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Archive for March 2010

Tyfone/First Data

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27 March 2010

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.

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Written by tomnoyes

March 26, 2010 at 1:21 pm

Posted in mobile payment

Tagged with , , ,

$5B MNO Opportunity: KYC

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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.

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Written by tomnoyes

March 11, 2010 at 5:38 pm

Posted in Analysis, US

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Comscore – US Mobile Market Share

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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

Written by tomnoyes

March 10, 2010 at 5:39 pm

Posted in Analysis

Venture Capital Trends

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9 March 2010 

Background Information 

This note is to entrepreneurs in order to provide some perspective on the state of the Venture Capital Industry (www.nvca.org). Venture firms are of tremendous importance to both the US and global economy. In the US alone VC-backed company revenues make up 18% of the U.S. GDP and account for over 10 million jobs. 

VCs are having challenges raising capital as they compete for risk adjusted return. Last year, 125 venture funds in the U.S. collected $13.6 billion, down from 203 funds that raised $28.7 billion in 2008 and down from 217 funds that raised $40.8 billion in 2007. As the data above shows, 10-year return fell to 8.4 percent from 14.3 percent in the previous quarter – and from 40.2 percent one year earlier. 

In the NVCA survey above, the majority of VCs see a substantial shake out in their industry with 90% of VCs predicting that the number of firms will shrink (NVCA chart). 

Plans to tax carried interest are further challenging VCs politically and financially. VCs take “active” roles and put personal capital into their investments. Further, GPs typically face hurdle rates

From Wilson Sonsini – Example Hurdle Rate Allocation

 

Net profits will be allocated: 

  • First, to all the Partners until each Partner has been allocated net profits sufficient to represent an 8% cumulative IRR on such Partner’s contributed (and unreturned) capital;
  •  Next, 100% to the General Partner until total allocations have been made: 80% to all the Partners in proportion to their respective capital commitments; and 20% to the General Partner; 

What does this mean for entrepreneurs? 

 

A: Times have never been tougher in raising capital, VCs are anxious as their RAROC is challenged by potential carried interest tax changes. Net is that the hurdles of getting your plan funded by a VC have gotten much higher (limited capital) and that valuations are tougher due to recent vintage trend data and carried interest tax implications on GP returns. 

Entrepreneurs don’t give up hope, there remains a bevy of options (some outlined here in Inc.): private placements, angels, angel networks, small business loans, existing customers, …etc. Most of these options start with a relationship or connection to your business. If you are having trouble raising capital, my top suggestion is to look at your board of directors. A successful CEO provided a tactless (but useful) approach to evaluating board performance in capital raising: “they either need to be able to give, get or get off”.

Written by tomnoyes

March 9, 2010 at 3:12 pm

Enstream’s Zoompass

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4 March 2010

See

Who said Canadians were only good at Hockey? This is a super service delivered by a consortium of Canada’s 3 largest MNOs. Zoompass has addressed both the distribution and bank connectivity problems that plague most global initiatives.  MNO collaboration provides customers with a consistent mobile application (embed on most phones) which can transfer funds in BOTH card and ACH networks.. both at POS and in a P2P model. Today’s announcement is around Zoompass, an NFC sticker that integrates with the existing Entream payment application shown below.  Canada now has a ubiquitous mobile payment client tied to either card or bank account on any phone … with NFC capability.

If I were to rate mobile payment solutions.. Canada gets the Silver (Japan keeps gold.. also a little bias given the recent US Olympic OT loss perhaps)… this solution is certainly in the top 3 globally with the only issue being the challenge in replicating to other countries. This may be the best kept secret of any mobile payment approach.

The software company behind this is hyperWALLET (www.hyperwallet.com) a Vancouver based payment provider with a comprehensive multi-lingual, multi-currency software platform that can deployed in either licensed or hosted model.  Beyond MNO applications, hyperWALLET also provides cross border solutions to both banks and corporations looking to distribute small value payments (commission, dividend, expense, payroll, … ) SAME DAY globally, across any multiple payment networks. To tell you the truth, I’ve not seen any other company come close to delivering same day cross border multi currency payments via ACH or Card.. their payment network resembles a “mini Citi GTS”.

Kudos to Enstream and the MNOs in their collaborative approach and in selecting a super platform for a starting point.  Man, I hate it when Canadians beat the US…

Written by tomnoyes

March 4, 2010 at 5:36 pm

China Mobile Buys Bank Stake

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3 March 2010

WSJ Article

Financial Times

Tremendous move by World’s largest MNO.

China Mobile Ltd. is in talks to buy a stake in Shanghai Pudong Development Bank Co., a deal that could help the wireless carrier push further into mobile e-commerce.

Expect to see more MNO/Bank tie ups globally (ex. Globe/BPI – Philippines). Banks realize that they cannot tackle the unbanked market without a partner that can profitably serve it (MNOs), MNOs realize that payment regulatory constraints mandate bank licesnses.

I expect to see more Bank-MNO “arrangements” in emerging markets as the entities that profitably serve the “unbanked” (MNOs) develop structures that provide access to non-traditional payment products which enhance the business models of both. The margins associated with the unbanked demographic are not attractive to banks (which is probably why the customers don’t have a bank account in the first place). In order for banks to support low margin payment products, they must be structurally compelled (either regulations or equity). 

In other words, few current retail or card line of business executives would take on an unbanked payment product (priced attractively to market).  There are simply better uses of capital within their existing business. For a bank to support (this low margin business), they must create a team that is structured (and compensated) to support. Given that most corporate investment processes entail selecting ideas that generate the most attractive returns, projects which would support outreach to the unbanked usually don’t make it. In the US legislators have addressed this structural planning issue with laws such as the Community Reinvestment Act (CRA).

However Emerging Markets face many challlenges in pursuing a “US Model” regulatory approach to expanding access: Banks/MNOs have a smaller “high margin” businesses which can support growth down market (20/80 vs. 80/20).  The equity/partnership approach taken by China Mobile and Globe addresses the bank structural issue and creates a common incentive for both organizations to excel in an investment area that has atypical financial performance.

Regulators in the Indian market appear to be advocating a similar approach. Banking and payment in Asia will evolve much differently than the western models. Imagine getting your paycheck, pension, social services payments all on your mobile…. instantly available… no longer will you have to take a 2 hour bus ride to your nearest agent…. and another 8 hour bus ride to go home and give your family money.

Thoughts appreciated

Written by tomnoyes

March 3, 2010 at 10:56 pm

SquareUp – Take 4

with 3 comments

27 January 2010 (updated 4March)

www.squareup.com

Venture Beat – SquareUp

New note from VentureBeat yesterday. Jack has certainly assembled a who’s who of angels. Given that these investors are proven winners I’m trying to guess whether they have “bet on the right horse” or have a plan that I’m not privy to (ex PayPal buyout). If it is the later, my educated guess is that prospects will let this bake for a few years before getting serious. There are too many issues which must be addressed for serious acquisition money to chase a customer convenience play.  Some of which I attempt describe below.

I understand that Jack’s vision for the company is to provide payment services to “craigslist” customers as the market place which will drive volume (an attempt to mimic the paypal/eBay synergy). His story is that everyone has a card in their pocket.. and merchants want to leverage this instrument without the burden of becoming a merchant in the network sense.

Of course Jack is competing with Cash and Checks in this pattern.. much different than the remote Card Not Present (CNP) world which PayPal attacked. I must say that many of my colleagues do not share my negative views on Square, and it has led to some very good conversations.  I certainly agree that issuers want SquareUp to succeed (read: interchange), and Square does have a very nice application, however my strong views are:

  1. There is no compelling consumer or merchant driver. Square will find that changing consumer payment behavior is much more challenging than social networking,
  2. Third party payment aggregation at POS is a moving out of favor with respect to network rules
  3. Fraud rates will be very high (see skimming video below) and bank issuers have ability to shut them down through authorization
  4. Volume will be low (merchant costs, competing methods of payment, charge back rules, …) and business will take at least 4 years to build (with sustained marketing).
  5. Competing bank/MNO sponsored “handset based” payments will overtake this approach in 2-3 years.

PayPal excelled because it addressed a clear gap in payments in a new marketplace where a 4 party system (merchant, consumer, merchant bank, issuing bank) could NOT adapt. This 4 party group, combined with the network and regulators, proved to be ineffective in responding to the “change” presented by online marketplaces.  PayPal did much heavy lifting, building “new rails” to manage merchants.  These eBay merchants were a well organized community which collaborated (generally speaking) and shared best practice. There was a REAL business problem in these pre-PayPal days..

Comparatively Square’s “Craigslist community” is not well organized, and the square payment method is competing with well entrenched behavior (check/cash, a 2 party system) in a person-person sale dominated by checks and cash. What is the problem that Square is attempting to address? My belief is that it is a convenience play, which will have  a much different adoption (and profitability model) then PayPal’s.

Top card issuers would love to see SquareUp succeed in order to drive cards (interchange revenue) further into cash replacement. However network rules (like PCI and merchant agreements) exist for a reason. Square’s approach to lowering the barrier for merchants (a valid market need) risks payment system integrity. In other words, the existing card merchant agreement process represents the rules by which the 4 party system has agreed to. If we take the SquareUp model to the extreme, what will stop every business from ditching their merchant agreement and start using square?  What benefits do acquirers/issuers and network have in supporting this model? Is the potential revenue upside for interchange (in cash replacement) vs. downside in fraud and lost revenue (merchant fees)?

SquareUp is acting as a third party payment aggregator (TPPA), a model which banks have adapted to since their experience with Paypal creating significant new rules and constraints (both ACH and Card). The network PCI rules (and certification process) for devices storing card information are also quite cumbersome, and require sponsor for certification. Perhaps this is why Square’s current customer agreement states:

You are responsible for all electronic communications sent to us or to any third party containing Account Data.

The acquirer that takes this on will likely have a few headaches when the first major craigslist merchant starts using the device to skim and resell card information (among other things). There is a reason for PCI compliance and for my “securing” my physical card and CVV. I can’t wait to see Square’s Payment Services Agreement (PSA). Operationally, the issuer’s have control over card authorization through systems like HNC’s Falcon or SAS Raptor. This means that if SquareUp is found to have contributed to a data loss, or has a high number of fraudulent transactions (see link) customer would see their card transaction declined, or the network (Visa/MC) would shut SquareUp down.

The great thing about the PayPal model is that the customer funded the account after agreeing to terms. In Square’s model, consumers are unregistered, Square is acting as an agent of the merchant. For Square’s investors, there is atypical risk which they will see through “unique” bonding/insurance requirements from the acquirer.  Just as with any company, Square will face unlimited liability associated with loss of consumer information (think TJX). To get an idea for potential mis-use see you tube video below.. crooks invest quite a bit in technology here… will SquareUp make it easier for every iPhone owner to become a skimmer?

The challenge any analyst has in assessing strategy is information. Given Square’s potential to drive electronic payments, either a card acquirer or PayPal interested … certainly a partner capable of managing the remote risk. If I were interested in acquiring, I would certainly let Square burn money gaining adoption,  changing consumer behavior, gaining approval from the networks, finding an acquirer and learning to manage the fraud issue… then if they are successful join in. At GartnerGroup we would call this approach  a  “late follower”. There is no revenue in this business for 3-5 years… my guess is that competing technologies like NFC will step all over this by that time… at least I HOPE SO!

Previous/Related Posts

https://finventures.wordpress.com/2009/12/02/squareup/

http://tomnoyes.wordpress.com/2010/01/26/usregs/

Written by tomnoyes

March 2, 2010 at 6:23 pm