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Mobile Payments Pilot Plans and Schemes

“So if money is the root I want the whole damn tree.” Dr. Dre

The recent announcement by Bank of America that it would conduct a mobile payment test in New York City followed the recently over-covered joint venture between Verizon, T-Mobile, AT&T, Discover and Barclays.  While these heavily funded examples of innovation and cooperation between ecosystem players seems like giant progress steps in the slow to develop mobile payments story, there are some questions as to the how things are structured and the motivation of these players i.e., who’s really hustling to get consumers to adopt vs. who is just trying to find a way to wall up the garden without a concern for consumers.

I recently had a discussion with a successful bank executive about a key learning for me in the transition from corporate officer to startup builder: ambition in a big company revolves around self promotion and individual success with company value being generated as a byproduct.  In a startup, you do everything possible to get operators who willingly link their success to the company’s success.  When I look at how MUCH the payment ecosystem has to change, given regulatory, consumer, technology and competitive pressures, the actors in these mobile payment pilots have to act like it’s a startup.  Not unlike 1966 when the Interbank Association joined with HSBC to become Master Charge and Bank of America franchised their card network to become Visa.  No that was hustle!

The Big Joint Venture:  Who owns the user experience? For consumers and merchants? Are the investors really aligned?  Which one of them is going to get f-cked?

The fundamental issue around the success of this JV is who makes the user comfortable with this new fangled product?  Telcos have not exactly done a phenomenal job on the customer side of their business; let’s not get into the banks.  Historically, banks and card issuers have never even considered merchants to be “users”:  The relative size of investment in merchant services vs. consumer marketing is testament to that.  So the JV has to not act like a bank or a telco, while pulling a management team from those organizations.

“No matter where you go, you are what you are player
And you can try to change but that’s just the top layer
Man, you was who you was ‘fore you got here “ –Jay Z.

I am also not convinced that these companies can be a useful board of managers for this joint venture business.  Corporate investors, especially banks and telcos, tend to exhibit qualities that really suck for the CEO of the Newco:

  • Groupthink: I have a growing theory that groupthink actually was invented in the consumer banking world.  How else could everyone’s card product do the exact same thing and cost exactly the same. Every time.  Groupthink is useless to the manager of a new business attempting to create new customer behavior.
  • Experience: Good VCs have done 100 to 1000 times the deals that any of these corporate operators have done.  They have seen and experienced analogous development in other industries that are underwritten by technologies.  Score another for new payment startups.
  • Courage: It takes big balls to start a new payment system.  Real courage, not false powerpoint bravado.  As I’ve advised others, be prepared for your business to nearly fail once a quarter.  That kind of fortitude is hard to find in these big companies.

As far as which of the investors here is going to get f-cked, we can save it for another post, but there are obvious signals in the size of the companies at play.  Also for fun, everyone should Google which banks do treasury, M&A advisory and other such activities for AT&T, Verizon and T-Mo.

Bank Of America: A shot at success? Don’t bank on it.

The B of A test seems more about form factor change rather than an actual system change.  DeviceFidelity themselves refer to their technology as a bridge to integrated NFC.  This suggests that B of A is simply trying to measure customer reaction.  But a handful of employees and consumers in New York?  Welcome to the upper west side, circa 1998:

“And in New York, after a dismal start, Chase Manhattan Bank–Mondex’s New York trial partner–simply gave customers living in the area a new debit or credit card equipped with a Mondex chip in it. It also put at least $5.00 of its own money on each card. More than 40,000 local residents received a card, yet the smart card remains as unpopular in New York as it is in Guelph. In both places, after an initial flurry of interest, card use has dropped to near zero.”
–Forbes, July 1998

In the end though there are some key characteristics that need to be exhibited by the winners in consumer mobile payments, whether big or small:

Understanding the changing consumer: Fundamentally, this is where banks fail over and over again.  Beaten up by government at regular intervals, they simply cannot manage inertia to modernize at pace with the consumer.  For example, smartphone payment means smart ass consumers.  That means the solution will need to be inherently smart.

Treat the merchant like a customer: This is a big one that nobody seems to get.  They didn’t get in 1998 and they still don’t get it.  Retailers continue to pay the ever increasing vig on card transactions because they are addicted to that crack.  They aren’t going to try your new NFC crack unless it is better or cheaper.  Incentivize them instead of selling them some no rational line about increased basket size.  Pay for the readers and throw some money at them for participation.

Let people mess around with it: Yes it’s risky to put beta product out in financial services, but you need to get real people to try this to read behavior.  Then listen to the users and get the right functionality in the next revision.  And tell the CTO it should be released in 6 weeks instead of 6 months.

Mobile Banking Use Rising, But Customers Say No to Paying More

So, it turns out that just having an app, SMS or mobile web presence is not enough to drive business value.  Who knew?

This latest IDC report seems to pile on to more of the “importance of the mobile channel” argument that I had been hearing (and delivering) since 2006.

Now that we’ve established that mobile phones are somewhat popular, banks need to put some of that old school, segmentation in the mobile channel.  Wake up those data analytics guys and the direct marketing managers.  Build some models around smartphone behavior or the Net Receivables value of a Droid X owner. Put the test cells together and see who’s got the propensity to buy.  Once you have that you can sell them something.

Mobile Banking Use Rising, But Customers Say No to Paying More.

AT&T Seeks a Piece of the $633B Mobile Payment Pie

Apparently, by charging merchants twice for transactions and hoping they don’t notice.  Not an ideal strategy, but if you come from the position of “owner” of the network, it’s not hard to see how their folks got to this.

Tough sell to smaller business owners who would be forced into more of a sticky relationship with their cell phone company.  Do small business owners love AT&T enough?  Can AT&T be like American Express in the small business finance ecosystem?

AT&T Seeks a Piece of the $633B Mobile Payment Pie http://ow.ly/28cp9

Google Takes on Mobile Payments

In a previous post, we discussed Apple’s patent filing on NFC mobile payments which relies on users having an iTunes account with a credit or debit card attached and the proposed integrated NFC chip on the iPhone pushing payments to it.  While the Apple service has not seen any further exposure since the launch of iPhone 4, it does seem like a plausible bank standard based payment tool that leverage current POS technology with the risk and fraud management offloaded to banks and processors.  The consumer just has to have the future iPhone with NFC.

QR Code for Mobile Retail Payments by GoogleEnter Google’s proposal for mobile payments which is based around the Android Payment Chrome Extension.  APCE is the software that enables merchants to process payments using Google Checkout by generating a unique QR code for each transaction that contains information about the merchant, goods in cart and connects to the merchant’s inventory.

For anyone keeping score, Google’s approach is to provide all retailers with a Google hosted eCommerce store that is to be used by their employees only.  Once the transaction information is entered, the “shopping cart” is transmitted to the consumer’s phone via QR code and payment proceeds via Google Checkout.

It is technologically feasible, the usability in its current state for existing merchants is not.  Retailers have a lot of upfront work to do that Google should try to help them with:

  1. Integrate merchant inventory management process with the Android checkout process:  This should be easy as a file export or DB translation from existing inventory systems.  Tougher for those still using paper.
  2. Train retail personnel:  Google must take this leap to move the initial adoption needle for any retailer with more than one cash register.  Retail employee turnover is not a trifle to merchants and training is a huge cost.
  3. Speed the checkout: POS integration should work such that the barcode scanning of goods populates the shopping cart.  If Google can make Android payment faster than cards, that would be the big win.  Not sure, but it sounds like Google should be shopping for a POS software provider or manufacturer even.

Google’s plan is a great start, and quite for me the direction that payments should go in order to provide consumers the most choice.  Usability and merchant adoption is a tricky affair, but consider this:  If I am a new retailer setting up shop for the first time, I  a) likely have an ecommerce strategy b) would be happy to integrate something new because there is no switching cost c) maybe Google transaction fees are cheaper and Google Apps integration is awesome.

Google, give new merchants an easy ride up to your cloud of transactions.

@Banks: Your Overdraft Fees are Going, Going…

As I have mentioned before, banks are going to have to do something about their overdraft fee revenue and mobile is a great opportunity to keep people opted into fee generating, added value services.
Sandler O’Neill and Partners quantified some of these lost revenues for Wells and B of A:
A Sandler O’Neill & Partners report last month said Bank of America, the nation’s biggest bank, could suffer the largest hit to annual revenue from a loss of overdraft charges — about $2.2 billion per year at the high end. Bank of America had total revenue last year of $119 billion.

Wells Fargo could lose $1.1 billion in revenue from lost fees, the second-biggest hit, according to Sandler O’Neill. It had revenue last year of $88 billion.

What will hurt even more through this rocky economic non-recovery is that consumer have increased use of overdraft and other buying power enhancing products.  Further case-in-point for the mobile as a tool to address customer need.
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Banks Don’t Get Android (or Consumers)

The story of Jeff Peiffer and his unsanctioned Android banking app is a spotlight on how the Banks have still got it wrong in their approach to mobile (and online) banking.  By not embracing access to services through public APIs and providing security and authentication as a service, banks ensure one thing:  They will never enjoy the exponential growth in usage that new consumer behavior could drive.

Branded applications are definitely a must for all mobile app platforms, but as the success of aggregators such as Mint.com have shown for account information, consumers benefit from access to their money from many endpoints.

I chuckled a bit at IDC Aaron McPherson’s comment in this article suggesting that “independent developers should not be getting involved”.   Since independent developers really haven’t contribute at all to the success of mobile applications.  Not one bit.

Mobile Users Want Android, Banks Don t Have It – American Banker Article.

Required Reading for Payment Innovators: ACH Explained

ACH Transaction

Very clear explanation of the four party payment model that needs to be understood to really get at why we need so much innovation and simplification in the industry.

Identity, Payments and Related Technologies: Online Payments for Developers – Part 2 – Clearing House Based Networks.

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