Traditionally the core of bank margin is in risk management. The core of risk management is data.. thus Banks have been the among the best data businesses (as IBM knows). Banks “learn” about their customers through bank interaction: payroll, card transactions, lending. This has helped banks make better risk decisions (both credit and fraud/identity). Within the bank data cycle the traditional use of data is for an internal benefit: risk and cross sale of the bank’s products and services (not that of consumers or merchants). However the “virtuous cycle of banking data” is very different from that enjoyed by Amazon and Google, both in the scale and type of data and consumer facing use. Continue reading “Banks as a Data Business – Example Amex Advance/Acxiom”
10 Jan 2016
V/MA are among my largest holdings, thus I’m constantly assessing. This also happens to be a consistent institutional investor and Bank question. So I thought I would share my views. Continue reading “2016. Threats to V/MA? (Nope)”
16 April 2015
Making Payments easy is a very hard thing to do (see post).. the same can be said of authentication. Apple has created a new standard for biometrics/identity and authentication with TouchID.. and platform security (with iPhone 6). Problem for entities needing to authorize using Touch ID (ex Banks) is that Apple doesn’t pass the raw biometrics.. its actually against the law in Europe (which makes sense as fingers are rather hard to re-issue).
How can banks leverage Touch ID for authentication/authorization of their bank app? There are 3 parts to the problem:
- integration with Touch ID (Trust of TouchID),
- Trust of the Phone (phone ID)
- Authorization for the Service.
I can’t believe I’m going to write this next part.. it breaks most of my rules.. but a Bank Consortium has actually innovated!! Early Warning’s purchase of Authentify may be the best bank innovation of the last 10 years. With Authentify, banks now have a consistent way to implement biometrics, manage trust, and authorization across iOS, Android and other platforms. See press release below.
Early Warning’s other components include Payfone (jointly owned by US Banks, US MNOs and Amex), and the US banking industry’s top secret fraud fighting utility (which has migrated from ACH, Checks, Debit into Credit and lending) .
Early Warning has completely remade itself over the last 5 years.. becoming a the US Banking Industry’s best consortium for innovation and value creation. Congrats to CEO Paul Finch and his fabulous product, M&A and Tech team.. and to all of his bank members for making this possible.
2 January 2015
Today’s blog is focused on discussing the structural changes influencing consumer retail payments in the US. For those interested in looking at a broader global view of all payments, I highly recommend reading the Cap Gemini World Payments Report (https://www.worldpaymentsreport.com/) .
Payments have been a focus of mine for 20 or so years… it is perhaps the MOST interesting of all network businesses. Payment is a critical part of commerce and a product of it. It is the event in which almost every commercial contract is based upon. Payments can be simple (cash), complex (bitcoin), and political (interchange, rules). Payment efficacy, reliability and data are important to: consumers, merchants, banks, governments and economies.
Globally, electronic payments are still in their infancy, which makes investing in it so much more exciting. For example, over 90% of the global electronic transactions occur in the top 10 markets (representing less than 10% of the world’s population). This would seem to point to a future where electronic payments (and the banking/commerce they represent) are poised to grow geometrically as the number of nodes grow. There is a chicken and egg argument here.. are payments the result of strong economic environments or are they the enabler? Perhaps a bit of both, but finding markets where they are growing (ie Brazil, Peru, Philippines, Kenya, … ) are worth exploring (Democratizing Access to Capital – see blog).
Not only are payments poised for exciting growth, there are also tremendous forces driving change within existing systems and networks. Investors must consider these structural changes impacting existing players across the entire value chain.
In its simplest form, payments are a brokering business which manages value exchange between two entities engaged in commerce. Logically, a broker must be removed from the transaction to maintain the trust of both parties, and deliver value through managing the financial risk associated with the transaction. My view is that Card issuing banks, have lost the neutrality of their “brokering” role by creating a card rewards system that incents card use (paid by the merchant). However, this ideal “neutral” world is NOT the nirvana that we should seek, as no one would invest and we would be stuck with cash (and SEPA in the EU .. see blog).
Complexity in payments is driven by the quest for control and margin of the various participants, not by necessity. This is what makes understanding payments so hard…. most of the changes are not logical, but political. The friction (inefficiencies and illogical design) in payments is what makes them work. As I’ve stated before, no engineer would design a payment system to operate the way we do today (see Push Payments). Thus there is beauty in this chaos! The V/MA model created incentives for 1000s of banks to invest in payments, and I doubt if we will ever see any other companies that could repeat this feat (thus my V/MA personal investments).
What changes are likely to impact the world’s oldest profession in the next 10 years? My list (in order of impact)
- Risk and Identity
- Data/Commerce Value
- Consumer Behavior/Trust/Acceptance
- Issuance/Customer Acquisition/HCE
- Regulatory/Rates/Rules (Fees)
- Mobile/Payment in the OS
#1 Risk and Identity: Authentication and Authorization
How would you authenticate someone’s identity? Best practice is to validate a combination of what you are (biometric, image, DNA), with something you have (mobile, token, OTP FOB, …) and something you know (shared secret). Apple’s new iPhone 6 is the first major consumer device that can manage all 3 securely. It is truly revolutionary. The ability to authenticate a consumer eliminates fraud risk, and thus impacts both Account Opening and Transaction Authorization. Both of these services in turn impact the “core” banking relationship (see Future of Retail Banking).. How do consumers choose a bank? A credit card? What is the value proposition?
Before there is payment there must be an account in which to pay from. The key to opening an account is identity (Regulatory KYC or Know Your Customer). Account Opening has been automated (and online) for over 10 years. In 2004, my team at Wachovia was the first in the world to introduce instant account opening (online) for deposit accounts (Credit Cards were just 2 years ahead of us..). 10 years ago I used products like Equifax accountChex or EWS AOA (Validating questions based on prior financial history and credit bureau data), today could I use Apple!?
Identity and authentication is changing rapidly, and if the first two paragraphs were not already enough to ponder on this topic, we must mention Bitcoin. As opposed to authenticating the person to give access to funds and services, bitcoin authenticates itself enabling the holder to be anonymous. It is a self authenticating instrument.. imagine a dollar bill that can tell you it is genuine with 100% accuracy. Self authenticating instruments exist independently of the holder and are a store of value (ie, Gold, Bitcoin, …etc). Normally there was physical presence required to exchange self authenticating instruments (exchanging gold), bitcoin changed all of that. A virtual self authenticating instrument that can be exchanged remotely and cannot be tracked (easily). Whereas payments are instructions move money (value) from one bank (store of value) to another, a bitcoin exchange is value exchange (not instructions).
The power of bitcoin to disrupt payments, companies, government, economies, .. cannot be understated. How could any central bank manage money supply in this model? How can you tax something that cannot be tracked? The growth challenge for bitcoin is in “connecting” to other payment networks and regulated entities (ie cash out). Unfortunately the entities which benefit the most from bitcoin are those that seek anonymity… which of course impacts the willingness of mainstream (regulated) institutions to accept it.
Fraud and Risk
As you can see from picture above “risk” in payments has several components: credit risk, settlement risk, fraud risk, regulatory/AML risk, … etc. Fraud risk is the area in the most flux, both WHO owns the risk and HOW it is managed. In the US Card Not Present transactions follow the pattern of ACH and Checks in that the originator of the transaction bears the risk of loss. In a retail transaction, that is the merchant.
Risk and fraud management were historically the key areas where banks excelled and differentiated (big banks have multi billion dollar investments), but the merchants and platforms have now passed banks in their ability to manage it. This mobile authentication advancement had rendered the multi billion dollar bank risk investments moot (for mobile initiated payments). Proof is in the picture above (see Federal Reserve 2013 Payment Study), all fraud has fallen tremendously! Both for Card Present, Card Not Present and even for Checks. Why? As the former EVP of a Kleiner Perkins backed Fraud Prevention company I’m not going to give you all the details, but suffice to say that identity plays a key role. Paypal, Amazon, Google, Apple all have fraud rates under 8bps, some have the around 3bps. These numbers will get better for Apple and Google as mcommerce starts to take an ever larger share of eCommerce (see my previous blog) and they bake in biometrics into mobile payments.
A key point that investors must understand here is that the large CNP merchants have gotten so good at managing fraud, that they could care less about a liability shift. What they want is a rate reduction (risk based pricing). After all, if you could manage fraud at a rate of 3-8bps.. what work is the bank doing to justify taking 240 for payments? The Paypal investors read this and say “ahh.. Apple and Google want to become Paypal”.. No they don’t! while Apple/Google COULD assume all the functions of Paypal, their role as commerce orchestrators is of FAR greater value. In this role you must not force a consumer to a merchant, a good, or a payment instrument. “Let the consumer decide” is the common mantra across the Google, Apple, Amazon.
The investor impact is complex. Large merchants have proven ability to manage fraud and risk, and want the consumer to choose the payment instrument of their choice. Banks ability to differentiate in managing risk is greatly reduced, and the cost of issuance/acquisition is dropping to 0. Banks have proven incompetent at creating a Visa/MA replacement. What are the levers in negotiation? How will merchants negotiate a lower rate?
The path in Europe, Australia and the US (Durbin/Debit) has been driven by regulation. No one likes having regulators define the rules, but my investment hypothesis is that there will be a very large TILT of Visa/MA toward the merchant. This will address the both regulatory pressure, and open up new revenue streams surrounding data (below). This tilt means moving rates in the direction that retailers want, creating new rate tiers where risk and identity can be managed by the merchant/platform. Remember Apple is getting 25 bps for their service, the next logical move would be make this same “discount” available to anyone that can drive down risk.
From an identity perspective, Google and Apple have authentication as the CORE feature of their mobile platforms.. it is key to everything they do in mobile. See my blogs on Brokering Identity Authentication in Value Nets, and Authentication – Key Battle for Monetizing Mobile for more here.
#2 Data and Commerce Value
The comments below are largely taken from my blog Banks, Non-Banks and Commerce Networks. As a side note, this is the focus of my new Company: CommerceSignals. We are working with the Fortune 50 to serve as the neutral broker, one layer above the network, supporting companies working together offline and in mobile.
Today, every issuer and card network is chasing after American Express and Alliance Data Systems. Both ADS and Amex have made SUBSTANTIAL progress in working with merchants to deliver new value to consumers. AMEX and ADS have the benefit of working in a 3 party model where they own both the merchant and the consumer relationship. As I’ve stated before, I believe these 2 companies are 3-5 years ahead of everyone else. Is this data stuff delivering any revenue? For ADS the answer is a resounding yes, for Amex the benefits seem to be less direct and more on customer loyalty/spend/engagement. See my blog on Amex Innovation Leader for more details.
Think about the battle in connecting networks, as each of us have limited resources we can connect only to a finite set of “hubs” (unless there is some larger orchestrator). Examples are Wikipedia and Google… these serve as the directories of information. It is almost IMPOSSIBLE to displace an efficient hub. This is why I love Visa, MA and Amex. If they can shake the issuer “tilt”.. and add a few merchant friendly services, they could leverage their networks in many new ways. The revenue opportunity? Payments in the US is roughly a $200B business (issuers, acquires, processors, networks), whereas marketing is $750B (in US).
Payments work well, but so did the Sony Walkman. The bets that Google, Apple, Amazon, Facebook and others are making is on value orchestration. Does this involve payment? Not really.. at least not as a primary focus.. Payment is there.. but orchestration is about commerce; payment is just one of many important processes (See blog Payment in the OS). Don’t look at payments as something in isolation, payments are the “connections” made in commerce; they are made for a purpose. Visa and MA also have the potential to expand their “traditional network”, but this must involve a separate agreement with separate rules.
Payments = Network
Here is my network view. Payments are the connections of the GDP. If we were to map payment flows, we would unlock a map of the global GDP at the micro level, from employment to shopping, behavior and preferences, to demand and supply. Free information flow on the internet is enabled through openness and a single primary protocol, whereas payments operate within 100s of proprietary networks with a complex series of clusters and “switches” (there is effort in connecting, authenticating and managing risk). Just as it would be nearly impossible to change the protocol for the internet, it would be difficult to bring fundamental change in payments (see Rewiring commerce). Now think about the value of payment data. Connecting business is much different than connecting information (the core of CommerceSignals.. but I digress).
From a network strategy perspective, the business opportunity of changing “payments” pales in comparison to the opportunity to influence connections in commerce, banking and manufacturing. Payments support business and consumer needs; they do not alter their path. This insight is the downfall of bank payment strategies around “control”, and their inability to “tilt” toward merchant friendly value propositions.
A top 5 retailer provided my favorite commerce quote
“I think of Commerce as a highway, the payment networks are like a toll bridge. I don’t mind paying them $0.25 to cross the bridge, but they want to see what is in my truck and take 2-3% of what is inside. Hence I’m looking for another bridge… “
ADS, Amex, Google, Amazon, Facebook, Alibaba, V, MA all understand this. Rather than charging toll for crossing their bridge, these networks are beginning to execute against plans to grow the size of the goods in the merchant’s truck.
Existing networks have an existing value proposition, and many don’t like to have their services leveraged by competitors, thus there is a much more highly “regulated” flow of information. Intelligent use of data increases the effectiveness of networks in a way that also benefits consumers. Tilting more toward merchants and consumers.. means tilting away from banks. This is VERY hard for a bank to initiate. It is a change worth making however, as assisting merchants (or consumers) is what brokering is about. My firm belief is that both V and MA have the opportunity to grow Revenue 4x+ in the next 5-10 years. Their principal challenge is to “tilt” their models away from Banks and toward the 2 parties that matter most in commerce: Merchants and Consumers.
#3 Consumer Behavior/Trust/Acceptance
Perhaps nothing matters more in business than consumer behavior (see Consumer Behavior: Discerning and Capturing Value). In payments we learn over and over again that behavior changes slowly in 20 year cycles (Checks, Debit Cards, ATMs, Mobile). Any investor looking for payment innovation should run away unless there is some underlying commerce value proposition. Payments work REALLY well its everything else that is broken (in OECD 20 countries)…. Among Payment innovators/founders there is a common saying.. you only start ONE payment company.
It is easiest to find the hotspots in payment by looking first for the changes in consumer behavior. For example, the tremendous change in how consumer’s are using their phones, as I outlined earlier this week in eCommerce/mCommerce Convergence. The banking relationship is also changing, as customers visit branches less than 3 times per year, and the billions spent on huge buildings, huge vaults, sports sponsorships and brand names gives way to value.
Brand reputations for 2014 just came out last week (see Venture Beat), with Amazon, Apple, Google topping the list. How did these companies earn this reputation? Through consistent daily interaction delivering value in every interaction. Value delivery and interaction are my key metrics for assessing investment and focus; both are key measures of consumer behavior and trust. There are many strategies: whereas Google engages with the average consumer 10-50 times per day (winning in frequency and insight), Amazon has a lower interaction but a much greater impact on transaction (value delivery), Apple’s interaction is more holistic within a much more affluent base, Facebook’s is more social.
If I were to outline one KEY point to my bank friends it is this: you can’t reach consumers where you want them to be.. you must reach them where they are. This is the essence of why most bank strategies to engage are failing. Consumers choose to go to Google, Apple, Amazon because of the value and service. As the charts above show, most banks are challenged to deliver value within the core banking products they already delivery, why would any customer want to use a new service in this environment. Thus Bank’s efforts are ill suited to drive a deliver products outside of their core, and outside of existing consumer behavior, banks play a role in SUPPORTING commerce.. not leading it (see Card Linked Offers).
Apple is the greatest company in the world in delivering value, experience and changing consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). Apple’s reputation is well deserved and earned “the hard way” by remaking: phones, music, mice, computers, apps, …etc. Through consistent delivery of value within fantastic hardware delivering great (and fun) consumer experiences they earned trust for their products and brand. The greatest NEW opportunity for Apple to influence consumers beyond the individual (music/contacts/calendar) and eCommerce (browser, apps) to the real world: Commerce.
Unfortunately Apple is inept at partnerships, even within its own supply chain. While apple has the talent to accomplish this, their commerce, payment and ad teams are buried within a hardware culture. They will only succeed if they are spun off into a separate division, thus my view is that there is a very low probability of Apple acting in an orchestration role across 1000s of Banks, millions of retailers and billions of consumers. If they did move, it my recommendation (and guess) is that it would be a consumer centric orchestration role as I outlined in Brokering Identity.
One technology (and behavior) I’m keeping an eye on is Beacons and mobile use in store (engagement). Qualcomm Retail Systems spun off the IP around Beacons to Gimbal with Qualcom and Apple both rumored to have 30-40% of the equity. Today Retailers are the entity best positioned to change consumer instore activity for 2 reasons: they alone know consumer product preferences, and they physically touch the consumer (trust, value, presence). See Retailers as Publishers , and Apple iBeacon Experience for more detail.
#4 Issuance/Customer Acquisition/HCE
Now this is a mixed bag of topics. What is fundamentally changing in card issuance? Most of you know I ran remote channels at both Citi (06-07) and Wachovia (02-06). Today, most new customer bank accounts are originated online as branch visits go down and direct mail (the old way) even directs the consumer to this “instant” channel.
Historically I had to spend about $150 in marketing for every new card customer, and around $80 for every new deposit customer. Banks still incur roughly these same costs, but prepaid cards have an acquiring cost of less than a tenth of this cost (See Future of Retail Banking: Prepaid). In this pre-paid model banking products sit on a shelf in a retailer and compete for customers just like shampoo and candy bars.
I would challenge all card participants to think about the credit card product… what delivers value? what about it is unique? how do consumers view it? how is it part of a great consumer experience? When you leave Disney World do you think wow.. buying the ticket with my card was just fantastic? How are new customers acquired? Who benefits when cost of issuance is $0? Is charging the average consumer 12-16% on a card, paying them 0.2% on their savings charging merchant 2% a great model? Do you think that there is room for improvement? Where do retailers win (ADS, Private Label, Co-Brand, )?
What prohibits you from having 20 retailer cards in your wallet today? Bank card issuers will roll their eyes, but you can not understate the influence that trusted retailers have in consumer decisions. Take this trust together with direct sales force and frequent consumer interaction and you have Private Label and industry whose cards outnumber everyone else’s by a factor of 2. As this week’s Morningstar article on Private Label shows, private label (the largest card segment) is making a tremendous comeback.
Citi, GE (now Sychrony), ADS, HSBC are leaders in this space, with ADS advancing most in use of technology. Retailers like Nordstrom, Macy’s, Sears and Kohls are fanatical on their private label program, as their most valuable customers use this product. All new customer experience must first address this base, which you can see is one reason why we don’t see ApplePay being pushed here at all. As I described in Retail 101 (and What do Retailers want in Mobile), most retailers don’t know who their customers are today. Private label and Loyalty programs solve this problem.
Let me throw in a little tech now. I’m on the board of advisors of SimplyTapp, the company that created HCE. Instant issuance is key to everyone in the card space, why wouldn’t every retailer want to enable a private label card if card issuance cost is $0!? Credit worth customers can get store credit, sub-prime get decoupled debit (see Target Red Card) and everyone else gets a loyalty only? I believe we will see this happen, not only within MCX but within platforms like Google, with PL managers like ADS and Citi. This is the strategy focus of the top retailers… (focusing on their top customers).
My bet on the future of Google wallet is that it will be very merchant and consumer friendly, enabling them to uniquely integrate to 100s of merchant platforms to create great consumer experiences. This linking of PL, Loyalty, in store, maps, mobile, advertising is value orchestration.. but it all starts with consumer opt in. The opt in is both to merchant (private label/loyalty) and to Google. See blog Host Card Emulation for more background. Google made the right technical move in HCE, but it dropped the ball in enabling merchants through last mile.. not a technical limitation .. an educational / awareness one.
Do I believe that the world will go private label!? No, it will be at the margins. My view of Visa and Mastercard have changed over the last 2 years. Before I was much keener on the development of a new scheme, but no more. Why? How many networks can you list where millions of participants have invested billions of dollars to make it work? Visa has 1.7B cards and 36M merchants.. how could anyone compete with this? This network works REALLY well, with the only issues with their network are in their control (merchant costs and rules).
From a regulatory perspective, the US retail payment system has been impacted by the Durbin Amendment and the EU to an even greater extent by SEPA and PSD (see my blog). Most of you have also read my token blogs outlining how the US banks were planning to build a new payment network to compete with V/MA (Now dead). If someone has a info-graph picture of global acceptance rates I’ll put it in here.. but suffice to say that airline ticket pricing has NOTHING on the complexity of payment pricing.
Visa and Mastercard are largely insulated from the regulatory driven pricing changes, as the issuers continue to bare most of the impact. The EU has created a payment nightmare environment with “cross border” Credit card merchant interchange (MIF) at 30bps starting in later this week Jan 1, 2015 (see article and Visa’s response). The EU can not mandate change within country (domestic transactions), but there will be a race to the bottom in fees.
EU competition commissioner Margrethe Vestager claimed that interchange fees are a form of tax levied on retailers by banks and said that the new legislation would reduce those costs and “lead to lower prices and visibility of costs for consumers”.
Ms Vestager may be correct from a transparency perspective, but SEPA and the PSD put governments into the brokering role with no incentives for intermediaries to invest.. making payments a nearly free infrastructure service (with agreement of consumers and merchants). Network work best when there are shared incentives, and minimal regulation. I believe Visa and Mastercard will work with new vigor to build relationships with merchants and deliver value, to head off the regulatory driven approach. Unfortunately Europe is already too far gone for this to work.
A prediction (next week’s blog) will be merchants providing greater influence in V/MA rules.
#6 Payments in the OS
My blog from this week: Payment in the OS
Big things are in store for my favorite eCommerce payments company. Really, I do like Paypal. I may ding them on their POS strategy… as it makes no sense at all… but I love Paypal online.. the “original” ecommerce payments solution that adds value to merchant and consumer. In 98/99 Thiel and Levchin were the first to dream up digital wallets, and first to solve a REAL problem of card acceptance online for small retailers. Perhaps even better than the great Paypal PRODUCTS, were the great PEOPLE that grew out of PayPal.. that have done soooo many great things: Peter Theil, Max Levchin, Elon Musk, Keith Rabois, Premal Shah, Osama Bedier, Amy Klement, Steve Chen, .. (list too long sorry to those I left off).
As its early leaders went on to do great things, the company “evolved” from an innovative start up to take on a bank flavor. Scott Thompson came from Visa and all his direct reports had bank backgrounds… the top tier of the organization led to a culture change (in a bad way) and it went from the coolest company in the valley… to … errrr… something else. Pierre and the BOD recognized this and tried to get the mojo back with putting David Marcus in at the helm. They wanted to recapture what made Paypal great (people).. to reset the culture. David is a great guy, as he says this week he was an innovator.. but one that never ran a team larger than 200.. and certainly not a global one which was highly regulated. It didn’t help that eBay’s CEO essentially undercut David by allowing Don Kingsborough and Gary Marino end run and make decisions directly with John. How could any CEO make it in that kind of environment!?
Now that David is gone (see Venture Beat) who can lead them (today) and what is their new strategic imperative.. their vision for growth beyond eCommerce?
Next 12 months
I believe Paypal will see competition in its core business like never before, As I stated previous Payments are moving into the OS… and Paypal doesn’t have one. Apple, Amazon, Google are new competitors in core eCommerce… all with an OS.
Paypal’s new competitors?
- Apple will own payment presentment and authentication on all iOS devices.
- Amazon will begin to get off Amazon traction (example today is Gogo wireles)
- Google’s massive success in Shopping Express (Free shipping and payments). Google also just launched wallet in iOS (see google’s blog)
- Bank Token Schemes and forthcoming rules for cards on file
As a side note, Paypal did squeeze itself into the Apple wallet (for NFC/POS transactions), but Apple will be expanding the iTunes buying experience very soon, and it won’t be looking to drive Paypal merchant adoption, as it is in the process of negotiating card present rates for CNP transactions (See my Apple blog).
Paypal at the POS is a complete joke (see blog). The business guys that have been running the show (or end running David) are focused on a Visa/Mastercard like strategy… not on one that delivers value to their core constituents (merchants and consumers). Paypal was the company best positioned to execute on a Braintree/Stripe product 5 years ago (remember X.com) and also the best company to have built a Square/Clover like solution. They missed all these things because their business heads were focused on quick transaction volume deals and solutions.. NOT ON VALUE.
POS – Buying Blackhawk?
This is my big theory today. With eBay repatriating $9B and taking a 30% tax hit, we all know that acquisitions are planned. But what?
Obviously Carl Icann, David Marcus and the BOD have had some disagreements. Rather than guess the strategy, lets take a look at WHO is staying at Paypal. Don Kingsborogh is the former CEO of Blackhawk and head of Paypal’s POS strategy, and Discover Network strategy/relationship.
Paypal has promised its institutional investors progress at the POS.. and they have NONE. Jamba Juice and Home Depot numbers are terrible. The Discover partnership did nothing for them, as MCX merchants REFUSED to accept Paypal (routed as a Discover Card) or new processor agreements (that ran as high as 210 bps). Paypal has “learned” it cannot sneak in payment products within an existing network (Discover), nor can it deliver enough value to push merchants toward a new agreement. Few eBay investors realize that the Discover relationship is yielding NO FRUIT. Even IF they could convince a merchant to TRY paypal at POS.. they first have to line up the Processors to support, and big ones like First Data were not playing (WSJ Article). This Paypal was paying $50k-$250k+ for merchant to SWITCH to Vantiv just to do a pilot.
Paypal at POS needs a ubiquitous merchant acceptance solution and a physical connection to all major merchants. They also have learned how both Google and Apple have developed strategies to end run the traditional payment terminal and integrate directly with the POS (see the brilliant Google/TXvia Patent US 8676709 B2. )
Blackhawk may fit the bill, as it has a merchant network and POS integration solution today. Every time you pull one of those pre-paid cards off the shelf the SKU bar code is tied to the card Primary Account Number. The Retailer’s POS system sends the SKU to Blackhawk upon payment and Blackhawk activates the card.
Blackhawk is working to leverage this transaction flow to create its own scheme to fund the transaction.See Blackhawk’s patent US8676709 B2. An item in the shopping card becomes a payment instrument. This could be “THE” enabler to someone like Apple too.. a new payment “gateway” that end runs the traditional payment stream. For Apple, all they would have to do is get a secure “TOKEN SKU” to the POS and the POS would leverage Blackhawk to route. Of course items in a basket usually have a cost, but settlement could be accomplished through a 100% discount, or by capturing the merchant ID and terminal ID to push the payment back through their current processor.
I think this is THE most brilliant scheme EVER!! I love it.. If implemented via ACH.. and MCX. I just don’t love Paypal delivering it because of “cost” and ability to coordinate/execute in delivering value from all merchant data.
I’m only 50% confident here.. just put a small $10k bet along these lines for fun. But at a $1.4B market cap.. this would not be a bad bet for PayPal.. problem is that merchants will never go for it.. this does NOT solve the VALUE problem (for consumers or retailers).. it only solves the network acceptance problem. This approach continues the “we will sneak it in” approach. It may “solve” a short term problem of Processors.. but it creates a new one for the merchant in having to deal with multiple processors (one for swipe one for … something else).
IF the merchants would go for this, it may be the best payment design on the planet.. as it would give a way to provide discounts and rebates within the POS system. Integrating with the POS would completely disrupt the processor/payment terminal process, and we would begin to realize the “power of tokens”.
6 April 2014
Sorry for the poor flow here. jumping on a plane and wanted to get some of this out. feedback appreciated.
A brief view on what is happening in global payments growth, debit, banking and data. Why moves here are so important to banking, commerce and payments.
Nothing will dent the 20%+ CAGR of Visa/MA, as 92% of electronic transactions are completed by less than 10% of the world’s population. Perhaps the best analysis done on global payments is from Cap Gemini (2013 World Payments Report). Markets like Asia and CEMEA are growing electronic payment volumes by over 22% CAGR. The network effects are enormous, it is like mobile in the late 90s, or the internet since the mid 90s. No investor can stay out of payments.
Payments is a rather complex environment. I’m not speaking from a technology standpoint, but from a value, control, political and regulatory one. Just as electronic payments are exploding internationally, there are several forces that are acting against established payment networks in OECD markets. For Example
- EU Interchange Regulation
- Retail Banking
- Consumer Preferences (Debit)
- Retailer led payment networks
Thus, It is important to view the changes occurring in payments with changes in other networks: social, telecommunication, retail, mobile, supply chain, demand chain, advertising, banking, commerce, education…etc. The lines that separate retailers, advertisers, platforms, MNOs, Banks, … are beginning to blur much more substantially. For example
- Tesco’s transactional account
- MPesa expanding into Europe
- Citi offering shopping services in HK
- Alipay offering 5% on Funds in China
- Amazon in TV, and retail, payments, advertising
- British MNOs collaborate on Weve for payments and advertising
Historically Banks supported commerce by providing access to capital, support of markets, specialized instruments, all of which created value through their unique ability to manage risk (using their information advantage). Consumers chose banks based upon their physical presence to support the interaction with (and transformation of) different forms of value: cash, check, electronic, …etc, as well as gain access to credit, and provide return on assets. Bank strategists created retail financial “supermarkets” where transactional accounts acted a loss leader to cross sell 100s of other consumer financial products. The majority of consumers never participated in this cross selling effort, and therefore the mass remains unprofitable to these “supermarket” banks.
As cash, and check are displaced by electronic payments, the value of the branch and “supermarket banking” has shifted to the value of electronic payments for a large majority of the population. The information advantage that best positioned banks to manage risk has decayed. Further, the billions of dollars spent in transactional risk management has been eliminated by mobile authentication (see Perfect authentication a nightmare for Banks). Regulators are working globally to open up payments to non-banks (ex EU ELMIs), but conversely holding banks responsible for everything. Governments and Banks have grown addicted to data surrounding electronic payments, leaving many consumers to search for anonymity (ie Bitcoin).
The entities that are currently best equipped to deliver consumer value and monetize data are companies that the consumer most frequently chooses to interact with (Apple, Amazon, Google, WalMart, …). Banks are working from a position of control, and must pivot to a position of value, trust and choice.
Most of you know that today’s Google wallet has a central transactional account of a non-Durbin Mastercard (see blog). Google pays each issuer with a card in its wallet the FULL rate on its cards (example 210 bps to FDC/Visa/Chase) and the merchant incurs a debit fee of 105bps. Google eats the cost.. In this model the bank wins, and the merchant wins. The consumer wins because they can put their preferred payment instrument in the wallet (ie Debit). In fact Google is the ONLY wallet that has debit cards in it.
You would think everyone would like this right? NOPE. Banks want Google to stop wrapping their cards. What are Banks upset by?
#1 Banks don’t like Google seeing the data,
#2 Banks don’t want debit use on mobile.. they want mobile to be a premium credit service
#3 Banks want part of GOOGLE’s revenue in addition to their full interchange.
This story should scare the pants off investors in the payment space, Google has invested a billion dollars, takes a loss on every transaction and has a value proposition for everyone. (see blog)
My recommendation to Google? Tell the banks that they can shut you off whenever they want to. It is in their control to decline your transactions. I can just imagine the customer message from Google to a consumer “your bank has decided they don’t like you using your credit and debit card with us, here are a list of banks that you can use, ….” .My recommendation to the Banks? Don’t trust Google with your data, find a way to work with them to accomplish your objectives. I have several ideas for you if you want to chat.
Five important takeaways from this section:
- There are no technology problems in Payments
- Mobile handsets and authentication are a threat to banks
- Banks are running away from the mass market, and Retailers/MNOs are running to fill the gap
- Google has done all the right things, invested a billion, takes a loss on every transaction and still can’t get traction with retailers or banks.
- Customer CHOICE is a threat to established players
Durbin – What Happened?
As reported Friday (see Bloomberg), the 3 judge panel at the US Court of appeals upheld the Federal Reserve rules, overturning Judge Leon’s ruling that “The court concludes that the [Federal Reserve] Board has clearly disregarded Congress’ statutory intent by inappropriately inflating all debit-card transaction fees by billions of dollars.” and the Federal Reserve failed to ensure that merchants enjoy access to “multiple unaffiliated networks” to process each debit-card transaction, as also required by the Durbin Amendment. Senator Durbin reacted to this Friday stating that the appeals ruling was “a giveaway to the nation’s most powerful banks and a blow to consumers and small businesses across America.”
Retailers and Senator Durbin argue that the clear language of the law directed the Fed to set the price of Debit at “reasonable and proportional to the cost incurred”. The Fed’s internal team came up with $0.12, but the Fed then came up with $0.21+5bps. Judge Leon had struck that fee down in July 2013 (see analysis here). For more background on Durbin and Fed see this this Federal Reserve Article.
Debit – Industry Perspective
Debit is the most frequently used payment product in the US, with the lowest fraud rates (see Charts, and Federal Reserve 2013 Payment Study). Debit is a product that evolved from your Bank’s ATM network. This is why you have all of those logos like NYCE, PULSE, STAR, Interlink, … on the back of your card, and why you also use the card to get cash out of the ATM. I covered this topic 2 years ago in Signature Debit is Dead. Visa’s big innovation was turning their 1987 interlink win from a PIN debit acceptance network to a signature network. By placing the Visa log on the debit card, and forcing the “honor all cards” rule on merchants, they successfully drove network expansion. As the NYTimes outlines
Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.
Why all the regulation? A picture is worth a thousand words
Clearly the pricing here does not seem to indicate that effective market forces are at work, as debit network expansion was followed by tremendous fee increases.
Canada, Australia, UK, most of Europe have debit pricing of around $0.12. A fantastic analysis of all these countries was done by Europe-Economics in The Economic Impact of Fee Regulation in the UK – June 2013. The universal regulatory goal is to establish (or retain) debit’s role as the central access point for transaction accounts. As in the Australian example, the hope was that the removal of debit fees would result in merchant savings, which would in turn result in consumer savings. Unfortunately, banks successfully recovered most of the lost interchange through new bank fees, and merchants did not pass along the cost savings.
In Australia, 85 per cent of debit card transactions are processed using an EFTPOS terminal. Interchange Fees (IFs) for such transactions are imposed in inverse direction to that of credit cards as they are paid by the issuing bank to the acquiring bank. [Post regulation] Issuing banks suffered from a revenues reduction from IFs worth AU$647m for 2006. However, as in the Spanish case, banks responded to the reduction in their revenue from IFs by increasing the level of other fees. Annual fees increased by AU$40 on average, which for 2006 represent an estimated AU$480m in issuer revenues. As a result, issuing banks recovered 74 per cent of the lost revenue from IFs.
Beyond debit, Europe is considering caps on credit card as well (see Digital Transactions – Europe’s Fee Conundrum). Visa Europe Fee structure provided below for background.
For more detail see my blog Debit Wars. My summary view is that debit payments are going toward a common bank owned service operating at cost (Average $0.12 globally). Visa is impacted slightly here as 19% of revenue is from debit. Thus banks are working aggressively to move payments to high margin credit.
Retail Banking Impact
This debit dynamic plays heavily into a larger retail banking strategy (see Future of Retail Banking, and theFinancialBrand). The business of managing your transactional account was never a great business for a bank. Gallup estimates that retail banking is unprofitable for 80% of consumers, McKinsey’s analysis shows it is over 40%. Durbin’s impact on debit fees cost US Retail banks over $7B (see Forbes).
Branches have historically been the #1 factor in consumer acquisition. During my time at Wachovia, over 80% of our customers selected us because we were the closest branch to home or office. This branch convenience is still the primary factor, although actual use of the branch has gone down dramatically.
This, together with the maturing of digital channels, has led to a culling of branches with banks like Chase looking to take upwards of $1B from branch cost.
The US is progressing along the lines of Australia, as the non-exempt banks add new fees to make up for the debit loss (see American Banker). However, unlike Australia, the US has 2 alternatives: Exempt Banks/Credit Unions (CUs), and Pre-paid Cards. Deposit growth in the exempt banks is growing 5-6% YoY, but the real winner seems to be pre-paid with growth over 36% (See 2013 Fed Payment Study and Bank Innovation ).
My simplistic analysis of pre-paid is that the growth is driven more by a need for access to electronic payments (by the unbanked), than a need for “banking”. Example.. need to buy something on Amazon. This seems to fit well with experience of other unbanked success stories globally. A way to view this is that value of traditional “banking” is shifting to the value of electronic payments for a large majority of the population.
What we have seen is that the Value of a big bank brand is diminishing very quickly. The brand, infrastructure and data advantages that banks held are rapidly diminishing in value. The big buildings and beautiful vaults have no advantage over an Amex Bluebird card in a box (deposit insurance levels the field for everyone). Retailers, MNOs, and Platforms have better brands, better pricing and more physical distribution and/or direct consumer “touch” than banks could ever hope for.
Nothing in this area changes quickly. But here is what I see as the most likely strategies by key players.
Non Exempt Banks (Citi, JPM, BAC, WFC, …)
Strategy #1 – Try to leverage data advantage, and grow data services (JPM)
Strategy #2 – Go up market (Citi)
Strategy #3 – Be the best retail bank (BAC/ WFC). Protect consumer information
Strategy #4 – Get into the Mobile/data/advertising space
Strategy #5 – Develop new bank lite product (ex Chase Liquid). Seems to be going poorly as they just killed the product
The modern form of retail banking envisioned a “financial supermarket” (see Forbes Sandy Weill) where the transactional account was a loss leader for cross selling 50 odd other products, the new “banking like” product is centered around electronic payments with an access network (think Greendot, WU, ATMs, …) to get money into and out of the system. Ubiquitous merchant acceptance, and employer direct deposit further drives out the need to provide “cash out” facilities (branch like services) within the network. This simple payments product fits nicely into retail environments with regular foot traffic.
The Non-Exempt Bank dilemma now becomes apparent. A classic “innovators dilemma” where the loss leading core deposit account has been undercut by pre-paid for a majority of consumers, as the services surrounding electronic payments has made branch distribution a significant millstone in cost to serve. As if that weren’t enough, 90% of the money supermarket products must be sold face to face (need a branch). While the retail bank could adapt to compete, the rest of the organization is forcing it to keep the branches and move upstream to the affluent high margin clients.
The biggest news for payments investors is that Apple, Google, Amazon DO NOT want to have their own payments network. They are all consumer CHAMPIONS.. They all want the consumer to have their CHOICE of payment instruments “Let the consumer decide how they want to pay” is their common mantra. I heard again this week that Google wanted to buy paypal and I spit out my coffee laughing.. “where did you hear that bullshit?” Not only is this a regulatory headache, it is not the centerpiece of how any of them make their margin. Customer choice is highly disruptive barrier to entry in a commerce/mobile platform. This is why Apple’s BOD decided not to buy Square in Jan/Feb.
Apple: Consumer Champion and Gatekeeper
Apple is setting itself up as the consumer champion. They are not great at partnerships, advertising, data… but they are great in just about everything else. Apple’s will keep your data safe in the phone, in the store and in the cloud. Consumers anonymity will be protected… even wi-fi tracking will be nearly impossible. UUIDs are a thing of the past for advertisers. If you want to know who an apple iPhone customer is.. you will need to work with Apple.
Apple is well positioned to benefit from the future tsunami of issues concerning data privacy. They are most focused on adding value to the consumer.. rather than retailer, advertiser or bank. They have the best consumer demographic on the planet and you will work with them in their model if you want to play.
Funny story here. The big banks were approached by Apple a few months ago to “pay” for getting their cards into the new iPhone wallet. The banks immediately called up V/MA and said “you guys are going to let Apple PATENT the process by which my card goes from their phone to the POS!!?”. Hence the rushed joint announcement on tokens (see PR here). Yep.. Apple made that happen. The funny part comes in later.. Apple now has some small changes to accomodate new V/MA standard but the banks ask apple.. “we would really like that biometric.. can you send it to us”… my guess at Apple’s response “price is the same as card registration we told you before announcement”.
Consumer Champion.. but with all of your data too. Much less robust security plan, but the best in class company for orchestration. See blog for detail. Google is attempting to work with Retailers, banks and advertisers. They are proving their value to consumers everyday with services that help them gain more consumer insight which in turn feeds better services. Google has no desire to be a bank, or a retailer… their value is in bringing everyone together. Just like apple, their fist priority is to the consumer.. everything else flows from that.
… will need to make this a part 2. Obviously retailers differ on consumer choice just a little..
27 Feb 2014
I was reading this Wharton paper on Risk Management in Financial Institutions and the lead paragraph struck me
Financial institutions exist to improve the efficiency of the financial markets. If savers and investors, buyers and sellers, could locate each other efficiently, purchase any and all assets costlessly, and make their decisions with freely available perfect information, then financial institutions would have little scope for replacing or mediating direct transactions. However, this is not the real world. In actual economies, market participants seek the services of financial institutions because of the latter’s ability to provide market knowledge, transaction efficiency, and contract enforcement.
How would I adapt this to cover a Financial Institution’s role in Commerce and Payments? Let me share a few background points to provide context:
- Risk Based Pricing (of Consumer Transactions). This is perhaps the #1 “ask” by the big retailers I work with. For example, Amazon, Apple, Paypal, Visa/Cybersource, Google all do a fantastic job managing eCommerce risk. Their fraud numbers are below 20bps. Why do they still get hit with CNP pricing? We know the answer here of course… Each issuer gets to set pricing and there is no network scheme to price based upon demonstrated fraud/risk performance.
- Selective Settlement Risk (SSR – my term… I just made this up). In the POS world, my local Kroger would be quite comfortable taking the settlement risk on my grocery transaction, after all they have seen me purchase about the same amount or groceries for 20 years (using the same debit card). At the POS, Retailers want to be able to leverage their data to take risk on certain transactions, and shift it to other intermediaries when they do not want the risk (big screen TV). This is the central challenge for Target Red Card (and perhaps MCX) in a decoupled Debit model. For those thinking about check fraud, make sure you take a look at the Fed’s 2013 payment study “Checks had the lowest fraud rate by number (0.45 basis points) and a fraud rate by value of 0.39 basis point”. Thats right, checks have a lower rate of fraud than credit and debit cards (not PIN debit in isolation).
- Instant Credit for Commerce Transactions. PayPal’s billmelater , and Macy’s, Nordstroms, Kohls and other leading Private Label Card (with Citibank leading the sector) to a fantastic job of taking credit worthy customers off of Open Loop bank cards. The successful programs are unbelievably profitable for the retailers. With the card held by highest spending, most loyal customers.. and 1500bps on ANR. It wasn’t that long ago that most retailers had their own in store credit (see blog on Private Label), they also accepted checks.
- Authentication. As I outlined in Authentication – Core Battle for Monetizing Mobile, and Apple in Commerce, and Who do you Trust, Authentication is core to the platform (Google, Apple, ..) role in Commerce. With respect to Payments, how does a Bank PAY GOOGLE and APPLE for performing the authentication role (example using handset biometric features)? In this model they are mitigating transaction risk. This is shaping up to be one of the key issues with HCE and Tokens as the new token spec has fields for authentication. I’m not speaking of the technical issues here, but rather the business issues.. how do payment providers compensate an authentication service for reducing fraud? As a side note, for US readers, there is no better service in the market than what Payfone has right now.. with access to both Telecom network integration and Bank ID/Acct verification information.
What makes modern financial markets unbeatable? The ability for many parties to identify and segment risk, specialize and a market which allows all of these specialists to interact with transparency. Consumer Finance in general, and Payments specifically must take on some of these features.
Yesterday Jamie Dimon was quoted saying that Google, Apple, … all want to “eat our lunch” in this metaphor I guess consumers like me are on the menu. As much as I respect Jamie as the best banker on the planet, he continues to miss the consumer view… we are not owned, we migrate to where value is provided. Rather than working to specialize in consumer, Consumer Banks tend to work to build higher walls and create rules which work against the specialization. These walls will become their own jail if they fail to focus on value and specialized risk management. Today, it would be almost impossible for 4 party networks to adopt to a flexible “risk based pricing” model. My view is that Paypal, Amex, and Discover have the infrastructure to support this today.
Surprised? 30 years ago most retailers began to abandon roles in transaction risk… only to be taken to the cleaners. Hence we see investment to reassert their roles (ie MCX, Private Label, …). Retailers have no choice but to build consumer financial networks which allow for the (selective) assumption of risk (settlement, fraud, credit, Authentication…)? This taken together trends of branch closures, prepaid, mass market retail profitability make for a very chaotic environment.. (which is ripe for a new leader that can deliver value).
20 Feb 2014
Let me state up front this blog is far too short, and I’m leaving far too much out. Token strategies are moving at light speed… never in the history of man has a new card present scheme developed so quickly (4-6 MONTHS, see announcement yesterday). As I tweeted yesterday, the payment industry is seldomly driven by logic, and much more by politics. Given many of my friends (you) make investments in this industry, and EVERY BUSINESS conducts commerce and payments, movements here have very broad implications. The objective of this blog is to give insight into these moves so we can all make best use of our time (and money). I was flattered at Money 2020 when a number of you came up and told me that this blog was the best “inside baseball” view on payments. Perhaps the only thing that makes our Starpoint Team unique is that we have a view on payments from multiple perspectives: Bank, Network, Merchant, Online, Wallet, MSB, Processor, … etc.
It’s hard to believe I’ve already written 12 blogs on tokens… more than one per month in last year. As I outlined in December there are (at least) 10 different token initiatives (see blog). Why all the energy around tokens? Perhaps my first blog on Tokens answered this best… a battle for the Consumer Directory. It is the battle to place a number in the phone/cloud that ties a customer to content and services (and Cards). The DIRECTORY is the Key service of ANY network strategy (see Network Strategy and Openness). For example, with TCH Tokens Banks were hoping to circumvent V/MA… (see blog). The problem with this Bank led scheme (see blog): NO VALUE to consumer, wallet provider or merchant. It was all about bank control. The optimal TCH test dummy was almost certainly Google, and the “benefit pitched” was that Regulators were going to MANDATE tokens, so come on board now and you can be the first.
Obviously this did NOT happen (perhaps because of my token blog – LOL), but the prospect of a regulatory push was the reason for my energy in responding to the Feds call for comments on payments. In addition to the failure of a regulatory push, the networks all got together to say no Tokens on my Rails (see blog). Obviously without network rail allowance, a new token scheme would have to tackle acquiring, at least for every bank but JPM/CPT (see blog). Paul Gallant spent 3 yrs pushing this scheme uphill and had no choice but to look for greener pastures as the CEO of Verifone (Congrats Paul).
In the background of this token effort is EMV. I’m fortunate to work at the CEO level in many of the top banks and can tell you with certainty that US Banks were not in support of Visa’s EMV announcement last year. One CEO told me “Tom I found out about EMV the way you did, in a PRESS RELEASE, and I’m their [Top 5] largest issuer in the world”. Banks were, and still are, FUMING. US Banks had planned to “skip” EMV (see blog EMV impacts Mobile Payments). The networks are public companies now, and large issuers are not in control of rules (at least in ways they were before). Another point… in the US EMV IS NOT A REQUIREMENT A MANDATE OR A REGULATORY INITIATIVE. It is a change in terms between: Networks and Issuers, and Networks and Acquirers, and Acquirers and Merchants (with carrots and sticks).
In addition to all of this, there were also tracks on NFC/ISIS (which all banks have walked away from in the US), Google Wallet (See Don’t wrap me), MCX, Durbin, and the implosion of US Retail Banking.
You can see why payment strategy is so dynamic and this area is sooooo hard to keep track of. Seemingly Obvious ideas like the COIN card, are brilliant in their simplicity and ability to deliver value in a network/regulatory muck. This MUCK is precisely why retailers are working
Key Message for Today.
With respect to Tokens, HCE moves are not the end. While Networks have jumped on this wagon because of HCE’s amazing potential to increase their network CONTROL, Banks now have the opportunity to work DIRECTLY with holders of CARDS on File to tokenize INDEPENDENT of the Networks.
Example, if JPM told PayPal or Apple we will give you:
- an x% interchange reduction
- Treat as Card Present, and own fraud (can not certify unless acquirer)
- Access to DATA as permissioned by consumer
- Share fraudulent account/closed account activity with you to sync
- Tokenize (dynamically) every one of our JPM cards on file
- Pass authentication information
- Collaborate on Fraud
This is MUCH stronger business case for participation than V/MA can create (Visa can not discount interchange, or give access to data).
This means that smaller banks will go into the V/MA HCE schemes and larger banks, private label cards, … will DIY Tokens, or work with SimplyTapp in direct relationship with key COF holders.
Sorry for the short blog. Hope it was useful
28 Jan 2014
The mainstream media is hooked on “mobile payments” like Doritos to the Super Bowl… we all like to talk about it… Difference is Doritos have real consumers.. while “mobile payments” at the POS are a laughable over-buzzed ethereal dream. I continue to be amazed at how badly this is covered, from over blown projections by Javelin ($20 B by 2012), to reports of NFC’s wonderful future from the GSMA. For readers of my blog, this hype is nothing new..
What is Apple doing?
Creating a Commerce Platform that will enable 1000s of Retailers to rewire commerce. Apple is the ONLY COMPANY in the world where Retailers will CHANGE THEIR BUSINESS to create a unique APPLE EXPERIENCE . Why? Apple’s biggest asset is their ability to change consumer behavior.. It is the only company in the world that can move: Retailers AND Consumers AND Manufacturers. There is enormous TRUST in the Apple brand; they have earned this trust (with THE MOST AFFLUENT consumer base) by consistently delivering the best product experience (A very very big PERIOD). They have proven to be THE leader in digital goods, physical retail AND eCommerce. Payments may be a starting point.. but Apple’s patents, technology, products and applications are completely missed if you only look at them from a payment perspective
Sorry to sound pompous here guys, but I’m pretty decent in predicting Apple in Payments, and the role of the Handset in Physical retail. Take a look at the consistency of my previous blogs…
- Apple and NFC (No NFC in iPhone 4 or 5)
- Apple and NFC Part 2 (NFC in next version of iPhone.. and the likely combo chip)
- Apple Passbook
- Handset – Commerce Orchestration (Drivers behind Apple and Google’s Platform Strategies)
- Rewiring Retail Commerce
Apple is a tremendous company, with the best product design teams in the world. They care deeply about their brand and the consumer experience, particularly as it relates to the iPhone. Apple also knows physical retail VERY VERY well, with the most profitable stores per square foot in the world (over $5,600 per square foot). Let me restate this again, Apple is #1 or #2:
- Ability to Change Consumer Behavior (see blog)
- Handset Profitability
- Customer Demographic/Profitability
- Product Design
- Consumer Experience
- Sales of Digitial Goods (App store)
- Sales of Physical Goods online (Mac Store)
- Physical Retail Sales (Apple Retail Stores)
- other (Authentication, developer community, cloud, fraud, security, …)
NOT About Payments
Do you think Apple would risk any of this on something that they could not control or has proven to be a failure? OF COURSE NOT!!
Physical Retail is a complex business that is undergoing a complete restructuring (see Blog), we are talking about $2.4T in sales (does not included Auto, Gas, Fin Services) vs. eCommerce sales of $180B. Apple has been very well served in acting as a late follower, the key for Apple to add value in retail is their role in changing consumer behavior (See Blog).
It is to make the iPhone a platform for Physical Retail, to enable retailers and manufacturers to create 1000s of fantastic consumer experiences. Apple will do NOTHING it cannot control, it knows that Banks and MNOs will look to leverage its brand and gain a controlling foothold. Apple and Google are very consistent in the battle to control the consumer (authentication)… the ability to authenticate is critical to bringing together the virtual (cloud, social, pictures, music, payment, ID) and physical worlds ( Blog Who do you Trust, and Authentication Battle ).
I have to run and catch a plane, but as a quick example. What if you were in a shopping aisle and the products could talk to you? They could tell you their reputation, what your friends thought of them, what they tasted like, or how they could best be used? What if you allowed certain retailers to know you were in the store (a form of checkin) and the retailer could give you a special deal on a package of 2 or more things you were looking at, or offer to meet Amazon’s price if they could package a warrantee and same day installation. When you walk up to the POS, they know your name and ask if you would like to put the purchase on the same card you used last time?
The business case for Apple is not making 10-30bps in payments, it is about making 500bps in advertising and retailer services. It is about cementing iPhone’s role as a platform for both Consumer and Retailer… adding services, adding transactions, adding loyalty and creating a behavior chain with APPLE AT THE CORE.
Most of you know I deal with the institutional investor community. Today I had a funny quote.. “Tom we heard that Paypal is working to be part of the Apple product”. My answer “I’m sure they are… but they have absolutely NOTHING to give them”. Apple would be nuts to include Paypal here, Paypal has NO Physical presence, no merchant relationships, no consumer traction in off line, … Should Paypal let consumers choose to a Paypal “product”? Why? Perhaps linking their debit accounts.. but Paypal is not merchant friendly… it would be a VERY bad way to start a platform business.
As I said before as Payments move to the OS, Paypal does NOT have one.
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.