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 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.


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?

2013: Payment Predictions – Updated

2 January 2013 (updated typos and added content on kyc, cloud, and push payments)HypeCycle

Looking back to my first “prediction” installment 2 years ago, 2011: Rough Start for Mobile Payments, not much has changed. Although I am personally approaching the “trough of disillusionment”.  Lessons below are not exclusively payment (ie mobile, commerce, advertising) but seem relevant .. so I mashed them together. Key lessons learned for the industry this year:

  • Payment is NOT the key component of commerce, but rather just the easiest part of a very long marketing, targeting, shopping, incentive, selection, checkout, loyalty … process. Payments are thus evolving to “dumb pipes”.
  • Value proposition is key to any success for mobile at the POS. There are no payment “problems” today. None of us ever leave the store without our goods because the merchant did not accept our payment. There are however many, many problems in advertising, loyalty, shopping, selection, …
  • There is no value proposition for the merchant or the consumer in NFC. NFC as a payment mechanism is completely dead in the US, with some hope in emerging markets (ie transit).
  • 4 Party Networks (Visa/MA) can’t innovate at pace of 3 party networks (Amex/Discover). See Yesterday’s blog.
  • Visa is in a virtual war with key issuers, their relationship is fundamentally broken.   This is driving large US banks to form “new structures” for control of payments and ACH. Control is not a value proposition.
  • US Retailers have organized themselves in MCX. They will protect their data and ensure consumer behavior evolves in a way which benefits them. Key issues they are looking to address include bank loyalty programs, consumer data use, consumer behavior in payment (they like chip and PIN but refuse to support contactless).
  • Card Linked Offers (CLO) are a house of cards and the wind is blowing. Retailers don’t want banks in control of acquisition, in fact retailers don’t spend much of their own money on marketing in the first place. Basket level statement credits don’t allow retailers to target specific products and it also dilutes their brand without delivering loyalty. Businesses want loyalty… Companies like Fishbowl and LevelUp are delivering.
  • Execution. This may be subject of a future blog… Fortune 50 organizations, Consortiums, Networks, Regulated Companies all share a common trait: they are challenged to execute. Put all of these groups together (isischoicewithout a compelling value proposition…) and we have our current state (see my Disney in a desert pic). Take a look at who is executing today and you will see product focus around a defined value proposition. My leaders: Square, Amex, Amazon, Sofort, Samsung, Apple, SKT, Docomo and Google.  Organizations can’t continue to stick with leaders that are focused solely on strategy, or technology, or corporate development… You should be able to lock any 3 people in a room for a week and see a prototype product. The lack of depth in most organizations is just astounding. Executives need to bring focus.
  • In a NETWORKED BUSINESS, it’s not enough to get the product right. You must also get retailers, consumers, advertisers, platform providers, …etc. incented to operate together. Today we see broken products and established players throwing sand in the gears of everyone else in order to protect yesterday’s network. Fortune 50 companies have shown poor partnership capabilities. Their strategies are myopic and self interested. For example Banks DO NOT DRIVE commerce, but support it. Their “innovation” today is self serving and built around their “ownership” of the customer. Commerce acts like a river and will flow through the path of least resistance. There can only be so many damns… and they will be regulated.
  • The Valley and “enterprise” startups. There are billions of dollars to be unlocked at the intersection of mobile, retail, advertising, social. Most of the value requires enterprise relationships. Most investment dollars have flowed to direct to consumer services. I expect this to change.
  • Consumer Behavior is hard to change, particularly in payments, it normally follows a 20 yr path to adoption. For example, in every NFC pilots through 7 countries we saw a “novelty” adoption cycle where consumer uses for first 2 months then never uses again. My guess is that there are fewer than 1-2 thousand phone based NFC transactions a week in the entire US. (So much for that Javelin market estimate of $60B in payments).
  • Consumer Attention. Who can get it? They don’t read e-mails, watch TV adverts, click on banner ads. My view is that the lack of attention is due to a vicious cycle relating to relevant content and relevant incentives.
  • Hyperlocal is hard. The Groupon model is broken, CLO is broken.. Large retailers have a targeting problem AND a loyalty problem. Small retailers have a larger problem as the have no dedicated marketing staff. Their pain is thus bigger, but selling into this space requires either a tremendous sales team or a tremendous brand (self service).
  • My favorite quote of the year, from Ross Anderson and KC Federal Reserve. [With respect to payment systems].. if you solve the authentication problem everything else is just accounting.


Here are mine, would greatly appreciate any comments or additions.

  • Retailer friendly value propositions will get traction (MCX, Square, Levelup, Fishbowl, Google, Facebook,  …)
  • MCX will not deliver any service for 2 years, but individual retailers will create services that “align” with principals outlined by MCX (Target Redcard, Safeway Fastforward, …etc). The service which MCX should build is a Least Cost Routing Switch to enable the most efficient transaction across payment “dumb pipes”. This will enable merchants who want to take risk on any given customer the ability to do so..
  • Banks will build yet another consortium in an attempt to control payments. They will work to “protect consumers” by hiding their account information and issue “payment tokens”. I agree with all of this, yet this is a very poorly formed value proposition and Banks will find it hard to influence consumer behavior.
  • We will see more than one bank start a pilot around Push Payments (see blog).
  • Facebook and Google will gain significant traction in mobile ad targeting…. following on to targeted incentives… which will lead to mobile success. Bankers, please read this again.. success in mobile will begin with ad targeting and incentives. Payments are an afterthought…
  • Retailers at the leading edge will begin to see that their consumer data asset is of greater value than their core business.
  • Banks will follow Amex’s lead in creating dedicated data businesses. What is CLO today will morph into retailer analytics, offers and loyalty.
  • Apple will put NFC in their iPhone.. but usage is focused on device-device communication… not payment. NFC will be just another radio in the handset, there will be multiple SEs with the carriers owning a SWP/SIM based one.. and the platform provider managing the other. Which will succeed? A: the group that can best ORCHESTRATE value across 1000s of companies.
  • Visa will lose a top 5 issuer to MA, and they will see a future where their debit revenue is gone (in the US) as MCX and bank consortiums take ownership of ACH and PIN debit.
  • We will see 100s of new companies work to create new physical commerce experiences that include marketing, incentives, shopping, selection. Amazon is the driving force for many, as retailers work to create a better consumer experience at competitive price.
  • Chaos in executive ranks. Amex, Citi, MCX, PayPal, Visa all have new CEOs.. all will be shaking up their payment teams.
  • Retail banking is going through fundamental change. Bank brands, fee income and NRFF are declining, big dedicated branches will be replaced by more self service. Mass market retail will see significant leakage into products like pre-paid. Retailers and Mobile Operators are better able to profitably deliver basic financial services, to the mass market, than banks…. see my Blog Future of Retail: Prepaid.
  • Unlocking the Cloud… and Authentication. KYC is a $5B business. Look for mobile operators to build consumer registration services that will tie biometrics with phone. Digital Signatures on contracts, payment through biometrics, .. all will be possible in a world without plastic. Forget NFC…  See previous Blog on KYC and Cloud Wallets.

EMV Battle Impacts Mobile Payments

20 September

Most of everyone knows of the EMV efforts in the US, with Visa implementing a liability shift on October 1, 2015. In this model, any merchant that is presented with a chip and pin card, but is not capable of processing it (as an EMV), will bear fraud loss.  There have been very BIG swings in strategy over the last 6-8 months. The big issuers were all dead set against EMV.. saying they could not afford the cost to re-issue. Now all are on board… why? This is what I’m thinking about today….

Merchants have always loved PIN Debit (see blog). PIN was the cheapest transaction type prior to Durbin, and post Durbin PIN still has the unique advantage of allowing the merchant to route without going to Visa at all. Remember PIN Debit leniage was from ATM networks. Merchants also like the fact that 96% of PIN Debit fraud losses are assumed by issuers..

Visa/MA hate PIN Debit.. the countries where it has taken off like Canada-Interac, Australia EFTPOS, China Union Pay… have domestic clearing networks. This means that transactions are no longer routed through Visa/MA. In the US we have 8 debit networks (see blog). It makes little sense to continue all of these separate PIN debit networks if merchants can route directly to banks… The banks were thus looking at consolidation similar to what was done in countires above. In other words, banks were planning to take Debit back from Visa/MA in a bank owned network. After all, Bank margin improves in the PIN model (post Durbin) when payments are routed directly to them (they don’t pay a network fee ~10 bps).

Visa read the tea leaves… So how can Visa/MA stop the bank and merchant love affair w/ PIN? Force EMV…

The Merchant Stick? How will Visa “force” merchant’s to accept contactless? (See Visa Document)

Domestic and cross-border counterfeit liability shift. Merchants that cannot accept an EMV or contactless card when presented one by a customer will bear the liability of a fraudulent transaction instead of the issuer after October 1, 2015.

The Merchant “Carrot”?  Visa TIP program

TIP program allows merchants to be excused from validating their PCI DSS compliance for any year that at least 75 percent of their Visa transactions come from chip-enabled point-of-sale terminals. There are also subsidies for terminal upgrades … To qualify, terminals must be enabled to support both EMV contact and contactless chip acceptance, including mobile contactless payments based on NFC technology. Contact chip-only or contactless-only terminals will not qualify for the U.S. program

Visa’s effort to include contactless in the TIP program is very strategic. To gain the benefits of TIP, merchants must reterminalize with both contact and contactless EMV capability. Why? Well for one reason there are no contactless debit cards out there… yes everything is a credit card. These of course carry much higher fees… The other advantage of TIP is that the PCI-DSS wavier is like a “get out of jail free” card. Merchants can’t get the card without contactless… If this weren’t enough… not only does VISA want contactless.. they also want signature.

Visa says PIN not necessary – Green Sheet

“There’s a lot of confusion around the myth that EMV means ‘chip-and-PIN,'” Stephanie Ericksen, Visa Head of Authentication Product Integration, said in a blog published Jan. 13, 2012. “It doesn’t in many countries, including the U.S. That’s because, in the U.S., we can rely on online processing where transactions are transmitted in real time to the issuer for approval. With that in place, there’s no need for the offline authentication that was the genesis of chip-and-PIN.

From Chip and PIN to Chip and Choose? Visa wants  encourage signature as these transactions must be routed through them.. my position (and that of most non network people) is that AUTHORIZATION and AUTHENTICATION are completely different problem sets. The availability of real time approval means nothing if you don’t know WHO you are approving for WHICH CARD.  PIN answers the “who” question and the chip is the account number or “how” you are going to pay. I just can’t believe that Visa has come up with this story.. but they must in order to support “contactless”. Most consumers don’t know that today contactless transactions have limits. These limits are set by the issuer, in Europe they are typically around $25. However the issuer can choose to increase the limit (no PIN required), or require a PIN with a contactless payment.  All of this is a little absurd for Visa as PIN is always viewed as key to authentication, AND Visa just waved the signature requirement for mobile payments. So no signature required for Square.. but Visa wants it optional at the merchant POS so it can retain the volume?….  Expect some Regulatory involvement here.

Large Merchants are very, very aware of this strategy to improve the credit transaction mix and make mobile/contactless payments a “premium” service. The top 20 retailers have put their foot down and said “no way” will we be putting contactless readers in our store (MCX members particularly). The terminals that they are ordering DO NOT have contactless capabilities.. only EMV chip and PIN. Most retailers agree that signature is a worthless authentication mechanism. Visa clings to signature in order to ensure transactions are routed through them. Expect MCX to look toward a PIN model..

So this EMV “battle” has many sides to it.. it impacts mobile payment adoption, EMV rollout, plastic re-issuer, consumer behavior, consolidation of national PIN debit networks, …

Comments appreciated.

Future of Phones.. Good Enough?

As an investor, I believe we will see a massive new wave of companies redesigning retail. Five years ago I had a camera, an iPod, a PDA, GPS, phone, … today I have one device. What will the bundling (or unbundling) of retail look like? What are the problems to be solved?

16 Sept 2012

Quote of the week

It’s not clear that NFC is the solution to any current problem…

Apple Senior VP Marketing – Phil Schiller

A few months ago I was in Hong Kong speaking with institutional investors at CLSA’s annual event. One of my more memorable meetings was with James, a chief investment officer with a top 5 investment bank. The heart of the discussion was on the future of telecom. Although I’m not a telecom expert, James was interested in finding “the next killer app” in mobile. Was NFC it?

His investment thesis was that phones are starting to become commodities: screens, LTE connectivity, cameras, battery life, applications, …etc are all reaching a point of good enough. His time with me was spent drilling down into payments and NFC in order to see if I had any new data which would alter his view.  I did not….

What will happen in a world where handset hardware is no longer the basis for competition?  The same thing which occurs to any manufacturing area where a “good” becomes a “commodity”: margins compress for the commodity and migrate to the new area which is basis for differentiation/competition. Yesterday I outlined the implications, and investment opportunities, for the mobile operators.

This week we saw the launch of the iPhone 5.. better, brighter, bigger, lighter, clearer, faster, lasts longer, crisper, sturdier, takes better pictures, more tightly integrated to applications that Apple controls, …etc. A great new product.  An Evolution… not a revolution.  What Apple understands better than almost any consumer product company is: consumer experience matters.  While some handsets already exceed those of  Apple’s iPhone in feature/function (Samsung’s Galaxy S III)…  none can match it on consumer experience. Experience is where Apple is focusing its efforts, and the major shift in iPhone capabilities is NOT in hardware features.. but on orchestrating value in ways it can control.

Apple takes a Clayton Christensen approach to the iPhone: what problems does a customer have, and how do I solve them? For example, I hate typing in my name and address on a little mobile browser to order a good from lets say  Apple’s passbook will resolve this by allowing Gap to integrate to passbook to pull all of the “iTune’s account” information over .. so I don’t have to fill this out anymore.   Apple is moving to solve real consumer problems…  It is looking to orchestrate value delivery.. moving the “hub” of coordination from the phone to iCloud.

This is what I refer to as the Stage 4 Value Shift (see April Blog). Theoretically, an open innovation model (ex Google/Android, Java/Oracle, …) should be able to quickly surpass Apple, as 100s of small companies invest larger amounts (cumulatively) in expanding capabilities of a “platform” (see platform leadership). However, Apple has learned its lessons from its Mac days and has defined competition along the lines of “consumer experience”. In this model, it does NOT CARE about interoperability or standards… rather Apple is maniacally focused on delivering value to consumers with usability, reliability, intuitiveness, …  being core measures.  Apple’s brilliance is multi-faceted, but by defining product focus along the lines of consumer experience, the iPhone’s closed model of innovation can not only effectively compete, but win easily against open systems. In other words, while open systems compete more effectively in a feature/function war.. they loose in the qualitative measures of “experience”.

Apple will obviously monitor the environment for effective new features, to ensure that the core product hardware remains competitive. For example, the real world transaction data for NFC based payments is a complete joke. There are no phones, there are few terminals, and there is no consumer or merchant value proposition. Sure there are exceptions like Japan, but only closed systems with a monopoly leader have proven the ability to push the solution out.

Apple does see a need to improve device-device communication, as well as shrink the hardware footprint. With these drivers, and given the prototypes in market, I fully expect Apple to redefine phone hardware architecture with a new integrated chipset that would encompass functionality of: controller, radios (wi-fi, BT, 14443, …etc), secure element that would also enable the SIM to be virtualized and placed within the SE. If this is indeed Apple’s direction, it will not be a new basis for hardware competition on feature/function, but rather: battery life, footprint and control (ex. virtualized SIM).

Other players also have unique strategies and assets. For example, Google’s strategy: orchestrate value based on consumer data. In assessing investments I look for one key answer: what problems are platforms trying to solve and in what marketplace?

All about Commerce… and Entertainment

My major issue with Apple’s strategy is the degree to which other entities can participate. I see mobile phone revenue streams in 2 major buckets: Commerce and Entertainment.  Entertainment is not a focus for me.. Commerce is. Businesses operating within the retail sector are undergoing fundamental transformation. For 1000s of years, local merchants survived based upon distribution and availability. Today they are left trying to sell a commodity product at a higher price to consumers in a marketplace with near perfect transparency.

What is the roll of any intermediary in commerce? Not just in the selling, and purchasing, but in marketing, product selection, distribution, service, support, … What does the new face of retail look like? This is the focus of Amazon… they are the leader here from a “virtual commerce” (e and m) perspective.

As an investor, I believe we will see a massive new wave of companies redesigning retail. Five years ago I had a camera, an iPod, a PDA, GPS, phone, … today I have one device.  What will the bundling (or unbundling) of retail look like? What are the problems to be solved? In the past 15 years mobile has grown up along side of commerce, operating primarily as a replacement to fixed line and then migrating to a replacement for online. We will start to see phones leap into commerce in new ways.. but my firm position is that this leap does not start with payment (the last phase of a commerce) but with marketing (the first phase). Why? Because marketing and retail are fundamentally broken, and Payments is NOT.

It is in this context that I laugh at NFC solutions. My favorite quote on this topic was from head of strategy of top 5 retailer

“Mobile Operators know how to run dumb pipes, not create business platforms for marketing… their current wallet initiatives are akin to a toll bridge, NFC is their toll booth where they stop me before reaching my customer..  to cross their NFC bridge I have to wait in line and when I arrive at the gate they don’t want $0.50 toll.. they want 3.5% of what I’m carrying in my truck, and a copy of the shipping manifest (customers’ names). This model doesn’t work for me. “

Commerce will find another path… one of least resistance … of better “experiences”. This is what Apple is enabling in Passbook, and why Amazon is succeeding in commerce. NFC is just a radio… one who’s standards are largely controlled by banks, mobile operators and card networks. Why would retailers want to participate here at all?  We should not act to enrich the complexity of payment networks, or wireless ones, but rather form new networks.

Sorry for the typos.. and re-hash of past blogs.. hope it was useful.

NFC – ISIS has 12 months…

what retailers do you think are anxious to assist Visa and MA with a new generation of payments that is more expensive than what they have already? Specifically, NFC is a credit card transaction.. carrying a 300-350bps rate. Although there is nothing to prohibit and NFC based debit card.. there are no banks (other than Discover/Barclays) that have stepped into this space. Visa and MA see NFC as the next great driver of CREDIT card transaction growth.

2 Oct 2011

Loads of new press out related to NFC

–          ABI research estimates $100B GDV by 2015 (yeah.. and pigs fly)

–          EMVCo 47 page report on technical standards for contactless payments

–          Visa’s new mandate to retailers.. EMV (+ NFC) by 2015 or merchants bear the fraud loss

–          ISIS Handset Support

–          Launch of Google Wallet

–          PayPal dissing NFC (today)

Having been the first to break the news on ISIS in 2009 (Although I was wrong on Visa involvement… it was Discover), perhaps I should be the first to predict its demise.. UNLESS something big changes.  The problems with mobile money is 5% technology, 95% business model. Take a look at my diagram below… 11 parties that need to execute on a clear value proposition… No wonder MNOs like Verizon are hedging their bets, creating alternate payment solutions (see my Payfone blog).

What company can invest in something it can’t control? That has a value proposition that is unproven? That requires collaboration with competitors? That customers may not want or pay for? Please someone give me an example…

Payments  (in isolation) adds very little value to an overall commerce value proposition. Did you buy your big screen because they took Visa? No.. you chose your big screen TV because it was the right model for you and you expected the merchant to offer you payment alternatives. Most of you reading this would probably have accepted 2-3 options..  The most important value proposition for any commerce network is targeted to the retailer.

ISIS started off with a great retailer value play (see my previous pro forma financials), the Barclays/Discover instrument would have been a winner.. credit the involvement of WalMart with the strategy of ISIS here.. as WMT was key in ISIS’ participation and Abbott’s hiring (former GE Money Exec… GE services WMT’s pre-paid cards). But the card networks found a way to put the screws on… and destroyed a very innovative product.. and their merchant value proposition along with it. To compensate for the ISIS 50 bps “carrot”, Visa has constructed an EMV stick (see above) to force merchants to accept EMV.. (and in essence NFC). Retailers are frequently assumed to be a bunch of back water idiots.. as a former banker I admit my mistakes…  this simplified view of retail could not be further from the truth..  Retailers are on the cutting edge of competition. Competition drives data based decisions, customer centricity, daily focus on margins (as they are razor thin) and a toughness matched only in professional sports.  Retailers know customers like few others..  Few names generate a more intense visceral reactions among retailers than Visa and Mastercard. Today’s card networks are no friends of retail. It was no single factor.. but rather decades of choices all made to favor one group: issuers.

In this environment.. which retailers do you think are anxious to assist Visa and MA with a new generation of payments that is more expensive than what they have already? Specifically, NFC is a credit card transaction.. carrying a 300-350bps rate. Although there is nothing to prohibit NFC based debit card.. there are no banks (other than Discover/Barclays) that have stepped into this debit space. Visa and MA see NFC as the next great driver of CREDIT card transaction growth. Thus, Visa’s EMV moves are meant to accelerate this. Currently MNOs (and ISIS) are being taken for a ride by the banks as a tool to drive this.

Google was brilliant to include a pre-paid card in their wallet to balance the options for consumers, ISIS will likely do the same.  But the conundrum faced by ISIS is that there is no revenue for the ecosystem above without credit card fees and no merchant value proposition WITH them. The answer of course is for NFC to develop a new revenue model and value proposition (see my Googlization post), but building an Ad network is no easy undertaking.. and it even more complex for ISIS since their owners are each undertaking the development of separate ad network initiatives (VZ has equity stakes in Cellfire, mphoria, and a 200 person team).

Now add this dynamic to the complexity of executing against a business model (any business model) across 9+ parties and you see the NFC business enigma. As I stated in Nov 2009, MNOs know how to be successful in payments. ATT ran the most successful private label card of all time.. they have tremendous (non monetary) tools to incent consumer behavior (ex think free unlimited data).  Unfortunately they don’t have experience in working with retailers.. or in orchestrating commerce interaction. ISIS will execute on the charter given to them.. but that does not mean it will be successful.  Having a functioning NFC wallet does not mean that anyone will use it. Particularly if it is disconnected from everything else that I do use (mail, maps, search, Android Marketplace, …).  This is where Google excels. Not only does Google have the best engineers on the planet, they have the best retailer relationships AND customer relationships.

Remember NFC was a construct of the NFC Forum, a group formed in 2004 to design a new protocol that could be controlled by MNOs and Handset MFGs. Again.. it was designed for CONTROL….  ISIS is proving that it has fantastic facilities for control of the secure element, particularly in the US where post-paid handsets are subsidized. What ISIS fails in is a consumer and retailer value proposition.  If they do not find a way to work with other participants, the window of opportunity for NFC will fade. I give ISIS 12 months…

What are the alternatives to NFC? I told a start up CEO this week that NFC is but one alternative to identifying someone at a POS. I could use a card, GPS location, biometric, .. just about any form factor to achieve the same thing (as an example look at Square’s Card Case, or VZ/Payfone). Also.. we all know that locking card information inside the phone is just plain stupid.. It’s how Microsoft worked before the internet existed.. today we are in the world of cloud computing where information lives on the cloud.. (See my previous blog)

Messages for ISIS

  1. Improve your retail value proposition
  2. Get the carriers aligned on the “SUPER” Value proposition… or you will have a wallet that functions.. but no one wants. Take a look at Enstream in Canada for a use case here. Zoompass was the precursor to ISIS….
  3. Move beyond control focus to VALUE focus. Build partnerships which will help you orchestrate commerce. Of course this is not in your charter.. and very, very hard for competitors to do… so this will be a driver in your demise.
  4. You will not get the data on every transaction occurring on the phone.. so give it up now. Both ATT and VZ are ISPs as well as backbone providers, do you keep every piece of data flowing through the internet? Your plan here is FUBAR…

Message for Retailers

  1. NFC terminals will only drive expense growth until there is a consumer value proposition. The only entity that is coming close here is Google. Google does not care about transaction revenue.. they care about value creation.. this is a retailer friendly structure.
  2. Delay your EMV/NFC plans.. The big issuers will not be reissuing cards.. so even if Visa follows through on the liability shift it will only be for cards that could have been validated.. So your risk is of fake EMV cards.. Perhaps if you see an EMV card you just ask for a customers ID..  sound rather simple…?
  3. Ask very simple questions and get clear answers: how will this deliver incremental sales? What kinds of customers will be using this?

My prediction? ISIS and MNO initiatives will be successful in Transit. Retailers will migrate to a new commerce network that steers clear of Visa and MA.

Payfone.. Verizon’s new mCommerce phone number based credential storage and authentication service

So why do I call this service “mCommerce phone number based credential storage and authentication service”? Verizon already has one wallet (ISIS).. they don’t want to confuse the market…

MoPoNuBaCreSAS (explained at end of post)

update Aug 2013


General architecture below is correct. Think the first deployed “use case” will be around mCommerce. An “autofill” function similar to and Google Chrome. MNOs are in a much better place to deliver this as they have information on EVERY handset.. and they can AUTHENTICATE with handset information. This is my FAVORITE MNO led payment effort in the US. Online merchants should adopt this without pause.. think you will see immediate conversion impact. See overview here



5 August 2011

Previous Post

I ran into a Payfone exec last month.. while stuck together in an elevator…“hey you look familiar”.. “I’m Tom… “ “You’re the guy writing bad stuff about us”… “I’m never afraid of being told I’m wrong.. tell me what is wrong”…   After spending a little time with Payfone, I’ve changed my view.. If US users can be convinced to pay with their phone numbers, and merchants can be convinced to implement the Payfone mobile payment API.. this may be a very good way to go.

What did I get wrong in previous post?

  • It is not only about P2P (at least in US).. but about mCommerce. Don’t know if I got it wrong, or whether their strategy has evolved… but today their focus is on mCommerce leveraging phone number for payment.
  • Buying physical goods with their phone number.. hey in the UK payforit is big… particularly for small purchase. VZ probably wants to have this happen because they see a very rough road ahead for ISIS.. not only will it take consumers buying handset.. it will take 6 parties to align on the value prop.. AND execute.
  • Substantial advantage in risk/fraud when carrier is involved in validation of credentials. Remember, my previous post estimated that MNO KYC could be a $5B market opportunity. Will Payfone take out other SMS verification solutions like Authentify?

My picture is based upon general market G2 (.. note I did not say “intelligence” as it may infer I have some).

What did I get right? The merchant integration challenge … I don’t see how AMEX, Payfone or VZ will be able to offer a compelling merchant value proposition. Amex is not exactly a processor of choice… Ticket sales seems like a sweet spot but hardgoods?  Re: Digital Goods.. My sources tell me that the carriers are currently doing about $600M a year in old fashion digital goods (think ringtones). Apple is doing about $1.6B in App Store, and $4.8B in other Digital Goods (previous post). Given that neither legacy digital goods (ring tones) nor App Stores need this functionality what are the physical goods use cases? Best Buy? Gap? Payforit found a great sweet spot in subscriptions and paid content (read the newspaper, video), ticketing,   …. Similar services in Japan also extend into vending.

So why do I call this service “mCommerce phone number based credential storage and authentication service“? Verizon already has one wallet (ISIS).. they don’t want to confuse the market… (great.. really great attempt here.. we would never call storing payment instruments and sending them to a merchant a “wallet”..  )

Oh.. BTW.. Citi and Verizon are both working on something substantial.. I will have to think of a new acronym for it.. how do I innovate a new word for “Offers”? Digital discount delivered by an MNO with redemption verified by a large multi-national bank? …. question remains who will actually create campaigns.. so need to put those words in there too somewhere. Suggestions appreciated.

Visa’s Mobile Strategy: Portfolio Manager

Visa is playing the role of a portfolio manager and evangelist. Selectively supporting and investing in mobile initiatives in an attempt to leverage their network. This is a “services” approach to their existing network. The structural challenge is that new services on Visa’s existing network equates to lipstick on a pig.

Visa’s Mobile Strategy: Hedge your bets

I frequently write this blog just to provide a little structure for my own thoughts. While I attempt to avoid “stream of consciousness” writing.. my efforts are not always successful. Top of mind today is the question: what on earth is Visa doing and why? Any time you see a major company come out with a press release with no customers, or proof points it bears a little research. Last week I wrote on Visa’s mobile wallet announcement (or non-announcement). Why would they do this?

Here is a short inventory of Visa’s (and Visa EU) mobile “related” announcements over last year

Clearly Visa has been thinking about mobile for quite some time (listen to Bill Gajda). As I’ve stated many times the great thing about a (well designed) global network is resiliency.. it is resistant to failure.. the challenge in running one is the same: resistance to change. Every network evolves around delivering value to the core constituents (nodes) who are CURRENTLY using the network.  Networks also evolve around a business and revenue model, as a network matures value evolves out from the process of coordinating transactions to managing interactions (HBR Where Value Lives, Jan 2001)

modularization takes hold, the ability to coordinate among the modules will become the most valuable business skill. Much of the competition in the business world will center on gaining and maintaining the orchestration role for a value chain or an industry. … Connected by networks, different companies can easily combine their capabilities and resources into temporary and flexible alliances to capitalize on particular market opportunities. As these “plug-and-play” enterprises become common, value shifts from entities that own intelligence to those that orchestrate the flow and combination of intelligence. In other words, more money can be made in managing interactions than in performing actions.

Why is it so hard for Visa to change? Visa’s history is that of a bank owned consortium and although they are a public company today, their legacy and network was built around a bank centered model.  The banks were very thoughtful in constructing Visa and its rules, to attract smaller banks the majority owners (Chase, BAC, WFC, C, USB) created a structure to ensure no single bank could take advantage of the network, and a rule making process that was optimized for “stability” not “adaptability”.

For those outside of the payments business, Visa operates like the NFL League Office. It cannot make rules in a vacuum, nor does it own the teams, the network rights or the ticket sales. Innovation teams in Visa are more like “advocates” and “evangelists”, they can not force change on their member banks, but rather paint a picture on what is possible. The Visa “franchise” thus has tremendous difficulty adapting to a new game just as if the NFL would have a challenge in coordinating a new sport like snow boarding. Although the fan base may be the same.. and the team owners are interested in generating additional revenue.. it’s a stretch for their network to adapt.  This dynamic correlates to why Visa failed in eCommerce and companies like PayPal and Cybersource excelled.  Both POS and CNP were payments, but the environment of the transactions were very different, particularly in fraud and required new “rules”. To stick with my NFL analogy, both POS and CNP required fraud services to surround transaction authorization.. just as both snow boarder and football player need safety equipment.

So what is Visa’s strategy? Internally, they know they missed out on eCommerce.. but it wasn’t their fault, they were bank owned until 2008. What they see is a new wave of mobile that will effect all of commerce (US $4T .. excluding Auto) not just eCommerce ($176B). They can’t afford to miss this boat.

The problem is that Visa’s existing, bank centered, network is rigid and ill suited for more than POS payments. The mobile revolution at the POS will be much more than payments, particularly as both the POS and the Mobile phone are each able to coordinate across many different networks. Technologies like NFC will also provide much greater potential for authentication and authorization separate from any single network (note I didn’t say payment).

The biggest challenge for Visa to overcome is value delivery. With the prospect of Durbin killing upwards of 20% of overall revenue (70%+ of Debit Rev) Visa is “squeezed” between preparing for a new world order driven by a new network (not yet profitable) and driving its existing business growth (moving along at a respectable 15% clip). The TOP ISSUE with Visa’s mobile NFC Payment is VALUE. Banks are looking to drive NFC to drive CREDIT volume (as opposed to Debit). This is why certain retailers with narrow margins (ex Grocery) are not supporting NFC (See my blog on BestBuy’s experience). The ISIS consortium in the US was leading with a “debit like” payment product that received strong interest from retailers.. with prospect for very low interchange. Alternatively, bank and Visa led schemes have the merchants paying for the “privilege” to take NFC.

If Visa’s mobile efforts were removed from the revenue pressure of the parent we would undoubtedly see Visa work to establish a new, more cost effective network built around Debit (See my previous blog on the “evolution” of debit networks) and they have worked to some extent on this with VMT. Or even build “new mobile rails”, as they attempted to do with Monitise and are now rumored to be investing in Fundamo for same (targeting emerging markets).

As it stands today, Visa is playing the role of a portfolio manager and evangelist. Selectively supporting and investing in mobile initiatives in an attempt to leverage their network. This is a “services” approach to their existing network. The structural challenge is that new services on Visa’s existing network equates to lipstick on a pig (or a snowboard on a running back). How can Visa deliver value to a POS transaction when it is forced (by issuers) to be credit only (250-350bps). To be perfectly clear this is NOT a technical challenge, it is a business model challenge. Bank/Retailer/Card relationships are very strained right now. A good example is “coupons”, Visa has their own coupon service (referenced in PR above) and has every technical capacity to offer a great experience. Visa could actually deliver a killer app in this space if retailers would only give up line item detail on what was actually purchased. The technical capacity for Visa’s network to deliver “level III item detail” has been in place for many years. Do you know how many merchants give up this information? Almost none.. (example Office Depot has it on their Chase co-branded card). Merchants trust neither the networks, nor the issuers with their price list or customer information. Visa is not able to “pay” for this information as it does not own the customer and cannot leverage this either. This all goes back to why Visa took 3+ years to roll out the offers service in the first place.. it had to get issuer permission for each consumer.

Every network begins with delivering value to at least 2 parties. My bet on mobile payment is based on a history. A history where banks (and Visa) have demonstrated poor competency in retaining their role as intermediary between consumer and retailer. A new retailer friendly network, that conveys much more than payment information is needed.

Visa for you to execute in this space, spin out Bill Gajda and team to build a new network. You certainly have the capital and intellectual horsepower to do it.. Don’t think of mobile as a service on VisaNet.. We will know this is moving when we see PayWave Debit volumes taking off.

Analysts.. lets start making Visa publish transaction volumes for NFC, VMT, eCom, Offers.. shining the light on this investment “hole” will help them in the long run.

Payments Innovation in Europe

So in Europe see the consequences of ubiquity. While SEPA was designed to increase competition and create new European schemes, there are few business models capable of supporting investment. Hence Europe is not the place to start a retail payments business. This is why I look to Asia, LATAM and Canada as great places to start a payments business (my picks: PH, HK/China, Brazil, Malaysia, SG, Colombia, Indonesia and New Zealand).

8 March 2011

Why do I like the Payments business? It is ubiquitous, sticky, with good margins and strong annuity revenue.

What do I hate about the payments business?

In the US, it is over regulated, concentrated, difficult to change and frustrating enigma driven by large FSIs with unlimited resources…. Within Europe the situation is little different.

After coming back from last week’s trip the Valley, I was attempting to develop an investment hypothesis on Europe, mobile, payments and innovation in general.

While Europe’s individual talent is second to none, and capital is plentiful, the European market is designed to resist change and thus impedes the development of early stage ideas and companies. Early stage companies can incubate within a single country but are challenged to expand beyond, due to complex regulatory and market dynamics. Navigating these dynamics causes early stage companies to develop more slowly, thus a requiring a higher risk premium on invested capital.

                   – Tom’s European Venture Capital Hypothesis

SEPA Overview 

(European colleagues can skip this section). 

SEPA and PSD (SEPA’s enabling legal framework) attempt to create harmonization of payment schemes across the EU (See SEPA Blog, and excellent PodCast). The result?  837 pages of detailed and contradictory EU law with no business incentive. SEPA has been plagued with delays and issues, as should be expected given that there was no business incentive nor a PAN EU regulator to enforce it. SEPA Credit Transfers and SEPA Card Framework have been in place for a few years (2008). While the SEPA framework commoditizes payments, and while this is consumer friendly, there is no business incentive to for large banks to implement it (see Barclay’s consumer support on SCT).  The same can be said for the SEPA Card Framework (See MA’s Self Assessment). The main points from ECB’s regular status report:

  1. Banks must create greater awareness of SEPA, and must offer better products, based upon the SEPA infrastructure. Government should accelerate programs to adopt SEPA as the standard for its disbursements.
  2. The banking industry must commit to work together to remove obstacles which might compromise the Nov 1 2009 launch date of the SEPA Direct Debit. Debates on the launch date, the validity of existing DD mandates, and interchange fees must be closed out rapidly.
  3. Bank systems need to be improved to enable end-to-end straight-through-processing, originated by files submitted or by e-payment, e-invoicing, and m-payments.
  4. The ECB wants to see a target end date for migration to SEPA products, and for exiting out of older credit transfer and direct debit.
  5. The SEPA card framework in its current form has not yet delivered the reforms which the ECB wants. In particular, ECB wants to see a European card scheme emerging.
  6. The ECB perceives a lack of consistency in card standards. It wants to ensure that a clear set of standards are adopted and promoted throughout the industry.
  7. A common, high level of security for Internet banking, card payments and online payments is needed.
  8. Clearing and settlement organizations in many countries have made good progress on SEPA, and several are upgrading from national to pan-European.
  9. The banking industry, and its representative body, the EPC have not sufficiently involved other stakeholders.

 SEPA’s Impact on Innovation

European harmonization is a fantastic objective, but translating EU guidance in to country law, with each country’s banking regulators responsible for interpretation and guidance, is problematic. This becomes even more difficult when Banks (who were not included in the SEPA design) have an inverse adoption incentive. An analogy in the telecom world would be telling the land line carrier that the must open up the switch to anyone that wants it at no cost.. and they have to assume all of the risk and operational responsibility.

Early stage companies and “payment innovators” are left with a complex set of constraints.

  • Dependent on local national relationships to launch a product,
  • SEPA creates harmonization, but country specific laws and regulatory guidance are unique
  • ECB initiatives (ex. See ELMI) create opportunities for non-bank participation in payments,  but SEPA has removed all margin from the business

So in Europe we see the consequences of over regulation.  While SEPA was designed to increase competition and create new European schemes, there are few business models capable of supporting investment. Hence Europe is not the place to start a retail payments business.  Hence Asia, LATAM  and Canada are all great places to start a payments business (my picks: PH, HK/China, Brazil, Malaysia, SG, Colombia, Indonesia and New Zealand).

Europe and Advertising

I don’t have time to finish the thought here. For those of you that read my blog you know I’m very enthused about the prospect for advertising to be a future payments revenue driver. Unfortunately for the EU, consumer privacy regulations (and subsequent “tracking” issues) are the most onerous in the world. In Germany for instance, my Citi team was forced purge the web log of IP addresses every 30 minutes.. for our own customers. The point here is that we could not even maintain loosely correlated consumer information in regulated accounts. Google has similar problems today (see Das ist verboten).

Where is the EU opportunity?

Where there is an intersection of: low margin payments, businesses with frequent cross border (within EU) transactions, without need or desire for banking relationship. MoneyBookers is an excellent example of this model in gaming.

Other possible  investment drivers relate to when payment transaction infrastructure is a commodity:

Arbitrage – Move intelligence to new regions or countries where the cost of maintaining it is lower

Aggregation – Combine formerly isolated pieces of dedicated infrastructure intelligence into a large pool of shared infrastructure that can be provided over a network

Rewiring – Connect islands of intelligence by creating a common information backbone

Reassembly – Reorganize pieces of intelligence from diverse sources into coherent, personalized packages for customers

 Thoughts appreciated.

Apple and NFC

Take Away for Investors/Start Ups: Apple will be a very, very hot platform for mobile applications. Do not assume that there will be substantial volume in next 4 years. In short term look to complimentary services.

26 Jan 2011

Today’s Article in TechCrunch: Apple Aims to take NFC Mainstream

Previous Blogs

To summarize from my previous blogs (regarding Apple’s NFC moves)

  1. Not about payment but about advertising. The mobile device will be the top advertising platform for the next century. It provides a unique opportunity for convergence of the online and physical worlds (with the commensurate customer data). In the virtual world there is a “click” by which google can bill. There is also an “order” by which online retailers track channel advertising effectiveness. Apple’s moves in NFC represent the combination of the click and the order AT THE POS so that advertising effectiveness can be managed. It is ALSO a platform for many, many other services through which Apple SEEKs to control (and monitize).
  2. Apple’s desire to control the secure NFC element is not aligned with carriers (in the US) or internationally. How will Apple’s NFC integrate with the SIM? Will they follow the GSMA approach? Most interesting is whether Apple will support Single Wire Protocol /UICC model or will it have a unique architecture (SE NFC) with Apple acting as TSM and managing the secure applications outside of the SIM?
  3. Apple has 4 separate payment infrastructures today: Legacy Apple Store, iTunes, App Store and global treasury. They are indeed building a new payment infrastructure to support their wallet. Rumors are they are working with a big bank (?Chase?) as well as considering acquisition (ex. GlobalCollect). It seems that they are confident that they have capability to support US market rollout.
  4. TechCrunch is well off base in its assertion that the Debit interchange provides an opportunity for Apple. Actually, the reverse is true (in US Market). As discussed in the ISIS blog above, the key for NFC adoption is merchant POS infrastructure investment. ISIS is working with several large retailers to subsidize POS infrastructure. ISIS is doing much heavy lifting in its payment system incentives. Discover/Barclays relationship allows ISIS to build a merchant friendly value proposition and gives ISIS a unique ability to “control” the NFC/PCI certification process. Given that Apple is currently outside of ISIS, it must have another payment network to support it at the POS. Apple has typically partnered with Visa (given that MA has partnered with RIM this would make sense). In either case the merchant transaction costs for an Apple/NFC transaction will be higher (Visa controls the MDR) and Visa will control the NFC certification process. Apple may create a package of marketing incentives that will offset the merchant costs, but marketing effectiveness will be poor in the early stage (prior to NFC at POS). A classic chicken and egg problem.

Take Away for Investors/Start Ups

  • Apple will be a very, very hot platform for mobile applications.
  • Do not assume that there will be substantial payment volume in next 4 years
  • Assume there will be iAd “advertising views” but few mechanisms to track effectiveness until payment is captured
  • Important: even after payment is captured, the item detail will not be available to Apple.  Apple will be able to track that customer clicked on iAd, and visited store, but NOT what item was purchased.  There are a few companies addressing this… but not going to spill the beans here as I really like this space.
  • Apple’s ability to capture mass media spend will be driven more by Steve Jobs and the demographic of the iPhone user base.
  • Apple will have continue w/ interim CPC model on iAd until tracking through POS.  They will likely attempt to develop a couponing system, but bar codes on iPhones are viewed very negatively by retailers.
  • Expect to see many “four square” like start ups which try to leverage store visit check ins. But less than $2B in marketing spend shifting to platform until POS integration.
  • Look for Investment hypotheses that align to Apple core services (acquisition/exit)
  • Payment will take some time, DeviceFidelity spent almost 2 years in certification with Visa. In short term look to complimentary services. Examples
  1. NFC to Open Doors
  2. Physical advertising with NFC (NFC in a store display through coupon redemption)
  3.  NFC “Four Square” like Check In (ex shopkick)
  4.  POS Infrastructure (VivoTech, Verifone, Vending Machines, …)
  5. Retailer friendly applications that attempt to marry iAd data with retail POS data (think KSS Retail, DemandTec, ….)

2011: Tough Start for Mobile Payments

2011 has been a rough start for mobile payments. Early bets in the space are running out of cash, and established industry players are placing $1B+ bets to compete with new MNO ecosystems.

10 January 2011

I learned my lessons on the Valley hype cycle early (from the source). In 1997, at the ripe old age of 32,  I joined GartnerGroup with the goal of participating in a great research and advisory team. Well… that lasted about 11 months. I learned that there was no research and their business model never broke away from its roots as a division of McGraw Hill. It was all about reporting, writing, buzz and sensationalism (with a very few exceptions .. Schulte/SOA).  It was great fun listening to buyers of IT talking about new products issues and then meeting with the software vendors (with more information on hand then their product heads had) to watch them watching them turn green.  But fun aside, I wanted to go run a business…. not become an industry analyst (this blog serves as an outlet for my minor competencies here).

The Gartner experience reinforced the importance of marketing in creating new products, of creating “buzz”. After all  IT periodicals and research firms must fill their pages with something every week. Of course ISVs and start ups are happy to oblige… Buyers and Investors must be able to cut through the fog and assess business viability, valuation and risk.  My data indicates that mobile payments is at the top of the hype cycle. I read the Nov 2010 Javelin report on mobile with great amusement: $7B in P2P mobile transactions in 2010!?  I would be very surprised if the number broke $100M.  Obviously the $7B number is driven by Javelin’s methodology, perhaps a mobile payment includes when I get an SMS message that my bank paid a bill….

Javelin’s methodology obviously does NOT include looking at financial statements. If it had (and the $7B number were real), we would not have seen the continued bloodshed in the space. 2011 has been a rough start for mobile payments. Early bets in the space are running out of cash, and established industry players are placing $1B+ bets to compete with new MNO ecosystems. An industry status of early movers here:

In every case above, there was complete failure in a value proposition. For Example, Obopay charging $0.50 to send money.  The key lesson learned (over and over) is: small companies cannot LEAD development of a payment network. The industry is replete with examples which substantiate this point(see list here). Payment networks are 2 sided, and compete against well entrenched competitors with deep pockets. Payment networks must start with delivering value to 2 parties (ex PayPal Consumer to EBAY). Going at consumers alone (p2p) or as a bank partner alone (Monitise) will not drive volume. As Clayton Christensen asks in Innovator’s Solution: “what problem are you solving”? Moving money through a phone does not create value.

To be clear, there is a very real potential for mobile payments (and NFC) to be the driver 100s of new companys. But their business models must deliver value today (example NFC to unlock doors), or serve  in a supporting role to new industry ecosystems. This supporting role requires a FUNDEMENTAL change in how valley firms typically operate: Start Ups must learn to work with and support multiple large companies and ecosystems. Supporting ecosystems is a B2C model.. NOT a direct to consumer model. This supporting role has new risks, as VivoTech (one of my favorite companies) has learned.  Small Companies which support emerging ecosystems are challenged to influence their overall shape and value proposition. Further, if transaction volume is low, there is minimal revenue or pricing power without a clear value proposition (see Google/Boku).

New ventures operating within NFC ecosystems have prospect of attracting  30-50% of the $6B in mobile venture capital. Investors should be wary of  hype and tag along investing as risk profiles are unique (ie NFC ecosystem play vs. consumer mobile app).  Look hard at the talent running the company (see investors guide). Social networks are much different than payment networks. Payment networks require alliances, regulatory/risk acumen, understanding of history, experience and relationships (see key skills). Banks can win in the move to electronic payments. The top 5 US banks are in a much better position to influence ecosystem development (see lessons learned) than the mid tier, however the mid tier is in a much better position to partner (ex. Barclays US in Discover).

Deal of the Week

From a valuation perspective, the latest “head scratcher” in mobile payments is Square’s $27.5M raise at a $240M Valuation. From VentureBeat:

Rabois acknowledged, but he pointed out that Square is already achieving impressive growth without paying for traditional advertising or other promotions. He said Square is processing millions of dollars in transactions every week, and that it’s signing up 30,000 to 50,000 new merchants every month. Rabois said many of those merchants were previously cash-only, but they were attracted by Square’s ease-of-use (the card-reading device plugs into iPhones, iPads, and Android phones) and low financial risk

I estimate they are doing about $20-$30M TPV per week (5k users $5k/wk) this translates into revenue run rate of $6M/yr … which would equate valuation of $240M to 40x REVENUE. Square may have 30k downloads of their iPhone app /wk, but does that translate into transactions. This valuation is NOT based upon financials, but upon the people involved in this company. Existing investors took a bigger stake.. they have every right to set the price. This makes complete sense,  particularly if they are looking for a Revolution Money kind of exit.