Retailers and payment schemes (Visa, Mastercard...) jousting on the interchange rates and impact it has on the economy has been interesting. Rates paid by retailers vary tremendously (based on many different factors which I shall not get into here). To drive a stake in the ground, the rates are around 1.8% in the US for credit cards. In a world where margins are thin, 1.8% seem like a king's ransom.
With this perspective, let us look at rates paid by online retailers to process online payments. Using PayPal as a benchmark, PayPal charged merchants an aggregate fee of 3.54% in Q4'09, nearly twice as much what merchants pay in the physical world. Additionally, PayPal's transaction processing expense rate and losses added up to only 1.36% [in Q4'09], resulting in a margin of a whopping 62%.
Fortunately for PayPal, their competition charge as much, but do not have the great business model of being able to keep most of the money. In a traditional (Brick-n-Mortar) model, the fees paid by merchants are split between at least four parties, the acquirer, the processor, the issuer and the network/scheme, with most of the fees heading to the issuer (around 80%). In the online world, there is yet another mouth to feed, the payment gateway (e.g., Authroize.net). Thanks to the disruptive innovation of PayPal, they successfully created a model where there is only party at the table, PayPal. In an increasing number of transactions, PayPal is the Payment Gateway, Acquirer, Network and the Issuer (and in these cases it costs them a few pennies to process a payment transaction). Through this innovation, they get to charge what the competition charges (high rates), while being able to keep most of it.
Isn't it wonderful to participate in a sub-optimal world of online payments. PayPal's large margins are funding their red-hot growth that is many times larger than the industry average. With each passing year, PayPal will continue to grow (both top line and bottom line) at the cost of the other players, with competition only being able to watch PayPal demolish them. The existing business model of Visa/MasterCard has tied the hands of the traditional players and forcing them to play in a playing field that is lopsided and favoring PayPal.
And, if you think that above situation is an unfair advantage for PayPal, wait for them to play their next card, Mobile Payments. The above structural disadvantages are holding back the traditional players in mobile payments, as nobody wants to add yet another player who demands a cut (the telecom operator). Guess what, the efficiencies and the margins that PayPal has can easily accommodate the player whom the competition is pushing out.
How do you think Visa and MasterCard, the public companies will respond to protect their turf and deliver shareholder value?
Sunday, January 31, 2010
Saturday, January 9, 2010
Higher transaction limit breathes life into a comatose market?
Over the holidays, RBI (the Federal Regulator in India) raised mobile transaction limits to Rs50,000 per transaction (source). A gripe by the mobile payments industry has been that the prevailing limit of Rs5000 per transaction was not sufficient, for e.g., to pay for an air ticket. What is the impact of RBI raising the limit for mobile payments in India? I'll look at this question in the context of urban India.
A quick survey of the possible demographic segments that the new regulation would appeal to:
a. The 80% of urban India who carry cell phones were held back because of the low transaction limits
b. The upwardly mobile tech savvy Indian (early adopters) did not have access to mobile payments
c. Those who are already paying for their sundry expenses using their mobiles phones, but couldn't pay for their airline tickets though
d. None of the above
As you might have realized, this is a rhetorical question. Mobile payments in India has been a big yawn. Mobile payment service providers in India are struggling, or are re-inventing themselves to stay alive / relevant (related post).
In India, the dominant perception (Cash Culture) is that cash is a preferred way of living, leaving no trail behind, being anonymous and not attracting attention of the government. This holds true for purchases related to both durable goods and consumables. Let's look at the traditional factors driving mobile payments, cash handling costs / cash displacement) in such an Indian context.
- Consumers who have and use credit cards and bank accounts, and merchants who accept them
- Organized retail
- Those interested in reducing customer service costs via self service channels
When you look at mpayments from the above perspective, there is a significant overlap between payment card users and mpayments target market. While this insight is not a revelation, in the context of India which has very few active card users (20-30 million active card users), the increase in transaction limits will do very little to the mpayment industry in India. The change in the transaction limits has not raised the mobile payments market size which continues to be 20-30 million card holders (not the 500 million mobile phone users).
The above undercurent does not bode well for the industry. If mobile payments changed the market size from 20 million to 500 million you get people's attention. If the pie is only going to grow marginally bigger, there is little incentive for the various ecosystem enablers to invest resources and do the heavy lifting to deploy mobile payment technology.
Look forward to dissenting or concurring opinions. Have a wonderful 2010.
A quick survey of the possible demographic segments that the new regulation would appeal to:
a. The 80% of urban India who carry cell phones were held back because of the low transaction limits
b. The upwardly mobile tech savvy Indian (early adopters) did not have access to mobile payments
c. Those who are already paying for their sundry expenses using their mobiles phones, but couldn't pay for their airline tickets though
d. None of the above
As you might have realized, this is a rhetorical question. Mobile payments in India has been a big yawn. Mobile payment service providers in India are struggling, or are re-inventing themselves to stay alive / relevant (related post).
In India, the dominant perception (Cash Culture) is that cash is a preferred way of living, leaving no trail behind, being anonymous and not attracting attention of the government. This holds true for purchases related to both durable goods and consumables. Let's look at the traditional factors driving mobile payments, cash handling costs / cash displacement) in such an Indian context.
- Merchant's perspective: Other than in exceptional cases, merchants prefer cash as they control / manipulate what is reported as sales, primarily for tax purposes (euphemism for tax avoidance)
- Consumer's perspective: Do not want to leave a trail of purchases [for tax authorities to follow]
- Significant part of India's retail economy lives in a parallel black market, some say as much as half of the economy!
- Consumers who have and use credit cards and bank accounts, and merchants who accept them
- Organized retail
- Those interested in reducing customer service costs via self service channels
When you look at mpayments from the above perspective, there is a significant overlap between payment card users and mpayments target market. While this insight is not a revelation, in the context of India which has very few active card users (20-30 million active card users), the increase in transaction limits will do very little to the mpayment industry in India. The change in the transaction limits has not raised the mobile payments market size which continues to be 20-30 million card holders (not the 500 million mobile phone users).
The above undercurent does not bode well for the industry. If mobile payments changed the market size from 20 million to 500 million you get people's attention. If the pie is only going to grow marginally bigger, there is little incentive for the various ecosystem enablers to invest resources and do the heavy lifting to deploy mobile payment technology.
Look forward to dissenting or concurring opinions. Have a wonderful 2010.
Wednesday, December 23, 2009
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:
What are the implications of the above trend/development as we step into 2010?
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
- 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)
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?
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
Friday, December 4, 2009
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
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.
- Merchant Discount Rates (MDR) are higher in the US (about 1%)
- Fraud rates are higher in the US (about 1%)
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.
Tuesday, November 24, 2009
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
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
Tuesday, November 17, 2009
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)
- South Africa & Latin America showing growth
Government e-ID initiatives:
Growth areas in the smart card industry:
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)
- 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...
- 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
- 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)
Tuesday, October 13, 2009
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:
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.
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 ... ;-)
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.
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