Tag Archives: POS

Future of Phones.. Good Enough?

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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.

Battle of the Cloud – Part 2

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29 August 2012

Previous Blog – Part 1 – May 11, 2012

Let’s update the Cloud Battle story and discuss events since my last post on the subject

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

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives

Since May, the following “significant” events “in the battle” have occurred:

  • Retailers have launched MCX with Wal-Mart’s Mike Cook as the lead. I want to emphasize, this is not “mobile payments” but rather a low cost payment network (Cook talks about $0.05/payment). Some retailers will seek to integrate their loyalty card, others will create plastic (see Target RedCard), others will certainly couple with mobile. WMT will likely integrate with a virtual wallet that manages digital coupons (Coupons.com likely leading)
  • Apple has rolled out Passbook in June.. See my Blog, and hardware analysis from Anandtech of why there is no NFC.
  • PayPal had a marketing announcement with Discover. Why would you announce something like this with no customers? Paypal is expanding its network… but merchants are just laughing.. MCX wants a $0.05 payment, Durbin gave them a $0.21 payment and Paypal wants to get 180-250bps. As you can tell, I don’t think much of this, as the Merchants are still in control of their payment terminal. This is also not an exclusive deal with Discover. I expect 2 other major players to partner with Discover in next few months. Paypal just wanted to run with this announcement before the other products come out. I also want to emphasize that DFS is a BUY. They will be a partner of choice as they run a subscale 3 party network that can adapt much more quickly than V/MA. As a side note,  Paypal will likely expand distribution of their own plastic.  See related blog.
  • Google rolled out Wallet 1.5 on August 1 (see blog). This is one of the biggest moves in payments and provides an enormous retailer value proposition (aligned to MCX). Google didn’t follow PayPal, Passbook, or Microsoft.. they rolled out product that was 1.5 yrs in progress.  Google’s new cloud wallet allows the consumer to select any payment method, and provides the merchant with a debit rate (Bancorp non-Durbin 1.05% + $0.15 (note Google/Issuer can lower this for merchants, as any issuer could, this is a MAX rate). Google is CURRENTLY loosing money on the payment side of the business in hopes of making it up on the advertising side. This is no marketing announcement like Apple, Microsoft and Paypal.. this is a product announcement.. it is working today in my new Galaxy phone. This is also the first PRODUCTION cloud wallet for the POS. Apple, Amazon and Paypal dominate cloud wallets in eCommmerce and mCommerce. Google and Amex’s Revolution money are the only one’s doing it at the POS.
  • Square acquired all 30M Starbucks mobile payment customers (see Blog). Square has done a great job acquiring merchants.. but was hurting on the consumer side. Square wants to build network and needed a pop on the consumer side. Square’s business is pivoting toward marketing and consumer experience. Within the next year, the little Square doggle will be a thing of the past. Starbucks is committing to the Square register experience, and Square is relabeling “card case” to “Pay with Square”.
  • LevelUp is making payments “free” for merchants as part of a loyalty value proposition. This is an example deal.. expect more to follow. Issue is that different merchants have different priorities. LevelUp is focused in QSR/Casual Dining and is operating as part of a loyalty play. I’ve outline their revenue in this blog, don’t think it is sustainable unless they can move into acquisition.
  • ISIS has lost key executives in its product area, AT&T is rumored to have a NFC/Wallet RFP of its own out and even Verizon is planning to let Google go ahead and put its wallet on the Samsung Galaxy III phones.. after all what choice does it have?
  • Card linked offers and incentives in the cloud. No one is making money in this space, large retailers are not participating, hyper local merchants (who are interested) are very hard to sell to, and consumers don’t see relevant content (thus redemption rates under 2%).

Where are the cloud battle lines? Well most significantly the battle lines are forming away from NFC (as I stated in January). Even my old friends at Gartner have caught up and placed NFC in the trough of disillusionment. To restate, NFC is not bad technology.. but it delivers no “value” in itself beyond control. Mobile operators have consistently failed to build a business around a “control” strategy (see my Walled Garden Blog). In the  ISIS example they mandated use of credit cards only, as this higher credit interchange was the only way to make revenue. Well guess who pays the freight here? Yep the merchants…  Wal-Mart and its peers were not thrilled at giving issuers and MNOs 3.5% of sales for the privilege of accepting a mobile payment.

The Cloud battle is complex, as the strategies are about MUCH MORE THAN PAYMENT. Payment is the ubiquitous service that is the last phase of a successful marketing, engagement, shopping, selection, deliver, retention, loyalty process. Leaders from my vantage point:

Payment Networks:

  • Mastercard focused on acting in supporting role globally.
  • Discover similar to MA, but with much greater flexibility as it operates in a 3 party network and is both issuer and acquirer.
  • MCX – Not a leader yet, but has CEO mindshare of every top US retailer. They seem overly focused on the cost side. There is a very big whole in their customer acquisition strategy. MCX is bidding out its infrastructure now, my guess is that Discover or Target will win it.. and the the RFPs are just a way of keeping Banks “in the tent” to keep them from changing ACH rules to kill it like they did to Scott Grimes at Cap One (decoupled Debit).

Physical POS:

  • Google – has more consumer “accounts” than any company on the planet. Can it convert them to accounts with a linked payment instrument? Google also “touches” more customers, more times per day than any other company, its heavy influence in the shopping process positions it well with retailers. Also has the best retailer sales force of anyone on this list, as they bring in customers to retailers every day. Android/Google Wallet….
  • Square – Best customer experience hands down (register). It also has the most traction among small retailers

eCommerce/mCommerce:

  • Apple – expect Passbook to dominate mCommerce. It will be the killer app.
  • PayPal – Challenged in market adoption beyond eBay/GSI customer base. Top ecommerce sites like Amazon and Rakuten have their own integrated payment, also 50% of eCommerce/mCommerce goes through Cybersource which Visa acquired. Paypal’s future growth driven by international
  • Amazon – leading eCommerce/mCommerce player. When will it take one-click beyond Amazon? Amazon’s experience is best from end-end…. PayPal/Apple will operate around the periphery of non-Amazon purchases.
  • Rakuten – “Amazon of Japan” who now also owns buy.com. Fantastic experience and leading eCommerce loyalty program.

How many places do you want to store your payment credentials? Who do you trust to keep them? What data do you want providers to know about you?

From a macro economic perspective, total payment revenue for all major participants is just under $200B in the US. Total marketing spend in the US is over $750B. Total retail sales in the US is $2.37T (not including oil/gas, Fin services, T&E). Marketing is fundamentally broken… payments is not. Retail sales gross margin has been compressed from 4.2% in 2006 to 2.4% in 2010. Who is best able to execute on the combined retail and marketing pain points? Who can be retailer friendly? Consumer friendly? Marketing friendly?

I start my analysis with #1 the consumer value proposition, and #2 the merchant value proposition. Entities like Google, Paypal, Apple already have tremendous consumer relationships and traction. They thus have very few “acquisition” costs. However, these entities do bear the costs of changing customer behavior. There are many approaches for changing customer behavior:

  • Incent behavior – direct/indirect/merchant
  • Customer Experience (ex Square)
  • Service integration (reduce effort or # of parties)
  • Reduce risk – financial (security/anonymity…)
  • Reduce risk – purchasing (social, community reviews, …)
  • Value proposition in commerce process (indirect incentives)
  • Marketing
  • ..etc

Other groups like MCX and ISIS bear the cost of both customer “acquisition” AND behavior change for: Consumer, Merchant or Both. As I state previously. one of my favorite arcane books I’ve ever read was “Weak Links” I’m almost reluctant to recommend it because it is so good you may jump ahead of me on some of my investment hypothesis. One my favorite quotes from the book

Scale-free distribution (completely open networks) is not always the optimal solution to the requirement of cost efficiency. .. in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks.

Networks like V, MA, PayPal, Amex and DFS are working to participate in this new Macro economic opportunity. But established networks are hard to change

“The network forms around a function and other entities are attracted to this network (affinity) because of the function of both the central orchestrator and the other participants. Of course we all know this as the definition of Network Effects. Obviously every network must deliver value to at least 2 participants. Networks resist change because of this value exchange within the current network structure, in proportion to their size and activity.”

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives (new digital coupons).

The current chaos will abate when an entity delivers a substantial value proposition that attracts a critical mass of participants. Today most mobile solutions are just replacing a card form factor… this is NOT VALUE. I am currently placing my bets on solutions that merchants support (Square, Google, MCX, LevelUp, …) as this is a key “fault” of almost every other initiative.

Comments Appreciated (as always sorry for the typos…)

Groupon Cash Register?

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31 May 2012

As reported in today’s WSJ, and 6 days ago by Bloomberg, Groupon is working on a Square competitor… So the list of companies that now enable any mobile phone/tablet to be converted into a POS to 7?

  1. Square, $4B GDV Run Rate
  2. Intuit/VZ, goPayment
  3. FirstData mobile pay
  4. PayPal + Roam?
  5. Groupon?
  6. Google?
  7. +10 other small start ups leveraging hardware from Verifone, RoamPay, MagTek

I joked in a tweet that perhaps this is why IBM sold its RSS division to Toshiba for $850M (a $1.15B revenue business).

What is value here? It is card acquiring? POS systems? Advertising? or something else?

Most of us would agree that it makes little intuitive sense for a small business to have multiple pieces of specialized hardware. A specialized, locked down, PC acting as a cash register connected to a specialized locked down payment terminal.

Did you know that retailers like WMT and Safeway have teams of over 500 customizing IBM’s 4690 ECRs? What on earth could these people be doing? A: Multiple tax jurisdictions, discounting rules, loyalty programs, regulations, hardware upgrades, software upgrades, new products, coupons, …  a rather messy business. Similarly few people realize that the payment terminal which we swipe our card is actually owned and delivered by the retailers acquirer.. the retailer just plugs it in. This helps them solve PCI compliance issues by keeping the store completely removed from unencrypted card info.

As my 8+ square blogs have indicated, the real “macro” opportunity many of these companies are chasing is in orchestrating commerce. Commerce is a process that includes marketing, incentives, shopping/selection, purchase, and after sales support. Square has evolved from a payment acceptance doggle to a retailer commerce solution.  Groupon has come about their POS from a different direction.. they need to improve the retailer and customer experience at time of use.  Both will be heavily into advertising (offers, incentives, …) by end of year.

What retailers want are tools to drive customers into their store (acquisition), fill empty seats (yield management),  get existing customers to buy more (basket size) and improve margin (price different customers differently).

Mainline POS manufacturers like Micros, NCR, Aloha, … have a list of companies requesting that they pre-integrate incentive solutions into their software..  By integrating incentive solutions into the POS, advertisers (and intermediaries) are hoping to close the loop in advertising. Closing the loop means allowing the advertiser to determine if a given advertisement resulted in a purchase. This would in turn allow for “performance based” advertising as opposed to cost per million, or cost per click. Today, there are very few performance based advertising solutions, as most advertising is completely untargeted.

But software availability does not equate to usage… as each retailer has their own marketing objectives. Believe it or not, retailers want to spread their campaigns across multiple advertisers, with many different programs to reach different audiences. The incentive for a new acquisition to my coffee shop will look much different than the program to retain customers (Starbucks being #1 here). Also customers are spread across multiple channels, and retailers sometimes operate as franchises that each market separately.

Case Study: Fishbowl

Fishbowl is a 10 yr old Washington DC based company 100% focused in Restaurants. Fishbowl gets its name from the fact that we drop our business cards in a fishbowl.. and the store wants to do something with them. CEO Scott Shaw is both a restaurateur, and serial entrepreneur. He and his team have done an unbelievable job constructing a campaign management tool that allows local franchisee’s to launch specific campaigns to specific customer segments (with a response rate ABOVE 10%) together with an integrated redemption package. Beyond the campaign management function at the hands of the local stores, there is an integrated “offer manager” that resides within the store’s POS systems (example Micros).  If you guys saw this in action your jaws would drop.. but it was no 12 month project.. Retailers want to test it… see what it does.

Most readers can see the obvious problem here with card linked offers (previous blog ). Retailers do not want to give 15% off to every customer weekly. They want specific incentives.. to specific customers that are not necessarily in a single issuers card portfolio. Add to the complexity the fact that 80% of advertising $$ flow from manufactures and the dynamics further cloud as retailers use trade spend $$ to incent specific product purchases. GM pulled it’s Facebook spend because of this dynamic.

Every network begins with a closed loop system delivering value between at least 2 parties. The solutions in this POS space are not “pure play” electronic cash registers.. but BRIDGE devices hoping to switch transactions within existing networks, while adding new features.  This seems complex for all but the smallest merchants.  I like Fishbowl’s approach better.. starting with a campaign tool that would allow the retailer to touch any customer in any “ad network”.  In the Groupon model, they can only reach their registered customers.. in offer models that they support.  If Groupon had a killer value proposition (for both retailer and consumer) this could work well, if not they suffer from the problem of distribution and targeting (relevant offers).

PayPal at POS?

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18 Nov 2011

The most frequent question I get from eBay’s institutional investors and start ups is about PayPal’s opportunity to win at the POS. I met with 3 top Retailers who  have been pitched PayPal’s new service. Quite frankly they were laughing.. it goes something like this

“we [Retailers] just won Durbin and are in the midst of planning how we incent customers to use their debit card … and we get presentation from PayPal with a rate of 150-200 bps..  am I going to loose any customers because I don’t have paypal payment? Will Paypal bring me new customers that would not have shopped here in the first place? Is there going to be a 100% conversion of credit card customers to paypal? Why on earth would I want to do this?”

PayPal of course is also pitching a gaggle of new mobile tools that let people scan in aisle and shop online to pick up in store.. but does a retailer really want to outsource this?  PayPal’s core value was built around commerce, specifically the new form of commerce that eBay marketplaces brought. Buyers and sellers flocked to a tool that met their needs. No one came to eBay because of PayPal.  Payments are just the last phase of a successful commerce interaction. PayPal still has tremendous global opportunity, but their opportunity is an evolutionary one driven from their COMMERCE core. Their business model (and cost of funds) does not adapt well to the physical world.

PayPal has no tools in its shed to deliver incremental value within a PHYSICAL commerce orchestration role. They simply do not touch consumers or influence them prior to purchase. Facebook, Apple, Google, MSFT all have a much better chance of orchestrating commerce..  This is why Google’s Wallet will win against ISIS… the business opportunity is commerce orchestration…NOT about mobile payments. Never before has a customer had the ability to interact real time in store with products and offers.  Who will win? Which company above has a sales force of over 2000 globally selling to retailers today? Driving business growth? There will be no contest here.

How can PayPal use its tremendous consumer network to deliver value off of eBay?  The answer revolves around what they “could” orchestrate.. perhaps in a junior capacity.  What problems can they solve? If PayPal’s biggest asset is Consumers.. and objective is physical commerce… why not create a “reverse auction” for goods? Let consumers describe what they are in the market for and have sellers bid for the privilege to sell (and service) it. Give consumers option to buy it now in store down the street. This would relegate physical retailers to competing on price alone.. and certainly would not make them many new merchant friends…but they could start off doing this for excess inventory or mark downs.  This could be a very stupid idea.. but PayPal’s efforts to go head to head with Visa and MA in an area where they add no value at a high cost is not much better.

One corollary here is that Payments will become dumb pipes. Banks had a traditional role as the intermediary in commerce. They have fouled the well.. and continue to cry against the harm done to them by Durbin instead of engaging in an honest assessment of the future of their business.  Banks believe they have a lock on payments.. and similarly to ISIS engage in a strategy of control instead of value delivery. This dynamic will push “Commerce orchestrators” to find the path of least resistance (least cost routing) for payment. Not all payments are the same, for example Credit card payments are much different.. because they extend financing to benefit merchant consumer and bank. However there is no reason to force everything through this CREDIT card channel, which is precisely what the banks are trying to do with NFC (for example there is no debit NFC product.. it is not a technical issue but a business one).

Even if payments are dumb pipes they must have a reservoir to pull from, either in a DDA, stored value account or credit line. During my meeting with the Kansas City Fed last week, I discussed the McKinsey report describing how the bottom 4 deciles of retail banking customers are unprofitable. In other words the big 5 banks are trying to find a way to sponsor “switch your bank day” for 40% of their customers.  Many will leave the banking system all together, and this reservoir of funds will translate to cash, pre-paid or some other non-bank product. Banks loss of control over DDA is a slippery slope. If every American has a PayPal account, an iTunes account, an Amazon account, a Google Wallet and a pre-paid card they could find their control strategies are no longer effective.

I apologize in advance for the brevity of this note, and I certainly appreciate comments.. but this is how I see it.

Disrupting Payments at the POS

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7 February 2011

(Note: I apologize for the typos here in advance.. I really do need an editor)

At the end of the year, I try to do a little research… catch up on reading and relationships… all while updating my assumptions and predispositions. We are all creatures of our environment. Past experiences influence our views on current events and future expectations.

During this annual Holiday refresh process I try to develop some big picture “themes”. The questions I’m trying to answer: where are the opportunities? Where should I place my “bets”? What fundamental challenges that must be addressed? Are “fundamentals” changing (core innovation or at periphery)? Who has built a great team? Distruptive Innovations? The 3 areas I’m currently focusing on are: payments, mobile, and convergence (digital/real world).

Anyone that has read this blog knows I am a big fan of Clayton Christensen (author of Innovator’s Dilemma and coiner of term “Disruptive Innovation”).  From claytonchristensen.com:

An innovation that is disruptive allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill

 The litmus test for disruption involves delivering service in a substantially different cost structure. A key example is delivering simplified “good enough” product to a demographic that is “over served” by existing providers. From my (very limited) purview, there seems to be 2 core disruptive innovations that will influence payments at the Point of Sale (POS):

  1. NFC as a Payment Platform
  2. Mobile as an Incentive/Advertising Platform

There are numerous environmental forces that are shaping how these disruptive innovations will manifest themselves, for example:

  • Bank Ownership/Control of payment networks
  • Non Traditional Banks (Target, WalMart Mexico, Discover/Barclays)
  • Regulations
  • Specialization of Labor in Payment Services (Ops, Fraud, Risk, Platform, Support, Compliance, Banking, Acquiring, Processing, Authorization, … )
  • Handset Platforms (Android, iPhone, …etc)
  • Mobile Network Operator (MNO) platforms (NFC, ISIS, Advertising, Carrier Billing … )
  • Retailer Analytics (ie Price Optimization)
  • Advertising Analytics (ie. Adding location context)
  • Consumer Behavior
  • Price Transparency (Merchandise, Bank Fees, …)
  • Social Networks (Groupon, Facebook, … )
  • Consortiums and Partnerships

NFC as a Payment Platform

Mastercard’s PayPass was the first major contactless card program. Within the scope of the 2003 pilot program:

  • PayPass Technical Standards
  • PayPass Certification
  • Consumer PayPass Tokens
  • POS Terminals (which accept tokens)
  • Issuer Participation
  • Retailer/Transport Participation

Following MA, all of the other card networks have launched their own proprietary contactless products. They have numerous form factors, including: stickers, Key fobs, chips in cards, …etc.  Although most are based upon the same ISO 14443 technical specification… each payment process is proprietary and technology must be certified by each card network. Contactless cards ARE NOT a disruptive innovation, although pilots have been “successful” from a consumer use perspective, there were no new markets served nor was a more efficient cost structure developed. Many contactless issues remain unresolved today, these include: merchant POS costs, retailer/network/bank relationships, card reissuance, network effects/consumer demand, mobile application integration. (See previous blog for more detail).

NFC

Mobile Operators and the GSMA created an industry forum to define a broad set of standards surrounding Near Field Communications (see http://www.nfc-forum.org/aboutus/). This is a new “platform” where multiple applications can leverage an ISO 14443/18092 compliant radio/controller (Ex NXP’s PN544 which is in the Nexus S). In business speak, this means that the phone can run software applications which assume the roles of the any of the multiple card “tokens” above. In the NFC world, PayPass is just a software application which can be installed on an NFC enabled phone. The NFC architecture could also facilitate applications to act as a PayPass Reader (POS machine), Oyster Card, or on to take the place of your office badge to open secure doors (Previous Blog on NFC Ecosystem).

The 140 members of the NFC forum have done a superb job of creating a the specifications of a “platform”. Unfortunately, it takes strong business leadership to create a business model (and team) that can execute against it. Generically, key measures of platform success are “ecosystem revenue” and number of entities investing in it (see ISIS Blog). By these measures the ISIS consortium’s plans are severely challenged.  Today, Apple seems better positioned to execute in a “closed” NFC model (see Apple and NFC).

NFC as Payment Platform – Disruption

NFC thus enables a new “software” nature for both existing cards and payment at the point of sale.  Disruption occurs in: cost of customer acquisition, cost of delivering “new” payment services, cost of developing a payment network, cost of POS infrastructure, …etc.. As a side note, there is a separate case to be made that this same disruption exists in emerging markets separate from NFC (See MNOs rule in Emerging Markets).

Card Costs – Industry 101

Anyone in the credit card business knows that acquiring a new customer has 3 primary cost components: marketing, application, activation/use. Marketing is straightforward enough with card cost per acquisition (CPA) driven by marketing effectiveness (direct mail, online, referral, co-brand partner, …) to a specific demographic. CPAs in card can range from $10 to $200+.  Application encompasses collection of consumer data, credit scoring, pricing, acceptance of terms, approval and shipment of physical card. Activation and use is rather self explanatory.. with example costs relating to incentive programs driven on first use.. and continued use.

Future Scenario – PayPal/Bling

Let’s discuss a scenario involving a new payment instrument. Given that Paypal’s analyst day is Wed perhaps: PayPal and Bling at the POS. Today, Bling’s RFID based tags attach to your personal items and enable you to pay at a Bling enabled POS device (including Verifone’s new terminals). This model has a few problems, one is that tags must be mailed and activated. In a future scenario, PayPal has hired Zenius solutions to build a PayPal/Bling POS application within an NFC enabled phone. Now you just download the PayPal app to your iPhone 5 (complete with NFC). Merchant’s POS systems currently allow them to receive updates for each supported payment instrument. In this “future” case, PayPal has decided to eliminate the need for normal merchant agreements.. all that is needed for a merchant to accept a PayPal/Bling NFC payment is a paypal merchant account (with PaymenTech). What are PayPal’s costs in this model? Marketing (and paying the MNO for NFC access).

If PayPal could extend leverage their consumer footprint into the POS, with little cost, what does this mean for banks? It means that the banks could also build a new payment instrument that leverages their customer footprint. Why do you need a Visa or Mastercard brand at all if there is no cost to reissue? For consumers, what payment instrument do you choose? Is there a threat to the  entire concept of a credit card? Apple, Google and Amazon scenarios may also logically follow this example. Retailers like Target could also extend use of their payment instrument outside of their stores (see Target RedCard).

Bank Strategy in this model? See Banks Will Win in Payments

MNO Billing

Carriers in the US, EMEA and Asia are expanding into mobile billing services (provided by Bango, Boku, billtomobile, payforit, …etc). In this model, carriers are taking on some additional credit risk (for post paid accounts) and expanding use of pre-paid. Given that the carriers will be controlling the NFC platform (see related blog), they could also extend this payment capability to the POS with the appropriate processor relationships (ie. First Data, FIS, PaymenTech, …etc).

Disruptive Innovation – Mobile as Advertising Platform

This blog has gone on a little too long.. so will have to make this part 2. The basis for this section is my previous Blog: Mobile Advertising Battle. Disruption is cost to influence a customer prior to purchase. Influence includes targeting that is relevant to customer’s geography, preferences, demographic, transaction context, behavior, …etc

Summary

What does all this mean? What will 2014 look like? Unfortunately I don’t have a crystal ball.. what I would really like to do is charter some smart college team to create a “virtual option market” where we could all participate in pricing/evaluating various options (as laid out in the HBR article Strategy as a Portfolio of Options).

From an investor perspective, the prospect for these disruptive innovations altering the market is real, but with many dependencies and tremendous stakes. Clayton Christensen presented IBM/Intel/Windows as key example in dynamic of disruptive innovation. IBM chose to ignore the PC market.. as the margins were poor. Today, payment incumbents clearly see the threat and are reacting to it. Additionally, incumbents hold many of the “keys” necessary to execute and are well placed to construct new competitive barriers as well as ferment chaos and confusion. Small companies embarking on investments in this space must be versed in dancing with 800 lb gorillas… so ensure you have execs that can fill out the dance card and move swiftly while wearing iron shoes.

ISIS: Moving payments from Rail to Air

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9 January 2011

Previous Posts 

It’s the New Year, and thought it was time to touch on this again (last post 9/10). Quite frankly its hard to believe I’ve been writing about this for almost 18 months.. it was AT&T Newco, then Mercury now finally I have a name: ISIS, with a URL www.paywithisis.com (err… same reaction). Over the last 18 months or so I guessed wrong on the consortium around AT&T, it was not Visa, but Discover (See winners/loosers blog above) it was also all of the major US MNOs (Sprint was initially involved, but has delayed further participation).  Discover makes complete sense, as stated previously a 3 party network is the only one capable of developing a new payment type (with corresponding set of rules and fees). Visa/MA are constrained by existing agreements with card holders, issuers, acquirers. A principle example is Visa’s failure to force a “mandatory” payment type in Visa Money Transfer (VMT).

Top questions I hear today:

1) What is merchant value now that Durbin has pushed back debit to $0.12

2) Will ISIS work with Mastercard Paypass/Visa Paywave ?

3) Will Phase 1 have a mobile advertising component?

4) What are the economics for a merchant POS “upgrade”

A common basis for many of these questions is the ISIS value proposition, the entities driving it and their incentives. The high level value proposition is shown below, updated from the previous September version (prior to announcement of Barclays and Discover).

Merchants love the idea of ISIS, as much because of prospective consumer value … as the pain it will bring: Visa, MA and Amex.  As one former collegue put it: “Merchants have always loved the idea of instant credit and see value in giving customers the ability to buy regardless of the balance in their account, however merchants don’t buy into paying 1.5% of sales for a debit transactions that was $0.05 with a check”.

Historically, the card schemes have built up much ill will with merchants due to: interchange, payment system integrity, fraud controls, consumer influence, …etc.  Two major issuers inferred that Discover is a failed payment “cash back” card network. I would proffer that their “success” is just delayed, and ISIS is the initiative which will drive transaction and network growth in a model that existing schemes can’t compete with. (See American Banker Article).  I see a $200B-$600B TPV network evolving with Discover at its core. Perhaps this is why JPM is assessing a Discover acquisition.

In addition to Discover, I see 5 other entities capable of driving similar value propositions (in the US): PayPal, Amex, Citi+??, Bank of America/First Data, and Chase/Paymenttech.

From an MNO perspective the value proposition is clear (see previous blog). Payments not only supports their existing value proposition to customers, they have the distribution and incentives (airtime, data rates, discounts, advertising) to change customer behavior.

Question 1: Will ISIS take off in light of Durbin and $0.12 debit?

I interpret this as a merchant question. Certainly merchants want the lowest cost payment type used in purchase. What if merchants were “paid” to take the payment instrument? Merchant borne interchange has historically been the major source of revenue for current card products, is there a model where advertising can replace interchange? Googlization of payments?

ISIS has this potential, but will likely not execute against this element for 2-3 years as it develops the payment infrastructure and customer footprint. This may be an issue for ISIS, as merchants may take a “wait and see” approach before investing in POS terminals. This would obviously impact payment volume as merchant NFC POS terminals are just as important to a payment network as millions of NFC enabled phones. If I were Michael Abbott, I would focus on a few very large merchants and commit to a very low interchange (50bps) to drive POS economics that would then support further network expansion. Perhaps this is why we hear so little of ISIS’ merchant value proposition..

So to answer this question, YES it will still take off. I’ve spoke with 2 Fortune 50 retailers this month and they are very firmly committed to making ISIS successful. They see value extending beyond the payment cost itself. That said, there will not be a “big bang” roll out, but rather geographically focused.

Question 2: Will ISIS work with other Visa/MA?

There are many, many sub-questions here. So let’s start with some facts:

1) Discover Zip is different then ISIS NFC (see Story Here).

Geoff Iddison (MA head of mobile) is quoted in NFC times as saying “The challenge that Isis will have is to re-terminalize all of those merchants to a terminal specification which is proprietary”. This is false, ISIS is not using ZIP. They are 2 different initiatives (see ZIP pilot results). The details are best described in this American Banker Article (Jan 2011).

2) NFC and RFID are both based upon ISO 14443

For further info, see the NFC FAQ. And NFC Ecosystem.

3) Merchant POS terminals support multiple standards today

POS terminal decisions have always been independent of card issuers, except where there has been direct subsidies for a “pilot”. Today, POS terminals support multiple staandards (example:  VivoPay 8100).  Note from a scheme perspective, these POS terminals must be “certified”.

Perhaps this interoperability question should be rephrased to ask if ISIS is constructing any competitive barriers? Does ISIS have unique “standards”? Will ISIS be subsidizing merchant POS terminal? What are the “control” points for ISIS? 

The “real” barrier ISIS is constructing is NOT at the POS, but the handset. Specifically, ISIS has created a multi carrier TSM (serviced by Gemalto). For those unfamiliar with NFC ecosystems, the TSM is the entity that owns the “keys” to the secure applications within your handset. Banks want to be in the position to serve in the TSM role, a “DESIRE” best exemplified in FirstData’s TSM brochure:

Card associations believe they are excellent candidates to fulfill the TSM role, and it makes sense from their perspective. The TSM role would make it much easier for the card associations to support their member financial institutions in the issuance of new payment applications and the expansion of the number of accounts they have. In addition, they already have an infrastructure in place for supporting their card accounts.

Banks will not get this TSM role… at least not for NFC which is embedded within the handsets. In the US market, MNOs subsidize phones and already engage in a device “locking” strategy (GSM phones cannot be used with another carrier). US MNOs plan to leverage ISIS and Gemalto (as TSM) to extend this control model to the secure NFC element. In other words controlling which cards and applications can use the device’s NFC capabilities. Note that this dynamic is very “US” focused, as consumers in most other countries buy their handsets unlocked and will have a “choice” of TSM.

This ISIS TSM construct greatly concerns Visa, MA and the large issuers. In the Visa/MA model, NFC transactions are “premium” and can carry very high interchange (see BestBuy Pilot). Merchants are very reluctant to add NFC POS capability if it will increase costs. Although Retailers don’t have to worry about consumers using PayPass or PayWave in mobile phones (due to TSM constraint above), they may have to contend with NFC stickers, MicroSD cards and unlocked phones with NFC capability.

I have no visibility into ISIS, or retailer, plans here. My guess is that the large retailers (which ISIS is working with) will exclude Visa/MA NFC payment types unless there is a an agreement to match interchange. Merchants and ISIS will be emphasizing a new payments brand.. Will merchants allow an Visa PayWave transaction on the same POS? I would imagine that some will, but I would bet that ISIS launch partners will not support PayPass or PayWave. They will tell their customers “sorry … just swipe your card”.

The issuers may contend that agreements in place prohibit discrimination of NFC vs. Card Swipe (retailers beware of this point). I doubt if they will be successful with this argument, given that the merchant is not discriminating but rather accepting a new payment type in a new infrastructure (which the merchant pays for).  Durbin, also allows merchants to “steer” customers toward preferred payment types.

Question 3 – Mobile Advertising

I have limited visibility here, but it would seem this is not in scope for Phase 1 of ISIS. Michael Abbott has only been in the job for a few months, and would expect him to be the driver of plans here given his CMO role at GE Money.  One interesting tangent will be what role ISIS allows Apple iPhone to take. It is assumed that the ISIS TSM will still manage the secure element, but Apple will manage marketing. See Apple NFC Patent.

Question 4 – POS Economics.

From my perspective, this remains the biggest barrier to adoption (see Federal Reserve Study). Durbin’s reduced debit rates have made a challenging business case even more so. There is a normal refresh rate on POS infrastructure of about 4-6 years. Card networks have typically subsidized POS infrastructure within pilot geographies. It remains to be seen how ISIS will incent merchant participation beyond the marketing value proposition (above).

Summary

Most of you know the story of FedEx Founder Fred Smith, and the college term paper he wrote discussing the market for a next day package delivery service. His professor scoffed at the idea and gave him a “C”. Why would anyone want to ship goods via Air.. and there was no need for a “next day” service. Similarly with ISIS, the banks see no need for a MNO driven payment solution… after all they have all of the technology that ISIS has … and have been doing this for years. The market opportunity for ISIS is in shifting of control away from banks and card networks toward merchants and consumers to deliver a new value proposition that goes beyond payments. The mobile handset has the opportunity to be THE primary device for advertising, content and communication. Payment is only one element, but perhaps the central one as it is enables delivery and tracking of incentives necessary for effective advertising.

Will banks / networks be able to adapt their existing payment rails to the ISIS model? It sure is hard for trains to fly…

Where can banks win?  Credit, Risk, Merchant Services, Consumer Preferences, Deposit, Customer Service, … etc.

Thought appreciated

Visa’s new iPhone App: Is this success?

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Visa’s iPhone app is available on Apple’s App Store (but not advertised)

www.visa.com/mobile

The application has been a 2 year effort driven by Monitise, and the UI looks very good. However, I’m afraid that Visa’s latest mobile effort is doomed to failure because of :  “last mile” issues at the POS, and issuer data ownership.

From Visa’s website (http://usa.visa.com/personal/using_visa/visa-mobile/faq.html)

 **Offers: Receive merchant discounts and special offers directly on your iPhone. The offers are stored on your iPhone and can be redeemed at physical merchant retail locations, online, or by telephone …

**In-store redemption:
Visit the merchant’s physical retail location and show the cashier the offer displayed on your iPhone. The merchant discounts the price in accordance with the offer and you pay for your purchase using your enrolled Visa card.

Great customer experience… click on an offer and “SHOW THE CASHIER” your coupon. My guess is that the cashier will gladly give you the discount with a cash purchase as well.  There is certainly the opportunity for a social network aspect to sharing discounts (think groupon) and location aware mobile advertising.. but the banks are not on board. Why?

  1. Visa makes it clear they can register up to 5 Visa cards. Hence they have 1 Participating Issuer – USBank.
  2. Visa is beginning to use customer data for advertising. Current Visa rules do not provide for them to advertise directly to the customer.. it is the issuer that owns the relationship. Perhaps this is the driver of the marketing annoucement

Mercury NewCo – Winners and Losers

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26 September

Previous Posts

Last week I found myself in NYC and was fortunate to meet with several payment leaders. Change is not something we see often in payments as it is historically known for its galacial pace. The most interesting topics centered around new investment and consolidation, with the rumored $500M capital commitment for ATT/Discover Mercury NewCo at the top of the list. I greatly appreciated the dialog, and this blog is a follow up to a few of the discussions. My view is that Mercury will be present a completely new payments value proposition that existing networks will have trouble competing against, with the revenue driver of mobile advertising. As stated in previous blog, mobile advertising may well exceed Google’s precedent set with online…. perhaps a completely different dynamic with established fortune 50 organizations leading the way in collaboration with old line Madison Ave Ad Agencies. The MNO payment strategy seems to be driven by a recognition that mobile advertising is key to future revenue growth, and payments is an outgrowth of this larger strategic plan (see previous blogs above). Why do I like Mercury’s prospects given the dim history of “change” in payments?

  • Enhances an existing value chain (mobile operators) that is well established with sufficient investment capital and patience (deep pockets)
  • Addresses a new market opportunity in a way that can deliver disruptive value to multiple stakeholders
  • Existing payment providers can not adapt. The great thing about networks are their resiliance. The negative is that they are also resiliant to change.. even when necessary
  • There is significant short term merchant pain in the card payments. Merchants have been in effective in influencing Interchange rates.
  • Consumer behavior is changing, and the pace at which adoption of new tools and technologies are “mainstream” are also accelerating.
  • Payments is an “infrastructure service” to every business and every country. Traditional banking is becoming decoupled from the business of payments in both mature and emerging markets.
  • …etc

Its hard to genericize the antagonist view of Mercury.. but the following are key points I frequently hear:

  • Consumers have tremendous card loyalty and will not use a different payment instrument just because it is available.
  • Discover is a failed network with over $2B invested in infrastructure
  • Existing cards can compete on rates. There is nothing that Discover (or Mercury NewCo) can offer which existing issuers can not compete with
  • Changing consumer behavior is unpredictable and takes tremendous marketing investment
  • Investment in POS infrastructure is expensive and time consuming
  • Merchants are happy with the existing payment networks, and will not spend additional money on marketing or interchange 

All are excellent points (with exception of merchant attitudes toward V/MA). Below I have laid out a scenario for NewCo success (some of which is based upon industry intelligence…). Following the scenario, there is an outline of the value propositions for the parties involved.

New Scenario 1 – Pre-Paid Card/Mobile Marketing (AT&T Example)

  • All AT&T customers are issued a pre-paid Discover card with $10 pre loaded
  • AT&T establishes incentives for use and incentives for user acceptance of mobile marketing agreement whereby personal data can be used to market you 10 times per month.
  • Customers accepting agreement also receive NFC MicroSD cards
  • Mercury commits to $200M in advertising spend to kick off program
  • Mercury establishes mobile advertising group in collaboration with major Madison Ave firms, goal of directing $2B in marketing spend by Year 2. Get back at Google (Own Mobile).. is motivation for Madison Ave firms.
  • Mercury establishes Merchant division in collaboration w/ Discover. Mercury will over all transactions at 50bps with minimum marketing spend and/or POS updates. Mercury will also provide marketing incentives/discounts for early adopters. Customer and campaign analytics will be key selling point. Mercury will also seek item detail in transactions.
  • Google makes investment in Mercury to serve as ad serving engine and direct existing spend. Agreement ensures that google does not have exclusive rights so that Madison Ave firms can work directly with large corporates.
  • Mercury/Discover develop common shared wallets and common marketing processes/standards that are used across MNOs (analogous to Apple iAD). Mercury retains directory of customers that have accepted disclosure and campaign engines bid for ad placement based upon demographics, analytics, and location.
  • Customer receives advertising via mobile. 4-8 Categories
  1. Brand level marketing
  2. Store discounts
  3. Product discounts
  4. Coupons
  5. Free Trials
  6. Cross sell/Upsell…
  • Incentives for card use drive merchant and consumer behavior. Durbin allows merchants to “direct” consumers to preferred payment methods. Discover is used for small purchases, and also acts as “decoupled debit” once history is established. Customers begin to think of Mercury card as new debit with benefits.

Process Flows – From GAO

 

 

NewCo Revenue Model – Year 1 (in Previous Post)

  • 85M subscribers (7M iPhone)
  • Year one penetration of 10% (8.5M or 60% of iPhone base),
  • Average purchase amount $40
  • Interchange 50bps

Revenue

  • Annual TPV = 50%(85M*10%*$40*5*12) = $10B  (note: 50% ramp up)
  • Transaction Revenue $50M
  • Digital Goods/Usage $50M
  • Retention                                    $50M
  • Ad Revenue $300M
  • Total Revenue $350M

Expense

  • Processing expense (30% of Rev, 100% ACH funding) – $15M
  • IT Build (one time) – $200M
  • Marketing spend – $200M
  • G&A – $80M
  • Total Expense – $495M

Value Proposition

Thoughts appreciated

– Tom

PayPal Virtual Terminal – Accept Cards at POS

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PayPal Virtual Terminal

6 June 2010

Great job PayPal…. bringing down the cost of card acceptance to $30/mo. No hardware, no special agreements.. just add the service to your existing merchant account.

The only downside seems to be for the 5+ Valley start ups like SquareUp that were targeting physical POS acceptance in a “Craigslist” type environment. The head of payment strategy at a top 3 bank told me that making merchant acquisition easier was a priority for driving new card volume. Looks like VT can both drive TPV growth and address potential down market competitive threats at the same time.

I can’t help but wonder how this pricing will effect Chase Paymentech (PayPal’s partner and merchant acquirer). Small merchants may indeed think twice of having their own merchant services agreement and specialized terminals.

Thoughts appreciated

iPhone at POS? PaybySquirrel – updated

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Twitter founder Jack Dorsey. Card swipe on iPhone.

Roberto Garavaglia was nice enough to share this finextra story on linkedin. Is this a consumer play.. or a “merchant play”? Will I see my local ticket scalpers taking credit cards on their iPhone? This start up was certainly “in the black”.  Data we know:

  • Squirrel has a “signature” line in the app
  • Have hardware on the phone
  • Alpha test in NYC
  • Receipt in engadget pic above shows consumer payment (you paid)
  • Mind behind it is Dorsey
  • Top VCs know about it, and seem to think it is a merchant play.
  • Very US centric.. no EMV (Chip and Pin)

There are certainly some conflicting data points. If a consumer play.. this signature will not be valid… and transaction will be treated as a CNP (so why the signature?). If this is a merchant play who would possibly want to act as acquirer (fraud loss)? The merchant use would make most fraud heads loose a little sleep, for they would have a whole new threat vector. Can you imagine the buyers of the merchant use?.. The bank and I will have to worry about every kid in a fast food window and every waitress holding my card swiping on their iPhone (in addition to paying for my dinner). My guess is that squirrel has the technology working.. but haven’t figured out the “banking side”.

Fraud attacks the “weakest link” in payments quickly. Would love to hear from others on the community, but my view is:

  • Interesting as a merchant play…. but acquirers will shy away from originating transaction in either network without solid fraud controls. The merchant owns the loss here by rules of network in a “CNP transaction”. Signature capability will be debated…
  • Squirrel biz model.. questionable as anything but a hardware business. The fraud numbers of leading merchant selling digital goods is astounding. All top merchants have had to develop their own internal specialist teams to handle.  If Apple and PayPal have trouble with teams of 300+ (after 10 years) this will be a challenge for any new “merchant”. As a payment method, squirrel will have to take this on. Having access to the physical card may allow them to try something disruptive like MagTek which reads the randomness (noise) in the card stripe to establish a “unique” card… which has the downside of card registration. Something like this would push squirrel further into a “US centric” model as it appears that they do not support EMV (aka Chip and PIN).  
  • “No go” as a consumer play. Why not just keep my card at the Apple app store? or at PayPal? What is the incremental value that this provides me? Why not just key in my card data.. why add a reader to my sexy iPhone .. .in its sexy case.

Innovation in payments is tough…  if I were going to add something the Steve Job’s product plan for the iPhone what would it be?

  • Global
  • Ubiquitous
  • Unique to every person
  • Globally Accepted for use in Payment and Authentication, by merchants, banks, networks, regulators
  • Low error rate
  • Impossible to clone
  • Difficult to crack

The answer is… (   ). OK so nothing fits my criteria, but any appendage on my iPhone must certainly seek to optimize the goals above. Only item I’ve seen that comes close it IRIS scanning.. now being miniaturized to fit on a chip the size of your thumbnail (below). Just for fun.. I bought “paybyiris.com” domain as I finished this article (today). 

http://www.nydailynews.com/archives/news/2002/01/07/2002-01-07_credit_card_cloners___1b_sca.html

http://4g-wirelessevolution.tmcnet.com/news/2009/08/19/4331395.htm