Boy, did I ever step in it last week.
I was speaking to a group of payments professionals in Denver and followed someone who had just extolled the many great virtues of Denver — the abundance of sunshine and microbreweries per capita, as well as the fact that it’s home to the world’s largest rodeo and that it’s credited with inventing the cheeseburger (who knew?). As a Boston gal and New England Patriots fan, when it was my turn to speak, I couldn’t resist reminding the group that, although all of that was true, what Denver didn’t have this year was an AFC Championship team.
And that was before all of the ugliness about “deflategate” surfaced.
Based on the reception that line got me, you’d have thought I’d said that EMV was a technology that was 20 years past its prime or something. <wink, wink>
Well, to quote that wise sage, Taylor Swift, “The haters gonna hate, hate, hate, hate, hate.” So maybe we all need to just “shake it off.”
Next Sunday will be the Patriots’ sixth try for a Super Bowl championship. If they win, Belichick and Brady will both own four Super Bowl rings. That’s pretty significant since that would tie records set by lots of football legends that Americans look up to and admire: Terry Bradshaw, Joe Montana and the late Chuck Noll, each of whom have four Super Bowl wins — and rings.
The Patriots really do seem to be the team that everyone loves to hate, hate, hate, hate, hate (especially all you Jets fans out there!). But despite the many opinions pro and con about the team, there isn’t anyone who doesn’t admit (even if begrudgingly) that Belichick and Brady are smart, strategic and deliver consistently good results. In addition to appearing in six Super Bowl championship games, they’re one of the most successful quarterback/coach duos in NFL history. Under their leadership, the value of the Patriots’ franchise has also hockey-sticked. Patriots owner Bob Kraft bought the team in 1994 for $172 million. Its value in 2000 when Belichick was hired was $464 million. And its value at the end of 2014 was $2.6 billion.
Maybe just a few things.
Cue the cheerleaders and halftime performers …
Introducing Karen Webster’s Football Payments Innovation Truisms, inspired by the New England Patriots dynamic duo of Bill Belichick and Tom Brady.
Details Matter — A Lot.
Belichick is famous for grilling his team on what appears to be unimportant details at seemingly random times, like asking about a player about the shoe size of a special teams player or where a receiver went to high school on their the way onto the practice field. In what has been described as the ultimate in psychological warfare, for Belichick it’s all about making sure that players are fully prepared to play their opponent because they have studied absolutely everything about them.
In payments and with respect to payments innovation, it’s not paying attention to the details that will kill an innovation every time — and keep sucking money out of the investors’ checkbooks all of the time. Not paying attention to those details is usually the result of not really understanding their importance to getting innovation off the ground in the first place. Decoupled debit cards didn’t get off the ground because their sponsors didn’t recognize the important “detail” that consumers didn’t want to start using a new card that didn’t work in most places instead of the cards in the wallet that did. Enthusiasts of the bitcoin blockchain technology seem to have missed the “detail” that the blockchain “technology” is utterly dependent on distributed network of miners and there is no one in charge of the incentive system for making sure they provide enough processing capacity.
Get Out Of The Hypothetical And Into The Real World
Belichick is known to actually hire replicas of the players who his team is likely to meet the following week on the field. A former Dallas Cowboy exec recently said that it’s like Belichick is able to stage practice with doppelgangers — guys who are eerily identical in height, weight and speed as the players they’ll meet in the real game. Belichick wants his players to practice in as close to game conditions as possible so that anything they encounter on game day is nothing they haven’t seen and practiced against the prior week so they can therefore handle it effectively.
That’s exactly the risk that payments innovators have when they rely on data and third-party information that’s grounded in absolutely nothing other than generalities and unrealistic growth assumptions. Industry analysts projected the massive growth of NFC for nearly a decade, right before they didn’t. Take a look at this chart of the “incredible shrinking inevitable technology” here.
I heard just the other day that industry analysts predict that by the end of 2015, less than 20 percent of transactions in the U.S. will be EMV transactions, quite different than what was described last year this time when more than 50 percent would be. (This might be a new rule of thumb. All predictions made in payments will be halved in the next year.)
Cash has been dying for the last 50 years, despite hard evidence to the contrary that it accounts for a majority of transactions in most countries.
Building forecasts based on anything but real data and assumptions that reflect that only results in business bets that yield less-than-expected results and investments that could have been diverted to other more promising things.
The lack of success with prepaid products is another example of making assumptions about a product that were not grounded in the reality of the consumer base it was intended to serve. A card product that made cash digital was hypothetically supposed to be better and safer for an unbanked or underbanked consumer. Except that on the playing field of financial services, those consumers really liked and preferred using their cash product. It was tangible, cheaper and accepted at all of the places they shopped. A dozen years after its launch, open-loop prepaid products are but a small fraction of financial services volume not because the product doesn’t work well, but because in the real world, they don’t work well for the audience they were intended to serve.
Know Your Limitations
There’s an abundance of testosterone flowing around NFL locker rooms with lots of guys claiming to be 100 percent after an injury because that’s what they think the coach wants them to say. They then “man up” and re-enter the lineup only to either re-injure themselves or perform below par. Belichick insists on nothing but a real assessment of the health and viability of its players so that he can decide how or if to use a player who’s recovering from an injury. Belichick is also known to use injury reports strategically as well. He may still show a player on the roster as “questionable” knowing that he won’t be playing at full strength, but using him selectively as needed and in accordance with his capabilities that week.
Amazon has shown both sides of this truism. The Fire phone was an example of really not knowing its limitations in terms of its vision to take on Apple and create an Amazon-inspired ecosystem, yet it recently bagged its wallet product and pushed pause on its private label product because it needed to better assess the situation.
Visa made a decision to exit Monitise and Fundamo in order to focus its resources on its core business.
The Telcos didn’t realize until nearly five years and $1 billion later that its business case for getting into payments in the U.S. was totally beyond its limitations — offering no value proposition other than to insert itself into a payments flow that no one wanted them a part of.
MCX/CurrentC’s attempt to turn to banks as potential partners may be a sign of its recognition of its limitations as a viable payments network to a consumer that now associates merchants as those parties unable to keep their cardholder data secure.
And Google unfortunately never understood its limitations from the vantage point of merchants, who viewed the online ad giant as a Trojan horse to getting transaction data that would be used against them in advertising later.
Square is another example of a company that just didn’t quite calibrate its limitations properly. Entering the market with a dongle that turned phones into POS devices didn’t require an ignition strategy — consumers already had cards, and micro-merchants had smartphones. Their innovation of creating a new business model for those merchants was its core value proposition. Turning Square into a consumer-merchant network was well beyond its capabilities and failed as CardCase and then Pay With Square fell flat since consumers had few places to use those wallets and even fewer incentives to download the app and even give it a try. Meanwhile, it is beginning to look like being a dongle company or a micro-business processor isn’t such a great business between the competition now all over the place and the difficulty making money from that crowd.
Have A Plan B That Is Good Enough To Become Your Plan A
Fourteen days into the 2008 season, quarterback Tom Brady would suffer a season-ending injury that many thought might even end his career. For most teams, that would have been the end. The Patriots managed to play respectable football and win 11 games that season. Sports pundits said that although the team was not good enough to beat the best teams in the league that year, they were coached well enough to beat the not-so-great teams.
The key here is to have a deep enough bench and an execution focus to make a shift successful. LevelUp and its pivot away from SCVNGR demonstrated a Plan B that created the monetization loop that embedded payment into the merchant loyalty experience and app to back it up.
LoopPay, the mobile technology that started life as a consumer accessory that turned every smartphone into a mobile payments device, is pivoting to a technology that will soon be embedded into handsets.
Western Union began its shift several years ago from simply being a physical money transfer network to a digital one, that could still leverage its worldwide cash in/cash out network.
And the forthcoming eBay/PayPal split makes this Plan B for both of them — a year ago this time, the company was adamantly against any sort of split — that will unlock massive sources of value for both.
In the not-knowing-your-limitations category, I guess we’ll know more later today when the Fed releases its vision for payments in the U.S., but the Fed’s roadmap for controlling payments and payments innovation may not realistically size and scope the Fed’s limitations in that area. The Fed does a bunch of important things in managing the money supply of the U.S. and saving us from depressions — but innovating payments isn’t necessarily in its top 1,000 list of accomplishments. Keep in mind that this is the group that gave us the check system; it took the private sector, not to mention 9/11, to innovate check processing and push Check 21 and CheckFree.
Know When To Go For High Percentage, Game-Changing Plays
The double pass from Brady to receiver Edelman who tossed it 51 yards to Amendola turned the tide of the 2014 AFC Title game in the Patriots’ favor. Edelman, who himself was a successful college quarterback, said that he and Amendola had been practicing that play for years and that it had been on the books nearly all season. When Belichick made the call, everyone knew what to do and how to execute. After that play, the Patriots totally erased their deficit, the momentum shifted in their favor and they went on to win the game. At the end of the game, Edelman was reported to have said that Belichick and the coaching staff had the “aggressiveness” to make that call, a call that Belichick made after sizing up the Ravens’ weakness on the field, and knowing that his team was prepared and could execute.
Doesn’t this remind you of the Apple Pay/networks/issuer play? The timing on this “play” couldn’t have been more strategic — 10 months after the Target breach left consumers feeling vulnerable about security at the point of sale and years after lackluster adoption of consumer and merchant mobile payments using NFC. The conversation about mobile and mobile payments has shifted to Apple, Apple Pay and therefore the networks ever since Apple Pay launched. In fact, I hear time after time that merchants are asking for Apple Pay not as a “generic” nod to wanting to accept mobile payments but because they specifically want to accept Apple Pay.
Alibaba’s IPO is another example of a strategic, high-stakes play unleashed at just the right time. Alibaba has created a powerhouse in China over the last decade or so and with it, several hundred million mobile Alipay users who are ready and primed to shop until they drop. Its IPO-infused coffers now gives it the ability to make a number of strategic investments outside of China on its way to becoming a powerful global commerce platform, serving 2 billion consumers. And that it has. Since its IPO, Alibaba has invested in financial services, media, logistics and eCommerce sites all over the world.
Closer to home, Chase Merchant Services and its game-changing deal with Visa to essentially rent Visa’s network capabilities for a 10-year period was both strategic and game changing for Chase and for Visa. For Visa, it kept Chase in the Visa boat, at least for the next decade, and for Chase, it gave it a platform to build a whole new set of capabilities on its way, perhaps, to becoming the next three-party system.
Catch The Competition Off-Guard
Belichick exploited a loophole in the 2014 AFC title game against the Ravens when he used unconventional offensive player substitutions to catch the Ravens off guard and ultimately score winning touchdowns. Brady is the master of the no-huddle offense using both his experience on the field and Belichick’s coaching to give Brady the mastery needed to quickly call plays before the defense has a chance to substitute players. This gives Brady a chance to see the lineup in formation and to quickly adjust his plays based on what he sees.
At least on the surface, this seems to be at the heart of the Discover Network strategy — white-label the network and then do deals with innovators who need access to the asset to scale and enable their own innovation. That was at the core of its deal with PayPal nearly three years ago, and its deal with Ariba to power a B2B payments network called AribaPay.
It was also the reaction to the ecosystem had about a year-and-a-half ago when PayPal bought Braintree, an acquisition that has provided PayPal with a cloud-based payments platform that can enable one-touch payments inside of apps, including PayPal.
Lending Club and OnDeck, two alternative lending platforms that recently IPO’d, have also taken the financial institution space by surprise. The pace at which technology and financial services have happened has been much faster than many in the financial services arena expected, and their success at attracting funds in the public markets will enable the scale needed to challenge the traditional lending platforms moving forward.
The network’s tokenization scheme also caught some by surprise when it launched with Apple Pay, not because the technology itself was new, but because of the role that the networks are playing (and want to) in serving as the trusted intermediary on the issuing side of the payments transaction.
And looking ahead there are many, many possibilities that could truly catch the competition off-guard in 2015 — I’ve listed a few of them in my piece on payments industry pairings and breakups from last week.
Deflate A Few Balls
“Deflategate” is all over the news as a result of an allegation that someone on the Patriots team deflated 11 of the 12 balls that were used in the AFC Championship game against the Colts two Sundays ago, a game in which the Patriots won, and gave them the ticket to punch at Super Bowl XLIX. (It’s also the butt of about a million double-entendre jokes and a pretty funny SNL skit.) All quarterbacks want their footballs a certain way, and apparently it’s a big production to have them polished, scuffed and inflated to the quarterbacks’ specifications. Deflating them, naturally, makes them easier to handle, especially in horrible weather conditions as was experienced during the game in which the so-called deflategate infraction occurred. Of course, doing so disadvantages the other side, even though at least one of the Colts players was quoted as saying that the Patriots would have won using soap balls instead of footballs.
On the payments side, we have our own “gates.” How about “terminalgate”: when merchants shut off their NFC terminals, which made them unable to accept Apple Pay? That created all sorts of unexpected issues with merchants who were caught between the proverbial PR rock and a hard place — not wanting to violate a contract that they had signed with MCX or enable access to other NFC applications yet not wanting to get caught in the social media buzzsaw when consumers with Apple Pay wanted to use it at their stores.
Then, of course, we have “Dominogate.” This one started with the Target breach, which inflated the then-deflated merchant appetite for EMV, which then led to a doubling down by the networks for merchants to take EMV and issuers to accelerate issuance of cards, which then ushered in terminals with EMV and NFC capabilities, which then played to the advantage of Apple Pay and other NFC-enabled schemes.
Then we have our own “deflategate,” if you want to talk about the value of bitcoin over the last year. At $254.39, it’s trading at about a 76 percent decline in value from this time last year. This makes it extremely hard to imagine the price of bitcoin getting to the $1 million that one of the Silicon Valley investors said it would get to, much less the $10,000 that was predicted by a bitcoin innovator less than a year ago.
Marry A Supermodel
The Patriots’ star QB Tom Brady is smart, experienced, talented and rich. He’s also married to a supermodel, Gisele Bundchen, who makes more money than he does and is said to be the first billion-dollar model. I know I’ll sleep better knowing that the Brady family won’t starve if Tom loses his job (fat chance of that). I’m sure he’s relieved that that the pressure’s off of having to be sole breadwinner in the family, which gives the Brady-Bundchen household lots of opportunities to hedge their financial bets.
When the networks and banks joined forces with Apple to create Apple Pay, it was sort of like hooking up with the supermodel of the tech industry, don’t you think?
And it had to have felt like a supermodel moment when TrialPay sold to Visa a year ago to become the cornerstone of its offers platform.
And when LevelMoney was acquired last week by Capital One.
Clover and Perka had their supermodel moment when First Data acquired each of them and then created a new platform that was integrated that into its merchant distribution network. And when Vantiv snagged integrated payments player Mercury Payments in 2014, it did the same thing.
Moving forward, the networks are hoping to create even more of those supermodel moments as they attract innovators to their development platforms to use their APIs to enable payments inside of their own innovations and apps.
Take Risks To Get The Superstars On Your Team
At the risk of opening a big sore wound with my Jets friends, owner Bob Kraft’s clever recruiting ploy to get Belichick away from the Jets and to the Patriots in 1999 was considered a real tide-turner for the Patriots (obviously) and deepened the already bitter rivalry between the two teams. Belichick was named head coach of the Jets in 1999, only to resign a day later at the press conference intended to introduce him as the Jets head coach. Not long after that, he was introduced as the head coach of the Patriots. The NFL slapped the Patriots by giving the Jets a first round draft pick, but the Patriots got Belichick. The rest is history.
On the payments side, a lot of the big plays in payments over the last couple of years have come at the expense of Chase … a slew of First Data execs including its president, CEO and key innovation and strategy execs, and Visa’s CEO and president. VeriFone snagged Citi’s enterprise CEO Paul Galant and PayPal lured Dan Schulman away from AmEx to run the new publicly traded PayPal. ShopRunner got PayPal ex-President Scott Thompson and $200M from Alibaba.
Even if you’re not an American football fan (and if you are and hate the Patriots), hopefully there’s something to be learned from both a coach who views his job as getting his team to win championships and not the league’s Mr. Congeniality award and a quarterback who’s a continual magnet of criticism for being pretty good at what he does and consistently held up by sportscasters as one of the best quarterbacks ever.
There’s also another lesson here that’s worth noting.
Winners are targets. And the powerful (and nice-looking ones married to supermodels) are even bigger targets. It’s who everyone loves to hate, or just plain hates, and works relentlessly to unseat, unravel and minimize. That’s what drives innovators, innovations, and the investments and energy that support both. Some efforts in some segments have been more effective than others (see money transfer and lending), seem never to end (merchants suing networks over interchange fees) and have visibly disrupted the balance of power (Apple Pay and its go-to market strategy).
In other cases, well, let’s just say that it’s still the first quarter, the teams are on the field and the play is about to begin.