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?