Payment Tokenization
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Tag Archives: wallet
V.me: Issuers please give me your customers
16 Nov
Visa is an independent for profit company… they are on a tear with adjusted earnings up over 19% and the stock up over 40% for the year. Who are Visa’s customers? They are a network, created by banks.. but they only set rules.. historically they don’t have direct relationships with merchants or consumers; the issuing bank owns the consumer, and the acquiring bank owns the merchant. Their primary customer is therefore banks (issuing and acquiring).
With the CYBS purchase, Visa gained direct merchant relationships. CYBS at one time handled over 25% of eCommerce transactions. The “big 3” in online merchant services are now eBay (Paypal+GSI), Visa (CYBS) and Amazon. Visa is looking for ways to expand its network, services and revenue base. The expansion is very hard to do if you are dependent on your member banks, hence Visa is looking to establish a direct consumer touchpoint in line with Cybersource’s merchant capability.
In my very first blog (2009 Googlization of Financial Services), I outlined both the alert service that Clairmail built for Visa, and the advertising/offer engine they had put in place. Neither the alert service nor the ad service had taken off as issuers were not exactly thrilled with expanding Visa’s services or opening the door to Visa’s efforts to communicate directly to consumers. Clairmail has since been acquired by Monitise ($173M in March 2012). Monitise is the entity that build “Visa Offers” and initially was “the mobile horse” which Visa intended to ride … until they upgraded to Fundamo. Now Monitise seems to be focused on the offers product… (See Visa Mobile Strategy). Visa wants to get into the card linked offers business (Visa Offers, FreeMonee, Monitise,…), and has had the technology working for sometime, they also want to get into the wallet business. (see Battle of the Cloud)
Neither of these services are to the best interest of issuers, which is why we see a hodgepodge of small banks without the resources to properly digest the strategic impact, or build the technology themselves in this recent V.me “50 bank pilot”. Let me be crystal clear on what I believe Visa’s strategy is:
- establish direct consumer service
- start with eCommerce (autofill) functionality to speed checkout and improve conversion
- add alerts to give consumers knowledge of card transactions
- add incentives/offers in 18 months (they already have built the service)
This is why Visa hates the Google service.. it steps all over their plans online.. as well as at POS (not in scope for this blog).
Take a look at V.me terms and conditions. They have done a great job in obfuscating their strategy in this document, as it clearly states that issuers have control
These Terms do not amend or otherwise modify the cardholder agreement or any other terms and conditions of your Issuer. In the event of any inconsistency between these Terms and your cardholder agreement with your Issuer, these Terms govern as to the relationship between you and Visa solely with respect to V.me and your cardholder agreement with your Issuer governs as to the relationship between you and your Issuer. You are responsible for ensuring that your use of the Services complies with your cardholder agreement with your Issuer.
Visa Alerts is the service where banks should start to become concerned. For the first time, visa is creating a list of consumer names, emails (above) and mobile phone numbers. Alerts will start with card usage, and then they will morph into incentives and offers based on spending patterns. These incentives will be offered completely separate from the issuers. In the V.me privacy policy “We share some information, but not your full card number, with merchants you pay with V.me” and “We may contact you about your V.me account, service updates, and new V.me features”.
I’ve got news for the V.me participating banks.. why don’t you just give Visa your customer list and give them permission to use it as they want? You have just given Visa much more.. They can now act on transactions they see on the switch.
I see Visa quickly expanding the service beyond eCommerce to physical commerce primarily around offers and alerts. You will be able to redeem offers across any card stored in your V.me wallet. This means that V.me will work without eCommerce merchant adoption… and could be a stand alone offers platform. Of course they don’t want to lead with this… but it is indeed where Visa sees the best margin.
Banks.. get serious about this. Why would you want to let Visa step all over your brand and start delivering services to consumers directly? This is the start of a major tipping point for Visa… the Top issuers are fuming… but Visa may be able to build consumer adoption ahead of banks pulling the plug on it.
There is certainly no reason to worry.. take a look at the participating merchants https://www.v.me/shopping/ not exactly a whose who of online merchants. Why is this? well my merchant friends are also aware of Visa’s efforts to do the incentive business and the last thing they want is another entity switching consumers to the lowest cost provider. V.me on an eCommerce perspective is fine.. but what Visa doesn’t realize is that Google, Paypal an Amazon all have this today. (ex Google has autofill in Chome browser and Android…). If Visa has trouble signing up its own CYBS merchants.. what issues do you think they will have in signing up with those on GSI?
Battle of the Cloud – Part 2
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…)
PayPal vs Google (at POS)
3 Aug 2012
Paypal COULD do everything that Google wallet does today.. so why won’t they? (Note I’m talking about the Physical POS… not online)
I’ve had a PayPal debit MasterCard for 6 yrs, when I use it at any merchant PayPal deducts from any stored balance I have, and then hits one of my stored payment instruments. I use this card exclusively on international trips because they have always offered the best cross border fees (.. and just 3 years ago paid an interest rate higher than any of my banks). I looked on the back of my new PayPal debit card and see that JP Morgan Chase is the issuing bank. Given that Chase has over $10B in assets, this card costs the merchant $0.21 + 5bps in the US. This is a great deal for retailers. A REALLY great deal.
Why is PayPal pushing out its own Plastic? Unbranded? Obviously they really don’t like the standard debit interchange (above) and want a bigger cut (than $0.21 flat fee) from the retailer. (see PayPal at POS)
Why won’t PayPal expand its online wallet to allow me to select any card for any given purchase? In this I mean creating an app that works like Google wallet, prompting the customer “what card do you want to use”? The answer is that they want to drive the underlying account selection decision to ensure the instrument with the lowest cost is selected.
Take a look at your payment instruments in PayPal today, they let you define a DDA account as “primary” but NOT a card. In other words PayPal incents you to link DDA in order to get money out.. then PayPal looks to leverage this account whenever possible (sometimes taking take settlement risk). The most costly customer for PayPal would be an Amex customer with no linked DDA and a PayPal debit card (for ATM withdrawals). See my related blog on PayPal’s funding mix (estimate 150bps)
PayPal is a payments business.. not an advertising business. Their goal is to maximize revenue. This is not a bad thing… But their recent moves are a “replay” of what happened to the bank payment networks as they pushed to ramp up merchant fees and grow interchange revenue at the expense of retailers. Why on earth would any merchant agree to take on Paypal’s new plastic? If it is above $0.21 it makes no sense at all… UNLESS Paypal is driving incremental sales.
PayPal today could create a Virtual “wallet” tied to either a Sticker or a Card that would work across Android, iOS, Blackberry, … and do everything that Google has done.. Why won’t they? Because the instrument must operate as a debit card, and the interchange “arbitrage” could kill them. In other words they will bear the cost of 350bps for a CNP Amex transaction and only charge the merchant $0.21 flat fee. If they rolled this out, I’m sure they would have MASSIVE success.. but if customers unlink DDAs and delete debit cards they would risk a funding mix that is “unsustainable” because they have no other revenue channel.
The true “payment innovation” from Google has little to do with payment and much to do about risk management and monetization of data. Google drives business to retailers today.. google helps consumers find the right product… they also “know you” from your history. They can use this information drive value to consumers AND to retailers.. they are also willing to take a very big risk that the benefits of Google will out weigh the COSTS of WALLET. Google Wallet will likely loose money on every single transaction. If you never accept an offer, incentive or coupon.. never search.. never use maps to find a business, never use Zagat to find a restaurant, never watch you tube commercials… they will likely loose money on you. However Merchants will ALWAYS win.. no matter what, they will have the lowest cost payment when accepting a Google payment.
This is either INNOVATION OR INSANITY. From my perspective, what Osama and team have done is fundamentally game changing.. ! Bearing costs, giving consumers and retailers complete control.. in the hope that they can deliver value in other services. Payment is now just a small part of an overall Commerce Process. For example, a “new” feature of Google Wallet that has not received enough attention is the “saveto” API release at Google I/O . Google allows merchants to store 3rd party offers and payment types in the wallet. These offers don’t have to be created by Google.. it is a true “wallet” function. 
As I stated yesterday, Visa, Mastercard, Amex, all of the banks are REALLY worried about data. Google will be in a position to deliver value to consumers independent (or dependent) on the card you use. Few other companies can do this… Consumers will always have a choice.. no one will be forcing them to use their Google wallet. But why not? Why didn’t the banks use their information to help me earlier? Why did the banks and payment networks stop retailers from passing their real costs along, of delivering incentives that they could control?
This “aggregate” model is something ANY company could do in short order.. Square is doing it, Revolution Money, LevelUp, … but no one else can make it profitable.
PayPal’s new POS “hope” is to re-engineer the customer experience at the POS, allow merchants to throw away their custom POS terminals.. As most of you know I believe Square Register was by far the best POS experience I have ever seen. From PayPal’s June Video it looks like they agree and have replicated the Square Register “voice” experience. While the customer experience is FANTASTIC.. it did not bring the customer into the store.. nor is payment cost competitive with Google.
[youtube=http://www.youtube.com/watch?feature=player_profilepage&v=CMByV-k9Oc4]
Investment take
PayPal has enormous runway left for them globally. I don’t see Google wallet denting current growth for 2 years. However this is VERY disruptive. IF google is successful in getting all Android users to register with a payment instrument (like Apple does in the App Store), and Google pushes Wallet out beyond NFC phones, it could result in a Tsunami wave which Paypal could not overcome in mCommerce.. This is a scenario where there are 3 primary mCommerce payments options: Apple Passbook, Google Wallet and Amazon. For physical commerce.. nothing will impact this world in next 5 yrs if it does not entail a physical plastic card. NFC phones and payment terminals just aren’t materializing fast enough. IF google creates physical plastic.. watch out… In this scenario Google should be pursuing an unbranded card.. “let the consumer decide”.. .”let the retailer influence” these are themes not heard in the payment world and would seem to resonate.
Random Thoughts: Settlement, NFC and CLO
16 July 2012
Retail settlement
As most of you have read a $7.25B settlement was reached with some US retailers (led by Kroger, Safeway, Payless, Rite-Aid). I’m not going into depth on the settlement but rather the likely response by retailers, and potential impact on Visa/MA earnings. The big retailers have been assuming that this settlement would be reached and have been in the midst of a plan. What would you do if someone was taking 3% of your sales and your average profit margin was 2.4% (ref page Aii IMAP Study)? Well the retailers have plans to leverage a portion of this $6B windfall and invest it in a payment network they can control. Perhaps they should turn around and buy Discover (DFS market cap $18B). This rumor has been in the market (perhaps a driver of 2012 performance).
The US has 2 other countries which serve as benchmarks for a shift away from credit card at POS: Canada (Interact – debit launched 1994) and Australia (EFTPOS). Unfortunately I have limited information on Visa/MA transactions in these geographies to generate a decent analysis of spend shift. From http://www.interac.ca/media/stats.php we see in Canada that roughly 80% of all retail card present transaction are done via Interact (2011 GDV was $182B). I’m not implying a 40% hit to Visa’s GDV is imminent (US is $507B out of global $956B GDV for quarter 31Mar12), particularly since there is no competing network like Ineract (YET). But there are certainly references for success.
I presented some of the Retail Drivers last week and also in my March post (Retailer Wallet). My bet on retailer plans? Well Retailers are not exactly a small group marching in unison, so response will likely differ by segment, ticket size, purchase type (ex non-discretionary gas) and influence.
Gas/Automotive
- Credit card use fee in 2-4 months nationally
Grocery
- Slower roll.. we will see marketing to inform customers of the costs of credit and plans to implement a fee for use of credit cards
- We will also see tests of fees in isolated stores/geographies. Not only assessing customer issues, but also competitive responses.
- Loyalty cards that will be integrated into a payment system
- Loyalty cards that have integrated digital wallet (WalMart issued a Digital Coupon RFP over 18 months ago).
- Incentives dependent on payment type
- Push for PIN Debit.. as it allows the retailer to route away from Visa/MA directly to the bank.
Big Ticket Retail
- No fee likely as they benefit from access to consumer credit
- “Carrot Trials” of Rewards programs and targeted offers will be contingent on payment type
- New loyalty cards
Apparel / Luxury
- Least likely to implement a fee.. wait for other stores to establish customer behavior.
Travel/Entertainment
- No fee likely…
- Discounts for debit, particularly with airlines.
Visa/MA impact. Minimal through 2012, but could result in negative US transaction growth by 2014 unless networks are successful in delivering some sort of retailer friendly service.
NFC
I’m still just laughing at the mainstream press’ reaction to Apple iPhone 5 plans. Perhaps I should crying at the disinformation that mobile payments (at POS) are taking off. Everyone should ask: what kind of mobile payments?… Transit/ticketing is a slam dunk for NFC technology, yet NFC is having problems (witness London TFL’s decision to defer). Other mobile payments segments which are doing quite well: mCommerce with Amazon reporting around $2B, Digital goods with Zynga leading the category around $1.2B (investor relations).
But the mobile payments at the physical POS? This has not even started. (update.. Starbucks is clear leader here)
I don’t know how much more bluntly I can educate the NFC aficionados, but retailers have not gone gaga over mobile POS payments.. In fact I will state that Payment is not the killer app for NFC.. payment delivers NO VALUE to the Retailer.
For all of you looking at Apple’s patents and thinking they will eventually put NFC in… here is news for you: every one of the patent claims could be fulfilled by Bluetooth (replacing NFC). In order for NFC to take off, the carriers must let go of control (see my long blog here on MNOs walled garden strategy). There is nothing wrong with NFC technology, but unless the carriers are willing to front all investment for retailers, consumers, marketing , … this will never take off. There is a value proposition problem (payments only) AND a control problem. The US MNOs won’t even work with Google who has built everything for free.. free is not good enough for them…. They want control…
Card Linked Offers
I have new stories of just how bad the open rates are on these offers, but most revolve around a central problem. It goes something like this
1) Banks want to get consumers interested in offers. The consumer experience is TERRIBLE (no discount on the receipt) and banks are experimenting with 3 types of distribution. Integrated into online banking (Bank of America), e-mail, and secure messaging.
2) Retailers are not buying basket level discount advertising.. they never have. Retailers must pay for the offer (15% back), the revenue share (% of margin) AND the tax on the offer since it is technically treated as a retailer rebate. Total Retail cost for the offer is approaching 25%.
3) Given lack of retailer participation, Banks (and the offer companies) are thus forced to create offers themselves with no retailer participation (see my WalMart Story)
4) Banks do not want to let consumers go with “no offers” so all available inventory is distributed to “everyone”
5) The poor targeting (universal distribution) has a twofold effect: Consumers see garbage offers and start to tune out the channel, retailers see poor lift in performance as the offer redemption is done by existing customers that would have normally come to store
I could go on.. the exception to the rule of CLOs is Card Spring.. I like them quite a bit. Also Linkable just purchased the assets of Offermatic, which will enable them to link offers across card networks (using Yodlee)..
The Directory Battle PART 1 – Battle of the Cloud
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/
Digital Wallet Strategies
Warning.. I ramble a bit in this one.
23 March 2012
Does anyone remember Microsoft Wallet circa 1997 (See Wikipedia)? Digital wallets are certainly not a new phenomena. Today we are struck with eWallet saturation: Google Wallet, ISIS Wallet, Visa Wallet, iTunes accounts, Amazon Accounts, Square, PayPal, … How many places must store all of my credentials?
For my own benefit I thought I would take a brief look at the history to determine what the future may look like (As the future holds the key for my investment decisions). With respect to Wallets, what are they? What are successes and why? What is the consumer value proposition? What are the risks? What does the future hold?
My last blogs on this topic were in November 2009, Investors Guide to Mobile Money, and in 2011 – Tough Start for Mobile Payments.
What is a Digital Wallet?
My all time favorite YouTube video definition is below (Courtesy of Google)
http://www.youtube.com/watch?v=gKGptWtzeaU
[youtube=http://www.youtube.com/watch?v=gKGptWtzeaU]
Proposed Definition: A consumer owned and controlled account that can store any electronic form of what is normally held in a physical wallet, including: payment, ID, coupons, loyalty, access cards, business cards, receipts, keys, passwords, shopping lists, …etc.
This definition sounds broad enough..
As a consumer, what would you think of having multiple physical wallets? I personally don’t have that many people I trust. Trust is a very important element to a consumer. Some of the information in my wallet is sensitive, and there is also a financial risk associated with loss of payment information (particularly outside of the US). What kind of entity would want to assume the risk of holding all of this information? Which reminds me of a story,
I was in a Board Meeting with a senior partner of a “Top 3” VC discussing consolidated sign on. A start up was proposing to hold all of the login credentials for all of your bank accounts. As the former internet head for both Wachovia and Citi I had some firm views on the topic and asked “who is going to take the risk if credentials are compromised”? I further explained “it is not a technology problem, but a risk problem.. Bank’s will not let someone keep their Customer’s keys if they can’t insure the risk”. As a side note, I also instituted a policy that if a customer discloses their credentials to anyone, they are responsible for any losses that result (sorry Yodlee).
Within a Digital Wallet, 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, for example Microsoft’s wallet has evolved to LiveID. From a pure technology perspective, the mobile phone (with NFC) seems to present an opportunity to provide the Consumer with a device that can uniquely handle the security and authorization aspects of a holistic digital wallet. In my view, the challenges faced by the “phone as wallet” are business related. Per my definition above, a wallet should allow consumers to control what goes in and how it is used. Today we see the carriers (ex ISIS) create a platform based upon their control, allowing only cards that have paid a fee to enter into their wallet. I digress…
What makes for a successful wallet?
Customer Trust, Customer Control, Convenience, Ubiquity (opposite of lock in), Intuitiveness, Experience in Use (buying, redeeming, accessing, ..), Security,
If I have a wallet that only accepts 3 cards that are not accepted at any of the top 20 retailers (ie ISIS), it is of little value. Why not let consumers control what goes in? This is where carriers must get to in order for NFC to survive. Even then, NFC phones are far from my recommendation. After all if your payment information is locked in a mobile phone how do you use it when you are at your computer buying something on Amazon? Locking information in a phone is just plain stupid in the age of the cloud.. most agree that individuals should have a their information in a cloud they control. The NFC zealots reading this blog will respond that it NFC doesn’t require a network and is more reliable… my response, the POS and payment terminals are connected.. NFC doesn’t need to hold the card in the SE.. it just needs some sort of identifier.. or in the Square cardcase example no NFC at all just your voice print. After all if there is no auth from the payment network.. the transaction will not happen.. so something is connected in 99%+ of card transactions.
Consumer Value Proposition
My primary digital wallet is Amazon, with Paypal as a close #2. The buying experiences are just superb, unfortunately neither extend well into the POS. I have a PayPal debit card I use here.. but I have a hard time justifying why I would use a paypal debit card that pulls money from a pre-funded account which is tied to my Bank of America Checking.. why not just use my BAC Debit Card? I don’t think I’m alone here.. The thought that comes to mind: why do I use PayPal at all? Convenience is certainly a key element, but I also really don’t like giving out all of my personal information to every vendor I do business with. Why does any vendor need to know my name? Is there a business case for anonymity? For Readers in Germany I know your answer… of course there is.
Most Silicon Valley eWallet business cases are being built around data sharing and “closing the loop”. In a network analysis model, every step away from the optimal consumer experience (control, anonymity, ubiquity,..) impacts broad based adoption. Alternatively, new value propositions (ex incentives, rewards, loyalty, …) can reverse entropy, but only within specific groups/clusters (that realize the value). Thus a highly fragmented world of wallets, each built around specific functions limited to narrow networks, where customers exercise only limited control and hence participate in a limited fashion.
Risks
My last blog on Payment Risk was associated with Square (I still don’t like the swipe, but I have eaten my shoe now that they have surpassed $4B GDV and have developed CardCase… which I love). Microsoft had grand visions for Wallet and Passport, and pulled back for a number of reasons. Globally, most consumers still have problems putting all of their information in one place. The Fed, OCC, FTC, CPFB, Banks have all been circling around the broad proliferation of consumer data.. what are the risks of having your payment instrument stored with 100s of vendors? While at the The Clearing House’s annual event, I was pinged by a JPM Chase exec.. what will be done to secure payment information? At the policy level, many believe there is a national security risk in the compromise of our payment systems… It is something all of the Banks are thinking about.
While cloud based storage of information sounds fantastic… there remains a gap in integrated controls, security and authentication. This is where I see both the US and EU taking action on consumer data access and controls much beyond what is now within PCI. Given today’s technology, there is little reason for any merchant to hold your actual credit card number.. yet it is still the case.
What business incentive is there for any entity to hold “unlimited” sensitive consumer information? If the information cannot be accessed without user consent? All of these factors will shape wallet functionality to either something focused within a given domain, or under complete control of the Consumer.
Wallet Strategies
1) Consumer Friendly.. Single store for all consumer information. Payment, loyalty, reciepts, … The players I see here are Google, Square. (note I acknowledge everyone at PayPal just rolled their eyes and point them to my Disclaimer above). Business case is around customer data access.
2) Marketplace focused. Obvious players here: Starbucks, Rakutan, Amazon, Apple, Paypal, Target Red Card. Objective: Deliver a fantastic customer experience in purchasing within a focused marketplace.
3) Form Factor/Device Focused. Mobile Operators, Card Networks, . Deliver technology and incent buyers/retailers to participate. This is not working out so well, exception is Edy.. may work in markets with dominant carrier.
4) Bank Consortium. We see this more in Europe at the moment, but I believe the US regulatory bodies are pushing banks to work together here. Much more payment focused, and thus minimal consumer value… Banks/Fed must realize mobile is not about a new form factor, but a new value network.
5) Retail/Transit Consortium. Transit is already clear leader here in Asia…. Transit actually resembles more of #2. Where there is only one transit company provider I believe it is.. this Category is defined as one wallet working across multiple retailers.. I look at this as incentives tied to something like a decoupled debit.
6) Commercial. Example outbound payments, payroll distribution, global dividend payments – hyperWALLET.
7) Other???
Future of Wallets
“Limited Wallets” can obviously be very successful: Starbucks, PayPal, Amazon, Apple iTunes, Oyster, Edy, Suica, Octopus, hyperWallet…. But all started around an existing marketplace/system. In order for an independent wallet to thrive it must deliver value within a core network. My approach to evaluating retail payments evolves around a central hypothesis: payments support a commercial system, they are only the last phase of a long marketing, incentive, shopping, selection, and buying process.
Networks are resilient to change, this is both an asset and a hindrance. The value that is delivered within an existing payment network is tied to the commercial system in which it operates. This includes both business agreements AND technology, neither of which are easy to change. As the nature of retail changes (example payments, and incentives across virtual and physical channels) new “value exchange” networks will form. Existing payment networks will certainly attempt to change, but given their distributed ownership, nodal control over rules, and legacy infrastructure it will be “a challenge”.
In the US today, this is what is happening with Google Wallet, Bank initiatives to form “the next Visa” and Large US retailer’s plans to form a new payment network that they control. Today’s wallet initiatives are operating in a very dynamic landscape: retail is changing, technology is changing, new value networks are forming, new marketing platforms are emerging.. The margin is always better in orchestrating the interaction, than in coordinating the transaction. Thus I place my “wallet” bets in the short term with groups that can control the commercial marketplace (ie Apple, Amazon, eBay, Retailers, … ), and with groups that can orchestrate new value propositions (ie. Google, Square, hyperWallet, ..etc).
Have a great weekend… My Asia thoughts are next.
Apple’s Commerce Future = Square?
25 October 2011
My top question for October has been “What is Apple up to” in payments/commerce? It matters to me because investments and strategies have to line up. Is there new risk? Should I be running from NFC? Where do I place my bets?
Data Points (From previous blogs)
- Apple/iPhone is staying away from NFC…Apple has something brewing that revolves around its iTunes account base.
- Chase is working with both Apple and Square
- Square just secured a billion dollar valuation on $3-6M in Rev from one of the best VCs (IMHO) KPCB.. SO they must have some big idea…
- WSJ Article reports Jamie Dimon is talking to Dorsey on Payment.. what possibly could Jamie be so enthused about?
- Keith Rabois said he would never have gotten involved in Square if it was just about a doggle and payments..
- Visa is on board.. so they must have a plan to drive card volume. Visa invested at a time when new mobile PCI standards were “in flight”
- The Square doggle is mag stripe only.. (doesn’t work outside US)
- They are pushing the doggle like mad, expanding distribution to WMT stores this week.
- My previous blog outlines how Square has shifted into V3 of a business strategy that is about commerce (not payment). V1 was “Payments for Craigslist community”, V2 Small Merchants alienated by terms of today’s Acquirers, V3 Commerce
- Square card case shows TODAY’s product for working in physical retail. To make this work efficiently (and at scale..) many people have to be “registered” with Square as Payers (to open a Tab). Visa Wallet, and Apple iTunes would seem to be logical extensions to expand this registration rapidly. See Card Case demo Square’s site http://www.youtube.com/watch?v=la0zz-pPEl4
- As I stated previously, there is no need for NFC… anything that NFC can accomplish can also be accomplished with a single key exchange.. whether that key is biometrics, a loyalty card or your GPS location
- In this blog 2 years ago (wow I’ve been writing about Square for that long!?), outlines how a commerce process of the future may look like the local country store of the past. I know who you are when you walk in.. ask “would pay like you did last time or put it on your account?”.
Apple/Square – the Anti NFC?
All indications are that Apple has a new “location registration” type of service.. Allowing users to determine “Who” they want to make aware of their presence. I’m sure most of you familiar with Square’s card case can see the immediate link: if you walk into a “registered” store you have given “permission” to be aware of your presence the store will be able to market to you during your shopping experience AND when you go to register it will know who you are based on Voice (Square example), picture, GPS, or some other proximity indicator. Assuming your payment is on file (iTunes/Square) and the retailer is “connected” (to same cloud as consumer): the entire marketing, shopping and checkout process is done without ANY select, scan, tap, swipe or anything … throughout your entire shopping experience. For example, you could be watching targeted iPhone ad videos while shopping with discounts automatically applied at checkout.
Hey I could be wrong … and should have just kept my mouth shut while I go patent this.. but I think this is already in flight.. so my goal is to inform investment decisions. My confidence level?
Square is building this? 60-70%
Apple is participating? 30-40%
This would make Square’s Wal-Mart distribution efforts look brilliant. Give away millions of free doggles to get consumers to sign up.. then leverage this network as the basis for future in store payment network.
Is this really a Killer App?
My response centers around this question: How would retailers (and existing value chain) react?
- Where is the value to the retailer? In store marketing is not valuable without knowing intent to shop or buy.. or brand preferences..
- What do Square, Visa, Apple know about physical advertising and retail?
- What incremental sales with this drive? New customers? Basket Size?
- Will I lose business if I don’t do this?
- This use case solves a “payment” problem and an “instore awareness” problem.. What is the benefit to the merchant? Speed? Reduced Interchange?
- If Chase and Visa are driving this.. retailers will not be jumping over themselves to be first on board
- IBM has an 80% share registers in top 20 retailers.. Are they going to give up the POS to Square?
On the positive side.. this is certainly MUCH cheaper than NFC.. Merchants: Why should you buy NFC terminals at all? This highlights again why the MNOs insistence in following a “control” model for delivering value through NFC will be such a failure (see related blog). Data should not live on the phone.. but the cloud.
Investment Implications?
- Be cautious in over estimating the uptake of NFC. It is not a panacea for payment. It is a great tool for machine/tag to machine communication (ticketing, door opening security, RFID reader, music sharing, …).
- Verifone’s vision of new terminals everywhere should be balanced with a view of no more payment terminals at all.
- There are some very big bets going on here.. Apple, Kleiner, Visa, Chase. If you are not aligned to one of the big players you could get stepped on quickly
- Many opportunities to add value within this “future” scenario.. SAP, Oracle, and other retail experts are well positioned to help retailers
- Visa and Chase’s involvement make retailers participation less certain… therefore increasing retailer interest in other “retailer friendly” value propositions.
- My favorite one.. in store bandwidth. Stores are sink holes for radio signals.. Verizon and AT&T could gain control over this entire value chain by selling connectivity solutions (ie microcells) into stores. They can control the content in the phones to a much higher degree.. for example blocking any non-retail friendly site while a customer shops.
- Government Regs.. We need to start managing who has access to location information in a much more “regulated” fashion. I’m more concerned about my location information than I am about my payment info. Why? I know I won’t be held liable for my fraudulent card data.. while a bunch of physical thieves could rob me blind if they know where I shop and when I’m gone from my house. There is an assumption that customers will let this happen. My recommendation is for Square and Apple to spend a little time in Germany..
- Visa Offers could have a new outlet in store.. unfortunately.. they don’t know how to “sell” offers to retailers..
Make no mistake.. I like this model and think it is brilliant. But others are much better positioned to execute on it. Starting a network business is hard.. cracking the nut on a retailer value proposition.. harder.
If this is true.. I could be flipping to a fan of Square.. errr… Apple?? I finally see Kleiner’s investment approach at work. As one of their partners said to me “Tom, if we get a great team in place.. they will figure it out… Google had no idea of how it would make money when it started.. they turned out OK “
Payfone.. Verizon’s new mCommerce phone number based credential storage and authentication service
MoPoNuBaCreSAS (explained at end of post)
update Aug 2013
——————————
General architecture below is correct. Think the first deployed “use case” will be around mCommerce. An “autofill” function similar to V.me and Google Chrome. MNOs are in a much better place to deliver this as they have information on EVERY handset.. and they can AUTHENTICATE with handset information. This is my FAVORITE MNO led payment effort in the US. Online merchants should adopt this without pause.. think you will see immediate conversion impact. See overview here http://payfone.com/1-touch-checkout/
——————————
5 August 2011
I ran into a Payfone exec last month.. while stuck together in an elevator…“hey you look familiar”.. “I’m Tom… “ “You’re the guy writing bad stuff about us”… “I’m never afraid of being told I’m wrong.. tell me what is wrong”… After spending a little time with Payfone, I’ve changed my view.. If US users can be convinced to pay with their phone numbers, and merchants can be convinced to implement the Payfone mobile payment API.. this may be a very good way to go.
What did I get wrong in previous post?
- It is not only about P2P (at least in US).. but about mCommerce. Don’t know if I got it wrong, or whether their strategy has evolved… but today their focus is on mCommerce leveraging phone number for payment.
- Buying physical goods with their phone number.. hey in the UK payforit is big… particularly for small purchase. VZ probably wants to have this happen because they see a very rough road ahead for ISIS.. not only will it take consumers buying handset.. it will take 6 parties to align on the value prop.. AND execute.
- Substantial advantage in risk/fraud when carrier is involved in validation of credentials. Remember, my previous post estimated that MNO KYC could be a $5B market opportunity. Will Payfone take out other SMS verification solutions like Authentify?
My picture is based upon general market G2 (.. note I did not say “intelligence” as it may infer I have some).
What did I get right? The merchant integration challenge … I don’t see how AMEX, Payfone or VZ will be able to offer a compelling merchant value proposition. Amex is not exactly a processor of choice… Ticket sales seems like a sweet spot but hardgoods? Re: Digital Goods.. My sources tell me that the carriers are currently doing about $600M a year in old fashion digital goods (think ringtones). Apple is doing about $1.6B in App Store, and $4.8B in other Digital Goods (previous post). Given that neither legacy digital goods (ring tones) nor App Stores need this functionality what are the physical goods use cases? Best Buy? Gap? Payforit found a great sweet spot in subscriptions and paid content (read the newspaper, video), ticketing, …. Similar services in Japan also extend into vending.
So why do I call this service “mCommerce phone number based credential storage and authentication service“? Verizon already has one wallet (ISIS).. they don’t want to confuse the market… (great.. really great attempt here.. we would never call storing payment instruments and sending them to a merchant a “wallet”.. )
Oh.. BTW.. Citi and Verizon are both working on something substantial.. I will have to think of a new acronym for it.. how do I innovate a new word for “Offers”? Digital discount delivered by an MNO with redemption verified by a large multi-national bank? …. question remains who will actually create campaigns.. so need to put those words in there too somewhere. Suggestions appreciated.
Visa’s Wallet Strategy – Part 2
18 July (Updated from 17 June 2011
). Corrected significant error on scope of Visa Wallet. It is much more than an autofill (point 4 below)
Previous Blog: Visa’s mobile portfolio
I’ve been thinking about Visa’s wallet strategy this week. From my last blog (Visa Digital Wallet)
… a non-announcement, a rebranding of what CYBS and PlaySpan already have. Too many teams are angling to create the wallet (mobile, online, …), and not enough focusing on the value of what is in it. Google, Apple, and RIM will win the mobile wallet wars. I guess I can’t blame Visa for trying.. however it would have been nice if they could have been successful at eCommerce to start with.
Here are the questions I’m trying to answer:
- What is their investment thesis?
- What assets are they trying to leverage and what opportunity do they plan to attack?
- What is their strategy in attacking the opportunity?
- How will the banks react/support this strategy?
For those that haven’t read my blogs for 2 years.. let me restate a few points that I’ve made previously:
- Visa has a very big hole in their earnings with Durbin.. not only will they loose substantial debit revenue.. they could be loosing debit forever… as member banks assess whether signature debit makes sense to continue… and create a centralized bank switch for PIN debit (ala SVPCo or TCH). Merchants and consumers both prefer PIN today. I don’t believe Visa has adequately described this debit driven financial risk to the investment community.
- Visa is attempting to fill the debit void with new transaction types, services and “cash replacement”. The top 2 prospects are G2P payments (payments by a government to people.. from pensions to welfare) and “mobile payments”.
- There are 5 classes of mobile payments: 1) mobile initiated bank payments (ex. Monitise, , Cashedge, send your bank a message to transfer funds as in bill pay). 2) mobile commerce payments – digital (ex iTunes, PayPal, BilltoMobile, Boku, Bango, …), 3) mobile commerce payments – physical goods (ex Square, Amazon, Visa Wallet, PayPal, Bango, ..) 4) Mobile phone as a wallet – Physical device at point of sale (ex, NFC Google Wallet, 5) Mobile Money for Unbanked (MMU) (ex MPesa, GCash).
- Any initiative above is profitable for Visa only if: it replaces cash/other electronic (ex G2P), drives a transaction into higher margin product (Debit to Credit), increases number of transactions (customer use), or increases use of processing services (ex CYBS). Monitise obviously did none of these.
- The big issuers are not fans of Visa’s moves in mobile and innovation. Visa is beginning to walk on toes and create “universal services”, many of which overlap with the large issuers have competing plans (alerts, offers, mobile, P2P).
- Visa’s wallet value proposition (and solution) go something like this: Here is an API for your online banking.. consumer clicks on Visa Wallet and their card(s) get automatically stored in our digital wallet for use at any merchant site.. and a new Visa wallet account is created. Bank, you benefit by increased card transaction fees (use) and enable your customers to pay for digital goods with their Visa card in a one click service that delivers better consumer experience. Issues are that Visa has not signed up any of the top issuers and are also very dependent on PlaySpan’s existing consumer base. Most merchants don’t like the idea of helping out banks.. or Visa.. In order to change consumer behavior, and drive usage, a value proposition is needed. Are consumers doing digital goods payments today? Yes.. what does Visa do for merchants that BTM, Zynga, PayPal.. and others don’t? Options: 1) Use our CYBS processing, 2) use API only and “form fill” to leverage your existing processor, 3) Liability shift and reduced interchange for attempted VBV use. This last one has not be covered significantly .. may delve into with future blog.
- Visa is attempting to evolve its debit network from “debit” to bi-directional (see my VMT blog) with the OCT transaction set. This would enable it to compete with ACH and deliver services like P2P with little bank involvement.
What is Visa’s investment Thesis?
My guess is this “ replace the debit hole by leveraging our existing customer footprint into new transaction types, expand card acceptance and create customer stickiness with new products and services that work in every channel”
Assets to Leverage?
- Consumer account holders. I don’t call them Visa customers because they are not.. they are customers of the issuing bank. If a bank wants to rebrand their portfolio (to Mastercard, Amex, or a new white label) they are no longer Visa card holders.. Visa holds no consumer agreements. … BUT they want to..
- Payment Network: Acceptance and services (Bank, merchant, consumer).
- VBV Agreement where liability shift and interchange reduction possible (for ecomm/mcom CNP transactions)
A rather short list. Note that prior to CYBS, Visa held very few merchant agreements… it was the acquiring bank and processor that held the merchant agreement.
Strategy to attack the G2P and Mobile Opportunities?
Visa probably sees the lack of NFC handsets and POS terminals as a deciding factor in delaying any push here. The $600M-$800M in NFC GDV is too small to impact more than 5% of the Durbin hole. I believe they have initiatives lined up against the following business drivers
1. Increase number of transactions (customer use)
- Increase merchant acceptance locations: Square, CYBS, Visa Wallet
- Increase Consumer Use: Visa Wallet, Visa Money Transfer, Marketing,
2. Replaces cash/other electronic (ex G2P)
- Fundamo, Playspan, Visa Wallet, ..
3. Drive transactions into higher margin products (Debit to Credit),
- ?NFC? It would seem this is a “stage 2” plan.. They first need to get consumer’s using the wallet in high volume/frequent transactions. After they get usage.. they can migrate.. It may even line up with another partner like Apple who isn’t quite ready for NFC anything. Visa actually doesn’t seem to like the idea of a card in the phone wallet.. a wallet they don’t control.. they want the card in a VISA Wallet.. a Visa Cloud wallet that they do control..
4. Increase use of processing services… I not going to touch on this now..
Visa’s wallet strategy is a two pronged approach. Consumers will have accounts “auto created” by their issuing bank (at least the ones that implement the wallet API) and
( Old Content 17 June) all by implementing a simple form fill API where Visa’s wallet pre-populates all of the consumer information and payment items on a merchant’s checkout page.
New Content (18 July)
Visa is looking to build a consumer footprint to compliment its CYBS online merchant footprint. To be clear, Visa is looking to grow its eCommerce processing business AND create additional lock in (stickiness) with Visa Issuing banks. Visa will first ATTEMPT to roll out this service first with all CYBS merchants… then get additional merchants to either convert to CYBS or at least Add Wallet as an additional payment type. Chase PaymentTech is expected to take a lead roll.
Value proposition to Merchant
– Merchants will be given a fairly attractive option to reduce CNP interchange with 2 Components: Attempted VBV verification (Visa can reduce merchants rates for attempted 3DS verification) and #2 reduced interchange in volume discounts with key partner banks like Chase.
– Processing Package (cost). Expect Visa/CYBS to aggressively price for non-CYBS merchants
– Single Wallet for online, mobile and perhaps even physical goods
Value Proposition for Banks
– Lock in to Visa (I can’t really think of another one)
This is not a bad strategy… IF the world were standing still.. and if Visa had a positive reputation with merchants. The value proposition here is all built around convenience. It is a good plan.. but merchants have many other options and they know that accepting a new Visa product has always proved to be a Faustian Bargain (aka deal with the Devil).
As a side note, I saw Square’s COO today in a conference. His quote was something like “Square is much more than about swipe.. I wouldn’t have invested if that were the case”. None of us know what this grand plan is.. but obviously it must involve merchants.. and I would hope a better profit margin (from 20-30bps). After he spoke a CEO came up to me and said “the major processors love square (and Chase PaymentTech). Now there is a place for all of the sub prime merchants to migrate toward… Can Square monetize a base of merchants that were outside of the ISO focus and processor interest? They are not doing it today.. How could they possible morph their value proposition into something with higher margin? Keith certainly seemed to imply that Square had a merchant incentive/Groupon/foursquare model in mind. A deal of the day only redeemable at a square merchant? Hmm.. seems like a little bit of a stretch.
See related Visa Press Release here (RightCliq)