“Perhaps mobile payment shouldn't just be thought about from the merchant’s perspective”

Timo’s comment on our mobile payment demo got me thinking about why so much of the innovation that I am excited about is focused on merchants. I can’t seem to get as excited about payment innovation that doesn’t benefit merchants, even though I know that this goes against the mainstream view point which focuses everywhere but on merchants. There’s lots of benefit in exploring an industry blind spot and being one of a very few to fill a need.

Few people focus heavily on making new payment technology much more exciting for merchants, yet without that, it will be difficult to find places that accept payment using contactless cards or mobile phones. It often seems like people are focused on either fiddling around with cool technology (the ‘solution in search of a problem’ syndrome) or they are looking at how technology can benefit themselves as a user (the ‘I would love to be able to leave home without my wallet’ syndrome, which is so self centred that it forgets about the complicated value chain that can prevent stuff from getting to market when a key player doesn’t see what’s in it for him).

Timo’s blog post shows a more nuanced understanding. I was impressed with the comment on using the receipt printer for what some people would consider a blasphemy (“What? Print a paper receipt when you can store the receipt in the phone’s memory?”) Here’s what Timo writes:

“It’s great to see that the transaction is very fast and there is at least basic audible feedback at the point of touching. It’s also interesting to note the integration of a paper receipt into the process. While a mobile wallet can provide payment history and receipts, the paper receipt builds trust in the transaction and its value should not be overlooked.”

Exactly!

Check out Timo’s blogpost on collaborative filtering. We are also working on something in the same space to build automated cross promotions along the lines of “people that shop like you also shop at these other places, for which we hereby offer you a special sample promotion.” But we’re looking at a mass market solution which simply prints the offer on the credit or debit card receipt. As we become comfortable with true mass availability (and consumer adoption) of NFC mobile phone concepts, it will be easy to begin migrating these features to the phone. Until then, paper is cheap, easy, widely understood by everyone and completely integrated within all retailers’ checkout procedures, requiring no re-training of staff or customers. Hard to beat!

Want to hear what merchants themselves are saying about mobile payment? Click here.

“What other innovations do you see coming in addition to targeted promotions?”

This question comes from Bryan Johnson, CEO of Braintree Financial, who recently left a comment on my blog.

I talk a lot about targeted promotions as a powerful way to get merchants excited about the value that banks can offer through new generation payment products like contactless and EMV. Once the infrastructure is a little more mature, lots of other things become possible, which Welcome is already working on.

Imagine for a moment that MasterCard PayPass cards are widely available across the US. Or if you prefer, look at Europe, and imagine that merchants already have a large number of customers using Visa Vpay debit cards, which all have chips. I’ve talked a lot about how a merchant can leverage data hidden within those card products to deliver targeted promotions. What else might happen in addition to targeted promotions?

Every once in a while, usually during the Christmas holiday season, the press gets to talking about return fraud, a huge problem that costs US retailers $16 billion annually and dwarfs bankcard fraud estimated at $3 billion. Over half of returns fraud is attributed to customers “renting” merchandise for free by purchasing a product, for example an expensive camcorder, using it once to record a wedding or graduation, then returning it for a full refund. Click here for prior posts showing how new generation payment products can help retailers address this problem.

Another angle we are exploring is something similar to roaming. When you go to another country with your GSM phone, you usually receive one or two SMS messages from your operator telling you which local operator to switch to for the best service. Why not have something similar when you use your card in a new country? The first time you pay, the receipt could include a roaming message from your bank telling you which bank’s ATM’s are free, or offering you special traveller’s insurance and a local number to call. You don’t want those messages popping up over and over again; the intelligence built into the new payment devices ensures that the message is only delivered once.

We’re looking at lots of other ideas as well, all of which are part of a new body of card features which Gartner calls "Payment Information Value Added Services" (or PIVAS).

“Don’t let the banks kill cash”

Here is a striking example of what happens when retailers don’t see enough difference between cash and cards. This article just appeared on The Retail Bulletin.

"There seems to be a constant campaign by both MasterCard and Visa to decry cash in favour of transactions that will reap extra revenue for the banks," writes the editorialist.

"There is little doubt that these are testing times for retailers, especially with the banks latest wheeze, 'contactless' cards, looking like a potential way for them to print money - not cash of course, but fully loaded pre-paid cards. Be in no doubt that if smaller value cash transactions were to all be replaced by these cards then it could easily result in a rise in retailers' bank charges of as much as 10-to-15 times their current levels.

"If you don't believe me then consider this example of how a small shop could be affected:

"Say the store turns over £5,000 per week and 90 per cent of its sales are in cash then if we take an average transaction of say £10 then this would equate to 450 purchases over the course of the week.

"If the retailer's bank was to charge it 12p for each of these transactions (and in many cases this is likely be much higher) when paid for by a contactless card then the monthly bill from the bank to the retailer would be over £210.

"When you compare this with the cost to the shop of accepting all these transactions in cash form, which could be as low as £20 for the month, then the profitability of the shop is severely affected.”

Visa, MasterCard and the financial institutions that issue credit and debit cards spend lots of energy trying to explain why payment cards are better than cash. But the payment function has become so commoditized that it appears basic and simple today, with very little perceived value over cash. It is really vital to start using the new angle centred on Payment Information Value Added Services. This will put clear water between cash and cards, since cash has no ability to store consumer behaviour data and cannot be used to help merchants improve their marketing activities.

For the full article, see Don't let the banks kill cash.

Mobile payment + targeted coupon delivery in a few hundred milliseconds

Frédéric Mayance sent me this video of a mobile payment demo using Welcome’s NFC applet integrated with a payment application in a mobile phone. Rather than simply doing a basic, boring payment transaction, the demo shows the payment terminal also delivering a targeted promotion to the customer, based on criteria set by the merchant. Enter the amount on the POS terminal, tap the phone and the payment receipt is printed, which now includes an offer that says “Buy one value meal, get a free dessert”.



“At each payment transaction", says Frederic, "the POS analyzes the behaviour data cookies contained in the mobile phone, compares them with the thresholds needed to trigger a promotion or message, and finally updates them according to the details of the transaction. The POS also analyses other data such as the customer’s date of birth and other segmentation criteria. All of this is done in less than 200ms therefore allowing a combined transaction in one single tap.”

Now, some people will wonder why this video shows the coupon being printed on the receipt rather than stored on the mobile phone in a paperless format. Some offers are useful in an electronic format, but in many cases printing a paper offer is much easier for merchants and customers to deal with.

From the merchant’s perspective, no integration is needed with the scanning device. Powerful targeting methods can be used to deliver promotions using a simple payment terminal. The customer has been here before, but it's been a long time since his last visit? Print an offer to encourage the customer to come back again quickly. Trying to get customers to sample other items, not just the basic lunch menu? Print an offer for a different sample item at each visit, rather than giving the same samples out over and over again.

The vast majority of promotional marketing offers are for specific items or groups of items, like the “Buy one value meal, get a free dessert” offer in the video. A paper promotion is treated just like any paper coupon that cashiers are already trained to accept, so there is no impact on the merchant’s procedures or systems. When the coupon is electronic, the process becomes much more complex and requires substantial integration with the retailer’s scanning systems, which is not always a viable option for most retailers. It’s easy to forget that the real benefit to the merchant is the targeting ability that new payment technologies offer, not paper elimination.

The applet used here is based on the one that Welcome uses inside standard contactless cards, so the same infrastructure can be used for both contactless and mobile payments. The added value to merchants makes it much easier to expand contactless and NFC acceptance beyond the very small number of shops that are interested in contactless in its current boring and low value format.

Why cash is cheaper than cards for most merchants

The very excellent Payments News blog reports on a publication by the Federal Reserve Bank of Boston, titled "Consumer Behavior and Payment Choice".

There is a good bit of discussion on the costs of handling cash, which is a huge problem for some companies, for example those in the mass transit industry. However, most merchants in traditional retail businesses see things differently. This quote jumped out at me:

"For the retail grocery sector, Hammonds (FMI) argued that the current structure of interchange fees is an obstacle to wider merchant acceptance of electronic payments. FMI studies of the grocery industry show that today, the relative cost of accepting a cash payment versus a card payment favors cash. He noted that merchants pay bulk deposit fees to their banks for the cost of processing cash deposits. Because these fees have no relationship to the number of cash tenders the merchant receives in a day, these bulk deposit fees represent a fixed cost and impose no marginal cost. In contrast, Hammonds said, individual fees are imposed on each credit or debit card transaction, imparting a marginal cost to the merchant. Thus, abstracting from other costs, card fees pose a higher marginal cost to merchants for each transaction."

So for most merchants, cutting the amount of cash going through the tills will not cut the costs of handling cash. The card industry's promise of reducing cash handling falls flat with most of these types of merchants. Better to focus on all the other benefits that cards provide.

Fresh data reveals a new way for payment brands to dramatically increase market share

Gartner suggests that payment brands need to “introduce Payment Information Value Added Services (PIVAS) to reduce pricing pressure from merchants and convince them of the real value of bank-sponsored retail payment networks.” Welcome now has fresh new statistics that show that these services also help payment brands dramatically increase transaction volume and market share.

We have been building ROI models with our customers for years, primarily concerning the bank’s own card issuer related metrics on cardholder acquisition, card usage, retention, etc. Banks have now begun sharing new data that can help understand how a payment brand can benefit when merchants are excited. The results confirm our premise that a payment brand becomes much more competitive when merchants can use data hidden inside the card’s chip to deliver targeted messages and promotions on the POS receipt. What do merchants think, in a nutshell? “Nine out of ten merchants perceive it positively,” says a Kasikornbank executive in a Cards International interview. “Instant marketing at the POS is the way we convey the concept to the merchants.”

The graph below summarizes the results achieved at specific merchants in various retail categories. The figures show that a card brand’s transaction volume can increase by an average of 75% when merchants use the card as a targeted promotional marketing platform. What drives such a high increase? The fact that merchants find the payment product valuable, of course!



When a scheme’s product is valuable to merchants:

• Merchants encourage customers to use that payment product over others.


• Merchants encourage customers to get a card if they don’t already have one.


• The cards are more attractive to customers, so easier to sell.


• Interchange fees are more easily justified with regards to that payment scheme.


• The product is adopted by more issuers.

When the product is not valuable to merchants:

• They encourage use of cheaper payment methods (such as cash).


• They make no special efforts to promote card acquisition.


• The cards are no different than those of other payment schemes.


• High interchange fees are not justified, and end up getting cut.


• Banks prefer other payment products.

This is fundamental stuff. We’re talking about the engine that drives competition between payment brands. More value for merchants means more value for issuers and a powerful new way for payment brands to compete.

You can find the individual merchant case studies here, all compiled by Pierre Boces.

Most read blog posts this year

The high response to some blog posts gives me a feel for the subjects that readers are most interested in. I started adjusting my thoughts in response to this feedback more than a year ago when I noticed that people responded much more when I wrote “from the gut” on topics like interchange. Those posts have always generated substantial interest, which has caused me to focus more and more on interchange as our industry’s hottest topic.

So far this year, six blog posts have attracted the largest number of readers. Here they are, starting with the most recent.

London contactless conference

As PaymentsNews puts it, my conference presentation takes a skeptical view of contactless payments that simply replace mag stripe functionality and suggests that “the real value is to also enable the card to interact with the merchant's POS to enable promotional marketing in addition to basic purchase functionality.”

Gartner: payment schemes need to offer merchants new promotional marketing capabilities at the POS to reduce pressure on interchange

View a recent Gartner report which suggests that banks need to introduce “payment information value added services” which reduce pressure on interchange by allowing merchants to deliver tailored promotions at the POS, printed at the bottom of credit and debit card receipts.

Will SEPA unleash the genie of spiraling interchange fees?

A strategic analysis which suggests that SEPA could cause interchange fees to increase, contrary to the common belief that more competition will cause fees to drop.

London Contactless Launch: Where Are The Merchants?

Why aren’t merchants excited about contactless? The benefits are not as irresistible as the tremendous hype would have us believe.

Priceless? The cost of credit card merchant restraints

The anomaly of credit card rewards, an issuer loyalty technique funded almost entirely through interchange fees. Merchants finance the issuer’s loyalty programme through higher interchange fees paid on premium and other rewards cards, yet get no additional benefit for accepting those cards.

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

We’re going round and round in circles.

Here’s the mantra: “Merchants receive extraordinary benefits from accepting electronic payments, including increased sales, an expanded customer base and immediate, prompt payment for goods and services.”

But the pitch doesn’t work anymore. Merchants stopped buying it a long time ago. It's time to change it.

The new card business model: merchants pay for everything, cardholders get the perks

An article in Forbes shows how high end premium credit cards depend heavily on the interchange business model (see The World's Most Exclusive Credit Cards). It is surprising to see how the article presents the model in such a simple, clear and transparent way.

“Though lenders aren't going to make much in the way of late fees and interest charges (assuming rich people pay their bills on time and in full, which isn't always the case) they make up for it in the fees they charge to merchants to process transactions. American Express network transactions mean fees of about 4% each purchase, so a $60,000 car charged to a Black Amex could potentially rake in $2,400 in processing revenue. Even if the issuer takes half of that and pays it back to cardholders in the form of outlandish perks, the profits are still good.”

Readers instantly understand that a) cardholders don’t pay much, b) merchants pay lots and c) the issuer gives half of that to the cardholder in the form of perks like points, miles and cashback. I don’t think I have ever seen the complete interchange model described in such a few clear and simple lines.

Looking at American Express’s annual reports, you can see a definite trend that confirms the model. Revenues from merchants are growing and represent almost half of total revenues, while revenues from cardholders are becoming much less relevant.

The Forbes article misses a major angle though. Charge merchants high interchange and give half of that to the cardholder in perks? What a weird, weird business model. American Express gets away with it because so far they have been able to convince merchants of the value of accepting Amex cards. But it is getting harder to demonstrate that value. Visa and MasterCard also offer exclusive high end cards and premium card usage is growing rapidly, creating increasing pressure on American Express, Visa and MasterCard to demonstrate far more value to merchants. This is going to be a very rich area of innovation in the payments space. It is strategic, vital and difficult. But so much more fun and fulfilling than things that we are currently obsessed with, like contactless cards that don't do much more than traditional magnetic stripe cards.