Can independent Trusted Services Managers (TSMs) flourish?

The concept of Trusted Services Managers (TSMs) has always intrigued me. The need for industries, as diverse as, telecom, transit and payments, having to work together is a daunting prospect. A neutral third-party, aka TSM, seems like a natural fit to facilitate interactions between these industry players, each of whom have different approaches to the same problem.

As we extend the concept of TSMs to reality, some wrinkles appear.

An observation that is common across NFC trials is about the number of partners (last count there were 6-8 partners) that need to be coordinated with. The complexity resulting from the number of partners is a hurdle, especially as one goes past trials and plans for commercial deployments.

TSMs also provide OTA services. Traditionally, OTA services have been provided by the card issuer, among others. In the telecom world, the telecom service provider (telco) have provided OTA services themselves, using OTA platforms from third-parties, such as, SmartTrust.

Reading between the lines of what telcos are saying and doing (around NFC trials), it appears that in the brave new of world of NFC, the telco will continue to provide OTA services. From a telco's perspective, this reduces the number of interfaces/participants to work with. Additionally, as ETSI has adopted the Single-Wire Protocol (SWP) as the standard, the SIM has become the secure element of choice, and the telco the issuer of the secure element. At the least, the telco would like to paint such a picture. Against this backdrop, the telco has a vested interest and a supporting business model (managing the secure element real-estate) to manage the relationships with third-parties, including banks and transit operators.

Alternatively, the SIM card vendor (G&D, Gemalto...) are better positioned to work with telcos to manage the SIM/secure element real estate, and have good relationships (both business and operational) with payment card issuers.

While TSMs (Venyon, Cassis...) would continue to be in the news for the next 3-5 years as the NFC ecosystem ramps up, it is uncertain whether independent TSMs (TSMs that are not part of SIM card vendors, telcos, financial services providers [e.g., First Data] ) would be able to succeed thereafter.

A question to ponder: What kind of business and usage models would enable independent TSMs to flourish as the NFC ecosystem ramps up and consolidates?

Is Online PIN Debit for real this time around?

News of online PIN debit payment products popping up in the news often. ATM Direct/Acculynk and NYCE's SafeDebit are the but the latest examples.

Persistence over the past ten years to make online PIN debit a success is admirable. In an effort to overcome prior industry missteps, Acculynk and SafeDebit are offering software-based solutions. As noted by others as well, a hardware-based module needs to be involved to secure online commerce comprehensively. Additionally, the usual suspects standing in the path of success include lack of ubiquity and changes to the user experience that make users uneasy.

The current interest in online debit payment options are driven by the credit squeeze being felt by consumers. If the current online PIN debit offerings can go commercial in the next 3-6 months with a broad array of merchants offering this payment option, there is a good chance of success.

Merchants may get real-time access to funds at lower rates

Typically, if a merchants wants to pay low fees, they get access to their funds later (e.g., ACH payments received after 3 days). If the merchant wants to get access to their fund immediately, they would have to pay a higher rate (e.g., credit/debit cards payments are received overnight).

This seemed to be an immutable reality that merchants had come to expect. Lower rates/fees and 'immediate' access to funds seemed to be a contradiction.

There is light at the end of the tunnel. Digital Transactions reports that PayPal is piloting a payment method where the merchants can have access to fund immediately (overnight). The rails are different from ACH and payment card rails. The disruptions keep on coming.

It will be interesting to see how this innovation plays out. All the best to PayPal for continuing to move the ball forward. Innovations that reduce online merchant's cost of accepting payments cannot come fast enough, especially in the current economic conditions.

Innovation 2.0 & the Obama Presidency

I ran into my friend Christian Sarkar's blog about Obama's Innovation Strategy. Felt that the topic was appropriate for this blog. Christian's blog has the video clip of Obama unveiling his innovation agenda at Google. Obama's speech was, as expected, very inspiring.

The dark economic cloud that has been hanging over the economy has been stifling. Startups are withering on the vine. Access to venture capital has literally dried up. IPOs have ceased being an option for startups for over a year. Revenues will surely dwindle or be delayed. I know of many a startups, some started by friends, that are barely surviving. The next 12-18 months of recession look insurmountable. The few choices left for startups include M&A. Not quite the Innovation 2.0 that we were expecting...

Having said that, the changes being proposed by Obama are indeed different. His vision and agenda will accelerate innovation in a variety of areas. Experienced and prudent nurturing/management of radical ideas could spur the blossoming of the Obama Googles. One could then argue that the true Innovation 2.0 was what the Obama presidency ushered in.

Innovations, such as EMUE's card, can get us going again

Very rarely do you see so much buzz about a new payment technology as EMUE's display cards. This is indeed an exciting innovation. This card has the thickness of a traditional credit card, while it has a 8-digit display, 12 digit keyboard and a battery that last 3 years! Wow, this is truly amazing.

This product has the potential of being applicable in a variety of markets, including the US.

The ability to leverage the above product features to support MFA (multi-factor authentication) using a single device is what makes this product exciting. To appreciate this innovation, compare against the Gemalto CAP (Chip And PIN) reader being tailor-made for Barclays (PINsentry) to support MFA for online commerce. Who would want an add-on device if your payment card can do it all? The additional cost of the EMUE card (costs 5 times as much as an ordinary card to manufacture) looks inexpensive when compared to shipping CAP readers to customers.

I see an immediate opportunity to use this card for MOTO (Mail Order Telephone Order) transactions. Visa is piloting this card with bank(s) to complement VbV (Verified by Visa). I am not sure that the problems that merchants and consumers have with VbV will be addressed by using EMUE's card.

You get so excited when you read about such innovations that you forget that the economy is supposed to comatose.

Obama effect on payments innovations?!

At a personal level, Obama's victory provides hope and optimism of a new tomorrow. Given the prevailing mood, hope and optimism are the engines that will get the US back on its feet again and restore its place as the leader of the free world. However, the expectations on President-elect Obama and his administration might be a little too much for any mortal to bear, even though that mortal might be Barack Obama

I was keeping this post for the new year. As all of us are being carried away by the developments of this week, I figured it is appropriate to gaze into the crystal ball (and again in the New Year).

Positive Trends

• More use of debit cards, resulting in a cheaper tender for merchants (PIN Debit).
  
• Alternative payment systems to reduce cost of accepting payment cards
• Consolidation among players in the P2P and alternative payments space
• Government use of payment cards to distribute social security and other benefits to citizens
  
• Initial usage models of Android phones-based applications to bridge online and retail
  

Negative

• Commercial deployments of NFC will be delayed
• Delay in deployment of contactless readers at retailers
• Mass transit, the beneficiary of high gasoline prices, might be collateral damage as cities struggle to invest over the next couple of years. The reason this aspect shows up here is because Mass Transit payments have led the deployment of contactless acceptance infrastructure
  

Initial indicators suggest that markets, such as, India have not been affected very badly. It will be interesting to watch for any innovations in the payments space from emerging markets.

Online Fraud Double Whammy

I am sure that you have heard about the startling discovery that a malware (Sinowal Trojan) has been harvesting financial data, including credit card numbers for nearly three years. The cache of stolen data exceeds half million records reports RSA FraudAction Research Lab.

On a related note, The New York Times reports

Microsoft plans to report on Monday that the security of its Windows operating system has significantly improved, while at the same time the threat of computer viruses, frauds and other online scourges has become much more serious.

News like the above are bad news for the online commerce industry. Especially, given the current mood of the consumer and economic environment. Improvements in technology can be leveraged to minimize the ability of fraudsters to profit from data collected by crimeware/malware.

A variety of participants, including CyberSource, Iovation, 41st Parameter have been working on combating this kind of fraud. However, what is becoming clear is that the fraudsters are a lot savvier and that we need to approach this problem very differently.

Call to action: Support the below technologies (some of which are already deployed for offline transactions) for online commerce transactions:

1. Support one-time credit card number, such as those offered by MasterCard in association with Orbiscom
2. Support use of dynamic CVx (CVV / CVC...)
3. Support multi-factor authentication, including utilizing CVM (Card holder verification) methods that are part of the current MasterCard and Visa specifications
   

The above advances will make the stolen information unusable. As credit card issue cycle is on average three years, the higher security cards will make it to the hands of the consumer over the course of the normal card replacement cycle. The cost differential of the higher security card will be made up by issuers if the consumer makes one additional transaction because of the higher security card.

Would love to hear about innovations that you are working on or are aware of that would remove the profitability from stolen data.