Static Strategies and the REWIRING of Commerce

30 Sept

Warning… unfinished thoughts from a non linear thinker with typos. Feedback appreciated.

Why did IBM choose to outsource DOS to MSFT?  How did US auto makers miss the small car market? Anyone remember WorldBook encyclopedia? How did Research in Motion loose its dominant position? What happened to Kodak (it had digital patents it didn’t use)?  Why is Uber so successful?

The nature of competition is changing in MANY industries, this short post focuses on consumer commerce. What is driving the change?

  • Information/Transparency
  • Social/Reputation
  • Data/Targeting
  • Consumer Behavior and Expectations
  • Advertising
  • Non-Price Product Factors
  • … etc

Make no mistake Commerce is being REWIRED..  How do you rewire 25% of your Economy?  (US Retail Sales of $4T is 25% of the US $15.68T GDP). Unfortunately most of the “rewiring” is not by design… Today we see existing companies and business models working to “bolt on” changes to their models rather than transforming products, processes and systems. example infrastructure

For example, imagine you are a Retailer, how do you compete? A) You sell commodity goods at the highest possible price (see Retail 101).  B) Sell unique goods at the highest possible price. How do you achieve this? Well there are 100s of strategies here (ie. loyalty, market downs, coupons, loss leaders, price optimization, promotions, trade spend, …). These strategies have people assigned, budgets allocated, systems and reports that have been “tuned”.  This organizational momentum makes pivoting very hard.

The consumer  strategies above may be best summarized as: getting consumers to spend more with you, and leverage that loyalty for profitability.  These strategies have been in place for 100 years!   Where is the innovation and data? Product insight? A digital  version of a loyalty card is NOT innovation… similarly electronic coupons are just automation of an existing (broken) paper process. Is it any wonder we see so few successes in mobile anything? Most innovation is thus “bolt on” with little incremental VALUE.

There is SO MUCH opportunity for restructuring retail Commerce that I’m challenged to provide examples that are broad enough.

  • When was the last time you clicked on a banner ad?
  • Every year almost 30% of fresh fruit and vegetables are discarded for spoilage (see USDA),
  • US Apparel sees 30% of its inventory go in mark down fire sales (See Forbes).
  • What if a store could more accurately estimate consumer demand? Would you commit to purchase for a 30% discount?
  • How can Banks justify all of those branches and employees when all I use is the ATM?

Today much of retail is about location, convenience, impulse. What if consumer behavior shifts from convenience to community reputation where shopping is completed on mobile? What if  customized versions of any product could be at your door the next day? What if products weren’t all disposable, but rather assigned to approved reconditioning and repair specialists? My favorite example of a store of the future is Korea’s Tesco. (note pic below is a poster of a dairy case in a subway).


png ad spend

Commerce is ripe for a MASSIVE rewiring. The business drivers behind the rewiring are complex as is the technology. Today OMNICHANNEL is a myth.. most consumers finish the purchase in the channel in which they began. Mobile stays in mobile, online stays in online, physical stays in physical… Ad spend has thus been “stuck” as well. In 2008, less than 10% of P&G’s $3.2B Ad budget went to digital, last month Lafley said that 35% will of a $4.8B budget will go to digital, spend not even tracked by Advertising Media/Analysts.

What is changing?

  • Consumer Insight and Trust
  • Consumer Behavior
  • Use of Data
  • Mass Marketing to Targeted
  • Physical Retailer as Publisher
  • Custom Pricing (no one knows that another person paid)
  • Finer grained products
  • Entertainment/Product
  • Distribution and demand planning
  • Complex incentives by products, community, social group, inventory, availability…
  • CMO as Real Time “mission control” of the organization
  • Consumer interaction with merchandise and advertising (through mobile)
  • Transition of Commerce from Transaction to Consumer Interaction (see shopper marketing).
  • Mobile significantly impacts everything… it will be your new consumer touchpoint

Change Process

How will change manifest itself? Organic? Evolutionary? Instantaneous? What I look for is for someone to solve a problem, and meet a need. Uber is my example of the decade.. using information to meet a need that benefits both consumer and driver. If you mapped the information flow of Uber, the value over the existing system would be obvious.. eliminating the need for a central dispatcher, plus the benefit of “reputation”.  I would suggest that we take a look at the data flow in retail to see where we could add value, but the problem is that there are many “dispatchers” each refusing to share their own data. This is why Amazon and WalMart win… their supply chain is integrated.. and consumer value propositions well understood.

Why didn’t anyone think of Uber before? the need was obvious!! History shows again and again that people are biased by life experience and hence tend to see things from a biased view. In other words, outsiders providing analysis on Apple Passbook and Google wallet see them from the perspective of today along the lines of what exists today… a static view.  This is why IBM did not see the potential of the PC and commit needed investment in DOS (margin was terrible), why RIM did not understand what the iPhone did to an integrated “digital life” (we are more secure … who needs music), or why WorldBook didn’t build a wikipedia community. Product ignorance, hubris, momentum, complexity, cannibalization all make pivoting very hard.

I’ll be adding onto this blog later in the week in order to add depth to the following points below.

  •  The pending changes in Retail are TECTONIC, yet Banks/MNOs are still working to solve YESTERDAY’s problems. Retail margins have compressed from 4.2% in 2008 to 2.4% in 2012 and Banks are proposing mobile payments solutions that increase costs. It’s like trying to sell water to a guy drowning in a lake.
  •  Large organizations are terrible at strategy; most are challenged to coordinate internally. In a dynamic environment businesses must partners with the entities driving the change in order to influence it and to stay connected to it. (see Apple blog)
  •  Retailers are driven to identify means to compete (beyond price). Who can help them? My bets are on Partners must have a proven track record of delivering value to MERCHANT and to CONSUMER.
  •  I see a $750B US Total Addressable Market. Much of the “new” value will need a new network and platform. At the merchant level, we see leaders like Square Register, in the phone we see Google Wallet, in networks we see MCX and Visa/JPM. The losers? Any entity that can’t use data to describe precisely what it achieved (ex TV Advertising).
  •  …

Start Up Advice

  • Take a dynamic view of strategy through scenarios.
  • Focus on delivering a commerce value proposition to Merchant And Consumer
  • Avoid automating old broken processes
  • Address a pain point in a new way
  • Help consumers understand a new value proposition, in a way that makes sense (financially, environmentally, and socially).
  • Use Social data in some new way.
  • Find greenfield players and partner with them (avoid cannibalization issues)
  • shopper marketing

Payments: So What is a Start up to do?

As a Payments start up, the objective of Banks is to make your life difficult. Particularly when it comes to POS payments!  They are particularly wary of payments “brand” at the POS, but even when your product is a Mastercard banks are well positioned to make your life miserable (ask Google).  The primary rules “changes” are forcing POS payment providers into a Stored Value Account model. This means account has to be funded.. which practically means a move toward  ACH (given CNP rates), hence NewCos face the challenge of settlement risk, a prepaid account, and/or backup funding instruments. As soon as you move in this direction you will add many regulatory hurdles associated with obtaining 47 State Money Services Business (MSB) Licenses ($50k+/yr per state in maintenance costs alone). Even if you pass these hurdles.. banks are likely to put new ones up around ACH Debit and KYC (see blog and also Origination Risk, Square’s Cease and Desist in Illinios). Moving away from ACH and V/MA creates problems with acceptance and clearing (ie Dwolla, or Paypal/Discover).

My top recommendation… stay away from POS payments (in the US) unless you can raise $500M on $50M in revenue (Square). If you are intent at pursuing, I think Paypal/Discover is the best model.. Discover has the potential to evolve into a common clearing network for all start ups… The “friction” that banks are creating in V/MA, ACH, … is making DFS the dance partner of Choice. DFS has told analysts that their relationship with PayPal is NOT exclusive.. which is a good thing for the Valley. Note if you go this route that acceptance is much, much worse than V/MA.. particularly for small independent retailers.

Owning a bank solves the regulatory MSB issues, but not the customer acquisition issues and the new challenges that ODFIs will have in ACH debit (KYC requirements).

My informed view is that top retailers have now recognized they must “let the consumer decide” what payment instrument to use. Many new opportunities exist for helping retailers “steer” consumers to the lowest cost payment instrument.. combining loyalty, payment, and incentives.


update 21 Aug 2013

It looks like PIN debit “rails” provide the most flexibility in rules..  See my blog post on Winners/Losers

Google in Payments: Why Yesterday was BIG News

For eCommerce/mCommerce merchants this may be the biggest “no brainer” since Cybersource offered to offload card processing/fraud risk management. This is a killer… from both cost, and advertising perspective.

16 May

—- Correction — MA rate for non-regulated debit is 160 bps (not 105). My old Google card in the NFC wallet was card present.. I forgot to make the change to card not present…  Rate table below —-

Yesterday Google rolled out InstantPay, and a new planned P2P service integrated with Gmail, wallet, … etc. Although this is a step back from the physical card revealed by Android Police in November.  This is a VERY BIG DEAL for payments. Why?

Merchant Value Proposition

  • Reduce payments cost. No matter what card customer uses, everything will be priced as a non Durbin Debit (160 bps). This marks the First Time Ever a provider will take a LOSS on every payment, to get the data.
  • Customer uses whatever card they want, credit, debit, Amex.. or even ACH.
  • Merchant keeps current processor. The payment metaphor is a 16 digit PAN.. a Google MA that wraps everything else (see don’t wrap me).
  • Increased Conversion (particularly mobile). One button (pay with Google) and everything is filled out.
  • New performance measurement tools in google analytics
  • New offers and ad types possible (dependent on redemption, and/or number of purchases)
  • Possible loyalty programs
  • New physical merchant use cases (buy on mobile pick up in store).instant buy

Consumer Value

  • Centralized payment instrument/fraud protection. I’m not giving my card number out to all merchants
  • Ease of use.. no more form filling
  • Centralized e-reciepts
  • Use any payment instrument I want
  • Store coupons/incentives in wallet
  • Wallet on Android no longer NFC dependent

Consumer “downside”

  • Google gets to see more of your data.. but who do you trust with it? Google vs. Banks vs. none of the rates non-regulated


  • Expanding the google master account (GAIA) to manage verified identities and making new services available (to these consumers it has verified)
  • Ad delivery: Leveraging customer insight and “touches” to influence consumer
  • Ad quality: closing the loop with payment.. what ads contributed to what ACTUAL behavior
  • PAY FOR PERFORMANCE Advertising!??  No more CPC? one obvious future is if Google can see transaction then the could bill merchant for advertising based upon the purchase (not on the click). This is the Holy Grail of advertising and if there are indeed plans here.. it is beyond a moon shot. As an advertiser I would only pay for marketing that led to customers buying from me. This would spawn an entire new industry of campaign managers. More on this in future blog.
  • Phone as tool for Authorization of a given identity.
  • Business model… big win for merchant (cost, conversion, experience and reach) and consumer (protection, convenience)…

For eCommerce/mCommerce merchants this may be the biggest “no brainer” since Cybersource offered to offload card processing/fraud risk management.  This is a killer…  from both cost, and advertising perspective. The primary challenge Google faces is that 70% of eCommerce sales are controlled by Amazon, eBay/PayPal/GSI, and Visa/CYBS… They can make it difficult for smaller brands to turn this on.. but it will happen… Amazon may even want to let Google eat 1% interchange on all their sales.

Osama and the Google team have done great work getting this out to market. Congrats.


On the P2P side.. not quite sure. Sending money in gmail is certainly better than a stand alone service.. but EVERY SINGLE P2P effort money with gmailhas failed: Obopay, Visa Money Transfer, ClearXchange, POPMoney, Zashpay, paybox, ..  Consumers just don’t pay other people (like babysitters or golf bets) electronically, nor do they PAY FOR PAYMENTS. There is a strong social element in giving and receiving something of physical value (ie cash). Remember when your Grandmother sent you a birthday card with $20 in it? It just wouldn’t be the same if Granny sent me an email with an electronic notice..

With respect to Google’s new service, I will certainly say that Google has done a great job with integration, and there is no more highly used service in the world than Gmail.. so if anything had potential.. this is it. Google is not exactly a culture that seeks operational folks.. more of CREATORS.. not regulatory, payment ops, KYC, dispute, … experts. This will be one GIANT headache of a service to manage (globally).  If they can make this work, and extend to android.. it could be the LINCHPIN to ubiquity and payment success in emerging markets. Payments for “free”!!?? If cross border were enabled, what would this do to Xoom? PayPal? WU? See my blog on Growing the world’s economy and poverty alleviation.

 NFC Thoughts

Is Google walking away from NFC? Don’t think so.. there are probably markets where it makes sense. US doesn’t seem to be one of them.  Remember the NXP chips only just recently allowed more than one card emulation application.. so for last 5 years everything had to be Visa, or MA, or Amex.. ISIS is facing delays because of lack of Gemalto SWP SIMs and the handsets to support them… and consumer “demand”.  The NFC ecosystem is dead in the US… the only people that win are banks and telecos.. Merchants are not enabling contactless.. for a reason. As I told Google 2 yrs ago, to establish consumer behavior, you must use it 5+ times per week. There are 3 critical payment areas for this: Grocery, Gas and Transit.  Without participation here.. no payment change will occur.   See my note on Apple and NFC, and Google Wallet.

My top recommendation is to integrate this tightly with KYC/Authentication initiatives..  See blog on reputation.

Private Label.. “New” Competitive Environment?

Clearly there are opportunities for new retailer friendly networks. The new incremental value TO BE delivered is centered around influencing and rewarding the (consumer in partnership with merchants). Given that retailers compete with each other, loyalty is thus useless for retailers which don’t offer competitive products at competitive rates. Thus a “community” of retailers is not as valuable as a “community” of consumers (ie Facebook, Twitter, Android, Apple). Thus platforms which serve the community of consumers will be much more effective.

1 April 2012 (sorry for typos, 2 hour quick blog here…you get what you pay for)


Remember the BIGGEST Retailer challenge is to know WHO THE CUSTOMER IS. A PL card combines loyalty card + customer information + payment information (closed loop) + possible payment information open loop. What Retailers gained by giving up their PL cards was access to credit without credit risk.. what they lost was the ability to know who the customer was. We now have models where they can have their cake and eat it too.

Most Retailers spend very little of their own money on marketing… it is the manufacturer that provides credits in form of “trade spend” to help Retailers advertise. Retailers thus seek new innovative tools to channel this spend. It is an arms race as retailers work to compete in selling commodity goods at the highest possible prices. A Retailer that has a new fun way to engage the customer will have a quantitative edge… and attract greater trade spend if they can engage customer. Manufactures want brand loyalty, Retailers want retailer loyalty, Platforms want platform loyalty, Banks want Card Loyalty. Best case study by far is Target Redcard (read great Mercator Report) which now accounts for 6%+ of sales (debit) from nothing just 2 years ago “net cost of offers”.  To restate above, with respect to Retailer “marketing spend” it is not the Retailer’s money.. it is the manufacturers. Few people understand this game.. which is why most Retailers laugh at silicon valley types with no retail background. The macro effect of new payment networks will be to shift AD spend from less efficient channels (TV, Radio, …) to more effective channels (?Trade spend). The money does NOT come from the Retailer.. but enables the RETAILER TO BE A BETTER MARKETER by using their data.

What is the business driver of the JPM deal?

If you were a bank which had all of the technical assets to run a 3 party network, but were constrained by rules in which your assets operated.. what would you do?Interchange Rates US Fed

Institutional investors constantly tell me that the Visa is efficient and that the overall network “costs” are very small in proportion to the benefits of universal acceptance.  Well there are very big assumptions in this statement of efficiency….

  1. That all parties are benefiting from universal acceptance
  2. There are no competitors operating in a different model

Both of these assumptions are wrong. If we look at it from a macro view, a 2% tax on sales is not very “efficient” at all, particularly when combined with a 15-20% interest rate on ANR of a typical card. The “value” of credit cards is highly biased toward banks and affluent customers.  As the Fed Study below illustrates, Affluent customers receive a benefit of $1,133 from consumers that pay with cash.

Card Rewards US Federal Reserve

Reward levels and retail prices affect the welfare of each individual  consumer differently. Although typical U.S. consumers use payment cards as well as cash and checks, some consumers use payment cards  more exclusively, while others use cash or checks more exclusively. If  more generous rewards imply higher prices for all consumers regardless  of their payment methods, then they may make consumers who tend  to use cash and checks worse off.

Who Loses in from Credit Card Payments? Federal Reserve Bank of Boston

Merchant fees and reward programs generate an implicit monetary transfer to credit card  users from non-card (or “cash”) users because merchants generally do not set differential  prices for card users to recoup the costs of fees and rewards. On average, each cash-using  household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year.

The very nature of card are changing, a disruption based on mobile ($0 issuance cost, improved identification/fraud) and data/advertising (see GoogleWallet).

How would you design the OPTIMAL Merchant friendly payment network?


  • Merchant Brand – Merchant’s brand
  • Cost of Payment – $0.05 for Debit
  • Risk Management – Allow for use of merchant data, mobile data and bank data.
  • Enable Merchant CRM – See blog
  • Consumer Credit – Available. Banks compete for lowest rate.
  • Payment Processing/Acceptance. Accepted in merchant, can be used off network as well. Minimal changes to existing systems
  • Consumer Support Services – Dispute resolution
  • Mobile Services
    1. Product Selection – Buying guide/research
    2. Community – Reviews
    3. Social – Facebook/Twitter integration
    4. Loyalty Services – Support merchant loyalty programs, points, incentives
    5. Advertising Services – Touch customer prior to purchase, during shopping, at checkout
    6. Coupon/redemption services – Enable all incentives to be stored/presented/managed
    7. eReciept – Supports customer requirements

This is certainly much beyond what Visa is currently delivering. As I’ve stated previously, Google and American Express are by far the leaders here, as top 5 banks struggle to deliver these services within a 4 party network.

The private label card industry is hot (See December American Banker, Mercator on Target RedCard). JPM is now uniquely positioned to deliver a platform which can support multiple private label payment products… from MCX to Google.  It would seem that their unique Visa relationship allows them to benefit from Visa’s larger  acceptance network when their private label card operates beyond a “closed loop” merchant community. An open question is whether a given private label merchant will choose to have a Visa bug on their card or not, and if the bug is not on the card.. will it still operate as a visa card?  This seems to be the only reason for a “switch” of transaction from VisaNet to JPM VisaNet.. so it seems to be a planned feature.  Regardless of approach on Bug and Switching transactions, JPM is in a class by itself in competing for business of merchants, payment platforms, and delivering value around Visa.JPM PL Example

In the mobile world the cost of issuance is now $0.. why wouldn’t every merchant want their own private label card? With a punch list of available features above? Giving every merchant “Cluster” the ability to strike agreements with other clusters (example Wal-mart accepting Exxon cards, see blog). Merchants that currently give their consumers loyalty cards, could exchange them for multi function virtual cards in a mobile wallet at no cost. Target is the clear leader here.

My view is that banks tend to look at private label as a division of their Card’s group. Banks have no other way to monetize the card platform beyond fees and rates.  The winner here will look at these new private label initiatives, not as a payments initiative, but rather as CRM and advertising. A very challenging task that goes against both organization, and consumer behavior. During my time running 2 of the world’s largest online banks, consumers don’t spend time shopping for deals. In retail banking they log on, check their balance, pay their bills 2-3 times a week. In Card it is much worse, coming on 2-3 times per MONTH.

Clearly there are opportunities for new retailer friendly networks. The new incremental value TO BE delivered is centered around influencing and rewarding the (consumer in partnership with merchants). Given that retailers compete with each other, loyalty is thus useless for retailers which don’t offer competitive products at competitive rates. Thus a “community” of retailers is not as valuable as a “community” of consumers (ie Facebook, Twitter, Android, Apple). Thus platforms which serve the community of consumers will be much more effective. Banks seem ill suited to “drive” this new network as they have demonstrated a very poor history of “partnership” with retailers.  For example current CLO initiatives are focused on using retailer data against them (Blog). We thus see banks working on a defensive token strategy to ensure that no one can operate on payment rails but them.ven goog reach

Future Scenarios for POS Payments

  1. Private Label Bank Platform. Amex in lead, JPM #2. Keys for success: delivering value beyond affluent, reaching consumer before they buy, delivering merchant CRM, helping merchants “own” the consumer.
  2. Retailer led payments. Target is role model, blog here. As Mercator reports, RedCard now accounts for 8% of sales.
  3. Retailer led financial services. Either through Pre-Paid as in the Amex/WMT relationship, or as in Tesco’s bank. Retailers (or MNOs) leveraging their physical distribution and foot traffic to deliver bank services. Keys for success: expanding beyond the Mass to the Affluent, consumer value proposition, consumer acquisition, bank licenses/regulatory, CRM, Advertising
  4. Neutral Party Platform. Square, Google, Level Up, ?Apple, ?Amazon… Consumer friendly… the means getting both merchants and banks on board.  Overview in blog on TXVIA, and Digital Wallet Strategies.

None of these will be successful in isolation.. my bet is that we will continue to see complete chaos until we find parties that can partner… or gain traction in a segment of the market that is not in view of 800lb Gorilla’s. Retailers, banks all view the customer as uniquely theirs. Once these entities realize that consumers migrate toward value and entertainment, they will begin to align their services to channels where consumers reside.. NOT to where they WANT their consumers to reside. (I’m not looking for diaper coupons on Similarly, Private label cards are a key element of a broader CRM and price promotion strategy… they do not exist in isolation and cannot be outsourced in part. price promotion

My top example this month is Restaurants. There are over 800,000 restaurant locations in the US. 474,000 of them are part of companies with less than 500 employees (independents).  This is a perfect ground for Square, Fisbowl (CRM) and LevelUp (Payments).. Square gives them a cash register that integrates existing card payments at a significantly lower cost on day one, and there is new functionality for advertising and buying experience (pay with Square).

Thoughts appreciated.

Network War – Battle of the Cloud Part 4

OLD blog that was all wrong.. kept alive because it shows I’m human

Clusters Form

———————– Update July 2014

I no longer believe in this fragmentation with the exception of JPM. The banks are trying to create an alternative to no avail (over last 5 yrs). I agree with Visa and Charlie here. This bank driven initiative is now dead.. so only read this if you are interested in history of why banks started this thing in the first place.. and worked to keep it a secret from V/MA for 3-4 yrs. The big announcement that changed this entire landscape came in Oct 2013 (Visa, MA, Amex EMVCo token announcement).

— Update

Guys I welcome updates.. If I’m wrong I’ll update. I’m not writing this to destroy Visa, I’m writing this because many businesses are going to be impacted by this change.

Visa itself does not have a complete picture of all of member bank plans, but the obvious assumption is that the banks are looking to create an acceptance and issuance infrastructure which circumvents them. For example, we now see through the secure cloud announcement that Banks are working to replace card numbers with “tokens” (16 digit PAN that is not a V or MA number, but an ISO number owned by the bank and not affiliated with any network).

Visa will continue to own Visa PANs, but are facing new restrictions on routing/switching (data sharing),  AND a world where the issued instrument is NOT their number (ie NFC, TCH “token”). JPM and other banks must consider how the POS operates with their new token network, for multiple form factors (card, mobile QR code, voice print, …). There are many complexities. For example a new Chase card (with no V bug) with a JPM owned PAN.  Does the merchant treat this as a Visa card? Of course not.. JPM wants the merchant to “resolve” this token for another card which is accepted. But in this “resolution” process is Merchant under a new agreement? What control does the merchant have to ensure that they instrument is not resolved to their detriment (ie debit vs. credit)? Why as a merchant would I take a token to a card and not the card?

Visa’s PR implies that they will participate and “support” ChaseNet.  They only have a partial view on what that is.. primarily that there will be new tokens.. JPM is allowing Visa to “switch” these tokens onto a new network. Visa may own Visa transactions.. but they will not own Tokens… it is a give and take. Tokens are NOT V or MA numbers, but issuers can use their same acceptance infrastructure in processing them. The lack of clarity by V is certainly not all of their fault.. as the token project is not quite announced. I doubt if V is full party to bank plans here, as some members may work to have these tokens embedded in plastic. A dual function card? Yes my head is spinning.

(Updated from Visa’s Barclay presentation). Charlie quotes on the new “Chase Net”

  • “Run through the Visa Network, an instance which they can say is theirs. “
  • “we control the network, we control the IP”
  • “Its the Chase acceptance mark, Chase will be on the card, Chase will be the name at the POS,.. but these transactions run through the visa network, an instance that Chase can say is theirs, but they run on the Visa network. “
  • “Its our network… we are not white labeling anything…”


21 March 2013

Battle of the Cloud 4 – Network War

Those that are frequent readers know I’m not a linear thinker. The cloud battle story just took a detour from my earlier note this month Battle of the Cloud Part 3 …the story line of wallets has jumped to shattering changes going on in the networks. .Network Clusters

Biggest news by far is the Visa/JPM deal which I covered earlier. The key “break” here is that JPM will no longer be paying transaction fees for on-us, no longer routing on-us transactions to Visa (note this is disputed) , and will have ability to create their own network with their own rules. You must parse Visa’s public statements very carefully to discern deal terms. Visa’s PR and IR teams get an A+ as they have proven to be masters at obfuscation here. My best guess on deal terms is that JPM has committed to “license” of VisaNet which has NO transactional component. Visa plans to treat this licensing fee as “transaction revenue”, but the revenue has no variable component.  This is where the PR/IR “art” comes in.. JPM’s “licensing of VisaNet” has given VisaNet a double meaning. This new JPM “version” of Visa Net is likely to operate this way in Name only. Visa told analysts that this new version will run within its infrastructure. Ok, but which transactions will run on it? On Us Transaction? “Transactions which conform to a new JPM rule set“? Both? How long will this take place?

Publicly Visa states that transaction revenue will increase. Which is true, at least for next 2 years, as the license revenue will more than cover current “on us” JPM volumes to yield a premium with the addition of non Visa volume (for a net volume increase at a lower per tran cost). However I have yet to see Visa project JPM’s “on us VisaNet” revenue against expected JPM ON US transaction volume. I have 90% confidence we will see a flat line.

Why am I so confident? If there was a 1:1 match of Visa Net transaction rate to JPM On-Us …. the other issuers wouldn’t be beating down the doors of Visa and MA over the last 2 weeks. Everyone in the industry knows what is going on this month.. and also knows what JPM received from Visa…  and they want it toChase Pricing

The Visa Network just shattered. Hence my article yesterday on Visa- Golden Goose is Now on the Menu.  We are evolving from a “star network” to one of clusters. Clusters are Bank led (ie JPM, new US Bank Consortium, EU Bank Consortium, ..), Merchant led (MCX, Amazon, PayPal, Rakuten, WalmartPay, TargetPay,  ..), Platform led (ISIS, Google, Apple, Samsung, …). Each clustering strategy considers relationship w/ consumer, merchant and bank (or clearing). Each cluster performs “on us” transactions and routes selectively (see Least Cost Routing and Business Implications of Tokens, Wallet Strategies).

An institutional investor asked yesterday “Why would Visa do this?” Well they certainly did NOT want to. I know first hand that JPM was quite upset with Visa (Joe Saunders 2011) and were planning to either buy Discover or move their portfolio to Mastercard. Visa’s BOD found out about how badly the Saunders/Buse team were screwing up …. and put in someone that Jamie Dimon trusted, FURTHER giving JPM everything they wanted in a Discover Acquisition with an new “ChaseNet” that allows JPM to keep on us transactions with PaymentTech (less than 17% of acquired volume). (also see Future of Retail Banking, new US ACH system, and  Rewiring Commerce).

Visa did not want to let on us go, or give away its transaction pricing.. and they have gone through extreme contortions to explain away this deal. But it is a major crack in their model.. and every other major issuer must pursue the equivalent. Visa kept them in the tent… well at least they kept JPM wearing the same jersey..

“It allows us to go to merchants and strike our own [deals] with merchants,” Jamie Dimon, chairman and chief executive of J.P. Morgan, said during an interview at the bank’s annual investor day in New York. “We just think it will be a better relationship between us and the merchant.” – Feb 26, WSJ

Implications for the industry

Visa is facing no revenue impact I can see through 2014 because of this. As transaction volumes from on-us will be covered by license revenue (at least in year one). This is how I would construct the deal.. it is my best guess… and it is a guess. I am personally short on Visa.. which may bias me… There are 3 primary drivers which would lead to significant revenue impact for V post 2014

  • On Us volumes will increase (JPM and others) and Visa will receive no incremental revenue. Other issuers will demand similar treatment or go to competing network.
  • New payment networks (Tokens) will form with alternate rules (JPM, MCX, Bank Consortium, EMEA Banks, …). The Consumer and merchant adoption curves of each will be different.
  • On Us will morph into “On We” where clusters route CREDIT outside of Visa. This is place today within the debit world, both US (post durbin) and EU Debit (SEPA DD)

Visa’s long term strategy. Own tokenization and acceptance mechanics.  I see this as rebuilding a generic “TSM” that can support NFC, Tokens or anything else that requires a non-card payment. Visa’s carrot is certification and card present rates.. this may be stronger than anything that bank consortiums could assemble in short term.

We could also see a “rebalancing” of network rules to favor the merchant. Wouldn’t that be funny. My top idea would be for Visa to change rules to force Acquirers and issuers to quote MDR to merchant and allow them to decline cards (or pass along costs) based upon rate. Ok that is my most extreme idea..  Visa can’t continue to live life as an entity that is despised by banks and merchants.. so where will it anchor? Visa’s EMEA news is much more complicated.. yesterday’s WSJ is a good read.

Mobile Payments. As I outlined in business implications of tokens, US mobile payments will have a new “network”, a system to use tokens which are neither V or MA card numbers. Thus Banks need not route these transactions through either V or MA, but will be able to leverage same acceptance infrastructure. Virtual card numbers will be bank numbers that banks resolve.  JPM’s is first to align w/ plastic, leveraging common authorization authentication and other services. THE CONCEPT OF A CARD IS CHANGING in MOBILE.

Every Cluster for themselves.. Each group is working to “lock out” others. Banks are working to lock up the ACH rails, V/MA are placing new network fees and controls, issuers are requiring tokens, retailers are locking up data and delivering financial services, MNOs are pushing SWP NFC. Who owns what rails? who owns customer? who owns data?IPP_3_clusters_labels

Mastercard’s phones are ringing off the hook. Visa subtly told institutional investors this month that JPM was a “special case” and that they had no plans to replicate deal. Top 5 banks don’t like being told they are not special. Pandora’s box has now been opened. The future is brighter for MA as they can only gain in US and international is not currently impacted.

Issuers/Retail Banks. JPM and other top banks really had no choice but to move in this direction. Payments are essential to their business (Banks will WIN in Payments), they created Visa once.. why not do it again? The cost of issuance is dropping to zero, retail banking is fundamentally changing, AMEX and Google are creating retailer value propositions where they can no longer compete, regulators have killed their fees, their brands are tarnished and they are beginning to lose the customer.

Very important to note that the large issuers/retail banks own the rules of most networks. There is a mature strategy here to stop non-bank mobile payments for example (see New ACH).

My belief is that we will see M&A and strategic partnership activity with acquirers and processors, as they become “the belle of the ball” which would enable other entities to compete w/ Amex and JPM/ Chase Paymentech. Clusters will be rather “lumpy” and rather messy but will eventually coalesce into a world where payments look much more like dumb pipes. Processors also have new opportunities in servicing new payment networks and new non-bank customers (retailers).

Platforms. We will see heavy investment to “own” the customer at point of interaction. Apple, Google, Samsung, Amazon should attempt to own customer identification and data needed to authenticate at all costs.

Retail financial services leaders Tesco, Target and Wal-Mart have defined a template which other retailers will follow. Retailers are poised to deliver banking services more cost effectively to the mass market than the banks. (Future of Retail Banking). I expect to see retailers work to acquire banking licenses or operate their consortium within a bank.

Mobile operators have chance to own customer mobile identity and deliver financial services… but must completely reorganize to do so. (see Stage 4 Value ShiftWalled Gardens, Future of Phones – Good Enough)

Start ups are facing life as food trucks driving around in a WWI battle field filled with trenches, landmines and mustard gas. Look at the neat stuff I have to sell.. as the big global powers fight each other. Just look at the impact that Mastercard’s new rules are having on PayPal.

Investors.. ensure your payment start up has a committed partner bank.. forget about MSBs unless you have 100M+ to sink in it.. MSBs still require you to have a bank account and banks are running from this space (in the US). Take a look at Square’s recent issue. Taking credit cards into a pooled account, issuing gift cards or credits..  Assume 100k per year per state in maintaining licenses. Best legal group to help you work through these things is Card Compliant.

I would challenge all 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? What if credit were free if you shared your data? What if the basis for competition in cards was no longer bank brand and bank loyalty points but retailer loyalty? What makes a consumer loyal?

My favorite example of a future vision is still Square.. even though Starbucks has had a few bumps in the road in implementing it…. It will be a great customer experience… Everyone loves to be recognized.. like walking into the Cheers Bar and hearing “NOOOORRRMMMM”.  I’ll have the same drink I had last time.. and pay with the same card. This is a great consumer POS experience that retailers will jump to support. How does this payment settle? However the consumer and merchant agree.. I expect to see significant degradation in the value of the card product and “plastic”. The metaphor is changing in physical commerce.   Credit access and clearing will become ubiquitous… customer insight and experience will differentiate merchants and product providers.

Gemalto QR Codes.. One Giant Leap _________ ?

I like QR codes for their ubiquity and established consumer behavior (thank Starbucks in the US). Stores don’t need to buy any new hardware for this to work, there is a zero cost of issuance, and it will work on a broad spectrum of phones. Development cycles for Store POS software are normally 18 months… so it could be some time before we see something come out.

10 Jan 2013

NFC is a beautiful technology with uses far beyond payment. In the payment use case however, it is not the technology, but rather a business battle over control and ownership  (a 12 Party NFC Supply Chain Mess) which has conspired to create many forces against NFC’s payment success. QR_code_phone

As I stated yesterday, latest news is that MCX has chosen QR code based approach from Gemalto (following Starbucks success). My guess is that Gemalto has developed a one time use QR code that is derived from device information (it will change for every transaction… ).  You can safely assume that ACH will be the primary funding mechanism (just as in Target’s Redcard and Safeway’s FastForward).  The banks had some idea of MCX’s plans are thus moving aggressively to create a directory service to “protect” customer DDA information via tokenization. My guess is that this protection will come at a price….

Here is my best guess of the transaction flow (assuming the rumor is true).


  • Customer downloads Gemalto’s wallet
  • Account is created unique to the phone
  • Consumer registers phone, DDA, loyalty cards, backup funding instrument
  • Bank account is validated, consumer risk scored, back up payment instrument run for auth
  • Wallet is activated on first use at a participating merchant after ID is validated


  • Customer opens wallet at checkout
  • Unique QR code is generated based upon phone information (ex IMEI, time, network, phone #, …)
  • Cashier selects “check” or “loyalty card”
  • QR code is presented to register and scanned. Note MCX merchants are large multi lane merchants with POS development teams.. there will be some work to be done here
  • Authorization – ECR passes QR code to MCX. Example via store controller routed much the same way coupons are done today.
  • MCX validates code, performs fraud screen, authorizes payment (performed by FIS).
  • Individual stores also will be able to leverage code as key for consumer “cloud wallet” access where coupons are stored and redemption is paperless.
  • Coupons are applied
  • Loyalty price/promotions are applied
  • Payment is applied
  • Zero balance
  • Consumer gets electronic receipt and paper one.

I like QR codes for their ubiquity and established consumer behavior (thank Starbucks in the US). Stores don’t need to buy any new hardware for this to work, there is a zero cost of issuance, and it will work on a broad spectrum of phones. Development cycles for Store POS software are normally 18 months… so it could be some time before we see something come out.

QR codes may not be rocket science, but NFC has demonstrated the downside of tech heavy solutions. We may not need a $400M F22 when a simple bicycle will do. Carriers face a future as dumb pipes, a future share by banks, as both work to control their market positions instead of delivering value. MNOs and Banks (in the US) have proven themselves equally incapable of succeeding with new walled garden strategies.  Commerce will find the path of least resistance, like a mighty river…

The big challenge for MCX will NOT be in technology, but rather a consumer value proposition.  Retailers stated goal is to bring death to merchant funded bank card reward programs. What will convince me to part with my Amex card at the POS?… it will need to be something substantial.

Another often asked question is can MCX keep a bunch of fierce competitors working together in the same tent? This approach seems broad enough to insulate MCX from retail competitive forces and align them in fighting a common enemy. Per Sun Tzu “the enemy of my enemy is my friend”. Retailers are looking to turn the tables on the  2% “payment tax” on their business. There is serious enterprise commitment to making MCX work, banks will do well to treat them with respect.

Who will lose in this approach?

  • Payment Terminal Manufactures
  • Anyone dependent on NFC
  • Existing Payment Networks – Debit Volume primarily (if MCX can create a value proposition)
  • Retail banks. The primary payment relationship is a strong “daily use”… there are many downside for banks if they loose it.. for example retailers could offer instant credit based upon your history and network reputation.
  • Start ups building case for value around bank cards or payment networks
  • Consumers that want anonymity.

Other Related Blogs

Future of Retail Banking: Prepaid?

Today’s pre-paid dynamics may be the tipping point by which 3 party networks begin to overtake V/MA in growth. A trend that will accelerate when other business models require “control”. This next phase will be centered around merchant/consumer transaction data, which will begin to unlock the advertising revenue pool, which is almost 4 times larger than that of payments.

Payments and core banking will become a “dumb pipe” business unless Banks create value and assume a larger orchestration role. POS Payments are the central feature of a transaction account, if banks loose this relationship they will be in a poor position to orchestrate. 4 party networks are very, very hard to change.

Nov 7 2012 (updated for typos)

Warning.. long monotonous blog. Sorry for the lack of connectedness, written over 7 days and my editor is rather slammed. You have been warned, so don’t complain….


  1. The competitive dynamics surrounding a “transaction account” (ie DDA) are shifting. For example, Retailer banking/prepaid products (Wal-Mart, Tesco, ..) offer significant fee advantages to most lower mass customers. Three party networks like Amex and Discover have unique advantages when combined with Retailers distribution/service capabilities. This means prepaid has become a disruption: a new good enough product…
  2. Net interest income is 64% of total US retail bank revenues, yet the bottom four deciles of mass market customers are no longer profitable. Given that the transactional account is the #1 factor for retail bank profitability, what are implications if banks loose it?
  3. There is a high probability for disruptive value propositions in Payments, as advertising replaces merchant borne interchange.  Payments and core banking will become a “dumb pipe” business unless Banks create value and assume a larger orchestration role. POS Payments are the central feature of a transaction account, if banks loose this relationship they will be in a poor position to orchestrate.

Does anyone else have trouble keeping up with state of the art? Who is doing what? My method of keeping up with change is to immerse myself in a given area for a day or two. It also gives me a reason to call my friends and colleagues.  This week the theme is retail banking. I’ve spent too much time thinking about payments and how it relates to mobile, advertising, …etc.   I thought I would dust off my banking hat and think in terms of a banker.

Retail Banking

I’m struck by how odd retail banking is. Why are banking services not more simple? Why do I have a separate savings, checking and card account? Why not one account? if the account runs in a arrears I pay interest and if it runs in credit the bank pays me interest? Why does a bank take 3-5 days to move money? How on earth do the banks afford all of those stand alone branches when I visit them perhaps once or twice a year?  Why all of the regulation? What does my bank do for me? What problems do retail banks solve? Can someone else solve these problems more efficiently?

There is certainly no single answer. Retail banking serves many demographics, from the college student to the billionaire. Historically retail bank relationships were very important relationships, as banks only lent money to people they “knew”, based on the deposits they had. Younger consumers need to borrow, older consumers …  savings. Banks focused on things like college student accounts to lock in that relationship as early as possible. Today’s modern financial markets provide for the securitization of loans, thereby spreading risk among various investors willing to assume it. Does a banking relationship matter anymore? to Consumers? to Banks?

I’m struck by how little change has occurred (in the US) on the liabilities side of the banking business? Quite frankly US consumers are treated like idiots who sacrifice “protection of capital” over risk. We now have an entire agency working to protect US consumers from banks.. (BTW what is predatory lending?). Other markets let consumers take on risk.. and hence have many more choices, and innovation, in savings. For example, I’m very fortunate to have worked with so many fantastic people over the years. The great thing about running Citi’s channels globally is that each and every country had a somewhat unique competitive and regulatory environment. It was like running 27 different banks. There were many different strategies for deposit acquisition, for example:

  • In Spain we had a 10/2 product that paid 10% interest on deposits for the first 2 months.. then went to 1%.
  • In Japan Citi leveraged its global footprint, and the poor local consumer rate environment, to create foreign currency (FCY) accounts which allowed consumers earn higher returns by assuming currency conversion (FX) risk in uninsured accounts.
  • The UK is perhaps the most competitive retail bank environment in the world. Consumers in the UK can switch banks almost as easily as changing shoes, it was thus essential to enable consumers to switch quickly and then get them into other products quickly. Take a look at today’s UK savings rates from MoneySuperMarket (8% on a fixed $30k deposit) vs the US (1.05%  Rate differences on this scale helped fuel the carry trade in Japan.

In the US, it is well known (inside the banking community) that banks are highly discouraged from competing on rates. Not that it matters, this amazing study by the Chicago Fed (Chicago Fed – Checking Accounts What Do Consumers Value – 2010) shows that US consumers are rate inelastic.. and care much more about fees. You have read this right, consumers don’t care about interest rates on their deposits.. which is certainly NOT intuitive. Perhaps rates are all so close to 0% that 5-10bps doesn’t matter. Or perhaps  because the average US consumer does not save at all, and those that do have their money in another place.

Retail Bank Profitability. Net interest income (2011, represented more than 64% of total US bank revenues) is the rate spread between borrowing short and lending long, or more broadly the differential between asset yields and funding costs. Net interest margins (defined as net interest income over average earning assets) were 3.6% at year-end 2011, just 11% higher from the 20-year low of 3.2% in the last quarter of 2006.

From DB Research

As low rates persist, loan-to-deposit spreads fall as prices adjust, and longer-term securities, held as assets, roll over to lower-yielding securities (the same holds true on the funding side, of course, helping to extend the positive impact of falling interest rates into the future). The net impact on banks’ net interest levels may be negative, though. In previous recoveries, this effect has been offset by increased loan volumes, allowing banks to return to sustainable growth levels. Furthermore, as an economy recovers, banks may quickly benefit as short-term assets roll over at higher rates

To summarize: Bank net interest income is important (64%), and falling. Banks have had a key revenue source taken away from them (Debit interchange) and are also facing another merchant led suit on credit card interchange. Bank brands and reputations are on a steady downward trend. Consumers don’t care about rates, but react strongly on fees. … A new regulatory agency to protect consumers is just now forming and looking to make its mark. What are banks to do?

Transaction Account

What is the purpose of a bank provided transactional account today? Well certainly our mattresses are a little less lumpy, and the relationship factors have largely gone away. So what is left? Transactionality?

The banks have long recognized that the transactional account is the #1 factor driving a consumer relationship. Virtually every other banking product and service hangs from this account. Most retail banks view direct deposit (internationally known as Salary Domiciliation or Sal Dom) as the key indicator of the transactional relationship. Consumers have limited “energy” to connect to more than one network (as outlined in followed my previous blog on Weak Links). 

This financial supermarket concept, authored by Sandy Weill and John Reed, has not exactly been a slam dunk success. Nonetheless every retail bank starts selling with a checking account, even if nothing else is attached. What are the key factors influencing the selection of a transactional account?

  • Why are deposits important to banks?
  • Driver of overall relationship à Customer Net Revenue
  • Liquidity ratio ->Risk ->Agency Rating -> Capital Costs
  • How do consumers select a bank?

The public compete data above is completely consistent with previous proprietary studies I’ve commissioned. Consumers tend to pick their bank based on how convenient the branch and/or ATM is.

Is there something fundamentally changing? What if consumers don’t visit a branch… or no longer use cash? Are there new value propositions? Where will consumers (and their deposits) go?

Recent market developments/Announcements

The Amex Bluebird product is revolutionary in terms of fees. It is the lowest cost reloadable card in the market today. Beyond the product, I’m even more impressed with WalMart’s business strategy here. They seem to be willing to break even on payments/banking in order to win the overall consumer relationship and increase foot traffic and loyalty in their stores. Take a look at the suite of products offered by WalMart. While banks are pushing out the bottom forty percent of mass consumers, WalMart has made a bet that it cannot only serve them, but do so profitably.

There are many different types of pre-paid cards (more below), however most are not regulated as bank accounts. In almost every geography, consumer deposits (interest bearing, insured) are regulated because they drive both bank liquidity (which drives lending and cost of capital) and profitability. Remember before capital markets existed to securitize assets (loans) retail banks could only lend to the extent of their balance sheet (deposits). Consumers put their money with banks in order to earn interest (the carrot) with the downside of fees on usage (the stick).  In the US consumers are beginning to ask themselves “is the carrot big enough”?

In emerging markets many banks have a poor reputation, additionally access to legal resources are limited, as are consumer protections. How would you feel if you showed up to your bank for a withdrawal and your bank said “sorry your money is gone” and you had no recourse? This dynamic has propelled other banking models in emerging markets. For example my friend Nick Hughes and his Vodafone/Safaricom team created MPESA in Kenya which provided enormous value to consumers. However MPESA caused an apoplectic reaction from the banking regulators as 10% of Kenya’s GDP sat in a non-interest bearing Vodafone owned settlement account. MPESA therefore impacted bank liquidity (IF the funds would have gone into a bank account as opposed to just M1/cash). Visa and MA have worked hard to try to make prepaid the underlying account for mobile money in emerging markets, to very little avail. The problem is not connecting people to the V/MA network.. and giving balances to an approved bank. The problem is first transferring money to entities currently not on any network, then paying a very small number of billers.  

Why are consumers defecting in the US? Ernst and Young just published a phenomenal global study on this subject. The result of their analysis was that consumer confidence in banks is degrading. E&Y outlined a call to action by banks: reconfigure your business models around customer needs. My hypothesis is that consumers have reached a tipping point where they view banking services as commodities… In the UK, this is already well established.


I haven’t spent much time thinking about prepaid cards so I thought it was time to refresh myself, particularly in light of MCX and the prospect of retailers acting as Banks.

From the US Fed

Prepaid cards offer much of the functionality of checking accounts, but that does not mean the underlying economics are the same. A typical prepaid card in the data is active for six months or less, a small fraction of the longevity seen with consumer checking accounts. As a result, account acquisition strategy and the recovery of fixed and variable costs are likely different than for checking accounts. …. prepaid cards with [direct deposit are uncommon but] remain active more than twice as long and have 10 times or more purchase and other activity than other cards in the same program category. As a result, these cards typically generate at least four times more revenue for the prepaid card issuer

Similarly Pre-paid cards also face a complex web of regulation (See Philadelphia Fed Paper 2010), across 31 different types of cards.

31 types of cards? Did anyone else realize the diversity here? Wow… For the sake of this blog, let’s focus on reloadable (GPR) open loop cards (references to prepaid below are on this card type only). It would seem that GPR pre-paid is following the general disruption pattern of serving a lower tier of the market at a more attractive price point. According to Mercator, In 2009, consumers loaded $28.6 billion onto prepaid cards. By 2015, prepaids will hold $168 billion.

Last month’s WSJ ( Prepaid Enters Mainstream) outlined this dynamic

Traditional leaders in GPR pre-paid have been Green Dot, NetSpend, . The Durbin amendment exempted most prepaid cards. This means that pre-paid is largely example from the Durbin interchange restrictions… (with several conditions). Thus the business case for pre-paid is rather strong, and Banks themselves are assessing if they can make this the new “starter” account (ex Chase Liquid). However Three Party Networks (Discover and Amex) have a significant advantage.

From Digital Transactions, March 2012

While the Federal Reserve’s rule implementing the Durbin Amendment has its greatest effect on traditional debit cards, it affects prepaid cards too, especially its provision that banks’ prepaid cards can avoid Durbin price controls only if cardholders can access the funds exclusively through the card itself. That provision thwarted banks’ efforts to make prepaid cards more like demand-deposit accounts and led them to scale back or end bill payments through prepaid card accounts.

But American Express and Discover are not subject to Durbin’s controversial provisions, Daniel and Brown noted. Both companies are so-called “three-party” payment systems that function both as merchant acquirer and card issuer. In contrast, Visa and MasterCard debit and prepaid cards are part of “four-party” systems in which the issuer and acquirer are usually different companies and rely on the Visa and MasterCard networks to route transactions among them. The Durbin Amendment exempts, or “carves out” in industry parlance, three-party networks from its provisions, including interchange regulation.

“There’s no restriction on what AmEx can pay itself” for prepaid card transactions, said Brown. Thus, AmEx and Discover have a new opportunity to grow their prepaid businesses, the attorneys said.

Clearly Discover (DFS) and American Express (Amex) have an opportunity to “Kill” prepaid cards, what are they missing? Physical distribution, service and reach in the mass market. These are the very things that retailers like WalMart can provide, and in fact economically benefit by providing them.

As you can tell, regulations are driving the business models here. Most large US retailers leverage a fantastic team of attorneys from Card Compliant that specialize exclusively in prepaid cards (run by my friend Chuck Rouse). WalMart’s move to Amex is brilliant both from a regulatory and business model perspective.  

Today’s pre-paid dynamics may be the tipping point by which 3 party networks begin to overtake V/MA in growth. A trend that will accelerate when other business models require “control”. This next phase will be centered around merchant/consumer transaction data, which will begin to unlock the advertising revenue pool, which is almost 4 times larger than that of payments.

Payments and core banking will become a “dumb pipe” business unless Banks create value and assume a larger orchestration role. POS Payments are the central feature of a transaction account, if banks loose this relationship they will be in a poor position to orchestrate. 4 party networks are very, very hard to change.

I see a battle where 3 party networks work to branch into orchestration and advertising, and existing orchestrators (ie Apple/Google) integrate legacy dumb pipes (payments and telecommunication) to deliver value to the consumer. What do consumers value today? This is the call to action for bankers… who are not always the best at creating alliances.

Here is one idea, focus on trust and helping consumers solve problems they don’t face frequently. For example,

  • Make financial planning easier and less of a sales job.
  • Help manufactures and retailers connect to target consumers.
  • Become a buyers agent?
  •     Help navigate the college application and loan process,
  •     Help  buy a new car for the lowest possible price…

I know this is not a clean finish.. but that’s all the time I have.


Thank you Kansas City Fed for the fabulous brief from the: CONSUMER PAYMENT INNOVATION IN THE CONNECTED AGE. Bill Keeton and Terri Bradford were nice enough to invite me, but unfortunately I couldn’t attend. In my last visit to the KC fed we spoke about future payments types, but we also spent quite a bit of time discussing where mass market consumers will go if banks view the bottom 4 deciles of retail banking as unprofitable (according to proprietary McKinsey Study).  Today I thought I would pull together a compendium of my learnings on retail deposits, MSBs and pre-paid… the “transaction account” by which payments flow.

The Directory Battle PART 1 – Battle of the Cloud

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. ( is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc. But what few understand is the implication for the physical payment world

11 May 2012

This week we had both Finnovate and CTIA going on, and behind the scenes the battle lines are being formed in a forthcoming “BATTLE OF THE CLOUD” wallet. I didn’t include wallet in the quote because Battle of the Cloud sounds so much more ominous. Perhaps I should take a page from George Lucas’ playbook and start with Chapter 4.

I’ve been talking about the directory battle for some time now (see Clearxchange post).  Who keeps the directory of consumer information? As I outlined in Digital Wallet Strategies: “ securing information AND giving Consumers the exclusive ability to control what is shared with whom is a challenge (beyond technology and trust). We thus have many limited “Wallets” that are constructed around specific purposes”.

This week we had Visa’s President tell the CTIA audience that Visa has moved beyond NFC to (see my previous post on Visa Wallet). What is really going on? What is the battle of the cloud?

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. ( is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc.   But what few understand is the implication for the physical payment world. This is what I was attempting to highlight with PayPal’s new plastic rolled out last week (see PayPal blog, and Target RedCard). If all of your payment information is stored in the cloud, then all that is needed at the POS is authentication of identity (see blog). Remember US  online commerce is $170B/yr, physical commerce is $2.37T (not including FS, Travel/Entertainment).

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives (new digital coupons).  Another example is Paypal’s ability to selectively assume settlement risk on some transactions as they route through low cost ACH, or even allow customers to use BillMeLater to selectively convert certain purchase to loans AFTER THE FACT.  In these 2 examples, traditional payments revenue will be significantly disrupted by: lower cost transactions, competitive credit terms (each purchase), and incentives tied to payment type.

But do consumers really want to store all of their information in one place? With one entity given the ability to see all of your spend? For an mCommerce transaction, there is nothing I hate more than having to type in my name, address and card number in that tiny little screen.  Most of these mCommerce solutions (like are little more than an “autofill” where the merchant checkout page leverages API integration to the cloud service to retrieve user information (see diagram here). If I’m on my phone, my carrier already knows who I am, so seems fairly logical for them to help me with the autofill. This is a reason I’m now a big fan of Payfone. I could also see why it makes sense for Apple and Google. But why Visa? Does it make any sense at all for Visa to hold my Amex card?  Oh.. let me cast a few more stones on ISIS/NFC.. that payment instrument that locked in your phone.. yeah it can’t be used for the online purchase. Perhaps someday someone will write a secure NFC mobile browser plug in to extract data from the SE.. but that opens up a whole new can of worms.

Today’s online merchants are getting a very small taste of the war as they are asked to integrate auto-fill plug ins (Paypal,, Payfone, Google, soon to be Apple). Merchants should get on board with all of them, as they do represent a tremendous improvement in customer experience, and you may be able to squeeze some free marketing/implementation money from each of them. However, the cloud battle at the physical POS is still a few years off, as existing card products have a substantial advantage in risk modeling/fraud. This is where Square is taking a lead, as it has the best consumer experience hands down. Low volume merchants really should assess whether they need a specialized POS system, as the parameters for selecting one have shifted from ISO/Processor/Cost/Acct Recon/Book Keeping to Sales, incentives and customer experience.

Battle starts in mCommerce/eCommerce

My guess on timing of is driven by knowledge of Apple’s impending plans to “extend” its iTunes account to payment outside of the Apple ecosystem. Visa sees this network risk and is in an all out war to protect its network, by leveraging its CYBS asset online. The banks have worked on a directory concept for quite some time. The Clearing House (TCH) built a working system called UPICK to solve the problem of consumers giving their RTN/ACCT# out in the open.. assigning a virtual number to the account. A sort of “virtual account number” that could only be translated by TCH.  It never took off, because ACH fraud was low and banks were much more excited about having merchants accept cards as payment.

Retailers are not silent participants to this war.. their champions are Target, Tesco, Amazon, and Rakutan. I hope Amazon will finally dust the plans off of One Click expansion. Other retailers are also aligning to assess creation of shared cloud infrastructure.  Sorry I can’t comment more. Similarly MNOs are also in the cloud game, for example Payfone may be one of the best services in the market..

Who are the players in the Cloud [Payments] War?

The initial battle will be in mobile/online purchases.

  • Banks:, Mastercard,
  • Platforms: Apple, Google, PayPal
  • Retailers: Amazon, Rakutan,
  • MNOs: Payfone, Boku, payforit, billtomobile, …

Most confusing is that there are few alliances.. it is many against many.

Banking the Masses… Prepaid?

We are beginning to see the early stages of an “overhaul” of what banking (and payments) is. The next 3-5 years will be a period of much experimentation. As the WSJ article alluded to… banks actually want the bottom 40% of their customer base to leave.. they are no longer profitable.. This is what the Fed is concerned about.. where do they go?

9 May 2012

Today’s WSJ outlines JPM’s plans to issue a new pre-paid debit card out of their branches. In January I discussed the tremendous impact that WMT/GDOT will have on mass market banking, where I outlined that the Fed is concerned that the bottom 4 deciles of customers are no longer profitable for the big banks.. and there is an exodus. How does the US financial system retain customers in the lower mass? GDOT and WMT believe it is not through the typical branch model. Just as with Tesco in the UK, Retailers are proving to be excellent distributors of banking services.

There has never been a better time to be in prepaid!

This is beyond interchange and plastic, we are beginning to see the early stages of an “overhaul” of what banking (and payments) is. The next 3-5 years will be a period of much experimentation. A few of the active initiatives:

  • Retailers as banks
  • Retailers constructing their own payment network
  • Retail pre-paid products (ex GDOT/WMT)
  • Bank’s monetizing data through card linked offers and merchant funded rewards (ex. BankAmeriDeals)
  • New Direct Bank models (ex Barclay’s from yesterday’s WSJ)
  • Phone/Virtual Wallets

…I could go on…

I apologize in advance if this sounds pompous.. but hey it is my blog.. and I want to give you background on how I came to this perspective. I’ve been very fortunate to have been either on the technology side, or as business head of most new banking models: Worlds First Online Bank – FirstUnion’s Cyberbanking  (1995 see wikipedia), First instant account opening and funding US (Wachovia 2002), First International Account opening and funding (Citi UK – 2006), Google Wallet….

The change happening today is many orders of magnitude more complex: consumer value propositions, distribution, technology (ex NFC), regulatory (… for example how do you accomplish KYC in a GPR card sold at a retailer… or mobile operator).

Where do I invest? Its all based upon 2 simple questions:

#1 what value do you get out of your Bank today (compared with alternatives)?

#2 who has a brand Consumers trust?

Most retail banks have rested on very stale product constructs. Why do we have a checking account, savings account and card… with fees on each? Why not have one account where I pay interest if I owe money.. and earn interest if I have a positive balance? Why must I pay $25 for a wire at the branch when it costs the bank $0.05 with the fed? The fee and service nightmare of understanding sweeps, lending, payments, cards, savings, checking, … is just insane. Even the simple products are not simple (particularly when it comes to understanding fees). I’m no fan of the CPFB.. but the Bank’s brought this on themselves… there is real consumer anger.. all of which damages brand and trust. Which of course makes the ground more fertile for competing schemes.

As the WSJ article alluded to… banks actually want the bottom 40% of their customer base to leave.. they are no longer profitable..  This is what the Fed is concerned about.. where do they go?  Most concerning is where will the liquidity go (for non bankers liquidity is the Liability or balance of funds that is stored in its accounts, Assets are loans made by the Bank). Liquidity impacts capital ratios, and lending..  For example, many of you have read my notes on Kenya’s MPESA, that evolved from nothing to holding 10% of Kenya’s GDP in a single settlement account in just over 3 yrs. Money in a settlement account is not available for lending (typically), this was a central point of concern for Kenya’s central bank and other emerging markets as bank liquidity ratios in emerging markets are very compressed.  In the US, major banks are not at all concerned with liquidity… in fact many would  say that they are overly liquid and would like to see the run off. The problem for US banks is Asset quality (qualified lending opportunities).

Wow.. these are exciting times. Companies to watch: retailer friendly plays, as this is where the distribution and data sit.

BTW.. if you agree with any of this.. how on earth can bank’s continue to justify stand alone bank branches.. ? something must change there soon…