Smells like innovation

Traffic Light TreeBig news today, with Chase entering in to a 10 year expanded partnership with Visa to create a ‘differentiated experience’ for its merchants and consumers. I would warn anyone thinking “offers and deals” when they hear “differentiated experience” – because I believe we are running low on merchants who have a perennial interest in offering endless discounts to its clientele.

I cringe every time someone waxes poetic about offers and deals driving mobile payment adoption – because I am yet to meet a merchant who wanted to offer a discount to everyone who shopped. There is an art and a science to discounting and merchants want to identify customers who are price sensitive and develop appropriate strategies to increase stickiness and build incremental value.

It’s like everyone everywhere is throwing everything and the kitchen sink at making things stick. On one end, there is the payments worshippers, where the art of payment is the centre piece – the tap, the wave, the scan. We pore over the customer experience at the till, that if we make it easier for customers to redeem coupons, they will choose us over the swipe. But what about the majority of transactions where a coupon is not presented, where we swipe because its simply the easiest, safest and the boring thing to do. Look at the Braintree/Venmo model, where payment is but a necessary evil. Which means, the payment is pushed so far behind the curtain – that the customer spends nary a thought on her funding source of choice. Consumers are issuer agnostic to a fault – a model propounded by Square’s Wallet. Afterall, when the interaction is tokenized, when a name or an image could stand in for a piece of plastic, then what use is there for an issuer’s brand?

So what are issuers doing? Those that have a processing and acquiring arm are increasingly looking at creative transaction routing strategies, in transactions where the issuer finds that it has a direct relationship with both the merchant and the consumer. This type of selective routing enables the issuer to conveniently negotiate pricing with the merchant – thereby encouraging the merchant to incent their customers to pay using the card issued by the same issuer. For this strategy to succeed, issuers need to both signup merchants directly, as well as encourage their customers to spend at these merchants using their credit and debit cards. FI’s continue to believe that they can channel customers to their chosen brands, but “transactional data doth not maketh the man” – and I continue to be underwhelmed by issuer efforts in this space. Visa ending its ban on retailer discounts for specific issuer cards this week must be viewed in context with this bit – as it fuels rumors that other issuers are looking at the private payment network option – with merchants preferring their cards over competitors explicitly. The wild wild west, indeed.

This drives processors to either cut deals directly with issuers or drives them far deeper in to the merchant hands. This is where the Braintree/Venmo model can come in to play – where the merchant – aided by an innovative processor who can scale – can replicate the same model in the physical world. We have already seen what Chase Paymentech plans to do. There aren’t many that can pull off something similar.

Finally, What about Affirm, the new startup by Max Levchin? I have my reservations about the viability of a Klarna type approach in the US – where there is a high level of credit card penetration among the US customers. Since Affirm will require customers to choose that as a payment option, over other funding sources – Paypal, CC and others, there has to be a compelling reason for a customer to choose Affirm. And atleast in the US, where we are card-entrenched, and everyday we make it easier for customers to use their cards (look at Braintree or Stripe) – it’s a tough value proposition for Affirm.

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Board of Advisors at SimplyTapp - creators of Host Card Emulation driving democratization and open access to NFC in Android. Mobile Commerce & Payments Lead at Experian Global Consulting, serving Experian's clients in Banking, Retail, Consumer Credit & Payments. A strategic adviser w/ over 17 years of international Tech & Business Strategy consulting, advising firms in banking, retail & asset mgmt that seek clarity & insight in to the myriad business models around payments, fraud & commerce. Founded DROP Labs, a mobile payments/commerce strategy & advisory practice. Tweets here. I'm on LinkedIn here.
Cherian Abraham
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  • What’s interesting to me about this least cost routing capability is that if it we’re combined with a real-time federated model of payments, the association networks lose their value fairly rapidly.

  • Ted

    What ever happened to blingnation? Last i heard they ran out of money b/c they purchased to much hardware and not enough merchants signed on. I would have to admit that the crescent business model is very enticing. We have been in many a discussion revolving around just that.