26 June 2013
My last blogs on TCH tokens were rather controversial.. several of my bank friends will no longer take my calls.. while others are grateful that I’ve shown the light on a program they are scratching their heads on. I’m a reformed banker.. only partially cured of my myopia. Banks can choose to put me on the hit list or leverage this information to refocus their efforts toward delivering value (based upon feedback I’m getting on the other sides of the conversation). I can’t imagine trying to justify $200M cash burn on this business plan. Bank CEOs.. if you can’t understand the objective in 30 minutes it is not there.
Controversial points:
- Banks are working to build a network that circumvents V/MA
- Focus is replacing cards on file w/ token
- Value proposition ill formed and poorly thought through (perhaps liability shift)
- V/MA have their own token projects
- V is contemplating using tokens to replace VBV, this would step on bank initiative (as is Masterpass)
This is the CEO level strategy war going on right now. So thought it would be good to give a summary to the retail/merchant audience.
Banks
FSIs aren’t big fans of Durbin, or of not having control over their payment rails and data. If you talk about V.me or Masterpass to a card head their face will turn red. They are very frustrated that they can’t innovate in a 4 party network and that Amex is 5+ years ahead of them. Thus they are looking to build a new retail network that they can control.. not that there was much research on what the market needs.. it really didn’t matter. They knew what they wanted: Control and an “interchange” that is better than Durbin.
A very, very big bank “secret” is that fewer than 20 percent of any major issuer’s Credit Card portfolio has consumer cards that are transaction “thick” (more than 5 per month). Most credit cards are thus used for MAJOR purchases only. Banks want to increase credit card usage, lock customers into rich merchant funded reward schemes, AND increase the revenue of debit (when used). None of these objectives aligns to merchant needs.
How are the banks going to achieve their change? They have gotten together to create a new system. Of course anytime a group of competitors get together there are potential antitrust issues, hence they chose an existing entity in which to congregate. They also selected real issues like security, integrity, fraud, interbank clearing to focus their plans, and avoid regulatory scrutiny. These issues are bank issues, as well as the pricing/control issues above. Given these design constraints you can imagine what they developed.. a bank friendly solution that has no market context.
A core requirement for any token pilot is that it is transparent to consumer. The perfect model for token issuance is OTA card provisioning in the NFC world. From an economic perspective, Banks want to focus tokens at the POS as this is where the transaction volume is.. but NFC has not taken off, and there is no way for them to get POS adoption in light of MCX and general merchant resistance (although they continue to try). Thus token pilots are likely to be eCommerce focused (the have no choice.. ) and this puts them squarely in conflict with a very, very capable field of competitors with established solutions.
Network War
Per my blog Clusters Form, there are some VERY VERY high stakes battles being fought in the C suite. For example, Visa is clearly positioned to deliver eCommerce tokens (as a replacement for VBV). In this model Visa would simply redefine VBV which already has bank “acceptance”, and would subsequently reduce CNP interchange and shift liability to issuer. If they did this, it would step on the TCH token project completely. Thus the large issers are threatening mutiny (with exception of BAC?). My guess is that Visa explicitly agreed NOT to do this with JPM in context of their new agreement (analysts/institutional investors please ask question). With issuers threatening Visa mutiny… MA is not likely to be first to market on a similar solution w/ MasterPass.
What options does Visa/MA have to their own token project? Once one of them redefines tokens the other will follow.. if they don’t then COFs will not be theirs any longer.. they will have lost their acceptance brand. My guess is that the banks will give up on trying to do this themselves and will attempt to accomplish within the scope of V or MA’s rules.. But this defeats their primary control objective.
TCH Tokens – Value Proposition
As I stated last week in TCH Tokens: Any Volunteers, there are few merchants or wallet providers jumping at the chance to participate in this pilot (POS or eCommerce). They want desperately to start a POS pilot, and may be forced to partner with a QR code solution provider with little to no merchant penetration. Why the merchant resistance?
Banks are not looking to solve a merchant problem, but rather their own. How on earth can a merchant agree to participate in a pilot where rules are not defined, banks have more control, and the cost is higher than debit. The value proposition currently goes like this:
- Give me your PANs and Cards on File.. and I will give you a token. (see Battle of the Cloud Part 4 and Business Implications of Tokens)
- I may be able to take liability (not firmed up)
- Since its really hard for us to do anything new at the POS, we will probably start with mCommerce and eCommerce and we will greatly improve your conversion rate by “auto filling” our customer’s name and address with the token. Since you have that already (given you had the card in the first place), perhaps we won’t really do anything new.. but hey we think we can.
- You will have to change your processor to CMS or Elevon to process them
- You will also have to retrain your fraud/customer support to handle all the special rules, and your customers will have no idea that they had a token to begin with
- We want to price this higher than debit, but will give you a break on any debit cards.. but we won’t tell you which one is which.. because the customer may decide to switch (so we can lock them into rewards)
- We will be able to give you a great new rewards/service using your data in the future. Not quite there yet.. but understand we will be the gateway between you and your customer forever…. So we want to justify the increased fees we plan to charge you once you have a number that only we understand.
- We really love “partnerships” where we can control data.. so if you can please also give us any other data you have we may be able to use it as well.
- Rules/Chargebacks.. hmmm.. haven’t gotten there yet. But we want to.. can’t we wait?
Ok, I’m rather harsh here.. partly for humor, but also to show how far they have to go for anyone to take this. As I mentioned in V.me – Issuers Please Give me your Customers, there is enormous concentration in eCommerce: Cybersource, Amazon, eBay/PP/GSI and Walmart.com account for over 60%+ of eCommerce retail purchases. Would anyone use a wallet that they only used 1-2 times PER YEAR?
Think about how you buy today.. Amazon, Walmart.com, Staples, Apple itunes, Google Marketplace. How many other sites do you buy from? Where else do you key in your name address, card number? Airlines and hotels lead the list for me. Am I going to put all of my cards in V.me, Masterpass, or something else to help me (consumer)?
Let’s look at competing initiatives, do the banks really believe they can improve sales/conversions against these?
- #1 eCommerce Amazon – One Click, #2 eCommerce PayPal, #3 eCommerce Google Chrome (and now with Instant Buy on phone as well)
- #1 mCommerce Experience Apple iTunes, #2 Payfone – Leverages my phone/device to autofill everything, and phone/device/location information to manage fraud
- V.me – Autofills everything for eCom/mCom… can load any card
- Apple (Future)? See blog
- Existing services from CYBS/GSI
Acquisition
Assuming tokens are issued without customer action, Tokens still face a fundamental problem of acceptance. eCommerce acceptance is just as difficult as physical commerce acceptance (given the concentration of both), eCommerce/mCommerce just solves the problem of keeping tokens consumers transparency. Having a 16 digit number resolves most of the technical hurdles, however merchants must know (and agree to) the rules that surround accepting something that is not within their current processor agreement. What is the cost, who bears loss on fraud, return policy, refunds, rebates, compliance, support, …etc. Taking a new product with new rules is not something done in the dark of night. The idea of a bank POS token pilot based upon QR code is completely laughable.. as this is yet another “token”.. and it now requires the consumer to do “something”. Once I require consumer participation, I now compete (conceptually) with NFC, Starbucks, Level up, Apple passbook and thousands of other apps.
Most retailers I’ve spoken with take the view “we just won Durbin and are in the midst of steering customers to debit.. why on earth would I want to support a new product type that is more expensive AND gives banks more control? AND further enhances merchant funded rewards? Will this improve my sales”?
Message to Merchants:
Tell them what your real problems are.. and see what they do to propose to help. Tell them you do want to create better customer experiences both online and off line.. but when customers walk in your door they are not “Bank customers” … but yours. 200 years ago merchant banks were focused on helping merchants grow through industry insight and access to capital. How has your bank helped you grow lately?
Message to Banks
Listen, focus, find a real problem to solve for your merchant customers and consumers. Why do most product searches start on Amazon? What community have you enabled? What services do you perform for that 2% of transactions
Message to Acquirers
You have the merchant relationship and are best positioned for new data services.. you just need a consumer facing partner (Apple, Google, Amazon, …). I see great new things in your future.. particularly if you can deliver Least Cost Routing to Merchants. Perhaps the token platform should start with YOU.
Food for thought…
If you were going to redesign payments.. as an engineer… how should it work? Your money is with one institution that can communicate to any company.
Option 1
- Bank issues token to consumer
- Consumer Presents token to a merchant
- Merchant passes token to 3rd party that can route token to payment network
- Payment network routes token to bank
- Bank authorizes transaction
- Payment network sends authorization to merchant service provider
- Merchant receives authorization
Option 2 (Sofort, push payments, Debit Consolidation)
- Consumer instructs bank to send funds to merchant
- Merchant confirms funds are received