Tag Archives: interchange

Visa’s Wallet Strategy – Part 2

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18 July (Updated from 17 June 2011

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

Previous Blog: Visa’s mobile portfolio

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

… a non-announcement, a rebranding of what CYBS and PlaySpan already have. Too many teams are angling to create the wallet (mobile, online, …), and not enough focusing on the value of what is in it. Google, Apple, and RIM will win the mobile wallet wars. I guess I can’t blame Visa for trying.. however it would have been nice if they could have been successful at eCommerce to start with. 

Here are the questions I’m trying to answer:

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

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

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

What is Visa’s investment Thesis?

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

Assets to Leverage?

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

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

Strategy to attack the G2P and Mobile Opportunities?

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

1. Increase number of transactions (customer use)

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

2. Replaces cash/other electronic (ex G2P)

  • Fundamo, Playspan, Visa Wallet, ..

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

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

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

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

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

New Content (18 July)

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

Value proposition to Merchant

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

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

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

Value Proposition for Banks

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

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

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

See related Visa Press Release here (RightCliq)

Visa and MA take a bath on proposed debit fees

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The banks knew it was coming, so don’t let anyone fool you that it was a “suprise”. The idea of a flat fee of $0.05-$0.15 has been floated for some time. As you can see from graph on right, Visa lost 10% of its value after the announcement. While Banks and Issuers are returning their Christmas presents tonight, the merchants are having a party.. particularly large ones like Wal-Mart who in 2009 had interchange costs of $1B.

As a banker, we invited Wal-Mart to come in and talk to us in 2005. They certainly did not mince words then, I remember a few quotes explicitly “what service do you provide that justifies taking 2% of my sales”?. Another memorable quote “we want to find a model where you pay us to take your card”.  Something we laughed off back then, after all who on earth in the bank wanted to design that model? Banks “had it coming”… The interchange rate creep bore too many signs of a

“network” run amok and NO ONE stopped the train.  Banks launching campaigns like “skip the PIN and win” to incent consumers to pursue signature debit transactions (200bps+) vs PIN debit.  We only need to look at the federal reserve chart on the right to see the lack of market forces here.

I believe this is a “tipping point” event in US cards. We will see merchants aggressively incent use of debit, and the Visa and MA logos will start to come off of our debit/ATM cards, as they do in Canada and Australia (Interac, and EFTPOS). What will the banks do about this revenue loss?

All are looking for new ways to drive other revenue streams into the payment services, particularly around marketing/advertising (see my Blog on Apple iAd). The Visa and MA relationships with the large banks was already showing signs of strain. The large banks will not wait for Visa and MA to develop an alternatives, most are assessing new networks and value channels which they can control (see Googlization of FS). I’m short on V/MA because of this dynamic.

The Federal Reserve’s proposal is open for comments, and there may be a change. But the starting point for the negotiations is quite a bit lower than what the banks were hoping for.  My message to Bank CEOs: drop the fight here and find a new model for payments. Don’t let Apple and Google eat your future as well. What will it take? Well for one thing it will take a little collaboration, re-energize a few of your existing consortiums like NACHA, The Clearing House, Early-Warning to develop new models for payments and seed these team with top executives. You can’t take your eye off of this ball, retail payments is less than sexy.. but it is core to your daily interaction with customers.

Debit Card in Peril?

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27 October 2010

The biggest story of the week has largely gone unreported. Bank of America (BAC) has taken a $10.3B goodwill impairment charge in 3Q.

The Merchant Payments Coalition responded to the impairment charge (reference above)

“With a Federal Reserve decision on debit interchange rates not expected until mid-2011, today’s claims by Bank of America dramatically overstate reality and represent a feeble attempt to divert attention from its mortgage foreclosure problems,” said Doug Kantor, counsel to the Merchants Payments Coalition.

In the 8-K, Bank of America said it plans to take (ref The Street)

 “a number of actions that would mitigate some of the impact when the laws and regulations become effective,” but it didn’t provide details about what those actions might be.

Will write more later, but I can assure you BAC is looking for debit alternatives. Given their size, most anticipate a new product driven from both their retail and global card team (including merchant services). So in addition to AT&T/Discover, we will now have another major bank led team developing a new payment product with a multi billion dollar incentive.

What does this mean for MA and Visa? Not good news for US growth.

Related Article

Paypal at the POS?

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18 August 2010

Great WSJ Article Today – Paypal looks to real world commerce

First Draft…. final tomorrow.

As stated in my previous blogs about Apple, Bling, and the Mercury NewCo we are in the midst of a revolution in consumer payments, driven by large non banks, with new value propositions. For example, we see established organizations like AT&T, Verizon, and Discover collaborating (Mercury NewCo) with a payment value proposition driven by mobile advertising, Card networks attempting to develop PayPal killers (see Visa PayClick) and mobile handset manufactures attempting to create models for payments separate from banks (see Nokia and Apple NFC).

The worst kept secret in mobile payments today is: there aren’t any (except for MNO unbanked solutions). Efforts like Mastercard/Obopay have failed globally because they have focused on P2P (no existing volume). Alternatively, PayPal’s efforts are focused on the POS. Enabling any “merchant” to accept any card either at POS or virtually (see previous blog on PayPal’s virtual terminal). This approach is a win for banks (card acceptance), a win for consumers (convenience/loyalty), and a win for merchants (reduced merchant fees and interchange).

PayPal is best positioned of any major player to link the virtual and physical payment worlds (see here for detail): they have a consumer base, merchant base and a phenomenal fraud/risk team of 300+ with commensurate tech and ops. However their ability to execute is not without challenges. For example, what % of their current merchant base does POS transactions? Will there be a need for merchant terminals? If so who will pay? As discussed in the article above, Bling has been mentioned as a potential approach. Issuing Bling tags to PayPal’s employees is certainly a useful way of testing the consumer issues associated with issuing (and using) a payment tag.

My guess on PayPal’s “focus”?

Given PayPal’s strengths I would see a “phone as POS” approach as the most logical.  As consumers we focus on our individual accounts, but PayPal is one of the few “2 Party” payment networks (others are Discover, Amex) that also include merchant acquisition. 2 Party systems are uniquely positioned to control the costs and value proposition between the merchant and the consumer. One of the major NFC challenges is POS infrastructure: who will pay for it? The phone as POS would certainly address this Gordian Knot for small merchants. Small merchants are a group that also feels the most pain in interchange and card acceptance fees due to their lack of negotiating leverage. Oddly enough large banks seem to be supportive of PayPal’s efforts here with the view that their actions will help drive cash replacement. In other words, if PayPal’s innovation is indeed focused on NFC acquisition then they will be able to process all cards..

On the merchant side, PayPal has already completed much of the heavy lifting with its existing virtual terminal service. This service equips PayPal merchants with ability to accept any card at the POS (see Virtual Terminal blog). NFC or RFID form factors are just another abstraction for this card.  On the consumer side, I would expect to see PayPal working to link PayPal accounts to multiple form factors. Expect PayPal to make an acquisition in this space.

As of today, here is my view of the teams competing in mobile payments at POS

  • Mastercard/Citi/Obopay/Nokia
  • Visa/Monitise
  • Apple
  • AT&T/Verizon/Discover/?Google/First Data
  • PayPal/?

More to come tomorrow.

Ruminations: Durbin and Debit

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13 Aug 2010

Time for a blog with many questions and few answers. My natural perspective is that of a banker. Banks are created to act as trusted intermediaries of commerce, and I’m concerned when their ability to act on this charter changes. I want banks to win and to create products that satisfy the customer, build trust, and effectively serve in commerce.

A friend and I were discussing the impact of Durbin’s 2 tier debit structure (Excellent analysis by Mercator here) on the incentives for large banks to continue to issue debit. My perspective (as a banker) has been greatly altered from my time at 41st parameter working with the largest retailers in the world. I’ve developed a new view and a new appreciation for the pain felt by merchants. It would not be too extreme a statement to say that there is a deep hatred of the cards networks. The feeling is both visceral and reasoned. I remember when a senior executive from Wal*Mart came to Wachovia for a presentation and was asked what he thought were appropriate interchange rates for credit and debit. He said “0” dead pan.. then during the quiet of the audience, he said “actually we think we should be paid for accepting your cards” and emphasized that this was not a joke.  

Will Merchants loose sleep if debit goes away? Answer probably rests with what will take its place. The retail banks are very unorganized around payments. With few exceptions (Chase, WFC, USAA, ..) bank payment executives do not get the focus of their retail organizations.  In general, retail banks are challenged to relate payments to profitability (and hence the overall retail strategy). Debit was a clear exception to this challenge and a “killer product” for cash/check replacement.

The bank value proposition for debit was clear. However, what was the merchant value proposition? Certainly reduction in check fraud, funds availability… but at what costs? The federal reserve studied interchange rates in graph to the right. What exactly drove this step creep? How did it drive value? What were the economic forces that pushed back against it? What additional investments did Visa/MA make in their network?

Will banks develop a debit replacement? Clearly Durbin has reduced banks incentives to push debit (w/ assets over $10B). I project that the market is ripe for a merchant friendly payment method that is much different than the products available today. Instead of funding the card product on merchant interchange.. perhaps mobile advertising?

Can banks/cards regain the trust of merchants as intermediaries of retail commerce? Could the wholesale or merchant acquisition business which drives a new payment product (ie Amex Revolution Money)?

 Thoughts appreciated