Payments in the Pandemic – Paypal

Paypal is very well positioned to capture new volume both short term and long term growth

First off, best wishes to you and your family during these challenging times. I had intended to get this out last week, but found the need to invest in family. My family is doing fine, I’m fortunate to have all of my children, grandchildren and parents within 10 miles of Davidson North Carolina. We are like the rest of you, navigating needs for family support and volunteering in our community.. All of which has changed up our schedules. My hope is that we all find some way to create good out of this terrible event. 

In this Blog

  1. Massive disruption in Commerce has created fundamental changes in payments and consumer behavior. 
    • Discretionary and T+E spend is dropping 40-80%. Visa and Mastercard have both revised growth from mid teens to low single digits. Paypal has maintained low end guidance. 
    • eCommerce is clear winner right now, estimate that Paypal’s core eCommerce TPV could be 40-60% above average 
    • Consumer behavior changes driven by the pandemic will rapidly accelerate the move away from physical retail (See 1 April WSJ).
  2. Paypal is very well positioned to capture new volume both short term and long term growth.

Current State – Earnings

From a commerce (and payment) perspective, this pandemic has wrought fundamental change. McKinsey reports (see WSJ ) eCommerce purchase volume soaring over 80% (since Feb). Industry analyst Craig Mauer (Autonomous/AllianceBernstein) has done a fantastic job of breaking this down by vertical, geography and discretionary/non-discretionary. 

While T+E related verticals have seen revenue decline 50-80%, and discretionary spending take hit of 40-50%, non-discretionary has seen a rise of 20-45% (driven by grocery). Across all of these spend types there is a significant shift in volume to online/mobile (card not present) and away from cash/Card-Present: ordering groceries, amazon, food delivery, …etc. The impact of this change in consumer behavior is complex. Visa and Mastercard have both revised earnings with expected growth dropping from mid teens to low single digits (see Visa 8-K, MA 8-K). Visa’s 8-K provided the following

Paypal’s Feb 27 update, outlined the impact of Covid-19 on cross border eCom, but maintained guidance “at the lower end of our previously guided range of $4.78 – $4.84 billion. We are reaffirming our first quarter 2020 GAAP and non-GAAP EPS guidance”.  

Behavior Change

Clearly no one can estimate the change that will occur in the next 5 years. Our lack of preparedness for this event is shocking, particularly as leaders like Bill Gates outlined the impact of a highly contagious virus (2018 lecture). We have never been a more connected society. Pandemics have consistently come in waves.. And drive fundamental changes in social structure, healthcare and commerce.  Just as the Spanish flu of 1918 drove creation of public health, hygiene and social distancing.. This event will also forever change our society, including how we shop and interact.

Consumers behavior will change.. But how? What elements of this behavior change are likely to “stick” long term and drive a reassessment of long term growth. For example, yesterday’s WSJ (see 1 April WSJ) paints a bleak picture for shopping malls and physical retail. Direct to Consumer (DTC) was already the hottest growth area for CPG, how is it adapting in an economy with greatly reduced discretionary spend and disposable income? (note: this will be the subject of a following blog) 

Assessing Paypal

First off the obvious, I’m not a financial analyst and this is not meant to guide your investment decisions. Rather I’m breaking down how I evaluate Paypal and the long term implications of changes in consumer behavior. Paypal is no longer a one trick pony processing payments for eBay. They have 5 key lines of business. PayPal, PayPal Credit, Braintree, Venmo, Xoom, hyperwallet, and iZettle. Their 4Q19 investor presentation was widely viewed as the best investor communication in their history as a public (stand alone) company. 

While most payment players have offsetting CP/T+E losses with eCom/mCom gains PayPal is positioned well to capture significant new growth. I look at this business through a sensitivity analysis perspective. My estimates of how changes in behavior could impact Paypal’s core revenue drivers.

  • 1% increase in Active Users drives $163M in revenue
  • 1% increase in Customer Engagement drives $163M in revenue (Currently 38 transaction per year)
  • 1% increase in eCommerce Acceptance drives $150MM in revenue (2019 grew 29% 22M Merchants- FX Neutral)
  • 1% increase in new Merchant Services drives $20M in revenue (ex Honey)
  • 1% increase in Lending drives $8MM in Revenue ($10B portfolio, ~8% NIM)

There is a degree of overlap in the correlations between these numbers, but there is also a high degree of “network effects”. For example, great acceptance leads to greater number of transactions per user, who gets credit? Merchant acceptance? Or Active user growth?  This approach is useful for assigning business priorities and for accessing the size of the opportunity (change) for Paypal. 

Let me give an example of my math for case 1

  • 40 transactions per user
  • 250M Active Paypal users (not including Venmo)
  • $50 Average Transaction size
  • 260bps take rate (factoring out Venmo)

1% increase in Active = 2.5M consumers * $50 * 40 * .026 = $162.5M (annualized)

Scenario – Ridiculous

  • 10% increase in Active Customers
  • 20% increase in Customer Engagement
  • 10% increase in Merchant Acceptance

Revenue Impact – $6.4B (not likely)

Obviously this seems wrong. However, rumor is that Paypal has seen a 60% increase in volume during the first few weeks of the pandemic. Most would point out that consumer discretionary spend will be decreasing, and that only grocery and restaurant take out will be beneficiaries (neither of which are traditional PP Verticals). This would point to a new scenario with decreased consumer engagement, but increased acceptance (as Paypal works to attack growth verticals and expand merchant services). 

Scenario – Likely

  • 10% increase in Active Customers
  • 10% DECREASE in customer engagement (40% decrease in discretionary, 30% growth in eCom – channel shift)
  • 10% increase in Merchant Acceptance
  • 20% increase in Merchant Services

Revenue Impact – $1.7B (incremental – 22% above baseline)

Key Assumptions – Discussion

In my opinion, PayPal looks set to gain in most scenarios. While net consumer spend is decreasing, channel shift and opportunity to create new services allows PayPal to capture incremental growth (ex braintree menu hosting for small restaurants). If PayPal can execute on non discretionary (ie Grocery) or on other growth categories, increased engagement will drive a chain reaction “network effect”. 

Outside the scope of today’s discussion is how Paypal could play a role in Government subsidy payout or in small business lending.. 

I have not wrapped this up cleanly.. But wanted to get this out. 

Payments 2020 – MVP Continued Domination?

What is the top performing industry group? MVP outperformed FAANG over last 4 yrs by 34 points.. will this trend continue?

I’m back to blogging after a 5 year hiatus… The CEO thing is rather all consuming. Glad to have an exit so I can get back to my fellow payment geeks. 

What to blog about first? Given we are in new decade I thought about writing some grand predictions.  But rather than look forward, we must spend a little time in the past, as the past 10 years have been JUST AMAZING in payments. I’m calling this blog series “payment growth vectors” where I hope to recap what has transpired in payments (history) to provide a trajectory for evaluation of the future course.  

Continue reading “Payments 2020 – MVP Continued Domination?”

Token update – TCH + 2 Big Banks and Paypal

I’ve been writing about this token stuff for over 5 yrs. Wow.. This is an update to my June 2013 blog – Tokens: any volunteers ,  SRC- W3C and Tokens and the Trojan Horse.

First my bias.. I may be naive.. but as I stated in Tokens and the Trojan Horse

Visa and Mastercard provide a level playing field for Issuers and Merchants (with few exceptions). Per my blog Payments Civil War, V/MA are a fantastic creation that have experienced profound success (and growth). As I outlined in the Changing Economics of Payments, the beauty of the V/MA model is that it creates incentives for millions of businesses to invest billions of dollars. For investors, the attraction of V/MA is that it is scale free.. with minimal effort required to add volume. While there are MANY more logical ways to deliver payments.. there are none with more profitable incentives for investment.

Tokens are an enormously powerful control point for the payment networks. 9 years ago the banks were working to “build a new Visa” within an initiative launched by The Clearing House. The idea was to create a new scheme that “wrapped” account numbers with another number (token) and avoid network routing (see wrapping). The networks smartly came down and issued clear guidance, if you wrap my card number with another number …. It is still a Mastercard/Visa.

TCH has been seeking a partner for tokenization since Paul Gallant led the 27 bank consortium 8 yrs ago.  Can you imagine the sales pitch (as I reviewed in the Trojan horse) “give me all of your customer information, I will lock it up.. and give you one of my keys for you to access it”. Google, Apple and Amazon have all smartly said no. What is the remaining “big” eCommerce Cards on File (COF) home? You guessed it PayPal.

While I’m not 100% sure about this.. it is the only group left AND two of these banks told me this week “Paypal is the only one that can move merchants effectively”. I was shocked … paypal can move merchants more than Google? They responded “Google has the best technology, but they just can’t sell merchant more than adwords”.. wow.

Thus my best guess is that 2 of the top banks are working with Paypal as the processor/gateway  to move “W3C” in the direction of the TCH tokenization service. The head of the W3C WG wrote me on twitter

Quite frankly my head is spinning. W3C is a browser standard.. how can Paypal get their TCH tokens in? I haven’t figured this out yet, but what I do know is that the complexity is enormous. We have 3 different token services

  • Visa VTS/MA MDES (Apple is primary customer)
  • Google (see Blog) – had no choice but to develop a new custom “standard” by which the encrypted FPAN flows to the merchant acquirer
  • TCH – Paypal + ??

And also multiple new eCom standards

To read what is happening you must therefore take a matrix view.  Obviously Google is moving with their own token service and W3C. Paypal seems to be moving with TCH and W3C.  Apple with network tokenization and ApplePay.

My head is spinning. I must say I did buy Paypal stock this week. I’m just floored that top tier issuers are innovating with Paypal.. focus, partnerships and execution are moving them into the bank friendly category.

Paypal is on a TEAR.. iZettle and hyperWALLET

Note: I’m not subjective on this one as I’m both an investor and former BOD member of hyperWallet. Of course I’m biased on all of my others too.. but just don’t have much of a financial stake.

Paypal has been on a tear in 2018, and is the leading payment stock performer in last 12 months – up over 60%. Continue reading “Paypal is on a TEAR.. iZettle and hyperWALLET”

PayPal surpasses Amex in Market Cap

WSJ Friday – Paypal Passes Amex in Market Cap

Paypal’s stock has been on an absolute tear this year up over 70% and pushing their market cap over $80B, with 55x P/E (compared to Visa’ 40x and Mastercard’s 36x)paypal-stock

eCommerce and payments are both hot sectors…. PayPal combines both. Most would tell you that the “real progress” for PayPal’s stock started July of last year with the V/MA peace treaties (blog).

Paypal’s biggest advantage is focus… they are 100% focused on payments. This gives them advantage in both innovation and execution, particularly when they are not dependent on getting the “permission” of anyone else. Venmo’s massive success is a great example of speed and finding a niche that no one else saw.

I tell Dan that I see 2 primary vectors for further growth: long tail (small retailers) and international (particularly small merchant acquiring). Wirecard sees the later as well given they just purchased Citi’s acquiring business in Asia.

Paypal’s competitive environment, the bundling of payments, and tech (new authentication/payment in OS ) creates a very challenging environment for growth. Their ability to focus and execute is what will differentiate them as a new tech standard is meaningless if no one uses it. Example is Apple Pay in store continues to be a flop.. where as apple pay in-app is a crushing success.

What most impresses me this week? Paypal’s partnerships (see Dan present on this topic – CNBC). Parnterships are a HUGE driver of volume (look at eBay’s impact). Consumers just want the easiest/default payment approach.

Congrats to Bill, Dan and team.. making this progress while REMAKING a technical infrastructure in a highly competitive environment is tough!

CORRECTION
In a post entitled “What to expect from Money in 2020” posted on October 5, 2017, I stated that Bank of America had “pulled out of their relationship with Cardlytics”. Cardlytics has informed me that this is false and that there is no change in the relationships with Bank of America or Citi. I
apologize and regret this error.

I look forward to getting another update on the CLO space from both banks this quarter.  It sure is nice that someone reads page 3 of a blog on Money 2020 to notice this stuff. I’m always open to correcting errors or omissions.

 

Amazon 2% + PayPal Discover

Two HUGE payment events this week

Amazon 2%

Per Bloomberg, consumers that don’t want to go for the 5% back Amazon store card (SYF) can now link their DDA and earn 2% back.  This may be the biggest payment innovation of the year!  Continue reading “Amazon 2% + PayPal Discover”

Short Blog – Paypal / Vodafone

News today

Vodafone-PayPal Payments Go Mobile in The UK

My summary view

  1. Vodafone is linking all cards in Google like “Proxy model” w/ card issued by  R. Raphael & Sons plc
  2. Vodafone is able to see all transaction data and deliver rewards/loyalty separate from card issuer.
  3. Paypal is virtual card (?Mastercard) at POS
  4. Vodafone has enabled a contactless SIM that can operate separately from the VodafonePay application with one default card (see Vodafone Smart Pass)
  5. TFL/Oyster accepts various external networks (see list). Paypal operates as a virtual V or MA in this circumstance.
  6. Revenue for PP is 30/40 bps less Vodafone and program manager costs.

The Vodafone Pay Terms give most of the meat

“For each funding source you wish to use with Vodafone Pay, we’ll issue you a prepaid virtual card (which we will store securely on your SIM card). By ‘funding source’, we mean a UK sterling denominated debit or credit card that was issued to you by a UK-authorised bank or an account
that you hold with a UK-authorised bank or your PayPal e-wallet. You can link up to 5 funding sources via the Add a Card feature. The virtual card expires when your funding source does. […]

Because the payment goes from your funding source to your virtual card before it is completed, you may not get the same benefits (like loyalty points, discounts and card protection) as you get when paying directly with your funding source. The funds loaded onto your virtual card will not earn any interest”[…]

We, the issuer or your virtual card, are R. Raphael & Sons plc (Company Registration No. 1288938) with our head office and registered office at 19-21 Shaftesbury Avenue, London, W1D 7ED.”

Acceptance – Part 1

I haven’t written much on acceptance over my 9 yr blogging career for one simple reason.. I was never “in” that side of the business. Given how much is going on in here I can’t leave it out any longer. Acceptance at the POS is a big topic, I see the following areas: Continue reading “Acceptance – Part 1”

Browser Tokens – Payments in OS Part 4

My last articles on this topic were
I’ll forgive you if you didn’t see the big news out of Google I/O. There is a MUST READ article in Android Police that is spot on. Summary? Google (Chrome/Android) and Apple (Safari) are ready to integrate payment tokens in the browser.. Buy buttons will be integrated into ads, product listings, or a single “pay” button with no subsequent user information to fill out “quasi one-click”. From Android Police

Continue reading “Browser Tokens – Payments in OS Part 4”

Payment in the OS – eCommerce/mCommerce Converge

28 Dec 2014

I hope everyone is having a wonderful holiday. Sorry for the delay in blogging, capital raising takes much more time than I had anticipated. Hope to tell you more about my NewCo in January. So much has happened since Money 2020, next week I will write a recap blog in prep for my 2015 predictions. Today’s blog is focused on “mobile” payments and platforms (iOS/Android)

I define 4 categories of mobile payments:

  1. Point of Sale. The phone used at a physical retailer
  2. mCommerce. eCommerce on your phone: buying something from a website in your mobile browser
  3. In App Purchase. Normally a subcategory of mCommerce, payment within an App (think Uber on iPhone). Only worth breaking out because ApplePay does this today.. and not above.
  4. Digital Goods. Games/Ringtones/Music/Apps (not in scope for today)

Point of Sale

Think NFC.. Not a focus for today.. but a great article from David Evans Apple Pay is Fizzling provided some key numbers. Only 4.6% of iPhone 6 users in a store that accepted NFC/ApplePay used it. Do you realize how small a percentage of use this is (4% of 3% of customers)!? If only the mainstream press realized that “50 new banks joining ApplePay” does NOT equate to usage. My bank issuer friends have confirmed what I’ve been saying.. there is no value proposition here.. and my volume estimates are accurate. Why? ApplePay does nothing beyond what your current plastic card does today.. Consumers just don’t care and Apple has made no effort to work with retailers (to promote at POS).

It would be great to know what NFC payment volume actually is, but the numbers are so low no one wants to talk about them. Overall NFC payment volume has gone DOWN in 2014 (from 2013) due to CVS, Best Buy and 7-11 “terminal configuration changes”. There are approximately 270,000 US locations which accept NFC, of which 100,000 are vending machines. My estimate for US Contactless Payment volume

  • 10% of consumers (20M active phones/wallets to 200M Adults)
  • 4% usage (very high)
  • 2.5% of retailers accepting (150k/6M, excludes restaurants)
  • $2.4T US Retail spend (ex Auto, oil/gas, Fin Ser, Restaurants, Travel)

———————

            $240M (1/100th of a % of retail sales)

I can’t believe I’m wasting time even writing about this number (my real guess is $100M). Can you imagine finding a way to make this PROFITABLE across 12 different suppliers?!

If Apple had 100% of this volume their total ApplePay revenue would be $600,000!! (25 bps). No wonder banks signed that agreement. When I went to Google in 2011, the first thing I told Osama was “run away from NFC”.. everyone I’ve known and loved has lost their lives in this NFC stuff. You could do everything right and it still wouldn’t work (see 12 party fur ball). NFC/Contactless may be very Hot in London, New York, Hong Kong, and a few other Cities (high density, mass transit, cabs, high affluent…) .. but the rest of the world is very very cold.

My analyst friends are telling me that 5 retailers will “bolt from MCX” to allow ApplePay. I told them what we will probably see is a few of them adding the option within select markets (like New York and SFO.. ) but obviously the retailers are telling the truth.. Apple consumers are not beating down the door because of the service. Consumers just don’t care (4.6%).. ApplePay .. just like all things contactless… is only “buzz”. My rule of thumb holds: Behavior Change requires at least a 20% increase in value (unless you live in NYC).

mCommerce/eCommerce

What is the difference between mCommerce and eCommerce? If you bought batteries from Amazon on your iPad while sitting in your living room?… A: _____________? (mCommerce.. !!) It makes little sense to break mCommerce out as a separate category from a consumer behavior perspective.. but it makes TREMENDOUS sense to break this out for an analyst platform view.

Total eCom/mCom sales in the US are approximately $180B/yr (See US Census Data). Note that this is a MUCH bigger payment segment than the $0.24B POS market above. Within eCommerce, there are the BIG 3: Amazon, Visa/Cybersource, and eBay/Paypal/GSI which account for over 65% of volume (ex services, my estimate).

There is massive change of consumer behavior within eCommerce over the last 4 years, as reported today, Amazon see’s 60% if volume going through mobile! Quite a tremendous change from the 5% Amazon outlined just 4 years ago (see article). In 4 years we have moved from a model where 95% of  US consumers bought online on a Desktop.. to an environment where 60% are buying from an Android or iOS device. Now you start to see the strategy drivers for: Apple, Google, Paypal (Braintree), Visa (Checkout) and Amazon (firephone) moves here.

Historically eCommerce payment services focused on the ability to manage fraud, as merchants held all liability in a Card Not Present (CNP) transaction. As such, payment service providers managed card acceptance and also provided fraud management services (hence their pricing of ~340-~600bps vs the card present MDR for CP of 160-180bps).  Paypal’s service was the first of its kind to allow small merchants to accept cards, as the big banks had no tools to manage CNP fraud. All the large eCom specialists became VERY VERY good at managing fraud, building custom infrastructure to assess buyer patterns, and the device which the consumer is purchasing from to score transactions. Today most of their fraud rates are under 8bps (Paypal still charges 340bps).

Move from Fraud Management to Identity

In Europe, Visa and Mastercard shifted liability within eCommerce transactions onto banks in 2006 (see 3DS a Collaborative Path to Failure). This did NOT work out well for all, as the technology was highly flawed. The US never had this facility… a good thing.. and the state of the art in fraud management stayed within the big 3. For more background on this see Authentication in Value Nets. However the billions of dollars invested in building fraud management assets are being rendered useless by identity management and authentication. This is a HIGHLY disruptive force! Existing payment intermediaries have built their position on owning the consumer and managing risk. Mobile changes both!!  I will drill into this next week.

As I outlined in Perfect Authentication: A nightmare to Banks, and Who do you Trust, the ability to authenticate a consumer is far in advance of what fraud systems do. As Ross Anderson said at the Federal Reserve “if you solve for authentication in payments.. everything else is just accounting”. This statement does hold for the credit risk side.. but it does for the payments side. This is what is changing with mobile. From my blog: apple-biometric

The “KEY” [prerequisite] in value orchestration is owning the Consumer relationship. Therefore Identifying and Authenticating the Consumer is the first, primary, service that must be owned by a platform.  What was a separate “Trusted Services Manager” in the NFC world has been co-opted by platforms which will take a proprietary route. …etc. There is an all-out war going on for the Trust role: Banks (see Tokenization), MA/V, MNOs, Samsung, retailers… everyone realizes this is the “key” to unlocking future value in the convergence of the virtual and physical world.

The impact of mobile and identity on eCommerce is easy to see, as the more “platforms” know about you can be used within the device you use (and trust) the most. Mobile’s impact is also hitting the offline physical retail world, but in a much more experimental phase as the platforms, online retailers and aggregators don’t work within this space (yet).

A new rate tier: Cardholder present

This “new” form of mobile authentication will enable networks to create a MUCH improved version of VBV/MSC, shifting liability onto the bank with an interchange rate between CNP and CP. Who can take advantage of this rate and liability shift? Entities that can authenticate the consumer on the mobile device (Apple, Google, ?MNOs), securely manage a token and broker identity with other parties (see Authentication in Value Nets).

How will Visa/MA roll this out? There are many, many lessons learned in the prior 3DS (VBV/MSC) roll out. Already V/MA have been talking to major issuers and eCommerce service providers. Token issuance is currently a bit of a hang up as the issuers want to get their own TSP services up and running, and the Google/Amazon, … want to run their own TSPs. If everyone would agree to use the V/MA TSP services this could happen quite quickly. But because this is NOT the case, ApplePay and Visa Checkout seem to be the only services positioned for this move.

As I stated previously in my ApplePay blog, when this new rate tier hits, it will free Apple (and others) to transfer the token to the merchant across a greater number of protocols. In store this means that NFC will compete with a BLE experience, with NFC carrying a CP rate and others carrying a Cardholder present rate (and bank liability) that is very close to the CP rate.

Paypal has no position here.. as payments move into the OS.. they don’t have one nor do they have the eCommerce “portal” of Amazon where consumer’s begin their product search.NFC Change

2014 – Payments Part of OS:

Per my July 2013 blog Payments Part of OS, both Apple and Google are integrating payment capabilities into the OS. Where Google Wallet detractors deride Google because of its lack of progress in payments, I believe they are shifting focus to what really matters: establishing Android as the core commerce platform. In this future world you don’t really care about payments.. they just happen. With great authentication your information is stored in the cloud and you choose what information and payment instruments you want to exchange with a retailer.

We see the first hints at what this will look like in this WSJ article Google Shopping to Counter Amazon.  Note that this is not Google payment… this is Google SHOPPING. Let me emphasize.. the battle is NOT about payment but about delivery value to consumer within Commerce. The focus for innovation investment TODAY across banks, retailers and service providers is Android as the iPhone platform is locked down. Sure Amazon and Bank of America are leveraging Touch-ID but this requires little effort. The key for Commerce Innovation and Value Orchestration is to get 1000s of companies engaged … Apple’s efforts are 95% consumer focused.google-shopping

This consumer focus is paying off for Apple as they are 3-5 years ahead of Google (and Android OEMs) in handset hardware/SW. However, Google and Amazon are 5+ years ahead of Apple in orchestrating commerce value. Value orchestration is a network business and entails enabling millions of partnerships where consumers and businesses are incented to participate. Apple isn’t exactly known for making money for anyone but themselves. Apple has a MUCH greater ability to manage identity and trust and should be pursuing a strategy of consumer focused identity brokering (see Brokering Identity, and iPhone 6 – Apple’s Platform Opportunity) but are challenged organizationally as payments/identity are deep within a hardware culture, a world where neither are capable of creating partnerships.

Bank “payment” strategy seems to center on control or redesign of existing networks and nodes. For example, Issuers are attempting to leverage old nodes (Cards) and current market position to form a new orchestration role (see Card Linked Offers). Jamie Dimon  created a new Data Division at Chase run by Len Laufer with a bifurcated visa*net. What banks forget is that their role is that of a neutral broker, they were NEVER the starting point for commerce (their network and nodes are weak). The harder banks work to build barriers to entry, the greater the value of finding ways around them….(think bitcoin).  Or in the case of payment in the OS.. making unique assets (fraud) a commodity… the NATURE commerce is changing and the role of payments, how they deliver value, is changing too.

Think about it this way: did you buy an Uber ride on your iPhone because it took your Visa card? Did you even think about Payment? Same with Amazon… did you shop there because of payment? Payment is becoming a back end commodity service and the mechanisms for banks to differentiate are getting smaller. There are many implications for small business. For the last 20 years much expertise has been needed to create an online store, particularly in accepting payment. All of that is changing, if I solve for fraud, integrate my inventory into search and product discovery, merge customer contact and loyalty into advertising and payment, all with standard services… it becomes EASY.

For too long banks have leveraged your relationship to create value for themselves, hitting you with a mind numbing array of products and fees. This is their network legacy.. it is bred with inefficiencies. The bank goal was not simplicity, it was complexity and margin. Products like Apple, Square, Stripe, Paypal, Amazon, Poynt, Tesla are beautiful in that they make the complex appear simple.

ApplePay Expands to Browser

As I outlined above, the key trend in commerce and payment is the move to “mobile”. Today Google wallet works with Google chrome and app store for auto fill and checkout. Expect to see Google make authentication within Chrome, android, and apps much tighter, with Chrome becoming a cross device focus.

Today 90% of my payment friends agree that Apple’s REAL win within the next 2 years will be ApplePay in eCommerce/mCommerce. Today ApplePay’s focus is on in App purchases only. I expect to see ApplePay expand into browser based payments within 6 months or so. Apple may be first to market with the “Cardholder present” function given that tokens, authentication and bank agreements are already in place. From a merchant perspective Apple will offer a free API (akin to autofill) where Apple tokens and necessary consumer information is passed. Amazon Payments and Google already have this capability, but have not yet implemented tokens, biometrics or have bank agreements.

Apple’s greatest asset is its ability to change 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. Consumers using Apple’s in app (today) or in browser (future) don’t even think about using payments… it just works.

mCom/eCom Convergence

When will we know it happened?

  • When neither consumer nor merchant had to do anything unique to support an online sale.
  • On phone, in app, in browser.. they all just worked and no one even thought about it.
  • We used the payment instrument of our choice.

Apple has already arrived at this state with in-app ApplePay. From a technical perspective, key convergence measures are:

  • Payment is treated the same regardless of channel.
  • Handets, platforms, and networks can pass information, identity and trust.
  • Banks accept that consumers can be authenticated without physical presences.
  • Developers leverage platform payment services with ease.

Who is impacted?

Paypal. What are paypal’s assets today? Risk management, consumer accounts, DDA Funding,  a few merchants. Apple, Google, Amazon, Facebook already have the consumers. The paypal risk management assets are worthless in a new environment. DDA funding looses importance as merchant costs for CNP fall from 340bps to 150bps. What do they have left? Let me know your answer..

MA/Visa. Visa/MA wins when there is card volume. Making payments part of the OS and giving consumers choice of payment instrument is a HUGE win for Visa/MA. As payments move into the OS so does V/MA. They become infrastructure. The losers? Well card issuance costs, risk management costs, fraud management costs, merchant integration costs all start moving to 0.. which means big margin compression for everyone else on the network.visa-checkout-ios-devices

With respect to eCommerce. Visa checkout/CYBS has substantial volume. They can adapt to tokenization quickly, but unclear how they would manage authentication.

Issuers. Imagine loosing all the airline CNP revenue? I don’t see an upside for issuers in this. They have a very poor ability to influence the network and are not well placed to serve in the trust identity role as consumers leave the branch and interact with the bank less often through remote channels. Banking is becoming a commodity service as well (see blog). You should have heard the squeal on the ApplePay agreement.. never before have Banks had something like this handed to them “take it or leave it”. Given the NFC volume above banks may have written if off. But this could turn out to be a big Trojan Horse as this tokenization expands into CNP/Card Holder Present. I believe their biggest fear is that Google will look to follow the model.

Merchants. Merchant that can sell or engage on mobile: Big winners.. mobile conversions, decreased fraud, liability shift to banks, changing consumer behavior. Merchants that are stuck in bricks and mortar.. no change.

Google. Big win. The only company that is cross platform/device. Buying in Chrome or in Android is seamless. Challenge is to move buying “search” back into Google from Amazon. The other advantage to convergence is the ability to close loop on behavior within the mobile/ecom process.. helping google advertising become even more effective. Google’s challenge is in Enterprise integration. Their engineers don’t like working with anyone else’s code. This is where Microsoft and Oracle are headed… helping enterprises engage consumers.

I propose the following metrics to measure/rate “Commerce Platforms” :

  1. Frequency of consumer touch (per day)
  2. Commerce transactions $/day
  3. Number of businesses you work with * the average time spent in managing in store experience…
  4. ??

Other Blogs

Payments Part of OS: What does that Mean?

Big Changes to NFC: Payments as Part of the OS

Stage 4 Evolution – Distributed Innovation,

ApplePay – eCommerce Distruption

iPhone 6 – Apple’s Platform Opportunity