PayPal Virtual Terminal – Accept Cards at POS

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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

US Carriers Form New US Pre-Paid Venture

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May 31

Previous Post http://tomnoyes.wordpress.com/2010/03/15/att-visa-prepaid/

Mobile Ad start ups… watch out… the big fish are coming …

It seems as if AT&T has pulled together Verizon and T-Mobile to form a new venture to focus on pre-paid. The large US Card Issuers are now aware (and quite suprised) of the move . It is doubtful that this new US entity (NewCo) will reach as far as Canada’s Enstream in mobile platform collaboration, but the focus of this initiative is mobile payment (NFC and P2P) and mobile advertising.

MNOs see a “Google like” future in mobile advertising, as they attempt to monetize their tremendous customer knowledge. For those that have ever purchased online advertising, we know that the biggest challenge in justifying spend is to move beyond “cost per click” to cost per customer acquisition or purchase. This Ad-Purchase disconnect is particularly true when purchase is made in the physical world. Mobile has the potential to bring together these two worlds, but a “key” is needed. MNOs and Banks see this “key” as a a common payment instrument available  to all customers. NewCo is therefore planning to control (issue or manage) a common pre-paid card which will serve as this transaction key and give MNOs the remaining tool necessary to coordinate focused mobile advertising.

Given that NewCo doesn’t yet have the CEO in place there is probably much left open (with respect to business plan and services). At a minimum I believe they will act as issuer, and create common services to address mobile advertising and payment.

Message for VCs and Start-Ups:

  • Assess risk of current path vs. supporting this new “collaborative” MNO ecosystem.
  • Investments “tied” to this new ecosystem will have different risk profile, particularly in navigating more complex environment.
  • Mobile advertising “pure plays” which do not touch financial transaction will be at a significant disadvantage. Ecosystems are forming based upon: Platform, Service (ie search), Network, Payment Instrument and bank.
  • Adapt.. A “dynamic” strategy which will keep your IP “in play” is necessary.
  • Winners will have the right talent that can navigate with the “big fish” and the right BOD that can help you evolve your strategy.
  • Think Global. Ecosystems will likely evolve differently globally, particularly in Asia.
  • Using financial information for advertising will touch privacy and regulatory issues. Regulated entities (Banks, MNOs, Payment Networks) are best positioned to deal with these. However, large MNOs and Banks have poor track records in “innovation” and moving collectively.

In short, it remains to be seen whether MNOs will be able to take on role as “orchestrator” of mobile advertising, or just a provider of location, reputation, authentication and transaction services.  How MNOs monetize these services will be driven as much by their ability to execute as investor expectations and competing models.

Unbanked Success: Pakistan

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18 May 2010

http://corporate.visa.com/media-center/press-releases/press935.jsp

Always on the look out for a success story, I was fortunate to be introduced to Abrar Mir of UBL by the head of cards at a major UK bank. Abrar’s team has built a stellar product that has addressed key needs of the unbanked and more specifically internally displaced persons (IDPs) with applicability in other disaster relief scenarios.

Fortunately for Pakistan, they have developed the National Database and Registration Authority (NADRA). Since 2000, NADRA has registered over 96M Pakistanis. The ability to issue a national ID, with electronic verification, provides Pakistan with a unique infrastructure which supports KYC in advance of most other countries around the world.  From an emerging markets perspective, distribution and KYC are thorny issues for addressing the needs of the unbanked.

2 years ago Pakistani’s fled the Wazir regions due to conflict. Abrar and his team at UBL worked with the government to issue relief funds, via Visa Debit Cards, to persons displaced from this crisis. As refugees entered camp, they were documented (NADRA), issued National IDs, issued Visa Debit Cards and subsequently educated on how to use these cards through a class and video. Within the camp, stores kiosks and ATMs supported the Visa Debit infrastructure.

As “refugees” moved and assimilated into other areas.. there were issues with debit card acceptance. IDPs had no way of exchanging value on their Visa Debit cards. This is where Abrar and the UBL team stepped in to develop a superb application and innovative model based around agent card acceptance. UBL developed a mobile application which allowed local agents to accept cards and earn commission. This new UBL “Agent” network provided IDPs with ability to transfer funds, pay bills, “cash out” and other services. Agents have signed on with UBL in a structure similar to a “Visa merchant agreement” where they take not only the card, but validate it against the national ID. UBL working together w/ NADRA manage authorization (and fraud issues).

As a result of this effort other institutions (World Bank, World Food Program, USAid and Government of Pakistan) are looking at this as a model program for deployment around the world. The World Food program (along w/ NGOs and Governments) have solid data to support their move AWAY from physical distribution of goods to electronic distribution of funds. It should be noted that Pakistan (and other countries like India) are likely to develop their own internal payment network which would circumvent the costs associated with riding the Visa/MA rails (think Star, Interact, NPC).

UBL is likely to see expansion of card from 200k.. to 4M in next 6 months. The potential card growth in this model is tremendous. 50M in Pakistan alone over next 2 years. I found the UBL “Agent” mobile application very unique.. giving retail shops the ability to support/enhance their role in community by turning merchants’ phones into both POS terminals and terminals to sell/open new bank accounts. This UBL project has become a recent “case study” for Visa … although Visa neither supported or knew of UBL’s efforts until recently.

Key findings

  • UBL thought leadership. What a Stellar team can do in the right environment
  • National ID is a key element of serving unbanked and those in need
  • Business model. Bank led models to the unbanked can be successful, particularly in government (G2P) payments, with government partnership
  • Agents are keys to success for both banks and MNOs
  • Success is driven by people in the field with the contacts, knowledge and ability to execute. This entire model was built within Pakistan, by Pakistani’s.
  • Visa and MA should think about creating new rules and rates to serve unbanked.

US Senate tinkers w/ card rules and rates

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http://on.wsj.com/coPzIH

US Senate Amendment Text

14 May 2010

The press seems to be focusing attention on the TBD rate setting and “swipe fees”, from my perspective the bigger long term impact to banks and networks will be elimination of restrictions associated with discounts (and steering) on competing forms of payment.

Amendment Text

“(b) Limitation on Anti-competitive Payment Card Network Restrictions.–

“(1) NO RESTRICTIONS ON OFFERING DISCOUNTS FOR USE OF A COMPETING PAYMENT CARD NETWORK.–A payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person to provide a discount or in-kind incentive for payment through the use of a card or device of another payment card network.

“(2) NO RESTRICTIONS ON OFFERING DISCOUNTS FOR USE OF A FORM OF PAYMENT.–A payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person to provide a discount or in-kind incentive for payment by the use of cash, check, debit card, or credit card.

…

In June 2003, Visa and Mastercard signed the settlement agreement which provided for steering.

D. Merchants shall also have the right to encourage or steer customers from Visa and MasterCard debit transactions to other forms of payment.

This ability to steer has been somewhat ambiguous, outside of cash. For Example, the Mastercard rules show

5.9.1 Discrimination
A Merchant must not engage in any acceptance practice that discriminates against or discourages the use of a Card in favor of any other acceptance brand.

5.9.2 Charges to Cardholders
A Merchant must not directly or indirectly require any Cardholder to pay a surcharge or any part of any Merchant discount or any contemporaneous finance charge in connection with a Transaction. A Merchant may provide a discount to its customers for cash payments.

and Visa Rules

5.2.D Discounts at Point of Sale
5.2.D.1 Advertised Price
Any purchase price advertised or otherwise disclosed by the Merchant must be the price associated with the use of a Visa Card or Visa Electron Card.
5.2.D.2 Discounts
5.2.D.2.a A Merchant may offer a discount as an inducement for a Cardholder to use a means of payment that the Merchant prefers, provided that the discount is:
• Clearly disclosed as a discount from the standard price and
• Non-discriminatory as between a Cardholder who pays with a Visa Card and a cardholder who pays with a “comparable card”

Will update this blog later, but the US Senate’s amendment will have substantial impact on merchant payment strategy. I see a strong future for new cards issued by  merchants that embed strong loyalty program.. outside of the Visa/MC network (?ACH?.. PayPal…) with a substantial rewards program to drive adoption. Perhaps ACH POP will take on new life..

Card networks and issuers should get active in the merchant funded rewards space.. before the merchants own it

http://www.paymentssource.com/news/merchant-funded-rewards-spark-card-issuers-interest-2637491-1.html

MNOs – Will RBI Disintermediate Agents?

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12 May 2010

I’m just amazed at how groups that have the best interest of the rural poor in mind make life so difficult for those that are in a position to actually help. The bank regulations in India, with respect to mobile money, are particularly restrictive (Or perhaps I should say prohibitively restrictive). RBI is encouraging business models which are attempting to build agent distribution networks via business correspondents (ex Fino with 5,000 agents) and non bank financial companies (NBFCs). It would seem their goal is to disintermediate the MNO networks by giving certain agents the ability to represent the banking network AND MNOs. Note: For those unfamiliar with India, Agents are not employees of the MNOs and perform many other functions (sell many other services).

Two recent reports provide an excellent highlight of the challenges facing mobile money for the unbanked (MMU). The data here confirms that only MNO led initiatives stand a chance of succeeding, and even then at the margin:

The lack of profitability in “payments” is something that banks understand well. (See my previous post and History of Interchange). Payment instruments typically compete on: speed, convenience, cost, risk, reward, acceptance, settlement time… Recurring transactions between businesses and consumers in mature economies take place on very low cost ACH type networks. P2P transactions are historically cash based with costs borne by central treasury. Payment services, physical distribution, regulatory compliance, consumer support are direct costs to retail banking. By restricting all payments to banks (and their agents) this cost must be distributed throughout the value chain. In an MNO led model, this infrastructure largely exists already. 

Closed systems first

History has shown that closed networks form prior to open networks (in almost every circumstance) as closed networks are uniquely capable of managing end-end quality of service and pricing. This enables the single “network owner” to manage risk and investment. How can any company make investment in a network that does not exist, it cannot control, at a price consumers will not pay, with a group that can not make decisions or execute? Answer: Companies cannot, it is the domain of academics, governments,  NGOs and Philanthropic organizations.

The success of MPESA, GCASH, Octopus, .. clearly indicates that payments can be decoupled from banking, with sound consumer controls and fantastic consumer satisfaction.

From CGAP (on MPESA)

  • Users say it is faster (98%), more convenient (97%), and safer (98%) than alternatives
  • 4 out of 5 say not having it would have a “large negative impact” on their lives

As a pragmatist (and capitalist) I firmly believe that the best approach to serving the unbanked in India is supporting a model where at least one entity has an economic incentive to invest. As I have stated previously (see Mobile Money: MNOs will Rule in Emerging Markets and Mobile Money: Emerging Markets/Emerging Models) MNOs operating in closed systems appear to be best positioned for creating a sustainable value proposition to the unbanked in next 2-3 years.

Example

As described in the CGAP reference above, both Fino and Bharti have completed pilots with Eko and State Bank of India (SBI). CGAP’s latest research (Fino Agent Profitability) shows a drastically different agent revenue model for bank led mobile payments in India. From the article:

FINO agents in Karnataka offer no-frill bank accounts from the State Bank of India (SBI). Some agents also sell insurance products. The business case for agents is working, but just barely. The average monthly profit is USD 23.42, far below what we’ve seen with M-PESA (USD 130.26) and Brazil (USD 134.42). Last November, account opening was halted while SBI migrates account data to its own servers, and the average monthly profit dropped to USD 8.08

I would hope that Indian legislators take a pragmatic look at the mobile money regulation. It will be up to consumers (ie Voters) to demand that the structures are in place to support a sound and fertile market for payment services. The economic growth and poverty imperatives greatly outweigh the justifications for RBI’s current approach.

Unfortunate news for the rural poor and unbanked: You will face a chaos of offerings from banks, agents, pre-paid cards, NBFIs, MSBs … the brand that you trust (ex. Bharti) and can most effectively deliver service to you is restrained by your regulator. Question to RBI: what is your objective and who is your customer? Most will agree that consumers don’t want (or need) a traditional bank.

Good news for MNOs: Shackled from serving your customer, you can take some peace of mind knowing that there will be no successful mobile money until regulations adapt and to allow your organization to lead delivery of it. Build it in another country and don’t stop talking about it within India.

Message for NGOs/non-profits: Quit pumping money into trials, and start influencing legislators and the RBI. The REAL risk for India is not loss of control of payments/AML and M4 (money supply), it is constraining growth and pro-longing poverty.

Comments appreciated

Related Articles

  • CGAP on building Agent Networks
  • Nokia Presentation: India Recommendations
  • Times of India on RBI regulations
  • CGAP on MNOs incenting w/ Airtime
  • Fino Blog covering business correspondents
  • Inclusion on reaching the unbanked

    • Obopay in VentureBeat (update)

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    What a complete waste of $126M in invested capital. My response to VentureBeat article is a picture from CGAP

    Thats right.. 1000 customers in a Yes bank pilot.. that will make for a global total of .. 2000 !? I’ve also spoken to 3 of the major banks which hosted the Obopay team as they described their new services…. lets just say there will be few returned calls. In the US (retail banking side) The Clearing House and Cashedge already own this space, internationally it is Monitise (1M+ consumers). On the card side there are few attractive P2P models and card teams’ focus is therefore on POS. The problems that Obopay continues to face at banks:

    1. Branding payments Obopay
    2. Weak business case for P2P
    3. Technology is easy.. risk management and fraud ops is hard
    4. Card groups are focused on mobile at POS (NFC).
    5. Banks are not very fond of Visa or MA right now.. they feel that payments is their business (imagine that).

    The American Banker Article is spot on in Obopay’s continuing evolution. The “salmon swimming upstream” from the Citi pilot is complete rubbish (bankers ask them to give you names, references and volumes). It would seem that there is an organizational tendency to tell a story and how that story led to product design. Whether it was Carol’s trip to Africa, or the only US Bank pilot. The real story seems to be that they can’t find any traction with anything they do.  Now they plan to create ” a mobile platform” for banks. Looks like that space is “a little” crowded already (back to the future?).

    I would like to see Obopay take on a little more candor, they know their situation and will have a hard time finding customers while they blow smoke over their status, plans and platform. See Nokia’s India market evaluation here. Perhaps Obopay is launching the US services based upon the realization of the Nokia analysis…. there is no revenue in emerging markets.

    Why am I so hard on Obopay? Because this team is focused on the unbanked, a group that needs protecting. Obopay has received far too much attention (and capital) that could be allocated to successful ideas and teams.  As they shift their focus off of the unbanked world, I will be less inclined to criticize as the large banks have the resources to clear the obfuscatory fog that is generated by this amazing marketing machine called Obopay. My hope is that Nokia and Mastercard restructure Obopay’s few assets and create a new organization without the accumulated baggage, perhaps  into 2 entities : one focused on the unbanked in honest partnership with NGOs, and the other focused on Nokia’s handset/wallet.

    See CGAP Article http://www.cgap.org/gm/document-1.9.43424/CGAP_-_Building_viable_agent_networks_in_India.pdf

    http://tomnoyes.wordpress.com/2009/11/12/obopay-india-another-failure/

    Fiserv ZashPay (Update)

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    12 May 2010

    (Update) I love a good laugh.. so be assured that you will have new insight into the importance of product marketing and product naming after you google “zash urban dictionary” to discover how Zash will resonate with urban consumers. Lesson learned: just because the URL is available.. doesn’t mean you should use it. Also interesting to note that they “new” definition of “moving quickly online” was placed in Urban Dictionary in April.. probably FISERV’s addition?

    Skipping the humor, Checkfree is extending its existing “merchant integration” process to consumers. Creating a directory of e-mail/mobile/ACH accounts, and adding a “consumer registration” process where you receive a notice that someone has sent you money.. adding a mobile interface. Unfortunate that FISV/Checkfree will be loosing Bank of America as a bill pay customer, having 10% of deposit accounts in a directory would have been fantastic.

    As a user you should be able to send someone cash via bill pay (or mobile) based upon an e-mail or mobile number. Checkfree has all of these pieces to make this work, and rock solid fraud and operational controls from their merchant integration activities. This product makes sense for ad-hoc P2P payments to an e-mail address or mobile, particularly for mid to small banks that are currently clients of Checkfree.. allowing them to send money to anyone with an e-mail address.

    From a competitive perspective, Metavante/FIS has integration with Paypal which will accomplish most of this as well (from bill pay interface). What is lacking is a mobile client.. but not for long as FIS just hired Bank of America’s mobile guru Doug Brown as head of mobile product and strategy.

    Cashedge’s Popmoney also competes here. The “transfer” paradigm seems to make more sense than a “bill pay” so I will give CashEdge a big edge in usability and in fraud controls as it has 6+ years experience (and data) managing individual account to account transfers.

    As a banker, I much prefer the FIS/Metavante model, as PayPal shares merchant interchange. As a consumer I also prefer the FIS model for eCommerce goods purchase as it is quite important to establish “network rules” between buyer and seller and integrate the payment process with the marketplace. There would seem to be a solid revenue business case for FIS, while the ZashPay seems to be a bill pay extension to address an uncertain P2P need.

    Both FIS and Fiserv may be getting into some interesting patent territory with other established players. For example, if either are using good funds they are probably stepping on this patent below..

    http://www.patentgenius.com/patent/7177830.html

    Visa Ooops – PR screw up on new Device Fidelity iPhone App

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    Looks like their PR came out a little ahead of time.
    Device Fidelity is one of the premier MicroSD NFC players (other is Tyfone). Trying to beat Apple to market with their embedded NFC or enabling existing phones? My bet is that this one will have AT&Ts involvement.  MicroSD is a great form factor for NFC, issue is who will pay the $15-20 for it and who will certify? AT&T has the best chance to make this successful and subsidize.. in order to bear this cost, AT&T must drive either transaction revenue (create a pre-paid card) or a new advertising service.
    More to come

    Visa Acquires CyberSource for $2B

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    22 April 2010

    CYBS/Visa Presentation

    CYBS 2009 10K

    126x earnings? $3M/employee  Why? Did  Carl Pascarella (former Visa CEO added to  CyberSource Board of Directors on March 5, 2009) intend to drive this when he joined the CYBS BOD?

    Part of the job of any payment network is to ensure a balance between network efficacy, profitability, risk and “value” received by each participant. (http://en.wikipedia.org/wiki/Network_effect)

    CyberSource bills itself as the “The World’s First eCommerce Payment Management Company” and initially focused on enabling “bricks and mortar” retailers expansion into the online channel. CYBS has evolved to provide global turn key services to any retailer selling goods online… from payment to distribution (ex. Digital software).

    CYBS 1009 10K

    Our customers range in size from small sole proprietorships to some of the world’s largest corporations and institutions. Our customer base includes leading companies such as Air France, Borders Group, British Airways, Christian Dior, Eastman Kodak, Home Depot, Louis Vuitton, Massachusetts Institute of Technology, Microsoft, Nike, Starbucks, and Yahoo!, among thousands of others. To properly serve this diverse set of needs, we divide our potential market into two customer profiles, enterprise and small business merchants, which require different solutions.

    Enterprise merchants have high sales volumes and generally demand the greatest range of payment options and the most sophisticated risk and management tools. These customers often sell in multiple countries and require support for local currencies and local payment options. Enterprise merchants also frequently need to integrate payment processing with one or more internal business systems. We serve enterprise customers by providing solutions that address and simplify the breadth of these requirements.

    Small business merchants generally seek simplicity and ease of use. We serve small business merchants by providing bundled services and integrations into popular online shopping cart software, while bringing to the small business market some of the advantages of our enterprise-level services, including important new payment options such as electronic checks, as well as high-reliability and quality customer support.

    Retailers face huge hurdles in building teams capable of navigating the complex rules and regulations associated with processing payments from PCI, Sepa, CARD, Reg E, Reg Z, … etc.  The very existence of CYBS (and competitors below) show the market for value added services as a precondition to Visa’s goal of: EXPANDING THE NETWORK.

    We face competition from merchant acquirers, independent sales organizations, and payment processors such as Chase Paymentech, First Data Corporation, and Royal Bank of Scotland. We also face competition from transaction service providers such as PayPal and Retail Decisions, as well as eCommerce providers such as Accertify, Inc., Digital River and GSI Commerce Inc. Furthermore, other companies, including financial services and credit companies may enter the market and provide competing services. Another source of competition comes from businesses that develop their own internal, custom-made systems. Such businesses typically make large initial investments to develop custom-made systems and therefore, may be less likely to adopt outside services or vendor-developed online commerce transaction processing software.

    Cybersource will provide Visa with an enhanced portfolio of services which could address merchant needs, particularly in risk, compliance, payment/fraud operations. However the expansion of Visa into these services poses a substantial risk to its business model as it runs the risk of alienating acquiring banks and other processors. Currently, I would view that risk as small because of the tremendous issues associated with online (eCommerce/mCommerce) payment system integrity and fraud.

    This is a bold move by Visa to drive network expansion, in mCommerce and eCommerce, and expanding value added services which cover ownership of payment risk and operations. The price does seem high if we view integration without synergies (CYBS will have to run at a 45% CAGR to be accretive in a 10 yr horizon). Therefore, Visa’s business case must be driven by new services which can be offered in the short term to all merchants and acquirers (ex Fraud data sharing, digital goods distribution, …).

    Can Visa grow this business more effectively under the Visa brand? Absolutely, but expect other network participants (issuers, acquirers, processors) to pressure Visa into managing CYBS as a separate entity. It is important to note that there is no love loss between most merchants and Visa. To address this, Visa should lead with a road show on how it will deliver value. Example.. it will take on fraud loss responsibility, improve marketing and take on compliance risk.

    Tangentially, I believe Visa will also likely add significant $$ to merchant marketing programs. Visa is investing heavily in a new mobile marketing/advertising engine... that will sit on the Visa switch. Their existing merchant agreements do not handle this kind of “marketing” services agreement so they needed a new contract vehicle. Given CYBS’s merchant footprint, they now have vehicle which can be leveraged to expand the advertising business in a turn key model which also tracks fraud and fulfillment.