Payments – Wrapping, Rules, Acquiring and Tokens

if Google had challenges pulling off POS innovation (after ~$1B in investment), rest assured you will too. Banks are well positioned to throw sand in your gears … focus on delivering value within merchant –consumer relationship.

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Private Label.. “New” Competitive Environment?

Clearly there are opportunities for new retailer friendly networks. The new incremental value TO BE delivered is centered around influencing and rewarding the (consumer in partnership with merchants). Given that retailers compete with each other, loyalty is thus useless for retailers which don’t offer competitive products at competitive rates. Thus a “community” of retailers is not as valuable as a “community” of consumers (ie Facebook, Twitter, Android, Apple). Thus platforms which serve the community of consumers will be much more effective.

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PayPal and Home Depot

There are few “payment problems” at the POS. For example, how often do you go to Home Depot and forget your wallet? Or go home empty handed because Home Depot wouldn’t accept your form of payment. Payment in and of itself is only the last phase of a long: product, marketing, retailing, pricing, selection, distribution and delivery buying process.

10 Jan 2012

Historically I’ve been a big PayPal fan, and still am. I have a PayPal Debit card that I used this morning… and use PP every chance I get online. The online checkout process is just fantastic. In the good old days I earned more money from my PayPal money market then I did from my bank (savings and DDA), so my preference was always to keep a balance with them. Sadly this is no longer the case.

In my last post on PayPal (PayPal at the POS – Nov 18, 2011) I described PayPal’s challenges at the physical POS:

PayPal has no tools in its shed to deliver incremental value within a PHYSICAL commerce orchestration role.

There are few “payment problems” at the POS. For example, how often do you go to Home Depot and forget your wallet? Or go home empty handed because Home Depot wouldn’t accept your form of payment? Payment in and of itself is only the last phase of a long: product, marketing, retailing, pricing, selection, distribution and delivery buying process. Most retailers strongly believe that the cost of this last “payment” process has been disproportionately high relative to the value it brings. This is the key strategic battle being fought today in “mobile payments”. Banks and the card networks are trying their best to make “mobile payment” a premium service tied to 300bps+ cards… while retailers and manufactures are looking for solutions that will enable them to create new buying experiences. PayPal’s solution may bridge this transaction cost gap (blended rate), but does very little  to address the physical buying process.

In the virtual world eBay is the lead orchestrator in this process (on its marketplace), as is Amazon. Key to Amazon’s and eBay’s ability to serve, as virtual world orchestrators, are their ability to control the buying process (end-end) AND the data.

However in the physical world, the buying process  is highly fragmented. The value that PayPal brings to Home Depot today is based upon their current product capabilities (payment + ?) and customer base (100M+ globally). If you were running store operations at Home Depot, what are you trying to accomplish with PayPal?

  • Decrease transaction cost? Perhaps Home Depot has a high credit transaction mix and PayPal’s 200bps (my guess) cost is a net savings
  • Increase basket size? Can Paypal incent customers to buy more
  • Increase total annual sales? Get existing customers to buy more over the year
  • Increase gross margin? Example set prices higher on shelf, as PayPal customers will get unique custom pricing
  • Increase marketing effectiveness? Drive sales of targeted merchandise?
  • Increase Loyalty? Decrease trips to competitors, increase share of wallet, …etc

I’m fortunate to have led teams at Oracle and 41st Parameter (a KP start up) that worked with some of the World’s largest Retailers (online and physical)….. It is based on this perspective that I see the following business issues with PayPal-Home Depot approach:

1. Incentive to use payment instrument. As a consumer why would I want to pay with my phone number? I know if I use my Amex card I get points.. what do I get here?

2. Home Depot value. What are the metrics around the pilot and what is success? I can’t imagine how this will drive sales or margin. eBay does not market, and if they did will consumers see the price for item on eBay? eBay is a competitor to most physical retailers.. a hyper efficient marketplace. eBay has few tools to market and influence a customer during the buying process..  I’m sure PayPal has develop some very cool instore tools.. but hey Home Depot could do that themselves.

3. Consumer protections. The reason I use a credit card at Home Depot are my Reg Z consumer protections. What happens if I have a dispute? Or want to return merchandise?

4. No need for PayPal. This is actually my number one reason.. Home Depot will eventually wake up and realize that they can keep the phone number based checkout.. but use it to ask the customer if they would like to pay with the same payment instrument they used last time. There is no need for PayPal anywhere in this process. This is what happens for me at my local grocery store today (Food Lion).

Make no mistake, I do like the idea of customers giving their phone number at the POS…  but it is the retailers that should use this data to make an informed decision on payment instrument choice AND loyalty incentive (example Target’s decoupled debit 5% back, or Payfone/Verizon with VZ incentives).

As a side note, Patrick’s comments on my Galaxy Nexus blog led me to update my disclosure, and restate the obvious: my views are biased (no secret to my Obopay and Square friends). Today’s blog is consistent with what I have been telling eBay’s institutional investors.. there is plenty of runway for PayPal globally.. but physical POS is a distraction and they don’t have the physical retail team to tackle it. There are no payment problems at the POS.. per yesterday’s blog, the REAL opportunity is in rewiring commerce in ways which enable manufactures, consumers and retailers to interact.   eBay’s virtual marketplace is a negative to most physical retailers.. as is Amazon’s.  Retailers are looking for solutions which will increase sales and decrease transaction cost. A platform which begins with a new marketing  paradigm (ex. Google) is much more likely to draw participation, particularly in a pay for performance model.  If this hypothesis holds, what companies are best positioned to influence a customer before they buy?

Also see Googlization of Financial Services.. 

Target REDCard – Back to the Future?

Congrats to Target on a great launch. Is this the beginning of more store cards? What is the “tipping point” which makes this model attractive to other retailers? Will customers take one more piece of plastic in their wallet? Can Target sustain this level of rewards, or will they look to target incentives after critical mass of acquisition? Will merchant acquirers and processors respond with new services?

Target’s 10-Q was published Friday for quarter ending 10/30/10. I’ve started following Target’s financial services performance given the US launch of their new REDCard decoupled debit.  All of this seems a little like back to the future… 40 years ago each store had their own closed loop branded card, 100 years ago small stores offered their customers store credit. Target’s innovation is creating a card that couples 0% interchange, with loyalty program that they control, in an infrastructure that already exists (Target’s card group and Target bank).

Financial services execs within: big banks, retailers and the payment networks are keeping a close eye on this product. Target has a very unique competency in payments through its ownership of Target Bank and associate card processing. Historically, Target’s card portfolio has been either a millstone or a jetpack. REDCard takes out the majority of the credit risk (aka the millstone) and leverages the card processing infrastructure to provided a competitive advantage.

The REDCard launch looks like a smashing success, and through the 10-Q we can estimate the initial adoption for the 15 days within the national launch (adding a small base within the Kansas City test market).  On page 14 and 17 we see that Target accounts for REDCard’s 5% rebate as reduction in sales, with the card unit reimbursing a portion of this cost (operations and marketing). In other words the “net cost” of to the card unit: REDCard’s 5% less card processing costs (ie interchange, …etc). 

  • Reimbursed amount: $26M
  • Less 10% one coupon run off: $19M (Estimated).
  • Card Net Reimbursement for REDCard: $7M

Red Card TPV (Assuming 200bps average cost of payment)

REDCard 15day TPV = $7M/(500bps-200bps) = $233M

(out of quarterly sales of $15.2B)

Admittedly, I do not have a way to resolve the difference between this number and the market penetration number below (from 10-Q). As stated below REDCard includes Target Credit card, Target Visa Credit Card, and Target Debit Card. When will these cards recieve the 5% off? Perhaps after new terms are agreed to and deposit accounts are linked (comments appreciated).

Beginning April 2010, all new qualified credit card applicants receive the Target Card, and we no longer issue the Target Visa to credit card applicants. Existing Target Visa cardholders are not affected. Beginning October 2010, guests receive a 5 percent discount on virtually all purchases at check−out every day when they use a REDcard at any Target store or on Target.com. Target’s REDcards include the Target Credit Card, Target Visa Credit Card and Target Debit Card. This new REDcard rewards program replaced the existing rewards program in which account holders received an initial 10 percent−off coupon for opening the account and earned points toward a 10 percent−off coupon on subsequent purchases. These changes are intended to simplify the program and to generate profitable incremental retail sales.

We monitor the percentage of store sales that are paid for using REDcards (REDcard Penetration), because our internal analysis has indicated that a meaningful portion of the incremental purchases on our REDcards are also incremental sales for Target, with the remainder of the incremental purchases on the REDcards representing a shift in tender type.

Note a) on Pg 17

Loyalty Program discounts are recorded as reductions to sales in our Retail Segment. Effective with the October 2010 nationwide launch of our new 5% REDcard rewards loyalty program, we changed the formula under which our Credit Card segment reimburses our Retail Segment to better align with the attributes of the new program. In the three months and nine months ended October 30, 2010, these reimbursed amounts were $26 million and $60 million, respectively, compared with $19 million and $59 million in the corresponding periods in 2009. In all periods these amounts were recorded as reductions to SG&A expenses within the Retail Segment and increases to operations and marketing expenses within the Credit Card Segment.

Congrats to Target on a great launch. Already we see some of their strategic plans to refocus the across the board 5% incentive to something more “targeted” (pardon the pun). As reported in Mashable, ShopKick is being trialed in 242 stores.  I would hope Target looks to white label this to make it their own service, unless they have an equity piece to incent them to build ShopKick’s network. Issue here is that they checkout process is still rather complex. The great thing about ShopKick is that it is focused on keeping foot traffic in the store when a prospective buyer finds a lower price somewhere else, shopKick can help generate a specialized offer to keep them. This works well for big ticked items, but for more than 1-3 items it will be a nightmare as the POS integration is not there.

Is this the beginning of more store cards? What is the “tipping point” which makes this model attractive to other retailers? Will customers take one more piece of plastic in their wallet? Can Target sustain this level of rewards, or will they look to target incentives after critical mass of acquisition? Will merchant acquirers and processors respond with new services?

The competitive barriers are high, as bank licenses and card teams are not formed overnight.  How would I leapfrog Target? First tell me where I go to buy a Flux Capacitor?

Decoupled Debit

Retail Payments over the next 20 years are likely to morph substantially from their current issuer/network dominance. In addition to regulatory changes, new technologies and new value networks are creating a new competitive dynamic which will bring more than $5-10B in capital investment into the payments within the next 2-3 years.

8 November 2010

Winston Churchill may have been referring to Payment systems in the US when he said:

It is a riddle, wrapped in a mystery, inside an enigma

The macro economic impacts of the recent US card legislation portend substantial business change for Visa and Mastercard. The US debit card market is soon to resemble Australia and Canada with other countries soon to follow (See China and India). Retail Payments over the next 20 years are likely to morph substantially from their current issuer/network dominance. In addition to regulatory changes, new technologies and new value networks are creating a new competitive dynamic which will bring more than $5-10B in capital investment into the payments within the next 2-3 years.

My wife’s visit to Target this week prompted a revisit to the decoupled debit space. Target’s value proposition: hand me your check and sign a release form, you will then receive a RedCard linked to your checking account and good for 5% off all future purchases. Will we see more of this type of value proposition (which Durbin enables through its steering provision)?

From TSYS

Decoupled debit is interesting for several reasons:

  1. The issuer is not required to be a bank in order to offer an account and issue a card
  2. The products can exist as private label products or co-branded products
  3. The products can potentially build significant loyalty
  4. The products reduce costs when delivered and managed correctly
  5. The products leverage the existing payments infrastructure and standards

Retail Business Case

Retailers have a different mindset when it comes to alternative or decoupled products because they are stakeholders in the product, not just the transaction. They look at the product as a way to help them:

  • Reduce cost of payments
  • Build loyalty
  • Offer merchant-designed promotions
  • Drive more store sales
  • Segment and target customer groups
  • Leverage ‘spend information’

For those outside the US I recommend reading: