The Directory Battle PART 1 – Battle of the Cloud

The Directory Battle PART 1 – Battle of the Cloud

This week we had both Finnovate and CTIA going on, and behind the scenes the battle lines are being formed in a forthcoming “BATTLE OF THE CLOUD” wallet. I didn’t include wallet in the quote because Battle of the Cloud sounds so much more ominous. Perhaps I should take a page from George Lucas’ playbook and start with Chapter 4.

I’ve been talking about the directory battle for some time now (see Clearxchange post).  Who keeps the directory of consumer information? As I outlined in Digital Wallet Strategies: “ securing information AND giving Consumers the exclusive ability to control what is shared with whom is a challenge (beyond technology and trust). We thus have many limited “Wallets” that are constructed around specific purposes”.

This week we had Visa’s President tell the CTIA audience that Visa has moved beyond NFC to V.me (see my previous post on Visa Wallet). What is really going on? What is the battle of the cloud?

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. (V.me is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc.   But what few understand is the implication for the physical payment world. This is what I was attempting to highlight with PayPal’s new plastic rolled out last week (see PayPal blog, and Target RedCard). If all of your payment information is stored in the cloud, then all that is needed at the POS is authentication of identity (see blog). Remember US  online commerce is $170B/yr, physical commerce is $2.37T (not including FS, Travel/Entertainment).

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives (new digital coupons).  Another example is Paypal’s ability to selectively assume settlement risk on some transactions as they route through low cost ACH, or even allow customers to use BillMeLater to selectively convert certain purchase to loans AFTER THE FACT.  In these 2 examples, traditional payments revenue will be significantly disrupted by: lower cost transactions, competitive credit terms (each purchase), and incentives tied to payment type.

But do consumers really want to store all of their information in one place? With one entity given the ability to see all of your spend? For an mCommerce transaction, there is nothing I hate more than having to type in my name, address and card number in that tiny little screen.  Most of these mCommerce solutions (like V.me) are little more than an “autofill” where the merchant checkout page leverages API integration to the cloud service to retrieve user information (see diagram here). If I’m on my phone, my carrier already knows who I am, so seems fairly logical for them to help me with the autofill. This is a reason I’m now a big fan of Payfone. I could also see why it makes sense for Apple and Google. But why Visa? Does it make any sense at all for Visa to hold my Amex card?  Oh.. let me cast a few more stones on ISIS/NFC.. that payment instrument that locked in your phone.. yeah it can’t be used for the online purchase. Perhaps someday someone will write a secure NFC mobile browser plug in to extract data from the SE.. but that opens up a whole new can of worms.

Today’s online merchants are getting a very small taste of the war as they are asked to integrate auto-fill plug ins (Paypal, V.me/CYBS, Payfone, Google, soon to be Apple). Merchants should get on board with all of them, as they do represent a tremendous improvement in customer experience, and you may be able to squeeze some free marketing/implementation money from each of them. However, the cloud battle at the physical POS is still a few years off, as existing card products have a substantial advantage in risk modeling/fraud. This is where Square is taking a lead, as it has the best consumer experience hands down. Low volume merchants really should assess whether they need a specialized POS system, as the parameters for selecting one have shifted from ISO/Processor/Cost/Acct Recon/Book Keeping to Sales, incentives and customer experience.

Battle starts in mCommerce/eCommerce

My guess on timing of V.me is driven by knowledge of Apple’s impending plans to “extend” its iTunes account to payment outside of the Apple ecosystem. Visa sees this network risk and is in an all out war to protect its network, by leveraging its CYBS asset online. The banks have worked on a directory concept for quite some time. The Clearing House (TCH) built a working system called UPICK to solve the problem of consumers giving their RTN/ACCT# out in the open.. assigning a virtual number to the account. A sort of “virtual account number” that could only be translated by TCH.  It never took off, because ACH fraud was low and banks were much more excited about having merchants accept cards as payment.

Retailers are not silent participants to this war.. their champions are Target, Tesco, Amazon, and Rakutan. I hope Amazon will finally dust the plans off of One Click expansion. Other retailers are also aligning to assess creation of shared cloud infrastructure.  Sorry I can’t comment more. Similarly MNOs are also in the cloud game, for example Payfone may be one of the best services in the market..

Who are the players in the Cloud [Payments] War?

The initial battle will be in mobile/online purchases.

• Banks: V.me, Mastercard,
• Platforms: Apple, Google, PayPal
• Retailers: Amazon, Rakutan,
• MNOs: Payfone, Boku, payforit, billtomobile, …

Most confusing is that there are few alliances.. it is many against many.

http://tomnoyes.wordpress.com/2011/10/26/apples-commerce-future-square/

WSJ Article – A Retailer Wallet?

3 March

Today’s WSJ Article - Retailers Join Payment Chase

What do Retailers want in mobile? Well they certainly DO NOT want a wallet which they can’t control and is restricted to a containing credit cards, at a cost of 350 bps cost (sorry ISIS). One retailer told it to me this way

“Mobile Operators know how to run dumb pipes, not create business platforms for marketing… their current wallet initiatives are akin to a toll bridge, NFC is their toll booth where they stop me before reaching my customer..  to cross their NFC bridge I have to wait in line and when I arrive at the gate they don’t want $0.50 they want 3.5% of what I’m carrying in my truck, and a copy of the shipping manifest (the customers names I’m going to see in my delivery). This model doesn’t work for me. “

Retail is under assault. Globally retailers have had their gross margins compress from 4.2% in 2006 to 2.4% in 2011. They view mobile as a principle tool that has led to this margin compression. When I go into talk to the majors and say ‘lets talk about mobile’ .. their response is usually something like “yes.. how do we stop it.. can we put disruptors in our store”? Of course there is much shock value here… particularly for Silicon Valley types where everything mobile is good. Read my previous post for more perspective here.

Few people know that ISIS is charging Bank issuers for the privilege of having their cards in the wallet. The only way issuers can make the up front investment is to have a product that pays for itself quickly. That product is a credit card. This means that the ISIS wallet is 100% credit..  for a retailer that has a transaction mix of 30% cash, 40% debit and 30% credit this means adding a payment type that is a 100% mix of its most expensive type. Retailers ask: will this ISIS wallet drive increased spend? Why on earth would I want to do this? For Consumers this means you have to pay with cards that are “privileged” and not the card you want to pay with.  A major advantage for Google is that it lets Consumer decide what is in its wallet. In the Google model, Issuers face no cost in getting their card in the wallet,  Stores can add their own private label or loyalty card.. and anyone can market..  Consumers are in control. Google Wallet is not just about payment.. but about advertising, loyalty and incentives. This point is missed in the mainstream press.

The WSJ article is off on a few points.. Retailers are not focused on the mobile payment side at all (..well perhaps agreeing not to allow bad ideas to get started is agreeing on a wallet strategy.. but in a negative sense).

What are Retailers looking for?

• Mobile as a tool for enriching the customer marketing, shopping and purchasing experience.
• Ability to deliver above to ALL Consumers.. not just ones with the latest phones
• Retailer friendly protection of sensitive consumer information
• Lowest cost payment (Google is the only entity that allows customer and retailer to store ANY card.. example paypal does not support store private label)
• Integration with loyalty and marketing programs

A consortium of highly competitive Retailers face that same challenges that a consortium of highly competitive Mobile Operators do.. Neither will work unless they can deliver value.  Individual companies do not excel in designing business platforms that benefit others, and are therefore very myopic.  Consumer’s are very reluctant to use a retailer’s own app while they shop or checkout… For example if I was shopping in Target,  why would I use Target’s iPhone app for price comparison? will I get the same results as Amazon’s?

What should you expect from Retailers?

• A defensive play.  Retailers are well positioned to slow adoption of technologies that don’t make sense for them. There is a high degree of collaboration among retailers here .. most of it resulting from their success in pushing back on interchange in various markets (recently Durbin in the US).
• Something that makes financial sense for them.. FAST. Given their margins.. they have no flexibility in making investments that don’t have a solid plan. Just as the MNOs look to card interchange.. Retailers also look to 3^rd parties like CPGs (think trade spend and coupons) to fund consumer facing initiatives.
• Cost reduction is usually more of a focus than sales creation.. this is particularly true when competitors get together in a consortium. I’m not going to say much more here.. but I think you get my point. For example, if I enabled ACH payment on my loyalty card.. I would take interchange from $0.21 debit down to $0.04…  Target has done this with their Red Card.. a FANTASTIC product. http://tomnoyes.wordpress.com/2010/12/06/redcard/
• Customer control. Retailers want to own the consumer shopping process… or at least feel like they own it.  Quite frankly Google has built the platform to enable this, but Retailers are concerned about data.

There is a tenuous balance to make mobile work in retail. This balance is between: Consumer, Retailer, Bank, Manufacturers, Mobile Operators, Advertisers, ..  “Platform effectiveness” or “Consoritum effectiveness” has a strong correlation to: data, reach (distribution), relevancy, effectiveness and control. Just as MNOs are not balanced, neither are Retailers.. Consumers will migrate to where value is delivered. In Retail, selling a commodity good at a higher price is not a winning business model.. I consider myself fortunate to work with many of these groups, what is most ironic is that each group views a consumer as 100% owned by them.  My position is that NO ONE owns the consumer… that consumers are driven by value and will change their behavior when value is delivered.

In my view, a neutral party ( like Google, Apple and MSFT) are much better positioned to bring participants together. Neutral Parties are akin to public highways with optional services.. They are not picking sides.. or forcing you to stop at the toll booth and hand over a percentage of your merchandise to complete a  ”commerce” process.

—- Addendum

BTW I admit that I’m a fan of Google. It is my baseline because nothing else is in the US market (POS Payment with phone).. and Retailers love them. It is the only company I know of that has Retailers calling them to request a visit.. why? Google delivers sales.

Great example of collaboration is Google Local Product Search (http://www.google.com/intl/en_us/products/local.html).  Stores can choose to share store level product inventory. Think of how sensitive this data is.. what you are selling in which store (0r just a binary in/out of stock). Retailers love this function and enthusiastically share this data with Google because it improves the way consumers choose a physical retailer from an online search. It drives sales. Payment is only the last transaction in a long research, marketing, shopping, selection process.

Your feedback appreciated.