3 Articles on Innovation in Payments

The Rise of the Hybrid Startup

In this article, Glenn Kelman, the CEO of Redfin, argues that 2011 will be the year of the Hybrid Startup.  Unlike the traditional clicks-and-mortar businesses, that simply add an online presence to its physical-world store, the hybrid business leverages the best of both the online and offline worlds to build entirely new business models. 

Hybrid businesses will enhance customers’ shopping experiences by integrating virtual elements, initially through mobile phones.  Examples are location-based offers, recommendations, augmented reality experiences and so forth. 

As hybrid business are already adding an online layer to the physical-world shopping experience, one would expect that they would take the payment online as well.   

http://techcrunch.com/2010/12/24/hybrid-startup/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Techcrunch+%28TechCrunch%29

Point of Sale Revolution: Transformation of Payment Acceptance

Point of Sale (POS) acceptance, a once sleepy, commoditised, add-on to the merchant acquiring business, is in the midst of a transformation, with several game-changing players entering the market.

There are three key drivers behind the innovation:

1.     Internet ubiquity at the point of transaction: virtually all merchants have transitioned from dial-up to always-on connections, facilitating an explosion of new capabilities that integrate traditional terminal functions with new loyalty, marketing, and information services

2.     Wireless proliferation: merchants are increasingly equipping the employees with sophisticated, mobile POS tools, such as the iPhone or iPad, which enables the merchant to fundamentally change the shopping experience

3.     Emergence of more sophisticated loyalty solutions: merchants constantly seek to develop more attractive loyalty and marketing programmes.  POS innovation is enabling them to integrate loyalty more seamlessly in the POS experience and to tailor offers more effectively by leverage the data they captured.

These drivers are significantly altering the POS space and making it one of the more innovative parts of the payments value chain.

http://www.thecatalystcode.com/theconversation/blog/2010/12/21/point-of-sale-revolution-transformation-of-payment-acceptance/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheCatalystCode+%28The+Catalyst+Code%29

Mobile Apps Wars’ Impact on the Payment Biz

In this article, David Evans points out that it is only just over two years since Steve Jobs open up the iPhone for external apps (October 2008).  There are now more than 100,000 apps for the iPhone and, for many customers, this has become an equally important reason to buy the phone as the phone itself.  Since then, Google Android has developed a successful app market of its own, while  Blackberry and others are also having a go.

A number of these apps are payment related.  Transactions and PlanetAuthorize have both developed apps that enable merchants to accept payments anywhere, while Yodlee and Monitise have developed online banking apps.  However, Evans argues that these are all relatively obvious innovations.

The key, he argues, “is that with all these developers, all around the world, thinking about apps, it is probable that someone — perhaps many someone's — will come up with a killer app that will revolutionize payments”.  “Those who believe in a linear path from mobile phone, to mobile phone plus NFC, to mobile phone as payment device at POS are likely to get a rude awakening”.

The payment industry could experience the type of groundbreaking innovation that the computer industry experienced after the launch of the PC or the mobile phone industry experienced after Apple opened up for external apps.

http://www.pymnts.com/mobile-app-wars-impact-on-the-payments-biz-2/

Monitise: Growth Through Partnerships

Earlier this month, Monitise, the UK-based mobile banking provider, announced that its European business has now reached month-to-month brake even.  In less than 10 years, Monitise has struck up partnerships with with most UK banks, including HSBC, Lloyds TSB, RBS and NatWest, signed up more than 3 million customers and is processing more than 10 million transactions per month. 

Key to Monitise’s success has been its flexible banking platform that allows it to work with all types of banks and carriers.  Moreover, it has a range of technical platforms that enable users to perform a range of banking services, such as check balances, view statements, pay bills and receive alerts, on mobile phones of all types, from SMS to iPhone apps.

However, what makes Monitise one of the most exciting companies in the mobile banking space is the partnerships it has struck up around the world.  Through these partnerships, Monitise is becoming the leading player globally and is entering the payments space. 

In 2009, Monitise announced a strategic alliance to develop mobile banking solutions for Visa, which would take a minority stake in Monitise.  This partnership has proven to be very powerful in positioning Monitise as an industry leader and facilitate global expansion.

In the US, Monitise partnered with FIS and entered as the first multi-bank, multi-carrier mobile banking platform.  The venture has proven successful and has now signed partner agreements with nearly 250 banks.

In Asia Pacific, Monitise announced a joint venture with First Eastern and will launch in Hong Kong as the first market.  Beyond Hong Kong, the Monitise has its sights on China, Japan, ASEAN and the Middle East.

Recently, Monitise has also announced launches in India and several African markets, such as Uganda and Nigeria.  In India, it will work with Visa and is interestingly integrating mass transport ticketing with its standard banking platform.

In addition to its geographic expansion, Monitise is also making very interesting moves in the payment space.  In February 2010, it announced that it would integrate Device Fidelity’s NFC capabilities in its global platform.

Furthermore, in November 2010, Monitise formed a join venture with Best Buy and Carphone Warehouse founder, Charles Dunstone, to develop an NFC network in the UK.  This network would initially leverage Monitise’s broad banking partnerships in the UK, Best Buy’s retail presence and Dunstone’s retail experience, to develop the network.

In December 2010, Monitise announced a partnership with ViVOtech, a leading near field communication (NFC) software developer, to deliver mobile phone payments services to banks across the United States.  With Monitise’s already broad base of bank partnerships, this deal could make it a major player in contactless payments when NFC enabled handsets are launched later this year.

In less than 10 years, Monitise has become a leading, global player in mobile banking and payments.  With its open mindset and platform, it has successfully forged powerful partnerships that have enabled it to build an emerging global presence and expand its product capabilities to contactless payments, mass transport ticketing and couponing.  Undoubtedly, Monitise will continue to strike up new partnerships and expand in new business areas, and is definitely “one to watch”.  

PayPal and Bling Nation

Ebay yesterday reported that PayPal tripled its mobile volume in 2010, a clear demonstration of the increased adoption of mobile payments.  To capitalize on this trend going forward, PayPal is increasingly targeting physical payments and has forged a number of partnerships to support this effort.  However, one partner has stood out from the rest; Bling Nation.

Bling Nation was founded by Meyer Malka and Wenceclao Casares in Palo Alto in 2008.  With Bling, they enable mobile phones for NFC payments with an RFID sticker, or Bling Tag, that is distributed for free.  Users simply register their phone number and PayPal account to their Bling Tag and are able to make purchases by tapping the tag on a contactless terminal.

To facilitate merchant acceptance, Bling initially partnered with local banks that would have cardholder and merchant relationships in the local area, to whom they would distribute NFC stickers and terminals.  The advantage of this approach was that transactions were ‘on-us’, which enabled Bling to offer merchants a cost effective solution.  On the flipside, each partnership was relatively small and growth was slow.

To achieve national scale, Bling has entered a partnership with Verifone, in which Verifone’s more than 370 resellers will begin to offer the Bling and PayPal service alongside traditional credit and debit card acceptance to merchants nationwide.  This is the first implementation that combines traditional cards-based payments with alternative payments at the point of sale.

The downside of this approach, is that PayPal transactions are charged at ‘card not present’ fees, and therefore adds unnecessary costs in a physical environment.

Interestingly, co-founder Casares views payments as the “commodity part”.  The value-added of Bling comes from connecting customers and merchants through data services and rewards. 

In the “marketing services” space, Bling has partnered with Facebook, as well as other online communities, where customers register to get access to discounts and rewards and merchants get access to customer data and profiles to drive increasingly targeted offerings.

It is this perspective that differentiates Bling Nation from other mobile payments providers and makes it such an attractive partner for PayPal, Facebook and a host of other companies that will want to leverage Bling’s growing network.

Three Exciting Stories in Payment (Jan 19)

Starbucks has launched a mobile payment application for iPhones, iPads and Blackberry's built on its Starbucks Card platform.  The application will enable customers to make their purchases with a barcode that appears on their mobile phone, check their balance and receive Starbucks loyalty points.
http://www.pymnts.com/mobile-payment-debuts-nationally-at-starbucks-20110119005434/

Softbank Mobile has selected France's Gemalto for their NFC trial in Japan.  The trial will leverage Gemalto's UICC SIM card and N-Flex technology.  Users simply receive a replacement SIM card, which enables a conventional mobile phone for NFC through the antenna.  In addition to a prepaid service, Softbank's trial also enables users to perform NFC transactions from two Japanese credit card issuers. 
http://www.paymentssource.com/news/gemalto-joins-mobile-japan-3004716-1.html

MasterCard has entered a marketing partnership with Transport for London (TfL) to distribute PayPass (MasterCard's NFC solution) branded wallets to Oyster Card users.  PayPass is still not available in London, but the marketing push is in anticipation of TfL putting Oyster on an open-loop network, such as Visa or MasterCard.
http://marketingmagazine.co.uk/news/1049764/MasterCard-brands-Oyster-wallets-PayPass-push/

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3-D Secure: Universal, but not Final

As we consider emerging online and mobile payment technologies, a crucial aspect of their innovation lies in their approach to cardholder verification.  The most prevalent verification online technology is 3 Domain Secure, or 3-DS, which was first introduced by Visa, and has later been adopted by MasterCard, JCB International and American Express.

Traditionally, the card industry has relied on a two-part verification process, where the customer produces their physical card along with their PIN-code.  This is of course not possible with online transactions, also referred to as ‘card-not-present’ transactions.  As these transactions are more vulnerable to fraud, the industry has shifted the liability for fraud from the card issuer to the merchant. 

3 Domain Secure was developed as an additional layer of security for online transactions.   Before online transactions are completed, users will be re-directed to a webpage associated with the issuing bank to authorize the transaction.  Banks are free to adopt any method of verification they prefer, but most opt for a simple password. 

Although 3-DS is expensive for merchants (set-up fee, monthly fees and transaction fees), they benefit from fewer chargebacks, as it enables the issuing bank to properly authorize the transaction and thereby shifts the liability for fraudulent transactions from the merchant to the issuer and cardholder.  This shift in incentives differentiates 3-DS technology from previous verification technologies and has been a crucial element to encourage the broad adoption.

However, in their article titled: “Verified by Visa and MasterCard SecureCode: How Not to Design Authentication”, Steven Murdoch and Ross Anderson argued that 3-DS has considerable security weaknesses.  To summarise:

·      Confusing the user: the industry generally tells users to only enter sensitive data in webpages that use TLS technology, which is recognized by most browsers.  However, 3-DS windows are not TLS secure and generally display the URL of the issuer’s software partner, not the issuer

·      Activated during shopping: the activating the verification technology during shopping, the user is given the impression that they are providing personal details and passwords to the merchant, not the issuer

·      Password choice: the user will generally be more concerned with shopping than security and is less likely to provide a strong password

·      Liability shifting: the shopping process is not an appropriate time to introduce new terms and conditions that fundamentally shift the liability of the user

·      Inconsistent verification: 3-DS leaves the actual method of verification open to the issuing bank, and there are several examples of banks that have made unwise choices, such as using the cardholders PIN-code

·      Privacy: 3-DS specifies that for a user to be provided with transaction-level details, this information must be shared with the issuing bank.  This information enables issuers to profile their customers and may be counter to privacy regulation in some European countries

Murdoch and Anderson conclude that 3-DS has enabled the payment networks to shift liability from merchants to cardholders, without providing cardholders with sufficient security.  To solve for this, the authors recommend transaction authorization. 

From personal experience, I have seen HSBC implement an SMS solution in the UK, where you authorize each payment with a transaction-specific code that is sent to your mobile phone.  Similarly, in Norway we use a key fob that produces transaction-specific codes.

Interestingly, we have seen that although 3-DS is being promoted as a universal solution to online security, it does not solve the crucial issue of verification.  Issuers have mostly opted for a password approach, which does not provide the level of security we need.  SMS-codes and key-fobs offer improvements, but are surely not the technologies of tomorrow.  We have already seen plenty of interesting innovations and should realistically expect this to continue for many years before the industry agrees on one solution.

Klarna: Solving the Most Fundamental Challenges of eCommerce

Earlier this week, a mate told me about a Swedish payments company that is funded by Sequoia Capital, the venture firm that invested in Google, Paypal and more recently Square.  To learn more about the Klarna, I thought I’d do a post on them.

First, some background.  Klarna was established by three students at the Stockholm School of Economics in 2005, when they took part in the school’s incubator programme and received EUR 60K of angel investment.  The background for their business idea can be summarised with two simple facts:

·      70% of online shoppers would prefer to pay by invoice

·      29% of those who don’t shop online do so because of security

The entrepreneurs behind Klarna therefore decided to develop a convenient, secure and flexible solution to enable online payments by invoice.  The customer simply selects Klarna Invoice as payment method at check-out, enter its national ID number and Klarna will underwrite the payment.  The merchant sends the order, along with an invoice, to the customer, who settles the invoice with Klarna within 14 days. 

By implementing Klarna Invoice, and better catering to customers who are uncomfortable with using credit cards for online purchases, merchants increase sales by an average 25%.  Klarna charges the merchant a set-up fee of EUR 330, an annual membership fee of EUR 330 and a transaction fee of 2.95% plus EUR 1.7.  This is clearly not cheap, but with few competitors offering a similar service, most merchants will probably see the value of Klarna.

In addition to their basic Invoice solution, Klarna has launched two other products; Klarna Account and Mobile.  Klarna Account is an instalment service that allows customers to break up their repayments over several months.  All purchases that are made through Klarna are consolidated to a single account, which provides additional simplicity.  This service has half million users, who on average make 5 times more purchases than other online customers.  

Klarna Mobile is the most the most recent Klarna product and is currently only available in Sweden.  With this solution the customer enters his mobile phone number at check-out and receives a PIN-code by SMS, which is used to verify the purchase.  The customer is automatically set up with Klarna Account, which provides one monthly account that aggregates all purchases and enables the customer to split the payment in instalments.  Although this service initially targets online payments, there is clearly potential to expand it to brick-and-mortar purchases.

The numbers certainly demonstrate that Klarna has hit on a very attractive opportunity and show why Sequoia chose to invest.  Five years after being set up, Klarna is now present in 6 northern European markets, Sweden, Finland, Norway, Denmark, Germany and the Netherlands, and is accepted at more than 8,000 merchants.  4 million customers have made a purchase through Klarna to the value of more than EUR 500 million.

The beauty of this model is that Klarna is not dependent on building a network, as customers can use the service without already being registered users.  Although customers may be more inclined to use the service as it becomes more familiar and they begin to consolidate their services with Klarna Account, at its core, the service is as relevant to the first merchant as it is to the millionth.  

Still, there are a number of challenges ahead.  The credit card networks are continuously improving their security features, slowly alleviating customers’ concerns with security.  Furthermore, every week a new player seems to enter the online payments space with new, more convenient and secure technology.  These trends may eventually put pressure Klarna to reduce their merchant fees.

Moreover, Klarna’s Mobile solution does not seem like a viable competitor in the bricks-and-mortar space.  Customers are more comfortable with using credit cards for physical transactions, cancelling out Klarna’s proposition to brick-and-mortar merchants.  With this in mind, physical merchants are unlikely to accept the relatively high implementation, membership and transaction fees that come with Klarna’s service.  Finally, the scale of sales and implementation resources that would be required for Klarna to expand their service among physical merchants would probably see them overreaching.

Despite these challenges, by developing a secure and convenient method for customers to shop online, Klarna has solved two of the fundamental challenges associated with ecommerce.  With little competition in this space in Europe, Klarna will likely to continue growing for many years to come, certainly justifying Sequoia’s EUR7M investment.

Square and the Mobile Acceptance Devices

Square has become a bit of a media darling recently and received much press attention when they yesterday announced that they have closed their Series B funding round for $27.5 million led by Sequoia Capital, which values the company to $200 million.  Square is headed by Jack Dorsey, the co-founder of Twitter, and is benefitting from this association in the media.  However, it has also developed an exciting, new product that merits attention on its own.

Unlike most mobile payments companies, Square is not challenging the cards industry, but taking a more pragmatic approach that is likely to give greater payoff in the short term.  It works from the observation that everyone already have plastic cards and that this model works quite well for now. 

However, not all merchants are able to easily get card terminals and merchant agreements. Square has therefore developed a device that turns any mobile device into a card terminal and developed an approach that enables anyone to get set up to accept cards in minutes.  The technical innovation is a small, square card-reader that plugs into the phonejack of any mobile device and processes Visa, Mastercard, Amex and Discover cards. 

The device is cheap to produce and Square distribute them for free to merchants that sign up for their service.  This has proven very popular, with between 30,000 and 50,000 merchants signing up per month since launch in October 2010.  It is especially smaller merchants for whom it was previously not cost efficient or convenient to accept cards that sign up for Square.

It is primarily this market positioning that differentiate Square from other providers that have launched similar products over the last year, such as  Verifone, Intuit and HomeATM.  None of these have seen the same level of success, either due to more stringent merchant agreements, or possibly because they have been outshone by Jack Dorsey’s star power.

However, a number of market participants have warned against lacking security features on Square.  Essentially, Square relies on the mobile device to encrypt the magstripe data, whereas more secure devices perform this encryption at the magnetic head.  With Square’s approach there is a risk that the mobile device is hacked and that the credit card data is intercepted before it has been encrypted, and therefore exposing the cardholder to fraud.  

Moreover, Square and other mobile acceptance devices do not really tackle the bigger issues where cardholders and merchants hope to benefit from mobile payments.  They may bring some convenience for smaller, mobile merchants, and may justify its media hype and valuation on this basis alone.  However, it does not reduce merchant fees or improve security and is therefore unlikely to make a bigger dent in the card industry.