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Wanted: Payment Leaders

with one comment

16 February 2010

This blog will be rather short, but wanted to share a few thoughts. As background.. my related Blogs:

MNOs will Rule in Emerging Markets

Investors Guide to Mobile Money

Cash Replacement – Part 2

As an investor and banker attempting to connect capital to innovation I see great prospects for the mobile phone as a tool for commerce.. both physical and remote. The mobile phone has the unique “opportunity” to connect multiple networks (financial, telecommunication, social, commerce, ..) with a trusted handset that provides: convenience, security, identification and authorization. CEO’s know that much of the economic potential of mobile commerce is locked within a the complex web of business relationships in existing networks (See NFC example).   Small companies must take a “dynamic view” on strategy as significant investments are made by established companies in this field. For example, Visa/MA no longer view themselves as constrained “bank only” card networks, but as Payment Service Providers.

The trends of note (this week) are:

  1. Established companies are having a tough time structuring payment spin offs and acquisitions
  2. Strong business leadership at the top of any small company is the key for success.

Bank Led Spin Offs

This is good news for entrepreneurs. For big banks and payment networks the top problems effecting “Payment innovation” are:

  1. Poor continuity in leadership (with the exception of Chase and Wells Fargo).
  2. “Payback”. Investment horizon for FSIs creating new products/alternative networks.
  3. Structural. Model for folding in or spinning out investments and incentive compensation for key executives
  4. Leadership/Talent. Established FSI stars with a $200MM+ may not be capable of transitioning to a “start up”
  5. Marketing expense in changing consumer behavior

The war stories here are too numerous, but a few should certainly elicit a chuckle.  “A top bank” has taken the approach of acting like a VC. The Bank is both making investments in existing ventures, as well as creating new ventures (50% or more of invested capital). The leaders of the new ventures are internal “innovation executives” with little to no operational experience (read strategy types) and no previous P&L experience. Internal HR (of the “top bank”) has determined that NewCo compensation and health plans should precisely mirror those within the bank, and executives within NewCo will receive NO Equity in the new business (but retain their bank incentive options). I refer to this as the “dingy” spin out (a reference to a small water craft lowered by a larger ship). The NewCo (aka Dingy) goes about building a product that was derived from the mother ship, looking for new business, … or even for business from its investors. Obtaining business from the sponsoring bank is problematic as they have only taken a “product” that already existed so the NewCo effort is mainly marketing releases concerning areas where their product is used (which they had nothing to do with). To further create “buzz” NewCo creates and iPhone app.. not that anyone will use it.. but it was relatively cheap and showed some progress.

Structurally, NewCo has difficulty selling products externally as they have no “sales skills” in the executive team and no other bank is interested in doing business with an entity owned by a competitor. Further the NewCo executives would like for NewCo to be successful, however they are much more cautious in aligning to their parent organization as all of their compensation remains tied there.

Lets extend this story to look at this NewCo from the perspective of the Bank’s head of payments (lets call him Paul). Paul has 50 initiatives that could drive 20% returns in current FY, but needs investment for each, his top 3 require only $10MM. He gets a call from NewCo’s CEO asking him to for assistance in implementing their product in one of his countries. The investment has no return and will cost him 20-30% of his discretionary IT budget to get in place (in reality no one has any discretionary IT this year). He further looks at the NewCo CEO and sees that NewCo received $20M in funding.. funding which he would have jumped through hoops to get. You get the picture…

What could the bank have done? Get some serious R&D types with international operations experience together to look at “sustaining” and “replicatable” innovation to gain internal credibility. Right now you have a completely discoupled Innovation team that only looks for the sexy customer facing “quick hits”.  The innovation team needs to fill itself with business experts and get out of the .com strategists and deal makers. Global banks need to realize that most innovation should be led within countries. A key example: at Citi Japan the team there built an application that takes control over the phones camera and provides an agent interface for remote acceptance of terms and conditions (contract) this video acceptance is stored in the banks KYC.

Acquisitions.. I’m cutting this short, but integrating any business is challenging. Bank/Network success in M&A takes strong business leadership AFTER the acquisition. The tendency of most companies after the acquisition tends to be product integration (capability) vs the value proposition. As a bank, you need in house leaders that can drive this value. Lets see how AMEX/Revolution Money turns out.

Business Leadership

This is my quickest litmus test for dealing with any new payment company: Get into detailed payment operations discussions with the CEO and look for a history in running a payments business. How do they deliver value today (in 30 seconds)? What markets do they operate and what are recent/impending regulations that will effect their business? What are their war stories? What is their knowledge of past events and failures?

Given that there is so much economic potential in mobile, where are the leaders that can unlock it and what are their skills? If we take a look historical look at any networked business we see that they start out as a private closed network that evolves and opens (either for regulatory or market reasons). We see this same trend today in MPESA, Octopus, payforit, GCash, … Closed networks start as a mechanism delivering focused value. Adding payment capabilities to existing non financial networks (read MNOs) enhances the value they can provide. Moving money on someone else’s network is easy.. getting permission from the networks/regulators and changing consumer behavior: “hard”.

Key Skills

  1. Define and evolve a core value proposition
  2. Ability to define regulatory risks and operational approaches to address
  3. Attract and retain start talent
  4. Ability to manage a P&L
  5. GLOBAL Payment Operations experience (the regulators are shutting us down)
  6. Sales skills (direct to consumer and/or business sales)
  7. Network within the Industry (what is everyone else doing)
  8. Manage a BOD
  9. Ability to listen to the customer and adapt
  10. Historical knowledge of payment initiatives
  11. Ability to drive complex technical initiatives
  12. Understanding of competing networks and value propositions
  13. Comfortable in the details and the strategy
  14. Can coach a people and build a team


As an ex Gartner guy (don’t hold it against me) the hype cycle in mobile payment is in full swing. There are significant challenges to raising money in this environment with the exception of the big banks. The number of mobile payment transactions in the US is almost non existent… and VCs do know the truth.  If I had a dime for every time a CEO was telling me of their new iPhone application… I’m much more impressed with initiatives driven outside of SiliconValley …

Within mobile money, there are a handful of successes (MPESA, Octopus, payforit, GCash, ..).. In NorthAmerica my top “small” payments companies are: CashEdge, BlingNation and HyperWallet… each have CEOs with over 20 years of payments background.

For entrepreneurs in mobile money my message is: focus outside of North America and add value to someone else’s network.. creating your own is a 20 year project.

Written by tomnoyes

February 16, 2010 at 4:29 pm

Investor’s Guide to Mobile/Money

with 2 comments

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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