I’m taking a rather abbreviated approach to blogging today.. as most of my key points have more detail in my other posts. I’ll just link to my old posts and focus on a few new thoughts. Continue reading “Rewiring – Part 2: Walmart+Goog, Amazon+Whole Foods, …”
28 Dec 2014
I hope everyone is having a wonderful holiday. Sorry for the delay in blogging, capital raising takes much more time than I had anticipated. Hope to tell you more about my NewCo in January. So much has happened since Money 2020, next week I will write a recap blog in prep for my 2015 predictions. Today’s blog is focused on “mobile” payments and platforms (iOS/Android)
I define 4 categories of mobile payments:
- Point of Sale. The phone used at a physical retailer
- mCommerce. eCommerce on your phone: buying something from a website in your mobile browser
- In App Purchase. Normally a subcategory of mCommerce, payment within an App (think Uber on iPhone). Only worth breaking out because ApplePay does this today.. and not above.
- Digital Goods. Games/Ringtones/Music/Apps (not in scope for today)
Point of Sale
Think NFC.. Not a focus for today.. but a great article from David Evans Apple Pay is Fizzling provided some key numbers. Only 4.6% of iPhone 6 users in a store that accepted NFC/ApplePay used it. Do you realize how small a percentage of use this is (4% of 3% of customers)!? If only the mainstream press realized that “50 new banks joining ApplePay” does NOT equate to usage. My bank issuer friends have confirmed what I’ve been saying.. there is no value proposition here.. and my volume estimates are accurate. Why? ApplePay does nothing beyond what your current plastic card does today.. Consumers just don’t care and Apple has made no effort to work with retailers (to promote at POS).
It would be great to know what NFC payment volume actually is, but the numbers are so low no one wants to talk about them. Overall NFC payment volume has gone DOWN in 2014 (from 2013) due to CVS, Best Buy and 7-11 “terminal configuration changes”. There are approximately 270,000 US locations which accept NFC, of which 100,000 are vending machines. My estimate for US Contactless Payment volume
- 10% of consumers (20M active phones/wallets to 200M Adults)
- 4% usage (very high)
- 2.5% of retailers accepting (150k/6M, excludes restaurants)
- $2.4T US Retail spend (ex Auto, oil/gas, Fin Ser, Restaurants, Travel)
$240M (1/100th of a % of retail sales)
I can’t believe I’m wasting time even writing about this number (my real guess is $100M). Can you imagine finding a way to make this PROFITABLE across 12 different suppliers?!
If Apple had 100% of this volume their total ApplePay revenue would be $600,000!! (25 bps). No wonder banks signed that agreement. When I went to Google in 2011, the first thing I told Osama was “run away from NFC”.. everyone I’ve known and loved has lost their lives in this NFC stuff. You could do everything right and it still wouldn’t work (see 12 party fur ball). NFC/Contactless may be very Hot in London, New York, Hong Kong, and a few other Cities (high density, mass transit, cabs, high affluent…) .. but the rest of the world is very very cold.
My analyst friends are telling me that 5 retailers will “bolt from MCX” to allow ApplePay. I told them what we will probably see is a few of them adding the option within select markets (like New York and SFO.. ) but obviously the retailers are telling the truth.. Apple consumers are not beating down the door because of the service. Consumers just don’t care (4.6%).. ApplePay .. just like all things contactless… is only “buzz”. My rule of thumb holds: Behavior Change requires at least a 20% increase in value (unless you live in NYC).
What is the difference between mCommerce and eCommerce? If you bought batteries from Amazon on your iPad while sitting in your living room?… A: _____________? (mCommerce.. !!) It makes little sense to break mCommerce out as a separate category from a consumer behavior perspective.. but it makes TREMENDOUS sense to break this out for an analyst platform view.
Total eCom/mCom sales in the US are approximately $180B/yr (See US Census Data). Note that this is a MUCH bigger payment segment than the $0.24B POS market above. Within eCommerce, there are the BIG 3: Amazon, Visa/Cybersource, and eBay/Paypal/GSI which account for over 65% of volume (ex services, my estimate).
There is massive change of consumer behavior within eCommerce over the last 4 years, as reported today, Amazon see’s 60% if volume going through mobile! Quite a tremendous change from the 5% Amazon outlined just 4 years ago (see article). In 4 years we have moved from a model where 95% of US consumers bought online on a Desktop.. to an environment where 60% are buying from an Android or iOS device. Now you start to see the strategy drivers for: Apple, Google, Paypal (Braintree), Visa (Checkout) and Amazon (firephone) moves here.
Historically eCommerce payment services focused on the ability to manage fraud, as merchants held all liability in a Card Not Present (CNP) transaction. As such, payment service providers managed card acceptance and also provided fraud management services (hence their pricing of ~340-~600bps vs the card present MDR for CP of 160-180bps). Paypal’s service was the first of its kind to allow small merchants to accept cards, as the big banks had no tools to manage CNP fraud. All the large eCom specialists became VERY VERY good at managing fraud, building custom infrastructure to assess buyer patterns, and the device which the consumer is purchasing from to score transactions. Today most of their fraud rates are under 8bps (Paypal still charges 340bps).
Move from Fraud Management to Identity
In Europe, Visa and Mastercard shifted liability within eCommerce transactions onto banks in 2006 (see 3DS a Collaborative Path to Failure). This did NOT work out well for all, as the technology was highly flawed. The US never had this facility… a good thing.. and the state of the art in fraud management stayed within the big 3. For more background on this see Authentication in Value Nets. However the billions of dollars invested in building fraud management assets are being rendered useless by identity management and authentication. This is a HIGHLY disruptive force! Existing payment intermediaries have built their position on owning the consumer and managing risk. Mobile changes both!! I will drill into this next week.
As I outlined in Perfect Authentication: A nightmare to Banks, and Who do you Trust, the ability to authenticate a consumer is far in advance of what fraud systems do. As Ross Anderson said at the Federal Reserve “if you solve for authentication in payments.. everything else is just accounting”. This statement does hold for the credit risk side.. but it does for the payments side. This is what is changing with mobile. From my blog:
The “KEY” [prerequisite] in value orchestration is owning the Consumer relationship. Therefore Identifying and Authenticating the Consumer is the first, primary, service that must be owned by a platform. What was a separate “Trusted Services Manager” in the NFC world has been co-opted by platforms which will take a proprietary route. …etc. There is an all-out war going on for the Trust role: Banks (see Tokenization), MA/V, MNOs, Samsung, retailers… everyone realizes this is the “key” to unlocking future value in the convergence of the virtual and physical world.
The impact of mobile and identity on eCommerce is easy to see, as the more “platforms” know about you can be used within the device you use (and trust) the most. Mobile’s impact is also hitting the offline physical retail world, but in a much more experimental phase as the platforms, online retailers and aggregators don’t work within this space (yet).
A new rate tier: Cardholder present
This “new” form of mobile authentication will enable networks to create a MUCH improved version of VBV/MSC, shifting liability onto the bank with an interchange rate between CNP and CP. Who can take advantage of this rate and liability shift? Entities that can authenticate the consumer on the mobile device (Apple, Google, ?MNOs), securely manage a token and broker identity with other parties (see Authentication in Value Nets).
How will Visa/MA roll this out? There are many, many lessons learned in the prior 3DS (VBV/MSC) roll out. Already V/MA have been talking to major issuers and eCommerce service providers. Token issuance is currently a bit of a hang up as the issuers want to get their own TSP services up and running, and the Google/Amazon, … want to run their own TSPs. If everyone would agree to use the V/MA TSP services this could happen quite quickly. But because this is NOT the case, ApplePay and Visa Checkout seem to be the only services positioned for this move.
As I stated previously in my ApplePay blog, when this new rate tier hits, it will free Apple (and others) to transfer the token to the merchant across a greater number of protocols. In store this means that NFC will compete with a BLE experience, with NFC carrying a CP rate and others carrying a Cardholder present rate (and bank liability) that is very close to the CP rate.
2014 – Payments Part of OS:
Per my July 2013 blog Payments Part of OS, both Apple and Google are integrating payment capabilities into the OS. Where Google Wallet detractors deride Google because of its lack of progress in payments, I believe they are shifting focus to what really matters: establishing Android as the core commerce platform. In this future world you don’t really care about payments.. they just happen. With great authentication your information is stored in the cloud and you choose what information and payment instruments you want to exchange with a retailer.
We see the first hints at what this will look like in this WSJ article Google Shopping to Counter Amazon. Note that this is not Google payment… this is Google SHOPPING. Let me emphasize.. the battle is NOT about payment but about delivery value to consumer within Commerce. The focus for innovation investment TODAY across banks, retailers and service providers is Android as the iPhone platform is locked down. Sure Amazon and Bank of America are leveraging Touch-ID but this requires little effort. The key for Commerce Innovation and Value Orchestration is to get 1000s of companies engaged … Apple’s efforts are 95% consumer focused.
This consumer focus is paying off for Apple as they are 3-5 years ahead of Google (and Android OEMs) in handset hardware/SW. However, Google and Amazon are 5+ years ahead of Apple in orchestrating commerce value. Value orchestration is a network business and entails enabling millions of partnerships where consumers and businesses are incented to participate. Apple isn’t exactly known for making money for anyone but themselves. Apple has a MUCH greater ability to manage identity and trust and should be pursuing a strategy of consumer focused identity brokering (see Brokering Identity, and iPhone 6 – Apple’s Platform Opportunity) but are challenged organizationally as payments/identity are deep within a hardware culture, a world where neither are capable of creating partnerships.
Bank “payment” strategy seems to center on control or redesign of existing networks and nodes. For example, Issuers are attempting to leverage old nodes (Cards) and current market position to form a new orchestration role (see Card Linked Offers). Jamie Dimon created a new Data Division at Chase run by Len Laufer with a bifurcated visa*net. What banks forget is that their role is that of a neutral broker, they were NEVER the starting point for commerce (their network and nodes are weak). The harder banks work to build barriers to entry, the greater the value of finding ways around them….(think bitcoin). Or in the case of payment in the OS.. making unique assets (fraud) a commodity… the NATURE commerce is changing and the role of payments, how they deliver value, is changing too.
Think about it this way: did you buy an Uber ride on your iPhone because it took your Visa card? Did you even think about Payment? Same with Amazon… did you shop there because of payment? Payment is becoming a back end commodity service and the mechanisms for banks to differentiate are getting smaller. There are many implications for small business. For the last 20 years much expertise has been needed to create an online store, particularly in accepting payment. All of that is changing, if I solve for fraud, integrate my inventory into search and product discovery, merge customer contact and loyalty into advertising and payment, all with standard services… it becomes EASY.
For too long banks have leveraged your relationship to create value for themselves, hitting you with a mind numbing array of products and fees. This is their network legacy.. it is bred with inefficiencies. The bank goal was not simplicity, it was complexity and margin. Products like Apple, Square, Stripe, Paypal, Amazon, Poynt, Tesla are beautiful in that they make the complex appear simple.
ApplePay Expands to Browser
As I outlined above, the key trend in commerce and payment is the move to “mobile”. Today Google wallet works with Google chrome and app store for auto fill and checkout. Expect to see Google make authentication within Chrome, android, and apps much tighter, with Chrome becoming a cross device focus.
Today 90% of my payment friends agree that Apple’s REAL win within the next 2 years will be ApplePay in eCommerce/mCommerce. Today ApplePay’s focus is on in App purchases only. I expect to see ApplePay expand into browser based payments within 6 months or so. Apple may be first to market with the “Cardholder present” function given that tokens, authentication and bank agreements are already in place. From a merchant perspective Apple will offer a free API (akin to autofill) where Apple tokens and necessary consumer information is passed. Amazon Payments and Google already have this capability, but have not yet implemented tokens, biometrics or have bank agreements.
Apple’s greatest asset is its ability to change consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). Apple’s reputation is well deserved and earned “the hard way” by remaking: phones, music, mice, computers, apps, …etc. Through consistent delivery of value within fantastic hardware delivering great (and fun) consumer experiences they earned trust for their products and brand. Consumers using Apple’s in app (today) or in browser (future) don’t even think about using payments… it just works.
When will we know it happened?
- When neither consumer nor merchant had to do anything unique to support an online sale.
- On phone, in app, in browser.. they all just worked and no one even thought about it.
- We used the payment instrument of our choice.
Apple has already arrived at this state with in-app ApplePay. From a technical perspective, key convergence measures are:
- Payment is treated the same regardless of channel.
- Handets, platforms, and networks can pass information, identity and trust.
- Banks accept that consumers can be authenticated without physical presences.
- Developers leverage platform payment services with ease.
Who is impacted?
Paypal. What are paypal’s assets today? Risk management, consumer accounts, DDA Funding, a few merchants. Apple, Google, Amazon, Facebook already have the consumers. The paypal risk management assets are worthless in a new environment. DDA funding looses importance as merchant costs for CNP fall from 340bps to 150bps. What do they have left? Let me know your answer..
MA/Visa. Visa/MA wins when there is card volume. Making payments part of the OS and giving consumers choice of payment instrument is a HUGE win for Visa/MA. As payments move into the OS so does V/MA. They become infrastructure. The losers? Well card issuance costs, risk management costs, fraud management costs, merchant integration costs all start moving to 0.. which means big margin compression for everyone else on the network.
With respect to eCommerce. Visa checkout/CYBS has substantial volume. They can adapt to tokenization quickly, but unclear how they would manage authentication.
Issuers. Imagine loosing all the airline CNP revenue? I don’t see an upside for issuers in this. They have a very poor ability to influence the network and are not well placed to serve in the trust identity role as consumers leave the branch and interact with the bank less often through remote channels. Banking is becoming a commodity service as well (see blog). You should have heard the squeal on the ApplePay agreement.. never before have Banks had something like this handed to them “take it or leave it”. Given the NFC volume above banks may have written if off. But this could turn out to be a big Trojan Horse as this tokenization expands into CNP/Card Holder Present. I believe their biggest fear is that Google will look to follow the model.
Merchants. Merchant that can sell or engage on mobile: Big winners.. mobile conversions, decreased fraud, liability shift to banks, changing consumer behavior. Merchants that are stuck in bricks and mortar.. no change.
Google. Big win. The only company that is cross platform/device. Buying in Chrome or in Android is seamless. Challenge is to move buying “search” back into Google from Amazon. The other advantage to convergence is the ability to close loop on behavior within the mobile/ecom process.. helping google advertising become even more effective. Google’s challenge is in Enterprise integration. Their engineers don’t like working with anyone else’s code. This is where Microsoft and Oracle are headed… helping enterprises engage consumers.
I propose the following metrics to measure/rate “Commerce Platforms” :
- Frequency of consumer touch (per day)
- Commerce transactions $/day
- Number of businesses you work with * the average time spent in managing in store experience…
Payments Part of OS: What does that Mean?
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).
Warning.. I ramble a bit in this one.
23 March 2012
Does 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?
What is a Digital Wallet?
My all time favorite YouTube video definition is below (Courtesy of Google)
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
My 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.
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.
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.
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.