Category Archives: NFC

Forces against NFC

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27 Sept 2012

Although I’m not known for short blog posts.. I thought I would try one. Like grabbing a cereal bar for breakfast instead of my normal 3 pancakes, eggs, bacon, OJ, coffee… it will of course leave me with a large empty place… but sometimes it’s good to be hungry.

I read Scott Loftness’ tweet on no need for dedicated POS terminals if phones take off. Also was thinking of Square’s strategy of enabling all consumers to have an account (think cloud wallet), and my blog earlier this week on EMV/Verifone’s imaginary vision of the future (contactless EMV).  As a side note Verifone is telling investors the retails will by a massive display payment terminal to market to their customers.. FUBAR! Take a look at how IBM values the POS business.

Forces against NFC

  1. Cloud Wallets. Much is made of NFCs ability to interact independent of network.. This is great.. but remember the POS system and payment terminal are always connected. How many of you remember the days where someone pulled the blue paper over the embossed card number? All that is needed is a key… voice print, loyalty card, qr code, …  There is no need for specialized hardware today.
  2. Credit card only. Issuers, Mobile Operators and Payment Networks worked to position NFC as a “premium service”. How many of you have seen contactless debit cards? Merchants are aware.. and top 20 retailers (with few exceptions) have walked away.
  3. POS systems. Why on earth would any small merchant want to buy a dedicated POS system with a cash drawer? I think we will see tablets really start to take over this space. Although I’m not a big fan of in aisle checkout… there are variants that could work. Even more so if you eliminated cash as a payment option.
  4. If tablets become POS systems…. Then Verifone is a short.. or a long short. In the next 3 years they will see a big bump in re-terminalization due to EMV. Here is a picture of a mobile chip and PIN reader my friends at Baclays put together. All of their UK consumers have one.
  5. Mobile phones.. there will be instances where consumers can pay for their purchases before they collect them, or for small merchants and small businesses where payment is to a sole proprietor  (remember there are 474,000 US restaurants with under 500 employees). IMHO THIS IS WHERE PAYPAL SHOULD FOCUS.
  6. UBIQUITY. No merchant is going to invest where only 2-3% of customers can use the product. There are not enough phones in the market, and not enough payment terminals (<200k in US) that support them
  7. No compelling value. NFC must do something else beyond payment… there are no payment problems. Therefore NFC must start with something like unlocking doors or beaming pictures..
  8. Supply chain chaos and standards. NFC will take off in homogeneous markets (or those dominated by a monopoly)  that can force a standard (Edy/Suica in Japan, Octopus, EZ-Link, The French, … ). Today’s phones largely feature an embedded NFC SE made by NXP. The carriers want SWP based solution but Gemalto can’t get the SIMs out the door. It also doesn’t help that NXP’s current chips can take only one card emulation application (only paypass, or only paywave.. but not both).. which means that the little sticker on my phone does just about everything I need.
  9. NFC is anti cloud.. everything is locked up inside this little secure vault.. it ONLY does POS payments. I can’t do a mobile checkout with an NFC phone….

Battle of the Cloud – Part 2

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29 August 2012

Previous Blog – Part 1 – May 11, 2012

Let’s update the Cloud Battle story and discuss events since my last post on the subject

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. (V.me is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc.   But what few understand is the implication for the physical payment world. This is what I was attempting to highlight with PayPal’s new plastic rolled out last week (see PayPal blog, and Target RedCard). If all of your payment information is stored in the cloud, then all that is needed at the POS is authentication of identity (see blog).

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives

Since May, the following “significant” events “in the battle” have occurred:

  • Retailers have launched MCX with Wal-Mart’s Mike Cook as the lead. I want to emphasize, this is not “mobile payments” but rather a low cost payment network (Cook talks about $0.05/payment). Some retailers will seek to integrate their loyalty card, others will create plastic (see Target RedCard), others will certainly couple with mobile. WMT will likely integrate with a virtual wallet that manages digital coupons (Coupons.com likely leading)
  • Apple has rolled out Passbook in June.. See my Blog, and hardware analysis from Anandtech of why there is no NFC.
  • PayPal had a marketing announcement with Discover. Why would you announce something like this with no customers? Paypal is expanding its network… but merchants are just laughing.. MCX wants a $0.05 payment, Durbin gave them a $0.21 payment and Paypal wants to get 180-250bps. As you can tell, I don’t think much of this, as the Merchants are still in control of their payment terminal. This is also not an exclusive deal with Discover. I expect 2 other major players to partner with Discover in next few months. Paypal just wanted to run with this announcement before the other products come out. I also want to emphasize that DFS is a BUY. They will be a partner of choice as they run a subscale 3 party network that can adapt much more quickly than V/MA. As a side note,  Paypal will likely expand distribution of their own plastic.  See related blog.
  • Google rolled out Wallet 1.5 on August 1 (see blog). This is one of the biggest moves in payments and provides an enormous retailer value proposition (aligned to MCX). Google didn’t follow PayPal, Passbook, or Microsoft.. they rolled out product that was 1.5 yrs in progress.  Google’s new cloud wallet allows the consumer to select any payment method, and provides the merchant with a debit rate (Bancorp non-Durbin 1.05% + $0.15 (note Google/Issuer can lower this for merchants, as any issuer could, this is a MAX rate). Google is CURRENTLY loosing money on the payment side of the business in hopes of making it up on the advertising side. This is no marketing announcement like Apple, Microsoft and Paypal.. this is a product announcement.. it is working today in my new Galaxy phone. This is also the first PRODUCTION cloud wallet for the POS. Apple, Amazon and Paypal dominate cloud wallets in eCommmerce and mCommerce. Google and Amex’s Revolution money are the only one’s doing it at the POS.
  • Square acquired all 30M Starbucks mobile payment customers (see Blog). Square has done a great job acquiring merchants.. but was hurting on the consumer side. Square wants to build network and needed a pop on the consumer side. Square’s business is pivoting toward marketing and consumer experience. Within the next year, the little Square doggle will be a thing of the past. Starbucks is committing to the Square register experience, and Square is relabeling “card case” to “Pay with Square”.
  • LevelUp is making payments “free” for merchants as part of a loyalty value proposition. This is an example deal.. expect more to follow. Issue is that different merchants have different priorities. LevelUp is focused in QSR/Casual Dining and is operating as part of a loyalty play. I’ve outline their revenue in this blog, don’t think it is sustainable unless they can move into acquisition.
  • ISIS has lost key executives in its product area, AT&T is rumored to have a NFC/Wallet RFP of its own out and even Verizon is planning to let Google go ahead and put its wallet on the Samsung Galaxy III phones.. after all what choice does it have?
  • Card linked offers and incentives in the cloud. No one is making money in this space, large retailers are not participating, hyper local merchants (who are interested) are very hard to sell to, and consumers don’t see relevant content (thus redemption rates under 2%).

Where are the cloud battle lines? Well most significantly the battle lines are forming away from NFC (as I stated in January). Even my old friends at Gartner have caught up and placed NFC in the trough of disillusionment. To restate, NFC is not bad technology.. but it delivers no “value” in itself beyond control. Mobile operators have consistently failed to build a business around a “control” strategy (see my Walled Garden Blog). In the  ISIS example they mandated use of credit cards only, as this higher credit interchange was the only way to make revenue. Well guess who pays the freight here? Yep the merchants…  Wal-Mart and its peers were not thrilled at giving issuers and MNOs 3.5% of sales for the privilege of accepting a mobile payment.

The Cloud battle is complex, as the strategies are about MUCH MORE THAN PAYMENT. Payment is the ubiquitous service that is the last phase of a successful marketing, engagement, shopping, selection, deliver, retention, loyalty process. Leaders from my vantage point:

Payment Networks:

  • Mastercard focused on acting in supporting role globally.
  • Discover similar to MA, but with much greater flexibility as it operates in a 3 party network and is both issuer and acquirer.
  • MCX – Not a leader yet, but has CEO mindshare of every top US retailer. They seem overly focused on the cost side. There is a very big whole in their customer acquisition strategy. MCX is bidding out its infrastructure now, my guess is that Discover or Target will win it.. and the the RFPs are just a way of keeping Banks “in the tent” to keep them from changing ACH rules to kill it like they did to Scott Grimes at Cap One (decoupled Debit).

Physical POS:

  • Google – has more consumer “accounts” than any company on the planet. Can it convert them to accounts with a linked payment instrument? Google also “touches” more customers, more times per day than any other company, its heavy influence in the shopping process positions it well with retailers. Also has the best retailer sales force of anyone on this list, as they bring in customers to retailers every day. Android/Google Wallet….
  • Square – Best customer experience hands down (register). It also has the most traction among small retailers

eCommerce/mCommerce:

  • Apple – expect Passbook to dominate mCommerce. It will be the killer app.
  • PayPal – Challenged in market adoption beyond eBay/GSI customer base. Top ecommerce sites like Amazon and Rakuten have their own integrated payment, also 50% of eCommerce/mCommerce goes through Cybersource which Visa acquired. Paypal’s future growth driven by international
  • Amazon – leading eCommerce/mCommerce player. When will it take one-click beyond Amazon? Amazon’s experience is best from end-end…. PayPal/Apple will operate around the periphery of non-Amazon purchases.
  • Rakuten – “Amazon of Japan” who now also owns buy.com. Fantastic experience and leading eCommerce loyalty program.

How many places do you want to store your payment credentials? Who do you trust to keep them? What data do you want providers to know about you?

From a macro economic perspective, total payment revenue for all major participants is just under $200B in the US. Total marketing spend in the US is over $750B. Total retail sales in the US is $2.37T (not including oil/gas, Fin services, T&E). Marketing is fundamentally broken… payments is not. Retail sales gross margin has been compressed from 4.2% in 2006 to 2.4% in 2010. Who is best able to execute on the combined retail and marketing pain points? Who can be retailer friendly? Consumer friendly? Marketing friendly?

I start my analysis with #1 the consumer value proposition, and #2 the merchant value proposition. Entities like Google, Paypal, Apple already have tremendous consumer relationships and traction. They thus have very few “acquisition” costs. However, these entities do bear the costs of changing customer behavior. There are many approaches for changing customer behavior:

  • Incent behavior – direct/indirect/merchant
  • Customer Experience (ex Square)
  • Service integration (reduce effort or # of parties)
  • Reduce risk – financial (security/anonymity…)
  • Reduce risk – purchasing (social, community reviews, …)
  • Value proposition in commerce process (indirect incentives)
  • Marketing
  • ..etc

Other groups like MCX and ISIS bear the cost of both customer “acquisition” AND behavior change for: Consumer, Merchant or Both. As I state previously. one of my favorite arcane books I’ve ever read was “Weak Links” I’m almost reluctant to recommend it because it is so good you may jump ahead of me on some of my investment hypothesis. One my favorite quotes from the book

Scale-free distribution (completely open networks) is not always the optimal solution to the requirement of cost efficiency. .. in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks.

Networks like V, MA, PayPal, Amex and DFS are working to participate in this new Macro economic opportunity. But established networks are hard to change

“The network forms around a function and other entities are attracted to this network (affinity) because of the function of both the central orchestrator and the other participants. Of course we all know this as the definition of Network Effects. Obviously every network must deliver value to at least 2 participants. Networks resist change because of this value exchange within the current network structure, in proportion to their size and activity.”

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives (new digital coupons).

The current chaos will abate when an entity delivers a substantial value proposition that attracts a critical mass of participants. Today most mobile solutions are just replacing a card form factor… this is NOT VALUE. I am currently placing my bets on solutions that merchants support (Square, Google, MCX, LevelUp, …) as this is a key “fault” of almost every other initiative.

Comments Appreciated (as always sorry for the typos…)

Google Wallet 2.0 – Who does not benefit?

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August 2, 2012

Yesterday I covered the winners… today I cover the flip side.

Mobile Operators

Most obvious is mobile operators payment efforts, at least those bent on controlling the NFC SE in a walled garden strategy. I covered this topic last month (Carriers as dumb pipes). As a refresh.. 5 years ago carriers were going to charge applications each and everytime they accessed the GPS.. you can see how that worked out…

Its really a shame.. Operators have tremendous distribution, brand, cash….  What they don’t seem to have is anyone that knows how to run a platform business (related blog). Running a platform is about creating a “sandbox where everyone can play and make money”.. Apple has it.. of course they also have 75% of mobile profits (related blog). Most of my frequent readers already know what I’ll say next: Control is NOT a value proposition.

The big problem with payments?  There aren’t any problems (and margins stink). Why focus on it? The mobile handset has the opportunity to do so much more. Google has an ad business which will greatly benefit from added payment information. It will be in a position to help retailers and consumers and deliver value (note I didn’t say banks). The MNOs don’t have a business that can leverage payments, and they are not the greatest at partnering. They couldn’t even work with Google… a company that built Wallet and Android for free. Just what were they trying to win? (related blog)

My STRONG recommendations to carriers: go partner w/ Google now.. If you thought Apple was a one time event you are sorely mistaken, google has more commerce assets (virtual and physical) than anyone in the world. Another recommendation? Focus where you can win easily, AND DELIVER VALUE (see KYC a $5B opp)

Big Banks

(At least the credit card divisions). Most of card teams were trying to position mobile as a “premium” payment service. Its not a total wash for you, given that Google is charging merchants regulated pre-paid rates while having to pay most of you full interchange… perhaps even CNP interchange. But while you see a quick win here remember that incentives can be tied to a card. If you don’t play nicely my guess is that you will see customers shift spend, particularly for small items.  Of course one big weakness of the Google wallet is the refund/return process.  Additionally, Google Mastercard consumer purchases will be covered under Reg E, vs the greater protections afforded consumers with a credit card under Reg Z.

The biggest bank loss however is Data.. not much of a problem today given the number of Samsung Nexus phones are in the market (.. with google wallet). But what if Google does issue their own contactless sticker.. like I have on the back of my iPhone? Why NFC at all… just a Google card to swipe would allow you to have all of the functionality. In the new Google wallet world, they will see all transaction data.. just like Paypal does. Difference Google knows how to use it in advertising.

Card Linked Offers

It just a guess.. but now I can have offers linked to any card I use.. For merchants TXVIA could create virtual pre-paid cards for you at no cost and let the “value” of the offer reside there. Basket level, or item level with POS integration. The writing is on the wall..

NFC Ecosystem

There are pros/cons here. If the carriers supported Google wallet it would be mostly a win.. We may actually see NFC handsets be common place… but not if people have to root their phone to install Google Wallet.  Apple will eventually put some sort of new combined SIM/NFC/BT radio in its phone (related blog). In this future Apple Passbook world I can guarantee the carriers won’t be keeping any version of the iPhone in a Garden.

Short term impacts with Google Wallet? The First Data TSM operates with Google as the SE owner and service provider, no SWP UICC chips, no OTA provisioning, …

Comments appreciated.

Google Wallet 2.0 – The Winners

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Today Google Wallet 2.0 launched (Google Blog announcement)

[youtube=http://www.youtube.com/watch?v=VuFVsaFCzsw]

Google will now allow me to add any card I want.. my Bank of America Debit, Citi Credit, my business Amex… My cards sit in the cloud and I can access them on the device at the POS, online, or for a mobile purchase. The device has a single card that acts as an “ID” that points to your account in the cloud. The gateway/acquirer then resolves this ID to the card (stored in the cloud) which you want to use and then processes an authorization with the corresponding issuer. Not all that different than how PayPal and Amazon work today (which card do you want to use)?

Google’s approach has empowered consumers and destroyed the ISIS Walled Garden Strategy. Banks no longer have to queue up to do OTA provisioning.. consumers just add their accounts. Retailers no longer have to take credit cards in mobile payment…

My view is that this is a huge leap forward, but there are at least 2 more steps to go. Allowing consumers to control the wallet must be followed by an ability for retailers to deliver value (independent of the latest phones). After all there are no payment problems in the market today (none of us ever left a store because they would not take our form of payment). Retailers are more concerned about driving top line sales growth, than bottom line card costs.. but the tools to do either are limited.

The wallet has the opportunity to be the “hub” of many new commerce experiences. What other company has the tools to create advertising campaigns? Shopping experiences?

A key “unknown” benefit is how broadly Google will expand the functionality of wallet outside of NFC. Afterall if I have only one master account.. I really don’t need an NFC phone.. I could use plastic or one of those stickers.  TXVia can certainly add value here.

Who are the winners?

  • Consumers. They control what goes in…
  • Retailers. Every retailer today should be thinking of having a pre-paid/gift/loyalty card with Google. Why not? Issuance is 100% electronic and should cost nothing. The other immediate benefit is lower cost (blended) due to debit mix and a new “platform” to offer targeted incentives (google offers) that is integrated into the payment.  Updated.. it looks like all Google wallet transactions are at regulated pre-paid debit rates. With Google wallet.. every transaction is at the lowest transaction price. Bancorp Bank has assets of $3.011B and is thus not covered under Dubin. Hence my best guess at the interchange is 1.05% plus a $0.15 (see comments below).
  • Small banks. Now your cards can go in the wallet … TODAY. You don’t have to pay ISIS that $1M after all.

Hey.. I could write more.. sorry for the short note. My previous blog gives a few other hints http://wp.me/pv8i-uv

Note the good discussion below.. my read is that the Google Card is a debit covered by durbin.. So merchants win big on card costs here. Everything is a debit…

Apple and NFC

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Apple and NFC..

Nothing really new here for the NFC crowd. No new information..  Purpose is to paint a picture by which investors can make a call.

Most of the issues associated with NFC today are NOT technical.. but rather business: What value can it bring? Who controls it? Who makes the money? How is it shared? For payments… NFC has been a complete bust (with the exception of Asia). Retailers just aren’t excited about the prospect of paying credit card interchange (3.5%) for the privilege of accepting a mobile payment which funds a 12 party supply chain  (necessary to make NFC work).

The WSJ (July 6, 2012) and I both have consistent information that Apple will NOT be rolling out NFC in the iPhone 5. If true, I believe Apple’s exec team is taking a brilliant approach to be a late follower here. Let everyone else pay the freight to educate the customer, and establish a high level retailer POS value proposition (with associated retail infrastructure). Apple is much better positioned to extend the App Store experience into mCommerce.. and control the customer end-end experience. Apple will also likely expand “selectively” into physical commerce areas like ticketing.

To be clear, I’m not positioning that Apple has run away from NFC.. but there has been no success to date and there is no reason for Apple to run into this space. In order to monetize and sort of physical POS solution, Apple must have a business structure that can orchestrate a very complex “physical commerce” value proposition. Keep in mind Apple doesn’t have much of a sales force to cover advertisers AND retailers globally. Rather than “focus” on the POS, or implementing standard NFC chipsets, I see Apple doing something “unique”… What is it?

I was meeting with senior NFC execs this week, and the consensus view is that Apple will likely redefine phone hardware architecture.  Most of you have read about Apple’s recent patent application which would allow the SIM to be logically placed within the SE. Also there are rumors about expanding the capabilities of the Radio and Controller to also cover Bluetooth functionality. The “value” that an integrated hardware solution? Not that much different than what NFC alone is capable of.. but it would greatly reduce footprint, power, time, and perhaps even expand “throughput” (example Accelerating/bypassing BT pairing: NFC is  424kb/s while Bluetooth V2.1 is 2.1 Mbit/s).

Although far from being an expert in this area, my summary view is that Apple recognizes the need for a secure radio and data store in the device that it can control.  A metaphore for an ID.  How do they want to control this ID? Well they certainly need to secure the wallet access (AuthenTec $356M last week, plus rumored IRIS scanning).

This approach is opposed to that of the carriers all of which are working very hard to “standardize” on an NFC architecture (Single Wire Protocol – SWP) that they will control. Apple’s plans are firmly in the opposite direction, and a brilliant business move. Giving carriers the control over this utility would be akin to letting them run an app store that they control.

Apple may be running much faster than anyone in the industry knows toward this vision. Perhaps they have already indigenously created this new combined secure element/UICC/BT Radio. Although I see no need for them to run with this early… But if they did create this capability in the iPhone 5 they will certainly have the control to govern how it is used.

What does this means for investors? Perhaps you start by asking Vivotech’s .. as they just folded up shop after 12 years. A fantastic team with a rock solid product line.. their fault? Betting  NFC would take off sooner.  Given Apple’s unique ability to capture mobile ecosystem profits it is always tough to find areas to nibble.  On the software side, how can new companies help Apple orchestrate value propositions in the physical world? Retail? Ticketing? Healthcare?.. The times.. they are a changin…

Apple Passbook: No NFC Here…

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I’ve covered this topic quite a few times

As most of us have known Apple has been out of the NFC game for some time (18mo+). It’s just amazing that the mainstream press can be so caught up in a disinformation hype cycle that seemed to have been started by some kind of patent application. Yesterday’s WSJ had a fantastic article on Apple’s plans.

What makes for a “successful” consumer wallet? From previous post:

Customer Trust, Customer Control, Convenience, Ubiquity (opposite of lock in), Intuitiveness, Experience in Use (buying, redeeming, accessing, ..), Security,

If I have a wallet that only accepts 3 cards that are not accepted at any of the top 20 retailers (ie ISIS), it is of little value. Why not let consumers control what goes in? This is where carriers must get to in order for NFC to survive. Even then, NFC phones are far from my recommendation. After all if your payment information is locked in a mobile phone how do you use it when you are at your computer buying something on Amazon? Locking information in a phone is just plain stupid in the age of the cloud.. most agree that individuals should have a their information in a cloud they control. The NFC zealots reading this blog will respond that it NFC doesn’t require a network and is more reliable… my response, the POS and payment terminals are connected.. NFC doesn’t need to hold the card in the SE.. it just needs some sort of identifier.. or in the Square cardcase example no NFC at all just your voice print. After all if there is no auth from the payment network.. the transaction will not happen.. so something is connected in 99%+ of card transactions.

I’m very impressed that Apple’s exec team has kept the iPhone away from NFC… strategy brilliance is an understatement. By expanding Apple’s ownership of Digital Goods (old blog here with financials) into mCommerce (ie physical goods bought via phone) and narrowly aligned Physical commerce (ex. Ticketing) they can maintain ownership of the entire consumer process.. from marketing, sales, purchase and “delivery”.

Apple’s unique ability to garner 75% of mobile handset profits is shifting from DESIGN to VALUE ORCHECTRATION (see blog). No one can orchestrate value in NFC (see 12 party mess).  What is truly ironic is that as the carriers spend hundreds of millions of dollars on NFC and their walled garden strategy to “force control”, Apple and Google will be further ahead in coordinating value in new networks. This value delivery outside of the mobile network will further cement carriers roles as dumb pipes (related blog).  This seems to support my hypothesis (often stated) that it is nearly impossible for legacy networks to adapt in delivering new value propositions.

NFC and Consumer Choice

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7 May 2012

Thinking about consumer choice today. As the MNOs think about how to lock up the SE and SE Management.. when does a consumer get to choose what is on their phone?

As most of you are aware, ISIS is charging each and every issuer for the “right” to put their cards on the phone. In a tweet 2 weeks ago I mentioned that all of the phones in market have a major problem: they can only support one card emulation application at a time. Although I’m not completely sure if this is a firmware issue or “silicone/memory” issue it relates to the storage on the NXP’s chip. Apparently the latest version’s of NXP’s chips don’t conform to Amendment C of Global Platform’s 2.2 Specification (supporting multiple card emulation apps).

http://www.globalplatform.org/mediapressview.asp?id=777

What this means is that your new NFC phone could have hundreds of Visa cards loaded.. or hundreds of MasterCards.. but the phone can’t support the signed java applets (card emulation apps) from Visa (paywave), Mastercard (paypass), Discover (zip), Amex (expressPay), Transit (…).. you get the picture.

Doesn’t everyone want a wallet where all of your cards can get stored? Visa, MA, Amex, .. plus loyalty, gift, … ?

My hope is that the market (and regulators) will push to keep consumer choice at the center of mobile phone wallets. If the carriers can’t lock down the SE, consumers will be able to choose the most effective option. Retailers know that the only cards willing to “PAY” to get in the ISIS wallet are credit cards.. which obviously impact their interest in accepting a 350bp payment product.

The mobile wallet that “wins” will be the one that offers consumers the most control. Letting consumers load any card they want.. without that card issuer first having to pay some sort of toll to the mobile operator. Also letting the consumer decide who gets access to what data. This last area is something that needs improvement beyond data that is stored in the SE. Right now apps are taking the approach of “take it or leave it” agreeements:.. we get your location, e-mail, contacts, usage, …  This terrible approach is leading to an unbelievable dissemination of data that is completely out of control. This is why HTML 5 will win.. Apps are becoming the paradigm by which companies obtain almost unlimited customer information.. and consumers will wake up soon.

As a side note, isn’t it amazing that this topic hasn’t been covered more broadly? Of course it speaks to the true uptake of mobile payments (at POS) in general..

My funny story: I went to the Duane Reade directly across from Penn Station last month. DR was a Google wallet launch retailer in NYC, with all of the beautiful marketing logos. I waved my phone to check out..  and the store manager was there behind the 8 cashiers.. he said “is that Google Wallet”.. I said no it was a Citi Sticker glued to the back of my iPhone.. I asked him how many purchases he has seen from people using their phones.. Answer “none in the last 2 months”… Across from Penn Station… wow..

Carriers as dumb pipes?

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25 April 2012

I just bought a brand new Galaxy Nexus on Google’s new play store today (https://play.google.com/store), very excited to have an unlocked GSM phone that I can take with me around the world. Better yet, I can now take advantage of Google wallet and many new NFC based applications..  independent of any carrier (… although the Sprint people are A+).
Given Apple’s tremendous earnings yesterday: 80% growth in iPhone shipments (30M), 150% year-over-year growth in iPad shipments with margins improving to 47%…. what does the future hold for carriers? If consumers go to the Apple store to select THE product will The Network be an afterthought? Its not just the MNOs who are on the short end of the stick, Retailers also loose when manufactures like Apple create an effective BRAND, PRODUCT and EXPERIENCE (see related USA Today article and Forbes).
How are the carriers responding? What are they doing to deliver new value or help the industries impacted by this new dynamic? They have gotten together to create an environment where they completely control everything: NFC (in the US it is a consortium called ISIS).  I was one of the first to break news of this consortium back in 2009, with some strong recommendations on their strategy (see Ecosystem or Desert).  If you were a retailer, or small company with limited resources, where would you place your bets? With Apple..? or a consortium of mobile operators that have been working for 3 yrs trying to get a pilot working across 12 different suppliers.

This week, I was struck by how similar the carriers “walled garden” NFC strategy is to previous attempts to create a “Walled Garden” . Why are the MNOs recycling the same control strategy? Remember Einstein said “the definition of insanity is doing the same thing over and over again, but expecting different results”.  As background, VZ (and most MNOs) love the “walled garden” strategy.

Version 1(2004-Present). BREW platform from Qualcomm (dumb phones).

Version 2 Handset capabilities

  1. Verizon invested over $300M in GPS “platform”, an investment they planned to recover by charging for Apps that wanted to use GPS. RIM was the first to realize that it could not deliver consumer features at odds with what VZ would authorize.
  2. Firethorn was the first payment related application that VZ promoted. Objective was to limit all consumers to Firethorn as the only approved “signed application” where consumers could check their bank balance. Banks were each asked for $1M to allow for their customers to check their balances on this MNO controlled application.. yeah.. great idea (2007)
  3. Search. $600M exclusive deal w/ MSFT in 2009. Unfortunately for MSFT, Android was not included agreement and then VZ make “Droid” THE key marketing theme.
  4. I could go on.. but

Version 3 NFC

  1. Control SE (http://tomnoyes.wordpress.com/2011/02/03/isis-platform-ecosystem-or-desert/)
  2. ISIS. Consensus is that the carriers will keep plugging along at this for 10 years..  however without talent, retailers and handsets I don’t see how they can sustain investment.
  3. Create a new BREW.. handset platform that leverages NFC and secure customer data.. payment (ISIS) is just one of the applications. Note that most carriers are in midst of issuing RFPs for SE management (my vote is for Sequent here). The objective of this effort is to create a “secure platform” where applications can leverage customer data (for a fee).

Would you want to “play” in a walled garden? The owner gets to make the rules and take the rug out from under your feet (ie MSFT $600M). Where the star (ie Apple) is able to negotiate special treatment or go over the top without you ever being aware? No way.. you can’t run a business like this. I wouldn’t even want to play..

Carriers must think about value creation before they can think about control. Apple earns its margin from brand and experience… they are not forcing people into their store. For example, the Samsung Galaxy Nexus is an unbelievable phone… easily on par with the iPhone.. But the carriers won’t let it in the market unless Google give them the keys to the SE.  It’s just crazy…My 11 yr old son can guess what happens next.. Google starts selling the phone directly (which I bought today). As most readers know, the US handset market is a very strange place (handset subsidies and post paid plans). The rest of the world buys their handsets and selects the carriers based upon cost/coverage. What if Google and Apple were to subsidize handsets through marketing, as opposed to anticipated spend? If telephone calls and data were routed through wi-fi whenever available? What do carriers have left?

Every point of “friction” which carriers create.. FURTHER ERODES their future profitability as this friction improves the profitability and market opportunities for companies going above, around and under them. Carrier business culture and experience all surrounds the walled garden “control” approach. This control approach works well for Apple as it has developed an integrated value proposition.. It does not work for the carriers that offer connectivity. To expand beyond connectivity carriers must create new services.. the must become orchestrators of value.. not controllers of handsets. In other words they need to shift from a “permission/transaction/payment” paradigm to  one of discovery->need->->fulfillment. (see my previous blog).Attention US Mobile operators… today your trajectory is headed toward dumb pipes.  You cannot deliver value through control.. no one trusts you.. and you can’t sustain investments to compete against Google, Apple, Facebook, …

What should you do? Where is the revenue opportunity? It is in value orchestration. You have direct consumer relationships… leverage them for marketing, authentication, personalization, awareness. The good news is that Hardware will peak and reach a “good enough” stage. If hardware is a commodity, then brands will begin to deteriorate.. and value orchestration will shift further from the handset node into the Cloud. If any operator agrees with this.. then ask why on earth are you locking all of this customer data inside a phone (NFC) where it cannot be used or sync’d with the cloud.

I will get off my soap box now.

BTW.. AT&T I fully appreciate that you can disable my new Nexus.. please dont make me go to an MNVO.. just another point of friction.

Digital Wallet Strategies

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Warning.. I ramble a bit in this one.

23 March 2012

Description: Mobile Market BreakdownDoes anyone remember Microsoft Wallet circa 1997 (See Wikipedia)? Digital wallets are certainly not a new phenomena. Today we are struck with eWallet saturation: Google Wallet, ISIS Wallet, Visa Wallet, iTunes accounts, Amazon Accounts, Square, PayPal, …  How many places must store all of my credentials?

For my own benefit I thought I would take a brief look at the history to determine what the future may look like (As the future holds the key for my investment decisions). With respect to Wallets, what are they? What are successes and why? What is the consumer value proposition? What are the risks? What does the future hold?

My last blogs on this topic were in November 2009, Investors Guide to Mobile Money, and in 2011 – Tough Start for Mobile Payments.

What is a Digital Wallet?

My all time favorite YouTube video definition is below (Courtesy of Google)

http://www.youtube.com/watch?v=gKGptWtzeaU

[youtube=http://www.youtube.com/watch?v=gKGptWtzeaU]

Proposed Definition: A consumer owned and controlled account that can store any electronic form of what is normally held in a physical wallet, including: payment, ID, coupons, loyalty, access cards, business cards, receipts, keys, passwords, shopping lists, …etc.

This definition sounds broad enough..

As a consumer, what would you think of having multiple physical wallets? I personally don’t have that many people I trust. Trust is a very important element to a consumer. Some of the information in my wallet is sensitive, and there is also a financial risk associated with loss of payment information (particularly outside of the US).  What kind of entity would want to assume the risk of holding all of this information?  Which reminds me of a story,

I was in a Board Meeting with a senior partner of a “Top 3” VC discussing consolidated sign on. A start up was proposing to hold all of the login credentials for all of your bank accounts. As the former internet head for both Wachovia and Citi I had some firm views on the topic and asked “who is going to take the risk if credentials are compromised”? I further explained “it is not a technology problem, but a risk problem.. Bank’s will not let someone keep their Customer’s keys if they can’t insure the risk”. As a side note, I also instituted a policy that if a customer discloses their credentials to anyone, they are responsible for any losses that result (sorry Yodlee).

Within a Digital Wallet, securing information AND giving Consumers the exclusive ability to control what is shared with whom is a challenge (beyond technology and trust). We thus have many limited “Wallets” that are constructed around specific purposes, for example Microsoft’s wallet has evolved to LiveID.  From a pure technology perspective, the mobile phone (with NFC) seems to present an opportunity to provide the Consumer with a device that can uniquely handle the security and authorization aspects of a holistic digital wallet. In my view, the challenges faced by the “phone as wallet” are business related. Per my definition above, a wallet should allow consumers to control what goes in and how it is used. Today we see the carriers (ex ISIS) create a platform based upon their control, allowing only cards that have paid a fee to enter into their wallet. I digress…

What makes for a successful wallet?

Customer Trust, Customer Control, Convenience, Ubiquity (opposite of lock in), Intuitiveness, Experience in Use (buying, redeeming, accessing, ..), Security,

If I have a wallet that only accepts 3 cards that are not accepted at any of the top 20 retailers (ie ISIS), it is of little value. Why not let consumers control what goes in? This is where carriers must get to in order for NFC to survive. Even then, NFC phones are far from my recommendation. After all if your payment information is locked in a mobile phone how do you use it when you are at your computer buying something on Amazon? Locking information in a phone is just plain stupid in the age of the cloud.. most agree that individuals should have a their information in a cloud they control. The NFC zealots reading this blog will respond that it NFC doesn’t require a network and is more reliable… my response, the POS and payment terminals are connected.. NFC doesn’t need to hold the card in the SE.. it just needs some sort of identifier.. or in the Square cardcase example no NFC at all just your voice print. After all if there is no auth from the payment network.. the transaction will not happen.. so something is connected in 99%+ of card transactions.

Consumer Value Proposition

Description: C:UserstomDocumentsPersonalblogIPP_3_clusters_labels.jpgMy primary digital wallet is Amazon, with Paypal as a close #2. The buying experiences are just superb, unfortunately neither extend well into the POS. I have a PayPal debit card I use here.. but I have a hard time justifying why I would use a paypal debit card that pulls money from a pre-funded account which is tied to my Bank of America Checking.. why not just use my BAC Debit Card? I don’t think I’m alone here.. The thought that comes to mind: why do I use PayPal at all? Convenience is certainly a key element, but I also really don’t like giving out all of my personal information to every vendor I do business with.  Why does any vendor need to know my name? Is there a business case for anonymity? For Readers in Germany I know your answer… of course there is.

Most Silicon Valley eWallet business cases are being built around data sharing and “closing the loop”. In a network analysis model, every step away from the optimal consumer experience (control, anonymity, ubiquity,..) impacts broad based adoption.  Alternatively, new value propositions (ex incentives, rewards, loyalty, …) can reverse entropy, but only within specific groups/clusters (that realize the value). Thus a highly fragmented world of wallets, each built around specific functions limited to narrow networks, where customers exercise only limited control and hence participate in a limited fashion.

Risks

My last blog on Payment Risk was associated with Square (I still don’t like the swipe, but I have eaten my shoe now that they have surpassed $4B GDV and have developed CardCase… which I love). Microsoft had grand visions for Wallet and Passport, and pulled back for a number of reasons. Globally, most consumers still have problems putting all of their information in one place. The Fed, OCC, FTC, CPFB, Banks have all been circling around the broad proliferation of consumer data.. what are the risks of having your payment instrument stored with 100s of vendors? While at the The Clearing House’s annual event, I was pinged by a JPM Chase exec.. what will be done to secure payment information?  At the policy level, many believe there is a national security risk in the compromise of our payment systems…  It is something all of the Banks are thinking about.

While cloud based storage of information sounds fantastic… there remains a gap in integrated controls, security and authentication. This is where I see both the US and EU taking action on consumer data access and controls much beyond what is now within PCI. Given today’s technology, there is little reason for any merchant to hold your actual credit card number.. yet it is still the case.

What business incentive is there for any entity to hold “unlimited” sensitive consumer information? If the information cannot be accessed without user consent? All of these factors will shape wallet functionality to either something focused within a given domain, or under complete control of the Consumer.

Wallet Strategies

1) Consumer Friendly.. Single store for all consumer information. Payment, loyalty, reciepts, … The players I see here are Google, Square. (note I acknowledge everyone at PayPal just rolled their eyes and point them to my Disclaimer above). Business case is around customer data access.

2) Marketplace focused. Obvious players here: Starbucks, Rakutan, Amazon, Apple, Paypal, Target Red Card. Objective: Deliver a fantastic customer experience in purchasing within a focused marketplace.

3) Form Factor/Device Focused. Mobile Operators, Card Networks, . Deliver technology and incent buyers/retailers to participate. This is not working out so well, exception is Edy.. may work in markets with dominant carrier.

4) Bank Consortium. We see this more in Europe at the moment, but I believe the US regulatory bodies are pushing banks to work together here.  Much more payment focused, and thus minimal consumer value… Banks/Fed must realize mobile is not about a new form factor, but a new value network.

5) Retail/Transit Consortium.  Transit is already clear leader here in Asia…. Transit actually resembles more of #2.  Where there is only one transit company provider I believe it is.. this Category is defined as one wallet working across multiple retailers.. I look at this as incentives tied to something like a decoupled debit.

6) Commercial. Example outbound payments, payroll distribution, global dividend payments – hyperWALLET.

7) Other???

Future of Wallets

“Limited Wallets” can obviously be very successful: Starbucks, PayPal, Amazon, Apple iTunes, Oyster, Edy, Suica, Octopus, hyperWallet…. But all started around an existing marketplace/system. In order for an independent wallet to thrive it must deliver value within a core network. My approach to evaluating retail payments evolves around a central hypothesis: payments support a commercial system, they are only the last phase of a long marketing, incentive, shopping, selection, and buying process.

Networks are resilient to change, this is both an asset and a hindrance. The value that is delivered within an existing payment network is tied to the commercial system in which it operates. This includes both business agreements AND technology, neither of which are easy to change. As the nature of retail changes (example payments, and incentives across virtual and physical channels) new “value exchange” networks will form. Existing payment networks will certainly attempt to change, but given their distributed ownership, nodal control over rules, and legacy infrastructure it will be “a challenge”.

In the US today, this is what is happening with Google Wallet, Bank initiatives to form “the next Visa” and Large US retailer’s plans to form a new payment network that they control. Today’s wallet initiatives are operating in a very dynamic landscape: retail is changing, technology is changing, new value networks are forming, new marketing platforms are emerging.. The margin is always better in orchestrating the interaction, than in coordinating the transaction. Thus I place my “wallet” bets in the short term with groups that can control the commercial marketplace (ie Apple, Amazon, eBay, Retailers, … ), and with groups that can orchestrate new value propositions (ie. Google, Square, hyperWallet, ..etc).

Have a great weekend… My Asia thoughts are next.

Worlds Largest mPayments Partnership?

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http://rfpconnect.com/news/2012/2/27/vodafone-and-visa-announce-world-s-largest-mobile-payments-partnership

This stuff gets harder to interpret every day. My guess is that Vodafone is integrating the “Visa Wallet + Prepaid” products into what Vodafone has built. This enables banks to accelerate adoption, and to “partner” w/ Vodafone for the defacto stored value account within a given market. This obviously simplifies the regulatory issues. Not a bad plan.. but how can you decipher this from the PR? By integrating the Visa Wallet (ex CYBS) they can also extend beyond POS … So key question to ask here.. WHERE is the stored value card held? In the phone alone?

Comments appreciated