My track record on Apple is pretty good.. having broke the Apple Pay news in 2014 and Last August I announced the Apple/Mobeewave acquisition. Apple is great at keeping secrets… perhaps the best tech company in the world in this regard. My latest forecast? Apple will enable payment acceptance in the US this October with Elavon as payment processing partner.Continue reading “ApplePay Accept (Mobeewave) in October”
My belief is that Mobeewave will be the equivalent of a NFC/EMV certified “toll collector”
Turns out my rumor was well founded as Bloomberg verified this weekend. As such I thought I would give my view on what Apple will do with the asset.
The broad theme.. Specialized Hardware ALWAYS gives way to software.
- Apple will make accepting cards as easy as using a card. They are likely to take on the role of a platform for acceptance. Acceptance requires tightly controlled and certified software and hardware. Thus it is also likely Apple will develop an app ecosystem for acceptance that expands on the “controlled” app with many 3rd party applications, and will also enable a physical acceptance device (ie dongle) to support acceptance of any card.
- To enable card acceptance on mobile devices, the acceptance infrastructure must work within Secure Enclave (iOS) or the Secure Element (Andriod).
- Apple does not publish, support or enable any third party operation in the enclave. Thus any card acceptance platform must be “inside the tent” with Apple’s software infrastructure. This is why Mobeewave was focused on Android and Samsung (openness).
- For card acceptance on IOS, in addition to enclave integration, the acceptance platform must be certified by both networks (V, MA, Amex, CUP, …) AND the acquirers (FIS, FISV, GPN, …etc). See Trust Networks.
- My belief is that Mobeewave will be the equivalent of a NFC/EMV certified “toll collector” for interaction with the enclave. Apple will enable MANY 3rd party applications to build around their platform. This approach directly attack’s square’s vision of merchant ecosystem centered around their hardware.
- Apple currently takes 15bps of all Apple Pay transactions (in US) per issuer agreement. It is likely to also seek a similar transaction fee from acquirers for acceptance. Note: processor take is 20-30bps vs 220 bps for issuer.
- Apple’s goal is to create great customer experiences, particularly for device to device payment (see blog). Enabling 100s of “app creators” to build value from this central service could be a $50-100B revenue opportunity if Apple is able to capture 10% of US market. The likely initial focus is small business.
- Key hurdles are on areas outside of Apple’s control: 1) Device/Software certification, 2) Acquirer/Processor automation of new merchant accounts.
- Estimated timeline? Testing in 5-9 months, Certification in 12-18mo, Rollout in 18-24mo
- Positive. Visa/MA merchant network expansion + Cash Replacement. Acquirers/Processors, new platform provider (with TBD cost). Other Fintech’s in this space: Poynt, Toast, MagicCube.
- Negative. Square.
Example – Stripe or Shopify expansion into the POS. Apple’s approach here would enable Stripe or Shopify to deliver omni channel and expand into the POS game with minimal additional investment. Either would be able to deliver integrated payment acceptance through IOS devices and create apps that are centered around their own unique platforms. Apple’s value? Solve device certification and merchant account creation – globally.
A more detailed blog on topic will be coming out next week. I’m a tad slammed today.
Rumor only. Apple has entered the POS game with purchase of Mobeewave.
This is just a rumor.. but when you hear it often I give it a tad more credence.
It would seem Apple is entering the POS game.. Over the last 5 years they have looked at Stripe, Square and others.. but couldn’t make sense of the “hands on” merchant relationships.. perhaps they don’t want to add a sales team or manage payment ops. If that is the case Mobeewave is an amazing company with a solution that makes any phone a POS with just an App. Rather than getting an issuers permission to add a card to your wallet, it would require a merchant bank to create an account to allow for acceptance (I’m sure all acquirers will be calling Apple today).
Apple’s services revenue hit another record in yesterday’s earnings.. merchant acquiring would be new area for growth.. The opportunity: enabling acquirer to add merchants as easily as issuers add consumers. Small merchants would seem to be the best path for attack.
Who is impacted? This is a short blog, so here is my short list
- Square. Wow… now competing against Apple.
- Samsung. An investor in Mobeewave.. now without an outlet for making Samsung phones the next POS
- SMB acquirers. Making payment acceptance an app on an existing device may be the closest thing to creating an “alipay” in the US. If Apple can make pricing simple, and merchant banks can accelerate underwriting, they can make this a fantastic growth service.
- Fintech, specialty acceptance. The remaining players (ex Toast and Poynt) will now be in play.
- V/MA. They should love this.. it helps anyone become a merchant.. and adds volume to the network.
My firm belief is that Apple is best positioned to create GREAT experiences. This is much more than payment acceptance. Just as Paypal recognizes the need for QR code to transmit more than just payment information (yesterday’s earnings call), Apple can bring Mobeewave into the tent (within the secure enclave) to process identity, loyalty, rebates, rewards and coupons. Remember that Apple chose NOT to enable contactless on their Apple Card.. they want consumer behavior to be device to devices.. this is a very logical step for them (see previous blog on Brokering Identity).
I’m not going to waste much more time on this rumor.. but this is a monster with important implications. For my long time readers.. remember I was almost 2 years off in my estimate for ApplePay launch.. so it may take a little time.
For me… I’m busy buying some more Apple stock. This is genius.
I haven’t written much on acceptance over my 9 yr blogging career for one simple reason.. I was never “in” that side of the business. Given how much is going on in here I can’t leave it out any longer. Acceptance at the POS is a big topic, I see the following areas: Continue reading “Acceptance – Part 1”
- mCom/eCom Convergence – Payment in the OS
- ApplePay in Browser
- One Click for Ads – Facebook Pay??
- eCommerce Thoughts – What is fundamentally changing?
2 Dec 2015
Happy ‘After’ Thanksgiving everyone, I’m coming out of my tryptophan coma and thought I would go for a mental stretch. This is a pretty big topic, and I won’t do it justice. Thanks in advance for your comments and perspective. [Note I’m not naming the titles of my reference blogs and used only URLs.] Continue reading “Changing Economics of Payments”
15 September 2015
Well kids are back in school and Europe is tan. 6 weeks left till Money 2020.. and I just completed our Series A here at Commerce Signals.. wow what a summer!!
This blog is a little bit more of an inventory of things going on.. mixed with some views and general rumblings.
EMV. Its going to happen in October and the big merchants are ready. Two top processors told me that small merchants are in big trouble, particularly as the issuers will be pushing back all fraud to non-EMV merchants VERY aggressively. Think of it this way. EMV does NOTHING to help the small merchant.. currently no business bares cost of fraud in card acceptance. In October merchants must change to accept EMV or they will have the risk of fraud on their business. ISOs to the rescue? This will be a great opportunity for Poynt, Square and other merchant friendly POS/Payment providers.
Acquirers. First Data is moving toward IPO. This is a very tough business.. but as I’ve said before my bets are around companies that can be merchant friendly.. Acquirers are the entity that own the merchant relationship in a 4 party network.. so it is theirs to lose. Nothing has really taken off (incrementally here), Clovr, Card Spring, First Data’s Palantir. Why?? Acquirers have largely been put into a pricing box at the top 500 merchants with a well defined service (not much room for incremental services), and have had their reputation impugned through the ISO channels at the low end (5-7% cost of acceptance). For any Acquiring CEO reading this blog.. my action for you today is to take a look at the invoice you send to a merchant. 2-4 pages of fees that are indecipherable.. When merchants don’t trust you they don’t buy more from you. This is why I would not invest in this space without a clear understanding of the disruption.
Private Label. Rumor is that both Amex and Paypal are looking at M&A here. Makes sense for Amex particularly given need for transaction volume, 3 party model and their state of the art infrastructure. Merchants love Amex customers.. and Amex does the best job in the industry of proving the value that they bring (justifying their hefty cost).
MCX. They are set with payment infrastructure from FIS and First Data. The payment capability is there, and it takes time to build a highly scalable payments company. I just don’t see the need for stand alone app. My guess is that there will be an MCX payment instrument that sits in Apple/Google wallet… just silly to compete on “presentment”. Is the alliance fracturing? I think all participants would love to have a payment instrument that they could own and control. The issue is that there is no agreement on anything beyond payment. Mobile is too important a channel to delegate to a consortium. Also, these are fierce competitors.. The real challenge? Creating a great consumer experience, quite frankly their product team was one of the worst I’ve ever met in any company. No wonder they were considering paydiant.. one of the only options out of the DIY.
Poynt and Square. This seems to fit right in to the flow.. I love both of these companies. Why? As described above the payment industry has been VERY unkind to retailers. Poynt and Square give retailers a greatly simplified hardware, software, and acquiring solution. As a small merchant moving from 5-7% acquiring to 2.75% is a rather simple value proposition. I believe Poynt has several significant advantages over Square: 1) Square has a 6month+ certification process on Apple devices. Whenever it changes anything in its app… it has to go through recertification by Apple. Poynt is the ANDROID of Point of Sale solutions 2) By staying off of Apple AND adding a separate stand alone processor for non-payment applications, Poynt can deploy more applications more quickly and act as a platform for other services. 3) Poynt has a powerful data solution that puts merchants back in control of their data, 4) Ergonomics/Design. Just beautiful. Chip/DIP, Chip Contactless, QR, BLE, customer facing touch screen (not a swivel stand) all work seamlessly without having to pick up the terminal and try to stick your card into a slot. Well done Osama and team.
Paypal? Not much of a stock pop.. I’m very high on the Dan and Bill. But their core asset (eCommerce risk management) is being rendered moot by great mobile auth. When Microsoft (OnePay), Google (Wallet), Visa (Checkout), Apple (ApplePay) all moving into eCommerce they also risk loosing consumers. One of my biggest beefs is their treatment of Venmo volume in TPV (it is 0bps). Rumors are also that they will lose Uber within next 6 months.. and worked a special deal to keep them with take rate below 90bps (perhaps a driver of their margin drop). Merchants are a natural ally here, but Don K really mucked things up with their POS try. It will take 2 years to get things in shape here.
Visa/MA.. They are my biggest holdings.. no change in my views here. VDEP and MDES have positioned both with new power to tokenize and own the rules on mobile. I expect to see a new CNP rate for tokens within next 9 months.
Google. Big news 9/10 (See Blog). Google wallet now on all phones KitKat 4.4 and above (50-60M in US). I love it.. This is the PLATFORM FOR PAYMENT INNOVATION. The user experience is not on par with Apple (or even Samsung Pay).. but Android users are more technical (only 6% of iPhone owners have ever used ApplePay). There are some BIG pluses over Apple, I love that it shows the ereciept and location of purchase for instance (most issuers). Very surprised that Google is still looking for bi-lateral deals from issuers (in order of $10M with no bps). This is why we don’t see many issuers at launch. What is funny is that there is a “free path” to issuers as well. If they don’t want their card art.. issuers can still just “turn it on” via the V/MA intranet tokenization route (register BINs). Funny that the big hold out is JPM.. given its data play.
Apple. I wouldn’t be surprised to see an ApplePay product announcement in October at Money 2020. Note that my track record is near perfect here so I don’t want to mess up 2 years of predictions. I know that Apple has ApplePay working in Safari, don’t know if they will roll this out our not. I also know that Apple went back to issuers asking for an “Amex like experience with eReciepts”. The issuers said “sure we can do that.. lets first tear up that 15 bps contract and talk about what you will pay me”. My sources say that beacons are a part of the next launch.. they could be just feeding me *&^*(&. My guess on new release? 1) New Developer Support Program and rollout of Private Label/ Synchrony, ADS and Citi. 2) Improved “eReciept” process (like Amex) in order to compete with Google. 3) ApplePay in Safari (60% chance.. it is working but don’t know if they want to push yet before new token CNP rate tier). 4) Beacons at POS. Improve retail experience with beacons (40%.. again working in lab but don’t know of readiness).
The big Apple news that everyone is talking about is their plans to finance phones directly (end running carrier subsidy dependencies). As I’ve stated before, Apple’s phone is already capable of enabling a virtualized SIM. This is the one step needed before Apple enables consumers to “switch” to the lowest cost network every month.. or every day. This obviously has big implications for Gemalto as well. Google is 2-3 years behind, but is making more progress in enabling wi-fi as network option.
Innovation. Chain getting investment from NASDAQ, Visa, Citi.. is big news. I remain very positive on use of bitcoin as a disruption to Payments (see blog structural changes to payments). I also live industry specific solutions where payments are combined with something else to solve a problem. hyperWALLET for global payroll, justpushpay for construction, WEX for fleet/gas. I also love payments and data (hence commerceSignals), in this Klarna and Sofi are just tremendous ideas.
Samsung Pay. No change in my views here. What is sad is that they didn’t know that their entire application is incompatible with Android M (until they read my blog). Working with a competing app on their own phones with no registration.. just sad.
Card Linked offers. Guys don’t believe the press.. all of these things are dying. Even the most successful (cardlytics). Citibank is rumored to have called EDO to come pick up the pallet of their equipment (after 300M+ spent). The good news is that their transactional data is in better shape for use.
Gemalto. Stock is at a 5 year low.. I told you guys to be short here. NO MCX, No GSMA NFC SWP… now Apple is pushing the SIM out of the phone altogether (or soon will).
Monitise. I want to end on a humorous note. This company did a great job at enabling online banking 8 years ago.. enabling “check your balance” functionality via a quick integration to the ATM switch. They pivoted in 2006/8 to support development on an array of handsets (Nokia, RIM, Apple, Samsung, …) with their only competition being mFoundry (acquired by FIS). But the phone complexity went away with 2 mobile OS (Android and iOS) and the rapid shift of mobile from the periphery to the center of the customer relationship. No bank will outsource the CENTER.. mobile development was a specialized skill.. now it is mainstream. As if this were not sad enough, they hired a US network exec with no EU experience, no mobile experience and no network of issuers (that liked her). Then she pushed out the founder.. only to quit last week. Wow .. I hope the BBC can make a Silicon Valley (HBO) equiv.. only make it more of a Shakespearian tragedy.
16 March 2015
How can Google, Samsung or anyone else ever hope to catch Apple? It depends on what they are chasing!
My view is that Google has just begun a major transformation to the physical (offline) world with Android as the key enabling “platform” (beyond search to orchestration) for a new business network. This transformation involves 5 primary vectors:
- Enable Android as the secure platform (SE Linux, Trustzone)
- Create participant incentives for commerce “network” to invest and transact on “platform” (Advertiser, MNO, Bank, Retailer, …)
- Improve physical world insight/data collection to enhance targeting and attribution
- Capture and manage consumer identity
- Create/enhance consumer engagement platform for commerce
Mobile Industry vs. Mobile Economy
Apple is the #1 company in the world. (A very BIG period). Apple’s position is well earned through focus and hard work. Operating as a consumer champion that captures a mind numbing 93% of the mobile industry’s profits. The most obvious question to address in this blog: what could ANYONE do to dent this? (operating from a basis of under 7%). In other words, what could Google do that would possibly matter?
Answer: The “Mobile industry” is not what Google is chasing (nor are Amazon, FB, Twitter, …). “Industry” is an old world classification that does not account for most aspects of the MOBILE ECONOMY (advertising, beacons, shopping, shipping, social, payment, identity, …etc). The mobile economy is about commerce. Perhaps my favorite “stat of the year” to exemplify the impact of mobile outside of the traditional “industry” came from January in Tech Crunch. Amazon’s business has shifted from 5% mobile to 60% mobile in 5 years!! (see Convergence Blog for more detail).
As mobile and IOT encompass ever larger roles/touches which impact our behavior, Google is moving to support both: Android as the embedded OS (connected everything) and Google core as the center of commerce (the orchestrator). This blog focuses on mobile commerce and I will try to outline a few of Google’s strategic moves that are redefining the mobile economy.
Google’s core is centered on connecting businesses and consumers, delivering services to all. At the center of this star network is the indisputable “data” utility which becomes more efficient with every insight they gain on both sides (consumer and merchant). Today millions of businesses and billions of consumers are investing “energy” to connect to Google (all with unique incentives)
Businesses, Banks and Consumers are all wondering if the beautiful simplicity of Google’s bright shining star [network] is a Faustian Bargain, much worse than Apple’s walled garden. Google’s position today is quite a feat given its humble beginnings as a free Open Source mobile OS that Google bought in 2005.
How is Google building platform and network? Moving to a model of shared incentives and partnerships? Before we go deep here, let me first attempt to paint the picture of Apple’s dominance (and weakness).
Apple’s success is completely driven by the consumer, logically this means their organization and investment are focused on delivering great consumer products which operate within a giant walled garden. This walled garden works well in a small world (individual’s control: telephone, music, calendar, pictures) where Apple can control, but not very well in coordinating interactions outside of the garden. Stated differently, Apple’s approach of “my way or nothing”, means it has few friends.
As I outlined 2015 Predictions blog, competition is no longer about camera resolution, storage, and screen size, that enable you to manage items in your small world. The visible (obvious) attributes of mobile competition have become a commodity; as well as the small world problems that your phone solves. My view is Apple’s greatest assets are consumer trust and its unique ability to change consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). These assets allow Apple to assume a leading role in connecting and orchestrating consumers in the real “connected” world , however they are 5 years behind Google, Amazon and Facebook in their ability to execute here.
Why is Apple falling down in IOT/Connected Commerce? Apple has 4 primary strategic weaknesses: 1) it does not partner well (closed network and proprietary standards) and 2) it relies primarily on hardware for revenue, 3) its entire organizational culture and focus is on hardware 4) it locks consumers into its walled garden. Today pointing out these weaknesses is like telling Peyton Manning that his singing was out of tune, or Albert Einstein’s flaw as dancing. These shortcomings just don’t matter in a world where Apple is 3 years ahead of everyone else in profitability, quality, loyalty, integrated OS and Hardware.
Apple’s business model is perhaps the best example of how closed networks win through the domination of a benevolent “channel master” (see iPhone 6 – Apple’s Strategic Opportunity). Cisco, Microsoft, Intel all operate in this model. Apple’s star network is much smaller (ie connected business) but its bonds are much stronger. However, their success may become a hindrance.. as merchants, banks and others want to “own the consumer” too.
Compared to Apple, Google’s world is much more democratic, it wins by delivering value through customer choice every day (search, maps, mail, play, HCE, …). Google is a commerce enabling, which tilts toward the consumer (on the phone) and toward the merchant (in advertising). Where Apple has a walled garden; Google is a semi open platform that supports many gardens and clusters. Where Apple’s business is driven by hardware margin; Google’s is driven by daily consumer and merchant choice. Where Apple delivers value to consumers and itself; Google delivers value to every merchant, bank, MNO and almost every consumer (even on iOS). What other businesses are enablers of consumer and merchant? My list is fairly small…
Apple’s inability to make the iPhone work outside their garden, means that they are dependent upon device only margin (currently a fantastic business model). Critics will point out that Apple runs a fantastically successful App Store Platform that is 8x-20x more profitable than Google’s (with less than one quarter of the handsets). However this is Apple’s walled garden.. where Apple made 30% from $2B from App store sales benefiting 500k odd top app developers, Google’s US Ad sales last year were $30B driving at least 20% of $185B in US eCommerce Sales. Google’s role was much more impactful to the overall economy (and almost all businesses).
Platform is turning out to be an opportunity lost for Apple. The iPhone 6’s security has made it the first “convergence device” with the ability to broker interaction in virtual world and the physical world (NSA, CIA and everyone else are still working to break industrial grade security). Yet Apple has no plan to leverage this identity management outside of their platform (see Brokering Identity), or even use basic identity information to assist banks with identifying ApplePay fraud (until very recently).
How to combine assets in the new Mobile Economy?
We need collaboration! The last 10 years has seen every major fortune 100 build big data facilities that work with nothing else. Banks, MNOs and others have all invested billions in an attempt to build an advertising business to rival Google’s. JPM Chase has a new data division on par with the investment bank, Verizon has built PMI, Walmart has WMX. All are constrained by their partial views of the consumer. Advertisers are challenged to work within these new proprietary efforts. The market need surrounds incremental insight engaging consumers in the channel which they prefer .. which means combining data.
US MNOs spent over $600M+ trying to make their NFC play work. As my good friend Osama said at a recent MNO event “in order to create value sometimes we must let go of the assets we treasure most knowing that value is only created when they are combined with the assets and interests of others”.
Google provides a massive closed market (Ad Words) with unsurpassed consumer insight and trust. No company can choose NOT TO participate in Google’s economy, after all advertisers and retailers must go to where consumers are (not where they want them to be). Google operates in discovery, awareness, engagement, selection, sales, delivery and support.
Google is perhaps the only company in the world that is both loved and feared by merchants, banks and consumers. Particularly as their traditional open source, closed market, and “do no evil” approaches become more proprietary and less transparent. Google’s insurmountable advantage is in using data and insights within its own organization, where everyone else must be diligent with sharing (externally).
Today that fear is not well placed. Few understand just how myopic Google’s current data dominance is. While Google knows most about you online (search, mail, maps), they know very little about you in the real world. Google indexed the internet to create a common directory of public data, yet it has very little insight into private data (even your actual identity). Facebook, Apple and Amazon all have far greater consumer identity insight. Physical world (off line) data is of far greater value than online data, and online eCommerce sales are only $185B (US) comparted to $2.4T in offline Commerce.
As stated in intro paragraph, I believe Google has begun a major transformation to the physical (offline) world with Android as the key enabling “platform” (beyond search to orchestration) for a new business network. This transformation involves 5 primary vectors:
- Enable Android as the secure platform (SE Linux, Trustzone)
- Create participant incentives for commerce “network” to invest and transact on “platform” (Advertiser, MNO, Bank, Retailer, …)
- Improve offline insight/data collection to enhance targeting and attribution
- Capture and manage consumer identity
- Create/enhance customer engagement platform for commerce
Android as Secure Platform
Android is transition from open source Linux to SE Linux (which was oddly enough created by the NSA). One of Androids major shortcomings was its dependency on OEMs (minimal say on hardware). While Apple worked to create innovations like touch ID that is stored within the secure enclave within the A7/A8, Google had to work with prime OEM vendors like ARM to build the equivalent (both Apple Secure Enclave and Google’s new equiv are based upon ARM’s Trustzone/TEE). Android is making big bets in security, as managing information (and authenticating consumer) is key to orchestration (see Authentication – A Core Battle for Monetizing Mobile).
Poor SamsungPay. These guys obviously don’t read my blog or they would have clearly seen the implications of Google’s new MNO deal. SamsungPay will not be pre-loaded onto Samsung’s own phone. Samsung not only lost in payments, but also in owning a proprietary security construct that secured the token (Samsung’s proprietary Arm TrustZone implementation). Even if a consumer loaded SamsungPay onto their phone, it will not work without Samsung leveraging the new Google/ARM firmware for secure credential management.
Apple’s biggest lead (with no apparent threat) is in touch ID. While SE Linux and Secure Storage are important… you must know WHO is coming in the front door. The Android approach seems to be more about behavior and forensic identification than biometric.
Incentives for participation
In 2011, the US carriers wanted an estimated $3B from Google for the “rights” to NFC (and the secure element). Google correctly responded.. “how about we figure this out together and see if we can make it work” (skin in the game approach). Last month we saw Google’s purchase of ISIS/Softcard for $60M with a new strategic partnership, with unknown revenue share, and unknown mandatory Android features (ie Wallet/Play/ ?) with the Carriers that redefines the “secure” standard of a new Android platform.
Whereas Apple has complete control over every aspect of iOS. Google has created a network for revenue/sales. Retailers advertise/engage/create, MNOs rev share, Banks manage payments. You can only guess which platform Banks and MNOs would prefer to invest. This common platform may be a turning point for collaboration and Commerce 3.0 (my year of partnerships).
Google’s mission is to use the phone to cross the chasm into offline. The reason a new platform is needed has to do with offline data. For example, Mobile advertising will never work without an understanding of intent and behavior. This [private] information is locked up in millions of businesses (with a copy at the NSA).
Today’s data business is just insane. Take a look at someone like CVS, Catalina is one of my favorite data companies (along with ADS), and Catalina works well with Nielsen to target and measure television ads. However they don’t work well digitally, thus CVS has to provide Datalogix (now Oracle) will all of it loyalty data (your SKU level purchase data) to play with Facebook (see my blog for background). Can you imagine having all of your data in multiple locations? Trusting these aggregators use it appropriately? Combining is with their proprietary models and other external data sets? What are they “gleening” from this data?
Google’s approach is to own the data and insights created from their services. Google now wants to create mechanisms to “share”.. the problem is that this “sharing” involves giving data to Google and getting customers back. This allows Google to create great experiences, but the price for data owners is loss of control.
Logically, nothing in biology or in capital markets has this amount of centralization. The title of this section is “combining assets”, is the only answer to combine assets giving them to someone else for unstructured use? This is what my NewCo Commerce Signals does: providing the plumbing for federated data where data owners retain the control over their data, determining not only who they should share data with, but also for what use (next blog). I’m fortunate to have a few big retailers, banks and MNOs that share this view (within Commerce Signals).
Capture Consumer Identity
Remember when you purchased that new iPhone? You couldn’t activate it until you created an iTunes account. That iTunes account required a credit card. What a brilliant Apple move!! This year Google will finally catch up, as I believe a key facit of new MNO agreements is to make the Google Play account mandatory (with CCN/Token).
Knowing the identity of the consumer is important, authenticating them is quite a bit more difficult. I believe third parties like Payfone will play a leading roll here. Payfone is jointly owned by top 6 US Banks, Amex, Verizon, RRE and a few other investors. They are tying together identity information of carriers, banks and platforms to score transactions and enrollment.
Google has many, many efforts here:
- Google shopping express
- Plaso Pay with initials (Business Insider)
- Google Local Inventory
- Offer ad extensions
- In store mapping
- Payments in the OS
Retailers and Banks are loathe to give Google data, or let them assist directly in consumer engagement. However as long as Consumers choose Google’s services first, Google is in the driver’s seat. Companies that share data more effectively with them will reap greater benefits.
EVERYONE works with Google… it is where consumers are. Consumer behavior on mobile is changing much faster than anyone has anticipated. No one company can ever hope to compete with Google, they are moving fast to reshape the mobile economy.. where consumers spend 3 hr/day.
Android is a much easier platform to make investment. It’s a more predictable standards based environment compared to Apple (ex Sapphire glass or that darn lightening connector), with a strong partnership track record. Google’s democratic nature allows for experimentation. The path toward rewiring commerce is much easier in a Google world.
Having Google at the core of data is not without risks. Companies must work with many parties after all. How do you track the interaction between all of your partners today? Who has your consumer data? What will you share with whom? How can you accelerate trials and tests?
How do you combine your assets to create value in this new future? Without loosing control. This is the problem I am focused on.
3 February 2015
Payments, commerce, data and mobile is this blog’s focus. I’m very very fortunate to have so many great friends, customers and partners in this area. My thoughts are not my own, as I’m greatly influenced by my “environment”.
I’ve made many new friends because of this blog. The funny story that comes to mind was in August of last year when the CEO of a Fortune 50 company comes into the room and says “ahh.. the INFAMOUS Tom Noyes”… (never a good way to start off a first date.. but we had a good laugh and thrilled he reads my blog.. ). Honest dialog has a way of creating great friendships. Thanks to all of you for providing such a fantastic environment! You make writing this thing fun.
2014 Prediction Eval
Before you bother reading my 2015 predictions you should probably see if it is worth your time. Best way is to evaluate what I projected last year in my 2014 Predictions
- Consumer Privacy. Grade – C. Not much happened in 2014 on consumer side. I’m holding with my prediction, just not certain of timing and “tipping point”. How will we know when it happens? Imagine a Sony like incident with consumer data.. Regulated businesses like MNOs and Banks are highly attuned, Apple is the best in class here (consumer champion of privacy see Blog). The Ad industry is dependent upon tracking and data sharing in a very, very grey market approach. There is a better way… 2014 is perhaps the year of “awareness” with Snowden, DEA tracking license plates, State department keeping all of our phone records, to new super cookies on mobile. The next logical phase is ACTION.
- Retail banking. Grade – A. Huge transformations going on. Prepaid and GPR products are segments growing at over 35% CAGR, US branch footprints are shrinking (see Blog)
- Debit Volume. Grade – D. Not much going on here, after the DC court of appeals struck down Judge Leon’s ruling on debit interchange (March 2014). Not much consolidation in PIN debit either. I do believe US debit will evolve to look like Canada’s Interact and Australia’s EFTPOS.
- Mobile BEACONS. Grade – F. Nothing happening in 2014. Looks like more of a 2016 thing. I’m holding to my projection.. but missed timing completely.. thought Apple would launch beacons at their Sept 9th
- mCommerce Payments. Grade – B. Summer 2015 is where we will see substantial progress. We see that the networks have turned over the new 3DS CNP scheme to EMVco last month (see link). As Payments move into the OS (see blog), Paypal doesn’t have one. Amazon, Google, Apple, will make SIGNIFICANT dents in Paypal as the platformcontrols authentication and authorization. Amex/Visa/MA’s new rules on tokens, combined with consumer privacy concerns, will accelerate the trend.
- Specialized HardwareGrade Gives way to Commodity Hardware- Grade A.. makes way for commodity hardware and software. Launch of POYNT and CLOVR are best examples.
- Host Card Emulation. Grade – B (for 2014), Grade A (by August 2015). Google did indeed push HCE into Android. With the death of ISIS and SEs in US phones.. things will be heating up in 2015 with a new Google launch.
- EMV. Grade – D?. It appears to be happening.. I bet it would have been pushed back… I have the cards, but don’t yet see the retailer infrastructure. The chip and signature (vs Chip and PIN) is still a very strange one. It would take me 3 days to explain the politics behind it. What really baffles me is Samsung’s planned launch of LoopPay this summer (with Visa support).
- Banks have given up on payment innovation. Grade – A+. I have a copy of the ApplePay issuer agreement (Sept 2014). Just can’t believe the banks have taken it on the chin like this.. not only ceding mobile to Apple, but Tokens to the Network and 15bps. What do they have left?
- ISIS WILL DIE.. Grade – A+. Money ran out in Dec 2014, sale will be complete by March.
- Apple will have NFC. Grade A+ … ApplePay 9/9/2014.. I was wrong on 3 things.. I projected October (it was 9/9) and there would be no SE, and Beacons would be part of launch (to wake up payment app). Big news (below) is that ApplePay will be in browser by summer 2015.. Paypal will be crushed with a double whammy on “value”: usability and a new rate tier (20-40bps off credit) for tokens in CNP.
- Unlocking the cloud and authentication. Grade – B+ . Apple has done an amazing job here. See my blog on brokering identity.
Summary Grade: B+ . Looks like I’m a little aggressive in projecting the new stuff (Beacons, Identity, EMV, HCE). Except for EMV and Debit, I’m still confident in the predictions (philosophically) but my timelines are too aggressive in most cases.
These predictions based upon the Structural Changes in Payments which I discussed last month.
Big Picture Predictions
- The Year of Partnerships, new Clusters and multi-tenant walled gardens (forced by Apple/Google Dominance).
- Mobile moves from Small World organization to Real World Orchestration (my next blog)… starting with merchant friendly value propositions. You must be where customers are, or influence them in the real (offline) world. We have spent the last 10 years enabling a handset that does more than take calls and connecting it to the virtual world. We will spend the next 10 connecting it to the physical world. From POS Payment, Google Shopping Express and Beacons to Door opening and document signing.
- Tipping point of Privacy (Apple Defines Best Practice)
- Politicization of networks. Government regulation in internet prioritization, payment networks, social networks, advocacy networks and advertising networks. Networks are needed for the efficient life of a firm. Star network resembles dictatorships in social networks, and “channel masters” in business networks. Star networks are optimal for business, however we have grown quite used to the state of `organized criticality’, the scale-free, democratic and highly complex social net. Government involvement in networks usually does not improve efficiency and can lead to significant disruption. Take a look at what Europe has created in SEPA.. a standard that no one will invest in.
- Collapse of “wallets” into Payment in the OS – mCom trumps eCom. Tokens take over in eCommerce w/ ApplePay, Visa Checkout and Google Wallet
- Marketing… the year of measurement… and beginning of pay for performance
- The most trusted consumer brands will remain: Apple, Google and Amazon… with banks suffering most as their products become commodities and mobile rendering physical footprints moot.
- Apple will launch aggressive effort to bring ApplePay into Browser by Summer 2015
- We will have a new rate tier from Visa and Mastercard based upon tokens in CNP (see EMVCo 3DS PR)
- Google will GO BIG in launch of new wallet in an HCE model akin to ApplePay. It will have dynamic tokenization. Google will excel in getting retailers private label and loyalty cards integrated, and pass Apple in BLE integration (in store).
- Alliance Data will be bought by JPM, C, Paypal, Hedgefund+Acquirer or Amex. ADS is my top stock recommendation for 2015, V/MA are my long term.
- Samsung will Launch LoopPay with support from Visa by September 2015.
- Visa will complete purchase of Visa Europe (hopefully at a 2015 discount) with strong dollar and weak EU growth.
- MCX will pivot to a payment instrument within another wallet (think Target Redcard) vs a wallet unto themselves .
- Beacon pilots will launch in top 20 retailers. In store navigation, product location, couponing and gamification will be first uses.
- Facebook payment will go live and be integrated into a new form of social advertising, where you are paid based upon your ability to influence your network, will see first pilots. Facebook will remain king of CPG advertising
- Behind the scenes there is tremendous progress in the collaboration of Banks, Telecos, and Mobile Platforms to Validate Identity. Short term impact is near elimination of mobile payment fraud. 2015 will be year of formalizing an identity verification infrastructure (in the cloud).
2015 the year of Partnerships
Google and Apple against Everyone Else?
I don’t have time to go over all 15 of my projections.. will do so in coming weeks. Over the last 6 months network and system design has consumed my thoughts like nothing else: proprietary networks vs. open networks, integrated vs modular, distributed innovation vs controlled platform, Apple vs. Google, Amex vs Visa, net neutrality vs. prioritization. At what point does OPEN win? My blogs on the subject was Value Creation and Distributed Innovation, Banks non-Banks and Commerce Network and my two favorite books are Platform Leadership and Weak Links by Peter Csermely (viewable on Google Books here).
Any analysis of this area must focus on Apple. Wow! What a machine! The most loved brand, the most profitable, highest in consumer satisfaction, most sales per square foot, creator of new categories, inventors of new consumer experiences, trusted by the most affluent demographic, champion of privacy… on and on. Is Apple an exception? Can any company ever aspire to replicate their success in any industry? How can anyone else compete in areas they touch? Do the rest of us just pick up the crumbs? Apple’s latest results show that their model is improving, garnering over 86% of the “mobile” industry’s profits (see Forbes).
Open networks are harder to build, and are certainly less profitable than closed. My prediction on “year of partnerships” is due to necessity, NOT the efficacy of collaboration. Few companies can compete with the data advantage of Google, Amazon and Facebook. Apple’s trust and reputation advantage is perhaps even more insurmountable. For large companies it may take 2-5 partnerships in a focused area. Imagine the data challenges small companies face. This is not a technical challenge as much as a business one. How many successful partnerships have you seen (elephants dancing). Remember that are injured elephants facing as structural changes in consumer behavior, mobile, information, distribution, trust … impact products and strategies. CommerceSignals is working to help bridge this gap, but that is for another blog.
Where Google, Apple and Amazon are self sustaining Stars (networks), clusters and multi-tenant walled gardens are forming to compete in a quasi open model. The challenges here are not technical, but organizational and value creation. History reveals few consortiums renowned for their efficiency. Value is best created where it can be controlled and monetized in “small worlds”. Networks in business are functional in 2 areas: around a specific function with broad use (Visa/MA, Credit Bureaus, ?Android?) and where market forces can take operate (NASDAQ, …). This is my big hypothesis… would greatly appreciate input here.
2015 must be the year of merchant friendly value propositions. Logically, the majority of commerce happens in a retailer.. and hence the “solutions” must as well. The inability to partner will give way to platforms that enable partnership… optimally platforms that would allow millions of “lightly structured” interactions to test 1000s of value propositions until something sticks (this is Commerce Signals). Take beacons for example.. we know that Apple can maintain security and confidentiality.. but the retailer must install beacons that work for everyone and have a business case (consumer insight). Consumers want to know how insights will be used. How do you manage the agreement between Manufacturer, Beacon Provider, Apple, Retailer and Consumer?
iPhone 6 – Tipping Point for Platforms
As I outlined in iPhone 6 – Apple’s Strategic Opportunity, I believe the iPhone 6 represents the dawning of a new age of mobile “platform”. What was a music manager with a phone has turned into the most secure, easy to use device ever created. The factors of competition have changed, it is no longer about camera resolution, storage, and screen size. The visible (obvious) attributes of competition have become a commodity; as are the “problems” that your phone solves (telephone, music, calendar, pictures). Where previous phones helped you manage items in your “small world”, the iPhone 6 has become both the secure key to the cloud with the ability to broker interaction in the physical world (NFC, BLE, identity, tokens). The “convergence device”. See my blogs Brokering Identity and Authentication in Value Nets.
Unfortunately, Apple is so focused on the consumer it has no ability to partner. While there is no company better in creating devices that thrill a consumer, there is perhaps no company worse at building partnerships and business models where value is shared. Given Apple’s cash hoard, my top recommendation.. create a new division focused on network.. helping connect consumers to the physical environment they live in (thermostats, health, retail, cars, advertising, …). This is NOT a handset function.
Abrupt end here.. this blog has been in partial completion mode for 6 weeks. I had to get it out. Will articulate my views on the other “Top 5” predictions this month.
2 January 2015
Today’s blog is focused on discussing the structural changes influencing consumer retail payments in the US. For those interested in looking at a broader global view of all payments, I highly recommend reading the Cap Gemini World Payments Report (https://www.worldpaymentsreport.com/) .
Payments have been a focus of mine for 20 or so years… it is perhaps the MOST interesting of all network businesses. Payment is a critical part of commerce and a product of it. It is the event in which almost every commercial contract is based upon. Payments can be simple (cash), complex (bitcoin), and political (interchange, rules). Payment efficacy, reliability and data are important to: consumers, merchants, banks, governments and economies.
Globally, electronic payments are still in their infancy, which makes investing in it so much more exciting. For example, over 90% of the global electronic transactions occur in the top 10 markets (representing less than 10% of the world’s population). This would seem to point to a future where electronic payments (and the banking/commerce they represent) are poised to grow geometrically as the number of nodes grow. There is a chicken and egg argument here.. are payments the result of strong economic environments or are they the enabler? Perhaps a bit of both, but finding markets where they are growing (ie Brazil, Peru, Philippines, Kenya, … ) are worth exploring (Democratizing Access to Capital – see blog).
Not only are payments poised for exciting growth, there are also tremendous forces driving change within existing systems and networks. Investors must consider these structural changes impacting existing players across the entire value chain.
In its simplest form, payments are a brokering business which manages value exchange between two entities engaged in commerce. Logically, a broker must be removed from the transaction to maintain the trust of both parties, and deliver value through managing the financial risk associated with the transaction. My view is that Card issuing banks, have lost the neutrality of their “brokering” role by creating a card rewards system that incents card use (paid by the merchant). However, this ideal “neutral” world is NOT the nirvana that we should seek, as no one would invest and we would be stuck with cash (and SEPA in the EU .. see blog).
Complexity in payments is driven by the quest for control and margin of the various participants, not by necessity. This is what makes understanding payments so hard…. most of the changes are not logical, but political. The friction (inefficiencies and illogical design) in payments is what makes them work. As I’ve stated before, no engineer would design a payment system to operate the way we do today (see Push Payments). Thus there is beauty in this chaos! The V/MA model created incentives for 1000s of banks to invest in payments, and I doubt if we will ever see any other companies that could repeat this feat (thus my V/MA personal investments).
What changes are likely to impact the world’s oldest profession in the next 10 years? My list (in order of impact)
- Risk and Identity
- Data/Commerce Value
- Consumer Behavior/Trust/Acceptance
- Issuance/Customer Acquisition/HCE
- Regulatory/Rates/Rules (Fees)
- Mobile/Payment in the OS
#1 Risk and Identity: Authentication and Authorization
How would you authenticate someone’s identity? Best practice is to validate a combination of what you are (biometric, image, DNA), with something you have (mobile, token, OTP FOB, …) and something you know (shared secret). Apple’s new iPhone 6 is the first major consumer device that can manage all 3 securely. It is truly revolutionary. The ability to authenticate a consumer eliminates fraud risk, and thus impacts both Account Opening and Transaction Authorization. Both of these services in turn impact the “core” banking relationship (see Future of Retail Banking).. How do consumers choose a bank? A credit card? What is the value proposition?
Before there is payment there must be an account in which to pay from. The key to opening an account is identity (Regulatory KYC or Know Your Customer). Account Opening has been automated (and online) for over 10 years. In 2004, my team at Wachovia was the first in the world to introduce instant account opening (online) for deposit accounts (Credit Cards were just 2 years ahead of us..). 10 years ago I used products like Equifax accountChex or EWS AOA (Validating questions based on prior financial history and credit bureau data), today could I use Apple!?
Identity and authentication is changing rapidly, and if the first two paragraphs were not already enough to ponder on this topic, we must mention Bitcoin. As opposed to authenticating the person to give access to funds and services, bitcoin authenticates itself enabling the holder to be anonymous. It is a self authenticating instrument.. imagine a dollar bill that can tell you it is genuine with 100% accuracy. Self authenticating instruments exist independently of the holder and are a store of value (ie, Gold, Bitcoin, …etc). Normally there was physical presence required to exchange self authenticating instruments (exchanging gold), bitcoin changed all of that. A virtual self authenticating instrument that can be exchanged remotely and cannot be tracked (easily). Whereas payments are instructions move money (value) from one bank (store of value) to another, a bitcoin exchange is value exchange (not instructions).
The power of bitcoin to disrupt payments, companies, government, economies, .. cannot be understated. How could any central bank manage money supply in this model? How can you tax something that cannot be tracked? The growth challenge for bitcoin is in “connecting” to other payment networks and regulated entities (ie cash out). Unfortunately the entities which benefit the most from bitcoin are those that seek anonymity… which of course impacts the willingness of mainstream (regulated) institutions to accept it.
Fraud and Risk
As you can see from picture above “risk” in payments has several components: credit risk, settlement risk, fraud risk, regulatory/AML risk, … etc. Fraud risk is the area in the most flux, both WHO owns the risk and HOW it is managed. In the US Card Not Present transactions follow the pattern of ACH and Checks in that the originator of the transaction bears the risk of loss. In a retail transaction, that is the merchant.
Risk and fraud management were historically the key areas where banks excelled and differentiated (big banks have multi billion dollar investments), but the merchants and platforms have now passed banks in their ability to manage it. This mobile authentication advancement had rendered the multi billion dollar bank risk investments moot (for mobile initiated payments). Proof is in the picture above (see Federal Reserve 2013 Payment Study), all fraud has fallen tremendously! Both for Card Present, Card Not Present and even for Checks. Why? As the former EVP of a Kleiner Perkins backed Fraud Prevention company I’m not going to give you all the details, but suffice to say that identity plays a key role. Paypal, Amazon, Google, Apple all have fraud rates under 8bps, some have the around 3bps. These numbers will get better for Apple and Google as mcommerce starts to take an ever larger share of eCommerce (see my previous blog) and they bake in biometrics into mobile payments.
A key point that investors must understand here is that the large CNP merchants have gotten so good at managing fraud, that they could care less about a liability shift. What they want is a rate reduction (risk based pricing). After all, if you could manage fraud at a rate of 3-8bps.. what work is the bank doing to justify taking 240 for payments? The Paypal investors read this and say “ahh.. Apple and Google want to become Paypal”.. No they don’t! while Apple/Google COULD assume all the functions of Paypal, their role as commerce orchestrators is of FAR greater value. In this role you must not force a consumer to a merchant, a good, or a payment instrument. “Let the consumer decide” is the common mantra across the Google, Apple, Amazon.
The investor impact is complex. Large merchants have proven ability to manage fraud and risk, and want the consumer to choose the payment instrument of their choice. Banks ability to differentiate in managing risk is greatly reduced, and the cost of issuance/acquisition is dropping to 0. Banks have proven incompetent at creating a Visa/MA replacement. What are the levers in negotiation? How will merchants negotiate a lower rate?
The path in Europe, Australia and the US (Durbin/Debit) has been driven by regulation. No one likes having regulators define the rules, but my investment hypothesis is that there will be a very large TILT of Visa/MA toward the merchant. This will address the both regulatory pressure, and open up new revenue streams surrounding data (below). This tilt means moving rates in the direction that retailers want, creating new rate tiers where risk and identity can be managed by the merchant/platform. Remember Apple is getting 25 bps for their service, the next logical move would be make this same “discount” available to anyone that can drive down risk.
From an identity perspective, Google and Apple have authentication as the CORE feature of their mobile platforms.. it is key to everything they do in mobile. See my blogs on Brokering Identity Authentication in Value Nets, and Authentication – Key Battle for Monetizing Mobile for more here.
#2 Data and Commerce Value
The comments below are largely taken from my blog Banks, Non-Banks and Commerce Networks. As a side note, this is the focus of my new Company: CommerceSignals. We are working with the Fortune 50 to serve as the neutral broker, one layer above the network, supporting companies working together offline and in mobile.
Today, every issuer and card network is chasing after American Express and Alliance Data Systems. Both ADS and Amex have made SUBSTANTIAL progress in working with merchants to deliver new value to consumers. AMEX and ADS have the benefit of working in a 3 party model where they own both the merchant and the consumer relationship. As I’ve stated before, I believe these 2 companies are 3-5 years ahead of everyone else. Is this data stuff delivering any revenue? For ADS the answer is a resounding yes, for Amex the benefits seem to be less direct and more on customer loyalty/spend/engagement. See my blog on Amex Innovation Leader for more details.
Think about the battle in connecting networks, as each of us have limited resources we can connect only to a finite set of “hubs” (unless there is some larger orchestrator). Examples are Wikipedia and Google… these serve as the directories of information. It is almost IMPOSSIBLE to displace an efficient hub. This is why I love Visa, MA and Amex. If they can shake the issuer “tilt”.. and add a few merchant friendly services, they could leverage their networks in many new ways. The revenue opportunity? Payments in the US is roughly a $200B business (issuers, acquires, processors, networks), whereas marketing is $750B (in US).
Payments work well, but so did the Sony Walkman. The bets that Google, Apple, Amazon, Facebook and others are making is on value orchestration. Does this involve payment? Not really.. at least not as a primary focus.. Payment is there.. but orchestration is about commerce; payment is just one of many important processes (See blog Payment in the OS). Don’t look at payments as something in isolation, payments are the “connections” made in commerce; they are made for a purpose. Visa and MA also have the potential to expand their “traditional network”, but this must involve a separate agreement with separate rules.
Payments = Network
Here is my network view. Payments are the connections of the GDP. If we were to map payment flows, we would unlock a map of the global GDP at the micro level, from employment to shopping, behavior and preferences, to demand and supply. Free information flow on the internet is enabled through openness and a single primary protocol, whereas payments operate within 100s of proprietary networks with a complex series of clusters and “switches” (there is effort in connecting, authenticating and managing risk). Just as it would be nearly impossible to change the protocol for the internet, it would be difficult to bring fundamental change in payments (see Rewiring commerce). Now think about the value of payment data. Connecting business is much different than connecting information (the core of CommerceSignals.. but I digress).
From a network strategy perspective, the business opportunity of changing “payments” pales in comparison to the opportunity to influence connections in commerce, banking and manufacturing. Payments support business and consumer needs; they do not alter their path. This insight is the downfall of bank payment strategies around “control”, and their inability to “tilt” toward merchant friendly value propositions.
A top 5 retailer provided my favorite commerce quote
“I think of Commerce as a highway, the payment networks are like a toll bridge. I don’t mind paying them $0.25 to cross the bridge, but they want to see what is in my truck and take 2-3% of what is inside. Hence I’m looking for another bridge… “
ADS, Amex, Google, Amazon, Facebook, Alibaba, V, MA all understand this. Rather than charging toll for crossing their bridge, these networks are beginning to execute against plans to grow the size of the goods in the merchant’s truck.
Existing networks have an existing value proposition, and many don’t like to have their services leveraged by competitors, thus there is a much more highly “regulated” flow of information. Intelligent use of data increases the effectiveness of networks in a way that also benefits consumers. Tilting more toward merchants and consumers.. means tilting away from banks. This is VERY hard for a bank to initiate. It is a change worth making however, as assisting merchants (or consumers) is what brokering is about. My firm belief is that both V and MA have the opportunity to grow Revenue 4x+ in the next 5-10 years. Their principal challenge is to “tilt” their models away from Banks and toward the 2 parties that matter most in commerce: Merchants and Consumers.
#3 Consumer Behavior/Trust/Acceptance
Perhaps nothing matters more in business than consumer behavior (see Consumer Behavior: Discerning and Capturing Value). In payments we learn over and over again that behavior changes slowly in 20 year cycles (Checks, Debit Cards, ATMs, Mobile). Any investor looking for payment innovation should run away unless there is some underlying commerce value proposition. Payments work REALLY well its everything else that is broken (in OECD 20 countries)…. Among Payment innovators/founders there is a common saying.. you only start ONE payment company.
It is easiest to find the hotspots in payment by looking first for the changes in consumer behavior. For example, the tremendous change in how consumer’s are using their phones, as I outlined earlier this week in eCommerce/mCommerce Convergence. The banking relationship is also changing, as customers visit branches less than 3 times per year, and the billions spent on huge buildings, huge vaults, sports sponsorships and brand names gives way to value.
Brand reputations for 2014 just came out last week (see Venture Beat), with Amazon, Apple, Google topping the list. How did these companies earn this reputation? Through consistent daily interaction delivering value in every interaction. Value delivery and interaction are my key metrics for assessing investment and focus; both are key measures of consumer behavior and trust. There are many strategies: whereas Google engages with the average consumer 10-50 times per day (winning in frequency and insight), Amazon has a lower interaction but a much greater impact on transaction (value delivery), Apple’s interaction is more holistic within a much more affluent base, Facebook’s is more social.
If I were to outline one KEY point to my bank friends it is this: you can’t reach consumers where you want them to be.. you must reach them where they are. This is the essence of why most bank strategies to engage are failing. Consumers choose to go to Google, Apple, Amazon because of the value and service. As the charts above show, most banks are challenged to deliver value within the core banking products they already delivery, why would any customer want to use a new service in this environment. Thus Bank’s efforts are ill suited to drive a deliver products outside of their core, and outside of existing consumer behavior, banks play a role in SUPPORTING commerce.. not leading it (see Card Linked Offers).
Apple is the greatest company in the world in delivering value, experience and changing 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. The greatest NEW opportunity for Apple to influence consumers beyond the individual (music/contacts/calendar) and eCommerce (browser, apps) to the real world: Commerce.
Unfortunately Apple is inept at partnerships, even within its own supply chain. While apple has the talent to accomplish this, their commerce, payment and ad teams are buried within a hardware culture. They will only succeed if they are spun off into a separate division, thus my view is that there is a very low probability of Apple acting in an orchestration role across 1000s of Banks, millions of retailers and billions of consumers. If they did move, it my recommendation (and guess) is that it would be a consumer centric orchestration role as I outlined in Brokering Identity.
One technology (and behavior) I’m keeping an eye on is Beacons and mobile use in store (engagement). Qualcomm Retail Systems spun off the IP around Beacons to Gimbal with Qualcom and Apple both rumored to have 30-40% of the equity. Today Retailers are the entity best positioned to change consumer instore activity for 2 reasons: they alone know consumer product preferences, and they physically touch the consumer (trust, value, presence). See Retailers as Publishers , and Apple iBeacon Experience for more detail.
#4 Issuance/Customer Acquisition/HCE
Now this is a mixed bag of topics. What is fundamentally changing in card issuance? Most of you know I ran remote channels at both Citi (06-07) and Wachovia (02-06). Today, most new customer bank accounts are originated online as branch visits go down and direct mail (the old way) even directs the consumer to this “instant” channel.
Historically I had to spend about $150 in marketing for every new card customer, and around $80 for every new deposit customer. Banks still incur roughly these same costs, but prepaid cards have an acquiring cost of less than a tenth of this cost (See Future of Retail Banking: Prepaid). In this pre-paid model banking products sit on a shelf in a retailer and compete for customers just like shampoo and candy bars.
I would challenge all card participants to think about the credit card product… what delivers value? what about it is unique? how do consumers view it? how is it part of a great consumer experience? When you leave Disney World do you think wow.. buying the ticket with my card was just fantastic? How are new customers acquired? Who benefits when cost of issuance is $0? Is charging the average consumer 12-16% on a card, paying them 0.2% on their savings charging merchant 2% a great model? Do you think that there is room for improvement? Where do retailers win (ADS, Private Label, Co-Brand, )?
What prohibits you from having 20 retailer cards in your wallet today? Bank card issuers will roll their eyes, but you can not understate the influence that trusted retailers have in consumer decisions. Take this trust together with direct sales force and frequent consumer interaction and you have Private Label and industry whose cards outnumber everyone else’s by a factor of 2. As this week’s Morningstar article on Private Label shows, private label (the largest card segment) is making a tremendous comeback.
Citi, GE (now Sychrony), ADS, HSBC are leaders in this space, with ADS advancing most in use of technology. Retailers like Nordstrom, Macy’s, Sears and Kohls are fanatical on their private label program, as their most valuable customers use this product. All new customer experience must first address this base, which you can see is one reason why we don’t see ApplePay being pushed here at all. As I described in Retail 101 (and What do Retailers want in Mobile), most retailers don’t know who their customers are today. Private label and Loyalty programs solve this problem.
Let me throw in a little tech now. I’m on the board of advisors of SimplyTapp, the company that created HCE. Instant issuance is key to everyone in the card space, why wouldn’t every retailer want to enable a private label card if card issuance cost is $0!? Credit worth customers can get store credit, sub-prime get decoupled debit (see Target Red Card) and everyone else gets a loyalty only? I believe we will see this happen, not only within MCX but within platforms like Google, with PL managers like ADS and Citi. This is the strategy focus of the top retailers… (focusing on their top customers).
My bet on the future of Google wallet is that it will be very merchant and consumer friendly, enabling them to uniquely integrate to 100s of merchant platforms to create great consumer experiences. This linking of PL, Loyalty, in store, maps, mobile, advertising is value orchestration.. but it all starts with consumer opt in. The opt in is both to merchant (private label/loyalty) and to Google. See blog Host Card Emulation for more background. Google made the right technical move in HCE, but it dropped the ball in enabling merchants through last mile.. not a technical limitation .. an educational / awareness one.
Do I believe that the world will go private label!? No, it will be at the margins. My view of Visa and Mastercard have changed over the last 2 years. Before I was much keener on the development of a new scheme, but no more. Why? How many networks can you list where millions of participants have invested billions of dollars to make it work? Visa has 1.7B cards and 36M merchants.. how could anyone compete with this? This network works REALLY well, with the only issues with their network are in their control (merchant costs and rules).
From a regulatory perspective, the US retail payment system has been impacted by the Durbin Amendment and the EU to an even greater extent by SEPA and PSD (see my blog). Most of you have also read my token blogs outlining how the US banks were planning to build a new payment network to compete with V/MA (Now dead). If someone has a info-graph picture of global acceptance rates I’ll put it in here.. but suffice to say that airline ticket pricing has NOTHING on the complexity of payment pricing.
Visa and Mastercard are largely insulated from the regulatory driven pricing changes, as the issuers continue to bare most of the impact. The EU has created a payment nightmare environment with “cross border” Credit card merchant interchange (MIF) at 30bps starting in later this week Jan 1, 2015 (see article and Visa’s response). The EU can not mandate change within country (domestic transactions), but there will be a race to the bottom in fees.
EU competition commissioner Margrethe Vestager claimed that interchange fees are a form of tax levied on retailers by banks and said that the new legislation would reduce those costs and “lead to lower prices and visibility of costs for consumers”.
Ms Vestager may be correct from a transparency perspective, but SEPA and the PSD put governments into the brokering role with no incentives for intermediaries to invest.. making payments a nearly free infrastructure service (with agreement of consumers and merchants). Network work best when there are shared incentives, and minimal regulation. I believe Visa and Mastercard will work with new vigor to build relationships with merchants and deliver value, to head off the regulatory driven approach. Unfortunately Europe is already too far gone for this to work.
A prediction (next week’s blog) will be merchants providing greater influence in V/MA rules.
#6 Payments in the OS
My blog from this week: Payment in the OS