New Ventures in Financial Services

Focus on Payments and Mobile

Archive for the ‘Uncategorized’ Category

Signature Debit is debt

leave a comment »

29 June

Death of Signature Debit

It’s hard for the banks to complain about yesterday’s Durbin caps. At $0.21 + 5bps, the caps provide no loss in revenue from a today’s average PIN Debit transaction (see yesterday’s blog). The loss is in Signature Debit. As I related in my post a few months ago, PIN Debit evolved from bank owned ATM networks while Signature Debit evolved from the card networks (and associated credit products).

ATM Networks grew as groups of banks banded together to monetize ATM infrastructure, and further expand network into the retail POS. This expansion led to further change from bank ownership to independence. The driver of any independent network is to add volume, nodes and services. ATM Networks evolved into PIN Debit Networks, with Visa’s 1987 contract to operate Interlink as the key milestone. Today, Pulse is owned by Discover, Star by First Data, Interlink by Visa (these 3 make up over 83% of PIN Debit Volume).

Visa was and has always been the leader in signature debit penetration, a look back at this 2003 article provides much insight into the history here. Most US consumers today don’t understand why their debit card has both a PIN and signature feature… many books could be written on this subject alone… but oddly enough consumers prefer PIN (see Pulse Federal Reserve Presentation 10/10).Federal Reserve PIN and Signature Debit Growth


Signature-based transactions currently have a lead on PIN Debit. In 2009, Fed reports signature as having 23.4 billion purchase transactions, and $837 billion of transaction value while PIN-based debit transactions totaled 14.5billion transactions, and $555 billion of transaction value.

However, PIN Debit enjoys a slightly higher growth rate (15.6% vs 14.3%), consumer preference (48% vs 34%), lower fraud rate (2009 fraud numbers: Signature $1.12B, $181M PIN debit card),  and obvious merchant preferences (interchange and fraud; 96% of PIN fraud losses assumed by issuers, vs 56% in Signature).

Retailer View

While yesterday’s announcement doesn’t impact average PIN debit rates (for average transaction), there are other elements of Durbin (routing and steering), which will eventually act to kill Signature Debit. Let’s first take a retailer view… Historically, retailers have been constrained in their attempts to deny signature debit transactions. Network agreements forced them to take “all cards”. The primary merchant “influence” mechanism was to default payment terminals to “enter PIN” and make it difficult to for a customer to use a signature debit card. While Durbin does not impact the “accept all cards” rule, it does allow for merchants to route debit transactions outside of the card network. When I spoke with a few of Visa’s institutional investors last week, much was made about 30% PIN debit penetration. Its very important to note that this penetration is on merchant terminals, NOT as a percentage of total payments. Small merchants remain rather ignorant of their payment options. This merchant financial literacy issue, combined with ISO sales incentives, has led to an uneven PIN Debit adoption.. but this will change not only for small merchants, but also for ONLINE transactions. PIN debit has had no traction in eCommerce because retail banks (issuers) did not want the lower interchange and refused to accept PIN transactions from online merchants. This has also changed. (I have detail here.. but can’t really discuss in the blog)

Bank View

At least 2 of the major banks in the US are working with processors to establish direct “BIN routing” and circumvent all network fees. This makes complete sense for the larger banks like bank of America, with 10%+ of US Debit volume, as it would enable them to eliminate network fees. Merchants would also benefit with a lower cost (the purpose of this routing provision). The key activity necessary to make this happen is to enable major processors to sort and redirect transactions. Processors already perform BIN lookup, but instead of going to Visa or MA with a BIN.. they will be going directly to a large bank. Obviously BAC/BAMS, JPM/Chase Paymenttech, FifthThird, …etc would be the top teams implementing this model. With Durbin at $0.21 + 5bps they actually can improve their margin on PIN debit.


The obvious corollary here is that once a bank is successfully routing transactions directly from the processor(s), what Value does Visa bring at all?  1) Merchants that are not using a processor that has not yet implemented the bank direct routing 2) International Debit Transactions, 3) ?Signature debit bank agreements? As Bank “inertia” is directed toward maximizing bank margin, and merchants in decreasing debit processing costs, a new debit network is formed… and today’s Visa  debit network begins a slow death. First to go will be PIN debit, but closely following will be the removal of the Visa logo off of all debit cards. The 2 countries where this has happened are Canada (interact) and Australia (EFTPOS). The next phase of death will be begin when banks recognize the synergies of maintaining a common directory with centralized authorization and fraud controls. The model here for the US is SEPA Debit.

Tom’s Predictions (Market)

1) 2 major banks will launch their own PIN debit network… starting with processors they control

2) Signature debit, as we know it, will die

3) Visa and MA logo’s on debit cards will have a slow death over next 5-10 years, just as they have in Canada and Australia… and perhaps soon in EU (SEPA). With little impact to affluent customers in short term.

4) Card issuing banks will look for new ways to grow credit use. (Mobile payments, juicing rewards, educating consumers on unique Reg Z protections, …)

5)  Merchant will be testing models to tie incentives to debit use and even create new products (Target Redcard is model)

6) Retail banks will be pushing out low end mass market customers. Pre-paid business will pick up the slack. Most of the major banks have solid plans on pre-paid card deployment.. but have delayed launch because they don’t want to be seen circumventing Durbin (see below)

7) Processors will pick up new fee revenue for “least cost routing”, but regulators will be keeping an eye on them to ensure that the bank owned processors are not acting in concert to circumvent cap definitions (see below)

8) Online PIN debit will begin to take off

9) PIN Debit merchant adoption will start to accelerate in 1-2 years

10) Visa’s US transaction processing volume will stay steady. Debit volume will go down, but processing margin will improve and pre-paid will begin to take off.

11) Banks will begin to couple debit payments with incentives in an attempt to avert retailer led models.. Look for BAC to be the leader here.

What does this mean for Visa earnings?

My summary view is that Visa has plenty of runway on international credit growth.. but their trajectory now has much greater risk ask it will be tied almost exclusively to credit. Visa’s recent success in processing services (ie DPS) wont suffer short term as the top 5 banks have minimal services with them.. but we will see erosion of debit revenue beginning as transaction volume further accelerates to PIN debit routed outside of Visa’s network and PIN debit adoption in small merchants accelerates.

Per final regs –  75 75 FR 81722, 81731 (Dec. 28, 2010).


ii. An issuer replaces its debit cards with prepaid cards that are exempt from the interchange limits of §§ 235.3 and .4. The exempt prepaid cards are linked to its customers‘ transaction accounts and funds are swept from the transaction accounts to the prepaid accounts as needed to cover transactions made. Again, this arrangement is not per se circumvention or evasion, but may warrant additional supervisory scrutiny to determine whether the facts and circumstances constitute circumvention or evasion.

Processor Fees

Merchant commenters voiced concerns that issuers may attempt to circumvent the interchange fee standards (applicable to those fees ―established, charged, or received‖ by a network) by collectively setting fees and imposing those collectively set fees on acquirers, and ultimately merchants, through the networks‘ honor-all-cards rules. For example, the largest issuers may collectively determine to charge interchange transaction fees above the cap and effect this decision by dictating to each network the agreed upon amount. The network, then,would permit each issuer to charge that amount, and because merchants would be required to accept all the network‘s cards, merchants would pay the amount determined by the issuers.

Section 920(c)(8) of the EFTA defines the term ―interchange transaction fee‖ to mean ―any fee established, charged, or received by a payment card network . . . for the purpose of compensating an issuer for its involvement in an electronic debit transaction.‖ Accordingly, interchange transaction fees are not limited to those fees set by payment card networks. The term also includes any fee set by an issuer, but charged to acquirers (and effectively merchants) by virtue of the network determining each participant‘s settlement position. In determining each participant‘s settlement position, the network ―charges‖ the fee, although the fee ultimately is received by the issuer. An issuer, however, would be permitted to enter into arrangements with individual merchants or groups of merchants to charge fees, provided that any such fee is not established, charged, or received by a payment card network. The Board has added paragraph 2(j)-3 to the commentary to explain that fees set by an issuer, but charged by a payment card network are considered interchange transaction fees for purposes of this part. The Board plans to monitor whether collective fee setting is occurring and whether it is necessary to address collective fee setting or similar practices through the Board‘s anti-circumvention

Written by tomnoyes

July 2, 2011 at 1:48 pm

Posted in Uncategorized

3DS: Collaborative Path to Failure

leave a comment »

Very good paper on card fraud systems and the “collaborative path to failure” posted by Bruce Schneier. I trust you have read this one already.. .wow…
I won’t foget a meeting I had with Paul Baker, Mastercard’s global product head for MasterCard Secure Code (MA’s version of 3DS). When we told him that it was broken and not working and detailed the fraud that was getting through his response was “we just defined the standard, it is the issuers job to implement it correctly“, and that MA thought the requirements were “adequate” but “implementations were not”.
So the networks go to merchants with updated agreements, and incent them with discounts of up to 50bps, to adopt new (broken) standards, in turn they obtain a “liability shift” for CNP transactions. Banks like HSBC and Citi saw their fraud losses skyrocket from nothing (as they did not bear loss in a CNP transaction) to $10M+/mo. The issuing banks then began to “dial down” the approval threshold for all transactions (consumers transactions were being declined to manage fraud loss). What a terrible consumer experience… many lessons on “collaboration”. Networks must take ownership for integrity of the system.. although both Visa and MA have Payment Systems Integrity groups, individual banks a left with informal coordination methods to find source of data compromises.. In the states collaborative bank entities like Early Warning are taking the lead.
I hope to see a change of attitude by Visa/MA, because if they don’t take ownership of risk and integrity other networks will emerge.
– Tom

Written by tomnoyes

April 21, 2010 at 4:52 pm

Posted in Uncategorized

Tagged with , , , , , , ,

Moneygram settlement

leave a comment »

MoneyGram settles suit for $80 mln over subprime

The regulators and the exec team fell down on the job in this one. Lesson for MTO organizations: don’t put your settlement funds into instruments you don’t understand.

Written by tomnoyes

February 27, 2010 at 2:29 pm

Posted in Uncategorized

Tagged with , ,

Western Union 4Q09 – Flat

leave a comment »

23 Feb 2010

From DJ News wire

Fourth-quarter earnings fell 6.6% as the company was pessimistic about business this year. Western Union posted a profit of $223.7 million, or 32 cents a share, down from $239.6 million, or 34 cents, a year earlier. Revenue increased 1.7% to $1.31 billion though it fell about 1% on a constant-currency basis.

Analystsestimates were for earnings of 32 cents on revenue of $1.31 billion.

Operating margin fell to 24.2% from 25.9% because of acquisition costs, reductions in pricing and promotions.

Revenue in the dominant consumer-to-consumer segment rose 1.7% but fell about 2% in constant currencies. Transactions increased 5%, while global-payments revenue grew 4% because of the acquisition of Custom House, a business-to-business payments provider

I would place a solid sell here. WU’s management team may see much opportunity in growing the electronic channel (remitter) from current 2%, however e-channel revenue growth will put them squarely in competition with the banks that serve them (Citi GTS).  This same competitive dynamic will hold for their new business payments group (currently 14% of rev), the core of which is the result of their recent Custom House acquisition.

As they morph their distribution strategy to e-channels and business why are they taking 30% of operating cash ($400MM) for stock repurchases? This does not speak well of internal investment opportunities and a company which  is certain of growth.. It feels like the start of an end game.  Additionally, WU’s current crown jewel (physical distribution) is being threatened in emerging markets by mobile operators leveraging their own agents for money transfer services. Perhaps this is why WU is looking  “up market” into higher margin business payments.

This does not feel like a business plan for a “market outperform” stock to me.  As an investor I would be looking for opportunities that leverage (and enhance their distribution), partnering with other networks (banks, governments and MNOs) will be a key opportunity. Let us see if they the current team can grab it.

Written by tomnoyes

February 22, 2010 at 5:53 pm

Posted in Uncategorized

Tagged with , ,

Verifone – Paywaremobile

leave a comment »

Verifone – Paywaremobile

December 10, 2009-12-10

 Super move by Verifone, a “serious” device for merchants. As an investor, be glad you skipped on the SquareUp opportunity. Advantages of the Verifone’s device:

Down side

  • Merchants must sign a merchant agreement with an acquirer
  • Costs associated with merchant agreement (below)
  • Paywaremobile could add chip and pin functionality… There is life outside of the US

Summary, for small merchants that don’t want to sign a merchant agreement there are payment solutions out there today (paypal). If you want to accept a card directly, you’d be best served by going through an acquirer and using a certified device like paywaremobile… as your risks are not inconsequential in accepting cards through without a merchant agreement in an uncertified device.

Written by tomnoyes

December 10, 2009 at 3:08 pm

NokiaMoney Update

with 2 comments

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

Citi/MSFT … the “New” Mint?

leave a comment »

Citigroup, Microsoft Said to Plan Challenge to Intuit,

Hmmm… I believe Brian found me from my Mint/Intuit note below. Hope I don’t come off as a radical. Citi must be successful.. US taxpayers are shareholders. Jeff is a great guy, and one of the most talented people I have ever worked with. I have no idea how Citi keeps hold of him. Perhaps it’s like joining the Army.

Citi/MSFT will obviously look to provide services to non customers and industry sources tell me that the account aggregation will be provided by Yodlee.  There is some amount of irony here, as Citi’s customer’s had access to Yodlee’s services until September 2005. During my time at Wachovia customers loved the Yodlee service, but we had to end it do to cost and risk issues. 

For Citi to build this service, a central challenge will be moving customers away from their bank to engage in activities such as budgeting and paying bills… and then transacting. Both MSFT, and INTU had trouble with this. In the US, Mint had the fastest growth rate with a total of just over 400,000 customers. A figure not likely to strike fear in the heart of many banks, this combined with the Mint demographic seems to indicate that the customer base of “spenders” vs “savers”, hence the need for budgeting. This would seem to indicate a card focus for Citi.

Assuming a card focus, a short term need to generate revenue, offering customers a way to transact with Yodlee as a service provider.. I would see card based bill payment as a key service to be offered in this new Citi/MSFT venture. During my time at Wachovia we piloted the Yodlee biller direct service. The UI was fantastic… and that was 4 years ago. This service leveraged cards as the vehicle for bill payment through aggregation of the billers online payment interface. BAC also evaluated this service as a way to generate interchange revenue off of bill payment.

Hence, I would assume that Citi’s business case for NewCo is based upon the following:

  1. Transacting. Both leveraging credit cards for a bill payment, and purchases. (interchange)
  2. Market customers based upon transactional data (marketing)
  3. Sales/Cross sales of Citi products 

There are several organizational, brand issues and customer support issses with Citi’s approach. Citi’s customer may get confused, is this a Citi service? How can Citi’s current card customers leverage it? How do they leverage it? For example, it is hard for me to remember the 3 separate log ins that I have today with Citi today: Card, banking, Obopay… now I need a forth? Who do I call when I have a problem?

Globally, the only success model for aggregation and comparison that I am aware of is, which Citi acquired May 2007 for just over $1B.  If you sit down with Paul Gratton, Egg’s first CEO he will tell you that their success was driven by a complete focus on delivering value to the customer, both in product and online services. It is the coupling of product and service value that creates challenges for large companies to replicate, particularly with respect to cannibalization of existing products.

In the UK, customers select their bank savings account through leading comparison sites like In the US, customers select their bank based upon the proximity to their house. The business premise with, Intuit and its competitors is that customers will start with budgeting, and then move to select financial products (no retention play as these are not necessarily Citi Customers) or transact. Egg was successful because is first started with the most competitive product, establishing trust, and then moved to deliver the best services to surround it. 

Fortunately for banks, customers prefer to go to their bank directly to perform financial services. This “Trust Pattern” is something banks should want to reinforce. WFC exemplifies the alternate approach within its online banking services, with integrated budgeting tools, which is a great service and provides solid customer retention. Banks hold enormous control over the success of any aggregator’s site. Yodlee possesses no contractual right to the data, and the collection of customer information by any third party can be managed.

Written by tomnoyes

October 20, 2009 at 1:20 pm

Posted in Analysis, Uncategorized