The Challenge to Online Giants as Banks and Retailers Build Data Strategies for Mobile
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August 10, 2014
The Challenge to Online Giants as Banks and Retailers Build Data Strategies for Mobile
- In some cases, the impact of mobile will be less to allow online payments/commerce franchises to extend to the physical world and more to allow traditional retailers to challenge effectively online. The launch of Visa Checkout and Chase Quick Check in competition with PayPal’s Express Checkout is an example. Both new products were motivated by bank data-strategies and concern that PayPal interferes in the flow of transaction data (for example, masking the identity of the end-merchant); and both have security, cost, and network advantages over PayPal.
- Charlie Scharf, Visa CEO, has commented: “we are keenly focused on achieving the same success in the digital world [with Visa Checkout] that we have in the physical world” and, alluding to PayPal, that “we should not have to rely on anyone else”
Exhibit – Estimates for 2014 Advertising Spend
Source: Winterberry Group
- The potential broader challenge to online franchises arises as consumers use mobile devices to engage digitally with wirelessly-enabled “smart” infrastructure opening up new data streams that are proprietary to retailers, and not as accessible to online giants. For now, data-enabled advertising (currently $50bn annually and growing at 15% – see Exhibit above) is almost entirely informed by the data harvested from consumer search and communications activity on IP-connected devices. The reported Fall launch of the iPhone 6 with a mobile shopping app, integrated into Bluetooth-enabled in-store iBeacons, is a likely catalyst for competing data-strategies that are proprietary to retailers.
- Richard Fairbank of COF (both a retailer himself through bank branches and a service-provider to retailers through the private-label card business) notes that while online “has been really hard” on retailers “mobile can actually be the best opportunity to bring the tie back in the retailer’s favor when you think about the opportunity for real-time communications, real-time offers, for literally knowing where the person is in the store, for building loyalty programs, for point-of-sale and transactional ease and convenience, and ultimately all the data that can be collected there.
- GOOG is looking to extend its data-capture strategy into stores through its mobile wallet and through GSX, but many retailers recognize the risks of exposing their data with Loews, for example, asking: “what would those wallets be doing with that data? Would they use it to steer customers to competing stores”. Members of the MCX consortium have explicitly committed not to accept the Google wallet or any mobile wallet other than the MCX wallet which has as a founding principle that member-retailers each control their own data.
- Payments are a cornerstone of retailer data-strategies because they provide “hard” insight into customer buying patterns and because payment devices provide a distribution-point for targeted offers. For example, Howard Schultz, CEO of SBUX, who is exploring licensing SBUX’ mobile technology (accounting for 15% of transactions at US stores) to other retailers, comments: “by integrating mobile loyalty, payment, and in-store digital experiences we are creating game-changing technologies …. and increasingly positive results through offering Stars as rewards in highly-targeted, one-to-one marketing”. A result is that payments decisions are increasingly made by chief marketing officers, rather than treasury officials, with emphasis shifting from a singular focus on acceptance costs to a broader view encompassing demand-generation and the consumer shopping experience.
- The payments shift from an interchange- to a demand-generation orientation is important because advertising budgets run at over $250bn annually (excluding trade-spend which is nearly the same amount) vs. the total retailer budget for accepting general-purpose payments cards of $70bn, and it has three likely consequences:
- The payments revenue model will shift to one based on the ability to leverage transaction data for demand-generation from one based (through interchange) on Visa’s market power in credit. This is already evident with Target, for example, offering a 5% discount on purchases made with its proprietary RED cards (because of the lift to visit-frequency and ticket-size) even though this represents a substantially higher acceptance cost than on a Visa card. Level-Up, the largest open mobile payment network in the US, is looking to reduce interchange pass-through to zero by generating revenue from marketing campaigns informed by payments data; and Uber charges taxi-drivers 20% of the ticket value without distinguishing between its demand-generating and processing services.
- As retailers and banks collaborate on using payments data to generate demand in their respective franchises, they will share common-cause to lower processing costs. An increasing focus on least-cost routing, combined with the routing options Durbin has given retailers for debit, will reverse the fee-driven shift in spending from debit-to-credit cards, create opportunity for firms (such as FIS, VNTV, and ACIW) which can enable direct-routing of transactions from bank to retailer by-passing the branded networks, and put pressure of V/MA pricing (with ChaseNet being an early example).
- Payments data-enabled marketing will gain share of the advertising revenue-pool creating opportunity particularly for “closed-loop” players (such as AXP and private-label providers e.g. COF and ADS) which can put together in-basket information from retailer-clients with purchase-away information from cardholder-clients. ADS CEO Ed Heffernan is explicit: “we are asking the retailer to take $40mm out of the TV budget and move it over to the private label card business…There is a secular shift of hundreds of billions of dollars that was traditionally spent via Madison Avenue on brand marketing over to data-driven targeted marketing… and a massive increase in interest from retailers in our product allowing a closed-loop network to pull out not just who the person is but also the [purchase] information down to the category or SKU level”.
Visa and Chase Challenge to PayPal
Later this year, we expect the roll-out and marketing support for two significant payments initiatives: Visa Checkout and Chase Quick Check. Like PayPal’s “Express Checkout”, both will provide consumers with the ability to make e-commerce purchases using registered cards by entering a log-on and password (rather than the 16-digit primary account number or PAN embossed on the front of the card) via a branded checkout button on the web-sites of participating merchants. Eileen Serra, CEO of the Chase Credit Card Business, explains: “Chase Quick Check will be a new method of payment that we will bring to market through Chase Net. And it will make a very simple, very streamlined secure shopping experience for merchants and consumers…There will be a little button that the merchant could put on their website that says ‘pay with Chase’ ”
We expect significant adoption Visa Checkout and Chase Quick Check by both merchants and consumers as banks market the products with the security assurance of tokenization (i.e., the replacement of the PAN with a proxy or “token” that can change from transaction-to-transaction and so is worthless if stolen). As a result, investor focus will shift towards the threat to PayPal’s online franchise posed by the Visa and Chase checkout products and away from the opportunity to extend this online franchise to physical point-of-sale. Merchants will prefer the new checkout products because they will have lower acceptance costs than PayPal; banks will prefer them because they will have richer transaction data and, in particular, see the end-merchant rather than face PayPal as an intermediary; and consumer adoption will be catalyzed by rewards. While PayPal has a cost advantage in that 20% of its volumes settle over the interchange-free ACH network it need to grow this proportion, which has been stable over the last three years, if to maintain current profitability as competition intensifies.
We see Chase Quick Check as an offensive move to take advantage of its leading presence as an acquirer of e-commerce transactions to “close-the-loop” (i.e., act as both acquirer and issuer, and disintermediate the Visa through ChaseNet), and lay the groundwork for extending this new closed-loop to physical point-of-sale. We see Visa Checkout as a defensive move to counter the threat from Chase Quick Check and to address the concerns of client-banks that PayPal is interrupting the flow of transaction data. This is an important problem given the growing e-commerce share of retail sales (now just over 6% and growing at 15% annually in dollar terms vs. 2-3% for total retail) and as PayPal attempts to extend its brand to physical point-of-sale (through partnership with DFS, for example); and it is an urgent problem as the convergence of payments and marketing makes these transaction data increasingly important.
The Marketing Importance of Payments Data
The fundamental change in the payments business is that the transaction data generated in the payments process is seen as crucial to improving the effectiveness of marketing. One way to assess the possible impact on the payments industry is to note that total fees paid by merchants for payments on general-purpose credit cards in 2013 amounted to just over $70bn while marketing spend was at least ~$500bn: the spend on advertising was ~$260bn (of which $50bn was in digital channels growing 15% annually – see Exhibit 1) with trade-spend adding nearly an equal amount.
Exhibit 1 – Estimates for 2014 Advertising Spend
Source: Winterberry Group
The potential for increasing amounts of marketing spend to flow into data-enabled digital strategies has been made by COUP: “If you look at retailers and CPGs desire for more efficiency in their spend, more than coupons and in trade spend, there has been a desire and it is a core strategy for all of them to be able to target specific offers for specific consumers”. ADS CEO Ed Heffernan is also explicit: “We are asking the retailer to take $40mm out of the TV budget and move it over to the private label card business…There is a secular shift of hundreds of billions of dollars that was traditionally spent via Madison Avenue on brand marketing over to data-driven targeted marketing… and a massive increase in interest from retailers in our product allowing a closed-loop network to pull out not just who the person is but also the [purchase] information down to the category or SKU level which is really the gold standard in data these days”.
Some retailers are understandably concerned to protect and control their transaction data so that it cannot be used by the online giants, such as Google, to drive customers to competitors. John Manna, a vice-president at Lowe’s Corporation expresses this defensive view as follows: “What would those wallets be doing with that data? Would they use it to steer customers to competing stores”. Other retailers see an opportunity to level the playing field with online competitors by enriching the shopping experience through digitizing the interaction between consumers and a “smart” physical infrastructure (e.g. Bluetooth-enabled “beacons”, RFID tags, touchscreens and tablets in stores) and using mobile for real-time, context-specific messaging. Richard Fairbank of COF (both a retailer himself through the COF branch bank and a service-provider to retailers through the private-label card business) articulates this view as follows: “Mobile can actually be the best opportunity to bring the tie back in the retailer’s favor when you think about the opportunity for real-time communications, real-time offers, for literally knowing where the person is in the store, for building loyalty programs, for point-of-sale and transactional ease and convenience, and ultimately all the data that can be collected there”.
We believe banks with closed-loop networks (such as JPM through ChaseNet, AXP, and private-label card-lenders such as ADS and COF) are better-placed than online ad platforms to support merchants in the design and implementation of data-enabled direct marketing because: (i) they are more trusted with SKU-level transaction data that improves the targeting/personalization of offers; and (ii) they can integrate rewards redemption into the payments stream reducing the barrier between sales and cart abandonment. Mike Pasilla, Head of Chase Merchant Services, noted in March 2014 that this as a key motivation for the establishment of ChaseNet as a closed-loop: “we think that Chase’s Quick Checkout payment option helps to do this [provide an easy way to shop online] by removing the barrier between sales and cart abandonment. And, through ChaseNet, we also have the ability to bring innovations to the marketplace like targeted offers and other demand-generation capabilities that will help merchants drive higher sales with Chase card customers”.
Payments Revenue Model Will Shift to Demand-Generation from Interchange
Online and mobile platforms are catalyzing an evolution in the payments business from stand-alone utility to core component of retailer marketing including through the capture of transaction data and integration into the payments stream of loyalty offers. This shift makes payments a strategic priority for retailers with decisions being driven by the Chief Marketing Officer (rather than Treasury) and the emphasis shifting from a singular focus on acceptance costs to a broader view encompassing demand-generation and the consumer shopping experience. We see the Target proprietary Red cards, now accounting for 20% of tender, as an illustration of this: Target offers consumers a 5% discount (far more than the acceptance cost of a Visa or MasterCard card) which it defends because of the lift to consumer engagement and hence visit-frequency and ticket-size.
The linkage of pricing to demand-generation is explicit for some of the new mobile payments services. For example, Level-Up (now the largest open mobile payment network in the US with 1.5mm registered users) promises retailers can “enrich the customer profile automatically with every payment” and “turn insights into action with a campaign engine to attract new customers, engage existing ones, and lift sales trackably”. It charges retailers a fee of 25% of the discount offered to consumers in these campaigns (working out at 2.5% of transaction value given the average discount is 10%) and, because of this revenue stream from campaigns which are run by 80% of merchant customers, is able to charge a flat fee of 1.95% of value for transaction processing (vs. the average among its client base of 3% for traditional Visa transactions). Founder Seth Priebatch of Level-Up expects demand-generation fees will increasingly supplant interchange: “we view these [interchange] fees as an unnecessary tax on the economy and have made it our mission to eliminate them altogether. We’re not far from the day where merchants will be unwilling to pay 4% to accept Amex or 3% to accept Visa and not get any data back in return”. Of course, Uber is already there charging taxi-drivers 20% of the ticket without making a distinction between the demand-generation and payments-processing components of the service.
- Level-Up has 1.5mm registered users vs. 12mm at Starbucks, but Level-Up is open to any retailer.