Token Activity – 10 Approaches?

11 December 2013

I’m preparing for a few institutional investor chats next week in NYC and thought it was time to update my view on the payment landscape. Summary: much chaos and noise, with existing players throwing sand in everyone else’s gears… lots of energy.. but NO HEAT. This blog contains a brief inventory of initiatives I’m aware of. One of the reasons I do this is to solicit further dialog from blog readers.. so your thoughts are always appreciated. It is very difficult for small companies to identify activities which will impact them.. turns out that most non banks and even Visa and MA are ill informed on some of these as well.

In my June Blog Tokens: Merchant Options, and September blog Money 2020: Tokens and Networks I laid out 5 token initiatives.. we have now almost doubled..

The key differentiation between these Token initiatives is WHERE the translation occurs (Wallet, POS, Processor, Network, Issuer).  Translation is also referred to as DIRECTORY, which I define as the mapping of consumer information to payment information (see blog Battle of Cloud Part 1). The owner of the consumer directory is the winner in all of this, as the value of payment pales in comparison to the value of data and the consumer relationship. This is the core of the token battle

Inventory is for POS payments only. 

Token schemes

  • Form A (TCH Pilot – Processor Translation)
    • Consumer Directory: Bank
    • Token is presented to Merchant at POS (QR code, NFC, Barcode, …)
    • POS forwards token to Merchant processor (ie Elavon)
    • Elavon translates token into card through TCH service
    • TCH can resolve token directly (switch to network), or forward to participating bank for resolution (switch to network)
    • Issuer sends Authorization to Elavon
    • POS settlement
    • Patent issues surrounding merchant processor translation of tokensTCH Scheme
  • Form B – Wallet Translation (Push Payments)
    • Consumer Directory: Wallet
    • Token is presented by Merchant and read by Wallet. Token represents MID, TID, Processor and Amount
    • Merchant POS is awaiting authorization as if a card was swiped
    • Wallet sends token to Issuer (circumventing Visa/MA). Note this is WEAK LINK as data connectivity required for Consumer’s phone at POS
    • Issuer translates token into authorization, sends to processor
    • Processor passes authorization through to TID as if card was swiped
    • SMS based payments done in this model for years. Form of tokens could be beacons, QR, biometrics. Difficult to patent as core for operation is consumer directing bank to make payment.
    • Key differences (globally) are how consumer IDs the merchant and amount, and how does issuer pass the auth
  • Form C (C for Chase with their unique VisaNet deal)
    • Consumer Directory: Bank
    • Token is card number, Presentment is TBD.
    • If Merchant is a CMS merchant, Card routes through JPM’s version of Visa net for offers/incentives (given merchant participation.. of which there is none).
    • If Consumer card is JPM then deliver Card Linked Offers. Again.. not much here.
    • Unique capabilities, but all based upon Visa’s network. Barrier to replication is the unique deal that JPM constructed to “branch” VisaNet
    • JPM Visa flow
  • Form E – EMV/NFC
  • Form G (G for Google’s old Mastercard proxy model)
    • Consumer Directory: Google
    • Token is a card number – Issuer is google (See blog)
    • A plastic version of this was planned in 2012 as reported by Android Police, but was pulled because of high stakes war involving top issuers and Mastercard.
    • Merchant runs transaction as normal
    • Google acts as issuer receives authorization request and routes to selected card (using facilities of TXVIA).
    • After receiving authorization from funding card, google authorizes transaction
    • Issuers make all of the interchange they did before, but don’t like being wrapped. They also don’t like the data leakage and the fact that this impairs their ability to offer unique services (10% off at Kinkos).
    • Note: this scheme has a value proposition for everyone.. and banks still don’t like it… Google loses money on every transaction.
    • Another little known fact is that early versions of GW ran in this model due to limitations within NXP’s chip (only supporting one card emulation app)
    • No Patent issues, few other companies could afford to take a loss on every transaction (buying data). Network rules are the primary issue.
  • Form H – Host Card Emulation  (Google, MA, SimplyTapp) I like – this one
    • Consumer Directory: Issuer
    • HCE Blog
    • Blend of NFC and Form V below. Simplifies the NFC supply chain
    • No dedicated hardware, NFC just another radioExposure: 000 : 00 : 00 . 156 %Accumulated%=0
    • Issuer Creates One time use tokens for EMV key generation
    • Merchant acceptance hurdle CURRENTLY same as NFC
    • Can be leveraged for non EMV purposes (Beacons, QR, wi-fi, …)
    • HCE is GPL, but ability to generate one time use tokens for EMV generation is unique.
  • Form M – MCX/Target Redcard
    • Consumer Directory: Wallet/Retailer
    • See Gemalto/MCX Blog
    • Very similar to Model S (Square) below except wallet is owned by the retailer and form factor is QR code
  • Form P – Paypal/Discover
    • Consumer Directory: PayPal
    • OK… this is not mobile yet.. but since I have Square down below, I thought I would be fair
    • Consumer registered for Paypal Card running on Discover network.
    • Consumer enters phone number at POS + PIN
    • Processor translates phone + PIN into Discover transaction
    • Discover routes to Paypal for authorization
    • Very similar to Model G above
    • Transaction authorized
  • Form S – Square/Starbucks/LevelUp – POS translation
    • Consumer Directory: Wallet/Square/Starbucks
    • Consumer account mapped to phone, ID, voiceprint, card, picture, location
    • POS translates ID to Card
    • POS request authorization as a card not present transaction
    • Consumer Authorization was taken during service registration
    • Consumer receives digital receipt for transaction
    • See Square Stand, LevelUp
  • Form V – Visa/Amex/MA – Network Tokens (TBD)
    • Consumer Directory: Network (Issuers don’t like this)
    • Press Release
    • See blog on Battle of the Cloud Part 4 – Clusters Form
    • Tokens will evolve to a very long number which will be translated to an issuer/account number. This is what Visa/MA do today.
    • Patents will be around generation, use and validation of token. In the future, merchants will not store your card numbers on file (COF), each merchant will have a unique token based upon your actual account number and their own ID.

From Business Implications of Tokens

Business Drivers

As I outlined 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 (seeDirectory 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.

Gemalto CEO: We will make “hundreds of millions” from MCX

4 Dec 2013

I had a large institutional investor forward me this article.. it is 60 days old.. but still I spit out my coffee laughing, so be careful.

gemalto

http://nfctimes.com/news/gemalto-offers-details-mcx-deal-vendor-will-earn-fees-transactions

Gemalto CEO’s assertion that he will make “hundreds of millions” from MCX is a big pile of… um… “optimism”.  Given he is a public company, I can’t imagine how he could possibly give forward looking statements that are so completely and utterly unfounded. Perhaps communication by public companies in Amsterdam is a little more relaxed (a trip to the “coffee shop” with Bob Dylan. I better watch out, or I may be treated like Bob was yesterday see CNN – Bob D Inciting hatred).

Let’s do a little math.

MCX will likely process payments in a decoubled debit model with a net payment cost of  $0.05 (plus 10-20bps for fraud). If Gemalto were able to get 10% of $0.05 ($0.005/tran) it would take 20 BILLION transactions to generate $100M in revenue, at $40 per average transaction that would be 800 BILLION in sales. For perspective, total US retail sales are $2.4T (not including restaurants, auto, services, gas).  Wow…. Quite Gemalto has quite an “aspirational” view on MCX adoption. I wonder if Gemalto’s CEO knows that the US operates in a competitive free market??

The only possible way to (re) interpret quote is that MCX will make 100M TRANSACTIONS. This means that Gemalto’s revenue from MCX would be $500,000 (at the VERY top end) in Year 5. I hope the institutional investors priced this “cloud” revenue…

I’ve yet to meet any vendor that has not left in tears after working with WalMart. These guys are supply chain Pros.. and no one makes hundreds of millions.. and if you were.. you sure wouldn’t go tell the press about it before your product went live.  Gemalto’s innovation is a pretty QR code.. they are complete idiots if they think that they are the only option for presenting a payment “token” to a POS (see Gemalto QR codes for detail).

12 Party

I own no Gemalto stock, but if I did.. it would be a short position. Their bread an butter businesses are handset SIMs and Credit Card Chips. My view of the world is that dedicated hardware is moving toward software. For instance the SIM card.. most have seen Apples plan to virtualize the SIM (see blog).  Gemalto’s hopes for NFC are also dashed by things like Host Card Emulation (HCE) and the 12 Party supply chain. See this picture on the right? The 12 parties… ? Well they ALL need to make money.. and I can tell you with great certainty that the NFC suppliers in this market don’t have 2 dimes to rub together on NFC.. everyone is taking a bath. Gemalto represents 2 boxes of the 12 (UICC and TSM).. Twice the risk.. non of the cash. Investors look at it this way.. do you really want to bet on Gemalto over both GOOGLE and APPLE? FUBAR!

What is left for Gemalto? EMV Cards.. They will see a bump in demand over next few years due to US reissuance.. but Gemalto is a commodity supplier here. I see nothing in their future that will help them evolve toward a software model.. MCX revenue projections are complete bull&*^*&^

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Issuers … give HCE a shot now

Imagine expanding your existing bank mobile app to do card emulation.. with NO TOLL to the TSM or carrier.. you are in complete control. A project which should be sub $1M AND NO CONTRACTS!!

Imagine expanding your existing bank mobile app to do card emulation.. with NO TOLL to the TSM or carrier.. you are in complete control. A project which should be sub $1M AND NO CONTRACTS!!

The only current dependency is Android 4.4 with an NFC or HCE capable handsets.. with over 40 new OEMs  handsets shipping in next few months.

I’ll fill this blog out in more detail, but here are the key actions

  1. mobile app development
  2. workout how your static signing keys can be deployed. SimplyTapp has solution in place (https://www.simplytapp.com/)
  3. Test with legacy embedded handsets and new OEMs to establish your test pool
  4. Create a new consumer registration service where virtual keys are provisioned to application (again SimplyTapp has this)

Google’s phones are ringing off the hook. Retailers, loyalty providers, Banks are all working to leverage this new approach. The Android team can help you with the APIs.. but recommend you get in touch w/ SimplyTapp today

(I have no current relationship with SimplyTapp… but think it is something that makes sense as hardware evolves to software)

– Tom

 

Another Bank Consortium? Paydiant

Banks have not put all of their eggs in the TCH basket. There is another Bank Consortium around payments which I have not discussed: Paydiant has been working with 27 odd banks around a “Push Payments” pilot for last 2 yrs.

PUSH Payments – 27 Bank ‘Consortium’

Summary

  • Banks have another “consortium” on payments I have not discussed: Paydiant Push Payments
  • Trials have been underway for over 2 years
  • Competes with TCH tokens
  • Led by BAC, FIS, and other top banks
  • Objective: minimize changes to POS, through a new payment terminal which displays QR code.
  • Flow: Customer takes picture of Payment Terminal QR Code (which contains MID and TID), Code sent from Consumer Phone to FIS service, translated in to card (currently), Processed in normal Auth flow, then Auth PUSHED to POS terminal.
  • Elavon in primary processor for TCH tokens, FIS is focused on Paydiantpaydient

Background

On a flight to SFO today and I’m looking at 50 odd emails from last week questioning my blog on Host Card Emulation (HCE). It has certainly caused a stir with the NFC community. As most know, companies like SimplyTap have been able to make this work on the Blackberry platform for some time…. I don’t mention vendors by mistake… but can’t tell you much more here other than it would be worth your time to work with them if you want to evaluate HCE.

How does HCE play in a world of Tokens, QR codes, merchant run networks, NFC, and Push payments? Well quite frankly nothing is happening now, and until a critical mass of Banks, retailers and platforms start to deliver value (beyond payment) nothing will.  I’ve stated many times that existing networks are ill equipped to drive fundamental change. For example banks look at mobile as a chance to cement use of credit card and maintain control over payments (and consumers).

Those that have read my numerous Token articles know that Banks have been working to disintermediate Visa/Mastercard. The theme is “if there is a number stored on the mobile phone, we want that number to be one we own and control.. not a V/MA number.. but ours”. This number is the Token I referred to in Tokens – Volunteer Needed, Directory Battle, and Tokens and Networks,  …etc. Last month Visa, MA and Amex launched their own competing token scheme to ensure Issuers did not end run them. This has put significant dampers on the TCH project, together with the loss of its early bank champions (Paul Gallant now CEO of Verifone).  The TCH project is likely to morph into ACH and perhaps debit tokens, as well as coordinator of standards, with the Card Network consortium winning the battle over Card tokenization. The only significant piece of new information on this is that the TCH bank champions were emphatic that Regulators would FORCE TOKENs in pending rules. Lets see if that happens.

PUSH PAYMENTS

Banks have not put all of their eggs in the TCH basket. There is another Bank Consortium around payments which I have not discussed: PAYDIANT (http://www.paydiant.com/). Paydiant has been working with 27 odd banks around a “Push Payments” pilot (see blog for Push discussion).

Paydiant Flow

  • Merchant has specialized Payment Terminal that can generate a Paydiant QR Code. No POS change necessary
  • Consumer has Paydiant application or Bank white labeled version
  1. Merchant pushes normal card button on ECR
  2. ECR sends Payment amount to FIS Card Reader
  3. FIS Reader Generates Unique QR code based upon Amount, Merchant ID (MID), Terminal ID (TID)
  4. Consumer launches application and takes a picture of the QR Code
  5. Application sends QR code to FIS/Processor for transalation and asks consumer to confirm amount/payment instrument selection
  6. Consumer confirms transaction
  7. FIS sends transaction through normal payment Auth flow.
  8. FIS receives Auth
  9. FIS Sends Auth to pending MID/TID
  10. Merhant Payment Terminal receives Authorization and communicates to ECR
  11. Transaction is completed

I think of this as a reverse Starbucks. Consumer reads a QR code instead of the other way around. In a perfect world this is a great example of push payments. Only supporting issuers can participate, and they can set rules for interchange, fraud or anything else they want to with Merchant. Banks can also completely circumvent Visa and Mastercard as actual card number did not have to be used.

This solution, while very attractive, does have a few problems. In my own personal experience

#1 Connectivity. Over half of participating merchants had to install wi-fi hot spots as consumers did not have data connectivity in stores. This makes for a very bad (and slow) consumer experience.

#2 Glare. I couldn’t take picture of the terminal without holding another hand up to block glare. Of course we could solve this with Bluetooth LE, or some other factor.. but today it is a problem.

#3 Learning curve. Taking a picture of a QR code is not something most of us do..  Cashiers are not in a place to help

#4 Why? This entire solution is cool.. but why? It is MUCH EASIER to just pay with my card. Just as in Card Linked Offers, there are very few advertisers or other offer content to make this attractive.  FIS seeks to offer LevelUp like loyalty services, but currently in its infancy.

Bank Chaos

The reason I’m telling this story is  to show you the chaos going around mobile payments. Just because the technology works doesn’t make this a great idea. However, I do like this particular initiative very much, as it is the BEGINNING of a new network and a NEW APPROACH to payments that could reinforce Bank roles in authentication.  The flow makes sense to me.. we just have a few problems with the phone to Payment Terminal interface.  Imagine if I could couple this with a SQUARE voice experience and Apple’s new fingerprint technology.

Paydiant was quite sure they were going to win the MCX business. The solution’s complete dependence on processors and issuers made this quite unattractive, and hence Gemalo’s win (see blog).

I have a number of friends in the payment s industry, and each bank seems to be involved in multiple intitiatives:

  1. Tokens
  2. CLOs
  3. NFC
  4. Paydiant
  5. Apple/Google Wallets
  6. MCX
  7. EMV/Reissuance
  8. Visa/MA/Amex Scheme
  9. …etc

It is a crazy time. Small companies and mobile investors need to be aware of this Chaos, and understand the diffusion of focus.

Software Secure Element – HCE Breaks the MNO NFC Lock

Visa and MA have both created HCE Apps which will REPLACE the SE based CARD EMULATION apps. This is a FANTASTIC development for BUSINESS and for Android. Now you can create apps that leverage payment, loyalty, … It is also a fantastic development for CUSTOMERS as you will be in control of the TSM and card provisioning. You will be able to load ANY CARD you want.. not just the Chase and Amex cards that are in ISIS.

News Today – WELL DONE GOOGLE!  (Note good comments below)

In my July post Big Changes to NFC: Payments part of OS I outlined the high level view of what is going on. In order for this blog to make any sense let me be a little less obtuse on the next shoe which will drop: Visa and MA have both created HCE Apps which will REPLACE the SE based CARD EMULATION apps. “Replace” is more from a business context than from a technical one. SE based applications (like a door key, or healthcare card) could still survive.. but why would anyone want to pay the MNOs RENT if you don’t need to.

I don’t have much time to delve into the technical details, but there are 3 core elements to NFC: Radio, Controller, Secure Element. They had been all residing on dedicated silicone from companies like NXP. I discussed in Apple and NFC Part 2 how companies like Broadcom have integrated these separate components into a single piece of silicone. In other words the NFC Radio is just another radio alongside GSM, CDMS, Wi-Fi, Bluetooth, … With Android 4.4 Google has now made Payments Part of the OS by enabling an application to bypass the SE and use the radio as directed by a OS. Another way of looking at this: in a world of integrated silicone, there is NO dedicated  controller… (the controller is in the firmware/OS).Exposure: 000 : 00 : 00 . 156 %Accumulated%=0

NFC zealots will HOWL that there is no TSM, or security. But SECURITY has DEGREES.. there is no such thing as 100% non-repudiation.  Visa and MA have both developed controls for how this will work, for example having a “token” that refreshes at a given rate based upon where the phone moves and how the phone transacts.

This model also addresses a key FLAW with NFC. HCE will allow for APPLICATIONS to access payment.. yes I am speaking of mCommerce (buying from an app or a web site). No longer will you have to key in your card information. NFC did NOTHING for this.

This is a FANTASTIC development for BUSINESS and for Android. Now you can create apps that leverage payment, loyalty, …  It is also a fantastic development for CUSTOMERS as you will be in control of the TSM and card provisioning. You will be able to load ANY CARD you want.. not just the Chase and Amex cards that are in ISIS.

I believe that banks had very limited view of this development, and that several of them will be calling V/MA to confirm that they are creating an new CERTIFIED Card Present scheme based on HCE. Bank control (push for credit use) has been as much of a drag on mobile payments (at POS) as telecom control. This approach BREAKS BOTH.

Bank Benefits

No one can fix EMV…. there are too many parties. New token rules together with HCE AND Network Enhancements (ex Wallet ID, Phone forensics, ..)  a much finer grain of control than exists today. For example, new structure will allow for any given issuer to turn off all tokens for any given wallet provider. When comparing EMV to HCE++ we can’t forget WHAT EXISTS TODAY (is mag stripe). No one can suggest that HCE++ is less secure than mag. Most banks realize that payments are NOT about security and authentication.. but about Fraud and Risk management. Not just “are you the person that controls the account”.. but “did you just loose your job and about to enter bankruptcy).

The mobile device has SO much more data on which to manage fraud and risk. For example at Citi, SMS PIN code completely eliminated risk in new transactions. When we saw a new payee, we sent the consumer a PIN code to their mobile that expired in 1 min.. In future HCE environment if bank sees risk they can PIN, or ask for finger print scan (from apple).

HCE actually ALIGNS to bank and network (V/MA) objectives: keep intelligence in network and control with issuers. Today big banks differentiate themselves on ability to manage risk. They have made multi-billion dollar investments here. Complete security and authentication in a platform decreases their competitive edge. Perfect authentication is a NIGHTMARE to banks because then anyone could do their job and ID risk would be eliminated (not credit risk)NFC Change

Big Technical UNKNOWNS

  • Tokenization, Network Enhancements, New Card Present Scheme, New V/MA Emulation App, POS Terminals, Fraud Services, Device Forensics, Authentication, all are needed in this future model. Much is built.. but this is not without challenges
  • Today’s NFC requires issuer keys to generate the dynamic codes required in a contactless transaction. IF this is reused, than issuers will be able to prevent HCE from working.
  • Will V/MA attempt to impose Authentication/Fraud Services standards impact consumer experience or conflict with issuer requirements
  • Who will create the HCE standards by which everyone can use? How long will this take? are we back to ground 0?

Other quick thoughts

  • This is not just PRESS.. HCE is actually all LIVE right now with a Canadian Bank.. RBC and SimplyTap (the Rocket Scientists of HCE). In this model an ISSUER has given its “NFC Keys” to the SimplyTap for use in an HCE model that circumvents NFC controller.
  • I expect that Apple’s iOS will also follow model within next 8-12 months.
  • Very positive for V and MA, Google, Businesses that transact with consumers
  • Very positive for mobile POS payment
  • Could create new differentiators for Android if Apple doesn’t follow quickly (I expect they will)
  • Positive for merchants as consumers can now load debit cards on their phones and you can create apps that incent debit card usage
  • Negative for companies that specialize in providing payment services to mCommerce or NFC
  • Negative for PayPal.. why use them at all? your cards are stored in the phone. If you are a merchant with a mobile store front or app you will integrate with 2 payment service providers: Apple and Google.
  • SEs will be going away. Connectivity and Authentication put data in the CLOUD.. not locked in a device with the carriers holding a key.
  • Google has alignment on HCE. Devices from the top handset OEMs announced in the next week+ with no SE on board, like the Nexus 5
  • Next BIG challenge? Certifying/standardizing authentication methods which provide for finer grained control of payments, cloud data, re-issuance of tokens…. 100s of new companies.
  • HCE actually ALIGNS to bank and network (V/MA) objectives: keep intelligence in network and control with issuers. Today big banks differentiate themselves on ability to manage risk. They have made multi-billion dollar investments here. Complete security and authentication in a platform decreases their competitive edge. Perfect authentication is a NIGHTMARE to banks because then anyone could do their job and ID risk would be eliminated (not credit risk).

Appreciate feedback.

Payments Part of OS: What does that mean?

Payments in the OS is perhaps best described as the intersection of the 2 major disruptive forces at work: Connectivity of Consumer and Merchant during shopping and purchase, Authentication. As I outlined in Cloud Wallet, it makes little sense to store anything in the mobile phone. If everything is connected, I should just need to authenticate my identity and payments, promotions, reminders, receipts, … everything else could happen in the background. If everything is connected, the nature of payment settlement risk changes (see credit push).

28 July 2013

Continuation of Friday’s Blog BIG Changes to NFC: Payments Part of the OS.

In 1996, I remember launching the first Client Server application for FirstUnion (Smalltalk, OS/2, Win 95).  I had left NASA just 2 yrs prior, and having a Sun Sparc, connected to Arpanet on my desk since 1987 had spoiled me..  The Win95/LAN environment was not designed for engineering… it was a poorly assembled toy for business. It didn’t have native TCP/IP in the OS, actually Microsoft itself didn’t even offer the protocol, I had to install a third party vendor stack on over 2000 PCs around the bank.  Hard to believe this was just 15 yrs ago.. MSFT seems to have embraced a few changes since then, and what was “outside” its platform is now part of it.

The same platform “integration dynamic” can be seen in: video boards, laptops (remember the external slots), mobile phones (Cameras, Bluetooth, Wifi,…), and now NFC from a dedicated NXP chipset to Integrated chipset (ex Broadcom BCM43341, plus firmware).  Most of my readers are not hardware people, so in layman’s terms.. dedicated hardware and software are merging into integrated “platform”.  Mobile phones are thus evolving. from telecom, to Toy, to entertainment, to COMMERCE CAPABLE, connected, devices beyond the browser.  For those interested in reading further, one of my top 10 business books is PLATFORM LEADERSHIP, a tremendous read.

The title of the book above is a great transition into the meat of this blog: Platforms require leadership.  Apple needs no lessons here, as they view stewardship of hardware, design, OS, app store, experience as core to their company. The “distributed” innovation model is akin to WINTEL, where generic industry standards were set, and again we see a core group (this time Google/Samsung/MOT) leading definition of a new platform, against a vision of MNOs (who customize and subsidize Android).  As hardware becomes a commodity, differentiation shifts to orchestration and network applications, this requires a central “orchestrator”.   MSFT itself shifted into this role in PCs, but Orchestration success is dependent on the number of nodes you touch.. and MSFTs nodes are still PCs, thereby allowing Google and Apple to more rapidly gain on their already advantageous positions.   

One way of look at the chaos in payments is to see existing players attempt to create an orchestration role across platforms. Google did this in PC search in 02. Payment Clusters attempt to leverage old nodes (Cards) and current market position to form a new orchestration role (or platform) where others will coalesce (ex: See Network War). Examples: Telecom and ISIS, Visa, Amex, US Banks, Retailers and MCX, Google, Apple, Qualcomm (old),  (links for each of my blogs discussing).  For example, existing beneficiaries of current interchange model are working to retain their 2% tax on commerce (in consumer credit). Among Payment Players, Amex is furthest along here, as they can uniquely help merchants know who their customers are … and market to them.  Visa is working to build services around cards to increase “stickiness” and barriers to entry/change, Banks and retailers are working toward the same goals. All participants realizing that payments in and of itself is a rather ubiquitous service with many different options. The central problem for all of these initiatives: a SUCCESSFUL PLATFORM must deliver value to ALL participants. For Payments, the problem to be solved is COMMERCE.. a rather long process of which payments is only the last, easiest part.  Network Clusters

Focusing on payments, the NFC “platform” provided a way for a telecom/TSM to “control” a user’s data, and a radio on the phone. NFC is great “walled garden” strategy for the MNOs.. but why would anyone want to support an MNO holding the “Key” to mobile commerce? MNOs created a great technical solution without a supporting business model (see Carriers as Dumb Pipes). Mobile is uniquely positioned as the point of confluence between the virtual and physical world, a platform of untapped value to date.

Commerce Services

As I stated Friday, Mobile Platforms (Apple/Google/?MSFT?) recognize the key to margin in an undifferentiated hardware world is in Orchestration/Services. Platforms can’t afford to give the keys to this Platform away to anyone, and are thus integrating all commerce functions into the platform.  Take for instance the service of AUTHENTICATION, this function is critical to both physical world commerce and virtual world (cloud access, pictures, music, online services). Commerce services from advertising, to in-store marketing, and obviously to payment. Thus Google/Apple’s M&A and R&D activity in the space.  Diagram_android

Many of my own “bets” are locked up in the “other services bucket” within the platform, and therefore I’m not able to comment much further here. But as an example, think of the primary categories: infrastructure HW/OS (legacy telecom, embedded SIM/HW mgmt, authentication, location, connection management, secure storage, data management, authorization…), Platform Services/APIs (Administration, Service provisioning, data access, hardware access, service access, location, preferences, payment, …), Core Platform Apps (ie Passbook, Maps, Wallet, …), 3rd Party Apps,

Example Future View – Transit

Today, the top success stories in Transit are Octopus/HK, Oyster/UK, EZ-Link/SG, and Suica/JP. All have a version of mifare compliant interface in transit station gates, with a dedicated card (Japan/Suica  can do mobile top up/reload).  Today all are experimenting with NFC/TSM model. In future “platform” all will be able to create an app on phone to access radio capable of MiFare communication, simplifying the creating and testing process without a hardware NFC dependency or TSM.  A GREATLY simplified development process. Further, given that Platform’s like Apple have existing payment instruments stored, funds could be either transferred into a dedicated stored value account prior to ticket purchase, or authorized on the underlying payment instrument at time of purchase. NFC solves NONE of these funding problems.. it only solves a single secure “presentment” problem.

Example: Store Checkin

Today with Square, Foursquare and others you “check in” to a business, either though GPS, wi-fi or QR code scan.  Similarly Target, Macy’s and other retailers have developed custom apps to enhance in store experience. Its hard to imagine loading an app for every retailer you deal with, or even using the app for any one of them. With future platform services, consumers could publish rules for merchants and store applications leverage a broader set of “platform” services which may include customer insight.  When you walk into any store, a future retail application would give you relevant information depending on your preferences. Platforms will support store branding and communication, enabling a much broader reach (no app install) and capability (insight, payment, ). In this future, the “Platform” is taking on an orchestration role independent of the store you are in. The platform is a working on your behalf, but also transparently supporting retailer objectives. Today, we see Target mobile delivering a price comparison application that doesn’t compare prices. Is there any wonder that usage suffers.. ?

Not Mobile Payments…  CLOUD PAYMENTS

Payments in the OS is perhaps best described as the intersection of 2 major disruptive forces: Connectivity of Consumer and Merchant during shopping and purchase, Authentication. As I outlined in Cloud Wallet, it makes little sense to store anything in the mobile phone. If everything is connected, I should just need to authenticate my identity, allowing requestors cloud access to: payments, promotions, reminders, receipts, … everything else could happen in the background. If everything is connected, the nature of payment settlement risk changes (see credit push).  iPhone-6-Fingerprint-Detection-And-Apple-Release-Date-Rumors

Payments in the OS presents a disruptive opportunity for banks. If there is going to be a PAN (“number”) in the iCloud or iOS why on earth would Banks want to make it a Visa or Mastercard? This is yet another reason they are working on Tokens.. to ensure control of the process.  Problem is that for a new “token” scheme to gain adoption, is must deliver increased benefit to: merchant, consumer AND to the Platform. Bank token advocates will say that the benefit of mobile payment is that the consumer would never need to see the PAN, and thus Consumers do not need to be incented.  Even if this is the case, they must still incent merchant and Platform, particularly when Apple ALREADY HAS the PAN.  In their tokenization efforts, Banks are attempting to resurrect the TSM role, to justify their payments revenue.

However, my view is that IF authentication is owned by the platform, there is very little that banks can do to retain their fee. Just imagine a world where the retailer could proactively offer store credit based upon an individual’s data and behavior (accessed through platform). Where open loop cards displaced store credit 25 yrs ago, the forces could be easily reversed, enabling a new breed of consumer credit companies which support merchants. Banks are working to add value to their existing 16% interest premium credit product which costs merchants 250bps. Merchants may be well positioned to capture all of this revenue, if they had the data (and platform) to make this a seamless experience.  My personal bet is that we will first see a new credit card product which will offer a greatly enhanced value proposition to both consumer and merchant in exchange for consumer data sharing. This product would completely disrupt existing cards.

POS –> CRM and Digital Marketing

We can also see the new opportunities for Payment Enabled CRM when a platform can work with retailers. Leaders here are Square, Levelup and Fishbowl.   The “platform” works before the checkout.. here the key is consumer insight for targeting and relevance. Consumers will only pay attention to “items” which deliver value.

Closing Thoughts – Commerce a very BIG and Broken Market

Commerce is a very, very big market (see $1.46T non-grocery US retail sales, 2013 Deloitte Global Retail Study). US eCommerce sales last quarter were $61.2B, or an annualized $245B, making eCommerce just 17% of non-grocery and 5.5% of total Retail Sales (see US DOC).  Digital Ad Spend is over $100B globally, with the US taking about 40% of that. Google alone accounts for over 40% (eMarkter) and over 50% of mobile (eMarketer), with self reported revenue of $14.1B for 2Q13, (US 45% of Rev).digital ad spend

Looking at US numbers alone, there is ~$750B in total marketing spend (see Chart). Why is digital marketing only 5% of total non grocery sales? Note that this figure is off by 2x as a very large portion of online spend is by service providers (banks, tree cutting, accounting, ..) and restaurants. These 2 categories are not part of Retail sales.

My view on why more marketing spend is not digital:

  • There is no CROSS CHANNEL marketing.  Online ads are most effective when there is an online purchase (or at least most effectively tracked).  Advertisers typically don’t advertise online when products aren’t sold online.
  • Amazon/eBay and other large companies have locked up a substantial portion of eCommerce.
  • Digital advertising is fundamentally BROKEN (when was the last time you clicked on a banner ad).
  • Madison Ave is bypassed as most companies go direct, or use specialized agencies. “Brand Advertising” is big and sticky… big corps like to spend about what they did the year before.. independent of what value it is providing to the organization

 

US Marketing Spend

 

 

BIG Changes to NFC: Payments Part of the OS

What does this all mean? Payment will be part of the mobile platform.. It could manifest itself as NFC, or a QR code, Bluetooth, … or it could be a restructuring of services that that make up payments (authentication, instruction, settlement, confirmation, receipt, …).

26 July 2013

This will be a very short blog. I’m just amazed at how poorly this topic is covered… As I stated in Stage 4 Evolution – Distributed Innovation, the future margin in mobile will be in value “orchestration”.  We can see that phones are “good enough” through current sales (see WSJ article – Wow Factor Fades). How will Apple, Google, Samsung keep their margins moving? Well it certainly does NOT involve turning over the keys to anything (ie NFC, KYC).  Why on earth would Apple want to enable a 3rd Party TSM? They already have your card information, music, pictures, …etc. In an orchestration role, owning the customer is Paramount (identification, authentication, Authorization, access, credential storage, preferences, …etc). Telecos were best placed to take this role.. but have lost it (See ISIS – Platform or Desert)   

I outlined what I believe to be Apple’s hardware strategy in Apple and NFC – Part 2.

Broadcom’s BCM4334 combo chip (dual-band 802.11n, Bluetooth 4.0+HS & FM receiver) is already in the iPhone 5, and other versions in  iPad  yet other possibly extending into Mac  success as well. What I find most interesting is the BC 2079x family of “stand alone” controllers.Broadcom has also contributed its NFC software stack to the Android Open Source Project. A generic controller with software stack which manages both secure storage and multiple radios in multiple frequencies. This is NOT the NFC which MNOs and Bank’s envisioned (see SWP).

 Apple’s go to architecture is outlined well in this patent PICApple NFC 

The 12 Party “Mess” of NFC is being simplified as the TSM role is assumed by either the PLATFORM or the “Network” (Payment or Telecom), what was a separate stand along NFC SE is now being integrated into both Software and Hardware. Payment Networks are working feverously to stake out new ground and “certify” these new solutions (necessary to be classified as a card present transaction).  Banks are working to develop their own “tokens”, Visa/MA are also working to develop their own “tokens”.. all of these fold into what was previously classified as NFC.. but is really a much broader category of mobile payments at the POS.

NFC Change

The picture has changed from this

 NFCarch

 

To this

 new nfc

 

What does this all mean?  Payment will be part of the mobile platform..  It could manifest itself as NFC, or a QR code, Bluetooth, … or it could be a restructuring of services that that make up payments (authentication, instruction, settlement, confirmation, receipt, …).

 The teleco’s seem completely clueless.. ISIS is rumored to have a $200M launch coming up in next few months. Not only will they face challenges in finding phones that support SWP, they will face a future where “platforms” have gone around them completely. 12 yrs of NFC work down the drain…  

Start ups/VCs.. there is a network war going on right now. The payment area is high risk as the platform players make payments part of the OS.

Long term, this is very GOOD news for payment AND COMMERCE Innovation. New payment networks like MCX, RuPay, Alipay, ELO, Sepa DD, can now work directly with a platform to create and certify their “App” that could take on ANY form factor.  Beyond Payment, these platforms have the potential to create/support 1000s of new physical commerce interactions.   

 

 

Apple and NFC – Part 2

Could the new iPhone run Visa Paywave? sure.. however it may need an add on antenna.. my guess is that NFC in the next iPhone was not built around supporting someone else’s project (Visa/Banks) . This is the paradigm which must be broken. Don’t think of NFC in terms of payment, it is just another radio

Previous Blog – Apple and NFC 

Well, I was right last year… a lone voice in the wind with BGR. Let’s see if I can repeat.

Prediction: Apple iPhone 5s/6 will have NFC.

Caveat.. it will operate MUCH differently than what you think of todayExposure: 000 : 00 : 00 . 156%Accumulated%=0

Hardware? My bet is  Broadcom’s BCM43341 or BCM20793 chip 

Broadcom has launched the industry’s first quad-combo chip. The BCM43341 combines NFC, Wi-Fi, Bluetooth and FM radio on one chip and, says Broadcom, “offers OEMs unmatched size, power and cost advantages.”

A second new product is a single card solution that pairs a BCM20793 NFC controller as used in the Google Nexus 4 with an 802.11ac (5G) WiFi radio and is aimed at high end mobile phones and devices.

Broadcom’s BCM4334 combo chip (dual-band 802.11n, Bluetooth 4.0+HS & FM receiver) is already in the iPhone 5, and other versions in  iPad  yet other possibly extending into Mac  success as well. What I find most interesting is the BC 2079x family of “stand alone” controllers. Broadcom has also contributed its NFC software stack to the Android Open Source Project. A generic controller with software stack which manages both secure storage and multiple radios in multiple frequencies. This is NOT the NFC which MNOs and Bank’s envisioned (see SWP).

HOW WILL APPLE LEVERAGE NFC?

This is the billion dollar question.

My guess is that Apple will focus on creating a new security and authentication infrastructure on the phone, and in the cloud. This infrastructure has both software and hardware components, and will change the way other “apps” interact with customer data, customer sensitive information (ie location) and the OUTSIDE WORLD.  For example, today apps that require location must adhere to policies consistent with “location services“. Think about extending this type of control over your credit card information, name, address, e-mail.. what apps get access to which data? Now also think about this new service which can identify you are who you say you are (identification) which will be present with AuthenTec capabilities

iPhone-6-Fingerprint-Detection-And-Apple-Release-Date-Rumors

Apples new lightening connector extends the iPhone security “platform” from the phone to external devices via proprietary cables which must contain embedded Authentication chips . I bet the folks at RIM just fainted reading this.. RIM built the most secure mobile platform in the world, with secure integrated corporate e-mail.. no developer community, “average” user experience.. and a completely STUNTED internet browser. Apple is going after security last.. after they have everyone hooked on the platform. Apple is completely brilliant, it took a “good enough” approach to security to build user base.. now it is adding services and security. .

All of this is completely consistent with what we see in Patents, acquisitions, evolution, phone architecture, … and Apple brilliantly evolving the company into orchestration as I outlined in blog on Stage 4 Value shift.

Could the new iPhone run Visa Paywave? sure.. however it may need an add on antenna.. as the design of NFC within the iPhone was not built to around supporting someone else’s  project (Visa/Banks).

where value lives

This is the paradigm which must be broken. Don’t think of NFC in terms of payment, it is just another radio.. actually it has 3 parts.. the radio, controller, and secure storage.. each of which can take on very different roles in a new Apple architecture. Why transfer data view NFC/ISO 14443 @  424kb/s when Bluetooth V2.1 is 2.1 Mbit/s and Bluetooth V4/V3 is 24Mbit/s… (60x faster).

I predict all of the phone platforms will spend whatever is necessary to retain ownership of customer and customer information. All commerce and financial services are dependent on consumer Authentication… it is the lynch pin for retaining the “hub” role in value orchestration and future margin..

Handset manufactures (Apple, Google, Samsung, …) are flipping the NFC value equation. From a SIM based SWP approach to an multi functional embedded approach with integrated consumer authentication. I’m amazed that there is not more press here. The implications are tremendous.

See previous blog KYC – $5B opportunity (I may have guessed low).

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.

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 Gap.com.  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.