The Future of Zapp and Other Musings on MasterCard and VocaLink

Yesterday, my colleague Gareth shared on these pages his first thoughts after the announcement that MasterCard is buying VocaLink. I agree with his points, but also wanted to add some of my own observations.

As someone who closely follows the developments in digital payments, one of the questions following the acquisition to me is what happens with Zapp, a solution that VocaLink has been working on for the last few years to bring "mobile payments straight from your bank app." To me, it boils down to two considerations:

  1. Would MasterCard want to kill off Zapp?
  2. If not, can MasterCard help accelerate Zapp's launch?

My view on the first question is a resounding "no". Yet, the question is not as silly as it might seem. At Celent, we have been talking about the "battle of rails" in payments, i.e. between pull-based payments running on the cards infrastructure, and push-based payments, such as Zapp, built on top of new faster/ real-time payment networks. Given the cards' dominance in merchant payments today (at least in the UK, US and quite a few other markets), solutions such as Zapp may be seen as a threat to card-based transactions. Buying off a competitor only to shut it down may be an expensive strategy, but would not be unheard of.

And yet, I believe that such logic would be completely flawed. By buying VocaLink, MasterCard becomes a rail-agnostic payments company, and stands to benefit from cards and non-cards transactions. Furthermore, specifically in the UK, Zapp could be MasterCard's ticket to regaining ground in everyday consumer payments. As I discussed in another recent blog, Visa controls 97% of the debit card market in the UK. I would imagine that a Zapp-like solution would have more of an immediate impact on debit card transactions rather than credit card spend.

So, if that's the case, can MasterCard help accelerate Zapp's launch? Perhaps. We first heard of Zapp in 2013, and even included a case study in a Celent report published in September 2013. Yet, three years later, despite announcing a number of high-profile partners – from Barclays and HSBC, to Sainsbury's and Thomas Cook, to Elavon and Worldpay – Zapp is yet to go live. I don't claim to have any insight knowledge into the reasons for a delay, but I would imagine that changes in the competitive environment had something to do with it, particularly with Apple Pay showing how easy mobile payments can be when paying in-stores or in-apps. While I have no doubt that VocaLink and Zapp have great technologists and User Experience design specialists, I would expect that MasterCard's Digital Enablement Service (MDES) should bring helpful experience of integrating mobile payments into the banks' apps. And MasterCard's relationships with both acquirers and issuers should help convince the remaining skeptics and bring more partners on-board.

Zapp aside, I think the deal is good for both organisations for a number of other reasons, such as for example:

  • Not every payment is particularly suitable for cards (e.g. B2B, government) – now these payment flows become accessible for MasterCard.
  • Visibility to a much broader pool of transactions should be very helpful when developing risk management, loyalty and other value added services.
  • MasterCard's global reach should help bring VocaLink's experience in faster payments to markets which would have been harder for VocaLink to access by themselves.

In closing, I woudl like to go back to another announcement MasterCard made last week – the one about rebranding, the first in 20 years. MasterCard has changed its logo – it still has the interlocking circles in the colours which are widely recognised, but the company's name is spelled "mastercard" (although the company's legal name remains MasterCard):

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According to MasterCard, in addition to a more modern look, there was a conscious desire to reduce the emphasis on "card." That particular announcement was combined with the re-launch of Masterpass, and of course, digital payments will over time reduce the reliance on cards as a physical form factor. However, yesterday's announcement diversifies MasterCard away from card rails, and not just the plastic form factor, and is an important step in the company's journey from a cards network to a payments network.

 

What MasterCards’ Acquisition of VocaLink might mean

Today, MasterCard announced the acquisition of VocaLink  in the UK.

Before I start I should say I have worked for both organisations, and any comments that I make are mine, and nor am I mentioning anything that isn’t in the public domain.

In some ways the acquisition is surprising, given all that is happening – PSD2, the PSR threatening to fundamentally change VocaLinks ownership and the PSF (it’s payments – never too far from an acronym!) talking about replacing the infrastructure altogether.

It’s easy to think this is perhaps MasterCard re-inserting themselves back into the UK market as since their acquisition of the Switch brand, virtually all the cards have flipped to Visa. I think it’s actually more for three reasons.

Firstly, real-time payments. I’ve written about the charge towards real-time, and VocaLink are well positioned. They operate the UK Faster Payment Service in the UK, and the underlying technology is at the heart of the systems in Singapore, Thailand and The Clearing House in the US. In addition, the market is likely to explode. The ECB said at a recent conference that they expect 60-80% of all SEPA CT transactions to migrate to SEPA Inst. Even at today’s volumes, that’s 12 billion transactions in addition to the UK’s 1 billion. That's volume any processor would be eyeing. Coupled with PSD2, where card volumes may well fall, then is rationale alone for the acquisition.

Secondly, look at electronic payments more broadly. The VocaLink core payments engine is award winning. It was built to win business across Europe in the post-SEPA world, and is capable of handling multiple schemes on the same platform. Indeed, part of Sweden’s transactions run on it to today alongside a very different UK scheme. Imagine now the offering that MasterCard has in say emerging markets – the ability to deliver 100% of electronic payments.

The third is when you bang together some of the technologies of the two businesses. These are ideas, and of course they are far harder than they sound but just think about the possibilities:

– Real-time payments + MasterCard global network = true real-time global ACH;

– ACH/real-time + low value debit transactions = decoupled debit on your own transactions;

– ISO20222 remitance data + VocaLink B2B skills+ MasterCard global network + MasterCard analytics + MasterCard finances = Synegra meets Tungsten Network, but on steroids.

There is much still to find out, and yet more to mull over, but the signs suggest some exciting times ahead.

The Networks’ Support for HCE Breathes Life Into NFC Payments

In my report on Top Trends in Retail Payments published a few weeks ago, I wrote the following paragraph: “Of course, doubts remain over HCE. For example, the payment schemes are yet to clarify on whether they will deem the security and performance of the technology acceptable. However, we view it as a positive development. Inexplicably, HCE was being described by some as the “NFC killer.” Yes, if successful, it might indeed kill the SIM-based business model (and have a negative impact on Trusted Service Managers), but it might actually breathe life into NFC and contactless payments.” The developments this week removed some of those doubts. Both Visa and MasterCard announced their support for Host Card Emulation (HCE) technology, paving the way for banks to offer NFC-based secure payments without relying on the secure element inside the phone. HCE reduces the need for banks and telcos to cooperate, thus helping overcome the business model challenge. However, approval and recognition from the networks was a critical pre-requisite to the technology’s success. Networks executives stressed that it is not an “either/ or” situation and they will continue to support the “traditional” SIM-based secure element solutions. As such, it doesn’t immediately change any of the established ventures, such as Isis, but it certainly makes it easier for others to take an alternative path. I would expect HCE to be important in Europe, which already is further ahead than the US in terms of deploying contactless terminals. European banks have been issuing contactless cards, and HCE will make it easier for them to make use of that infrastructure for mobile payments as well. Having said that, HCE technology is only available on Android, so iOS devices continue to be excluded from these developments at least for now. It will be interesting to see what Apple does in payments. I plan to publish a short report soon speculating on how Apple might enter payments more aggressively – keep an eye on it!

Weve and MasterCard Collaborate on UK Mobile Payments

I’ve been following today various news reports about the announcement that Weve and MasterCard have partnered to drive forward contactless mobile payments in the UK. I am still hoping to speak to my contacts at the companies involved, but wanted to share some of my early thoughts. It is not surprising to see Weve, the JV between three leading UK mobile network operators (MNOs), pushing into payments. After getting approvals from the European authorities, Weve started with building out a “single point of contact” infrastructure for retailers and other parties to deliver marketing messages to consumers. However, it always had the ambition in payments, and after hiring David Sears, a seasoned payments executive, as a CEO, it was always only a matter of time before we would hear more about it. This seems like a significant win for MasterCard, although the devil will be in the details. All the indications are that this will be a “traditional” SIM-based NFC payments solution, but the announcements so far have been a little vague about the set-up and the role of various partners. The Financial Times and other sources reported that “under the terms of their agreement, MasterCard will provide technology and integration services to banks and financial institutions that use Weve’s payments platform.” What kind of “technology and integration services” will MasterCard be providing to banks? Who are the other parties involved, e.g. TSM services? Another question crucial to the success of any NFC initiative is how the business model issues will be solved, i.e. the commercial terms between banks and Weve acting on behalf of MNOs. Mobile Marketing reported Weve CEO saying that they now have a “‘commercial agreement’ with banks, via the MasterCard partnership. Banks will be able to plug in their existing payments infrastructure and pay for the service on a general usage rather than a percentage of transaction model.” This could potentially represent a breakthrough and fresh thinking in how banks and MNOs can work together. Weve is reportedly in discussions with many banks, although at this stage, no bank has yet announced its support or participation. Finally, most of the UK’s card spending is on debit rather than credit cards. Debit card spending is also growing at nearly twice the rate of spending on credit cards. According to the UK Cards Association, spending on debit cards in 2013 was £31.8bn which grew by 7.2% since 2012 compared to £13.7bn and 3.7% respectively for credit cards. MasterCard’s strength in the UK is in credit cards, whereas Visa leads in debit. To succeed, Weve needs to ensure all major networks, including Visa and American Express, are eventually part of its ecosystem. At this stage, there are still perhaps more questions than answers to the outsiders, but it is certainly a welcome development in the UK mobile payments market.

The Relentless Drive of Payments Innovation

I just came back from three weeks of being on the road. I ran a workshop on merchant-funded rewards at Merchant Payments Ecosystem event in Berlin, presented on mobile payments at Celent’s own (and very successful!) Insight and Innovation Day in Boston last week, and managed to squeeze a holiday on the snow in between. While I was away, there were a lot of interesting news and announcements in the mobile payments space, particularly last week at the Mobile World Congress in Barcelona. As I was catching up on all the latest developments, I wanted to share a few announcements that especially caught my eye. 1. MasterCard introduced MasterPass, the “future of digital payments.” According to the company, MasterPass is “a digital service that allows consumers to use any payment card or enabled device to discover enhanced shopping experiences that are as simple as a click, tap or touch – online, in-store or anywhere”, and represents an evolution of PayPass Wallet Services, itself announced only last year. At first glance, MasterPass appears to be a solution to bridge the chasm I was describing between online and offline payments in my recent digital wallets report. While the initial focus remains on e-commerce and online/ remote transactions, MasterCard was apparently demoing how MasterPass can be used for proximity payments with QR codes on posters and even TV. Naturally, MasterCard will want to make sure it also works well with PayPass contactless to be a truly universal solution, but the direction is definitely encouraging. 2. Visa introduced Visa Ready Partner Program “designed to accelerate the introduction of innovative payment solutions globally and further drive the global migration from cash to electronic payments.” The program has two main components: the existing program for the approval of mobile NFC-enabled devices, and a new one for Mobile Acceptance (mPOS) Solutions. Ingenico’s ROAM is the first partner to participate in the mPOS solutions program. However, it was the announcement of a new deal between Visa and Samsung under the NFC program that I found particularly interesting. Future NFC-enabled Samsung phones will come with Visa’s PayWave applet and pre-certified to work with Visa’s payment system. Another important feature is the new NFC integration allowing banks and others to launch mobile payment services using Visa’s new Mobile Provisioning Service to download payment account information to the devices. This has the potential to simplify the existing complex process of provisioning payment accounts to secure elements, one of the barriers for widespread NFC adoption today. 3. Bankinter in Spain also announced a new way to circumvent secure element hassle for mobile NFC payments. Their customers will need an app on their NFC-enabled phones, and then, instead of using a secure element from a handset manufacturer or network operator, the customer will temporarily download virtual one-time use replicas of their physical credit or debit card every time they make a payment. The service was developed with Visa Europe, Net1 UEPS and Seglan. While such a solution clearly puts the bank in control of mobile payments, it relies on ubiquitous network connectivity and ability to download a virtual token before a payment can be made, which may not be practical in all circumstances. There were more news in the start-up world, from Stripe entering the UK to PayPal co-founder Max Levchin launching a new payments venture Affirm focused on streamlining the mobile checkout process. All of which only confirms that there is no respite when it comes to innovation in mobile payments.

Google Wallet Relaunches and Takes on PayPal at Its Own Game

They say, “imitation is the sincerest form of flattery.” In my report last year I contrasted Google Wallet and PayPal as representatives of two fundamentally distinct approaches seeking to win in the battle to bring mobile payments to the high street. Not anymore – having failed to ignite the market in the first 12 months and its first incarnation, Google Wallet re-launched yesterday with a revised approach, essentially taking a leaf out of PayPal’s book. Unlike PayPal, the “Google Wallet 2.0” will continue to focus on NFC technology. However, instead of storing all the payment credentials on the secure element inside the phone, it is moving most of them into the cloud, leaving inside the phone only a prepaid account, which is based on MasterCard’s PayPass and can be used anywhere where PayPass is accepted. The prepaid account is linked direcly to any of the debit or credit payment cards (MasterCard, Visa, Amex, Discover), which the customers can register themselves, just like they would register a card as a funding source for a PayPal account. More details on the new Google Wallet here. So, what does this mean and who are going to be the winners and losers? It’s early days, of course, but here are some of my preliminary thoughts:
  • Consumers, Google and payment networks, especially MasterCard, are likely to emerge as the winners here. Consumers are now in control and can register and manage their cards directly with Google, independent of their banks. They will have to learn to trust Google, which has some work to do to re-establish its image after the initial security concerns. However, as and when consumers come on board, this will be good news for Google and its card partners.
  • While Google continues to stick with NFC for the “last mile” technology, MNOs will continue to have a say in this game. However, this set up now lays the ground for Google to potentially decide to bypass the secure element, and the MNOs, in the future altogether.
  • The impact on banks is likely to be mixed. Most banks didn’t want to play with Google when it was offering the opportunity to digitalise their payments credentials directly and remain in control of the payments portion of the transaction. Now, while the bank cards will continue to be part of the transcation, they are clearly taking the back seat and will have to deal with Google as a “merchant of record” for their transactions. True, they won’t have to incur the extra costs of provisioning their card credentials on to secure element, but that would also rule them out from participating in other NFC ventures, such as Isis.
  • The biggest unknown is the impact on merchants. And that’s because the transaction economics are no longer obvious for Google Wallet and is a question I am most keen to find out more about. In the initial set-up Google was clear that they would not take a cut on the payment transaction and the merchant would have paid a standard fee depending on the card used. Now, from the merchant point of view, they are accepting a prepaid MasterCard, while it might an Amex card that actually funds the transaction. PayPal deals with it by having direct acquiring relationships with its merchants and offering them a discount rate which represents an expected blend of funding transactions. Does it also mean that Google Wallet will have to establish relationships with the acquirers to re-coup from merchants any potential differences in transaction costs? Or will it have to charge the end user for “loading” their wallet, something that other prepaid card providers do for card-based re-load transactions?
It’s Day 1 after re-launch and, naturally, there are more questions than answers. Only time will tell how successful Google Wallet 2.0 will be, but for now it feels like a step in the right direction, at least from Google’s perspective.

Does EU Really Want to Ban Card Interchange?

Just as PayPal in the US was gearing up to challenge the established order of payment networks (see my previous blog), on the other side of the Atlantic, MasterCard (MA) received news that the European General Court upheld a decision by the European Commission (EC) that the scheme’s multilateral interchange fees (MIF) violate EU antitrust rules. MasterCard said it would appeal again, but if upheld, the decision could have profound consequences for card payments not just in Europe, but also globally. For those who haven’t followed this closely, back in 2007, the EC deemed MasterCard’s MIFs for intra-regional cross border transactions illegal, and ordered MA to withdraw these fees within 6 months. MasterCard appealed, and in the interim, reached an agreement with the EC which allowed it to establish cross border interchange rates, provided they do not exceed 0.3% for credit cards and 0.2% for debit card transactions on a weighted average basis. This week’s decision only applies to cross-border fees within Europe, which are “fall-back” rates when either bilateral agreements or multilateral domestic agreed rates do not apply. However, it’s been watched closely by all the interested parties, and already variuos domestic retailer bodies, such as the British Retail Consortium, are calling for the ban to extend to the domestic arrangements as well. Also, the court’s decision does not aply to Visa which has already cut its cross-border debit fees. The European Commission is now likely to turn its attention to Visa’s credit fees. In other words, while the decision’s immediate scope is limited, it sets a precedent and gives ammunition to the “anti-interchange brigade”. What makes this decision particularly dangerous is that it appears to be challenging the actual concept of interchange, rather than the level of fees or the approach by which they are calculated. As reported by Finextra, the court said that it “does not accept the arguments relating to the objective necessity of the MIF to the operation of the MasterCard payment system“. There is a big difference between arguing for a reduction in fees and banning them altogether. The ruling changes little in practice in the immediate term. MasterCard’s stock started the day of the decision at $426 and was trading at $416 just over 24 hours later, a 2.3% drop, which implies it was not unexpected news to the investors. Also, the story isn’t over – MasterCard already said they would appeal and I expect the pro-interchange lobbying efforts would only get bigger. The concept of interchange has been a cornerstone of four-party card schemes and many would say it’s worth fighting for.

Life After Durbin: The Gloves Are Coming Off

This week Visa held its earnings call and one of the key announcements was a pricing restructuring. In what appears to be a direct response to Durbin regulations, Visa is lowering its variable per-transaction fees and introducing a “network participation fee” in the United States for all of its debit, credit and prepaid card services. The participation fee will apparently be based on a merchant’s size and the merchants’ number of locations. While not disclosing the specifics, Visa claims that the overall fees will be reduced. According to JP Morgan securities analysts, Visa has about 75% signature debit market share and 55% PIN debit share in the US, so clearly has the most to lose from the final Durbin ruling requiring all debit cards to carry two unaffiliated network badges. Many large issuers in the past carried both Signature and PIN networks from the same company (e.g. Visa/ Interlink or MasterCard/ Maestro); now, they will have to either change one of the networks or to add another network to their cards, which will give more routing choices to the merchants. Visa’s change to the pricing structure is designed to keep competition at bay and to encourage merchants to continue routing the transactions over Visa’s networks and benefit from lower transaction fees and economies of scale. The last thing that the networks need is a price war and Joe Saunders, Visa’s chairman and CEO was keen to make that point by saying “we have no intention, nor do we think we have to start, a race to the bottom” on pricing. Yet, it is clear that Visa does not intend to give up its leading market position without a fight. The gloves are coming off; it will be interesting to see how MasterCard responds. Their earnings call is next week – not long to wait.

Win Win Win

Walter Wriston, former Chairman and CEO of Citi once said, “Information about money has become almost as important as money itself.” Google gets it. Up to this point I have been skeptical of the NFC business case and have blogged about it. Thin Isis Making a Bad Business Case Worse: Durbin and Mobile NFC Google has the ability to make this happen. Why? Because they don’t care about the payment. They care about the information around the payment. Who am I? What am I searching for? What do I buy? They don’t need a piece of the payment pie, because they will get a piece of the advertising and promotion pie, which is what pays the rent at Google. Any new payment initiative needs to make three parties happy: the consumer, the bank (or credit card scheme), and the merchant. This works for all three. The bank will be able to drive more purchases through their system, without giving anything up. They can also provide, with permission, payment data. Retailers can focus their offers on the most interesting customers. Google is partnering with MasterCard, Citi, First Data, Sprint, and retailers such as American Eagle Outfitters Inc., Macy’s Inc. and Walgreens. American Eagle might want to target customers who spend more than $100 per month on clothes. They may want to target those who spend more than $200 a month on clothes and are less than a mile from one of their stores. They will pay to be able to focus their advertising dollars on such a consumer. The merchant is happy. The consumer loves the offer. More targeting means consumers can get better offers. It’s a win win win.

Google Mobile Wallet: A Big Step for Payments

Yesterday Google announced a new mobile wallet in partnership with Citibank, MasterCard, First Data and Sprint. Is it significant? Yes, very. Why? For a number of reasons. First and foremost, mobile proximity payments are getting a boost from a large player whose primary interest is NOT payments. Paradoxically as it may sound, in my view this is key to finally getting some traction around much touted NFC payments. Celent’s view has long been that the payments industry on its own in the developed markets had little incentives to move to NFC. If it’s just purely about payments, then the customer already has a number of perfectly valid alternatives to pay at the POS, so why do something that potentially reduces your revenues (as you have to share them with more parties) and increases costs (as you need to invest in both issuing and acceptance)? Well, Google is not doing this for payments and confirmed yesterday that they would not be charging anything for the payments transaction itself. Instead, they expect to make money from services surrounding the payments transaction, particularly from drawing customers to merchants through targetted ads, coupons, loyalty point management, etc. This is consistent with Google’s strategy to-date where online ads drive majority of their revenues and their vision for the future (see my previous blog post “How Much Does Google Love Mobile?”) Second, while I didn’t hear it mentioned yesterday (I could have missed it), I remember reading in March in Finextra, which was quoting Wall Street Journal and Bloomberg that Google’s “plans also include terminal vendor VeriFone, which … will roll out NFC cash-register systems paid for by the search giant.” If that is the case, it will certainly help drive market penetration for NFC-capable terminals. I am not aware of any other examples where a player outside of a payments industry (i.e. other than acquirers and card schemes) would be investing in building out a payments infrastructure. Again, for Google it makes sense given that they need these terminals to achieve goals other than just payments. Finally, while it is true that partnering with one scheme, one issuer, one network operator, etc. limits the scale initially, Google neverheless has chosen an impressive list of partners – in MasterCard they have a major card scheme, in First Data, a major processor and in Citibank, a major issuer with an impressive track record of innovation. For Citibank this is part of their focused efforts to create significant value through payments for their customers. Last year they created a Global Enterprise Unit, spearheaded by Paul Galant for exactly that purpose and the unit is starting to deliver results. I saw some in the blogosphere questioning Google’s choice of Sprint as a network partner, but I don’t really have a view on that, so wouldn’t like to comment. Of course, the proof is in the pudding – over the coming months we will get to see if the consumers and merchants truly buy into this vision painted by Google and its partners. However, the sketches provided yesterday indicate that this could be seen as a masterstroke by all involved in years to come.