Starbucks' Payments App and how it could Disrupt the Industry (SAI)

Business Insider has written an interesting piece about the Starbucks payments app and its disruptive potential for a number of payments players. 

Although, I don't agree with much of what they write, I like the idea of a relatively small change/innovation having widereaching implications for an entire industry (and beyond), illustrating the level of uncertainty and number of moving parts in the payments industry right now.

First of all, I should point out that Starbucks' solution is not NFC - it relies on barcode scanning, a much more basic technology, not dissimilar to what FaceCash has introduced.  Whatever form of mobile payments that eventually wins out, I don't think it will be this, and that Starbucks will soon need to upgrade the technology.

I also think Business Insider over-exaggerates the impact that Starbucks will have on the payment industry overall.

Still, if we were to take the article to be about the emergence of mobile payments, rather than simply about Starbucks, it is absolutely worth the read!


http://www.businessinsider.com/starbucks-mobile-payments-2011-1#first-heres-how-starbucks-mobile-payments-work-its-really-straightforward-1

Offers: How Groupon, Facebook and Google could Disintermediate the Payments Industry

In my post about Cardlytics earlier this week, I laid out the reasons for why the transaction-based marketing approach could displace, or at least severely weaken, the interchange model, which the major payments companies rely on today.

Previously, I have also covered other deal intermediaries, such as Groupon and Google, and highlighted the similar threat they pose to the interchange model.  As offers are increasingly delivered on mobile devices, it will be a small matter for deal intermediaries to add a payments solution to the backend of their service, and effectively disintermediate the traditional payments networks.

As the deal intermediary business develops at lightening speed and new players surface on a daily basis, we are starting to see different business models emerge. 

Below I will try to lay out five main categories that I have seen so far and try to make some sense of where the industry might be going.

Group-Based Buying

The group-based model pursued by Groupon and Living Social has seen the most traction so far.  Groupon is often referred to as the fastest growing company of all time, having received a $9B buy-out offer from Google within two years of launch.  It mainly offers deeply discounted deals from local service providers, such as hair dressers, restaurants and masseurs, and has proven a highly effective marketing channel for these business to attract new customers.

On the downside, their deals are not targeted or customized to potential customers beyond being in the same city.  This undoubtedly leads to low conversion rates and potential Groupon fatigue, in that people don’t even read their ads.  By exclusively focusing on deeply discounted deals, they also limit their offers to one-off services.

Social Group-Buying

Last week, Facebook announced a new feature called “Buy with Friends”.  The feature enables users to share their purchases and “unlock” deals for other friends.  Facebook has found that more than 50% of test users chose to share a purchase they made on the social network with their friends and a number of other studies show demonstrate the power of recommendations from friends to impact our purchasing behavior. 

Initially, the feature is focused on purchases within the network (e.g. games and apps) and only one purchase is enough to unlock deals.  However, over time, one could imagine how this feature could extend across the internet and require more than one purchase to unlock deals.  For example, I could imagine going to any online store and being told that the ordinary price for a product is X, but if I buy with 5 friends, we get a 15% discount, if I buy with 10 friends, we get a 25% discount, etc. 

This feature clearly has the potential to rival Groupon and could potentially transform pricing models across a range of industries.

Transaction-Based Marketing

Transaction-based marketing has been seen as Eldorado for card companies for years.  However, intermediating deals is far from the core business of a credit card company, and we have not seen a successful implementation until third-party players recently entered the market. 

The benefit with this model is that it provides retailers unique insight into their customers’ and prospects’ purchasing behavior and enables them to target their offers very effectively.  Seeing as the reward or discount is automatically redeemed when the customers use their registered cards, they also avoid the hassle of coupons, promotion codes, etc.

A key challenge associated with transaction-based marketing is the complexity of integrating the system with banks’ technologies and implement the program.  Cardlytics and similar providers also need to develop tools that effectively leverage the treasure chest of data to which they have access and enable merchants to easily and effectively target customers.  Finally, they must move away from delivering offers through online bank statements, and develop more timely and convenient delivery channels.

Location-Based Marketing

Location-based services, such as Foursquare, Gowalla, Facebook Places and Scvngr, are receiving a lot of attention and seeing explosive growth.  So far they have mainly encouraged ‘check-ins’ with social updates on online badges, and only sporadically offered deals. 

However, the potential to for these services to offer deals is undoubtedly huge.  Imagine leaving the cinema and being offered a dinner deal at a local restaurant or bar.  Seeing as location-based services, by definition, are mobile, it is also easy for them to integrate with a payment interface.  The benefit of doing this would be that they would have access transaction data and be able to overlay transaction-based marketing on their location-based services – powerful!

Preference Based Marketing

Earlier this week, a Seattle-based startup named Thoughtful, launched a new service that generates gift recommendations based on the recipient’s taste as indicated on their Facebook profile. 

The beauty of Thoughtful’s business is that it offers uniquely customized gifts for which its customers don’t expect deep discounts.  This makes it possible for a broader range of retailers to participate, in comparison with Groupon, which is primarily limited to smaller service providers that are willing to offer 50%+ discounts to get people in the door.  Still, by focusing on gifts, Thoughtful’s potential in terms of total volume is of course more limited that Groupon’s.

Although a gifts-business faces some limitations, there is clearly plenty of potential to leverage the preference-based model for other opportunities – e.g. Groupon or Google could perhaps benefit from adopting this approach to better target their offer.

Final thoughts

Having reviewed five emerging models, it is clear that none of the current players have total cracked the code, and despite their staggering success, there is plenty of potential to improve even further.  In addition to developing new approaches to the industry, the most obvious potential comes from developing hybrids from the already existing models.

Particularly the location-based model could be overlayed with any of the other models.  Being able to deliver deals based on a customers’ location adds immediacy and should increase conversion rates.  It is therefore no surprise that most of the big players, such as Facebook and Google are positioning themselves in this space.

Another interesting observation is that Facebook plays an important role in most of the models, perhaps with the exception of transaction-based marketing.  As social commerce matures and is likely to make up an increasingly important piece of Facebook’s revenue stream, they are sure to be a front-runner in this space.

Still, other players such as Google, Groupon and e-Bay will undoubtedly give them fierce competition and make this industry one of the most exciting to watch over the next few years.

Starbucks Interactive Storefront - very cool !

Great Article about NFC Deployment by Non-Payment Players (Fast Co.)

In the below article, Fast Company lays out plans for NFC deployment by a range of non-payment players.

• BMW: introducing NFC technology in their keys, enabling the owner to open doors with NFC, store train and flight tickets on the car key and receive a multitude of data about the car, such as; is it locked?, how much fuel does it have?, where is it parked?, etc
• LG: developing both NFC enabled phones and point of sale terminals.  By getting involved with POS terminals, it is involved with the whole ecosystem and may better carve out a meaningful role
• Google, Apple and Nokia: as we I have previously covered, these guys are all developing NFC devices

Beyond payments, Fast Company also make some interesting suggestions for the potential use of NFC in retail and advertising.

http://www.fastcompany.com/1723276/companies-battling-to-make-your-nfc-wireless-credit-card-dreams-come-true

Cardlytics: Merchant Funded Rewards for Debit and Prepaid

Red Herring, the business and innovation magazine, yesterday named Cardlytics among its 2010 Global Awards Winners.  Previous winners include Google, Skype, Netscape, Salesforce.com, YouTube and eBay.

Cardlytics is a deals intermediary that connects retailers and potential customers through their online bank.  Cardlytics leverages its proprietary technology to target offers according to customers’ actual card transaction data, enabling a more targeted marketing approach – a “market-of-one” approach, as Cardlytics refers to it.  The retailer is charged only when a customer actually acts on an offer and purchases the goods.

Cardlytics partners with banks and integrates its technology with the online banking platform. Cardlytics analyses customers’ transaction history and displays offers on their bank statements.  For interesting offers, customers simply click a button on the statement to activate the offer.  Once they complete the transaction, the discount is automatically transferred to their account, rather than the customer having to worry about coupons or promotion codes.  According to Cardlytics their campaigns consistently generate activation and conversion rates that are 20 – 50 times higher than other marketing channels.

So far, Cardlytics has implemented its programme with more than 100 banks, through which it reaches more than 30 million customers with offers from more than 100 merchants.  Unlike, other deal intermediaries, such as Groupon and Living Social, Cardlytics’ merchant partners are primarily national retailers, rather than local service providers.

However, the transformational aspect of Cardlytics is its impact on banks’ debit card programs.  Through Cardlytics, bank customers get a reward program for their debit cards.  Retailers attract new customers with a transaction-based marketing program with a pure pay-for-performance model.  Banks generate additional revenue from debit, an already low-revenue product, which has recently come under even more pressure from the Durban regulation.

Transaction-based marketing could have a fundamental impact on the revenue model of the payments market, which has historically relied heavily on discount revenue funded by merchants.  American Express is the primary example of a company that has pursued a premium discount rate strategy.  They justify this premium by giving merchants access to affluent cardholders who are more likely to spend with merchants that accept the card. 

However, under the discount rate model, merchants are asked to blindly trust that they will see incremental revenues and are generally not offered data to track the impact.  Transaction-based marketing turns this on its head, as merchants pay a much lower discount fee and a fully performance based marketing fee for incremental transactions. 

As Cardlytics and similar providers expand their networks of bank partners and extend their services to other parts of the payments industry, such as prepaid and credit, one could imagine that merchants would increasingly favour this model and shy away from traditional discount rates.  It is therefore no surprise that the payments networks have long tried to implement their own transaction-based marketing services and that industry observers and investors view the emerging market leaders with much interest.

Apple: Taking NFC to the Mainstream?

The hottest area of speculation at the moment is around Apple’s entry in the payments market.  Already early last year, it was being reported that Apple was putting together a payments team, while patent applications revealed that they would likely introduce NFC the iPhone 5, which will probably launch in June 2011. 

Now, considering that NFC has been around for a long time and that a flurry of prominent companies, from Visa to the major phone carriers to Google, already have NFC enabled products or trials – why is Apple able to generate so much excitement? 

Simply put, Apple has a remarkable track record of popularizing new technologies with a user experience that seamlessly bridges the hardware and software.  Like they have previously applied their midas touch to the personal computer, the music player, the mobile phone and most recently the tablet, people are eagerly awaiting what they will do to payments.

Most interestingly, people are asking how they will enter the market?  What role will they play in the payments value chain?  Consensus says that they will probably use a version of iTunes as a mobile wallet.  However, it will be interesting to see if they simply have their customers pay with their credit cards through iTunes or if they attempt to link directly to customers’ bank accounts, and essentially do their own clearing and settlement.

Moreover, what features will they offer their customers?  Will they start their own offers and rewards program, similar to what Google is developing?  will they do anything cool with the data they collect?  How will they extend NFC outside payments – e.g. identification and ticketing?

Also, will they enter the merchant side of the industry?  Will they enable the iPhone or iPad as payment terminals by developing NFC readers that plug directly in to the devices?  Will they offer data services?

Another interesting perspective is if they will open up their payments platform (iTunes) for external developers to develop application, similar to what Apple has done for the iPhone and iPad and PayPal has done in payments.  We are starting to see some interesting developments coming out of PayPal X and cannot even begin to imagine where Apple could take this market.

Still, with all this excitement, we should still remind ourselves that not all Apple launches are a success.  Apple TV is a classic example.  The payments industry is probably also more complex than industries Apple has previously taken on.  It is the quintessential network business, which might not be a good match for Apple’s notoriously proprietary and closed approach. 

It would take time for the iPhone 5 to build a user base that is sufficiently attractive for merchants to justify new point of sale investments.  If acceptance is not wide from day one, all the excitement that surrounds the launch could whittle away and slow application innovation, etc.

Despite all the excitement and endless opportunities, we should therefore remember that Apple faces big challenges and stiff competition in this field.  Still, the buzz generated by an Apple launch, along with all the other launches upcoming launches, could mean that 2011 is finally the breakout year for NFC.

Boku & Zong: what does the future hold?

Having previously written about emerging payments companies, such as Square, Klarna and FaceCash, I wanted to look at two similar mobile phone players; Zong and Boku.

Zong and Boku are similar in that they target online purchases, using the mobile phone as payment method, rather than a credit card.  The user simply selects Zong or Boku as payment option at the online merchant and enters their phone number.  Both companies then perform a verification process with the customer’s mobile phone – the process differs somewhat between the two companies, but is quick and easy – and the transaction is charged directly to the phone bill – no credit cards involved.  To enable this, both Zong and Boku have entered extensive partnership agreements with phone carriers across the world.

Zong and Boku have both been very successful in capturing micropayments on Facebook and online games.  By making their APIs available to the merchants, their models are highly flexible and integrate seamlessly into the broader online experience.  They also aim to expand into other digital goods, but have yet to proven this model.

The issue is that the carriers take a big cut of the transactions, which makes the method of payment expensive compared to credit cards.  This clearly limits its attractiveness to merchants, who are likely to only accept Zong and Boku if a considerable proportion of their customers don’t have credit cards or are uncomfortable using them online. 

To get around this issue, Zong has added a credit card option, where instead of being charged directly to their phone bill, the customer is charged to their credit card.  This is a very similar model to PayPal and seems like the right approach to capture larger-ticket purchases outside Facebook and online games in the short term.

However, in the longer term, one has to question whether either of these players offer anything unique in terms of technology or business model to expand beyond the social networks and evolve as independent companies.  My bet would be that they are either bought by a larger payments player or pushed out of the market by better a technology.