Indian credit card industry looks black

I have been looking at the profitability of online card payments in India, specifically from a card issuer's perspective.  This post is following up on a related post (Oct 09).  A couple of trends triggered this post:

• 2FA (Two-factor authentication), mandated by the RBI, deployed since Aug 09 seems to be a success.  The timing of this deployment is helping increase the size of the ecommerce pie in the nascent Indian market, at just the right time.  Early indicators are that both merchants and issuers are seeing reduced fraud.
  
• Stung by the credit defaults during the [temporary] recession of 2008-09, card issuers are offering credit backed by a card holder's asset (e.g., a fixed deposit / CD)
  

Recognizing that the main cost drivers for card issuers are credit risk, fraud risk and transaction processing costs, the relatively high interchange fees (3% and higher) and lower costs must be making the balance sheets of Indian credit card issuers look nice and black.

What are the implications of the above trend/development as we step into 2010? 

• Aggressively pursue new markets [in India] to get credit cards into more hands?
• Migrate to EMV [finally]?
• Any other suggestions?

Looking for dark clouds on the horizon.  India Pay initiative is a major development which could have far reaching impact.  A possible course for card issuers would be to milk the current profits while not growing the market until the picture clarifies around India Pay, and MasterCard's and Visa's reaction to it?

Though the above post has focused on the online payments space, the dynamics of the F2F / payments at stores are similar leading to the same conclusion.

This is to wish all a wonderful holiday season and a great 2010

Engines powering disruptive innovations in Payments industry

As I get to look at the payment card economics for online retailers in the US and elsewhere in the world, a couple of things jump out

• Merchant Discount Rates (MDR) are higher in the US (about 1%)
  
• Fraud rates are higher in the US (about 1%)
  

Even though online retailers are picking up the costs associated with online fraud, online retailers still pay a higher MDR.  A double whammy.

What stumps me is the basis for higher online fraud rates in the US.  In the online world, payment cards are all magstripe cards (you can't use chip-n-PIN cards onine).  Therefore, the US being a straggler in adoption of smartcard-based payment cards does not hold.  US prides itself on having a lot of intelligence in the payment network to detect fraud.  In spite of this, the US has $4 billion in online fraud.

Are the above indicators part of the landscape which can't be changed, or are the above indicators indicative of staid incumbents with little incentive to change status quo?  If it is the latter, we must be able to see evidence on innovations from challengers.

PayPal has been a disruptive innovator.  Though the MDR charged by PayPal is about the same as what the rest of the industry charges, PayPal's merchants have immunity from chargebacks (a 1% saving to merchants).  The fraud levels (transaction losses) experienced by PayPal is about 30bps (100bps = 1%).  A 1% premium MDR charged by PayPal while experiencing only 30bps of losses is a good business model.  So here we have a disruptive innovator offering a true win-win offering.  The online retailer saves 1% in chargeback costs, which is about 20% increase in net margins.  PayPal gets a 1% premium MDR while managing losses at 30bps (resulting in 70bps larger margins).

PayPal has been and expected to grow at about 18-20% CAGR while the incumbents are growing at half the rate (around 9%), which is proof of the relevance of the disruptive innovation of PayPal.

This posted started off evaluating the [possible] uniqueness of the US online payments industry, but is ending up looking at how a challenger is disruptively innovating at the cost of staid incumbents.  Please look forward to a follow-up post which examines why PayPal is an anomaly in the world of payments systems.

Revolution Money in an AmEx world

Revolution Money getting acquired by American Express is closing of an interesting chapter (18 Nov 2009). When this venture started, there was a lot of hope (or hype on hindsight) around the disruptive innovation Revolution Money was bringing to the staid and conservative world of payment schemes.

Over the past 10 years, many have attempted to challenge the market dominance of Visa and MasterCard (with a smaller role being played by AmEx and Discover). The only notable success has been PayPal. This speaks to the challenges of creating a new payment scheme, and the credit PayPal deserves for being the lone [recent] success. While PayPal established its business using online payments as their beach-head, Revolution Money took the battle to the stronghold of the incumbent payment schemes, the brick-n-mortar retailer.

Revolution Money with its investors and management team seemed to have the right pedigree required for such a challenge. They raised a war chest of $112 Million. It turned out that building relationships with acquirers and merchants was the easier task. They had relationships with Fifth Third and Cardinal Commerce. Leveraging these key ecosystem players, Revolution Money was able to sign up nearly a million merchants. This was the target they set themselves early on, and reached it. The challenge came in the form of signing up new customers. They had signed up 300k customers, which included signing up some with a $25 bounty. They had a target of 1 million customers as well.

With the 0.5% merchant discount rate that Revolution Money was charging, retailers had an incentive to accept Revolution Card. In verticals such as gas stations, consumers got the benefit of using their Revolution Card, lower prices at the pump. However, such instant gratification was frequent and sufficient enough to change their behavior and adopt their Revolution Card as top of wallet. Consequently, customer acquisition and transaction volumes (or lack thereof) brought down the company. In some ways, the challenging economy in the US over the past 12 months was a double-edged sword which the company could not effective wield to their advantage.

Let us look forward. Revolution Money's investor came out OK. A 2-3 times return in today's investment climate is not bad. From an AmEx perspective, they are getting a lower-cost data center which might be of marginal value. A lower-end mass market product to complement AmEx's existing product line might be the real prize. The AmEx brand would help consumers sign up for and use the Revolution card. Revolution Money might also make AmEx more relevant in the online payments space.

Having said that, like any other startup, Revolution Money had multiple product lines, including Revolution Card, Revolution Money Exchange. They were also waging battles on multiple fronts (online, money transfer, physical retailers). In the near term, there might be sharper focus to increase chances of success. Given AmEx strengths, I suspect that the focus would be physical retailers, and try to grow the customer base and transaction volume.

Where do you think Revolution Money is heading as an AmEx product?

PS: Given Revolution Money's focus on the US, this writeup has an US perspective

Notes from Cartes 2009 kick-off sesssion

Notes from Cartes 2009 kick-off session held on Tuesday Nov 17, 2009 (lacks editorial polishing as this was captured as the session was in progress)

Session participants included senior executives from Gemalto, Oberthur, Sagem Orga, G&D, Infineon, NXP, Hypercom, Ingenico, Visa Inc. and MasterCard

Market macro trends
Credit is down, and will stay down
- Debit and prepaid is still growing
- Electronic payments will grow even though overall economic growth slows
- Price pressure is converting volume growth to reduced top-line (near-term)
- Reduced innovation dollars available
- Customers are downgrading the card capabilities (e.g., 64kb to 32kb)

Growth areas
- South Africa & Latin America showing growth

Government e-ID initiatives:

• An important distributor of cards
  
• Competition among government to be a 'model govt', thereby helping create frameworks around privacy, data protn, post-issuance downloads
• Govt is helping smart card industry as they engender high-level of trust among citizens/consumers. They are also helping educate consumers to bring about behavioral change
• In some cases, they are also loading other apps (for their own services) after the cards have been issued
• Early adopters are countries which have about 20-50 million citizens, which include Estonia, Singapore, Taiwan, Columbia, countries in the Middle-East...
  

Use of smart cards by government to distribute subsidies

• Brings about efficiency in the delivery of services by the government, as well as, increase in convenience and productivity for the citizens.
  
• Examples including US government issuing Visa prepaid cards in 38 states to distribute subsidies, Pakistan and Dominican Republic using prepaid cards to get subsidies to their citizens
• Adds another demographics group as smart card users: the Unbanked

Opportunities in addressing the needs of the unbanked:

• Nearly 30% of Kenya and Uganda are smart card users
• Meeting needs of the unbanked is adding nearly 1% to the GDPs of the above countries
  

Growth areas in the smart card industry:

• Government initiatives
• Move to EMV
• Unbanked initiatives in Africa, LatAm...
• Authentication
• Contactless deployments
  
• Migration away from mag-stripe cards (4 billion market opportunity)
  

Please share your feedback, and any questions that you have for me to follow-up on while at Cartes.

Indian Payments Card market analysis

In recent times, mention of the Indian economy evokes images of growth, opportunities and a new gold rush. However, when it comes to electronic payments systems, India is yet to break out. Payment card volume in India is a fraction of that of Singapore (KPMG Report). Let's take a look at the 2008-09 (April 08 - March 09) statistics


A few observations on the above stats:

• Though debit cards have higher circulation (as they double as ATM cards as well), their usage is significantly lower (even by India's standards) [less than 1 transaction per card per year!]
  
• Credit card transaction volumes are low ($52 per year per card). Coming out of the 2008 market downturn, credit card companies are flying to quality. They are trimming credit limits, canceling cards with minimal usage... Nothing new to the western world, but a new trend in the wild swinging Indian market.
  
• Though the above numbers are small, the market is growing at a CAGR of over 30%. In 2020 the market size will be ... ;-)
  

Turning our sights to the online commerce world, the stats are similar. Online commerce is trending at about USD 3 billion a year (US market of $300B). Typically, ecommerce is 10-15% of the total retail payments card market. However, you will notice that in the Indian payments card market, the ecommerce market is over 20% the size of the retail market. A phenomenon that can be attributed to the cash-dominant brick-n-mortar retail economy (with a sizable parallel counterpart).

With regard to payment card fraud, I do not have data on fraud rates at brick-n-mortar stores (contribution of relevant data is appreciated). According to Al Cameron, Payments Fraud/Loss Prevention Specialist, online payment fraud rates (Card-Not-Present / CNP fraud) is around 3oo bps (US is at 140 bps, and UK at 100 bps).

Even though the Indian ecommerce market is in its infancy, security concerns during online payments are cited as among the top-5 barriers to faster growth. Regulatory authorities in India (RBI) mandated 2FA (Two factor authentication) for online payments from Aug 1, 2009. Going by UK's experience (where CNP fraud dropped for the first time during the first half of 2009) of CNP fraud reducing due to deployment of 2FA, India might also experience a similar benefit. This could help bring more users to the world of online commerce (grow the pie), as well as, increase the bottom line of online merchants and card issuers.

I have not been able to get any data on the benefits expected by the Indian regulators after the implementation of their mandate. If any of you have access to this data, please do share it. I shall post it here and acknowledge your contribution.

If the US does not go down the EMV road...

The debate over whether US should deploy EMV infrastructure or not has been intensifying of late. Some estimate the cost of deploying EMV in the US at $30B. Ms Baxley, retail payments management consultant, observed that Javelin Strategy estimates US EMV transition at a lower $5.5B. She also noted that, in lieu of EMV, leveraging contactless cards and readers [presently being deployed in the US] would adequately meet the payment card security needs while costing significantly less (even lesser than Javelin's estimates). As you might recall, contactless infrastructure being deployed in the US is based on Mag Stripe Data (MSD) fortified with dynamic CVx (in effect making a payment card number a one-time use card number). Please note that in this post, when I refer to US contactless cards/readers, I am referring to MSD with dynamic CVx (dCVx)

Debating card security aspects between EMV and US Contactless is an enticing topic, which can be set aside for another day and another blog.

Assuming that the US heads down the Contactlesspath (a significant leap of faith) as a means to enhance security of payment cards, let us look at the implications to the card payment infrastructure by fast forwarding to 2015 when US has transitioned to the brave new world.

• Cards: Cards would have to support both EMV applet and Contactless applets. Obviously, the cards would have to support both contact and contactless interfaces. Would we still need support for mag stripe on cards, for those still in the 20th century?
• POS infrastructure: Contactless readers supporting both US implementation and the EMV implementation would be necessary. Would US merchants need to offer support for EMV contact feature? Would ROW (Rest of the World) merchants need to support US contactless feature?
• Who is going to pay for retrofitting the global POS infrastructure to support both EMV and US Contactless.
• User Education: ROW consumers will have been educated (hundreds of millions of dollars of expense) of how and where to use contact EMV contact and contactless cards. It would be a very interesting consumer education experience and an expensive customer support issue of educating consumers, when they travel, about when and where contact cards are acceptable.
  

When you look at this picture, don't you long for the good-old-days of magnetic stripe cards, when one size fit all.

One of the lessons emerging from EMV deployments in Europe is that legacy support features (mag stripe on EMV cards) opens a large back door for fraudsters to take advantage of. As EMV cards reduced mail non-receipt, lost/stolen card, and counterfeit card fraud, online fraud and fraud abroad ballooned up. Card Issuers migrating to EMV were hoping for for 30% annual reduction in fraud, but realized only 10% reductions (APACS data), thereby significantly reducing ROI.

There are no silver bullets. However these are things that keep us awake at night.

As we look at the emerging economies of the world, payments card security is not a bottom-line issue (reducing fraud) but a top-line issue which communicates trust and security thereby bringing in large sections of population into the non-cash payments world, thereby growing the pie for all.

Where do you think that the payment card industry needs to be in the G-20 countries by 2015?

When selling shovels is more lucrative - Another look at Trusted Services Managers

It has been a year since I last wrote about TSMs (Sep 14 '08). As you might be aware, TSM is a third-party Trusted Service Manager. This organization would secure manage the card data in a mobile wallet on behalf of a card issuer. In some markets, a TSM is also referred to as a TTP (Trusted Third Party). Since the last I posted about TSMs, some water has flowed under the bridge.

• No visible signs of progress in deployment of NFC in the US
• Subtle changes in the go-to-market strategies of TSMs
• Incumbents are showing their preferences for roles in the post-NFC world
  

I came across Carol Coye Benson's blog Getting the Garden Ready, in which she speaks with Barry McCarthy, President of Mobile Commerce Solutions for First Data. This conversation provides a glimpse of the changing landscape in the TSM space. When Carol talks about Getting the Garden Ready, I hope we are not talking about yet another walled garden. We seem to have enough of such gardens from telcos!

First Data's interest in being a TSM is understandable. They have been providing card issuing services to banks (to 1500 issuers), and would like to continue to have this business. Allowing a third party TSM (e.g., Venyon) to establish relationships with banks/issuers to provision credit cards to mobile wallets would limit the growth of First Data. For First Data, adding TSM capability provides them the ability to deliver cards thru' another channel. Finally, it does not make sense for First Data to contract out card management services on mobile wallets with a TSM (adds another layer of unsustainable overhead).

As you might already know, the industry has a role called Issuing Processor. First Data is an Issuing Processor. They provide issuing services on behalf of a Card Issuer (e.g., a small bank or Credit Union). Card Issuing services include embossing cards, shipping cards and PIN mailers to consumers, activating cards, being part of the [payment] transaction authorization chain... For these services, a Card Issuer (e.g., Credit Union) would pay a fee to the Issuing Processor (e.g, First Data).

The First Data case study provides a feel of where the TSM road is leading to. Each issuer [or issuing processor] (payment card, loyalty card, coupon) will try to provide TSM services themselves so that they protect the client relationships that they have. This implies that the mobile wallet would be managed by the telco/MNO [as a TSM]. There would be containers inside the mobile wallet which would be managed by issuers (payment, loyalty, transit, coupons...). Each of these issuers would be a TSM managing their containers / sub-wallets.

So, what happens to existing TSMs (e.g., Cassis, Venyon, Vivotech...) who have been participating in the many NFC field trials taking place around the world? These TSMs would try to morph themselves into software / platform vendors (the trend has started). Based on the TSM's relationships, they would sell their platform and professional services to the many issuers (telcos, banks, transit companies...) who need these TSM platforms.

This may actually be good news to existing TSMs. There may be more money in selling shovels than in prospecting for gold, i.e., there might be more money in selling TSM platforms than in being a TSM.

What are your thoughts?

Related Post: Does somebody have an edge?

P2P use cases will get NFC started in the US

I came across an interesting post by Celent on Mobile NFC. This report claims that cash displacement is the main motivation behind Mobile NFC deployment. The report claims that there will be an annual revenue increase of $1.83 per debit card for banks.

I agree that cash displacement is a major driver. For small-value transactions, e.g., at a fast-food restaurant or at a drug store, both the merchant and the consumer would like to get thru' the checkout lines quickly. Eliminating cash handling, doing away with signatures for payment card authorizations are definitely desirable.

If banks stand to make $1.83 per card per year from Mobile NFC, there is very little incentive for mobile operators to invest in NFC technology on handsets in the US. Payment cards, the purported killer app in mobile NFC, become marginal. Other apps on Mobile NFC, such as, Loyalty cards and coupons are stretch goals and would become difficult to fund.

Looking at Japan as a trendsetter, Lars (Mobikyo, Japan) had these insights to share:

• Cash replacement is a major use case across a variety of locations, including quick-serve restaurants (QSRs), convenience stores, transit (trains, buses and taxis) and vending machines
• Exchange of information is a major category: Smart posters providing coupons, receive and redeem coupons, tickets..., access information (to unlock a PC)...

These use cases have been the mantra of NFC practitioners the world over. What is daunting about these use cases is that the 'network' is a critical component, which makes NFC deployment a classic chicken-n-egg situation.

P2P (Peer-to-Peer) use cases may help break the NFC logjam in the US. For e.g., when I buy my fancy mobile phone with Bluetooth (obviously this is a 2005/6 scenario), all I need is my fancy Bluetooth headset to start using Bluetooth. I don't have to wait for the ecosystem to be enabled and up-n-running. This instant gratification is necessary for people to fork out their valuable money for new features/gizmos, and get the market going.

We need such P2P instant gratification use cases for Mobile NFC. Exchange of business cards is an example of P2P mobile NFC (if you recall, this use case was used during the early days of Bluetooth as well). However, these uses cases have to substantial (from a business model perspective, to justify OEMs/operators to invest in NFC).

What do you think will help get mobile NFC started in the US?

Impact of Nokia Money on India's mobile commerce landscape

In light of the announcement of Nokia Money, I would like to analyze this development in the context of mobile commerce in India.

Nokia Money is an attempt by the world's largest mobile phone vendor to deploy mobile commerce commercially. Before we dive deep into this post, let's have a quick background on this topic. Nokia invested $70 million in Obopay (analysis). Leveraging their investment in Obopay and the infrastructure that Obopay offers, Nokia brings Nokia Money to market. Also, you may recall that Obopay powers MasterCard Mobile MoneySend (link).

I suspect that Nokia Money will be available on every Nokia mobile phone. Considering that the mobile operator does not subsidize handsets (and consequently control mobile phone configuration) in India, Nokia will be able to take its mobile payment product to market directly.

Financial regulations are a critical piece of any mobile payments puzzle. It is no different in India. RBI, India's financial regulator, unvieled their policy on mobile payments (link). They allowed a fund transfer limit of INR5000 (approx $100) and a daily transaction limit (for goods and services) of INR 10,000 (approx $200). Considering that the biggest sector in India's ecommerce is Online Travel (over 2/3 of ecommerce market), the mobile commerce industry was up in arms claiming that these limits were too constraining [to buy air tickets?].

mChek is the leader in mobile payments in India. Airtel, India's largest mobile service provider, is mChek's first partner. mChek has been used for bill payments, charging airtime (mobile topup)... mChek crossed a million subscribers in January 2009 (link). Airtel SIM cards have mChek on its menu. Other Indian telcos are following this trend.

Obopay does not seem to have crossed the critical 1 Million subscriber mark (otherwise we would have heard about it, right?). By that measure, Obopay / Nokia Money is the challenger. Other service providers in this space include PayMate, ITZCash and NGPay.

A study (June '09) commissioned by Paymate and AC Nielsen estimates the mobile commerce market in India at 5 million users, and is primarily urban and male-centric.

Now that you are updated on history, let us look at the future. How does Nokia Money change the landscape of mobile payments in India? Is the entry of Nokia Money going to change the dynamics of mobile commerce and create a thriving marketplace for small payments (similar to what Nokia did for mobile phones in India)? Are operators better positioned to offer mobile payments?

Will this competition create confusion? For example, to an Airtel subscriber using a Nokia phone, there will be two mobile payment choices and the user can't differentiate the subtle differences between a phone offering and an operator offering. How will the message be packaged in such cases? Will Nokia Money choose to go rural and Aitel/mChek focuses on urban audience? For all the promise of mobile payments in emerging countries, 5 million users in a userbase of over 350 million is dismal.

Who and where will the mobile commerce battles be fought in India? What are your thoughts?

Intuit joins the ACH-based flat-fee band wagon

Intuit has created an ACH-based payment network where merchants pay a flat fee of $0.50 per transaction (link). This is fast work on Intuit's part, coming less than 3 months since they acquired PayCycle for $170 million (link) Intuit, based on its Quickbooks franchise, has relationships with 3.7 million small businesses. The 170 million dollar question is, will this offering gain critical mass where we will see the Intuit bug in enough payment pages?

To contrast this offering, let us look at other similar offerings. NACHA's SVP charges a flat $0.745 per transaction for their transactions (link). There seems to be some transaction for this product at universities, with government agencies opting in as well. PayPal charges merchants a discount rate of approximately 3.9%, which is comparable to what Amazon and Google Checkout charge.

I was talking with a long-time industry insider, who sees the trend towards flat-fee based discount rates. Where do you think the industry is heading?

Card acceptance infrastructure in India: A perspective

I have been scouting Bangalore for innovations in the payments industry. Bangalore is as good a place as any in India to deploy new offerings. The economy is vibrant, consumers willing to try new things, retail space is hyper-competitive with enough investments coming in...

Let me first take a step back and frame the merchant payments space (to help provide context). Retail payments are characterized by:

• It is customary to see a retailer have card acceptance devices from multiple acquirers. Depending on the card provided by the consumer for payment, the retailer decides to run the card thru' the acceptance device that provides him the most favorable terms (which typically results in an 'On-Us' transaction)
• Though there are third-party acquirers (e.g., Venture Infotek), leading card issuers are also acquirers (e.g., ICICI, Citi, HDFC...)
  
• Smaller retailers will charge a fee of about 2% (surcharge) for purchases paid using payment cards. Some of these retailers may also share their POS terminal. They will run the card transaction thru' the neighboring retailer's terminal!
  
• Benefits of India's cash economy (by some estimates, about 50% of India's economy) handily overcomes cash-handling costs borne by the merchant
  
• As multiple acceptance devices are the norm at retailers, deploying new payment products is not as much of a challenge as you do not have to displace incumbents.
• Over 70% of sales are cash-based (based on my informal spot surveys; will update this blog when I am better figures and support links)
  

Quite a few of the high-end retailers accept chip-n-PIN (EMV) cards, though very few card issuers in India have deployed chip-n-PIN cards. This is primarily to cater to tourists and visiting Indian diaspora (high-end high-margin clientele). Indian card issuers seem to have bought time till 2011, by which time they are expected to have rolled out EMV cards. I am keeping my fingers crossed regarding this target date.

It was a pleasant surprise to see PayPass readers at retailers. However, the excitement was tempered after finding out that the deployments were part of a trial. I hope that commercial deployments follow (both by card issuers and acquirers).

[Updated Aug 20 '09] First Data is continuing to push into India, first with their relationship with Kotak Mahindra (link), and next with their association with Yes Bank (link). First Data also offers a payment gateway (Merchant Solutons), in association with Standard Chartered Bank.

While I started off the post talking about Bangalore, I would like it to end talking about Delhi. As you might be aware, Delhi is having a coming-out party of sorts next year. It is hosting the Commonwealth Games 2010. Watch out for unveiling of new payment products next year around this event.

If you are interested in following trends in the Indian Payments industry, this is the conference for you (Digital Payment Conference, Mumbai, Aug 21 2009)

Apple of the smart card industry

In the early part of the decade, different categories of mobile devices emerged. These include, internet device, gaming device, music player, phone, camera, digital reader... There was a lot of debate then about the right direction to proceed. Can a single multi-purpose device adequately meet the diverse and specialized requirements of a category or a specialized device that does one thing well the way to go? Would a consumer prefer to carry a single device or multiple devices that does each thing well?

Companies in the CE space, such as Sony, went on to address this need by delivering a device for each of these categories. Sony has a gaming device (PSP), phone, music player (Walkman), camera (Cyber Shot), eBook Reader...

As each category matured, the requirements for each category stabilized enabling aggregating these categories into one device. iPhone is the current leader of a device that has managed to be many things to many people. Apple's success, though difficult to emulate, has been built on genius(!), vertical integration, active value-add ecosystem and a large group of vocal evangelists.

Samsung, Nintendo and Sony are quickly following suite to come up with their own variants.

Can Apple's success in converging CE devices be repeated in the smart card industry?

Over the years, multi-app multi-party smart cards have been discussed and promoted by the industry. For a variety of reasons, this model has not taken off. Each of us carry multiple smart cards in our wallets/purses. Not very different from a world where we carried multiple CE devices, that is, until Apple came along.

If so:

• Who is the Apple in the smart cards industry to pull this off? Is it fair to say, similar to the Apple experience, a telco will not be able to pull this off? Would this be somebody outside the industry?
• What is that critical out-of-the-box offering/configuration that will enable success this time around? Many have argued that payments should not be the first service as this requires to heavy a lift. Loyalty, though alluring, has been disappointing to-date. Transit has proven itself to be a killer-app in enabling behavioral change, but has seen limited success in anchoring a multi-tenancy service.
  
• Is Barclays One Pulse card the seed of the new world? Would a One Pulse in the mobile be the beginnings of the new world?
• Will we a successful model emerge from a new geo, such as, Turkey?
  

I am consciously not looking at the Far East market to provide the template which can be successfully replicated elsewhere (at the risk of being proved wrong). My interest is in understanding success factors affecting multi-tenancy smart cards in open / large markets. Successes till-date have been in areas where a large player, with a dominant position, has been able to pull the entire market along. In the US and Western Europe, a more collaborative approach might be necessary.

Look forward to hearing from you.

Best Buy suspends NFC reader deployment

A recent issue of RFID Journal discussed contactless payment terminal deployments in North America. The article discussed Best Buy suspending its national deployment of contactless terminal over its disagreement with Visa on how debit cards were processed.

To help understand the issue, let me elaborate with an example. You buy a LCD TV for $500 at Best Buy and choose to pay with your debit card. If you used your magstripe debit card, you would swipe the card, enter your PIN and head home to enjoy your TV. Best Buy would pay about $1 as fees for accepting the card.

Let's look at the scenario where Best Buy has deployed a contactless reader and you whip out your fancy contactless debit card to pay for the LCD TV. You authorize $500 to be debited from your account by providing your PIN and you leave happy. Best Buy would pay about $11 as fees, an extra 1000% for the mistake of deploying contactless readers.

Now you know why Best Buy pulled out these readers. The question is, why did they not pull the readers out earlier. Last I heard, their losses were in 7 digits due to the way contactless PIN Debit transactions were processed by Visa Interlink.

It might be worthwhile to discuss another dimension of deployment of contactless readers here. Visa and MasterCard have positioned contactless payments as an option when speed and convenience are of the essence [for transactions less than $25]. You are at a Coffee Shop. You 'wave' your card to pay the $3 for your caffeine fix and run. No need to sign, no PIN necessary, no receipt. Makes sense. However, for users to get used to waving their cards at readers, these readers need to every where. Otherwise, its one more decision point (and aggravation) for the user to figure out whether they swipe, wave or insert their card. Consequently, Best Buy, Home Depot and other retailers deploying contactless readers are getting us to the critical mass where you can 'wave' whereever we pay. Interchange rules that are currently geared towards speed and convenience need to modified to accommodate ubiquity as well. One hopes that this change will come soon so that Best Buy can go back to having nationwide deployment of contactless readers. I have to say that I enjoyed waving my card at Best Buy readers. Sigh!

[Updated 07Jan2010]: Wanted to inform readers that Best Buys has stopped accepting Visa contactless cards (source).

What do you think?

JP Morgan's analysis of PayPal - A must read

I came across a very good analysis of PayPal by JP Morgan (link). The PayPal blog also talks about it. If you are interested in payments systems, this is a must read.

China overtakes the US in the Year of the Rabbit?

We recently crossed an interesting technology adoption milestone (Yahoo tech news). China has more internet users than the US population. China have over 338 million PC users. I thought that this would be an opportunity to aggregate related statistics about China. With the PC subsidy for rural China (Source: Gartner) expected to increase PC adoption, would China surpass the US in annual PC sales in 2011 (Year of the Rabbit)? A corollary to this question: If China does pass the US in PC sales, does this mean anything? China has passed the US in mobile phone sales, and the world continues to turn...

I will continue to updated the stats I collect. If you have related stats that you would like to see here, please send them to me and I will include it.

Platform is the future. What is the platform, though?

Google recently announced that they would launch Chrome, the OS. Then followed analysis of whether this was the right thing for GOOG to do or not (related post from thecatalystcode). It might be helpful to take a step back to see the undercurrents behind GOOG's decision.

This post attempts to shed light on the strategies being pursued by Google, Apple, Nokia and Microsoft to subsume as much value for the ecosystem.

Thin is in: Google is focusing on getting the market to go thin, use the cloud and cloud-based resources. In so doing, it can use its ad-support freemium business model to skew the advantage in its favor. It gets the end-users hooked on free and thin, by being the purveyor of thick. The thickest client that exists on most of our machines is the browser. Therefore, Chrome, the Browser.

These days, browsers have subsumed so much of the value of the software layer, it is getting easier to commoditize the OS. However, for the browser to be in charge of its own destiny, having control of the OS is desirable. So we have Android and Chrome the OS.

Google in charge of the browser and OS, in an ad-supported freemium world, takes in most of the value and chokes off oxygen (aka revenues) from most everybody else. In such a world, it is a slow bleed to lower ASPs and commoditization. Ask anybody in the value chain who sits below or above Google, and they will attest to this.

App Store is the platform / Thick is it: Apple's strategy is to enable the app developers to leverage investments in cutting-edge hardware, design and usability. Innovation by the third-party developers / value-added service providers helps increase the relevance of iPhone to the end-users. In so doing, Apple can command a larger ASP, have a direct channel with end-users and commoditize the MNO (e.g., AT&T). Additionally, thick client is part of Apple's platform strategy as iPhone native apps help keep the iPhone differentiation front and center in the minds of end users. A corollary to the above strategy of Apple: Hardware is not a commodity. Use the platform to extract premium for the hardware. Apple's vertical integration of the stack comes in handy, as well.

Nokia: They have as good a vertical story as any in the mobile space. They control the hardware (Nokia the OEM), the OS (Symbian), Browser (based on open source WebKit)... They have an App store as well (Ovi). In many parts of the world, Nokia has a direct market presence (unlike the US, where the telco offers the phones to consumers). However, they find themselves in unfamiliar territory. Downloadable apps and value-added services was the domain of their partner, the MNO. Though Nokia has a vibrant 3rd party developer community (Forum Nokia), consumers getting to a mobile app was largely dictated by the MNO's on-deck decision. Though it was possible for side-loading an app and folks like Handango have been active in the 3rd party mobile apps marketplace, loading mobile apps after you got the phone was an exception. Please note that this behavior has very little to do with SMS, 2G, 3G..., or with the purchasing capacity.

Why is the App download problem important to Nokia? Up until the iPhone came along, all of us were happy with our phones the way they were. In a post-iPhone world, the local relevance and the global connection seems diminished if the phone does not have an easy way to get apps and utilities, however trivial they may be.

What is Microsoft's strategy?. As they do not have hardware, the Apple App strategy has limited value for MSFT. As App stores have become a business imperative, MSFT has its version. The ad-supported freemium model is one which they have been trying to crack for a while now. They have the cash flow to ensure they have runway space while they attempt to take off. For sure they are the incumbent, even in a Google's Thin is In strategy. Will Bing get them down this path is a billion dollar question. MSFT's strategy on mobile devices seem to be weak and their PC story is flailing. Only time will tell, whether MSFT's irons in the fire will result in anything meaningful to change their trajectory and destiny.

Do you think that hardware can be commoditized, and that platform is the key to migrating value?

Inserted 26th July 2009: I took a related survey recently (please let me know the name of the site as I do not recall the name) which complements this post:

What is the future of mobile?
Google is right Web apps will win against native 22%
Google is wrong App Stores will still be big 39%
Apple will win Native apps will trump web apps 20%
I dont care : 17%

Total Votes: 4213

Influencer or the King

It is a paradigm change. It's hype with little relevance. It's the future. It's US-centric obsolete technology that the rest of the world has gone past...

The above are some of the comments associated with the iPhone. Which of the above are true? All of them? None of them?

Does the iPhone represent a minority viewpoint (US / IT press) or is it a trend of things to come?

iPhone has been a game-changer with innovations including:

• Native applications that are custom built to take advantage of the platform capabilities (Gartenberg's comments, analyst with Interpret)
• Smartphone platform (App store and iPhone SDK) being an integral enabler of the smartphone value
• Device that lends itself into app download and mobile browsing. Though iPhone has about 10% of the smartphone marketshare, it commands a disproportionate 32% of mobile internet market share (Source: Admob). Nokia has 40% market share of mobile devices and a similar share of the mobile internet market.
  
• Did Apple open the pandora's box with their App Store. Though we've had 1.5 billion downloads to-date, Juniper predicts that the industry would reach an annual 20 billion app downloads per year by 2014! (Source: Juniper Research and Mobile Innovation)
  

On the other hand, iPhone is a footnote in many international markets for some of these reasons:

• Would an audience used to cutting-edge hardware, such as, 12 Megapixel camera, settle for the 3 Megapixels that iPhone offers?
• Would the global market place used to variety of smart phones to select from settle for a model-of-the-year offering from iPhone?
• Can the tail wag the dog? Can US consumers with only 8% of smart phone market share or iPhone with 10% global market share challenge the market leader Nokia
  

Apple and iPhone are today's shiny toys. The question is whether they will continue to change the nature of the smart phone market place while lingering in the back, or will they mount an attack and displace the leader Nokia?

What are your thoughts?

Empowering BoP, in India and elsewhere

At best of times, convenience and efficiency is the value we add [thru' our product and services]. It is heartening to see when a person or organization's efforts result in empowering and liberating their client base. Microfinancing is one such initiative.

On my recent visit to India, I visited a few women's Self Help Groups (SHGs) to see the impact of micro-finance to their lives, and the role mobile commerce can play in rural settings. It was heart-warming to see these women, who come from very conservative backgrounds and who barely know to read and write, thru' financial empowerment, are sending their daughters and sons to college and hoping to break the wretched cycle of poverty for ever. The hope and aspirations in the eyes of these individuals, are also those that exist in eyes of folks in Latin America, Africa, China and elsewhere.

It is amazing to notice the flood of money heading to the bottom of the pyramid (BoP). Some of the Micro-Finacial Institutions (MFIs) I spoke with were planning for 5x to 10x growth over the next 2-3 years.

Guess what, folks at the BoP I spoke with have mobile phones. They are starting to get connected with the internet. In the coming years, as MFIs optimize their service delivery in their attempts to scale, mobile commerce will truly take off. I sincerely hope that the regulators in India facilitate this transition.

Please feel to contact me if you would like more details about this case study, or related opportunities.

Note about the pictures: The first group is a starter group which is striving to get its first loan. The second group is a veteran group, been together for 4 years and currently working thru their 5th loan. You can see the difference empowerment makes in the eyes and demeanor of these two groups.

Contactless in Rome

I was impressed with ATAC, the organization operating mass transit in Rome and a couple other cities in Italy. What impressed me about ATAC is the coordination between the different modes of transport. In Rome, you can ride the train and bus (of course). You could also rent a scooter/motor cycle or even a bicyle.

One of the standard rebuttals I hear from my US friends about why mass transit would/does not work is because of the odd times that they have to run an errand to a place which does not have mass transit connectivity. With other modes of transport that you can rent, such an excuse is only that.

Why do I care about well coordinated mass transit operators? A perfect place for mobile / contactless commerce. To the hammer, the whole world is a nail!

In Rome, like elsewhere in Italy, there a lot of young folks. With mass transit opening the doors to contactless transactions, I expected to see a lot more of contactless payments in the retail world. I was very disappointed when even QSRs and newspaper stands at Termini did not accept contactless payments (transit or bank wallet). The silver lining was the availability of dual interface Metrecard that works for both transit and EMV Visa Electron card.

There seems to be a critical mass of converted audience. Initial inquiries to the cause of this gap seem to indicate that the contactless wave was come, heading south and west from London. Why do you think that there is no commercial deployment of contactless payments outside of tranist in Rome?

US Proximity mobile payments round the corner

The standard refrain around mobile commerce commercial deployments [in the US] is:

• Far East (Japan, Korea, Hong Kong) has been doing this for years. The rest of the world can use this roadmap
  
• Western Europe and US are more competitive/freer markets (as opposed to a handful of dominant players in Japan/Korea), and therefore, have to chart their own course (implying Far East's success is not readily transferable)
  

Business model (the 800# gorilla in the room) aside, I take a whack at understanding what Japan has done and what the 'western' world can learn from it:

Japan 2008-09 (tipping point?): 25% of POS terminals support contactless (400K out of 2.1 million); 40 million of the 90 million mobile phones have contactless / proximity payment capabilities; 780 Million payment cards, 80 million contactless cards, 10 million mobile electronic wallets enabled for contactless payments. Additionally, keep in mind, transit is an intrinsic part of life in Japan where majority of the urban population uses contactless technology.

US retail market: 8 million POS terminals deployed out of which less than 800K have contactless readers; 900 million payment cards in circulation, 400 million cards active, 80 million contactless cards. Needless to say, no phones, mobile wallets... (for proximity payments).

When will the US reach tipping point: Contactless cards getting into wallets of consumers seems to underway. As part of the card replacement cycle, by 2011-12, US might have 300 million cards deployed. At which time consumer education around contactless cards [in our wallets] will start. By 2012, we might have 3 million contactless readers, deployed primarily at cash replacement verticals and industries/stores with higher fraud rates. Given this picture, MNOs (e.g., AT&T, Sprint) will offer proximity payments in their handsets starting in 2012.

What else needs to change: Payment/Debit networks rules around PIN and contactless have to change to enable, for e.g., PIN debit via contactless [for amounts greater than $25] (Thanks to Scott for pointing out the nuance around Debit & PIN).

As deployment of contactless cards and readers takes place, MNOs will work out business models and place orders for phones. We have more than a couple of years to get there.

Do you agree with the above assessment. If this true, would startups serving this market survive till then? If so, how? What can the industry do between now and then to prepare?

Thanks to Steve, Japan for leading me to some of the stats used here.

Disclaimers: Figures mentioned are ball-park numbers, and are at different points in time. The figures are meant to provide a context to the discussion and to the point being made.

1 - K used above indicate thousands of units

CTST2009 - Conspicuous by their absence

I am at New Orleans attending CTST Americas 2009, the annual conference of the Smart Card Alliance. The Smart Card Alliance is an industry consortium of participants in the smart card industry, such as, smart card vendors, personalization equipment vendors, personalization bureaus, banks, processors, payment brands, standards bodies... The industries active in this alliance are Payments and Identity.

Notable topics discussed today, the first day of the conference, included government regulations, identity theft/fraud and privacy. As can be expected, mobile phones are impacting this group, especially in the payments space.

Throughout the conference, a track of sessions has been dedicated to mobile payments. The mobile payments sessions discuss usage scenarios, security, privacy, business models, results from pilot deployments, steps necessary to go commercial by learning from pilots, how the smart card and payments industry will work with the Mobile Network Operators (MNO), primarily from a business model perspective (sharing revenues)...

However, conspicuous by their absence were the MNOs themselves. MNOs were not speaking at any session. Other than one MNO, they were not even attending the conference. From their perspective, this forum does not even exist!

Correction: GSMA participated in one session on Day 2, which by proxy, implies all operators were present?

A few of the mobile handset vendors were present, only in the margins.

Does this mean that the MNOs are going to dictate terms? Are there other forums/fora where these public discussions are taking place. What does this say about the Smart Card Alliance and the CTST Americas conference? Would Cartes Americas replacing CTST help?

What are your thoughts? If you have any feedback, I'll try to get you answers while I am at the conference.

Cinco de Mayo greetings to all!

Freemium: What would consumers pay for

Freemium business model seems an appropriate way to attract people to a service, while trying to make the business sustainable/profitable. However, what aspect of the service would somebody pay for?

From a service provider perspective, getting your audience to become subscriber is preferred. Event-based premium content (akin to pay-per-view) is a good bridge to get from the free world to the subscription world.

What kind of events would somebody pay for? One of my friends has been working on trying these models for a couple of years now. He said live data is the key. As a consumer I can relate to it. Live data can be multi-faceted:

• Get access to information/event before others. Data services for businesses have been doing this for a while now.
  
• Experience an event while on the run/road. Popularity of smart phones is driving this category. A significant portion of the billion Appstore downloads are of this segment.
  

There might be related information for which folks would pay for:

• Inform when a friend/contact is in the vicinity
• Event of interest taking place in the vicinity
  

The above is a pull-push model. Based on personal filter settings (static data) and location details (dynamic data), the consumer 'pulls' events of interest (primarily in the personal/social space).

Prima facie, a service that can take advantage of the above triggers would require:

• Support for mobile devices, as the above use cases involve user mobility
• Sophisticated push engine: The success of BlackBerry service was based on their push model. If the guy pulls something, chances are that he wouldn't pay for it!
  
• Micro-payments: Each of these events are atomic, and paid for prior to consumption
  
• 1-click / Integrated payments: Make it easy for the consumer to get to what they want
  

The Apple Appstore is turning out to be a platform where interesting experiments are being tried as folks figure out a way for consumers to pay for services (more about this in another blog).

While on the topic of what consumers would pay for, would they pay for:

• Identity: Would a parent pay to ensure that adults don't participate in kids conversations (for e.g., at a chat room)?
• Security: The site must be secure, and that the information you share with the service is secure. To most people, this sounds like hygiene and should be covered by the service provider
  

What are your thoughts? Love to hear from you.

PS: Advertising revenues from businesses targeting the audience of the service is assumed to be a source of revenue.

Universal Financial Access by 2013

[Manju Murthy] In my earlier post, I wrote about the opportunities for disruptive innovations as emerging markets address financial inclusion, I had also written about Sanjay Bhargava, who is championing Universal Financial Access in India. He has graciously agreed to be a guest blogger at Commerce Insights (follows). Additionally Universal Financial Access India, a LinkedIn group, has been created to enable interested professionals continue such discussions and to network with each other. Please sign up to this group as well.

[Sanjay Bhargava] Manju, thank you for inviting me to be a guest writer on your blog and sharing in the dream that real and not cosmetic UFAI (Universal Financial Access in India) can be achieved by 2013.

I would like to start this first post with two extracts from the Nobel acceptance speech given by Prof. Muhammad Yunus. For the full speech see http://nobelprize.org/nobel_prizes/peace/laureates/2006/yunus-lecture-en.html

“We wanted to go to the moon, so we went there. We achieve what we want to achieve. If we are not achieving something, it is because we have not put our minds to it. We create what we want.”

“I firmly believe that we can create a poverty-free world if we collectively believe in it. In a poverty-free world, the only place you would be able to see poverty is in the poverty museums. When school children take a tour of the poverty museums, they would be horrified to see the misery and indignity that some human beings had to go through. They would blame their forefathers for tolerating this inhuman condition, which existed for so long, for so many people.”

I think it is important that we set ourselves measurable BHAG (Big Hairy Ambitious Goals) and my first attempt at articulating five goals for 2013 is there for everyone to look at and comment on. See this five slide presentation http://www.slideshare.net/sbhargav1/ufai-five-goals-2013

Do you think UFA should be a national priority for India and that the five goals for 2013 can be achieved with high innovation and low subsidies?

The presentation also refers to a set of whitepapers which can be downloaded from http://www.slideshare.net/sbhargav1

Most of you will not have the time or the inclination to read the whitepapers and may find them complex without explanation and context. I plan to do a series of bite sized posts highlighting the main points over the next few weeks. We are all learning and seeking solutions so critical comments are very welcome. Together we will find a way. I look forward to collective action and an interesting debate.

Disruptive innovations in payments - BoP style

In emerging markets, often the growth opportunity in the payments industry lies in addressing the un-banked. While addressing opportunities at the bottom-of-the-pyramid is challenging, financial inclusion empowers the un-banked to be both producers and consumers, thereby unlocking a viable business opportunity.

While looking at payments opportunities in India, addressing the unbanked / under-served forces its way into any brainstorming session. This could be because of innovations around branchless banking, novel methods of handling KYC mandates, reducing documentation/paperwork associated with opening a new bank account, zero-cost bank accounts, leveraging technology without being encumbered by legacy… When you are trying to create a profitable business from millions of customers who earn less than $100/month, you think thru’ the problem in a very different way. Resulting in a raft of innovations can be truly disruptive. CGAP has been successfully promoting this cause for a while now. I've enjoyed participating in the CGAP group on LinkedIn as well.

It is in this context that I ran into Sanjay Bhargava, who has been championing Universal Financial Access. He brings a lot of energy and enthusiasm into a daunting initiative, and makes it seem achievable. His attitude is so infectious, that I figured a lot more space needs to be devoted to the Universal Financial Access project (subject of another blog).

Is BoP a lost cause? Is Universal Financial Access an oxymoron? What are your thoughts?

End of independent mobile payment players?

It is difficult to have missed the news (here, here, here) about Obopay receiving $70 million from Nokia. This is on top of the earlier round (Series D) of $20 million in April 2008.

What does this investment indicate:

• Obopay's CEO is skilled in raising money (you'll find this interview interesting)
  
• Mobile payments industry is at an inflection point, and on the verge of take-off
• Nokia sees Obopay as best suited to take advantage of the opportunity.
  
• Nokia is seeing Obopay as its next billion dollar baby?
  

One of the signs of an emerging industry crossing the chasm is investments from the large players. This happened in the email space (Microsoft buying Hotmail...), Online Advertising (Yahoo/Blue Lithium; Microsoft/aQuantive)... Startups many a times do not have the ability to scale quickly to address the available market efficiently. Alternatively, the economics of the space do not justify a startup building out the sales, delivery and service infrastructure. In such cases, an existing player buys a startup to either move up the value chain or to increase the breadth of their offering.

Does Nokia's interest in Obopay suggest this?

Obopay has alliances with scheme operators (MasterCard), banks (Citi, Yes), carriers (Verizon) and device vendors (Qualcomm, Blackberry, Nokia).

Any of the above partners could have made a large investment. Qualcomm in an existing investor in Obopay. Does Nokia's investment indicate that the device vendors have an inside track to leverage the mobile payments market. Would a payment scheme operator or a telecom operator have been able to grow the mobile payments market better than a mobile device vendor?

In terms of registered users and money flowing thru the system, PayPal mobile seems to be the front-runner in mobile P2P payments in the US. mChek seems to be the front-runner in India.

Does Obopay have strategic alliances or IP that can block these early leaders? Can Nokia help Obopay move ahead. Has there been any development in the recent past to indicate the slumbering mobile payments industry is getting ready to sprint?

Are mChek and PayMate next in line for a bear hug?

What are your thoughts?

Authenticating online transactions

The payment ecosystem is comfortable with the authentication of a payment card holder at the time of retail transaction (about 1.5 basis points of fraud). In retail transactions, the user is authenticated by the checkout clerk, and the payment session is authenticated by the payment server. Two sets of checks using independent channels.

In online commerce, similarly, multi-factor authentication (MFA) is being used for strong authentication to achieve the same degree of authentication. The authentication factors used, include:

• What you have (the payment card) [weak as a factor unless a card reader is also involved]
  
• What you have (the cellphone / hardware token registered with your card)
  
• What you know (the PIN)
• Biometrics (who you are): This is being used by some, with the potential for increased usage)
• One-time password / Signature (yet another knowledge factor [what you know])
  

Banks are deploying hardware in a variety of form factors to enable MFA for [more] secure online commerce. There is lots of debate whether these investments are appropriate or being mis-directed.

Unconnected Chip-n-PIN readers are being endorsed by payments associations and being deployed by European banks to generate OTP (one-time passwords) for secure access to online banking sites. The simplicity of unconnected card reader devices make them secure. They are not connected, therefore are less prone to being attacked by malware. However an additional device to carry around when you travel (or otherwise) is not terribly convenient. There is still the issue of Adversary/Man-in-the-Middle (MITM) attack.

Using SMS as an alternate delivery channel is another alternative (saves cost of deploying readers and hassle of carrying readers around). Cell phones are used to communicate the OTP or Transaction Number (TAN), which the user enters at the online site. For those that don't care for cell phone and/or SMS/text messages, an IVR (interactive voice response) variant of the above is also used.

Hardware token, either the unconnected kind or the USB kind, are also used, but not in the same class of security solution as what you know (PIN) is not involved.

The emerging consensus, including observing the above alternatives, is that a hardware based solution over an alternate channel be used to generate/communicate the additional authentication factor (what you know). See related post here and here.

There are varied opinions about the usability and security profile of these offerings, including:

• Does a Chip-n-PIN reader put a user at physical risk?
• Is SMS safe enough (SMS is a non-confidential plain-text channel)?
• Are smart phones safe enough?
• Should one of the authentication factors be sent over an alternate channel. E.g., user sends the OTP or TAN over SMS to thwart MITM attacks
  

Are the current approaches to securing online transactions adequate? Are there any fundamental lacunae that we need to plug to get a solid foundation on which we can build the necessary security solution? What are your thoughts?

[10Aug09]: Interesting related post from Finextra (link)

Paypal Mobile: Is it a non-starter?

I was reading Carol Coye Benson's blog about cash going away. Such posts catch my attention and got me thinking. Why are we not using P2P (peer-to-peer) mobile payments when friends/colleagues have to pay each other (splitting a meal tab...)? A related question is why has Paypal not been able to make mobile payments more successful/ubiquitous? This question is topical, in light of Ebay's recent focus on Paypal and its mobile offering (2009 Analyst Day presentation).

First, a background of the offering. Paypal mobile has been around for over 2 years now. Paypal has over 70 million active users. The cost for individuals to make payments to each other is free (other than the cost of the SMS charged by the telco, if you are using SMS/text). Paypal does not charge individuals any fee to load their wallet from a DDA/bank account. They do not charge individuals any fee to withdraw the money back to their DDA/bank account. In summary, Paypal's mobile payment service is free to individuals to pay each other. It is reasonable to assume that most of Paypal's active users in the US have a mobile phone (see Tomi T Ahonen's post). However, I would assume that only single digit percentage of active users have registered for mobile payments.

I suspect we, as consumers, do not use Paypal mobile as we have not made the necessary shift in our lifestyle. There has been no incentive or education for us to incorporate Paypal Mobile into our lives. No major ecosystem player has encouraged the use of Paypal Mobile.

Why is Paypal not pushing their mobile offering? Paypal mobile is an opportunity for Paypal to move from the online payments space to the physical world. Peer-to-peer payments seems to be a low hanging fruit in Paypal's retail payments strategy. Or is it?

Let's look at why physical merchants (the kind Carol visited in Oregon) have not embraced Paypal mobile. The cost of acceptance seems to be the first place to look. For most small vendors, Paypal fees work out to about 3.5%. This is a pretty high cost.

Acquirer/ISO recruit merchants and help them in accepting [new forms of] electronic payments. Is the absence of such a partner in the Paypal Mobile ecosystem affecting adoption?

Are mobile payments still an oxymoron? Is Paypal not interested in physical retail payments (aka Paypal Mobile), as it sees lots more growth in the online world? Would love to hear your thoughts?

Outsourcing product field trials in Web 2.0 world

I came across this news item about Citi being interested in having NFC field-trials in Bangalore, India to help prepare for commercial deployments in the US.

This is an interesting idea. I had heard of outsourcing call centers, development, back office operations... to Bangalore/India. Pharmaceutical companies have been outsourcing field trials of their drug testing to places like India. To Citi, outsourcing NFC field trials was an obvious step in trying to stretch the dollar in trying times.

Would this work though?

How much would a Bangalore merchant promote this new technology while he knows that product/service being tried out is not making its way to his store any time soon? Would the NFC reader be buried somewhere, with the [transient] checkout staff being ignorant of its existence/usage?

I heard that the local transit agency is being roped in for the trial. Makes sense, considering the pivotal role transit plays in the contactless ecosystem. However, would the local transit agency make the effort to actively participate when they know that they are just the lab rats.

The dynamic of India's mobile carriers are very different from that of the US, starting from low ARPUs, to high proportion of prepaid users... I heard that nearly 90% of India's mobile customers are prepaid users.

Would India's cash-based economy, culture... provide Citi the ability to extrapolate results? You get the drift.

Initial reports of the trials came out in September 2008, an update showing up in late Feb '09, with potential start date in Q2'09. It is anybody's guess if and when this trial will happen. What do you think are the odds of Citi being able to pull this off?

Is this the beginning of a new trend/market segment? This question is a little broader one, around innovative ways to field trials and reducing the cost of product development especially in the Web 2.0 paradigm.

Incentives and rewards for secure online payments

Paypal plugin, and one-time credit card numbers are some of the innovations taking place in the online commerce space which are helping the consumer tackle online fraud.

One-time credit card numbers address the online fraud associated with phishing (malware capturing the card details as it goes across). Many card issuers / banks offer one-time credit card numbers on their sites. Paypal plugin, addresses threats from keyloggers. Citi offers similar plugins. Products, such as, Roboform offer similar security features.

I am wondering whether the fraud mitigation features used by a consumer (in association with the issuer) can result in lower interchange discount rates for the entity bearing fraud risk (merchant or issuer). The lower interchange rates received can be translated into loyalty points or similar benefits to the consumer. This would provide the right incentives for the ecosystem to take innovations around anti-fraud to the next level.

Presently, there are few incentives to encourage use of secure online payment solutions by the consumer. Interchange rates are broadly broken up into Card Present rates and Card Not Present rates. I am wondering whether there is scope for something in between the two. I understand that there already a myriad of interchange rates and are very confusing. My suggestion would only add to this 'mess'.

There may be a precedent, with Visa providing better interchange rates (a few basis points) for merchants offering VbV (Verified by Visa) on their sites. Would it be possible for similar to get similar incentives for using one-time credit numbers, secure plugins, updated browsers with the latest security patches...

What are your thoughts on how to motivate and reward safe online payment behavior?

Interchange fees, innovation & disintermediation

There has been a lot of debate on the level of interchange fees (aka merchant discount rates - the fees paid by the merchant for accepting an open loop network card), and the role it plays in fostering commerce.

Supporters, typically issuers, says it fosters innovation, increases sales at stores... Opponents, typically merchants, says that the fees paid by merchants are subsidizing issuers marketing programs. Interchange fees were not particularly controversial until the proliferation of reward cards. The interchange rates for reward cards are at least 20 basis points higher than for the basic card, and are therefore balked at by the merchants especially those that have slim margins.

In a world where intense competition is getting organizations to review every single expense, merchant's focus on interchange rates is not misplaced. In the 'old' days, merchants did not have much of a choice and came to terms with the world dictated by Visa/MasterCard.

However, new entrants are changing the landscape. Paypal, Amazon and Apple have tremendous market reach. They have the ability to be an alternative to the payment networks. This is already true for Paypal in the US ecommerce world. Amazon is well on its way as well.

It is not obvious to me that focus (or limits) on interchange rates implies reduced innovation. There is plenty of innovation taking place in the payments industry, outside of the realm of the traditional payment networks. This innovation is not being funded by interchange fees. Innovation will continue

Having said that, I agree that Congress must not try to mandate interchange rates and stifle the competitive nature of the payments industry.

Do you support limits on interchange rates? How does the disintermediation of payment networks in the online world extrapolate to the offline/retail world? Is iPhone providing a glimpse of what may be looming on the horizon?

Heartland breach, One-time credentials & EMV

The inauguration is over, and we are waking up to a new tomorrow. We are realizing, as is to be expected, that nothing much has changed in our lives.

The latest breach, at Heartland Payments Systems, was shocking. However, a cynic would say that after Madoff, the TARP fiasco, 8 years of Bush... the Heartland breach seems rather benign. Reports are that, as many as, 100 million accounts could have been compromised. To put this in perspective, TJX breach affected 45 million accounts.

Security audits, certifications et al are necessary. But these are essentially a cat-n-mouse game. As long as there is value in the data, the bad guys will continue to try to steal it (and they will occassionally succeed). Making payment transaction data worthless maybe a way to break this vicious cycle.

One-time credit card numbers is one way to get there. Orbiscom, recently acquired by MasterCard, offers such a solution. Citi, Paypal, among others, offer such payment cards.

Additionally, the US might need to get moving on adopting EMV / Chip-n-PIN. Creating magstripe payment cards using skimmed data is too easy. Creating chip cards using skimmed data is a tad tougher. As the rest of the world moves towards EMV, the US will increasingly be the soft target. I wonder what the trigger needs to be for the US payments industry to decide that cost to move to EMV is cheaper than status quo?

Feedback / Comments?

Telco Garden or Telco Jail

The choices available to companies offering mobile products and services (Value Added Service [VAS] Providers) have increased in 2008, thanks to iPhone, G-1...

The VAS provider's relationship with the telco and VAS business model are some of the strategic levers available to manipulate. Placement of the VAS service with the telco is another option available. Factors affecting this decision / potential value added by the telco include:

A) On-deck placement: Activation/Trial of a service is 10-times higher for on-deck products/services than those that need to be downloaded

1. Awareness of product/service: Initial awareness can occur on the web
2. Seal-of-Quality implicit when the telco offers a product/service on their deck
   
3. Customer ownership is a critical element affecting this decision. Needless to say, the one bringing the customer to the service owns the customer

B) [Co-] Branding: Branded / Co-branded / White-label: Some of the factors affecting the VAS provider's decision on how to brand their offering:

1. Consumer's awareness of the service, thru possibly other channels (e.g., internet)
   
2. Marketing dollars to create awareness
3. Is the value-added service (VAS), or part thereof, another company's branded product (e.g., Hollywood content)
   

C) Service Activation: Role played and incentives provided by the telco, service provider and partners

1. Who is best positioned during the user experience to proposition the user
2. Information available to craft and introduce service activation request message
3. Role played by the entity to increase success rate
   

D) Call-to-action: Whom does the consumer interact with to use the service? More to do with branding and customer control?

E) Optimization of performance [of app/service] vis-a-vis network

1. Telco is best positioned to do this
2. There are third-parties who have deployed their infrastructure at telcos who can help do this as well

F) Optimization of user experience

1. Knowledge of device capabilities, network choice/performance. As in the above (E), the telco can offer this more easily. However, there are other service providers with their equipment at the telco, who could offer this service to you as well. Going with a third-party might help you have a more consistent interface across the many the telcos that you need to support.
   

G) Credit management

1. Credit rating a user and extending credit to them, especially in a Web 2.0 world can be an art, which affects the health of the business. More so, in the given economic environment
   

H) Billing & Collection

1. Efficient itemized billing, especially for micro-payments, is critical
2. Effective collections of micro-payments can be tricky in a mobile/telco world

I) Information about the user's usage, preferences...: Who has the more comprehensive view of the user

1. A telco might have a better view of the user across the various products/services that they consume, and across the telco's user base
2. The VAS provider might have a better view of the product/service across multiple telcos, as well as, other communication channels / media

J) Add-on services/revenues: Ability to sell, up-sell, cross-sell

1. Does the telco or the service provider have the ability to better sell related products and services

The telcos charge anywhere from 50% to nearly 70% of the revenues for providing some of the above value. The price charged by the telco to provide is value is the height of the wall that determines whether the you, the VAS provider, is in a garden or a jail.

Alternatively, a VAS provider could look at this list to tweak the offering to reduce the height of the wall. I have seen quite a few companies doing this, especially in today's more open mobile environment. There are quite a few tools and technologies available for each of the above factors (possible topic of another blog).

What are you noticing in your neck-of-the-woods? Dumb-pipe, intelligent-pipe...? Are there any other levers folks are using in the tussle between the telco and the VAS provider? Which of the above value-adds by the telco that you care for / can't do without?