Payments Part of OS: What does that mean?

28 July 2013

Continuation of Friday’s Blog BIG Changes to NFC: Payments Part of the OS.

In 1996, I remember launching the first Client Server application for FirstUnion (Smalltalk, OS/2, Win 95).  I had left NASA just 2 yrs prior, and having a Sun Sparc, connected to Arpanet on my desk since 1987 had spoiled me..  The Win95/LAN environment was not designed for engineering… it was a poorly assembled toy for business. It didn’t have native TCP/IP in the OS, actually Microsoft itself didn’t even offer the protocol, I had to install a third party vendor stack on over 2000 PCs around the bank.  Hard to believe this was just 15 yrs ago.. MSFT seems to have embraced a few changes since then, and what was “outside” its platform is now part of it.

The same platform “integration dynamic” can be seen in: video boards, laptops (remember the external slots), mobile phones (Cameras, Bluetooth, Wifi,…), and now NFC from a dedicated NXP chipset to Integrated chipset (ex Broadcom BCM43341, plus firmware).  Most of my readers are not hardware people, so in layman’s terms.. dedicated hardware and software is merging into integrated “platform”.  Mobile phones are thus evolving. from telecom, to Toy, to entertainment, to COMMERCE CAPABLE, connected, devices beyond the browser.  For those interested in reading further, one of my top 10 business books is PLATFORM LEADERSHIP, a tremendous read.

The title of the book above is a great transition into the meat of this blog: Platforms require leadership.  Apple needs no lessons here, as they view stewardship of hardware, design, OS, app store, experience as core to their company. The “distributed” innovation model is akin to WINTEL, where generic industry standards were set, and again we see a core group (this time Google/Samsung/MOT) leading definition of a new platform, against a vision of MNOs (who customize and subsidize Android).  As hardware becomes a commodity, differentiation shifts to orchestration and network applications, this requires a central “orchestrator”.   MSFT itself shifted into this role in PCs, but Orchestration success is dependent on the number of nodes you touch.. and MSFTs nodes are still PCs, thereby allowing Google and Apple to more rapidly gain on their already advantageous positions.   

One way of look at the chaos in payments is to see existing players attempt to create an orchestration role across platforms. Google did this in PC search in 02. Payment Clusters attempt to leverage old nodes (Cards) and current market position to form a new orchestration role (or platform) where others will coalesce (ex: See Network War). Examples: Telecom and ISIS, Visa, Amex, US Banks, Retailers and MCX, Google, Apple, Qualcomm (old),  (links for each of my blogs discussing).  For example, existing beneficiaries of current interchange model are working to retain their 2% tax on commerce (in consumer credit). Among Payment Players, Amex is furthest along here, as they can uniquely help merchants know who their customers are … and market to them.  Visa is working to build services around cards to increase “stickiness” and barriers to entry/change, Banks and retailers are working toward the same goals. All participants realizing that payments in and of itself is a rather ubiquitous service with many different options. The central problem for all of these initiatives: a SUCCESSFUL PLATFORM must deliver value to ALL participants. For Payments, the problem to be solved is COMMERCE.. a rather long process of which payments is only the last, easiest part.  Network Clusters

Focusing on payments, the NFC “platform” provided a way for a telecom/TSM to “control” a user’s data, and a radio on the phone. NFC is great “walled garden” strategy for the MNOs.. but why would anyone want to support an MNO holding the “Key” to mobile commerce? MNOs created a great technical solution without a supporting business model (see Carriers as Dumb Pipes). Mobile is uniquely positioned as the point of confluence between the virtual and physical world, a platform of untapped value to date.

Commerce Services

As I stated Friday, Mobile Platforms (Apple/Google/?MSFT?) recognize the key to margin in an undifferentiated hardware world is in Orchestration/Services. Platforms can’t afford to give the keys to this Platform away to anyone, and are thus integrating all commerce functions into the platform.  Take for instance the service of AUTHENTICATION, this function is critical to both physical world commerce and virtual world (cloud access, pictures, music, online services). Commerce services from advertising, to in-store marketing, and obviously to payment. Thus Google/Apple’s M&A and R&D activity in the space.  Diagram_android

Many of my own “bets” are locked up in the “other services bucket” within the platform, and therefore I’m not able to comment much further here. But as an example, think of the primary categories: infrastructure HW/OS (legacy telecom, embedded SIM/HW mgmt, authentication, location, connection management, secure storage, data management, authorization…), Platform Services/APIs (Administration, Service provisioning, data access, hardware access, service access, location, preferences, payment, …), Core Platform Apps (ie Passbook, Maps, Wallet, …), 3rd Party Apps,

Example Future View – Transit

Today, the top success stories in Transit are Octopus/HK, Oyster/UK, EZ-Link/SG, and Suica/JP. All have a version of mifare compliant interface in transit station gates, with a dedicated card (Japan/Suica  can do mobile top up/reload).  Today all are experimenting with NFC/TSM model. In future “platform” all will be able to create an app on phone to access radio capable of MiFare communication, simplifying the creating and testing process without a hardware NFC dependency or TSM.  A GREATLY simplified development process. Further, given that Platform’s like Apple have existing payment instruments stored, funds could be either transferred into a dedicated stored value account prior to ticket purchase, or authorized on the underlying payment instrument at time of purchase. NFC solves NONE of these funding problems.. it only solves a single secure “presentment” problem.

Example: Store Checkin

Today with Square, Foursquare and others you “check in” to a business, either though GPS, wi-fi or QR code scan.  Similarly Target, Macy’s and other retailers have developed custom apps to enhance in store experience. Its hard to imagine loading an app for every retailer you deal with, or even using the app for any one of them. With future platform services, consumers could publish rules for merchants and store applications leverage a broader set of “platform” services which may include customer insight.  When you walk into any store, a future retail application would give you relevant information depending on your preferences. Platforms will support store branding and communication, enabling a much broader reach (no app install) and capability (insight, payment, ). In this future, the “Platform” is taking on an orchestration role independent of the store you are in. The platform is a working on your behalf, but also transparently supporting retailer objectives. Today, we see Target mobile delivering a price comparison application that doesn’t compare prices. Is there any wonder that usage suffers.. ?

Not Mobile Payments…  CLOUD PAYMENTS

Payments in the OS is perhaps best described as the intersection of 2 major disruptive forces: Connectivity of Consumer and Merchant during shopping and purchase, Authentication. As I outlined in Cloud Wallet, it makes little sense to store anything in the mobile phone. If everything is connected, I should just need to authenticate my identity, allowing requestors cloud access to: payments, promotions, reminders, receipts, … everything else could happen in the background. If everything is connected, the nature of payment settlement risk changes (see credit push).  iPhone-6-Fingerprint-Detection-And-Apple-Release-Date-Rumors

Payments in the OS presents a disruptive opportunity for banks. If there is going to be a PAN (“number”) in the iCloud or iOS why on earth would Banks want to make it a Visa or Mastercard? This is yet another reason they are working on Tokens.. to ensure control of the process.  Problem is that for a new “token” scheme to gain adoption, is must deliver increased benefit to: merchant, consumer AND to the Platform. Bank token advocates will say that the benefit of mobile payment is that the consumer would never need to see the PAN, and thus Consumers do not need to be incented.  Even if this is the case, they must still incent merchant and Platform, particularly when Apple ALREADY HAS the PAN.  In their tokenization efforts, Banks are attempting to resurrect the TSM role, to justify their payments revenue.

However, my view is that IF authentication is owned by the platform, there is very little that banks can do to retain their fee. Just imagine a world where the retailer could proactively offer store credit based upon an individual’s data and behavior (accessed through platform). Where open loop cards displaced store credit 25 yrs ago, the forces could be easily reversed, enabling a new breed of consumer credit companies which support merchants. Banks are working to add value to their existing 16% interest premium credit product which costs merchants 250bps. Merchants may be well positioned to capture all of this revenue, if they had the data (and platform) to make this a seamless experience.  My personal bet is that we will first see a new credit card product which will offer a greatly enhanced value proposition to both consumer and merchant in exchange for consumer data sharing. This product would completely disrupt existing cards.

POS –> CRM and Digital Marketing

We can also see the new opportunities for Payment Enabled CRM when a platform can work with retailers. Leaders here are Square, Levelup and Fishbowl.   The “platform” works before the checkout.. here the key is consumer insight for targeting and relevance. Consumers will only pay attention to “items” which deliver value.

Closing Thoughts – Commerce a very BIG and Broken Market

Commerce is a very, very big market (see $1.46T non-grocery US retail sales, 2013 Deloitte Global Retail Study). US eCommerce sales last quarter were $61.2B, or an annualized $245B, making eCommerce just 17% of non-grocery and 5.5% of total Retail Sales (see US DOC).  Digital Ad Spend is over $100B globally, with the US taking about 40% of that. Google alone accounts for over 40% (eMarkter) and over 50% of mobile (eMarketer), with self reported revenue of $14.1B for 2Q13, (US 45% of Rev).digital ad spend

Looking at US numbers alone, there is ~$750B in total marketing spend (see Chart). Why is digital marketing only 5% of total non grocery sales? Note that this figure is off by 2x as a very large portion of online spend is by service providers (banks, tree cutting, accounting, ..) and restaurants. These 2 categories are not part of Retail sales.

My view on why more marketing spend is not digital:

  • There is no CROSS CHANNEL marketing.  Online ads are most effective when there is an online purchase (or at least most effectively tracked).  Advertisers typically don’t advertise online when products aren’t sold online.
  • Amazon/eBay and other large companies have locked up a substantial portion of eCommerce.
  • Digital advertising is fundamentally BROKEN (when was the last time you clicked on a banner ad).
  • Madison Ave is bypassed as most companies go direct, or use specialized agencies. “Brand Advertising” is big and sticky… big corps like to spend about what they did the year before.. independent of what value it is providing to the organization


US Marketing Spend




2 thoughts on “Payments Part of OS: What does that mean?

  1. Awesome article and very nice blog site. While I am not in the payments industry, I have been following mobile payments for sometime now and write a blog (Pixelballads) about it as well. It is certainly not as in-depth as yours, but I am going to be regular visitor to your blog-site to learn and hopefully share.

    Thanks much for sharing this info and providing your valuable perspectives.

  2. Pingback: Who do you Trust? | FinVentures

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