and create a centralized bank switch for PIN debit (ala SVPCo or TCH). Merchants and consumers both prefer PIN today. I don’t believe Visa has adequately described this debit driven financial risk to the investment community.
  • Visa is attempting to fill the debit void with new transaction types, services and “cash replacement”. The top 2 prospects are G2P payments (payments by a government to people.. from pensions to welfare) and “mobile payments”.
  • There are 5 classes of mobile payments: 1) mobile initiated bank payments (ex. Monitise, , Cashedge, send your bank a message to transfer funds as in bill pay). 2) mobile commerce payments – digital  (ex iTunes, PayPal, BilltoMobile, Boku, Bango, …), 3) mobile commerce payments – physical goods (ex Square, Amazon, Visa Wallet, PayPal, Bango, ..) 4) Mobile phone as a wallet – Physical device at point of sale (ex, NFC Google Wallet, 5) Mobile Money for Unbanked (MMU) (ex MPesa, GCash).
  • Any initiative above is profitable for Visa only if: it replaces cash/other electronic (ex G2P), drives a transaction into higher margin product (Debit to Credit), increases number of transactions (customer use), or increases use of processing services (ex CYBS). Monitise obviously did none of these.
  • The big issuers are not fans of Visa’s moves in mobile and innovation. Visa is beginning to walk on toes and create “universal services”, many of which overlap with the large issuers have competing plans (alerts, offers, mobile, P2P).
  • Visa’s wallet value proposition (and solution) go something like this: Here is an API for your online banking.. consumer clicks on Visa Wallet and their card(s) get automatically stored in our digital wallet for use at any merchant site.. and a new Visa wallet account is created. Bank, you benefit by increased card transaction fees (use) and enable your customers to pay for digital goods with their Visa card in a one click service that delivers better consumer experience. Issues are that Visa has not signed up any of the top issuers and are also very dependent on PlaySpan’s existing consumer base. Most merchants don’t like the idea of helping out banks.. or Visa.. In order to change consumer behavior, and drive usage, a value proposition is needed.  Are consumers doing digital goods payments today? Yes.. what does Visa do for merchants that BTM, Zynga, PayPal.. and others don’t? Options: 1) Use our CYBS processing, 2) use API only and “form fill” to leverage your existing processor, 3) Liability shift and reduced interchange for attempted VBV use. This last one has not be covered significantly .. may delve into with future blog.
  • Visa is attempting to evolve its debit network from “debit” to bi-directional (see my VMT blog) with the OCT transaction set. This would enable it to compete with ACH and deliver services like P2P with little bank involvement.

What is Visa’s investment Thesis?

My guess is this “ replace the debit hole by leveraging our existing customer footprint into new transaction types, expand card acceptance and create customer stickiness with new products and services that work in every channel”

Assets to Leverage?

  • Consumer account holders. I don’t call them Visa customers because they are not.. they are customers of the issuing bank. If a bank wants to rebrand their portfolio (to Mastercard, Amex, or a new white label) they are no longer Visa card holders.. Visa holds no consumer agreements. … BUT they want to..
  • Payment Network: Acceptance and services (Bank, merchant, consumer).
  • VBV Agreement where liability shift and interchange reduction possible (for ecomm/mcom CNP transactions)

A rather short list. Note that prior to CYBS, Visa held very few merchant agreements… it was the acquiring bank and processor that held the merchant agreement.

Strategy to attack the G2P and Mobile Opportunities?

Visa probably sees the lack of NFC handsets and POS terminals as a deciding factor in delaying any push here. The $600M-$800M in NFC GDV is too small to impact more than 5% of the Durbin hole. I believe they have initiatives lined up against the following business drivers

1. Increase number of transactions (customer use)

  • Increase merchant acceptance locations: Square, CYBS, Visa Wallet
  • Increase Consumer Use: Visa Wallet, Visa Money Transfer, Marketing,

2. Replaces cash/other electronic (ex G2P)

  • Fundamo, Playspan, Visa Wallet, ..

3. Drive transactions into higher margin products (Debit to Credit),

  • ?NFC? It would seem this is a “stage 2” plan.. They first need to get consumer’s using the wallet in high volume/frequent transactions. After they get usage.. they can migrate.. It may even line up with another partner like Apple who isn’t quite ready for NFC anything. Visa actually doesn’t seem to like the idea of a card in the phone wallet.. a wallet they don’t control.. they want the card in a VISA Wallet.. a Visa Cloud wallet that they do control..

4. Increase use of processing services… I not going to touch on this now..

Visa’s wallet strategy is a two pronged approach. Consumers will have accounts “auto created” by their issuing bank (at least the ones that implement the wallet API) and

( Old Content 17 June) all by implementing a simple form fill API where Visa’s wallet pre-populates all of the consumer information and payment items on a merchant’s checkout page.  

New Content (18 July)

Visa is looking to build a consumer footprint to compliment its CYBS online merchant footprint. To be clear, Visa is looking to grow its eCommerce processing business AND create additional lock in (stickiness) with Visa Issuing banks. Visa will first ATTEMPT to roll out this service first with all CYBS merchants… then get additional merchants to either convert to CYBS or at least Add Wallet as an additional payment type. Chase PaymentTech is expected to take a lead roll.

Value proposition to Merchant

– Merchants will be given a fairly attractive option to reduce CNP interchange with 2 Components: Attempted VBV verification (Visa can reduce merchants rates for attempted 3DS verification) and #2 reduced interchange in volume discounts with key partner banks like Chase.

– Processing Package (cost). Expect Visa/CYBS to aggressively price for non-CYBS merchants

– Single Wallet for online, mobile and perhaps even physical goods

Value Proposition for Banks

– Lock in to Visa (I can’t really think of another one)

This is not a bad strategy… IF the world were standing still.. and if Visa had a positive reputation with merchants.  The value proposition here is all built around convenience. It is a good plan.. but merchants have many other options and they know that accepting a new Visa product has always proved to be a Faustian Bargain (aka deal with the Devil).

As a side note, I saw Square’s COO today in a conference. His quote was something like “Square is much more than about swipe.. I wouldn’t have invested if that were the case”. None of us know what this grand plan is.. but obviously it must involve merchants.. and I would hope a better profit margin (from 20-30bps). After he spoke a CEO came up to me and said “the major processors love square (and Chase PaymentTech). Now there is a place for all of the sub prime merchants to migrate toward…  Can Square monetize a base of merchants that were outside of the ISO focus and processor interest? They are not doing it today..  How could they possible morph their value proposition into something with higher margin?  Keith certainly seemed to imply that Square had a merchant incentive/Groupon/foursquare model in mind. A deal of the day only redeemable at a square merchant? Hmm.. seems like a little bit of a stretch.

See related Visa Press Release here (RightCliq)

Clearxchange – Bank Strategy Perspective

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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

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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?

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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

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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

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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