Internet banking

Chris Skinner was in Hong Kong at the Financial Cards & Payments Asia conference which I wrote about earlier. Chris just did a very good post on a presentation by eBank Japan. Check out Internet banking ... but not as we know it.

"An $8 billion in assets bank, with almost 3 million customer accounts, operated by just 195 staff. 195 people in total that is. 15,000 accounts per staff member. How do they do it?"

How will banks meet the challenges of innovations in retail payments?

I chaired a conference this week in Hong Kong (Financial Cards & Payments Asia) and gave the keynote address, which you can download here.

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Many thanks to Dave Birch for giving me the idea of opening the talk with a 1964 magazine advertisement for Sheaffer pens. The ad shows a futuristic key ring that projects a holographic image of a credit card. It even shows 4 tiny buttons which could be used to enter a PIN code on the ring. The really amazing thing though is that the ad demonstrates a blind spot that we humans have when it comes to innovation: Shaeffer being a pen company, they couldn’t imagine a future in which pens would not be used to sign credit card receipts.

Mobile junk mail from McDonald's

Dave Birch has done an insightful post on contactless, mobile payments and value added services.

He points out that contactless has marginal utility in the US, where all transactions are on-line anyway, which is something I have argued repeatedly as well. Dave and many other people that I have spoken to, feel that contactless is just a transition technology paving the way for mobile payments. If contactless results in lots of terminals being equipped with NFC readers, then indeed this could open the way for mobile payments. But if contactless never takes off in a significant way, then it might not be a mobile NFC facilitator after all.

The best part of the post describes how McDonald's is testing a mobile application that lets customers order their meal on their phone, tap it against a reader to place the order, then receive an e-receipt. McDonald's plans to use the application to send coupons to customers, targeted marketing obviously being the main reason they would be doing this. But apparently customers are resisting this, and avoiding technologies that lead to unwanted mobile marketing messages.

The conventional solution is simple: request the customer's permission. But I don't like conventional wisdom or conventional solutions. They're too boring and easy and rarely result in fantastic new products and services. In this case, permission based marketing would result in a massive number of customers opting out, making the solution much less useful to McDonald's. It would be simpler to trigger a paper coupon on the receipt printer, targeted based on whatever criteria McDonald's wants. A receipt in many cases is still going to be printed. In many countries it is even obligatory, even if it is in addition to an e-receipt. Since the customer usually expects a piece of paper anyway, this is non-obtrusive. If you don't want the coupon, just toss away the receipt, like you do today.

UPDATE: Click here for more information on the McDonald's mobile marketing solution.

“What have you done for me lately?” (Part 2)

(Part 1 is here)

Last week the Boston Globe ran an op-ed piece titled “Leave the ‘plastic’ alone”, essentially saying that merchants should stop complaining about the cost of interchange because payment systems today are so much better than they were 40 years ago. This is a really poor way to protect interchange.

The old days were indeed a big hassle for merchants:

“First, the customer's account number had to be checked against the latest bulletin of stolen-card numbers mailed by the credit-card companies. For purchases above a certain amount, the company had to be called for authorization. If the charge was authorized, a confirmation number was provided, which had to be recorded; the card was then run through the manual imprinter (ka-CHUNK), and the charge slip filled out and presented for the customer's signature. Finally the slip's three copies had to be separated, with one carefully saved for eventual deposit in the bank.”

A Boston Globe reader added these comments to the article:

“Imagine 1960. A hypothetical meeting of owners and CEOs representing millions of businesses is held. A payment option is announced that is faster, improves productivity, and enables virtually all store shoppers to become buyers - and to buy more and more often - with no merchant credit risk. Gasps are heard when the audience is told that 1 billion consumers worldwide could also make a purchase by mail or telephone. The cost: just a 2 percent discount to the face value of any sale. No reasonable mind could doubt that all in attendance at that hypothetical gathering would have jumped at this prospect, and would have seen the cost for acceptance as a bargain.”

The payments industry is definitely much better today, but so are lots of other information based industries, and their costs have all gone down in relation to volume, speed, capacity, etc. Taking this line of reasoning, going back in time a whopping 40 years, can only backfire on the payments industry. The hassles described in the op-ed piece were solved a quarter century ago when electronic payment terminals became widely available. That was the big jump, the big improvement, the WOW! that got lots of merchants excited about accepting cards. Since then, merchants spend much more on payment and have clearly not seen any real improvements substantial enough to increase the value of card acceptance. Otherwise, the Boston Globe article would be focusing on those more recent improvements and the more recent problems that have been addressed.

The op-ed piece concludes with this:

“But Visa and MasterCard are hardly monopolies, and merchants are not without other options. No one is forced to accept Visa and MasterCard; retailers are free to take only American Express or Discover, which operate on a different model and don't charge interchange fees. Online vendors have even more choices, such as PayPal or Google Checkout. And, of course, there are the old standbys: cash and checks.”

Right. So it’s like, if you don’t like my fees, stop accepting my cards. All or nothing. Take it or leave it. (The comment on American Express and Discover is revealing too - both companies do indeed charge merchants a fee for each transaction, which, from any merchant's perspective, are completely identical to interchange fees).

This is not helpful. The payments industry needs more positive and constructive people who are customer (i.e. merchant) focused and who can promote new value creation instead of all this stuff.

We certainly don’t need regulators setting interchange rates like they did in Australia, but with these arguments we’re just showing them that the industry is happy enough offering essentially the same value as a quarter century ago, for much more money.

When to be a first mover? When to be a fast follower?

Day 2 at the Digital Money Forum in London.

In his intro today, Dave Birch made a comment that I found interesting. Many of us know that Western Union passed up on the telephone patent in 1871, saying that there was no money to be made in the technology. Of course, it eventually became huge, but only much later, in 1929. So all those guys in charge of Western Union in 1871 were absolutely right not to put any money into telephones in 1871. The technology finally took off long after those men were long gone and retired.

This is in line with a popular quote a few years ago that's been overused (why am I using it again?), "You can recognize a pioneer easily; he's the one with all the arrows in his back."

Innovation, first mover advantage, fast follower, etc. -Sigh- When do you decide to move aggressively, and when do you decide to wait? From what I have experienced, you don't usually have a choice. You are forced to move forward aggressively, even foolishly (as viewed by others) into new technology and business models when you are backed into a corner and can't get into the market through mainstream channels. Once you're in though, you are almost forced to switch tactics and adopt Western Union's mindset.

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)

Justifying interchange fees by helping retailers fight return fraud

The holiday shopping season is here. Return fraud is in the news again, right on time. And it’s getting worse. Retailers know what I'm talking about but many people in the payment industry and banking community might not. It's not a problem that banks face. But I talk about this because I believe that payment networks are ideally positioned to help retailers address this problem. Why should the networks do this? To help justify their interchange fees.

Fraudulent returns are expected to total $3.7 billion this holiday season, according to estimates from the National Retail Federation. For the year, retailers will lose about $10.8 billion to return fraud.

Over half of return fraud is attributed to the practice of "wardrobing”, where someone purchases a product, wears it and then returns it to the store for a refund. The practice, according to the NRF study, is on the rise.

Some retailers now require a picture ID when customers return merchandise, so clerks can check a database for possible abuse. This is the only solution available today. It is inconvenient and obtrusive to customers, the vast majority of whom return items in good faith. According to the NRF study, over 90% of returns are perfectly honest and legitimate.

Instead, why not take advantage of payment data to identify potential abuse? A solution which leverages payment data at the POS, with no need for the cost and effort of operating a database and authorization service, and no need for a picture ID, would directly benefit merchants.

I believe that the new competitive landscape (i.e. Visa and MasterCard as publicly held companies accountable to shareholders, competing more fiercely than ever before to get their brands on cards, with interchange being one of the top criteria for banks to choose one brand over another) will cause the payment brands to develop all sorts of new payment features which directly benefit merchants. When people at Visa and MasterCard start asking the question, "What can I do to make my brand much more attractive to merchants, so that they agree to my interchange fees and don't surcharge?" the types of answers that can emerge are endless. My blog has looked extensively at one angle, promotional marketing, which is Welcome's background. Return fraud is another, complementary answer to exactly the same question. There will undoubtedly be others. Other companies like Welcome will emerge with their own specific answers to the question, coming from their own specific areas of expertise.

Welcome is developing new technology that uses data stored within EMV chip cards to automatically authorize valid returns and refunds. It has no impact on a bank’s existing authorization systems, since it only requires data stored within the EMV chip. It simply requires the clerk to key in the original purchase date and the amount. In most cases, the refund is authorized instantly, making it more convenient and less expensive than the ID and database methods that merchants are currently putting in place. We are also adapting the technology to work with traditional magnetic stripe cards so that payment networks can leverage the existing cards already in people’s wallets.

See my prior posts on return fraud here.

Protecting interchange fees through marketing solutions

The following text is a combination of several recent blog posts, expanded with additional information on privacy issues. It was published in the latest issue of the E-Finance & Payments Law & Policy newsletter.

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Working with banks and payment schemes across the globe, Welcome has developed a new card applet for payment schemes, called SPICED, which makes it possible for merchants to deliver targeted promotions at the bottom of credit or debit card receipts. SPICED is designed to make payment scheme brands more attractive and useful to merchants, so that brand acceptance and usage are encouraged and pressure on interchange fees is reduced. When a payment brand offers valuable features to merchants, there is a higher chance that merchants will encourage customers to use that brand over others, interchange fees are easier to justify, and the brand becomes more attractive to banks keen on receiving more interchange.

Statements from regulators indicate that their focus is less on abolishing interchange than on exploring ways to deal with the variations in levels of fees in different markets and for different card products. EU competition commissioner Neelie Kroes recently said that while the commission would not abolish interchange fees it would continue to assess the legality of current fee levels. The solution usually evoked consists of some form of leveling of fees across the EU, through regulation which would result in payment schemes all adopting the same legislated fee levels. This would be unfortunate. Regulating the level of interchange fees would eliminate a powerful incentive for payment schemes to create innovative products and services which benefit merchants. Payment schemes should be able to compete with each other to make their products more useful and valuable to merchants, their incentive being the ability to generate higher interchange fees and, in consequence, the ability to attract banks.

With SEPA, European banks will be able to choose between multiple debit brands for their cards. Payment schemes are competing fiercely to have their brands chosen by banks. Interchange is a powerful differentiator. As competition between schemes increases, there will be a growing desire to raise interchange fees to attract issuers. If the system functions properly, brands that don’t offer enough value to merchants should find it more difficult to raise fees than brands that provide more value.

The key is to focus on leveraging payment data to help merchants solve major problems. SPICED accomplishes this by helping merchants improve the efficiency of their promotional marketing activities, an industry estimated at $342 billion in the US alone (dwarfing US interchange fees of $40 billion). Retailers spend tens of billions of dollars each year on tactics such as direct mail, premiums and incentives, retail in-store promotions, couponing, loyalty marketing, games and sampling. These can be made more effective by leveraging customer behavior data. But obtaining that data is difficult and costly and, in addition, existing techniques that rely on sending offers by mail require customers to provide personal details that many prefer not to divulge.

When a payment scheme is SPICED, merchants can use data stored inside the cards to deliver targeted messages and promotional offers at the POS, at very low cost. For example, a coffee chain can recognize an infrequent customer that has not been to the chain in over 30 days, and print an offer at the bottom of the card receipt encouraging the customer to come back soon. Alternatively, merchants can avoid giving high value promotions to all customers by delivering their most valuable coupons after a certain number of visits or cumulative spending.

It is difficult and expensive for merchants to achieve similar results through data mining and direct marketing techniques, whereas with SPICED, the feature is built into the payment transaction and the offer is simply printed at the bottom of the card receipt. There is no need for merchants to operate a separate database, perform complicated and sensitive integration with bank systems, or use equipment other than traditional payment terminals. Merchants simply accept payment brands with the SPICED applet built-in and ask their acquirer to set up the campaigns of their choice. Also, since the data available at the moment of payment is anonymous and non-sensitive, payment schemes can avoid the privacy and security issues which occur when payment data is used for direct marketing purposes.

There are three major drawbacks with offers sent by mail:

1 - Cost. Offers sent by mail must be printed then inserted into envelopes, often bank statements. In contrast, an offer at the bottom of a card receipt adds a few centimetres of paper and is otherwise free.

2 - Privacy. Imagine finding an offer from Carrefour in your bank statement, which you receive at home several weeks after you last went to Carrefour. You probably understand that your bank is tracking your buying habits and is encouraging you to go to Carrefour, a retailer that you perhaps don’t often shop at. Did privacy warning bells just go off? Compare that to receiving the offer on your debit card receipt while paying at Carrefour. The effect is completely different.

3 - Contextual relevance. When you receive an offer by mail, there are chances that it won’t go into your wallet since you are examining your mail, not your wallet. When you receive it at the POS, your wallet is open, waiting for your card to go back in. The probability of keeping the offer is much higher.

Promotional marketing is one area in which payment schemes can help merchants. There are others. For example, fraudulent and abusive returns cost US retailers $16 billion annually, much more than bank losses due to card 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 refund. Some retailers now require a picture ID when customers return merchandise, so clerks can check a database for possible abuse. This is the only solution available today. It is inconvenient and obtrusive to customers, the vast majority of whom return items in good faith. Instead, why not take advantage of payment data to identify potential abuse? A solution which leverages payment data at the POS, with no need for the cost and effort of operating a database and authorization service, and no need for a picture ID, would directly benefit merchants.

It is reassuring to see that regulators accept interchange as an important part of an efficient payment system. It would be even more reassuring to see regulators recognize the importance of interchange as a competitive weapon between schemes. The current interchange model, with adjustments for fully market driven fees, is a powerful tool to foster innovation for the benefit of merchants. Leaving fees unregulated, but giving merchants the ability, for example, to easily surcharge card brands which are too expensive in relation to their value, creates a powerful incentive for schemes to make their products and services more useful to merchants. Some payment brands will manage to create enough value to convince merchants to accept the higher fees without applying surcharges, while others will simply reduce their fees. In practice, customers should see little if any surcharging.

Competition is fiercer than in the past, what with developments such as SEPA and with MasterCard and Visa becoming profit-driven companies that must show strong growth to investors. There is an opportunity for regulators to leverage this growing level of competition in a way that creates more value for all players. Capping or cutting interchange fees would cause that opportunity to be wasted and will simply cause the current payment infrastructure to ossify at essentially the present level of functionality. Schemes will put little energy into new merchant-centric features. The system will remain essentially as it is today, with innovation focused on new cardholder-centric features. It might be hard to imagine today the types of new payment features which will be attractive to merchants, but this does not mean that payment schemes will not discover them in the future. Abolishing the incentive to search for these new capabilities will guarantee that they are never found.

Pay By Touch drops biometric payments to focus on targeted marketing services

So Pay By Touch is getting out of biometric payments and is focusing on targeted marketing (see Evan Schuman’s StorefrontBacktalk comments on an article in the current issue of The Nilson Report).

Good move. The company apparently understands that most of the added value in the payments space is going to come from facilitating targeted marketing using payment data. Not focusing on the commoditized low value payment function, which can’t easily be made more valuable with little add-on gadgets like thumbprint transaction initiation or contactless cards or even mobile phone payments … unless of course those new devices are used to dramatically enhance marketing capabilities at the point of sale.

Evan Schuman did an earlier post a couple months ago on Pay By Touch, titled “Did Radio (Waves) Kill The Biometric Star?” The article explores the possibility that contactless cards are killing “pay by finger” biometric schemes.

Here are a couple of my own prior posts on Pay By Touch:

Are you unknowingly trying to resurrect failed concepts from the past?

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

Why an unregulated interchange model is crucial to fostering competition between payment schemes

Statements from regulators indicate that their focus is less on abolishing interchange than on exploring ways to deal with the variations in levels of fees in different markets and for different card products. EU competition commissioner Neelie Kroes recently said that while the commission would not abolish interchange it would continue to assess the legality of current fee levels. The solution usually evoked consists of some form of levelling of fees across the EU, through regulation which would result in payment schemes all adopting the same legislated fee levels. This would be unfortunate. Regulating interchange fees would eliminate a powerful incentive for payment schemes to create innovative products and services which benefit merchants. Payment schemes should be able to compete with each other to make their products more useful and valuable to merchants, their incentive being the ability to generate higher interchange and, in consequence, the ability to attract banks keen on receiving more interchange.

With SEPA, European banks will be able to choose between multiple debit brands for their cards. Payment schemes are competing fiercely to have their brands chosen by banks. Interchange is a powerful differentiator. As competition between schemes increases, there will be a growing desire to raise interchange fees to attract issuers. If the system functions properly, brands that don’t offer enough value to merchants should find it more difficult to raise fees than brands that provide more value.

The current interchange model, with some adjustments, is a powerful tool to foster innovation for the benefit of merchants. If merchants were able to negotiate interchange fees and choose freely between payment methods which give them the most value in relation to their cost, then normal market forces would automatically force card fees to their acceptable levels. However the nature of the payment industry makes it difficult for merchants to negotiate interchange fees.

Capping fees through regulation does not solve the problem because it will not create a market driven system. It will simply cause the current payment infrastructure to ossify at essentially the present level of functionality. With little incentive to innovate for the benefit of merchants, payment schemes will not put much energy into new merchant-centric features. The system will remain essentially as it is today, with innovation focused on new cardholder-centric features. It might be hard to imagine today the types of new payment features which will be attractive to merchants, but this does not mean that payment schemes will not discover them in the future. Abolishing the incentive to search for these new capabilities will guarantee that they are never found.

A viable solution already exists in a growing number of countries. Leaving fees unregulated, but giving merchants the ability, for example, to easily surcharge card brands which are too expensive in relation to their value, creates a powerful incentive for schemes to make their products and services more useful to merchants. In response to this pressure, and to avoid having their cardholders subjected to surcharges, some payment brands will manage to create enough value to convince merchants to accept the higher fees, while others will simply have to reduce their fees. In practice, customers should see little if any surcharging, and merchants will get far more value for their money.

There are many ways in which payment schemes can innovate to make their cards more valuable to merchants. The most effective solutions will focus on leveraging payment data to help merchants solve major problems at the point of sale, in the store, as the card is being used. For example, payment schemes are already beginning to help merchants improve the efficiency of their promotional marketing activities, an industry estimated at $342 billion in the US alone (dwarfing US interchange fees of $40 billion). These budgets can be made more effective by leveraging customer behaviour data available at the moment of payment, for delivery of targeted promotions on credit and debit card receipts. This is my company’s area of expertise.

Another area in which payment schemes could better help merchants is by addressing the issue of fraudulent and abusive returns, which cost US retailers $16 billion annually, eclipsing the $3 billion that banks lose due to card fraud. 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 refund. Some retailers now require a picture ID when customers return merchandise, so clerks can check a database for possible abuse. This is the only solution available today. It is inconvenient and obtrusive to customers, the vast majority of whom return items in good faith. A solution which leverages payment data at the POS to identify potential abuse, with no need for the cost and effort of operating a database and authorization service, and no need for a picture ID, would be very valuable to merchants.

It is reassuring to see that regulators accept interchange as an important part of an efficient payment system. It would be even more reassuring to see regulators recognize the importance of interchange as a competitive weapon between schemes. Competition is fiercer than in the past, what with developments such as SEPA and with MasterCard and Visa becoming profit-driven companies that must show strong growth to investors. There is an opportunity for regulators to leverage this growing level of competition in a way that creates more value for all players. Capping or cutting interchange fees would cause that opportunity to be wasted.

Are you unknowingly trying to resurrect failed concepts from the past?

Imagine this nightmare scenario.

You are excited about your brand new product or service that you are about to launch. As far as you know, it is something new and innovative that hasn’t ever been tried before. Then, right after launching it, you run into all kinds of horrible problems that eventually cause management to pull the plug. The old guy down the hall that has had it in for you for a long time starts doing his “I told you so” routine and begins circulating old press releases from other companies that tried to do the same thing a long time ago, and failed, mostly for the same reasons. You have unknowingly been trying to resurrect other people’s failed marketing concepts.

Fortunately, the web makes it much easier to avoid this kind of thing today. You can certainly attempt something that lots of other people have failed at; but at least you can be aware of what has been tried before and why those approaches failed and yours will not.

But what to make of this article on Pay By Touch’s plans to deploy loyalty coupon kiosks? I have seen the same thing tried before and it has often failed. Maybe there are no traces of those failed attempts? Out of curiosity (and as a test of my memory) I did a Google search on “coupon kiosk” and found lots of relatively old stuff on pilots that are no longer around. Coupon kiosks were a 1990’s thing that never really took off. A couple articles from back then give hints of the major flaws in these products, although the flaws weren’t clearly understood at the time. An article from 1991 starts with the following sentence, “Kmart is testing an automated electronic couponing kiosk in nine stores through which shoppers can receive coupons for as many as 24 different products.” Another article, from 1994, talks about a touch screen kiosk offering coupons on 32 products.

In May 2000, long after Kmart’s attempts, another company resurrected the concept and boldly announced that they “have designed the world’s first interactive multimedia coupon kiosk”, completely oblivious to the fact that identical products had been launched a decade earlier.

There are lots of problems with coupon kiosks. It’s easier to look through the Sunday paper and clip the coupons you want out of a selection that is far greater than anything a single company could reasonably negotiate for their kiosks. A kiosk would need to offer potentially hundreds of coupons, much more than the 24 or 32 offered on earlier generation products. That’s especially true if the coupons are targeted! Pay By Touch is going to have to fundamentally transform their organization if they expect to constantly update their kiosk with new offers on hundreds of products. Anther problem, this one even more fatal, is that nobody wants to wait in line at a kiosk before going into the store. The Google search also identified another issue to deal with: patents. I wish Pay By Touch luck navigating through those waters.

I don't know exactly why some of these concepts keep popping up again through the decades. My best guess is that it comes from a technologist's mindset, the old "solution looking for a problem" thing.

You can avoid all this by doing a simple Google search and being humble enough to ask why all those other people (many of them very smart) failed and how your project is so different that it will not.

“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).

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.

Contactless in America: Slow adoption due to lack of merchant interest - what to do about it?

After reporting in April that UK merchants are not interested in contactless (see “London Contactless Launch: Where Are The Merchants?”), Card Technology now reports that contactless adoption in the US is slower than anticipated. Here again, the major obstacle is convincing merchants to accept contactless. But how? Slashing interchange? Or instead providing more value to merchants to get them excited about contactless?

“Vendors predict they will ship only about 25 million contactless cards or fobs this year. That’s up modestly from the roughly 20 million contactless cards or tokens vendors sold in 2006.”

“The 25 million contactless cards and fobs likely to be issued this year compares with the roughly 300 million credit, debit and prepaid cards U.S. financial institutions will roll out in 2007, nearly all of them simple magnetic-stripe cards.”

“Of the largest banks, only JPMorgan Chase has begun a significant rollout, although it has only put contactless chips on part of its portfolio.”

Major scheme initiatives like contactless and mobile payments will fail without active merchant participation. This has been evident to many of us for a long time, but now the realization is starting to go mainstream.

“A major obstacle is persuading more merchants to accept contactless.”

“There are 6 million places where you can use your credit card, 45,000 (contactless acceptance locations) doesn’t excite me.” (John Suchanec, senior vice president of payment technology for Bank of America)

“Until you have a better merchant coverage, there’s clearly a problem. It’s coming along. We would just like to see it come at a faster pace.” (Leigh Malnati, vice president for contactless payments at American Express)

“With rules adopted by the payment card organizations allowing U.S. consumers to make low-value purchases without signing receipts, tapping cards or other tokens to pay is not appreciably faster or more convenient than swiping the cards at the point of sale.” (John Suchanec, senior vice president of payment technology for Bank of America)

Visa has already agreed to lower interchange in the UK to encourage merchant acceptance, and the same might happen in the US. Here are a few prior posts on other ways to encourage acceptance, based on providing more value to merchants through new payment features now available thanks to chip technology like contactless and EMV:

Report: Banks Should Mine Data Troves to Build Merchant Loyalty

How contactless payment brands (PayPass, Visa Wave, ExpressPay) can be much more attractive to merchants

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

Cool payment technology that makes contactless much more attractive for merchants

Blueprint for launching new cash replacement products like contactless

What is much more important than speed at the checkout?

Report: Banks Should Mine Data Troves to Build Merchant Loyalty

An article in Digital Transactions News suggests that payment data could be tapped as a valuable and useful resource for merchants, thereby helping to justify the interchange fees that merchants pay to Visa and MasterCard.

“Tens of thousands of terabytes of payment data are lying dormant. The data could help shape programs that would get shoppers who go to a particular store often to shop there even more frequently, and could help merchants cross-market products within the store.”

“Visa USA and MasterCard Worldwide have a potent reason to cooperate with merchants in creating these marketing programs. By harnessing their data, they might have an easier time selling merchants on interchange fees. Retailers feel ‘trapped’ by interchange, since they don’t feel they can stop accepting bank cards and yet also believe they’re not getting full value for the rates they’re paying on each transaction.”

In the past, this has been complicated and expensive, since the data had to be processed, mined, analysed and used at some centralized database type machine. Using the data in that manner also triggers all kinds of privacy issues and even security issues if merchants are allowed to use card numbers to track purchase history.

But today, it is possible to use anonymous data embedded within the payment transaction, stored in new generation payment cards like EMV and contactless chip cards, to instantly trigger offers at the moment of payment. There are no additional costs for the merchant, the bank, the processor or anyone else, since the offer is simply printed at the bottom of the standard credit or debit card receipt. There are no privacy issues, since the merchant doesn’t have access to names, addresses or any other personal information that people get concerned about. And there are no security issues, since the merchant doesn’t need to store card numbers anywhere on the system.

NFC mobile phone demo: A few smooth, convenient features … and one not so smooth

Most of the features in this video appear smooth, simple and convenient. Tap a bill board in an airport and trigger a phone call to a hotel. Tap an RF-ID enabled business card and instantly suck the contact information into the phone. Tap a contactless reader and pay without a card. The payment demo starts out just as smooth as the other features, but then unfortunately falls apart when security issues are addressed.



Watch the last part of the video carefully. The first payment demo is nice and smooth. Tap your phone against a contactless reader and you’re done. Just like a contactless card. The presenter starts saying that you can configure your phone for a PIN code if the transaction is over a certain amount. The customer taps the phone once, enters a PIN code on the phone keyboard, then taps the phone a second time. Another voice asks about PIN protecting every transaction, so if someone steals your phone they can’t use it to pay. You get a glimpse of how to configure the PIN code in the mobile phone, and then you get to see the phone tapped once, the PIN entered, then tapped again.

I pretty much get the idea of using a mobile phone the same way a contactless card is used, for speed and convenience. It makes sense for transactions under $25, where less security might be acceptable, in line with current thinking around contactless cards. Tap your phone against the contactless reader and jump out of the cab, eat your hamburger, or whatever. But over $25, things get a little messier. A contactless card can deal with purchases over $25 in several ways, inherent to the fact that the customer is holding a physical card. You can insert the card and enter your PIN code (for the EMV part of the world, i.e. everywhere except the US) or you might have to sign the credit card receipt. Those solutions are specific to contactless cards and cannot be used for mobile payments. You can’t insert the mobile phone into a chip reader to enter a PIN, and you cannot sign for the transaction, since the clerk has no way to check your signature. Hence the clunky solution that you see in this demo.

The demo doesn’t get into the mother of all mobile payment issues: the concept of a mobile wallet. You don’t see the customer choosing to pay with a different card programmed in the phone. “Let’s see, I want to choose my Citibank card, so I touch this key, then that one to confirm.” Or how about another nightmare situation that you know is going to come up: “Oh wait! Cancel that transaction please. I just noticed that it automatically chose my Visa debit card, but I wanted to use my American Express card instead!”

To me, this demo just shows that the cleanest, simplest and fastest way for mobile payments to come about is by keeping everything simple. Only small transactions and only one card linked to the phone. If you think about it, the only place where mobile payments have had some measure of success is Japan, where the phones are linked to the universal mass transit card for payment. Small transactions only, and just one payment option, your transit card.

On a completely different note, I really liked the way the video shows how NFC can be used to simplify Bluetooth connectivity. Bluetooth is always a hassle, what with identifying each device and everything. Here, you tap the device with the phone, which establishes the identification, and then Bluetooth is used automatically to transfer larger volumes of information that NFC is not designed for. So you skip the whole manual identification phase. It’s done automatically with NFC. That’s a cool feature that really does make things more convenient.

Actually, come to think of it, that is very much related to the payment issues that I write about. The “NFC/Bluetooth connectivity automation feature” is actually very relevant to how I think about payment innovation. I like things that make the complexity disappear, that hide all the strings, wires and mechanics so things look smooth and simple to the user. Make complexity your problem, don’t pass it on to the user like a hot potato. That’s the type of innovation that is really useful and makes you go, “Wow, I have to have that! It’s just too cool! When can I get it? I want it now!”

I haven’t gotten all excited about contactless cards or mobile payment because I just don’t get that feeling.

When will we see colour printers on payment terminals?

Verifone and Hypercom both offer high end payment terminals with sophisticated touch screens and colour video capabilities which they hope retailers will use to deliver promotional marketing and advertising messages to customers (see the brochures here and here). But I haven’t seen any colour printers yet. As the credit or debit card receipt becomes richer with targeted promotional offers, the same way that till receipts have become more sophisticated, it is unavoidable that payment terminals will also offer colour printers.

In the US, Catalina Marketing is one of the top providers of promotional marketing capabilities at the point of sale. They recently began upgrading their POS printers to colour, after twenty years of black and white coupons printed at the checkout. Advertisers like the colour printers because of the higher redemption rates, an average of 30% higher than Catalina's traditional black and white prints, which indicates that colour print promotions are more effective at driving customer behaviour. Catalina's targeted promotions delivered at the checkout already have much higher redemption rates than virtually all other mass-delivered coupons (7% versus an industry average of 2%). Another interesting angle is that about 30% of Catalina’s business is ads delivered at checkout, with no coupon or promotional incentive attached, simply an ad printed on a checkout receipt. That ad business has grown as Catalina completes its conversion to full-color printers on all its point-of-sale units.

It will be hard for payment terminal vendors to tap into this market on their own. They need to get their technology accepted by advertising and marketing organizations and actually create a new media, just as Catalina has done. And more than likely, the new media will need to be print based rather than video, which means that colour printers are more valuable than colour video monitors at the checkout. I know technologists will think I am totally insane for saying this, but hey, that's pragmatism. Sure, colour video screens are pretty and nice. But a print ad that the customer walks away with is much more effective in influencing customer behaviour. Notice that Catalina's business is entirely print based, with no video displays.

Welcome’s bank customers are in a way becoming advertising and marketing organizations within this niche, since they build credit card promotional marketing offers in partnership with merchants. This fills an important missing element that terminal vendors lack on their own. There could be an opportunity for a terminal vendor to offer a colour printer option which merchants can choose to upgrade to if they want to print higher quality offers on credit and debit card receipts.

Still, there is one very major barrier that remains. Each terminal vendor has persistently developed their own proprietary environment. If they add colour printers, you can be sure that the printers will function in quirky ways. Technology suppliers like Welcome would need to develop different drivers for each platform, which would necessarily drive the capabilities down to fit the platform that is the lowest common denominator. So the whole richness angle is defeated. Either the industry comes together and defines common standards (don’t hold your breath) or technology providers like Welcome choose one single platform for colour promotional offers. In that scenario, which I kind of like, merchants would be able to choose from lots of different terminal platforms for basic, traditional black and white receipts and promotions, but they would have a single choice of terminal provider for high end colour print promotions.

Mobile Phone: The New Way to Pay?

I have been reading a paper from the Federal Reserve Bank of Boston, titled “Mobile Phone: The New Way to Pay?” It provides a good general overview of mobile payments. There are a few things that I would have liked to see in more depth, and several assumptions which need to be looked at more critically. All in all though, it's a good introduction to the subject.

One area that deserves a more critical outlook is the assumption that mobile payments are already very common in other parts of the world:

“In some areas of the world, particularly Asia, mobile payments are prevalent. Japan’s NTT DoCoMo, for example, implemented the largest and most sophisticated wireless system in the world. Introduced in July 2004, the company’s service, known as FeliCa, sold five million wallet phones in its first year. The phone can be used to pay for goods in retail stores, to buy items from vending machines, and to pay for transit fares after January 2006. Technology-friendly consumers in Singapore and Malaysia can use one service, TeleMoney, to pay for transit fares, top off their prepaid wireless phones, buy concert tickets, and make retail Purchases.”

Unfortunately, these types of claims rarely include figures on actual transactions performed with mobile phones. I haven't actually seen anybody in Asia use their phone to pay. I have seen RFID readers in taxi cabs in some places (Korea comes to mind) but when I asked the cab driver how often people use their mobile phone to pay, he told me that he had only had a few transactions over the past year. I didn't check, but maybe Korean cabs add a surcharge like they do in Singapore, which would kill any desire a customer might have to pay with a mobile phone.

An important section in the document is titled Challenges to the Adoption of Mobile Payments, and examines all kinds of barriers, with a special emphasis on the infrastructure players, wireless carriers, financial institutions, card associations, mobile handset manufacturers. A much smaller part addresses merchants acceptance, and concludes essentially that since contactless is already successful, merchants automatically have what it takes to accept mobile payments. Unfortunately, the paper doesn't address the challenge of interchange. The most disturbing part of the document is the very small section which looks at challenges related to consumer adoption.

“Perhaps more research needs to be conducted to determine the ‘compelling’ reasons why a consumer would want or need to substitute mobile payments for traditional or other electronic payment methods.”

But that’s the key to the whole thing! It's unfortunate to see the consumer value proposition treated pretty much as an afterthought.