Part 3 – Internet 2.5 – The Next “Wave” is Here

Payments are transforming the internet as the common trust function: Embedded Payments, Embedded Finance and Wallets

Happy After Thanksgiving! Hope everyone was able to enjoy a wonderful time with family and friends. Today is the 3rd installment of the series, a long blog. 
The next big network wave is here. Call it web 2.5 or 3.0, but the integration of payments into “everything” is a major event. Payments are the “trust layer” that TRANSFORM anonymous nodes providing uncertain service into known, defined and guaranteed service providers. Effective communities require value exchange and “trust”. The payment trust function enables networks to evolve from “cost free” discovery and information sharing, into transactional resource/service exchange: from read-write to read-write-execute. Sure we could call the wave “trust” but the only ubiquitous “trust network” is payments so I prefer to keep payment wave as the naming convention.

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Part 2 – The Power of Bank Networks

Last year I made a provocative statement “Visa and Mastercard have NEVER lost share in a market where they have gained a foothold”. Today I will work to give a basis as to why.  V/MA continue to succeed despite the efforts of regulators and Nobel winning economists. Why?

The Bull Case for V/MA (24 pages). 

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Part 1 – US Payments Environment covered the complexity of the US payment environment and the challenges faced by top banks in modernizing their systems (where all systems live forever). There are many types of payments: bill payments, A2A, P2P, wires.. Today the focus is on how banks intermediate commerce. Banks MUST have networks as every bank can’t connect to every consumer/merchant. Effective Bank networks (aka rails) are NOT a commodity service, but one that allows the banks to leverage their unique ability to assume risk.

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Merchants Tokenize – eCom Wallet Challenges

Banks want the ability to provision cards to approved wallets but they don’t have this position in eCom. PayPal, Amazon, ApplePay, have all worked directly with the consumer to have them register their card. This horse has left the gate. 

UPDATE – Nov 29 2022 – Note that I have conflated the relationship between SRC and 3DS 2.0. 3DS 2.0 is the authentication protocol used by SRC. 3DS 2.0 has been widely adopted as a mandatory replacement to 3DS 1.0. Part of the driver for adoption was the EU SCA mandate. SRC has NOT been widely adopted as it is a fairly broken consumer experience at the moment. 

I’m at M2020 today and it has been a “back to normal” fantastic event. Let me put my “merchant hat” on for a story from their perspective.

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Apple Launches High Yield Savings

Apple DOES NOT want to be a bank. They want to create great consumer experiences and a $0 fee proposition for consumers

Apple and Goldman Sachs announced the forthcoming launch of high yield deposit account focused on increasing the value of Apple Card’s Daily Cash rewards. Operating as a kind of rewards sweep account, customers that register for the new account will have “their Daily Cash [move] into a new high-yield Savings account from Goldman Sachs”. 

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US Payments Environment – Something Big – 5 Part Series

Part 1 – Assessing the Environment and Setting the Focus  (part 2  – Power of Bank Networks)

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Must read FT article “How JPMC’s plan to kill credit cards split the bank”. The article discusses Jamie Dimon’s internal mandate to drive a new payment network. I was shocked with the level of internal org quotes here.  In my view, Jamie is the best bank CEOs in history (based on performance and talent coming out of JPMC). As a former banker, I know how hard it is to move the ship.  However, FT is wrong. Chase’s efforts ARE NOT about killing credit cards, but rather creating something much bigger.

This is a long blog..

Continue reading “US Payments Environment – Something Big – 5 Part Series”

Pay By Bank – Where does it work and why?

Pay by Bank (aka Push Payments) are tremendous efforts driven by local market bank groups. Their core success is in cash replacement (ex P2P) and where there is high consumer-merchant trust (ie bill pay/recurring payments). Data clearly show that Push Payments are NOT a threat to V/MA but part of a rising electronic payment “tide” that lifts all boats. 

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Friday I was a tad “let down” in the Sionic/TCH/MX release of Pay-by-Bank. Per my blog on Google/TCH launch and Google P2P I was anticipating something much bigger. To be clear I firmly believe that TCH is working on an “ApplePay Competitor”, which will entail TCH tokens inside of Google’s phone, but this will be 3-6 months out.  Per the blogs above, I see neither pay-by-bank nor TCH Tokens in Google Pay as a threat to V/MA. 

Today I thought I would drill down into “pay by bank”, the dynamics of why it works in some markets, and why I see little threat to V/MA in replacing core cards in eCom or at POS.

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Google/TCH Launch – Banks Hire New Network CEO

Something is launching next week (rumor 8/23) with Google, TCH and at least 4 banks. The banks have just hired a new CEO to run it with a “network background”.

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September 7 BEFORE YOU READ. This blog is dated. 3 key updates

  1. The launch was a very small TCH RTP effort. Forbes Article on Launch of Pay by Bank using TCH. Google’s role seems to be limited to hosting servers in the Google Cloud. This was NOT the big announcement I thought was coming. It looks like the TCH tokens in Google Wallet will be a few more months away.
  2. TCH’s primary focus this year is an eCom wallet focused on the Secure Remote Commerce Model (see blog)
  3. Neither Apple nor Google are involved in any of these activities, yet Google is working to pilot both FedNow and TCH RTP to leverage their India UPI success.

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Something is launching next week (rumor 8/23 pilot) with Google, TCH and at least 4 banks. The banks have just hired a new CEO to run it with a “network background”. This is likely a new consortium, and we will see changes in where the assets of TCH, Akoya and Early Warning line up. This CEO will be tasked with creating a new network to “compete with ApplePay” as the premier mobile payment platform.

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Durbin 2 – Short Update

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What are the new Durbin’s legislative prospects? A: Not at all likely (<10% probability)

Top retailers spent this week meeting with Bank CEOs trying to convince them to support the new Durbin legislation. Their pitch was to enable bi-lateral deals, “new products” and avoid network rules (see blog). Banks did not seem to bite, as they remembered the lessons of Durbin 1:

  • Only largest merchants benefited from dual routing
  • Consumers lost in debit rewards (ie keep the change), increased bank account fees, and no merchant pass-through of savings
  • Acquirers/processors did not pass through fee reductions to most merchants
  • Networks recovered lost revenue through merchant fees
  • Large banks lost competitive advantage as smaller “exempt” banks under $10B operated under different rules
  • See WSJ article

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TCH Tokens in eCom SRC Model

TCH tokens will be in Apple/Google in next 6 months with Request for Payment as the primary scheme

Part 1 – Current US Routing Rules

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UPDATE – Nov 29 2022 – Note that I have conflated the relationship between SRC and 3DS 2.0. 3DS 2.0 is the authentication protocol used by SRC. 3DS 2.0 has been widely adopted as a mandatory replacement to 3DS 1.0. Part of the driver for adoption was the EU SCA mandate. SRC has NOT been widely adopted as it is a fairly broken consumer experience at the moment. 

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