NFC Game: MNOs 1, Banks 0

There is much written on the technology, standards, pilots and who is doing what.. this is an attempt to understand the business incentives within the ecosystem(s) and WHY key actors are pursuing/supporting different strategies.

2 February 2011

The actual scoring is probably a little more complicated. This blog is focused on investors and business heads that are not deep in the trenches with mobile payments. There is much written on the technology, standards, pilots and who is doing what.. this is an attempt to understand the business incentives within the ecosystem(s) and WHY key actors are pursuing/supporting different strategies. Getting NFC in a mobile handset was no “obvious” decision for MNOs or Handset manufactures, in fact just 18 months ago Apple told a major bank “we have enough radios in the phone, can’t we just use one of the existing ones?”  The point shouldn’t be missed, there are many, many ways which a consumer can store information and transmit it to another device (like a POS).  As an example: the US State department (in its infinite wisdom) decided to put an unencrypted RFID tag that contains your name and passport #… Another wacky example is Google Zetawire Patent.

Why NFC? Technically it operates on the same ISO/IEC 14443 protocol as both RFID and MiFare so how is it different? I’m not going to get into the depth of the technology (see Wikipedia), but the biggest driver was  GSMA/NFC Forum’s technical definition (UICC/SWP) that ENABLED CARRIERS to control the smart card (NFC element). This in turn enabled carriers to create a business model through which they could justify investment (See NFC Forum White Paper). 

(Sorry for the pedantic nature of this, but since blog readership is going up.. I’m taking some license in assuming that the style is not irritating too many people.. and besides getting right use of terminology is important. )

Banks and card networks have been circling mobile/contactless payments for sometime. Mastercard’s PayPass (2003) led the way for many of the current bank contactless initiatives. Visa later followed (and still trails) with PayWave in 2007, and Discover with Zip in 2008.  All card initiatives operate on the same ISO/IEC 14443 protocol as NFC, most with numerous “successful” pilots.  The issues with contactless card platforms are not technology, but business model.

As with any new “platform” it must support a business model for some… preferably for many … participants. Card focused models focused on either cash replacement (ex. Transit, Vending, P2P, …etc.) or “premium” convenience play (see Best Buy NFC Pilot). For those of you not in the card or retail business… there is little love loss between the 2 groups. Retailers are not about to invest in anything that helps either banks or card networks unless it improves sales or margins (see Banks will win in Credit). The NFC model allowed carriers to control the radio, and integrate it into the SIM (UICC) for management of secure applications and data (see Apple and NFC).

Prior to NFC, the “control” for contactless payment was with each contactless network. Visa and Mastercard took 12-18 months to certify every new device. That meant every single new POS Reader, handset, … had to go through multiple certification processes. What  manufacturer would want to invest in this contactless model? Alternatively, NFC contains standards and specifications operating within ISO 14443 with an independent certification process. The NFC specification does provide for an independent entity, called the Trusted Service Manager (TSM), to assume the role of gatekeeper (See Dutch Example). But MNOs are not likely to give up the keys prematurely. In the US ISIS model, this TSM will be run by Gemalto (for the MNO consortium).

What does this mean? Q: Can Visa develop a PayWave application on an NFC certified phone? Yes.. can Mastercard develop a PayPass Application? Yes.. that have already. Can TFL develop an Oyster Application? Yes. Vendors like Zenius design secure applications that do just that. NFC enables the phone to host multiple applications that can use the “radio” in different ways (example open secure doors). These mobile applications are secure and can be provisioned and updated remotely. This is the “beauty” of the NFC ecosystem. Investors note: In all of these examples, it takes the MNO and/or TSM to approve your application. In the case of Visa and MA… they are not approved.  This means your start up can build the slickest app in the world.. but someone else owns the keys to consumer use.  For Visa and Mastercard: their PayPass and PayWave brands are mere NFC applications that can be denied within the NFC enabled phone.

Another important control point (for NFC payment) is POS infrastructure. A new NFC payment instrument must be supported by both the POS (certfication) and the processor(s). POS terminals typically support multiple standards, protocols and payment insturments (see VivoPay 5000M). For each payment method  (PayWave, PayPass, Zip, Bling, ..) the POS terminal must undergo a proprietary certification process. POS terminals connect to one or more processors (ex. FirstData, FIS, …) and in addition to processing the transaction, the terminals can receive and process updates (example ISIS/Zip protocol which is still in definition). A recent example of POS payment upgrade: Verifone’s efforts to include Bling/PayPal acceptance at POS, a very big story that has received little attention.

The “downside” of NFC for many stakeholders is that they are no longer in control. In the NFC model, the “keys” to the NFC platform sit with the MNO who controls the UICC.  This control is necessary, as it is the MNO who fulfills the KYC (Know your customer) requirement linking a real person to a SIM (and hence to a transaction). In the NFC model, Visa will still need to certify their own NFC software application to be PayWave compliant.. but will NOT necessarily need to certify the chipset/OS and device in which the application runs. Of course the details are a little sketchy here because Visa has not tested their own application for this environment, as handset manufactures are still in flight with their designs (focused on ISIS compatibility). I believe the ISIS dynamic is also the driver of why the latest Android Nexus S had write functions disabled..


In analyzing the Total Addressable Market (TAM) for any investment I always look at who are the existing stakeholders and their realative markets. Within the NFC Ecosystem I see the following:


MNOs have had very little experience in running a software platform ecosystem, or a payment network.. or a TSM. Closed systems usually precede open systems, and I would expect this trend to follow within NFC. The vendor most able to coordinate a value proposition which spans payments, software, mobile platform, advertising, … ? Apple. Say what you want about Apple’s penchant for control.. they are one of the few companies with the skills and experience to address all of the issues surrounding a new mobile platform.

Banks and card networks are the only group not to score in NFC because of their inability to create a new value proposition with MNOs and retailers, as such they loose.  Banks hold out hope that existing card loyalty programs hold, and consumers refuse to use payment instruments that are not currently in their pocket. History demonstrates that telecom operators have ability to sell and market cards (see AT&T Universal) to create compelling incentives…. Banks will likely begin pushing the benefits of Credit cards (Reg Z consumer protections). Will carriers respond by expanding their consumer credit risk through carrier billing initiatives (Boku, Bango, billtomobile)?

Message to banks.. stop depending on Visa and Mastercard for this.. develop your own payment network, with a unique POS integration.

Thoughts appreciated

Banks Will Win in Payments! … But Which Ones?

Banks will win in payments…. with one provision… payments that are profitable. Every successful payment type has at least one bank behind it. But WHO are the banks? Target, Sears, American Express, Wal-Mart, Tesco, General Electric, BMW …etc all have banking licenses. As the lines between retailers, banks and mobile network operators start to blur..

25 January 2011

Part 1

Previous Blog – Bank Payment Councils

Banks will win in payments…. with one provision… payments that are profitable. Every successful payment type has at least one bank behind it. But WHO are the banks? Target, Sears, American Express, Wal-Mart, Tesco, General Electric, BMW …etc all have banking licenses. As the lines between retailers, banks and mobile network operators start to blur.. who will be successful? Now that MA and V are public companies, how are banks vested in their continued success? Will there be a new wave of creative destruction?

Bank Structures

This blog has a “payment view” on these answers. Typically, large banks do not view payments as a business, but rather a service that supports multiple products. Exceptions occur when the “product” is payment (Credit Card, Retail Lockbox, …). Within retail, credit cards are either a separate LOB (BAC, JPM, AMEX, C) or aligned within the retail Asset side of the business, while debit cards are managed within the consumer deposit team. A review of this organizational complexity is necessary in order to understand retail bank “initiatives” in payments and their corresponding business drivers.

 For Retail Banks, credit is the primary business driver of payment investment. As a side note, this is one reason why there is such poor payment infrastructure in emerging markets. Bank credit is of value to the merchant and the consumer. Although not all Retailers seek to be depository institutions (ie Tesco and Wal-Mart), most are assessing how they can ensure access to credit, and are experimenting with differentiated credit value propositions. Most card issuers are quite confident in their ability to retain customers with substantial consumer data confirming strong loyalty.

Retailers have a different perspective, their consumer data indicates broad dissatisfaction with bank services particularly in segments below mass affluent (ie switching preference, satisfaction, bank fee sensitivity, store loyalty and general anti-bank sentiment). In addition, although Retailers are firmly in support of store credit, they have moved “beyond” the tipping point with respect to interchange, and are quite proud of their roles as architects of the Durbin Amendment.

For the US retailers, that have already expanded into the banking business, the most common structures we see are the ILC (See KC Federal Reserve Article) and Federally Chartered Thrift (moving from OTS to OCC). For US Retailers, Target (see Target RedCard) may provide a model case study with significant assets in team, infrastructure, and capabilities.  UK and EMEA banks face a much less complex regulatory scheme, with Tesco PLC taking the global lead in innovative banking services (Wal-Mart Mexico is a very close second).


There are several excellent resources for those looking into the history of credit cards (I recommend Paying with Plastic: The Digital Revolution … ). Retailers and manufacturers have long realized that earnings from the credit business can well exceed that of the core business (GE Finance, GMAC, Target, Sears, ….etc.).  But these endeavors are not without risk, as retail/mfg driven finance companies have also suffered the same fate as banks in consumer credit (ex Target looking to sell its own $6.7B Card portfolio ). Credit is the lifeblood of most retail, and while there are few issues with credit access for affluent consumers, there are many consumers with FICO scores below 800 that retailers want to serve.

Credit Card businesses have been hemorrhaging cash over the last 3 years because of NCL, and anticipated impacts of the new financial regulations. The most striking example is BAC’s $10.3B write down in 3Q10. 4Q10 earnings show that the credit environment is improving, with banks improving the quality of their credit portfolio (sub prime). US card issuers released earnings this week demonstrating improved credit quality as they also release reserves, toward the top of the list is JPM (card 27% of $4.8B Net Income).  Citigroup’s card also returned to profitability in 4Q10 with North America Net Income of $203M for 4Q and -$164M for FY2010. But there are other indicators which point to a change in prime consumer credit behavior (ex TransUnion reporting that 8M fewer consumers used their credit card). Perhaps this behavior change is driven by card rates climbing to all time highs (today’s CNN Money). Regardless of the behavior correlation, it is clear that consumers VIEW of credit cards AND consumer ACCESS to credit is changing. Consumer access to credit and change in payment behavior are both critically important to retailers.

Historically speaking, the data clearly shows that most retailers DO NOT offer a better credit value proposition (See US House Store Card Rates). Intuitively this makes sense as their ability to manage credit risk should be below that of banks, hence requiring a larger risk adjusted rate of return on capital. Today many retailers are questioning the value of the Bank Card products in delivering credit. Prior to Dodd-Frank, merchant card agreements prohibited: card exclusion, steering, payment incentives, …etc. Today US retailers can offer incentives for cash purchases, steer, deny and develop their own cards (ex. Target RedCard).

As the US consumer credit market has matured, the industry has spawned numerous specialists to manage the various functions of credit issuance, from acquisition and credit scoring through processing, collection and portfolio risk management. Consumer credit application cycles have gone from 2 weeks in the 2002 to under 2 min in 2007. This specialization allows non-banks to develop turn key credit offerings.. and approach risk management with tools that are equivalent to best practice within established banks. Of course the ability to manage risk is more than tools, it takes solid credit/fraud risk management processes and talent… but I digress.

What do retailers want? Credit availability and brand.  Given that most Retailers don’t want to form a bank, they pursued private label cards to achieve these goals. Banks were badly burned here, with both Citi and Chase disposing of their private label card portfolios. In many cases consumers took the one time discount and never used the card again, those that did continue use were largely sub-prime borrowers and the banks did not adequately manage the portfolio risk until after the economy tanked.

My biased credit summary is thus

  • Bank card rates are at an all time high and consumer use of credit cards is declining
  • Retailers are always willing to pay interchange for access to consumer credit, but credit access is shrinking
  • Private label cards have been a very bad bet for banks
  • Retailers have new opportunities within Dodd-Frank and are evaluating plans (credit, steering, loyalty)
  • Retailers are expanding into banking and credit through licensed structures. Growth in industry specialists allow them to create new products quickly
  • Visa/MA/Amex are facing new competition from store derived cards, and merchant relations are at a low point

How can Banks Win?

Trust, value, credit, relationship, anonymity, protection, security, service, brand. With debit interchange revenue legislated away, what incentives to banks have to continue pushing network debit? A: None. The US will begin to resemble Canada, Australia and Germany with unbranded debit cards. From a retail bank perspective, the focus is back on credit and loyalty with ONE NEW CAVEAT: Value.

Will there be retailers that develop their own cards and banks? Yes.

Will Consumers jump to these offerings? Only if they can price risk better than you can.


They offer a better value (ex. Target 5% off everything).

As a baseline, let’s establish a common view of what is a payment. For Banks, payment system profitability is a function of: fees, funds, risk, value, control and network.

It is this value element that many banks are overlooking. Loyalty based reward programs have been at the heart of most card schemes. My guess is that many of you are hooked on AMEX’s membership rewards (as I am). Why would you pay any other way? The merchant pays for my points and I get the goods at the same price.

The model of interchange revenue driving payment system revenue (and rewards) is about to undergo fundamental change. Interchange is being regulated down and new “merchant friendly” value propositions driven by advertising revenue are being created. Given that most bankers are not retailers.. a quick 101 … in retail profitability nirvana is something called price optimization. Retailers, CPGs and manufactures want to influence consumer behavior and product selection based upon price/promotion. (I’m purposely vague here). 

Most banks do not fully appreciate this consumer incentive dynamic. In a future scenario, it will not be convertible loyalty points driving payment selection behavior, but real dollar savings on every purchase with consumer behavior driven through rich personalized marketing. Retailers and advertisers will be able to influence behavior and generate revenue from it. In a conversation with a senior card exec on this he said  “I can negotiate interchange down with any retailer I want to.. this is just a price issue”. I related my often used Wal-Mart quote “can you pay them for taking your card?”

Where is value creation … and the business case? 

During my Holiday reading I ran across some old HBR articles: Skate to Where the Money Will Be (Clayton Christensen) and Where Value Lives in a Networked World (Mohanbir Sawhney and Dave Parikh). In the later, Dave and Mohanbir articulated a key principal:

In a networked world, more money can be made in managing interactions than in performing transactions.

This 10 year old HRB article was particularly thought provoking. These value tenants have broad applicability in assessing strategies and plans within both current and future network business models. Specifically,

Value at the Ends. Most economic value will be created at the ends of networks, At the core-the end most distant from users-generic, scale-intensive functions will consolidate. At the periphery-the end closest to users-highly customized connections with customers will be made.

Value in Common Infrastructure. Elements of infrastructure that were once distributed among different machines, organizational units, and companies will be brought together and operated as utilities.

Value in Modularity. Devices, software, organizational capabilities, and business processes will increasingly be restructured as well-defined, self contained modules that can be quickly and seamlessly connected with other modules. Value will lie in creating modules that can be plugged in to as many different value chains as possible. Companies and individuals will want to distribute their capabilities as broadly as possible rather than protect them as proprietary assets.

Value in Orchestration. As modularization takes hold, the ability to coordinate among the modules will become the most valuable business skill. Much of the competition in the business world will center on gaining and maintaining the orchestration role for a value chain or an industry.

I will leave this section unfinished, it is clear that banks are uniquely capable of leading in all of these roles. What is also clear is that the business environment is ripe for a new network. What roles should banks have in its formation? Is there a downside to being a late follower and acquiring the “winners” after they have built the infrastructure?

Bank Action Plan

What are the bank assets here? Payment Infrastructure, Consumer Data, Trust, Existing Payment Mechanisms, Consumer Behavior information, Credit, Risk, Support, …

What do Banks need? A collective plan for action.  Card Networks will not solve your problems, their initiatives to date around this have been complete failures and are severely challenged in creating a merchant friendly value propositions.

Recommendations for Banks

  • Assign a senior exec.. #2 in your card organization
  • Develop regular data backed trends and reports. Example: how is Target RedCard impacting your card profitability, spending shift, ANR
  • You have 5 years.. develop a strategic plan that is multi-pronged. This is about standards, legislation, technology, IP, advertising, network, consumer data protection, innovation, payment, mobile, …
  • Assess where there are synergies with existing consortiums particularly around standards and legislation.
  • Partner with non-banks. Google is active here now.. what do you know about their plans?? Have you seen their ZetaWire Patent?
  • Assume your competitors are moving on this. BAC’s $10.7B write down is a level set on the investments which will go into this area.

Part 2 – Payments that are not profitable (at least not for banks).. this is beginning to look like Debit AND emerging markets.

Apple and NFC

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

26 Jan 2011

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

Previous Blogs

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

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

Take Away for Investors/Start Ups

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

ISIS: Moving payments from Rail to Air

Merchants love the ideas of ISIS, as much because of perspective value as the pain it will bring: Visa, MA and Amex. 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.

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 (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).


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