The Battle of the Titans continues as NACS squares off with the ETA over mobile payment.

Greek Mythology and the payments industry seem to have a lot in common. There’s something similar about CVS and Rite Aids decision not to accept Apple Pay that reminds me of when “Cronus attacked Uranus, and, with the sickle cut off his”…..well, you get the point.

There has been a lot of noise about mobile payment over the last few years. Confusion about technology and economics clouds the issues. Now, in the same tradition of Durbin (legislation) and Brooklyn (litigation), banks and retailers are setting the stage for another battle over mobile payment. The new issue is; does Apple Pay, Softcard and other NFC based solutions simply enable the traditional payment providers (read fees), or is MCX just an anti-competitive alliance of retailers created for no other reason to leverage the emerging consumer acceptance of mobile payment systems to drive the cost of payments down? In the middle is the consumer who simply wants convenience and choice.

The Apple Pay launch opened the latest salvo in the fee/service war. The Electronic Transactions Association is saying that the decision by CVS and Rite Aid to block mobile payments services like Apple Pay, Google Wallet, and Softcard is “anti-consumer and anti-competitive”. NACS, apparently in support of the Retailers MCX relationship is saying that Apple Pay essentially allows “Visa/MasterCard monopoly into mobile payments”. saying “Those two dominant credit card networks have faced a lengthy series of antitrust actions from the U.S. Department of Justice and merchants over the years due to their anticompetitive conduct. Now, they are working feverishly to require merchants to accept their preferred technology, near-field communications (NFC), so that they can extend their dominance into the future.” How supporting MCX, a program that requires exclusivity within the mobile payment channel, even the exclusion of non-VISA/Mastercard 3rd parties is not Anti-Competitive is a bit of a mystery.

Let’s be clear, MCX could allow either Visa or Mastercard into the CurrentC wallet, it’s a business decision, not a technology issue. Apple was clever enough to shift costs (at least for now) to the issuer, rather than the merchant. This opened the door to many merchants avoiding the interchange conversation. Why many merchants have chosen not to join MCX might have something to do with membership fees, product availability, or perhaps that it is an ACH program rather than a new low cost 4^th network. After all, there are many ACH providers, why spend a lot of money joining a coalition only to pay a high membership fee for a product that is already available from other providers?

The reason the industry is lining up to fight over the CVS & Rite Aid decision is because this is another skirmish in a multi-year battle over the fees retailers pay, or banks earn, when consumers make a payment. For retailers simply wanting mobile payment at low cost, the program is available today. Retailers can compete with banks for consumer’s method of payment, that’s the “Competitors Code”. The point is, Retailers don’t need legislation or litigation to drive fees down, competition will do the job. If CVS and Rite Aid don’t want to accept Apple Pay, so be it. On the other hand, how does a restrictive exclusive contract with MCX serve the consumer?

Three emerging trends in payment

Consumer payments will experience accelerated change in 2013. Multiple disruptive and innovative companies, particularly 3^rd party app developers and retailer branded mobile solutions, will enter the market to challenge the incumbents. Traditional payment processing networks and financial institutions will struggle to keep pace with nimble, tech savvy competitors. “Payments incumbents will leverage their market power to battle disruptors. MasterCard’s new fee structure for “staged” digital wallet providers such as Google Wallet, PayPal and Square” are an early shot-across-the-bow in a fight that will set the stage for payments over the next decade. The legacy technology managing the current payment processing network will be unable to keep pace as new POS and cloud based programs enable merchants and consumers to pick winners and losers.  Mobile solutions; coupled with low cost alternative payment, in conjunction with retailer funded rewards, will become more abundant, more accessible, and deliver greater value.

The eco-system is changing. A new “Retailer-Consumer-centric” payments paradigm is emerging. The future of the new paradigm will be shaped by three disruptive digital (POS based combined with IP communication) trends:

◾The POS Payments Cloud:  The last 10 years has brought major change to the POS and communications.  Less than 10 years ago the POS was a relatively limited device and communications were slow and arcane, at least by today’s standards.  The traditional legacy payments processing network relies on processors, associations and financial institutions in conjunction with POS vendors and a “heavy” communications systems like the Hughes satellite network to enable electronic payment. Unlike the consumer and their expectations, change within this eco-system is difficult, time consuming and expensive.  POS vendors are setting the slate to disintermediate the traditional network through the introduction of the “payment cloud”. Today’s POS is a powerful device built with open standards capable of supporting a wide range of payment and loyalty solutions. The internet changed the nature of communication allowing low cost, reliable, fast, and secure connectivity. Emerging payment models leverage the combination of POS capability and the internet to disrupt traditional payment economics. “Merchants have a growing set of payment options that do not adhere to the traditional interchange or processing fee model. Some of these options even deliver additional value above and beyond payment processing. As merchants adopt these new payment methods, their expectations will reset and they will expect lower costs and greater value from incumbent payment service providers. Traditional economic models will not disappear overnight, but it would be a mistake for payment incumbents to dismiss the growing number of unique pricing schemes and the disruptors who are moving aggressively to gain scale”. Watch for the emergence of these POS payment platforms in 2013.

◾Mobile Payment: Mobile payment and digital wallets will change the nature of the relationship between the consumer and the retailer. New technology will enable a robust “dialogue” between the consumer and the retailer during the “purchase cycle” allowing the retailer to engage the consumer before, during and after the transaction.  Technology “will drive adoption by integrating capabilities that remove friction and transform the payments and commerce experience in contextually relevant ways. These wallets will embed capabilities that can create a more convenient commerce experience for consumers and give merchants a growing set of potential benefits — that may provide a distinct competitive advantage — to evaluate and weigh against the additional costs of wallet acceptance.”

◾ACH & Merchant Issued Rewards: The advantage merchants have in mobile payment is two-fold. First, merchant control access to their mobile payment environment, they will decide what forms of payment are available to the consumer. Secondly, rewards are the key driver for consumers as they choose their method of payment and rewards are controlled by the merchant.

 

Low cost alternative payments in conjunction with merchant issued rewards will appeal to a broad base of retailers and consumers. The loyalty industry in the US is significantly more than $10 Billion dollars and growing. Current card acceptance fees are in the two percent range adding up to billions of dollars. Merchants who leverage the combination of these two line items will offer consumers powerful incentives. Clearly, Merchants can have a lot of influence regarding payment choice with this type of spending. “Disruptors are creating better, lower-cost alternative products and services that deliver more value and meet broad-based payment needs.” Retailer services will provide consumers with personal, relevant offers designed to drive a more profitable purchasing experience.  ACH payment will lead the way towards low card acceptance fees. Retailers who recapitalize these fees as consumer rewards will see increased sales and profits.

 

It will take a few years before we see the full force of this disruption. Retailers will be hesitant to make the technology changes necessary to support the new payments paradigm. Some will wait as end-of-life requirements make change inevitable, others will jump in early and gain leverage in their market.

2013 will be an interesting year for the payments market, what changes do you see in your organization?

How big is Big? The Uber Cloud

In my last blog I discussed the three high level priorities of Big Data and its role with mobile payment.  In this blog I take a closer look at how big is BIG DATA. Today, retailers have access to the transactional data that they collect at the POS, or is provided to them by 3^rd parties. Big Data is the “other data” from the “Uber Cloud”. The Uber Cloud includes all data sources like web server logs and internet clickstream data, social media activity reports, mobile-phone call and text detail records and information captured by sensors.

How big is big? YouTube, FaceBook and Goggle are estimated to store 1400 petabytes of data including more than 35% of the world’s photographs. Between them, they share approximately 11.2 billion page views per day. People “Tweet” about 128 billion times per year at a rate of 4500 tweets per second. Annually, people spend over 2.2 trillion minutes either talking on the phone or sending 6.1 trillion texts. On any given day people are texting 193,000 messages per second or spending 2.2 trillion minutes talking on the phone.  There are only 7 billion people. We can agree, this is BIG!

That’s a lot of millions, billions and trillions: but what is a Petabyte? When I tried to think about how to explain a Petabyte I found myself thinking of Doctor Evil demanding; “one million dollars” not aware of how little a million dollars had become. It is true, a million dollars is not what it used to be, but the same is even truer when considering data.

A Petabyte is big. Mathematically, “a unit of information equal to one quadrillion (short scale) bytes, or 1 billiard (long scale) bytes”.  It’s hard to visualize what a Petabyte could hold. “1 Petabyte could hold approximately 20 million 4-drawer filing cabinets full of text. It could hold 500 billion pages of standard printed text. It would take about 500 million floppy discs to store the same amount of data”. The promise of mobile payments is that retailers will be able to access and use these data sources to build a more profitable, relevant relationship with their customers.

Big Data means Big Data Analytics. Big data analytics is the process of examining large amounts of data from a variety of sources to uncover hidden patterns, unknown correlations and other useful information to engage the consumer during the purchase cycle. Access to Big Data within the mobile wallet will drive radical efficiencies enhancing social engagement and improve information sharing between the consumer and the retailer.

Big Data and Mobile Payments: Three priorities.

The three high-level goals of a Big Data program are:

1. Collect information: The objective is to collect information that deepens the understanding of customer’s plans, intentions and behavior so the organization has a basis for decision and action. The first step is to collect and save all of the digital breadcrumbs. The challenge is, since we can’t understand consumer behavior that we don’t have, we need to collect everything. Since it’s impossible to know the future value of data we must hang on to it for a very long time.
2. Conduct Analysis: Big Data really means Big Data Analytics. The challenge is to find relevance in an ocean of information. There are multiple trends occurring within the consumer base, some evolve quickly, some play out more slowly. The goal of analysis is to provide insight and opportunity to the decision makers managing the business.
3. Take action: More tactically, it is what you do with the information that counts. The key to Big Data and mobile payments is the dialogue that occurs between the consumer’s mobile application and the POS during the purchase cycle. The objective of action is to promote more profitable consumer purchasing behavior.

The success of mobile payments begins with transactions. Transactions are a result of consumer enrollment and adoption. Enrollment and adoption require constant visibility and consumer incentives, in ways similar to advertising typical of the current payments paradigm. The difference is that Retailers rather than Financial Institutions are promoting the method of payment. The key to ROI is engaging consumers and creating demand using Big Data solutions during the purchase cycle. This is the connection between BIG Data, mobile payments and the POS.  Access to Big Data during the purchase cycle requires an integration that is tightly coupled to the POS at the transaction services layer.

The retailer controls payments in the mobile environment. Retailers are being very careful about who they allow into the wallet…MCX is an outgrowth of this concern. Retailers are concerned that the current card fee structure will become the standard in mobile payments. Retailers are asking, “How do mobile payments make me money or even justify the infrastructure investment”. While the current focus on mobile payments are POS enablement and transaction fees, tomorrow the focus will be driving new business through consumer engagement. Big Data is the backbone of demand generation and the POS controls how Big Data solutions are enabled.

Smart phone technology changed the expectations of consumers, merchants and eco-system partners. The smart phone has also changed the way consumers do business; integrated mobile payments at the POS is the last frontier.