Inside Baseball for Payment and Data Geeks
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”
1 Nov 2014
Money2020 is next week, and I’m moderating the ApplePay session on Tuesday at 5pm… hope you guys can come. I’m more than a little sad that I can’t get any retailers up on stage with me. Why? The top 60 retailers are in MCX, and it makes little sense for them to get on stage and tell the world what they are NOT going to do and why. As I’m preparing to leave for Las Vegas tomorrow, was thinking “what could I write about? What unique perspective can I offer?” Well given I can’t get them on stage with me, let me try to articulate the Retailer’s view of the world. My twitter feed is blowing up as I work to explain why CVS and Rite-Aide turned off NFC. Please know I’m only trying to give perspective…
Payment Services are a brokering activity between two entities engaged in commerce. Logically, a broker must have the trust of both parties, and deliver some sort of value in managing the financial risk associated with the transaction. Within Consumer Retail, Visa and Mastercard evolved from Bank owned exclusive networks of the 1960s (see History) to ubiquitous independent payment networks. Few remember that back in the 1960s, merchants took either Visa or Mastercharge but not both as the Merchant’s acquiring bank could only be a member of one of the networks. For merchants, the value proposition was clear: consumer credit.
Payment networks thus evolved from a closed and focused value proposition, to a settlement “infrastructure”. However the rules and governance process by which many parties (merchant, acquirer, processor, issuer, network, VASP, …etc) participated in defining operation of this “brokering” activity did not evolve. This is the central issue restricting the future growth of Visa and Mastercard. One I believe both are acting on. My firm belief is that rebalancing network rules will unleash a massive new phase of value creation for these networks.
Let me take a quick side bar here..
Network Theory – Openness
As I’ve stated many times, closed networks always precede open networks until scale is reached (Building Networks and “Openness”, 2011). Weak Links (nodal affinity) influences network creation, and there are VERY few open networks which exist in Nature. This is logical as Networks form around a function rendering generic open networks less “efficient” than specialized networks around any given specialized need.
Scale-free distribution (completely open networks) is not always the optimal solution to the requirement of cost efficiency. .. in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks.
-Weak Links
Networks NATURALLY form around a function and other entities are attracted to this network (affinity) because of the function of both the central orchestrator and the other participants. Open networks (internet/TCPIP, Visa, NASDAQ, … ) succeed where a common infrastructure benefits MANY NETWORKS.
Visa and MasterCard have transitioned to become common network infrastructure, a position FAR MORE valuable than that of a closed credit delivery system. They are a network of networks. However their rule making and governance processes do not match the other open networks listed above (NASDAQ, Internet, …). Most Banks, have also lost their traditional role of “brokering” and risk management (in retail) by creating a card rewards system that encourages card use paid by the merchant. This creates a brokering incentive separate from the commercial transaction… impacting brokering independence.
What do merchants want? A neutral broker!!
A top 5 merchant told me a few months ago “Retailers like Starbucks have proven that we are best placed to deliver value and influence consumer behavior. I don’t want to force my consumers to do anything, but similarly I want to networks that let me play on an even field. These next 5 years are going to be complete chaos for consumers. What do we want them to do? Swipe, dip, chip, pin, tap, QR…? We have been planning for EMV for 3 years… am I really supposed to jump to Apple in 4 weeks?”
MCX
These guys are good friends of mine, and I think their business vision is well placed. They want a network where they can play on an equal footing. A neutral broker.. or at least one where they can have a seat at the table when rules are set. Will MCX be a massive success? It depends on the consumer value proposition. Are the merchants motivated to work together in creating a neutral broker? Hell yes.
One merchant said it this way “Tom I didn’t think we would ever have someone more difficult to work with than Visa and Mastercard, but I was WRONG. Apple is a nightmare! At least we knew what was coming with Visa and Mastercard, with Apple they don’t talk to us, respond to our letters, or offer any kind of value proposition. Why on earth would I want to let another brand in my store without understanding what it will do for me? They are a great company, with great products, and certainly have a much better approach to data than Google.. but anonymity is NOT a value proposition, in fact Apple makes our efforts to deliver value to the consumer even harder as we have no defined way of using Apple to engage our consumers”. See Brokering Identity – Part 1, ApplePay and Merchants, Digital Transactions ApplePay Issuer Agreement.
Getting a card number from consumer to merchant is NOT innovation. There is just no problem here. My payment friends are already rolling their eyes. Apple does have great security and great ability to manage fraud.. but fraud losses for CP are 3.2 bps. What about store data losses? That is not “fraud”, and certainly a problem for merchants that keep PANs. Tokens do solve this problem… but so does better security, and more intelligent approach to tracking loyalty. Apple must move to create a merchant value proposition, and define how they will help with consumer engagement. I believe Google will far outpace Apple here.
Retail is a zero sum game.. I’m not going to buy MORE gas and groceries.. differentiation is about switching, product selection and pricing on data, ..the flux… once this flux dies.. steady state resumes. Perhaps all iPhone owners will only shop at whole foods, but data shows that consumers don’t make decisions this way. In fact payment is not in the top 5 reasons for consumers choosing a new iPhone.
Why are MCX merchants turning off NFC? To give themselves a little breathing room, make Apple create a merchant value proposition (engagement), get a seat at the table in a new network, and help to establish a consumer behavior that works for them too (Most Important Payment Race: Consumer Behavior, Apple’s Platform Strategy: Consumer Champion ).
What do Retailers want in Mobile?
Following from my big blog Static Strategies and the Rewiring of Retail.
How will this play out?
11 December 2013
I’m preparing for a few institutional investor chats next week in NYC and thought it was time to update my view on the payment landscape. Summary: much chaos and noise, with existing players throwing sand in everyone else’s gears… lots of energy.. but NO HEAT. This blog contains a brief inventory of initiatives I’m aware of. One of the reasons I do this is to solicit further dialog from blog readers.. so your thoughts are always appreciated. It is very difficult for small companies to identify activities which will impact them.. turns out that most non banks and even Visa and MA are ill informed on some of these as well.
In my June Blog Tokens: Merchant Options, and September blog Money 2020: Tokens and Networks I laid out 5 token initiatives.. we have now almost doubled..
The key differentiation between these Token initiatives is WHERE the translation occurs (Wallet, POS, Processor, Network, Issuer). Translation is also referred to as DIRECTORY, which I define as the mapping of consumer information to payment information (see blog Battle of Cloud Part 1). The owner of the consumer directory is the winner in all of this, as the value of payment pales in comparison to the value of data and the consumer relationship. This is the core of the token battle.
Inventory is for POS payments only.
See my blog on the 12 party supply chain making this approach a nightmare
From Business Implications of Tokens
Business Drivers
As I outlined in New ACH System in US, my view of Bank business drivers for Tokenization are:
What banks seem to be missing is that mobile payment is not just about payment (seeDirectory Battle Part 1). Payments SUPPORT commerce, Banks therefore do not operate from a position of control but rather of enablement. Most retailers recognize that Consumer access to credit has resulted in improved retail spending, however most would also say consumer addition to bank rewards has been detrimental to their margin.
A core “investment assumption” by TCH banks was that “regulators” were going to force the use of tokens in the US. As a primary means for meeting obligations under BSA/AML. The “value proposition” pitched to pilot participants was thus “regs are coming which will drive PayPal out of business.. everyone will be required to tokenize.. pilot participation means you can have a jump on everyone else.” Obviously this has not been the case..
29 Oct 2013
Short Blog.. will update next week. Sorry for Typos
Is anyone else struggling to see the logic of Bank led token initiatives? These folks are smart people.. we obviously see why they want to do it (control)… but they are smart enough to construct some kind of value proposition. It’s not as if they can MAKE every merchant and wallet service convert.
Well… this is NOT necessarily a good assumption (value proposition). I met with a few folks this week, each touched TCH SecureCloud. A core “investment assumption” by TCH banks was that “regulators” were going to force the use of tokens in the US. As a primary means for meeting obligations under BSA/AML. The “value proposition” pitched to pilot participants was thus “regs are coming which will drive PayPal out of business.. everyone will be required to tokenize.. pilot participation means you can have a jump on everyone else.” Obviously this has not been the case..
The Banks wanted to start with tokenizing eCommerce Cards on File (COF), as this enabled them to keep the favorable credit card mix (75%+ credit) in a new mobile world. If would have been much easier if they just pushed all of the consumers approved payment products down to Apple, Amazon, Paypal, Google… but Banks don’t really want consumers to have a choice.. they want friction and fear in debit. This Credit on Mobile Strategy may not be a STATED goal of TCH tokens.. but it is certainly a corollary which Banks don’t care to address.
Visa/MA/Amex did an end run on Bank token plans with a proposed interoperable standard. It thus seems that the 20 odd Bank TCH token participants will give the utility to the networks, with the hope that there will be a continued credit focus. What will TCH do? Probably be a standards body of some sort, and be the token authority for things like ACH.
The ACH LOCKDOWN strategy had 3 prongs: NACHA Rules, Regulation, and an alternative. See related Post around NACHA Rules. With respect to alternative.. this is the driver of Clearxchange, a real time ACH that circumvents NACHA…
One of the Bank leaders quipped “in 5 years we hope to put Paypal out of business in the US”… implying banks could lock out non-banks in riding ACH rails. This would also have significant implications to MCX… My view is that there are ways to get around all of these grand plans IF they ever materialize (ie Bank partnerships).
All of this seems a little too smart, too complex, too dependent on regulations by a regulator that isn’t really doing much to help Banks these days.
Message to Regulators.
PLEASE DON’T FORCE TOKENS.. but rather allow risk to be owned by non-bank entities (ex MSBs) originating transactions. There are so many new ways to mitigate risk and authenticate a customer. Mandating tokens will kill innovation and keep control locked inside intuitions that innovate at the rate of glaciers.
Reminds me of a joke. Did you hear about the Bank mobile SVP that tried to commit suicide? He threw himself in front of a Glacier.
Authentication is key to unlocking billions of dollars in revenue and bringing enormous efficiency to the market… allowing for the REWIRING of Retail, Advertising, Commerce.
Regulators should not focus on payment tokens, but facilities for managing distributed TRUST and AUTHENTICATION. Allowing other entities to assume risk in payments. This may mean creating new quasi bank licenses (regulated trust authority) or a new federally approved MSB that does not hold any deposits. A first start may be to open up Fed Wire to non bank participants. With ability to take risk on settlement funds.
I actually agree with Banks in their token plans.. IF they are ultimately accountable for EVERYTHING.. they must control EVERYTHING.
30 Sept
Warning… unfinished thoughts from a non linear thinker with typos. Feedback appreciated.
Why did IBM choose to outsource DOS to MSFT? How did US auto makers miss the small car market? Anyone remember WorldBook encyclopedia? How did Research in Motion loose its dominant position? What happened to Kodak (it had digital patents it didn’t use)? Why is Uber so successful?
The nature of competition is changing in MANY industries, this short post focuses on consumer commerce. What is driving the change?
Make no mistake Commerce is being REWIRED.. How do you rewire 25% of your Economy? (US Retail Sales of $4T is 25% of the US $15.68T GDP). Unfortunately most of the “rewiring” is not by design… Today we see existing companies and business models working to “bolt on” changes to their models rather than transforming products, processes and systems. 
For example, imagine you are a Retailer, how do you compete? A) You sell commodity goods at the highest possible price (see Retail 101). B) Sell unique goods at the highest possible price. How do you achieve this? Well there are 100s of strategies here (ie. loyalty, market downs, coupons, loss leaders, price optimization, promotions, trade spend, …). These strategies have people assigned, budgets allocated, systems and reports that have been “tuned”. This organizational momentum makes pivoting very hard.
The consumer strategies above may be best summarized as: getting consumers to spend more with you, and leverage that loyalty for profitability. These strategies have been in place for 100 years! Where is the innovation and data? Product insight? A digital version of a loyalty card is NOT innovation… similarly electronic coupons are just automation of an existing (broken) paper process. Is it any wonder we see so few successes in mobile anything? Most innovation is thus “bolt on” with little incremental VALUE.
There is SO MUCH opportunity for restructuring retail Commerce that I’m challenged to provide examples that are broad enough.
Today much of retail is about location, convenience, impulse. What if consumer behavior shifts from convenience to community reputation where shopping is completed on mobile? What if customized versions of any product could be at your door the next day? What if products weren’t all disposable, but rather assigned to approved reconditioning and repair specialists? My favorite example of a store of the future is Korea’s Tesco. (note pic below is a poster of a dairy case in a subway).
Commerce is ripe for a MASSIVE rewiring. The business drivers behind the rewiring are complex as is the technology. Today OMNICHANNEL is a myth.. most consumers finish the purchase in the channel in which they began. Mobile stays in mobile, online stays in online, physical stays in physical… Ad spend has thus been “stuck” as well. In 2008, less than 10% of P&G’s $3.2B Ad budget went to digital, last month Lafley said that 35% will of a $4.8B budget will go to digital, spend not even tracked by Advertising Media/Analysts.
What is changing?
Change Process
How will change manifest itself? Organic? Evolutionary? Instantaneous? What I look for is for someone to solve a problem, and meet a need. Uber is my example of the decade.. using information to meet a need that benefits both consumer and driver. If you mapped the information flow of Uber, the value over the existing system would be obvious.. eliminating the need for a central dispatcher, plus the benefit of “reputation”. I would suggest that we take a look at the data flow in retail to see where we could add value, but the problem is that there are many “dispatchers” each refusing to share their own data. This is why Amazon and WalMart win… their supply chain is integrated.. and consumer value propositions well understood.
Why didn’t anyone think of Uber before? the need was obvious!! History shows again and again that people are biased by life experience and hence tend to see things from a biased view. In other words, outsiders providing analysis on Apple Passbook and Google wallet see them from the perspective of today along the lines of what exists today… a static view. This is why IBM did not see the potential of the PC and commit needed investment in DOS (margin was terrible), why RIM did not understand what the iPhone did to an integrated “digital life” (we are more secure … who needs music), or why WorldBook didn’t build a wikipedia community. Product ignorance, hubris, momentum, complexity, cannibalization all make pivoting very hard.
I’ll be adding onto this blog later in the week in order to add depth to the following points below.
Start Up Advice
Existing research (such as Morgan Stanley) are keen on Paypal’s chances as they survey merchants likely to use Paypal’s new services. This research is backward looking, as merchants don’t understand what new services will do for their business, and new value propositions are not yet in market. In my view Paypal’s entire eCommerce revenue is at risk.. with their only advantage (DDA integration/cost of funds) lost because of new Debit pricing of $0.07 cents. This is not just a US thing, or a mobile thing, or a POS thing.. this is EVERYTHING. They have no competitive differentiator… and are not positioned well to compete in ORCHESTRATING COMMERCE.
eBay shares were down 3% on news that Facebook has launched a new payment service (see article). Facebook came out later the next day to emphasize it was a small test and it has a “great relationship” with Paypal (see Businessweek article).
Paypal is a cluster unto itself (see Battle of the Cloud 5). The negative “cluster” connotation (ie heard with respect to Vietnam) seems to stick well with Paypal’s current US prospects in several segments. Last week we heard of Facebook’s payment pilot.. the future of which presents a just one of the many real threats to Paypal’s “core” eCommerce (off eBay) volume.
The nature of payments is changing… and I’ve stated often: the stength of networks is their resilience and resistance to change; they were formed around an defined value proposition where participants were aligned… The strategic threat for Paypal is that the nature of competition is changing as advertisers and channels couple payments with other services (social, community, advertising, …) to deliver a better COMMERCE experience through insight into customer data. Merchants gain CUSTOMERS… For example, both Google (instant buy) and Facebook payment will offer merchants an API that allows them to pull consumer information into the checkout page. This means a greatly improved checkout experience, improved ad targeting, improved lead attribution, improved consumer analytics, improved mobile conversion, and of course much more data for Google and Facebook. The MNOs also have a service in place with Payfone, (to launch in next month or so.. see blog).
The entities most capable of delivering on mobile payments (in order of likely success)
#1 Touch the consumer BEFORE the purchase (ability to add value and couple w/ advertising)
#2 Have a direct consumer “mobile relationship”, with payment history, and can authenticate/manage Fraud
#3 Have a physical POS relationship (or part of existing POS network)
Online merchants are asking themselves where do my customers come from? how can I improve customer experience? customer conversions? Reduce cost of payments. The answers all point to very poor PayPal’s prospects. Paypal does NOT bring customers to the merchant, they can add no value to merchants beyond Autofill, a task much better suited to channels that already have authenticated the consumer before they enter the merchant’s virtual store.
Look at Google’s Instant Buy, Google’s delivers one click mobile buying AND financial savings to the online merchant in EVERY transaction with a 160bps (non Durbin regulated debit) taking a LOSS on EVERY transaction. Paypal’s cost of funds is around 80-110bps, and average merchant cost is over 240bps.
eBay’s 2012 10-k reports that $13B of TPV was assigned to marketplace mobile Commerce (page 5). On page 7 we see
In 2012, PayPal’s net total payment volume, or net TPV, for transactions using mobile devices reached nearly $14 billion, up from approximately $4 billion in 2011. PayPal’s mobile products are designed to deliver an end-to-end mobile shopping experience in a safe and secure environment. PayPal’s mobile checkout solutions offer a convenient and easy way for merchants to accept payments from mobile devices, and for consumers to pay, through a mobile-optimized user experience
This leads us to assume just $1B of “mobile payments” was off eBay commerce related. In other words, all “mobile payment” growth from eBay participants finishing transactions on mobile/iPad.
Paypal’s core is in improving the eCommerce checkout experience, and will NOT extend into mobile as mobile participants are better able to leverage their channel positions, consumer insight and existing services to better deliver both a merchant and consumer value proposition. Beyond mobile.. what are Paypal’s prospects?
POS – FAILURE
Paypal is going absolutely no where with POS payments. For example, I had two separate industry experts tell me that FirstData has refused to route any Discover/Paypal traffic (see my May 13 Blog). Paypal’s approach to this network roadblock is to partner with processors (like Vantive) and offer a spiff (say $500k) to switch from FD to Vantive. Can you imagine the laughter.. I’m going to switch from FirstData to accept a Paypal payment product that is more expensive than anything other than a premium Visa credit card? Why?? exactly what is the consumer adoption. It all makes no sense at all… Thus, I hear internally that Don Kingsborough’s continued POS push may be short lived (product and person?). Given Home depots experience of 5 transactions per WEEK, it would seem obvious.
eCommerce
This is Paypal’s core. How do consumers find products online (see Forbes Article). With more product searches initiated on Amazon than Google, what if Amazon is well positioned for both: Retail/aggregator/reseller/distributor role AND the payments/advertising role.
eCommerce is very, very LUMPY, with eBay/GSI, Visa/CYBS, Amazon accounting for over 60% of Sales in US. In Japan, Amazon and Rakuten have similar shares, with similar concentrations in other markets. An obvious investor question is to ask: what is PayPal’s penetration is within these other “networks”? for example, within CYBS merchants, what have been PayPal wins within last 2 years.
Paypal has won here historically because of its ability to manage fraud and deliver great consumer experience.. it was a consumer facing value proposition. It will now be under attack as the same “channel” dynamic described for mobile above takes shape. Google, Facebook and Amazon will change the nature of “payments” competition. No longer is it about experience and cost… payments is just part of a long commerce process. Channels are much better positioned to bring consumers to retailers (consumer’s search, select and shopping online). Payments is the last (easiest) part of this cycle.
Analysts (such as Morgan Stanley) are keen on Paypal’s chances as they survey merchants likely to use Paypal’s new services. This research is backward looking, as merchants don’t understand what new services will do for their business, and new value propositions are not yet in market. Paypal won market adoption because of its ability to make commerce easier (consumer) AND deliver benefit to Merchant. It is no longer cost competitive in EITHER as other entrants can offer service at BREAK EVEN costs to support their overall PLATFORM business.
Investor Impact
PayPal Competitors will:
Paypal generates 64% gross margins from online transactions. PayPal’s blended cost of funds is 104bps, with fraud costs of 30 bps. For total cost of funds = 134 bps. 2Q13 Take rate was 379bps, of which cross border was 22% (250bps fee for cross border). Standard Merchant fees are published and tiered (See pricing), with average domestic of approximately 300bps.
Google’s merchant pricing for InstantBuy currently brings pricing down to 160bps, with Facebook, Amazon and MNOs/Payfone capable of matching.
2012 Off eBay payments revenue was $5,146 (on $97.2B TPV), which includes both remittance and commerce volume. I don’t have good numbers on breakout here, so lets assume Commerce represents 80% of off eBay payments revenue = $4B , with US taking approximately 50% ($2B).
Revenue at risk is US eCommerce revenue * (competitor take rate/current take rate ) =
$2B * 160/300 = $1.07B ( 7.6 % of total 2012 revenue of 14,072MM)
Google has also announced a rollout of a Gmail P2P money transfer service, as will Facebook.. In my view Paypal’s entire eCommerce revenue is at risk.. with their only advantage (DDA integration/cost of funds) lost because of new Debit pricing of $0.07 cents. This is not just a US thing, or a mobile thing, or a POS thing.. this is EVERYTHING. They have no competitive differentiator… and are not positioned well to compete in ORCHESTRATING COMMERCE.
in 3Q13 we will see at least 3 major eCommerce initiatives launch which will impact Paypal
#1 Google InstantBuy (keep your processor and save on every transaction)
#2 ATT/Verizon Payfone
#3 Visa/Mastercard V.me/Masterpass
Networks are also changing the rules to make Paypal’s life more difficult. Example is Mastercard’s 35 bps staged digital wallet fee which ONLY impacted Paypal.
I’m short on eBay…. the reasons are above.
if Google had challenges pulling off POS innovation (after ~$1B in investment), rest assured you will too. Banks are well positioned to throw sand in your gears … focus on delivering value within merchant –consumer relationship.
18 June 2013 (sorry for typos)
Thought it was time for blog this week. Primary objective is to inform the venture community of changes which may impact payment related start ups. Sorry that the title isn’t a little more polished (you can tell I’m rather left brained). The exec summary of this blog: don’t ever bet your business on someone else’s rules… particularly if they themselves don’t own them.
Background
All Networks are working on unique token schemes (as I outlined in: Payment Tokenization, “New” ACH System, Visa’s Token Plans and Business Impact of Tokenization). The business drivers here are: #1 Control, #2 Mobile Payments. The US Banks have gotten together in The Clearing House (TCH Tokens) and are in the midst of piloting with 2 providers. In this TCH token initiative, the banks have logically determined that if a customer doesn’t need to see their Primary Account Number (PAN), then they will provide a number which they can uniquely resolve. For example, in mobile payments Citi could put in a unique Citi 16 digit number that is not a MasterCard, not a Visa card, not an ACH account number.. its just a Citi “token”. Citi can decide how to resolve this number adaptively.. based upon what the customer wants, or what products they have with them. There are MANY benefits to this approach:
This is a BRILLIANT move by banks. I believe that this central bank “facility” within The Clearing House will be their centerpiece for consolidating all of Debit, in addition to the mobile play.
TCH Tokens are not the only game. Visa, Mastercard and Amex (through Serve) are also in this token game, and others like Payfone (through phone number as token at VZ/ATT), Google (through TXVIA) are also on the periphery. My view is that the BEST tokens are ones you don’t have to issue (ie Square/Voice, Apple/Biometric, Google/Facial Geometry, Payfone/Phone #…). I outlined dynamics of the strategies in my blog last year “Directory Battle Part 1 – Battle of the Cloud”. Its amazing that this topic is not covered more broadly in the mainstream… of course most of these efforts above are not discussed at all, and sometimes denied.
Of all the token initiatives, I believe Visa is most likely to succeed. This is not a typo… I’ve been very negative on Visa in the past.. as they have alienated everyone. But Charlie has started to change the culture, he has pulled the JPM relationship out of the toilet and has made a tremendous hire with Ryan. Why do I like Visa’s token prospects? They failed in their first initiative (non 16 digit PAN required big changes by everyone), and learned their lessons. However, most importantly, they can change the rates through rules on CNP and risk “ownership” creating a “new” version of VBV, with the best payment brand.
Wrapping
Currently the networks are at war with anyone attempting to wrap their product and add incremental value. As I outlined in Don’t Wrap Me, and Battle of the Cloud Part 3
The threat to banks from “plastic aggregation” at POS from solutions like Amex/Serve, PayPal/Discover, Square/Visa, MCX, Google is real. Make no mistake, Banks have legitimate concerns surrounding ability support consumers and adjust their risk models. But the real business driver here is to “influence” mobile payment solutions that do not align to their business objectives. Key areas for bank concerns:
- #1 CUSTOMER DATA
- Top of wallet card (how does card become default payment instrument)
- Credit card ability to deliver other services (like offers, alerts, …)
- Ability for issuer to strike unique pricing agreements w/ key merchants
- Brand
- …etc
Visa, MA, Amex, DFS are in a great position to “stop” wrapping. What does this mean? They have initiated new rules, fees, cease and desists, threats of litigation …etc. Banks are thus looking to circumvent these restrictions by placing their “token” with the customer. This token is thus a new quasi acceptance “brand”.
Acceptance is therefore the new battle arena (who can convince merchants to accept their tokens, rules, rates, …). eCommerce may have slipped away from the banks and networks (PayPal), but they are determined not to let this happen in mCommerce, or at the POS. JPM has structured its new agreement with Visa to give them the flexibility on rules in acquiring and network routing for a new acceptance brand (Chase Merchant Services – CMS).
Retailers
Retailers are not the dumb mutts that banks assume. The MCX consortium realizes that greater bank control does NOT benefit them unless the 
service is ubiquitous and standard so that banks can compete against each other, with no switching costs. Analogy here is internet traffic routing…They just want the payment cleared, with transparency/control in price, speed, risk. Retailers also want the death of bank card rewards schemes, and if they can’t kill them instantly, want the ability to deny “preferred” cards. I told a major retailer yesterday that they should offer an “X Prize” to anyone that can make sense of Visa’s rate structure in a youtube video.
Many Retailer’s also have a “token” in form of a loyalty card.. with Target’s Redcard, and Starbucks demonstrating the model in which a retailer led payment scheme could work. For retailers, their loyalty program is fundamentally about selling data, and trade spend.
As a side note, the “big” secret in acquisition is that most (~60%) of profits come from the bottom third of retailers.. specifically the small independents that don’t know enough to negotiate (hence the ISO business). Companies like Walmart negotiate heavily with the top issuers to reduce rates from “standard”.. and still end up paying over $1B a year.
I see a substantial opportunity for acquirers to participate in what I would discussed within Payment Enabled CRM. This would change their profitability from one driven by small merchants to data/analytics. This is undoubtedly what JPM sees within CMS. Retailers know that they can’t further empower the big bank with their data, but rather need an independent party to run the CRM platform for them.
Summary
I’ve already spent a little more time than I was anticipating here. For start ups my message is quite simple, if Google had challenges pulling off POS innovation (after ~$1B in investment), rest assured you will too. Banks are well positioned to throw sand in your gears … focus on delivering value within merchant –consumer relationship. The Mobile-retail interaction is greenfield, and there are 1000s of different flavors.. no one company will be the centerpiece here. Avoid POS payments.. or be the “arms provider” to the big institutions as they duke it out. My view is that the key for MNOs, Apple, Amazon, Google and Samsung’s future value is
#1 Authentication (Linking the Physical and Virtual World)
#2 Orchestration (Coordinating Virtual and Physical World Processes, Data and Value Chain)
March 6, 2012
If you can solve Authentication.. everything else is just accounting
– Ross Anderson, KC Fed, March 2012
Good news: Someone is reading my blog.
Bad news for Mobile Operators…. It is the Banks.
3 years ago I wrote $5B Mobile Operator Opportunity: KYC. If I were in control of ANY aspect of mobile.. I would work to ensure that privacy and anonymity reign. Google/Apple should work to ensure that mobile browsers and apps have VERY WELL DEFINED controls around user identity, tracking (ie cookies, fso, …), location, payment, … Similarly mobile operators should have VERY TIGHT controls around who can leverage tower information, customer information, .. for location and “hidden” identification of users.
Today I learned that one of the top 3 banks has struck a unique agreement with the ISIS telecos to do KYC, account opening, and really act as an agent. This is just brilliant for the bank… as it decreases its cost to acquire and cost to serve. However striking a one off deal with a big bank is short sighted.
The Mobile Operator KYC/Agent opportunity is TREMENDOUS if MNOs can focus a business around this and make KYC a generic service. As I stated in Future of Retail Banking: Prepaid?, Retailers and Mobile operators have a competitive advantage in their physical distribution. Retailers like WMT, Tesco and Target are doing a tremendous job here. International Mobile Operators like Docomo, Vodafone, Sing Tel, SKT, Bharti are also far in their planning. US Mobile operators are completely out of the game…. Perhaps things like this slip to “deal” because they “outsourced” the strategy to a dysfunctional consortium (ISIS, see Walled Garden) .
MNOs why would you want to be an agent for a SINGLE bank, when you could sell a service that could be used by every bank, every commerce company, every government agency… to the BENEFIT of your customer (example mobile esignature below).
Operators, let me be specific in my recommendations.
I believe that Apple gets this, as we can see from their acquisition of Authentec. Creating a digital storage locker for identity.. is much more important than creating one for music.. (hint).
I also think Square get this.. and has built a business around identity as the key for physical commerce AND payment. Given that Square and Apple are also all about creating great consumer experiences.. with a maniacal product focus.. I would love for them to get together..
US mobile payments will have a new “network”, a system to use tokens which are neither V or MA card numbers. Thus Banks need not route these transactions through either V or MA, but will be able to leverage same acceptance infrastructure. Virtual card numbers will be bank numbers that banks resolve. JPM’s is first to align w/ plastic, leveraging common authorization authentication and other services
21 Feb 2013 (pardon the typos as always)
US mobile payments will have a new “network”, a system to use tokens which are neither V or MA card numbers. Banks’ position is that the need not route these transactions through either V or MA (in order to leverage same acceptance infrastructure), whereas V/MA clearly say that an account can’t be both a network account and a XPAY account (see no wrapping).
The banks desire in 2011 is that Tokens will be bank numbers that banks resolve. JPM’s is first to align w/ ChaseNet and ChasePay. Banks are putting in place “controls” around ACH debit and card rules which will “encourage” token adoption. Watch out payment start ups.. rough seas ahead. As I stated: Banks will WIN in payments.
In the US, merchants own liability for Card Not Present (CNP) fraud which aligns online merchants to the risk of using a payment instrument for a consumer they cannot physically verify (see VBV exception). However well an individual online merchant manages their own payment risk, their remains extraneous indirect risk to banks, as card data loss could result in: counterfeit plastic, identity theft, other first party fraud, …etc. Thus the fallibility of the current card “token” which relates Bank to Consumer relationship. Through this NEW token initiative, Banks are seeking to expand the account identifier by making it unique to: consumer, bank AND merchant.
Today merchants receive an authorization for use of the card and behind the scenes Banks use very large sophisticated risk models (ex software HNC’s Falcon) to make authorization decisions. As eCommerce merchants are responsible for fraud, they perform their own risk management either directly or through payment specialists (Cybersource, PayPal, Amazon, Digital River, …etc). Banks have few problems approving online transactions.. as they bear none of the loss… and hence a game is played. Banks have little incentive to share their fraud data and merchants have little incentive to share theirs. Remember that within banking, margins are driven by the ability to manage risk and banks therefore incented to differentiate capability (not harmonize it). Which leads to other interesting dynamics (perhaps a topic for a later time).
At the Physical POS, the situation is different. Merchants bear little fraud and with EMV (Chip and PIN) the US will further reduce fraud where plastic is presented (if EMV in the US does happen). As I described in EMV Battle Impacts Mobile Payments, Retailers love EMV and are biased toward PIN and Debit. Retailers are continually looking for a way to reduce payment costs and influence consumers AWAY from Bank reward schemes.
Mobile payments remain “green field” and may be significantly disruptive at the POS. One of my favorite quotes around payments ” if you solve authentication.. everything else is just accounting” (Ross Anderson @ KC Fed). The mobile device can provide a much richer set of information which to authenticate (vs a piece of plastic). Banks have invested billions in their card risk and authentication infrastructure. Mobile could render most of this investment moot, thus Banks are working to control and influence mobile payments at POS, particularly given NFC’s complete failure. Additionally, new payment providers like LevelUp, Google Wallet, MCX, Passbook, …etc all present large challenges to banks efforts to own the consumer relationship and payment choice at the POS (See MCX Blog). Banks have some latitude to create incentives around mobile. For example is an MCX QR code backed by a Visa Debit card a CNP Visa transaction? Card Present? Or will MCX try to encourage consumers to back with DDA like the Target RedCard model? Mobile payments are a key battle ground for many parties.. it is imperative to recognize that mobile payments are not just about payments.. but also about loyalty, relationship, data, influence, banking… etc.
In architecting incentives, banks have diminished ability to force V/MA to change acceptance rules. The same is true for retailers. Thus both are looking to create networks based on direct consumer accounts with account numbers (tokens) they can control. This is a very big statement.. if the banks can create a “token” which represents a credit account or a debit account.. they have “wrapped” Visa and MA (see blog Don’t Wrap Me). If successful, they could subsequently change networks anytime they wanted… or create their own. Why on earth would they want to route any debit transaction through V or MA if the token represented a debit card that represented a DDA? Or similarly doubtful: a token that represents a credit card which represents a credit account? (see PayPal at the POS). Taking card number out of merchant (and consumer) possession, and replacing it with a token, enables banks enormous flexibility.
Yes my head is spinning too. I am implying that banks could leverage their entire acceptance and authorization infrastructure without routing anything through V or MA. No direct consumer involvement would be necessary in this token scheme since something like an MCX QR code could be mapped to multiple tokens in a single back end process. Banks are looking to make ACH changes as a defensive play to ensure that ACH rails are protected against funding a Retailer/3rd Party wallet directly (as PayPal, Target RedCard, Safeway Fastforward do today). This was my point in yesterday’s blog on ACH Debit.
Business Drivers
As I outlined this week in New ACH System in US, my view of Bank business drivers for Tokenization are:
What banks seem to be missing is that mobile payment is not just about payment (see Directory Battle Part 1). Payments SUPPORT commerce, Banks therefore do not operate from a position of control but rather of enablement. Most retailers recognize that Consumer access to credit has resulted in improved retail spending, however most would also say consumer addition to bank rewards has been detrimental to their margin.
Tokens for Mobile POS?
Why would any merchant or wallet provider choose to exchange consumer payment instrument(s) for token(s)? Reduction in CNP rates, liability shift are significant. But the mobile device has many additional “identifiers” that far exceed what is available on a piece of plastic (IMEI, location, history, password, interaction for challenge). IMHO the bank business case for tokens must be built on CNP rates and Customer Choice. If Banks directly assist consumers provision their account into a mobile wallet, every wallet provider should support it. In other words the bank has done the work to integrate and “push” the customer’s choice into a given wallet from their online banking site (ex yesterday V.me and SavetoAPI).
But this bank led provisioning does nothing for the millions of accounts that consumers have already provisioned themselves in: PayPal, Apple, Amazon, Google, Target, Safeway… All of these companies have worked to deliver consumer value and obtained a direct consumer relationship, which subsequently resulted in the consumer choosing to store payment information directly. I can’t imagine a scenario (or business case) for them to part with that asset, particularly prior to 100% acceptance of tokens by all merchants (online and offline).
Token Acceptance
The value of a bank issued token is completely dependent on: ACCEPTANCE, cost and Risk Mitigation. At the physical POS Retailers are firmly in control of acceptance, unless the tokens perfectly mimic existing card schemes. Banks will likely work to ensure that any non-tokenized payment (QR Code) will be treated as a CNP transaction with merchants bearing fraud responsibility. If tokens are in the format of a 16 digit account number than there will be very little change necessary to the payment terminal. However, the downside of using 16 digit account numbers is that it would not enable banks to firmly separate from V/MA bin routing (and network fees). It will certainly be interesting to see the plan here.
Retailers, Banks, Networks, Consortiums… are all at odds… all trying to own the consumer relationship and control a directory which they can resolve.
In general I see the token initiative as a distraction for banks. They are far too focused on control and throwing sand in the gears of commerce. Commerce will find the path of least resistance in an open market.
Summary
My guess is that many Card CEOs are skeptical of all this network tokenization strategy. Banks card teams have tremendous assets in their consumer relationship, established consumer behavior, brand, network of acceptance, merchant white label relationships. Why not work to partner and extend today’s model in a way that benefits consumer and merchant? Example Payment enabled CRM.
This tokenization project’s ability to positively impact mobile payments and retailers may be like squeezing Jello… American Express can only be laughing to themselves. As US Card issuers are 5 years behind them in innovation Amex is extending their lead as they endeavor to “pull their weight” by while helping retailers obtain new insights on their customers. This sounds like a much better idea than tokens.. probably one that investors will understand better as well.
My message to Bank CEOs: stop trying to lock in your market position and start trying to justify it through value. Tokens will provide you more control, but it is significantly detrimental to your acceptance network (V/MA). You have brilliant payment executives.. there is true genius in the token design here, but it is completely myopic. If you had a cross functional team with experience in retail, advertising, data, processing, CRM you would realize that mobile will change the way consumers interact with their environment. Banks will NOT be the intermediary in every interaction. The barriers you are constructing will only further inhibit your ability to partner and take part in processes which add value. Remember your customer is not yours exclusively, we also are customers of Google and WalMart and Verizon…. Banks have an OPPORTUNITY to orchestrate commerce IF they deliver VALUE. Payment people design payment solutions to payment problems. Banks must redefine the problem and the opportunity.
The questions banks must answer (for a retailer): when was the last time you brought me a customer and helped me build my brand, and consumer relationship?
Another scenario Card CEOs should consider: if Payments become “dumb pipes” …. where retailers and non bank intermediaries can perform Least Cost Routing (LCR)… how do we compete? How strong is your customer relationship? Why did the consumer choose you as the bank in the first place?
2 January 2013 (updated typos and added content on kyc, cloud, and push payments)
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:
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.Predictions
Here are mine, would greatly appreciate any comments or additions.