Spending money with a swipe; no-signature policy registers with buyers

I don’t get it.

Here’s the contactless story: “Eliminate the need for a signature so customers can get through lines quickly with a simple tap.”

And here’s the magstripe no-signature-required story: “Eliminate the need for a signature so customers can get through lines quickly with a simple swipe.”

The Kansas City Star just did a piece titled “Spending money with a swipe – No-signature policy registers with buyers”:

With just 30 minutes allowed for lunch, every second counts for Bobby Roberson.

So he often stops at the McDonald’s near his Broadway office and charges it on his Visa card, which thanks to a “no signature required” program is now as fast — or faster — than using cash.

“It’s quick and convenient,” said Roberson, who swiped his card and then rushed off with his $5.76 meal this week.

Visa says that in 2005 its credit and debit cardholders spent $49 billion on small-ticket purchases, up 25 percent from 2004. A recent advertisment by Visa encourages customers to use their cards for low value purchases. The message of the ad? “Money shouldn’t slow you down.” Exactly the same story as contactless, but without expensive contactless chip cards in people's wallets or special card readers that take up space on checkout counters.

The contactless story needs to become stronger. It can’t offer exactly the same benefits as those described in this article. It has to offer more.

Preparing for our biggest and most exciting year ever at Welcome

We’re a high growth company, so next year is always going to be our biggest year ever. But there is “biggest” and there is “BIGGEST”. We can be in high growth mode without actually getting the most out of our potential. That to me is failure. Wasted potential is bad. Keeps me awake at night.

Over the last 3 years, we have sold software licenses for a total of 19.2 million cards in force and 248,000 POS terminals. Very good growth, but still tiny when you look at the global potential for our software.


We are still holding ourselves back. We still haven’t cracked some of the world’s largest markets yet, and we are still very far from our objective of providing a payment platform that is irresistible to all financial institutions everywhere. In many cases, we have simply stumbled onto success. Imagine what our growth would look like if we could replicate successful deployments in a much more industrial manner.

We’ve just finished a week of meetings at our headquarters in Aix-en-Provence, with lots of discussions on strategy and plans for 2007. As we saw in those sessions, making our products absolutely irresistible has been a constant theme over the past 10 years. We are still not there. Many banks find our products very attractive, and we do have lots of examples of banks getting lots of value out of our software. But that’s not nearly the same as irresistible.

Over the next few weeks, we will be focusing heavily on becoming IRRESISTIBLE, as we prepare for our BIGGEST and most exciting year ever.

Traditional rewards programs losing steam, due to redemption hassles (survey)

The other day, I posted a TV ad by a bank that wanted to show customers how easy it is to redeem points at the point of sale using the bank’s new generation credit card. Now a GMAC Mortgage consumer survey confirms the power of that advertising angle. The survey suggests that if you make it easier to redeem rewards, people will value your card more.

Other results of the survey:

Over 50 percent of respondents reported having at least one or two rewards credit cards.

41 percent of these reward cardholders either rarely or never even bother to use their rewards.

Only 13 percent of all respondents in the survey ranked airline miles as valuable.

Something the survey doesn't mention, but which has been raised in other studies, is that customers are jaded and bored of traditional loyalty programs that give back only a tiny fraction of a percentage of their spending. A couple of our bank customers have done surveys which show that customers do indeed like points or cash back programs, but they want to get 5% or more back on all transactions, which is of course economically impossible.

Design better software, eliminate lots of options

In this software design post, titled “Choices = Headaches”, the author describes how Windows supports 15 different ways of turning off a PC ( sleep, hibernate, switch user, logoff, lock, shutdown, etc.) and shows how only one option is really needed, a logoff button which the author calls "b'bye".

“Inevitably, you are going to think of a long list of intelligent, defensible reasons why each of these options is absolutely, positively essential. Don't bother. I know. Each additional choice makes complete sense until you find yourself explaining to your uncle that he has to choose between 15 different ways to turn off a laptop.”

Very pragmatic advice that reminds me of Antoine de Saint-Exupéry's comment, "Perfection is reached not when there's nothing left to add, but when there's nothing left to take away."

Scissors ads

I stumbled on this Discover Card ad on YouTube. It immediately reminded me of one of Akbank's ads in Turkey in 2001, when they launched their Axess card. Both ads depict scissors cutting up credit cards, getting rid of things people don't like about cards, and replacing them with a card which has none of those faults. It is interesting to me that the two companies came to the same result. I'm not sure customers get excited about this message, though.





Akbank did another ad at the same time, showing HOW their Axess card gave more benefits to customers, rather than simply saying it like the two prior ads. It's the old "Show, don't say" principle. Here we see a customer redeeming his Axess loyalty points right at the point of sale. He chooses a new pair of socks, then pays with his points. A very simple, clear and easy to understand benefit that was still new in Turkey in 2001.



The scissors ads for both Discover Card and Axess simply say "we're better" whereas the Axess points redemption ad actually shows it.

Using the same old interchange pitch over and over again, yet hoping for different results

“Insanity is doing the same thing over and over again yet expecting different results.” Does anybody know where this quote comes from?

Peter Madigan, Director of the Electronic Payments Coalition, tries to explain in a letter to the editor why interchange is justified and why merchants are wrong to complain about the fees. He describes interchange fees as “one of the merchant's costs of doing business similar to packaging, marketing, employee salaries, etc.” He argues that “Merchants receive extraordinary benefits from accepting electronic payments, including increased sales, an expanded customer base and immediate, prompt payment for goods and services.”

These are the exact same benefits that have been touted for years, with no change, despite the fact that merchants are not buying the story in the same way anymore. The story has got to change. You can’t simply say the same thing over and over again, louder and louder, keeping your ears closed so as not to hear customer complaints (yes, merchants are customers, they are paying interchange fees, so their complaints need to be heard) and hoping that this time merchants will finally hear and understand that they should simply accept the fees without complaining.

Here is the opposing viewpoint in a press release from the Merchant Payments Coalition: "Processing - the original reason for interchange - comprises only 13 percent of interchange costs. Meanwhile, the largest component of interchange, paying for issuer rewards programs, accounts for 44 percent of interchange costs, but merchants get nothing out of these programs. Given the merchants' lack of perceived value for what they pay, the situation is clearly unstable."

Mr. Madigan should be providing answers to these complaints, rather than repeating the same things over and over again. Card issuers have to give more value to merchants than the few benefits Mr. Madigan mentions. If they don’t, interchange revenue will shrink. Merchants will find ways to get around the fees. If not through litigation, then through steering, surcharging or through alternative payment services or via some other brand new approach that hasn't been invented yet. Mr. Madigan and the companies that fund his organization need to understand that merchants are putting lots of effort into finding ways to get around interchange. It is only a matter of time before they succeed. Ignoring their complaints and sticking to the same old arguments and the same old benefits is not really the best solution.

The very best solution by far, probably the only solution, is to give merchants more benefits than today, much more benefits. Make payment much more valuable to merchants than it is today, because it is clearly not valuable enough to justify high interchange fees that are used primarily to fund card issuer loyalty programs.

Slate reports on Citi's new TV ads

Slate has a regular feature called Ad Report Card which analyses recent advertisements and quite often blasts credit card ads. The most recent article looks at ads for Citi's rewards program and gives a mixed review. Check out the column here and the ads here.

Restaurant sign: 3% surcharge for credit card purchases

This picture was sent to me by Alan Hale in Sydney. The restaurant doesn't have different surcharge rates based on the card brand, unlike the picture of this store in Denmark. Just a single flat rate of 3% if you choose to pay with a credit card.

Return fraud is in the news again; banks can build lots of goodwill by addressing it

Return fraud is a growing problem which first made it into public news last Christmas. Here it is again, in a Washington Post article titled Return Fraud Earns Retailers' Wrath.

I write about this problem because:

a) it is huge, costing retailers 3 to 5 times as much as bank losses due to credit and debit card fraud,

b) a credit card is almost always used in the process of returning goods, and

c) if card issuers can help retailers solve this problem in a simple, convenient and inexpensive way (unlike the current solutions described in the article mentioned above), they will be making payment cards much more attractive and valuable to retailers, thereby justifying interchange fees in the process.

See my prior posts on how this can be done:
Returns fraud
Try this: increase profits by pampering best customers … and firing undesirable customers

You can also click on Return Fraud in the CATEGORIES section on the right of this page.

Does Wall Street understand the risk of severe interchange cuts?

MasterCard Europe just announced that they will lower debit-card interchange fees by 60% in response to pressure from European Union regulators (see the Wall Street Journal and Forbes).

The news had no impact on MasterCard’s share price. Wall Street loves the stock.

Analysts keep warning investors that interchange fees could drop substantially, but the stock keeps rising. Check out this CNNMoney.com article from last July. A Credit Suisse analyst said that concerns about the merchant lawsuits could lead to a reduction in interchange fees for big card issuers. The article should have also made it clear that if banks get less interchange on MasterCard branded products, many would switch their cards over to higher interchange brands like American Express, a trend that is already happening in lots of places. A Goldman Sachs analyst said that merchant dissatisfaction has prompted MasterCard to give more rebates to merchants, as a way to reduce interchange fees without impacting banks' revenues. MasterCard's merchant rebates have increased by 64 percent in 2005, according to the analyst.

Still, the stock keeps rising. From around $40 a share last June to almost $100 today. Investors are valuing MasterCard at a P/E multiple of around 30, much higher than American Express's P/E valuation of 19.

Do investors understand the risk of dramatic interchange fee cuts and are they factoring it into the share price already?

How US banks can use contactless to compete more effectively against alternative payment provider Pay By Touch

Biometric payments company Pay By Touch yesterday announced that it has acquired retail loyalty programme operator S&H Solutions and its parent company S&H Greenpoints for over US$100 million in cash and stock. Cardline reports that “the combination gives Pay By Touch an edge when competing against technology like contactless payments.”

According to the press release, “Many years and more than $200 million dollars have gone into developing the company's real-time marketing technologies, including a highly sophisticated analytical engine that enables retailers to deliver one- to-one consumer messages in-store through multiple proprietary platforms.”

The S&H system requires a dedicated server installed within each store. The server manages behaviour data related to a customer’s transactions at that store, so that messages can be targeted based for example on the number of visits or dollars spent.

US banks have a potentially much more powerful solution with the contactless cards that they are issuing. Contactless cards are chip cards, so they can do much more than traditional magnetic stripe cards. Check out my prior post on how Welcome manages the same type of data within each card’s contactless chip as Pay By Touch does on servers installed in each store.

With contactless cards, there is no need for an in-store server. Each card carries all the necessary data. Plus, promotions can be across multiple stores. “Eat at any San Francisco McDonald’s restaurant 3 times in the same week and get a free meal.” With Pay By Touch’s solution, they would have to convince McDonald’s to install a server in each store (a major challenge, which is probably why S&H is only installed in supermarkets), and they would be limited to single store promotions. “Eat 3 times this week in this restaurant and get a free meal.”

Right now, US card issuers are entirely missing the point. They are touting the speed benefits of contactless, something which is easily replicated with traditional magstripe cards where all you need to do is eliminate the need for a signature. Worse, Pay By Touch is possibly even faster than contactless because the customer doesn’t have to pull a card out at all. So the whole speed angle actually plays into Pay By Touch’s strengths and works against banks.

No credit, no problem - businesses find benefits of not accepting credit cards

More and more newspapers seem to be following suggestions from merchant associations, and are now telling people to pay with cash so as to avoid the high cost of plastic. This article was published in a local newspaper in Utica, New York - The Observer-Dispatch. Click here for the full article.

A few quotes:

"Many consumers don't realize that businesses get charged between a quarter of a percent and five percent on each credit card transaction through what is known as an interchange fee."

"Some business owners have found a way to work around the interchange fees by accepting credit cards with the lowest fees and refusing to accept cards with customer incentives, such as cash back."

"Those incentives are paid by the merchants. A merchant can also refuse to take a card that has an incentive on it."

Notice how they are educating customers, encouraging them to drop their rewards and cash back cards, informing them that those cards cost merchants more. Using interchange revenue to finance bank loyalty programs (rather than things that directly benefit merchants) is probably the most fundamentally flawed part of the whole interchange story. It doesn't make sense. You have to give the merchant value in exchange for that money.

Welcome achieves top quality rating

Congratulations to Vaibhav and his team, as well as the many people across the organization that worked on achieving the CMMI appraisal. The press release is here, and the interview with Vaibhav is here.

For a list of companies that have also achieved CMMI ratings, check out the Carnegie Mellon Software Engineering Institute web site here. Although the list is long, very few companies have achieved the same level of appraisal as Welcome. Just 5 in Singapore (where Welcome’s R&D and software development activities are based) and 13 in France.

Welcome merchant storyboard

This storyboard is for a video showing how merchants can get more value out of new generation credit and debit cards. Welcome's customers can use the storyboard with their advertising agencies as they prepare merchant facing marketing material. It gives payment brands, card issuers and acquirers much more to talk to merchants about.

The video shows how merchants all engage in the same type of promotional marketing techniques which are not effective, akin to spinning plates and doing handstands to attract customers. It shows how merchants can leverage the power of XLS enabled credit and debit cards to really enhance their promotional marketing activities.

The storyboard is designed to be used in conjunction with another ad which targets consumers (see prior post here).

Welcome consumer TV ad storyboard

This is a sample advertisment storyboard to get creative juices flowing. We wanted to show how consumers can experience the new, exciting way to pay, versus the old, boring way to pay. After watching lots of ads from banks that have launched new card products using our software, we wanted to distill all the various ideas into something resembling a best practices ad.

We chose to stress the comparison between traditional old cards and new cards which give cardholders more. We focus on how the customer gets more value instantly, at the moment of purchase. And we focus on the fresh, new angle of getting special promotions when you pay with your card, promotions which are always more valuable and more exciting than a few points, miles or cash back.

Banks that use XLS can share this storyboard with their advertising agencies to help in the brainstorming process. I will be posting a similar storyboard that looks at this angle from the merchant's perspective, as a tool to help create marketing material to recruit merchant partners.