ApplePay in Browser – March 2016

News today from Jason at Re/Code – ApplePay in Browser this Year

OK.. so I was a year off! (see Blog ApplePay in Browser by Summer 2015).

Not much surprise here.. as I outlined in my January blog on topic ApplePay in browser has been for over a year. I don’t have time for a long blog so will make bullets on what I think are latest “big items” Continue reading “ApplePay in Browser – March 2016”

Changing Economics of Payments

2 Dec 2015

Happy ‘After’ Thanksgiving everyone, I’m coming out of my tryptophan coma and thought I would go for a mental stretch. This is a pretty big topic, and I won’t do it justice. Thanks in advance for your comments and perspective. [Note I’m not naming the titles of my reference blogs and used only URLs.] Continue reading “Changing Economics of Payments”

2015 End of Summer Payments Update

15 September 2015

Well kids are back in school and Europe is tan. 6 weeks left till Money 2020.. and I just completed our Series A here at Commerce Signals.. wow what a summer!!

This blog is a little bit more of an inventory of things going on.. mixed with some views and general rumblings.

EMV. Its going to happen in October and the big merchants are ready. Two top processors told me that small merchants are in big trouble, particularly as the issuers will be pushing back all fraud to non-EMV merchants VERY aggressively. Think of it this way. EMV does NOTHING to help the small merchant.. currently no business bares cost of fraud in card acceptance. In October merchants must change to accept EMV or they will have the risk of fraud on their business. ISOs to the rescue? This will be a great opportunity for Poynt, Square and other merchant friendly POS/Payment providers.

Acquirers. First Data is moving toward IPO. This is a very tough business.. but as I’ve said before my bets are around companies that can be merchant friendly.. Acquirers are the entity that own the merchant relationship in a 4 party network.. so it is theirs to lose. Nothing has really taken off (incrementally here), Clovr, Card Spring, First Data’s Palantir. Why?? Acquirers have largely been put into a pricing box at the top 500 merchants with a well defined service (not much room for incremental services), and have had their reputation impugned through the ISO channels at the low end (5-7% cost of acceptance). For any Acquiring CEO reading this blog.. my action for you today is to take a look at the invoice you send to a merchant. 2-4 pages of fees that are indecipherable.. When merchants don’t trust you they don’t buy more from you. This is why I would not invest in this space without a clear understanding of the disruption.

Private Label. Rumor is that both Amex and Paypal are looking at M&A here. Makes sense for Amex particularly given need for transaction volume, 3 party model and their state of the art infrastructure. Merchants love Amex customers.. and Amex does the best job in the industry of proving the value that they bring (justifying their hefty cost).

MCX. They are set with payment infrastructure from FIS and First Data. The payment capability is there, and it takes time to build a highly scalable payments company. I just don’t see the need for stand alone app. My guess is that there will be an MCX payment instrument that sits in Apple/Google wallet… just silly to compete on “presentment”. Is the alliance fracturing? I think all participants would love to have a payment instrument that they could own and control. The issue is that there is no agreement on anything beyond payment. Mobile is too important a channel to delegate to a consortium. Also, these are fierce competitors.. The real challenge? Creating a great consumer experience, quite frankly their product team was one of the worst I’ve ever met in any company. No wonder they were considering paydiant.. one of the only options out of the DIY.

Poynt and Square. This seems to fit right in to the flow..  I love both of these companies. Why? As described above the payment industry has been VERY unkind to retailers. Poynt and Square give retailers a greatly simplified hardware, software, and acquiring solution. As a small merchant moving from 5-7% acquiring to 2.75% is a rather simple value proposition. I believe Poynt has several significant advantages over Square: 1) Square has a 6month+ certification process on Apple devices. Whenever it changes anything in its app… it has to go through recertification by Apple. Poynt is the ANDROID of Point of Sale solutions 2) By staying off of Apple AND adding a separate stand alone processor for non-payment applications, Poynt can deploy more applications more quickly and act as a platform for other services. 3) Poynt has a powerful data solution that puts merchants back in control of their data, 4) Ergonomics/Design. Just beautiful. Chip/DIP, Chip Contactless, QR, BLE, customer facing touch screen (not a swivel stand) all work seamlessly without having to pick up the terminal and try to stick your card into a slot. Well done Osama and team.

Paypal? Not much of a stock pop.. I’m very high on the Dan and Bill. But their core asset (eCommerce risk management) is being rendered moot by great mobile auth. When Microsoft (OnePay), Google (Wallet), Visa (Checkout), Apple (ApplePay) all moving into eCommerce they also risk loosing consumers. One of my biggest beefs is their treatment of Venmo volume in TPV (it is 0bps). Rumors are also that they will lose Uber within next 6 months.. and worked a special deal to keep them with take rate below 90bps (perhaps a driver of their margin drop). Merchants are a natural ally here, but Don K really mucked things up with their POS try. It will take 2 years to get things in shape here.

Visa/MA.. They are my biggest holdings.. no change in my views here. VDEP and MDES have positioned both with new power to tokenize and own the rules on mobile. I expect to see a new CNP rate for tokens within next 9 months.

Google. Big news 9/10 (See Blog). Google wallet now on all phones KitKat 4.4 and above (50-60M in US). I love it.. This is the PLATFORM FOR PAYMENT INNOVATION. The user experience is not on par with Apple (or even Samsung Pay).. but Android users are more technical (only 6% of iPhone owners have ever used ApplePay). There are some BIG pluses over Apple, I love that it shows the ereciept and location of purchase for instance (most issuers). Very surprised that Google is still looking for bi-lateral deals from issuers (in order of $10M with no bps). This is why we don’t see many issuers at launch.  What is funny is that there is a “free path” to issuers as well. If they don’t want their card art.. issuers can still just “turn it on” via the V/MA intranet tokenization route (register BINs). Funny that the big hold out is JPM.. given its data play.

Apple. I wouldn’t be surprised to see an ApplePay product announcement in October at Money 2020. Note that my track record is near perfect here so I don’t want to mess up 2 years of predictions. I know that Apple has ApplePay working in Safari, don’t know if they will roll this out our not. I also know that Apple went back to issuers asking for an “Amex like experience with eReciepts”. The issuers said “sure we can do that.. lets first tear up that 15 bps contract and talk about what you will pay me”. My sources say that beacons are a part of the next launch.. they could be just feeding me *&^*(&.  My guess on new release? 1) New Developer Support Program and rollout of Private Label/ Synchrony, ADS and Citi. 2) Improved “eReciept” process (like Amex) in order to compete with Google. 3) ApplePay in Safari (60% chance.. it is working but don’t know if they want to push yet before new token CNP rate tier). 4) Beacons at POS. Improve retail experience with beacons (40%.. again working in lab but don’t know of readiness).

The big Apple news that everyone is talking about is their plans to finance phones directly (end running carrier subsidy dependencies). As I’ve stated before, Apple’s phone is already capable of enabling a virtualized SIM. This is the one step needed before Apple enables consumers to “switch” to the lowest cost network every month.. or every day. This obviously has big implications for Gemalto as well. Google is 2-3 years behind, but is making more progress in enabling wi-fi as network option.

Innovation. Chain getting investment from NASDAQ, Visa, Citi.. is big news. I remain very positive on use of bitcoin as a disruption to Payments (see blog structural changes to payments). I also live industry specific solutions where payments are combined with something else to solve a problem. hyperWALLET for global payroll, justpushpay for construction, WEX for fleet/gas. I also love payments and data (hence commerceSignals), in this Klarna and Sofi are just tremendous ideas.

Going South

Samsung Pay. No change in my views here. What is sad is that they didn’t know that their entire application is incompatible with Android M (until they read my blog). Working with a competing app on their own phones with no registration.. just sad.

Card Linked offers. Guys don’t believe the press.. all of these things are dying. Even the most successful (cardlytics). Citibank is rumored to have called EDO to come pick up the pallet of their equipment (after 300M+ spent).  The good news is that their transactional data is in better shape for use.

Gemalto. Stock is at a 5 year low.. I told you guys to be short here. NO MCX, No GSMA NFC SWP… now Apple is pushing the SIM out of the phone altogether (or soon will).

Monitise. I want to end on a humorous note. This company did a great job at enabling online banking 8 years ago.. enabling “check your balance” functionality via a quick integration to the ATM switch. They pivoted in 2006/8 to support development on an array of handsets (Nokia, RIM, Apple, Samsung, …) with their only competition being mFoundry (acquired by FIS). But the phone complexity went away with 2 mobile OS (Android and iOS) and the rapid shift of mobile from the periphery to the center of the customer relationship. No bank will outsource the CENTER.. mobile development was a specialized skill.. now it is mainstream. As if this were not sad enough, they hired a US network exec with no EU experience, no mobile experience and no network of issuers (that liked her). Then she pushed out the founder.. only to quit last week.  Wow .. I hope the BBC can make a Silicon Valley (HBO) equiv.. only make it more of a Shakespearian tragedy.

Payments – June 2015 Current State/Updates

Mobile Payments – 2015 Current State

Lots of stuff going on right now.. hard for me to keep track. Sometimes just writing this silly blog helps me coalesce all the information coming my way.

As I outlined in January’s Structural Changes in Payments, payments and banking are evolving at an amazing pace. Thought I would cover news worthy items that touch on the top areas I outlined:

  1. Risk and Identity
  2. Data/Commerce Value
  3. Consumer Behavior/Trust/Acceptance
  4. Issuance/Customer Acquisition/HCE
  5. Regulatory/Rates/Rules (Fees)
  6. Mobile/Payment in the OS


Top Items

  • Visa and Mastercard have “won” the payment wars. They are in control of mobile payments, EMV, tokenization of cards, new rules (ex VDEP). They are now starting to “tilt” their networks to be more merchant friendly to enable commerce collaboration (see my blog from last week). Even in Europe where interchange will be capped at 30bps for credit and 20bps for debit the networks win (no change in network fees).
  • Visa working to buy Visa Europe.
  • Visa’s VDEP program. A major announcement. VDEP is to Tokens what VisaNet is to Cards. VDEP is the KEY ENABLER of Payments in the OS. Visa has established rules that will greatly accelerate mobile payments. Removing all economic incentives and data from wallet providers and enabling frictionless enrollment/adoption/use that is consistent with how physical cards work today. Wallets must find another way to make money. I am a very very big fan of Visa’s move here and the have greatly expanded their role as the hub of remote payments.
  • After the global adoption of VDEP (ie rollout of ApplePay/Android Pay), I expect to see a new V/MA rate tier for use of tokens in mobile. “Cardholder present” that will mean liability shift to bank and a rate reduction of around 10-25bps (in the US). Timeline is late 2016. Huge implications for paypal here.
  • Google’s Android Pay moves payment out of an APP and into the OS (Android). Not much in new features, but as this is based upon Host Card Emulation.. this has 3 very big implications: 1) Tokens and Proprietary Architectures have beat out the GSMA’s vision for SIM based payment (NFC) and 2) Google has expanded the Android platform to allow any app to take advantage of payment (see Google Creating Platform), and 3) Google has moved payment into Google  Mandatory Services (GMS) like maps, search and mail for Android M. MNOs and OEMs can still choose the free Android, or build their own.. but it comes at a big loss.
  • Plastic cards work REALLY WELL. Consumers just don’t care about mobile payments at the point of sale. Less than 6% of iPhone 6 users use ApplePay (Behavior change requires value)
  • Consumer behavior is continuing a massive shift toward mobile… nothing has ever moved this fast. Important to note that over 65%+ of interaction is within an App. This creates great opportunity for ApplePay/AndroidPay…


  • Real Time Payments in the US… What a mess! This month NACHA agreed to create 3 intraday windows. The Fed working group still pushes a string uphill with token bank support. The Clearing House (TCH) is trying to position itself as both the token utility and the hub for real time (to no avail). On this one the TCH board has asked them to move, but bank operating teams have told them to get lost. The Banks token pilot (3 yrs ago) hasn’t moved an inch.
  • Somewhat related to RT/P2P Payments, Mastercard seems intent on re-invigorating MoneySend as a way to enable a downline (ie disbursement channel) to support commercial business (ex dividend payments, insurance distribution, mobile wallet P2P). If I were Visa I would keep a keen eye on the bilateral debit routing facility established for ApplePay.. particularly transactions from CrossRiver Bank (as a sort of ODFI). Why is this in my “top items”…. ? If Mastercard is indeed doing this, it will set up a new competitive dynamic with issuers and commercial payments companies. Debit card heads don’t exactly like someone using their cards as free P2P platforms (see VMT blog from 5 yrs ago).
  • Microsoft rumored to be working on payments platform for Internet Explorer (as neither one of the Windows Mobile users were interested in using it on their phone). This would be a MAJOR hit to Paypal as Internet Explorer is over 50% of the global user base (all versions). Microsoft hasn’t succeed in its quest for “Live” accounts.
  • MCX has lost its CEO Dekkers Davidson (a good friend) and its platform Paydiant (sold to my good friend Dan at Paypal). My view is that MCX members agreed to collaborate on payments, but due to their competitive nature could not agree to collaborate on marketing/loyalty.  A payments only wallet had no future.  Paypal is a natural alliance partner of MCX and retailers.. but their 325-375 bps take rate must go down to under 50bps for this to ever
  • Trust/Identity. Mobile + Tokens has created the most secure payment method in the world (far better than EMV). While there was some enrollment fraud at Apple, this has now been resolved. For more information see “Stripe of Identity” and, Structural Change in Payments. Google has also added biometrics into the new Android M.
  • JPM’s Payments Enigma (See Blog ChaseNet) is a running industry joke (ex asking Amazon to put a chase wallet button next to one click checkout). Unfortunately JPM pushed out (or moved to mortgage compliance) everyone that knew how to run it. One Card Exec said it this way “Chase is building a F(*(^ing island, the rest of us will be building a continent”. Another example of this is Visa’s support of Citi in winning the Costco deal (Citi is Mastercard’s largest issuer, JPM is Visa’s).
  • Lots of payment M&A Activity… Best source is FT Partner’s analysis here. The data space is even more crazy (ex Oracle on Datalogix/Bluekai, Neilsen, WPP, …)
  • MASSIVE Talent Churn. From the unfortunate death of Ed Gilligan, Amazon’s loss of its top 2 payment execs (Matt Swann to Citi, Mary Kay to Square), Google’s loss of Frank Young (to Global Payments), Bank of America (Jason Blackhurst to Visa), the industry is changing like never before.

Other Items

  • ISIS is dead bought by Google
  • Samsung Pay. Samsung bought loopPay for its MST technology filling the acceptance gap (non-EMV in US and Mexico) only to find out 3 months later that Google did direct MNO deals (in US) to make AndroidPay GMS. Samsung can’t load its own wallet on its own phone.. As of last month they still were telling banks everything is fine. I told the banks to go talk to Verizon
  • Twitter Acquires Cardspring.. I liked this one (Merchant friendly card linked offers). Problem is that Cardspring was built on FirstData’s Offerwise Platform (IBM) not their Unix/Clover stuff
  • Payment Terminals and Points of Sales. Heartland gives up on Leaf, FD is still pushing on Clover, and Verifone is pitching a new data service
  • Payment data is leaking everywhere.. CommerceSignals is working to help bring a little structure here

ApplePay in Browser by Summer 2015

Very short blog

Today ApplePay is limited to in-App purchase and at the POS (using NFC). Per my blog last week, mCommerce is one of the fastest growing trends in the industry right now. Apple will be extending the “touch ID” payment experience to all Safari browsers (with merchant support). Contrary to the poor POS/NFC uptake.. this will be a MASSIVE SUCCESS!!

Pre-requisite/Set Up

  1. Merchant implements new ApplePay API that looks for supporting browser/device. Similar to what Google Checkout, Stripe, Braintree have done for accepting a token in lieu of card and cardholder data
  2. There is likely some other device/browser information going to merchant (like applePay plug-in on browser)
  3. Consumer has at least one touch ID compliant device (iphone 5s or 6)

UC 1 – ApplePay on MacBook – Easiest one to explain

  1. Consumer Checks Out
  2. Merchant checkout page finds supporting device/plug-in and displays “pay with Applepay”
  3. Consumer selects pay with Apple Pay
  4. Consumer’s iPhone 6 comes up with tough ID prompt (touch ID to complete purchase with Merchant X). Side note somehow Apple Keychain management is involved in exchange between devices
  5. Merchant receives token(s) for user ID and for card. User ID token is resolved through Apple service, Card Token is routed through TSP in current iPhone 6 AP model.

Merchant  Benefits

  1. conversion
  2. new CNP  rate tier for “tokenized” eCommerce (see my blog above from last week)
  3. fraud liability shift

Significantly it was announced that EMVCo just took over the next version of the 3DS spec. Remember when this happened for tokens?


  1. Paypal’s US take rate is around 340 bps, Apple will enable merchants to accept payments at a new rate tier and shift liability unto banks for 140-160.. wow..
  2. I believe Google is also in good shape to capitalize here, as is Visa Checkout. Perhaps Visa Checkout morphs into ApplePay online from a CYBS perspective. (CYBS becomes AP acquirer)



My confidence in this prediction 95%.


Structural Changes in Payments

2 January 2015

Today’s blog is focused on discussing the structural changes influencing consumer retail payments in the US. For those interested in looking at a broader global view of all payments, I highly recommend reading the Cap Gemini World Payments Report ( .

Payment Value - highlighted

Payments have been a focus of mine for 20 or so years… it is perhaps the MOST interesting of all network businesses. Payment is a critical part of commerce and a product of it. It is the event in which almost every commercial contract is based upon. Payments can be simple (cash), complex (bitcoin), and political (interchange, rules). Payment efficacy, reliability and data are important to: consumers, merchants, banks, governments and economies.

Globally, electronic payments are still in their infancy, which makes investing in it so much more exciting. For example, over 90% of the global electronic transactions occur in the top 10 markets (representing less than 10% of the world’s population).  This would seem to point to a future where electronic payments (and the banking/commerce they represent) are poised to grow geometrically as the number of nodes grow. There is a chicken and egg argument here.. are payments the result of strong economic environments or are they the enabler? Perhaps a bit of both, but finding markets where they are growing (ie Brazil, Peru, Philippines, Kenya, … ) are worth exploring (Democratizing Access to Capital – see blog).

Not only are payments poised for exciting growth, there are also tremendous forces driving change within existing systems and networks. Investors must consider these structural changes impacting existing players across the entire value chain.

In its simplest form, payments are a brokering business which manages value exchange between two entities engaged in commerce. Logically, a broker must be removed from the transaction to maintain the trust of both parties, and deliver value through managing the financial risk associated with the transaction. My view is that Card issuing banks, have lost the neutrality of their “brokering” role by creating a card rewards system that incents card use (paid by the merchant). However, this ideal “neutral” world is NOT the nirvana that we should seek, as no one would invest and we would be stuck with cash (and SEPA in the EU .. see blog).

Complexity in payments is driven by the quest for control and margin of the various participants, not by necessity. This is what makes understanding payments so hard…. most of the changes are not logical, but political. The friction (inefficiencies and illogical design) in payments is what makes them work. As I’ve stated before, no engineer would design a payment system to operate the way we do today (see Push Payments). Thus there is beauty in this chaos! The V/MA model created incentives for 1000s of banks to invest in payments, and I doubt if we will ever see any other companies that could repeat this feat (thus my V/MA personal investments).

What changes are likely to impact the world’s oldest profession in the next 10 years? My list (in order of impact)

  1. Risk and Identity
  2. Data/Commerce Value
  3. Consumer Behavior/Trust/Acceptance
  4. Issuance/Customer Acquisition/HCE
  5. Regulatory/Rates/Rules (Fees)
  6. Mobile/Payment in the OS

#1 Risk and Identity: Authentication and Authorization

How would you authenticate someone’s identity? Best practice is to validate a combination of what you are (biometric, image, DNA), with something you have (mobile, token, OTP FOB, …) and something you know (shared secret). Apple’s new iPhone 6 is the first major consumer device that can manage all 3 securely. It is truly revolutionary.  The ability to authenticate a consumer eliminates fraud risk, and thus impacts both Account Opening and Transaction Authorization.  Both of these services in turn impact the “core” banking relationship (see Future of Retail Banking).. How do consumers choose a bank? A credit card? What is the value proposition?PIN Fraud Rate 2013 Value

Before there is payment there must be an account in which to pay from. The key to opening an account is identity (Regulatory KYC or Know Your Customer). Account Opening has been automated (and online) for over 10 years. In 2004, my team at Wachovia was the first in the world to introduce instant account opening (online) for deposit accounts (Credit Cards were just 2 years ahead of us..). 10 years ago I used products like Equifax accountChex or EWS AOA (Validating questions based on prior financial history and credit bureau data), today could I use Apple!?

Identity and authentication is changing rapidly, and if the first two paragraphs were not already enough to ponder on this topic, we must mention Bitcoin. As opposed to authenticating the person to give access to funds and services, bitcoin authenticates itself enabling the holder to be anonymous. It is a self authenticating instrument.. imagine a dollar bill that can tell you it is genuine with 100% accuracy.  Self authenticating instruments exist independently of the holder and are a store of value (ie, Gold, Bitcoin, …etc). Normally there was physical presence required to exchange self authenticating instruments (exchanging gold), bitcoin changed all of that. A virtual self authenticating instrument that can be exchanged remotely and cannot be tracked (easily). Whereas payments are instructions move money (value) from one bank (store of value) to another, a bitcoin exchange is value exchange (not instructions). bitcoinhow-100032615-orig

The power of bitcoin to disrupt payments, companies, government, economies, .. cannot be understated.  How could any central bank manage money supply in this model? How can you tax something that cannot be tracked? The growth challenge for bitcoin is in “connecting” to other payment networks and regulated entities (ie cash out).  Unfortunately the entities which benefit the most from bitcoin are those that seek anonymity… which of course impacts the willingness of mainstream (regulated) institutions to accept it.

Fraud and Risk

As you can see from picture above “risk” in payments has several components: credit risk, settlement risk, fraud risk, regulatory/AML risk, … etc. Fraud risk is the area in the most flux, both WHO owns the risk and HOW it is managed. In the US Card Not Present transactions follow the pattern of ACH and Checks in that the originator of the transaction bears the risk of loss. In a retail transaction, that is the merchant. applepayinapps

Risk and fraud management were historically the key areas where banks excelled and differentiated (big banks have multi billion dollar investments), but the merchants and platforms have now passed banks in their ability to manage it. This mobile authentication advancement had rendered the multi billion dollar bank risk investments moot (for mobile initiated payments).  Proof is in the picture above (see Federal Reserve 2013 Payment Study), all fraud has fallen tremendously! Both for Card Present, Card Not Present and even for Checks. Why? As the former EVP of a Kleiner Perkins backed Fraud Prevention company I’m not going to give you all the details, but suffice to say that identity plays a key role. Paypal, Amazon, Google, Apple all have fraud rates under 8bps, some have the around 3bps.  These numbers will get better for Apple and Google as mcommerce starts to take an ever larger share of eCommerce (see my previous blog) and they bake in biometrics into mobile payments.

A key point that investors must understand here is that the large CNP merchants have gotten so good at managing fraud, that they could care less about a liability shift. What they want is a rate reduction (risk based pricing).  After all, if you could manage fraud at a rate of 3-8bps.. what work is the bank doing to justify taking 240 for payments? The Paypal investors read this and say “ahh.. Apple and Google want to become Paypal”.. No they don’t! while Apple/Google COULD assume all the functions of Paypal, their role as commerce orchestrators is of FAR greater value. In this role you must not force a consumer to a merchant, a good, or a payment instrument. “Let the consumer decide” is the common mantra across the Google, Apple, Amazon.

The investor impact is complex. Large merchants have proven ability to manage fraud and risk, and want the consumer to choose the payment instrument of their choice. Banks ability to differentiate in managing risk is greatly reduced, and the cost of issuance/acquisition is dropping to 0. Banks have proven incompetent at creating a Visa/MA replacement. What are the levers in negotiation? How will merchants negotiate a lower rate?

The path in Europe, Australia and the US (Durbin/Debit) has been driven by regulation. No one likes having regulators define the rules, but my investment hypothesis is that there will be a very large TILT of Visa/MA toward the merchant. This will address the both regulatory pressure, and open up new revenue streams surrounding data (below). This tilt means moving rates in the direction that retailers want, creating new rate tiers where risk and identity can be managed by the merchant/platform. Remember Apple is getting 25 bps for their service, the next logical move would be make this same “discount” available to anyone that can drive down risk. Personal-Data-Ecosystem-Diagram-from-FTC-Roundtable

From an identity perspective, Google and Apple have authentication as the CORE feature of their mobile platforms.. it is key to everything they do in mobile. See my blogs on Brokering Identity Authentication in Value Nets, and Authentication – Key Battle for Monetizing Mobile for more here.

#2 Data and Commerce Value

The comments below are largely taken from my blog Banks, Non-Banks and Commerce Networks. As a side note, this is the focus of my new Company: CommerceSignals. We are working with the Fortune 50 to serve as the neutral broker, one layer above the network, supporting companies working together offline and in mobile.

Today, every issuer and card network is chasing after American Express and Alliance Data Systems. Both ADS and Amex have made SUBSTANTIAL progress in working with merchants to deliver new value to consumers. AMEX and ADS have the benefit of working in a 3 party model where they own both the merchant and the consumer relationship.  As I’ve stated before, I believe these 2 companies are 3-5 years ahead of everyone else. Is this data stuff delivering any revenue? Market Size AdvertisingFor ADS the answer is a resounding yes, for Amex the benefits seem to be less direct and more on customer loyalty/spend/engagement. See my blog on Amex Innovation Leader for more details.

Think about the battle in connecting networks, as each of us have limited resources we can connect only to a finite set of “hubs” (unless there is some larger orchestrator). Examples are Wikipedia and Google… these serve as the directories of information. It is almost IMPOSSIBLE to displace an efficient hub. This is why I love Visa, MA and Amex. If they can shake the issuer “tilt”.. and add a few merchant friendly services, they could leverage their networks in many new ways. The revenue opportunity? Payments in the US is roughly a $200B business (issuers, acquires, processors, networks), whereas marketing is $750B (in US).Infographic_Showrooming-lg

Payments work well, but so did the Sony Walkman. The bets that Google, Apple, Amazon, Facebook and others are making is on value orchestration. Does this involve payment? Not really.. at least not as a primary focus.. Payment is there.. but orchestration is about commerce; payment is just one of many important processes (See blog Payment in the OS).  Don’t look at payments as something in isolation, payments are the “connections” made in commerce; they are made for a purpose. Visa and MA also have the potential to expand their “traditional network”, but this must involve a separate agreement with separate rules.

Payments = Network

Here is my network view. Payments are the connections of the GDP. If we were to map payment flows, we would unlock a map of the global GDP at the micro level, from employment to shopping, behavior and preferences, to demand and supply. Free information flow on the internet is enabled through openness and a single primary protocol, whereas payments operate within 100s of proprietary networks with a complex series of clusters and “switches” (there is effort in connecting, authenticating and managing risk). Just as it would be nearly impossible to change the protocol for the internet, it would be difficult to bring fundamental change in payments (see Rewiring commerce).  Now think about the value of payment data. Connecting business is much different than connecting information (the core of CommerceSignals.. but I digress).

From a network strategy perspective, the business opportunity of changing “payments” pales in comparison to the opportunity to influence connections in commerce, banking and manufacturing. Payments support business and consumer needs; they do not alter their path. This insight is the downfall of bank payment strategies around “control”, and their inability to “tilt” toward merchant friendly value propositions.

A top 5 retailer provided my favorite commerce quote

“I think of Commerce as a highway, the payment networks are like a toll bridge. I don’t mind paying them $0.25 to cross the bridge, but they want to see what is in my truck and take 2-3% of what is inside. Hence I’m looking for another bridge… “

ADS, Amex, Google, Amazon, Facebook, Alibaba, V, MA all understand this. Rather than charging toll for crossing their bridge, these networks are beginning to execute against plans to grow the size of the goods in the merchant’s truck.

Existing networks have an existing value proposition, and many don’t like to have their services leveraged by competitors, thus there is a much more highly “regulated” flow of information. Intelligent use of data increases the effectiveness of networks in a way that also benefits consumers. Tilting more toward merchants and consumers.. means tilting away from banks. This is VERY hard for a bank to initiate. It is a change worth making however, as assisting merchants (or consumers) is what brokering is about. My firm belief is that both V and MA have the opportunity to grow Revenue 4x+ in the next 5-10 years. Their principal challenge is to “tilt” their models away from Banks and toward the 2 parties that matter most in commerce: Merchants and Consumers.

#3 Consumer Behavior/Trust/Acceptance

Perhaps nothing matters more in business than consumer behavior (see Consumer Behavior: Discerning and Capturing Value). In payments we learn over and over again that behavior changes slowly in 20 year cycles (Checks, Debit Cards, ATMs, Mobile). Any investor looking for payment innovation should run away unless there is some underlyibranch visitsng commerce value proposition. Payments work REALLY well its everything else that is broken (in OECD 20 countries)…. Among Payment innovators/founders there is a common saying.. you only start ONE payment company.

It is easiest to find the hotspots in payment by looking first for the changes in consumer behavior. For example, the tremendous change in how consumer’s are using their phones, as I outlined earlier this week in eCommerce/mCommerce Convergence.  The banking relationship is also changing, as customers visit branches less than 3 times per year, and the billions spent on huge buildings, huge vaults, sports sponsorships and brand names gives way to value.

Brand reputations for 2014 just came out last week (see Venture Beat), with Amazon, Apple, Google topping the list. How did these companies earn this reputation? Through consbank likabilityistent daily interaction delivering value in every interaction. Value delivery and interaction are my key metrics for assessing investment and focus; both are key measures of consumer behavior and trust. There are many strategies: whereas Google engages with the average consumer 10-50 times per day (winning in frequency and insight), Amazon has a lower interaction but a much greater impact on transaction (value delivery), Apple’s interaction is more holistic within a much more affluent base, Facebook’s is more social.

If I were to outline one KEY point to my bank friends it is this: you can’t reach consumers where you want them to be.. you must reach them where they are. This is the essence of why most bank strategies to engage are failing. Consumers choose to go to Google, Apple, Amazon because of the value and service. As the charts above show, most banks are challenged to deliver value within the core banking products they already delivery, why would any customer want to use a new service in this environment. Thus Bank’s efforts are ill suited to drive a deliver products outside of their core, and outside of existing consumer behavior, banks play a role in SUPPORTING commerce.. not leading it (see Card Linked Offers).Measure Data

Apple is the greatest company in the world in delivering value, experience and changing consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). Apple’s reputation is well deserved and earned “the hard way” by remaking: phones, music, mice, computers, apps, …etc.  Through consistent delivery of value within fantastic hardware delivering great (and fun) consumer experiences they earned trust for their products and brand. The greatest NEW opportunity for Apple to influence consumers beyond the individual (music/contacts/calendar) and eCommerce (browser, apps) to the real world: Commerce.

Unfortunately Apple is inept at partnerships, even within its own supply chain. While apple has the talent to accomplish this, their commerce, payment and ad teams are buried within a hardware culture. They will only succeed if they are spun off into a separate division, thus my view is that there is a very low probability of Apple acting in an orchestration role across 1000s of Banks, millions of retailers and billions of consumers. If they did move, it my recommendation (and guess) is that it would be a consumer centric orchestration role as I outlined in Brokering Identity.

One technology (and behavior) I’m keeping an eye on is Beacons and mobile use in store (engagement). Qualcomm Retail Systems spun off the IP around Beacons to Gimbal with Qualcom and Apple both rumored to have 30-40% of the equity. Today Retailers are the entity best positioned to change consumer instore activity for 2 reasons: they alone know consumer product preferences, and they physically touch the consumer (trust, value, presence). See Retailers as Publishers , and Apple iBeacon Experience for more detail.greendot

#4 Issuance/Customer Acquisition/HCE

Now this is a mixed bag of topics. What is fundamentally changing in card issuance? Most of you know I ran remote channels at both Citi (06-07) and Wachovia (02-06). Today, most new customer bank accounts are originated online as branch visits go down and direct mail (the old way) even directs the consumer to this “instant” channel.

Historically I had to spend about $150 in marketing for every new card customer, and around $80 for every new deposit customer. Banks still incur roughly these same costs, but prepaid cards have an acquiring cost of less than a tenth of this cost (See Future of Retail Banking: Prepaid). In this pre-paid model banking products sit on a shelf in a retailer and compete for customers just like shampoo and candy bars.

I would challenge all card participants to think about the credit card product… what delivers value? what about it is unique? how do consumers view it? how is it part of a great consumer experience? When you leave Disney World do you think wow.. buying the ticket with my card was just fantastic? How are new customers acquired? Who benefits when cost of issuance is $0? Is charging the average consumer 12-16% on a card, paying them 0.2% on their savings charging merchant 2% a great model?  Do you think that there is room for improvement? Where do retailers win (ADS, Private Label, Co-Brand, )?

What prohibits you from having 20 retailer cards in your wallet today? Bank card issuers will roll their eyes, but you can not understate the influence that trusted retailers have in consumer decisions. Take this trust together with direct sales force and frequent consumer interaction and you have Private Label and industry whose cards outnumber everyone else’s by a factor of 2. As this week’s Morningstar article on Private Label shows, private label (the largest card segment) is making a tremendous comeback.Private label market share

Citi, GE (now Sychrony), ADS, HSBC are leaders in this space, with ADS advancing most in use of technology. Retailers like Nordstrom, Macy’s, Sears and Kohls are fanatical on their private label program, as their most valuable customers use this product. All new customer experience must first address this base, which you can see is one reason why we don’t see ApplePay being pushed here at all. As I described in Retail 101 (and What do Retailers want in Mobile), most retailers don’t know who their customers are today. Private label and Loyalty programs solve this problem.

Let me throw in a little tech now. I’m on the board of advisors of SimplyTapp, the company that created HCE. Instant issuance is key to everyone in the card space, why wouldn’t every retailer want to enable a private label card if card issuance cost is $0!? Credit worth customers can get store credit, sub-prime get decoupled debit (see Target Red Card) and everyone else gets a loyalty only? I believe we will see this happen, not only within MCX but within platforms like Google, with PL managers like ADS and Citi. This is the strategy focus of the top retailers… (focusing on their top customers).Private Label Profitability

My bet on the future of Google wallet is that it will be very merchant and consumer friendly, enabling them to uniquely integrate to 100s of merchant platforms to create great consumer experiences. This linking of PL, Loyalty, in store, maps, mobile, advertising is value orchestration.. but it all starts with consumer opt in. The opt in is both to merchant (private label/loyalty) and to Google. See blog Host Card Emulation for more background.  Google made the right technical move in HCE, but it dropped the ball in enabling merchants through last mile.. not a technical limitation .. an educational / awareness one.

Do I believe that the world will go private label!? No, it will be at the margins. My view of Visa and Mastercard have changed over the last 2 years. Before I was much keener on the development of a new scheme, but no more. Why? How many networks can you list where millions of participants have invested billions of dollars to make it work? Visa has 1.7B cards and 36M merchants.. how could anyone compete with this? This network works REALLY well, with the only issues with their network are in their control (merchant costs and rules).

#5 Regulatory

From a regulatory perspective, the US retail payment system has been impacted by the Durbin Amendment and the EU to an even greater extent by SEPA and PSD (see my blog).  Most of you have also read my token blogs outlining how the US banks were planning to build a new payment network to compete with V/MA (Now dead).  If someone has a info-graph picture of global acceptance rates I’ll put it in here.. but suffice to say that airline ticket pricing has NOTHING on the complexity of payment pricing.

Visa and Mastercard are largely insulated from the regulatory driven pricing changes, as the issuers continue to bare most of the impact. The EU has created a payment nightmare environment with “cross border” Credit card merchant interchange (MIF) at 30bps starting in later this week Jan 1, 2015 (see article and Visa’s response). The EU can not mandate change within country (domestic transactions), but there will be a race to the bottom in fees.

EU competition commissioner Margrethe Vestager claimed that interchange fees are a form of tax levied on retailers by banks and said that the new legislation would reduce those costs and “lead to lower prices and visibility of costs for consumers”.

Ms Vestager may be correct from a transparency perspective, but SEPA and the PSD put governments into the brokering role with no incentives for intermediaries to invest.. making payments a nearly free infrastructure service (with agreement of consumers and merchants). Network work best when there are shared incentives, and minimal regulation.  I believe Visa and Mastercard will work with new vigor to build relationships with merchants and deliver value, to head off the regulatory driven approach. Unfortunately Europe is already too far gone for this to work.

A prediction (next week’s blog) will be merchants providing greater influence in V/MA rules.

#6 Payments in the OS

My blog from this week: Payment in the OS

card-financial-compete view

Comments appreciated.

ApplePay: Debit issues

Update Oct 1

Apple forced all the top 5 launch partners to launch debit and credit at same time. Right thing to do!!.. but debit is messy.

My bank friends are having kittens over Apple Pay debit compliance. Issue isn’t Apple, but forcing debit cards to EMV (industry not ready) and dealing with the conflict between EMV rules and Durbin. For example, EMV rules state transaction must be routed to primary AID as identified by issuer. This is fine for credit, but Durbin requires routing flexibility… this requirement just never bubbled up through the EMV specs. Tokens exascerbate the problem, particularly if the AID is from a Visa BIN.. Specs must be updated to address need for routing flexibility (using the secondary AID) …but this breaks network rules.. and there are no payment terminals that read secondary.


Previously I stated that debit cards in ApplePay are not Durbin compliant. I am retracting that comment completely.  The debit card in ApplePay seems to be Durbin compliant, as Bank of America spent significant time with First Data’s Star network to make it so. Problem is that the rest of the debit industry is scratching its head trying to figure out how to make this stuff work… so don’t expect to see any ability for all your debit cards to work in ApplePay anytime soon.. just the top 5.

The Challenges with Debit

Debit in the US is broken down into 2 primary segments: Signature Debit (processed through Visa) and PIN debit processed through 8+ PIN Networks. See this Federal Reserve note for more background. Retail banks exert almost complete control within PIN debit, after all it is their “ATM” acceptance infrastructure that allowed for this network.

PIN Volume2

While the new EMVCo token scheme is available to Debit, coordinating implementation across 8+ PIN Networks (and large Retail Banks) is a big chunk of work. Particularly when these same banks are working to consolidate PIN networks, and create their own centralized token solution (see blog).  I’m painting a picture of many companies and many moving parts in PIN debit and tokenization. Add to this picture Apple, who worked with networks to compartmentalize and maintain secrecy with a handful of partners.

To get anything done in this environment, it is best to work with the biggest gorilla, solve their problems, show the way, and hope everyone else gets in the boat. This seems to be what happened and the Gorilla is Bank of America. This is the only Debit card I’m confident is in ApplePay. I believe BAC has been working with Apple for over 4 years on this.

There are 2 essential problems with debit in mobile wallets

  1. Debit cards must be PIN capable
  2. Debit cards have complex routing requirements (more detail below)

Durbin Challenges – Routing

The Durbin amendment requires that Debit cards give merchants flexibility in the routing debit transactions (see this excellent Paul Hastings note). From Financial Reform Insights

As noted above, all banks, regardless of asset size, must comply with the prohibition on network exclusivity and routing requirements. The Fed has implemented requirements to prohibit network exclusivity arrangements on debit card transactions and ensure merchants will have choices in debit card routing. In addition, the network exclusivity and routing requirements apply to both debit cards and prepaid cards.

The final regulation requires issuers to make at least two unaffiliated networks available to the merchant, without regard to the method of authentication (PIN or signature). A card issuer can guarantee compliance with the network exclusivity regulations by enabling the debit card to process transactions through one signature network and one unaffiliated PIN network. Cards usable only with PINs must be enabled with two unaffiliated PIN networks. ATM transactions are not subject to routing and exclusivity regulations.

Note: A smaller payment card network may be used to help satisfy the two unaffiliated network requirements; however, if the second payment card network is unwilling to expand its coverage to meet increased merchant demand for access, that would trigger noncompliance with the network exclusivity regulations.

In real world terms, the Durbin amendment allows merchants to treat all debit cards like bank PIN debit cards (they can be routed around Visa/MA switch and switched through PIN networks Star, NYCE, Pulse, Cirrus, … etc). Large merchants have also started routing debit transactions DIRECTLY TO BANKS, skipping the PIN Networks all together.  This is all very straight forward in the world of a 16 digit PAN. The merchants (or their processors) use BIN routing tables that can be customized by issuer/debit network.

Within the EMVCo Token Scheme, the only way for the underlying card to be “resolved” is from the Token Service Provider (TSP) as described in part 3.2 of the EMVCo spec.  Visa and Mastercard are the only TSPs in the current version of ApplePay. Although, both networks have committed to allow Issuers to serve in the TSP role directly none appear to be ready October 2014. These unique TSP roles are probably due to the speed at which the EMVCo spec materialized (fastest new Scheme in history of V/MA), and also to the secrecy surrounding its first use (ApplePay). Thus, in the current ApplePay EMVCo token scheme neither the Issuers or PIN Networks are in control of the tokens, and hence cannot make “at least two unaffiliated networks available” without first resolving the token with the TSP.

To solve for token resolution, each and every processor must have the ability to work with a multitude of TSPs to resolve tokens into something that could be routed based upon the MERCHANT’s options (2 unaffiliated networks). The problems here are not insurmountable and resemble the problems associated with the Internet’s DNS system, where multiple copies of DNS routing tables exist to convert to an IP address. Tokens have an added advantage of identifying the owner/TSP through the BIN. For example, a Visa debit card within the ApplePay system could be a Visa Bin, a Chase Bin, a Wells Fargo bin.. So a token identifies its “owner”, or the TSP which can translate it.

To solve for this problem, Visa and Mastercard have made a “detokenization” service available, and other TSPs/PIN networks must do the same (running Vaulting / PIN transformation).  But to do this for all cards, all processors and all merchants takes a little time. There are technical and business issues here.

What is most surprising to me? I spoke to the head of debit cards at a top 5 banks, and he didn’t even know there was a problem..

PIN Capable

While it is great that they included debit in the launch, the debit issue had plagued other schemes as well. ISIS initially launched with a Chase Debit account to hold balance. Chase’s regulator told them that this card was not compliant (no PIN capability) and thus they had to pull weeks before the ISIS launch. ISIS had to run to Amex Serve for the solution, as Amex was not under durbin constraints. This PIN issue will also hit ApplePay, but the more immediate problem is routing.

Google solves the PIN problem by wrapping in a non Durbin debit. Specifically, banks with under $10B in assets, and non-banks (like Amex) don’t have to comply with Durbin. Google thus has one token (non Durbin debit), where they are issuer with Bancorp Bank (TBBK).

I am laughing a little bit on the PIN side, can you imagine, unlocking your phone, touching the ID, tapping to merchant, then also keying in a PIN. Merchants are in a place to “steer” toward PIN for every debit card. But downside is that if consumers get too frustrated with experience they will just use their credit card.

Merchants know…

A few months ago, “a merchant group” sent Apple a “formal notification” telling them that their scheme was not Durbin compliant. I don’t know if Apple’s team just sat on the notification, or hoped it would just go away once all the good launch activities came to pass.  I’ve been convinced over the last 2 days that there is a durbin compliant card in the wallet, but Apple Pay is certainly not ready for every debit card. Why didn’t Apple respond to the merchants and tell them they were investing to make sure this works? It is not a great way to start off a relationship… particularly when you have your own plans for engaging the consumer.

This is the graph that merchants see in their minds when they think of Apple pay

non cash payment

Notice the flat line on credit card spend.. and the 20%+ CAGR on debit. Merchants worry that the strong banker presence at ApplePay launch is a key message.

Industry Confusion

My friends in the Debit industry are scratching their heads this week: Retail Bankers (debit card owners), Processors, PIN Networks and Merchants. What do they do to get their debit cards in ApplePay? If only one of them is ready (meaning has ability to resolve and or issue PIN debit tokens) what does it mean for the other 7?. Is this the first path toward an industry PIN consolidation? Who “owns” the token resolution service, standards and approach? What are the service levels on directory synchronization and response times? No one told them about an industry body to standardize… Man this debit stuff is complicated.

The underlying PIN Network industry problem is there is really no single authority to coordinate EMVCo token implementation across 5000+ banks and 8+ PIN Debit networks. Perhaps there is really no single way to get debit cards into a wallet, and this mess just further helps the 800lb gorillas that can invest in semi-proprietary schemes to get it done.



Banks/Non-Banks and Commerce Networks

Banks/Non-Banks and Commerce Networks (Why I love V/MA)

27 July 2014

This blog has been in 50% mode for 2 weeks! Obviously summer is not my productive time (I must be German). There will be a noticeable change in my blogs these next few months as I work on a newco launch. Blog will therefore focus more on concept, much less G2.  This will be a transition piece…

What is the benefit of becoming a bank? Would Paypal buy a bank? That is the rumor… I have no idea on this one.. 0% confidence.. my guess is no way. There are some great payment+bank companies (Amex, Wirecard and Alliance Data), and some great payment non-bank companies (Visa, MA, Stripe, Paypal, …etc). What are the business drivers of becoming a bank? What are the Pros/Cons?


For those without time to read below, a bank license brings on enormous compliance cost and restricts: what business you can do, how you manage consumers and their data, and what risks you can take. The upside for being a bank? You get to take risk with other people’s money. Simply put, any company contemplating a bank license must have a business plan MORE dependent on managing risk than on orchestrating commerce value.  Today there are many bank licensed “specialists” which support non-banks (TBBK, Meta, Alliance Data)… so why would you want to become one? Paypal is on the fence here, as historically they won in eCommerce because of their ability to manage risk (CNP Fraud). Do they want to grow in risk management? or in everything else?

When looking for the right regulatory structure of any company, we must assess their current network plans in the context of commerce AND banking. Not just how your network delivers value today… but rather how you deliver value in the future? Banks tend to make most of their money within their own node, whereas others in commerce are highly dependent upon other partners (manufacturers, distributors, agencies, sales, …). Electronic payment growth and network services are set to grow geometrically, yet payments are very very sticky and hard to change. This is the start up investor conundrum:  How do you make intelligent investments in payments/new networks? There are 3 basic options

1) Help others expand their networks

2) Build new networks

3) Build communities with minimal need to network outside of your environment (Facebook, Amazon, Alibaba, BANKS?…)

92% of all electronic transactions are done in the top 10 markets. (Cap Gemini’s World Payments Report is a must read). 90% of the worlds population is not connected to financial services. There is a n-squared dynamic when this takes place.

Many entrepreneurs, journalists and technologists miss THE CORE facet of Visa and Mastercard: a business platform where thousands companies invest billions of dollars. There is no way to compete technically with this business model, rather the ONLY way to “compete” is on value and services. Where Amex has the ability to deliver much broader and richer services (as they own both merchant and consumer accounts), they have a downside: no one else investing in their network (scale/adoption).

My firm belief is that both V and MA have the opportunity to grow Revenue 4-10x in the next 5-10 years. Their principal challenge is to “tilt” their models away from Banks and toward the 2 parties that matter most in commerce: Merchants and Consumers. Payments work well, but so did the Sony Walkman. The bets that Google, Apple, Amazon, Facebook and others are making is on value orchestration (in a new network). Does this involve payment? Not really.. at least not as a primary focus.. Payment is there.. but orchestration is about commerce; payment is just one of many important processes (See blog Payment in the OS).  Don’t look at payments as something in isolation, payments are the “connections” made in commerce; they are made for a purpose. These payment connections are rapidly changing from many environmental forces:

  • Internet flow of information,
  • Google enabled discovery
  • MNOs have enabled constant connectivity
  • Social has enabled reputation across activities
  • Online retail has enabled price transparency, comparison and product reputation
  • Changing of Bank roles, products and services
  • New Consumer behaviors

Payments = Network

Payments are the connections of the GDP. If we were to map payment flows, we would unlock a map of the global GDP at the micro level, from employment to shopping, behavior and preferences, to demand and supply. Perhaps this is why our government loves payment information. Oh.. the stories here.. (for another time). Free information flow on the internet is enabled through openness and a single primary protocol, whereas payments operates within 100s of proprietary networks with a complex series of clusters and “switches” (there is effort in connecting, authenticating and managing risk). Just as it would be nearly impossible to change the protocol for the internet, it would be difficult to bring abopayments pyramidut fundamental change in payments (see Rewiring commerce).  Connecting business is much different than connecting information (the core of my NewCo.. but I digress).

From a network strategy perspective, the business opportunity of changing “payments” pales in comparison to the opportunity to influence connections in commerce, banking and manufacturing. Payments support business and consumer needs; they do not alter their path. This insight is the downfall of bank payment strategies around “control”, and their inability to “tilt” toward merchant friendly value propositions.

A top 5 retailer provided my favorite commerce quote “I think of Commerce as a highway, the payment networks are like a toll bridge. I don’t mind paying them $0.25 to cross the bridge, but they want to see what is in my truck and takeUS Marketing Spend 2-3% of what is inside. Hence I’m looking for another bridge… “ (See Rewiring Commerce).  Google, Amazon, Facebook, Alibaba, Rakutan, V, MA, Amex, eBay all understand this. Rather than charging toll for crossing their bridge, these networks are beginning to execute against plans to grow the size of the goods in the merchant’s truck.

Intelligent use of data increases the effectiveness of the merchants, and in a way that also benefits consumers. Tilting more toward merchants and consumers.. means tilting away from banks. This is VERY hard for a bank to do. It is a change worth making however, as assisting merchants could meant 4x-10x of their current value creation (payments is roughly a $200B US business, marketing is $750B).


My favorite book on networks is Weak Links by Peter Csermely (viewable on Google Books here). If I had one book for you to read this is it. This book is tremendously arcane, detailed, technical, deep.. but I guarantee you that you will have a new view of commerce, banking, advertising, biology, social networks, payments, and society after reading it. In connecting to networks, each of us have limited resources. Therefore optimize our connections through finite set of “hubs” (unless there is some larger orchestrator).

Think about the battle in connecting networks, as each of us have limited resources we can connect only to a finite set of “hubs” (unless there is some larger orchestrator). Examples are Wikipedia and Google… these serve as the directories of information. It is almost IMPOSSIBLE to displace an efficient hub. This is why I love Visa, MA and Amex. If they can shake the issuer legacy.. and add a few merchant friendly services, they could drive 4x of their current value. Specifically, payments is roughly a $200B business, whereas marketing is $750B (in US).

Against this network strategy and services backdrop, there is an enormous transformation taking place in Commerce and Banking. In other words existing networks are evolving their services, as the “hubs” that they connect to (banks, retailers, manufacturers, aggregators, ..etc) undergo change within their “core”. See Remaking Retail, Future of Retail Banking: Prepaid?.

The regulatory/compliance “headache” for payment “innovators” revolve around connecting networks and engaging in non-commerce transactions. I’m not just talking about just small guys.. but BIG ones too (think Google, Apple, Amazon, Walmart, MCX, …etc).  Existing networks have an existing value proposition, and many don’t like to have their services leveraged by competitors (see Banking and Commerce: What is the Difference?, Don’t Wrap Me).

Banking Services

This leads us to Banking Services… expanding beyond commerce. This is area is very nebulous because of the complexity of regulatory authorities covering “banking” and money services. Here are just a few of the US regulators


What are Banking Services? Anything the regulators say are banking services. I’m not joking.. this is why I put the Paypal 2002 prospectus at the top. Banks are highly regulated, and the compliance costs are extraordinary. Regulators are attacking all things payments and banking with renewed vigor. Along with compliance constraints, there are constraints on how you can use data. As an example, my online banking team in Germany had to purge the server logs of IP addresses every 30 minutes (regardless of use for fraud).   (see Banking and Commerce: What is the Difference).

So what is the upside of being a bank? It’s certainly not the regulation or the mandatory compliance courses forced on every employee. The “benefit” of being a bank is the ability to take risk with other people’s money. Unfortunately, the BIG downside to being a bank, is that data can no longer flow outside of your organization. I cannot understate this limitation.

Banks have much clearer and hence stricter obligations as regards the sharing and protection of sensitive information, commonly known as ‘bank secrecy’. This matches the generally more extensive regulation of a bank, as opposed to the regulation of an ELMI or MSB.

Acquiring a new consumer financial account is hard, even if you get the consumer to create an account with you, you must get them to fund it, or take credit risk on them. These are the problems that banks have dealt with for 100s of years.
take rate

Banks have much clearer and hence stricter obligations as regards the sharing and protection of sensitive information, commonly known as ‘bank secrecy’. This matches the generally more extensive regulation of a bank, as opposed to the regulation of an ELMI or PI. Based on the same reasoning why non-banks require less strict regulation for their business and prudential risk involved, it follows that also their activities and also access and handling of certain information and data is restricted accordingly.

Would Paypal Buy a Bank?

Again, I have no idea here, but it doesn’t seem to make much sense. Considering a bank license is like watching flies in your kitchen window: the ones on the outside want in, and the ones on the inside want out.

For long time readers, I put together a blog about 4 years ago covering this topic Payment Startup: MSB or Bank? and US Payment Regulations.  As I outlined, there are very few payment regulations covering purchase of tangible commercial goods (this is true globally). We can see the evolution from PayPal’s 2002 prospectus.

We believe the licensing requirements of the Office of the Comptroller of the Currency, the Federal Reserve Board or other federal or state agencies that regulate or monitor banks or other types of providers of electronic commerce services do not apply to us. One or more states may conclude that, under its or their statutes, we are engaged in an unauthorized banking business. In that event, we might be subject to monetary penalties and adverse publicity and might be required to cease doing business with residents of those states. A number of states have enacted legislation regulating check sellers, money transmitters or service providers to banks, and we have applied for, or are in the process of applying for, licenses under this legislation in particular jurisdictions. To date, we have obtained licenses in two states.

How does Paypal operate today?


  • Licensed money services business in 47 states (all states which require one)
  • Bill Me Later, and paypal working capital are structured so that loans are originated by WebBank (Utah ILC). See this 2013 note on structure/issues
  • PayPal had been a market leader in “deposit” rates, through the Paypal Money Market fund (see Link). This fund was shut down in 2011 due to treasury rates/market conditions (see link).
  • A Discover partnership has yielded little fruit at the POS. Paypal had been claiming that there was an “exclusive” nature to the network agreement, whereas DFS was clear they could work around it by providing other services. (My blog on topic)
  • Paypal has been telling investors it plans to move to the POS, both with mobile, and an experimental paypal plastic card (running on Discover). Nothing is moving here, my guess is that JambaJuice is their #1 in volume and would be surprised if that had more than $50-$100M TPV ($1.5M-$5M in Revenue).
  • MasterCard pre-paid card for PayPal “balance” spend. I love this product, it is how I get cash out of my paypal account at the ATM.
  • Wells Fargo Clears Paypal ACH volume in US.
  • Paypal as strong acquiring relationship with Chase.
  • ADS partnership (see WSJ). In 2013 Paypal and ADS created a partnership with 3 primary components: ADS credit risk management (BML), Paypal merchant acceptance, Data/analytics/marketing at POS.



  • In Australia, PayPal serves its customers through PayPal Australia Pty. Ltd., which is licensed by the Australian Securities Investment Commission as a financial product
  • Per eBay’s 10k “In markets other than the U.S., the EU, Australia, Canada, Brazil, and Russia, PayPal serves its customers through PayPal Pte. Ltd., a wholly-owned subsidiary of PayPal that is based in Singapore. PayPal Pte. Ltd. is supervised in Singapore as a holder of a stored value facility.”

I see little upside for Paypal expanding it’s EU bank model to the US, as its current network assets and future opportunity revolve more around supporting commerce than managing risk.  Paypal’s current structure and partnerships (with ADS, Discover, MA, GE, …) provide the flexibility to deliver banking/lending services. For Paypal, Bank ownership would only hinder their broader efforts to deliver value to consumer (through data). Alternatively, a bank structure does work for other companies like Wirecard. The Wirecard bank model is a tremendous fit within a network where mobile operators serve distribution channels for financial services.

With respect to the Paypal/Bank rumors, my guess is that there is an “opportunistic” assessment going on .. and that this rumor is just one of the paths they have looked at. I also have a strong feeling that Discover is looking for a “partner/acquirer” that can make use of its network while it is still somewhat relevant.  Particularly since its M&A discussions with a top 5 bank 2 years ago did not happen.