Archive for November 2009
Amex Revolution (update 4)
Amex Acquires Revolution Money – $300MM (Update 4)
QUICK Take Analysis
Investor Webcast – Amex Acquisition
News
Customers
Card Holders: 300,000
Merchants: TBD
TPV (FY 2009 Estimate): $200M-$400M
Revenue (2009 Estimate)
Interchange: $1.0M (Est 50bps)
Fees: $0.30M *Est
NRFF: $0.60M *Est
Other: $0.20M *Est
Total 2009 Rev: $2.1M (Estimated)
Invested Capital
Series A – $10 (Estimate)
Series B – $50M 9/07 Deutsche Bank, Morgan Stanley, Ted Leonsis
Series C – $42M 4/09 Goldman Sachs, Steve Case, Ted Leonsis, David Pottruck, David Golden, Citigroup, Morgan Stanley.
Total Invested Capital: $112MM (Estimate)
Post Money Valuation – Series C $200M (April 09) *Est
Purchase Price: $300M (11/18/09 Press Release)
Deal Analysis
• 142.8 times Forward Revenue
• 2.68 times Invested Capital
• Profitability. Assuming ACH funding costs of 42bps, gross margin on TPV is less than 8bps. If consumer fees remain consistent, and merchants bear marketing costs, break even is TPV of $1.9-2.5B (12x+ current TPV). Note PayPal TPV is $60B.
Bank License: First Bank & Trust
Partnerships: Chase Paymenttech, 5th 3rd
Business Overview
The most telling data on this business is from the conference call above. CEO said “I don’t know what the numbers are, and if I did I probably wouldn’t tell you”. Revolution efforts to date, and their value proposition, are heavily merchant focused. Early vision was to own the rails and act as both issuer and acquirer. Realizing that this was too much to bite off for a small company they chose to focus on a platform and partner w/ acquirer, selecting the most cost effective network (PIN Debit) as “rails to ride”.
Revolution has “tested” the platform, a platform which provides unique cards that resemble US Bank’s existing PIN Debit (ATM) card plus some additional security features. Given the break in their acquisition strategy, Revolution’s margins are extremely compressed, with merchants provided a flat 50bps MDR. All accounts are funded by ACH transfer and no interest is paid to customer on funds held. Payments funded though ACH typically carry a flat processing fee, usually less than 25c (this represents cost of less than 40 bps on an average PayPal transaction of $62). By comparison, PayPal’s funding mix includes option for credit which carries funding cost of 200-250bps.
Under existing US regulations (Reg E/ Reg Z) merchants suffer heavily in losses on Card Not Present (CNP) fraudulent transactions. Visa and MC networks have had challenges implementing improved CNP risk controls as 4 parties (issuer, acquirer, merchant, network) have very different incentives. Revolution’s enhanced security controls attempt to address merchant liability in CNP fraud , and could lower costs for merchant, and issuer (Revolution).
Consumer Fees
Analysis
- 140x revenue represents a significant premium for a business model that has not proven itself, only “tested” its platform, requires substantial changes to consumer behavior, and leverages bank networks without providing bank incentives. It will take a 500%+ annual growth rate for this transaction to be accretive in a 5 year view with current pricing structure. American Express acquisition may be able to accelerate merchant growth, but marketing costs remain a challenge.
- Current MDR and Consumer fee structure will likely remain until a TPV of $2-$3B to drive merchant adoption and offset merchant costs associated with integrating (and marketing) a new payment instrument.
- Merchants may distrust AMEX intentions here as AMEX’s MDRs are among the highest of any payment type. Internally, AMEX will be challenged to allocate resources to Revolution’s given cannibalization issues surrounding fee structure. It may however, align with AMEX recent activity to form a deposit business.
- Amex merchant connectivity may be able to provide the low cost rails that were initially envisioned in Revolution’s early business model. Internal incentives will prove challenging.
- Price driven product. As the head of payments at a top 4 bank told me last week, what about this can I not do? The margins in this model have not driven earnings, and pricing will likely increase to support a sustainable business. A key element to pricing (and adoption) will be the degree to which merchants take ownership of marketing, loyalty and consumer adoption.
- Companies like LifeLock have demonstrated that there are profitable consumer segments that care deeply about security. Uptake of Revolution money may be influence heavily by customer awareness. Under Reg E and Reg Z, maximum consumer liability for a fraudulent Credit Card transaction is $50. The liability for a PIN Debit is much different (note below). If consumers realize that their existing card liability is superior (then this instrument), it may impact adoption.
- As with any new payment instrument, consumer adoption often proceeds much more gradually than predicted. PayPal solved a critical problem for an emerging market. Paypal’s ability to manage fraud and losses may justify their higher take rate (300-350bps), as the PIN debit model does not address merchant liability (see Chicago Fed Overview).
- It is Critical that Chase Paymenttech stay engaged in merchant acquisition, as they are the leading acquirer for online merchants (addressing CNP issues).
- (Aug 2010) learned that Revolution paid acquirers $1-$2M to integrate product.
- Message to banks and issuers: set aside $10-$30M to invest in solutions to address CNP fraud.
Issues
Banks have invested enormous capital in building the ACH and PIN Debit (ATM) network, Revolution money leverages ACH to to fund their accounts, and then leverages the ATM PIN Debit network to conduct transactions. This flow of funds completely eliminates Debit card interchange revenue for “originating” banks (~150bps). Banks have not acted to date as current TPV is not of concern. In the event that TPV expands significantly, expect Bank involvement in restricting both the funding of accounts and use of PIN debit network. NACHA members have been very active in enforcing limits on clearing of non-bank payments, particularly if total transaction volume exceeds bank’s assets.
Non-bank money transfer services are typically a regulated activity. In addition to regulatory challenges, the unique regulatory environment (Reg E, 3rd party sender to ODFI) in the US may prohibit international expansion of this model. Another unique aspect to the US market is the card issuing business is typically separate from the merchant acquisition side (exceptions are American Express and Discover). Internationally, banks with both issuing and acquisition businesses are in a much better competitive position.
American Express will likely look to supplant role of Chase Paymenttech in merchant acquisition. Chase Paymenttech has several unique capabilities that will be challenging for AMEX to match. Look for AMEX to provide incentives for continued Chase Paymenttech involvement.
Value proposition is heavily merchant focused. Merchants may bear marketing costs to drive consumer adoption given the enormous cost benefits, however an integrated (merchant funded) marketing campaign will be challenged. Branding payments will eventually provoke a bank reaction. Paypal supported bank profitability through some interchange (50% funding mix w/ ACH). This model completely disintermediates banks (all while leveraging network in which they have influence/ownership).
Fraud does not typically attack a new payment system until it reaches critical mass, as fraud perpetrators must invest time to explore weaknesses and develop new tools. PayPal suffered losses of 7.4% of Revenue (over $300M gross fraud last year). This would obviously impact a business model with a margin of less then 10bps. The funding of the initial account is certainly a key weakness in this arrangement, as witnessed by both “direct banks” and transfer agents like Cashedge. Cashedge has a dedicated team of 30 risk analysts that have developed tools over 5 years to address fraud. See Mule Accounts.
Is the merchant value proposition strong enough that merchants will invest in building business teams that are capable of creating marketing and loyalty plans that can drive consumer adoption?
Vendor Review – Monitise
November 13, 2009
I’ve been fairly negative on a few vendors lately. In the long term, Capital is attracted to success and growth. Perhaps it is time to look at a few “successful” start ups. Success is a relative term in the mobile payments space as both public and private companies have been challenged to generate revenue. What we see today is established players making “bets” in the form of investment capital and revenue guarantees. Because of the breadth of this space, there are multiple (overlapping) bets being made by existing players.
Once investment capital flows into a venture whose business model is “in progress” information concerning its current state is hard to obtain. A top VC constantly reminds me that Google had no plan for revenue when it first started. However, it remains to be seen HOW the highly regulated and highly competitive world of payments will adapt to this “innovation” and invested capital. The complexity and profitability of mobile payments within the emerging market “sector” is further aggravated by new participants: Philanthropic Organizations and NGOs. These groups see tremendous potential in mobile to address financial infrastructure issues in developing markets (CGAP Articles).
Criteria for “success”:
- Consumer Metrics (Active Customer Growth, Revenue)
- Dependencies (Behavior, infrastructure, technology, …)
- Value Proposition
- Market Opportunity
- Financials (Invested Capital, Burn Rate)
- Competition
- Ability to Execute (Team/Partnerships/Regulatory Issues)
- Intellectual Property
A more detailed list can be found here
Vendor Assessments
Monitise PLC (MONI on London Exchange)
As one of the few public companies in this space, an analysis of their annual report (Aug 2009) is highly recommended. They have evolved substantially over the last 6 years morphing from a closed mobile banking fat client that resembled an ATM (in direct conflict with Bank brand), to a bank friendly vendor with over 150 active bank customers globally and over 1 million users globally.
Just 2 years ago, Monitise and Firethorn were in direct competition, both agreeing on a future in which fat mobile clients would reign, all while resisting the iPhone (dismissing it as being a small niche). The current service has some substantial short comings as their card-centric approach means that a customer cannot get access to all their accounts, but rather just those linked to a particular card. Another example is that their card-centric “ATM like” approach results in a paucity of transactional information — for instance: “DEBIT $25.32″ instead of say “Walmart $25.32″.
Monitise tends to emphasizes that mobile as a separate channel from online and that more consumers have cards vs. online banking, but the bankers don’t like offering a product that is deficient to their online banking. US banks have realized with Firethorn, it is rather expensive to create yet another servicing channel, particularly one that is used infrequently (see Firethorn is dead). Recent PR indicates that they are continuing to make progress as an account servicing tool (Lloyds TSB 6/09).
Today, Monitise is attempting to move from its role as a “mobile banking” application provider to mobile payment platform. Currently, no bank customers for this service have been published. Monitise has a solid reputation with banks, and existing bank contractual agreements represent a substantial asset. Because of these contractual agreements, and their global footprint, Monitise is the vendor best positioned to execute against a “bank play” in mobile payments.
4Q09 financials show that Monitise had a 2009 operating loss of £13.1 MM on £2.66 MM in Revenue. They have taken on additional capital as Visa International subscribed for £4.2MM shares (announced on 30 June 2009) and is now the largest shareholder representing a 14.4% stake (in the issued share capital). Visa’s agreement also provides revenue worth a minimum of $13MM over a five year period. Visa’s capital has enhanced MONI’s cash to just over £10MM, with the expectation of the 2010 burn rate coming down from £13.1MM, they will have sufficient liquidity for the next fiscal year but will be challenged to generate new revenue streams from their existing customer base without substantial consumer marketing assistance from Visa.
The Visa partnership may provide an avenue for MONI to expand their footprint within their existing customer base, and also help them expand addressable market by leveraging Visa’s Brand and Marketing prowess. The initial focus of Monitise mobile payment services seems to be cash replacement with current customers, increasing card use (debit/credit/pre-paid) in both Tier 1 OECD countries and emerging markets. Although their bank friendly model will insulate them from many of regulatory issues (which affect their competitors), they will be severely challenged to generate incremental revenue from a new payments business. Banks hold the keys to success here, and will not invest until: consumer demand for mobile payment picks up, or other revenue streams (interchange) enable them to fund the expansion.
Key challenges for Monitise to execute in mobile payments:
- Making the Visa relationship work (marketing)
- Consumer Interest/Competing models ( ex. www.payforit.co.uk)
- Financial crisis impact on bank customers
- Bank Consumer marketing budgets
- Risk Management (mobile fraud)
- Regulatory initiatives as SEPA/ UK Faster Payment
http://www.paymentsnews.com/2009/06/visa-monitise-form-strategic-alliance-for-mobile-payments.html
Vendor 2 – BlingNation
Vendor 3 – aKos Corp
Coming Soon
NokiaMoney Update
November 13, 2009
http://www.totaltele.com/view.aspx?ID=450668
Nokia is making quite a few bets in this space. Their investments certainly make economic sense as helping the unbanked will also provide handset growth for the “unphoned”. Perhaps Nokia’s strategic vision is to enable a standard “financial operating system” that can be leveraged by Banks, MNOs and Consumers. However, if you look at the regulations in places like India, china, Indonesia.. you will find that Banks/ MFIs control “payments”. The services listed above are very, very similar to the “future” services listed on Obopay India (Top up , bill pay)…
This article is curious as it conflicts with itself: “will enable people without bank accounts in emerging markets to transfer money” and “the service requires a banking licence”. The focus of this initial offering is India (95% confidence), hence statement “requires a banking license” and they are looking for a customer. The correct wording for this article doesn’t sound as positive “it COULD allow people without bank accounts to transfer money.. if the regulators would let us, since they won’t we have to sell it to a bank first”.
There are many challenges for Nokia if they are trying to brand this service: who are they selling to? Banks? MNOs? NokiaMoney (aka Obopay) offerings (bill pay, transfer, and top up) all overlap with what BOTH banks and MNOs are providing to banked customers TODAY. The Obopay model is the SENDER PAYS.
I think there is an opportunity for NokiaMoney to develop a “financial operating system” for mobile. But it should probably start with open standards (take an android approach), and then develop a separate content business to support it. Wrapping Obopay in yet another package (putting make up on a pig) only works until it is unwrapped.
Related Posts
http://tomnoyes.wordpress.com/2009/11/12/obopay-india-another-failure/
