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- S&P Capital IQ Initiates Coverage on Xplore Technologies Corp. in Standard & Poor’s Factual Stock Reports
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PYMNTS Voice
Commentary » PYMNTS Voice
Mobile Movers, Shakers and Shockers
I don’t know about you, but 2012 so far has left me a little breathless given the fast pace at which the payments industry has been moving since we all emerged from the New Year’s break. Maybe it’s the mild winter. No matter, the catalyst, not surprisingly, is mobile and the IP-enablement of just about everything that touches or influences commerce. This last week was particularly interesting given a few announcements from very different corners of the payments ecosystem about their payments strategy, not surprisingly, keyed to what they will pursue (or won’t) along the mobile lines. Here’s my take on last week’s mobile movers, shakers, and shockers.
Analysis: Hip to be "Square?" Why Visa Thinks So
Last week’s announcement of Visa’s strategic investment in Square set off a wave of news reports and blog posts about its implications for Visa, Square and the rest of the ecosystem. Most of the discussion was focused on the how much Visa invested (they say it was in the “single millions of dollars”) and speculation as to Visa’s motivations for doing so (neat mobile technology). I think that perhaps the more interesting story is what this could mean to Square’s prospects in the long run, and more importantly, one of its major marketplace challengers (Intuit’s GoPayment) and small businesses more generally.
New Global Payment Schemes: Imitation, the Sincerest Form of Flattery?
Throughout the 1980s and 1990s payment network consolidation in the US and Europe, resulted in a world with only 3 global credit card brands – Visa, MasterCard and American Express, supported by a host of regional/ local debit solutions. However, the desire to avoid the dominance of US brands and expand their domestic card markets, has driven players in China, India and Europe to contemplate their own competitive card schemes to compete with the global dominance of Visa, Mastercard and American Express.
Will the Apple Fall Far From the (Contactless) Tree?
Apple started some tongues a’waggin’ about two weeks ago when reports of its contactless patent filing were released. Is Apple getting ready to enable its users to pay with their iPhones at the point-of-sale? Is this the first step in empowering their 110 million iTunes users to start paying for things not-Apple? Or, is it ho hum, companies file patents all the time and hardly anything happens with any of them so what’s the big deal?
Of course Apple isn’t the only one playing the iPhone contactless game. Visa just announced that it and Device Fidelity are going to collaborate and turn iPhone handsets into contactless payment devices.
These efforts come on top of Square: that’s the new iPhone-based system that allows merchants to take cards on their iPhones to sell physical goods. There aren’t any published reports yet, but extrapolating from the number of comments filed about the app and the downloads since its release on May 12, one might surmise that as many as 10k people have downloaded the Square application in less than a week’s time. This strikes me as a pretty good start though the real test is how many merchants sign up for the service and start taking charges.
We’re bound to see more efforts to turn the iPhone into a way for consumers to pay or for merchants to accept. And of course Android isn’t going to be far behind.
The big question is whether these new devices could do what the card networks and their issuers haven’t been able to: persuade merchants to spend the bucks on installing readers at the point-of-sale that take contactless. As our readers have heard from us over many years, the great hopes of contactless have thus far been dashed by the fact that merchants don’t see enough interest on the part of cardholders to make the investment and consumers don’t really see enough benefits from paying with contactless to care much about whether a merchant has contactless or not.
There are few factors now to consider in evaluating whether this could change.
First, most people don’t have a smart phone (75 percent don’t) and only a fraction of those have an iPhone. At the moment there probably aren’t enough people who might want to use these phones at the point-of-sale to get merchants interested.
But that could change quickly. iPhone, Android, and other smart phone sales are exploding. A few years from now it is easy to see that well over half of consumers could have a smart phone and many of these phones would be running the kinds of cool apps that were first developed for the iPhone. It is also important to keep in mind that these users may have an intense desire to use their clever apps to pay and contactless may be what they need to do that. Contactless cards didn’t catch on because consumers didn’t care about them (at least not enough). I’d expect smartphone users to be at lot more enthusiastic. It doesn’t take a large fraction of interested users to get merchants to pay attention to them—we think the magic number is around 5-10%.
If anything is going to get contactless ignited this could well be it.
Second, smart phones are so smart that they may not need contactless. This is a point that we’ve been making for a long time. Contactless seemed like the great technology hope many years ago. But life—and technology—has moved on. Square isn’t using contactless. It’s relying on the fact that the iPhone/iPad are wireless devices with interactive screens. We think this is big. Smartphones may well become the dominant way people pay (and in some form perhaps even the major device used by merchants to take payments) at the physical point of sale. But that doesn’t mean they have to be contactless. They may provide some other clever interface. Apple’s teaching us to tap, not wave.
And that’s my guess—businesses that are focused on putting contactless in mobile phones are, oh, so last decade. Entrepreneurs should be focused on what value can be delivered to consumers and merchants using the new technologies that have become available.
This brings us back to Apple. This company has the incentive and opportunity to drive mobile phone payments. In addition to the device itself Apple has two major assets. First, more than 110 million iTunes account holders all of whom have wallets populated with a credit card. That’s a base that vies with PayPal, but unlike PayPal Apple has a great offline delivery mechanism. Second, Apple has thousands of entrepreneurs who are trying to figure out creative ways to incorporate payment functionality and features into iPhones. It is simply unpredictable what they will do. But what is predictable is they will come up with lots of ideas no one at major payment players have thought about. The combination of these two assets - together with the iPhone customer base - can make Apple a significant player in the payments space.
And, Apple has strong incentives to do this. Think about it: if iPhones could become a highly useful tool for paying for things in the physical world that would vastly expand iPhone sales; then there are the sales of related devices like the iPad to merchants. If that’s not enough there’s also the possibility that Apple could control the wallet for these phones and extract a small fee for managing that wallet—as we know in payments small transaction fees times billions of transaction adds up.
Conclusion: if you are in payments you should watch Apple, but don’t think it is all about contactless.
The Web Payment Wars Begin with Visa’s Purchase of CyberSource
Visa’s $2 billion purchase of CyberSource, a leading e-payments provider, may mark the beginning of the wars over who will help merchants and consumers transact over the web.
Where There’s Smoke, There’s Fire?
There’s a lot of speculation about the recent move by Target to abandon its Visa co-branded card in favor of its own private label store version. Some say that it is ‘back to the future’ and the start of a trend that will end up bifurcating the card market: general purpose payment and store-branded cards with little in between. Others say that this is a “one-off” by a big player known for making bold moves in the space (e.g. remember the Target Visa smart Card, which Money magazine cited “about as useful as a Ferrari in a traffic jam?”). Here are a few observations on the topic.
Once upon a time, co-branded cards were the cat’s meow. They were highly attractive to issuers because they accrued higher interchange fees and gave issuers and retailers a way to capture affinity (and monetize it). You could find a card for just about any affinity…from your favorite store to your favorite school to your favorite charity. The theory of the case was that affinity = top of wallet.
As these programs proliferated, it suddenly became harder and harder for retailers to associate increased traffic (code for sales) to the use of these (more expensive) cards. And, now in the age of more stringent card regulations and tightening credit, it has also become more difficult for issuers to justify the economics that come with some of these programs, which sometimes includes revenue guarantees back to the co-branded partner.
So, it’s probably not that surprising that we’re seeing some flux in this whole space at both ends: retailers with the scale of a Target exploring their options, in spite of the receiveables’/risk management issues that plague this category of credit card, and issuers reducing the number of affinity cards that they support (e.g. Chase/Starbucks, Citi/Home Depot).
Target says that it’s done a bunch of research and suggests that it gets more incremental sales from customers who use its own store card, and will now have better economics to create additional incentives (coupons, for example) that will drive more sales, even after accounting for the risk (and also probably after discerning that it does not have to comply with some of the same “income verification” issues at POS that they once feared the CARD act would require.)
But, as they say, for every action, there is an equal and opposite reaction. Target’s announcement comes about two weeks after one made by American Express and Macy’s to issue a co-branded card, and a month or so after Chase and Hyatt announced a co-branded card program. So, it seems hard to make the case that store card programs are going the way of the hula hoop any time soon.
I don’t have any inside baseball information on this, but wonder if Target’s decision wasn’t based on an insight as simple as their consumers used their co-branded cards like a store card. By that I mean, that customers with a Target card, were, by and large, using the card at Target exclusively and not as their “top of wallet” outside of that store. If that is the case, then the economics for them could be far better if they managed their own program. And, if that’s the case, it might also imply that there might be more value created by the more “general” affinity card programs: charity, sports, and travel, where the incentives and the rewards accrue to the underlying passion, with better redemption options - and where there is real evidence of top of wallet placement.
I was talking with someone today about how sometimes the mistake the people make in thinking about innovation is trying to make it too big, when incremental improvements sometimes deliver a more compelling use case and better margins. Maybe those who see a much bigger story here are operating under a similar precept.
What will be interesting to watch is how moves like what Target and others in this space are doing affect loyalty programs and rewards/redemption options more generally. The new realities of the economic environment and financial regulation will force a new layer of decisioning about the one thing that really impacts what everyone in the ecosystem cares about – sales. I think we’ve just started to scratch the surface on the new ideas and implementations that will be used to drive affinity to cards, retailers and card products.
Why the MasterCard and Visa IPOs Were the Most Significant Development of the Last Decade
Why the MasterCard and Visa IPOs Were the Most Significant Development of the Last Decade
Debit Takes the Plastic Throne in the U.S.
Debit Takes the Plastic Throne in the U.S.
What Has a Bigger Head and Longer Tail? Card Issuing
Its head has gotten bigger and the tail longer and skinner. I'm not talking about a scary monster but about the distribution of purchasing volume for the credit and debit card issuers in the United States.
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