Tag Archives: google

PayPal vs Google (at POS)

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3 Aug 2012

Paypal COULD do everything that Google wallet does today.. so why won’t they? (Note I’m talking about the Physical POS… not online)

I’ve had a PayPal debit MasterCard for 6 yrs, when I use it at any merchant PayPal deducts from any stored balance I have, and then hits one of my stored payment instruments. I use this card exclusively on international trips because they have always offered the best cross border fees (.. and just 3 years ago paid an interest rate higher than any of my banks). I looked on the back of my new PayPal debit card and see that JP Morgan Chase is the issuing bank. Given that Chase has over $10B in assets, this card costs the merchant $0.21 + 5bps in the US. This is a great deal for retailers. A REALLY great deal.

Why is PayPal pushing out its own Plastic? Unbranded? Obviously they really don’t like the standard debit interchange (above) and want a bigger cut (than $0.21 flat fee) from the retailer. (see PayPal at POS)

Why won’t PayPal expand its online wallet to allow me to select any card for any given purchase? In this I mean creating an app that works like Google wallet, prompting the customer “what card do you want to use”? The answer is that they want to drive the underlying account selection decision to ensure the instrument with the lowest cost is selected.

Take a look at your payment instruments in PayPal today, they let you define a DDA account as “primary” but NOT a card. In other words PayPal incents you to link DDA in order to get money out.. then PayPal looks to leverage this account whenever possible (sometimes taking take settlement risk). The most costly customer for PayPal would be an Amex customer with no linked DDA and a PayPal debit card (for ATM withdrawals). See my related blog on PayPal’s funding mix (estimate 150bps)

PayPal is a payments business.. not an advertising business. Their goal is to maximize revenue. This is not a bad thing…  But their recent moves are a “replay” of what happened to the bank payment networks as they pushed to ramp up merchant fees and grow interchange revenue at the expense of retailers.  Why on earth would any merchant agree to take on Paypal’s new plastic? If it is above $0.21 it makes no sense at all… UNLESS Paypal is driving incremental sales.

PayPal today could create a Virtual “wallet” tied to either a Sticker or a Card that would work across Android, iOS, Blackberry, … and do everything that Google has done.. Why won’t they? Because the instrument must operate as a debit card, and the interchange “arbitrage” could kill them. In other words they will bear the cost of 350bps for a CNP Amex transaction and only charge the merchant $0.21 flat fee.  If they rolled this out, I’m sure they would have MASSIVE success.. but if customers unlink DDAs and delete debit cards they would risk a funding mix that is “unsustainable” because they have no other revenue channel.

Google

The true “payment innovation” from Google has little to do with payment and much to do about risk management and monetization of data. Google drives business to retailers today.. google helps consumers find the right product… they also “know you” from your history. They can use this information drive value to consumers AND to retailers.. they are also willing to take a very big risk that the benefits of Google will out weigh the COSTS of WALLET. Google Wallet will likely loose money on every single transaction. If you never accept an offer, incentive or coupon.. never search.. never use maps to find a business, never use Zagat to find a restaurant, never watch you tube commercials… they will likely loose money on you.   However Merchants will ALWAYS win.. no matter what, they will have the lowest cost payment when accepting a Google payment.

This is either INNOVATION OR INSANITY.  From my perspective, what Osama and team have done is fundamentally game changing.. ! Bearing costs, giving consumers and retailers complete control.. in the hope that they can deliver value in other services. Payment is now just a small part of an overall Commerce Process. For example, a “new” feature of Google Wallet that has not received enough attention is the “saveto” API release at Google I/O . Google allows merchants to store 3rd party offers and payment types in the wallet. These offers don’t have to be created by Google.. it is a true “wallet” function. 

As I stated yesterday,  Visa, Mastercard, Amex, all of the banks are REALLY worried about data. Google will be in a position to deliver value to consumers independent (or dependent) on the card you use. Few other companies can do this… Consumers will always have a choice.. no one will be forcing them to use their Google wallet.  But why not? Why didn’t the banks use their information to help me earlier?  Why did the banks and payment networks stop retailers from passing their real costs along, of delivering incentives that they could control?

This “aggregate” model is something ANY company could do in short order.. Square is doing it, Revolution Money, LevelUp, … but no one else can make it profitable.

PayPal’s new POS “hope” is to re-engineer the customer experience at the POS, allow merchants to throw away their custom POS terminals.. As most of you know I believe Square Register was by far the best POS experience I have ever seen. From PayPal’s June Video it looks like they agree and have replicated the Square Register “voice” experience. While the customer experience is FANTASTIC.. it did not bring the customer into the store.. nor is payment cost competitive with Google.

[youtube=http://www.youtube.com/watch?feature=player_profilepage&v=CMByV-k9Oc4]

Investment take

PayPal has enormous runway left for them globally. I don’t see Google wallet denting current growth for 2 years. However this is VERY disruptive. IF google is successful in getting all Android users to register with a payment instrument (like Apple does in the App Store), and Google pushes Wallet out beyond NFC phones, it could result in a Tsunami wave which Paypal could not overcome in mCommerce.. This is a scenario where there are 3 primary mCommerce payments options: Apple Passbook, Google Wallet and Amazon.  For physical commerce.. nothing will impact this world in next 5 yrs if it does not entail a physical plastic card. NFC phones and payment terminals just aren’t materializing fast enough.  IF google creates physical plastic.. watch out…  In this scenario Google should  be pursuing an unbranded card.. “let the consumer decide”.. .”let the retailer influence” these are themes not heard in the payment world and would seem to resonate.

The Directory Battle PART 1 – Battle of the Cloud

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11 May 2012

This week we had both Finnovate and CTIA going on, and behind the scenes the battle lines are being formed in a forthcoming “BATTLE OF THE CLOUD” wallet. I didn’t include wallet in the quote because Battle of the Cloud sounds so much more ominous. Perhaps I should take a page from George Lucas’ playbook and start with Chapter 4.

I’ve been talking about the directory battle for some time now (see Clearxchange post).  Who keeps the directory of consumer information? As I outlined in Digital Wallet Strategies: “ securing information AND giving Consumers the exclusive ability to control what is shared with whom is a challenge (beyond technology and trust). We thus have many limited “Wallets” that are constructed around specific purposes”.

This week we had Visa’s President tell the CTIA audience that Visa has moved beyond NFC to V.me (see my previous post on Visa Wallet). What is really going on? What is the battle of the cloud?

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. (V.me is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc.   But what few understand is the implication for the physical payment world. This is what I was attempting to highlight with PayPal’s new plastic rolled out last week (see PayPal blog, and Target RedCard). If all of your payment information is stored in the cloud, then all that is needed at the POS is authentication of identity (see blog). Remember US  online commerce is $170B/yr, physical commerce is $2.37T (not including FS, Travel/Entertainment).

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives (new digital coupons).  Another example is Paypal’s ability to selectively assume settlement risk on some transactions as they route through low cost ACH, or even allow customers to use BillMeLater to selectively convert certain purchase to loans AFTER THE FACT.  In these 2 examples, traditional payments revenue will be significantly disrupted by: lower cost transactions, competitive credit terms (each purchase), and incentives tied to payment type.

But do consumers really want to store all of their information in one place? With one entity given the ability to see all of your spend? For an mCommerce transaction, there is nothing I hate more than having to type in my name, address and card number in that tiny little screen.  Most of these mCommerce solutions (like V.me) are little more than an “autofill” where the merchant checkout page leverages API integration to the cloud service to retrieve user information (see diagram here). If I’m on my phone, my carrier already knows who I am, so seems fairly logical for them to help me with the autofill. This is a reason I’m now a big fan of Payfone. I could also see why it makes sense for Apple and Google. But why Visa? Does it make any sense at all for Visa to hold my Amex card?  Oh.. let me cast a few more stones on ISIS/NFC.. that payment instrument that locked in your phone.. yeah it can’t be used for the online purchase. Perhaps someday someone will write a secure NFC mobile browser plug in to extract data from the SE.. but that opens up a whole new can of worms.

Today’s online merchants are getting a very small taste of the war as they are asked to integrate auto-fill plug ins (Paypal, V.me/CYBS, Payfone, Google, soon to be Apple). Merchants should get on board with all of them, as they do represent a tremendous improvement in customer experience, and you may be able to squeeze some free marketing/implementation money from each of them. However, the cloud battle at the physical POS is still a few years off, as existing card products have a substantial advantage in risk modeling/fraud. This is where Square is taking a lead, as it has the best consumer experience hands down. Low volume merchants really should assess whether they need a specialized POS system, as the parameters for selecting one have shifted from ISO/Processor/Cost/Acct Recon/Book Keeping to Sales, incentives and customer experience.

Battle starts in mCommerce/eCommerce

My guess on timing of V.me is driven by knowledge of Apple’s impending plans to “extend” its iTunes account to payment outside of the Apple ecosystem. Visa sees this network risk and is in an all out war to protect its network, by leveraging its CYBS asset online. The banks have worked on a directory concept for quite some time. The Clearing House (TCH) built a working system called UPICK to solve the problem of consumers giving their RTN/ACCT# out in the open.. assigning a virtual number to the account. A sort of “virtual account number” that could only be translated by TCH.  It never took off, because ACH fraud was low and banks were much more excited about having merchants accept cards as payment.

Retailers are not silent participants to this war.. their champions are Target, Tesco, Amazon, and Rakutan. I hope Amazon will finally dust the plans off of One Click expansion. Other retailers are also aligning to assess creation of shared cloud infrastructure.  Sorry I can’t comment more. Similarly MNOs are also in the cloud game, for example Payfone may be one of the best services in the market..

Who are the players in the Cloud [Payments] War?

The initial battle will be in mobile/online purchases.

  • Banks: V.me, Mastercard,
  • Platforms: Apple, Google, PayPal
  • Retailers: Amazon, Rakutan,
  • MNOs: Payfone, Boku, payforit, billtomobile, …

Most confusing is that there are few alliances.. it is many against many.

http://tomnoyes.wordpress.com/2011/10/26/apples-commerce-future-square/

Carriers as dumb pipes?

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25 April 2012

I just bought a brand new Galaxy Nexus on Google’s new play store today (https://play.google.com/store), very excited to have an unlocked GSM phone that I can take with me around the world. Better yet, I can now take advantage of Google wallet and many new NFC based applications..  independent of any carrier (… although the Sprint people are A+).
Given Apple’s tremendous earnings yesterday: 80% growth in iPhone shipments (30M), 150% year-over-year growth in iPad shipments with margins improving to 47%…. what does the future hold for carriers? If consumers go to the Apple store to select THE product will The Network be an afterthought? Its not just the MNOs who are on the short end of the stick, Retailers also loose when manufactures like Apple create an effective BRAND, PRODUCT and EXPERIENCE (see related USA Today article and Forbes).
How are the carriers responding? What are they doing to deliver new value or help the industries impacted by this new dynamic? They have gotten together to create an environment where they completely control everything: NFC (in the US it is a consortium called ISIS).  I was one of the first to break news of this consortium back in 2009, with some strong recommendations on their strategy (see Ecosystem or Desert).  If you were a retailer, or small company with limited resources, where would you place your bets? With Apple..? or a consortium of mobile operators that have been working for 3 yrs trying to get a pilot working across 12 different suppliers.

This week, I was struck by how similar the carriers “walled garden” NFC strategy is to previous attempts to create a “Walled Garden” . Why are the MNOs recycling the same control strategy? Remember Einstein said “the definition of insanity is doing the same thing over and over again, but expecting different results”.  As background, VZ (and most MNOs) love the “walled garden” strategy.

Version 1(2004-Present). BREW platform from Qualcomm (dumb phones).

Version 2 Handset capabilities

  1. Verizon invested over $300M in GPS “platform”, an investment they planned to recover by charging for Apps that wanted to use GPS. RIM was the first to realize that it could not deliver consumer features at odds with what VZ would authorize.
  2. Firethorn was the first payment related application that VZ promoted. Objective was to limit all consumers to Firethorn as the only approved “signed application” where consumers could check their bank balance. Banks were each asked for $1M to allow for their customers to check their balances on this MNO controlled application.. yeah.. great idea (2007)
  3. Search. $600M exclusive deal w/ MSFT in 2009. Unfortunately for MSFT, Android was not included agreement and then VZ make “Droid” THE key marketing theme.
  4. I could go on.. but

Version 3 NFC

  1. Control SE (http://tomnoyes.wordpress.com/2011/02/03/isis-platform-ecosystem-or-desert/)
  2. ISIS. Consensus is that the carriers will keep plugging along at this for 10 years..  however without talent, retailers and handsets I don’t see how they can sustain investment.
  3. Create a new BREW.. handset platform that leverages NFC and secure customer data.. payment (ISIS) is just one of the applications. Note that most carriers are in midst of issuing RFPs for SE management (my vote is for Sequent here). The objective of this effort is to create a “secure platform” where applications can leverage customer data (for a fee).

Would you want to “play” in a walled garden? The owner gets to make the rules and take the rug out from under your feet (ie MSFT $600M). Where the star (ie Apple) is able to negotiate special treatment or go over the top without you ever being aware? No way.. you can’t run a business like this. I wouldn’t even want to play..

Carriers must think about value creation before they can think about control. Apple earns its margin from brand and experience… they are not forcing people into their store. For example, the Samsung Galaxy Nexus is an unbelievable phone… easily on par with the iPhone.. But the carriers won’t let it in the market unless Google give them the keys to the SE.  It’s just crazy…My 11 yr old son can guess what happens next.. Google starts selling the phone directly (which I bought today). As most readers know, the US handset market is a very strange place (handset subsidies and post paid plans). The rest of the world buys their handsets and selects the carriers based upon cost/coverage. What if Google and Apple were to subsidize handsets through marketing, as opposed to anticipated spend? If telephone calls and data were routed through wi-fi whenever available? What do carriers have left?

Every point of “friction” which carriers create.. FURTHER ERODES their future profitability as this friction improves the profitability and market opportunities for companies going above, around and under them. Carrier business culture and experience all surrounds the walled garden “control” approach. This control approach works well for Apple as it has developed an integrated value proposition.. It does not work for the carriers that offer connectivity. To expand beyond connectivity carriers must create new services.. the must become orchestrators of value.. not controllers of handsets. In other words they need to shift from a “permission/transaction/payment” paradigm to  one of discovery->need->->fulfillment. (see my previous blog).Attention US Mobile operators… today your trajectory is headed toward dumb pipes.  You cannot deliver value through control.. no one trusts you.. and you can’t sustain investments to compete against Google, Apple, Facebook, …

What should you do? Where is the revenue opportunity? It is in value orchestration. You have direct consumer relationships… leverage them for marketing, authentication, personalization, awareness. The good news is that Hardware will peak and reach a “good enough” stage. If hardware is a commodity, then brands will begin to deteriorate.. and value orchestration will shift further from the handset node into the Cloud. If any operator agrees with this.. then ask why on earth are you locking all of this customer data inside a phone (NFC) where it cannot be used or sync’d with the cloud.

I will get off my soap box now.

BTW.. AT&T I fully appreciate that you can disable my new Nexus.. please dont make me go to an MNVO.. just another point of friction.

Google/TXVIA

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3 April 2012

http://googlecommerce.blogspot.com/2012/04/google-acquires-txvia.html

Congrats to Google and the TXVIA team. Given that Google is a  client of mine I’m not going to comment on anything specific here.. but clearly this deal significantly expands the reach of Google at the POS. No longer will Google Wallet be dependent on a few thousand NFC phones in market.

The primary reason for my post is that a senior retail executive just rang me to tell me they are concerned about Google’s wallet and card strategy. It seems I was incorrect in dismissing the WSJ article on a Retailer Wallet. There is MUCH more structure here than I realized, and it is not just wallet that the retailers are contemplating.. but ownership of a new payment/incentive network. I would laugh if I didn’t want to cry..

  • Banks are working to form “the next Visa” because they don’t trust the one in market today
  • Retailers are forming their own payment network
  • Banks are worried that Google will be the next PayPal, or Visa
  • Retailers are concerned about Google killing their customer relationship
  • Mobile operators what to own payments.. err… that was last week sorry… now they want to own marketing
  • Retailers are refusing to adopt NFC because everything is a card transaction…
  • …etc. I could go on.. but the chaos just continues

Retailers, I admit I am VERY biased toward Google. The issue in market perception is: through Google’s effort to be a neutral platform for consumers, banks, operators, retailers, … they appear friendly to the competition. For example, they have no desire to be a Bank.. or to be a Paypal.. but if Banks don’t allow for efficient payments (consumers and retailers) they must deliver an alternative.  Google wants to “enable” .. which can mean not picking winners.. but letting the marketplace select them (principle example is Card Linked Offers). This approach is embedded in to Google’s culture of billiant engineers running with a  great idea, and letting the market determine if it will work. Apple on the other hand engineers great customer experiences.. In a very, very controlled fashion. How many “partners” has Apple enabled? How many non-Apple businesses benefit from Apple’s platform? How many other brands does Apple support?

Google has no desire to take over retail.. they want to create fantastic consumer shopping experiences. Yes that means Google’s customers are the same as a Retailer’s customers.. and consumers will use a generic andriod shopping app vs. one your IT team built..

The paranoia is just contagious.. billions of dollars are being wasted because few know how to partner…  In Google’s efforts to be “neutral” they appear to be friendly to all. To retailers they are “too bank friendly”, to banks they are “trying to be a payment network”, to consumers “they are tracking everything I do”..

TXVIA will be a major turning point for Google in payments. This new platform will enable them to support their internal marketplaces in new ways, and give retailers new tools to deliver incentives on their brand. In the Google Press Release, they mentioned TXVIA support for 100M cards. Take a guess how many of these cards have a TXVIA brand on them? NONE..  It is a company that provides a platform to support many business models (like Blackhawk). If Google continues this approach they will win big.  Note, if they do develop a “Google Card”.. it may just be a pilot.. they are not taking over the world with their own plastic.

My top market question is: “what will Blackhawk do now that Google owns your card platform”? TXVIA is the best pre-paid software platform in the market.. hands down.

Digital Wallet Strategies

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Warning.. I ramble a bit in this one.

23 March 2012

Description: Mobile Market BreakdownDoes anyone remember Microsoft Wallet circa 1997 (See Wikipedia)? Digital wallets are certainly not a new phenomena. Today we are struck with eWallet saturation: Google Wallet, ISIS Wallet, Visa Wallet, iTunes accounts, Amazon Accounts, Square, PayPal, …  How many places must store all of my credentials?

For my own benefit I thought I would take a brief look at the history to determine what the future may look like (As the future holds the key for my investment decisions). With respect to Wallets, what are they? What are successes and why? What is the consumer value proposition? What are the risks? What does the future hold?

My last blogs on this topic were in November 2009, Investors Guide to Mobile Money, and in 2011 – Tough Start for Mobile Payments.

What is a Digital Wallet?

My all time favorite YouTube video definition is below (Courtesy of Google)

http://www.youtube.com/watch?v=gKGptWtzeaU

[youtube=http://www.youtube.com/watch?v=gKGptWtzeaU]

Proposed Definition: A consumer owned and controlled account that can store any electronic form of what is normally held in a physical wallet, including: payment, ID, coupons, loyalty, access cards, business cards, receipts, keys, passwords, shopping lists, …etc.

This definition sounds broad enough..

As a consumer, what would you think of having multiple physical wallets? I personally don’t have that many people I trust. Trust is a very important element to a consumer. Some of the information in my wallet is sensitive, and there is also a financial risk associated with loss of payment information (particularly outside of the US).  What kind of entity would want to assume the risk of holding all of this information?  Which reminds me of a story,

I was in a Board Meeting with a senior partner of a “Top 3” VC discussing consolidated sign on. A start up was proposing to hold all of the login credentials for all of your bank accounts. As the former internet head for both Wachovia and Citi I had some firm views on the topic and asked “who is going to take the risk if credentials are compromised”? I further explained “it is not a technology problem, but a risk problem.. Bank’s will not let someone keep their Customer’s keys if they can’t insure the risk”. As a side note, I also instituted a policy that if a customer discloses their credentials to anyone, they are responsible for any losses that result (sorry Yodlee).

Within a Digital Wallet, securing information AND giving Consumers the exclusive ability to control what is shared with whom is a challenge (beyond technology and trust). We thus have many limited “Wallets” that are constructed around specific purposes, for example Microsoft’s wallet has evolved to LiveID.  From a pure technology perspective, the mobile phone (with NFC) seems to present an opportunity to provide the Consumer with a device that can uniquely handle the security and authorization aspects of a holistic digital wallet. In my view, the challenges faced by the “phone as wallet” are business related. Per my definition above, a wallet should allow consumers to control what goes in and how it is used. Today we see the carriers (ex ISIS) create a platform based upon their control, allowing only cards that have paid a fee to enter into their wallet. I digress…

What makes for a successful wallet?

Customer Trust, Customer Control, Convenience, Ubiquity (opposite of lock in), Intuitiveness, Experience in Use (buying, redeeming, accessing, ..), Security,

If I have a wallet that only accepts 3 cards that are not accepted at any of the top 20 retailers (ie ISIS), it is of little value. Why not let consumers control what goes in? This is where carriers must get to in order for NFC to survive. Even then, NFC phones are far from my recommendation. After all if your payment information is locked in a mobile phone how do you use it when you are at your computer buying something on Amazon? Locking information in a phone is just plain stupid in the age of the cloud.. most agree that individuals should have a their information in a cloud they control. The NFC zealots reading this blog will respond that it NFC doesn’t require a network and is more reliable… my response, the POS and payment terminals are connected.. NFC doesn’t need to hold the card in the SE.. it just needs some sort of identifier.. or in the Square cardcase example no NFC at all just your voice print. After all if there is no auth from the payment network.. the transaction will not happen.. so something is connected in 99%+ of card transactions.

Consumer Value Proposition

Description: C:UserstomDocumentsPersonalblogIPP_3_clusters_labels.jpgMy primary digital wallet is Amazon, with Paypal as a close #2. The buying experiences are just superb, unfortunately neither extend well into the POS. I have a PayPal debit card I use here.. but I have a hard time justifying why I would use a paypal debit card that pulls money from a pre-funded account which is tied to my Bank of America Checking.. why not just use my BAC Debit Card? I don’t think I’m alone here.. The thought that comes to mind: why do I use PayPal at all? Convenience is certainly a key element, but I also really don’t like giving out all of my personal information to every vendor I do business with.  Why does any vendor need to know my name? Is there a business case for anonymity? For Readers in Germany I know your answer… of course there is.

Most Silicon Valley eWallet business cases are being built around data sharing and “closing the loop”. In a network analysis model, every step away from the optimal consumer experience (control, anonymity, ubiquity,..) impacts broad based adoption.  Alternatively, new value propositions (ex incentives, rewards, loyalty, …) can reverse entropy, but only within specific groups/clusters (that realize the value). Thus a highly fragmented world of wallets, each built around specific functions limited to narrow networks, where customers exercise only limited control and hence participate in a limited fashion.

Risks

My last blog on Payment Risk was associated with Square (I still don’t like the swipe, but I have eaten my shoe now that they have surpassed $4B GDV and have developed CardCase… which I love). Microsoft had grand visions for Wallet and Passport, and pulled back for a number of reasons. Globally, most consumers still have problems putting all of their information in one place. The Fed, OCC, FTC, CPFB, Banks have all been circling around the broad proliferation of consumer data.. what are the risks of having your payment instrument stored with 100s of vendors? While at the The Clearing House’s annual event, I was pinged by a JPM Chase exec.. what will be done to secure payment information?  At the policy level, many believe there is a national security risk in the compromise of our payment systems…  It is something all of the Banks are thinking about.

While cloud based storage of information sounds fantastic… there remains a gap in integrated controls, security and authentication. This is where I see both the US and EU taking action on consumer data access and controls much beyond what is now within PCI. Given today’s technology, there is little reason for any merchant to hold your actual credit card number.. yet it is still the case.

What business incentive is there for any entity to hold “unlimited” sensitive consumer information? If the information cannot be accessed without user consent? All of these factors will shape wallet functionality to either something focused within a given domain, or under complete control of the Consumer.

Wallet Strategies

1) Consumer Friendly.. Single store for all consumer information. Payment, loyalty, reciepts, … The players I see here are Google, Square. (note I acknowledge everyone at PayPal just rolled their eyes and point them to my Disclaimer above). Business case is around customer data access.

2) Marketplace focused. Obvious players here: Starbucks, Rakutan, Amazon, Apple, Paypal, Target Red Card. Objective: Deliver a fantastic customer experience in purchasing within a focused marketplace.

3) Form Factor/Device Focused. Mobile Operators, Card Networks, . Deliver technology and incent buyers/retailers to participate. This is not working out so well, exception is Edy.. may work in markets with dominant carrier.

4) Bank Consortium. We see this more in Europe at the moment, but I believe the US regulatory bodies are pushing banks to work together here.  Much more payment focused, and thus minimal consumer value… Banks/Fed must realize mobile is not about a new form factor, but a new value network.

5) Retail/Transit Consortium.  Transit is already clear leader here in Asia…. Transit actually resembles more of #2.  Where there is only one transit company provider I believe it is.. this Category is defined as one wallet working across multiple retailers.. I look at this as incentives tied to something like a decoupled debit.

6) Commercial. Example outbound payments, payroll distribution, global dividend payments – hyperWALLET.

7) Other???

Future of Wallets

“Limited Wallets” can obviously be very successful: Starbucks, PayPal, Amazon, Apple iTunes, Oyster, Edy, Suica, Octopus, hyperWallet…. But all started around an existing marketplace/system. In order for an independent wallet to thrive it must deliver value within a core network. My approach to evaluating retail payments evolves around a central hypothesis: payments support a commercial system, they are only the last phase of a long marketing, incentive, shopping, selection, and buying process.

Networks are resilient to change, this is both an asset and a hindrance. The value that is delivered within an existing payment network is tied to the commercial system in which it operates. This includes both business agreements AND technology, neither of which are easy to change. As the nature of retail changes (example payments, and incentives across virtual and physical channels) new “value exchange” networks will form. Existing payment networks will certainly attempt to change, but given their distributed ownership, nodal control over rules, and legacy infrastructure it will be “a challenge”.

In the US today, this is what is happening with Google Wallet, Bank initiatives to form “the next Visa” and Large US retailer’s plans to form a new payment network that they control. Today’s wallet initiatives are operating in a very dynamic landscape: retail is changing, technology is changing, new value networks are forming, new marketing platforms are emerging.. The margin is always better in orchestrating the interaction, than in coordinating the transaction. Thus I place my “wallet” bets in the short term with groups that can control the commercial marketplace (ie Apple, Amazon, eBay, Retailers, … ), and with groups that can orchestrate new value propositions (ie. Google, Square, hyperWallet, ..etc).

Have a great weekend… My Asia thoughts are next.

Card Linked Offers Update

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,,,,,,,,

27 March 2012

We see in the press that Google/MA have gone beta with Card Linked Offers, and Bank of America is  about to go live with “BankAmeriDeals”. I last gave an overview of this space back in November in my Card Linked Offers post. For those that haven’t seen it, there is also a must read blog by Reed Hoffman in Forbes on the subject: The Card is the new App Platform.

Here is my blog from 3+ yrs ago – Googlization of Financial Services – outlining data flow. My purpose is mentioning this blog is not to show how smart I am (as an alternate view is already firmly established), but rather to highlight how much my view on the opportunity has changed over the last 3.5 years. As I tell all of the 12 start ups in the CLO space.. if Visa couldn’t get this to work what makes you think that it will be easy for anyone else.

There is a CORE business problem I didn’t realize back then.. merchants don’t like cards and are VERY reluctant to create ANY unique content (offers) where card redemption is REQUIRED.  Further constraining the “capabilities” of CLO is lack of item detail information within the purchase transaction. IBM is the POS for 80% of the worlds to 30 retailers. Take a look at the 4690 overview here, notice what incentive solution is integrated? This was a 5 yr project for Zavers…

A story to illustrate my point on retailer reluctance. As most of you know POS manufactures like IBM, Micros, NCR, Aloha are implementing POS integration solutions similar to what Zavers has done. Most of the CLO companies above are paying the POS manufactures to write an “adapter” that will work within their POS and communicate basket detail information. (ISIS is rumored to have a 200 page Spec for this POS integration as well).  There is a very big difference between having integration capability, and a RETAILERS agreeing to use it (ie share data).  There must be a business value proposition for retailers to move… and I can tell you with a great deal of certainty.. Retailers don’t like the BANK card platform.

I emphasize BANK for a reason.. I was with the CMOs of 3 large retailers a few months ago. When asked what their payment preferences where, they answered without hesitation: Store Card. This is their most profitable product used by their most loyal customers (think private label). Do you think for a moment that a Retailer would deliver “incentives” to customers that are not in this group..  Remember, these PVL loyal customers also hold a number of other bank cards, and there is not much in the way of customer matching between data sets. I think you get my point.

As I stated previously, all offers businesses are highly dependent on targeting. Targeting is dependent on customer data, relevant content, effective distribution (SMS, e-mail, an App), campaign management (A/B testing, offer type, target audience, …). Campaign management is very dependent on feedback.  There are very few companies that can effectively TARGET and DISTRIBUTE.  The current group of CLOs is partnering with the banks to solve the targeting problem (example Catera/Citi, Cardlytics/BAC, …). This is further EXASERBATING the poor Retail adoption. Why? Here is what a CMO told me:

“Tom, lets say a consumer just shops at Nordstrom.. the card network and bank see that I just completed the transaction and now market to them … the advert is “go to Macy’s and save 20% on your next purchase”… Given that they can only offer basket level incentives this is how it must work… Tom do you know what will happen? The customer will return what they just bought and go to Macy’s and get it. How is this good for Retail?”

From an Ad Targeting/Distribution perspective, Mobile Operators certainly have an eye on this ball (mobile phone). But only a few companies like Placecast can actually deliver it for them. MNOs are truly messed up in this marketing space (within the US). If you had the CEOs of Verizon, ATT and ISIS in a room and asked “who owns mobile advertising”?.. ISIS would say nothing if both of the other CEOs were in the room.. They want it.. but no one will give it to them as they can’t execute with what they have in this space.  Verizon would say “many partners”… Their preference would be to sell the platform akin to their $550M search sale to Microsoft in 2009. So VZ wants a $1B+ Ad platform sale… who would compete for that business? I digress.. but what is in place today looks much more like a rev share… Internationally there are carriers with their act together: Telefonica and SingTel (just bought Admobi).

Let me end this CLO diatribe with a customer experience view. Let’s assume I have 12 CLO players.. each partnered with a different bank/network. Also assume that all are heavily dependent on e-mail distribution. I have 6 different cards.. and will be getting at least 6 e-mails per week with basket level discounts. Now assuming that I can keep track of which offer was tied to which card.. and use the card. I’m still left at the POS with a receipt that shows none of these basket level discounts (as they are “credited” to my account after purchase).

Without POS integration AND Retail data sharing this will not work.. the customer experience is terrible, as is the campaign’s restriction on basket level discounts. The ubiquity of cards is attractive.. as is bank data on Consumer “Store preferences”…. But both work to the detriment of retailers. What consumers will see in CLO for some time is the generic 10-20% off your next purchase that will also be available in direct mail campaigns… Let’s just hope that someone can work the double redemption problem…

My read on this for Google is a little different. Google is positioning itself as a neutral platform.. it can do Retailer Friendly.. Bank Friendly… MNO Friendly.. Manufacturer Friendly…  Each will have different adoption dynamics. Google’s objectives are likely: gain insight, be the central platform for marketing spend, be the most effective distributor of content, … . This offer beta would certainly seem to be a “bone” thrown to banks.. hey… here it is … good luck trying to make it work.

Commerce Network Puzzle

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This is brief.. just something top of mind. This is an extension of my previous blog this month on Remaking of Commerce and Retail. I wrote today on linked in

POS and Payment Terminal mfgs have 30+ groups trying to add coupon and payment functionality. Their message.. FIRST get a retailer that wants it. Verifone’s Verix architecture provides retailers with capability to run 100s of POS apps… but retailers are skeptical.. will “apps” drive revenue? will it confuse customers? What will drive loyalty to MY BRAND vs. some start up? who is going to manage the mess when something doesn’t work?

All of the Card Linked Offer companies (see my blog), PayPal, ISIS, Google, Groupon, Living Social, Fishbowl, Inxent …are trying to integrate into the physical POS.  There are 2 primary options to integrate marketing into the checkout process: the Electronic Cash Register and the Payment Terminal.

I speak quite a bit with Verifone’s investors about their POS vision.. Will NFC drive reterminalization? Will payment terminals morph into a rich customer interaction environment? Big retailers like Safeway and WalMart have teams of 500-2000 developers around their core IBM 4690 ECR (ACE, GSA, SurePOS,…) and heavily customize it.  Take a guess how many people retailers have in managing their payment terminal? The answer is usually zero..  The reason the payment terminal (where you swipe your card) came into being was that retailers did not want to deal with PCI compliance, so their processors (like FirstData) came in with the terminals. The Cards get encrypted at the swipe and no one but the processor has the key to unlock the numbers. The ECR sends total amount and the payment terminal tells them it is paid with an auth number.  I thus find Verifone’s Verix architecture somewhat amusing…  I certainly see how retailers would benefit by taking electronic coupons from this terminal (and sending to ECR), but the terminal does not give receipts and certainly doesn’t allow for matching of UPC information.  Even if it did… the retailers don’t want to create a new IT team to manage this mess on a piece of hardware they don’t own.

Will Verifone sell new terminals because of NFC? YES. Perhaps even as much as a 20% reterminalization (over baseline) in next year… BUT my bet is that the POS  manufactures will win the battle long term both due to retailer IT competency and the tremendous capability for POS manufactures to deliver complex business solutions (IBM is 80% of top 20 global retailers).. Things like coupons are not some abstraction… they relate to pricing and loyalty and must be integrated into a retailers price promotion strategy. Currently we are in experimentation mode… with leaders like Google, Catalina and Coupons.com.

What are the puzzle pieces that will make “rewiring commerce” work? Small companies are very challenged in delivering value within networked business. They certainly do not have the heft to create their own, so they must choose sides. Within the card linked offers space, they align to the big card networks. This alignment has implications for attracting retailers and the targeting which can be done from bank data (store preference) vs the targeting which retailers can deliver (brand and price).

In general, the Marketing and Shopping phase of a NEW commerce process requires the following

1) know the customer,

2) deliver an incentive that is relevant and prompts action,

3) in a way that is integrated to the retailers brand and price promotion strategy,

4) with a great redemption experience

5) and prove to the advertiser that the campaign was effective

The Business platform necessary to deliver on this?

1) Campaign Management

2) Customer Data

3) Advertising distribution (virtual, physical, … how do you get eye balls)

4) POS Redemption/Retailer Integration

5) Massive Customer value to change behavior (relevancy, value, usability, convenience, entertainment, social, …)

6) Global sales force that can sell to retailers

Notice that Payment is not listed.. Payment is not a problem in physical commerce. Now that Durbin allows for STEERING.. you can imagine what Retailers want to incent…

2012: Remaking of Commerce and Retail

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8 January 2012

I’m recovering from a nice Holiday.. successfully marrying of my only daughter.. keeping a smile on my wife’s face (most important) as well on those of my children. I never thought all of that family time could make me look forward to work..  Many of my bank friends seem to be making new year’s resolutions to do something different and I’m fortunate to have them share their opportunities. What are the really big opportunities?

For those that read my blog.. I’ve been very locked-in to the concept of value proposition, and the challenges of creating a new “network” for exchange of value… with my often repeated “every successful network begins with exchange of value between at least 2 parties”. In addition to sharing ideas on new opportunities with former colleagues, I’m also about to take a trip to the Far East to meet with institutional investors.  In Asia, I’m preparing for discussions which will be focused on: What are the REALLY BIG opportunities out there?  Where are the sustainable bets? Where are the risks? My bias in this new year is Commerce.. and the influence that mobile will have in reshaping it.

My Investment Hypothesis:

Unlocking the “commerce” capabilities of mobile will reshape the $2 Trillion advertising market and $14 Trillion retail landscape, as new customer shopping experiences are created which leverage consumer data.  2012 will be a key year where retailers, mobile operators, handset ecosystems, banks and consumers make choices which will affect outcomes in future years.

In the US alone, we spend over $750M in marketing. Any guess how much of that is “targeted” to a specific consumer? Less than 10%.. !!

It’s not that top advertisers don’t WANT to target, but that they have no Platform to do so in the Physical World. In the virtual eCommerce world, there are many facilities for engaging influencing, incenting and paying (for performance). Data is shared from the first click… to the point of purchase across many intermediaries. In the physical world, life is much different. For those interested in this space, let me strongly recommend reading the Booz Shopper Marketing paper (just fantastic).

$14T of retail represents over 22% of the $61T global GDP.. How often do we get to talk about rewiring 25% of the global economy? This is why I’m so high on Google right now. Google currently gets only $14B of the US $750B in marketing spend, and is making strong inroads to the physical POS.  (please see my legal disclosure above).

As I’ve stated before, Retailers are frequently assumed to be a bunch of back water idiots.. as a former banker I admit my mistakes…  this simplified view of retail could not be further from the truth..  Retailers are on the cutting edge of competition. Competition drives data based decisions, customer centricity, daily focus on margins (as they are razor thin) and a toughness matched only in professional sports.

Retailers had to be tough and innovative… after all how do you sell a commodity on more than just price? This week’s WSJ story on Best Buy perfectly illustrates the challenges ahead for many retailers.

“I will buy it in your store…use it while I order another one for 75% less on Amazon and then return the new in the box one at your store,”

The mobile handset is uniquely capable of serving as a bridge between the virtual and physical world.. giving individual consumers access to unlimited information while they shop, not JUST price transparency, but information on quality, fashion, community reviews, availability, AND the opportunity for merchants and manufactures to reach the customer in the buying process BEFORE AND DURING their shopping experience.

What companies have the platform today? Amazon, Apple, Google, eBay, Visa.. all have elements, but the value propositions of each are widely disparate. If Commerce is to be remade, there must be a new value proposition to manufacturer, retailer and consumer. Notice I left out banks..  The problem with virtually every platform on the list below is that they have started life as bank friendly.. which destroys their merchant value proposition. Groups like ISIS are focusing on payments.. and not on a larger mobile value proposition (focusing on advertising for example, also see ISIS: ecosystem or desert).

How will commerce (and retail) be remade? I have no idea… but this will be the year which we see platforms start to gain momentum. You can guess what I’m telling my bank friends…..

Building Networks and “Openness”

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8 Dec 2011

I’ve been reading some off beat stuff lately. One book “Weak Links: Stabilizers of Complex Systems from Proteins to Social Networks” was very thought provoking. As Mark Stefik (PARC Fellow) said ‘Something magical happens when you bring together a group of people from different disciplines with a common purpose.’ The combination of people, experience and approaches often leads to unexpected consequences.

As an engineer I like to solve problems.. I usually learn more from mistakes than I do from successes… but it is the learning that is fun. As an investor and entrepreneur I don’t like making mistakes… my preference in the start up environment is to have the learning cycle counted in minutes and days (vs customers and capital). I was speaking with a US Central Banker last month and the concept of “openness” was discussed. A hypothesis was laid out by the Fed “Mobile payments are not taking off because of a lack of common standards”.  The Fed team is very good, the best way to encourage a good dialog is to lay out something radical; as for this hypothesis I disagreed completely. As stated in my numerous blogs: history has clearly showed that closed systems must form before open ones.  I also told the Fed that the problem in US mobile payment IS NOT lack of standards but lack of a value proposition to consumers and retailers. In other words existing payment instruments solve all of my problems.. mobile payment simply does not add additional value (in isolation) compared with existing products (See Mobile Advertising Battle). In order to stimulate a change in behavior (merchant and consumer) there must be a strong value proposition. Two years ago I discussed the implications for broad payment standards in SEPA: Chicken or the Egg and in March of this year I outlined how SEPA has depressed payment innovation in the EU.

Given all of the chaos in NFC at the moment, I woke up this morning asking myself what is the “right amount” of openness and standards? How do successful networks form and mature? What are successful “open” networks? What is the first “open” standard you think of ? TCP/IP? Linux? Java? RosettaNet? EDI? Open Network? Internet? GSM? US Interstate system? SEPA? The Weak Links book opened my eyes to many new concepts, one was on how affinity influences network creation, and another on how few open networks exist in Nature. Networks form around a function and open networks are not necessarily the most efficient.

Scale-free distribution (completely open networks) is not always the optimal solution to the requirement of cost efficiency. .. in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks.

The network forms around a function and other entities are attracted to this network (affinity) because of the function of both the central orchestrator and the other participants. Of course we all know this as the definition of Network Effects. Obviously every network must deliver value to at least 2 participants. Networks resist change because of this value exchange within the current network structure, in proportion to their size and activity. Within the EU, SEPA undertook a rewrite of network rules and hoped that existing networks would go away or that a new (stronger) SEPA network would form around its core focus areas (SCT, SDD, SCF, ..). It was a “hope” because the ECB has no enforcement arm. In other words there was a political challenge associated with ECB’s (and EPC specifically) ability to force an EU level change on domestically regulated banking industry.. given that SEPA rules destroyed much value in existing bank networks, the political task was no small effort. We have seen similar attempts (and results) when governments attempt to institute major change in networks (Internet NetNeutrality v. Priority Routing, US Debit Card Interchange, …)

Mobile Payments Standard?

If we take a look at today’s payment networks what are the biggest problems to be solved? I have a perspective, but its certainly biased. How about payment routing and speed? These seem to be common merchant and consumer concerns. Keeping with an internet analogy, can you imagine if there were no DNS servers to route IP traffic? Every router would have to keep the directory for the entire internet not only of the final destination, but also the most effective route to forward traffic. What if the internet were not indexed? No ability to find information (thanks Google for fixing this).  In the payments environment, the central assets of Visa and MA is 1) A Directory and 2) the rule that EVERY participant must route traffic through them (with a new PIN debit exception in US).

Outside of card transaction’s banks maintain their own directory for routing retail and commercial payments; this is called “least cost routing”.  A key bank service I would propose (note: I’m not the originator of this idea) is a universal directory service mapping e-mail, phone and account numbers.  In Australia, the banks have this today run by my friends at Cardlink and completed under project Mambo. In the US, The Clearing House (TCH) has had the UPick service completed for a number of years.. without much interest.

My thought here, is that rather than facilitate a EU mistake in mandating a change in all rules.. decrease the switching costs between networks so that market forces can take hold. I’m not proposing to take the directory public.. but at least give regulated entities equal access. In Australia the driver was to decrease bank switching costs, also note that Australia has no Signature debit.. just as in Canada.  A common directory could also follow rule that non-regulated institutions could not hold account data (or card number).. Just as I don’t have to know my Bank’s IP address.. I could use another identifier (email, mobile, …) for online transactions. The danger for banks is that this would certainly open up the world of least cost routing to non-banks. Payments would become “dumb pipes”.. which is perhaps what it should be.

Mobile payments is certainly not critical government infrastructure. So what is Government’s proper role? Consumer data protection, transparency, regulatory requirements, equal participation/access..  ? I don’t know the answer. I like the idea of the Government creating a model service for R&D purposes.. perhaps based on Fedwire and letting non-banks have access to it… I also like the idea of a common directory.

ISIS

For 2.5 years I’ve been writing about ISIS.. I’ve always have been a huge advocate.. until lately. What has changed? My position, and that of retailers, is that today’s payment networks are heavily tilted in favor of the banks. The opportunity I originally saw for ISIS was constructing a new merchant friendly network that was an “extension” of the current mobile network which the carriers run (The original business case for ISIS is outlined in ISIS: Moving Payments from Rail to Air).

Keeping with my theme of openness and standards how is ISIS creating a platform for other to invest in? What value is an ISIS mobile payment to a retailer? Yesterday’s blog talked about the complex supply chain necessary to deliver on NFC. Don’t get me wrong, there is nothing wrong about NFC technology.. it is a very well defined specification. But it is complex.. if it was a NEW WAY of doing payments (or better yet commerce) perhaps it should have started a little less ambitiously. The team seems as if it prudently sought to reduce risk, but it also gave up on a central element to its value proposition. My analogy for today is that ISIS project is like Vanderbilt’s skipping steam and going straight for high speed mag lev in 1880…. While the entire country was growing at a 10x pace and he had no right of way..

Big projects are tough in normal times.. but mobile is changing at an unbelievably fast pace. Small focused projects are certainly lower risk when innovating at the cutting edge. Everything is changing.. how could anyone architect an open system in such a fast changing environment? It would seem that technical standards like TCP/IP or GSM were successful because of their ubiquity and distributed control. They could be used by all to create different networks with different value propositions.. which incented millions of companies and consumers to invest.  I just don’t see how MNOs can create a business platform based on NFC. Their best shot may be to work with someone like Sequent Software to create an architecture for 1000s of applications to access secure element data.. instead of the one single CSAM wallet coming out in Pilot Dec 2012.

Your thoughts are appreciated

Previous Blogs (Nokia NFC Ecosystem, ISIS Ecosystem or Desert, Banks will win in Payments.. but WHICH ones?)

Nexus S – Verizon’s Plan B

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6 December 2011

Today’s WSJ article that Verizon plans to block Google’s wallet on its new Samsung Galaxy Nexus .  While the mainstream press sees this as a slam on Google… I see this as Verizon constructing a fallback strategy. Why on Earth would Verizon want to allow the Nexus S on its network at all? It is a 2 year old Google designed phone which embeds a “non-standard” NFC architecture (embedded SE) which is controlled by Google (and cannot be controlled in a UICC based architecture).

As I stated yesterday, the ISIS is experiencing delays in its “go to” architecture. The rumor is that the current ISIS timeline is pilot in December of 2012 and production in mid 2013. I see this move by Verizon as accomplishing 3 things..

1)      The Google Nexus S is the only production NFC phone in the market (actively using NFC.. 50M blackberry’s have it.. but element is cold and lonely). It could allow Verizon and the ISIS team to reconfigure their CSAM wallet platform to this “non standard” architecture to accelerate time to market for a test.  The desired ISIS architecture is SWP/UICC based…  Note that if this is indeed Verizon’s plan, they will need Google participation as Google owns the SE keys in the Nexus S AND they have not published the APIs for the NXP element access

2)      Gives Verizon a phone in the market to pilot with Google. In other words they can play in the Google camp without a formal commitment. Verizon can play ISIS and Google off of one another to see which horse will win. This is very smart.

3) Gives Verizon access to NFC/Android much beyond payment. As Google has clearly articulated in Android Beam, NFC will be the tool for machine-machine communication. How you share pictures, videos, music and apps with another phone. VZ’s current NFC plans revolve all around ISIS and payment (and very closed), Google sees NFC as another radio to do many, many different things. As this week’s Comscore report shows.. Android’s 46%+  market share is a key driver of VZ’s success. VZ needs this handset not just for wallet.. but for access to all the other cool new Google toys that will come out supporting NFC. The question the analysts should be asking VZ is how their SWP/UICC architecture plays in the Google model. How will VZ allow many apps to access the NFC radio AND the secure data? There is only one software company that can help here and that is Sequent.. The other option is a multi SE architecture (see my previous blog, note blog was wrong on Apple), which RIM will likely support. In either of these scenarios, complexity reigns.. the only real option is to let Google drive the definition and the apps. Perhaps this is why VZ has thrown in the towl to Google’s Nexus architecture (hardware).. but not yet on software (wallet)

Don’t believe everything you read.  Verizon’s decision to commit to selling the Galaxy Nexus  is an indication of major strategic planning.

Related article on the ISIS Platform: Ecosystem or Desert?