Commerce Network Puzzle

This is brief.. just something top of mind. This is an extension of my previous blog this month on Remaking of Commerce and Retail. I wrote today on linked in

POS and Payment Terminal mfgs have 30+ groups trying to add coupon and payment functionality. Their message.. FIRST get a retailer that wants it. Verifone’s Verix architecture provides retailers with capability to run 100s of POS apps… but retailers are skeptical.. will “apps” drive revenue? will it confuse customers? What will drive loyalty to MY BRAND vs. some start up? who is going to manage the mess when something doesn’t work?

All of the Card Linked Offer companies (see my blog), PayPal, ISIS, Google, Groupon, Living Social, Fishbowl, Inxent …are trying to integrate into the physical POS.  There are 2 primary options to integrate marketing into the checkout process: the Electronic Cash Register and the Payment Terminal.

I speak quite a bit with Verifone’s investors about their POS vision.. Will NFC drive reterminalization? Will payment terminals morph into a rich customer interaction environment? Big retailers like Safeway and WalMart have teams of 500-2000 developers around their core IBM 4690 ECR (ACE, GSA, SurePOS,…) and heavily customize it.  Take a guess how many people retailers have in managing their payment terminal? The answer is usually zero..  The reason the payment terminal (where you swipe your card) came into being was that retailers did not want to deal with PCI compliance, so their processors (like FirstData) came in with the terminals. The Cards get encrypted at the swipe and no one but the processor has the key to unlock the numbers. The ECR sends total amount and the payment terminal tells them it is paid with an auth number.  I thus find Verifone’s Verix architecture somewhat amusing…  I certainly see how retailers would benefit by taking electronic coupons from this terminal (and sending to ECR), but the terminal does not give receipts and certainly doesn’t allow for matching of UPC information.  Even if it did… the retailers don’t want to create a new IT team to manage this mess on a piece of hardware they don’t own.

Will Verifone sell new terminals because of NFC? YES. Perhaps even as much as a 20% reterminalization (over baseline) in next year… BUT my bet is that the POS  manufactures will win the battle long term both due to retailer IT competency and the tremendous capability for POS manufactures to deliver complex business solutions (IBM is 80% of top 20 global retailers).. Things like coupons are not some abstraction… they relate to pricing and loyalty and must be integrated into a retailers price promotion strategy. Currently we are in experimentation mode… with leaders like Google, Catalina and Coupons.com.

What are the puzzle pieces that will make “rewiring commerce” work? Small companies are very challenged in delivering value within networked business. They certainly do not have the heft to create their own, so they must choose sides. Within the card linked offers space, they align to the big card networks. This alignment has implications for attracting retailers and the targeting which can be done from bank data (store preference) vs the targeting which retailers can deliver (brand and price).

In general, the Marketing and Shopping phase of a NEW commerce process requires the following

1) know the customer,

2) deliver an incentive that is relevant and prompts action,

3) in a way that is integrated to the retailers brand and price promotion strategy,

4) with a great redemption experience

5) and prove to the advertiser that the campaign was effective

The Business platform necessary to deliver on this?

1) Campaign Management

2) Customer Data

3) Advertising distribution (virtual, physical, … how do you get eye balls)

4) POS Redemption/Retailer Integration

5) Massive Customer value to change behavior (relevancy, value, usability, convenience, entertainment, social, …)

6) Global sales force that can sell to retailers

Notice that Payment is not listed.. Payment is not a problem in physical commerce. Now that Durbin allows for STEERING.. you can imagine what Retailers want to incent…

Cross Border Cards

Cross Border Card Transactions

17 January 2012

International transaction revenues are now 17% of Visa’s earnings (similar to MA). I try to have a cursory knowledge of payments.. but have to admit the dark world of cross border and network rates were a significant blind spot. Thanks to those folks who walked me through it. The information generally available is very poor. Don’t get your hopes up.. I’m sure this blog is equally as poor..  with perhaps a few new pieces of data.

My guess is that cross border remains a mystery because neither banks nor retailers want you to know who you are paying and how much you are being taken for. Cross border represents a tremendous area for growth and profitability… it is low hanging fruit.. Let me see if I can describe the fee dynamics. Note there are many, many variations here. I some geographies the government mandates exchange rates.. in others DCC… Not to worry.. the banks make a very nice margin in all scenarios.

Let’s take a look at 2 scenarios for a 100 EU hotel room bill, one using DCC and another without (My conversion rate of 1USD= 1.5 EU is a little off).

DCC is a mechanism developed by acquirers to earn FX… giving merchants an incentive to change POS by splitting revenue with them, thereby decreasing their cost (net interchange). With DCC adoption, issuers and Visa were faced by the loss of FX revenue, sometime around 2005 Visa instituted a new cross border fee of 1% (paid by Issuers). Issuers subsequently mark up this 1% fee with their own (see this WSJ article).

Network rules mandate that all cross border transactions go through V/MA. This drives the big banks like Citi crazy as they have banking licenses and consumer BINs in almost every country.. but still must pay Visa freight for settling cross border transactions AND let Visa manage the FX (in most countries). Given the margins here.. there is much room for global prepaid travel cards.  This was a driver behind Mastercard’s $459M purchase of Travelex Pre-paid business in Dec 2010.

I’m starting to see quite a bit of interest in this space as the big banks ramp up their presence in pre-paid. For global businesses.. there is a solid case to be made for issuing pre-paid cards to employees that regularly travel. See my consumer value proposition below. In full disclosure I’m a board member of hyperWALLET.. and I like them quite a bit (always a good thing for a BOD member).

http://en.wikipedia.org/wiki/Dynamic_currency_conversion