New Ventures in Financial Services

27 March 2010

• Tyfone Press Release
• First Data Press Release
• Computer World

When I evaluate companies, I look at the team first, business focus second and technology/platform third. Tyfone has one of the best technical teams in the NFC business led by Siva Narendra. Their product IP is just tremendous, resulting in a hardware platform that is in production and ready for market (a 5 year effort).

Tyfone’s micro-SD card is both NFC and MiFare (ISO 14443) compliant, meaning that in one device I “could” pay at every NFC POS reader AND go through every public transit (Oyster, Octopus, …) system. In other words, I buy this Micro-SD card, put it in my blackberry’s slot and now can wave my blackberry across POS terminals to pay a merchant and wave my blackberry on the UK Tube turnstile. “Could” is the operable word here as each payment network (including “closed loop” transit networks) holds the key to certification (and acceptance).

Tyfone’s partnership with First Data is key to addressing both Visa certification AND the 6 party fur ball which surrounds NFC. Why do I love these guys?

• Team
• IP
• Hardware
• Partnership
• Flexible business model

Their competitors are: QCOM, handset manufacturers, bladox, …etc and perhaps (at the low end) NFC “sticker” providers like INSIDE. The “battle” in NFC is very complex as it extends into authentication, provisioning, device silicon, standards, certification, IP, POS … etc.  Obviously much heavy lifting remains to be done here, but my prediction is that the winner will be driven by a stellar team that is able to form the right alliances, with enough capital to ride through the storm. Their top challenge will be to stay focused on revenue generating opportunities and ignore (politely) the 100s of banks and transit teams looking to test their hardware.

The VISA/ATT NFC effort should kick start First Data in their role as Trusted Service Manager. I hope that my ATT store will be selling the Tyfone cards soon.. because I will certainly buy one.

March 11, 2010 

If you had 30 seconds on the elevator with the CEO of any of the large MNOs, what would you say? I would tell them that they can uniquely address a substantial short term revenue opportunity with an authentication service (in existing customer base). How big? Addressable market is at least $5-10B with MNO revenue opportunity proportional to user/payment volume.

What drives this addressable market?  A: Fraud. Card fraud is big business (~$5.5B globally) for “bad guys” and so is stopping it.

Why MNOs? Unique capabilities with existing customers which can deliver short term revenue. Globally MNOs seem to be caught up in a brawl with banks and regulators in facilitating payments. For an MNO, why bother with the payment? If MNOs can manage risk (independent of payment type) then they have the potential to change the payments landscape and provide consumers (and merchants) with the ability to form new payment arrangements. If a consumer could be authenticated, then they no longer need to carry around any financial information with them…. account information could be managed separately. This is not a new concept (read virtual wallet). Past “wallet” failures were based upon a MNO model which attempted to “control access” AND “payment instruments”.  Alternatively, an “authentication” model would put MNOs into a role where they support existing processes and payment streams (rather then intermediate them) AND remove them from many of the regulatory hurdles which surround payments.

What are Key MNO Capabilities? Customer location, near real time customer communication, customer payment history, KYC, regular communication with customer, brand (trust greater then banks in most cases), handset (ex. Camera), merchant relationships, ability to incent customer, … etc.

Examples:

• Globally, the most cost effective form of “authorization” my teams had ever rolled out was SMS based… A simple message to the customer providing a OTP. This model does not require MNO involvement, but could be substantially enhanced with additional MNO provided information (ex. Location, picture).
• Verisign’s VIP and Arcot’s new OTP generator are great examples of the potential for the mobile phone to act as an authentication device… this kind of service has the potential to displace EMV/CAP (outside the US) and usher in changes in the US.
• A non-card story comes to mind. CitiFin Japan had one of the coolest mobile applications I had ever seen: mobile account opening. The App took control of the handset camera so that the prospective customer could look into it and say “I accept the terms & conditions”. This would be a great generic service for MNOs.. for all types of “contracts”

Where to start?

In the US, the merchants are bearing the costs of card fraud and are highly incented to partner. The biggest merchant pain point is card not present (CNP) transactions. Getting the customer involved in authentication is a harder nut to crack, particularly when they bear no risk/costs (US Reg E/Z, and Fraud Liability Shift Whitepaper).

To get the ball rolling MNOs need to partner where the pain is (merchants) then incent consumers. Incentive costs should be borne by merchants through some combination of rewards, discounts or coupons. Another possible incentive is fear (identity theft.. don’t laugh have you seen Lifelock’s subscriber base?).  In my previous post (iPhone at POS? ) I touched on several elements which are critical.

Customer Experience? 

• Having the mobile phone as part of the payment stream would result in the best (short term) customer experience, but would give the card networks new control (adding mobile number to card directory). I’m sure there are 100x permutations, but most would involve a customer interaction with the device to approve or verify.
• ACH Push has plenty of examples where consumer presents mobile phone number to the merchant (as is done today in Nordics and PayBox) instead of your card.
• In a “decoupled” authentication process, the merchant would ask to validate the consumer. Consumers are reluctant to give out their mobile numbers, so I would assume that the service may gain the most traction by making the party that stands to gain (merchants) do most of the work.  MNOs would develop an auth service where merchants would send a “validate” request to the MNO for a given payment type (many US merchants use an similar service for checks today: Telechek). Consumer would receive request and approve (prior to card authorization). The great thing here is that this request could also morph to take into account “context” of the validation request (ie. buyer/seller/new customer validation).

Example “future payment” process: Taking my cart full of groceries to the checkout counter of Tesco, the clerk gets my name and asks “would you  like to pay for this the same way you did last week”? I say sure.. and get a message on my phone with amount and store, validate with my PIN. Store recieves validation and processes order with my last payment instrument. I never had to open my wallet, and get a feeling that the store knows me… perhaps this is “back to the future” with the local corner grocery of 100 years ago (they knew their customers and cash was not always required). 

Summary

Authentication is a natural space for MNOs, and US merchants are screaming for help in managing $1.5+B in fraud. Unique MNO KYC capabilities could provide for many new revenue streams and accelerate an “mcommerce” world that expands beyond ring tones. In the US, we must find a way to leapfrog EMV, improve customer experience AND address the tremendous risks and fraud costs borne by merchants. Why should I carry around 8 cards and swipe for everything when 90% of merchants already have my payment information? MNOs have the opportunity to deliver compelling value and cement their position in customer interactions. Generating revenue from a “generic service” like authentication will likely require additional companies capable of consuming (and extending) it. Perhaps the mobile phone will be the “key” to trust portability (hey that rhymes) and link the virtual and physical world of commerce.

Related Links

• KC Federal Reserve – Oct 09
• UK Fraud Numbers – Card £440.3MM
• Smart Card Alliance/Nielsen – $5.5B Global Card Fraud
• Merchant Risk Council
• Fraud stats (creditcard.com)
• Philadelphia Federal Reserve
• US Merchants – $48B in Interchange
• Fraud Liability Shift Whitepaper
• Lexus/Nexis – Javelin: U.S. $191 Billion in Fraud Losses  
• Payment card fraud costs $8.6 billion per year, Aite Group says

Comscore Report – March 8, 2010

Good report from a great company. The quality of Comscore’s data is just unbelievable. Though statistical sampling, they were able to predict my numbers at Citi to within 2%.. from balances, to users, to account openings. Its the best competitive information source I’ve ever dealt with.

- Tom