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blog http://www.pymnts.com/commentary/pymnts-voice/ PayPal's "Shot Across The Bow" At Square's Local Efforts http://www.pymnts.com/commentary/pymnts-voice/PayPal-Just-Built-Its-Own-Payments-Mega-Laboratory/ Ciao!
Greetings from Rome where I am, ahem, doing a little field work on the adoption of mobile payments outside of the US. Ok, well maybe just a little in between some great fieldwork checking out the coolest shops, restaurants, and museums in this most fabulous city.
On the former, I have to say that while I have seen a zillion mobile phones I’d be hard pressed to find a single soul using one to pay for anything at a store or a café or even trying to.
On the latter, let’s just say that I’ve encountered nary a problem using my good old-fashioned mag stripe cards in any number of shops and restaurants.
You will also be happy to know that good old cash is alive and well here too – in spite of any number of articles published in the newspapers here since my arrival on the irritation that the European Union has with the cash economy in Italy since it would very much prefer this underground economy to surface so that it can be taxed. But for now, at least, you can’t ride in a taxi; you can’t buy at some of the shops off the beaten tourist path; and if we are to believe any of the allegations coming out of the recent “Vatileaks” scandal, you can’t open an account at the Vatican Bank, or do any number of things associated with, shall we say, some of what would be considered more Sicilian pursuits, without cash.
I haven’t been too busy, however, to keep up with what is going on back home in the payments field. PayPal kicked off the summer season last Thursday with a slew of announcements about its POS payments pursuits. No doubt by now, everyone is entirely up to speed on the partnerships (e.g. VeriFone and Equinox), and retailer lineup (e.g. Barnes &amp; Noble, Aeropostale and Office Depot) that further cements its physical retail ambitions. It’s pretty clear that PayPal is putting some serious puzzle pieces in place to reinvent the experience at the physical point of sale – using the combination of mobile and its PayPal installed base to entice merchants to play along.
What didn’t get a lot of ink was what it is doing with the smaller, local merchants. Its Thursday announcement also included a partnership with a company called ShopKeep, which is based in NY and has developed a Pay by Square-like solution in use at roughly 2000 local merchants (small guys, like cafes, ice cream shops, etc.). It is iPad-based and has a lot of the same features as Pay with Square: the consumer has to have the PayPal app downloaded on her phone; she checks into the merchant and then pays at the point of sale without having to produce the phone; the cashier authenticates the transaction by associating the person’s face with what they see on their terminal. <a href="http://www.youtube.com/watch?v=CMByV-k9Oc4" target="_blank">The demo here shows you how it works.</a> 
This is clearly PayPal’s shot across the bow at Pay by Square. PayPal is now experimenting with a small merchant solution that leverages the mobile phone and a new IP-enabled POS device to authenticate a transaction at the register using facial recognition after the consumer checks in using their mobile phone. I haven’t seen this process live, but after looking at the demo, it seems quite clear that this is all about test and learn. The process seems a little clunky from the consumers’ perspective – it takes like 3 or 4 screens to get the app ready to engage and then it takes as many for the cashier to check out. At least as the solution exists right now, I wouldn’t want to be in line behind someone using it – it seems like it would take a lot longer than the traditional card swipe – and seems like it comes with a lot more rigmarole than what, say, LevelUp now offers. But, unlike Pay by Square, which has to build both a consumer and merchant network, PayPal can leverage its existing customer network to further extend its local merchant network offline.
But I sort of don’t think that’s the real point of this announcement. I think that this ShopKeep experiment gives PayPal 2000 local merchants to play around with, and potentially tens of thousands of consumers in those geographies to also incent to use the app to build its local physical small merchant and consumer network. I wouldn’t be surprised if the next thing you see being glommed onto this app is a series of merchant offers served up by PayPal Media Network (formerly WHERE Ads), which create demand gen for merchants accepting the app, which could stimulate more merchant interest, which could create more consumer interest.
So, the big story is probably not as much to do with how elegant the app is now or even whether the merchants are teensy weensy merchants in a few cities here and there. The big story here is that whatever we see PayPal testing in the local ice cream shop will probably find its way into the big retailers once they work thru the user experience on both the merchant and consumer side. Sure beats focus group testing, doesn’t it?
Anyway, that’s the view from my perch in the Eternal City. What’s yours? Tue, 29 May 2012 11:13:41 -0500 http://www.pymnts.com/commentary/pymnts-voice/PayPal-Just-Built-Its-Own-Payments-Mega-Laboratory/ A Skeptical Optimist's Look at Facebook http://www.pymnts.com/commentary/pymnts-voice/A-Skeptical-Optimist-s-Look-at-Facebook/ Optimists see Facebook’s prospects as almost unbounded. After all, it has almost a billion users and its users spend an astounding amount of time on the site. Even if you replaced Zuckerberg with a dolt, the company ought to be able to figure out how to make gobs of money from having a community that is larger than the population of all but two countries.
Skeptics, though, remember how indomitable social-network-rival MySpace looked not that long ago. Then MySpace went into a death spiral as users flocked to Facebook. Skeptics have a more immediate cause for concern. Facebook admits that it doesn’t have very good ways of making money when people use Facebook on mobile devices. That’s a big problem as mobile use skyrockets.
Me, I’m a skeptical optimist. My optimism is based on understanding that Facebook isn’t just a platform—it’s a lot of interdependent platforms each of which could be valuable alone, but incredibly valuable together. Read on to find out why I’m nevertheless a bit skeptical.
Unpacking the Facebook Platform
To the casual observer Facebook is mainly a social network where people link up with their friends. The movie didn’t exactly help elucidate what the platform is really about. So here’s a really boring description and further evidence that I have no future in Hollywood.
Facebook’s user accounts are its core asset. For every individual who joins, Facebook has a unique identifier, relatively rich self-reported data on the person including location, sex, relationship status, where they went to school, and more. It also knows the other individuals, merchants, celebrities, and organizations that person is connected to. This has just started, but some users also have a wallet that is connected to one or more payment instruments. Facebook has these accounts for almost 900 million people around the world. That’s one amazing database.
These accounts support seven interrelated platforms as shown in the Figure 1.
<img class="center" src="http://www.pymnts.com/assets/_resampled/resizedimage500382-FacebookDE1.jpg" width="500" height="382" alt="" title=""/>
<ol><li>Communications platform. Facebook started out as a way for friends to communicate with each other. Enriching this has been a major focus of the company as it has worked hard at growing and keeping the user base engaged. But today, Facebook is the largest communications company in the world. Most people use it for multi-casted messages between friends rather than for bilateral communications using voice or video calling. But since Facebook has aliases (urls not to mention email addresses) for all of its users it can provide many different forms of communication. Increasingly, Facebook is also a communications platform that connects individuals and merchants. </li>
<li>Advertising platform. Facebook has made its money so far by operating a fairly traditional online advertising platform that connects advertisers and users. The ads appear on the right-hand side of the page (with new methods just rolled out to include paid spots in the news feed). Ads accounted for about 82 percent of its revenue in the first quarter of 2012. </li>
<li>Application platform. Facebook provides APIs, SDKs, tools, and a sandbox to developers who it has courted assiduously for some time. There are more than 500,000 applications on its platform. Social games are the “killer app” of the moment propelled by Zynga’s games such as Farmville. Facebook is making money from applications by requiring them to use Facebook Credits for selling virtual goods (the main source of revenue for social games) and taking 30 percent of the value of credits when they are turned into cash. That was a major contributor to the 18 percent of revenue in the first quarter of 2012 than came from “payments and other fees revenue”. </li>
<li>Customer-relationship-management platform. Facebook has almost 40 million “pages” with 10 or more fans. These pages are operated by merchants, celebrities and organizations who use them to organize and communicate with their fans. This is a massive CRM system. </li>
<li>Commerce platform. Although this is happening in low volumes at the moment Facebook is being used to sell digital and physical goods to merchants. A number of merchants have set up their fan pages so that they can sell things, malls have been established, and Facebook has developed an offers program to help drive consumers to merchants’ physical locations. </li>
<li>Payments platform. Facebook enables people to pay merchants on Facebook using Facebook Credits. The company has a wallet which enables consumers to link several different method, including their mobile phone account as well as credit and debit cards, and purchase Facebook Credits. At the moment, Facebook Credits are primarily used to purchase virtual goods but over time they will likely to be the main currency used on Facebook. </li>
<li>Mobile platform. To an extent mobile devices are simply another browser-based device that can access Facebook directly through its url or indirectly through a mobile phone app. But already Facebook’s mobile applications enable people to check-in at physical locations. Over time this mobile platform is likely to allow significant interaction amount Facebook’s consumers and merchants in physical space.</li>
</ol>Facebook Optimism
The numbers shown in Figure 2 show how successful Facebook’s platforms are after just a few years of development. Remember, this company only opened up to the general public in September 2006. My optimism for Facebook’s future isn’t based, though, on how good it is today but on how much runway it has. The truth of the matter is that none of its platforms are anywhere near their full-on potential.
<img class="center" src="http://www.pymnts.com/assets/_resampled/resizedimage500384-FacebookDE2.jpg" width="500" height="384" alt="" title=""/>
The most well developed platform—communications—provides mainly for fairly limited multi-casting of messages. It isn’t a sophisticated platform for bilateral communication or for broadcasting in the way Twitter is. And even for multicasting the communications are straightjacketed within a fairly limiting user page.
Some observers might think that the Facebook advertising platform is well developed. And it is relative to other online advertising networks. But it takes little imagination to realize that with the social graph to use, and rich data on people, one can do a lot better than tiny clickable display ads. Facebook, like all online advertising, is still using 20th century approaches to advertising and hasn’t yet developed innovations that really make use of the new technologies. It’s starting with things like Sponsored Stories and the newly launched Highlight feature (where people can pay to have their posts bumped to the top of a news feed) but these are early experiments. But no one else has the social graph and data available to do what Facebook can do.
Skeptics point out that Facebook is nowhere in commerce and is getting killed in mobile. But those are problems that talent, focus, and money can crack. None of those ingredients are in short supply at Facebook. I put all of those in the opportunity column.
In applications, Facebook has essentially one killer app (games) putting it, at about the same point in its history, as the personal computer with spreadsheet software like Lotus 123. With application developers around the world writing for Facebook in many different areas it is only a matter of time before there are more.
In the end, though, the reason why I’m optimistic about the economic future of Facebook is that it has almost a billion, and growing, accounts with rich information. If Facebook succeeds in most countries in obtaining the penetration of Internet users it has achieved already in some countries, it will essentially have a incredibly rich database of the global population. It won’t have everyone. But it is likely to have account information in not too long for the people that account for most of the income (and spending power) in the entire world. 
Facebook Skepticism
There are reasons to be skeptical that Facebook will be able to capitalize on the tremendous assets it has developed. But as I’ve just noted that’s not because it doesn’t have its game together in mobile or because there isn’t a lot of commerce occurring in Facebook-land. To the extent I am skeptical that Facebook is worth $100 billion valuation it is that I see several sources of peril.
MySpace went into a death spiral because people stopped wanting to go there (it was getting pretty nasty) and because there was a nicer place to go - Facebook. Facebook isn’t immune from positive feedback effects working in reverse. Some people may decide they’d rather go hang out some other place, and then more follow them, and then sooner than you know it a slow trickle of departures turns into a stampede. Facebook is particularly vulnerable to younger people deciding that Facebook isn’t hip anymore. Those younger users could give a competing social network a critical mass (just like Facebook’s college crowd gave it a critical mass) and then that critical mass sucks in more people as they all grow up and enter the mainstream. So far Facebook hasn’t had significant defections despite various actions that have led to significant complaints from their users. But a significant misstep by Facebook, or a just a collective view from users that they’d rather be somewhere else, could sink Facebook – and it fast.
Facebook has done a much better job than MySpace at making people sticky. People are attracted by all the applications and the fact that almost all their friends and merchants they’d want to be fans of are there. That makes Facebook formidable, but hardly impregnable.
The other reason for skepticism is that Facebook hasn’t proved that it is adept at anything beyond the communications platform. Its advertising platform isn’t particularly innovative. Its software platform is well executed but Apple has developed a far richer and stickier applications layer. It is way too early to tell whether Facebook can pull together social commerce, payments, or mobile.
The final reason to worry is that there is a significant risk that Facebook, and Zuckerberg, will get drawn into government investigations and lawsuits around the world over antitrust and privacy issues. Not because they’ve done anything, mind you, but just because that’s the way it is these days for successful companies with complicated business models. Facebook is by far the leading social network, immensely wealthy, and widely known. That makes it a natural target for competition authorities and consumer advocates throughout the world. In the not too distant future, these investigators will have either gotten tired of beating up on Google or have extracted enough concessions from the search-engine giant that they feel like they can move on to fresher meat. Facebook will be the next one up. As the top executives at Microsoft found, these battles can take a lot of time and psychic energy.
In the end I’m more of an optimist than a skeptic. If I were a betting man I’d probably take a flier on Facebook. Since I’m not I’ll calmly watch my optimist friends sweat bullets if Facebook goes Groupon, and my skeptical friends turn green with envy as investors buy beach houses. Tue, 15 May 2012 09:58:41 -0500 http://www.pymnts.com/commentary/pymnts-voice/A-Skeptical-Optimist-s-Look-at-Facebook/ NFC? Not Again! More on the Card Industry's "Betamax" http://www.pymnts.com/commentary/pymnts-voice/NFC-Not-Again-More-on-the-Card-Industry-s-Betamax/ Okay, <a href="http://www.fiercemobilecontent.com/story/yankee-group-nfc-not-next-betamax/2012-04-23" target="_blank">Nick Holland</a> – I’ve taken the bait. Your NFC media advisory today refuting the notion that NFC isn’t to cards what Betamax was to video was simply too good to pass by. You actually selected the perfect analogy. Here is my argument as to why it could end up just like it.
1. The Betamax was a “superior” recording option – if all you are talking about is the quality of the picture. But Sony failed when it tried to turn that superiority into a standard that was going to control the ecosystem. Rather than comply, competitors created something new – even though it was admittedly less “superior.” On the NFC front, the big difference is that NFC is a technology standard already, with others working to persuade the ecosystem to adopt it via SIM-based wallet. That “control” is not something that all players in the ecosystem are willing to cede right now, so, rather than comply, competitors are emerging all over the place.
2. And just how “superior” was Betamax: it could only record an hour at a time! That meant that guys who wanted to record a football game were SOL. So were moms who wanted to record a movie – who the heck wanted to get up in the middle of the game or a movie and switch cassettes, even if the quality of the recording was better? Utility, ease of use and convenience ruled over quality. Turning to NFC, consumers are now used to whipping out their cards and using them just about anywhere they want – utility and convenience. Tap and pay sounds good and may be a superior proposition, but not if you can’t tap and pay anywhere you want to. NFC seems to have a long way to go before getting that sort of coverage. Until then, consumers will just use something else that is more convenient, whether that is a mobile app, their plastic cards, or good old cash. The risk to NFC is that consumers will standardize on a mobile solution that enables them to use their phone at most of the merchants that they visit regularly and once NFC becomes available to them, there won’t be enough benefit to make the switch. 
3. The VHS – Betamax wars started in the early 1980’s and by 1982 was in a knockdown, drag ‘em out fight. By about 1984, Sony was losing share but still selling units – actually peaking that year. It was all downhill from there though. That year, ironically, marked the tipping point for VHS. Three years later, VHS accounted for about 95% of the market and Betamax was officially declared dead by Rolling Stone magazine. Turning back to NFC, it very well may be that having POS terminals that enable NFC causes some merchants to activate it. It still means that consumers have to buy in (literally, as in buy new phones with chips) and the business models among the players in the ecosystem have to work themselves out for deployment to get to any sort of scale. The longer that takes, the more risk to NFC that another solution tips, and moves like wildfire to gain so much share that NFC becomes a technologically superior but irrelevant payment alternative.
4. Betamax also ran into another problem. As consumers became disillusioned with the lack of recording capabilities, the other side of the market – video rentals – began to take notice and fewer video rentals became available in Betamax format. That meant that the demand for Betamax recorders declined since consumers couldn’t rent the movies they wanted, leading to a downward death spiral – fewer movies to rent, less demand for recorders, meant fewer movies to rent leading to less demand for recorders, etc. The corollary for NFC is twofold. First, fewer merchants accepting NFC means fewer consumers are interested in using it. Second, fewer merchants, and consumers interested in NFC mean fewer developers and entrepreneurs interested in developing cool apps that leverage it. It really could become the Betamax scenario almost to a tee.
Nick also projected that there would be $355 billion in NFC payments transaction volume worldwide by 2016. Wow, that’s like 4 (well, 3.5 to be exact) years from now from sort of nothing today. Holy ignition Batman! I take the point that there are parts of the world where NFC technology is a little more entrenched, like some parts of Asia Pac and Europe, but their overall share of the payments market pales in comparison to the US where getting scale seems still elusive. Nick’s prediction is, by far, the most optimistic I’ve seen. InStat predicts $9.9 billion in the US in 2014 (which means the rest of the world would have to REALLY ignite to make Nick’s numbers pan out) with others topping out at $50B in 2014 – even that seems ambitious given where things are and in less than two years’ time.
Nick concludes his piece by saying that “card networks, banks, MNOs and hardware vendors must work in unison to create a positive and compelling case for merchants around NFC, particularly underscoring its long-term benefits." Totally agree but his stated differentiator, “tap and go” payments, just doesn’t seem to have the appeal that it did once upon a time. And so, far, that seems to be the only value proposition that anyone selling an NFC solution talks about. It may be “technically superior” and in an ideal world convenient and easy, but it needs a serious ignition strategy and soon. Otherwise, well, I’ll let you finish that sentence. So, now you’ve heard my take on this … what do you think? Wed, 25 Apr 2012 10:23:51 -0500 http://www.pymnts.com/commentary/pymnts-voice/NFC-Not-Again-More-on-the-Card-Industry-s-Betamax/ Is Facebook a Massive Payments Company? http://www.pymnts.com/commentary/pymnts-voice/Is-Facebook-a-Massive-Payments-Company-/ You’d think so given <a href="http://www.sec.gov/Archives/edgar/data/1326801/000119312512175673/0001193125-12-175673-index.htm" target="_blank">its amended S-1</a>. It is on track to earn almost $1 billion from payments in 2012. In the first quarter of 2012 it earned $186 million in payments and other fees. That was almost double what it earned in the first quarter of 2011. If Facebook’s payments revenues continue to grow at this rate the company would have payments revenue of $978 million for 2012 and exceed $1 billion in 2013. And even if growth stopped dead in its tracks, and payments revenues just continued at the $186 million a quarter clip of the first quarter of 2012, Facebook would have payments revenue of $744 million at the end of this year. 
Remarkably Facebook payments are growing much more rapidly than advertising. Comparing the first quarters of 2012 and 2011, advertising revenues grew by 37 percent while payments revenues grew by 98 percent.
With a $184 million a year in payments revenues Facebook is only about a seventh the size of PayPal, which had March 2012 revenue of $1.3 billion. But then Facebook has been at this for about a year compared with 13 years for PayPal. Next year, it looks like Facebook, at its current rate of payments growth, could be more than a quarter the size of PayPal based on revenue.
So is Facebook a massive new payments company? No, at least not yet, and here’s why.
Facebook earns these “payments revenues” by:
<ul><li>requiring social game providers on Facebook to use Facebook credits for selling virtual goods; </li>
<li>enabling consumers to buy Facebook credits that they can use as virtual currency for these games;</li>
<li>paying social game providers 70 percent of the value of the credits they’ve been paid; and,</li>
<li>keeping 30 percent of the value of the credits social game providers have been paid for itself.</li>
</ul>This business model should sound pretty familiar to you. It is similar to Apple’s policy of charging developers 30 percent of the revenues they earn from applications sold in the Apple iPhone store. The only difference is that Apple doesn’t have the stutter step of selling virtual currency to people and requiring its sellers to take it.
Both Facebook and Apple are charging developers a fee for using their software platforms. They aren’t the only ones. That’s what the video game console makers such as Sony PlayStation do too—they charge game providers a royalty (a percent of revenue) on every game they license to consumers. Other platform businesses do too. Shopping malls, for example, charge stores rent plus sometimes a slice of revenue for space at the mall.
Facebook, Apple, and these other companies are charging “software platform fees” for giving developers access to the software platform codebase (including APIs, SDKs, and other tools) and access to the users that they software platform has assembled. 
This isn’t just semantics. Payments companies earn revenue from providing payment services to consumers and merchants. They aren’t providing any underlying good or service. They are simply helping buyers and sellers settle up. 
Facebook is doing that too. But if that’s all it was doing for sellers it wouldn’t be getting 30 percent and it wouldn’t have to require game providers to use its currency.
Facebook is on track to earn about $1 billion as a software platform provider to developers of applications. It turns out that these revenues are mainly from social games. But there’ll be more applications and probably other killer applications in the future.
Words matter perhaps more than they should. 30% of revenue sounds like an awfully onerous payments charge. It makes the 2% or so that issuers get in interchange fees sound like chump change. Facebook should drop the payments revenue label like a hot potato before some class action lawyer makes that misleading comparison. (“Ladies and gentlemen of the jury: 1500 percent more than even those evil monopoly credit card networks charge!”)
So does this mean Facebook isn’t going to be a big payments company? Well, no, that’s a different question. <a href="http://pymnts.com/briefing-room/featured-briefing-rooms/facebook-commerce/Facebook-Credits-Do-Payments-Firms-Need-to-Worry/" target="_blank">As I’ve argued in previous articles</a> Facebook Credits could become a very interesting currency used for online and offline transactions. Facebook could make money from that as a payments provider. But that’s in the future, it’s not now. Tue, 24 Apr 2012 09:35:02 -0500 http://www.pymnts.com/commentary/pymnts-voice/Is-Facebook-a-Massive-Payments-Company-/ Fed's Mobile Use Numbers—That Was Then, This is Now http://www.pymnts.com/commentary/pymnts-voice/Why-Fed-Mobile-Use-Numbers-are-Misleading-and-More/ I participated on two panels in the 4th annual Mobile Contactless Forum held in San Fran last week (April 3-4). The agenda, speakers and turnout was really great. I thought I’d share some of my takeaways wrapped around some of my own remarks at the conference.
Don’t be misguided by the Fed.
It’s not what you think. I’m referring to the 2009 Federal Reserve Report on Consumer Payments Usage that says that consumers don’t want to use their mobile phones to pay for stuff. I totally love the Federal Reserve Emerging Payments guys and know many of them well. The work that they do is awesome. But the survey result on consumers interest in mobile payments is really OLD and, unfortunately, is helping some rationalize all of the reasons why mobile payments is too early, consumers don’t trust it and it hasn’t added any real value to payments since cards work so well today. Sure, cards do work well today, and will work well tomorrow and for probably the next decade or more. But quoting a 2009 report using data that was collected in 2009 – three years ago now is like making judgments about the viability of the internet from a report published in 1996 using 1994 data to understand what happening in 1996, let alone to project forward 3 to 5 years. Even that doesn’t capture how quickly things are moving in the mobile space and therefore the danger of using even 2 year old data to understand what’s happening today. The diffusion of mobile devices, the application of mobile to IP enabled devices and the ease at which entrepreneurs can leverage existing payments infrastructure to innovate around the mobile is moving the payments industry along at lightning speed. For reasons I’ll get to in a minute, using that data as a reason to slow things down on the mobile front would be like deciding not to go into e-commerce in 1996.
Back to the survey for a minute. In 2009 there was one and only one way that mobile payments was being discussed and described to consumers: NFC-enabled devices being tapped onto POS terminals. So, not surprising that the results are the results reported. Asking those same consumers those same questions today using that same context and the results would likely be the same. In fact, it was just reported that less than 2% of all merchant locations in the US are NFC enabled. The chances of having an NFC enabled phone near an NFC terminal are not unlike the odds of winning the lottery … possible, but very difficult and not at all likely. Kind of a bummer of a statement to make at a mobile contactless conference, but …
The Fed Survey on Consumer Payments for 2011 is coming out later this year, and it will be interesting to see what it says about mobile payments and how it has changed if at all. But, if you really want to know how people feel about mobile payments and using their phone to enable mobile commerce, I wouldn’t wait for the survey. I’d just look around you at the people with smartphones and how they are using them. And then figure out how you can play before you are outplayed. More on this later.
Mobile Payments by Any Other Name...
There is a lot of confusion over what is meant by the term “mobile payments.” People in the industry use the term to mean a variety of different things. Mobile payments and mobile commerce are often used interchangeably and that is how the confusion perpetuates. There was a lot of back and forth over that at the conference itself.
Mobile payments is defined by many as using the phone to pay – so using the phone at the point of sale to make a purchase. Although that isn’t happening much using NFC phones and terminals it is using bar codes and apps that facilitate that. I know that people are sick of hearing this example, but 4 million Starbucks customers can’t be wrong. A lesser known, but probably not for long, example is Level Up and its bar code enabled payments/loyalty scheme that enables local merchants to accept payment via bar code. Then there’s Pay by Square and PayPal that are enabling payments via mobile in ways we’ve discussed many times. Paydient is another venture that is enabling payment via QR code. Its solution is white labeled by merchants as is its wallet which aggregates offers from a variety of sources. Uber, my new favorite app of all time, allows me to pay via an app on my phone when I want an alternative to a taxi in the cities they operate (thankfully Boston),
Mobile payments is also replacing the way consumers pay for stuff on line. Thanks to the iPhone and Android devices using the phone instead of the PC is getting easier and easier to do. The growth in online retail via mobile grew nearly 100% 2010 to 2011. MasterCard reported that nearly 7% of all internet sales were done via the mobile device. Someone in another session mentioned that mobile retail is the second most popular activity on the mobile device behind general use including search. I found this surprising at first but suppose that for so many people, the smartphone has replaced the personal PC (if there was one to replace) that it isn’t that difficult to imagine after all.
This view of mobile payments also extends to tablets – a device increasingly responsible for commerce. Thirty percent Gilt Group’s sales over the holidays were made with tablets and 38% of people who own tablets – yes, still a small number but growing – make purchases from their tablets. And why not, they are just more portable PCS and offer a better browsing experience than the smartphone.
Now, let’s move to mobile commerce. That’s the set of activities that happens on either side of the acting of paying. The mobile, in many ways, has almost commoditized the payments process – it is the means to the end – it’s not where the interesting stuff in payments is happening now. Payments is still important but simply the final leg of a shopping experience that is now being transformed by the mobile device. Offers are being pumped to consumers via mobile in the hopes of bringing in more foot traffic to those storefronts, inventory and prices both are being checked by mobile. But that’s just the beginning.
Nearly half (46%) of the apps downloaded today are designed to help consumers shop or make better buying decisions while they are shopping. Sixty five percent use their mobile devices to find businesses and then go to the physical store to make a purchase. It’s why everyone and his mother is chasing down schemes that make it seamless to go from search to purchase using the mobile phone. And, frankly, it’s why schemes like those that PayPal and Square are putting into the market are getting so much interest and traction – they make it easy for local merchants and consumers to transact. They both remove the friction from the transaction itself, and add value by serving offers and making the experience more personal and personalized. Keith Rabious was recently interviewed about the popularity of Square and its Pay with Square and Square Register applications. He said two things: (a) Square solves a real problem for real people (and merchants) and (b) Square has embraced the existing payments rails to enable its innovation. Square rides existing payments rails and enables existing plastic cards to transform commerce for consumers and merchants via the Square dongle. And, did I mention he also disses NFC? Pretty much says it is DOA (my words, not his).
Mobile Commerce isn’t going to tip, it has tipped.
Anyone who follows my writings knows that I am known for my direct and sometimes controversial statements. After all it was me and my colleagues back in 2006 that gave the big thumbs down to NFC when just about everyone on the planet said we were insane and instead invested in NFC schemes like there was no tomorrow. The mobile is a fait complet in the payments/commerce world and that has been a known fact for a long time. But NFC was just too complicated with too many players to make happen. So, entrepreneurs moved to the cloud and found their innovation and opportunity there. NFC might make it at some point but it will be a long slog and it will now have to prove it is better than the cloud based solutions that are moving along at Mach speed and getting consumer and merchant traction.
But I digress. So, here’s the controversial statement. We’ve hit a tipping point for mobile commerce. Unlike some who at the conference said it was coming, I’ll disagree and say it’s here (echoing what David Evans said a few weeks ago in his post). And, it’s only going to explode from here.. It is here and it will explode because smartphones are just about everywhere now or they will be soon and by definition they work with cloud-based applications.
Here are the stats that I shared at my session.
• 53% of US Adults own a smart phone
• 71% of those 25 – 34 own one too.
So, maybe you say, tell me something I don’t already know. Well, here’s maybe something you don’t already know.
• 70% of those who earn $75k and over own one
• More than half of those making $30k or less own one
If you cross the percentage of those who own smartphones with those with the most spending power – it is pretty astounding. Me and my colleagues at MPD have looked at this and found that, as a conservative estimates, about 60% of the spending power in the US belongs to people who carry around smart phones. If you don’t think that is a reason for mobile payments to tip, I don’t know what is.
But that is just the tip of the iceberg.
Nearly 90% of those users access the internet with their phones – and almost 95% of those 18 – 29 do. That pool of people is just going to get bigger as people adopt smartphones worldwide. The number of global internet users is going to grow two times in the next three years and smartphones will fuel that trend. Just think about that … two times as many people in the next three years will be using their mobile phones to access the internet - with many people in many parts of the world only having a mobile phone and only accessing the internet using it. The opportunity for commerce to happen via mobile is almost beyond comprehension.
So, as I said, it’s only a matter of time – and not that long of a time – before all of these people who are running around with smartphones do three things:
1. Shop on line just as they did or do with their PCs
2. Use their phones even more to assist with the shopping/commerce experience – discovering merchants or offers or both
3. Download apps like LevelUp, Uber, Pay with Square, PayPal and the others who allow them to use simple technology to facilitate their shopping experience at their favorite merchants.
The smartphone makes it easy for that to happen and the consumers who carry them are comfortable with the technology. Plus, they’ve had a whole decade of experience of shopping on the web and being trained by the card companies that they are safe and protected while shopping doing so. Security is a topic that many people talk about and say is an inhibitor of mobile commerce adoption. For the reason that I just stated, I just disagree.
People also these days don’t think twice about registering their cards with apps. If you’re over 45 and still use a Blackberry maybe you don’t or say you wouldn’t but you’re in a shrinking minority and certainly not where the mobile commerce momentum is gathering a head of steam.
So, at the end of the day (and the end of the conference), here is where I stand. With apologies to anyone who is still madly in love with NFC, if you want to find the future of mobile, look in the cloud and look in your hand. That shift to the cloud, and the connection to smart mobile phones, has and will shake up the ecosystem in so many ways. Every single player now will have to pivot. Every single question about business models, data security, maybe even the rationale for EMV, is all up for grabs.
The mobile commerce train has left the station – and it isn’t the NFC express. So better get on board and hang on for the ride of your life. Mon, 09 Apr 2012 09:03:45 -0500 http://www.pymnts.com/commentary/pymnts-voice/Why-Fed-Mobile-Use-Numbers-are-Misleading-and-More/ Breaking the Groupon Habit, or, Making Merchants Money http://www.pymnts.com/commentary/pymnts-voice/Breaking-the-Groupon-Habit-or-Making-Merchants-Money/ I was doing some work today on the social commerce application that we’ve been incubating and piloting here at MPD. The application is a SaaS-based toolkit that allow local merchants to capitalize on the online/offline commerce shift that we’ve been talking about for a long time, using mobile and social channels to enable that new commerce opportunity. More on that innovation in a later post, but a couple of things struck me like a thunderbolt as I reviewed our latest pilot results.
Insight number one: new habits are hard to break.
One of the big experiments that we have been running during our pilot involves different ways to motivate people to buy a variety of promotional offers. More precisely, we’ve been running experiments to try to determine how (and why) people will throw down their card information onto a web site they’ve never heard of in exchange for being presented with an offer. On the one hand we’ve observed the millions of people who happily enter their card information on Groupon's site to buy a hugely discounted deal at a (generally) lousy place that they (likely) never return to again, ever. Why do people do this and so many of the same people repeat the cycle – pay good (but cheap) money to go to places that they probably don’t like and won’t visit again?
My hypothesis is that this results from two things: (a) regular customers of those merchants who like snagging the deal and/or (b) the psychological high that people get from “being smart about saving money” when they buy anything that is 70% off, irrespective of what they are buying. This big revelation hit me after reading a really great book about why people develop habits and why those habits are so hard to break. The author’s research concludes that all human beings (and mice too) all have a “cue-response” mechanism hard wired into our brains that sort of operates like our own personal autopilot. This autopilot means that whenever we are stimulated by a cue, we take an action on that cue because we get a reward when we do – even if that cue/action combo results in a reward that isn’t always good for us (smoking, eating too much, etc.). So, if we take that same logic to the Groupon environment, I would posit that the cue is consumers seeing deeply discounted deals, the action is to buy it, but the reward isn’t just about big savings but rather feeling good about saving oodles of money on that deal and feeling pretty darn smug about doing so. It is sort of conveys bragging rights too about how much was saved. I further contend, that if the cue-action-reward stimulated more than that response (buy more deeply discounted deals) people would actually return to the merchants that offered those deeply discounted deals, even when they didn’t offer a discount.
If you agree, there are some interesting implications for merchants, consuemrs and even Groupon (and others like them). The big net-net here is that Groupon has helped to hook a whole generation of consumers onto the habit of humongeous discounts in order to get the payoff of “feeling smart about saving money” – a reward that has become ever more relevant to consumers in a tough economic environment. This is significant since the “more typical” 20% to 30% discounts now no longer mean that much to consuemrs – 50% is barely viewed as tolerable. After all, when consumers have been trained to see 70% to 80% off each and every day in their inboxes, that becomes their frame of reference for just about everything else they see.
That, by the way, is exactly why merchants hate Groupon. This habit is especially bad for merchants who want consumers to develop the habit of returning to their storefront post-coupon to buy at full price. By and large, that isn’t happening, and most merchants would rather be audited by the IRS than do another Groupon offer
I’ll also mention that once you understand the Groupon habit and the habit-forming dynamic it sets up (between itself and its consumers), it’s not hard to see thru the “incremental customer” promise that they dangle in front of merchants. Groupon and other deal sites like them, bring in incremental customers to those merchants, but only one time. Consumers don’t develop the habit of returning to those merchants a second or third time. Paying full price is a habit that Groupon has helped to break, in a big way, for many consumers across all retail categories. The implications for Groupon and its business model is something we’ve said all along – they have to keep the direct sales machine revved up – repeat customers isn’t really a part of their model.
Insight number two: loyalty is the new mobile payment app
Once upon a time, in payments card land the loyalty experience went something like this.
→ Customer walks into any store that takes a card for payment
→ Customer buys stuff
→ Customer pays for that stuff using a credit or debit card that she whips out of her wallet
→ Customer will decide which card to use based on whether she wants to get points for that purchase and what card might give her the most points
→ Customers completes transaction and gets points for making that purchase on that card
→ Customer saves up a bunch of points and 50% or so will redeem those points for merchandise, airline miles, etc.at some point in the future
Well, I guess that’s not so once upon a time, now is it. This “loyalty experience” looks pretty much like this today just about everywhere you look, except that redemption formulas are getting stingier and debit rewards programs are disappearing. That said, the standard process of payment transactions pulling thru loyalty to a card via points is the model that exists today, and has existed for as long as loyalty has been a topic of conversation at card issuers.
Mobile and in particular, smartphones, have begun to turn this process upside down and inside out.
Apps tied to payments are popping up all over the place that redefine the loyalty experience so that it looks now something like this:
→ Customer downloads an app onto her iPhone
→ Customer registers a card to that app
→ Customer goes into a merchant that allows her to use that payment app to pay, most of these are enabled via bar code
→ Customer gets a discount for using that app to pay at that store for whatever they buy. The discount isn’t grand (maybe 10% or 15%) but it is applied to the total amount of the transaction at that merchant
→ Customer gets an email from that merchant reminding her that she can get another credit off of her next purchase the next time she comes in
→ Customer goes back to that merchant and buys stuff and gets a credit applied to her card
→ Repeat.
What’s different here? Well, a whole lot.
First, themerchant has much more of an opportunity to control the loyalty experience. The big gripe in payments/loyalty land today is that merchants “fund” issuer loyalty programs via interchange and don’t get the direct benefit back. Although these programs are still card-based, and so merchants still pay interchange, these schemes help merchants create a “cue-reward” mechanism that prompts consumers to return to their store and to buy things – and not because they are deeply discounted.
Second is that in these situations, the “reward” is immediate – an email that says the consumer has saved money on that transaction and a statement credit to prove it. Loyalty to the merchant and that immediate gratification is really what’s pulling thru the payment transaction – not the other way around. The act of registering a card to an app in exchange for a credit that is applied to the bill is much more about an inducement to return to THAT merchant to shop and buy than it is about selecting a card that racks up points for redemption later. The “reward” only happens when the consumer comes back to spend money at the store. The habit that these apps are hoping to create for the merchant is preference for the merchant that accepts the app - loyalty pulled thru a mobile payments app that offers an incentive to return and an easy way to tie payment to the experience.
It’s a really interesting shift, I think, and one that is made entirely possible because of two things: mobile phones and that lowly piece of technology – the barcode. These apps are, by and large, driven by an app that produces a bar code that is scanned at the merchant and linked to the payments flow. It is by and large, a frictionless experience for the merchant and the consumer.
Even though the discounts aren’t steep, merchants still have to fund them so they have to be willing to adopt the mindset they are giving “regular” customers a discount for visiting their storefront. And, as the density of merchants that accept these apps increases, the promise of “incremental new customers” for these merchants may become a less plausible claim for the apps developer (the pool of potential customers in any geography won’t get any larger so these same customers can’t all be new to everyone at the same time).
These schemes are new and so we don’t have a lot of data points to know yet whether (a) merchants will be willing to subsidize regular customers on a going basis, (b) apps customers will remain loyal customers absent the credits/discounts and (c) whether the apps business model is sustainable. But for now, it seems that these new mobile payments apps are transforming the notion of loyalty, popping up like rabbits in the Springtime and launching their loyalty/apps schemes outside of the traditional issuer/points paradigm.
What are your thoughts? Fri, 06 Apr 2012 13:38:09 -0500 http://www.pymnts.com/commentary/pymnts-voice/Breaking-the-Groupon-Habit-or-Making-Merchants-Money/ Leave Us Alone, We're Innovating! http://www.pymnts.com/commentary/pymnts-voice/Leave-Us-Alone-We-re-Innovating/ Last week I was asked to give my thoughts on what the market obstacles are to payments innovation and what if anything the government should do about this. The occasion was an excellent conference put on by the Kansas City Federal Reserve Bank.
The premise of the question seemed to be that it’s been hard to get mobile payments, NFC, and other things off the ground. Maybe there’s a problem there and we need to government to knock some heads together or show the way. After noodling on this subject for about 2.3 nanoseconds I concluded that entrepreneurs should post sign to Gov: Stay Out. 
I made three points.
<ul><li>We are going through one of the most intense periods of innovation in payments—really anything that surrounds the exchange of value between consumers and merchants—that we’ve ever had. </li>
<li>But a lot of things that people call innovation wouldn’t actually make consumers and merchants better off. Often they don’t solve a real problem. They can’t and shouldn’t get traction in the market. </li>
<li>Decentralized markets are pretty efficient at discovering the optimal path of innovation in the payments industry. And the government doesn’t have a great track record when it comes to payments innovation. </li>
</ul>Creative Destruction
We’re in a period of creative destruction. We see this in a number of ways.
<ul><li>A lot new technologies and business models are being introduced. For example, LevelUp is a mobile payments system that is tying payments to sophisticated loyalty programs. </li>
<li>A lot of this innovation is blurring the lines between online and offline commerce. That’s Pay by Square.</li>
<li>Much of this innovation is coming from major players outside the traditional industry. That includes Google, Facebook, Intuit, and Groupon.</li>
<li>Venture capital is poring into payments. Just about every day some VC is handing out several million to a payments-related startup. </li>
<li>The big guys are acquiring innovative players. For example Visa bought Fundamo, a mobile payments platform for lesser developed countries.</li>
<li>Just about everyone in the payments industry and in adjacent ecosystems is focused on innovation. Just take a look at Amex which has a whole business unit run focused on this.</li>
<li>All the traditional players are very worried. Just listen to their nervous chatter about PayPal’s entry into offline payments. And they should be nervous because a lot of the innovation is commoditizing the networks and issuers. </li>
</ul>There are several reasons why we’re going through this “inflection point” of creative destruction.
<ul><li>The spread of mobile devices: 100 million smart phones in the US as of January 2012. My guess from looking at the data on the demographics of people with smart phones is that they account for a majority of spending. They are high spending people under the age of 45.</li>
<li>The development of sophisticated software platforms on mobile devices and in the cloud that empower entrepreneurs around to engage in payments innovation. Think iPhone, PayPal X, and IPCommerce.</li>
<li>The rise of data analytics. Many of these new schemes like Square and LevelUp are using data in creative ways to provide value to merchants and consumers.</li>
</ul>Innovation doesn’t always lead to good products.
Just because something is an innovation, or called one, doesn’t mean that it can or should succeed in the marketplace. Entrepreneurs talk about their innovations like parents talk about their kids.
There are some serious obstacles to market adoption.
The most important one is that payments currently work really, really, well. You swipe your card or click online and it all happens in a second. Merchants get paid. Everyone knows how to do it. A lot of the mobile phone solution that have been devised fail because they are just too complicated.
The next most important one is the chicken and egg problem. Many of these innovations can succeed only if they get merchant and consumers to agree. That’s usually a hard business problem. But its especially hard if the innovation doesn’t make merchants and consumers better off.
Third, there are massive amounts of sunk costs tied up in payments. From the rails, to the processing software platforms, to the physical point of sale equipment, to all the learning that clerks and consumers have done. That leads to massive inertia. It is true that a lot of the payments system is a rickety Rube Goldberg contraption tied together with rubber bands, paper clips, and shoelaces. A lot of it could be replaced with better stuff. But it all works, so why spend good money changing it?
Entrepreneurs encounter many market obstacles. But a market obstacle isn’t the same thing as a market failure (the name of the problem that economists agree we might think about fixing). Many seemingly great ideas won’t get traction because at the end of the day they don’t generate enough incremental benefits relative to the incremental costs. That’s been the problem with the adoption of NFC. Waving cards at the point of sale sounded great to a lot of senior execs and payments pundits. Visa and MasterCard led banks to issue millions of cards and kept telling merchants they better take them because it was inevitable. Unfortunately, contactless didn’t save consumers much if any time and forced them to change their behavior. It also required merchants to invest in changes in their physical point of sale without any evidence that it would save consumers money.
Of course, it wasn’t inevitable after all. Most of the successful mobile payment apps are using QR Codes. NFC may take hold eventually because the market is ready for it, not because central planners wish it to be so.
Just because things that sound cool don’t take off policymakers, and academics, should avoid the knee-jerk reaction to claim there’s a market failure. It is probably consumers and merchants speaking loudly that it isn’t so cool after all.
Government: Please, Go Stay Away 
When it comes to guiding payment innovation what should the government be doing? The short answer is stay out of the way especially while the market is trying to figure things out.
First, there’s no evidence there are market failures in the adoption of payments innovation. A market failure would be a situation in which an innovation that increases net social value doesn’t get adopted in the marketplace. No one has articulated a compelling case for why that is likely to happen.
 Second, there’s no reason to believe that the government could identify markets failures with any degree of accuracy. Even people who are deeply knowledge about payments aren’t very good at predicting what consumers and merchants really want. Just look at the mass hysteria over NFC. The very smart and knowledgeable people at MasterCard and Visa weren’t very good at predicting market adoption. Some regulator in Washington, DC is going to do better. Its important to emphasize that anyone who supports government intervention has to show not only that the government can identify problems but they can also solve those problems, not create unintended consequences from solving those problems that actually make things worse, and don’t make things worse by also fixing problems that weren’t.
Third, governments don’t have a particularly good record when it comes to payments innovation. Let’s give credit where credit is due though. A government created the fundamental innovation in payments: the creation of metallic money three millennia ago. But what have they done for us since I say tongue slightly in cheek?
Indeed, as soon as they had gotten people to use government minted coins governments figured out how to use this innovation to tax people. They started depreciating the content in the coin so that the government could buy things with coins that were really worth less. (This is known as seignorage. Some governments did this with such abandon that people didn’t want to use the currency. Smart governments, like believe it or not the Greeks back then, managed to keep the depreciation low enough that no one really noticed.)
Then there has been the whole check debacle in the United States. Anyone who has tried to get into B2B payments knows how we are still living with a massively inefficient system as a result of the Fed’s subsidizing the check system during much of the 20th century. Even with the movement to electronic checks we’re almost certainly losing large swaths of the rain forest and contributing to global warming as a result. (Some people at the Fed will tell you they saved the country from a massively inefficient private sector check system, in the late 19th and early 20th century, where checks circled the country for weeks in order to avoid the bank fees. That’s actually bunk as <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=816245" target="_blank">my paper</a> on the early history of checking showed a few years ago.).
Conclusion
There is a lot of chatter in the government (and at various Federal Reserve Banks) about the payments industry and how various policies could “help things out” or even improve on what the card networks do. The industry isn’t perfect and there are certainly areas where government regulations are needed. Guiding innovation and helping supposed entrepreneurs overcome market obstacles isn’t one of them. Mon, 02 Apr 2012 14:07:17 -0500 http://www.pymnts.com/commentary/pymnts-voice/Leave-Us-Alone-We-re-Innovating/ Is 2012 the Inflection Point for Mobile Payments? http://www.pymnts.com/commentary/pymnts-voice/Is-2012-the-Inflection-Point-for-Mobile-Payments/ Prognosticators don’t do well in payments. Change happens more slowly than these pundits predict. And even when they learn this they still underestimate how slowly things change. Take cash. People have been predicting the death of cash since about the minute the baby general-purpose payment card was spanked on the bottom in 1950. Yet the most recent <a href="http://pymnts.com/briefing-room/consumer-engagement/consumer-behavior/Boston-Fed-Credit-Scores-Predict-Debit-Usage/">Federal Reserve Bank of Boston</a> survey of consumers found that cash use is on the increase—and that’s in the US, a highly developed economy, where we’ve had cards the longest of anyone.
Of course we’ve been hearing about how everyone’s going to be paying with mobile phones, any day now, for about a decade. By waving, of course, because merchants are going to have NFC readers and phone makers are going to have NFC chips. Those who’ve heard me talk about this know that I’ve been a great skeptic of mobile payments happening quickly in the US.
So you might think that there’s an imposter writing the rest of this piece and making this assertion: 2012 is the point of inflection for mobile payments where the future will be must different than the past. The next few years will see speedy adoption in the US as mobile payments becomes mainstream for consumers and merchants.
This will all happen differently than anyone has forecasted.
I focused on the possibility that we were passing through an inflection point for mobile payments a couple of weeks ago when I realized that I had completed every single transaction that day on my iPhone. Now a couple of things you should know before I go on. It was a Sunday and I lead a pretty boring. I got up and paid for my morning newspapers at the Charles Street Market in Boston with LevelUp ($9.50 for the NYTimes, the Boston Globe and the Financial Times). I went to Starbucks and paid $2.08 for my coffee using the Starbucks card app on my phone. I got a car service using my Uber app.
During the week, my most common purchases are for the newspaper, my coffee at Starbucks, and my lunch at a place called Delicato. I can, and usually do, all these purchases using my mobile phone.
There aren’t any statistics on how many people are doing this. My guess is that while it is still pretty small it is significant and is growing quickly. Lots of people have gotten accustomed to paying with their mobile phones at Starbucks and more and more are doing it with services like LevelUp and Uber. Importantly, it is a lot more common than is was a couple of years ago. Things have changed.
So why could 2012 be an inflection point?
To begin with we have a critical mass of people who uses smart phones. As of January 2012, according to comScore, 101.3 million people had a smart phone. About 80 million of those phones were iPhones or Android phones that support these new mobile payment methods. People fall in love with these phones and have gotten used to using them for lots and lots of things. And experimenting with them.
Then the NFC hysteria ended. Entrepreneurs realized that all this talk about the inevitability of NFC was bunk. They followed the hacker ethos and focused on things you could actually get into the market now. Starbucks, SCVNGR’s LevelUp, Square’s Card Case, and others have adopted QR codes for now. That’s inexpensive for merchants to install.
Entrepreneurs also figured out that the last thing you wanted to do—and needed to do—was go talk to mobile carriers. The solutions that are getting traction don’t involve getting permission from the mobile carriers, banks, or the card networks. These businesses can spend time making their applications slick rather than spending time in conference rooms with lawyers and execs who can’t seem to get out of their own way.
Solutions like LevelUp have gotten a lot of traction quickly. There are now more than 200 locations in the Boston area that take it. About 4,000 people have used it at Sebastian’s Café around the corner from me. Yes, these numbers reflect an absolutely a minute fraction of physical commerce but it is a pretty good start.
I don’t know whether any of these mobile payment solutions, or ones similar to them, will survive for long. At most inflection points involving creative destruction the market is flooded with hundreds of alternatives only a few of which survive. What these solutions are doing though is getting consumers and merchants used to paying with their mobile phones.
What’s remarkable about this is that despite all the press releases, pilots, powerpoint presentations and general hoopla from the big guys—you know who they are—they are barely a factor for most people. Oh, I did see Google Wallet at the checkout at Duane Reade in Manhattan last week. If only I had a Sprint Android phone I might have used it.
These mobile payments entrepreneurs might just get the market primed for Isis, Google, Visa, and others to come in and take over. Or one or more of them might be what most smart phone users fall in love with when it comes to mobile payments. <a href="http://techcrunch.com/2011/11/14/keen-on-why-50-billion-is-small-change-for-scvngr-tctv/" target="_blank">The 23-year old founder of SCVNGR even has his sites on killing off interchange fees and the card networks as we know them</a>. I’m going to pass on predicting the outcome. For now. Mon, 26 Mar 2012 16:33:32 -0500 http://www.pymnts.com/commentary/pymnts-voice/Is-2012-the-Inflection-Point-for-Mobile-Payments/ PayPal "Squared" Yields Triangle - And It's Blue! http://www.pymnts.com/commentary/pymnts-voice/paypal-squared-yields-triangle-and-it-s-blue/ So much for first-mover advantage. PayPal Here was unveiled today as not the first, not the second, and by many counts not even the third or even fourth small business solution designed to turn phones into POS terminals. And, based on what I’ve seen and heard so far, it was smart for them to wait. PayPal Here is a mash up of all of the “good” features of existing dongle-based solutions, and turbocharged with PayPal’s unique set of assets.
I spoke with Ed Eger, PayPal’s General Manager for North America, who gave me (and probably a dozen other of his closest friends) the scoop on PayPal Here. You can read and see all of the specifics here. Here’s my take on what he said.
It’s not about the dongle. In fact, Ed started the conversation that way. He was emphatic that PayPal Here is not really so much about a triangle-shaped dongle but rather an all in one solution for small businesses to better serve its customers. It is targeted to small merchants, casual sellers, services businesses and mobile field service personnel who either want to replace existing POS options with a single solution that gives them more options and/or wants to be able to accept and process electronic payments. And, the merchant gets instant access to those funds. That’s big for the small business. Really, really big and a huge differentiator. Bottom line, for small businesses, PayPal Here is about never losing a sale because a customer does not have a convenient (for them) way to pay.
It’s not about the swipe. PayPal Here enables merchants to accept just about every payment method under the sun: card, check, cash, and yes, even PayPal accounts. Ed didn’t say this, but I have a sneaky suspicion that PayPal will at some point offer inducements for consumers to pay that way (see point number 5). PayPal Here’s Local feature, in fact, seems to, nicely facilitate that. Phones registered with the app use geo-fencing (sound familiar?) to serve offers and enable consumers to check in and buy with that merchant – tagged to an account on file. So, think of it as Phones with Benefits (sorry, couldn’t resist). Any wagers on how many of those accounts will end up being PayPal accounts not tied to a card?
It’s about maximizing core assets. I was recently introduced to a “head to tail” restaurant dining trend for something else I am working on. This is a trend that is, yuk, about using every last bit of the, ahem, animal in preparing the meal. In the case of PayPal Here, it is about using every last bit of PayPal and eBay’s corporate assets to enrich the small business solution. Local (as described above) leverages WHERE, invoicing for mobile field personnel leverages its invoicing assets, the payment options that consumers might be presented when those invoices are presented leverages Bill me Later, the cash-back business debit card leverages the existing eBay merchant debit product, payments leverages the new digital wallet which leverages all of the offer/discovery and payment options via Milo, Red Laser, and naturally, the security and risk capabilities that are the PayPal core competency. And, I am sure that (a) I missed a few and (b) there will be more capabilities as time goes on. We didn’t talk about how Here will be distributed, but I’d bet money that it involves more than simply activating the existing eBay merchant base.
It’s about the business model. When I first saw the pricing scheme, I admit to being a little underwhelmed. Offering a 2.7% rate is only a teensy bit cheaper than the competition – so teensy it is almost not even worth mentioning, never mind rushing to sign on the dotted line. But, PayPal is promoting that when paired with the use of the PayPal Business Debit card product (which is linked to the merchant account and) the 1% cash back offered on purchases made using that card, brings the “effective merchant rate” down to 1.7%. In this environment of rapidly shrinking debit rewards programs, maybe this is an inducement for small business to consolidate other merchant accounts (if they have them) and really use the card. For PayPal, it is even better – they can make some money from deposits. But, it seems to me that PayPal Here just has to be competitive on the fee and not ridiculously competitive to get adoption. It is banking that merchants aren’t making their decision about small business solutions on the basis of fees alone, as long as they are close. PayPal Here is banking on the proposition that using a one-stop platform will make life easier as a small business - and enable those small businesses to make features available to its customers that will, in turn, allow them to serve them better and find more.
It’s about customer acquisition. As I said, Ed made it clear that PayPal Here’s name of the game is payments acceptance, and making sure that small businesses never lose a sale. That means that it was engineered out of the box so that PayPal is but one of the many payment options that people are able to use. Ed didn’t say this and I didn’t ask, but Here HAS to be a strategy to acquire new PayPal accounts. Yep, there are 106 million registered customers, worldwide, with a PayPal account, which is about 105,000,054 more than customers than have Square Card Case accounts. But, that’s about 200M less than the number of people walking around with Visa or Master Card plastic cards in their wallets (and that’s just in the US). Enabling small merchants to accept electronic payments using a blue triangle is nice and all that, but capturing that customer’s information via an opt in to get deals from small businesses (that, for example, are sweeter if you pay with PayPal); or presenting consumers with financing options at the point of sale using PayPal assets that incent them to use that option; or asking consumers to opt-in to Local and cardless payments tied to their PayPal account could be a very effective way grow their base quickly, and in a way that adds value to both merchants and consumers in the process. And that will seal the deal.
Being “fashionably late” to a party is a tried and true way of capturing all of the attention, scanning a filled room to see just where the most interesting conversation is happening, and using the anticipation of the arrival to build both hype and mystique. PayPal Here has certainly made its entrance, fashionably late with its small business electronic payments platform, and is certainly capturing the attention of the many existing players in the space. It will be fun to see how PayPal Here now works the room. Fri, 16 Mar 2012 14:24:45 -0500 http://www.pymnts.com/commentary/pymnts-voice/paypal-squared-yields-triangle-and-it-s-blue/ Karen Webster Sizes Up the Rapidly Changing World of Mobile Payments http://www.pymnts.com/commentary/pymnts-voice/Karen-Webster-Sizes-Up-the-Rapidly-Changing-World-of-Mobile-Payments/ Let’s play a little game after you’ve read all of these recent announcements.
“Starting This Summer, the Isis Mobile Wallet Will Be Available to More Than 100 Million U.S. Card Holders” (ISIS announcement with BarclayCard, JPMC, Capital One)
“[The Visa and Vodaphone mobile wallet] has the potential to transform the way that people pay and are paid the world over.” (Visa/Vodafone mobile wallet announcement at MWC 2012)
“Google Wallet has announced that 22 of the largest U.S. retail chains support its initiative, which enables consumers to make purchases by tapping their Android smartphone at 300,000-plus MasterCard PayPass-enabled merchant terminals.” (Google Wallet)
“We are exploring potential solutions that would help us to deliver the fastest, most secure mobile-payment experience possible for our customers." (New retailer-centric mobile payments scheme)
“Home Depot has decided to bring the revolutionary POS technology to nearly all of its 2,000 stores in the US. It’s the first time in recent memory that a major retail chain has allowed a way to pay at the register that doesn’t actually require customers to have a physical product (whether it’s a credit card, a mobile phone, or a dollar bill).” (PayPal mobile wallet debut at Home Depot).
“Apple is clearly running a semi-sandboxed experiment inside selected retail stores. The experiment? Allowing customers to buy physical goods using Apple's own virtual currency system (iTunes).” (Apple Easy Pay Trial)
“Serve, the digital payment and commerce platform from American Express, debuted a Facebook application that allows users to send, receive, and request money without leaving the social network” (Serve and mobile wallet via Facebook)
“Card Case is an example of the grace that Dorsey believes defines Square, a company he hopes will radically transform the generally unmagical burden of exchanging money for goods and services. The app, designed as a visual homage to the fashion house Hermès, can also show you your payment history, what’s for sale in-store, and nearby places that take Square.” (Fast Company writing about Square)
Here are the rules of the game:
• For one point, to what are all of these announcements (made since the start of the year) referring?
• For ten points, what major players are missing from these announcements?
• For one hundred points, what’s the same about most of these announcements?
• And, for 64 thousand points, who’s likely to gain the most traction and win?
Let’s see how you did.
If you answered the first question with “mobile wallets” then score a point! (And if you didn’t, don’t admit that to anyone…)
If you answered the second question with Amazon and Facebook, add 10 points to your score.
If you answered the third question with, “All but three don’t rely on NFC to enable payments (Apple, AmEx, and PayPal),” then add 100 more to your score.
Now, before we see whether you can add 64 thousand points to your score, we need to first discuss just how many winners there will be and why.
Everyone quoted above, plus probably at least a hundred more, all want to win and are working very hard to capture market share. Just about every day there is a new announcement about a mobile wallet something or other. The Mobile World Congress last week in Barcelona was mobile wallet announcement central where we had the long-awaited ISIS debut, along with announcements from just about every mobile operator, network and mobile wallet start up.
Then, on Friday — well timed, I’m sure to hit at the tail end of all of this mobile wallet euphoria — was the retailer coalition. Their announcement basically dissed everyone in favor of “something different.” The strategy, I suppose, was to appear stealth, but its complete absence of substance made it too cute by half. No, we don’t have a technology and we’ll work with anyone, but “it” has to be better and safer than what exists now. To that point, there’s not a whole lot of experience to draw from; mobile wallets are mere babies in the payments lifecycle. Sure sounds like a strategy to me – but maybe one that is less about mobile wallets and more about shaking down the fees from the card networks and future mobile wallet providers.
But I digress. Let’s get back to the discussion of the mobile wallet winners. It will come down to, I think, how many mobile wallets people will want to have which is a function of: how easy they are to use; how convenient they are to access; and how many merchants will accept them.
My hypothesis is that, in spite of the fact that people, today, technically, have multiple accounts registered for payment (e.g. iTunes, Amazon, PayPal), most people by and large think of themselves as having one wallet. Most of those wallets are leather and they hold a bunch of stuff, including cards, cash and ID. If you were to ask anyone today if they would like to carry around two or three or ten leather wallets, my guess is that most people would look at you as if you had lost your mind. They’d say they’d rather consolidate everything into a single wallet that could comfortably hold the cards they wanted, and those they liked to use at the places they liked to shop. I would say this would be true even for women who carry purses that could hold multiple wallets, and like buying a lot of fancy leather accessories.
So, will the mobile environment make the answer to the “how many wallets are you willing to carry” question be any different? That depends on how you define the wallet — or, more correctly, how consumers will define their mobile wallets.
One answer is that the mobile wallet is the mobile phone so the phone literally becomes the digital substitute for the leather wallet. The many individual payments apps that can be downloaded on that phone are the digital analogs to the plastic cards that are carried around today in the leather wallet, even if they have more functionality and give the consumer the choice of switching between payment types. This new mobile form factor makes it tons easier for people to have and use many different payment types at many different merchants. As I have written previously, Starbucks has shown us the power (and profitability) of having an easy-to-use, single-purpose payment app – a stored value app that can be used only at Starbucks. The mobile phone makes it easy to now carry around multiple store card apps just like that since the fat wallet syndrome is a non-issue in cyberspace.
But I don’t think that most people will think of those apps as wallets. They’ll think of them as payments apps to be used at a particular merchant, just like the store cards they carry around now.
My definition of a wallet is a container that holds a bunch of different payment options that can be used at many merchants – cash, checks, cards – and I think that most people would agree. If you also agree, it means that single use apps like Starbucks aren’t wallets, they are apps which people today refer to as wallets (thus contributing to the confusion over mobile wallets). One of my colleagues has the Starbucks and LevelUp apps (a new mobile payment method available in Boston) on his iPhone and the iPhone is for all intents and purposes his mobile wallet. Those individual apps aren’t wallets, they are apps inside of his new digtal wallet, the iPhone. My guess is that he’ll probably add more of those sorts of apps, but not a lot more.
The mobile wallet as I have just described it (the phone) will make it possible to have multiple — even, in theory, hundreds — of such apps. It would make merchants really happy since they like it a lot more when people use their store cards (hence their motivation behind their own mobile payment network). But that doesn’t necessarily mean that people will want and/or use all of them. Just as in the leather world, people have a lot of cards (on average 7) but use only a few (like 2). Mobile may make it easier for more payments apps to “fit” into the wallet, but it doesn’t mean people will use them or want to have them. And having another icon on your phone isn’t costless—it takes more time finding the apps you want. Over time, people will reduce icon clutter on their phones and just have the payment types that generally use.
Moving on. Another answer to the wallet question is that the mobile wallet is actually a container that lives in the cloud or on a phone, that is accessed via the mobile phone, and that aggregates and makes easily accessible several frequently used payment tender types. That’s the PayPal and Square models (cloud-based) and what Google, ISIS, AmEx/Serve, Visa, MasterCard and many more are all pursuing too. Of the group, PayPal is the farthest along – 100M+ consumers with accounts ready to transact at the point of sale and merchant traction is starting to happen. Its cloud-based approach has given it a running head start – like 12 years of a running head start – with fewer moving parts to manage. Cloud-based wallets, like PayPal’s and Square’s, will integrate lots of other things too, such as loyalty programs, financial management tools, shopping assistants and so forth. Square’s Card Case is designed to recreate the experience of putting your purchases on “account” never producing cards or even showing the phone. The identification of the Card Case customer and authentication is done in the cloud, and via a “geo-fencing” feature that recognizes customers with Card Case accounts as they enter the merchant’s store. In all of these cases mobile wallets function more or less as an acceptance mark which, to be useful to consumers and merchant, means that these wallets must be accepted beyond just a single merchant.
If mobile wallets, a.k.a. new acceptance devices, are defined as these cloud-or phone-based containers, lots of other questions naturally arise.
The first is, how many are merchants going to be willing to accept them? The answer to that question depends on how costly it is to add another mobile wallet to the POS system but my guess is that it is going to be costly enough that only a few wallets will get traction with merchants.
The second is, how many are consumers going to be willing to use? My guess is this isn’t going to be any different than the physical wallet in the end and that consumers will have a handful.
The third is, how many mobile wallets are going to get enough traction with consumers and merchants, and solve the chicken and egg problem quickly enough so that they can survive long term? If you agree with my answer to the first two questions the answer is NOT MANY.
The fourth question is whether the existing payment networks will be wallets, simply, as they are with PayPal, just a choice within a wallets, or simply payment apps on a mobile that only allow the consumer to use their network card. I’m less sure on my answer to this one but my guess is that the networks will either survive as payment apps on the mobile phone (like the Starbucks store card) or that consumers will decide what they really want is a multi-tender type wallet with lots of functionality in which case the payment networks will become a much less interesting business. Unless that is decided soon, and the business model questions related to this for the networks are thorny, PayPal will have had a long lead time in plowing the multiple tender type ground and consumers might not see enough value to move away from that wallet to something new. (Square is aiming for the same target but in a slightly different way.They’re hoping to build and ignite a merchant and consumer network around using IP-enabled devices to create a personal experience in store, an invisible payments experience and a prompt to try other merchants who can match that experience.)
Then, there’s Facebook. Facebook could redefine the mobile wallet even more differently since its core asset is Facebook Credits, which is more of a currency than a mobile payments application. To put this in perspective, the Facebook Credits experience is more like what you do when you travel to a different country and need to buy that country’s currency to transact there - you simply use your native currency to buy it and then use that currency to transact in that country. Facebook Credits is no different - you basically use existing currency (accessed via existing payment methods) to buy a new currency (Facebook Credits) that are accepted at a country you want to visit (the merchant). Today those merchants are digital goods/games, by and large, but tomorrow who knows. It is also easier for merchants to accept Facebook Credits than add a new acceptance mark to their POS. Sure, there is the “currency conversion” that happens on the back end to “convert” Credits to the dollars attached to a payment type, but it is likely a much easier lift than adding a new acceptance mark. The Facebook wallet would become the currency used at the point of sale, with the details of how those currencies are “exchanged” being handled in the background. Facebook in this scenario, could have the equivalent of a software-enabled smart euro. (Sound interesting? <a href="http://pymnts.com/briefing-room/featured-briefing-rooms/facebook-commerce/Facebook-Credits-Do-Payments-Firms-Need-to-Worry/">Read the full take on Facebook’s possible “smart currency” at PYMNTS.com</a>).
So, back to the 64 thousand point question. Who will win and get traction? The game is very early. And as they say, never make predictions you don’t think you’ll outlive. But you need to look at consumer and merchant behavior together to predict the outcome. I’m not going to put money yet on the winners (some of whom may not even have been born yet). But I am going to lay down a wager that consumers will have only a handful of icons on their phones that connect to a single-tender type (payment app) or a wallet (multi tender types) and that merchants accept payment with mobile only for a few of these icons. The notion of a thousand wallets is unrealistic for the same reason that there aren’t thousands of payments networks: merchants and consumers don’t want them.
So, now it’s your turn. What’s your answer to win 64 thousand points? Tue, 06 Mar 2012 14:28:42 -0600 http://www.pymnts.com/commentary/pymnts-voice/Karen-Webster-Sizes-Up-the-Rapidly-Changing-World-of-Mobile-Payments/ PayPal Poked at Goldman Sachs http://www.pymnts.com/commentary/pymnts-voice/paypal-poked-at-goldman-sachs/ The Goldman Sachs technology conference last week in San Fran sure did stir the pot around PayPal and its Point of Sale ambitions. The centerpiece of this criticism is PayPal’s earlier in the year public announcement of its physical point of sale trials with Home Depot, the specifics of which questioned its inability to scale, business model, and security risk.
Seems like a sure sign to me that PayPal is making the traditional players a little nervous.
Here’s my quick take, in reverse order.
Related: <a href="http://pymnts.com/briefing-room/security-and-risk/Visa-PayPal-Go-Back-and-Forth-on-Security/">Visa, PayPal Go Back and Forth on Security</a>
The whole security risk thing seems like a bit of a red herring to me. Keep in mind, this the same PayPal that built its whole value proposition on security. When PayPal launched some 11 years ago, as an alternative, online only network, it’s only hope for adoption and survival was to convince people it was secure. It came into life as a way to enable people to buy from teeny-weeny merchants they never heard of and built its systems and user interface to safeguard customer data and card information. If people didn’t trust it to be secure, it would have probably been a dead carcass on the dot com highway. Not only that, PayPal was the company that figured out how to balance easy payment online with hordes of criminals stealing them blind. Lots of others, including banks, tried that but were either too cautious (no fraud but no transactions!) or too careless (uh oh!) PayPal created (and had to) a very robust risk and fraud system, that has only been made more robust via its Bill me Later acquisition. In fact, PayPal has done such a good job at convincing people that it is secure, it rates 3rd – right behind Visa and ahead of American Express, MasterCard and Discover - as the most trusted financial services brand in the mobile payments arena. [link to Market Strategies study] And not only has it convinced people but its profit contribution to eBay sure suggests that they aren’t wallowing in fraud losses themselves. Home Depot also made a very good point – if it wasn’t safe, it wouldn’t risk its customer’s relationships just for the sake of a trial.
As for the business model, well that’s all about money. I would imagine that this is the sort of thing that could get negotiated, especially when in pilot mode.
The scale claim might also be another thing to fall into the red herring category. It is a fact that Visa processes a huge volume of transactions, but there’s no evidence that PayPal can’t or won’t be able to do the same. I am not a technologist, but it seems to me that cloud-based networks, like PayPal, would seem to be able to scale relatively easy, too. And gee, Discover, seems to have done all right despite being small.
There are a lot of things that one might criticize PayPal for at the Point of Sale, but these don’t strike me as the top three. As on and offline commerce converge – fueled by the mobile phone and the point of sale transacting that it enables - a lot of issues emerge that all of the players will need to solve for. For instance, what changes are required at the point of sale to accommodate a new mobile payment scheme and how much will that cost? Will this new scheme enable store cards (where retailers make the most money)? How does a new scheme support loyalty and other consumer engagement strategies? How is customer data captured and shared with the merchant?
2012 promises to be very interesting, indeed. What are your thoughts?
<hr/>Karen Webster is the CEO of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info <a style="outline-style: none; outline-width: initial; outline-color: initial; color: #058cbf;" href="http://www.marketplatforms.com/MPD/corporate/whoweare/Experts/Karen%20L_%20Webster/" target="_blank">here</a>. Thu, 23 Feb 2012 15:33:29 -0600 http://www.pymnts.com/commentary/pymnts-voice/paypal-poked-at-goldman-sachs/ Retailer/Customer Relationships: What Retail 2012 Can Learn from Retail 1912 http://www.pymnts.com/commentary/pymnts-voice/What-Retail-2012-Can-Learn-from-Retail-1912/ Mary walks into her favorite store on her way home from lunch with a few friends. Upon entering the store she’s greeted by name by the shopkeeper and asked how she liked her purchases from two weeks ago. She’s also told that more of her favorite items just arrived and the shopkeeper set aside some of the items just in case she wants them, which she does. After looking around the store for a bit, Mary decides what she wants. When buying the items, the shopkeeper asks if she wants her items delivered and if she wants them charged to her account on file. Without producing a wallet or ID to pay for the items, Mary leaves the store with her two shopping bags in tow and heads home.
Ironically, this isn’t some far-fetched futuristic view of the ideal shopping experience, but rather how things were routinely done about 100 years ago when shopping transitioned from weekly marketplace visits to more frequent visits to storefronts on Main Street. It’s also the experience that everyone in the retail sector — large or small — should be aggressively trying to emulate. Using IP-enabled devices like smartphones is helping consumers make this goal a reality.
Think about it: A century ago, shopkeepers and customers actually knew each other by name since their visits were frequent. Loyalty wasn’t a function of points, deals or discounts, but of service. Relationships were built on trust. Merchants knew their customers’ likes and dislikes and strived to deliver on those preferences. Putting purchases “on account” was done in part because some payments were done via barter and some were handled by the “man of the house,” who settled the account at a later time.
As dreamy as it sounds, shopping then wasn’t perfect by any means. Goods, by and large, were kept behind stores’ counters and required shopkeepers to retrieve them one at a time. Items were bought and stored in bulk, which meant that some items had to be both weighed and wrapped. That made shopping a time-consuming activity. Product selections weren’t plentiful even though merchants tried to stock what their customers wanted. In spite of these drawbacks, what defined this retail experience more than anything was the connection between customers and merchants. It was intensely personal. After all, many were on a first-name basis.
Fast-forward about 75 years and just about everything had changed. People still went shopping, but they visited gigantic malls and cavernous supermarkets where the name of the game was choice, selection and service, but of a different sort. Goods and services were on display in aisles or on racks for consumers to touch and smell and sometimes even sample before they purchased. Consumers served themselves, loading their basket or shopping bag with the goodies they wanted to buy.
Checkout still happened at the counter, but the transaction was largely impersonal between a cashier and a customer who’d already decided what she wanted to purchase. The cashier simply “rang up” the transaction. Still, customers seemed happy to trade personal service for the liberating experience of being independent while in a buying mode.
Retailers seemed just as happy with the trade-off too, as they could serve, or more appropriately enable the service of many more consumers. This transition also allowed retailers to preserve even more of their already razor-thin margins. What defined this retail experience more than anything else was efficiency. What does all of this have to do with retail in 2012 and beyond? Well, just about everything.
Creating a Modern-Day Personal Retail Relationship 
What consumers lost when modern-day retailers turned their attention to efficiency is the personal relationship that’s always been at the core of the retail experience. That’s exactly what merchants — large and small — are working vigorously to reclaim 100 years later. That means anticipating what their customers want, letting them know when it’s available for them to buy and providing them with information about that product as they’re making their buying decision. It also means creating a relationship with a consumer that’s far more personal than an email announcement of a sale or deal.
There are zillions of companies circling around this multitrillion dollar retail industry eager to help merchants recreate and modernize the shopping experience of 100 years ago. Some have focused on ways to make shopping more efficient. For example, players like Price Check , Product Graph and AisleBuyer enable merchants to offer price and inventory checks on items in-store, provide product reviews and information, and even enable checkout in the aisle. Other vendors enable retailers to offer coupons or similar schemes to drive consumers into stores to make purchases and begin a relationship (e.g., ordering online and picking up in-store).
Groupon and LivingSocial are the grandfathers of these schemes, relying largely on email to drive foot traffic to local merchants. Apps like shopkick , Scoutmob , Bloomspot and a growing number of retailer-specific apps provide mobile access to offers that can be redeemed in-store. Still others like Apple’s ZipCheck combine service and checkout anywhere the customer happens to be in the store. Pioneers like the recently launched beta version on Facebook of getta!Table , which offers exclusive daily offers from the best local restaurants, are pursuing a vertical strategy on that new commerce frontier to make purchasing efficient (i.e., directly on merchant fan pages) and redemption in-store, again with the hope that new customers will have a good experience with that merchant and eventually develop a long-term relationship with them.
While different, all of these schemes rely on three essential ingredients to make this new retail experience possible:
 
<ul><li>mobile phones that provide access to the internet and thousands of apps in the hands of just about any consumer who wants one;</li>
<li>IP-enabled point-of-sale systems (including tablets) that offer a richer consumer experience in and out of stores; and</li>
<li>mobile apps that live in the cloud now literally cloud the distinction between online and offline transacting.</li>
</ul>After nearly two decades of being able to shop online, consumers are finally comfortable doing so. Transacting on a mobile phone today is as easy and becoming as second nature as shopping on a PC.
Online Payment Players 
For all of this advancement, the application of technology to make the shopping process both efficient and the consumer/merchant relationship more personal still seems elusive. Three players, none of whom are either a traditional retailer or payment firm, are now working to change all of that.
1. PayPal. PayPal’s portfolio of capabilities is designed to streamline the shopping experience for consumers and merchants alike. Its geo-targeted application serves offers via the phone from merchants when consumers are in striking distance. Other apps such as Milo and RedLaser enable inventory checks and pricing information by scanning a product code inside or outside of a store. Others provide product reviews and other relevant information before a purchase is made.
In-store checkout will leverage the more than 60 million active U.S. PayPal accounts. What’s more, it can be done without a card by simply typing in a phone number and PIN at the POS, leveraging devices that merchants already have. PayPal is perhaps the most powerful force today in blurring the online and offline commerce worlds. It will no doubt use these assets and others to enable merchants and consumers to have a more personal — not just more efficient — relationship.
2. Square. This app has evolved over the last year beyond a micromerchant processor into a consumer and merchant network. Square’s Card Case customers, who opt in, have their faces and shopping histories visible on tablets that operate Square’s register application, enabling that merchant to better serve that customer when they enter their store. Purchases are made “on account” without producing any card or identification since authentication happens via visual identification.
Also, digital receipts promote other Square merchants in the area, helping drive traffic to their storefronts. Square’s “cardless checkout” has less to do with shopping efficiency and more to do with enabling a better experience in-store for consumers and a deeper relationship with that merchant. Square’s road map no doubt includes capabilities for merchants and consumers to both broaden and deepen those relationships.
3. Google Wallet. By comparison, Google Wallet seems a bit out of sync with the other players. It leverages the powerful Google ad platform that technically makes it easier for merchants to reach consumers with offers. Its economic proposition makes it attractive for merchants to play along too. But its value proposition to consumers is wrapped around a mobile wallet technology that only works on certain phones and with certain merchants that can interact with its technology and those phones.
Its wallet is open, so the technology can accommodate a variety of cards, but it still requires the phone to be used at checkout to complete a purchase. Google Wallet uses the power of the web to drive traffic to storefronts, but it’s focused almost entirely on a consumer and merchant value proposition wrapped around ease of checkout. While claims of “customer delight” ground its mobile shopping proposition, at least for now, the experience seems to fall way short of either making the shopping experience more efficient or making the consumer/merchant relationship more personal.
What PayPal, Square, Google Wallet and many others who are trying to reinvent the retail experience must bear in mind is that from a shopping experience the Mary of 2012 isn’t much different from the Mary of 1912. What is different is the set of tools that consumers and merchants have at their disposal to make that experience a cost effective and relevant reality. But tools that create efficiencies alone aren’t enough; they also have to drive a personal relationship between consumers and merchants. Ironically, it will be the IP-enabled revolution that started roughly six years ago that will move consumers closer to the experience that defined retail more than a century ago and that will fuel its reinvention for the next 100 years.
 
<hr/>This article originally appeared on <a href="http://www.retailonlineintegration.com/" target="_blank">Retail Online Integration</a>. Fri, 17 Feb 2012 15:29:27 -0600 http://www.pymnts.com/commentary/pymnts-voice/What-Retail-2012-Can-Learn-from-Retail-1912/ Mobile Movers, Shakers and Shockers http://www.pymnts.com/commentary/pymnts-voice/Mobile-Movers-Shakers-and-Shockers/ I don’t know about you, but 2012 so far has left me a little breathless given the fast pace at which the payments industry has been moving since we all emerged from the New Year’s break. Maybe it’s the mild winter. No matter, the catalyst, not surprisingly, is mobile and the IP-enablement of just about everything that touches or influences commerce. This last week was particularly interesting given a few announcements from very different corners of the payments ecosystem about their payments strategy, not surprisingly, keyed to what they will pursue (or won’t) along the mobile lines. Here’s my take on last week’s mobile movers, shakers, and shockers.
Movers
Visa announced last week that it will enable FIs to more easily enable the delivery of mobile financial services solutions to their customers. This mobile banking/payments platform capability is courtesy of its alliance with and equity investment in Monitise, a UK-based technology and services company that has a pretty powerful and proven mobile banking and payments engine. This new Visa capability will allow FIs to extend a variety of useful financial services to their accountholders including balance checks, funds transfers, and transaction alerts. As a purely B2B play, it didn’t get as much airtime as the stuff that is more consumer directed but is interesting nonetheless. It puts Visa right smack dab in the middle of same competitive playing field as Fundtech, Sybase, mFoundry and others who have built their businesses by allowing FIs to deliver banking services via the mobile phone. Visa can now use its powerful FI channel to distribute this capability and to do it worldwide. There was no reference made to the business model that Visa will use as part of its go to market strategy, but one can imagine that it could create a disruptive model given their long-standing FI relationships and the other revenue possibilities that this platform can generate for them. 
This move could also be an interesting way to “back door” a variety of mobile payments capabilities that carry the Visa brand without the heavy lift associated with going direct-to-consumer. As the largest global payments network on the planet, Visa has the benefit of global brand awareness and acceptance but it lacks a direct relationship with the consumer. As a platform and absent those direct consumer relationships, it also faces a strategic conundrum in how to capture more transaction share and revenues since it is completely dependent on its distributors and merchant partners to do that for them. Enriching its platform with more capabilities that allow its “distributors” to add more value to its customers seems like a sensible move. It not only adds value to their customer – and their customers customer – but it rings the cash register at a much higher margin – the “distributors” are the ones that do the heavy lift with getting consumers to adopt. And, once these mobile banking and payments hooks are in place via the FI accounts, Visa all of a sudden has a worldwide mobile network of consumers that it can touch, via the platform, with other services like offers, coupons, and who-knows-what else. Visa has been criticized for being slow moving in the mobile world, and while this announcement certainly does not conjure images of “cool and nifty”, but if my assessment is correct, it seems a strategic and methodical approach to creating a mobile commerce capability that it can finally, ahem, monetize.
Shakers
Facebook has been making a ton of news lately, not the least of which is its S1 filing and all of the juicy tidbits that it revealed about its payments ambitions. [<a href="http://pymnts.com/briefing-room/commerce-3-0/social-commerce/What-Facebook-s-IPO-Filing-Reveals-about-Its-Payments-Business/">Check out David Evans article</a> which provides insight and analysis.] But, it was its agreement with Bango last week that really got tongues a waggin’. 
Bango does two things in the mobile payments space: it integrates with mobile operators’ billing systems so that consumers can buy mobile apps and have those charges show up on their mobile phone bills and it collects and provides data on mobile content usage. Facebook has 425M+ people around the world accessing Facebook via the mobile phone. It is increasingly worried that as more consumers access Facebook via mobile, that its ad revenue will plummet unless it figures out a way to monetize eyeballs that move from online to mobile. It’s a tricky proposition for them. Lots of brands – and mobile operators - have experienced the backlash from users who hate being bombarded by ads popping up on a small mobile (or tablet) canvas. Sponsored stories or similar strategies (a la what Twitter has done) are rumored to be in the offing for Facebook, but that alone won’t really help Facebook capture the revenue it needs – and frankly should be able to get – from the mobile channel. 
Enter Bango, potentially. I don’t think that Facebook will use Bango to create its own payment network on Facebook, although I guess anything’s possible. It seems like it would be an awfully big an investment just to make money from moving transactions thru the system. Rather, Bango is likely to be used by Facebook to accelerate the adoption of a new monetary network using Facebook Credits as the currency to effect commerce transactions. Think about it. It’s been reported that one in every three Facebook mobile users uses the mobile phone to play games. Using Bango, Facebook Credits and the carrier billing channel, Facebook could flood, okay maybe just increase, the number of Facebook Credits in the system which Facebook monetizes by taking 30% of whatever Facebook Credits when businesses or people try to cash those Credits for government-issued tender. 
It is a pretty sweet set up. Every $1 of Facebook Credits means 30% back to Facebook at some point down the road when those Credits are pulled out of the Facebook network. One might imagine mobile operators using Facebook Credits as a currency to pay developers who are, in turn, being paid via Facebook Credits when consumers buy their apps. At some point, those Credits will be “cashed in” and the 30% tax will be directed back to Facebook, but until then it is sort of like there is this little alter-monetary system happening all around us that is fueling commerce on a massive social and soon to be commerce platform, the Facebook way. 
This mobile payments strategy cum-Bango also shifts the risk of chargebacks to the carrier, who probably bears little risk anyway since the transaction amounts are relatively small and the last thing people these days want to risk is having their phones shut off for non-payment. And those 30% “taxes” are pretty high margin to boot. 
This whole scheme is made all the more powerful when you consider it on a global basis, where not now, but soon, most everyone in the world will have a mobile device and be able to connect to the internet via that device. Facebook, with its ~1 billion users today, is likely to capture many billions more as consumers in developing markets begin to use their phones to interact with this social platform. Once this happens, Facebook will see even more enormous growth - for instance, in spite of having an enormous user base in India, less than 4% of its population is on Facebook. Once that happens, Facebook will have a mechanism in place to monetize on the interactions of its consumers with the apps on its platform via a payments network that is already in place – the mobile carrier and a monetary system that they control - Credits. 
Talk about shaking up the ecosystem. Now we know at least one other reason why Facebook’s IPO value is in the $100B range.
Google
Google’s a shaker for a totally different reason. The news last week was all about the reported ease with which Google’s Wallet could be hacked – and was. Reports suggested that if one’s phone is lost or stolen, all a bad guy has to do is to go into app settings, clear the data and reset the PIN. Now, that of course only applies to the universe of people with (a) a Sprint Galaxy Nexus 4S and (b) a Google wallet account which is still a pretty small universe. But it is unsettling particularly given the dust up in December over Verizon’s decision to block Google wallet from its Galaxy phones over security concerns. [See my commentary on that announcement here.] My take on that decision was that it was likely motivated over control of the wallet, but maybe their concerns were rooted in real security issues after all. This news also comes on the heels of recent reports of a pretty lackluster reception to Google Wallet in the marketplace as a result of many things – its NFC POS requirements, its demand for SKU level data from merchants and lack of a compelling value proposition for consumers (not many phones avaiable to acces Google Wallet and not many places to use it if you had it).
PayPal
PayPal made big news last week when it totally confirmed what eBay CEO John Donohue said about NFC some time ago .. .and that is that it stands for “not for commerce.” On Thursday, PayPal went on the public record to say that it was ditching, um discontinuing, its efforts involving mobile payments at the Point of Sale via NFC. The reason? Not enough merchant interest to continue. It seems that PayPal’s other POS innovations were far more interesting to them since they create less disruption at the point of sale (and don’t even require mobile phones to access PayPal accounts) and therefore a whole lot easier to implement and get traction. We’ve talked to a bunch of merchants who still want to see more of what PayPal has to offer but who admit to being intrigued by its frictionless POS experience and the prospect of enabling the PayPal account base on their behalf. 
We’ve said before that PayPal has made a bunch of really smart moves, backburnering NFC as just the latest example of that, and is doing some interesting things to enable the convergence of on and offline commerce that will reinvent commerce at the physical point of sale. But, it ought to keep a close eagle eye out on its Silicon Valley neighbor Facebook, now that it will soon come under public pressure to deliver shareholder returns and sees payments as one of the ways to do that. Facebook, just by its sheer reach of consumer eyeballs, is in a great position to create an alternative online and mobile payments network but not in the same way PayPal has. 
Instead of creating an alternative acceptance mark Facebook could force the adoption of an alternative currency on those channels that uses other funding sources to enable payment on its social platform. As more and more eyeballs and commerce move to the Facebook platform – which we believe it will in the next several years – it could more plausibly become a ginormous payments network without any of the investment required to build one and without getting into the risk and risk management business just by controlling the monetary supply, if you will, for enabling commerce on that platform. If it does, it could turn the online and mobile payments business model upside down by making its money, in effect, on currency conversion and not payments transacting. 
Oh, and I am totally invoking my right to say I told you so on the whole mobile payments/NFC front. For those of you who haven’t read all of my NFC rantings, a few of the more recent ones are here. I don’t know about you, but I can’t wait for this week to see what else is in store!
<hr/>Karen Webster is the CEO of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info <a href="http://www.marketplatforms.com/MPD/corporate/whoweare/Experts/Karen%20L%5F%20Webster/" target="_blank">here</a>.
<hr/> Mon, 13 Feb 2012 06:00:00 -0600 http://www.pymnts.com/commentary/pymnts-voice/Mobile-Movers-Shakers-and-Shockers/ What Facebook’s IPO Filing Reveals about Its Payments Business http://www.pymnts.com/commentary/pymnts-voice/What-Facebook-s-IPO-Filing-Reveals-about-Its-Payments-Business-2/ <a href="http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm" target="_blank">Facebook's S1</a>, which was filed on February 1st in preparation for its IPO, shows that this almost 8-year old company will likely become a global powerhouse in payments.
Payments is the second largest revenue generator for the company. It accounted for around 15 percent of Facebook’s $3.7 billion of revenue in 2011. Payments revenue has grown from $5 million in 2010Q1 to $188 billion in 2011Q4. And, between the last quarter of 2010 and the last quarter of 2011 Facebook’s payments revenue grew by a whopping 247 percent.
That said, don’t try to draw an analogy between Facebook and PayPal, the only other successful Internet-based payment company. Or even to Visa, which is the largest payments card business in the world. That’s because Facebook is a very different sort of payments company. Here’s why.
An Overview of Facebook
To understand the nature of Facebook’s payments business, let’s first take a short detour into its business model.
The core asset of Facebook is the social graph. Let us unpack what that really is.
People open accounts on Facebook and obtain an alias that allows them to be identified. About 60 percent of the Internet users in the United States have done so and in some countries such as Chile more than 80 percent have. Facebook is trying to get all 2 billion Internet users to open accounts and has gone long way in a short time in accomplishing that objective. Meanwhile a rapidly portion of the world’s population has an Internet connection increasingly as through mobile phones, making it easier for more people to establish an account with Facebook and use it.
Once people have an account on Facebook, they form friendships (or enhance the ones they already have). There are roughly 800 billion bilateral connections on Facebook with each Facebook account holder having about 130 friends each.
The result of this is that Facebook essentially has the largest phone book in the world (a directory of all the people that have signed up for Facebook and can be communicated with). But it also has a register of who is communicating with whom (info on who is calling whom). And of course it has detailed information that people provide for their profiles plus the content they post on their pages or receive from their friends and other source (and details on much of what you say to your friends).
Facebook decided not to keep this data-rich communication empire to itself. Instead it created a <a href="http://pymnts.com/commentary/pymnts-voice/the-new-age-of-invisible-engines/">software platform</a>. That means that it created APIs that enabled developers to hook into that powerful social graph and create applications that leverage the information contained in it. Much of Facebook’s S1 is about this software platform and how it and others are using it.
Some of the most successful applications on Facebook have involved games. Zynga, which is the game king for now, developed popular “social games” such as Farmville for Facebook. Zynga and the other social game developers have made most of their money from selling virtual goods to their users. If you want to compete on Zynga’s Mafia Wars you might really want a (virtual) tank and you’ll have to buy that tank from Zynga. It doesn’t cost much but with millions of users it helped drive Zynga’s revenues. It also drove its own IPO last December. Zynga’s market cap as of February 7, 2012 is $9.3 billion.
So far, Facebook has made most of its money from advertising. It charges for various sorts of ads that appear on Facebook user’s pages and on the pages of applications such as Zynga’s Farmville that run on Facebook that Facebook users are interacting with.
But its payments revenue is skyrocketing.
Facebook Money
May 2009 marked the time when Facebook introduced its own currency – Facebook Credits – which works on Facebook much like the dollar, euro, or yuan does Lots of other players have tried to create virtual currencies but have not gotten traction. Facebook is different.
Unlike everyone else who has tried, Facebook is in many ways its own country. It has a “population” of about a billion people making it the third largest country in the world after China and India. Its people live together in a community and interact with each other as well as the many businesses and other organizations on Facebook. It also has the power of a government. It can mandate that transactions take place in its currency. That’s because it controls the platform and can prevent pretty much anything it wants to in its borders. Just ask Zynga.
When Facebook Credits was first introduced it was just another tender type that could be used for transactions on Facebook. It was a convenient payment method for small purchases and many businesses and people opted to use it.
In early 2010 Facebook announced that it was going to require the use of Facebook credits for social games. Most importantly it said it would impose a 30 percent “exchange rate”: that is, if someone wanted to convert their pile of Facebook credits into dollars Facebook would take a 30 percent slice off the top. It was as if the European Union had figured out a way to impose a 30 percent tax on the exchange rate on the euro.
Facebook turned to Zynga for a slice of its game revenue. Zynga complained, and of course hired lawyers, but quickly relented. Zynga threatened to leave Facebook but that was sort of like McDonald’s threatening to leave the European Union—pretty tough when that’s where there are a lot of customers and you’ve already built your restaurants to serve.
To get an idea of just how significant payments is likely to be for Facebook it is important to recognize how nascent this $500+ million revenue business is. After only two years it accounts for 15 percent of Facebook revenue. And most of that revenue comes from one very successful social game company. More social game companies will join Facebook and Zynga’s game business will likely expand.
Most importantly Facebook has every reason to extend its currency to other transactions on Facebook. As it says in its S1, “Payments integration is currently required in apps on Facebook that are categorized as games, and we may seek to extend the use of Payments to other types of apps in the future.” How important that is depends on how social commerce evolves on Facebook. Given that most businesses have opened up Facebook pages and can access a large fraction of world’s population on Facebook it is likely that Facebook will become an enormous e-commerce platform. This prediction rests on the fundamental premise that Facebook is like a highly wired country with almost a billion people. What business wouldn’t try to sell there? (More on this in a forthcoming piece on social commerce.) In that case Facebook will take a slice—probably not 30 percent since margins are lower on much e-commerce activity—of those payments too.
Owning a currency is pretty cool. In fact, for millennia governments have made a lot of money from having a currency. Those revenues are called “seinorage” and they come from depreciating the currency by printing more of it. (Back in the golden days governments just reduced the mount of precious metal in the coins.) It is one of the best taxes going because so long as the government doesn’t get carried away (that is, causing high inflation) hardly anyone notices it and when they do they just blame businesses for raising prices.
Facebook can do that but it has an even better deal going. Money is so liquid that it would be very difficult for any country to impose a tax on exchange. Facebook can do this though because it controls essentially all of the communications systems and other infrastructure in its “country.” You can’t take Facebook Credits out of Facebook easily without them knowing about it and so they can insist on the exchange rate tax.
There is of course nothing wrong with Facebook’s approach. The company is providing businesses and people with an incredible asset for engaging in commerce. Facebook wants to get paid for that and, in fact, needs to be paid in order to continue to improve this asset. Facebook Credits is a clever mechanism for ensuring that the social network it has created can be monetized.
Facebook Credits in More Detail
Here are some excerpts from the Facebook S1 that describe its payments platform.
“Facebook provides an online payments infrastructure that enables developers to receive payments from users through an efficient and secure system. Developers can focus on creating engaging apps and content rather than spending time and resources to build payment processing and fraud management capabilities. Our users can store their payment credentials with Facebook in a trusted and safe environment, facilitating easy and fast purchases across the Facebook Platform rather than having to re-authenticate and re-enter payment information for each developer. We designed our Payments infrastructure to streamline the buying process between our users and developers. Our Payments system enables users to purchase virtual or digital goods from developers and third-party websites by using debit and credit cards, PayPal, mobile phone payments, gift cards or other methods. We have also extended our Payments infrastructure to support mobile web apps on certain mobile platforms. Developers have used the Facebook Platform to build a variety of user experiences, including apps on Facebook, desktop apps, mobile apps, and Platform-integrated websites, each of which can take advantage of the capabilities of the Facebook Platform.”
“When users purchase virtual and digital goods from our Platform developers using our Payments infrastructure, we receive fees that represent a portion of the transaction value. Currently, substantially all of the Payments transactions between our users and Platform developers are for virtual goods used in social games, for example virtual tractors in the social game FarmVille. Payments integration is currently required in apps on Facebook that are categorized as games, and we may seek to extend the use of Payments to other types of apps in the future. Our future revenue from Payments will depend on many factors, including our success in enabling Platform developers to build experiences that engage users and create user demand for their products, and the fee arrangements we are able to negotiate in the future.”
The Future of Payments at Facebook
You can do a lot with a global currency!
To begin with Facebook Credits is different from the payment card networks. Companies like Visa and PayPal are in the business of facilitating non-cash payments at the physical point of sale and online. They make their money from fees for authorizing and settling transactions between parties. But they obviously do not actually own the underlying currencies that are behind these transactions.
Facebook does. It can make money from selling its currency to people and businesses that want to transact on Facebook (think about going to China and having to get some yuans) and exchanging its currency for other currencies when people want to use its currency off of Facebook (think about leaving China and exchanging your yuans for dollars). It can also make money from seignorage.
With a global currency Facebook can operate a global system for transmitting money between people and businesses. That is different from what Visa, PayPal, or Western Union can do because Facebook can do these transfers from account to account on its own platform and without the hassle of dealing in several hundred different currencies with fluctuating exchange rates. It is like a bank that has a billion accounts and can shift money between any of those accounts.
Of course, just like the euro is only useful in the Eurozone, Facebook’s currency is only useful on Facebook and today only for social games. If commerce takes off on Facebook though, and people spend a lot of time on Facebook, Facebook’s currency is more like the euro for people that are living most of the year in the Eurozone countries. Except Facebook will likely have a bigger population.
Does this mean that payment companies should care as little about Facebook credits as they care about the dollar, euro, or yuan—just another currency to deal with? Hardly. That will be the subject of the next article in this series.
<hr/>David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework® , a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass. <a href="http://pymnts.com/profiles/people/david-evans/">More on David S. Evans</a>
<hr/> Sat, 11 Feb 2012 15:25:35 -0600 http://www.pymnts.com/commentary/pymnts-voice/What-Facebook-s-IPO-Filing-Reveals-about-Its-Payments-Business-2/ Target Looks to K.O. Amazon Price Check http://www.pymnts.com/commentary/pymnts-voice/Target-Looks-to-K-O-Amazon-Price-Check-2/ The media was abuzz last week over Target’s clever move to combat “showrooming.” Showrooming is the latest word to take up entry into Webster’s dictionary and describes the following phenomenon: consumer with smart phone and Amazon’s Price Check app uses physical store to zap a product’s bar code to get pricing and product info, takes up sales person’s time to get questions answered, then buya the item from Amazon at their discounted price (plus a $5 kicker presented as a further bribe to use the app and buy from them).
When Price Check was initially introduced in December of 2010, it was reported to have had a significant impact on holiday sales. Since then, it has been the bane of many a small and large retailer existence as consumers, many now trained to follow the best deal, feel absolutely no remorse about using a physical store merchant’s facility to kick the tires, only to buy those proverbial tires from Amazon cheaper.
Target’s counter punch last week was a missive to its suppliers asking them to make and distribute exclusive merchandise only available at their stores, making the whole notion of price checking irrelevant. Their store merchandising strategy also includes the “store in store” approach creating a unique product mix muddying the online price check opportunity further. Target’s motivation is obvious – keep from being disintermediated. Their suppliers’ motivation is also obvious: salute if they want Target as a customer. It would be hard to imagine that Target will get any pushback either - suppliers don’t want their margins squeezed any more than Target does.
As you can imagine, there are a variety of opinions on the showrooming topic, and Price Check in particular. Some I’ve talked to say all’s fair in the new “smart” world of mobile apps and price transparency. Others have said that it’s no different from people running around to a variety of car dealers, driving cars, and then playing one dealer against the other. On the latter point, I’m not so sure. In that scenario, dealers know the drill, and have a face-to-face fighting chance to win the business. On the former, well I am not sure it is that simple.
Certainly, technology--and technology in the form of a mobile app--is changing the nature of the relationship between consumer and retailer. In 99% of the cases, though, that intent of that change is to strengthen the bond between a merchant and a consumer. For the purposes of this piece, let’s not get hung up on whether the underlying tactics are actually having said result, but agree that the spectrum of tactics – discounts, offers, loyalty/promotions – are designed to foster a healthy relationship between consumer and merchant, even if that relationship is being facilitated by a third party, like a deal site.
Enter Price Check. The intent of this app is also very simple and designed to strengthen the relationship between consumer and merchant. This time, however, it’s using a third party – Amazon – to disrupt a relationship or a potential relationship between a consumer and a merchant. One could argue that a consumer that would actually spend time in a physical store only to buy via Price Check on Amazon might not be a target customer for that merchant anyway but who’s to really know? But for the Price Check app, that merchant could have snagged a customer.
The truth of the matter is the intersection of technology, mobile phones and the plethora of apps that goes along with it is becoming a bit of a double edge sword today for merchants. One the one hand, it is helping drive traffic into their storefronts in new and creative ways and making it more efficient for consumers to discover offers and opportunities and new merchant relationships wherever their smart phones take them. On the other, it can also have the effect of leveling the playing field around only one attribute – price and who has it cheapest. And, although Groupon has proven the point that when made cheap enough, tons of people will buy stuff they never would have otherwise (e.g. a voucher for a no-name restaurant 50 miles away in the boonies) most merchants don’t want to build their business or even acquire customers that way. The Groupon experiment, if anything for most merchants, has proven that deal hounds don’t convert easily if at all to lifetime customers.
That brings me back to Price Check. When doing my research for this piece, there were a ton of articles with merchants characterizing it as ‘evil’ and “despicable”– especially from the more main street merchants who don’t get the same price advantages as an Amazon or even a Target and who feel most vulnerable. They are the guys who seem to be getting the real raw end of the showrooming stick. And these are the guys who are painfully aware of the impact that Amazon has had on local bookstores – which today are as rare as hen’s teeth. They don’t want to be Amazon’s next collateral damage.
While I too think that it is pretty crummy for Amazon to blatantly build its business on the backs of merchants that have invested in physical storefronts, Price Check presents a great opportunity for merchants to get creative and to fight fire with fire. Target’s move to basically create a version of private labeling merchandise is brilliant and iterations of it something you’ll likely see more of the larger merchants embrace, along with advertised limited inventories that compel immediate purchase and the launch of new and innovative loyalty offerings that blunt Price Check temptations. Smaller merchants, who strive to create relationships with their more locally based customers, will continue to differentiate via smaller quantities of less mass-inventory merchandise while emphasizing local roots, personal service, and fair but not necessarily the cheapest prices.
The great opportunity that Price Checker has created for physical retailers is the chance for merchants to use technology to step up their game in order to better serve their customers and create the kind of relationships that can withstand the temptation of a few bucks off the suggested retail price. It’s why what Square is doing with Card Case and Register and what PayPal is doing to drive foot traffic into stores to make purchases is so appealing to merchants large and small.
The $1 trillion question is how consumers will actually respond. The bad economy still has consumers nervous about opening their wallets that creates more pressure on price than value. Maybe apps like Price Check can be turned into the mobile version of car dealer negotiations – starting conversations with merchants who have the chance to convert apps users into customers – even if it means shaving a little off their price to do so. That strikes me as a most fitting “turnabout is fair play” ending, wouldn’t you say?!!
<hr/>Karen Webster is the CEO of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info <a href="http://www.marketplatforms.com/MPD/corporate/whoweare/Experts/Karen%20L%5F%20Webster/" target="_blank">here</a>.
<hr/> Wed, 01 Feb 2012 15:33:09 -0600 http://www.pymnts.com/commentary/pymnts-voice/Target-Looks-to-K-O-Amazon-Price-Check-2/ Prepaid Tips for 2012: Why Fees Aren't Always the Answer http://www.pymnts.com/commentary/pymnts-voice/prepaid-tips-for-2012-why-fees-aren-t-always-the-answer/ More from the "Tips for 2012" Series
<ul><li><a href="http://pymnts.com/commentary/pymnts-voice/tips-for-2012-platform-carcasses-how-to-keep-yours-out-of-the-pile/">Platform Carcasses - How to Keep Yours Out of the Pile</a></li>
<li><a href="http://pymnts.com/commentary/pymnts-voice/Tips-for-2012-Make-Your-Loyalty-Program-Worth-the-Expense/">Making Your Loyalty Program Worth the Expense</a></li>
<li><a href="http://pymnts.com/commentary/pymnts-voice/tips-for-2012-top-emv-ignition-strategies-and-mobile-security-solutions/">Top EMV Ignition Strategies and Mobile Security Solutions</a></li>
</ul>1. Know your customer: Now more than ever, it’s important to understand your customer and what makes them tick. We all know the market is fragmented, but many companies are getting more sophisticated at understanding and targeting unique segments through social media, mobile applications and online marketing tools and techniques. If you don’t exactly who your customers are, what makes them tick and how to talk to them, you’d better get going.
2. Dig into the costs: As we all know, prepaid has thin margins. The nooks and crannies count. This is the year to thoroughly understand everything that drives your costs. What is the root cause? How can you adjust your product marketing, your servicing, your vendor agreements to optimize and streamline? If a solution isn’t optimal, change it.
3. Stay on top of regulations: Make sure you thoroughly understand the implications of Dodd-Frank and other regulatory issues - Don’t assume that what your competitor does applies to you. Get expert advice, ideally multiple sources. And remember, necessity is the mother of invention.
4. Find your niche, even though it may not be “follow the leader”: What are your unique assets? How can you apply them to best your competitor?
5. Figuring out when “prepaid” isn’t prepaid: We use the term “prepaid” to describe how funds are loaded on the account in advance. There are many times consumers don’t care and are frankly put off by this term. It’s an industry term, not a consumer term. Understand your marketing message and if it’s not needed, don’t use it.
6. Mobile, mobile, mobile: This medium is providing a huge platform for prepaid growth. It applies to both ends of the demographic spectrum and gives us a way to communicate in ways a plastic card just can’t accommodate. How does your strategy incorporate mobile? Does it embrace it? Have you decided how to think differently about your product or services in a mobile environment? If not, the time is now.
7. Focus: Bright shiny objects can send an organization in too many directions. They can be investment and resource drains. Hone your expertise, gain momentum, and then expand in a thoughtful way.
8. Fees aren’t necessarily the answer: It is critically important to understand which fees matter and which fees don’t. Cost structures to support prepaid products vary significantly and it is expected that there are fees for services provided. However, these expectations vary widely among demographics and mediums delivered. Aligning methods of delivery to your customer to simultaneously manage your costs and associated revenues is critical.
9. Partner wisely: Pick the best partner to help get new products, features, and solutions off the ground. The marketplace is changing quickly - use other’s expertise to help build creative solutions and deliver value. Use your own time and energy where your business excels - not replicating what exists.
10. Test, learn and scrap when needed: Don’t hang on to underperforming solutions. They are resource and investment hogs. Employ a rapid test environment wherever possible.
11. Protect your investment: If you have developed a unique approach, products, or solution, investigate patent rights. Capitalize on your efforts.
12. Government solutions: Solutions for governmental programs and distributions continue to grow. Care needs to be taken before approaching this segment, but for those that understand the complexities and have the proper distribution channel, it can be worth it. 
<hr/>Gloria K. Colgan is a Managing Director at Market Platform Dynamics and a leader in emerging payments and financial services. Prior to her affiliation with MPD, Gloria served as Senior Vice President for Discover Network, and as a member of the Discover Financial Services Management Committee.
While at Discover, Gloria established and grew the Marketing organization, including product development and management, branding and communications, plus pricing and analytics, enabling Discover to position themselves as a viable network alternative in the marketplace. Among her accomplishments include the development of Discover’s market-leading solutions for emerging payments, including mobile, contactless/EMV, and prepaid products.
Prior to joining Discover, Gloria was the Senior Vice President of the Commercial Card Product Group for JPMorgan Chase. There she was responsible for development and management of the purchasing, travel and entertainment, fleet, and stored value card programs. In addition, she managed all training and external communications functions for the commercial card organization.
Gloria also has depth in private label and co-brand marketing and product management. She was a marketing leader with Sears Credit Services managing consumer affinity card programs, as well as their commercial credit card products. She began her career in consulting, working for McKinsey and Company, advising financial services companies on issues of marketing strategy, organizational structure, and re-engineering opportunities.
Gloria earned her M.B.A. in Finance from The University of Chicago Booth School of Business and her B.S. in Business from Bradley University. She lives in the Chicago area with her husband and son. Fri, 20 Jan 2012 04:48:07 -0600 http://www.pymnts.com/commentary/pymnts-voice/prepaid-tips-for-2012-why-fees-aren-t-always-the-answer/ B2B Payments Innovation: Back in the Spotlight? http://www.pymnts.com/commentary/pymnts-voice/B2B-Payments-Innovation-Back-in-the-Spotlight-2/ There was a time not that long ago, when B2B payments innovation was perceived by many to be “out of vogue.” Back in the late 90s and early 2000s, B2B payments innovation was synonymous with an exuberant group of innovative B2B payment exchanges, marketplaces and hubs that failed spectacularly. Moreover, even the secular trends in payments over the last decade have made little impact in the dominance of paper-based payments, which still account for more than 80% of all payment transactions and over 70% of total payments volume in the B2B space. It is perhaps understandable that many entrepreneurs and innovators looked elsewhere for innovation opportunities during the last decade. In fact, with the exception of Remote Deposit Capture solutions, very little B2B payments innovation gained traction in the 2000s.
However, a few stalwart companies, including B2B payments processors like Fundtech and Bottomline Technologies, as well as traditional players U.S. Bank, J.P. Morgan Chase and American Express have continued to invest in B2B payments innovation, even while some of their competitors have divested or exited the space. In addition, following the tremendously volatile period of the recent recession and financial crisis, many new players have emerged with a renewed focus and energy on solving the challenges of B2B payments.
Perhaps because these companies were tested during these tumultuous times, many of them have evolved with strong value propositions that combine electronic payments capabilities with a range of other solutions, including credit/financing, integrated supply chain solutions, reporting and fraud solutions that simplify and streamline a range of business processes. In addition, the most interesting players in this space seemed to have learned lessons from past B2B missteps, minimizing complexity and integration challenges via Software as a Service (SaaS) solutions and identifying critical partnerships and commercial relationships, including white- label offerings, that should help drive critical mass. These new solution providers also minimize the capital investments required to get involved in electronic payments, while also recognizing the unique business process flows already in place.
Since 2009, a host of new activity has been happening in the B2B payment space to the point that B2B payments is now starting to appear regularly in the spotlight. So, it appears that this new decade may well be the time to look again at B2B payments innovation, as innovation springs up across this space. Key areas where I’ve seen some promising trends include:
- Electronic Invoice Presentment &amp; Payment (EIPP)
- Integrated Supply Chain Solutions
- Innovative Financing/Credit Solutions
- Card acceptance innovations
- Payment Platform Innovation
EIPP - A wide range of innovators have been working to tackle the problem of paper for years, with varying degrees of success. This category includes perhaps the broadest list of players, with large players, like Bottomline Technologies, Ariba, Fundtech, J.P. Morgan Chase, Deutsche Bank, Syncada (Visa), GXS and U.S. Bank, providing solutions alongside more entrepreneurial ventures, like Transcepta, Bill.com, FreshBooks, OB10, iPay and many others. The sheer number of competitors in this space, however, speaks to one of the greatest challenges, which is lack of standards.
However, a couple of startup companies have achieved notable success using SaaS solutions to build compelling business partnerships with established players in ways that may help them drive greater e-invoicing adoption. PaySimple and Bottomline Technologies’ PayMode are two examples of solutions that have potential to turn the tide toward e-invoicing and payment adoption, particularly among small and mid-sized businesses.
PaySimple, a startup founded in 2005, focused on solving one of the thornier issues in this space: how to get small businesses to participate in electronic receivables management and payments. They built a simple, easy-to-use solution with all the expected functional components, and then in 2009, teamed with American Express to create arguably one of the most highly marketed B2B payments solutions in years – AcceptPay. Eric Remer, CEO of PaySimple shared his thoughts for the solution’s recent success, saying, “American Express is listening closely and reacting to the needs and desires of its customers. American Express noticed… a lack of easy-to-use, affordably priced solutions designed with the small business in mind.”
Most e-invoicing players claim to serve the unique needs of businesses. So, what’s different about this solution? A couple of factors stand out. Simplified pricing combined with fast and easy on-boarding are compelling and differentiating attributes. The PaySimple website is remarkably straightforward and accessible. The invoicing product is $11 per month and their EIPP solution, PaySimple Pro, is $34.95 + transaction fees to handle multiple payment types. For small businesses that don’t have time to deal with complexity, the promise of being able to handle multiple payment types for a straightforward monthly charge is attractive, especially as use of the SaaS solution makes implementation concerns minimal. PaySimple’s business model also helps drive towards mass adoption, using a white-label approach to build a customer base through established networks like American Express. As a result, PaySimple is fast closing in on $1 billion in processing volume, with a rapidly growing client base of small businesses.
PayMode-X has been in the B2B payments space for over a decade, with roots as a BankBoston-funded eCommerce venture. Over the years, PayMode has been closely aligned and ultimately owned by large banks – first FleetBoston and then Bank of America – where its B2B payments and remittance solution struggled for resources and focus. However in 2009, Bottomline Technologies bought the PayMode solution from Bank of America, giving Bottomline a SaaS solution, which Bank of America continues to sell to its Treasury clients. Today, the Paymode network has more than 100,000 active vendors and can handle a broad range of payments, including ACH, card, wire and even checks.
In contrast to PaySimple, Paymode targets larger B2B players, and as a result, has a broader range of features, which are standard requirements for most large corporations. For example, PayMode is capable of integrating with all ERP and AP automation systems and has a range of capabilities, including payment workflow management, working capital management, and advanced reporting and analytics. These features add to the complexity of the solution, making them more difficult for payers to integrate, but the solution is easy and free for suppliers to adopt, and as a result, has been growing at 46% in recent years.
Another successful startup, NVoicePay, has taken a slightly different approach, designing solutions for small to mid-sized companies, using an open, cloud-based technology solution but with a vertical market approach that seeks to build B2B payment networks that are rooted in the unique business processes and experiences of specific industries. NVoicePay’s CEO Karla Friede expressed what many of us in the industry believe, that it “is shocking today how many businesses are still writing checks! It’s a land-grab opportunity.” Like many of the other successful players in this space, however, NVoicePay is seeking to leverage technology to make integrations shorter and easier, so that even small and mid-sized companies can get involved in EIPP.
Integrated Supply Chain Solutions – This is another area where a number of competitors, large and small, have been vying to build B2B payment volume for years. The emerging landscape, however, appears to favor several SaaS solution providers. Two that will be interesting to watch are Syncada and Hubwoo.
In 2009, U.S. Bank and Visa announced the creation of Syncada, a partnership that creates a multi-bank global B2B financial supply chain solution. And although many payments industry joint ventures have failed over the years, Syncada has made some promising progress recently, signing Citicorp, Elavon (a U.S. Bank subsidiary) and Commerce Bank as partners. In addition, Syncada has made some clear signals about expanding its partnership base outside North America to include partners in Asia and Europe.
What’s unique about Syncada? For starters, Syncada draws on the strengths of its origins as U.S. Bank’s PowerTrack solution, which is a multi-patented, SaaS solution that combines B2B invoicing and payments with trade finance and supply chain management capabilities. These capabilities, combined with Visa’s global payments capabilities and network, have real promise to achieve the very daunting task of building a viable global financial supply chain solution. Perhaps the biggest challenge facing the solution relates to its bank-centric business model, which hasn’t to date proven that it can drive adoption of new technology solutions as universally as players in adjacent spaces (e.g. SAP, Ariba, Oracle).
Hubwoo is a “cloud procurement” company that provides an easy-to-use SaaS capability that lets companies use sophisticated purchasing and e-invoicing solutions without capital-intensive custom solutions. And because they have partnerships with large software players, like SAP, they minimize the need for companies to reengineer all their business processes. The solution isn’t primarily a payments solution, but rather, an information/data exchange capability, but they already include value-added support for Purchase Cards, making the integration of additional payments a likely step.
Innovative Financing/Credit Solutions – One of the biggest shifts in discussions around B2B payments has come as a result of the recent credit crunch. Businesses of every size faced liquidity challenges as a result of the financial crisis, with small businesses among the hardest hit. Traditionally, small businesses have had fewer sources of credit than larger firms, and many otherwise successful businesses faced financial hardship when their financial institutions tightened their credit policies and eliminated access to needed financing for thousands of businesses. Several players have emerged to address the credit and liquidity challenges facing these players, but two notable firms have linked payments/receivables with credit in interesting new ways. PrimeRevenue, The Receivables Exchange and FTRANS are three interesting companies to watch.
Although PrimeRevenue (founded in 2004) is no longer a startup, it continues to bring innovative supply chain finance solutions to the market. Despite, or possibly because of, the recent credit crunch, PrimeRevenue has given companies a new set of tools to unlock working capital from their supply chain, and strengthen relationships between buyers and suppliers. One of the key aspects of their solutions is a set of information tools that provide deep visibility to cash flows throughout the supply chain, as well as on-demand financing. Like many of the innovations in this space, the tools are Web-based, making implementation and use easy and non-capital intensive.
The Receivables Exchange seeks to unlock the power in small business balance sheets with by an innovative take on an industry – factoring – that has long been viewed in a negative light. Receivables can account for up to 65% of a small businesses’ working capital, and when payment cycle times slow, that represents a real challenge to small business cash flow. To address this problem, the Receivables Exchange, founded in 2007, has created an open and transparent market in receivables using a SaaS model. They have gotten enough volume to boast an enviable cost of capital (1%), which translates into better financing terms for small businesses. Small businesses can also set their own terms and the receivables are purchases as assets by institutional investors and others looking for alternatives to commercial paper markets. Like many of the other recent innovations in this space, the solution is user-friendly and easily accessible by small and mid-sized businesses.
FTRANS is another relatively new company (founded in 2004) focused on unlocking the potential value in small business receivables. FTRANS provides accounts receivable and credit management solutions that increases small business working capital by providing clear access to end-to-end receivables information, collections risk information, and other information that enables local financial institutions to make better lending decisions to small businesses. FTRANS’ asset-based lending solution leverages online tools to provide easy access to the entire portfolio of small business information needed to better manage working capital.
Card acceptance innovations - PayPal was one of the early leaders in recognizing the challenges that small businesses face in accepting card payments, building a billion-dollar business by serving the payment acceptance needs of small businesses, first for eBay merchants, and increasingly for medium and larger scale eCommerce businesses. Over the last two years, several other companies have leveraged mobile solutions and innovative mag-stripe reading technologies to create card acceptance innovations for small businesses. Intuit’s Go Payment solution and Square are two of the most notable solutions in this space.
Intuit launched its Go Payment solution in 2009, making it easy for small business customers to accept card payments quickly and easily. Go Payment leverages mobile technology from ROAM data to ensure that it works seamlessly access different carriers, handsets and operating systems. With easy access to the loyal following of QuickBooks customers, the Intuit solution has gained rapid adoption and currently boasts tens of thousands of customers. And since Intuit has an established track record of handling financial transactions securely and professionally for its QuickBooks customers, it has leveraged many of its core capabilities in risk management, data delivery and presentation to make the solution easy and secure.
High-profile venture Square joined the fray in 2010 with an innovative (and stylish) iPhone adaptor and a simple user interface that made merchant-like card payments accessible even to the smallest merchants. The solution had special appeal to mobile merchants, like artists, street vendors and others who found heavier, more traditional wireless terminals to be too expensive or too cumbersome. Square, founded by newcomers to payments, has had some operational challenges, notably with risk management, but has brought a fresh perspective to the design of its solutions, building a capability that promises to bring card payment acceptance to masses of “micro-enterprises,” potentially creating small businesses in the process.
Payment Platform Innovation - A final and critically important area of B2B payments innovation is platform-based innovation. Several players have established payments platforms that augment basic payment and commerce functionality with a range of other solutions available on those platforms, via open APIs, integrated gateways and menus of value-added tools and services from players in adjacent businesses. PayPal, Braintree, Serve and Alipay each have built unique solutions that expand upon their core offerings and deepen relationships with their B2B customers, driving solution adoption and transaction volume.
PayPal launched its PayPal X platform in 2009. By providing an open development platform, developer toolkits, APIs and a range of developer support capabilities, the platform quickly attracted over 50,000 developers who have created over 1,000 mobile, Web and television commerce applications that drive over $1 billion in annual processing volume. Earlier this month, eBay announced another investment in it open platform and SaaS capabilities with its acquisition of Magento, a global, enterprise-class B2B player that serves tens of thousands of businesses worldwide with solutions ranging from payments to inventory management.
Founded in 2007, Braintree might seem like “just another payment gateway.” However, they have rapidly gained traction in a highly competitive online payment processing space by creating a platform that is developer and user-friendly. They have the client libraries, APIs, software developer kits and technical documentation to back that up. They even provide a “sandbox” area for developers to test code. For business types, Braintree has created a series of easy to use tools and dashboards for its clients that they claim are so good that their customers will “play with in on the weekends.” This is all packaged with simple pricing and data portability, as a very modern, “open” take on payments that seems to resonate with a lot of businesses, especially Web 2.0 type businesses like OpenTable, LivingSocial and Animoto.
Serve by American Express is another innovative play by an established company that suggests that serving the small business market is a meaningful business opportunity. The Serve platform is a “digital payment platform” that enables small businesses to accept online and mobile payments easily. Much like the PayPal solution, Serve has also partnered with players like Sprint to make the user experience simple and streamlined for Android and iOS users (they are also working with RIM and Microsoft Windows platforms). Other unique aspects of the Serve program include the automatic inclusion of a “Serve Card” that gives access at ATMs or wherever American Express is accepted, as well as useful sub-account capabilities and no “cash advance” fees for transactions between Serve users.
Summary – So What’s Old is New Again?
B2B payments drew a lot of attention, hype and VC funding back in the late 1990s and early 2000s, however, economic realities and flawed business models saw many of those early efforts “flame out.” Now, however, despite sobering economic realities in the B2B space, the sector is attracting promising investment and innovation again from both startups and established companies.
However, there are some real differences this time around about the approach companies are taking to this space, so that it seems like this is more than a simple case of rediscovering an out-of-favor sector. The technology and business model innovations of the last 10 years around Software as a Service (SaaS), open platforms, transparency and broad, market-oriented solutions, seem particularly well-suited to the challenges of the B2B marketplace. So, B2B Payments 2.0 seems to be a real and sustainable phenomenon, not just a passing trend.
<hr/>Margaret is a Managing Director at <a href="http://www.marketplatforms.com/MPD/corporate/">Market Platform Dynamics</a> and experienced payments industry executive with a proven track record of commercializing new technologies in small start-ups, and large multi-national corporations. <a href="http://www.marketplatforms.com/MPD/corporate/whoweare/Experts/Margaret%20Weichert/">Read More</a>
<hr/> Mon, 31 Oct 2011 11:00:00 -0500 http://www.pymnts.com/commentary/pymnts-voice/B2B-Payments-Innovation-Back-in-the-Spotlight-2/ The Enigma of Zero http://www.pymnts.com/commentary/pymnts-voice/The-Enigma-of-Zero/ (Part of the <a href="http://www.pymnts.com/Payments-Redefined/">Payments Redefined</a> series)
Abdul runs a ‘kirana’ (a small grocery) store in Dharavi, the world’s largest slum in Mumbai. The area is also the hub of several financial inclusion, remittance and micro-lending initiatives. Abdul is now exposed to both mobile and card-based banking and payment systems, as he sees new age ‘bank’ staff affiliated to Business Correspondents traversing his neighborhood, issuing plastic!
Right across the street lies a few hundred leather goods outlets selling merchandise to mass affluent customers who make payments with plastic similar to those that are now increasingly visible on his side of the road as well. On enquiring he soon discovers that the retailers pay up to 2% of the value as transaction fees. Abdul is astounded and soon realizes that would be unimaginable for him! That would be the monthly cost of milk for his child, if he were to conduct all his business on cards!
The challenge at the Bottom of the Pyramid, as has been often stated, is not in the opportunity or the scale, but in rethinking the basic principles of conducting business and commerce. Several industries have made significant progress in this area, led foremost possibly by the FMCG manufacturers, introducing low price variants in innovative packaging and sizes that can meet the stringent distribution and retailing environments in these markets. The low price points, as low as Re.1 for a shampoo sachet, is possibly the single largest breakthrough in breaking through this barrier. Is there a key in there for future payment systems as well?
With mobile phone and smartcards driving financial inclusion efforts, vast amounts of cash are being disbursed to this new to banking segments for government subsidies and welfare efforts. Business correspondents have been completing the last mile allowing these customers to deposit the funds into their bank accounts and also withdrawing cash as per their needs.
Electronic G2C disbursals have addressed transmission loss and costs incurred in managing cash, whereas financial inclusion efforts have provided a safe and accessible haven for these new-age customers to store their hard earned daily earnings and savings. However, the fact remains that a vast amount of cash continues to remain in circulation!
The true gains to the economy would be maximized when the end purchase and sale transactions too were to be conducted in electronic formats, thus taking cash and the related costs out of the system.
Several initiatives, technologies and standards are being evolved to make low-cost transaction acceptance a reality, but the fundamental premise remains that there is a cost of processing the transaction that needs to be borne either by the bank, the merchant or the consumer! And here lies the challenge.
The classical model would require a department store to bear the transaction fee, consisting of interchange and processing fee, hence making the consumer immune to the payment format. The adoption of non-cash payments by consumers is then drawn by the security and convenience of electronic modes of payments via card plastic or even the mobile.
However, cut across to the new age retailers comprising corner-store groceries operated by Abdul, neither retailers nor consumers would readily accept the burden of paying transaction fees. Hence how is the banking and payment industry going to cross this last mile?
The onus would then lie on the banks and financial institutions in creating a low-cost transaction processing system that can handle micro-transactions in a scalable cost effective manner. The additional challenge with mirco-transactions lies in the scale that it naturally offers, with more than 95% of retail transactions in India lying below the USD 5 mark. Hence the model to process a 2-cent transaction would need to be ridiculously cost effective.
However, coming back to the moot point, why should this new-age retailer and consumer pay any charges to migrate to cashless payments?
A possible solution could be in offering a price point of ‘Zero’ for both consumers and retailers alike! The inflection point lies in the design principle that starts from this thought of ‘Zero’.
A classical but yet unviable banking approach to this ‘Zero’ philosophy would be to make enough float money from balances maintained in the retailer and customer bank accounts to subsidize the cost of acceptance and processing infrastructure. In the current scenario, consumers are quick to withdraw cash received, rather instantly and in making few deposits, making the float revenue opportunity scarce.
Hence, back to the moot question. Who is going to pay for this?
An alternative approach could be in re-engineering some of the business principles that have been deployed in mass affluent consumer markets. These would appear to be ancillary revenue streams of most payment and card networks. The departure is the thought that makes these, the primary revenue streams in creating an economically viable electronic payments system.
A new payment system paradigm could evolve wherein it’s not the banks and payment processors alone who attempt to reach out to these consumers, but a coalition of players that are seeking to create value on this end of the pyramid. With all these players attempting to reach out and transact with the same sets of customers, is it possible to evolve a new payment system wherein organizations and entities beyond the triad of consumer, merchant and bank fund the eco-system?
To trigger your thoughts in the Quest for ‘Zero’, some simple examples demonstrating the possible path….
1. Create a ‘Wow’ Pull Factor: Consumers need to be drawn in by incentives for using the new non-cash systems, offering greater value than using cash
<blockquote>
- An FMCG manufacturer could transmit trial mobile coupons for a shampoo sachet trial to customers who have spent more than a specified amount in a retail community accepting the new age payments
</blockquote>
2. Pay for Services that increase business
<blockquote>
- A retailer may not pay transaction fees, but may avail a facility for a fee allowing him to transmit offers to customers who have transacted more than twice in a month from his store!
- Enable special promotional tie-ups with manufacturers directly through this eco-system
</blockquote>
3. 3rd Party Entities Pay for accessing the ecosystem
<blockquote>
- Financial Lending Intermediaries: Principles of microfinance extending to retail purchases allowing consumers to pay in EMIs for purchases from retail stores, and the financiers pay a distribution and collection cost to the merchants
- Manufacturers &amp; Service Providers: Manufacturers could extend cash back and discount schemes applicable as in the conventional card industry
- Mobile Operators: Offering micro airtime incentives (eg. 1 cent!) to drive customer acquisition and reduce churn linked with consumer purchases
</blockquote>
This leads us to the next frontier in payment systems design? Would that be the right quest in itself? Yes, payments remain the bedrock of commerce and are designed to be adaptable in multiple modes. But with new technologies coupled with rapidly evolving consumer preferences and adoption cycles, should we actually be designing a consumer marketing and retail business system with payments embedded into it?
(Part of the <a href="http://www.pymnts.com/Payments-Redefined/">Payments Redefined</a> series)
Upendra is based in Gurgaon, India. He blogs at <a href="http://futureredefined.blogspot.com/">http://futureredefined.blogspot.com</a> and <a href="http://loyaltyredefined.blogspot.com">loyaltyredefined.blogspot.com</a> and can be reached at <a href="mailto:un2400@gmail.com">un2400@gmail.com</a> or <a href="http://twitter.com/#!/upendranamburi">http://twitter.com/#!/upendranamburi</a> Mon, 25 Jul 2011 16:00:00 -0500 http://www.pymnts.com/commentary/pymnts-voice/The-Enigma-of-Zero/ P2P Odyssey Gets Bumpy http://www.pymnts.com/commentary/pymnts-voice/P2P-Odyssey-Gets-Bumpy/ As you know, I've tried a couple different P2P applications, Venmo, ZashPay and PayPal. And I'm always on the lookout for the P2P mechanism which will win the P2P race. Recently, my P2P journey got bumpy.
Bump is an app for Smartphones (available for iPhone &amp; Android phones) which enables you to share by physically "bumping" the phones together. Share what? Contacts, videos, photos, and money, just to name a few.
So, I enlisted the help of my latest guinea pig, Adrian Brown, Education &amp; Professional Services, here at The Payments Authority. First, we downloaded the Bump and PayPal apps. It was the blind leading the blind here, but hey, we're both Gen X'ers so to all of you Gen Y'ers, please give us some slack.
Hoping the app is user friendly, we fired up the PayPal app and selected, "Pay with Bump." I selected Adrian from my contact list and we waited for the Bump App to "warm up." Oops, location setting has to be ON. Try this again. The app indicated it was warmed up and ready. We started bumping the phones together and we got an error message that said, "No match." Upon researching this problem online, I discovered "No match" means one or both of our phones wasn't getting 3G or a Wi-Fi signal (necessary to bump). Picture Adrian and I standing near the window, one leg up in the air trying to get a signal. Reminds me of the old TV rabbit ear antennae days when my Dad would send me with tin foil over to the tube to try and get a better picture. Some things never change, eh?
Meanwhile, since Adrian is a contact in my phone and he has a PayPal account, I noticed that I could pay him simply by choosing him from my contact list or entering his cell number. No need to Bump! So, this Gen X'er is wondering...if it is so easy to simply select a contact AND I don't need to be in the same proximity in order to Bump, why would I want to? Obviously, because it's cool (duh).
If you would like to check out Bump, here is a <a href="http://bu.mp/press">video</a> of the CEO talking about Bump and more <a href="http://bu.mp/faq">info</a> here. Part II of this blog coming when Adrian and I find a common signal. We'll keep you posted. Have you tried Bump? Let us know how it worked for you. 
For more on The Payments Authority, please visit their <a href="http://www.pymnts.com/bulletin-The-Payments-Authority/">Bulletin Board</a>
<hr/>Denise Bahs, is an Accredited ACH Professional (AAP) and a member of The Payments Authority Marketing team. <a href="http://www.pymnts.com/Denise-Bahs">Read More</a>
 
 Tue, 12 Jul 2011 13:24:50 -0500 http://www.pymnts.com/commentary/pymnts-voice/P2P-Odyssey-Gets-Bumpy/ Will Zong Make eBay the Future of Retail Commerce? http://www.pymnts.com/commentary/pymnts-voice/Will-Zong-Make-eBay-the-Future-of-Retail-Commerce/ eBay’s <a href="http://www.pymnts.com/ebay-inc-to-acquire-zong-20110707005650/">announcement</a> yesterday of its acquisition of Zong is just another interesting example of this e-commerce giant’s grand ambition to change the face of retail as merchants and consumers know it and experience it today. Here’s what I mean.
Retail Nirvana as envisioned by eBay (and described in the current issue of Fast Company) goes something like this:
You see someone walking down the street wearing a cool pair of shoes. You pull out your smartphone and snap a pic of them. An eBay app pulls up the product and its description, then finds the 3 locations nearby where the product can be bought, whether there is inventory and if so, what the prices are at those various merchants. You choose the merchant that is right for you (best price, closest, has stock – all of the above) and then click “buy” which completes the transaction for that merchant online via the phone (using PayPal, of course). You get a confirmation back on your phone, which you show to the clerk in said store when you go in to score the new shoes. This cycle repeats each time you see someone wearing, driving, carrying, pushing or riding something you just have to have. 
There is really only one word for this if you are a consumer: Cool; one word for this if you are a local merchant: Wow, one word if you are a national merchant: Hmmm and one word for you if you are a traditional network, card issuer, terminal manufacturer or mobile carrier: HOLY #%&amp;^ (okay, two words…).(If you are one of my cranky colleagues, you say: Farfetched.)
How, you ask, can they pull this off, and why haven’t I been paying more attention. Here’s a little rundown of the assets that eBay has been assembling over the last year to move the scenario described above from fantasy to fait accomplit.
<ul><li>RedLaser: a smartphone bar code reader that drives comparison shopping (acquired June 2010, terms not disclosed). </li>
<li>Milo: an inventory aggregation engine that currently accesses 50k stores and 3 million pieces of inventory. (acquired December 2010 for $75 million) </li>
<li>GSI: ecommerce, fulfillment and marketing services behemoth with 180 large merchant customers already using their ecommerce platform (acquired March 2011 for $2.4 billon) </li>
<li>Figcard: USB-enabled mobile payments acceptance device that plugs into the cash register or point-of-sale terminal and enables consumers with the Fig app to pay (via PayPal) (acquired April 2011 $15 million) </li>
<li>WHERE: Location based offers and ad network with 4 million users that also suggests local places based on past behaviors (acquired April 2011 $138 million) </li>
<li>Magento: An open source ecommerce platform that will become the basis for a unit within eBay called X.Commerce - the retail version of PayPal X. (fully acquired June 2011 $180 million – they owned 49% prior to this) </li>
<li>Zong: mobile payments provider which allows payments to post to mobile phones - for mostly virtual goods.(acquired July 2011 $240 million)</li>
</ul>The notion of cross-channel shopping (of which the example described above is, but on steroids)drove $1 trillion in sales volume last year – more than 33% of all retail sales according to Forrester, and will reach 50% very soon. With online sales hovering around 9% (and mobile at a teeny weeny sliver of that, powered mostly by people using their phones to shop online) it is a massive opportunity that eBay obviously wants to own. So, while many have suggested that eBay is out to really best <a href="http://www.pymnts.com/search/Amazon">Amazon</a>, it seems to me that the game that they are playing to win is entirely different. Rather than trying to create the world’s largest marketplace, they seem intent on creating the world’s largest retail platform – and in so doing, disrupting just about every facet of the traditional ecosystem as it now exists. 
<ul><li>Scan and geo-search capabilities that level the playing field for local merchants who want to compete with the big guys for business that also create a formidable competitor to Groupon, Living Social and their many local clones (Red Laser, Milo, WHERE) </li>
<li>See, buy online and pick up in store (PayPal, GSI commerce) that completely sidesteps the need for merchants to rip and replace terminals to support such new commerce opportunities and makes it easier for PayPal to insert itself into the payment mix at large national merchants (one of their stickiest wickets) </li>
<li>Pay by mobile (phone or account) that also averts the rip and replacement of terminals courtesy of apps downloaded to mobile phones, devices that plug into registers and of course, PayPal accounts that customers can set up once and use to pay in subsequent visits. (Zong, Fig) </li>
<li>Outsourcing innovation to developers who can go crazy in the X Commerce sandbox to create new applications that complement existing capabilities and create new ones, all of course, powered by the PayPal payment platform. (Magento, PayPal X)</li>
</ul>Now, as all of you know who follow our stuff, every platform needs a good <a href="http://www.pymnts.com/ignition-series/">ignition strategy</a> – simply having a lot of pieces does not a successful platform make. The biggest – merchant acceptance of PayPal at large retailers-is a critical component of ignition and has been a really tough slog over the years for a whole host of reasons. PayPal had a digital wallet before that term of art was even coined, and so should have had much more penetration outside of the eBay perimeter by now. Arguably, some of these acquisitions, like <a href="http://www.pymnts.com/search/Magento">Magento</a> and GSI can minimize that friction, but getting merchants to adopt probably has as much to do with how the business model shakes out as it does with dangling the prospect of 100 million PayPal account holders walking thru their doors. Price has been one of the deterrents merchants have had to PayPal and while PayPal may not have been hurt so much by the Fed rules, downward pressure to lower merchant fees doesn’t help its case. Then, there is the issue of integrating all of these pieces together into a cohesive whole – easier said than done. Then, there’s a boatload of details to be worked out in how data gets used, what piece merchants get, and how privacy issues get navigated.
The race to retail that may really be worth paying attention to, may not be Amazon and eBay but eBay and <a href="http://www.pymnts.com/search/Google">Google</a>, who each have the heft, platform elements and consumer and merchant base to reinvent the space as we know it. Winning this race is about recognizing that payments is just a necessary byproduct of a commerce experience that yields better merchant and consumer value and a whole new set of economics that monetize incremental sales to merchants well beyond interchange revenues. There’s a huge prize for whoever can create this online/offline retail platform. eBay is hungry for it, has bought a bunch of assets that could help it win, but faces an enormous challenge in getting consumers and merchants on board. And its increasingly contentious battle with Google is only going to become more so. It should be fun to watch.
<hr/>Karen Webster is the President of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info <a href="http://www.marketplatforms.com/MPD/corporate/whoweare/Experts/Karen%20L%5F%20Webster/" target="_blank">here</a>.
<hr/> Thu, 07 Jul 2011 21:37:38 -0500 http://www.pymnts.com/commentary/pymnts-voice/Will-Zong-Make-eBay-the-Future-of-Retail-Commerce/