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?