Mobile – Noyes Payments Blog

PayPal Threats – 2020

I’m a big fan of PayPal, but as they approach 100x earnings I’m on the look out for risks. While PayPal is BEST positioned as the ONLY company to solely focus on eCommerce payments AND A UNIQUE ability to “own the rules”as a 3 party network, they are not without significant risk. 2020 has 2 major threats that can hit them very very quickly.

#1 Apple Pay in Browser

I’ve been writing about this for 5 years and it is finally here. While I was certainly off in my projected 2016 timing, I was not off in the user experience. Take 2 minutes to do the following

EU probe of Apple Pay

17 Jun 2020

Short Blog today. Before jumping in.. I’ve been working on 2 significant blog series

Consolidation in Financial Services. Given convergence of several forces, we are in the midst of a consolidation of networks, and services. The pandemic has placed new strains on sub scale players, which will provide the basis for significant M&A. My involvement in the deal flow has slowed the writing down.
Big Tech, Neo Banks and Financial Services. Looking to give the “inside baseball” look at what is really happening.

I’ve got over 100 pages of material… hope to get it out in bite size chunks in a few weeks.

EU and Apple Pay

From today’s WSJ and also on Forbes, the EU announced 2 investigations:

Changing Economics of Payments

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”

What do Retailers Want in Mobile?

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.

Consumer Engagement
Consumer Acquisition
Consumer Loyalty
Allow Retailer to be in control of data
Partners that allow Store’s brand front and center
A Partner either IN CONTROL of the consumer experience (Apple/Google) or one that already has massive consumer adoption (ie Facebook).
Creating a fantastic customer experience from end-end
Ability to manage campaigns, data or your business
A Partner that can reach/influence consumers WHERE THEY ARE.. not where you want them to be.
Payment..? I guess if that comes too…

How will this play out?

Much has been made of the MCX contract provisions that prohibit participating retailers from allowing other forms of mobile payment. This is just not accurate. Any retailer can choose to turn on NFC, any retailer can sign up for MCX. Can an MCX retailer turn on NFC? Yep.. Large retailers are not participating in ApplePay because Apple has completely failed in a merchant strategy, they have not articulated one, nor have they worked directly with merchants. This is really no different than Apple’s failure to work with Banks. Banks are just fuming over the take it or leave it terms Apple offered to them. Merchants had no terms…
Apple will rollout a merchant friendly beacon product, and loyalty product for consumer engagement in next 6-9 months, this will also include a renewed focus on BLE. The product will fall flat until they can create an new merchant organization. Google has 4,000 sales people working with merchants, apple has around 16… so it is a big task.
Apple will ROCK in App payments.. it will be their homerun… I will make a further bet: Apple will WIN in every situation where they can control the consumer experience from beginning to end.
Visa and Mastercard are beginning a shift toward the merchant. They may not win the top 60, but Visa has 36M merchants.. that leaves 35,990,940 that will be open to new ideas. These are my biggest personal holdings, and I know both of the CEOs. Everything I’ve written here they know already.
Consumer authentication is VERY disruptive to retail and banking. As Ross Anderson said “if you solve for authentication in payments.. everything else is just accounting”. The need for an independent broker and their services are dramatically different if either the consumer or payment can be authenticated (ie cash, bitcoin). Why do you need a payment product at all? Just present the identity to the bank. This is what Sofort/Klarna does… Why not do this? Because the banks have no ability to MONETIZE the transaction (no merchant agreement). There are many better ways to leverage authentication, but no other ways to currently MONITIZE IT (outside card). Perfect Authentication… A Nightmare?
Apple is pursuing an “anti-google” approach: keep no data, closed platform, control everything. Google is 2-4 years behind on platform security.. but is catching up. The Google platform is much easier to build in and control (ex HCE), but consumer adoption lags as each Android participant must move consumer to their vision. Apple has successfully delivered security and authentication, but has not laid out a way for many apps to leverage it. Retail is a REALLY big business, with 1000s of specialists. It cannot be throttled by one company.. thus Apple will work fantastically in environment it can control. (sorry to restate).
ApplePay and overall contactless adoption will begin with small merchants and infrequent purchases. Most phones have the capability today. MCX will not stop contactless.. but it will impact consumer behavior substantially

Is NFC/Contactless Acceptance required as part of EMV rollout? NO!! This is the most widely held mis-understanding. While the large terminal manufacturers have no products in their official product list without contactless, the top 60 merchants order bespoke or custom terminals to fit their needs.

Token Activity – 10 Approaches?

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.

Form A (TCH Pilot – Processor Translation)
- Consumer Directory: Bank
- Token is presented to Merchant at POS (QR code, NFC, Barcode, …)
- POS forwards token to Merchant processor (ie Elavon)
- Elavon translates token into card through TCH service
- TCH can resolve token directly (switch to network), or forward to participating bank for resolution (switch to network)
- Issuer sends Authorization to Elavon
- POS settlement
- Patent issues surrounding merchant processor translation of tokens

Form B – Wallet Translation (Push Payments)
- Consumer Directory: Wallet
- Token is presented by Merchant and read by Wallet. Token represents MID, TID, Processor and Amount
- Merchant POS is awaiting authorization as if a card was swiped
- Wallet sends token to Issuer (circumventing Visa/MA). Note this is WEAK LINK as data connectivity required for Consumer’s phone at POS
- Issuer translates token into authorization, sends to processor
- Processor passes authorization through to TID as if card was swiped
- SMS based payments done in this model for years. Form of tokens could be beacons, QR, biometrics. Difficult to patent as core for operation is consumer directing bank to make payment.
- Key differences (globally) are how consumer IDs the merchant and amount, and how does issuer pass the auth
Form C (C for Chase with their unique VisaNet deal)
- Consumer Directory: Bank
- Token is card number, Presentment is TBD.
- If Merchant is a CMS merchant, Card routes through JPM’s version of Visa net for offers/incentives (given merchant participation.. of which there is none).
- If Consumer card is JPM then deliver Card Linked Offers. Again.. not much here.
- Unique capabilities, but all based upon Visa’s network. Barrier to replication is the unique deal that JPM constructed to “branch” VisaNet
Form E – EMV/NFC
- Consumer Directory: TSM/MNO
- See Smart Card Alliance
- Token resolution is TSM (yet another network). Problem with NFC is that TSMs are usually controlled by MNOs, that take a walled garden approach in constructing a toll bridge for use.
- See my blog on the 12 party supply chain making this approach a nightmare
- Pressure here comes from Payments as part of the Handset OS, HCE (see blog) and unique US political dynamics (see Chip and Signature).
- Patents and Standards well established. Issue is value to all parties.
Form G (G for Google’s old Mastercard proxy model)
- Consumer Directory: Google
- Token is a card number – Issuer is google (See blog)
- A plastic version of this was planned in 2012 as reported by Android Police, but was pulled because of high stakes war involving top issuers and Mastercard.
- Merchant runs transaction as normal
- Google acts as issuer receives authorization request and routes to selected card (using facilities of TXVIA).
- After receiving authorization from funding card, google authorizes transaction
- Issuers make all of the interchange they did before, but don’t like being wrapped. They also don’t like the data leakage and the fact that this impairs their ability to offer unique services (10% off at Kinkos).
- Note: this scheme has a value proposition for everyone.. and banks still don’t like it… Google loses money on every transaction.
- Another little known fact is that early versions of GW ran in this model due to limitations within NXP’s chip (only supporting one card emulation app)
- No Patent issues, few other companies could afford to take a loss on every transaction (buying data). Network rules are the primary issue.
Form H – Host Card Emulation (Google, MA, SimplyTapp) I like – this one
- Consumer Directory: Issuer
- HCE Blog
- Blend of NFC and Form V below. Simplifies the NFC supply chain
- No dedicated hardware, NFC just another radio
- Issuer Creates One time use tokens for EMV key generation
- Merchant acceptance hurdle CURRENTLY same as NFC
- Can be leveraged for non EMV purposes (Beacons, QR, wi-fi, …)
- HCE is GPL, but ability to generate one time use tokens for EMV generation is unique.
Form M – MCX/Target Redcard
- Consumer Directory: Wallet/Retailer
- See Gemalto/MCX Blog
- Very similar to Model S (Square) below except wallet is owned by the retailer and form factor is QR code
Form P – Paypal/Discover
- Consumer Directory: PayPal
- OK… this is not mobile yet.. but since I have Square down below, I thought I would be fair
- Consumer registered for Paypal Card running on Discover network.
- Consumer enters phone number at POS + PIN
- Processor translates phone + PIN into Discover transaction
- Discover routes to Paypal for authorization
- Very similar to Model G above
- Transaction authorized
Form S – Square/Starbucks/LevelUp – POS translation
- Consumer Directory: Wallet/Square/Starbucks
- Consumer account mapped to phone, ID, voiceprint, card, picture, location
- POS translates ID to Card
- POS request authorization as a card not present transaction
- Consumer Authorization was taken during service registration
- Consumer receives digital receipt for transaction
- See Square Stand, LevelUp
Form V – Visa/Amex/MA – Network Tokens (TBD)
- Consumer Directory: Network (Issuers don’t like this)
- Press Release
- See blog on Battle of the Cloud Part 4 – Clusters Form
- Tokens will evolve to a very long number which will be translated to an issuer/account number. This is what Visa/MA do today.
- Patents will be around generation, use and validation of token. In the future, merchants will not store your card numbers on file (COF), each merchant will have a unique token based upon your actual account number and their own ID.

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:

Stop the dissemination and storage of Card numbers, DDA RTN and Account Numbers
Control the bank clearing network. Particularly third party senders and stopping the next paypal where consumer funds are directed to unknown destinations through aggregators.
Own New Mobile POS Schemes to protect their risk investment
Improve ACH clearing speed (new rules, new capabilities to manage risk). In a token model the differences between an ACH debit and a debit card will blend as banks leverage common infrastructure.
Create new ACH based pricing scheme somewhere between debit ($0.21) and credit cards
Regulatory, Financial Pandemic, AML controls (per blog on HSBC)
Take Visa and MA out of the debit game (yes this is a major story)
Maintain risk models (see both sides of transaction)
Control Retailer’s efforts to form a new payment network

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.

US Payment Innovation and Regulation

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.

Static Strategies and the REWIRING of Commerce

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?

Information/Transparency
Social/Reputation
Data/Targeting
Consumer Behavior and Expectations
Advertising
Non-Price Product Factors
… etc

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.

When was the last time you clicked on a banner ad?
Every year almost 30% of fresh fruit and vegetables are discarded for spoilage (see USDA),
US Apparel sees 30% of its inventory go in mark down fire sales (See Forbes).
What if a store could more accurately estimate consumer demand? Would you commit to purchase for a 30% discount?
How can Banks justify all of those branches and employees when all I use is the ATM?

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?

Consumer Insight and Trust
Consumer Behavior
Use of Data
Mass Marketing to Targeted
Physical Retailer as Publisher
Custom Pricing (no one knows that another person paid)
Finer grained products
Entertainment/Product
Distribution and demand planning
Complex incentives by products, community, social group, inventory, availability…
CMO as Real Time “mission control” of the organization
Consumer interaction with merchandise and advertising (through mobile)
Transition of Commerce from Transaction to Consumer Interaction (see shopper marketing).
Mobile significantly impacts everything… it will be your new consumer touchpoint

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.

The pending changes in Retail are TECTONIC, yet Banks/MNOs are still working to solve YESTERDAY’s problems. Retail margins have compressed from 4.2% in 2008 to 2.4% in 2012 and Banks are proposing mobile payments solutions that increase costs. It’s like trying to sell water to a guy drowning in a lake.
Large organizations are terrible at strategy; most are challenged to coordinate internally. In a dynamic environment businesses must partners with the entities driving the change in order to influence it and to stay connected to it. (see Apple blog)
Retailers are driven to identify means to compete (beyond price). Who can help them? My bets are on Partners must have a proven track record of delivering value to MERCHANT and to CONSUMER.
I see a $750B US Total Addressable Market. Much of the “new” value will need a new network and platform. At the merchant level, we see leaders like Square Register, in the phone we see Google Wallet, in networks we see MCX and Visa/JPM. The losers? Any entity that can’t use data to describe precisely what it achieved (ex TV Advertising).
…

Start Up Advice

Take a dynamic view of strategy through scenarios.
Focus on delivering a commerce value proposition to Merchant And Consumer
Avoid automating old broken processes
Address a pain point in a new way
Help consumers understand a new value proposition, in a way that makes sense (financially, environmentally, and socially).
Use Social data in some new way.
Find greenfield players and partner with them (avoid cannibalization issues)

PayPal under attack.. Not just Facebook…

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)

Channels: Google, Facebook, and Amazon

#2 Have a direct consumer “mobile relationship”, with payment history, and can authenticate/manage Fraud

MNOs (Payfone), Braintree/Venmo

#3 Have a physical POS relationship (or part of existing POS network)

Retailers, Visa (V.me), Mastercard (Masterpass), Amex/Serve (Payfone)

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:

Drive reduction in off e-bay take rate.
Introduce new P2P products
Take lead in orchestrating commerce
Destroy Paypal’s funding mix advantage through use of debit

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.

Payments – Wrapping, Rules, Acquiring and Tokens

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:

Banks control account
Banks control DATA (transactional and account information)
Banks own network rules
No fees to other networks
Set unique (NON DURBIN) pricing for a NEW payment product.
No restrictions on “Routing”
Enables banks to “switch” providers of any payment service or network clearing
more detail here…etc

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)

MNOs giving away Billions to Banks.

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.

The mobile device will become the key point of confluence between virtual and physical world. You can only take a role in the economics if you can retain the integrity of customer relationship (and data).
Don’t look for a “deal” to distribute a single bank’s products. Create a business around KYC leveraging your distribution. Make the banks bid for your capabilities. This is akin to “agent” networks in emerging markets
The critical piece of payment is authentication. You have many unique capabilities here for your post-paid plans. You ID, phyisically sight and credit check consumers. What if you also registered them for an “e signature” process… a generic security process which could be re-used in banking, commerce, government, health care
You have a “token” today.. it is phone number. Please just go buy Payfone and make it your new payments AND KYC focus.
Control customer data and location. My top recommendation is watch out who is using consumer location data.. just as banks want to own the payment rails.. ensure there are tight consumer protections around this.. YOU SHOULD BE THE TRUST ENTITY (hey that rhymes).

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..