blog

Target Looks to K.O. Amazon Price Check

Mon, 30 Jan 2012 04:37:38 -0500

ANALYSIS FROM KAREN WEBSTER

Payments Players vs. Google vs. Facebook: Who Should Really Win Your mPayments Trust?

Main St. vs. Wall St. - Which Does Online Innovation Hurt Most? (Answer May Surprise You!)

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?!!

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 here.

Prepaid Tips for 2012: Why Fees Aren't Always the Answer

Fri, 20 Jan 2012 04:48:07 -0500

More from the "Tips for 2012" Series

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.

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.

Tips for 2012: Making Your Loyalty Program Worth the Expense

Tue, 10 Jan 2012 04:48:07 -0500

More from the "Tips for 2012" Series

Platform Carcasses - How to Keep Yours Out of the Pile

I was watching TV last week and a commercial came on for a credit card issuer. It was pretty much the same as most credit card commercials right now - how their points program was better than points programs from other issuers - and I got to wondering how we got to the point of points being a key differentiator in credit card marketing competition and whether or not that was working (he said pointedly).

This line of thinking led me to a question: if I were the CEO of a card issuer, what would I be thinking about regarding my loyalty program? After all, margins are shrinking, regulation is imposing on the space, and it’s a tough time to be in the card business. A loyalty program is a major expense item, and if it isn’t delivering a return well in excess of the expense, then maybe some re-thinking should be done.

So, here are the 12 questions that I would be asking about loyalty if I were the CEO of a card issuer:

1) Why do we have a loyalty program? Is it because we now assume that its “table stakes,” and we’ll lose market share without it? Has it just always been there, and we’ve been focusing on other things, or is it a strategic asset that makes a significant contribution to the value of our enterprise?

2) What does the program really cost? Are all the costs being factored into the equation, or are we just looking at program administration, marketing expense, and point liability? Are we also looking:

- consulting fees

- redemption management expense

- statementing cost

- customer service and call center costs

- training of front line staff and others in the organization not directly connected with the program (like branch staff)

- direct and indirect IT cost

- website development and maintenance

What about the opportunity cost of focusing so much resource on the loyalty program instead of working on other ways to improve the value proposition and competitive position of the business? And then, there’s the cost of business that we would have gotten from the customer anyway, even if there wasn’t a loyalty program in place.

3) What can we reasonably expect a loyalty program to do for the business? Aside from improving profitability, should we expect anything else? Is it really creating loyal customers, or is it just habituating them to our product over others, and is that necessarily the best way to create a “sticky” customer?

4) What is it actually doing for the business? Is the program generating incremental revenue and profitability well in excess of the total program costs? Is it enhancing the brand with our most valued customers? Is it creating franchise value for the enterprise and creating shareholder value?

5) Are there other investments that we could make that would deliver more value to the business? Do we need to commit to a status quo level of spending against the loyalty program forever, or could some funding be diverted into other areas that have the potential to do more for the enterprise long term?

6) Why should our customers choose us over a competitor? Is it reasonable to assume that a loyalty program creates enough differentiable value to attract customers or keep customers from leaving? How much value does the loyalty program deliver within our value proposition? Any at all?

7) How does the loyalty program fit in the overall product mix? Is it one of several offerings with variable benefits, or is it core to every card offering? Is it the foundation of an enterprise level program designed to create customer value in areas beyond cards? How does it impact the company’s product offering, negatively or positively?

8) Are we using the data that the loyalty program creates? Is the data being integrated into the broader vision of the customer in the CIF? How does customer behavior in the loyalty program impact other aspects of the customer’s relationship with the organization? What can we learn that will help us improve the customer experience and shareholder value? If we’re not learning anything from the data that we’re collecting, then why are we collecting it?

9) How does the loyalty program affect the customer experience? Is it positively changing customer’s perception of the company, or is it an add-on that effectively complicates things from a product delivery and purchase decision point of view?

10) What do customers really think of the program? Do they see it as a valuable component of the product offering, or do they see it as a giveaway that they are entitled to because every issuer offers a points program? Is the program meeting their needs in terms of rewarding them appropriately when they exhibit the right behavior, or are reward thresholds too high to be meaningful?

11) If we shut down the program tomorrow, what would happen? Would any negative economic impact be offset by the expense savings from not having to operate the program? How long would the negative impact last? What would happen to the customer mix, would the customers who deliver the most value to the business be significantly impacted?

12) What do we mean by loyalty? Finally, are we actually creating loyal customers, or are we deluding ourselves? Are there other, better ways to create loyalty to the business and “sticky” customers that would have a more beneficial and lasting impact?

It seems that every area of the payments industry is being challenged right now and for good reason. There are real opportunities to change and enhance the business model and real risks if the model isn’t changed. Evaluation of the loyalty effort needs to be factored into the mix; it’s too big an expense in both time and resources not to be critically evaluated. Every leader of a payments business with a loyalty program should find the tough questions that need to be answered in their organization and then reshape their loyalty effort to deliver a result that contributes to the bottom line, the brand, and shareholder value.

Thad Peterson is a Managing Director at Market Platform Dynamics. Thad has a proven track record in payments and financial services, identifying and developing new opportunities and technologies. Prior to joining the firm, Thad was Managing Director of Maritz Real-Time Rewards, leading the company’s mission to build a new industry standard at the nexus of transactional marketing and consumer engagement. Read More

B2B Payments Innovation: Back in the Spotlight?

Mon, 31 Oct 2011 11:00:00 -0400

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 & 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.

Margaret is a Managing Director at Market Platform Dynamics and experienced payments industry executive with a proven track record of commercializing new technologies in small start-ups, and large multi-national corporations. Read More

Handicapping PayPal and Google in the Mobile Transaction Platform Race

Tue, 27 Sep 2011 04:37:38 -0400

PART 1: • Handicapping PayPal in its Mobile Race with Google and Others

PART 2: • Handicapping Google in its Mobile Race with PayPal and Others

• PayPal President Reveals Plans to "Free You From the Cash Register"

Over last two days, I handicapped PayPal and Google in their race with each other and potential players to grab a big share of the emerging mobile transaction platform ecosystem. Today, I’m going to share some final thoughts.

One thing that I think that the Starbucks mobile experience has shown us is how willing consumers are to adopt mobile payments solutions that only work in limited locations, like one store. The big question for all of the mobile payments solutions though is whether, how and for how long, consumers will tolerate a patchwork payments experience at the physical point of sale.

Yes, mobile phone penetration is to the point that just about everyone who wants a phone has one, which, of course, is an important step number one. But everyone also carries around their plastic cards now, too (and more so today than they do cash). What we don’t know yet is for how long the “belts and suspenders” approach to mobile payments (mobile wallets + cards just so you are covered) will be acceptable to consumers and what it will take for them to trade off lack of ubiquity for other goodies that will help drive mobile payments usage at the physical point of sale. We know that what drove Starbucks adoption (4 million users in less than three months) had nothing to do with making a payment transaction but rather solving for a problem that was more relevant to them and their customer: providing information on the available balance on their prepaid cards. Transacting was bolted to the ability of their customers to more easily manage prepaid card balances via the mobile phone.

It may come down to the fact that what drove adoption of plastic cards (speed and ubiquity) may not be as important, at least initially, in the mobile payments arena for either merchants or consumers (or the consumers standing behind the mobile payments user in-lane). It may be that mobile payments ignite first where they, in some sense, ignited last – local Main Street merchants that account for every day spend where consumers want a better way to interact with those merchants. It may also be that mobile payments ignite first in larger merchants where the notion of “store cards” becomes easier for consumers (since fat wallets in cyberspace is a non-issue) and more attractive for merchants who can see better economics from those propositions and offer different things to their customers. The future propositions for everyone pursuing the mobile payments vision seems to hinge on which of these forks in the road are pursued. And as always, the devil is in the details.

For sure, it’s still too early to know any of this, because there are still many, many unknowns. But at least we’re getting closer to the day when we’ll all have the benefit of real consumer and merchant feedback on real solutions. That will make mobile payments arena a whole lot more interesting and tangible. Can’t wait!

Handicapping Google in its Mobile Race with PayPal and Others

Mon, 26 Sep 2011 04:37:38 -0400

PART 1: • Handicapping PayPal in its Mobile Race with Google and Others

PART 3: • Handicapping PayPal and Google in the Mobile Transaction Platform Race

• Analysis of Google Wallet Launch - Key Facts & Lingering Questions

Yesterday, I gave my thoughts on what PayPal had going for it in its race to win or at least get bronze in the mobile transaction platform race. Here’s my take on Google.

Consumers: There are a couple of important things to look at here. First, Google is the largest search engine on the planet, has ~200 million email accounts and the largest share of smartphone operating systems. So, Google brings a ton of assets to the mobile payments starting line. Second, their launch partner is Citibank and Citi’s MasterCard credit product. Citi is the 4^th largest credit card issuer in the United States and made news recently when they literally flooded the post office with millions of credit card solicitations. Clearly, they are looking to move up the ladder. At the jump, they also bring a decent number of consumers to the party. Third, their launch partner is MasterCard, and their PayPass infrastructure that gets them acceptance right out of the gate at those merchants. Fourth, for the solution to work at least for now, it has to be via an app that is accessed via a Sprint Nexus S phone, which sort of narrows the funnel and a lot. Sprint in the United States actually has a decent share of the Android OS market, so the addressable market could be OK. But at least at the outset, the number of the people running around with Google Wallets will be small, and until the app is available with other carriers/handsets, it will likely have trouble igniting.

Merchants: Google has millions of merchant relationships today via their online advertising platform. Clearly, they will leverage that asset as best they can. Their card network and issuer channel partners, though, provide powerful access to merchant relationships, too. As mentioned, since they are leveraging MasterCard’s PayPass technology, there are more than 140k merchant locations that accept the Google Wallet today. And they are really good merchants, too – drug stores, department stores, restaurants, clothing stores, etc. That, however, is but a pin dot of merchants in the United States today – like 1 percent of them. Merchant acquisition moving forward, then, becomes a little more complicated, since saying yes to Google Wallet also means saying yes to buying and installing new POS gear.

Preferred/accepted tender type: Google has embraced an open platform and wants to enable all cards in an effort to make their solution more scalable more quickly, given the ubiquity of Visa and MasterCard acceptance on both the consumer and merchant side. MasterCard/Citi is already on board. Visa just announced that they have signed on, so it stands to reason that other issuers will fall into place very soon. That is a big advantage, since it does not require anything more of the consumer than stuffing her electronic wallet with account numbers that already exist in her leather one and that she uses today at all of her favorite merchants. That is a big plus – technology issues notwithstanding.

Technology and ramp time: This is where it gets tricky. As mentioned, there are 144k locations today where Google Wallets can be used. Another 180k will come online soon. Visa’s announcement of the Google Wallet partnership will bring on all of its payWave locations too, upping the ante slightly. But there has to be much more than that to get to critical mass on both the consumer and merchant side. Yes, Google is said to be subsidizing installation, and yes, Visa has suggested that it will also create an incentive scheme to drive installation of NFC-enabled terminals as part of their EMV initiative, but that will take time. I simply don’t believe recent analysts forecasts of a 50 percent penetration of NFC terminals by 2014, unless I missed the bullet point in the President’s latest stimulus plan about subsidizing merchant terminal installation. <jk> That means that, as I written many times, the biggest risk to this entire scheme is the end-run that IP-enabled solutions, like what PayPal, Starbucks and others still in stealth mode are devising that make for a great consumer experience without the technology hassles.

Value Add: Google Wallet will support Google Offers, which is the Groupon-killer that Google is launching full-on. Offers is enabled in a number of ways and linked to Places, which will certainly include primo offers from the collection of players that Google is buying to support these propositions, like Zagat. The Offers proposition for merchants is pretty compelling too and makes the business model that Google is putting forward both interesting and attractive: no transaction fees, plus I’ll drive traffic to your storefront.

Bottom Line: Google is a serious, well-funded player in the mobile payments space. They have assembled a bunch of powerful channel partners who bring consumers and accepted payment types – that is a big advantage over PayPal. Their digital wallet enables the existing accounts that people have in their physical wallets today. Their big Achilles heel is the current technology platform. NFC introduces a lot of moving parts: (a) handset manufactures and manufacturing cycles, (b) POS systems and refresh cycles and (c) operators and their business models. Google’s acquisition of Motorola makes them less dependent on (a) in the long run, their deep pockets presumably less hamstrung by (b) but nothing gets them away from (c), at least for now. They also have to persuade consumers to install the app (and likely buy the phones or switch carriers), which is not impossible but still a hurdle. Of all of the players who could pull off an NFC solution, I believe they can be the one, given the assets that they bring to this space. But it is still a slog, and their big risk is the (by comparison) easier lift associated with enabling mobile payments via an IP-enabled solution.

Main St. vs. Wall St. - Which Does Online Innovation Hurt Most? (Answer May Surprise You!)

Wed, 21 Sep 2011 04:37:38 -0400

ANALYSIS FROM KAREN WEBSTER

Payments Players vs. Google vs. Facebook: Who Should Really Win Your mPayments Trust?

Groupon IPO Delay: Is a Strategic About-Face Next?

San Diego was the host to WesPay’s annual payments forum this year, appropriately themed “Payments in Transition.” The ballroom at the Westin Hotel was packed, as members from the nation’s oldest and largest regional payments association gathered to soak up the latest and greatest on a variety of topics, including the future of branch banking, ACH, POS and payments in general. I was lucky enough to have been asked to speak to the group on two topics: trends and drivers of innovation in payments and the what’s and wherefores of social commerce.

The two-day forum included a lot of really interesting sessions, but the topic explored in the kickoff keynote was particularly fascinating. It was focused on the relationship between ePayments and Retail Banking (aka Branch Banking) and reminded me of the discussions taking place in payments around the notion of on- and offline convergence and the challenges associated with making physical bricks and mortar relevant in an increasingly online world.

Michael Croal, whose business is advising retail bankers on how to crack this code, showed a bunch of data that offered some good food for thought. Bottom line is that banks with more branches take in more deposits and have stronger customer relationships than those that don’t. That is sort of a no brainer, when you think of it, but hard sometimes to convince those ops and finance guys and gals who are looking at the costs of operating branches and want to lose headcount and shutter branches. One of his solutions to getting on their good side was to deploy technology (VoIP Phone systems) that essentially incents branch personnel to handle call center queries during down time. He mused, “branch personnel will do anything for an incentive… you offer a CSR $10 to open a $10,000 CD, and if some guy walks into the branch with $100,000, I guarantee he will walk out with 10, $10,000 CDs!.” He suggests that if banks were to incent CSRs with something that rewarded them for minutes online or calls handled, they would jump at the chance. Now, I have to admit that as fancy-schmancy as VoIP phone systems are (we have one ourselves), they can be finicky. I would caution that buyer beware, but it makes sense. CSRs can log in and out at will, minutes on “duty” can be accurately logged and call volume can be smoothed. And, bonus, you actually have people talking to customers who know a thing or two about the bank and banking services. How’s that for a novel customer service concept!

I followed Michael and hit on the multi-channel theme a bit in my own presentation, which focused on the drivers of innovation in payments more broadly. I used a few examples of how technology is both disrupting and complementing the traditional payments experience for merchants and consumers. The example that everyone latched onto was Amazon Price Check, which stimulated a bunch of questions, most notably, how that could destroy (further destroy?) Main Street merchants. It was an interesting observation, I thought, since that suggests that people are only motivated by a better price and not the intrinsic value of having their hometown merchants alive and viable, too. The general takeaway was that it is probably the larger merchants who are more “vulnerable” than those where there is a relationship (personal and community) at stake, but only time will tell. Certainly, there are a lot of plays like Groupon, LivingSocial, Foursquare, Gilt, Google – and the list goes on and on – designed to drive business to local merchants. I did have a rather large merchant approach me to confirm that they have been impacted by the “Amazon” factor and are vigorously working to devise strategies to countervail it. It will be interesting to watch this unfold again this holiday season.

The social commerce prezo was fun in part because EVERYONE can relate to being on Facebook as a user, but that VERY FEW can relate to the notion of commerce on Facebook, since it is still so new. I get the impression still that many people need to be convinced that Facebook will be an important commerce hub. Well, all I have to say is we’ve called stuff way early before (like NFC would not drive 50% of payment spend by 2010). So, we will just have to see how this all plays out. The point that I made is that it is still very early days, BUT, it’s coming. It’s just a question of how and when. There are just too many “stars” aligning that point in that direction, including the unadulterated cannibalization of time on the Internet that Facebook is now responsible for (25% of all time on the Internet, and since there are still only 24 hours in the day, other stuff like visiting merchant websites is taking a real beating). There’s also the fact that 50% of users check their Facebook page daily, the fact that more and more people share what they see in their news feed, and when they do, that also not only gets shared further but acted upon by those to whom it was shared – the list goes on. Several people raised the “security” issues associated with doing business on Facebook and even on mobile. My view is that there will be an educational effort required but not the same one that was required to get people to use their card online eight or nine years ago. People are over that fear and paranoia now, in part because the banks have done such a good job of convincing people that they are protected if their card is lost or stolen. I actually think that the mental leap may be harder on the mobile front, since people may not have completely made the mental leap that the cards in the digital wallet are the same cards that are in their leather wallets today, but we shall see.

Anyway, it was all great fun, and the WesPay team got a lot of well-deserved kudos for putting together a great forum. For more information on the program and who spoke, check out the agenda here.

Groupon IPO Delay: Is a Strategic About-Face Next?

Tue, 06 Sep 2011 17:37:38 -0400

OK, having just written a little analysis on the deal space, I was feeling pretty prescient about the Groupon IPO delay story that popped up literally hours after my story was published on PYMNTS.com. No, it had nothing to do with Andrew Mason reading my piece and deciding they needed a strategic about face, but, if news reports are true, it is just as interesting. Seems as though Mason has some ‘splaining to do after his internal-but–leaked-to-the-public-memo touting Groupon’s success was made public during what was supposed to be their quiet period. Don’t these guys know that you NEVER put anything in writing that you wouldn’t want on the cover of the NYT (or TechCrunch) and that quiet period really means quiet? I mean, geez. Anyway, it seems as though there is a little command performance being requested down in DC and a possibility that they will need to amend their public filing. Hey, maybe it will turn out OK after all. The market has been in the tank for awhile, and maybe by the time all of this is cleared up, it will be out of the dumper. The Andrew Mason email is actually interesting reading. Check it out when you get a chance.

1 Million Acts of Payments Innovation: Capgemini on the Intersection of Developed and Developing Markets

Sun, 28 Aug 2011 17:44:00 -0400

The mobile phone is the first ubiquitous communication device in human history, paving the way for the most revolutionary event in the history of finance. As a consequence, mobile payments are an unprecedented opportunity to address four billion people in emerging markets.

On August 10, 2011, 300 passionate payments innovators from 27 countries ranging from Albania to Uzbekistan, with strong representation from Brazil, Canada, Germany, India, Kenya, Nigeria, South Africa, UK and 30 US cities, came together to cause breakthrough results. The session provided a once-in-a-lifetime opportunity to interact face-to-face, using Cisco’s amazing TelePresence technology. Since emerging markets are leapfrogging developed markets in mobile payments, the conversation centered on what markets can learn from each other, what payments innovations from Kenya or India can be used in Canada or US, engaging stories on the use of mobile payments, and overcoming business model inertia.

Betty Mwangi-Thuo and her colleagues at M-Pesa described their sophisticated leverage of Know Your Customer (KYC) data, used to segment customers, understand behaviors and develop marketing campaigns. One resulting success is “Kenya for Kenyans,” a hunger fund that raised 2.8 million US dollars in one and a half weeks.

Figure 1: Betty Mwangi-Thuo and her colleagues at M-Pesa in Nairobi, Kenya

“MPesa ended thuggery in Kenya,” Lowell Campbell, Standard Bank of South Africa

Gaurav Zutshi of Obopay shared a touching story of mobile payments improving people’s lives: a fix-it businessman in Nairobi saves two hours for each supply pick-up and payment using YuCash. Obopay also uses KYC data to segment for pricing sensitivity and promotions. A surprising success was issuing companion plastics with mobile money accounts – their customers really liked the “snobbish” appeal of plastic!

Lowell Campbell in South Africa sees the need for the agent environment – the human interface – in cash-saturated markets, the key being building trust, as M-Pesa developed.

ICICI bankers in Mumbai described their USSD-based pilot servicing consumers and small businesses. They found ways to support customer servicing, account maintenance and regulatory compliance, stressing the importance of training their agent network.

Turning to developed markets, Richard Wendell in New York talked about some of American Express’ recent innovations including mobile wallet and Facebook service “Link, Like, Love,” which provides automatic coupons on the back-end.

The overarching commonality between emerging and development markets is simplified “lite” accounts serving the underbanked.

One Million Acts of Payments Innovation began January, 2011 as a partnership between Capgemini, Cisco, PaymentsMarket and Access Group. It has launched projects such “Without a budget, how can you formulate a strategy to accrue one million new users across the nation?" – a team made up of six university students and a payments start-up.

Deborah Baxley is a Principal with Capgemini Financial Services Consulting. She is a recognized expert in the payments industry with 20 years consulting experience in 14 countries. She possesses in-depth experience in mobile payments and credit cards. She is an officer on the Smart Card Alliance Payments Council, co-founder of One Million Acts of Payments Innovation, advisory Board Member at Brighter Planet, socially responsible company helping manage and mitigate carbon emissions using cutting-edge analytics linked to payment cards, and Certified Smart Card Industry Professional. She is a frequent keynote speaker and prolific author on topics of mobile and advanced payments innovation.

Deborah can be reached at Deborah.Baxley@capgemini.com.

Prof. Steve Jobs: Lessons from His Legacy for the Payments Sector

Thu, 25 Aug 2011 12:37:38 -0400

EDITOR'S PICKS

Why Steve Jobs Will Go Down as "The Man"

Steve Jobs Resigns as CEO of Apple

(Editor's Note: Apple co-founder Steve Jobs passed away Wednesday, Oct. 5. He was 56. "Apple has lost a visionary and creative genius, and the world has lost an amazing human being," wrote Apple CEO Tim Cook in an email to all Apple employees. When Jobs stepped down as Apple's CEO in August, MPD CEO Karen Webster paid tribute to the man who, as a Twitter user named Matt Galligan aptly put, "touched an ugly world of technology and made it beautiful.")

The resignation of Steve Jobs as Apple’s CEO has prompted a zillion articles on its impact on everything from Apple’s ability to continue to innovate to the future of the mobile industry. I don’t have much to add to that score. News of his resignation brought to mind two things, though, that might be new to the conversation – here goes.

The first is how Steve Jobs taught us some important lessons about how to ignite a platform. Before the genius of the iPod, iTunes, iPhone and iPad, there was, well, Lisa. Lisa was developed in 1983 (well before most of the iPod, iPhone toting users were even born) by Jobs during his first stint at Apple. Its genius was that it was the first commercial computer with a GUI interface. Before that, we all either chiseled our documents out of stone tablets <joke>, or more likely, relegated document production to the computer to techies who could type commands on the keyboard to make the system work.

Lisa was pretty cool, and arguably, the precursor to what we all know and love and can’t live without today. But it was a flop. It was, by and large, a huge, expensive (around $6,500) paperweight. Since it had few software applications to run on, there weren’t a lot of buyers. The Lisa fiasco helped get Jobs tossed from Apple, ironically.

But one could say that this failure was one of the biggest drivers for Jobs and Apple’s success. The brilliance of Apple products isn’t just their slick design but the integration of applications with the devices that drive their sales and devotion to them – forever. Jobs built an incredibly robust and integrated platform that has driven Apple from being nearly bankrupt back in the 1990s to a Fortune 100 powerhouse a decade later. He has also done something else along the way: opened everyone’s eyes to the power of a platform – the apps store for driving commerce on IP-enabled devices. Today, there are more than 100,000 apps in the iPhone apps store, which keeps users sticky to Apple’s products and developers developing apps for them. Its embedded payment platform makes adding to one's personal collection simple and easy. Apple probably did more to drive the future of mobile commerce forward than anyone else on the planet by raising the lid on these platform network effects and stimulating the likes of PayPal, Amazon and Google countless more to replicate its magic. Sure, Apple is a closed platform (on the hardware side; it is open of course on the app side), and many suggest that will be its Achilles’ heel. But so far, Apple has proven them wrong. The mistake made with Lisa – create cool products without cool things to drive sales and usage – is at the core of what we all know to be central to Apple’s success. [Related: Why Steve Jobs Will Go Down as "The Man"]

The other thing that his resignation brought to mind, for me at least, is an admiration for how strong Jobs must really be as a human being. Jobs has been really sick for a very long time, and until very recently, was reported to be working at full tilt on the new product suite. That’s impressive given the seriousness of his illness. My guess is that getting up every morning and pursuing his life’s dream was the only way he could block out how sick he really was and in the process capture some small piece of a normal life. Not talking about his health or dwelling on it was as good for him, as it was for the company who never wanted to focus on life post-Jobs. If I’m right, that lesson is huge and something we can all learn from – and certainly benefited from.

We wish Steve Jobs well, and peace.

Why Steve Jobs Will Go Down as "The Man"

Thu, 25 Aug 2011 04:48:07 -0400

EDITOR'S PICKS

Prof.Steve Jobs: Lessons from His Legacy for the Payments Sector

Steve Jobs Resigns as CEO of Apple

(Editor's Note: Apple co-founder Steve Jobs passed away Wednesday, Oct. 5. He was 56. "Apple has lost a visionary and creative genius, and the world has lost an amazing human being," wrote Apple CEO Tim Cook in an email to all Apple employees. When Jobs stepped down as Apple's CEO in August, MPD Founder David Evans paid tribute to the man who, as a Twitter user named Matt Galligan aptly put, "touched an ugly world of technology and made it beautiful.")

To integrate, or not to integrate: that is the question. Or at least the one that has hung over Steve Jobs’ career that, sadly, seems to have come to an end.

By the late 1980s, Jobs was considered a fool outdone by the wily Bill Gates. Jobs – obsessed with the beauty of the Mac, with its nicely integrated hardware and software – had lost to the savvy and practical Gates, who realized that licensing Microsoft’s operating systems to many computer manufacturers would drive price down, put a PC on every desk and make him a gazillionaire. Apple’s share of computer desktops plummeted to the low single digits over the next 20 years as Microsoft seemingly came to rule the PC world. What a narcissistic idiot, that Jobs. Such was the conventional wisdom from the mid-1980s through the mid-2000s.

Summarily dismissed from the company he founded, Jobs went into the wilderness, did Next and all that, came back and truly revolutionized the world by leading the company that introduced the iPhone. Now, there was a thing of beauty. A bundle of software and hardware that made millions salivate to hold it. And this siren managed to flip the whole mobile ecosystem. The iPhone sucked – I don’t remember, did anything like this happen in the Odyssey? – much of the power of mobile from the carriers into Apple. Followed by the iPad, Microsoft, largely sans Gates and lead by sidekick Ballmer, was on the ropes. The supposed monopolist had a stock price stuck in time for a decade. Not only had Microsoft seemingly lost the mobile phone wars, after a decade of slogging away at various attempts to shove its gargantuan and increasingly klutzy Windows platform into puny mobile phones, but it looked like its PC kingdom was being ransacked, too. The brilliant iPad made PCs seem like typewriters or at least like something your Dad mainly used. Apple was the most valuable technology company in the universe with a market cap worth more than Microsoft. How that must have stung the gang in Redmond.

But not so fast: Google buys a little software company and seemingly out of nowhere creates the Android software platform for mobile phones. And then this arch enemy of Microsoft steals a play from Gates and Ballmer’s book and licenses the Android to any handset manufacturer who wants to use it as its operating system (of course, Google one-ups Microsoft by making it free, since it is looking for ad revenue down the road). Android mobile handsets take off and gain an even larger share of the smartphone business than iPhones. Maybe Jobs was the idiot after all. Many commentators started saying so. Same old, same old. That Jobs once again faced a smarter competitor – with whizkids Brin and Page reprising the Gates and Ballmer roles – specialized in software platforms and left the hardware side to the plebes.

Then, there was last week’s intriguing twist: Google goes out and buys (subject to regulatory approval) mobile handset manufacturing giant Motorola. OK, let’s cut through all this crap about buying patent portfolios, since you can buy those things without getting everything from the engineers to the dishes in the cafeteria. Google bought Motorola because they wanted to own a mobile handset manufacturer. It is just really hard to imagine any other reason for doing that. They realized that, to really compete with the iPhone, they had to tightly integrate the increasingly fragmented (remember this is open source) Android operating system into hardware that people would lust over. Google obviously didn’t believe that the Microsoft “let a thousand highly competitive equipment manufacturers bloom” approach was going to succeed in the long run for mobile devices. [More: After Google Buys Motorola, What’s Next for the Payments Ecosystem?]

So, at least on the day of his resignation, Jobs looked like a hero. Someone who persevered against brutal criticism for decades only to find that his vision of the computing industry was the right one after all, who singularly created products that people lust after and who has led a revolution that could be more transformative for the world – and more important for consumers – than the PC revolution itself. Indeed, when the history of the information technology revolution that started in the late 1970s is written decades from now, based on how the world looks today, Steve Jobs is likely to be considered the superhero above all others. [Related: Prof.Steve Jobs: Lessons from His Legacy for the Payments Sector]

Given that Jobs has gone from genius to idiot to genius to idiot to genius in that last three decades, I would not suggest that the story is over. Perhaps Google will trounce Apple with Android using a mixed integration/licensing strategy. Perhaps Microsoft and Nokia will pull a rabbit out of a hat and maybe even create some great thing as a merged entity. Perhaps someone else will emerge from nowhere who makes Jobs look like John Adams instead of Washington, Jefferson and Lincoln rolled into one. Indeed, you should beware of experts who make sweeping conclusions based on ex-post rationalizations of why some entrepreneur succeeded and another failed.

But, at least today, Steve Jobs can be proud of one of the greatest comeback stories in business history, as well as the prospect that he, and not his longtime rival Bill Gates, will go down as the man.

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. David is the Founder of Market Platform Dynamics. Read More

Analysis: After Google Buys Motorola, What’s Next for the Payments Ecosystem?

Mon, 15 Aug 2011 12:37:38 -0400

Just when you thought things couldn’t possibly get more exciting in the mobile world, Google up and buys Motorola (view press release). Google’s planned acquisition of Motorola is just plain big news. Could it be a giant stepping stone on the way to creating a tightly integrated mobile ecosystem that will reshape commerce – or a misstep by now giving other handset makers more of an incentive to consider alternative operating systems?
(More: Google Does Cards)

A few quick thoughts:

This is Google’s first major acquisition of a company that produces physical goods. It just so happens that those physical goods are handsets that power their Android operating system, which accounts now for roughly 40% of all smartphones sold in the United States, according to Nielsen. The lack of Android integration into Motorola’s Xoom tablets has held sales back too, according to its CEO. But Android’s popularity and growth was a function of having it available across handset manufacturers. They may be betting that this move will make them look, feel and operate more like Apple (or DoCoMo). The big risk is that this sounds an awful lot like Nokia’s deal with Symbian, where Nokia owned Symbian but wanted competing handset manufacturers to use it, too. Interestingly, Nokia’s shares jumped the most they had in 1.5 years on this news. Of course, a big part of the problem with that was that Symbian didn’t really know how to be a mobile phone platform.

The notion, though, that Google can now more directly influence the shipment of phones with Google Wallet features – NFC or no NFC – is potentially pretty powerful. If you were Google and had control of Android + control of the handsets that shipped with Android already loaded on it, wouldn’t you also include Google Wallet features that users could just easily activate? It is a very efficient way to get millions of consumers walking around with phones with Google Wallets just ready and able to be used at physical merchant locations. And these wallets don’t just influence interactions at the physical point of sale. Having Google phones with Google Wallet features can make it incredibly easy for them to facilitate online transactions, too. (Do I hear a comeback in the works for Checkout?) Obviously, this will take some time, but it is potentially a way for them to more readily get the consumer side of their mobile payments platform on board.

Google phones with Google Wallets that include offers is also potentially destabilizing to Foursquare, GrouponNow, Facebook Deals and any other player that is banking on the combination of phones + GPS to power offers to consumers. And it’s not just because they have the ability to serve offers, as I’ve said before. It’s because they have the power to adjust their business model to make it more appealing for merchants to opt in, on top of now having millions of consumers with handsets and wallets to use at their locations.
(More: "Googling" mPayments Ignition?)

We’ll obviously know more as this takes shape and others react. And how are other players reacting? My predictions:

- In spite of Nokia’s uptick in stock price, Nokia and Microsoft should be worried. Besides Apple, they face another integrated software platform and hardware maker. But unlike them, one that has a highly successful software platform and a big American handset presence.

- The stock price went up supposedly because investors thought other handset manufacturers would turn to Microsoft. I don’t think so. First, I suspect that handset manufacturers will trust Google more than they trusted Nokia. Everyone knows Google isn’t interested in making money from handsets; they are interested in furthering their advertising and offers ambitions. Second, it isn’t clear why Windows would be more appealing than Android, given Microsoft’s tight connection to Nokia.

- ISIS might be a little worried today, too. While they have signed multiple payments providers to their wallet platform and multiple carriers, they have no real way to quickly diffuse their wallet. Now, Google does – with a compelling value proposition for consumers and merchants.
(More: Google, Apple, ISIS: Which Will Ignite NFC Payments)

- PayPal – now here’s an interesting one. Will PayPal customers be able to use their PayPal accounts on Google phones? No reason to think they won’t or can’t, at least online. But as part of a wallet that might come integrated into the phone and is able to be used at the physical point of sale, well, it seems doubtful, or at least not easily done.

- MasterCard is probably really liking this, especially since they are the only payment platform powering Google Wallet today. Depending on how things shake out and get distributed, this could be a huge advance for them in the mobile commerce space and could sort of make up for the fact that they haven’t much of a compelling mobile strategy at least so far.

- RIM – Yikes! I have this sinking feeling in the pit of my stomach that the days of tactile keyboards on mobile phones are coming to an end sooner than I’d like.
(More: First Blackberry with Built-In NFC Support)

Now, as exciting as this is, there is a lot that could go wrong. Google has clearly nailed the market for online advertising and search but has missed the mark on other things, like Google TV, Google Video and even Google Checkout. So, this is not a slam dunk by any stretch. But, it sure makes the mobile landscape interesting. So, what’s next for Google? Buying a payments system maybe? Can’t wait for next Monday!

Ask the Industry: How do you think Google's acquisition of Motorola will impact the payments sector? Share Your Thoughts

I Am Curious… Stock Market Impact on Payments Company Performance

Wed, 10 Aug 2011 04:48:07 -0400

OK, so it’s not as pithy as the 1960s Swedish cult film in which the main character (for 3.5 hours) dragged us around Stockholm on her search for life’s meaning. It is however, a fitting metaphor for those of us still walking around doe-eyed after the stock market drubbing of the last week and the blood-pressure- through-the roof-day on Monday. Our team at Market Platform Dynamics has been even more curious and has put together a little analysis of the performance of payments stocks over the past couple of weeks. While not quite as, well, seamy, as the film, the results may surprise and shock just the same.

So, who fared the worst? NetSpend was the biggest loser. And who fared the best? MasterCard. (Related: Party Like It's 2008: What the US Debt Crisis Means for Payments)

So, here’s a little more background. We wanted to know just how some of the leading payments card players, across several key segments, did over the course of the recent stock market nosedive. We define “nosedive” as the period of time when U.S. markets started cratering (July 25th with 9 out of 10 days of losses) leading up to the panicked sell-off on Monday, August 8th. We ended our analysis on Tuesday, August 9th, thereby giving everyone credit for the biggest rise in the S&P 500 since March 2009. The table below shows the results for companies both year-to-date and over the past 12 trading days. For this purpose, we’ll focus on the last 12 days to show how the market changed its evaluation of the future prospects of these companies courtesy of the latest global financial crisis. Naturally, other things were going on in the payments market generally and for individual firms. We aren’t going to try to isolate each and every cause of the changes. This is just designed to be a broad brush look. So, no sweeping statements from us on cause and effect beyond the points Evans made on Tuesday about why payments firms are in the dumps now.

The table shows the results for 20 large players and a couple of broad stock indices ranked by their stock return over the last 12 trading days. We’ve included several of the large banks, even though they are hardly pure plays in payments.

What the table shows is really quite interesting. Prepaid pioneer NetSpend had the biggest drop of all—a whopping 45.6% loss in a little over two week’s time. Ouch. And despite the 10% tumble on Monday, MasterCard recovered enough yesterday that it came out ahead over these last 12 days with an overall 2.8% gain. In fact, MasterCard and Heartland Payment Systems were the only two companies we looked at that were in the black over the 12 day period.

Of the networks, Discover performed the worst, losing 12.9%. American Express was next at 11.8%. Visa came in second behind MasterCard, losing 7.6%. Part of the story is that Discover and AmEx are issuers, so the market is likely to be more concerned with those that are extending credit than those that are just processing transactions.

While many of the acquirer/processors are not publicly traded, of those that are, TSYS was the biggest loser with a 16.7% decline. Heartland Payment Systems did the best with a 2.6% gain.

The banks, of course, have a lot more going on besides payments. A lot of their pain came from the systemic risk concerns combined (like Europe doing a Lehman) with continuing legal problems (BAC’s seeming lawsuit a day problem). Bank of America took the biggest hit with a 25.0% loss, and Citigroup was close behind with a 20.9% drop.

On the prepaid side, well, it was all over the map. Green Dot managed to beat the broader market indices with “only” a -5.7% loss, while NetSpend fell by 45.6%. This was a double ouch given that NetSpend is already hurting from a poor second quarter earnings announcement and lower earnings guidance for the remainder of the year.

Very interesting, though, is Radiant Systems. This POS player in retail, hospitality, petroleum and other niche industries posted the third-best performance just behind MasterCard and Heartland at -1.1%.

And, how did the payments industry do overall? At least this list of firms did worse on average than the S&P 500. Twelve of the 20 had bigger losses than the S&P 500.

Is there a big takeaway? Certainly not a pretty time to be a bank (but that’s not really news). Beyond that, there was lots of variation in the fortunes—compare GreenDot with NetSpend and Visa with MasterCard. With the enormous gyrations and uncertainty of the last two days, we doubt the roller coaster ride is over. Stay tuned as this latest crisis plays itself out.

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. David is the Founder of Market Platform Dynamics. Read More

Scott Walster‎ is a Director at Market Platform Dynamics where he has consulted for many of the leaders in the payments and financial services industry. His advisory role has covered issues of innovation, strategy, economics, and regulation. Since joining MPD, Scott’s experience has focused on developing the research and analysis that describes the competitive landscape in the payments industry. He is also a specialist in financial analysis especially involving the causal relationship between events and security price movements.

Party Like It’s 2008: What the US Debt Crisis Means for Payments

Mon, 08 Aug 2011 11:48:07 -0400

Here’s my take on the current global economic turmoil and its implications for the payments industry. (Related: Jon Stewart to Sen. Durbin: "Is This the Worst It's Been?")

First, what’s happened and why?

(a) The sovereign debt of a bunch of European countries has started to look like junk bonds. Greece, Ireland and Portugal were bad enough. But then Italy and Spain got added to the mix. If these countries were banks, they’d have long lines of people stretching around the corner at their branches trying to take out their cash. As it turns out, the banks are the ones holding a lot of the debt. The fear of sovereign debt defaults leading to banks once again falling like dominos has spooked the market. This is all taking place in a political entity—the European Union—that doesn’t really have the right institutions in place for solving these problems (they are a monetary union but not a fiscal union), and they are struggling to do so.

(b) The United States is slowing down. The country looks like it could head into a second recession in the worst of worlds or just remain sluggish in what may be the best we can hope for. Unemployment remains over 9 percent, lots of people have left the labor force because they’ve decided getting a job is hopeless and there isn’t robust hiring since companies have figured out how to do more with less until their confident demand is back. Consumer confidence and spending is down, and there’s not a lot out there that looks like it could lift the economy up.

(c) China and the rest of the world no longer look like we can count on them to keep the global economy motoring along. Maybe China won’t go into a recession, but it also isn’t clear that it can be counted on to grow as quickly as it has been.

(d) The U.S. debt downgrade to my mind puts an exclamation mark on points (a) and (b) but isn’t such a big deal. There may be disagreement on this, but I don’t see the downgrade, per se as changing much. The markets knew that the U.S. fiscal situation and policymaking was a mess before the S&P downgrade, and prices have already largely reflected that, at least that in my view. There’s virtually no chance—and there never was—that the U.S. government is going to default on its debt.

Second, what does this mean for the payments industry? The answer to that depends on how all this plays out—whether there’s a serious downturn or just no upturn. (Related: 7 Ways to Innovate Through A Recession)

(a) We know that if the unemployment rate edges up and more people lose their jobs or experience big reductions in income, charge-offs will go up for anyone extending credit. The big question is whether we are in for more firings, or whether we’re just going to get stuck at around 9 percent unemployment for the foreseeable future. This is a tough one to call. Firms became pretty lean during 2009 and didn’t fatten up much and still aren’t. It’s not clear they have much more room to lay people off, unless of course, there is a serious nosedive in the economy.

(b) We also know that when the economy falls, people engage in fewer transactions. The mix of transactions will shift toward non-discretionary ones, and average ticket sizes will go down. That’s going to affect pretty much every player in the payments industry directly or indirectly. What happens again depends on how big a nosedive we take, and whether we just stay sluggish. Again this is a tough one to call. If we stay at the current anemic level of economic activity in the United States and Europe, not much changes.

(c) What has changed in my view in the last several weeks are expectations about the future. Here’s the way to think about it from the standpoint of an investor in payments. A few months ago, there were reasons to be somewhat optimistic that the U.S. economy was going to recover and that European Union would contain the sovereign debt crisis within its various member states. I think forecasts about future consumer spending, business spending, investment and employment all need to be ratcheted down if they haven’t already been in the last few weeks. That necessarily means the present discounted value of payments companies (and many other companies) is lower. The question again is just how much lower? So, we’re again back to whether we stay sluggish or have a significant collapse.

Third, what should you do if you are running a payments company?

(a) Go home tonight and have a stiff drink or run off that anxiety or watch a stupid show. Whatever you do to relieve stress.

(b) I’m sorry to say this, but I think it would be prudent for payments folks (not necessarily bankers) to put their September 2008 hats back on. There’s a decent probability that we’ll have a significant downturn. We may know for sure pretty quickly, or it may take some time. Yesterday’s tanking of the markets can’t tell us for sure. It might have been an overreaction or the beginning of something worse.

(c) For issuers, the prospect of a significant downturn means paying very close attention to the extension of consumer credit, including overdrafts for checking accounts. For everyone else, that means paying close attention to employment and investment levels if there’s a reduction in transaction volume and price resistance by business partners in payments.

Fourth, I hear someone saying, “Can’t you say something to cheer us up?” Well, if I must.

(a) We’ve had financial crises for millennia. They are horrible. Things always get better. The United States especially will have a vibrant economy for sure. There’s no reason to think otherwise. If you are looking at the long-run, investment in building great payment companies is still well worth doing and will eventually be rewarded.

(b) It may be a great time to buy! And many large players have cash sitting around. Hey, maybe you could even buy Groupon for a song.

(c) The long-term prospects for payments are still very solid. There’s a huge opportunity to displace non-electronic, and the innovation possibilities are incredible. You just may need to be patient

If that doesn’t cheer you up see 3(a).

The Enigma of Zero

Mon, 25 Jul 2011 16:00:00 -0400

(Part of the Payments Redefined 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

- 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

2. Pay for Services that increase business

- 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

3. 3^rd Party Entities Pay for accessing the ecosystem

- 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 & 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

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 Payments Redefined series)

Upendra is based in Gurgaon, India. He blogs at http://futureredefined.blogspot.com and loyaltyredefined.blogspot.com and can be reached at un2400@gmail.com or http://twitter.com/#!/upendranamburi

From Search to Swipe... Google Does Cards

Fri, 22 Jul 2011 21:37:38 -0400

So, I wonder how many payments industry hearts stopped beating yesterday morning when the news hit the wires that Google was issuing a credit card? Turns out that it was not THAT kind of credit card, but rather a small business financing tool that happens to be a plastic card carrying the MasterCard bug and issued by World Financial Capital Bank. This card will be free, carry a low interest rate (8.99%) but can only be used to purchase AdWords. It is being offered to select businesses as part of a beta and will be rolled out to a larger group at a later time.

Google says that it is doing this to help stimulate and smooth (and hopefully increase) small business spending on ad campaigns. Its timing coincides with the approaching back to school and mega-holiday season when most retail sales are made (and ad budgets are spent). At first blush, it seems little more than a clever vendor financing tool and no real big deal (aside from being the first/only vendor financing offer by Google) using a tool that is familiar to a lot of small businesses. Most, including the Google founders in their startup days before they were gazillionaires, use credit cards to finance their business operations. This trend has even intensified given the tightening of small business credit overall. A survey conducted in late April, 2009 found that 59% of small businesses use credit cards to finance their operations, up 10% from December 2008.

------------
Related News

Google Takes a Bite of the Apple

"Googling" mPayments Ignition? Why Google's Wallet May Be the Top

Google Takes on NFC, Will They Crack the Code?

Google 'Locates' New Multichannel Shopping Feature
------------

But Google seems awfully interested in revving the AdWords engine these days. Sure, you say, that IS what accounts for 94% of their revenues, but still, they seem quite focused on making sure that as many small businesses as possible are using its platform. At the end of last year, for example, it created a promotion that gave 1 million small businesses a $100 AdWords credit if they spent $100 before a certain time– and it has offered similar promotions in the past. It has incorporated the personal touch into its “onboarding” process – it offers a phone number and real live person to help get campaigns set up for the first time. And, perhaps even more relevant to its more recent Groupon-smashing ambitions, it offers a business the option to link AdWords to Google Places, essentially giving visibility to local business when local search is done. And we know that local is a huge areas of focus for Google. It promotes Google Places anytime anyone does a local search and has a top exec running its local products business unit.

So, is this credit card just a well-timed vendor financing tool? Could be. But I am sort of thinking that it might be a strategy for getting as many small businesses (and their ad spend) on the AdWords platform as possible so that it can juice up its mobile POS ambitions. Subsidizing one part of a platform in order to get the other on board is a classic ignition tactic. Perhaps taking the friction out of AdWords spending is one way to get more merchants on board, which will make it more likely that consumers will become more interested in Google’s local offers, which will make a more compelling case for small businesses to use AdWords.

I’ve also read conflicting reports about whether beta testers will really only be able to use the cards for AdWords – if those restrictions are lifted, perhaps this new card is an interesting way for Google to create a built in base of digital wallet customers with a card that is top of wallet and for preference to be established by providing offers, rebates and other incentives to those business owners to use the card more regularly. Remember, small business owners are consumers, too.

Then again, maybe I am thinking about this too much. What are your thoughts? (Please share below!) Vendor financing tool or just another strategy to build out their payments strategy? Either way, Google, seems intent on spending its cash reserves on things that make its core asset, online advertising, even more valuable.

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 here.

Tempo, Take 2: Lessons the Payments Sector Can Learn From

Mon, 18 Jul 2011 21:37:38 -0400

The interview that I did with Mike Grossman, CEO of Tempo Payments triggered several thoughts and reminded me of just how important the notion of critical mass is to success in two/multi-sided ecosystems. Here are my musings.

1. It’s really hard to get merchants and consumers on board with something new. No duh, you say. I was a little surprised to be reminded that Tempo, which started life as Debitman in 2003 and then hit the reset button as Tempo in 2005, was only able to convince 7-8 merchants and ~100,000 cardholders to sign on over that period of time. Tempo’s proposition was to offer merchants lower interchange fees in an effort to get them on board first, then hoping to lure consumers to shop ‘til they dropped at those merchants, who presumably, would fund loyalty and other programs to both attract customers and persuade them to use their Tempo cards. I wonder if merchants really did plow the savings into programs in a meaningful enough way to make a persuasive case for consumers to pull out the Tempo card and not someone else’s. (Might be an interesting data point into what we can expect in a post-Durbin world…) Since Tempo wasn’t able to attract more merchants, it was inevitable that they would be limited on the number of consumers that they could ultimately attract too. I wonder – and I bet Mike and his team does, too – whether having 1.000 merchants and 1 million consumers would have helped them blunt what became their Durbin death knell.

2. Lower interchange fees didn’t turn out to be as important as merchants said it was. I don’t have intimate knowledge of the Tempo business model, but Mike reiterated in the interview that lower fees was THE value proposition for this once promising payments network. Like many emerging networks of its time though, it banked (literally) on the fact that merchants would beat a path to their door if they dangled the prospect of lower fees in front of them. Again, I think it is a really interesting data point that over 8 years only 7-8 merchants found the business proposition by Tempo to be compelling enough to embrace. Sure, part of the struggle for Tempo in talking to merchants was not having a large consumer base to offer to them but believing that lower fees was the only calling card they needed to juice their network turned out to be fatal. Obviously, merchants didn’t value that as much as they said they did. The interesting learning here, in spite of what we’ve all just lived through with Durbin, is that lower fees aren’t the only (or most important) criteria for new payment acceptance. If it was, there would have been more merchants knocking on (or down) Tempo’s doors (and more generally, merchants systematically refusing to take cards at all).

3. Time to ignition is important. We sound like broken records when we talk to our clients about this point, but there is truly a relevant window for getting something new to critical mass. Slogging along is always part of the path to ignition. But the longer that it takes for an innovation to slog through the slogging and reach critical mass, the more at risk the innovation becomes to something else – either a new innovation, or in this case, regulation that puts said innovation at risk. We’ve seen it in spades in the United States with contactless and NFC, and on the flip side, watching new things like Google+ take off, the latter creating a serious challenger in the social networking space at a time when no one thought it possible. And, like Tempo was, every single player in the payments space is being impacted by Durbin, one way or the other. The difference it seems is that pivoting to something new is possible for others, because critical mass exists and business models can be modified to address the revenue shortfall. It is much easier to do this when you have a market position to leverage or momentum that provides investors with some evidence that a course correction is worth funding, as we’re seeing with ISIS, for example.

4. Business models are disruptive –in good and bad ways. Our experience over a decade of work with clients in massively complex ecosystems is that business models are perhaps the most powerful driver of innovation, and as such, where you sit in the ecosystem really does matter. Technology is, in many cases, a means to an end, and can be more easily replicated and therefore, commoditized. Business models, on the other hand, have the ability to create switching costs, destabilize the competition and reshape the ecosystem in the process. Not to beat the NFC dead horse, but that is the intrigue of Google and mobile payments they have multiple revenue pockets and therefore the prospect of driving revenue from a variety of sources and thus the ability to eliminate the friction that has kept others from succeeding in this space. Tempo’s model was simple and singular, but in so doing, set itself up for huge risk if someone else came along with even lower fees, which is how and why their story ended the way it did.

It is never easy to for people to talk about things that didn’t turn out as planned. Mike was really gracious with his time and quite candid during our interview, and I really appreciated the fact that he was willing to talk so openly about Tempo and why it failed. I’ll tell you one thing - not many (any?) in similar circumstances would have had the guts to do it. Getting people to open about what didn’t work is nearly impossible – and the lessons from failures are probably more helpful to understand than the successes – which always look deceptively easy. We should all thank Mike for sharing his experiences so openly and vividly – we can all learn from them. I wish him the very best with his next adventure (and judging by the number of hits to his profile on PYMNTS.com since the interview ran, it probably won’t be long before the next chapter begins).

P2P Odyssey Gets Bumpy

Tue, 12 Jul 2011 13:24:50 -0400

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 & 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 & 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 video of the CEO talking about Bump and more info 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 Bulletin Board

Denise Bahs, is an Accredited ACH Professional (AAP) and a member of The Payments Authority Marketing team. Read More

Will Zong Make eBay the Future of Retail Commerce?

Thu, 07 Jul 2011 21:37:38 -0400

eBay’s announcement 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 #%&^ (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.

RedLaser: a smartphone bar code reader that drives comparison shopping (acquired June 2010, terms not disclosed).
Milo: an inventory aggregation engine that currently accesses 50k stores and 3 million pieces of inventory. (acquired December 2010 for $75 million)
GSI: ecommerce, fulfillment and marketing services behemoth with 180 large merchant customers already using their ecommerce platform (acquired March 2011 for $2.4 billon)
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)
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)
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)
Zong: mobile payments provider which allows payments to post to mobile phones - for mostly virtual goods.(acquired July 2011 $240 million)

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 Amazon, 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.

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)
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)
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)
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)

Now, as all of you know who follow our stuff, every platform needs a good ignition strategy – 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 Magento 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 Google, 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.

Dangers of Assuming Invincibility - Could Your Firm Go the Way of the Typewriter Makers?

Wed, 29 Jun 2011 18:39:35 -0400

There was a lot of great stuff that came out of the Payments Innovation Institute at Harvard last week but two anecdotes that have absolutely nothing to do with payments specifically, I think, provide some of the more thought provoking insights around the pitfalls and promise of innovation. See if you agree.

The story of the typewriter industry and its demise in the face of the rise of the word-processing industry is not a new one. A possibly new spin on this story is that of Smith Corona – an anecdote Dan Schulman, President of Enterprise Growth at American Express shared. For all of you Gen X/Y-ers out there, Smith Corona was a U.S. company established in 1886 and the preeminent manufacturer of typewriters for the better part of a century. Having a portable electric version was akin to dying and going to heaven when it came to typing term papers back in the day. In fact, using a Smith Corona typewriter was about the only way that term papers got typed back then. And boy was it a chore. There were messy ribbons to replace that guaranteed ink-stained fingers. Fixing mistakes was impossibly tedious, requiring the removal of the document and using Wite-Out to obliterate the mistake and then reinserting the document and hoping you could line up the carriage in such a way that typing over the mistake was not noticeable. Ha! Fugetaboutit if you messed up a couple of sentences on a page – you had to start all over. But, believe it or not, that was state of the art document production through the late 1970s.

I did a little digging into their story after Dan’s presentation, and what I found was both interesting and stunning at the same time. Smith Corona was very, very proud of its history of innovation. It was the first typewriter to have uppercase and lowercase letters and the first to miniaturize the machines so that they were portable. It was the first to pioneer the removable ribbon cartridge (eliminating forever those ink-stained fingers). But, it was the last to see that computing would put it out of business about a decade later. When its CEO was asked in 1992 (no, not a typo, 1992) about its declining market share and what new products and services were on the horizon, he commented, “… nothing now … Many people believe that the typewriter and word-processor business is a buggy-whip industry, which is far from true. There is still a strong market for our products in the U.S. and the world.” Wow, this gives a whole new meaning to the notion of having a strategic blind spot.

Now, let me challenge your French military history for a moment and recount a story that Mark Selby, VP at Nokia shared with the group at Payments Innovation Institute last week as well. It will sound totally unbelievable but is utterly true. The year: 1812. The scene: 600,000 French soldiers marching towards Russia, an army that was the most formidable in Europe – undefeated and unmatched at that point. In a move that was perhaps motivated more by hubris (Napoleon wanted his soldiers to look sharp) than necessity (his soldiers needed new uniforms), a decision was made to use tin buttons for the first time on those uniforms. As these very sharply dressed soldiers marched into Russia, a horribly unexpected thing began to happen. When exposed to bitter cold, tin literally disintegrates. So, all of those fancy-looking tin buttons holding those soldiers’ uniforms together began to crumble. The result was an army whose uniforms literally disintegrated as well. As soldiers across all ranks struggled to keep their uniforms closed, they also quickly succumbed to the cold and the approaching Russian army. In a short period of time, an army of 600,000 solders shrunk to 10,000.

So, what does all of this have to do with payments? Let me share three things that I think might come out of these two stories.

First, is the assumption of invincibility. Smith Corona, as late as 1992, refused to see the demise that was staring them right in the face. They had dominated one industry for 100 years and never thought that there would come a time when they wouldn’t. They fell prey to the “once a leader, always a leader” mantra and never took seriously what others were doing outside of their own four walls that could put their company at risk. And they weren’t the only ones. Only about 70 companies (give or take a few) that were on the Fortune 500 list in 1955 (the first year it was published) remain on the list today. Dan said his mantra at American Express is just because it’s been in business for 160 years doesn’t mean it will be for the next 160. What you see it doing in the marketplace today to innovate their products and the brand itself is their commitment to walking that talk.

The second is perspective. Smith Corona was focused entirely on improving its own product within its own narrow industry sector – the typewriter industry. Now that was a great strategy when the alternative to using its product was paper and pen(cil). But it never challenged itself to find new sources of value to help consumers and businesses prepare documents efficiently. They never wanted to disrupt the existing business. IBM, as a contrast, did. They too were in the typewriter business but recognized the opportunities and threats around personal computing (of course, they were more worried about the gun to the head of their mainframe business) and at least succeeded in getting into the new game in a big way.

The third is rigor. Napoleon was focused on an “innovation” that made uniforms look better (until these buttons were used, most were made of far more mundane materials) but did not bother to think beyond the superficial aspect of making that change. He also made a big change at a critical point in time with an assumption that the change would have only a positive impact, never questioning whether there was any risk to making that change at such a critical juncture, nor whether such a change added real value to his army. Hey, the soldiers looked good – what else did they need? As it turns out, they needed uniforms to stay closed, and the lure of the shiny new object, literally, was Napoleon’s demise.

As I have written so often, this is perhaps the most exciting time in payments. The opportunities to innovate are incredible, and all of the raw ingredients are in place to create considerable new value for the ecosystem and to find that new value at the intersection of payments, mobile, social and online. There are risks to be sure – risks to existing players, products, business models and brand. If the three insights above are to be believed, it may be that the greatest risks are those that have nothing to do with decisions about the blocking and tackling of the payments business – whether people want to tap or swipe, whether the Fed’s ruling today requires one or two routing networks or whether people will ever shop on Facebook. It may, in fact, be how organizations view their place in the ecosystem, and given that belief, how they choose to develop and implement their innovation agendas. As the Smith Corona story illustrates, believing that you’ll always dominate just because you once did (or now do) is dangerous. And, change for change sake also doesn’t mean that you have checked the “innovation box” and are guaranteed success.

So, who in your view is at risk of being the industry’s Smith Corona? And, who may be focusing on tin buttons? As always, I look forward to your comments and conversation.

And, have a wonderful 4^th!

blog

Target Looks to K.O. Amazon Price Check

Prepaid Tips for 2012: Why Fees Aren't Always the Answer

Tips for 2012: Making Your Loyalty Program Worth the Expense

B2B Payments Innovation: Back in the Spotlight?

Handicapping PayPal and Google in the Mobile Transaction Platform Race

Handicapping Google in its Mobile Race with PayPal and Others

Main St. vs. Wall St. - Which Does Online Innovation Hurt Most? (Answer May Surprise You!)

Groupon IPO Delay: Is a Strategic About-Face Next?

1 Million Acts of Payments Innovation: Capgemini on the Intersection of Developed and Developing Markets

Figure 1: Betty Mwangi-Thuo and her colleagues at M-Pesa in Nairobi, Kenya

Related Content

Prof. Steve Jobs: Lessons from His Legacy for the Payments Sector

Why Steve Jobs Will Go Down as "The Man"

Analysis: After Google Buys Motorola, What’s Next for the Payments Ecosystem?

I Am Curious… Stock Market Impact on Payments Company Performance

Party Like It’s 2008: What the US Debt Crisis Means for Payments

The Enigma of Zero

From Search to Swipe... Google Does Cards

Tempo, Take 2: Lessons the Payments Sector Can Learn From

P2P Odyssey Gets Bumpy

Will Zong Make eBay the Future of Retail Commerce?

Dangers of Assuming Invincibility - Could Your Firm Go the Way of the Typewriter Makers?