Google+Softcard Levels Field Against Apple

24 Feb 2014

Well done Google. As predicted last month, Google announced last night that it had acquired “some exciting technology and IP from Softcard”. The price? My guess is around $50-60M, plus multi year revenue share (below). This is a FAR cry from the $3-$4 BILLION that these same Mobile Operators wanted for “NFC RIGHTS” in 2011. Google proposed a rev share back then too.. but MNOs were convinced they could go it alone. After dropping almost a billion in ISIS/Softcard with no future revenue of any kind in sight the drivers of the deal were obvious. Not only did carriers need an exit for their investment, they needed a partnership that gives them a role in the future of mCommerce.

What technology will stay? The SE Keys and the vending machine acceptance terminals.. seriously.. 98% of what ISIS/Softcard was is completely dead. My biggest unknown? I would love to see if Amex Serve could pick up the pre-paid card from Mastercard.. as the banks wanted to beat up my good friend Ed McLaughlin for doing what I still think was one of the best most innovative deals ever (Google pre-paid).SONY DSC

What did Google get? MANDATORY GOOGLE WALLET. That’s right, now EVERY ANDROID phone sold by the carriers will have wallet installed. This addresses a key advantage that Apple has in mandating an iTunes account (with credit card) for activating the iPhone. Apple’s brilliant registration process allowed it to know its customers (ID, card on file) where Android/Google did not. Many analysts believe that this ID/Payment deficiency is THE KEY reason why Apple’s environment is 8x-10x more profitable with less than 20% of the handsets. Now Google can compete in all things which require identity+payment. Not JUST in buying apps/music in Google Play, but in orchestrating commerce and brokering identity. I cannot understate the win here for Google. A brilliant move, and I firmly believe that this was the primary driver of the deal. Don’t look at this as a ApplePay competitive thing, it is about enabling Google to identify every Android holder as a default “opt in” during phone activation (iTunes Account Mandatory = Wallet Account Mandatory).

The Carriers? A partner that will share revenue. Where Apple takes 15bps for itself, my guess is that Google will give that to the MNOs, plus some revenue share for play services. My TOP 2015 prediction was that this would be the year of partnerships.. This is certainly my top new one for the year. MNOs are losing sleep about Apple’s unmatched “walled garden”, no one plays but Apple here. Google is developing an open model and this deal may be the first template for MNO/Platform revenue sharing.

Banks? Google will likely slowly “roll out” of its Google Wallet Card (also see TXVIA blog) which wrapped all other cards in a Mastercard Debit. Banks will be able to sign up for Google Wallet through network agreements just as they do for ApplePay today (at same rates/rules). This will mean that the networks will provision bank cards as tokens, and that Google will also benefit from forthcoming CNP token rules this summer. The primary difference in GW operation is HCE+Tokens (see blog). The Google Wallet model is not dependent on the SE Keys, or SD storage.. but it CAN operate in a non HCE model (from its GW 1.0 lineage).

Payment Networks. BIG WIN. Cards are the defacto standard for everything in mobile. I’m interested to see if the networks recognize (certify) the HCE card emulation application, as of 3 months ago it was still not certified. My belief is that they certify as part of tokenization scheme acceptance. This is a funny side story in itself. Most would ask how Google Wallet could run a non-certified card emulation app. Remember that the ONLY card being emulated was a Google owned mastercard debit.. just a brilliant work around. Note that in ApplePlay, Apple operates as a tier 1 token requestor in the current ApplePay model, and V/MA/Amex are tier 2 token requestors (see this excellent blog by SimplyTapp). In the Google model Visa and Mastercard will act as both Tier 1 and Tier 2 token requestors.

Big Losers? Samsung. OUCH!! No wonder they had to buy loop. Their new wallet strategy was to have a DUAL NFC/LOOP wallet. Google just got all the SE keys for the Samsung Phones. This means that Samsung’s wallet will only work on new phones.. a rather rough place to start.  Paypal.. with the birth of a new CNP scheme this summer driving ApplePay and Google Wallet beyond Apps to mCom checkout.. Paypal has no future in Mobile…  Except in emerging markets.

More to come.. but wanted to get this out today.

2015 Predictions

3 February 2015

Payments, commerce, data and mobile is this blog’s focus. I’m very very fortunate to have so many great friends, customers and partners in this area. My thoughts are not my own, as I’m greatly influenced by my “environment”.

I’ve made many new friends because of this blog. The funny story that comes to mind was in August of last year when the CEO of a Fortune 50 company comes into the room and says “ahh.. the INFAMOUS Tom Noyes”…  (never a good way to start off a first date.. but we had a good laugh and thrilled he reads my blog.. ). Honest dialog has a way of creating great friendships. Thanks to all of you for providing such a fantastic environment! You make writing this thing fun.

2014 Prediction Eval

Before you bother reading my 2015 predictions you should probably see if it is worth your time. Best way is to evaluate what I projected last year in my 2014 Predictions

  • Consumer Privacy. Grade – C. Not much happened in 2014 on consumer side. I’m holding with my prediction, just not certain of timing and “tipping point”. How will we know when it happens? Imagine a Sony like incident with consumer data.. Regulated businesses like MNOs and Banks are highly attuned, Apple is the best in class here (consumer champion of privacy see Blog). The Ad industry is dependent upon tracking and data sharing in a very, very grey market approach. There is a better way… 2014 is perhaps the year of “awareness” with Snowden, DEA tracking license plates, State department keeping all of our phone records, to new super cookies on mobile. The next logical phase is ACTION.
  • Retail banking. Grade – A. Huge transformations going on. Prepaid and GPR products are segments growing at over 35% CAGR, US branch footprints are shrinking (see Blog)
  • Debit Volume. Grade – D. Not much going on here, after the DC court of appeals struck down Judge Leon’s ruling on debit interchange (March 2014).  Not much consolidation in PIN debit either. I do believe US debit will evolve to look like Canada’s Interact and Australia’s EFTPOS.
  • Mobile BEACONS. Grade – F. Nothing happening in 2014. Looks like more of a 2016 thing. I’m holding to my projection.. but missed timing completely.. thought Apple would launch beacons at their Sept 9th
  • mCommerce Payments. Grade – B. Summer 2015 is where we will see substantial progress. We see that the networks have turned over the new 3DS CNP scheme to EMVco last month (see link). As Payments move into the OS (see blog), Paypal doesn’t have one. Amazon, Google, Apple, will make SIGNIFICANT dents in Paypal as the platformcontrols authentication and authorization. Amex/Visa/MA’s new rules on tokens, combined with consumer privacy concerns, will accelerate the trend.
  • Specialized HardwareGrade Gives way to Commodity Hardware- Grade A.. makes way for commodity hardware and software. Launch of POYNT and CLOVR are best examples.
  • Host Card Emulation. Grade – B (for 2014), Grade A (by August 2015). Google did indeed push HCE into Android. With the death of ISIS and SEs in US phones.. things will be heating up in 2015 with a new Google launch.
  • EMV. Grade – D?. It appears to be happening.. I bet it would have been pushed back… I have the cards, but don’t yet see the retailer infrastructure. The chip and signature (vs Chip and PIN) is still a very strange one. It would take me 3 days to explain the politics behind it. What really baffles me is Samsung’s planned launch of LoopPay this summer (with Visa support).
  • Banks have given up on payment innovation. Grade – A+. I have a copy of the ApplePay issuer agreement (Sept 2014). Just can’t believe the banks have taken it on the chin like this.. not only ceding mobile to Apple, but Tokens to the Network and 15bps. What do they have left?
  • ISIS WILL DIE.. Grade – A+. Money ran out in Dec 2014, sale will be complete by March.
  • Apple will have NFC. Grade A+ … ApplePay 9/9/2014.. I was wrong on 3 things.. I projected October (it was 9/9) and there would be no SE, and Beacons would be part of launch (to wake up payment app). Big news (below) is that ApplePay will be in browser by summer 2015.. Paypal will be crushed with a double whammy on “value”: usability and a new rate tier (20-40bps off credit) for tokens in CNP.
  • Unlocking the cloud and authentication. Grade – B+ . Apple has done an amazing job here. See my blog on brokering identity.

Summary Grade: B+ . Looks like I’m a little aggressive in projecting the new stuff (Beacons, Identity, EMV, HCE). Except for EMV and Debit, I’m still confident in the predictions (philosophically) but my timelines are too aggressive in most cases.

2015 Predictions

These predictions based upon the Structural Changes in Payments which I discussed last month.

Big Picture Predictions

  1. The Year of Partnerships, new Clusters and multi-tenant walled gardens (forced by Apple/Google Dominance).
  2. Mobile moves from Small World organization to Real World Orchestration (my next blog)… starting with merchant friendly value propositions. You must be where customers are, or influence them in the real (offline) world. We have spent the last 10 years enabling a handset that does more than take calls and connecting it to the virtual world. We will spend the next 10 connecting it to the physical world. From POS Payment, Google Shopping Express and Beacons to Door opening and document signing.
  3. Tipping point of Privacy (Apple Defines Best Practice)
  4. Politicization of networks. Government regulation in internet prioritization, payment networks, social networks, advocacy networks and advertising networks. Networks are needed for the efficient life of a firm. Star network resembles dictatorships in social networks, and “channel masters” in business networks. Star networks are optimal for business, however we have grown quite used to the state of `organized criticality’, the scale-free, democratic and highly complex social net. Government involvement in networks usually does not improve efficiency and can lead to significant disruption.  Take a look at what Europe has created in SEPA.. a standard that no one will invest in.
  5. Collapse of “wallets” into Payment in the OSmCom trumps eCom. Tokens take over in eCommerce w/ ApplePay, Visa Checkout and Google Wallet
  6. Marketing… the year of measurement… and beginning of pay for performance
  7. The most trusted consumer brands will remain: Apple, Google and Amazon… with banks suffering most as their products become commodities and mobile rendering physical footprints moot.

Tactical/Deal Predictions

  1. Apple will launch aggressive effort to bring ApplePay into Browser by Summer 2015
  2. We will have a new rate tier from Visa and Mastercard based upon tokens in CNP (see EMVCo 3DS PR)
  3. Google will GO BIG in launch of new wallet in an HCE model akin to ApplePay. It will have dynamic tokenization. Google will excel in getting retailers private label and loyalty cards integrated, and pass Apple in BLE integration (in store).
  4. Alliance Data will be bought by JPM, C, Paypal, Hedgefund+Acquirer or Amex. ADS is my top stock recommendation for 2015, V/MA are my long term.
  5. Samsung will Launch LoopPay with support from Visa by September 2015.
  6. Visa will complete purchase of Visa Europe (hopefully at a 2015 discount) with strong dollar and weak EU growth.
  7. MCX will pivot to a payment instrument within another wallet (think Target Redcard) vs a wallet unto themselves .
  8. Beacon pilots will launch in top 20 retailers. In store navigation, product location, couponing and gamification will be first uses.
  9. Facebook payment will go live and be integrated into a new form of social advertising, where you are paid based upon your ability to influence your network, will see first pilots. Facebook will remain king of CPG advertising
  10. Behind the scenes there is tremendous progress in the collaboration of Banks, Telecos, and Mobile Platforms to Validate Identity. Short term impact is near elimination of mobile payment fraud. 2015 will be year of formalizing an identity verification infrastructure (in the cloud).

2015 the year of Partnerships

Google and Apple against Everyone Else?

I don’t have time to go over all 15 of my projections.. will do so in coming weeks. Over the last 6 months network and system design has consumed my thoughts like nothing else: proprietary networks vs. open networks, integrated vs modular, distributed innovation vs controlled platform, Apple vs. Google, Amex vs Visa, net neutrality vs. prioritization. At what point does OPEN win? My blogs on the subject was Value Creation and Distributed Innovation, Banks non-Banks and Commerce Network and my two favorite books are Platform Leadership and  Weak Links by Peter Csermely (viewable on Google Books here).

Any analysis of this area must focus on Apple. Wow! What a machine! The most loved brand, the most profitable, highest in consumer satisfaction, most sales per square foot, creator of new categories, inventors of new consumer experiences, trusted by the most affluent demographic, champion of privacy… on and on. Is Apple an exception?  Can any company ever aspire to replicate their success in any industry? How can anyone else compete in areas they touch? Do the rest of us just pick up the crumbs? Apple’s latest results show that their model is improving, garnering over 86% of the “mobile” industry’s profits (see Forbes).

network evolution nodes to consortium

Open networks are harder to build, and are certainly less profitable than closed. My prediction on “year of partnerships” is due to necessity, NOT the efficacy of collaboration. Few companies can compete with the data advantage of Google, Amazon and Facebook. Apple’s trust and reputation advantage is perhaps even more insurmountable. For large companies it may take 2-5 partnerships in a focused area. Imagine the data challenges small companies face.  This is not a technical challenge as much as a business one. How many successful partnerships have you seen (elephants dancing).  Remember that are injured elephants facing as structural changes in consumer behavior, mobile, information, distribution, trust … impact products and strategies. CommerceSignals is working to help bridge this gap, but that is for another blog.

Where Google, Apple and Amazon are self sustaining Stars (networks), clusters and multi-tenant walled gardens are forming to compete in a quasi open model.  The challenges here are not technical, but organizational and value creation. History reveals few consortiums renowned for their efficiency.  Value is best created where it can be controlled and monetized in “small worlds”.  Networks in business are functional in 2 areas: around a specific function with broad use (Visa/MA, Credit Bureaus, ?Android?) and where market forces can take operate (NASDAQ,  …). This is my big hypothesis… would greatly appreciate input here.

2015 must be the year of merchant friendly value propositions. Logically, the majority of commerce happens in a retailer.. and hence the “solutions” must as well. The inability to partner will give way to platforms that enable partnership… optimally platforms that would allow millions of “lightly structured” interactions to test 1000s of value propositions until something sticks (this is Commerce Signals). Take beacons for example.. we know that Apple can maintain security and confidentiality.. but the retailer must install beacons that work for everyone and have a business case (consumer insight). Consumers want to know how insights will be used. How do you manage the agreement between Manufacturer, Beacon Provider, Apple, Retailer and Consumer?

iPhone 6 – Tipping Point for Platforms

As I outlined in iPhone 6 – Apple’s Strategic Opportunity, I believe the iPhone 6 represents the dawning of a new age of mobile “platform”. What was a music manager with a phone has turned into the most secure, easy to use device ever created. The factors of competition have changed, it is no longer about camera resolution, storage, and screen size. The visible (obvious) attributes of competition have become a commodity; as are the “problems” that your phone solves (telephone, music, calendar, pictures).  Where previous phones helped you manage items in your “small world”, the iPhone 6 has become both the secure key to the cloud with the ability to broker interaction in the physical world (NFC, BLE, identity, tokens). The “convergence device”. See my blogs Brokering Identity and Authentication in Value Nets.

Unfortunately, Apple is so focused on the consumer it has no ability to partner. While there is no company better in creating devices that thrill a consumer, there is perhaps no company worse at building partnerships and business models where value is shared. Given Apple’s cash hoard, my top recommendation.. create a new division focused on network.. helping connect consumers to the physical environment they live in (thermostats, health, retail, cars, advertising, …). This is NOT a handset function.

Abrupt end here.. this blog has been in partial completion mode for 6 weeks. I had to get it out. Will articulate my views on the other “Top 5” predictions this month.

Softcard to Google?

17 Janisischoice

As I tweeted Monday, it is now in mainstream press (See today’s WSJ). This has been a very poorly kept secret, as the team at ISIS talks up its suitors.. I found out from a retailer. (BTW I did not return the calls of the WSJ for this article)

My very first blog in 2009 was on ISIS (project mercury back then).Did you know Softcard started as a joint venture between GE, Walmart and ATT!?  Selecting Discover and Barclays as the primary network/issuer to deliver value to retailers (Dekkers was lead at Barclays now CEO of MCX, Abbott was lead at GE now CEO of Softcard). There wasn’t much of a business case for the MNOs (50bps Discover card) so they brought in the mainstream networks, and realized that there still wasn’t a value proposition.. and started charging BANKS $1M a pop for the RIGHT to have their cards in the wallet (leaving 3 willing issuers today). Walmart left after the MNOs moved away from DFS/Barclays (and began planning MCX).

Hard to believe change can happen so quickly.  Just 4 years ago, the carriers wanted $3-4 Billion for the “rights” to NFC, now ISIS is going for around $60M. A price that more closely aligns the real value of NFC in an Apple, Token and Android HCE world.

SOOO many lessons learned, so many funny stories.  How could any company drive enough revenue to support a 12 party supply chain in payments (see blog)? See my “value prop” slide from 2009. Do you see anything that didn’t quite pan out? The WHOLE thing!!Mercury Value Proposition

I’m working on my 2015 predictions, one will be that we have come to a tipping point of … wait for it… COLLABORATION. Yes big companies WORKING with one another. Too much capital has been burned trying to go it alone. No one company can compete against Apple, Google, Amazon… Of course I’m betting on this with CommerceSignals

Look at the Google deal for Softcard (if rumors are true) as Google working to create a starting point for collaboration in payments. I don’t know if softcard is that right vehicle for that.. If Google is buyer, they will throw all of the technology away in days after acquisition.. I have some other very firm views here on why this all makes sense.. but don’t want to share now until deal is finalized.

Here are a few of my old blogs..

ISIS Platform: Ecosystem or Desert

Battle of the Cloud – Part 2

ISIS National Launch

NFC – ISIS has 12 months… (Oct 2011.. I was wrong by 24 months)

ISIS: Antonym of Nimble?

Software Secure Element – HCE Breaks the MNO NFC Lock

NFC and Consumer Choice

 

 

ApplePay in Browser by Summer 2015

Very short blog

Today ApplePay is limited to in-App purchase and at the POS (using NFC). Per my blog last week, mCommerce is one of the fastest growing trends in the industry right now. Apple will be extending the “touch ID” payment experience to all Safari browsers (with merchant support). Contrary to the poor POS/NFC uptake.. this will be a MASSIVE SUCCESS!!

Pre-requisite/Set Up

  1. Merchant implements new ApplePay API that looks for supporting browser/device. Similar to what Google Checkout, Stripe, Braintree have done for accepting a token in lieu of card and cardholder data
  2. There is likely some other device/browser information going to merchant (like applePay plug-in on browser)
  3. Consumer has at least one touch ID compliant device (iphone 5s or 6)

UC 1 – ApplePay on MacBook – Easiest one to explain

  1. Consumer Checks Out
  2. Merchant checkout page finds supporting device/plug-in and displays “pay with Applepay”
  3. Consumer selects pay with Apple Pay
  4. Consumer’s iPhone 6 comes up with tough ID prompt (touch ID to complete purchase with Merchant X). Side note somehow Apple Keychain management is involved in exchange between devices
  5. Merchant receives token(s) for user ID and for card. User ID token is resolved through Apple service, Card Token is routed through TSP in current iPhone 6 AP model.

Merchant  Benefits

  1. conversion
  2. new CNP  rate tier for “tokenized” eCommerce (see my blog above from last week)
  3. fraud liability shift

Significantly it was announced that EMVCo just took over the next version of the 3DS spec. Remember when this happened for tokens?

Impacts

  1. Paypal’s US take rate is around 340 bps, Apple will enable merchants to accept payments at a new rate tier and shift liability unto banks for 140-160.. wow..
  2. I believe Google is also in good shape to capitalize here, as is Visa Checkout. Perhaps Visa Checkout morphs into ApplePay online from a CYBS perspective. (CYBS becomes AP acquirer)

 

 

My confidence in this prediction 95%.

 

Structural Changes in Payments

2 January 2015

Today’s blog is focused on discussing the structural changes influencing consumer retail payments in the US. For those interested in looking at a broader global view of all payments, I highly recommend reading the Cap Gemini World Payments Report (https://www.worldpaymentsreport.com/) .

Payment Value - highlighted

Payments have been a focus of mine for 20 or so years… it is perhaps the MOST interesting of all network businesses. Payment is a critical part of commerce and a product of it. It is the event in which almost every commercial contract is based upon. Payments can be simple (cash), complex (bitcoin), and political (interchange, rules). Payment efficacy, reliability and data are important to: consumers, merchants, banks, governments and economies.

Globally, electronic payments are still in their infancy, which makes investing in it so much more exciting. For example, over 90% of the global electronic transactions occur in the top 10 markets (representing less than 10% of the world’s population).  This would seem to point to a future where electronic payments (and the banking/commerce they represent) are poised to grow geometrically as the number of nodes grow. There is a chicken and egg argument here.. are payments the result of strong economic environments or are they the enabler? Perhaps a bit of both, but finding markets where they are growing (ie Brazil, Peru, Philippines, Kenya, … ) are worth exploring (Democratizing Access to Capital – see blog).

Not only are payments poised for exciting growth, there are also tremendous forces driving change within existing systems and networks. Investors must consider these structural changes impacting existing players across the entire value chain.

In its simplest form, payments are a brokering business which manages value exchange between two entities engaged in commerce. Logically, a broker must be removed from the transaction to maintain the trust of both parties, and deliver value through managing the financial risk associated with the transaction. My view is that Card issuing banks, have lost the neutrality of their “brokering” role by creating a card rewards system that incents card use (paid by the merchant). However, this ideal “neutral” world is NOT the nirvana that we should seek, as no one would invest and we would be stuck with cash (and SEPA in the EU .. see blog).

Complexity in payments is driven by the quest for control and margin of the various participants, not by necessity. This is what makes understanding payments so hard…. most of the changes are not logical, but political. The friction (inefficiencies and illogical design) in payments is what makes them work. As I’ve stated before, no engineer would design a payment system to operate the way we do today (see Push Payments). Thus there is beauty in this chaos! The V/MA model created incentives for 1000s of banks to invest in payments, and I doubt if we will ever see any other companies that could repeat this feat (thus my V/MA personal investments).

What changes are likely to impact the world’s oldest profession in the next 10 years? My list (in order of impact)

  1. Risk and Identity
  2. Data/Commerce Value
  3. Consumer Behavior/Trust/Acceptance
  4. Issuance/Customer Acquisition/HCE
  5. Regulatory/Rates/Rules (Fees)
  6. Mobile/Payment in the OS

#1 Risk and Identity: Authentication and Authorization

How would you authenticate someone’s identity? Best practice is to validate a combination of what you are (biometric, image, DNA), with something you have (mobile, token, OTP FOB, …) and something you know (shared secret). Apple’s new iPhone 6 is the first major consumer device that can manage all 3 securely. It is truly revolutionary.  The ability to authenticate a consumer eliminates fraud risk, and thus impacts both Account Opening and Transaction Authorization.  Both of these services in turn impact the “core” banking relationship (see Future of Retail Banking).. How do consumers choose a bank? A credit card? What is the value proposition?PIN Fraud Rate 2013 Value

Before there is payment there must be an account in which to pay from. The key to opening an account is identity (Regulatory KYC or Know Your Customer). Account Opening has been automated (and online) for over 10 years. In 2004, my team at Wachovia was the first in the world to introduce instant account opening (online) for deposit accounts (Credit Cards were just 2 years ahead of us..). 10 years ago I used products like Equifax accountChex or EWS AOA (Validating questions based on prior financial history and credit bureau data), today could I use Apple!?

Identity and authentication is changing rapidly, and if the first two paragraphs were not already enough to ponder on this topic, we must mention Bitcoin. As opposed to authenticating the person to give access to funds and services, bitcoin authenticates itself enabling the holder to be anonymous. It is a self authenticating instrument.. imagine a dollar bill that can tell you it is genuine with 100% accuracy.  Self authenticating instruments exist independently of the holder and are a store of value (ie, Gold, Bitcoin, …etc). Normally there was physical presence required to exchange self authenticating instruments (exchanging gold), bitcoin changed all of that. A virtual self authenticating instrument that can be exchanged remotely and cannot be tracked (easily). Whereas payments are instructions move money (value) from one bank (store of value) to another, a bitcoin exchange is value exchange (not instructions). bitcoinhow-100032615-orig

The power of bitcoin to disrupt payments, companies, government, economies, .. cannot be understated.  How could any central bank manage money supply in this model? How can you tax something that cannot be tracked? The growth challenge for bitcoin is in “connecting” to other payment networks and regulated entities (ie cash out).  Unfortunately the entities which benefit the most from bitcoin are those that seek anonymity… which of course impacts the willingness of mainstream (regulated) institutions to accept it.

Fraud and Risk

As you can see from picture above “risk” in payments has several components: credit risk, settlement risk, fraud risk, regulatory/AML risk, … etc. Fraud risk is the area in the most flux, both WHO owns the risk and HOW it is managed. In the US Card Not Present transactions follow the pattern of ACH and Checks in that the originator of the transaction bears the risk of loss. In a retail transaction, that is the merchant. applepayinapps

Risk and fraud management were historically the key areas where banks excelled and differentiated (big banks have multi billion dollar investments), but the merchants and platforms have now passed banks in their ability to manage it. This mobile authentication advancement had rendered the multi billion dollar bank risk investments moot (for mobile initiated payments).  Proof is in the picture above (see Federal Reserve 2013 Payment Study), all fraud has fallen tremendously! Both for Card Present, Card Not Present and even for Checks. Why? As the former EVP of a Kleiner Perkins backed Fraud Prevention company I’m not going to give you all the details, but suffice to say that identity plays a key role. Paypal, Amazon, Google, Apple all have fraud rates under 8bps, some have the around 3bps.  These numbers will get better for Apple and Google as mcommerce starts to take an ever larger share of eCommerce (see my previous blog) and they bake in biometrics into mobile payments.

A key point that investors must understand here is that the large CNP merchants have gotten so good at managing fraud, that they could care less about a liability shift. What they want is a rate reduction (risk based pricing).  After all, if you could manage fraud at a rate of 3-8bps.. what work is the bank doing to justify taking 240 for payments? The Paypal investors read this and say “ahh.. Apple and Google want to become Paypal”.. No they don’t! while Apple/Google COULD assume all the functions of Paypal, their role as commerce orchestrators is of FAR greater value. In this role you must not force a consumer to a merchant, a good, or a payment instrument. “Let the consumer decide” is the common mantra across the Google, Apple, Amazon.

The investor impact is complex. Large merchants have proven ability to manage fraud and risk, and want the consumer to choose the payment instrument of their choice. Banks ability to differentiate in managing risk is greatly reduced, and the cost of issuance/acquisition is dropping to 0. Banks have proven incompetent at creating a Visa/MA replacement. What are the levers in negotiation? How will merchants negotiate a lower rate?

The path in Europe, Australia and the US (Durbin/Debit) has been driven by regulation. No one likes having regulators define the rules, but my investment hypothesis is that there will be a very large TILT of Visa/MA toward the merchant. This will address the both regulatory pressure, and open up new revenue streams surrounding data (below). This tilt means moving rates in the direction that retailers want, creating new rate tiers where risk and identity can be managed by the merchant/platform. Remember Apple is getting 25 bps for their service, the next logical move would be make this same “discount” available to anyone that can drive down risk. Personal-Data-Ecosystem-Diagram-from-FTC-Roundtable

From an identity perspective, Google and Apple have authentication as the CORE feature of their mobile platforms.. it is key to everything they do in mobile. See my blogs on Brokering Identity Authentication in Value Nets, and Authentication – Key Battle for Monetizing Mobile for more here.

#2 Data and Commerce Value

The comments below are largely taken from my blog Banks, Non-Banks and Commerce Networks. As a side note, this is the focus of my new Company: CommerceSignals. We are working with the Fortune 50 to serve as the neutral broker, one layer above the network, supporting companies working together offline and in mobile.

Today, every issuer and card network is chasing after American Express and Alliance Data Systems. Both ADS and Amex have made SUBSTANTIAL progress in working with merchants to deliver new value to consumers. AMEX and ADS have the benefit of working in a 3 party model where they own both the merchant and the consumer relationship.  As I’ve stated before, I believe these 2 companies are 3-5 years ahead of everyone else. Is this data stuff delivering any revenue? Market Size AdvertisingFor ADS the answer is a resounding yes, for Amex the benefits seem to be less direct and more on customer loyalty/spend/engagement. See my blog on Amex Innovation Leader for more details.

Think about the battle in connecting networks, as each of us have limited resources we can connect only to a finite set of “hubs” (unless there is some larger orchestrator). Examples are Wikipedia and Google… these serve as the directories of information. It is almost IMPOSSIBLE to displace an efficient hub. This is why I love Visa, MA and Amex. If they can shake the issuer “tilt”.. and add a few merchant friendly services, they could leverage their networks in many new ways. The revenue opportunity? Payments in the US is roughly a $200B business (issuers, acquires, processors, networks), whereas marketing is $750B (in US).Infographic_Showrooming-lg

Payments work well, but so did the Sony Walkman. The bets that Google, Apple, Amazon, Facebook and others are making is on value orchestration. Does this involve payment? Not really.. at least not as a primary focus.. Payment is there.. but orchestration is about commerce; payment is just one of many important processes (See blog Payment in the OS).  Don’t look at payments as something in isolation, payments are the “connections” made in commerce; they are made for a purpose. Visa and MA also have the potential to expand their “traditional network”, but this must involve a separate agreement with separate rules.

Payments = Network

Here is my network view. Payments are the connections of the GDP. If we were to map payment flows, we would unlock a map of the global GDP at the micro level, from employment to shopping, behavior and preferences, to demand and supply. Free information flow on the internet is enabled through openness and a single primary protocol, whereas payments operate within 100s of proprietary networks with a complex series of clusters and “switches” (there is effort in connecting, authenticating and managing risk). Just as it would be nearly impossible to change the protocol for the internet, it would be difficult to bring fundamental change in payments (see Rewiring commerce).  Now think about the value of payment data. Connecting business is much different than connecting information (the core of CommerceSignals.. but I digress).

From a network strategy perspective, the business opportunity of changing “payments” pales in comparison to the opportunity to influence connections in commerce, banking and manufacturing. Payments support business and consumer needs; they do not alter their path. This insight is the downfall of bank payment strategies around “control”, and their inability to “tilt” toward merchant friendly value propositions.

A top 5 retailer provided my favorite commerce quote

“I think of Commerce as a highway, the payment networks are like a toll bridge. I don’t mind paying them $0.25 to cross the bridge, but they want to see what is in my truck and take 2-3% of what is inside. Hence I’m looking for another bridge… “

ADS, Amex, Google, Amazon, Facebook, Alibaba, V, MA all understand this. Rather than charging toll for crossing their bridge, these networks are beginning to execute against plans to grow the size of the goods in the merchant’s truck.

Existing networks have an existing value proposition, and many don’t like to have their services leveraged by competitors, thus there is a much more highly “regulated” flow of information. Intelligent use of data increases the effectiveness of networks in a way that also benefits consumers. Tilting more toward merchants and consumers.. means tilting away from banks. This is VERY hard for a bank to initiate. It is a change worth making however, as assisting merchants (or consumers) is what brokering is about. My firm belief is that both V and MA have the opportunity to grow Revenue 4x+ in the next 5-10 years. Their principal challenge is to “tilt” their models away from Banks and toward the 2 parties that matter most in commerce: Merchants and Consumers.

#3 Consumer Behavior/Trust/Acceptance

Perhaps nothing matters more in business than consumer behavior (see Consumer Behavior: Discerning and Capturing Value). In payments we learn over and over again that behavior changes slowly in 20 year cycles (Checks, Debit Cards, ATMs, Mobile). Any investor looking for payment innovation should run away unless there is some underlyibranch visitsng commerce value proposition. Payments work REALLY well its everything else that is broken (in OECD 20 countries)…. Among Payment innovators/founders there is a common saying.. you only start ONE payment company.

It is easiest to find the hotspots in payment by looking first for the changes in consumer behavior. For example, the tremendous change in how consumer’s are using their phones, as I outlined earlier this week in eCommerce/mCommerce Convergence.  The banking relationship is also changing, as customers visit branches less than 3 times per year, and the billions spent on huge buildings, huge vaults, sports sponsorships and brand names gives way to value.

Brand reputations for 2014 just came out last week (see Venture Beat), with Amazon, Apple, Google topping the list. How did these companies earn this reputation? Through consbank likabilityistent daily interaction delivering value in every interaction. Value delivery and interaction are my key metrics for assessing investment and focus; both are key measures of consumer behavior and trust. There are many strategies: whereas Google engages with the average consumer 10-50 times per day (winning in frequency and insight), Amazon has a lower interaction but a much greater impact on transaction (value delivery), Apple’s interaction is more holistic within a much more affluent base, Facebook’s is more social.

If I were to outline one KEY point to my bank friends it is this: you can’t reach consumers where you want them to be.. you must reach them where they are. This is the essence of why most bank strategies to engage are failing. Consumers choose to go to Google, Apple, Amazon because of the value and service. As the charts above show, most banks are challenged to deliver value within the core banking products they already delivery, why would any customer want to use a new service in this environment. Thus Bank’s efforts are ill suited to drive a deliver products outside of their core, and outside of existing consumer behavior, banks play a role in SUPPORTING commerce.. not leading it (see Card Linked Offers).Measure Data

Apple is the greatest company in the world in delivering value, experience and changing consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). Apple’s reputation is well deserved and earned “the hard way” by remaking: phones, music, mice, computers, apps, …etc.  Through consistent delivery of value within fantastic hardware delivering great (and fun) consumer experiences they earned trust for their products and brand. The greatest NEW opportunity for Apple to influence consumers beyond the individual (music/contacts/calendar) and eCommerce (browser, apps) to the real world: Commerce.

Unfortunately Apple is inept at partnerships, even within its own supply chain. While apple has the talent to accomplish this, their commerce, payment and ad teams are buried within a hardware culture. They will only succeed if they are spun off into a separate division, thus my view is that there is a very low probability of Apple acting in an orchestration role across 1000s of Banks, millions of retailers and billions of consumers. If they did move, it my recommendation (and guess) is that it would be a consumer centric orchestration role as I outlined in Brokering Identity.

One technology (and behavior) I’m keeping an eye on is Beacons and mobile use in store (engagement). Qualcomm Retail Systems spun off the IP around Beacons to Gimbal with Qualcom and Apple both rumored to have 30-40% of the equity. Today Retailers are the entity best positioned to change consumer instore activity for 2 reasons: they alone know consumer product preferences, and they physically touch the consumer (trust, value, presence). See Retailers as Publishers , and Apple iBeacon Experience for more detail.greendot

#4 Issuance/Customer Acquisition/HCE

Now this is a mixed bag of topics. What is fundamentally changing in card issuance? Most of you know I ran remote channels at both Citi (06-07) and Wachovia (02-06). Today, most new customer bank accounts are originated online as branch visits go down and direct mail (the old way) even directs the consumer to this “instant” channel.

Historically I had to spend about $150 in marketing for every new card customer, and around $80 for every new deposit customer. Banks still incur roughly these same costs, but prepaid cards have an acquiring cost of less than a tenth of this cost (See Future of Retail Banking: Prepaid). In this pre-paid model banking products sit on a shelf in a retailer and compete for customers just like shampoo and candy bars.

I would challenge all card participants to think about the credit card product… what delivers value? what about it is unique? how do consumers view it? how is it part of a great consumer experience? When you leave Disney World do you think wow.. buying the ticket with my card was just fantastic? How are new customers acquired? Who benefits when cost of issuance is $0? Is charging the average consumer 12-16% on a card, paying them 0.2% on their savings charging merchant 2% a great model?  Do you think that there is room for improvement? Where do retailers win (ADS, Private Label, Co-Brand, )?

What prohibits you from having 20 retailer cards in your wallet today? Bank card issuers will roll their eyes, but you can not understate the influence that trusted retailers have in consumer decisions. Take this trust together with direct sales force and frequent consumer interaction and you have Private Label and industry whose cards outnumber everyone else’s by a factor of 2. As this week’s Morningstar article on Private Label shows, private label (the largest card segment) is making a tremendous comeback.Private label market share

Citi, GE (now Sychrony), ADS, HSBC are leaders in this space, with ADS advancing most in use of technology. Retailers like Nordstrom, Macy’s, Sears and Kohls are fanatical on their private label program, as their most valuable customers use this product. All new customer experience must first address this base, which you can see is one reason why we don’t see ApplePay being pushed here at all. As I described in Retail 101 (and What do Retailers want in Mobile), most retailers don’t know who their customers are today. Private label and Loyalty programs solve this problem.

Let me throw in a little tech now. I’m on the board of advisors of SimplyTapp, the company that created HCE. Instant issuance is key to everyone in the card space, why wouldn’t every retailer want to enable a private label card if card issuance cost is $0!? Credit worth customers can get store credit, sub-prime get decoupled debit (see Target Red Card) and everyone else gets a loyalty only? I believe we will see this happen, not only within MCX but within platforms like Google, with PL managers like ADS and Citi. This is the strategy focus of the top retailers… (focusing on their top customers).Private Label Profitability

My bet on the future of Google wallet is that it will be very merchant and consumer friendly, enabling them to uniquely integrate to 100s of merchant platforms to create great consumer experiences. This linking of PL, Loyalty, in store, maps, mobile, advertising is value orchestration.. but it all starts with consumer opt in. The opt in is both to merchant (private label/loyalty) and to Google. See blog Host Card Emulation for more background.  Google made the right technical move in HCE, but it dropped the ball in enabling merchants through last mile.. not a technical limitation .. an educational / awareness one.

Do I believe that the world will go private label!? No, it will be at the margins. My view of Visa and Mastercard have changed over the last 2 years. Before I was much keener on the development of a new scheme, but no more. Why? How many networks can you list where millions of participants have invested billions of dollars to make it work? Visa has 1.7B cards and 36M merchants.. how could anyone compete with this? This network works REALLY well, with the only issues with their network are in their control (merchant costs and rules).

#5 Regulatory

From a regulatory perspective, the US retail payment system has been impacted by the Durbin Amendment and the EU to an even greater extent by SEPA and PSD (see my blog).  Most of you have also read my token blogs outlining how the US banks were planning to build a new payment network to compete with V/MA (Now dead).  If someone has a info-graph picture of global acceptance rates I’ll put it in here.. but suffice to say that airline ticket pricing has NOTHING on the complexity of payment pricing.

Visa and Mastercard are largely insulated from the regulatory driven pricing changes, as the issuers continue to bare most of the impact. The EU has created a payment nightmare environment with “cross border” Credit card merchant interchange (MIF) at 30bps starting in later this week Jan 1, 2015 (see article and Visa’s response). The EU can not mandate change within country (domestic transactions), but there will be a race to the bottom in fees.

EU competition commissioner Margrethe Vestager claimed that interchange fees are a form of tax levied on retailers by banks and said that the new legislation would reduce those costs and “lead to lower prices and visibility of costs for consumers”.

Ms Vestager may be correct from a transparency perspective, but SEPA and the PSD put governments into the brokering role with no incentives for intermediaries to invest.. making payments a nearly free infrastructure service (with agreement of consumers and merchants). Network work best when there are shared incentives, and minimal regulation.  I believe Visa and Mastercard will work with new vigor to build relationships with merchants and deliver value, to head off the regulatory driven approach. Unfortunately Europe is already too far gone for this to work.

A prediction (next week’s blog) will be merchants providing greater influence in V/MA rules.

#6 Payments in the OS

My blog from this week: Payment in the OS

card-financial-compete view

Comments appreciated.

Payment in the OS – eCommerce/mCommerce Converge

28 Dec 2014

I hope everyone is having a wonderful holiday. Sorry for the delay in blogging, capital raising takes much more time than I had anticipated. Hope to tell you more about my NewCo in January. So much has happened since Money 2020, next week I will write a recap blog in prep for my 2015 predictions. Today’s blog is focused on “mobile” payments and platforms (iOS/Android)

I define 4 categories of mobile payments:

  1. Point of Sale. The phone used at a physical retailer
  2. mCommerce. eCommerce on your phone: buying something from a website in your mobile browser
  3. In App Purchase. Normally a subcategory of mCommerce, payment within an App (think Uber on iPhone). Only worth breaking out because ApplePay does this today.. and not above.
  4. Digital Goods. Games/Ringtones/Music/Apps (not in scope for today)

Point of Sale

Think NFC.. Not a focus for today.. but a great article from David Evans Apple Pay is Fizzling provided some key numbers. Only 4.6% of iPhone 6 users in a store that accepted NFC/ApplePay used it. Do you realize how small a percentage of use this is (4% of 3% of customers)!? If only the mainstream press realized that “50 new banks joining ApplePay” does NOT equate to usage. My bank issuer friends have confirmed what I’ve been saying.. there is no value proposition here.. and my volume estimates are accurate. Why? ApplePay does nothing beyond what your current plastic card does today.. Consumers just don’t care and Apple has made no effort to work with retailers (to promote at POS).

It would be great to know what NFC payment volume actually is, but the numbers are so low no one wants to talk about them. Overall NFC payment volume has gone DOWN in 2014 (from 2013) due to CVS, Best Buy and 7-11 “terminal configuration changes”. There are approximately 270,000 US locations which accept NFC, of which 100,000 are vending machines. My estimate for US Contactless Payment volume

  • 10% of consumers (20M active phones/wallets to 200M Adults)
  • 4% usage (very high)
  • 2.5% of retailers accepting (150k/6M, excludes restaurants)
  • $2.4T US Retail spend (ex Auto, oil/gas, Fin Ser, Restaurants, Travel)

———————

            $240M (1/100th of a % of retail sales)

I can’t believe I’m wasting time even writing about this number (my real guess is $100M). Can you imagine finding a way to make this PROFITABLE across 12 different suppliers?!

If Apple had 100% of this volume their total ApplePay revenue would be $600,000!! (25 bps). No wonder banks signed that agreement. When I went to Google in 2011, the first thing I told Osama was “run away from NFC”.. everyone I’ve known and loved has lost their lives in this NFC stuff. You could do everything right and it still wouldn’t work (see 12 party fur ball). NFC/Contactless may be very Hot in London, New York, Hong Kong, and a few other Cities (high density, mass transit, cabs, high affluent…) .. but the rest of the world is very very cold.

My analyst friends are telling me that 5 retailers will “bolt from MCX” to allow ApplePay. I told them what we will probably see is a few of them adding the option within select markets (like New York and SFO.. ) but obviously the retailers are telling the truth.. Apple consumers are not beating down the door because of the service. Consumers just don’t care (4.6%).. ApplePay .. just like all things contactless… is only “buzz”. My rule of thumb holds: Behavior Change requires at least a 20% increase in value (unless you live in NYC).

mCommerce/eCommerce

What is the difference between mCommerce and eCommerce? If you bought batteries from Amazon on your iPad while sitting in your living room?… A: _____________? (mCommerce.. !!) It makes little sense to break mCommerce out as a separate category from a consumer behavior perspective.. but it makes TREMENDOUS sense to break this out for an analyst platform view.

Total eCom/mCom sales in the US are approximately $180B/yr (See US Census Data). Note that this is a MUCH bigger payment segment than the $0.24B POS market above. Within eCommerce, there are the BIG 3: Amazon, Visa/Cybersource, and eBay/Paypal/GSI which account for over 65% of volume (ex services, my estimate).

There is massive change of consumer behavior within eCommerce over the last 4 years, as reported today, Amazon see’s 60% if volume going through mobile! Quite a tremendous change from the 5% Amazon outlined just 4 years ago (see article). In 4 years we have moved from a model where 95% of  US consumers bought online on a Desktop.. to an environment where 60% are buying from an Android or iOS device. Now you start to see the strategy drivers for: Apple, Google, Paypal (Braintree), Visa (Checkout) and Amazon (firephone) moves here.

Historically eCommerce payment services focused on the ability to manage fraud, as merchants held all liability in a Card Not Present (CNP) transaction. As such, payment service providers managed card acceptance and also provided fraud management services (hence their pricing of ~340-~600bps vs the card present MDR for CP of 160-180bps).  Paypal’s service was the first of its kind to allow small merchants to accept cards, as the big banks had no tools to manage CNP fraud. All the large eCom specialists became VERY VERY good at managing fraud, building custom infrastructure to assess buyer patterns, and the device which the consumer is purchasing from to score transactions. Today most of their fraud rates are under 8bps (Paypal still charges 340bps).

Move from Fraud Management to Identity

In Europe, Visa and Mastercard shifted liability within eCommerce transactions onto banks in 2006 (see 3DS a Collaborative Path to Failure). This did NOT work out well for all, as the technology was highly flawed. The US never had this facility… a good thing.. and the state of the art in fraud management stayed within the big 3. For more background on this see Authentication in Value Nets. However the billions of dollars invested in building fraud management assets are being rendered useless by identity management and authentication. This is a HIGHLY disruptive force! Existing payment intermediaries have built their position on owning the consumer and managing risk. Mobile changes both!!  I will drill into this next week.

As I outlined in Perfect Authentication: A nightmare to Banks, and Who do you Trust, the ability to authenticate a consumer is far in advance of what fraud systems do. As Ross Anderson said at the Federal Reserve “if you solve for authentication in payments.. everything else is just accounting”. This statement does hold for the credit risk side.. but it does for the payments side. This is what is changing with mobile. From my blog: apple-biometric

The “KEY” [prerequisite] in value orchestration is owning the Consumer relationship. Therefore Identifying and Authenticating the Consumer is the first, primary, service that must be owned by a platform.  What was a separate “Trusted Services Manager” in the NFC world has been co-opted by platforms which will take a proprietary route. …etc. There is an all-out war going on for the Trust role: Banks (see Tokenization), MA/V, MNOs, Samsung, retailers… everyone realizes this is the “key” to unlocking future value in the convergence of the virtual and physical world.

The impact of mobile and identity on eCommerce is easy to see, as the more “platforms” know about you can be used within the device you use (and trust) the most. Mobile’s impact is also hitting the offline physical retail world, but in a much more experimental phase as the platforms, online retailers and aggregators don’t work within this space (yet).

A new rate tier: Cardholder present

This “new” form of mobile authentication will enable networks to create a MUCH improved version of VBV/MSC, shifting liability onto the bank with an interchange rate between CNP and CP. Who can take advantage of this rate and liability shift? Entities that can authenticate the consumer on the mobile device (Apple, Google, ?MNOs), securely manage a token and broker identity with other parties (see Authentication in Value Nets).

How will Visa/MA roll this out? There are many, many lessons learned in the prior 3DS (VBV/MSC) roll out. Already V/MA have been talking to major issuers and eCommerce service providers. Token issuance is currently a bit of a hang up as the issuers want to get their own TSP services up and running, and the Google/Amazon, … want to run their own TSPs. If everyone would agree to use the V/MA TSP services this could happen quite quickly. But because this is NOT the case, ApplePay and Visa Checkout seem to be the only services positioned for this move.

As I stated previously in my ApplePay blog, when this new rate tier hits, it will free Apple (and others) to transfer the token to the merchant across a greater number of protocols. In store this means that NFC will compete with a BLE experience, with NFC carrying a CP rate and others carrying a Cardholder present rate (and bank liability) that is very close to the CP rate.

Paypal has no position here.. as payments move into the OS.. they don’t have one nor do they have the eCommerce “portal” of Amazon where consumer’s begin their product search.NFC Change

2014 – Payments Part of OS:

Per my July 2013 blog Payments Part of OS, both Apple and Google are integrating payment capabilities into the OS. Where Google Wallet detractors deride Google because of its lack of progress in payments, I believe they are shifting focus to what really matters: establishing Android as the core commerce platform. In this future world you don’t really care about payments.. they just happen. With great authentication your information is stored in the cloud and you choose what information and payment instruments you want to exchange with a retailer.

We see the first hints at what this will look like in this WSJ article Google Shopping to Counter Amazon.  Note that this is not Google payment… this is Google SHOPPING. Let me emphasize.. the battle is NOT about payment but about delivery value to consumer within Commerce. The focus for innovation investment TODAY across banks, retailers and service providers is Android as the iPhone platform is locked down. Sure Amazon and Bank of America are leveraging Touch-ID but this requires little effort. The key for Commerce Innovation and Value Orchestration is to get 1000s of companies engaged … Apple’s efforts are 95% consumer focused.google-shopping

This consumer focus is paying off for Apple as they are 3-5 years ahead of Google (and Android OEMs) in handset hardware/SW. However, Google and Amazon are 5+ years ahead of Apple in orchestrating commerce value. Value orchestration is a network business and entails enabling millions of partnerships where consumers and businesses are incented to participate. Apple isn’t exactly known for making money for anyone but themselves. Apple has a MUCH greater ability to manage identity and trust and should be pursuing a strategy of consumer focused identity brokering (see Brokering Identity, and iPhone 6 – Apple’s Platform Opportunity) but are challenged organizationally as payments/identity are deep within a hardware culture, a world where neither are capable of creating partnerships.

Bank “payment” strategy seems to center on control or redesign of existing networks and nodes. For example, Issuers are attempting to leverage old nodes (Cards) and current market position to form a new orchestration role (see Card Linked Offers). Jamie Dimon  created a new Data Division at Chase run by Len Laufer with a bifurcated visa*net. What banks forget is that their role is that of a neutral broker, they were NEVER the starting point for commerce (their network and nodes are weak). The harder banks work to build barriers to entry, the greater the value of finding ways around them….(think bitcoin).  Or in the case of payment in the OS.. making unique assets (fraud) a commodity… the NATURE commerce is changing and the role of payments, how they deliver value, is changing too.

Think about it this way: did you buy an Uber ride on your iPhone because it took your Visa card? Did you even think about Payment? Same with Amazon… did you shop there because of payment? Payment is becoming a back end commodity service and the mechanisms for banks to differentiate are getting smaller. There are many implications for small business. For the last 20 years much expertise has been needed to create an online store, particularly in accepting payment. All of that is changing, if I solve for fraud, integrate my inventory into search and product discovery, merge customer contact and loyalty into advertising and payment, all with standard services… it becomes EASY.

For too long banks have leveraged your relationship to create value for themselves, hitting you with a mind numbing array of products and fees. This is their network legacy.. it is bred with inefficiencies. The bank goal was not simplicity, it was complexity and margin. Products like Apple, Square, Stripe, Paypal, Amazon, Poynt, Tesla are beautiful in that they make the complex appear simple.

ApplePay Expands to Browser

As I outlined above, the key trend in commerce and payment is the move to “mobile”. Today Google wallet works with Google chrome and app store for auto fill and checkout. Expect to see Google make authentication within Chrome, android, and apps much tighter, with Chrome becoming a cross device focus.

Today 90% of my payment friends agree that Apple’s REAL win within the next 2 years will be ApplePay in eCommerce/mCommerce. Today ApplePay’s focus is on in App purchases only. I expect to see ApplePay expand into browser based payments within 6 months or so. Apple may be first to market with the “Cardholder present” function given that tokens, authentication and bank agreements are already in place. From a merchant perspective Apple will offer a free API (akin to autofill) where Apple tokens and necessary consumer information is passed. Amazon Payments and Google already have this capability, but have not yet implemented tokens, biometrics or have bank agreements.

Apple’s greatest asset is its ability to change consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). Apple’s reputation is well deserved and earned “the hard way” by remaking: phones, music, mice, computers, apps, …etc.  Through consistent delivery of value within fantastic hardware delivering great (and fun) consumer experiences they earned trust for their products and brand. Consumers using Apple’s in app (today) or in browser (future) don’t even think about using payments… it just works.

mCom/eCom Convergence

When will we know it happened?

  • When neither consumer nor merchant had to do anything unique to support an online sale.
  • On phone, in app, in browser.. they all just worked and no one even thought about it.
  • We used the payment instrument of our choice.

Apple has already arrived at this state with in-app ApplePay. From a technical perspective, key convergence measures are:

  • Payment is treated the same regardless of channel.
  • Handets, platforms, and networks can pass information, identity and trust.
  • Banks accept that consumers can be authenticated without physical presences.
  • Developers leverage platform payment services with ease.

Who is impacted?

Paypal. What are paypal’s assets today? Risk management, consumer accounts, DDA Funding,  a few merchants. Apple, Google, Amazon, Facebook already have the consumers. The paypal risk management assets are worthless in a new environment. DDA funding looses importance as merchant costs for CNP fall from 340bps to 150bps. What do they have left? Let me know your answer..

MA/Visa. Visa/MA wins when there is card volume. Making payments part of the OS and giving consumers choice of payment instrument is a HUGE win for Visa/MA. As payments move into the OS so does V/MA. They become infrastructure. The losers? Well card issuance costs, risk management costs, fraud management costs, merchant integration costs all start moving to 0.. which means big margin compression for everyone else on the network.visa-checkout-ios-devices

With respect to eCommerce. Visa checkout/CYBS has substantial volume. They can adapt to tokenization quickly, but unclear how they would manage authentication.

Issuers. Imagine loosing all the airline CNP revenue? I don’t see an upside for issuers in this. They have a very poor ability to influence the network and are not well placed to serve in the trust identity role as consumers leave the branch and interact with the bank less often through remote channels. Banking is becoming a commodity service as well (see blog). You should have heard the squeal on the ApplePay agreement.. never before have Banks had something like this handed to them “take it or leave it”. Given the NFC volume above banks may have written if off. But this could turn out to be a big Trojan Horse as this tokenization expands into CNP/Card Holder Present. I believe their biggest fear is that Google will look to follow the model.

Merchants. Merchant that can sell or engage on mobile: Big winners.. mobile conversions, decreased fraud, liability shift to banks, changing consumer behavior. Merchants that are stuck in bricks and mortar.. no change.

Google. Big win. The only company that is cross platform/device. Buying in Chrome or in Android is seamless. Challenge is to move buying “search” back into Google from Amazon. The other advantage to convergence is the ability to close loop on behavior within the mobile/ecom process.. helping google advertising become even more effective. Google’s challenge is in Enterprise integration. Their engineers don’t like working with anyone else’s code. This is where Microsoft and Oracle are headed… helping enterprises engage consumers.

I propose the following metrics to measure/rate “Commerce Platforms” :

  1. Frequency of consumer touch (per day)
  2. Commerce transactions $/day
  3. Number of businesses you work with * the average time spent in managing in store experience…
  4. ??

Other Blogs

Payments Part of OS: What does that Mean?

Big Changes to NFC: Payments as Part of the OS

Stage 4 Evolution – Distributed Innovation,

ApplePay – eCommerce Distruption

iPhone 6 – Apple’s Platform Opportunity

 

What do Retailers Want in Mobile?

1 Nov 2014

Money2020 is next week, and I’m moderating the ApplePay session on Tuesday at 5pm… hope you guys can come. I’m more than a little sad that I can’t get any retailers up on stage with me. Why? The top 60 retailers are in MCX, and it makes little sense for them to get on stage and tell the world what they are NOT going to do and why. As I’m preparing to leave for Las Vegas tomorrow, was thinking “what could I write about? What unique perspective can I offer?” Well given I can’t get them on stage with me, let me try to articulate the Retailer’s view of the world. My twitter feed is blowing up as I work to explain why CVS and Rite-Aide turned off NFC. Please know I’m only trying to give perspective…

Payment Services are a brokering activity between two entities engaged in commerce. Logically, a broker must have the trust of both parties, and deliver some sort of value in managing the financial risk associated with the transaction.  Within Consumer Retail, Visa and Mastercard evolved from Bank owned exclusive networks of the 1960s (see History) to ubiquitous independent payment networks. Few remember that back in the 1960s, merchants took either Visa or Mastercharge but not both as the Merchant’s acquiring bank could only be a member of one of the networks. For merchants, the value proposition was clear: consumer credit.

Payment networks thus evolved from a closed and focused value proposition, to a settlement “infrastructure”. However the rules and governance process by which many parties (merchant, acquirer, processor, issuer, network, VASP, …etc) participated in defining operation of this “brokering” activity did not evolve. This is the central issue restricting the future growth of Visa and Mastercard. One I believe both are acting on. My firm belief is that rebalancing network rules will unleash a massive new phase of value creation for these networks.

Let me take a quick side bar here..

Network Theory – Openness

As I’ve stated many times, closed networks always precede open networks until scale is reached (Building Networks and “Openness”, 2011). Weak Links (nodal affinity) influences network creation, and there are VERY few open networks which exist in Nature. This is logical as Networks form around a function rendering generic open networks less “efficient” than specialized networks around any given specialized need.

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.

-Weak Links

Networks NATURALLY form 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. Open networks (internet/TCPIP, Visa, NASDAQ, … ) succeed where a common infrastructure benefits MANY NETWORKS.

Visa and MasterCard have transitioned to become common network infrastructure, a position FAR MORE valuable than that of a closed credit delivery system. They are a network of networks. However their rule making and governance processes do not match the other open networks listed above (NASDAQ, Internet, …). Most Banks, have also lost their traditional role of “brokering” and risk management (in retail) by creating a card rewards system that encourages card use paid by the merchant. This creates a brokering incentive separate from the commercial transaction… impacting brokering independence.

What do merchants want? A neutral broker!!

A top 5 merchant told me a few months ago “Retailers like Starbucks have proven that we are best placed to deliver value and influence consumer behavior. I don’t want to force my consumers to do anything, but similarly I want to networks that let me play on an even field. These next 5 years are going to be complete chaos for consumers. What do we want them to do? Swipe, dip, chip, pin, tap, QR…? We have been planning for EMV for 3 years… am I really supposed to jump to Apple in 4 weeks?”

MCX

These guys are good friends of mine, and I think their business vision is well placed. They want a network where they can play on an equal footing. A neutral broker.. or at least one where they can have a seat at the table when rules are set. Will MCX be a massive success? It depends on the consumer value proposition. Are the merchants motivated to work together in creating a neutral broker? Hell yes.

One merchant said it this way “Tom I didn’t think we would ever have someone more difficult to work with than Visa and Mastercard, but I was WRONG. Apple is a nightmare! At least we knew what was coming with Visa and Mastercard, with Apple they don’t talk to us, respond to our letters, or offer any kind of value proposition. Why on earth would I want to let another brand in my store without understanding what it will do for me? They are a great company, with great products, and certainly have a much better approach to data than Google.. but anonymity is NOT a value proposition, in fact Apple makes our efforts to deliver value to the consumer even harder as we have no defined way of using Apple to engage our consumers”. See Brokering Identity – Part 1, ApplePay and Merchants, Digital Transactions ApplePay Issuer Agreement.

Getting a card number from consumer to merchant is NOT innovation. There is just no problem here. My payment friends are already rolling their eyes. Apple does have great security and great ability to manage fraud.. but fraud losses for CP are 3.2 bps. What about store data losses? That is not “fraud”, and certainly a problem for merchants that keep PANs. Tokens do solve this problem… but so does better security, and more intelligent approach to tracking loyalty. Apple must move to create a merchant value proposition, and define how they will help with consumer engagement. I believe Google will far outpace Apple here.

Retail is a zero sum game.. I’m not going to buy MORE gas and groceries.. differentiation is about switching, product selection and pricing on data, ..the fluxonce this flux dies.. steady state resumes.  Perhaps all iPhone owners will only shop at whole foods, but data shows that consumers don’t make decisions this way. In fact payment is not in the top 5 reasons for consumers choosing a new iPhone.

Why are MCX merchants turning off NFC? To give themselves a little breathing room, make Apple create a merchant value proposition (engagement), get a seat at the table in a new network, and help to establish a consumer behavior that works for them too (Most Important Payment Race: Consumer Behavior, Apple’s Platform Strategy: Consumer Champion ).

What do Retailers want in Mobile?

Following from my big blog Static Strategies and the Rewiring of Retail.

  • Consumer Engagement
  • Consumer Acquisition
  • Consumer Loyalty
  • Allow Retailer to be in control of data
  • Partners that allow Store’s brand front and center
  • A Partner either IN CONTROL of the consumer experience (Apple/Google) or one that already has massive consumer adoption (ie Facebook).
  • Creating a fantastic customer experience from end-end
  • Ability to manage campaigns, data or your business
  • A Partner that can reach/influence consumers WHERE THEY ARE.. not where you want them to be.
  • Payment..? I guess if that comes too… 

shopper marketing

How will this play out?

  • Much has been made of the MCX contract provisions that prohibit participating retailers from allowing other forms of mobile payment. This is just not accurate. Any retailer can choose to turn on NFC, any retailer can sign up for MCX. Can an MCX retailer turn on NFC? Yep.. Large retailers are not participating in ApplePay because Apple has completely failed in a merchant strategy, they have not articulated one, nor have they worked directly with merchants. This is really no different than Apple’s failure to work with Banks. Banks are just fuming over the take it or leave it terms Apple offered to them. Merchants had no terms…
  • Apple will rollout a merchant friendly beacon product, and loyalty product for consumer engagement in next 6-9 months, this will also include a renewed focus on BLE. The product will fall flat until they can create an new merchant organization. Google has 4,000 sales people working with merchants, apple has around 16… so it is a big task.
  • Apple will ROCK in App payments.. it will be their homerun… I will make a further bet: Apple will WIN in every situation where they can control the consumer experience from beginning to end.
  • Visa and Mastercard are beginning a shift toward the merchant. They may not win the top 60, but Visa has 36M merchants.. that leaves 35,990,940 that will be open to new ideas. These are my biggest personal holdings, and I know both of the CEOs. Everything I’ve written here they know already.
  • Consumer authentication is VERY disruptive to retail and banking. As Ross Anderson said “if you solve for authentication in payments.. everything else is just accounting”. The need for an independent broker and their services are dramatically different if either the consumer or payment can be authenticated (ie cash, bitcoin). Why do you need a payment product at all? Just present the identity to the bank. This is what Sofort/Klarna does… Why not do this? Because the banks have no ability to MONETIZE the transaction (no merchant agreement). There are many better ways to leverage authentication, but no other ways to currently MONITIZE IT (outside card). Perfect Authentication… A Nightmare?
  • Apple is pursuing an “anti-google” approach: keep no data, closed platform, control everything. Google is 2-4 years behind on platform security.. but is catching up. The Google platform is much easier to build in and control (ex HCE), but consumer adoption lags as each Android participant must move consumer to their vision. Apple has successfully delivered security and authentication, but has not laid out a way for many apps to leverage it. Retail is a REALLY big business, with 1000s of specialists. It cannot be throttled by one company.. thus Apple will work fantastically in environment it can control. (sorry to restate).
  • ApplePay and overall contactless adoption will begin with small merchants and infrequent purchases. Most phones have the capability today. MCX will not stop contactless.. but it will impact consumer behavior substantially

ApplePay Vs Google

  • Is NFC/Contactless Acceptance required as part of EMV rollout? NO!!  This is the most widely held mis-understanding. While the large terminal manufacturers have no products in their official product list without contactless, the top 60 merchants order bespoke or custom terminals to fit their needs.

Apple Pay- eCommerce – Disruption

30 September 2014

ApplePay/eCommerce/Tokens/Card Not Present

Quick blog, based on Apple Pay in eCommerce.. following on to my March Blog Tokens and Card Not Present (NOT the POS NFC stuff). I won’t do this topic justice, but hey half the fun is getting comments. I’m heads down on a few things.. so this will be my last post for at least 3 weeks.. and I want to make a few key points prior to money 2020.

Summary

  • So much for Paypal being acquired.. wow!! Dan Schulman is the right guy here, and I must congratulate the eBay BOD. This thing can NOT survive without a major change. Dan is a “direct to consumer” Innovation Superstar: Priceline, Virgin mobile, Serve/Bluebird, .. etc. He knows how to run a global organization, he knows mobile, he knows payments, he knows retail. His biggest challenge will be rebuilding a house on fire during a Hurricane.
  • Apple and eCom: No change in CNP rates with Tokens.. Tokens in Apple Pay are used for both POS and eCom, but the issuers revolted at the prospect of a CNP revenue loss. I do see “next phase” where we will see A NEW RATE TIER for tokens in eCommerce.. for any online merchant replacing their Cards on File (99% confident). Funny battle here is “who” will lead this. Visa/MA have the TSP up and running now. 3-5 issuers should have theirs running in next 5-7 months. Can you imagine having to work with each and every issuer separately to tokenize? NO WAY. But they just don’t get it..
  • Big issuers are concerned that the Apple Pay launch was a watershed “freedom” moment for V/MA. However Issuers did win a very important battle.. keeping a primary control point: token binding (deciding when and where their cards can reside), and the also have the ability to create their own token authority.. but they have work to do.
  • ApplePay’s focus is 1) POS $15-$20B and 2) “in app” payments $5B 2015 GDV.. US eCommerce payments will remained locked in the status quo battle among the giants of Amazon, Visa/CYBS, Paypal..  with Google, Off Amazon On Click and Alipay as 3 of the new challengers here.
  • Apple Pay Tokens: Visa and Mastercard did 90% of the work to get this scheme from concept to reality in 12 months. The fastest time to market for a new scheme IN HISTORY. It is a thing of beauty.. seriously. I believe the networks learned many lessons here (like build it first then bring the Banks on board to tweek it).
  • There will likely be a new rate tier for tokens in eCommerce with liability shifting back onto the banks, but issuers must support in order for this to gain traction and merchants learned from VBV that you don’t get into a scheme where issuers don’t support (ie declines matter more than interchange).
  • iPhone 6 is a revolutionary product, which will impact identity, trust, retail, banking and payments. I see the revolution beginning outside of payments, where value can be created.
  • eCommerce wallets are an aggregation function. There are only 4-5 companies that can possibly make this work, each having a different value proposition. Visa and Google are the leaders here.

What did I get wrong on Apple Pay?

  • I did not see the NXP SE. I thought that Apple would encapsulate the SE functionality within the Secure Enclave. While the Secure Enclave has secure storage, it did not have secure execution, nor did it have a way for a third party to update applications and data in secure storage/execution. Hence the SE, with First data running the “TSM” function.
  • The tokens within Apple Pay are NOT provisioned at time of manufacture (not burned). They are provisioned by the Visa/MA after a binding process. The token issuance/binding process is just fantastic, leveraging the existing AUTH message set to avoid network changes. Issuer process to ApplePay: sign an agreement, turn on the Visa services (most are not EMV enabled), decides who’s BINs you want (your own or Visa’s), and prepare to respond to auth requests for binding/tokenizing cards.
  • There does not seem to be a beacon/BLE experience within Apple Pay (yet). My guess is that there is a 3 phase road map. Phase 1 traditional NFC, Phase 2 Merchants enhance the checkout process with Beacon at the POS to improve application “wake up” and perhaps another loyalty app that can interact, Phase 3 All BLE, with perhaps an NFC handshake to “sign”.
  • Issuers giving up 15bps. I can’t believe they went for this.. Issuers only sustainable business case for this is around shifting spend to credit cards.
  • Visa and Mastercard did and amazing job in this token design. Getting all this done from concept to production in 12 months is just incredible. There is much to celebrate here, and it could be the most successful network accomplishment in 20 years. There are major implications here, shifting roles of control, managing consumer identity, and of course a new “model” process for change in the future (no design by committee, let the banks comment after it is complete).
  • Paypal was thrown out of the Apple Pay deal… They were in, but they were thrown out. My guess (and this is purely an informed guess) is that the Issuers and V/MA gave Apple an ultimatum: you can launch with us, or with them.. your choice..  Enabling Paypal allows Apple and consumers to end run the card network.

Apple Pay and eCommerce

This Custora blog provides an excellent economic view of Apple Pay’s eCommerce impact. Today I wanted to comment on a few additional items which influence the dynamic:

  • Macro Environment – eCommerce
  • In app vs browser
  • Future: What if Tokens in eCommerce had card present rates/Liability Shift
  • Tokens + Identity kill fraud, but they also create a whole new biz strategy for CONTROL
  • Wallet = Trust
  • Platform: Partners and acquirers for acceptance
  • Other Strategies

Macro Environment – eCommerce

What is eCommerce? eCom is normally defined as buying physical goods in a browser. However, if your browser is an iPad or phone, this is typically categorized as mCommerce. I break mCommerce down into 3 major categories:

  1. Physical goods/services in a browser,
  2. Physical goods/services in an app, and
  3. Digital goods (songs, armor, movies).

eCommerce sales in the US are around $185B, while all mCommerce sales are about $20B. In a perfect world I would love to label ALL browser, and in-app purchase of physical goods/services as “eCommerce” and just track the consumer preferences in the app/browser that led to purchase.. but I might be alone in that quest.

The Apple Pay buy button is only available within approved iOS 8 applications (on iStore). This means that Apple will be focusing within the rather small “in-app” sub-segment of overall mCommerce market. This means that Apple Pay will have minimal impact Paypal, Visa Checkout/Cybersource , Masterpass, Checkout by Amazon, Google Wallet  or any of the other eCommerce payment specialists .. …at least not in 2015 (estimate is $5-10B max). Apple is the dominant mobile platform for “purchase” even though it represents only 18% of handsets), accounting for over 70% of purchases.. wow talk about a great consumer base!! Of course this “in app” only could all change in 2 ways: 1)  IF most retailers shift “sales” to APPs (like Target and Amazon) that exceed the functionality of browser based experience (ie App vs HTML 5), and #2 if Apple creates an eCommerce Apple Pay Button for the Safari Browser.

Custora_MobileShare_Brand_Aug2014_570px2

If online Fraud costs were the only justification for card not present (CNP) interchange, then logically the new EMVCo token process should eliminate the “barrier” between card present and card not present rates. But CNP rates are not based upon fraud, for example Google, Apple, Amazon, Paypal all have fraud rates hovering around 3bps, whereas the CNP to CP delta can be over 100bps. If you were in the room with one of these big eCom guys you would hear them tell issuers they want risk based interchange (aligning costs of acceptance to ability to manage risk). However, aligning the cost of payment acceptance to the cost of payment (and credit) provision is the crux of the merchant issues with card payment networks, particularly when the costs include loyalty schemes that do not deliver loyalty for the merchant (even though they pay the cost).

Banks are not keen to support Apple in creating great consumer experiences which they can’t control. For example, if tokens in eCommerce were treated at card present rates, they could be transmitted and exchanged in many different protocols (QR Codes, BLE, Wi-Fi, …). Tokens + authentication enables uncontrolled innovation in presentment and acceptance, thus destroying MERCHANT Incentives to support the bank driven uniform NFC contactless acceptance (ie BLE vs NFC) and uniform behavior (credit card, tap and pay), and limiting Banks ability to influence consumer behavior.

eCommerce Wallet?

eCommerce in US is a lumpy business where the big 3 rule over 60% of spend and processing: Amazon, Cybersource (Visa), Paypal/GSI (eBay). To re-emphasize, Apple Pay does NOT impact the battle for a ubiquitous eCommerce wallet, which explains why we see all those cool Visa Checkout commercials on the NFL games this week. The INDUSTRY’s eCommerce problem is eliminating card numbers stored in 100s of locations.

With respect to eCom wallet.. most consumers just scratch their head.. “Why do I need one of those”. Amazon’s one-click, Chrome’s auto fill, Paypal checkout, iTunes buy.. it just works. Why do I need something that spans across merchants when 90% of my spend is with one of these 4 already? Additionally, consumers don’t really care about security, because they don’t bear the costs of fraud. So we have a situation where Banks want to solve for cards stored everywhere, and consumers won’t take part. This means that banks must develop a merchant value proposition to TOKENIZE their cards on file (COF). Hence the prospect of a new rate structure for tokens in eCommerce.

Merchants may RUN toward tokenizing Cards on File if the recipe is right, however tokens by itself may not be enough to overcome the terrible history of VBV/MSC launch in EU (see my blog Authentication in Value Nets for detail). In addition to rates, Google has potential to bundle eCom payments with advertising (consumer acquisition),  Amazon could do the same, and Apple.. . Consumer win for eCom tokenization? Anonymity, consistency, security, ease of use, more targeted advertising. A funny battle over tokenizing cards on file is taking place right now. Each issuer is trying to work with Amazon, Google, Apple, WMT… to tokenize. Can you imagine trying to do deals with each issuer? with seperate proprietary “on ramps”.. This issuers are concerned that Visa and MA will take this token issuance/binding process away from them .. but I don’t see another way.

Who else could win the eCom “wallet” war? Visa! Their advantage? Brand, reach, marketing, Cybersource assets, rule making and acting as one of the only TSPs. Their challenge? signing up consumers.. and they seem to have the marketing muscle (and intent) to do it (V.me blog). Innovating in a 4 party network is normally next to impossible (see blog), but they have gained tremendous momentum in learning a “new way” to innovate through the Apple Pay experience.

This is a very, very major point.. and should lead V/MA investors to take a new fresh look at what these networks could accomplish beyond their traditional switching role. These are my largest personal holdings, so I am a little biased here.. there is so much upside.. but most of the future is dependent on tilting toward consumer and merchant.  In emerging markets, I expect these network will assess their regulatory structure: do they become a bank? An MSB? An acquirer? in OECD 20 markets.. An advertisers? A merchant friendly loyalty provider?… YES!!. This is the YEAR for a network pivot away from issuers toward consumers and merchants.

Strategies in eCommerce

I think about eCommerce with the context of an acquisition funnel. Where did the consumer start? Where did they finish? Today more product purchases start with Amazon than with Google.  Does anyone really thing Amazon wants to let another brand come in and help them (Sorry Chase Wallet). Where can anyone add value here? Amazon and Google may position that same day distribution of goods is far more important than payment (and I would agree). But perhaps the barrier for every mom and pop shop having their own self managed eCom sales site is fraud and payment acceptance. If Tokens solve for this, and help broker identity/preferences.. then EVERYONE could compete with Amazon, online retail becomes disrupted by taking away the advantages of scale. This model would be a huge boon to Google and Alibaba (they see a world of a million merchants and billions of products).

  • Payment Networks are working to take risk out of payment acceptance, solve for consumer anonymity and improve on their only weakness: no direct consumer relationship. Thus they endeavor to directly enroll consumers in a direct service offering to serve the eCommerce wallet role (see Battle of Cloud Part 3). I am very high on these efforts. Why? Because they have ability to create a new value proposition when coupled with their tokenization efforts. I predict within 2 years that we will see a new rate structure for use of Tokens in eCommerce .. something near CP rates.
  • Issuers are working to improve value to card holder and keep consumers within a Branded experience. JPM has created a new data division and purchase a card linked offer company. Banks are working to create their own “wallets” (Why on earth would a Amazon add a Chase Wallet button.. just plain stupid). Banks love the NFC and ApplePay token model where cards must be “provisioned” into a wallet. Banks thus control of which wallets to “authorize” and hide purchase data from the wallet provider.  Why would any merchant accept this? EXACTLY!
  • Apple, Google, Samsung, Microsoft working to make payments part of the OS (see blog). Payments in OS will impact “In App” first, eCommerce “browser” next.. authentication removes risk. This enables unstructured retail and disrupts marketplace concentration. I moved their strategy to the next section below (brokering trust)
  • Marketplaces like Amazon, Rakutan, Alibaba have integrated payment into their platform and are not keen to exchange Cards on File (COF) for tokens without a liability shift and risk based pricing. I’m slowing down here.. should be able to put a few more things in..
  • Paypal? Well.. let’s give Dan a little time here.

Brokering Trust (Platform strategy)

The ability of a mobile handset to authenticate consumers, and allow the consumers to delegate trust to 3rd parties (identity and secure data) will have major implications to retail, loyalty, payments, healthcare, social, MNOs, government, access management (see Brokering Identity). To understand the different strategies in this area, we must look at how tokens impact the existing model, who controls platforms/OS, who sees the data, where do consumers begin their product search (ie Amazon), who bears the cost of fraud, who is regulated?, what restrictions does entity have in collaboration/data? what is the consumers current behavior?, and who does the consumer trust to manage identity (see Who do you Trust?, Perfect Authentication – Nightmare for Banks, Token Assurance, KYC – $5B Opportunity, Authentication – Core to monetizing mobile).

Banks have historically played the central role in brokering commerce. They created the payment networks, and are central to many commercial payment processes we don’t see. Perfect authentication of consumers will completely disrupt payments, as the many new intermediaries can participate in risk (ex clearing and settlement). This is all happening at a time where retail banking is being turned upside down (WMT/GDOT Checking, Future of Retail Banking). The winner in this risk/identity battle will have the trust of the consumer and the ability to broker it against all possible market participants.  Merchant “trust” can NOT be won without a merchant friendly value proposition.. hence the problem for any of the eCom wallet providers. My view is that Apple and Google are better placed to execute here, not because they are more trusted, but because they know how to partner and move more quickly.

 

ApplePay: Debit issues

Update Oct 1

Apple forced all the top 5 launch partners to launch debit and credit at same time. Right thing to do!!.. but debit is messy.

My bank friends are having kittens over Apple Pay debit compliance. Issue isn’t Apple, but forcing debit cards to EMV (industry not ready) and dealing with the conflict between EMV rules and Durbin. For example, EMV rules state transaction must be routed to primary AID as identified by issuer. This is fine for credit, but Durbin requires routing flexibility… this requirement just never bubbled up through the EMV specs. Tokens exascerbate the problem, particularly if the AID is from a Visa BIN.. Specs must be updated to address need for routing flexibility (using the secondary AID) …but this breaks network rules.. and there are no payment terminals that read secondary.

————————————————

Previously I stated that debit cards in ApplePay are not Durbin compliant. I am retracting that comment completely.  The debit card in ApplePay seems to be Durbin compliant, as Bank of America spent significant time with First Data’s Star network to make it so. Problem is that the rest of the debit industry is scratching its head trying to figure out how to make this stuff work… so don’t expect to see any ability for all your debit cards to work in ApplePay anytime soon.. just the top 5.

The Challenges with Debit

Debit in the US is broken down into 2 primary segments: Signature Debit (processed through Visa) and PIN debit processed through 8+ PIN Networks. See this Federal Reserve note for more background. Retail banks exert almost complete control within PIN debit, after all it is their “ATM” acceptance infrastructure that allowed for this network.

PIN Volume2

While the new EMVCo token scheme is available to Debit, coordinating implementation across 8+ PIN Networks (and large Retail Banks) is a big chunk of work. Particularly when these same banks are working to consolidate PIN networks, and create their own centralized token solution (see blog).  I’m painting a picture of many companies and many moving parts in PIN debit and tokenization. Add to this picture Apple, who worked with networks to compartmentalize and maintain secrecy with a handful of partners.

To get anything done in this environment, it is best to work with the biggest gorilla, solve their problems, show the way, and hope everyone else gets in the boat. This seems to be what happened and the Gorilla is Bank of America. This is the only Debit card I’m confident is in ApplePay. I believe BAC has been working with Apple for over 4 years on this.

There are 2 essential problems with debit in mobile wallets

  1. Debit cards must be PIN capable
  2. Debit cards have complex routing requirements (more detail below)

Durbin Challenges – Routing

The Durbin amendment requires that Debit cards give merchants flexibility in the routing debit transactions (see this excellent Paul Hastings note). From Financial Reform Insights

As noted above, all banks, regardless of asset size, must comply with the prohibition on network exclusivity and routing requirements. The Fed has implemented requirements to prohibit network exclusivity arrangements on debit card transactions and ensure merchants will have choices in debit card routing. In addition, the network exclusivity and routing requirements apply to both debit cards and prepaid cards.

The final regulation requires issuers to make at least two unaffiliated networks available to the merchant, without regard to the method of authentication (PIN or signature). A card issuer can guarantee compliance with the network exclusivity regulations by enabling the debit card to process transactions through one signature network and one unaffiliated PIN network. Cards usable only with PINs must be enabled with two unaffiliated PIN networks. ATM transactions are not subject to routing and exclusivity regulations.

Note: A smaller payment card network may be used to help satisfy the two unaffiliated network requirements; however, if the second payment card network is unwilling to expand its coverage to meet increased merchant demand for access, that would trigger noncompliance with the network exclusivity regulations.

In real world terms, the Durbin amendment allows merchants to treat all debit cards like bank PIN debit cards (they can be routed around Visa/MA switch and switched through PIN networks Star, NYCE, Pulse, Cirrus, … etc). Large merchants have also started routing debit transactions DIRECTLY TO BANKS, skipping the PIN Networks all together.  This is all very straight forward in the world of a 16 digit PAN. The merchants (or their processors) use BIN routing tables that can be customized by issuer/debit network.

Within the EMVCo Token Scheme, the only way for the underlying card to be “resolved” is from the Token Service Provider (TSP) as described in part 3.2 of the EMVCo spec.  Visa and Mastercard are the only TSPs in the current version of ApplePay. Although, both networks have committed to allow Issuers to serve in the TSP role directly none appear to be ready October 2014. These unique TSP roles are probably due to the speed at which the EMVCo spec materialized (fastest new Scheme in history of V/MA), and also to the secrecy surrounding its first use (ApplePay). Thus, in the current ApplePay EMVCo token scheme neither the Issuers or PIN Networks are in control of the tokens, and hence cannot make “at least two unaffiliated networks available” without first resolving the token with the TSP.

To solve for token resolution, each and every processor must have the ability to work with a multitude of TSPs to resolve tokens into something that could be routed based upon the MERCHANT’s options (2 unaffiliated networks). The problems here are not insurmountable and resemble the problems associated with the Internet’s DNS system, where multiple copies of DNS routing tables exist to convert www.domain-name.com to an IP address. Tokens have an added advantage of identifying the owner/TSP through the BIN. For example, a Visa debit card within the ApplePay system could be a Visa Bin, a Chase Bin, a Wells Fargo bin.. So a token identifies its “owner”, or the TSP which can translate it.

To solve for this problem, Visa and Mastercard have made a “detokenization” service available, and other TSPs/PIN networks must do the same (running Vaulting / PIN transformation).  But to do this for all cards, all processors and all merchants takes a little time. There are technical and business issues here.

What is most surprising to me? I spoke to the head of debit cards at a top 5 banks, and he didn’t even know there was a problem..

PIN Capable

While it is great that they included debit in the launch, the debit issue had plagued other schemes as well. ISIS initially launched with a Chase Debit account to hold balance. Chase’s regulator told them that this card was not compliant (no PIN capability) and thus they had to pull weeks before the ISIS launch. ISIS had to run to Amex Serve for the solution, as Amex was not under durbin constraints. This PIN issue will also hit ApplePay, but the more immediate problem is routing.

Google solves the PIN problem by wrapping in a non Durbin debit. Specifically, banks with under $10B in assets, and non-banks (like Amex) don’t have to comply with Durbin. Google thus has one token (non Durbin debit), where they are issuer with Bancorp Bank (TBBK).

I am laughing a little bit on the PIN side, can you imagine, unlocking your phone, touching the ID, tapping to merchant, then also keying in a PIN. Merchants are in a place to “steer” toward PIN for every debit card. But downside is that if consumers get too frustrated with experience they will just use their credit card.

Merchants know…

A few months ago, “a merchant group” sent Apple a “formal notification” telling them that their scheme was not Durbin compliant. I don’t know if Apple’s team just sat on the notification, or hoped it would just go away once all the good launch activities came to pass.  I’ve been convinced over the last 2 days that there is a durbin compliant card in the wallet, but Apple Pay is certainly not ready for every debit card. Why didn’t Apple respond to the merchants and tell them they were investing to make sure this works? It is not a great way to start off a relationship… particularly when you have your own plans for engaging the consumer.

This is the graph that merchants see in their minds when they think of Apple pay

non cash payment

Notice the flat line on credit card spend.. and the 20%+ CAGR on debit. Merchants worry that the strong banker presence at ApplePay launch is a key message.

Industry Confusion

My friends in the Debit industry are scratching their heads this week: Retail Bankers (debit card owners), Processors, PIN Networks and Merchants. What do they do to get their debit cards in ApplePay? If only one of them is ready (meaning has ability to resolve and or issue PIN debit tokens) what does it mean for the other 7?. Is this the first path toward an industry PIN consolidation? Who “owns” the token resolution service, standards and approach? What are the service levels on directory synchronization and response times? No one told them about an industry body to standardize… Man this debit stuff is complicated.

The underlying PIN Network industry problem is there is really no single authority to coordinate EMVCo token implementation across 5000+ banks and 8+ PIN Debit networks. Perhaps there is really no single way to get debit cards into a wallet, and this mess just further helps the 800lb gorillas that can invest in semi-proprietary schemes to get it done.

 

 

Most Important Payment Race: Consumer Behavior

In the US, we are set for a once in a generation shift in consumer behavior in payments. The dynamics are extremely complex, and the desired behavior is very dependent upon the players you talk to. Five years from now, what do we want consumers to do?  Dip, chip, pin, tap, QR code, touchID, ApplePay, authenticate …?

I can tell you US Banks had a very, very solid plan here 4 years ago. They wanted to leapfrog EMV toward a token scheme (See Business Implications of Tokens). EMV has big problems, although the POS transaction is very secure, the card number still goes in the clear within a chip transaction (see Secure Element, NFC, HCE, EMV, Tokens and Cards). Which means I can take that primary card number (PAN) and use it online.. We thus see EU fraud rates disappear for POS transactions.. but remain at parity for online. The goal of any new scheme must be to take the PAN away … to make it useless… This is what tokenization does..

So many people here mis understand the fraud rates in the US.. Please read the US Federal reserve payment study. Fraud rates on US GP credit are only 3.72 bps.. the real fraud comes in when these card numbers are used for online purchases (stolen in one channel, used in another).. Banks are 100% correct in their mission to rid the system of stored PANs.. and tokens do just that

PIN Fraud Rate 2013 volume

ApplePay is the best, most secure payments mechanism ever released. But it is Visa, Mastercard, Amex, Issuers and FirstData that did 90% of the work. Apple’s add? touch ID.. This new token standard is available to any other company as well (See EMVCo Spec).

In the midst of all this is a battle for Chip and PIN, vs Chip and Signature (see TSYS Article), banks ability to have payment embedded into their own applications with HCE (which also uses tokens, see blog), and merchant’s own desire to have a starbucks like card of their own. What do I want consumers to do? well that depends on WHO you are.

If you are a bank, key factors are: control, brand, usage, cost (issuance/service), incremental rev, fraud, ability to leverage data. That means HCE, or Chip/PIN or Chip/Signature

If you are a network brand, the EMVCo tokenization approach is best for all of the same reasons. The reason Apple was able to roll this out so effectively was that they worked with the networks first to establish the “approach”… then gave it to the banks as a take it or leave it..

If you are a merchant.. you want to let the consumer choose the way they want to pay. You want the consumer to have access to instant credit when they need it, and you don’t want to pay for the Issuer’s card loyalty programs. You would love to have your best consumers use a starbucks, or Target Redcard like payment method in your store. You also don’t want anyone else’s brand in there but the one you control. You may be willing to pay someone that BROUGHT THE CONSUMER IN.. but if they didn’t .. then stay out. You are also concerned about cost of acceptance, and ability to known who the consumer is (loyalty program). Merchants also want ubiquity.. support of the 90% of consumers… nothing special for any subset unless they are in your loyalty program. This means acceptance of the common standard. Merchants love chip and pin and will support it.

My view is that merchants would also support contactless if there was a 100% commitment by banks to equally support debit and credit cards in new mobile schemes.. 100% of the time. 50% of the resistance to contactless acceptance is related to “credit only” support, the other resistance is in building a mobile platform where they can interact with the consumer.. and payment is a key function they would like to be involved with.

I wrote a rather long piece on consumer behavior earlier this year, and right now I think EVERYONE is a little myopic. Consumers will not change consumer behavior until there is incremental value. Moving a card number from consumer to merchant in a different technology is not consumer innovation. The only entities that can possibly deliver the 20% incremental value are merchants.. so any successful solution must have a merchant friendly aspect. American Express knows this… I also believe Google, Amazon, Square and Visa know this.. Thus I see a future where our entire payment system begins to tilt a little more toward the merchants.. as payments become ubiquitous and consumer identity is brokered by new entities that will also allow for more efficient risk management. The battle for payments is now wrapped up in the “war” of rewiring commerce, with consumer and merchant data as the keys.