Looking back to my first “prediction” installment 2 years ago, 2011: Rough Start for Mobile Payments, not much has changed. Although I am personally approaching the “trough of disillusionment”. Lessons below are not exclusively payment (ie mobile, commerce, advertising) but seem relevant .. so I mashed them together. Key lessons learned for the industry this year:
- Payment is NOT the key component of commerce, but rather just the easiest part of a very long marketing, targeting, shopping, incentive, selection, checkout, loyalty … process. Payments are thus evolving to “dumb pipes”.
- Value proposition is key to any success for mobile at the POS. There are no payment “problems” today. None of us ever leave the store without our goods because the merchant did not accept our payment. There are however many, many problems in advertising, loyalty, shopping, selection, …
- There is no value proposition for the merchant or the consumer in NFC. NFC as a payment mechanism is completely dead in the US, with some hope in emerging markets (ie transit).
- 4 Party Networks (Visa/MA) can’t innovate at pace of 3 party networks (Amex/Discover). See Yesterday’s blog.
- Visa is in a virtual war with key issuers, their relationship is fundamentally broken. This is driving large US banks to form “new structures” for control of payments and ACH. Control is not a value proposition.
- US Retailers have organized themselves in MCX. They will protect their data and ensure consumer behavior evolves in a way which benefits them. Key issues they are looking to address include bank loyalty programs, consumer data use, consumer behavior in payment (they like chip and PIN but refuse to support contactless).
- Card Linked Offers (CLO) are a house of cards and the wind is blowing. Retailers don’t want banks in control of acquisition, in fact retailers don’t spend much of their own money on marketing in the first place. Basket level statement credits don’t allow retailers to target specific products and it also dilutes their brand without delivering loyalty. Businesses want loyalty… Companies like Fishbowl and LevelUp are delivering.
- Execution. This may be subject of a future blog… Fortune 50 organizations, Consortiums, Networks, Regulated Companies all share a common trait: they are challenged to execute. Put all of these groups together (without a compelling value proposition…) and we have our current state (see my Disney in a desert pic). Take a look at who is executing today and you will see product focus around a defined value proposition. My leaders: Square, Amex, Amazon, Sofort, Samsung, Apple, SKT, Docomo and Google. Organizations can’t continue to stick with leaders that are focused solely on strategy, or technology, or corporate development… You should be able to lock any 3 people in a room for a week and see a prototype product. The lack of depth in most organizations is just astounding. Executives need to bring focus.
- In a NETWORKED BUSINESS, it’s not enough to get the product right. You must also get retailers, consumers, advertisers, platform providers, …etc. incented to operate together. Today we see broken products and established players throwing sand in the gears of everyone else in order to protect yesterday’s network. Fortune 50 companies have shown poor partnership capabilities. Their strategies are myopic and self interested. For example Banks DO NOT DRIVE commerce, but support it. Their “innovation” today is self serving and built around their “ownership” of the customer. Commerce acts like a river and will flow through the path of least resistance. There can only be so many damns… and they will be regulated.
- The Valley and “enterprise” startups. There are billions of dollars to be unlocked at the intersection of mobile, retail, advertising, social. Most of the value requires enterprise relationships. Most investment dollars have flowed to direct to consumer services. I expect this to change.
- Consumer Behavior is hard to change, particularly in payments, it normally follows a 20 yr path to adoption. For example, in every NFC pilots through 7 countries we saw a “novelty” adoption cycle where consumer uses for first 2 months then never uses again. My guess is that there are fewer than 1-2 thousand phone based NFC transactions a week in the entire US. (So much for that Javelin market estimate of $60B in payments).
- Consumer Attention. Who can get it? They don’t read e-mails, watch TV adverts, click on banner ads. My view is that the lack of attention is due to a vicious cycle relating to relevant content and relevant incentives.
- Hyperlocal is hard. The Groupon model is broken, CLO is broken.. Large retailers have a targeting problem AND a loyalty problem. Small retailers have a larger problem as the have no dedicated marketing staff. Their pain is thus bigger, but selling into this space requires either a tremendous sales team or a tremendous brand (self service).
- My favorite quote of the year, from Ross Anderson and KC Federal Reserve. [With respect to payment systems].. if you solve the authentication problem everything else is just accounting.
Here are mine, would greatly appreciate any comments or additions.
- Retailer friendly value propositions will get traction (MCX, Square, Levelup, Fishbowl, Google, Facebook, …)
- MCX will not deliver any service for 2 years, but individual retailers will create services that “align” with principals outlined by MCX (Target Redcard, Safeway Fastforward, …etc). The service which MCX should build is a Least Cost Routing Switch to enable the most efficient transaction across payment “dumb pipes”. This will enable merchants who want to take risk on any given customer the ability to do so..
- Banks will build yet another consortium in an attempt to control payments. They will work to “protect consumers” by hiding their account information and issue “payment tokens”. I agree with all of this, yet this is a very poorly formed value proposition and Banks will find it hard to influence consumer behavior.
- We will see more than one bank start a pilot around Push Payments (see blog).
- Facebook and Google will gain significant traction in mobile ad targeting…. following on to targeted incentives… which will lead to mobile success. Bankers, please read this again.. success in mobile will begin with ad targeting and incentives. Payments are an afterthought…
- Retailers at the leading edge will begin to see that their consumer data asset is of greater value than their core business.
- Banks will follow Amex’s lead in creating dedicated data businesses. What is CLO today will morph into retailer analytics, offers and loyalty.
- Apple will put NFC in their iPhone.. but usage is focused on device-device communication… not payment. NFC will be just another radio in the handset, there will be multiple SEs with the carriers owning a SWP/SIM based one.. and the platform provider managing the other. Which will succeed? A: the group that can best ORCHESTRATE value across 1000s of companies.
- Visa will lose a top 5 issuer to MA, and they will see a future where their debit revenue is gone (in the US) as MCX and bank consortiums take ownership of ACH and PIN debit.
- We will see 100s of new companies work to create new physical commerce experiences that include marketing, incentives, shopping, selection. Amazon is the driving force for many, as retailers work to create a better consumer experience at competitive price.
- Chaos in executive ranks. Amex, Citi, MCX, PayPal, Visa all have new CEOs.. all will be shaking up their payment teams.
- Retail banking is going through fundamental change. Bank brands, fee income and NRFF are declining, big dedicated branches will be replaced by more self service. Mass market retail will see significant leakage into products like pre-paid. Retailers and Mobile Operators are better able to profitably deliver basic financial services, to the mass market, than banks…. see my Blog Future of Retail: Prepaid.
- Unlocking the Cloud… and Authentication. KYC is a $5B business. Look for mobile operators to build consumer registration services that will tie biometrics with phone. Digital Signatures on contracts, payment through biometrics, .. all will be possible in a world without plastic. Forget NFC… See previous Blog on KYC and Cloud Wallets.
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
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:
- Payment service providers not dependent on credit, or offering alternative PayPal, Google, Square,
- Instant Credit
- Retailer Led payment networks
- PIN Debit
- 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?
Mercury NewCo scenario based upon industry intelligence. Following the scenario, there is an outline of the value propositions for the parties involved.
- Mercury NewCo – Aug10
- Mobile Marketing – Jun10
- Googlization of Financial Services
- AT&T Discover Pre-paid – Mar10
Last week I found myself in NYC and was fortunate to meet with several payment leaders. Change is not something we see often in payments as it is historically known for its galacial pace. The most interesting topics centered around new investment and consolidation, with the rumored $500M capital commitment for ATT/Discover Mercury NewCo at the top of the list. I greatly appreciated the dialog, and this blog is a follow up to a few of the discussions. My view is that Mercury will be present a completely new payments value proposition that existing networks will have trouble competing against, with the revenue driver of mobile advertising. As stated in previous blog, mobile advertising may well exceed Google’s precedent set with online…. perhaps a completely different dynamic with established fortune 50 organizations leading the way in collaboration with old line Madison Ave Ad Agencies. The MNO payment strategy seems to be driven by a recognition that mobile advertising is key to future revenue growth, and payments is an outgrowth of this larger strategic plan (see previous blogs above). Why do I like Mercury’s prospects given the dim history of “change” in payments?
- Enhances an existing value chain (mobile operators) that is well established with sufficient investment capital and patience (deep pockets)
- Addresses a new market opportunity in a way that can deliver disruptive value to multiple stakeholders
- Existing payment providers can not adapt. The great thing about networks are their resiliance. The negative is that they are also resiliant to change.. even when necessary
- There is significant short term merchant pain in the card payments. Merchants have been in effective in influencing Interchange rates.
- Consumer behavior is changing, and the pace at which adoption of new tools and technologies are “mainstream” are also accelerating.
- Payments is an “infrastructure service” to every business and every country. Traditional banking is becoming decoupled from the business of payments in both mature and emerging markets.
Its hard to genericize the antagonist view of Mercury.. but the following are key points I frequently hear:
- Consumers have tremendous card loyalty and will not use a different payment instrument just because it is available.
- Discover is a failed network with over $2B invested in infrastructure
- Existing cards can compete on rates. There is nothing that Discover (or Mercury NewCo) can offer which existing issuers can not compete with
- Changing consumer behavior is unpredictable and takes tremendous marketing investment
- Investment in POS infrastructure is expensive and time consuming
- Merchants are happy with the existing payment networks, and will not spend additional money on marketing or interchange
All are excellent points (with exception of merchant attitudes toward V/MA). Below I have laid out a scenario for NewCo success (some of which is based upon industry intelligence…). Following the scenario, there is an outline of the value propositions for the parties involved.
New Scenario 1 – Pre-Paid Card/Mobile Marketing (AT&T Example)
- All AT&T customers are issued a pre-paid Discover card with $10 pre loaded
- AT&T establishes incentives for use and incentives for user acceptance of mobile marketing agreement whereby personal data can be used to market you 10 times per month.
- Customers accepting agreement also receive NFC MicroSD cards
- Mercury commits to $200M in advertising spend to kick off program
- Mercury establishes mobile advertising group in collaboration with major Madison Ave firms, goal of directing $2B in marketing spend by Year 2. Get back at Google (Own Mobile).. is motivation for Madison Ave firms.
- Mercury establishes Merchant division in collaboration w/ Discover. Mercury will over all transactions at 50bps with minimum marketing spend and/or POS updates. Mercury will also provide marketing incentives/discounts for early adopters. Customer and campaign analytics will be key selling point. Mercury will also seek item detail in transactions.
- Google makes investment in Mercury to serve as ad serving engine and direct existing spend. Agreement ensures that google does not have exclusive rights so that Madison Ave firms can work directly with large corporates.
- Mercury/Discover develop common shared wallets and common marketing processes/standards that are used across MNOs (analogous to Apple iAD). Mercury retains directory of customers that have accepted disclosure and campaign engines bid for ad placement based upon demographics, analytics, and location.
- Customer receives advertising via mobile. 4-8 Categories
- Brand level marketing
- Store discounts
- Product discounts
- Free Trials
- Cross sell/Upsell…
- Incentives for card use drive merchant and consumer behavior. Durbin allows merchants to “direct” consumers to preferred payment methods. Discover is used for small purchases, and also acts as “decoupled debit” once history is established. Customers begin to think of Mercury card as new debit with benefits.
Process Flows – From GAO
NewCo Revenue Model – Year 1 (in Previous Post)
- 85M subscribers (7M iPhone)
- Year one penetration of 10% (8.5M or 60% of iPhone base),
- Average purchase amount $40
- Interchange 50bps
- Annual TPV = 50%(85M*10%*$40*5*12) = $10B (note: 50% ramp up)
- Transaction Revenue $50M
- Digital Goods/Usage $50M
- Retention $50M
- Ad Revenue $300M
- Total Revenue $350M
- Processing expense (30% of Rev, 100% ACH funding) – $15M
- IT Build (one time) – $200M
- Marketing spend – $200M
- G&A – $80M
- Total Expense – $495M
Word on the street is that Visa is set for a major mobile payments announcement in next 6-8 weeks. Separately, US MNOs are also rumored to be collaborating on Near Field Communications (NFC) payments with acquirers. Could it be that the log jam on NFC is about to be broken? Is Visa developing new rails to support mobile payments?
25 November 2009
Word on the street is that Visa is set for a major mobile payments announcement in next 6-8 weeks. Separately, US MNOs are also rumored to be collaborating on Near Field Communications (NFC) payments with acquirers. Could it be that the log jam on NFC is about to be broken? Is Visa developing new rails to support mobile payments? Let me say up front that this blog represents “connecting the dots” more than a definitive market projection.
The US market is ripe for a break from the 6 party political “fur ball” that is hampering delivery of mobile payment (Card Issuers, Acquirers, Network, Merchant, MNOs, Handset Mfg). For those outside the US, MNOs have substantial control over handset features and applications, and have been leveraging this “node control” to “influence” direction of payments. The central US MNO argument being: “it is our customer, our handset, our network we should get a cut of the transaction rev”. Unfortunately existing inter-bank mobile transfers/ payments are settled through existing payment networks that provide limited flexibility in accommodating a “new” MNO role and the network rules leave much room for improvment in: authorization, authentication and consumer “control”.
Outside the US, the situation is much different, as consumers have great flexibility in switching MNOs, have ownership of their handsets, and are largely on pre-paid plans. The MNO challenge for payments in this environment is largely regulatory. Many countries (EU, HK, Korea, Japan, SG) have open well defined rules for MNOs role in payments (example: ECB ELMI framework within the EU), while other countries are highly restrictive and are in the midst of developing their legal and regulatory framework. Even in the countries where MNOs participation is defined, they have largely benefited from the complimentary role that the service plays with pre-paid plans (not in interchange at POS).
Globally, MNOs are looking for a payment platform where they can benefit from interaction between consumer and merchant, with flexibility to deal with a heterogeneous regulatory environment. The competitive pressures on Visa/MC are much different then they were 5 years ago (when both were bank owned). The network fee structures and rules were written with banks and mature markets in mind. Emerging markets present a much different set of opportunities, as MNOs lead banks in brand and consumer penetration within every geography.
All of this leads to the case for a new “Mobile Payments Settlement” network, a network which will alienate many banks. I expect to see Visa roll out the initial stages of this network in the next 2 months with an emphasis on NFC. Quite possibly the best kept secret I have ever seen from a public company. I’m sure many Silicon Valley CEOs are crossing their fingers (with me) on this, as a “new wave” of innovation is certainly close at hand that will drive growth (and valuations).
For those not keeping up with the 50 or so product announcements a day on NFC, handset manufacturers committed to have NFC enabled phones to consumers in mid 2009 in the GSMA 2008 congress. NFC capabilities are numerous (Vodafone YouTube Overview), and may represent a true disruptive innovation surrounding payments. There have been many very recent product announcements that will enable existing phones to use NFC, and P2P Capability. All of which will blossom in a more “fertile” mobile settlement environment. See one example “future” Visa mobile service here: http://tomnoyes.wordpress.com/2009/09/24/googleoff/
Side note: This is not all bad news for Banks, as the structure will certainly provide for existing cards (debit/credit) and may deliver substantial revenue through cash replacement (small < $50) transactions. More details on structure of MNO in settlement 2 weeks….
Select Product/Alliances Below:
- Neustar http://www.americanbanker.com/issues/174_125/-383355-1.html
- http://www.nearfieldcommunicationsworld.com/2009/11/04/32152/zenius-adds nfc-to-standard-mobile-phones-with-bladox-waver/