ATT-Discover Prepaid

ATT and Visa will be rolling out a pre-paid card staring next month. What will this bring? Will it take off like AT&T’s universal card? Will it be the “Tipping point” for mobile commerce, ushering in a new era where the mobile phone can transact with a wallet that spans the virtual and physical world?

15 March 2010

Previous Post NFC Break Out – VISA/FirstData/AT&T

My updated prediction is now first week of April. This is real.. and it is imminent.

Q: What will it mean when every AT&T subscriber receives a pre-paid Discover card with an NFC sticker? (Note back in March I did incorrectly guess it was Visa instead of Discover)

Answers

  1. Tipping point for mobile commerce, ushering in a new era where the mobile phone can transact with a wallet that spans the virtual and physical world, aggregating every other account type and payment instrument.
  2. A new business for AT&T which could drive 30-60% growth in LT revenue
  3. Software REVOLUION. The “Next wave” for iPhone AND the entire mobile commerce ecosystem (see googlization)
  4. New mainstream marketing channel as couponing integrates with payment, location awareness and detailed knowledge consumer behavior/preferences
  5. Card business killer for Bank/Issuer revenue as MNO Pre-paid encroaches on the consumer relationship AND issuer debit/credit products (Decoupled Debit)
  6. Cash replacement for small value payments as merchants of all types adapt POS to accept NFC, and small merchants take out POS terminals in favor of making their phone a cash register
  7. .. would love to hear from you on the next 100…

Business Model

Retention or revenue play? AT&T Universal card changed the credit card landscape in 1990. ATT demonstrated it could both create a card business AND leverage  distribution muscle as it attracted over 10M card holders in under 2 years. Citi acquired the AT&T Universal card for $3.5B+ in 1997 and it remains the largest affiliate card in Citibanks’s portfolio.

The biggest variable with anything “consumer facing” is the marketing investment needed to push it into critical mass. Example, will AT&T develop some program to incent “pay by phone” use like a $50 credit with $200 of spend? Discounted airtime rates? Rewards program? AT&T has proven it can deliver new technology and ecosystems (iPhone and Universal card)… and subsequently has many options.

AT&Ts pre-paid revenue model will likely see MUCH lower margins than their 90s card business, perhaps something of a split between a pre-paid card and a “decoupled debit” (which the US banks have long feared). How will customers “load the funds”? How will they encourage bank funding? Will Citibank get its act together and partner to extend credit (existing universal card holders)?

Given that there are many unknowns, here is my high level estimate on year one financials. Assumptions:

  • 85M subscribers (7M iPhone)
  • Year one penetration of 5% (4.25M or 60% of iPhone base),
  • Average purchase amount $40
  • Annual TPV = 50%(85M*0.05*$40*5*12) = $5B  (note: 50% for linear ramp up)
  • Take rate 120bps (Note there are current issues w/ NFC interchange, see BestBuy)
  • Revenue $60M
  • Processing expense (30% of Rev, 100% ACH funding) – $18M
  • Marketing spend – $50M
  • G&A – $3M
  • 12 mo EBITDA – $(11M)

$11M loss obviously doesn’t take into account many unique one time expenses, but it does provide some insight into the dynamics. It seems as though AT&T is spreading out the other “investment costs” through a consortium of First Data, Visa and a number of smaller companies. I would also expect to see a number of new revenue streams (marketing) as merchants experiment with other new Visa sponsored services like mobile coupons. The tech industry needs an initiative like this to expand the “mobile app” world consumer base beyond its current iPhone demographic.

Related Posts

Obopay and Firethorn

Spoke to most of the top 5 US banks this week. Neither Obopay nor Firethorn will have any traction at the top US banks.

2 March 2010

Related posts

Spoke to most of the top 5 US banks this week. Interesting to note that Firethorn is out of all of them.. even in the model where Firethorn paid one of the majors $1M to take the application and integrate it. As of the latest QCOM 10-Q we can now see that total Firethorn revenue was $3M for the 2009 YEAR!  Wow.. no wonder Len lost his head for buying this thing and making it a separate division.

QCOM and Firethorn have a new product planned:  SWAGG (www.swagg.com). Good luck trying to figure out what this thing is.. could this be associated with Visa/ATT? (Youtube here). There seems to be a pre-paid debit card associated with it (from Dr. Jacobs CES presentation). Hey QCOM is one of my favorite companies… the people there are absolutely brilliant. But the Firethorn team is adopted.. and therefore the  genes do not extend here. They need a top exec to drive this thing.

On another note, Obopay showed up to at least one of the top 3 banks last month (BankX) touting its mobile payment solution. Undoubtedly with “millions” of subscribers (actual estimated at less then 20k). Always interesting to see spin here, they also reportedly told BankX that Citi’s departure was only temporary. Other banks should ask them to get specific.. very specific.. (probably not the US and there is no commitment on use).

From compete.com (Hard to spin facts..8,000 unique visits last month .. estimate only 20% use the service)

The “big secret” in mobile payments is that there aren’t any… (with very few exceptions). Those exceptions usually deliver “payments” as part of an existing value proposition (see  MNOs will rule in Emerging Markets). Banks know that changing consumer behavior is a 20 year effort. Card based payment schemes have particularly high hurdles in emerging markets due to interchange rates and rules that are ill suited for low value payments by unbanked. Toward this end countries such as India are contemplating the development of new domestic payment networks.

Thought for the day

RBIs Payments Vision 2012

SEPA: Chicken or the Egg?

The over arching goal of SEPA is to make the EU a single market on “payment” par with the U.S. Perhaps the best way to start is not by incenting changes to “payments”, but to open the EU retail banking market. (Think of the US banks operating under a Fed charter). “All banking is local” can be the mantra ascribed to the EU today, with each country maintaining tight regulatory control over domestic financial institutions (i.e. M&A and Liquidity). Significant market forces could be unleashed when local banks can operate throughout the EU, and a German consumer can seek the best rate and apply for an account at a “Spanish” bank.

4 January 2010

I was reading an update on SEPA : New Alliances Required to Tip the Market. The report gave me new perspective on how challenging it is to change a networked business. This challenge is exacerbated by the ‘well intended’ EU political compromises in SEPA (specifically) and EU regulation of retail finance (more broadly). Clearly “payment networks” can benefit from innovation, but as Juergen correctly states “In a network industry, cost reductions and/or additional revenues that can be realized by applying the new standards have to exceed the network effects currently realized with the old standard”.

SEPA is struggling to resolve issues in cost/benefit allocation given the slow growth and adoption for SDD and SCT. The greater growth in SEPA Cards Framework can be attributed to the “control” and investment from Visa/MA as they manage compliance (and marketing) or the new SCF brand. An excerpt from the report above:

Key strategic decisions have to be made almost simultaneously in organisations that are in competition with each other, follow different strategies and have different abilities to innovate or prepare for an industry change. Only if consensus on a new business model can be reached – among stakeholders who represent significant market shares and hold key positions in the industry– will it be possible to generate the synergies promised by SEPA. As already described, the cross-border business within SEPA represents only a small share of the payments market. The dominant national standards, which all would have to be replaced by the new SEPA standards, are built around national market requirements.

International banks (for example, Deutsche Bank) have separate organisational units in several European countries that run their own national payments engines. They maintain different payment infrastructures in Europe. Modifications in response to new compliance requirements (for example, money laundering or new requirements of the PSD) create several similar projects [for this single bank]..

The costs for SEPA (estimated at €10B) fall heavily on the banks, and the benefits (ex. e-invoicing, cross border competition in payment products, …etc) are expected to be realized by the consumers of bank payment services (with and estimate €7B revenue hit to banks). Fortunately for the Banks, in 2002 the approach decided on by the EPC was to create SEPA in a market-driven and self regulated process.

The over arching goal of SEPA is to make the EU a single market on “payment” par with the U.S. Perhaps the best way to start is not by incenting changes to “payments”, but to open the EU retail banking market. (Think of the US banks operating under a Fed charter).  “All banking is local” can be the mantra ascribed to the EU today, with each country maintaining tight regulatory control over domestic financial institutions (i.e. M&A and Liquidity). Significant market forces could be unleashed when local banks can operate throughout the EU, and a German consumer can seek the best rate and apply for an account at a “Spanish” bank.  Today the regulatory hurdles for this retail competition are significant.

The EU, ECB and the EPC started with payment standards and “infrastructure” as it did not alienate any of the existing participants (market driven.. .not mandatory). What we have is the fruit of this compromise, standards for payments across the EU without the ability for companies to compete for business across the EU domain. The unrealized value of the “SEPA Innovations” are thereby constrained by the market in which banking operates. Perhaps integrating EU retail financial markets would be a better first step. This “openness” would certainly provide an attractive carrot for bank led investment in common payments. Which comes first? The Chicken or the Egg?

See data here

CapCo Analysis

NFC Break Out – VISA/FirstData/AT&T

Get set for a major announcement in next 4 weeks from Visa, AT&T and FirstData that will combine an AT&T pre-paid card account, managed by FirstData, and with services from several Visa led start up companies (both mobile advertising, couponing and NFC).

23 December 2009

Previous post http://tomnoyes.wordpress.com/2009/11/25/visamobpay/

Get set for a major announcement in next 4 weeks from Visa, AT&T and FirstData that will combine an AT&T pre-paid card account, managed by FirstData, and with services from several Visa led start up companies  (both mobile advertising,  couponing and NFC). Consumers will be issued NFC stickers for existing phones and can fund the account with existing card and deposit accounts. AT&T will also have an integrated reward system to reward payment activity with coupons, airtime and special offers with participating merchants. In addition to the NFC sticker, Visa will also be trialing other “other form factors” including: plastic, handset integrated NFC (new phones) and 3rd party hardware for OTA provisioning. FirstData will begin a new role as both the processor and Trusted Service Manager (TSM).

As stated previously, the US market is ripe for a break from the 6 party political “fur ball” that is hampering mobile innovation (Card Issuers, Acquirers, Network, Merchant, MNOs, Handset Mfg). Mobile Network Operators (MNOs) are better positioned to execute in mobile payment in all markets. AT&T is no stranger to credit cards, even today the ATT Universal card is the largest affinity card within Citi’s portfolio.  The implications for card issuers are unclear, given the uncertainty of “mobile payment” consumers behavior and payment patterns. There is a storng possibility that this initiative will be a “tipping point” in both mobile commerce, unleashing a new wave of innovation for all consumers (not just iPhone any longer). It will be very interesting to see if Apple is a part of this initiative. 

More to come..  

From Previous Post

For those outside the US, US MNOs have substantial control over handset features and applications, they have been leveraging this “node control” to “influence” direction of payments. The central US MNO argument being “it is our customer, our handset, our network we should get a cut of the transaction rev”. Unfortunately existing inter-bank mobile transfers/ payments are settled through existing payment networks that provide limited flexibility in accommodating another party (beyond issuer/acquirer), with much room for improvement in authorization, authentication and consumer “control”. 

Outside the US, the situation is much different, as consumers have great flexibility in switching MNOs, have ownership of their handsets, and are largely on pre-paid plans. The MNO challenge for payments in this environment is largely regulatory.  Many countries (EU, HK, Korea, Japan, SG) have open well defined rules for MNOs role in payments (example: ECB ELMI framework within the EU), while other countries are highly restrictive and are in the midst of developing their legal and regulatory framework.  Even in the countries where MNOs participation is defined, they have largely benefited from the complimentary role that the service plays with pre-paid plans (not in interchange at POS).

Globally, MNOs are looking for a payment platform where they can benefit from interaction between consumer and merchant, with flexibility to deal with a heterogeneous regulatory environment. The competitive pressures on Visa/MC are much different then they were 5 years ago (when both were bank owned). The network fee structures and rules were written with banks and mature markets in mind. Emerging markets present a much different set of opportunities, as MNOs lead banks in brand and consumer penetration within every geography.

All of this leads to the case for a new “Mobile Payments Settlement” network, a network which will alienate many banks.  I expect to see Visa roll out the initial stages of this network in the next 2 months with an emphasis on NFC. Quite possibly the best kept secret I have ever seen from a public company. I’m sure many Silicon Valley CEOs are crossing their fingers (with me) on this, as a “new wave” of innovation is certainly close at hand that will drive growth (and valuations).

For those not keeping up with the 50 or so product announcements a day on NFC, handset manufacturers committed to have NFC enabled phones to consumers in mid 2009 in the GSMA 2008 congress. NFC capabilities are numerous (Vodafone YouTube Overview), and may represent a true disruptive innovation surrounding payments. There have been many very recent product announcements that will enable existing phones to use NFC, and P2P Capability. All of which will blossom in a more “fertile” mobile settlement environment.

Side note: This is not all bad news for Banks, as the structure will certainly provide for existing cards (debit/credit) and may deliver substantial revenue through cash replacement (small < $50) transactions.  More details on structure of MNO in settlement 2 weeks….

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