Right to the “3rd” power”: Mobile Payment the POS and ROI

The arc of loyalty/payment programing, particularly as it relates to mobile, is now mature enough for retailers to set long-term strategic goals. The high level strategy is about consumer engagement. The objective is to create a more intimate consumer shopping experience that is contextual in nature. The requirement being: “Right to the 3rd power”; the right offer, to the right person, at the right time. The tool set for loyalty, payment and the integration of omni-channel marketing in the mobile channel is the POS.

Mobile is the most important next generation service, in many ways it is here today. Consumer adoption of mobile services is exploding. The consumer is willing and ready, even waiting for the retailer to catch up. First to market retailers will be in the lead and have an advantage. Ignore mobile and you risk losing both the Millennials and the X-er’s. Is there any doubt that the next group will only be more mobile? Cards, checks and cash will exist, and will require attention, but having a mobile strategy is the key to future success.

While EMV will drive NFC to the POS, consumer engagement will be driven by merchant rewards. The days when retailers give over control of their customers to banks and associations will end as mobile payment becomes the norm. In this war for the mobile consumer, the POS and cloud-based mobile payment is supreme. The transaction is changing from the legacy model of capture/authorize and settle to a robust IP based dialogue. This dialogue is between the consumer and the POS and is about the relationship between the retailer and the consumer. Unlike today where the transaction begins when the item, coupon or loyalty card is scanned, tomorrow’s consumer will begin the engagement long before they arrive at the location. Mobile app based solutions will leverage Geo Fencing, Wireless, and BLE to engage the consumers according to their preference. The IT environment required to deliver these services must be tightly coupled to the POS at the Transaction Services Layer (TSL). This important change in the transaction flow means that payment, rather than being outside of the TSL, is now a part of the TSL. This change means that the entire legacy payments network may be disintermediated from the mobile transaction. We see this with companies like National Payment Card Association and believe MCX shares this goal.

Retailers are understandably concerned about ROI. ROI is a result of more profitable shopping. ROI is more than a function of “frequency and shopping basket”, it is about shaping the consumers purchasing decisions. People are asking about ROI and Mobile and reluctant to allow legacy payment fees into the branded app. To the extent that consumers react through the use of offers, coupons, push notifications, points etc in the mobile channel, payment is required to close the transaction within the same user experience. The notion that the mobile consumer will be interactive with the mobile experience and then be asked to use a card for payment does not make sense. Using a card in the mobile channel would destroy the user experience and make it impossible to measure conversion.

Certainly, there are many issues impacting retailers and the POS environment. The key questions is: which IT solution makes the most sense and how does it set the retailer on the road towards a larger goal of implementing a successful consumer acquisition and retention program that is “Right to the 3rd Power”?

Lower fees get the headlines, but might not be the story. Why multiple unaffiliated networks is the real bombshell in Judge Leon’s decision.

Groucho Marx once said that “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” Judge Leon might have been better served had he considered the wisdom in Marx’s thought before his recent ruling throwing out the current Fed’s implementation of the Durbin Amendment.

When Judge Leon threw out Durbin saying “The Board has clearly disregarded Congress’s statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction” he may have opened the legislation to a potential flaw that might just make implementation of Durbin impossible

In an August 13 article published in American Banker called “Damage to Banks from Debit Card Ruling Goes Beyond Lower Fee Cap”, Kevin Wack writes “Perhaps just as significant, but less discussed, the judge also ruled that retailers must be given the choice of routing each signature debit transaction, as well as each PIN debit purchase, over at least two card networks.” Kevin is correct, fees impact the economics of the transaction, but like the highs costs of implementing EMV, multi-homing has technical implementation costs far beyond the cost of the transaction. I covered this this issue in this blog, January 2011, “Who gets to choose? Durbin’s provision on “multi-homing” and the prohibition on network routing exclusivity” Here is the issue. I asked a well know expert this question: what makes multiple unaffiliated networks a complex requirement? His answer: “most retailer’s payment systems route transactions based upon the Bank Identification Number or BIN.  They do not have the ability to make different routing decisions if a PIN is present or not.  Additionally, a lot of smaller merchants do not have direct connections to networks but instead route the majority of their traffic to a merchant acquirer who then will determine how the card needs to be authorized based upon processing agreements that retailer has in place.  While the concept of allowing networks to compete for the same card traffic sounds attractive, from a practical matter it is far more complex.  And as raised in the most current legal opinion, the ability to route between non-affiliated networks needs to be at the transaction level, not the card level. “

I wanted a bit more granularity and so another source tells me that “Although most retailers do not connect directly to debit networks, there is nothing other than cost that prevents them from doing so. As EMV comes into the US domestic market and each Debit Issuer is tagged with their own network EMV AID(application identifier on the Chip), we may see more large scale retailers choosing to connect directly with their network of choice. A lot of stuff is up in the air right now. The next 10 months will be very exciting in terms of the number of changes coming to the debit networks above and beyond Judge Leon’s judgment. I doubt if the Federal Reserve or Congress will be able to keep up with everything that is happening in this space in the interim.”

So, Judge Leon concluded that the Fed must allow retailers the choice of two unaffiliated networks for each individual purchase — whether the consumer elects to make a signature or PIN debit transaction, never mind the costs or complexity of making it so. I come way feeling like Judge Leon clearly does not understand how routing actually works especially for small merchants.  He seems to believe there is a “Payments Genie” and that rubbing the lamp makes payments happen. The intuition is easy, but the way this actually works as a technical matter I think is a mystery to people.

Big Data, mobile payments and the connected consumer

“Big Data” is a term that refers to the vast quantity of consumer information that is available both on-line through 3^rd party resources and within the retailer’s environment. Connecting Big Data to consumers through mobile payments represents the commercial usefulness of the information. Thanks to more powerful ePOS, the internet and the emergence of the “information cloud” this data can now be manipulated and utilized to drive pre-sales consumer engagement and drive sales during the purchase cycle. Big Data information is more potent when it can be applied to areas unconnected with how it was originally collected. As an example, the ability to link the CDC’s tracking of the flu with promotions for cold medications, or the ability to link coupons for hot/cold drinks to National Weathers Services tracking of temperatures. The back bone of retailer performance will be connecting Big Data to mobile payments (the consumer) during the purchase cycle through “personalization” and driving consumer engagement.

Mobile payments. The integration of the consumer through their smart phone to Big Data is the technical challenge facing the industry. Leveraging Big Data in a mobile payment environment means establishing a dialogue between the consumer’s smart phone/wallet and the ePOS at the time of purchase allowing a robust exchange of data so that the consumer experiences payment, loyalty, and offers (product recommendations, coupons) in one seamless experience.

The technical requirements of serving mobile payment and the connected consumer at the ePOS during the purchase cycle will drive change in the payments processing environment. Perhaps the greatest change is the potential disintermediation of the traditional payment processor from the mobile payment. A large shift in consumer payment behavior to mobile payment means a significant drop in card transactions across the legacy payment processing network. 

The legacy payments processing network was built to handle payments at the beginning of the electronic payments era before the emergence of Big Data. The result is that the infrastructure, while highly fault tolerant and reliable, does not lend itself well to change and is not compatible with a robust exchange of Big Data between the consumer and POS at the time of the transaction. This is great for the traditional card based ISO8583 message, but severely lacking for mobile payments and Omni-channel shopping.

The ePOS has evolved from a limited “dumb” machines built around closed systems with proprietary code to a very powerful computing device utilizing open standards. The ePOS now has the ability to communicate in an IP environment and as a result, has the ability to communicate both payment and Big Data to networks outside of the legacy payment network utilizing IP based communication.  ePOS vendors have changed their payments strategy and are moving to cloud based systems. In Petroleum all four major providers are developing cloud based payments applications that will standardize the software between the POS, EPS and Payments Cloud.

The future of Omni-channel shopping depends on the ability to communicate to the connected consumer through an IP/cloud based mobile payment with access to Big Data. Big Data is the “secret sauce” of mobile payments.