The Directory Battle PART 1 – Battle of the Cloud

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

11 May 2012

This week we had both Finnovate and CTIA going on, and behind the scenes the battle lines are being formed in a forthcoming “BATTLE OF THE CLOUD” wallet. I didn’t include wallet in the quote because Battle of the Cloud sounds so much more ominous. Perhaps I should take a page from George Lucas’ playbook and start with Chapter 4.

I’ve been talking about the directory battle for some time now (see Clearxchange post).  Who keeps the directory of consumer information? As I outlined in Digital Wallet Strategies: “ securing information AND giving Consumers the exclusive ability to control what is shared with whom is a challenge (beyond technology and trust). We thus have many limited “Wallets” that are constructed around specific purposes”.

This week we had Visa’s President tell the CTIA audience that Visa has moved beyond NFC to V.me (see my previous post on Visa Wallet). What is really going on? What is the battle of the cloud?

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). Remember US  online commerce is $170B/yr, physical commerce is $2.37T (not including FS, Travel/Entertainment).

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).  Another example is Paypal’s ability to selectively assume settlement risk on some transactions as they route through low cost ACH, or even allow customers to use BillMeLater to selectively convert certain purchase to loans AFTER THE FACT.  In these 2 examples, traditional payments revenue will be significantly disrupted by: lower cost transactions, competitive credit terms (each purchase), and incentives tied to payment type.

But do consumers really want to store all of their information in one place? With one entity given the ability to see all of your spend? For an mCommerce transaction, there is nothing I hate more than having to type in my name, address and card number in that tiny little screen.  Most of these mCommerce solutions (like V.me) are little more than an “autofill” where the merchant checkout page leverages API integration to the cloud service to retrieve user information (see diagram here). If I’m on my phone, my carrier already knows who I am, so seems fairly logical for them to help me with the autofill. This is a reason I’m now a big fan of Payfone. I could also see why it makes sense for Apple and Google. But why Visa? Does it make any sense at all for Visa to hold my Amex card?  Oh.. let me cast a few more stones on ISIS/NFC.. that payment instrument that locked in your phone.. yeah it can’t be used for the online purchase. Perhaps someday someone will write a secure NFC mobile browser plug in to extract data from the SE.. but that opens up a whole new can of worms.

Today’s online merchants are getting a very small taste of the war as they are asked to integrate auto-fill plug ins (Paypal, V.me/CYBS, Payfone, Google, soon to be Apple). Merchants should get on board with all of them, as they do represent a tremendous improvement in customer experience, and you may be able to squeeze some free marketing/implementation money from each of them. However, the cloud battle at the physical POS is still a few years off, as existing card products have a substantial advantage in risk modeling/fraud. This is where Square is taking a lead, as it has the best consumer experience hands down. Low volume merchants really should assess whether they need a specialized POS system, as the parameters for selecting one have shifted from ISO/Processor/Cost/Acct Recon/Book Keeping to Sales, incentives and customer experience.

Battle starts in mCommerce/eCommerce

My guess on timing of V.me is driven by knowledge of Apple’s impending plans to “extend” its iTunes account to payment outside of the Apple ecosystem. Visa sees this network risk and is in an all out war to protect its network, by leveraging its CYBS asset online. The banks have worked on a directory concept for quite some time. The Clearing House (TCH) built a working system called UPICK to solve the problem of consumers giving their RTN/ACCT# out in the open.. assigning a virtual number to the account. A sort of “virtual account number” that could only be translated by TCH.  It never took off, because ACH fraud was low and banks were much more excited about having merchants accept cards as payment.

Retailers are not silent participants to this war.. their champions are Target, Tesco, Amazon, and Rakutan. I hope Amazon will finally dust the plans off of One Click expansion. Other retailers are also aligning to assess creation of shared cloud infrastructure.  Sorry I can’t comment more. Similarly MNOs are also in the cloud game, for example Payfone may be one of the best services in the market..

Who are the players in the Cloud [Payments] War?

The initial battle will be in mobile/online purchases.

  • Banks: V.me, Mastercard,
  • Platforms: Apple, Google, PayPal
  • Retailers: Amazon, Rakutan,
  • MNOs: Payfone, Boku, payforit, billtomobile, …

Most confusing is that there are few alliances.. it is many against many.

http://tomnoyes.wordpress.com/2011/10/26/apples-commerce-future-square/

Banking the Masses… Prepaid?

We are beginning to see the early stages of an “overhaul” of what banking (and payments) is. The next 3-5 years will be a period of much experimentation. As the WSJ article alluded to… banks actually want the bottom 40% of their customer base to leave.. they are no longer profitable.. This is what the Fed is concerned about.. where do they go?

9 May 2012

Today’s WSJ outlines JPM’s plans to issue a new pre-paid debit card out of their branches. In January I discussed the tremendous impact that WMT/GDOT will have on mass market banking, where I outlined that the Fed is concerned that the bottom 4 deciles of customers are no longer profitable for the big banks.. and there is an exodus. How does the US financial system retain customers in the lower mass? GDOT and WMT believe it is not through the typical branch model. Just as with Tesco in the UK, Retailers are proving to be excellent distributors of banking services.

There has never been a better time to be in prepaid!

This is beyond interchange and plastic, we are beginning to see the early stages of an “overhaul” of what banking (and payments) is. The next 3-5 years will be a period of much experimentation. A few of the active initiatives:

  • Retailers as banks
  • Retailers constructing their own payment network
  • Retail pre-paid products (ex GDOT/WMT)
  • Bank’s monetizing data through card linked offers and merchant funded rewards (ex. BankAmeriDeals)
  • New Direct Bank models (ex Barclay’s from yesterday’s WSJ)
  • Phone/Virtual Wallets

…I could go on…

I apologize in advance if this sounds pompous.. but hey it is my blog.. and I want to give you background on how I came to this perspective. I’ve been very fortunate to have been either on the technology side, or as business head of most new banking models: Worlds First Online Bank – FirstUnion’s Cyberbanking  (1995 see wikipedia), First instant account opening and funding US (Wachovia 2002), First International Account opening and funding (Citi UK – 2006), Google Wallet….

The change happening today is many orders of magnitude more complex: consumer value propositions, distribution, technology (ex NFC), regulatory (… for example how do you accomplish KYC in a GPR card sold at a retailer… or mobile operator).

Where do I invest? Its all based upon 2 simple questions:

#1 what value do you get out of your Bank today (compared with alternatives)?

#2 who has a brand Consumers trust?

Most retail banks have rested on very stale product constructs. Why do we have a checking account, savings account and card… with fees on each? Why not have one account where I pay interest if I owe money.. and earn interest if I have a positive balance? Why must I pay $25 for a wire at the branch when it costs the bank $0.05 with the fed? The fee and service nightmare of understanding sweeps, lending, payments, cards, savings, checking, … is just insane. Even the simple products are not simple (particularly when it comes to understanding fees). I’m no fan of the CPFB.. but the Bank’s brought this on themselves… there is real consumer anger.. all of which damages brand and trust. Which of course makes the ground more fertile for competing schemes.

As the WSJ article alluded to… banks actually want the bottom 40% of their customer base to leave.. they are no longer profitable..  This is what the Fed is concerned about.. where do they go?  Most concerning is where will the liquidity go (for non bankers liquidity is the Liability or balance of funds that is stored in its accounts, Assets are loans made by the Bank). Liquidity impacts capital ratios, and lending..  For example, many of you have read my notes on Kenya’s MPESA, that evolved from nothing to holding 10% of Kenya’s GDP in a single settlement account in just over 3 yrs. Money in a settlement account is not available for lending (typically), this was a central point of concern for Kenya’s central bank and other emerging markets as bank liquidity ratios in emerging markets are very compressed.  In the US, major banks are not at all concerned with liquidity… in fact many would  say that they are overly liquid and would like to see the run off. The problem for US banks is Asset quality (qualified lending opportunities).

Wow.. these are exciting times. Companies to watch: retailer friendly plays, as this is where the distribution and data sit.

BTW.. if you agree with any of this.. how on earth can bank’s continue to justify stand alone bank branches.. ? something must change there soon…