PayPal and Home Depot

There are few “payment problems” at the POS. For example, how often do you go to Home Depot and forget your wallet? Or go home empty handed because Home Depot wouldn’t accept your form of payment. Payment in and of itself is only the last phase of a long: product, marketing, retailing, pricing, selection, distribution and delivery buying process.

10 Jan 2012

Historically I’ve been a big PayPal fan, and still am. I have a PayPal Debit card that I used this morning… and use PP every chance I get online. The online checkout process is just fantastic. In the good old days I earned more money from my PayPal money market then I did from my bank (savings and DDA), so my preference was always to keep a balance with them. Sadly this is no longer the case.

In my last post on PayPal (PayPal at the POS – Nov 18, 2011) I described PayPal’s challenges at the physical POS:

PayPal has no tools in its shed to deliver incremental value within a PHYSICAL commerce orchestration role.

There are few “payment problems” at the POS. For example, how often do you go to Home Depot and forget your wallet? Or go home empty handed because Home Depot wouldn’t accept your form of payment? Payment in and of itself is only the last phase of a long: product, marketing, retailing, pricing, selection, distribution and delivery buying process. Most retailers strongly believe that the cost of this last “payment” process has been disproportionately high relative to the value it brings. This is the key strategic battle being fought today in “mobile payments”. Banks and the card networks are trying their best to make “mobile payment” a premium service tied to 300bps+ cards… while retailers and manufactures are looking for solutions that will enable them to create new buying experiences. PayPal’s solution may bridge this transaction cost gap (blended rate), but does very little  to address the physical buying process.

In the virtual world eBay is the lead orchestrator in this process (on its marketplace), as is Amazon. Key to Amazon’s and eBay’s ability to serve, as virtual world orchestrators, are their ability to control the buying process (end-end) AND the data.

However in the physical world, the buying process  is highly fragmented. The value that PayPal brings to Home Depot today is based upon their current product capabilities (payment + ?) and customer base (100M+ globally). If you were running store operations at Home Depot, what are you trying to accomplish with PayPal?

  • Decrease transaction cost? Perhaps Home Depot has a high credit transaction mix and PayPal’s 200bps (my guess) cost is a net savings
  • Increase basket size? Can Paypal incent customers to buy more
  • Increase total annual sales? Get existing customers to buy more over the year
  • Increase gross margin? Example set prices higher on shelf, as PayPal customers will get unique custom pricing
  • Increase marketing effectiveness? Drive sales of targeted merchandise?
  • Increase Loyalty? Decrease trips to competitors, increase share of wallet, …etc

I’m fortunate to have led teams at Oracle and 41st Parameter (a KP start up) that worked with some of the World’s largest Retailers (online and physical)….. It is based on this perspective that I see the following business issues with PayPal-Home Depot approach:

1. Incentive to use payment instrument. As a consumer why would I want to pay with my phone number? I know if I use my Amex card I get points.. what do I get here?

2. Home Depot value. What are the metrics around the pilot and what is success? I can’t imagine how this will drive sales or margin. eBay does not market, and if they did will consumers see the price for item on eBay? eBay is a competitor to most physical retailers.. a hyper efficient marketplace. eBay has few tools to market and influence a customer during the buying process..  I’m sure PayPal has develop some very cool instore tools.. but hey Home Depot could do that themselves.

3. Consumer protections. The reason I use a credit card at Home Depot are my Reg Z consumer protections. What happens if I have a dispute? Or want to return merchandise?

4. No need for PayPal. This is actually my number one reason.. Home Depot will eventually wake up and realize that they can keep the phone number based checkout.. but use it to ask the customer if they would like to pay with the same payment instrument they used last time. There is no need for PayPal anywhere in this process. This is what happens for me at my local grocery store today (Food Lion).

Make no mistake, I do like the idea of customers giving their phone number at the POS…  but it is the retailers that should use this data to make an informed decision on payment instrument choice AND loyalty incentive (example Target’s decoupled debit 5% back, or Payfone/Verizon with VZ incentives).

As a side note, Patrick’s comments on my Galaxy Nexus blog led me to update my disclosure, and restate the obvious: my views are biased (no secret to my Obopay and Square friends). Today’s blog is consistent with what I have been telling eBay’s institutional investors.. there is plenty of runway for PayPal globally.. but physical POS is a distraction and they don’t have the physical retail team to tackle it. There are no payment problems at the POS.. per yesterday’s blog, the REAL opportunity is in rewiring commerce in ways which enable manufactures, consumers and retailers to interact.   eBay’s virtual marketplace is a negative to most physical retailers.. as is Amazon’s.  Retailers are looking for solutions which will increase sales and decrease transaction cost. A platform which begins with a new marketing  paradigm (ex. Google) is much more likely to draw participation, particularly in a pay for performance model.  If this hypothesis holds, what companies are best positioned to influence a customer before they buy?

Also see Googlization of Financial Services.. 

OpenNFC – Game Changer

OpenNFC has a tremendous impact on MNO NFC business models. MNOs invested tremendous effort in developing NFC, now they are having their legs taken out from under them by a contactless vendor and the handset manufacturers. For ISIS to succeed they must run much faster and expand scope from a narrow payment pilot (over next 18 months) to building a platform that can compete AND interoperate against Android

24 February 2011

Monday I wrote about Apple’s “NFC Twist” and how a multi SE environment impacted MNO’s NFC business case. From Monday (I hate to quote myself.. but it keeps from following the link)

The champion of Multi SE architecture is Inside Contactless (OpenNFC).. a very very smart “Judo” move that leverages NXP’s substantial momentum (in integrated NFC/controller/radio) against itself. Inside’s perspective is that there is no reason for the ISO 14443 radio to ONLY be controlled via NFC (treat it like a camera). Inside’s OpenNFC provides for “easily adaptable hardware abstraction software layer, which accounts for a very small percentage of the total stack code, meaning that the Open NFC software stack can be easily leveraged for different NFC chip hardwalet multiple applications and services access it”. Handset manufactures love this model.. MNOs hate it. As I stated previously, closed systems must develop prior to open systems as investment can only be made where margins and services can be controlled. OpenNFC changes the investment dynamics for MNOs, and provides new incentives for Google/Apple/Microsoft, … to transition their closed systems into NFC platforms.

For Banks, Handset Manufacturer and Startups…

I cannot understate the importance of this approach.  My guess is that Apple, Motorola and RIM are all planning to pursue “OpenNFC” .  Multiple applications can now leverage the 14443 radio IN ADDITION TO the MNO controlled (SWP/SE) environment. Applications can then ride “over the top” independent of carrier controlled (TSM Managed) OTA provisioning.

In business terms, what does this mean? ISIS was founded under the assumption that it controlled the radio and all applications accessing it under NFCs  secure element (SE)  single wire protocol (SWP). Nothing could use the radio unless the ISIS TSM (Gemalto) provisioned it. Visa, Mastercard, Amex were all looking at a future where the BEST they could do was exist as a sticker on the back of the phone. In the OpenNFC model, the radio can be accessed directly through the handset operating system (assuming the OS integrates to the Inside OpenNFC controller).  This provides the ability for applications on Android and iPhone to access the radio. In this model, Mastercard DOES have the ability to get PayPass into the phone. My guess is that one driver of MasterCard’s hiring of Mung-Ki Woo from Orange was his unique perspective on how to make PayPass work within this InsideContactless model.

For ISIS? This is a tremendous impact to their business model. Perhaps something they cannot recover from. MNOs invested tremendous effort in developing NFC, now they are having their legs taken out from under them by a contactless vendor and the handset manufacturers. For ISIS to succeed they must run much faster and expand scope from a narrow payment pilot (over next 18 months) to building a platform that can compete AND interoperate against Android. Yeah.. that big. Their advantage is in control, security and provisioning. Unfortunately, because they have focused on the “control” aspect as the centerpiece of their  business model, they have developed no alliances. In this, ISIS may well follow the failure of Canada’s Enstream. A group that got all of the technology right but failed to develop a sustainable business model.

Start-Ups

Start building to OPEN NFC. Game IS ON. Assume that Android and iPhone will let you access the radio…. For a fee.

For Consumers

CHAOS. What do you do when 5 applications all want to submit your payment.. .or read an RFID.. which one do you use?  For a view on the mess this will cause, see the Stolpan whitepaper

I believe this approach benefits Apple much more than Google. Apple’s platform “control” and QA testing will be essential to getting this off the ground. My guess is that Apple will have only ONE NFC payment option.. APPLE PAYMENTS. Perhaps a gatekeeper model where multiple cards can be store but Apple collects a fee.

Although Apple has an advantage in control. Google has the opportunity to deliver a much better value proposition to consumers, businesses and application developers. I’ll stick by my Axiom that new networks must start as closed systems delivering value to at least 2 parties. But can Apple compete with its Gosplan (USSR State Planning) like controls against open Android?

Background

NFC Background for non-techies reading the blog, there have been many, many global pilots of NFC.. but no production rollouts. From my previous blog

What is NFC? Technically it operates on the same ISO/IEC 14443 (18092) 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).

“Real Time” Funds Transfer in the US

I’ve had quite a few questions from start ups on this subject, so I thought I would address here. In the past few months we have seen press from Obopay on Star/NYCE integration that would allow for “instant” transfers. Only FedWire offers real time transfers between all financial institutions. All other solutions have sporadic coverage unless balances are held within the same institution (bank, paypal, … ).

8 Feb 2011

I’ve had quite a few questions from start ups on this subject, so I thought I would address here. In the past few months we have seen press from Obopay on Star/NYCE integration that would allow for “instant” transfers, yesterday there was a press release from Cashedge/NYCE on the same subject. In my previous blog on Visa Money Transfers I discussed the top 2 fallacies: Instant and Mandatory. These same issues plague NYCE’s and Star’s PIN Debit “credit push”.

For the non-bankers, there are 5 basic payment networks that surround a typical US DDA account:

  1. PIN Debit/ATM (Interlink, Pulse, Star, NYCE)
  2. Signature Debit
  3. ACH (example The Clearing House, Jamie Dimon Chairman)
  4. FedWire (the US RTGS system run by the Fed)
  5. SVPCo (Check Images)
  6. Optional (ex. SWIFT, Western Union, …)

For further information see the FFIEC’s Examination Guide on Retail Payment Systems.

From a global perspective, we are quite a few years behind the UK and most of EMEA. While consumers in the UK can expect that 98% of domestic payments to clear in “real time”, most ACH “payments” in the US clear in the 3-5 day horizon. This blog is focused on “instant” payments. Important to note that the definition of “instant” is relative to both bank and consumer. For example, each bank has its own policy on funds availability and posting (vs clearing). A consumer could see funds posted to their account, but the funds may not be available for withdrawal. Other banks choose to show the consumers available funds to avoid confusion.

FedWire is a Real Time Gross Settlement (RTGS) system run by the federal reserve. Each bank in the US maintains funds with the federal reserve, and FedWire performs real time exchange of funds between member banks. Consumers and Commercial Businesses know of this service as a “wire”, and it is the only real time payment network in the US with universal adoption. FedWire Fees (~ $.52) are paid by the sending bank.

PIN Debit

The other “real time” payments systems (surrounding a US consumer DDA) are PIN Debit and Signature Debit. PIN Debit Networks evolved from ATMs, connecting ATM nodes to bank run authorization systems. Bank Authorization processes for PIN Debit/ATM systems are rather straight forward: validate the PIN  and funds available (I emphasize this authorization process as it is key to understanding why a “credit” is difficult to process on this debit system). PIN Debit fees are typically paid by the merchant and average around 85bps + $0.10. For ATM use, banks control fees and can assess surcharge for use of bank or foreign ATMs.

ATM Networks grew as groups of banks banded together to monetize ATM infrastructure, and further expand network into the retail POS. This expansion led to further change in structure, from bank ownership to independence. The driver of any independent network is to add volume, nodes and services. ATM Networks evolved into PIN Debit Networks, with Visa’s 1987 contract to operate Interlink  serving as a key milestone. Today, Pulse is owned by Discover, Star by First Data, Interlink by Visa (these 3 make up over 83% of PIN Debit Volume).

PIN debit networks have been working to fill the real time “hole” in DDA payment services for many years. Star’s Expedited Transfer, NYCE’s A2A Money Transfer , Visa’s VMT all attempt to EXTEND their respective PIN Debit networks to handle credit transactions. In EVERY CASE, the networks must sell their members banks and get them to extend a PIN based network (which processed only debits in a simplified authorization process), into a funds transfer service. Who owns fraud? Compliance? Reg E burdens? Consumer Support? Returns? Reporting? Integration into online banking? Statements? .. yep the banks.. Oh and by the way.. the other “benefit” to a bank is that once you implement it you can forget about those expensive wire fees. The result of their efforts is what you would expect… VERY poor adoption.

Today, PIN debit networks are looking at a very bleak future. Signature and PIN debit rates will be moving to a flat fee of $0.21 as a result of the recent Dodd-Frank Act (pending completion of the comment period). As a result, my guess is that we will likely see consolidation and bank ownership of shared PIN network infrastructure as with any commodity payment service.

Signature Debit

Signature Debit varies from PIN Debit in that it evolved from Credit Card (as opposed to ATM). Visa was and has always been the leader in signature debit penetration, a look back at this 2003 article provides much insight into the history here. Most US consumers today don’t understand why their debit card has both a PIN and signature feature… many books could be written on this subject alone… but oddly enough consumers prefer PIN (see Pulse Federal Reshttp://3dmerchant.com/blog/how-can-i-reduce-american-express-transaction-fees/erve Presentation 10/10).

In the signature debit model, transaction authorization is much more complex, with most banks leveraging either network shared infrastructure (example Visa DPS), or their credit card systems. The complexity arises as the lack of PIN requires the banks to risk score transactions in a manner akin to credit card (absent the credit risk). There are limited facilities for a credit transaction within most Signature Debit systems, and most relate to a merchant credit relating to a previous transaction (ex. Overcharge, returned merchandise). DPS, Mastercard IPS, and most other platforms perform usually perform a daily net settlement with member banks (multiple settlement files are sent throughout the day.. but netted just once) .  Just as with PIN Debit, Signature Debit is also designed as a DEBIT ONLY system…

In VMT, Visa is attempting to enhance signature debit network into a quasi RTGS transfer service by leveraging its DPS hosting and authorization role. The QUASI is very important… as DPS, Interlink or any of the debit systems are “real time” ONLY in the instruction, NOT the Settlement.  To suggest that any of these services are an actual RTGS system is a significant stretch of the imagination and thoughtful invention. A payment system cannot be faster than its underlying settlement system.  The PIN and Signature Debit Networks DO NOT SETTLE, but rather depend on existing bank settlement processes (which are daily batch runs). The “message” to post or credit a transaction to the customer can be “instant” but the funds will not clear into the customers account until settlement occurs (dependent upon each bank’s policy).

What does this all mean for real time transfers in the US?

Only FedWire offers real time transfers between all financial institutions. All other solutions have sporadic coverage unless balances are held within the same institution (bank, paypal, … ).

How should you view NYCE, STAR, Visa “credit” Capabilities?

It works at some banks, with many provisions. I estimate that combined coverage of NYCE, Star and VMT “credit” covers less than 5% of all US deposit accounts. As you can see from WSJ graphic below, the top 5 banks account for 80%% of debit volume…. given that these banks have not adopted the credit services (in debit), there is little likelihood of success.

It is likely that independent PIN debit networks will go the way of Canada’s Interac… a bank owned service.

Messages for banks

Keep bank control of transfer facilities.. new services that give consumers real time transfers compete with wire, increase fraud exposure and enable rate hoppers… Why role this out today when you will likely get it from a bank owned network in 2-3 years.. ?

Disrupting Payments at the POS

From my (very limited) purview, there seems to be 2 core disruptive innovations that will influence payments at the Point of Sale (POS):

Mobile as a Payment Platform
Mobile as an Incentive/Advertising Platform

7 February 2011

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

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

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

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

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

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

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

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

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

NFC as a Payment Platform

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

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

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

NFC

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

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

NFC as Payment Platform – Disruption

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

Card Costs – Industry 101

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

Future Scenario – PayPal/Bling

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

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

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

MNO Billing

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

Disruptive Innovation – Mobile as Advertising Platform

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

Summary

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

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

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).

Credit

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.

Or

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.

2011: Tough Start for Mobile Payments

2011 has been a rough start for mobile payments. Early bets in the space are running out of cash, and established industry players are placing $1B+ bets to compete with new MNO ecosystems.

10 January 2011

I learned my lessons on the Valley hype cycle early (from the source). In 1997, at the ripe old age of 32,  I joined GartnerGroup with the goal of participating in a great research and advisory team. Well… that lasted about 11 months. I learned that there was no research and their business model never broke away from its roots as a division of McGraw Hill. It was all about reporting, writing, buzz and sensationalism (with a very few exceptions .. Schulte/SOA).  It was great fun listening to buyers of IT talking about new products issues and then meeting with the software vendors (with more information on hand then their product heads had) to watch them watching them turn green.  But fun aside, I wanted to go run a business…. not become an industry analyst (this blog serves as an outlet for my minor competencies here).

The Gartner experience reinforced the importance of marketing in creating new products, of creating “buzz”. After all  IT periodicals and research firms must fill their pages with something every week. Of course ISVs and start ups are happy to oblige… Buyers and Investors must be able to cut through the fog and assess business viability, valuation and risk.  My data indicates that mobile payments is at the top of the hype cycle. I read the Nov 2010 Javelin report on mobile with great amusement: $7B in P2P mobile transactions in 2010!?  I would be very surprised if the number broke $100M.  Obviously the $7B number is driven by Javelin’s methodology, perhaps a mobile payment includes when I get an SMS message that my bank paid a bill….

Javelin’s methodology obviously does NOT include looking at financial statements. If it had (and the $7B number were real), we would not have seen the continued bloodshed in the space. 2011 has been a rough start for mobile payments. Early bets in the space are running out of cash, and established industry players are placing $1B+ bets to compete with new MNO ecosystems. An industry status of early movers here:

In every case above, there was complete failure in a value proposition. For Example, Obopay charging $0.50 to send money.  The key lesson learned (over and over) is: small companies cannot LEAD development of a payment network. The industry is replete with examples which substantiate this point(see list here). Payment networks are 2 sided, and compete against well entrenched competitors with deep pockets. Payment networks must start with delivering value to 2 parties (ex PayPal Consumer to EBAY). Going at consumers alone (p2p) or as a bank partner alone (Monitise) will not drive volume. As Clayton Christensen asks in Innovator’s Solution: “what problem are you solving”? Moving money through a phone does not create value.

To be clear, there is a very real potential for mobile payments (and NFC) to be the driver 100s of new companys. But their business models must deliver value today (example NFC to unlock doors), or serve  in a supporting role to new industry ecosystems. This supporting role requires a FUNDEMENTAL change in how valley firms typically operate: Start Ups must learn to work with and support multiple large companies and ecosystems. Supporting ecosystems is a B2C model.. NOT a direct to consumer model. This supporting role has new risks, as VivoTech (one of my favorite companies) has learned.  Small Companies which support emerging ecosystems are challenged to influence their overall shape and value proposition. Further, if transaction volume is low, there is minimal revenue or pricing power without a clear value proposition (see Google/Boku).

New ventures operating within NFC ecosystems have prospect of attracting  30-50% of the $6B in mobile venture capital. Investors should be wary of  hype and tag along investing as risk profiles are unique (ie NFC ecosystem play vs. consumer mobile app).  Look hard at the talent running the company (see investors guide). Social networks are much different than payment networks. Payment networks require alliances, regulatory/risk acumen, understanding of history, experience and relationships (see key skills). Banks can win in the move to electronic payments. The top 5 US banks are in a much better position to influence ecosystem development (see lessons learned) than the mid tier, however the mid tier is in a much better position to partner (ex. Barclays US in Discover).

Deal of the Week

From a valuation perspective, the latest “head scratcher” in mobile payments is Square’s $27.5M raise at a $240M Valuation. From VentureBeat:

Rabois acknowledged, but he pointed out that Square is already achieving impressive growth without paying for traditional advertising or other promotions. He said Square is processing millions of dollars in transactions every week, and that it’s signing up 30,000 to 50,000 new merchants every month. Rabois said many of those merchants were previously cash-only, but they were attracted by Square’s ease-of-use (the card-reading device plugs into iPhones, iPads, and Android phones) and low financial risk

I estimate they are doing about $20-$30M TPV per week (5k users $5k/wk) this translates into revenue run rate of $6M/yr … which would equate valuation of $240M to 40x REVENUE. Square may have 30k downloads of their iPhone app /wk, but does that translate into transactions. This valuation is NOT based upon financials, but upon the people involved in this company. Existing investors took a bigger stake.. they have every right to set the price. This makes complete sense,  particularly if they are looking for a Revolution Money kind of exit.

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 www.paywithisis.com (err… same reaction). Over the last 18 months or so I guessed wrong on the consortium around AT&T, it was not Visa, but Discover (See winners/loosers blog above) it was also all of the major US MNOs (Sprint was initially involved, but has delayed further participation).  Discover makes complete sense, as stated previously a 3 party network is the only one capable of developing a new payment type (with corresponding set of rules and fees). Visa/MA are constrained by existing agreements with card holders, issuers, acquirers. A principle example is Visa’s failure to force a “mandatory” payment type in Visa Money Transfer (VMT).

Top questions I hear today:

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

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

3) Will Phase 1 have a mobile advertising component?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2) NFC and RFID are both based upon ISO 14443

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

3) Merchant POS terminals support multiple standards today

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

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

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

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

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

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

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

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

Question 3 – Mobile Advertising

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

Question 4 – POS Economics.

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

Summary

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

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

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

Thought appreciated

Visa and MA take a bath on proposed debit fees

The banks knew it was coming, and don’t let anyone fool you that the idea of a flat fee of $0.05-$0.15 was a “suprise” . While Banks are morning tonight, the merchants are having a party..

The banks knew it was coming, so don’t let anyone fool you that it was a “suprise”. The idea of a flat fee of $0.05-$0.15 has been floated for some time. As you can see from graph on right, Visa lost 10% of its value after the announcement. While Banks and Issuers are returning their Christmas presents tonight, the merchants are having a party.. particularly large ones like Wal-Mart who in 2009 had interchange costs of $1B.

As a banker, we invited Wal-Mart to come in and talk to us in 2005. They certainly did not mince words then, I remember a few quotes explicitly “what service do you provide that justifies taking 2% of my sales”?. Another memorable quote “we want to find a model where you pay us to take your card”.  Something we laughed off back then, after all who on earth in the bank wanted to design that model? Banks “had it coming”… The interchange rate creep bore too many signs of a

“network” run amok and NO ONE stopped the train.  Banks launching campaigns like “skip the PIN and win” to incent consumers to pursue signature debit transactions (200bps+) vs PIN debit.  We only need to look at the federal reserve chart on the right to see the lack of market forces here.

I believe this is a “tipping point” event in US cards. We will see merchants aggressively incent use of debit, and the Visa and MA logos will start to come off of our debit/ATM cards, as they do in Canada and Australia (Interac, and EFTPOS). What will the banks do about this revenue loss?

All are looking for new ways to drive other revenue streams into the payment services, particularly around marketing/advertising (see my Blog on Apple iAd). The Visa and MA relationships with the large banks was already showing signs of strain. The large banks will not wait for Visa and MA to develop an alternatives, most are assessing new networks and value channels which they can control (see Googlization of FS). I’m short on V/MA because of this dynamic.

The Federal Reserve’s proposal is open for comments, and there may be a change. But the starting point for the negotiations is quite a bit lower than what the banks were hoping for.  My message to Bank CEOs: drop the fight here and find a new model for payments. Don’t let Apple and Google eat your future as well. What will it take? Well for one thing it will take a little collaboration, re-energize a few of your existing consortiums like NACHA, The Clearing House, Early-Warning to develop new models for payments and seed these team with top executives. You can’t take your eye off of this ball, retail payments is less than sexy.. but it is core to your daily interaction with customers.

MA buys Travelex Prepaid for $458M

Great move by both Mastercard and Travelex. This gives MA a global platform for prepaid, by which there exisiting bank customers can launch branded, multi currency, prepaid cards. Few banks today are able to compete with Citi’s pre-paid (http://www.citiprepaid.com/), a group that is seeing tremendous growth.

9Dec 10

Press Release

Great move by both MasterCard and Travelex. This gives MA a global platform for prepaid, by which their exisiting bank customers can launch branded, multi currency,  prepaid cards. Few banks today are able to compete with Citi’s pre-paid (http://www.citiprepaid.com/), a group that is seeing tremendous growth. Citi’s recent success here has certainly drawn attention.  On the product front, Citi prepaid had its genesis in the 3/2007 acquisition of eCount.  On the business side, Citi is hitting the ball out of the park with both governement and commercial disbursement, supporting new payment flows with existing customers and a high margin product.

The opportunities for MA growth are:

  • Commercial – White Lable Processor for corporate disbursement (ie Citi Prepaid )
  • Foreign currency card (Travelex Cash Passport). Important to note here that it is not just for travel, but also for cross border online transactions.
  • G2P Payments
  • Cross Border Remittance (Base of the pyramid).
  • …etc

With respect to a consumer “travel card”, the challenge that MA faces is that bank processors (TSYS ,FIS Prepaid) currently have much broader PRODUCT capability in this area already. Fortunately (for MA) these processors are dependent on multiple issuers for branding and marketing. Travelex has excelled in the branding and marketing of its products. Consumers (and businesses) all over the world associate the Travelex name with global travel, currency and FX. Can MA extend its brand here as well? They certainly have the A+ team to do it with.. but it will require some of the major banks to also jump on board. As an issuer, you have multiple choices for this today.. from the large processors (TYS/FIS), and Citi, to small global program managers like hyperWALLET.

From the press release

According to a 2010 Boston Consulting Group study commissioned by MasterCard, prepaid is expected to reach more than $840 billion in global volume by 2017, a compound annual growth rate (CAGR) of 22 percent. This same study estimates that the prepaid open-loop market in the travel sector is expected to grow at a CAGR of 31 percent over the same period.

MasterCard expects the transaction to be $0.04 dilutive to its 2011 earnings per share due to amortization and one time transaction and integration costs. For 2012, MasterCard expects the transaction to be neutral and accretive beginning in 2013.

Obopay Update – 4Q10 (update on 3Q)

Given their poor performance to date, MA is starting to step away from them as primary MoneySend platform (example is recent RIM announcement). Obopay now seems to have a split focus: US and emerging markets.

5 Oct 2010 (Updated 12/9)

For those that don’t read this blog often, I’m an Obopay cynic. A company that is the very definition of a hype machine (and I came from Oracle). The company has many awards, and very few customers (<20k see site analytics below) and only $3.8M in revenue as of Sept 2010 (no wonder the CFO left).

Why am I so cynical? They are focusing on emerging markets, and the rural poor.. a group than can ill afford to buy into vapor. Press release above shows them targeting US banks now. Good to see them change strategies. Three years ago they wanted to build a direct to consumer brand,  investing in money transfer licenses in all US states and alliance with MasterCard. Now they want to sell a new a “white label” P2P bank service?

Given their poor performance to date, MA is starting to step away from them as primary MoneySend platform (example is recent RIM announcement). Citi has also moved on from the limited Obopay pilot it launched in 2007, into a great new service delivered by Cashedge (POPMoney). The press release indicates quite a dramatic shift in the Obopay business model back to the US, with very little press relating to emerging markets (UPDATE NOKIA bought Obopay India). The bank shift may have been driven by cash burn as the $130M in invested capital is not enough to compete against the likes of Visa and AT&T in marketing a new consumer payment service. This strategy shift, and resulting financial implications, may have been a driver of Obopay’s CFO departure (never a good sign).  Message to Obopay.. you may want to update your management team page as Tyler’s name is still there.

With respect to a new “white label” strategy, there does seem to be thoughful expansion of their transaction network;  Obopay announced integration to both NYCE and STAR (allowing PINless debit) . This network structure follows in the footsteps of PayPal, and is not a bad strategy at all (if you are stuck to a card based money transfer paradigm).  Cards have many advantages in P2P use, top among them are the facilities for authorization and “instant” transfer. The word instant is in quotes here because authorization and posting of the transaction can be near real time, but settlement is up to the bank (1-2 days) and settlement network. The downside for Obopay’s card model is cost, particularly sensitive in a  sender pays model. Of course these initiatives will bring down transaction cost, but they neglect to address Obopay’s core issues: no consumer value and hence few transactions.

The problems with a bank White Label strategy is that they are late to this game with sales team not geared for banks. They have set themselves up for competition with vendors such as Cashedge, FIS and FISV who host bank infrastructure. Cashedge is the clear leader in mobile P2P here, with the recently launched Citi service and over 100 banks (including Wachovia, BB&T and Bank of America). Chase’s QuickPay is another example of a bank led mobile P2P initiative. As I told one of the major banks last week, the Obopay business case for P2P may look better (because of interchange), but the price is steep (consumer adoption, behavior change and limited use). In other words, there is no proof point for a card based P2P model, as demonstrated by Obopay’s adoption over the last 3 years.

Emerging Markets

Over the last 2 years, Obopay has been active in attempting to penetrate emerging markets (particularly India – See previous Blog on Obopay’s failure). India is a very tough business for any payment players. RBI is well known as one of the toughest regulators on the planet, Obopay (and local MNOs) have been hamstrung in pursuing any model that is NOT bank led. Their YES bank pilot shows the challenges of rolling out a solution that is bank led in a card model… all best described in this Nokia presentation. It would seem that Nokia is taking the lead from Obopay on India (UPDATE 12/9 Confirmed), as it is key to retaining their 60% handset market share. The Nokia team is stellar, and their leadership of India efforts will put them in a much better position to execute against complex alliance and regulatory issues. As a side note, I expect to see Nokia focus on a handset “wallet” (bank/MFI/BC agnostic) with Obopay as the “switch” to IMPS (see related blog) clearing and bill payment (perhaps a future blog on Obopay as the Checkfree/Cardlink of India?). Understand that a government pilot on this approach is under consideration.

Message to investors: make some big changes. You have lost the early lead, and your partners are running away. The risk in competing against the big networks and banks in P2P is not within your investment hypothesis. Banks do not need your core asset (money services licenses) and you do not have the right team to sell and service banks. Emerging markets have limited revenue prospects, and MNOs are capable of building mobile payments from scratch (ref MPESA). MasterCard is making alliances with teams that drive network (either customers or merchants) expect them to develop alternatives.