Forum Monétique 2008

Voici la présentation de mon intervention hier à Paris, au Forum Monétique 2008.

Le titre: Comment valoriser le paiement auprès des commerçants? Peut-on renverser les tendances actuelles?

SEPA, co-branding, lobbys de commerçants, consolidation des processeurs,… autant d’initiatives et de pressions qui mènent à la baisse des revenus des banques acquéreurs. Quelles sont donc les initiatives visant à développer une stratégie de valeur ajoutée pour les commerçants? Les pilotes sans contact ou NFC répondent-ils à l’attente des commerçants et permettent-ils de renverser les tendances actuelles? Comment tirer plus de valeur de la transaction de paiement et réduire la pression sur les prix?

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Free payment processing

Google has been offering free payment processing to Internet merchants since they launched Google Checkout almost two years ago. Merchants get free credit and debit card processing when they also use Google Adwords, a direct marketing service that displays paying advertiser’s names alongside search results. Could a marketing subsidized payment processing model work for physical face-to-face transactions as well? Could an acquirer offer free payment processing? Not just cheap and very low margin services (where they’re headed to already, due to pressure on acquirer fees and interchange litigation around the world) but free, gratis, without charge.

Wired Magazine’s cover story this month is titled Free! Why $0.00 is the future of business. “A decade and a half into the great online experiment, the last debates over free versus pay online are ending,” writes editor-in-chief Chris Anderson. “In 2007 The New York Times went free; this year, so will much of The Wall Street Journal. Once a marketing gimmick, free has emerged as a full-fledged economy. Offering free music proved successful for Radiohead, Trent Reznor of Nine Inch Nails, and a swarm of other bands on MySpace that grasped the audience-building merits of zero. The fastest-growing parts of the gaming industry are ad-supported casual games online and free-to-try massively multiplayer online games. Virtually everything Google does is free to consumers, from Gmail to Picasa to GOOG-411.”

The article has a good bit of the hyperbola typical of Wired, but it is nevertheless an interesting piece on how the practice of shifting the cost of one thing on to another (i.e. cross-subsidies) has matured at the same time that unit costs of technology continue dropping rapidly. It pretty much comes down to giving things away in exchange for advertising and marketing revenue. That’s echoed by Kevin Kelly, another Internet guru who has also written about the economics of free: “Ads are widely regarded as the solution, almost the ONLY solution, to the paradox of the free. Most of the suggested solutions I've seen for overcoming the free involve some measure of advertising.”

Readers of my blog have heard me rant ad nauseum about making payment more valuable for merchants so that we can slow down commoditization and protect payment fees, including interchange. Is my angle all wrong? I’m wondering now if there is not a more powerful way to accomplish the same thing, but from a very different angle. Instead of resisting downward pressure on payment fees, why not learn from Google and speed the process along? Why not eliminate the fees and make money instead through marketing and advertising services built into the payment transaction? At first glance, this may be impossible for many acquirers to imagine, but when you look a bit deeper at how Google does it, the idea is not so far fetched and the financials work out to the acquirer’s advantage. Which is of course why Google is doing this.

How does Google’s free payment processing model work? For every dollar merchants spend advertising on Google each month, they can process ten dollars in sales the following month for free. Merchants normally pay around twenty-five cents to process ten dollars of sales, so merchants are in effect getting a twenty-five cent discount on ever dollar spent on Google Adwords. Google hopes that by being a trusted intermediary, they can reduce the number of purchase transactions that are abandoned when customers are uncomfortable giving up their credit card information to a merchant. In turn, this would result in more shoppers buying from Google’s AdWords clients and more merchants spending marketing dollars on AdWords.

A Deloitte study shows how Google views the entire shopping experience as a continuum from the first search through to the final purchase, which enables Google to envelop the payment transaction within the shopping context. “Because search-to-purchase firms make their money primarily from merchant advertising fees, rather than on transactions, the potential profits are much greater. The profit margin for solving the merchants’ commerce problems and delivering new customers and/or closed sales is two to three times that of the payments transaction fee. Data shows merchants will pay between 7-9% for delivery of a sale vs. 2% for merely processing the payment.”

How would this look in the physical world? Imagine an acquirer offering merchants the following, “For every dollar you spend delivering targeted promotions when a credit or debit card is used in your stores, you can enjoy free processing on ten dollars in sales.” Let’s look at the impact on the acquirer’s margins. Take the same one-dollar paid by the merchant for targeted marketing services, and the same twenty-five cents of processing fees waived on a ten-dollar transaction. In this scenario, the acquirer earns seventy-five cents on that ten-dollar transaction instead of twenty-five. Three times more revenue. Since normal acquiring fees are primarily made up of interchange that goes to the issuing bank, the impact on net margins is much higher. Some of the numbers I’ve been playing with show that an acquirer’s net margins can be five to eight times greater with free payment processing. So this model is even more lucrative for a traditional acquirer working with mainstream physical merchants than it is for Google with Internet merchants.

Things are not all rosy for Google Checkout. Small merchants might not worry a whole lot about letting Google manage the relationship with their customers, but large Internet merchants like Amazon.com and eBay want to have a direct relationship with customers and don’t want Google in the middle (to complicate matters, eBay is a key Google advertising account, yet refuses to offer Google Checkout, preferring instead its own competing payment service, PayPal). Acquirer banks don’t face these challenges in the physical space, where merchants almost never know the customer anyway, unless a loyalty card is used. The whole disintermediation issue is avoided.

One big challenge that acquirers do face is the ability to think differently and to position themselves in the marketing world. Most acquirers are tired of playing in a low margin, commoditized market and many have successfully added new services that generate more profitable revenues from merchants. So they are already going in this direction. It could be a matter of time before an acquirer decides that it would be better to provide payment processing services for free and make money elsewhere, rather than competing with cheaper and cheaper providers.

“There is a huge difference between cheap and free,” Says Wired’s Chris Anderson. “Give a product away and it can go viral. Charge a single cent for it and you're in an entirely different business, one of clawing and scratching for every customer.”

Hmm. Clawing and scratching for every customer. Sounds like today’s payment processing world.

Google seems to want to move into the physical world too, starting with Google Maps on petrol pumps that provide drivers information on hotels, restaurants and other local merchants, plus coupons to get you to go to those merchants. Will Google want to close the loop with a free payment service for those physical merchants? (play scary movie music here)

How much will merchants spend on payment information value added services?

PIVAS – Payment Information Value Added Services: A platform that lets retailers deliver targeted promotions at the POS, via credit or debit card receipts (lots more here).

A few of my prior blog posts provide some insight into the value of marketing rich payment services, mainly at a macro level. For example, there’s the Deloitte study that shows that merchants will pay 7-9% for a full payment service which delivers sales, versus 2% interchange for payment alone. Also, we know that several promotional marketing tactics frequently used by merchants (direct marketing, in-store advertising, couponing, games, sampling…) represent a combined industry of over $100 billion in the US alone.

Another angle is to look at the cost to an individual merchant of delivering printed promotions, special deals or messages to customers. I’ve pulled a few examples from a Morgan Stanley report. See other examples here, here and here. Costs are generally stated in CPM, or cost per thousand, but I have stated them in costs per individual impression.

Mass distribution methods generally cost advertisers a few cents per impression. This includes newspaper advertisements (2¢ per impression), free standing inserts, i.e. coupons in the Sunday paper (less than 1¢), shared direct mail methods such as coupon books (4¢). But how about targeted communications?

For most retailers, the only way to target distribution is through direct marketing, database rentals and postal mailings. At 90¢ per impression or more, most merchants have to use targeted distribution channels very sparingly, especially in low value sectors like quick service restaurants, supermarkets, convenience stores and petrol stations.

Printing targeted promotions at the bottom of POS receipts is obviously much less expensive. It can help merchants see more value in bank owned payment networks. And it can help attract new revenue streams to banks (as I was writing this piece, I received a report that merchants are paying one of Welcome’s bank customers 5¢ to 30¢ per transaction - plus the normal campaign management and setup fees ranging from thousands of euros per year to tens of thousands … but that’s another story for another blog post).

There is another, similar, POS based distribution method, Catalina Marketing’s checkout coupon service, which I didn’t mention earlier because it is almost exclusively paid by consumer goods manufacturers and limited to supermarkets. Companies like Procter & Gamble pay around 7.5¢ per printed impression, and even more when offering a coupon to buyers of the competitor’s product.

Merchants will pay 7-9% for a full payment service which delivers sales vs. 2% interchange for payment alone

Merchants complain about paying 2% for payment processing, most of which is interchange, yet, according to a new report by Deloitte, they are willing to pay 7-9% to companies like Google that envelop the e-commerce payment transaction within the online shopping context and actually deliver sales. The study looks at online purchases only, but I am excited about how the same ideas can be applied to real-world purchases. Last week, at Welcome’s 2007 User Summit in Dubai, several banks gave presentations which showed how they were achieving impressive results by enveloping the payment transaction within an overall service that solves real problems for merchants (like identifying and attracting infrequent customers and encouraging them to spend more, which is a really big problem). These banks are already involved in real-world implementations of the ideas promoted by Deloitte in the online space.

Deloitte describes “search-to-purchase” as a new business model which views the entire shopping experience as a continuum from the first search through to the final purchase. Payment is only a small part of the overall experience (see the PaymentsNews post, “Is the Retail Payments Industry Headed for Disruption?”).

“Merchants consistently told us that their biggest commerce challenge, one for which they would gladly pay, is finding new customers. Innovations by search-to-purchase players are solving this valuable job. An unintended consequence of those innovations is an increasing merchant perception that the convenience of retail payments at point-of-sale is no longer a “hard” or valuable job—consequently, the merchants would apply pressure to pay. By contrast, merchants equate the costs associated with search-based advertising with that of a commission-based salesperson—one who works 365 days a year and brings in new customers constantly without ever calling in sick. For that level of closed sales, merchants will gladly pay more commission. Solving this difficult, valuable job is at the heart of search-to-purchase’s disruptive potential.”

“The profit margin for solving the merchants’ commerce problems and delivering new customers and/or closed sales is two to three times that of the payments transaction fee. Data shows merchants will pay between 7-9% for delivery of a sale vs. 2% for merely processing the payment.”

Deloitte provides some interesting advice to traditional payment industry players that want to avoid getting written out of the emerging e-commerce business model.

“The first step in taking advantage of the emergent ecommerce buying model is a change in perspective. The online payment experience must be viewed through a different lens. In order to obtain a larger share of the 7%-9% merchants will pay for a sale, retail payments companies need to make significant adjustments. They must think beyond the transaction itself—they should be asking themselves hard questions and looking at their own business models to see where they have a strategic advantage and how it could be leveraged in the online platform. Retail payments companies should also consider restructuring bank/merchant relationships to help subsidize advertising, further strengthening the bank-merchant relationship and preventing disintermediation.”

Deloitte couldn’t resist some crystal ball gazing. They estimate that online purchases will skyrocket from 9% of retail commerce to more than 30% within just ten years. These figures have always been way off and it is surprising to still see consultants make such bold statements. (On another note, I just read an excellent book that severely discredits MBA and Nobel-prize credentialed experts who make their living from economic forecasting. It’s called The Black Swan, by Nassim Nicholas Talib. After reading the book, you look at things differently. People that make bold economic forecasts begin to appear silly and incompetent).

At best, consultants and analysts can sometimes provide a qualitative glimpse of a potential future. Where they shine the brightest, however, is their analysis of current conditions, and that part of the Deloitte study is quite good. I almost ignored the entire report when I read the 30% forecast, but I stuck with it and am glad I did. Whether online purchases are 9% or 30% of total retail sales doesn’t matter much really, since I am interested in applying the ideas to the much larger market of real-world purchases. Whichever way you look at it, real world purchases will remain much bigger for a long time to come. Let’s fix some real world problems and make payment much more attractive for merchants, so that the 2% they pay in interchange seems like peanuts compared to advertising and promotional marketing budgets.

Actually, come to think of it, we’re just going back to the roots of the payment card industry. When credit cards were first introduced, customers were able to buy things that they might not have bought without a card. Credit card companies were essentially delivering sales to merchants. Somewhere along the line, the culture of solving problems for merchants was lost and the basic payment function became a low value (but expensive) commodity.

Here are a few prior posts on ways that payment cards can be used to help merchants attract and excite occasional customers:

How focusing on acquisition features (rather than loyalty) can lead to better protection of interchange fees

Finally, an ad about new ways to protect interchange!

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

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

ONLY 10 MORE DAYS to view this valuable Gartner report for free! Then we have to take it off our server.

Gartner has recently published a report, titled “Banks' Retail Payment Operations at a Tipping Point”, which we found so interesting that we obtained the right for you to view it.

Here are some of the report’s recommendations for banks:

“Introduce PIVAS [Payment Information Value-Added Services] to reduce pricing pressure from merchants and initiate a virtuous circle for retail payment operations. Merchants must actively support card programs and emerging payment solutions, but they are challenging the pricing model for the interchange. It's time to introduce services such as PIVAS to convince them of the real value of bank-sponsored retail payment networks.”

“An EMV-compliant card would store cardholders' shopping patterns on the chip (for example, how many times the cardholder has used a card at a specific retailer or whether the person has shopped at that retailer).”

“As a result, the retailer will have a platform to deliver tailored promotions at the POS that account for its marketing strategy and the activity and preferences of the customer. The promotion or message can be delivered via a POS receipt.”

Click here to view the report now.

Finally, an ad about new ways to protect interchange!

This ad is going into the EFMA conference guide for a Paris event at which I’ll be speaking next Tuesday.

This is probably the first advertisement in the world that specifically addresses interchange protection through new, merchant-centric payment features. As far as I have seen, most other interchange related ads have focused on litigation and stressing the unjustness of merchant complaints. I expect that several years from now, lots of companies are going to be promoting features, products and services that also protect interchange. But for now, this may possibly be the very first advertisement of its kind. It seems clear and simple now, but it has taken several years to get the message into this format. And it can still be much more powerful.

In the past, Welcome has mostly worked with individual banks that use our software in a closed loop issuer-acquirer network that helps the bank enhance its relationships with both cardholders and merchants. In that environment, the value proposition and ROI are based on protecting the bank’s fees, recruiting cardholders and merchants faster and easier (and at lower cost) and encouraging usage.

Today, we are working more and more at the payment scheme level, helping to make payment brands more attractive to merchants. The value proposition and ROI now are based on protecting interchange fees, recruiting issuers and acquirers faster and easier (and at lower cost) and encouraging usage.

The positioning described in this ad is a quantum leap forward.

For a more complete understanding of where this all leads to, check out the presentation on what a new generation Maestro card would look like (see Making MasterCard’s Maestro the preferred debit brand in post-SEPA Europe).

How focusing on acquisition features (rather than loyalty) can lead to better protection of interchange fees

Ron Shevlin attacks the fundamental concept underlying customer loyalty, the common belief that “it costs X times more to acquire a customer than to retain one”. After you read his blog post you come back to me and say, “OK, Aneace, so loyalty might be a bit overrated. What in the world does that have to do with interchange?”

The tendency to stress loyalty tactics over acquisition could cause the industry to sell itself short when designing payment information value added features which help to justify interchange fees. Acquisition tactics are often much more valuable to merchants, and, as a major side benefit, it turns out that they function best on general purpose credit or debit cards, rather than store cards, so merchants need banks more.

Here are a few simple examples using payment data hidden in the card to trigger receipt promotions. They are all based on attracting and exciting occasional customers, rather than rewarding loyal customers.

Recognizing a customer who has not been to a store in a long time and being able to print a special offer on the credit or debit card receipt is simple, cheap and irresistible for almost any merchant. All that’s needed is a simple bank payment terminal. No need for a CRM system, database tools or technical expertise. The feature is simply built into the standard payment transaction. It is a valuable feature that is uniquely available through general purpose credit or debit cards, not store loyalty cards or private label payment cards (remember, this customer is not a frequent customer, so he is not going to pull out his loyalty card).



You can’t call the special offer a reward because the merchant is not rewarding any type of desired behaviour. You can only refer to it as a promotional offer. Calling it a reward is bizarre.

Another example is sampling, a promotional marketing tactic which is almost as big as loyalty. Promo Magazine says that “product sampling is the most influential in-store marketing method when it comes to influencing consumer purchase decisions.” General purpose cards can help make sampling even more effective. Behaviour data stored in new generation credit or debit cards can help merchants avoid giving the same samples to everyone over and over again. Instead, merchants can give customers a different surprise sample at each visit, encouraging them to try many different products.


The receipt acts primarily as a trigger to alert the clerk to hand out a specific sample pack. The trigger could be on the receipt, as in this example, or it could be a flashing display that the clerk sees. The idea is to use the payment transaction to help enhance and improve the marketing activities already happening at the point of sale.

Let's throw in a twist. This payment feature could allow merchants to offer higher value samples, for example only at a customer’s 4th visit in a given period, which is much more effective than giving the sample to anyone that walks in the store. Yes I know, this little twist looks kind of like loyalty, but it’s not, because the merchant is not saying “shop 4 times and you get this big sample”. Calling it loyalty is confusing and diminishes the value of simply making product sampling more effective.

Games are another promotional marketing tactic almost as big as loyalty. Data in the payment card can be used to create simple game promotions that appear at the bottom of credit or debit card receipts, perhaps as part of an advertised promotion, or maybe just a surprise that pops up on the receipt.


Building these types of features into a single bank’s cards and POS terminals, in a closed loop system, helps to protect the bank’s merchant fees and brand value. This has been Welcome’s core capability for many years. Now, building the same features into a scheme payment product makes the product more attractive to merchants and therefore helps to justify the interchange rates attached to that product. This is Welcome’s new strategic direction.

“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.

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.

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

Gartner has recently published a report, titled “Banks' Retail Payment Operations at a Tipping Point”, which we found so interesting that we obtained the right for you to view it.

Here are some of the report’s recommendations for banks:

“Introduce PIVAS [Payment Information Value-Added Services] to reduce pricing pressure from merchants and initiate a virtuous circle for retail payment operations. Merchants must actively support card programs and emerging payment solutions, but they are challenging the pricing model for the interchange. It's time to introduce services such as PIVAS to convince them of the real value of bank-sponsored retail payment networks.”

“An EMV-compliant card would store cardholders' shopping patterns on the chip (for example, how many times the cardholder has used a card at a specific retailer or whether the person has shopped at that retailer).”

“As a result, the retailer will have a platform to deliver tailored promotions at the POS that account for its marketing strategy and the activity and preferences of the customer. The promotion or message can be delivered via a POS receipt.”

Click here to view the report now.