Wednesday, September 21st, 2011

Google Wallet Goes Live, More Consumer-friendly Version to Follow

Tags: mobile payments

Google Wallet Goes Live, More Consumer-friendly Version to Follow

Google Wallet — an app that enables users to store credit card information in their smart phones and make payments by waving them by specially equipped point-of-sale (POS) terminals — has now gone live, Osama Bedier, the search giant’s Vice President of Payments tells us in a blog post.

In the same post Bedier announces that next versions of the wallet would accommodate Visa, Discover and American Express cards, in addition to MasterCard, which is the sole brand the first iteration of the mobile payments app supports.

Opening up their wallet to all card brands is exactly the right thing to do and would put Google ahead of the competition. Let me explain.

The News

Google Wallet is now available to Sprint customers who own the Nexus S 4G smart phone, which is the only device that can currently work with the app. It enables users to make payments with their Citi-issued MasterCard or the Google prepaid card at merchants with compatible near-field communication (NFC)-equipped POS terminals, of which currently there are about 300,000 in the U.S. NFC is a wireless technology that allows the exchange of information between enabled devices within a very short range (up to 8 inches or so).

We wrote about the app back when it was announced in May and to all appearances it looks like the project is moving along as smoothly as one could hope for for a new technology. Back then Bedier was doing his best to convince everyone who would listen that Google Wallet would be as secure as needed and sensitive consumer data will be more than adequately protected by a “Secure Element” (the chip where card information is stored). We will soon discover how justified his claim is.

Visa, Discover and American Express to Join MasterCard

The biggest news to come out of Bedier’s blog post, however, is the expected addition of MasterCard’s biggest competitors to future versions of Google Wallet. Here is what Bedier has to say on the subject:

…Visa, Discover and American Express have made available their NFC specifications that could enable their cards to be added to future versions of Google Wallet.

Our goal is to make it possible for you to add all of your payment cards to Google Wallet, so you can say goodbye to even the biggest traditional wallets.

This is exactly what we’ve been advocating on this blog, as regular readers would know. From a consumer’s point of view, the best mobile wallet would allow us to store in it all payment products we can put into a physical wallet, including all types of payment cards, cash and checks. What we would not want to have is a clutter of apps for each card type or even each issuer. So Google is going in precisely the right direction and I hope the promised “future versions” are not too far off.

The Takeaway

Now that Google and Isis (clumsily as they did it) have opened up their mobile wallets to all major card brands, it seems highly unlikely that single-product platforms will be able to gather any speed. Yet, some deep-pocketed players are more than willing to test my proposition and at least one of them is having no trouble signing up big-name partners.

You may have guessed that I have American Express’ Serve in mind. We’ve previously beaten up on Serve at some length, so there is no reason to do it all over again in this post, but it will be interesting to see for how long AmEx will be willing to swim against the tide, before changing direction. For Isis the process took only a few months and the shift occured before the service was even in beta (it is still not live). AmEx is apparently willing to go much further. By the time they realize that they are going nowhere, it may be too late to catch up with Google and Isis.

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Monday, August 29th, 2011

GoPayment, Square, Processing Fees and Cupcakes

Tags: credit card fees, debit card fees, interchange fees, mobile payments

GoPayment, Square, Processing Fees and Cupcakes

Suddenly it looks like the owner of the cupcake store of TechCrunch Jay Donovan’s story hasn’t made such a clever business decision by selecting Square as her credit card processing provider after all. It turns out that a Square competitor could be processing her cupcake payments at a rate that is lower by more than one percent, losing even more money than Jack Dorsey’s start-up in the process.

Intuit GoPayment, the Square competitor in question which has just partnered up with Verizon, has also dropped the fixed per-transaction component of its processing fee, which seems to be the current fad in the mobile payments world, even though that makes no sense at all.

What GoPayment / Verizon Customers Get

Here is what GoPayment’s blog tells us about the pricing details of their Verizon offer:

For Verizon Wireless customers, the GoPayment credit card reader is free after you’re approved for a GoPayment account and you file the mail-in rebate, which refunds to you the $29.97 purchase price.?áWe’re also making it easier for Verizon Wireless customers to get started with a discounted service plan for the first two months. This is a great deal for those of you who expect to process a higher number of credit card payments. Under this offer, you’ll spend just $12.95 a month and pay the low rate of 1.7 percent for swiped transactions.

Of course, we’re still offering our basic service plan as well, which has no monthly or cancellation fees and offers a 2.7 percent discount rate for swiped transactions.

Intuit tells us that GoPayment is available to “everyone,” even as their Terms & Agreement explicitly states that the “use of the Services is subject to your being affiliated with a merchant that has an active Intuit Payment Solutions merchant account.” So GoPayment is not exactly available to individuals, as Square is, but the lack of fixed monthly service and cancellation fees, combined with the lower processing fees, makes it the better choice for small businesses.

Why Is the Per-Transaction Fee a Big Deal?

Now back to the per-transaction component of the processing fee. As I’ve pointed out in my cupcake post and before that, Square is losing money on transactions below a certain threshold that varies by card type. For regular Visa and MasterCard credit cards, the threshold is about $8.50, give or take, and it is higher for special card types, such as rewards, commercial, business-to-business, etc. Square’s break-even threshold is lower for debit card transactions, but once the interchange limit goes into effect in October, that one too will rise above the one for regular credit cards.

The break-even threshold is much higher for GoPayment’s “High-Volume Plan,” as high as $60 or so for regular Visa credit cards and even higher for MasterCard. Now, this plan does come with a monthly fee, which will protect them from losing money from low-volume accounts, but our cupcake store would certainly be a money-loser, even though their transactions will be processed at a lower interchange and the break-even threshold will also be lower.

The Takeaway

I really have no idea why Square, GoPayment and their competitors are falling over one another in their rush to dispose of the fixed transaction fees. I understand that their overarching priority right now is to grow as quickly as they possibly can, but this is a strategy that will inevitably need to be adjusted at some future point or other. If their plan is to reintroduce the fixed fee or to set a minimum transaction fee later, I think they will discover that the merchants that will be affected by such a change will not like it and push back hard against it.

The issue will become even more acute in October when the per-transaction component of the debit interchange fees will rise to $0.22 and the break-even threshold for small-ticket debit transactions will rise quite substantially. Perhaps Square and GoPayment will be forced to redo their pricing models sooner than they would like.

Image credit: Wikimedia Commons.

Thursday, August 25th, 2011

Cupcakes, Credit Card Processing and Square

Tags: credit card fees, mobile payments

Cupcakes, Credit Card Processing and Square

It’s been quite some time since we’ve written anything about Square, Jack Dorsey’s mobile payments project, but I read something interesting this morning that simply had to be commented on.

The story in question involves a sleepy Midwestern suburb, cupcakes (fantastic ones at that), the biggest U.S. payment processor, credit card fees and, of course, Square. It’s a great story and I had a lot of fun reading it, as I’m sure many others did too. However, I suspect that I had so much fun for a reason that completely escaped the author’s notice.

The Cupcake Story

So TechCrunch’s Jay Donovan tells us about Fantasy Cupcake’s search for the best credit card processing provider. This aptly-named killer cupcake maker (take Donovan’s word for it, not mine) is located in Canal Winchester, a suburb of Columbus, Ohio.

The fun began shortly after Leah Dotson, the owner, chose Square as Fantasy Cupcake’s processor. A procession of smug bank representatives beat a path to Fantasy’s door, armed with flyers and credit card processing proposals that were sure to be far better than Square’s. “We’ll give you 300 bucks if we can’t beat your current merchant rate plus give you $100 to switch to our service,” one of them tells Dotson, only to make an ignominious retreat shortly after she sees Square’s pricing sheet (and keep her $300 in the process!).

Having fun yet? Wait, it gets better. Donovan has actually posted the pricing proposal submitted by a Huntington Bank / First Data representative. Here it is:

Huntington Bank / First Data Pricing

Qualified rate 1.69% (small ticket 1.20%)
Transaction fee $0.15
PIN debit $0.39
Monthly service fee $9.95
PCI compliance fee $99.95
Application fee $49
Terminal $32 per month

By comparison, Square charges a qualified rate of 2.75 percent, with no other fees. Donovan has excluded both Huntington’s and Square’s non-qualified rates, I guess for the sake of simplicity, which is fine, as I don’t think it takes anything away from the point he’s making, which is as follows:

In the end, a First Data merchant agreement would have amounted to almost $800 per year in additional fees for Leah vs. Square’s simple 2.75% rate structure and no additional fees. Forget the POS hardware purchases and statement fees and just think about that $.15 transaction fee. That’s 1.2% plus $.15 on every single transaction vs. Squares flat rate of 2.7%. When you think about the fact that the majority of Leah’s sales are under $3.00, it really adds up. That’s roughly $.21 in fees for that $3.00 order vs. $.08 using Square.

Then there are the PCI, service and terminal fees. By the way, the type of terminal this merchant needs costs $100 – $200, depending on the make and model, and $32 per month for two or three years is way over the top.

So yes, Square is indeed the better option for Fantasy Cupcake and Dotson has made the right decision. But what makes me smile is that Donovan is unwittingly making fun of the wrong payment processor here.

A Few More Successes Like This One…

When Square dropped the per-transaction component of its qualified rate back in February, we analyzed its fee structure and concluded that:

[F]or regular credit cards, Square’s break-even threshold would be at about $8.50. In other words, the start-up would be making money from processing larger transaction amounts, but losing money on lower transaction amounts.

For rewards and other special credit card types the threshold is higher, while for debit cards it is lower. What that means in our cupcake story is that Square is losing money on the majority of Fantasy’s transactions (which Donovan tells us average $3 per sale).

So I’m not sure if the Square guys are having as much fun as Donovan and Dotson understandably are.

The Takeaway

The point is that Square’s decision to drop its per-transaction fee places it in a very vulnerable position. The start-up is already losing money on most small-ticket transactions, as seen above, even as it charges a very high percentage rate on both qualified and non-qualified transactions.

At the same time, as the number of Square’s competitors is rapidly increasing, so is the downward pressure on the percentage component of the processing fee. For example, just today we learn that ERPLY is now offering a Square-like service that charges 1.9 percent per transaction. Even though the ERPLY card reader costs $50 to buy, that would be a price well worth paying for merchants with a sufficiently high average ticket (the higher the ticket amount, the higher the weight of the percentage component and the lower the weight of the fixed per-transaction component of the processing fee).

So Square will eventually have to adjust its pricing structure in some way. I wouldn’t be surprised at all if the per-transaction fee makes a reappearance or a minimum fee is introduced, specifically to counter losses from processing small ticket transactions. Whatever their form, any future changes may not be as amusing to owners of cupcake bakeries or indeed, bloggers.

Image credit: Wikimedia Commons.

Friday, August 12th, 2011

Can BOKU Survive the Evolution of Direct Carrier Billing?

Tags: mobile payments

Can BOKU Survive the Evolution of Direct Carrier Billing?

In my review of the new T-Mobile Direct Carrier Billing program last week, I wrote that it was difficult to predict what the future holds for this type of mobile payments service. That got me thinking about the companies that actually facilitate this type of payments for T-Mobile and other carriers and about their own prospects.

Perhaps the most prominent one among the direct billing specialists is San Francisco-based BOKU, so I decided to take a closer look into their business model.

What Does BOKU Do?

BOKU enables consumers to make payments online by entering their cell phone numbers at the checkout. Then BOKU sends you an SMS, asking you to confirm the transaction. You reply with a “Y” and you are done. The sale’s amount is then added to your monthly phone bill.

BOKU started early and grew fast. The company claims to operate in “60 + countries with more than 220 different carriers.” They have been most successful in facilitating micropayments for virtual goods sold on social media sites.

There are two reasons for BOKU’s success with selling virtual products. The first is that these are purchased primarily by very young consumers who typically have no other payment options available to them. The second reason is that the very steep fees merchants are charged for accepting BOKU payments (around 30 percent, compared to around 2.5 percent for credit cards) are in this case acceptable, because of the incredibly high gross margins (in excess of 90 percent) on virtual goods and the lack of alternatives.

BOKU’s Problem

BOKU’s problem is that it is not in control of its destiny. The company may own its payment processing platform and have established direct relationships with merchants, but its carrier partners own the customer relationships and can dictate the terms of service, including the pricing. That is a big problem indeed.

Neither BOKU nor any of its competitors can in any way influence the decision-making process taking place at the T-Mobiles of the world. So far the carriers have been willing to utilize their payment platforms, but that shouldn’t be taken for granted, nor should the present terms.

Moreover, it is difficult to see how BOKU can expand beyond the social gaming websites. No regular e-commerce merchant will ever agree to pay a 30 percent payment processing fee, under any conceivable circumstances.

What about processing credit and debit card payments on typical industry terms (say, 2.15% + $0.25 per transaction)? Well, all e-commerce websites already accept bank cards, so where would BOKU fit in?

The Takeaway

It seems to me that in the long run BOKU will not be able to function as an independent company. Its best exit strategy might be to make itself attractive to as many potential buyers as it possibly can and attempt to trigger a bidding war among them. We got a glimpse of how that may play out last year when Apple and Google were both reportedly in talks with BOKU, interested as much in acquiring the company, as they were in keeping it out of each other’s reach.

We don’t know exactly why neither tech giant ended up buying BOKU, but it is not difficult to see how things can get much more interesting if we add a few carriers and possibly a large payment processor or two to the mix.

Image credit: BOKU / YouTube.

Thursday, August 11th, 2011

NFC Ascent Pushes Visa to Speed up Adoption of Smart Credit Cards

Tags: chip and PIN, mobile payments, Visa

NFC Ascent Pushes Visa to Speed up Adoption of Smart Credit Cards

When we first published an article on EMV cards back in April, we did not expect it to cause much of a stir among our non-industry-related readers. Instead, we received quite a few emails from Americans who’d had difficulties using their mag-stripe cards in Europe and many of them were asking us how they could get a chip-and-PIN one (which is how EMV cards are known in Europe).

Of course we can’t get chip-and-PIN cards here in the U.S. Wells Fargo and JPMorgan Chase told us that they were planning to start issuing smart chip-based cards at some point, but the details were scant.

Now Visa has decided to weigh in on the subject in a rather big way. The biggest credit card network in the world is making it mandatory for all U.S. processors to support acceptance of chip-based transactions by April 1, 2013, in order to prepare the ground for the arrival of NFC-based mobile payments, we learn from a press release. Of course, by then NFC will have arrived in force.

Visa’s Decision

Here is what I think is the gist of Visa’s announcement:

Visa will require U.S. acquirer processors and sub-processor service providers to be able to support merchant acceptance of chip transactions no later than?áApril 1, 2013. Chip acceptance will require service providers to be able to carry and process additional data that is included in chip transactions, including the cryptographic message that makes each transaction unique.

Why do that? Visa:

The adoption of dual-interface chip technology will help prepare the U.S. payment infrastructure for the arrival of NFC-based mobile payments by building the necessary infrastructure to accept and process chip transactions that support either a signature or PIN at the point of sale.

So there it is. In effect, the huge hype around an untested and unproven mobile payments technology is already causing the beneficial side effect of solving a pressing issue for an increasing number of Americans trying to use their mag-stripe cards in Europe.

Dynamic Authentication

The release pays much attention to the use of dynamic authentication for securing chip-based card transactions, but it doesn’t tell us exactly what it is. Let me fill in the gap.

In a face-to-face EMV transaction, the cardholder would first enter her PIN to initiate the transaction. Where dynamic transaction authentication is supported, the point-of-sale (POS) terminal would at this time prompt the smart card to produce a one-time password that would be then used to complete the transaction. The point here is that a counterfeit card would not be able to communicate with the reader and the transaction would not be completed.

The reason Visa is pushing dynamic authentication right now is that all NFC-enabled devices will have a chip embedded into them by default that would store the user’s card account information, turning the smart phone into a form of an EMV credit card. As new POS terminals will be needed to communicate with these new payment forms anyway, they might as well be equipped with the latest fraud prevention technology. I think it is a good decision on the part of Visa.

The Takeaway

It should be noted that Visa is not requiring banks to start issuing PIN-based cards, but it is very likely that they will, once the infrastructure is laid out for accepting them. After all, U.S. issuers lost $3.9 billion in overall transaction volume and $447 million in revenues in 2008, because 9.7 million American cardholders were unable to use their cards abroad, according to data from Aite Group. Moreover, U.S. issuers have been receiving tons of complaints from inconvenienced American vacationers. Why haven’t they responded?

Well, issuers were faced with a chicken-and-egg type of a problem here in the U.S. If they did start issuing EMV cards, these would only have been accepted abroad, which would not have justified the investment. Now that Visa has required processors to ensure acceptance of chip-and-PIN, that changes the dynamics completely.

In fact, issuers are likely to also benefit from a benign EMV side effect in the form of lower fraud losses. In the U.K. the implementation of the chip-and-PIN technology resulted in in-store credit card fraud falling from 218.8 million pounds ($356.5 million) in 2004 to 98.5 million pounds ($160.5 million) in 2008, according to statistics from the U.K. Payments Administration. U.S. banks will no doubt take the windfall if it comes their way.

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