Friday 31 December 2010

MasterCard: Leading the way in Prepaid


I have previously written about the opportunities in prepaid and the truly transformational potential of this product, both for the payments industry and society at large. 

Firstly, it is ideal for underserved markets, such as the unbanked population in emerging markets or the teen market in developed markets, and consequently has enormous scope for growth. 

Secondly, for two important reasons, this market may be a leader within disruptive product innovation; (1) emerging markets do not have a fully developed cards-based infrastructure and may therefore leapfrog to mobile payments and (2) the processing infrastructure for prepaid is relatively new and more open for mobile and online applications.

MasterCard is among the leaders in this space and have announced a number of interesting programs over the last years.  Let’s have a look at a few of these programs that demonstrate different applications of prepaid:
· US Social Security Administration: partnership with the government to replace checks for social security payments.  In addition to being more cost efficient, convenient and safe than checks, prepaid is also a greener alternative
· Walmart: partnership with Walmart to replace cash and checks from their payroll program.  The benefits are similar to the Social Security partnership and the potential is enormous
· Univision: partnership with the largest US-based Hispanic TV channel to market prepaid products to the Hispanic population of the US.  This segment includes many migrant workers and has the potential of including many unbanked people in the financial sector
· TravelEx: MasterCard recently announced it’s acquisition of TravelEx’ portfolio of MasterCard branded multi-currency prepaid cards for $459m.  The product is seen as a convenient and secure alternative to traveller’s checks and is part of an ongoing effort for MasterCard to grow its international business through acquisitions

The combination of tremendous market potential with transformational product innovation is sure to make prepaid one of the most exciting spaces of the payments industry over the next years.  MasterCard has demonstrated its commitment to this opportunity and if it continues to develop its product and strike up exciting partnerships, it will no doubt see huge rewards.

Wednesday 29 December 2010

Social Commerce: Leading the Future of Online Shopping & Payments


Until recently, e-commerce was the domain of online shopping sites and payments was a fenced-off part of a now-familiar ‘check-out’ process.   With the emergence of social and geo-location-based services, e-commerce will change fundamentally.  This will disrupt the current online payments process and require more flexible and customisable solutions.  This blog entry looks at the emergence of social commerce, early market leaders and possible implications for online payments.

Although online social networks have been around since the late 90s (sixdegrees.com launched in 1997), the tipping point can be traced to 2003 when PC penetration, the emergence of broadband technologies and the rise of software platforms fuelled the growth of these networks.

Today, these networks have fundamentally changed the online experience from a passive, read-only mode, to an active, read-write experience.  The corporate world has thrown itself on the bandwagon and nearly all companies now have a presence on social networks.  Still, very few have cracked how to transform this presence to dollars on the bottom line. 

In a recent edition of the Lydian Journal, Karen Webster identified 4 forces that will trigger a tipping point for social commerce:

The explosive growth of social networks
·  75% of worldwide online users now visit social networks or blogs, a 24% increase from 2009 
·  Although younger users are more likely to visit social networks, half of Internet users aged 50 – 64 and one in four of users aged 65 or older now use social networks
·   Among the different networks, Facebook is the largest with close to 600 million users, followed by Twitter (190M), MySpace (122M) and LinkedIn (70M)

Social networks become the dominant destinations online
·  Time spent on social networks Facebook and Twitter accounts for nearly one-quarter of the time spent online for Americans, up nearly 50 percent from a year ago
·  One explanation is that social platforms allow their users to do everything from online gaming to messaging with friends to exploring their interests and favourite brands, and thus economise on their time spent online
·  Mobile phones are also increasing the time we spend on social networks; 150 million people connect to Facebook via their mobile and 37% of Twitter users connect via their mobile

Social networks are high-trust sources of information
·  People join social networks to be part of a connected community
·  Communities of peers are high-trust networks where users are more willing to disclose personal information and even make purchases
·  Peer-to-peer word-of-mouth has always been a source of valued, dependable information – social networks have the potential to systematise this and become a hub for purchasing decisions

Merchant begin to see the value and growing importance of social networks
·  Based on the above factors, merchants are beginning to view social networks as a sales channel with which to turn fans into customers
·  Nearly all major retailers have a fan page on Facebook as traffic to their own websites is being cannibalized by traffic on Facebook, where fans are more willing to buy and advocate on behalf of the brand
·  Analysts estimate the value of an average Facebook fan to be $136.38, suggesting that fans are likely to spend an extra $71.84 they would not otherwise have spent
·  More than half of Twitter-users recommend companies or products in their Tweets, with just about that same percentage actually following through to buy that product

Although social networks clearly represent a fantastic prospective sales channel, very few companies have yet managed to generate revenues on these platforms.  Attempts to tap into this opportunity can be grouped in three categories:
·  Shopping cart technology that facilitates check-outs on Facebook (e.g. Payvment)
·  Deal-sites off social networks that drive sales at discounts (e.g. Groupon or Living Spaces)
·  Promotional activities aimed at driving traffic to online or offline stores off social networks (e.g. JetBlue’s Twitter promotions)

However, the next years will no doubt see tremendous innovation and social networks will transform our current experience of online shopping.  New forms of online shopping are likely to tap into social dynamics in new ways and will require more flexible and customisable shopping and payment interfaces. 

It is therefore essential that payment providers develop technologies that can support this development. PayPal and IP Commerce have approached this challenge by opening up their platforms to external developers.  However, the other major players, such as Visa, MasterCard and American Express will undoubtedly have their own responses.

Wednesday 22 December 2010

Security & Dispute Resolution: Barriers to Disintermediation?


In a previous blog-entry I identified security and dispute management as the two most potent assets that traditional issuer/acquirers have to prevent disintermediation by online/mobile payment providers for offline purchases.  Today I want to look at these in some more detail; particularly how likely online providers are to develop capabilities in these areas.

Among all factors that determine a consumer’s payment choices, security is the most important.  Today’s online payment solutions offer a simple one-factor model that simply requires a static password or PIN to complete a purchase, whereas the card-based model offers two-factor security; physical possession of the card and a PIN-code or signature. 

The payments industry has been unable to roll out a two-factor model for online payments despite a number of attempts.  Therefore security is considerably greater for cards-based payments than online payments and is likely to prevent many from adopting the online/mobile model for offline payments.  However, as smartphones become more advanced and widespread, secure technologies for online/mobile payments is likely just around the corner.

Another factor that is important to customers when choosing a payment option is their position in case they need to dispute the transaction.  The card industry, and particularly the closed-loop networks, have traditionally supported cardholders in resolving disputes.  Online/mobile payment providers on the other hand do not have sufficient organisational scale to support individual customers with dispute resolution.  

However, they are likely to become major players in the ‘reputation economy’, which is likely to put new pressures on merchants to quickly resolve disputes.  One could also imagine that new players, such as shopping or marketing platforms (e.g. eBay or Foursquare), will play an increasingly important role I dispute resolution.

Having reviewed security and dispute resolution in more detail, it is clear that the card-based industry has important advantages in these areas.  For this reasons, consumers are unlikely to switch to online/mobile solutions for offline transactions in the immediate future.  However, this is only a question of time, so the card industry must quickly understand what the value chain of the future will look like and position themselves to benefit from the changes that are sure to come.

Monday 20 December 2010

Issuers & Acquirers: the Threat from Online Payment Providers


In an earlier blog I described a scenario in which online payment providers, such as PayPal or Google Checkout, would disintermediate issuer/acquirers at the POS in the physical world, as they already have done online.  A potential catalyst could be the emergence of mobile marketing services for physical-world shopping (e.g. location-based or social marketing) that would steer the consumer towards online payment providers.  This would allow online payment providers to consolidate transactions from physical-world merchants, thereby increase their market power relative to merchants and acquirers and force interchange rates down.

However, issuers and acquirers have deep relationships with their customers (cardholders and merchants) and perform activities that online payment providers would not be able to replace in their entirety, such as credit management and clearing and settlement).  The interesting question is therefore if these activities would enable issuers and acquirers to defend their position at the POS or if there is an opportunity for online providers to disintermediate?

To answer this question, let’s go through the customer touch points that issuers have with cardholders and acquirers have with merchants and assess the extent to which these would enable issuers and acquirers to prevent POS disintermediation.

Issuer/cardholder touch points:
·   Customer acquisition/activation: unaffected by POS disintermediation.  However, with lower interchange fees, issuers are unlikely to retain their current level of product innovation and marketing
·   POS authorisation: online-only transactions are likely be one- step, in that there is no physical proof of identify, such as a signature or pin required.  Although the online payments industry could develop an alternative approach, cardholders may view this as less secure and more susceptible to fraud
·  Statementing/credit management/collection: largely unaffected.  Issuers would no longer have access to transaction-level information, so online payment providers would need to provide statements or integrate their data with the issuer
·  Customer servicing: the majority of service enquiries relate to statements, credit management or payments and would be unaffected.  However, issuers would no longer be able to assist the cardholders with disputes, as transactions would go through the online payment provider
·  Loyalty/marketing offers: disintermediation and lower interchange fees would likely leave issuers unable to continue loyalty and marketing programs.  However, online payment providers would likely be associated with new marketing programs that carry greater benefits to the customer
·      Cross-sales: unaffected.

Acquirer/merchant touch points:
·  Merchant acquisition/negotiation/activation: unaffected.  Merchant acquirer fees would likely not be affected to the same extent as interchange fees, so acquirers should be able to continue their activities as today
·  POS authorisation: similar to cardholders, merchants are likely to view an online-only model as less secure and more susceptible to fraud than the card-based model
·  Clearing and settlement: unaffected.
·  Statementing and analytics: As with issuers, acquirers would no longer have access to transaction-level information, so online payment providers would need to provide statements directly to merchants or integrate their data with acquirer-statements.  As an extension, acquirers would no longer be able to provide data analytics services to merchants
·      Related banking services: unaffected.

Having assessed each customer-touch point, there are two areas where the card-based model appears to be superior to the online-only model; POS security & fraud prevention and disputes.  Tomorrow’s blog will look at these areas in more detail and assess the potential for issuers/acquirers to leverage these to prevent disintermediation.

Friday 17 December 2010

Does NFC have a Role in the Future of Payments?


Industry commentators and entrepreneurs have spoken of alternative and emerging payment technologies for many years.  Mobile payments, and in particular Near Field Communication (NFC) technologies, have been a focus for nearly a decade. 

Unlike other mobile payment technologies, NFC is to a large extent hardware-driven, in that a smartcard is installed on the mobile device that enables wireless communication with a reader at the POS.  This provides superior security and convenience to other mobile payments technologies.
Despite countless statements of intent and pilots, little progress has been made towards mass adoption.  The card-based payment infrastructure has proven highly resilient for three reasons:
·  Complex network of participants cooperate effectively along shared standards
·   Infrastructure is decentralised and expensive to replace
·  Traditional customer needs are optimised: reliable, convenient, secure and cost efficient

The failure of NFC can be seen against these dimensions:
·  Industry bodies and players have been unable to agree shared standards for authentication and software protocols.  Instead they have developed proprietary and incompatible systems
·  Hardware upgrades are required to enable both mobile devices and POSs for NFC
·  Beyond the convenience of contactless payments, few customer benefits have been demonstrated

Recent months has seen encouraging news for NFC technology.  The three largest US operators have announced a joint venture to develop a mobile commerce network utilising NFC and Google has pledged support for NFC in the next version of Android. 

There is also more focus on non-payment benefits of NFC, such as identity, access and marketing.  As more phones become NFC enabled, it could be that these features will encourage consumer adoption of the technology.  This could well be the push the payments industry needs to develop a comprehensive payment solution around NFC.

Still, the challenges to replacing the card-based infrastructure may be too great for NFC.  My bet would be on a different, more disruptive and less hardware-driven technology winning the day.  Most importantly, any such technology needs to deliver customer benefits beyond what we associate with traditional payments.  These benefits could be related to new marketing approaches, such as location-based marketing, or an entirely new shopping experience.  Regardless, this will likely see new entrants entering the payments industry and shake up the current landscape.

Thursday 16 December 2010

Customer Servicing in a Connected World


Mashable and Blackberry have nominated 5 companies for “Best Social Media Customer Service in 2010” (http://mashable.com/2010/12/09/social-media-customer-service-finalists/). 
All 5 nominees emphasise the importance of proactively going where your customers are.  These companies scan for comments about their service online and join the conversation to proactively understand the issue and provide help.
This is clearly the way to surprise and delight your customers online.  However, as more and more customers expect companies to join their conversations online, a fundamental change to customer servicing is required, particularly with regards to the concept of customer value and value-based servicing. 
In traditional, one-to-one servicing channels, companies have differentiated their service levels according to the value of the individual customer.  E.g. American Express will identify a customer’s colour card when they call the customer centre and dedicate more resources to service a black card than a green card.  However, as customer servicing develops in one-to-many, social media channels, companies must also factor in their customers’ social influence.  The more socially influential a customer is, the more resources companies must dedicate to address complaints and encourage positive comments.
In order to successfully do this, companies must develop tools to identify their customers online, assess their social influence and monitor any comments online.  As these tools emerge, the concept of customer value and service will change radically.

Tuesday 14 December 2010

Migrant Workers and their Dependents: Defining the Future of Mobile Payments


Nearly 200 million migrant workers currently use remittance services to send money to a recipient base of around 800 million people.  On average, they send back $2,000 – 5,000 annually – approximately 20 – 30% of their earnings.  The World Bank estimated the total market to be close to $600 billion in 2008.  This is up 63% in 5 years and expected to continue growing in the years to come.
India, China, Mexico and the Philippines are the four largest recipient countries, while the US, Saudi Arabia and Western Europe are the largest originating countries. 
For individuals in developing countries, access to remittance funds has the potential to bring profound change to their lives, and to the social and economic growth of their communities. For recipient countries, such funds have huge economic and social benefits on a national scale.  Ensuring secure and efficient transfer of funds is therefore paramount, not only for the individuals involved, but also for national economies and international development.
However, two challenges in particular restrict the market from reaching its full potential; access and cost.  The vast majority of migrant workers and recipients do not have access to the banking sector and rely on alternative, cash-based remittance channels, such as commercial remittance establishments (e.g. Western Union and MoneyGram) and check-cashing stores.  These are costly to operate and therefore charge high fixed commission costs per remittance, particularly for smaller transactions.  Average transaction costs are estimated to 15%, increasing to 25% for remittances below $100.
The ubiquity and low-cost nature of mobile technology has the potential to revolutionise the remittance market.  According to the UN, more than 3.3 billion people now have access to mobile phones.  The majority of these are enabled with the functionality required for mobile money transfers.  Moreover, mobile money transfers eliminate the operating costs associated with today’s cash-based systems and significantly reduces the transaction costs.
With improved access and lower costs, the UN estimates that such use of mobile technology would encourage lower-value remittances and increase the value of remittances to more than $1 trillion in the next 5 years.  This would clearly be tremendously beneficial for economic development.
Hence, not only is this market incredibly attractive to mobile operators, financial institutions and other entrepreneurs, it would also make mobile phones the primary financial channel for more than 1 billion people in emerging economies.  Without access to alternative financial channels, these people and their societies are likely to be early adopters to other mobile financial services.  Therefore, to see the future of mobile payments, we should look to migrant workers and their dependents in emerging economies.

Monday 13 December 2010

Mobile Payment Technologies

There is no question that mobile payments is an exciting space with considerable scope for disruptive innovation.  Still, this is a broad space that includes a number of different technologies.  These are all very much in their infancy and we are still waiting for technical standards to emerge.  To help us make sense of this space, CNET broke the existing technologies into four categories :

·      Peer-to-peer: money transfers between two people.  This has considerable potential to capture informal payments that are currently cash-dominated.  It could be particularly powerful in facilitating remittances between countries.  Migrant workers are continuing to grow as a group, so this is an enormous opportunity that I will cover in more detail in a later post
·      Mobile Point-of-Sale: the phone physically carries a NFC or RFID chip that communicates with the terminal to green-light transactions.  This requires both phones and terminals to be NFC or RFID enabled so would require considerable hardware updates
·      Mobile Commerce: uses the phone as a gateway to online shopping. Instead of buying items from your desktop or laptop computer, users would open an app in which they would complete the transaction.  Currently this approach is used online only.  However, seeing as no hardware is required, one has to ask if this technology could be applied in the ’bricks & mortar’ world as well
·      Mobile Acceptance: enables mobile handsets to accept card payments through a plug-in device that connects to iPhone and Android phones.  Should have considerable potential to capture micropayments from new merchants, although it does not replace the card
Although the business is looking for an industry standard, it would be misleading to think of these technologies as competing, as they target different types of payments.  It is exactly this point that is likely to determine which technologies will succeed going forward. 
Clayton Christensen, in his book the Innovator’s Dilemma, proposed that disruptive technologies are those that deliver value to underserved segments or customer needs.  Technologies are allowed to grow in these segments without competition and will eventually replace more mainstream technologies. 
Accordingly our hypothesis would be that the future of mobile payments will grow out of segments or technology uses that are currently not served.  Two potential such spaces would be micropayments or the unbanked in emerging economies.  More on these opportunities in later blogs.

Location-based Services: Relegating Traditional Payments Providers to Commodity Players


As smartphones become smarter, location-based services and marketing is set to become the next big thing.  This is developing industry, with countless entrants.  Still, Foursquare, Gowalla, Facebook and Google appear to be the early leaders. 
Google is currently testing its Hotpot service in Portland (http://mashable.com/2010/12/09/google-hotpot-ads/).  Through this technology, customers will be able to receive marketing material and offers from the merchant as well as read reviews.
These marketing messages could be an opportunity for Google to leverage its Checkout service to disintermediate payments companies in the ‘bricks & mortar’ world.  One could also see Paypal entering this area by striking up a partnership any of the other players. 
Furthermore, we already see location-based services entering the rewards space.  Foursquare recently launched a partnership with Safeway and PepsiCo.  These partnerships will give brands access to check-in data on Foursquare and can push relevant offers based on your actions.  For example, a check-in at a gym could trigger PepsiCo to offer the customer an energy drink.
Location based services clearly demonstrate how mobile payments pose a threat to traditional payments companies and could potentially have them relegated to commodity status. 

Sunday 12 December 2010

Open Platforms: A New Era of Innovation


The payments industry is entering an exciting, new era of innovation.  The reason lies in how several established industry players are opening up their platforms to third party developers. 
Some have likened this to the situation in the computer industry in 1979 when the development of the PC and emergence of a shared operating system allowed software providers to develop programmes for a shared platform.  The PC revolution led to a massive number of developers around the world producing innovative software packages that spawned entire new industries.
Three payments providers that are enabling this development are Visa, IP Commerce and PayPal.
Visa is selectively entering partnerships and opening its platform for development.  It is partnering with Monitise to develop a suite of mobile services, collaborating with DeviceFidelity for contactless payments and integrating it’s mobile solutions with ClairMail’s mobile banking platform.  These partnerships enable Visa to tap into external technical expertise and significantly increase speed to market of its services in these areas.
IP Commerce has developed a platform that sits on top of the traditional payments infrastructure.  The system are reminiscent of Windows in that it enables developers to write applications for the platform without having to worry about the complicated plumbing that supports it.  They claim that this reduces time to market and development costs by a factor 3.5.  
Moreover, through Commerce Marketplace they offer an online solution catalogue on which developers can publish applications.  Potential customers can search and acquire applications from this catalogue that all leverage the IP Commerce architecture.
Similarly PayPal has opened its platform with PayPal X and Adaptive Payments.  Developers can access X.com's development toolkits, technical documents and programming interfaces to produce integrated checkout solutions.  Examples of pre-existing products using the Adaptive Payments API include:
·      The Javastore's new drag-and-drop installation and frictionless payment system
·      Instant storefronts for Facebook via Payvment's social network shopping cart system
·      Cut-and-paste shopping solutions embedded in mobile applications, including instant purchases via ShopSavvy's barcode-enabled comparative shopping application for Android
There is little doubt that these developments will completely change the face of the payments industry.  And, if experiences from elsewhere are anything to go, innovation will be rapid and the industry will soon converge on one platform.

Friday 10 December 2010

Payments Frontier: Our Constitution

Payments Frontier will focus on three developments that are set to turn the payments industry on its head:
  • Online and mobile payments are turning the industry on its head.  Since the launch of the payments card over 50 years ago, the industry has developed within the same infrastructure and there have been no fundamental changes.  In the last few years, several existing players, such as Visa, PayPal and IP Commerce, are opening the platforms up to external developers.  This should lead to a wave of customer-focused innovations that will fundamentally change the industry
  • Billions of people who have previously been unbanked are being included in the financial services industry through prepaid and mobile solutions.   Migrant workers is a particularly interesting segment, as many of these currently deal in cash and repatriate enormous sums to their home countries.  A number of exciting initiatives are currently underway to convert this to more secure and efficient payments systems.  This is also likely to be an arena for innovation, as there are no legacy systems
  • The social web is changing the way in which we communicate and could have enormous implications for how payments providers interact with their customers
Viva la Revolution !!  lets start the discussion ...