The Challenge to Online Giants as Banks and Retailers Build Data Strategies for Mobile

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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

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Source: Winterberry Group[1]

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[2] 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:

1)      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[3], 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.

2)     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).

3)     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”.

[1] http://www.dmnews.com/outlook-2014-marketing-spending-to-rise/article/328925/

[2] https://www.theinformation.com/Apple-Mobile-Wallet-Talks-Heat-Up

[3] Level-Up has 1.5mm registered users vs. 12mm at Starbucks, but Level-Up is open to any retailer.

Please see our published research for the full note and tables.

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