Long time… no blog

I don’t disagree that Visa would love to create a platform where they are the trust authority.. but the banks and mobile operators have different plans. Visa’s CAP plan is a poor attempt to build a platform where they have additional control over merchants, consumers and banks. Mobile is causing tectonic shifts in where and who performs: risk, authentication, KYC, mobile provisioning, clearing and settlement. These are all threats to Visa’s network, CAP is there attempt to put barbed wire around their decaying model.. to keep customers from leaving…

I’ve been meaning to post this super long blog on network profitability.. 8 weeks ago. I’m almost finished.. to encourage completion I promised myself not to post anything else until it was done. Well.. I’m breaking my promise.

For frequent readers, most of you know that I love PayPal. They just rolled out their latest “vision” today


I thought it was some sort of joke.. PayPal.. if you are listening.. please take it down. Do you really plan to penetrate large multi-lane retailers?!  That POS demo with someone keying in their phone number and password.. yeah a grocery store would LOVE letting their customers spend 2 min on a payment terminal. Come on guys. Why not focus on your existing small merchants? Maybe you are but wanted to show something different. I almost spit out my lunch as I laughed when the lady self scanned in the aisle, put the items in a bag and walked out of the store by waving her phone above her head to the cashier busy with another customer. Yeah…. store of the future.

My hope is that PayPal outsourced the video to a 3rd party and forgot to review it..  With Sig and PIN interchange both sitting at $0.21 + 5bps what would motivate a merchant to take PayPal?  Do you go after merchants that do not accept cards (ie Square’s market)? existing merchant customers? big retailers? There is no way I see big retailers going your way.. too much change in customer behavior at POS.. I do use my PayPal debit card … but typing in my phone number? Heck I don’t want to do that and I love you guys.

On another front.. I just read the ABA journal article on Visa’s CAP initiative.


These experts are all wrong. I can tell you why the big banks will not go with this.. it is about risk management. Currently the big banks can manage fraud with custom infrastructures.. banks compete on ability to manage risk (including fraud), putting this technology out puts all banks on a level playing field and wipes out all of their investment edge. Take this together with a $1B+ plastic reissue cost and a $5B+ re-terminalization AND a rotten bank environment and you have a very poor environment for adoption.  I do believe banks will selectively reissue to global travelers. I can’t even use my mag stripe cards in Canada anymore.  The ABA analysis is all wet. The worst line in the article has 2 major hypothesis which are completely unsubstantiated.

1) … they [Issuers] may push for shifting more of the fraud losses and fraud prevention costs to merchants.

2) As is the case in some countries and as proposed by Visa, merchants would only get the current guaranteed payment if they adopt the new chip technology.

ABA.. come on!! Merchants and Issuers both have legal agreements in place. What dark crevasse did you pull these ideas from? For point 1), Durbin allows for future adjustment (to rate) if banks can show that fraud costs are not being covered. What we will see is the death of signature debit. PIN Debit rates have been show to one fouth that of signature (http://www.digitaltransactions.net/news/story/2845) … so the change will be toward PIN only transactions at merchants.  This PIN model combined w/merchant ability to route transactions is a very big threat to Visa’s network.. How will Visa address? By creating a Chip.. everyone must validate it with Visa.. THIS IS THE PRIMARY STRATEGIC POINT. What banks and merchants will agree on is that Visa has no place in a debit transaction.. as we will see later in the year 2 large banks will roll out their own network…

For point 2) FORCED re-terminalization? … yeah that will win friends. As you can see from Durbin merchants have the power this year.  So Visa will force merchants to accept a new agreement and incur additional expense?   In the EU, Visa used the carrot.. not the stick. So please, please give me an example of Visa pursuing this approach in any country. For history, I ran channels for Citi in 47 markets.. and didn’t see this.. but perhaps they did it in last year or so.

ABA’s next point caused me to choke

Not only will chip technology accelerate mobile innovations, it is also expected to secure payments into the future through the use of dynamic authentication

Have you heard of NFC? I don’t disagree that Visa would love to create a platform where they are the trust authority.. but the banks and mobile operators have different plans. Visa’s CAP plan is a poor attempt to build a platform where they have additional control over merchants, consumers and banks. Mobile is causing tectonic shifts in where and who performs: risk, authentication, KYC, mobile provisioning, clearing and settlement. These are all threats to Visa’s network, CAP is their attempt to put barbed wire around their decaying model.. to keep customers from leaving…

Square will “do better” than PayPal? Yeah.. and Pigs Fly

Keith Rabois has been around payments a long time.. and given his PayPal background, his view shouldn’t be ignored. $1B TPV sounds like a big number.. but equates to only $3M in revenue (30bps take rate). PayPal has a 330-390bps take rate driven by its 3 party model (both merchant and consumer have accounts). Yes, that’s right… Paypal makes 10x more revenue for every dollar processed than Square. So for Square to Surpass PayPal, they need $1T in TPV

May 25, 2011 (Updated.. I was 25% off on TPV)

TechCrunch Today (Square has 95% chance to do better than PayPal)

TechCrunch – Square Register (May 24)

Keith Rabois has been around payments a long time..  and given his PayPal background….  his views shouldn’t be ignored. $1B TPV sounds like a big number, but equates to only $3M in revenue (275bps take rate, 30bps margin). PayPal has a 330-390bps take rate (230bps margin) driven by its 3 party model (both merchant and consumer have accounts). Yes, that’s right… Paypal makes 7x+ more revenue for every dollar processed than Square. So for Square to surpass PayPal, they need $700B in TPV… (in their current revenue model). Given that total US Credit Card TPV is $1.3T (Visa $781B , MA $515) that seems a little unrealistic.  (for more detail see http://tomnoyes.wordpress.com/2011/02/24/do-squareups-square/).

So what is “do better”? Number of accounts? Square is sitting on about 20k active customer accounts.. this is a long way from PayPal’s 100M..

The new Square register is a decent idea.. but Square is NOT competing in a vacuum. During PayPal’s early days there was a problem that needed a solution (CNP). PayPal delivered a strong value proposition.. a 3 party payment platform for online purchases. Solving this problem was critical for commerce (on eBay) to take place. The online payments problem, which PayPal solved, was a roadblock to delivering commerce value.

What are the problems that Square is attempting to solve?

  • Help Visa drive credit card volume
  • Help small merchants accept cards
  • Help small merchants communicate to consumers (Square registers)?
  • Provide Consumers a Wallet on their phone?
  • Help a Craig’s list seller use a card next time they sell something?

Square has done a great job in consumer experience, across all of their applications,  but their challenge remains value delivery. Chase and Visa have billions of reasons for sustaining CREDIT card TPV, but this is NOT a retailer friendly value proposition. As I’ve stated, the challenges of increasing card usage with small merchants is not a technology problem, it is a business (value proposition) issue. Square is doing a great service to many small merchants in bringing down the cost of accepting the card, and improving the consumer/merchant experience.

What is their opportunity?

Retail Sales in US is about $2.4T (excluding Auto, Gas, Resturants). This is certainly a larger market than the $176B spent in US eCommerce. What is your guess on % of merchants that do not currently accept cards, and their categories? Take a look as the US Census data, and I would say total sales for “square prospects” are around $100B.

Take a look at the recent Micros/Verifone announcement as an example. Existing POS and terminal manufactures are not sitting on their hands. Who would want to invest in Square? What kind of platform are they building? This is not a group which will rally the industry, but rather spur it to action (or isolate it to individuals/small businesses).

We will soon see mobile value propositions that contain payments.. but payments are just a supporting mechanism of a larger commerce related value proposition.  Square is making card acceptance nice and neat for small merchants.. this is a good niche opportunity. I will shave my head when Square “does better” than PayPal.. I give this a .0005% chance..

Do SquareUp’s $$ Square?

My guess is that Square sees the light at the end of the tunnel and knows it will not be a pretty collision. They want to grow the merchant base as fast as possible in hopes to attract an acquirer.

Update 1May

Dorsey just tweeted Square’s numbers. See here on Tech Crunch

Looks like analysis below is directionally accurate, actually a little kind.  TPV moved to $2M on that day (of Tweet).

Note that Square revenue is $59k for the $2M TPV, or 295 bps. Transaction Margin is revenue less Square’s processing expense: issuer fees, processor fees. As listed below, this should translate into net square transaction revenue of $10k (note on my post last night I was wrong.. never post at 2am.. error rate is high).

Dorsey picture shows 9k active customers (merchants) on this particular day, which is again consistent with estimates below. Total Active is probably 3x-4x of this, so average transaction amount is probably around $10-$15.

Funny that Visa bought into Square on the same week that it rolled out new mobile swipe security standards. Visa is highly sensitive to Chase needs, and given Chase’s equity stake here they wanted to show support.

Could Square work out? sure it could.. but it is an intermediary solution at best as it is US only (No EMV), and will compete with new mobile solutions which we will see rolling out by fall.

Original post below

24 Feb 2011

Today’s TechCrunch Article


Following Square is a Hobby. My alarm bells go off whenever a non-payment team “innovates” in payments. My December blog Square Up Update  estimated that Square had 5-15k users. Today’s TechCrunch says Squares 1Q11 TPV is $40M and that they are “signing up” 100k merchants per month. My guess is that “signing up” means downloading Square on your iPhone.

From this TPV we can derive Square’s revenue and their “active” customer base

Rev = TPV * Transaction Margin

Transaction Margin = Merchant rate less cost of funds = 275bps – 225bps = 50bps

Square 1Q11 Rev = $40M* 50bps = $200,000

Rev lost from eliminating $0.15/tran fee = 0.15* 40M/$10 = $600k

Active Customers (Merchants)

Lets assume that average ticket size is $10 and average square merchant accepts 50 transaction per week (10/day, $6,000/ quarter).  This means that Square has 6.7k active merchants. For other iterations see chart below

Is Square really shipping out 100k doggles every month, while only 6-7k merchants are active? I have no idea, but it cannot be a good thing if they are.. see www.sq-skim.com.


  • Square’s active merchant numbers are likely to be around 5k-30k
  • Eliminating the $0.15 fee is a very big revenue hit… 1Q Rev looks like $200k now
  • Square’s doggle is still not on the PCI compliance list (see PCI org’s list of approved applications )
  • Just as in any merhant account, settlement funds are held to mitigate risk. Does a small merchant want to wait 60 days for payment and pay 3% for the priviledge of accepting a card? This is not a Square issue, but an industry issue in moving down market into cash replacement.  PayPal solved a real problem (CNP Transactions) for a real community of buyers and sellers that coordinated (eBay).

My guess is that Square sees the light at the end of the tunnel and knows it will not be a pretty collision. Evidently Square is burning through its newly received $27.5M (courtesy of Sequoia and Khosla) to grow the merchant base as fast as possible in hopes of attracting an acquirer. Square’s last round closed on a $240M valuation, assuming trailing revenue of $2.5M on $100M TPV, valuation is 16x revenue. However now that the /transaction fee is eliminated.. we are looking at 75% reduction in revenue and valuation on forward revenue is near 240x.  Believe or not.. OBOPAY was still more highly valued.. In both cases, investors have just doubled down and created valuations driven toward an exit strategy.. not on a sustainable biz plan.

The only entities that would be interested in Square are large card issuers who could unilaterally charge a different interchange rate for their own cards (ex Chase and BAC). But the bank business case for an acquisition would be very tough, as a single bank could only reduce interchange for the cards it controls, resulting in a 10% improvement in transaction margin (at best).  A Visa or MA acquisition would alienate the acquirers and processors. I just don’t see a logical exit for them with anyone. Issuers don’t want to pick winners in this space.. they want broad adoption. If JPM and BAC cut special interchange deals w/ Square then they will be pressed to do the same for PayPal.

eBay’s analyst day conference 2 weeks ago showed how aggressively paypal plans to move in the POS space. PayPal’s Virtual terminal not only lets merchants take cards with NO CARD READER, it has partnered with Verifone to act as an acquirer. Next month, we will see some super applications at APSI conference. One of which will demonstrate the current Nexus S operating as an NFC acquiring terminal. .. You don’t even need the doggle or the “signature”..

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).


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


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.

Paypal at the POS?

PayPal is best positioned of any major player to link the virtual and physical payment worlds (see here for detail): they have a consumer base, merchant base and a phenomenal fraud/risk team of 300+ with commensurate tech and ops. However their ability to execute is not without challenges. For example, what % of their current merchant base does POS transactions? Will there be a need for merchant terminals? If so who will pay?

18 August 2010

Great WSJ Article TodayPaypal looks to real world commerce

First Draft…. final tomorrow.

As stated in my previous blogs about Apple, Bling, and the Mercury NewCo we are in the midst of a revolution in consumer payments, driven by large non banks, with new value propositions. For example, we see established organizations like AT&T, Verizon, and Discover collaborating (Mercury NewCo) with a payment value proposition driven by mobile advertising, Card networks attempting to develop PayPal killers (see Visa PayClick) and mobile handset manufactures attempting to create models for payments separate from banks (see Nokia and Apple NFC).

The worst kept secret in mobile payments today is: there aren’t any (except for MNO unbanked solutions). Efforts like Mastercard/Obopay have failed globally because they have focused on P2P (no existing volume). Alternatively, PayPal’s efforts are focused on the POS. Enabling any “merchant” to accept any card either at POS or virtually (see previous blog on PayPal’s virtual terminal). This approach is a win for banks (card acceptance), a win for consumers (convenience/loyalty), and a win for merchants (reduced merchant fees and interchange).

PayPal is best positioned of any major player to link the virtual and physical payment worlds (see here for detail): they have a consumer base, merchant base and a phenomenal fraud/risk team of 300+ with commensurate tech and ops. However their ability to execute is not without challenges. For example, what % of their current merchant base does POS transactions? Will there be a need for merchant terminals? If so who will pay? As discussed in the article above, Bling has been mentioned as a potential approach. Issuing Bling tags to PayPal’s employees is certainly a useful way of testing the consumer issues associated with issuing (and using) a payment tag.

My guess on PayPal’s “focus”?

Given PayPal’s strengths I would see a “phone as POS” approach as the most logical.  As consumers we focus on our individual accounts, but PayPal is one of the few “2 Party” payment networks (others are Discover, Amex) that also include merchant acquisition. 2 Party systems are uniquely positioned to control the costs and value proposition between the merchant and the consumer. One of the major NFC challenges is POS infrastructure: who will pay for it? The phone as POS would certainly address this Gordian Knot for small merchants. Small merchants are a group that also feels the most pain in interchange and card acceptance fees due to their lack of negotiating leverage. Oddly enough large banks seem to be supportive of PayPal’s efforts here with the view that their actions will help drive cash replacement. In other words, if PayPal’s innovation is indeed focused on NFC acquisition then they will be able to process all cards..

On the merchant side, PayPal has already completed much of the heavy lifting with its existing virtual terminal service. This service equips PayPal merchants with ability to accept any card at the POS (see Virtual Terminal blog). NFC or RFID form factors are just another abstraction for this card.  On the consumer side, I would expect to see PayPal working to link PayPal accounts to multiple form factors. Expect PayPal to make an acquisition in this space.

As of today, here is my view of the teams competing in mobile payments at POS

  • Mastercard/Citi/Obopay/Nokia
  • Visa/Monitise
  • Apple
  • AT&T/Verizon/Discover/?Google/First Data
  • PayPal/?

More to come tomorrow.

Visa Payclick

Summary on Visa Payclick: “Partnering with banks” is very challenging…. do banks want Visa to deliver a “bank friendly” paypal competitor.. or would banks prefer to create something they can control? View Payclick today as an Australia “test market” of something Visa intends to grow, with an initial consumer focus on digital goods.

30 June 2010

Summary on Visa Payclick: “Partnering with banks” is very challenging…. do banks want Visa to deliver a “bank friendly” PayPal competitor.. or would banks prefer to create something they can control? View Payclick today as an Australia “test market” of something Visa intends to grow, with an initial consumer focus on digital goods.

Visa just launched Payclick (www.payclick.com.au) with plans to expand globally. I see this service competing more with Bango (see http://www.bango.com/) and payforit (www.payforit.com) than PayPal. There is no way for a consumer to withdraw funds placed in the wallet, or to be paid..  (it is not a wallet), it allows for the addition of current account funds through BPAY integration (note BPAY is a bank owned consortium in Australia providing common services like telephone and online bill payment). Allowing multiple funding instruments provides for a lower cost of funds, and BPAY penetration is over 80% in online customers. However the inability to credit the wallet, while  simplifying risk and fraud operational challenges, limits the consumer value proposition and the addressable market. Given these wallet restrictions, Visa has chosen an initial market focus on teens buying digital content… this narrow market focus may provide Visa the opportunity to “kick the tires” on the system before expanding it (geographically and demographically).

Re: Expansion.  I understand that Visa is “in flight” with expanding the AFT/OCT transaction set (See Patent) which is the heart of the Visa Money Transfer service. My global card contacts tell me that Visa is attempting to get issuers on board with credit push in an updated issuer agreement (see Visa Money Transfer Overview – Issuer presentation). The “incentive” for issuing bank to accept new agreement is a $0.50 revenue share. Banks are not biting on this (subject of another blog on Visa and card remittances).. hence my guess is that the Payclick service has “visions” for being bi-directional.. but not until issuers sign off on accepting OCT transactions.

We should not assess Payclick based solely upon current functionality, given Visa’s substantial investment here there must be plans for additional transaction types. The CYBS acquisition gives Visa assets to develop something much more comprehensive. For example, with the CYBS could serve as an acquirer for Payclick as a “light” tool for small merchants selling digital goods in mobile market places and app stores.  On the consumer side, Visa has a steep hill to climb in creating a value proposition which would drive consumers to store card information with Payclick (particularly given the competing payment methods above).

Risks I see for Visa in Payclick:

  • Initial target demographic is well served by both Bango, Paypal, iTunes Wallet, prepaid card (for my teen), payforit (UK), MNO billing, …
  • “Send only” functionality will not create critical mass in either consumers or merchants
  • Banks will not bite on OCT transaction set and service functionality will not be able to expand
  • Visa will loose focus after core innovation team departs
  • CYBS can acquire and service… but it will take serious marketing dollars to create a new consumer brand… as well as a solid value proposition.

Add these risks to Visa’s existing “dynamic” with  retailers (a group that is not favorably inclined toward assisting Visa nor any card network) in creating another payment type  (issues w/ interchange, compliance, fraud, payment system integrity, ..). Since Visa’s IPO,  Banks are no longer in control and also view Visa’s efforts through a new competitive lens. Banks also like the idea of having their own brand on payments. Thus, Visa is stuck managing a complex 4 party system with limited ability to create an innovative value proposition which all parties can agree on.

Visa is facing head on competition from “unshackled” teams like PayPal. In fact PayPal just launched mobile instant checkout today .

Feedback appreciated

PayPal Virtual Terminal – Accept Cards at POS

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

PayPal Virtual Terminal

6 June 2010

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

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

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

Thoughts appreciated

Bumping payments? Paypal Bump

What I’m most impressed with is Paypal’s ability to extend itself in niches like this. Their open APIs and ability to extend “their rails” beyond internet merchants is 5-10 years ahead of what any other payment network can do.

26 March 2010 (updated April 13)

Excellent Video overview below (30 sec commercial)


I’m reading the CTIA press and see this come out, wondering how my iPhone communicates with another iPhone. The bump application listens to the iPhone accelerometer and when it reads a bump (when running) it sends time and event to the bump cloud. The bump cloud looks for 2 events and then requests that your bump user information be shared (from bump)

When you bump, if we find a match with a phone that felt the same bump, our servers ask each phone to send up the contact information each user chose to share, but nothing more. If and only if both users then confirm that the match is indeed correct will the contact information be sent down to the other person. None of your personal data is ever stored on our servers.

Very ingenious…. What I’m most impressed with is Paypal’s ability to extend itself in niches like this. Their open APIs, ability to manage risk and extend “payment rails” beyond internet merchants is 5-10 years ahead of what any other payment network can do. Beyond the technology side, it certainly helps that  Paypal’s user penetration within the iPhone’s customer base is “rather high”.

This application also highlights the opportunity for NFC in Apple’s platform. For those that aren’t familiar with my previous posts, industry G2 indicates that Visa and AT&T are going without Apple. Obviously a good strategy for AT&T as Apple already has significant leverage in the “relationship”. Of course, NFC P2P will require an intermediary to own “risk” of card acceptance and work through (payment network related) merchant and third party payment aggregator (TPPA)  issues.

From a regulatory perspective, it is fortunate that PayPal has already gone through the “heavy lifting” in obtaining money service licenses in the 50 states (see related post).

What other vendors/payment networks could compete here? A: CashEdge and Money Bookers. In the UK I could almost envision the video clip for a money bookers “Bump Bet”. In the US CashEdge is a 3rd party service provider with 60-70% of US retail deposit accounts in their footprint (BAC, Wachovia, Citi, …). CE has  a much more efficient (low cost) ACH network and is one of the few US companies with proven operational risk management in “remote” payments. CE should look into riding PayPal’s marketing wave and leverage bump technology to allow me to do everything PayPal does,  only directly from my bank account (at no cost). On the regulatory side, Cashedge runs as a bank service provider… in essence you are dealing with your bank to “push” funds (ACH debit) when you use POPMONEY.

Great job Paypal.

PayPal Shut Down in India

The RBI published Annex I circular on November 27, 2009 (RBI/2009-01/ 236). India’s regulators are some of the toughest on the planet. They expect that organizations read their guidelines.. The country manager should have some scars on his back after this one.

11 February 2010

NYTimes article from last night

India’s Central Bank Stops Some PayPal Services‎ – 

Simply put.. paypal has no license (See RBI list ) for Operating a Payment System in India under India’s Payment and Settlement Systems Act, 2007. The RBI published Annex I circular on November 27, 2009 (RBI/2009-01/ 236).

It Appears that RBI’s central issue is with PayPal’s role as an “unlicensed” Money Transfer Service. This issue is certainly not new to PayPal (see US Regulations – Online Payment/Transfer). As highlighted in the circular above:

All cross-border inward remittances under MTSS must be accompanied by accurate and meaningful remitter information (name, address and unique identification number of each remittance like, MTCN) on funds transfer and related messages that are sent and the information should remain with the transfer or related message through the payment chain. A unique reference number, as prevalent in the country concerned, must be included.”

Further, Paypal’s “agents must”:

Indian Agents should have effective risk-based procedures in place to identify cross-border inward remittances lacking complete remitter information. The lack of complete remitter information may be considered as a factor in assessing whether a cross-border inward remittance or related transactions are suspicious and whether they should be reported to the FIU-IND. The Indian Agent should also take up the matter with the Overseas Principal if a remittance is not accompanied by detailed information of the fund remitter.

Issue for PayPal is that its “agent” in this case is its commercial bank that initiaties the domestic ACH. My guess is that they are also in a bit of hot water for allowing this connectivity in light of the Nov 2009 circular (and subsequent inaction).

In order to resolve RBI’s issues, PayPal must:

  1. Obtain an MTS License (or a Payment System License)
  2. Renegotiate terms and services with its clearing bank(s) so that they will comply with “Indian agent” responsibilities above, namely PayPal must provide detailed information on remittance (above) to clearing bank and hold information in country so that bank can perform both AML sanction screening and other SAR reporting
  3. Put the detailed technology plan in place capture and send information to bank
  4. Review Plan with regulator
  5. Obtain regulatory approval on end state plan and request exception process for operating until final (end state) is in place

India’s regulators are some of the toughest on the planet. They expect that organizations read their guidelines.. “Better to ask forgiveness than permission” is a regulatory approach that probably works best before you are public company.

Note that PayPal’s “merchant” transactions (where an eBay buyer is paid) are not covered within the MTS regs above, unfortunately for PayPal it is difficult to screen these commercial transactions from other payments,  hence the broader impact in clearing both commercial “merchant” ebay payments and P2P/Remittances. 

My related Post

Cash Replacement

NACHA on Aggregation

SEC AML/Patriot Overview Regs

US Regulations – Online Payment/Transfer

This blog takes a look at the regulatory risk today’s start ups face and gives background on how PayPal got to where it is today. For today’s “emerging” payment companies, there are 4 primary choices for operating in the US: 1) Obtain the licenses, 2) Operate as an agent of an entity with the proper licenses, 3) Sell your software to a licensed entity, 4)Exchange non-monetary forms of value (minutes, eGold, credits, …).

Lessons from PayPal

January 25, 2010

I was on the phone today with Jeff McConnell, a tremendous exec with a long history of leading innovation in money transfer (WU, Moneygram, iKobo, …). In some respects it’s hard for me to believe that 2002 is 8 years ago, and I was reminded of how challenged PayPal was in obtaining the proper licenses “after the fact” in its early business.

In his 2006 book The PayPal Wars, Eric Jackson did an excellent job laying out the challenges paypal faced in its early years.  In the early days after its inception in 1999, PayPal was moving toward becoming a bank, but the Internet startup decided that banking regulations were too cumbersome. “We just wanted to be able to facilitate a quick payment,” he said. “The question of how to classify PayPal lingered for some time….It’s a sort of modern-era Western Union.. really, all PayPal is doing is shifting money around on your behalf.” 

To see the “change” in PayPal’s regulatory approach, take a look at PayPal’s 2002 prospectus.

We believe the licensing requirements of the Office of the Comptroller of the Currency, the Federal Reserve Board or other federal or state agencies that regulate or monitor banks or other types of providers of electronic commerce services do not apply to us. One or more states may conclude that, under its or their statutes, we are engaged in an unauthorized banking business. In that event, we might be subject to monetary penalties and adverse publicity and might be required to cease doing business with residents of those states. A number of states have enacted legislation regulating check sellers, money transmitters or service providers to banks, and we have applied for, or are in the process of applying for, licenses under this legislation in particular jurisdictions. To date, we have obtained licenses in two states.

This 2002 regulatory view, by the Paypal exec team, was based on a position that PayPal was acting as a Third party payments aggregator (TPPA), not in need of a money transfer license. TPPA is a description used for merchants that are charging a credit card for a product or service that they do not own. TPPAs simply facilitate the exchange of money between two parties sometimes using a credit card as a funding source. Several fraud and AML incidents arose which got the attention of both federal and state organizations. It became clear that PayPal was being used for much more then payment for goods within the eBay marketplace.

In Feb of 2002, the Federal Deposit Insurance Corporation (FDIC) ruled that PayPal is not a bank, which accelerated efforts by states to pursue PayPal for violating money transfer laws (New York and Louisiana are most notable).  This could have been the death knell for PayPal, as they were operating without the proper licenses. PayPal’s “post facto” licensing efforts were greatly aided by the local political support from thousands of eBay’s buyers and sellers. Today, according to spokesperson Michael Oldenburg,  PayPal is licensed as a money transmitter in 43 states (not all states require a license), demonstrating that regulatory risk was far greater than what they articulated in the 2002 prospectus. For those interested in the legal/regulatory conundrum faced by regulators, I highly recommend:  Regulating Internet Payment Intermediaries, by Ronald J. Mann, University of Texas School of Law

For today’s “emerging” payment companies, there are 4 primary choices for operating in the US:

  1. Obtain the licenses
  2. Operate as an agent of an entity with the proper licenses
  3. Sell your software to a licensed entity
  4. Exchange non-monetary forms of value (minutes, eGold, credits, …).

Obtain the licenses

For those of you that read my Blog, you’re probably aware that I’m fairly negative on Obopay, however they do excel in obtaining US MTO licensing (https://www.obopay.com/corporate/stateLicenses.shtml) . Unfortunately, all of these US licensing effort seems for naught as they are pulling out of the US and focusing in emerging markets as the “sender pays” model does not work in developed countries (morphing from a failed US P2P effort to Remittance). Today, PayPal, Western Union, Travelex, Moneygram, MoneyBookers (soon to be NY licensed) also operate as licensed Money Transfer Organizations (MTOs).

Becoming an MTO is not for the faint of heart, as regulatory capital requirements in excess of settlement obligations (fiduciary assets) are a complex (state by state) maze. This creates a challenging dynamic where capital reserve requirements grow as payment volumes grow. As a start up this means you not only need to raise capital to start the business, but also the regulatory capital BEFORE you get the state licenses.

MoneyGram’s 2007  “investment issues” offer many insights into MTO challenges. MGI suffered an $860M+ plus loss as it shifted out of high yield asset backed securities (which lost their investment grade rating). To preserve liquidity it sold $630MM in preferred and received debt financing of approximately $500M, a situation which today leaves MGI common shareholders in a $870MM equity deficit.

Operating as an MNO is not your only choice. I’m amazed at how few companies there are attempting to develop a bank based model. Trolling the dust bin of failed financial institutions may provide a unique opportunity for a start up to acquire the “shell” of a licensed bank to develop a “payment” focused value proposition. The strategy behind Revolution Money’s acquisition by Amex gives Revolution the “best of both worlds”: an acquirer and a bank. If it were not for Amex’s bank charter (and associated regulatory capital), Revolution’s PIN based debit would be highly susceptible to NACHA aggregation restrictions if they are operating as a non-bank, operating as a type of decouple debit.

I know from my own personal experience that operating as a “payment bank” is not without challenges, not just Citi C2it.. (which stopped 2.5 yrs prior to my role), but Citi GTS which today provides many of the banking licenses for payment providers like WU, Vodafone, ZAIN, …  In addition to Citi GTS, one of Citi’s most profitable “global” retail bank businesses is NRI (Non Resident Indian) which serves affluent Indians (within the US, UK, …) with comprehensive services that cater to the needs of affluent clients. Citi also effectively up sells NRI clients services within its investment and commercial bank.

Operate as an agent

Pre-paid cards offer a “fast track” to operating a new payment service (Revolution money, Squareup, payoneer, iKobo, …). In this model the service relies on the licenses of the underlying bank (example Metabank). The legal precedent here is rather new as witnessed by May 30, 2007 finding by the First Circuit , which affirmed that the National Bank Act preempted New Hampshire regulation of the pre-paid product. In the “agent” model, it is therefore paramount that start ups seek a federally chartered partner. 

There is still substantial “risk” in this pre-paid agent model, as traditional banks and networks control the “rails” for this payment type. For example, Consumer accounts must be “funded” from either a card or DDA account. NACHA has developed new rules which significantly curtail the ability of a “payment aggregator” operating off of a current account (see NACHA Tightens Risk Management and aggregation rules) . Additionally, card networks and acquirers are much more attuned to the risks that these new payment intermediaries present.

My top vendor in the bank model is CashEdge (having been the banker who signed the agreement at Wachovia). CE is the “3rd party sender” for Citi, BAC, Wachovia, PNC and other top banks representing approximately 50% of US DDA accounts. You don’t hear about them much because they are a white label “bank friendly” service. They excel in risk management, with a team second only to paypal. Most of you in the US reading this already use their software.. but just don’t know it.  In the mobile space, I love the innovation at BlingNation.

Sell your software

This is rather straightforward. Within the mobile money space, companies such as Monitise, HyperWALLET, Fundamo, Paybox (now Sybase 365) all provide good platforms from which to build an offering. Issue for small companies is that the entities which have the necessary license have largely made significant bets here already. Of course some of the bets by big banks (some alliteration here) have been terrible, most notably Firethorne which has lost the accounts at Chase, Citi and Wachovia all in the last 8 months.

Exchange non-monetary forms of value

Beyond the scope for my discussion here. My advice is that this is a slippery slope and you will have trouble (as a payment company) attracting “A Class” capital. Look no further than the history of e-Gold for education on the issues.



In writing this I cannot help but be struck by many similarities in the “unregulated growth” of PayPal and Vodafone’s MPesa. The growth of both companies was driven by an existing customer base and a value proposition which addressed clear gaps within the payment systems of their respective markets. In both cases, there was no clear regulatory authority to restrict them and once they were firmly established (through contagious adoption) it was too late to stop.

Within the EU, the ECB has developed ELMI regulations that are supported by other initiatives such as SEPA (See http://www.paysys.de/download/Krueger%20e-money%20regul.pdf).

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