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Archive for November 2009

Amex Revolution (update 4)

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Amex Acquires Revolution Money – $300MM (Update 4)

18 November 2009

QUICK Take Analysis

Company Website

Investor Webcast – Amex Acquisition


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


  • 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.

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?

Written by tomnoyes

November 18, 2009 at 9:19 pm

Vendor Review – Monitise

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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)

Investor Relations Website

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.Monitise Vendor Assessment

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.
  • Financial crisis impact on bank customers
  • Bank Consumer marketing budgets
  • Risk Management (mobile fraud)
  • Regulatory initiatives as SEPA/ UK Faster Payment

Vendor 2 – BlingNation

See Blog here

Vendor 3aKos Corp

Coming Soon

Written by tomnoyes

November 13, 2009 at 9:37 pm

NokiaMoney Update

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November 13, 2009

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

Written by tomnoyes

November 13, 2009 at 6:07 pm

Posted in Uncategorized

Investor’s Guide to Mobile/Money

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November 10, 2009

Breaking Down Mobile Money Opportunities – Part 1

Does anyone else feel challenged keeping up w/ vendors, regulations, alliances, pilots and investments in the mobile space? As I get older, my tendency is to categorize and sort for storage in my decaying gray matter. Upon encountering a new idea, I’m fortunate to have some very good friends to help me analyze it and assess it. I’ve certainly learned that my ability, to categorize and sort in isolation, has a very high error rate. The added benefit of conversation is to further the human network (as I can depend less on my decaying neural one).

I have never seen such global fragmentation of: ISVs, ASPs, FSIs, MNOs, regulators, TSMs (Trusted Service Managers), Merchants, Acquirers, Handset Manufacturers, Standards, and Customers (this may well be a 100 part series).  Two of my favorite attempts at market segmentation are below

 Mobile Market Breakdown

Jan Ondrus INFORGE – Ecole des HEC

Even these diagrams are not comprehensive as they fail to take into account such things as microfinance (unbanked/underbanked), regulatory issues (cross border, AML, KYC),  consumer protection, carrier dominance, credit bureaus, merchant POS infrastructure, customer education, broadband/3G availability,  …etc.

After speaking with over 50 start ups globally (and several VCs, FSIs and MNOs), my opinion is that mobile payments is likely to stay “regional” for the next 5-10 years. Success will be driven by well established, trusted companies with an existing mobile/financial network or with large payees/beneficiaries (government, transit, retailers, …) capable of creating a critical mass of consumers with a strong convenience play (ex. HK Oyster Card).

Within Tier 1 OECD countries, there is opportunity in chaos. From a banking perspective, NFC integration into mobile handsets is the top global opportunity, with a significant consumer convenience play. The ability to pull out your mobile phone to pay at a cash register, open a locked door, store coupons, receive marketing, send money across the globe, and store all of your other “digital keys” will combine with the unique capabilities of mobile (location, always on, …) and financial services (demographic, spending ability, spending habits, …) to provide a tremendous “wave” of innovation, investment and M&A activity.

Over the next 10 years, emerging markets will be riding an even greater wave as the absence of infrastructure is bridged by access to low cost mobile devices capable of providing both access to information and services. The developments here will likely take on a much different focus then developed countries, but with a much larger global impact on the quality of life of 80% of the world’s population. In the West we take for granted such basic infrastructure as: consumer protection, contracts, law and access to an unbiased judiciary.  Given these challenges, concepts such as: “Trust” external to one’s community, and “banking” are foreign. The bank opportunity, in the developing market, is to leverage mobile as a platform to serve 600M-800M new customers over the next 6-8 year.

There will likely be great differences in development of mobile payment between the developed and “developing” world, hence banks should strongly consider separating the responsibility for approaching them. Banks and payments, typically play an infrastructure role to commerce handling such things as authorization, clearing, settlement, reporting, … etc. Banks are uniquely chartered to serve this function and commerce is served by having a reliable, regulated entity responsible for the exchange values between parties.

Evaluating Mobile Opportunities

I would greatly appreciate your feedback on the following thoughts below (as I evolve my categorization process). Yesterday I was on the phone with one of my friends, payments head top US bank, over 30 years experience in structuring some very large M&A in both card and retail… a “realist” is an understatement. Prior to my call with Him, I had a well structured set of questions to assess mobile initiatives for investment:

1. Who is the customer?
     a. Geography(s)
     b. Profitability
     c. Existing Bank Relationships/Products
    d. Access to mobile
    e. Access to broadband
2. What is the consumer value proposition?
    a. Why is it so urgent that the consumer cannot wait until they get home or office access to their computer?
    b. Speed
    c. Convenience
    d. Cost
    e. Loyalty
    f. Alignment to trends
    g. Distribution: Customer acquisition costs
    h. Other
3. What is the merchant value proposition?
    a. Pricing/MDR
    b. Loyalty
    c. Risk
    d. Technology/Cost
    e. Regulatory
    f. Speed
    g. Refund/Dispute
4. Banking/Payment Network Value Proposition
    a. Competes or aligns with existing products?
    b. What current products target this consumer?
    c. What is transaction volume and growth?
    d. What is their primary market (ex PayPal – eBay) and are they expanding?
    e. Does it connect to an existing payment network? Who manages switch risk?
5. What are the Dependencies
    a. What change is required?
    b. Consumer Behavior? (Who bears marketing expense)
    c. Merchant POS?
    d. Regulatory (US/EU/ Other)
    e. IP/IP Access
6. Is it a separate network? If so,
    a. Who makes the rules?
    b. What is compliance burden?
    c. Who is responsible for compliance?
    d. Have regulators reviewed?
    e. Servicing: Who owns customer dispute/resolution?
    f. How are rates/fees set? Who negotiates them?
    g. How long has it existed? Fraud/weaknesses?
    h. Has it been tested at volume (ex. Paypal has 300+ person team in risk)
    i. …etc (additions appreciated)
7. Financials
    a. Invested capital, valuation, BOD experience?
    b. How does it support Parent’s business model?
    c. Pricing: Sensitivity, sustainability
    d. Revenue, Burn rate, Cost Structure, Debt
    e. Market share.
    f. Distribution: costs
    g. Sales Pipeline (realism) or Direct to Consumer (marketing plans)
    h. Capital raising plans
8. Exec team
    a. Knowledge of Customer, Market, Competition, Value Prop
    b. Customer Reference (consistency)
    c. B2B vs. B2C
    d. Experience in payments
    e. Experience in financial services
    f. Global/US
    g. Network
9. Partnerships

(As you can tell.. I am a list person). As I spoke of some new opportunities, my “bank” friend put the new companies through his much simplified filter:

  1. What service does it provide that I can’t do today?
  2. Why do I care?

The shocking result is that there were very differences in the results of our decision frameworks. The purposes of this Blog are: engage community in defining categories, increase investment (where appropriate) by assisting those with capital in their assessment, identify new opportunities in payments. 

The first 2 opportunities seem to be universally agreed to as an opportunity for mobile money (“new payment” mechanism), as they are not services that banks provide today:

  1. CASH REPLACEMENT – Developed Countries
  2. UNBANKED – Emerging Markets (multiple subcategories)

Categorization of payment schemes that do not fall into the categories above are challenging. Which attributes should drive the categorization? My tendency, in process of categorization, is to always segment based upon customer or customer usage. This approach leads to market quantification and I will proceed in this vein until it stops working for me. Separating the unbanked (above emerging markets), the draft category list is below.


Yes this is too complex. Since I’m not writing a novel here I will focus on the ones which I’ve had some interaction, or which are exhibiting exciting growth trends. The complexity and potential for mCommerce is precipitating some very curious investment decisions, some of which can only be categorized as a “bet” that a team will “figure it out” sometime in the future (See Nokia-Obopay). Companies which are able to deliver a focused value proposition, build core competencies, partner, and adapt their plans will be best positioned to ride the storm. I’m attempting to take on the role of a weather forecaster, while investing in the areas that are likely to have the best harvest.

“Mobile Money” Assumptions

Prior to reading any of further, perhaps I should state my “payment” assumptions that predicate many of the views to follow. Of course good people will disagree, and I appreciate the dialog.

             I.      Banks compete where there is profit incentive, and there are very few “new” payment types where a bank cannot compete with an existing product. Retail Banks have 2 competing internal organizations: Banking and Card. Retail Bank earnings are tightly tied to the products that surround payment. 

          II.      Banks and MNOs are notoriously hard to partner with. There seems to be (at least) 4 communities that don’t collaborate frequently: Banks, MNOs, Start Ups/VCs, NGOs, … Each of these has their own (competing) objectives.

       III.      The US payment market is much different than the rest of the world (not better). Add another dimension to the parties listed above.

       IV.      Developing ecosystems will display much chaos before clear trends emerge. Chaos in payments is anathema to trust. Trust is necessary for mainstream customer adoption.

          V.      The most successful non bank which has emerged in payments is PayPal, their success is due to their ability to focus. Initially on eBay, then leveraging its success and focusing on 2 unique “weakness” in card transactions: Card Not Present (risk management) and the inability of the existing Card network to adapt (complexity).

       VI.      Silicon Valley hype machine surrounding mobile is in full gear. There are some gems, but hard to separate from the dirt. Most private valuations and M&A transactions to date have very little connection to reality.

    VII.      Europe’s “success” in mobile payments adoption provides insight into profitability of the service(s). In almost every case, the margin opportunities exist separate from the transaction. This “evolved” ecosystem seems to model cash, particularly in the Nordics where Mobile Payments are becoming “ubiquitous”.

 VIII.      Emerging market dynamics are completely unique, and there will be many unexpected “leap frog” developments as business, technology, financial services and regulations adapt to serve the world’s developing nations. Any broad categorization of these opportunities is difficult separate from the market dynamics (Example Vodafone has an 80% market share in Kenya that drove MPesa).

       IX.      US MNOs are working to define how they can take part in transaction revenue (e.g. control). International markets are much different.


For investors assessing start ups attacking the confluence of “payments” and “mobile”, historical view of past transactions and investments is of little value. In the US, the big players (MNOs and Banks) have not acted yet, and when they do it will impact every mCommerce company in your portfolio.  Take a look at Japan, HK, Nordics, SG to see alternate visions of what the future could hold. Ensure the prospect has a sustainable value prop in the current market, and a management team capable anticipating market moves to adapt it.

Select Transactions

Select Capital Raising Transactions

MobileMonday provides an excellent overview of the current deal flow in mobile.  A few select transactions are listed below (further detail is available).

 mobileMonday investment pic

Mobile Monday

It is apparent (from the complete data set) that capital raising valuations for “mobile services” have very little basis. FT Partners provides an excellent detailed look at M&A activity in financial services space, and should be considered when evaluating mobile money investments.


Payment Providers – Valuation (Source JPMC)

JPMC Analysis

Next Post – Assessing Cash Replacement

Written by tomnoyes

November 10, 2009 at 6:26 pm

Posted in Mobile

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