Role of Identity and Trust in eCom

Please excuse typos.. Editing not complete. I had a great compliment this week: “Tom you write so dense.. why are you so different”? I’m not an analyst or a blogger, but a guy that has run operational businesses and led venture investments. The only great thing I’ve ever done in life is to meet great people with passion and ability to execute on a vision. This blog is how I chat with all my colleagues. Glad others find it useful..

This is a rather long blog.. if you don’t have time read the wrap up at the end which is a summary of key points.


Continuing on from yesterday’s blog on Authentify – Bank ID Service, I thought I would outline the role of identity in eCommerce and the problems to be solved. Although most of you know me as a payments guy, I also have deep roots in data working directly with retailers, AdTech, Google/FB and media (in addition to issuers/acquirers/networks). In looking through eCommerce articles I couldn’t find one relating to identity (from a big picture perspective).. So I thought I would write one.

Continue reading “Role of Identity and Trust in eCom”

Plaid and Pay By Bank

There are 2 big options: 1) Plaid is expanding its API set and back-end to create a new organic service 2) Plaid is a partner in a new bank service

As I sit down with my coffee this morning I’m asking myself what are the key questions to answer:

  1. What is the Plaid service? What innovation have they created?
  2. Is it a threat to V/MA?
  3. What merchants/Consumers will use it?
  4. What do banks think of this? Can they stop it?
Continue reading “Plaid and Pay By Bank”

Google’s “Bank” Plans

THE most bank friendly partner offering that will enable any bank to compete at parity with the NeoBanks.

Summary – Google is not becoming a bank, but rather enabling:

  1. New integrated tools that will provide the BEST mobile bank experience
  2. Instant account opening
  3. Consumer incentives that will unlock the power of data (w/ consumer’s consent)
  4. New predictive analytics, recommendations, alerts, reminders, coupons, offers and engagement

Public PR

Over last 6 months or so we have seen several Press Releases relating to Google’s bank partnerships:

“We had confirmed earlier that we are exploring how we can partner with banks and credit unions in the U.S. to offer digital bank accounts through Google Pay, helping their customers benefit from useful insights and budgeting tools, while keeping their money in an FDIC or NCUA-insured account,” stated the release.

Smart, according to Google, because it will provide its checking accountholders with money management tips to optimize and manage the funds in those accounts – funds linked to payments and identity credentials that consumers can use to buy things, pay bills and send money to others in and outside the Google ecosystem.

Continue reading “Google’s “Bank” Plans”

Rewiring – Part 2: Walmart+Goog, Amazon+Whole Foods, …

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, …”

T-Mobile – Great Move into Banking

23 Jan 2014

First off, congrats to the T-Mobile, Bancorp and Blackhawk teams. I love this product and the unique capabilities of the team that put this together.



What is the value proposition?

  • For the Consumer: Cost, Convenience through a “Banking Lite” product (see Product Pricing Here)
  • For T-Mobile: Consumer Loyalty, Increased Switching Cost, NRFF + Debit Interchange, Leverage existing consumer footprint and physical distribution

As I’ve stated previously, the bottom 40% of mass market retail banking accounts are no longer profitable for the large banks. New banking regulations (and regulators) have eliminated fees like NSF as well as Debit interchange for the largest banks. I covered most of this in my blog Future of Retail Banking. The top tier of banks are actively running away from the lower mass segment, and working to drastically reduce the cost of servicing. For example one Top 3 bank CEO I met with was looking to take $1B out of branch costs in next 3 yrs, by actively working to push consumers into mobile/online.

In one of my oldest blogs, MNOs Rule in Emerging Markets, I laid out the basic business case for Telecos to enter banking. Where Banks are burdened by a physical distribution network of branches that only sell banking products, MNOs (and Retailers) have physical distribution which can be leveraged to sell many products. In fact MNOs and Retailers can offer banking services at cost and still create a sustainable business case as banking/payments enhance foot traffic and loyalty. MNOs have a better short term prospect of delivering these services in the US as post paid customers go through a credit check process, thus consumer sighting and credentialing are very similar to what is necessary in opening a bank account (see my MNO KYC and Who do you Trust blogs). Add to this MNOs unique capability to enhance fraud controls in payments, and you have a set of VERY unique business platform that exceeds what a bank can deliver.


My blog 2 years ago Future of Retail: Prepaid? spelled this move out.

…the business case for pre-paid is rather strong, and Banks themselves are assessing if they can make this the new “starter” account (ex Chase Liquid). However Three Party Networks (Discover and Amex) have a significant advantage. From Digital Transactions, March 2012

While the Federal Reserve’s rule implementing the Durbin Amendment has its greatest effect on traditional debit cards, it affects prepaid cards too, especially its provision that banks’ prepaid cards can avoid Durbin price controls only if cardholders can access the funds exclusively through the card itself. That provision thwarted banks’ efforts to make prepaid cards more like demand-deposit accounts and led them to scale back or end bill payments through prepaid card accounts.

But American Express and Discover are not subject to Durbin’s controversial provisions, Daniel and Brown noted. Both companies are so-called “three-party” payment systems that function both as merchant acquirer and card issuer. In contrast, Visa and MasterCard debit and prepaid cards are part of “four-party” systems in which the issuer and acquirer are usually different companies and rely on the Visa and MasterCard networks to route transactions among them. The Durbin Amendment exempts, or “carves out” in industry parlance, three-party networks from its provisions, including interchange regulation.

“There’s no restriction on what AmEx can pay itself” for prepaid card transactions, said Brown. Thus, AmEx and Discover have a new opportunity to grow their prepaid businesses, the attorneys said.

Clearly Discover (DFS) and American Express (Amex) have an opportunity to “Kill” prepaid cards, what are they missing? Physical distribution, service and reach in the mass market. These are the very things that retailers like WalMart can provide, and in fact economically benefit by providing them.

T-Mobile may have started this project as a result of Deutsche Telekom’s WireCard Success. Proving that it is not just emerging markets where Teleco’s can lead. In my view there are now 4 solid models for US MNO/Retailer as Bank (see and MSB or Bank)

1) WalMart/Bluebird through Amex/Serve

2) TMobile/Bancorp (DT/Wirecard) in Visa Product

3) Target .. Obtain the Banking License Directly (see Blog)

4) Prepaid non reloadable

Amex/Serve is the Leader, Bancorp #2

Why? Best example is the Chase Liquid Reloadable. Because of the Durbin constraints on funds access Chase had to pull Bill Pay capabilities from the product. Because Bancorp has under $10B in assets, it is exempt from this provision (?apparently) and can provide bill pay. However if I was an MNO, or Retailer, I would lean in strongly toward Amex (and to a lesser extent to Discover).  Bancorp is the best pre-paid issuer to work with and is winning through hustle…

Prediction Big Future for Discover

TMobile may represent a tipping point for retail banking in the US. Now it is not just Walmart/Bluebird… this is a real business model that enhances a core telecom value proposition AND provides a tremendous launch platform for REAL PAYMENT INNOVATION.  This together with the launch of MCX will provide the mass market with new products, not all of which are understood by the customer (ex Direct deposit my paycheck to my mobile phone company?).

The advantages of 3 Party networks are beginning to hit the market in REAL products, and I therefore predict that Discover will see a few MAJOR new partnerships, or be acquired in the next 18 months. All of this is somewhat ironic given that the ORIGINAL ISIS consortium was ATT WalMart Barclays and Discover.

Divide and Conquer: Commerce Battlefield

What “standards” are there in commerce?

Do we advertise in the same way? Locate in the same geographies? Price products the same way? Have the same eCommerce or mobile “store” and services?

What about Payment?

Payment is perhaps one of the few “standards” that retailers have in commerce. I had an “ah hah” moment at Money 2020. It was from a presentation by Jim McCarthy of Visa.. the theme: Visa is a model where everyone wins, and participants can monetize their respective roles. Of course I should know this.. but it really just struck me on WHY the Banks want to work within the Visa model.. if they break it.. they will no longer be able to monetize payments.

Mobile is a platform which enables a radically improved customer experience. With respect to payments it also offers a unique ability to authenticate a consumer (fingerprint, GPS, cell tower location, voice, camera, …). Yet, no banks are looking to leverage these “new” capabilities in a “new” payment system. After all, given a clean sheet of paper, no one in their right mind would design a payment system like we have in Visa/MA: present a credential to a merchant, who passes to a processor, who passes to network and routes to issuer to approve a customer transaction… giving the auth to everyone in the chain again.. and getting back another message. If everything is connected why not just ask the consumer to send the money from their bank (ex Sofort,  Push Payments also read Banks will Win in Payment ).

Why? Well because Banks can’t make money in a Sofort model.. (would need to create all new merchant agreements). This is why Banks are going through contortions to stay within Visa/MA, yet attempting to alter it fundamentally (ie Tokens). A top 3 Retailer provided me a great example “if tokens are not created by Visa/MA do I have to accept all tokens like I have to accept all cards”?

Defining the Battlefield

My real “ah-hah” came when thinking about how the Card “standard” has been managed for the last 50 yrs. Quite frankly the Banks have been playing Chess while everyone else has been playing checkers (quote from a Retail Client).

This reminds me of Sun Tzu

Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted

Hence that general is skillful in attack whose opponent does not know what to defend; and he is skillful in defense whose opponent does not know what to attack.

Sun Tzu – Book 6

Retailers have been playing on someone else’s field.. they have been so distracted in competing with each other.. that they did not even identify a common enemy. This has shifted significantly in the last 5 years. The payment burden has become so substantial that Retailers realize they must define their own rules and create a new network (aka field).. thus we now have MCX in the US, SEPA in EU, EFTPOS Australia, CUP/China, Interac/Canada…  This is not just the US, take a look at what is happening in the UK last week, or with Card EU regulation cross border.

Implications of Tokens

I cannot understate the business implications of tokens to Retailers, Processors, Wallet Providers, eCommerce/mCommerce companies, and Start Ups(also see Money2020 and Tokens). It will impact every company that keeps cards on file (COF), or processes transactions electronically.  What is most concerning? These entities have few existing mechanisms to coordinate/collaborate … a coordinated Bank/Network consortium is battling a bunch of unorganized tribes… and setting them against one another. The hectic activity in payments has caused a fog of war which serves to obfuscate the primary advances of the opposition. While everyone is focused on litigation, debit, mobile, MCX…  banks are moving 3 steps ahead.

Banks have wrapped tokens in secrecy (per Sun Tzu) with motherhood and apple pie stories pertaining to protection.  I can assure you that Banks are not dropping over $1B+ to protect consumers.. they are spending this to protect themselves from competition. As I said previously, Banks know they cannot innovate at the pace of Google, Square, Cardspring, Braintree, … thus they must control the battlefield. Tokens enable them to recast the battle.

The new battle surrounds data. As my friend Osama told Tim Geithner, the value of data exchange may quickly outweigh the value of risk management and clearing in payments. JPMC has even created a new DIVISION run by Len Laufer to focus on data, as Jamie would say “we have better data than Google”.  Bank Card CEOs are furious at the thought of anyone delivering value on their cards, particularly efforts by the networks themselves (, Visa Offers, …). Other token drivers:

  • Control who can be a wallet provider
  • Control who can add value to a card number
  • Control how a merchant can identify a customer via a card number (See payment CRM)
  • Control how payments are cleared (ex. What they did to Google Wallet).
  • Control how and WHEN mobile payments succeed
  • Control what payment instrument is used in mobile POS payments (ie Credit)
  • …etc

Banks are so far ahead on strategy….. I’m concerned Retailers will have no idea of what hit them.

How to respond?

  • Coordinate on a plan of action (glad to assist)
  • Create a new Battlefield.. create a new set of rules that Retailers control (thus the brilliance of MCX)
  • Join MCX.. just to ensure Banks know they must take this seriously
  • Frustrate the Banks on their Battlefield… Visa/MA and the issuers are not on the same page.. help to further the rift.. ensure new rules work to the Retailer’s benefit. For example, push V/MA to create a “certified wallet provider” that can translate cards to tokens WITHOUT THE ISSUER.
  • Regulatory… push payments into DUMB PIPES. Let innovators own the risk.. give banks a pass on payment compliance, open non bank owned pipes (Fed wire)…
  • Find Banks that will partner with Merchants to deliver value. On my short list are: Barclays, AMEX, Discover and Bank of America..
  • Help Banks solve their problems through you.. help Banks leverage their data for your benefit….instead of the other way around. Amex is FAR ahead in this.. 5 yrs ahead (see blog)
  • Break the Card revenue model…. Beyond what Chase did to VisaNet
  • Ensure you are viewed as fighting for the consumer.. NOT for yourself. Banks don’t exactly have a stellar reputation these days.
  • Banks also rightly fear that Debit will move from $0.21 to $0.05 or even $0.03.. making debit the equivalent of a quasi real time ACH system. How can you incent increased use of debit today?

I have a few others that I’m not going to share.. but we have got to stop falling on the same sword over and over again.  Banks are NOT the center of commerce, just as my ISP or MNO is not the reason I shop at Amazon.

Investors.. I’m not saying to short V/MA.. I see nothing to dent their global growth.. but in US/EU.. we will see their revenue drop substantially in 5 yrs.

My predictions

  • Visa/MA will create a rule that no one can wrap their card in a token but them… after all a card is really a token for an account number in the first place. Bank token efforts will die in next 12 months.. unless they can force a strategic change… or they make a move toward a 3 party network like discover.
  • Visa/MA will start off getting feedback from all participants.. but banks will win on their rules like they always do.  Merchants will resist efforts unless carrots are substantial (card present and fraud liability shift). If issuers are NOT on board merchants know (from VBV/MSC experience) that issuers will just tweak the decline rates to make for a terrible customer experience. In the end issuers have control over how any new scheme works for its consumers.. they have an unlimited ability to frustrate Visa’s rules… or leverage networks against each other.
  • Take a look at how long EMV, NFC, … have taken. I would make the case that EMV only succeeded because of regulatory pressure.  I see no impetus for change… no business case for either merchant or consumer.  PCI costs and Fraud are already managed…
  • Mobile successes will work around today’s plastic.. This is the beauty of Square..
  • Merchants have reached beyond the tipping point of collaboration on common payment services. It will happen… and there will be implications to V/MA volume (in 5 years)
  • There is only one entity that has the POWER to change consumer behavior on mobile: Apple. It took them over 20 years to earn consumer trust through their maniacal focus on quality and consumer experience. If Apple makes a move in mobile payments.. we should all “think different”
  • Merchant friendly solutions and big data.. are red hot areas. My favorite case study here is a little restaurant marketing company (Fishbowl).. will write a blog on them this month.

Payment Start ups – MSB or Bank?

7Sept Update

Late last year the state of Georgia created a new bank type. See link below


16 Aug

I had 6 calls in last week on the same topic, covering different companies…(Strange how things go in waves… )…. General theme is what regulatory structure should I take on if I’m a payments business. My answer is: go talk to your attorney, as this is not legal advice… just a few random thoughts for INVESTORS.

This blog is a follow on to my note 2 months back Payments: What is a Start-Up to Do?  Perhaps the best way to start this off is from the quote I gave in US Regulations, which demonstrates the regulatory evolution that has taken place over last 10 yrs.

From PayPal’s 2002 prospectus.

We believe the licensing requirements of the Office of the Comptroller of the Currency, the Federal Reserve Board or other federal or state agencies that regulate or monitor banks or other types of providers of electronic commerce services do not apply to us. One or more states may conclude that, under its or their statutes, we are engaged in an unauthorized banking business. In that event, we might be subject to monetary penalties and adverse publicity and might be required to cease doing business with residents of those states. A number of states have enacted legislation regulating check sellers, money transmitters or service providers to banks, and we have applied for, or are in the process of applying for, licenses under this legislation in particular jurisdictions. To date, we have obtained licenses in two states.

Data points from this week:

  • New payments focused bank led by Bob Willumstad (former AIG CEO) – Independence Bancshares (public company IEBS: OTCQB).
  • Carol Realini bought Obopay US (the MSB licenses)
  • Wirecard’s international MNO wallet success (see 2013 earnings presentation, and Bank Licenses.
  • Greendot 2x run up.. now a bank and “model” GPR card and BANK IN A BOX.
  • Analyst question… would Visa ever seek to be an MSB or a Bank?
  • US regulatory clamp down … KYC enforcement is the theme here. Banks must know their customers.. and also KYC every single one of their corporate customers beneficiaries.

Thoughts for the day

If there is one thing you do today.. get familiar with Wirecard. I love this model….  I’ve gotten myopic in my old age (48), at Citibank I was 100% focused outside of US.. in last 2 yrs I’ve switched to 90% US focus.. now paying the price. I can’t believe Wirecard slipped my radar. 2,400MM EU transaction volume.. almost 500MM EU in Rev.. 2,700MM EUR Market Cap. Think of them as a white label banking platform with bank licenses. For those that read my blog.. Wirecard is a new cluster at scale in Europe and Asia.

Don’t have time to make this a 5 page blog.. so I will resort to bullet points

  • MSBs are limited, and costly, licenses. If the core of your business is leveraging another primary account (bank), and leveraging existing “rails” then this is probably the right structure. In the US, you must work to obtain 47 separate licenses with each state individually.
  • Bank licenses are certainly more flexible, and provide for managing the customer relationship but there are 3 big downsides. #1) your financial reports and balance sheet must include a separate bank division #2) Acquiring customers is really hard #3) Regulatory burdens can be insane and consume your time and capital (Ex, CRA and Bloomberg article)
  • Most Start ups “rent” a license through an existing  player. Square/Chase, Google/Bancorp, …
  • Leveraging existing banks is proving very, very problematic as they own the customer, “rails” and the “rules”
  • Today, Top issuers, Networks, Retailers and Platforms are at War here… See CEO View – Battle of the Cloud 5. There are billion dollar bets being made..
  • In Europe, an ELMI Structure is the global reference model for a start up.. unfortunately there are no other regulatory equivalents (see E-Money regulation in the EU)
  • Mobile payments (physical/POS) success today centers around transit.. and is either transit led or MNO led.
  • NFC is failing completely.. technology is fine, but the supply chain and distributed control are unworkable
  • Every major entity today is competing for the “TSM” role. My belief is that Apple, Google, Amazon are in the Driver’s seat.
  • I am 80% confident that Visa, MA will follow Amex’s/Discover and obtain bank licenses in a limited number of markets. Neither wants to be first.

Take Away

If MNOs look to retain a leadership role in payments, then Wirecard is the reference model. I’m not the only one to see this… Today we see banks working to squeeze in their existing product (Credit Cards) in to the mobile phone. As MPESA’s success showed, mobile payments are much more likely to succeed when you have one leader capable of driving a focused value proposition.  Why squeeze and existing product into the phone if you can create an entirely new one? What if the future of banking “profitability” is driven less by Net Interest Margin, Treasury, and Transfer Pricing and on more on Consumer Data…?

Buy Wirecard (I just did). I also think they will be acquired within 18 months… Buyers: Visa, MA, Platforms, … Biggest Hurdle: Who can handle having a bank balance sheet.


Related Blogs

Paypal – Lending

Investors Guide to Mobile Money

Emerging markets – MNO Led

India – the craziest market on the planet

Tokens: Any Volunteers?

19 June 2013

I’ll be leading a panel on Tokens at Money 2020 so thought I would spend a little prep time this week.

V, MA, TCH token initiatives all share one very big problem: no volunteers. Visa is the furthest along organizationally.. they tried tokens before (2010 Token best practices), technically there was nothing wrong with Visa’s previous efforts. The primary problem was that network participants (POS, Card Reader, Gateway, Processor, Acquirer, .. ) were ill suited to transmit anything but a 16 digit PAN.  Now that we have 16 digit tokens (likely based upon ISO/IEC 7812 BIN ranges owned by individual banks), the network CAN forward them for resolution..  these tokens are not Visa, MA, or ACH numbers.. they are an identifying “key” to information (other cards).. which only the holder can determine. This is the heart of what I referred to in Directory Battle Part 1.

If you were a merchant and a vendor came to you with this proposition “give me all of your customer information, I will lock it up.. and give you one of my keys for you to access it”… would you do it? There are some possible business cases around fraud/data leakage liability…. but customer information is somewhat important to most businesses. Token value propositions are not much different.. give me all your stored cards and I’ll give you a token.  At least Visa and Mastercard have rules around PAN.. but what are the business rules around tokens? Think of the Amazon world where I select from a list of stored cards… does the customer have to consent to exchange of PAN for token? In instances where I have multiple bank accounts/cards. Will there be a token for each bank? for each card?  (Networks are prohibiting “non compliant” schemes today). How does customer select instrument (debit/credit) if multiple products are behind token.

I believe that if the consumer has given a merchant payment information, it is an asset that they should only part with if there is a significant value exchange (data, rates, …).  The idea that a merchant would willingly part with card data is just plain silly.. and hence the lack of pilot participants.

The only way I see this working is if banks “push” tokens into every wallet/retailer. Automatically enrolling them into Google, Amazon,, Apple, PAYPAL, … In this model consumers are permission banks to assist with “fast checkout”. In the NFC world this is akin to “provisioning” a card.

We are very far away from seeing tokens at the POS “work” in any business sense, as there are no clear business drivers (beyond giving banks greater control of payments). Banks are not solving a consumer problem, nor are they solving a merchant problem. It is a strategy to maintain control (rules, rates, liability, speed, clearing, network, …). There is also friction within competing networks as MasterCard and Visa do not want to be wrapped by a TCH token, nor vise-versa… As stated previously, in the eCommerce world V/MA could see substantial success if they replace VBV/MSC with this token approach, shift liability to banks and give discount CNP rates. Banks would have great trouble replicating this eCommerce approach because they are in a very poor position to influence eCommerce gateway/processors.

From my view the future of any Token must be driven by customer first. This is where the best opportunities exist for MNOs, and the Banks (physical distribution). I call this federated identity management. Enabling a way for your real world ID to be associated with your virtual accounts and IDs (see my blog on Apple –  Currently Apple, Google, Amazon and Square are leaders here… although there is a$5B opportunity for MNOs if they could put a team together with some focus.

My updated view on TCH token framework – Usage (“Wallet” transaction for JPM Visa Credit Example)

  1. Consumer presents Token (virtually or physically) held by consumer (or 3rd party)
  2. 16 digit “token” treated same as card (although not a V or MA PAN)
  3. Processor routes token to Bank Token Authority (TCH) in an ISO 8583 transaction
  4. TCH can resolve token directly (switch to network), or forward to participating bank for resolution (switch to network)
  5. JPM resolves token to Visa Credit, if on Merchant is CMS customer.. then on-us (No Visa Interchange). If non CMS, route through Visa.
  6. Authorization sent to Acquiring bank/Processor
  7. Authorization sent to both merchant payment terminal and to 3rd party wallet provider (?). Pilot prospects.. negotiate this one HARD
  8. POS settlement

Retailers Discourage Credit Cards

I maintain that Banks have the facilities to win in payments (see blog).. but winning is more than leveraging your user base and ubiquity to extract tolls from merchants.. and more about delivering value.

9 July 2012

WSJ Article Today: Price of Plastic Going Up?

Merchants may soon begin to impose a surcharge each time a customer pays with credit card, a practice Visa Inc. and MasterCard Inc. currently prohibit…. [But provision will likely go away as part of impending settlement].

The “accept all cards” rule is likely to undergo a huge change, with implications for Visa/MA earnings, new retailer led payment networks, mobile wallets, issuer loyalty programs, EMV reissue, and “new products” (ex. Instant credit, pre-paid, decoupled debit, …).

Take a look at this excellent GAO Report to gain detailed insight into the battle being fought.

 Several of the large merchants that we interviewed attributed their rising card acceptance costs to customers’ increased use of rewards cards. Staff from these merchants all expressed concerns that the increasing use of rewards cards was increasing merchants’ costs without providing commensurate benefits. For example, one large merchant provided us with data on its overall sales and its card acceptance costs. Our analysis of these data indicated that from 2005 to June 2009, this merchant’s sales had increased 23 percent, but its card acceptance costs rose 31 percent. Rewards cards were presented as payment for less than 1 percent of its total sales volume in 2005 but accounted for almost 28 percent of its sales volume by June 2009.

This will have an impact on Visa’s volumes if card issuers don’t start immediately renegotiating the rates with the top retailers. This taken together with Durbin (see previous blog), retailer driven payment networks (ex See Target RedCard), Retailers acting as banks (see GDot/WMT), Google/PayPal at POS (as MSBs), Pre-paid cards, …etc. We have a VERY exciting time in payments that the banks will be challenged in responding to.

Why will this impact Visa’s US volumes? Well if signature debit it dead, consumers will use PIN debit (just like Canada and Australia). In the Post Durbin world, Retailers don’t have to route PIN debit transactions through Visa at all. If retailers aggressively reprice credit card transactions (adding fee of 1-2%) we will have consumers shift spend back to debit.. a PIN debit… This also is happening at a time when consumers aren’t exactly fond of banks and fees. If the top 20 US retailers add fee to credit card use, this could impact Visa’s growth buy 2-6% in 2 years. The main dependencies here are Issuer’s ability to lower interchange for these retailers and survival of Signature debit (over bank controlled PIN Debit).

Certain merchants obviously benefit from access to ubiquitous consumer credit facilities, and these merchants are unlikely to add on any fee. But retailers in non-discretionary and low margin segments will likely move aggressively to stem the growth of loyalty driven credit card use. I would also expect retailers to add lower cost payment options, instant credit (ex paypal’s BillMeLater) and new products which may replace some of the “lost” loyalty benefits (ex Target RedCard).

I maintain that Banks have the facilities to win in payments (see blog).. but winning is more than leveraging your user base and ubiquity to extract tolls from merchants.. and more about delivering value. Unfortunately Banks are working to restrict growth of new payment mechanisms by enhancing control points (ie ACH) .. they have seen this coming and are looking to lock any door they can. If you lock the door.. someone will just jump through the window.

BIG winners if there is a settlement on passing credit card costs:

  1. Payment service providers not dependent on credit, or offering alternative PayPal, Google, Square,
  2. Instant Credit
  3. Retailer Led payment networks
  4.  Pre-paid,
  5. PIN Debit


  1. Anyone dependent on a credit card (NFC, issuers, loyalty, …).

For my mobile friends.. this may give you additional context on why many merchants don’t accept NFC?

Structuring a Bank Groupon – 101

There is no shortage of talent interested in running a bank owned Groupon. But most of these CEO prospects haven’t had to survive in a bank owned company/consortium before. The high failure rate of bank driven start ups is because banks have not taken the time to define the asset and separate it from the capital. If a BankGroupon is core to the business.. it should remain in the business. If it is not core, and you have assets to leverage.. define the asset and let someone else grow it.

30 Nov 2011 (as always pardon the typos)

My post yesterday resulted in some good feedback. Theme was “are you bank friendly…? Stop telling me about what does not work.. how about recommending what does!”  My previous blogs covered a number of lessons learned.. so today I’ll give my view on What Does Work as Banks attempt to extend their existing business models. Your feedback is certainly appreciated..

As background.. here are my previous related blogs

What Works?

Well perhaps the first step is to frame the objective.. what does the Bank want to accomplish? For simplicity let’s reuse yesterday’s example: a Bank Groupon.  What is the Bank’s objective? Maximize revenue? Of the Groupon Unit? Of the Corporation?   Given the recruiters response..  it would seem that maximizing the revenue of the Corporation is the focus and their method is control. The Bank emphasizes control because it has significant uncertainty on entity and outcome.

Example BankGroupon Conversation “we have no idea how this thing will play out.. we have a number of the assets necessary to make BankGroupon a success and should be able to put something together.. so hey lets give it a try.. get some leader in here that has some experience in a big bank.. and some with start ups.. lets see what he proposes”.

Banks are the best institutions in the world at managing investment and risk.  When a bank contemplates an investment in another company, it is certainly appropriate for them to assess the business model, the team, the environment and price the risk.  This ability to make and manage investments is much different than an ability to run a NON CORE business and react to market forces (Elephants don’t dance).  While banks may have individuals in their company with these skills.. these employees did NOT develop the skills within the bank.

There is an obvious need to decouple the Bank Asset (customer data), Capital, and Entity that executes the plan. Commercial and Investment banks have tremendous experience in structuring entities that separate a bank asset and capital. Bonds, SPVs, CDSs, CDOs, … these vehicles not only allow banks to move assets off balance sheet, but they also allow investors to take different tranches of risk and even insure/hedge against loss.  The first stage of these commercial bank activities is defining the underlying asset (with appropriate continuity and underwriting in portfolio).

“Asset Definition” is the critical piece I believe is missing in structuring most bank owned NewCos. If the business is core.. keep the asset in house. If it is non-core.. define it and let someone else go maximize it within covenants.

CEO Prospect – Approach

In the BankGroupon example, if I were a prospect CEO here is how I would approach the task.

1) Define the bank asset (non monetary).

What is the bank contributing? BankGroupon is a separate company. What is the operating agreement between the 2 entities. Optimally this asset would be a 10 yr exclusive agreement to sell pre-paid offers leveraging bank data. Just as with Bonds, SPVs, the agreement would have covenants to protect the bank in certain events, as well as MUTUAL performance guarantees. This operating agreement would be the central asset around which the business would be formed. The focus of a NewCo CEO would be to ensure that this operating agreement is sustainable and fine tune the covenants.  Can I build a sustainable business off of this asset?

Operating agreements are NOT easy to create, they require much thought and planning. However, these agreements HAVE BEEN the core asset of many successful bank driven entities (Visa, MA, Early Warning, Clearing House, …). Quite simply, it defines the asset, how it can be used and also governs the roles of other entities in participation.  If you happen to meet one of the bankers/lawyers that were involved in the creation of any of the operating models above.. they would probably say it was like 2 years in North Korea.  By not creating these agreements, the Bank has shifted the burden of defining the asset AND building the business to NewCo.  Ask any recent bank spin off CEO and they will tell you their lives were like 2 years in a place much hotter than North Korea.  Spin offs have very little leverage to influence asset definition AFTER they have taken the capital.

This is my central point.. and should probably stop here.. but let me finish up a few other thoughts. I see the prospect bank CEO and the bank investment lead (future BOD member) working on this for a year or so. During this time.. the CEO comp is heavy on cash with an incentive if bank cancels or funding is successful.  Just as with Capital markets folks.. lining up investors for a $200M offering.

2) Capital to start the business.

My next job after obtaining the right operating agreement is to get Capital. What is the path toward revenue and what will it cost me to get there? Most Banks have taken approach of supplying all of the capital.. or perhaps partnering with one other big organization. Since the source of capital drives the direction of the business it is very important to have CEO drive source and mix. For example, BankGroupon needs to attract retailers.. Retailers don’t like banks.. and Banks don’t understand Retailers. Having an entity that is 100% controlled by a bank is not a great sales asset. I would want a clear path to reducing Banks control to under 50%…  and gaining investors who are retailer friendly. I would do this by either converting Bank stock to non-voting, non bank investors, or other commitments.

Wrap up for now

I could probably write a book on this.. but won’t bore you with the diatribe.  There is no shortage of talent interested in running a bank owned Groupon. But most of these CEO prospects haven’t had to survive in a bank owned company/consortium before.  The high failure rate of bank driven start ups is because banks have not taken the time to define the asset and separate it from the capital.  If a BankGroupon is core to the business.. it should remain in the business. If it is not core, and you have assets to leverage.. define the asset and let someone else grow it.

Your feedback is appreciated..  I’m sure there are several of you that think this viewpoint is insane.. but hey.. sometimes great ideas are generated from dissecting insane ones.