Not on my Rails

We now see network resistance “Not on my rails”. Why on earth would Visa or MA want to let a Token ride on their rails? Perhaps the best example of “Rail” ownership is First Data’s refusal to support routing and processing of any Paypal/Discover BINs

In last year’s post “Don’t wrap me“, I described how issuers were responding to having their cards “wrapped” by Digital wallets and new Plastic aggregators (Serve and Paypal). Examples:


  1. Paypal’s plastic. MA established a Staged Digital Wallet fee of 35bps, when its card brand was not used at the POS, but was the funding instrument for the transaction.  Amex and Visa also pushed back, although I don’t have details on rule changes here, they made clear that they wanted their brand at the POS.
  2. Serve. Hit by similar issues above,
  3. Google Wallet/Plastic. Visa reportedly issued a cease and desist to Google at the behest of Chase (See NFC Times)

All of these wallets (Virtual, NFC, Cloud, …) led issuers to wonder “what card is top of wallet”?.. and how does a customer select my plastic. Issuers have been (to date) the drivers of rule changes and resistance. They seem much more concerned about one physical plastic card wrapping them (ie Serve and Paypal) than a virtual wallet, but they are also very concerned about data (see blog). Letting a new intermediary see transaction data (and add offers/services on top of them). In other words “DON’T WRAP ME” (see blog Paypal at POS).

Issuers subsequently got together and developed the concept of tokens (see Business Implications of Tokens). The summary: IF issuers had the opportunity to give the customer an account number in a digital wallet. Why would it be a Mastercard, or a visa card number? They are thus working on a system for distributing 16 digit tokens which they own and control (see Secure Cloud PR from TCH).

We now see network resistance “Not on my rails”. Why on earth would Visa or MA want to let a Token ride on their rails? Perhaps the best example of “Rail” ownership is First Data’s refusal to support routing and processing of any Paypal/Discover BINs.  This means that every new “Home Depot” or “Jamba Juice” Paypal signs up must be serviced by a supporting processor (like Vantive).  Making your merchants switch processors in order to accept a more expensive payment instrument (240bps compared to debit pricing of $0.07-0.12) would seem to be a difficult sale. Quite frankly I didn’t see the weakness of Discover’s 3 party network until now.. it only acquires directly for top 100.. and is dependent on many other acquirers. Amex does not have this problem… paypal home depot

My guess is that Visa and MA will also throw up walls soon, but not sense in doing it now.. let the banks work feverishly to build a token machine.. only to find out that the tokens don’t fit in any “slots”.  The only bank globally to have worked all this out is JPMC with its new Visa deal, which bifurcates VisaNet to a new Chase version. Of course the other issuers will eventually ask for same… but these are 5 yr cycles.. All of this means V and MA will continue to rule the mainstream, and that any new competitor must have network control, issuer control and merchant control.

End Game

These rule and ownership battles make my head spin. Investing in this space is not for the faint of heart.  Perhaps the best way to really “change” payments is to first ride existing rails and establish a fantastic consumer/merchant value proposition .. THEN move that solution to a different network… or better yet enable a switch where payments are cleared on a least cost routing basis (like switching IP traffic).

Hopefully the Venture Community is aware of these pitched control battles: Network, wrapping, secure element, trust, card present, tokenization, … But information certainly does not flow well here. Just this week I learned of a start up about to launch a new P2P service built around Visa Money Transfer … allowing a user to “instantly” move money to another account.  Unfortunately they didn’t read my 2.5 yr old VMT Blog, or ensure it would work at ALL of the top 5 retail banks.

… I don’t have time to lay out the scenarios here.. but I like investment thesis that recognize DEBIT as equivalent to ACH…new rules may bring cost down from $0.21 to $0.07… Although PIN Debit and Signature debit both cost the same),  PIN debit is not routed through Visa/MA and operates under separate rules. For example, I love the way First Data and Cardspring are leveraging STAR for non payment data.. without any issuer participation. a VERY good model. Thus I see PIN debit as a ripe area for both for merchant led payment products, and for new bank products.

Issuers are just fuming over the fact that AMEX is completely untouched by Durbin and EU SEPA pricing.  Which is why I see Wells Fargo’s move to Amex as “possibly” strategic… is wells switching railroads? with a first “test” of affluent?.

US PIN Debit Consolidation

18 April

Fed Pin Debit

Two years ago, top 5 bank CEOs met every week during Durbin to discuss response. I believe they probably had a good plan as Debit is a very very popular payment product. Unfortunately BAC’s Moynihan jumped the gun and announced a “fee” for debit.  Consumers and press went ballistic.. I wish that BAC had just waited another few months to roll out it’s card linked offers product to show the new “value”  and tie the pricing to this new “value”. As the Chinese say

If you are patient in one moment of anger, you will escape a hundred days of sorrow

There have been quite a few excellent Fed studies out on Debit since my last blog on the topic (Real Time Transfers – Feb 2011):

From the Reference 2 aboveDebit bank loss - EPC

The network exclusivity provision and the merchant routing provision of Regulation II both give merchants more control in routing transactions to preferred networks. However, most banks’ way of complying with the prohibition of network exclusivity arrangements is to enable more than one PIN network on their debit cards, but not more  than one signature network. As a result, those merchants that accept  only signature transactions generally have not gained any increased  scope to choose from among different networks.

Among merchants that accept PIN debit transactions, many have taken advantage of their new control. The routing kc fed before and after reg 2provision of Regulation II allows them to pick the PIN network they prefer from among  those enabled on a given card. Their exercise of this control has altered  PIN debit networks’ market shares. Many merchants now avoid Visa’s Interlink network, the largest PIN network prior to the regulations, and  instead choose other PIN networks whenever possible. As a result, in  terms of transaction volume, Interlink has lost significant market share  to other PIN networks such as Maestro, Pulse, and STAR (Finkle; Daly). Through their new control over routing, merchants’ emerging influence over the market shares held by different PIN networks is likely  to increase competition among PIN networks for merchants….

Consumers appear to have shifted to some extent from signature debit to PIN debit as a result of the regulations. Regulated banks now have an incentive to promote PIN debit over signature debit, though that same incentive does not apply to exempt banks…Many regulated banks stopped offering rewards to debit card users, especially to signature debit users, and they may also have eliminated the PIN fees that were assessed in the past to some consumers for each PIN debit transaction. Merchants have also taken steps to steer customers toward the use of PIN debit.

From Reference 1 – with respect to PricingKC Fed small large merchant debit fee

Merchants’ new freedom to offer discounts based on payment method, brand, and product allows them to steer customers toward the payment methods that the merchants prefer—and thus to affect the market shares held by networks. For example, if signature networks set their interchange fees for exempt banks higher than those set by PIN networks, merchants may offer greater discounts to customers who use PIN debit. To retain transaction volume, signature networks may avoid setting their interchange fees significantly higher than those of PIN networks. In this way, merchants’ new flexibility in offering discounts causes networks to compete for merchants. Most merchants, however, have not yet taken advantage of this new power. Given the many different payment methods, brands, and products that merchants accept and the complexity of the fee structures, it will take time for merchants to determine whether and how to offer discounts based on payment method. For example, Kroger,
one of the nation’s largest grocery store chains, considers payment based discounts a very powerful tool for influencing customers’ payment choices (Clifford and Strom), but has not decided how to offer the discounts.

Thus we see a world where big merchants push PIN debit, small merchants are getting taken by ISOs who don’t even know to ask for PIN capability, with competition in pricing…. With signature debit going down, PIN debit use going up.. Visa’s Interlink hemorrhaging volume. For perspective, my estimates are that somewhat Approximately 15% of Visa’s Revenue comes from US debit (just 2% from PIN Debit Interlink). Does anyone now wonder why Visa wants “Chip and Signature”?kc fed before and after reg

Banks have lost over $7.7B annually because of this change. Remember that PIN debit is just an extension of the Bank’s ATM network..  why on earth would they want to continue to use 8 different independent networks to continue here? What if there were new products they could deliver on the PIN debit networks…. ?

PIN Debit seems to be ripe for consolidation and bank control. I have a strong bet that the US banks will consolidate around a single PIN provider within the next 18 months. Why? Probably more for defensive purposes.. Its also nice to be able to control the rules on your own network..

Perhaps more on this subject in a future blog.