Payments – Wrapping, Rules, Acquiring and Tokens

if Google had challenges pulling off POS innovation (after ~$1B in investment), rest assured you will too. Banks are well positioned to throw sand in your gears … focus on delivering value within merchant –consumer relationship.

18 June 2013 (sorry for typos)

Thought it was time for blog this week. Primary objective is to inform the venture community of changes which may impact payment related start ups. Sorry that the title isn’t a little more polished (you can tell I’m rather left brained). The exec summary of this blog: don’t ever bet your business on someone else’s rules… particularly if they themselves don’t own them.

Background

All Networks are working on unique token schemes (as I outlined in: Payment Tokenization, “New” ACH System, Visa’s Token Plans and Business Impact of Tokenization). The business drivers here are: #1 Control, #2 Mobile Payments. The US Banks have gotten together in The Clearing House (TCH Tokens) and are in the midst of piloting with 2 providers. In this TCH token initiative, the banks have logically determined that if a customer doesn’t need to see their Primary Account Number (PAN), then they will provide a number which they can uniquely resolve. For example, in mobile payments Citi could put in a unique Citi 16 digit number that is not a MasterCard, not a Visa card, not an ACH account number.. its just a Citi “token”.  Citi can decide how to resolve this number adaptively.. based upon what the customer wants, or what products they have with them.  There are MANY benefits to this approach:

  • Banks control account
  • Banks control DATA (transactional and account information)
  • Banks own network rules
  • No fees to other networks
  • Set unique (NON DURBIN) pricing for a NEW payment product.
  • No restrictions on “Routing”
  • Enables banks to “switch” providers of any payment service or network clearing
  • more detail here…etc

This is a BRILLIANT move by banks. I believe that this central bank “facility” within The Clearing House will be their centerpiece for consolidating all of Debit, in addition to the mobile play.

TCH Tokens are not the only game. Visa, Mastercard and Amex (through Serve) are also in this token game, and others like Payfone (through phone number as token at VZ/ATT), Google (through TXVIA) are also on the periphery. My view is that the BEST tokens are ones you don’t have to issue (ie Square/Voice, Apple/Biometric, Google/Facial Geometry, Payfone/Phone #…).  I outlined dynamics of the strategies in my blog last year “Directory Battle Part 1 – Battle of the Cloud”.  Its amazing that this topic is not covered more broadly in the mainstream… of course most of these efforts above are not discussed at all, and sometimes denied.

Of all the token initiatives, I believe Visa is most likely to succeed. This is not a typo… I’ve been very negative on Visa in the past.. as they have alienated everyone. But Charlie has started to change the culture, he has pulled the JPM relationship out of the toilet and has made a tremendous hire with Ryan. Why do I like Visa’s token prospects? They failed in their first initiative (non 16 digit PAN required big changes by everyone), and learned their lessons. However, most importantly, they can change the rates through rules on CNP and risk “ownership” creating a “new” version of VBV, with the best payment brand.

Wrapping

Currently the networks are at war with anyone attempting to wrap their product and add incremental value. As I outlined in Don’t Wrap Me, and Battle of the Cloud Part 3

The threat to banks from “plastic aggregation” at POS from solutions like Amex/Serve, PayPal/Discover, Square/Visa, MCX, Google is real. Make no mistake, Banks have legitimate concerns surrounding ability support consumers and adjust their risk models. But the real business driver here is to “influence” mobile payment solutions that do not align to their business objectives. Key areas for bank concerns:

  • #1 CUSTOMER DATA
  • Top of wallet card (how does card become default payment instrument)
  • Credit card ability to deliver other services (like offers, alerts, …)
  • Ability for issuer to strike unique pricing agreements w/ key merchants
  • Brand
  •  …etc

Visa, MA, Amex, DFS are in a great position to “stop” wrapping. What does this mean? They have initiated new rules, fees, cease and desists, threats of litigation …etc. Banks are thus looking to circumvent these restrictions by placing their “token” with the customer. This token is thus a new quasi acceptance “brand”.

Acceptance is therefore the new battle arena (who can convince merchants to accept their tokens, rules, rates, …). eCommerce may have slipped away from the banks and networks (PayPal), but they are determined not to let this happen in mCommerce, or at the POS.  JPM has structured its new agreement with Visa  to give them the flexibility on rules in acquiring and network routing for a new acceptance brand (Chase Merchant Services – CMS).

Retailers

Retailers are not the dumb mutts that banks assume. The MCX consortium realizes that greater bank control does NOT benefit them unless the Visa ratesservice is ubiquitous and standard so that banks can compete against each other, with no switching costs. Analogy here is internet traffic routing…They just want the payment cleared, with transparency/control in price, speed, risk.  Retailers also want the death of bank card rewards schemes, and if they can’t kill them instantly, want the ability to deny “preferred” cards. I told a major retailer yesterday that they should offer an “X Prize” to anyone that can make sense of Visa’s rate structure in a youtube video.

Many Retailer’s also have a “token” in form of a loyalty card.. with Target’s Redcard, and Starbucks demonstrating the model in which a retailer led payment scheme could work. For retailers, their loyalty program is fundamentally about selling data, and trade spend.

As a side note, the “big” secret in acquisition is that most (~60%) of profits come from the bottom third of retailers.. specifically the small independents that don’t know enough to negotiate (hence the ISO business). Companies like Walmart negotiate heavily with the top issuers to reduce rates from “standard”.. and still end up paying over $1B a year.Square fees

I see a substantial opportunity for acquirers to participate in what I would discussed within Payment Enabled CRM. This would change their profitability from one driven by small merchants to data/analytics. This is undoubtedly what JPM sees within CMS. Retailers know that they can’t further empower the big bank with their data, but rather need an independent party to run the CRM platform for them.

Summary

I’ve already spent a little more time than I was anticipating here. For start ups my message is quite simple, if Google had challenges pulling off POS innovation (after ~$1B in investment), rest assured you will too. Banks are well positioned to throw sand in your gears … focus on delivering value within merchant –consumer relationship. The Mobile-retail interaction is greenfield, and there are 1000s of different flavors.. no one company will be the centerpiece here. Avoid POS payments.. or be the “arms provider” to the big institutions as they duke it out. My view is that the key for MNOs, Apple, Amazon, Google and Samsung’s future value is

#1 Authentication (Linking the Physical and Virtual World)

#2 Orchestration (Coordinating Virtual and Physical World Processes, Data and Value Chain)

Payment News for May.. What a Month!

I’m actually starting to change my attitude on Visa. Its not just that Jim McCarthy is down the street from my in North Carolina… but rather Charlie is changing the culture there from one that alienated everyone.. back to a network that wants to add value to all.

15 May 2013

I’m in overload on information this week. Just don’t know what to comment on..

In an effort to conserve energy, let’s just say that there are MANY announcements.. but little real progress…  If you were a retailer.. would you exclusively advertise through Groupon? Through Visa? Through anyone? Of course not you have a price promotion strategy and multiple marketing programs which to accomplish objectives in each.  You would choose your channel based upon the ability to REACH the customer (ie Radio, TV, ?email…). As a retailer you also want loyalty to YOUR BRAND.. not some card, bank or start up…  Most of these entities have NO REACH.. having customers is MUCH different than being an effective CHANNEL TO INFLUENCE them.

With respect to POS.. the world needs change. Both Square, and Paypal have the merchant value proposition about right. Their respective terminals solve a short term cost/complexity issue. Square’s product is much further ahead as it also solves inventory management and marketing problems.  PayPal’s value proposition may be higher as they could manage payment costs more effectively (given consumer paypal account penetration), and many merchants already have a merchant account. Perhaps Paypal is taking my advice from 2 yrs ago.. focus on the merchant side first.. I hear that the paypal card is Don K’s pet project.. but John and Marcus may be finally tiring of the poor performance.

I’m actually starting to change my attitude on Visa. Its not just that Jim McCarthy is down the street from my in North Carolina… but rather Charlie is changing the culture there from one that alienated everyone.. back to a network that wants to add value to all. One example is emerging markets, where Hannes of Fundamo has done some REAL work in creating new VisaNet transaction sets to support emerging market solutions. Unfortunately their offers platform is stunted, as the mix of issuer “permission” and consumer experience makes this unworkable basket level program that I have already discussed many times (See CLO). Visa does not keep transaction history (with exception of debit hosted service of a few DPS banks), thus any offer targeting would be driven off a visit to a single store, or single event. This enables it to be a switching service..  Buy something at Macy’s and BOOM get a 10% back offer from Neiman Marcus. From the PR:

Most importantly, the Visa POS Offers Redemption Platform provides real time ticket reduction as part of the offer redemption during the authorization process, delivering an alternative option to the need for statement credits or paper coupons. This functionality streamlines the checkout process by enabling instant redemption of rewards and has the potential to drive incremental transaction volume. Once the reduced transaction amount has been approved by the card issuer, consumers are immediately notified of their savings via receipt printout and SMS text, or email message. (The Next Web)

Customer Experience? The Visa “POS Offers Redemption Platform” is really a “credit” that COULD be given on the receipt if the retailer’s POS interprets the message, and IF the issuer allows it. Thus the entire platform suffers from targeting, basket level redemption, consumer experience, POS integration, Issuer permission, … (need I go on)? American Express’s focus is completely different. They work with the retailer to help them gain insight into their most valuable customers and work with them to create programs to reach them. Visa can’t do this.. as they don’t own the customers.. nor does Vantive.. NO WONDER JPM wanted to opt out of VisaNet.

Google.. lets wait 2 weeks here (after I/O). I already discussed what was reported on Android Police in November. My guess is that the cost of this program was going to be pretty big… even for Google.. If it was successful. Eating 100-150bps in physical commerce ($2.4T) can be quite a big hit, even if you take only 1% of the market ($240M-$360M in US alone).

WMT’s Pre-paid success.. and impending MCX efforts are making the banks itchy. Somewhat ironic, as banks really don’t want WMT’s mass consumer customers in their branches.. while WMT loves them in their stores. Think the banks really don’t like having their “banking lite” services productized and sitting on a retail shelf to buy. They don’t want consumers to think of them as a product which can be bought.. and switched. Of course some banks have seen the light (Amex, Discover, GreenDot, BankCorp, Meta, …). Competition, transparency, and product selection are core elements of efficient markets. Of course it makes sense to ask your regulator from protection against consumer choice. But this is certainly not to benefit the consumer.

Bitcoin? where to begin.. ? Unlike most currencies, bitcoin does not rely on a central issuer, like a central bank or government. Instead, bitcoin uses atransaction log across a peer-to-peer computer network to record transactions, verify them and prevent double spending. It is a VERY INNOVATIVE mathematical crypto innovation (that is used extensively in illegal activities). Bitcoin stands in dramatic contrast to all of the data sharing, bank controlled, transparent stuff above. Its success demonstrates that there is a tremendous need for anonymity in payments.  There is no centralized authority here.. which is what alarms governments..  Thus there will be very strict controls on how coins can be converted into currency. Thus Amazon’s coins can only be used to purchase games/apps.  For those investing in this space, you should thoroughly research eGold.

Payment is still a red hot market.. expect significant M&A activity over next 12 months.

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)

Updated

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?

Features

  • 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 bankofamerica.com). 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.

JPM/V Scenarios… Which one is it?

A central problem facing any token is “where to start”. If JPM can do this with CMS.. why can MCX do this with First Data. It is precisely what FirstData was doing in 2006 prior to their settlement with Visa.

27 March 2013

I’m still trying to get my head around the V/JPM deal (see prior blog). As I outlined in Business Implications of Tokens, New ACH and the Visa/JPM Deal, US bank token efforts are clearly focusing on POS payments. Mastercard and Visa’s strategies are focusing on all digital wallets.JPM Visa flow

A central problem facing any token is “where to start”. What merchant would invest in capability to accept a token if consumers don’t use them? Similarly what consumer would want a token if there are no merchants that accept them? What problems do tokens solve? For Bank? Merchant? Consumer?

I think most of us clearly get the bank value proposition. If the only way to “interpret” a token is to ask your bank to resolve it.. this interaction establishes a very clear path to control.

Since I don’t have the new JPM/V agreement in front of me, I thought I would look at a few scenarios.. (which I would appreciate your comment on). Note these scenarios are not mutually exclusive.

Scenario 1 – Issuer Solution

Description: JPM takes ownership of all Visa BINs. These Unique BINs become the “token” by which JPM can assign them to either debit or credit or both. All JPM bins now get routed through JPM’s own unique VisaNet regardless of acquirer. If JPM is acquirer then it takes on-us. Represented by flows 1 and 4. JPM moves to put 100% of cards through Visa for consistency of routing. I like to think about this scenario as JPM just put its services on the Visa switch for all of its consumers… as opposed to delivering those services as an “issuer”. In one of my very first blogs (Googlization of FS, 4 years ago), I outlined how an advertising service would work from Visa’s switch.

Consumer Impact: None.. consumers have no idea anything happened. Of course in a mobile or “private label” scenario, JPM could “pre-load” a wallet with its cards.. or give its existing consumers a unique “private label” card, all with no issuance cost.  Banks will refuse to accept non-tokenized cards in wallet (see blog), and networks will restrict usage of aggregators (see blog).

Merchant impact POS.  ?What card am I accepting? A credit card? a debit card? a private label card? a direct link to another account type? No one knows but JPM.  How can the merchant route this payment type?  There are durbin rules for dual function “hybrid” cards but if card acts primarily like a credit then there is no problem.

Visa Impact. 2-4% revenue impact by 2015. Loss of JPM network fees, switching domestic payments off traditional VisaNet. Biforcating VisaNet, Loss of Rule control.  On the plus side, Visa may leverage CMS services for cards they service within its hosted transaction processing.

JPM Impact. Consumer value independent of merchant agreements. Control of customer, control of card number, multi function card, new advertising capabilities, new value added services, new product differentiation, mobile wallet control, position CPT/CMS for wallet provider role (PayPal, Square, MCX, …)

Scenario 2 Merchant Only Solution

Description: Chase PaymenTech/Chase Merchant Services (CMS) work to strike special arrangements with retailers that go beyond acceptance cost to data sharing. Represented by flows 1 and 2. Currently issuers can set interchange rates for merchants (strike unique deals), however this will allow retailers to combine data and keep retail transaction data off VisaNet (Flow 1 Red Arrows).  Focus is on value added services to merchants and white label programs with unique features.

Consumer Impact: None.. consumers have no idea anything happened

Merchant impact POS.  Chase Merchant Services becomes new acceptance brand. Merchants that use CMS have new features available and new white label products.  If JPM can do this with CMS.. why can MCX do this with First Data. It is precisely what FirstData was doing in 2006 prior to their settlement with Visa.

(American Banker 2006)

… on-us transactions are becoming more common among issuing banks that also operate merchant acquiring businesses. “Large banks like JPMorgan Chase, Citigroup, and Bank of America are currently doing on-us transactions now, and always have,” he said. “The more consolidation you have in the banking industry, the more on-us transactions you’ll get.” Bank of America is also rumored to be interested in creating its own card processing network.

Visa Impact. Dependent on success of new CMS acceptance network takes off and whitelabel/co brand. MAY be consistent with a V.me strategy by allowing customers to participate directly in data sharing (non JPM banks would not like this model). Loss of CMS “on us” network fees, switching domestic payments off traditional VisaNet. Biforcating VisaNet, Loss of Rule control.  On the plus side, Visa may leverage CMS services for cards they service within its hosted transaction processing.

JPM Impact. Differentiation. JPM can now compete w/ Amex in virtual 3 party network for some Merchants. New white label/co brand value propositions. New retailer services (example Payment enabled CRM).

Scenario 3 – Mobile only

Description: New VisaNet is restricted to switching Chase mobile tokens. Chase does not have ownership of their Visa BINs, but rather has an “interoperability pact” with Visa to ensure Visa can route new “tokens” (see blog). The tokens operate same as BINs, but may be of different format (not 16 digits). Objective is to ensure all mobile wallets have tokens instead of PANs. Note this is very similar to scenario 1, but scope is focused on mobile POS to stop wallet providers (PayPal, Google, Square, LevelUp, MCX) from gaining traction. I also believe tokens must initially take the format of PAN in order to minimize technology risk for the ecosystem. Turnkey mobile solution to enable credit, debit, ACH, Offers, platform for other wallet providers.

Consumer impact: Number of mobile payment schemes, how your account is provisioned into a mobile wallet, bank control and protection of your information, no account number you can use.. all hidden.

Visa impact: Same as above, getting out of mobile payments at the POS… focusing on eCommerce/V.me. No revenue impact at all.

Merchant impact. Loss of consumer data, bank control, new data sharing agreements, loss of access to ACH system for settlement, payment mix cost.

JPM impact. Uniquely compete for Platform business, retailer business, become the retailers, consumer, 3rd party platform of choice.

Thoughts appreciated.

Controlling Wallets – Battle of the Cloud Part 3

The networks are now in the midst of defining new rules to ensure they can “influence” wallets. Banks have legitimate concerns surrounding ability support consumers and adjust their risk models. But the real business drivers here control and customer data.

#1 CUSTOMER DATA

14 MAR 2013

Short blog today.. patent law changes tomorrow and need to get something filed.

Efforts to “control” have unintended consequences.. like holding onto your Jello by squeezing it..

The networks are now in the midst of defining new rules to ensure they can “control” wallets. I wrote about this a few months ago in Don’t Wrap Me – October 2012 and Battle of the Cloud – Part 2. The threat to banks from “plastic aggregation” at POS from solutions like Amex/Serve, PayPal/Discover, Square/Visa, MCX, Google is real. Make no mistake, Banks have legitimate concerns surrounding ability support consumers and adjust their risk models. But the real business driver here is to “influence” mobile payment solutions that do not align to their business objectives. Key areas for bank concerns:

  • #1 CUSTOMER DATA
  • Top of wallet card (how does card become default payment instrument)
  • Credit card ability to deliver other services (like offers, alerts, …)
  • Ability for issuer to strike unique pricing agreements w/ key merchants
  • Brand
  •  …etc

Each network is in midst of creating rules which will ensure it has control and can see merchant/consumer transaction.

The buzz this week is surrounding Mastercard’s new Staged Digital Wallet Operator Annual Network Access Fee (MA detail reference not avail).

  • What is it? Well since I don’t have the Dec 20 rule in front of me I have to go off my notes.
  • Applies to wallets that facilitate POS commerce between merchants and consumer (not ecommerce)
  • Who is responsible? It is largely a new processor responsibility. They are responsible for identifying wallet transactions
  • New transactions sets? Yes. Currently aggregators can be the merchant of record, but new rules require the MID of purchase and a new WID (WALLET ID) to be transmitted.
  • New fees? Yep.. looks like around 35bps on LAST YEARS volume
  • Timing? Goes live June 2013. Processor technology complete by April 2013

This is a brilliant move by Mastercard… but there may be some unintended consequences as issuers will have control over how it is applied.  MA’s objective?  “influence”  PayPal/Discover, Amex/Serve and Square/Visa, MCX…  NOTE eCommerce is NOT the focus (Apple/Amazon). However MA seems to be tying themselves in knots trying to differentiate a ecommerce aggregator (Amazon) from plastic aggregator (ex. PayPal/Discover).

These changes are already having “material” consequences. In eBay’s 2013 10k Page 19

MasterCard has recently announced a new Staged Digital Wallet Operator Annual Network Access Fee which would apply to many of PayPal’s transactions if the buyer uses a MasterCard to fund their payment, and will be collected starting in June 2013. PayPal’s payment card processors have the right to pass any increases in interchange fees and assessments on to PayPal as well as increase their own fees for processing. Changes in interchange fees and assessments could increase PayPal’s operating costs and reduce its profit margins.

Also see the long discussion by Amex’s Dan Shulman

http://www.reportlinker-news.com/n061421027/American-Express-Company-SemiAnnual-Financial-Community-Meeting-Final.html

UNIDENTIFIED AUDIENCE MEMBER: Thanks. I have a question for  Dan Schulman.  MasterCard recently revealed that they’re introducing this digital wallet that I’ll read it’s called the staged digital wallet operator annual network access fee. It’s one of his famous acronyms.  I was going to ask has Amex contemplated a digital wallet fee as well? And generally do you think the optics of digital support merchant discount rates, are they going higher or lower in a card not present world?

DAN SCHULMAN : So I think you’re seeing a lot of different players whether it be traditional or non-traditional start to think through the digital wallet strategy. And we’ve said this and it’s still absolutely true, this is the very early innings of this play out with digital wallets right now. We’re beginning to get some very nice traction in the back half of the year. It’s kind of on our digital platform right now.  We have looked very hard at the different fee structures that are out there. We’ve looked at the embedded infrastructure that we have. As Ken mentioned we have a kind of fixed infrastructure that we can leverage. We have a lot of assets that we can leverage that are very different than other players out there right now.

So I wouldn’t expect that fee structures are necessarily going to mimic each other because each of us come to the market with different assets and different profiles. If you look at some of the kind of newer players that have come into reloadable prepaid, they’ve got very different infrastructures and therefore have to have very different fee structures if you look at a  NetSpend  or a  Green Dot  they charge on their, kind of what they are beginning to try and call wallets, they’re charging monthly fees that can be $4.95

A new WID  has multiple uses. It enables MA issuers to enhance their risk models and “decline” both individual transactions from a wallet, as well as decline wallet providers that are not “certified”.  Amex already has similar rules in place, their summary view seems to be that Serve can wrap everyone else’s card… but no one can wrap theirs (for physical commerce).

Banks love the original NFC model where cards had to be “provisioned” into a wallet. Banks were in complete control of which wallets to “authorize” and completely hid the card number (purchase data) from the wallet provider.  This perfect world broke down quickly as the first NFC wallets had space for only one card emulation application (see Forces against NFC) so there were 2 options: allow only one card type, or enable a single card to represent multiple cards (See Blog). Now that NFC in payment is dead just about everywhere (except Asia), banks are looking to enable this “provisioning” control within the network level. MA is just the first visible instance, as I outlined in NEW ACH SYSTEM the Banks are also doing the equivalent to ACH debit through tokens probably 18mo- 2 yrs away.

And we wonder why mobile payments aren’t taking off.

Retailers look at this change and see complete imbalance… Networks which will change rules in weeks to satisfy banks. V/MA you may want to consider a new transaction set which would force issuers to define price of a specific card for that specific merchant (interchange), and acquirers their fees (MDR)… then share that information with other retailers.  Then allow retailers to decline based on price… (as opposed to accept all cards). That would certainly level things out…

I do think there are many ways to get around this.. but  I will not be putting them in this blog ($$).  All surround who owns the customer… and 5 “LAWS OF Commerce”:

  • Commerce will always find the path of least resistance
  • Consumers are NOT owned, but rather migrate where there is value
  • Value can be delivered by price, product and also through great consumer experience
  • Most Retailers face life selling commodity goods at a higher price… experience is all they have left
  • Banks have never held a sustained role in controlling commerce, they influence and support it.

In all of this bank control.. where is there value? What does a JPM Sapphire Card actually do that is differently than a platinum Amex or a sub-prime Capital One? Brand, points, loyalty… these are qualitative attributes.. but what if there were REAL value differences? Where is the customer relationship. Note that Retail Banking is going through many FUNDAMENTAL changes (see blog)

Tim Geithner visited a friend of mine prior to his departure. My input question to him was what if core “Bank accounts” morphed from Net Interest Margin (NIM) profitability to “Trust Accounts” where the key to profitability was consumer data? (See blog Payment Enabled CRM)

With respect to squeezing Jello… as the banks angle for control EVERYONE else is looking toward least cost routing (see Blog). The payments system is not a set of 5 pipes.. Just as the internet backbone is not run on a single piece of fiber. Changing all of the rules for everyone and stopping the leaks is hard work…

payments pyramidI would love to set up a Wiki site where we could list the features differences and customers of all of these digital wallets.

.. back to my patent app .. oh and corporate taxes due tomorrow too. Yuck.

Business Implications of Payment 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

21 Feb 2013 (pardon the typos as always)

US mobile payments will have a new “network”, a system to use tokens which are neither V or MA card numbers. Banks’ position is that the need not route these transactions through either V or MA (in order to leverage same acceptance infrastructure), whereas V/MA clearly say that an account can’t be both a network account and a XPAY account (see no wrapping).

The banks desire in 2011 is that Tokens will be bank numbers that banks resolve.  JPM’s is first to align w/ ChaseNet and ChasePay.  Banks are putting in place “controls” around ACH debit and card rules which will “encourage” token adoption.  Watch out payment start ups.. rough seas ahead. As I stated: Banks will WIN in payments.

In the US, merchants own liability for Card Not Present (CNP) fraud which aligns online merchants to the risk of using a payment instrument for a consumer they cannot physically verify (see VBV exception). However well an individual online merchant manages their own payment risk, their remains extraneous indirect risk to banks, as card data loss could result in: counterfeit plastic, identity theft, other first party fraud, …etc. Thus the fallibility of the current card “token” which relates Bank to Consumer relationship. Through this NEW token initiative, Banks are seeking to expand the account identifier by making it unique to: consumer, bank AND merchant.token

Today merchants receive an authorization for use of the card and behind the scenes Banks use very large sophisticated risk models (ex software HNC’s Falcon) to make authorization decisions. As eCommerce merchants are responsible for fraud, they perform their own risk management either directly or through payment specialists (Cybersource, PayPal, Amazon, Digital River, …etc). Banks have few problems approving online transactions.. as they bear none of the loss… and hence a game is played. Banks have little incentive to share their fraud data and merchants have little incentive to share theirs. Remember that within banking, margins are driven by the ability to manage risk and banks therefore incented to differentiate capability (not harmonize it). Which leads to other interesting dynamics (perhaps a topic for a later time).

At the Physical POS, the situation is different. Merchants bear little fraud and with EMV (Chip and PIN) the US will further reduce fraud where plastic is presented (if EMV in the US does happen). As I described in EMV Battle Impacts Mobile Payments, Retailers love EMV and are biased toward PIN and Debit. Retailers are continually looking for a way to reduce payment costs and influence consumers AWAY from Bank reward schemes.Payment-Gateways-growth

Mobile payments remain “green field”  and may be significantly disruptive at the POS. One of my favorite quotes around payments ” if you solve authentication.. everything else is just accounting”  (Ross Anderson @ KC Fed). The mobile device can provide a much richer set of information which to authenticate (vs a piece of plastic). Banks have invested billions in their card risk and authentication infrastructure. Mobile could render most of this investment moot, thus Banks are working to control and influence mobile payments at POS, particularly given NFC’s complete failure. Additionally, new payment providers like LevelUp, Google Wallet, MCX, Passbook, …etc all present large challenges to banks efforts to own the consumer relationship and payment choice at the POS (See MCX Blog).  Banks have some latitude to create incentives around mobile. For example is an MCX QR code backed by a Visa Debit card a CNP Visa transaction? Card Present? Or will MCX try to encourage consumers to back with DDA like the Target RedCard model?  Mobile payments are a key battle ground for many parties.. it is imperative to recognize that mobile payments are not just about payments.. but also about loyalty, relationship, data, influence, banking… etc.

In architecting incentives, banks have diminished ability to force V/MA to change acceptance rules. The same is true for retailers. Thus both are looking to create networks based on direct consumer accounts with account numbers (tokens) they can control. This is a very big statement.. if the banks can create a “token” which represents a credit account or a debit account.. they have “wrapped” Visa and MA (see blog Don’t Wrap Me). If successful, they could subsequently change networks anytime they wanted… or create their own. Why on earth would they want to route any debit transaction through V or MA if the token represented a debit card that represented a DDA? Or similarly doubtful: a token that represents a credit card which represents a credit account? (see  PayPal at the POS). Taking card number out of merchant (and consumer) possession, and replacing it with a token, enables banks enormous flexibility.

Yes my head is spinning too. I am implying that banks could leverage their entire acceptance and authorization infrastructure without routing anything through V or MA. No direct consumer involvement would be necessary in this token scheme since something like an MCX QR code could be mapped to multiple tokens in a single back end process. Banks are looking to make ACH changes as a defensive play to ensure that ACH rails are protected against funding a Retailer/3rd Party wallet directly (as PayPal, Target RedCard, Safeway Fastforward do today). This was my point in yesterday’s blog on ACH Debit.

Business Drivers

As I outlined this week in New ACH System in US, my view of Bank business drivers for Tokenization are:

  1. Stop the dissemination and storage of Card numbers, DDA RTN and Account Numbers
  2. Control the bank clearing network. Particularly third party senders and stopping the next paypal where consumer funds are directed to unknown destinations through aggregators.
  3. Own New Mobile POS Schemes to protect their risk investment
  4. Improve ACH clearing speed (new rules, new capabilities to manage risk). In a token model the differences between an ACH debit and a debit card will blend as banks leverage common infrastructure.
  5. Create new ACH based pricing scheme somewhere between debit ($0.21) and credit cards
  6. Regulatory, Financial Pandemic, AML controls (per  blog on HSBC)
  7. Take Visa and MA out of the debit game (yes this is a major story)
  8. Maintain risk models (see both sides of transaction)
  9. Control Retailer’s efforts to form a new payment network

What banks seem to be missing is that mobile payment is not just about payment (see Directory Battle Part 1). Payments SUPPORT commerce, Banks therefore do not operate from a position of control but rather of enablement. Most retailers recognize that Consumer access to credit has resulted in improved retail spending, however most would also say consumer addition to bank rewards has been detrimental to their margin.

Tokens for Mobile POS?

Why would any merchant or wallet provider choose to exchange consumer payment instrument(s) for token(s)?  Reduction in CNP rates, liability shift are significant. But the mobile device has many additional “identifiers” that far exceed what is available on a piece of plastic (IMEI, location, history, password, interaction for challenge). IMHO the bank business case for tokens must be built on CNP rates and Customer Choice. If Banks directly assist consumers provision their account into a mobile wallet, every wallet provider should support it. In other words the bank has done the work to integrate and “push” the customer’s choice into a given wallet from their online banking site (ex yesterday V.me and SavetoAPI).

But this bank led provisioning does nothing for the millions of accounts that consumers have already provisioned themselves in: PayPal, Apple, Amazon, Google, Target, Safeway… All of these companies have worked to deliver consumer value and obtained a direct consumer relationship, which subsequently resulted in the consumer choosing to store payment information directly. I can’t imagine a scenario (or business case) for them to part with that asset, particularly prior to 100% acceptance of tokens by all merchants (online and offline).

Token Acceptance

The value of a bank issued token is completely dependent on: ACCEPTANCE, cost and Risk Mitigation. At the physical POS Retailers are firmly in control of acceptance, unless the tokens perfectly mimic existing card schemes. Banks will likely work to ensure that any non-tokenized payment (QR Code) will be treated as a CNP transaction with merchants bearing fraud responsibility. If tokens are in the format of a 16 digit account number than there will be very little change necessary to the payment terminal. However, the downside of using 16 digit account numbers is that it would not enable banks to firmly separate from V/MA bin routing (and network fees). It will certainly be interesting to see the plan here.

Retailers, Banks, Networks, Consortiums… are all at odds… all trying to own the consumer relationship and control a directory which they can resolve.Payment Value

In general I see the token initiative as a distraction for banks. They are far too focused on control and throwing sand in the gears of commerce. Commerce will find the path of least resistance in an open market.

Summary

My guess is that many Card CEOs are skeptical of all this network tokenization strategy. Banks card teams have tremendous assets in their consumer relationship, established consumer behavior, brand, network of acceptance, merchant white label relationships. Why not work to partner and extend today’s model in a way that benefits consumer and merchant? Example Payment enabled CRM.

This tokenization project’s ability to positively impact mobile payments and retailers may be like squeezing Jello… American Express can only be laughing to themselves. As US Card issuers are 5 years behind them in innovation  Amex is extending their lead as they endeavor to “pull their weight” by while helping retailers obtain new insights on their customers. This sounds like a much better idea than tokens.. probably one that investors will understand better as well.

My message to Bank CEOs: stop trying to lock in your market position and start trying to justify it through value.  Tokens will provide you more control, but it is significantly detrimental to your acceptance network (V/MA). You have brilliant payment executives.. there is true genius in the token design here, but it is completely myopic. If you had a cross functional team with experience in retail, advertising, data, processing, CRM you would realize that mobile will change the way consumers interact with their environment. Banks will NOT be the intermediary in every interaction. The barriers you are constructing will only further inhibit your ability to partner and take part in processes which add value.  Remember your customer is not yours exclusively, we also are customers of Google and WalMart and Verizon…. Banks have an OPPORTUNITY to orchestrate commerce IF they deliver VALUE.  Payment people design payment solutions to payment problems. Banks must redefine the problem and the opportunity.

The questions banks must answer (for a retailer): when was the last time you brought me a customer and helped me build my brand, and consumer relationship?

Another scenario Card CEOs should consider: if Payments become “dumb pipes” …. where retailers and non bank intermediaries can perform Least Cost Routing (LCR)… how do we compete? How strong is your customer relationship?  Why did the consumer choose you as the bank in the first place?

Payment Tokenization

Banks don’t really want consumers to choose… not really… they will make their favored option seamless and ensure friction with everything else. This is normal business behavior, but payments are a networked business. Banks SHOULD be neutral here.. they DO NOT direct commerce but support it.

From blog yesterday I had several friends ring me. Turns out the card networks and individual banks are SEPARATELY pushing Token ideaS..  unfortunately none of the token schemes has individual adoption, no less interoperability.

Per my blog yesterday, ACH debit tokens can work, particularly if the consumer doesn’t have to enter them. Also in ACH, banks are in a position to influence acceptance.  Consumers could even go to the online bank to permission the payment instrument in the first place. This is the model of V.me and Google wallet (w/ the new Saveto API). In this model the consumer never enters anything.. the BANK enters the customer information in the wallet. Of course banks DO NOT want consumers to use ACH.. there is no revenue here.

Therefore Banks don’t really want consumers to choose… not really… they will make their favored option seamless and ensure friction with everything else.  This is normal business behavior, but payments are a networked business which supports Commerce. Banks SHOULD be neutral here.. they DO NOT direct commerce but support it. Their partnering approach is thus completely broken…

Thus the conundrum. The network where banks have the most influence is ACH, yet they don’t want to encourage ACH use as there is no revenue. We have a world where consumers can enter information directly, or ask their bank to enter it for them (V.me and Google).

One bank even seems to be creating a scheme that blends both ACH tokens AND Credit card tokens… in the hopes of being the “master directory” of payment information in a consumer’s wallet. Their dependency: consumer, merchant and wallet participation (ie. when pigs fly).

Why would any merchant want to give up card information and exchange it for tokens? Well there could be some incentive with reduced CNP rates.. and fraud liability shift… but isn’t that 16 digit card number already a token? Any approach must start out by being invisible to consumers (like V.me.. yes I am saying something nice about Visa).

I was talking to the KC Fed a few months ago.. brainstorming a little.. like what if you opened up Fed Wire to non-banks (ie regulated MSBs). That would really throw a wrench in all these future token plans… well I guess there would be one little problem… fraud.. but if an entity could crack the authentication/authorization nut this would be a great approach.

vme enrollment

“New” ACH System in US

The current ACH system will never go away (related blog). There were $33.91 TRILLION moved over the network in 2011, compared to total debit and credit volume of around $4.5 Trillion. However, there are several “improvements” to ACH where all could benefit, primarily speed and fraud management.

19 Feb 2013

(sorry for typos in advance)

Thought I would add a little meat to my 2013 prediction on a new token based payment scheme in the US. 60% of the thoughts below are contrived… as participants and pilot results are not in.. and things are still evolving.

Prior to describing a “new” ACH system, it may be useful to understand what banks are looking to achieve.

  • Stop the dissemination  and storage of DDA RTN and Account Numbers
  • Control the bank clearing network. Particularly third party senders and stopping the next paypal
  • Improve clearing speed (new rules, new capabilities to manage risk)
  • New pricing scheme somewhere between debit ($0.21) and credit cards
  • AML controls (per yesterday’s blog on HSBC)
  • Taking Visa and MA out of the debit game (yes this is a major story)
  • Maintain risk models (see both sides of transaction)
  • Control Retailer’s efforts to form a new payment networkTPS Definition

Overview

The current ACH system will never go away (related blog). There were $33.91 TRILLION moved over the network in 2011, compared to total debit and credit volume of around $4.5 Trillion.  However, there are several “improvements” to ACH where all could benefit, primarily speed and fraud management. Thus I believe there will be a carrot and stick approach to creating the right incentives for ACH users to move. The highest priority will be around third party senders (TPS), the lowest priority will be regular customer directed debits and payments to billers.

Third party senders (TPS) are a subclass of Third Party Service Providers (TPSP) which originate ACH transactions based on a direct consumer relationship.  Alternatively TPSP are also known as “processors” whose customers are banks (primarily) and have no direct consumer relationship. Banks are not happy with the “free riders” on their network (see yesterday’s blog). Most bankers view companies like PayPal and Xoom as riding on their rails for free. One of their biggest issues is that they do not have visibility into the actual beneficiary as the settlement account hides where the payment is going to. This impacts their ability to perform risk management and authorization. Take these issues together with the increased regulatory focus on AML and we have a fertile environment for change (HSBC’s See Deferred Prosecution Agreement, and business overview of HSBC’s issues from Reuters). Note that AML concerns are much more relevant to International ACH Transactions (IAT). This blog is not focused on IAT.Token

Banks must therefore architect a solution to evolve ACH while the ship is moving. This is a much better approach than that taken by the UK of mandating faster payments… (one bank was losing 30M GBP a WEEK from fraud when launched). The consensus approach seems to be one surrounding tokens and directory (my blog from last year Directory Battle Phase 1).

Scheme (updated 2/20)

  • Token will replace DDA RTN/AN. Starting with ACH Debit, Third Party Senders will be required to use token for access to top 5 banks. Consumers will not know their “token” as it is unique to the requester.
  • Third party sender (TPS/TPPA) must request token for originating consumer account from consumers bank (more on business incentives below). This establishes a “directory” role for the consumer’s bank and positions them to “approve” ACH Debits, where today the responsibility is only on the ODFI.
  • The bank owning the consumer account will be the owner of the token. Individual banks may choose to issue tokens, tokens will be synchronized with a central director, banks not wishing to issue their own tokens may depend on the central directory for issuance.
  • Once a token is issued, a third party sender will use the token to debit consumer account just as the account number is today. However tokens may be unique to each TPS/TPPA
  • Individual banks may clear payments by using their own local directory, or leveraging the central ACH service. There are no forced routing rules (learning from VisaNet).  Banks also agree to collaborate on fraud and risk (keep information fresh).
  • A token will be unique and represent a combination of both sender and beneficiary information. Focus is initially on ACH Debit. Unclear if multiple tokens will be required in MSB scenario. Banks want visibility beyond settlement account. Multiple ways to achieve.
  • Members of scheme agree not to store consumer DDA/account information after token is received (think PCI for ACH).
  • Token issuance (by the originating bank) will take into account, KYC, fraud and other factors
  • Tokens may be revoked and tokens may correlate to risk/fraud information
  • TPS may be required to include beneficiary information for ACH Debit (my guess here). This may take the form of a unique token for every originator-beneficiary combination.
  • Authorization and intra bank settlement begins to look exactly like debit card/ATM. Only piece missing are agreements which would support usage outside of V/MATPS Noyes

———- Update 20 Feb—————————————-

It seems the Directory service has credit and debit cards in scope… I haven’t fully processed this one. Why would Visa and MA want banks wrapping the card number? Talk about a scheme to cut them out of the loop. Once proxy numbers are issued they could just dump other networks immediately..  Merchant acceptance becomes the big question mark if this is the case. My guess is that banks will focus on mobile, and eCommerce.. defeating V.me, I’m sure CYBS, AMZN and eBay will all jump at the chance to help banks with their tokens

Token provider rumored to be start up Venmo

—————————————————————-

Carrots/Sticks

In the ACH world, the big banks rule.. and make the rules. My guess is that the top 5 banks will inform (and subsequently enforce) a rule on all TPS ACH debits requiring use of Tokens to access consumer accounts. Given that the big 5 have over 50% of the accounts… if they act in concert it will certainly impact the network. The focus of their action is on Third Party Senders, with mobile payments and remittance services as primary examples.

  • NACHA may issue new rules which will change existing ACH. My guess is that we will have a new transaction type (associated with TPS, and token). Note that new NACHA rules become law uniform commercial code.
  • NACHA has already begun tightening requirements on TPS/ODFI relationships (Section II, Chapter II (ODFIs), subsection B-3)
  • Banks which serve as correspondent aggregators of ACH (for MSBs/TPS) may be pressured to make immediate changes (beneficiary data, tokens). These payment aggregation banks (which frequently serve as ODFI) will likely not be part of the system design
  • To “enforce” the rule changes, the large banks will set a date where they will not accept transactions that do not conform
  • There will likely be “options” for fraud checking, and accelerated clearing cycle (Carrot?)
  • Processing Token transactions will have a different baseline fee

Implications

  • If your clearing bank is not one of the top 5, they may not even know this is going on
  • PayPal, MCX, Google Wallet, Target RedCard are all likely dependent on some form of ACH. They will likely have incremental costs associated with ACH origination as a third party sender. My guess is that it will be at least $0.21.
  • The big 5 banks will be best positioned to help any start up navigate this changing environment.
  •  It may be better for start ups to focus on obtaining consumer debit card information vs. DDA
  • Small banks that specialize as ODFIs will be squeezed
  • The cost of ACH is going up..

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).

Registration

  • 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

Usage

  • 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.

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