I tweeted this week that “Mobile Payments” is dead.. quite a contrarian view, particularly when compared to  Juniper’s forecast of $180B by 2017.  Or Visa Europe’s wild prediction that half of all payments will be through mobile by 2020.

Why am I the Contrarian?

1. There are FEW payment “PROBLEMS”. Do any of us leave the store without our merchandise because the retailer didn’t take our form of payment?
2. Payments is only the last phase of a long Commerce process that involves marketing, influencing, shopping, selection, purchase, support. Payments should be evolving toward a DUMB PIPE.. More value will not center around payment… but rather the retailer and consumer.. the costs of payments will begin to decrease SUBSTANTIALLY as supporting services improve DRAMATICALLY (Authentication, Fraud/Risk, Credit, Transparency  Reputation, … ). Can you imagine if you had to pay a 3% transaction fee everytime you bought a stock? Such a market would be highly INEFFICIENT.. yet that is the case in retail today.
3. Mobile is not a payment solution.. it is primarily an “Access” and “Authentication” Solution
4. My behavior rule of thumb says that there must be a >20% value improvement for behavior change
5. Cloud, Cloud, Cloud.. Our money, friends, digital creation, … are NOT locked up in the phone.. they exist in the cloud. It makes no sense to have a solution that ONLY works with the phone. (See Cloud Wallet). The mobile device can serve as a key authentication tool.. but so can your iris, voice, or facial geometry.. (See Apple NFC and Stage 4 Value Shift).  This is the context of Ross Anderson’s quote at KC Fed “If you solve the authentication problem [in payments].. everything else is just accounting  ..”
6. Retailers are not supportive
7. Supply Chain is complex

To be clear, there are many viable payment businesses today. Many exist because of the INEFFICIENCIES of the current network. My top examples surround P2P and international remittance (see my note on Xoom).  Banks have the ability to completely defeat any 3rd party service in these areas, yet they choose not to.

Emerging markets are completely different. There are many problems to be solved..including: commerce, banking, remittance, community, access, transparency, social welfare,

In OECD 20, We are beginning to see a massive restructuring of commerce. How are goods created, marketed, and sold. It extends much beyond Amazon, taxes, mobile-physical shopping and channels, marketing, loyalty, discounting..   It is a 3rd phase of Retail (Future Blog).  What is Retailer loyalty? Brand loyalty? What is a commodity? How do you service a customer? What is the role of price in a buying decision? Where can I get a customer’s attention? Who else can influence this customer?

Start ups…. Go solve a Real problem

VC/PE… Due Diligence is required prior to investing here.  If Visa and Google can’t move the needle… how can NewCo?

Parting Thoughts

WSJ.com is my home page.. yesterday I see a Monitise banner ad on the right “Over $30B in payments, purchases and transfers annually” (see Monitise PR)… I almost spit out my coffee.  I doubt if many know the context here.. Monitise’s history is in SMS banking.. a first kind of online banking, where their unique innovation was integrating an SMS server onto the ATM switch.. this allowed a very quick and dirty implementation that was extremely reliable. My guess that $29B+ of their volume is banking customers moving money from one account to another.. including bill pay.. Oh.. their pricing?  its not transaction based for this.. its just a piece of software sitting in Lloyds, RBS, HSBC, …

So before you go out to buy a piece of MONI on the London Stock exchange.. realize that biz model resembles FIS.. or rather Jack Henry (be VERY skeptical of any mobile payments revenue). In fact, Visa gave up on MONI within emerging market payments (in favor of the much more robust “BANK IN A BOX” Fundamo solution).

—- Correction — MA rate for non-regulated debit is 160 bps (not 105). My old Google card in the NFC wallet was card present.. I forgot to make the change to card not present…  Rate table below —-

Yesterday Google rolled out InstantPay, and a new planned P2P service integrated with Gmail, wallet, … etc. Although this is a step back from the physical card revealed by Android Police in November.  This is a VERY BIG DEAL for payments. Why?

Merchant Value Proposition

• Reduce payments cost. No matter what card customer uses, everything will be priced as a non Durbin Debit (160 bps). This marks the First Time Ever a provider will take a LOSS on every payment, to get the data.
• Customer uses whatever card they want, credit, debit, Amex.. or even ACH.
• Merchant keeps current processor. The payment metaphor is a 16 digit PAN.. a Google MA that wraps everything else (see don’t wrap me).
• Increased Conversion (particularly mobile). One button (pay with Google) and everything is filled out.
• New performance measurement tools in google analytics
• New offers and ad types possible (dependent on redemption, and/or number of purchases)
• Possible loyalty programs
• New physical merchant use cases (buy on mobile pick up in store).

Consumer Value

• Centralized payment instrument/fraud protection. I’m not giving my card number out to all merchants
• Ease of use.. no more form filling
• Centralized e-reciepts
• Use any payment instrument I want
• Store coupons/incentives in wallet
• Wallet on Android no longer NFC dependent

Consumer “downside”

• Google gets to see more of your data.. but who do you trust with it? Google vs. Banks vs. none of the above.

Core INNOVATIONS

• Expanding the google master account (GAIA) to manage verified identities and making new services available (to these consumers it has verified)
• Ad delivery: Leveraging customer insight and “touches” to influence consumer
• Ad quality: closing the loop with payment.. what ads contributed to what ACTUAL behavior
• PAY FOR PERFORMANCE Advertising!??  No more CPC? one obvious future is if Google can see transaction then the could bill merchant for advertising based upon the purchase (not on the click). This is the Holy Grail of advertising and if there are indeed plans here.. it is beyond a moon shot. As an advertiser I would only pay for marketing that led to customers buying from me. This would spawn an entire new industry of campaign managers. More on this in future blog.
• Phone as tool for Authorization of a given identity.
• Business model… big win for merchant (cost, conversion, experience and reach) and consumer (protection, convenience)…

For eCommerce/mCommerce merchants this may be the biggest “no brainer” since Cybersource offered to offload card processing/fraud risk management.  This is a V.me killer…  from both cost, and advertising perspective. The primary challenge Google faces is that 70% of eCommerce sales are controlled by Amazon, eBay/PayPal/GSI, and Visa/CYBS… They can make it difficult for smaller brands to turn this on.. but it will happen… Amazon may even want to let Google eat 1% interchange on all their sales.

Osama and the Google team have done great work getting this out to market. Congrats.

P2P

On the P2P side.. not quite sure. Sending money in gmail is certainly better than a stand alone service.. but EVERY SINGLE P2P effort has failed: Obopay, Visa Money Transfer, ClearXchange, POPMoney, Zashpay, paybox, ..  Consumers just don’t pay other people (like babysitters or golf bets) electronically, nor do they PAY FOR PAYMENTS. There is a strong social element in giving and receiving something of physical value (ie cash). Remember when your Grandmother sent you a birthday card with $20 in it? It just wouldn’t be the same if Granny sent me an email with an electronic notice..

With respect to Google’s new service, I will certainly say that Google has done a great job with integration, and there is no more highly used service in the world than Gmail.. so if anything had potential.. this is it. Google is not exactly a culture that seeks operational folks.. more of CREATORS.. not regulatory, payment ops, KYC, dispute, … experts. This will be one GIANT headache of a service to manage (globally).  If they can make this work, and extend to android.. it could be the LINCHPIN to ubiquity and payment success in emerging markets. Payments for “free”!!?? If cross border were enabled, what would this do to Xoom? PayPal? WU? See my blog on Growing the world’s economy and poverty alleviation.

 NFC Thoughts

Is Google walking away from NFC? Don’t think so.. there are probably markets where it makes sense. US doesn’t seem to be one of them.  Remember the NXP chips only just recently allowed more than one card emulation application.. so for last 5 years everything had to be Visa, or MA, or Amex.. ISIS is facing delays because of lack of Gemalto SWP SIMs and the handsets to support them… and consumer “demand”.  The NFC ecosystem is dead in the US… the only people that win are banks and telecos.. Merchants are not enabling contactless.. for a reason. As I told Google 2 yrs ago, to establish consumer behavior, you must use it 5+ times per week. There are 3 critical payment areas for this: Grocery, Gas and Transit.  Without participation here.. no payment change will occur.   See my note on Apple and NFC, and Google Wallet.

My top recommendation is to integrate this tightly with KYC/Authentication initiatives..  See blog on reputation.

I’m in overload on information this week. Just don’t know what to comment on..

• Visa’s earnings,
• MA’s miss,
• Bitcoin EVERYWHERE
• Google’s Plastic Future
• Paypal’s “free payments” or Plastic Failure .. Discover Relationship
• Square’s new “Stand”
• Visa’s new rewards Scheme and Vantiv’s efforts to support
• MCX new members
• WMT’s Success in Prepaid and Banks whining to the Fed to stop it.
• WU’s recognition that is must change agent model
• Groupon’s POS
• Network rule changes, particularly around “wrapping” cards.
• Emerging market developments
• Best Buy shutting down all of its NFC capability on payment terminals.

In an effort to conserve energy, let’s just say that there are MANY announcements.. but little real progress…  If you were a retailer.. would you exclusively advertise through Groupon? Through Visa? Through anyone? Of course not you have a price promotion strategy and multiple marketing programs which to accomplish objectives in each.  You would choose your channel based upon the ability to REACH the customer (ie Radio, TV, ?email…). As a retailer you also want loyalty to YOUR BRAND.. not some card, bank or start up…  Most of these entities have NO REACH.. having customers is MUCH different than being an effective CHANNEL TO INFLUENCE them.

With respect to POS.. the world needs change. Both Square, and Paypal have the merchant value proposition about right. Their respective terminals solve a short term cost/complexity issue. Square’s product is much further ahead as it also solves inventory management and marketing problems.  PayPal’s value proposition may be higher as they could manage payment costs more effectively (given consumer paypal account penetration), and many merchants already have a merchant account. Perhaps Paypal is taking my advice from 2 yrs ago.. focus on the merchant side first.. I hear that the paypal card is Don K’s pet project.. but John and Marcus may be finally tiring of the poor performance.

I’m actually starting to change my attitude on Visa. Its not just that Jim McCarthy is down the street from my in North Carolina… but rather Charlie is changing the culture there from one that alienated everyone.. back to a network that wants to add value to all. One example is emerging markets, where Hannes of Fundamo has done some REAL work in creating new VisaNet transaction sets to support emerging market solutions. Unfortunately their offers platform is stunted, as the mix of issuer “permission” and consumer experience makes this unworkable basket level program that I have already discussed many times (See CLO). Visa does not keep transaction history (with exception of debit hosted service of a few DPS banks), thus any offer targeting would be driven off a visit to a single store, or single event. This enables it to be a switching service..  Buy something at Macy’s and BOOM get a 10% back offer from Neiman Marcus. From the PR:

Most importantly, the Visa POS Offers Redemption Platform provides real time ticket reduction as part of the offer redemption during the authorization process, delivering an alternative option to the need for statement credits or paper coupons. This functionality streamlines the checkout process by enabling instant redemption of rewards and has the potential to drive incremental transaction volume. Once the reduced transaction amount has been approved by the card issuer, consumers are immediately notified of their savings via receipt printout and SMS text, or email message. (The Next Web)

Customer Experience? The Visa “POS Offers Redemption Platform” is really a “credit” that COULD be given on the receipt if the retailer’s POS interprets the message, and IF the issuer allows it. Thus the entire platform suffers from targeting, basket level redemption, consumer experience, POS integration, Issuer permission, … (need I go on)? American Express’s focus is completely different. They work with the retailer to help them gain insight into their most valuable customers and work with them to create programs to reach them. Visa can’t do this.. as they don’t own the customers.. nor does Vantive.. NO WONDER JPM wanted to opt out of VisaNet.

Google.. lets wait 2 weeks here (after I/O). I already discussed what was reported on Android Police in November. My guess is that the cost of this program was going to be pretty big… even for Google.. If it was successful. Eating 100-150bps in physical commerce ($2.4T) can be quite a big hit, even if you take only 1% of the market ($240M-$360M in US alone).

WMT’s Pre-paid success.. and impending MCX efforts are making the banks itchy. Somewhat ironic, as banks really don’t want WMT’s mass consumer customers in their branches.. while WMT loves them in their stores. Think the banks really don’t like having their “banking lite” services productized and sitting on a retail shelf to buy. They don’t want consumers to think of them as a product which can be bought.. and switched. Of course some banks have seen the light (Amex, Discover, GreenDot, BankCorp, Meta, …). Competition, transparency, and product selection are core elements of efficient markets. Of course it makes sense to ask your regulator from protection against consumer choice. But this is certainly not to benefit the consumer.

Bitcoin? where to begin.. ? Unlike most currencies, bitcoin does not rely on a central issuer, like a central bank or government. Instead, bitcoin uses atransaction log across a peer-to-peer computer network to record transactions, verify them and prevent double spending. It is a VERY INNOVATIVE mathematical crypto innovation (that is used extensively in illegal activities). Bitcoin stands in dramatic contrast to all of the data sharing, bank controlled, transparent stuff above. Its success demonstrates that there is a tremendous need for anonymity in payments.  There is no centralized authority here.. which is what alarms governments..  Thus there will be very strict controls on how coins can be converted into currency. Thus Amazon’s coins can only be used to purchase games/apps.  For those investing in this space, you should thoroughly research eGold.

Payment is still a red hot market.. expect significant M&A activity over next 12 months.

Thought I would take a few moments before my Saturday Tennis match to discuss a top “success indicator” as a prospective investor: Consumer Behavior. I probably entertain 5-10 calls per week on new payment ideas.. my worst experiences are from individuals that start “I have a patent around…”… my eyes close I take a breadth, try to appreciate their personal energy in putting themselves out there, and then go on to encourage them to find a customer and ring me again.

For the calls that go through the next stage, I like to start with an understanding of the customer experience.  Why? Well establishing a great experience can build adoption like wild fire… but most new founders make very poor assumptions on how consumers will change behavior.  For example, consumers taking mobile phones out of their pocket, launching an app, connecting to wi-fi, and walking around a store looking for deals (every time they shop). When it comes to making assumptions on consumer behavior, Big companies suffer from the same problem. Where is the experience in bringing big new consumer offerings to market?

A few of my Fortune 50 examples hail from online banking (I was fortunate to have teams responsible for online at both Citi and Wachovia).  One of my biggest learnings by far was focus on customer at Wachovia… what do they do? What do they like? What don’t they like?.. what are the primary behaviors? By customer segment? Why do they bank with us? What do we do better?  Its just amazing what you can learn from your customers!

In the online banking space, my teams always faced a wall on the limited time consumers spend on banking sites. In retail banking (where you move money and pay bills) consumers log on an average of 4 times a week. They typically spend about 3-4 minutes as they.. check a balance, pay a bill.  Customers with self directed brokerage accounts have much higher interaction (perhaps 4-8 min), and Credit Card only customers have much lower interaction (Less than once per month, with active users of around 40-50%, compared with 80%+ for retail). One thing remained constant across all banking segments.. customers DO NOT explore the site… or expand beyond the task which they want to accomplish. 90%+ of all consumer interaction proceeds along 3-5 core behaviors. Customers come to online banking with an objective.. NOT TO SHOP.

This is one reason I’m very suspect of card linked offers. Consumers don’t go to their bank for “deals”, to check reviews, … to poke around what they could possibly get. Of course that could change..  if consumers were able to receive some sort of substantial value.. something they could get no where else.. .  But the effort to CHANGE BEHAVIOR is SUBSTANTIAL. It is much more than delivering a fantastic consumer experience, and delivering differential value, AND doing this consistently, it involves MUCH MORE (ex. existing behaviors, loyalty, Social factors) . In the CLO example, the consumer behavior change entails BOTH an online behavior (navigating offers), and a physical behavior (selling offers to merchants, assessing effectiveness vs. alternative, targeting, redemption, loyalty). Consumer PROFITABILITY for the merchant is also VERY DEPENDENT on consumer demographic. (See my CLO Blog).

Social factors are the primary drivers of commerce related behavior change (IMHO). What do your friends say? Community? This is the core of what makes Amazon and eBay great. The importance of Social factors shouldn’t be much of a shock, as we see this in how bees swarm, how ants find food, how birds fly.. all patterns that have a significant social component. This is why I remain very high on Facebook’s valuation.. as they have much room to leverage social networks for BEHAVIOR CHANGE.

Speaking of change, if you were going to influence someone: A) would you want them to come to you? Or B) would you go to where they already are? This is the key to evaluating any new concept…. Business plans that reach customers within their current patterns of behavior have a much lower risk. Where do you spend “open” time today? time that could be used more effectively? Airport? Google? In the Car?

This is why I love Square.. they aren’t telling the customers to carry something new, or to go somewhere they haven’t shopped before.. they work to make established behaviors stronger.. with a better customer experience.

Another example in the payments world is Payfone… consumers already use their connected devices to pay for things.. why do I have to type in all of my address, card information, …etc into a little mobile screen.. why can’t the carrier just send it over and fill it out for me.. they know my phone.. they know my information.

On the negative side I would put NFC. Consumers must buy a new phone, get their banks to provision a card, depend on a new merchant terminal type to wave their phone… Oh.. and the BIG ELEPHANT.. there are no NFC enabled debit cards.. which happens to be the primary way consumers pay for goods in the US. Also the only banks within the ISIS wallet are the ones that paid $1M to have their cards in the wallet. In the end NFC is slower, more expensive, harder to use, and has fewer options.. why is this a good thing for the consumer? Like a toll bridge with a 5 hour wait.

The best quote on the NFC topic was from a Top 5 global retailer “Tom NFC is like a toll bridge, but the telecos don’t want $2 to cross their bridge, they want 3% of what is in my truck.. and the entire shipping manifest… I think I’ll just find another way to cross…”

I can’t help but think of the Steve Jobs book, and all of the stories on his product focus.. from the curved lines around icons, to the curved back of the iPad. What do CEOs focus on today? How many of them really know why their customers use their product? At Wachovia, our CEO Ken Thompson called over to our team to tell us he had problems logging in.. It turns out he didn’t know the difference between his User ID and his Password.. as he transposed them.. yes this should have been an indicator, this same  brilliant man who bought Golden West with no due diligence (subsequently forcing liquidation to WFC).

For entrepreneurs, there are 100s of opportunities to build value where the consumer already is. Much of this revolves around helping existing entities build better relationships (like Square, Fishbowl, Payfone, Payments Enabled CRM, …). Along these lines there has been a sea change in the Valley over the last 18 months.. B2B is in, while NEW consumer brands and app companies are facing a much more challenging funding environment.

Even in this space, companies with stellar funding and boards can make terrible business decisions. My top example would be ShopKick.. why on earth would any retailer want to support little speakers in a store to help consumer’s earn kickbucks.. ? Am I really going to keep my phone on, and load an app when I walk in to Target .. looking for “deals”?  Why would Target or BestBuy want to let consumers earn value outside of their own brands? Both of these retailers would probably say.. “we were just playing around to learn some lessons”.. which makes perfect sense.. unless you were a ShopKick investor.

There is enormous Value in existing patterns.

A WalMart exec provided my top retail insight for the year. “Tom it doesn’t matter what ad our consumer sees, or where they see it.. when they decide to buy the product.. they will come to us.. “.

Walmart’s Everyday Low Prices (ELP), has helped them establish tremendous loyalty with their consumer base. They have been able to expand upon this trend and offer other services, from telecom (straightTalk), to Financial Services (Bluebird, moneygram, greendot, check cashing, …).

Before you run out with a business plan to help WalMart, remember they are the rocket scientists of retail.. and their procurement group are all from the Manhattan project. As they all excel in ensuring the value which is captured remains in WalMart. They have established a behavior pattern where consumers TRUST them for every retail interaction.

Thus not every pattern is valuable, or can be influenced easily. One of the things my online and payments team did at Wachovia was PFM. In fact we were the largest PFM bank in the world at one time (as we gave out the software for free to certain consumer segments). The consumers loved the software.. they were addicted to it.. problem was that it did nothing for me (Wachovia).. I wanted people to come online. It also turns out that consumers that use quicken are VERY literate financially. In fact, they were one of our least profitable consumer segments (with exception of wealth and self directed brokerage).

Their loyalty was to Quicken, over and above my bank… I needed that to change. In order to get them online I stopped the OFX connection service and told consumers that download was available only through the website.. online was my “virtual branch” and a a very important interaction.. I didn’t want consumers to think their bank was like a water utility..  we actually had a store (where we wanted to see them).. and thus wanted to reinforce an ONLINE relationship. Consumers who had historically used PFM used online banking very infrequently.. but when we forced the behavior change…  they realized that we offered much of the “PFM lite” capability… and were successful in converting most.. We did loose some.. (although we did not  touch wealth or small business customers).. others that were furious, but they were not profitable to begin with. Therefore it was a necessary change, we had to deliver value through our brand, not Quicken (or the now defunct MS Money), we had to disintermediate them.

I had a chat with the head of mobile at one of the banking teams… building a great new mobile offers service. He spoke about all of the alerts, the UI, the content..  I  said you are competing with: Facbook, Google, Groupon, Cardlytics, Shopkick, Foursquare, Visa, MA, ISIS, … and every other bank. All have alerts.. all have the same content. When I’m walking down the street am I going to have 8 different apps that all alert me to the latest deal? Is that really your vision? He said “no… honestly of course not.. but hey I’m only compensated to get this project done.. “ That certainly gives perspective on how Fortune 50s attack the problem.  In fact they are not solving any problem, but rather take a view on CAPABILITY (“we can do this”) vs. Strategy.. imitating just one facet of a successful business plan.

I could go on and on in stories.. but let me wrap this up with some of my Rules of thumb

1. Consumer change not possible without a 20-30% change in the value proposition.
2. Delivering consumer “Value” for free is much easier than making money at it (ie Twitter). Consumers don’t like to pay for anything. So how do you monetize the service? Can you really execute an advertising model?
3. Who will deliver the “value”? How is value created? How will it be sustained? What can one of the 800lb gorillas do to crush you? How will you respond?
4. What are your data dependencies? Who owns your data? Companies which add value on data they do not own resemble service provider revenue.. companies that own their data can exponential rev multiples.
5. Loyal customers are by far the most profitable. Customer acquisition is just the first, easiest phase.. loyalty means delivering value everyday.  Is there a new value “chain” or does current success mean just reaching a new audience with current value proposition. How is loyalty established (although not every business is dependent on loyalty… ie gas station).
6. Customers are not “Owned” by a bank, a business, or a service. Every entity claims a customer is “uniquely” theirs. The next phase of innovation will see greater collaboration between non-competitors around a common customer (Coke and McDonalds, Google and Everybody, …)
7. Time to Market. Multiply number of parties that must do something new by 2 yrs to get total time to execute (Consumer, retailer, teleco, bank, payment network, …). This is the Apple advantage… NFC has 12 parties.. so that means 24 yrs.
8. Consumer Facing. It takes $10M in marketing to acquire every 1M during early stage. Exception is around socially led change, or existing services that expand.
9. Payments and Other Networked behavior involve much longer “Trust” behavior change on a 20 yr cycle. The early adopter “techie” demographic is under 10% of consumer base and NOT an accurate representation of all consumers
10. Dependency on demographic alignment with business. Different consumers matter to different businesses. WalMart has very broad offering, Neiman Marcus a much narrower one.. The processes by which consumers are reached (advertising), select goods, develop loyalty, and purchase is complex. Few entities can deliver value to all consumers or to all retailers. Thus what is their focus, and how can it mature?
11. Experience in rolling out direct to consumer offerings. Is the business looking at their customers? What else do they do? What other problems do their customers have?

This week the WSJ reports that Discover “has deals with 50 merchant acquirers, which handle card transactions for retailers, to offer eBay’s PayPal service as a payment option at checkout counters”, with First Data holding out.

I like DFS, I own DFS stock… it is likely to be the dance partner of choice for many new payment start ups..  as they are a bank operating a 3 party network.  Their network revenue is paltry ($218M rev out of $3,753 EBIT). DFS looks like a bank, with profitability driven by credit quality of their cash back cards. Logically DFS is the ummm “hand maiden” of choice for entities looking to extend to extend products to the physical world. DFS has nothing to loose, as they don’t serve many of the demographics that are part of “mobile wallets”. 

Discover has a very poor ability to “push” products into market, as they perform less than 40% of their own acquiring (“direct merchant” in Discover terminology is account in top 100, with indirect merchants handled by other processors). PayPal’s current POS economics just don’t work for merchants, particularly large merchants that have already negotiated steep discounts with issuers. A top 5 retailer’s quote on the topic

“why on earth would I want to take a PayPal card that wraps a bank account at 200bps when I JUST WON DURBIN and have my own new product coming out. The last thing I want to do is change consumer behavior to my detriment.”

The average merchant fee for Discover today is about 197bps. If Paypal kept this rate I estimate their margin at 10-20bps max (PayPal’s transaction cost is around 107bps (2012), Loss rate is 26 bps, a network fee to Discover is rumored to be 50bps which leave 14 bps as total fee available to split WITH ACQUIRERS).    Let’s just assume that 197bps is the fee that acquirers run with, as they certainly can’t make the case to INCREASE the cost of accepting a PayPal card. So merchants are left with the value of accepting a Paypal card at 197bps instead of taking my BAC debit card which cost them $0.21 + 5bps.

My point is that NO major merchant will go this route… only the poor little independents that don’t know enough to assume ISOs are working on their behalf and don’t even accept PIN debit. The press release on acquires “supporting” paypal means nothing. Each and every merchant has the ability to turn this off.  As a side note, it is estimated that 60% of processor revenue comes from small shops that don’t know what to ask for.. hence the Square value proposition.

Lets assume that every merchant looks past the cost, and runs to PayPal. As I outlined in Paypal at POS, there is NO CONSUMER VALUE to the PayPal card.. why on earth would I use a PayPal card that wraps my BAC debit, Citi credit or Amex card.. why not just use the card in my wallet… ? Consumers obviously feel the same way, hence HomeDepot’s experience of less than 5 transactions PER WEEK per store. For anyone in payments, I encourage you to experience a return using PayPal at the POS. My experience is something for another blog. For more on this topic, I encourage you to read the slightly dated Philly Fed Acquiring Overview (2007)

What do Cardspring and Groupon Rewards have in common? Both deliver incentives and loyalty based upon card data sourced from the merchant’s Processor.

 Registration

Customer registers card and email with merchant (or campaign manager like Groupon)

 Use Case

1. Processor sends all transactions file to Merchant. Card numbers are encrypted with a consistent hash. Merchant then sends this same file to digital campaign management partners (ex: Fishbowl, Cardspring, Groupon Rewards, …)
2.  Partners run promotions and/or loyalty based upon the Processor Data. Match the MD5 hash of the customer entered card with the MD5 hash of the PAN provided by merchant processor.
3.  Consumer transaction is “discounted”.. the transaction amount on your card, is different from the transaction amount on the receipt (ex 10% off). This is of course a rather broken experience.. hence the preferred option of earning loyalty points based upon total spend. (Another option is that transaction is credited to loyalty program).
4. Analytics are performed on customer loyalty.. consumers can now be identified against any participating merchant and participating consumer

 What do Issuers think?

They hate this approach.. Value delivered on their cards without them.. Processors are prohibited from providing PANs to merchants.. so this MD5 hash of the PAN is worthless unless the consumer enters in their card information, which enables a “match”. Banks are in a poor position to stop this since the customer specifically permissioned it.  But now you can see why Banks are moving to tokenize payments.. as the token will not match the customer’s card information… and no credit will be earned. (See my blogs on tokenization)

 Merchant value proposition

MFCLO is much easier than managing Groupon redemptions, or issuer CLOs, you also get MUCH BETTER data and an ability to track consumer purchases within their stores. Also has very neat “loyalty” capability for any retailer, with no tech work on the merchant side.

On the negative side, the customer experience in offer redemption is terrible, and merchants should also be aware of the very different models (who keeps card data, e-mail data, and consumer purchase patterns). Groupon is a consumer brand, having your customer register cards with them enables them to add value outside of your brand.. and only they can target. Companies like fishbowl work off of restaurant owned email database and target consumers based on merchant’s objectives. With Fishbowl and Zave (now owned by Google) offer redemption is at a line item level.. and on the receipt the customer sees.

 Other Thoughts

I understand that Cardlytics and EDO are out raising capital, and claiming 200M+ cards on file.. with ability to analyze transactions across issuers.  Let me just say that an agreement with FIS may give you potential for 100M cards, but you must first sell 5,000 banks to get anything done. Any investor should ask for meetings with their top 10 advertisers.. ask them their spending plans for next 12 months, then also ask Cardlytics/EDO for the invoices from their top 10 advertisers, with 6 months of history.  A disconnect on where the “volume” of offers connects to who is paying for the offers will become evident…

Without giving away specific numbers.. lets just say that the open rates on offers are less than compelling for the banks. Great merchant value drives great merchant content which drives great consumer adoption… there are none of these.  Banks are indeed turning it on.. and consumers are using it.. but this novelty phase will come to an end unless value is delivered each and every week.

See my quote on Wal*Mart’s experience and perspective.

As described in this patentlyApple

On November 3, 2011, the US Patent & Trademark Office published a patent application from Apple that reveals that they’re working on a possible future iPhone that will operate using a Virtual SIM Card. Apple states that it would be desirable to be able to provide improved ways in which to provide users with the ability to purchase and use wireless network services without the need of a SIM Card. According to Apple, a secondary benefit of switching to a Virtual SIM Card is that’ll improve security while allowing Jony Ive and his team to do what they do best: Design an ever thinner, astoundingly beautiful, next generation iPhone

 

Another interesting apple patent application: 20110306318

Apparatus and methods for provisioning wireless devices for operation in one or more networks. In one embodiment, a provisioning service may provide access client (e.g., Subscriber Identity Module) data to a secure element in the wireless user device. The device may be preloaded with a provisioning SIM profile. The device may use the provisioning profile to roam onto a carrier, and communicate with a provisioning service, which may present the user with a list of available wireless carriers, such as carriers that service the user’s current geographic location. In response to a user selection, the provisioning service may load a SIM profile associated with the selected carrier onto the secure element

You can thus see why it would make little sense for Apple to build an NFC controller that would be owned and operated by a carrier. Apple may allow for consumers to finally break free from post-paid long term contracts. Can you imagine a world where you phone provisioned service at the lowest cost.. for that particular market.. paid for out of your iTunes account? Talk about dumb pipes..

Just as you don’t care which backbone your home internet was routed through…. why would you care about the “Brand” of network? Same should hold true for payments.  This is why I recommend carriers get very serious about an authentication service. The future “battle field” for profits will be centered around owning the consumer relationship and authenticating the customer for access to “cloud” services. Carriers physical distribution would serve well here.

1. The new tokenization project focused on mobile at the POS. There is NO VISA in this project.. mobile wallets hold a token that can only be resolved by the consortium. Token could be a debit, token could be credit… My guess is Token is routed via the debit network (one that banks control)… authorization is also sent via bank owned “consortium” debit network. JPM seems to be only bank with another option… routing through their own version of Visanet. This seems to protect JPM’s interchange and is a backstop to any regulatory issues surrounding a new token pricing scheme which is dependent on debit.
2. Post Durbin Margin is not sufficient to support 6+ players. There are no anti trust issues from my perspective because the rates have been set. Banks also have the right to choose with who and how they settle, just as the choose membership in ACH today.
3. Merchants AND top issuing Banks both want to kill signature debit. There will be moves now to encourage consumers to use PIN Debit (I can’t believe this is coming full circle). See the KC federal reserve note from yesterday on dynamics.
4. Banks need flexibility of a 3 party system at POS without going through creating a new acquisition brand. PIN Debit solves this problem today.
5. Its not all about interchange…. the battle is around data, data, data. Did you see that MA was caught with hand in the cookie jar.. selling data for retargeting?  If I were going to create a new BIN range… and need was NOT to maximize interchange, but to maximize adoption of a new product.. one that was very focused on data… where would you build it? on Visa? on Signature Debit? on PIN debit? Merchants are already starting to take advantage of services from FirstData, TSYS, FIS, … that allow them to sort through hashed card numbers to look for trends. Banks view this as a key threat.. tokenization would further abstract card numbers.. both for mobile wallet providers AND for processors.. Top issuers want to stop the data leakage. From regulatory perspective they are pitching this as “consumer protection” … which is certainly true.. but doubt if this is the true center of the bank business case.
6. PIN debit is already the fastest growing payment type. Visa is pushing “chip and signature” through strange incentives.. the rest of world thinks they are bonkers.. banks and merchants are now aligned.. PIN is the behavior they want.
7. Merchant nirvana: Canada’s Interac
8. New revenue streams. BAC’s debit card fee efforts didn’t fare well. All of the CLO programs are also struggling… but banks are still working to make merchant funded rewards a reality.

Again, I can’t help but be struck at how insane all of this is. The paradigms of debit and credit networks are ripe for disruption. Why do I present a payment instrument that requires the merchant to ask its bank if it could obtain money from my bank? In the connected age, why don’t I just tell my bank to pay the merchant? This is what Sofort brought about in Europe… of course this is also why US banks are not keen to enable real time transfers..

As I told the KC federal reserve.. I absolutely think that the FED should either extend FED WIRE to regulated non bank FIs (MSBs). Enabling a SOFORT type solution in the US would help break the log jam in mobile payments and this bank “control” mindset.

SOFORT Overview http://www.europeanfinancialreview.com/?p=4113

Two years ago, top 5 bank CEOs met every week during Durbin to discuss response. I believe they probably had a good plan as Debit is a very very popular payment product. Unfortunately BAC’s Moynihan jumped the gun and announced a “fee” for debit.  Consumers and press went ballistic.. I wish that BAC had just waited another few months to roll out it’s card linked offers product to show the new “value”  and tie the pricing to this new “value”. As the Chinese say

If you are patient in one moment of anger, you will escape a hundred days of sorrow

There have been quite a few excellent Fed studies out on Debit since my last blog on the topic (Real Time Transfers – Feb 2011):

• KC Fed – 2012 New Debit Card Regs – MUST read
• KC Fed – 2013 Payment system efficiency impacts on consumers and merchants
• Boston Fed – Consumer Survey
• Electronic Payments Coalition Overview – Must read

From the Reference 2 above

The network exclusivity provision and the merchant routing provision of Regulation II both give merchants more control in routing transactions to preferred networks. However, most banks’ way of complying with the prohibition of network exclusivity arrangements is to enable more than one PIN network on their debit cards, but not more  than one signature network. As a result, those merchants that accept  only signature transactions generally have not gained any increased  scope to choose from among different networks.

Among merchants that accept PIN debit transactions, many have taken advantage of their new control. The routing provision of Regulation II allows them to pick the PIN network they prefer from among  those enabled on a given card. Their exercise of this control has altered  PIN debit networks’ market shares. Many merchants now avoid Visa’s Interlink network, the largest PIN network prior to the regulations, and  instead choose other PIN networks whenever possible. As a result, in  terms of transaction volume, Interlink has lost significant market share  to other PIN networks such as Maestro, Pulse, and STAR (Finkle; Daly). Through their new control over routing, merchants’ emerging influence over the market shares held by different PIN networks is likely  to increase competition among PIN networks for merchants….

Consumers appear to have shifted to some extent from signature debit to PIN debit as a result of the regulations. Regulated banks now have an incentive to promote PIN debit over signature debit, though that same incentive does not apply to exempt banks…Many regulated banks stopped offering rewards to debit card users, especially to signature debit users, and they may also have eliminated the PIN fees that were assessed in the past to some consumers for each PIN debit transaction. Merchants have also taken steps to steer customers toward the use of PIN debit.

From Reference 1 – with respect to Pricing

Merchants’ new freedom to offer discounts based on payment method, brand, and product allows them to steer customers toward the payment methods that the merchants prefer—and thus to affect the market shares held by networks. For example, if signature networks set their interchange fees for exempt banks higher than those set by PIN networks, merchants may offer greater discounts to customers who use PIN debit. To retain transaction volume, signature networks may avoid setting their interchange fees significantly higher than those of PIN networks. In this way, merchants’ new flexibility in offering discounts causes networks to compete for merchants. Most merchants, however, have not yet taken advantage of this new power. Given the many different payment methods, brands, and products that merchants accept and the complexity of the fee structures, it will take time for merchants to determine whether and how to offer discounts based on payment method. For example, Kroger,
one of the nation’s largest grocery store chains, considers payment based discounts a very powerful tool for influencing customers’ payment choices (Clifford and Strom), but has not decided how to offer the discounts.

…

Thus we see a world where big merchants push PIN debit, small merchants are getting taken by ISOs who don’t even know to ask for PIN capability, with competition in pricing…. With signature debit going down, PIN debit use going up.. Visa’s Interlink hemorrhaging volume. For perspective, my estimates are that somewhat Approximately 15% of Visa’s Revenue comes from US debit (just 2% from PIN Debit Interlink). Does anyone now wonder why Visa wants “Chip and Signature”?

Banks have lost over $7.7B annually because of this change. Remember that PIN debit is just an extension of the Bank’s ATM network..  why on earth would they want to continue to use 8 different independent networks to continue here? What if there were new products they could deliver on the PIN debit networks…. ?

PIN Debit seems to be ripe for consolidation and bank control. I have a strong bet that the US banks will consolidate around a single PIN provider within the next 18 months. Why? Probably more for defensive purposes.. Its also nice to be able to control the rules on your own network..

Perhaps more on this subject in a future blog.

Well, I was right last year… a lone voice in the wind with BGR. Let’s see if I can repeat.

Prediction: Apple iPhone 5s/6 will have NFC.

Caveat.. it will operate MUCH differently than what you think of today

Hardware? My bet is  Broadcom’s BCM43341 or BCM20793 chip 

Broadcom has launched the industry’s first quad-combo chip. The BCM43341 combines NFC, Wi-Fi, Bluetooth and FM radio on one chip and, says Broadcom, “offers OEMs unmatched size, power and cost advantages.”

A second new product is a single card solution that pairs a BCM20793 NFC controller as used in the Google Nexus 4 with an 802.11ac (5G) WiFi radio and is aimed at high end mobile phones and devices.

Broadcom’s BCM4334 combo chip (dual-band 802.11n, Bluetooth 4.0+HS & FM receiver) is already in the iPhone 5, and other versions in  iPad  yet other possibly extending into Mac  success as well. What I find most interesting is the BC 2079x family of “stand alone” controllers. Broadcom has also contributed its NFC software stack to the Android Open Source Project. A generic controller with software stack which manages both secure storage and multiple radios in multiple frequencies. This is NOT the NFC which MNOs and Bank’s envisioned (see SWP).

HOW WILL APPLE LEVERAGE NFC?

This is the billion dollar question.

My guess is that Apple will focus on creating a new security and authentication infrastructure on the phone, and in the cloud. This infrastructure has both software and hardware components, and will change the way other “apps” interact with customer data, customer sensitive information (ie location) and the OUTSIDE WORLD.  For example, today apps that require location must adhere to policies consistent with “location services“. Think about extending this type of control over your credit card information, name, address, e-mail.. what apps get access to which data? Now also think about this new service which can identify you are who you say you are (identification) which will be present with AuthenTec capabilities

Apples new lightening connector extends the iPhone security “platform” from the phone to external devices via proprietary cables which must contain embedded Authentication chips . I bet the folks at RIM just fainted reading this.. RIM built the most secure mobile platform in the world, with secure integrated corporate e-mail.. no developer community, “average” user experience.. and a completely STUNTED internet browser. Apple is going after security last.. after they have everyone hooked on the platform. Apple is completely brilliant, it took a “good enough” approach to security to build user base.. now it is adding services and security. .

All of this is completely consistent with what we see in Patents, acquisitions, evolution, phone architecture, … and Apple brilliantly evolving the company into orchestration as I outlined in blog on Stage 4 Value shift.

Could the new iPhone run Visa Paywave? sure.. however it may need an add on antenna.. as the design of NFC within the iPhone was not built to around supporting someone else’s  project (Visa/Banks).

This is the paradigm which must be broken. Don’t think of NFC in terms of payment, it is just another radio.. actually it has 3 parts.. the radio, controller, and secure storage.. each of which can take on very different roles in a new Apple architecture. Why transfer data view NFC/ISO 14443 @  424kb/s when Bluetooth V2.1 is 2.1 Mbit/s and Bluetooth V4/V3 is 24Mbit/s… (60x faster).

I predict all of the phone platforms will spend whatever is necessary to retain ownership of customer and customer information. All commerce and financial services are dependent on consumer Authentication… it is the lynch pin for retaining the “hub” role in value orchestration and future margin..

Handset manufactures (Apple, Google, Samsung, …) are flipping the NFC value equation. From a SIM based SWP approach to an multi functional embedded approach with integrated consumer authentication. I’m amazed that there is not more press here. The implications are tremendous.

See previous blog KYC – $5B opportunity (I may have guessed low).