2015: THE YEAR IN PAYMENTS & COMMERCE

DECEMBER 2015

Commentary: Karen Webster, CEO Market Platform Dynamics

Top Voices in Money & Finance

VOTED

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2015: The Year In Payments & Commerce That Changed Everything – And Nothing.

Pop Quiz. What does the following passage describe? Fortunes made. Fortunes lost. Alliances forged to do battle facing an unassailable foe - and dissolved when the foe is revealed to be invincible. Stunning reversals, come from behind wins and wounded warriors fleeing the field of battle in the hopes of living to fight another day. Prophets proclaiming the end of times as we know it. And a great sense of wonderment about what’s next. TV? New Netflix Series? Sage XVII Of The Marvel Movie Universe Expansion? Sci-Fi Novel?

How about the Payments And Commerce Ecosystem In 2015?

Because while the prose of that opening passage might be somewhat more expected in the trailer of an upcoming season of Game of Thrones, it more aptly describes the year in payments and commerce that is about to draw to a close in a few short weeks. What the payments and commerce world, in reality, lacked in sword fighting and zombies, it made up for in sheer unpredictability. Amazon went into holiday 2014 with analysts questioning its strategy given its repeated to make profit on $22 billion in sales, but is entering the same time period a year later as a conquering hero ready to take a victory lap around its many, many vanquished foes - also known as the nation’s physical retailers. Reversals go in the other direction too. Last holiday season’s conquering champion was Apple, riding a stallion called iPhone 6 about to take the world of mobile payments (and wearables, and music streaming, and enterprise software/hardware) by storm. A year later, Apple is struggling to ignite Apple Pay, sell Watches and prove to the world that it is more than a one-hit iPhone wonder.

But while Apple has taken some particularly critical press - they are far from the only player that has struggled to make mobile payments the big hit at the Point of Sale that everyone, everywhere, hoped it would be. Consumers are not yet “into” mobile payments even though study after study show that both groups know mobile is out there and approve of the idea in theory. Low tech but highly reliable plastic cards are the horse to beat, and so far not many – well, perhaps none outside of Starbucks – have managed to surprise and delight consumers in-store with their phones as payments devices. .

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So what’s next? Who wins? Who loses? And what does it even mean to “win” or “loose?”

Where are the real innovations and who are the pretenders to the throne?

Unlike a prestige drama with a definitive end to the season, the payments and commerce saga of 2015 will roll on and out right into 2016. There are no easy answers, lots of split decisions and a pile of unknowns. But every epic needs an oracle to offer up the exposition of the story as it spins along. And our resident Delphic stand-in is MPD CEO Karen Webster - who has spent a year calling the actions as they have unfolded, and offered her take on where the real story was and where the hype was taking over. Ready to re-watch the last year all over again with a new eye for where the action really was for the last year? Then this is probably the eBook you’ve been hoping would show up in your stocking this December. If you want to know what’s next, maybe you first need to take a closer look at what just happened here, in 2015.

Shall we?

2015: The Year In Payments & Commerce That Changed Everything – And Nothing.

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BITCOIN / BLOCKCHAIN……..………………..PAGE 5

INNOVATION……………………………………...PAGE 13

FINANCIAL SERVICES / REGULATION….......PAGE 21

MOBILE WALLETS………...…………………….PAGE 29

MOBILE COMMERECE………………………….PAGE 36

RETAIL …...........................................................PAGE 42

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B I T C O I N /B L O C K C H A I N

“Described as “owned by no one,” and a glorious libertarian bastion of permissionless trust, the devoted use the analogy of bitcoin and the blockchain as one that is identical to the physical Internet — a global network based on nothing but protocols that move data all over the world in real time without any central authority telling it how and what to do. ”

- Karen Webster

On some level one has to admire bitcoin – for both its resilience and its unpredictability. While ups and downs are a normal part of doing business – the non-stop roller coaster ride bitcoin has been on for the last year is impressive by any measurement. At its height an individual bitcoin was worth over $1,000 and many were proudly proclaiming it was the innovation that would replace fiat currency. Then there were the price crashes, a few apocalypse, various convictions, a host of exchanges going down (after somehow losing a from of currency reportedly immune from theft), government around the world saying “no thanks” through a variety of regulatory actions and an almost unshakable association with being a tool for funding criminality – and a host of people proclaiming this was the end of bitcoin, the blockchain and digital currency. Which – again not so much – bitcoin has been down, but never out, and its biggest proponents may have moderated their claims that bitcoin is the future of all human currency – but many are quite sure it is the future of making that money truly mobile – to anywhere, from anyone with access to the Web. Like the Internet before it – bitcoin and the blockchain represent a wonder eutopia of ungoverned trust that, free to flower into libertarian greatness, will be as transformative as the Internet has been. A nice just so story – but with a big lacuna in the theory. The Internet, unlike bitcoin, Karen Webster points out, is pretty darn far from an ungoverned digital community that functions on permissionless trust – and is in fact collaboratively “run” through complex hierarchy of ACRONYM laden official regulatory bodies to make sure the Web doesn’t run wild. That is not bitcoin – nor will it ever be – and though the blockchain technology that underpins it could be useful, according to Webster, that is a predicated on a big if. Bitcoin lovers will have to give up bitcoin itself – in favor of the concept that underpins it.

“So, can we agree to move time, energy and brain cells away from bitcoin as an alternative currency? And to disentangle the technology of the blockchain away from it, too?”

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The Blockchain: ‘Just Like the Internet,’ Except That It’s Not Karen Webster October 5, 2015

“It’s just like the Internet.” And so starts every conversation by the devoted that rationalizes why bitcoin and the blockchain is the technology that will forever change how financial services and payments happen around the world. And why if you don’t agree, you are (a) a complete moron and (b) anti-innovation. I had this experience at a panel I participated in last week at a conference filled with bankers eager to understand the details of bitcoin and the blockchain. For the true believers, I’ve discovered that it’s simply impossible to have a rational conversation about the pros and cons of the blockchain. Why? Because it’s impossible to move them away from the narrative about how it is just like the Internet when it started in the 1980s. This, of course, is all just cheap talk because it immediately moves the discussion away from just how the blockchain could generate value. Described as “owned by no one,” and a glorious libertarian bastion of permissionless trust, the devoted use the analogy of bitcoin and the blockchain as one that is identical to the physical Internet — a global network based on nothing but protocols that move data all over the world in real time without any central authority telling it how and what to do. There’s only one problem with that narrative. It doesn’t accurately reflect how the physical Internet really works or even how it got started, or how bitcoin and the blockchain really work now and are likely to in the future. There’s another problem. Lots of really smart people in financial services are drinking that Kool-Aid served by the devoted in massive quantities. And, that’s scary – not because bankers are eager to find ways to innovate how money and data moves around the world – the one great thing that the blockchain has done is to start those very necessary conversations. Scary because banks are prioritizing money and people and resources against a set of blockchain initiatives that they believe can deliver innovation as powerful and game-changing as “the Internet was in the 1980s.”

So, I thought it might be time to set the record straight. Here are the five things that are important to understand about the blockchain, the Internet and how it started, and the implications to innovation in financial services.

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G U E S S W H A T ? T H E I N T E R N E T I S N O T G O V E R N L E S S

Bear with me for a couple of hundred words on how the Internet got started and how it works. The physical Internet – the backbone that enables the delivery of messages and data between the billions of senders and receivers worldwide today — was developed by ARPANET in the 1960s. ARPANET is the acronym for the Advanced Research Projects Agency Network that was funded by the U.S. Department of Defense. The purpose of the network – and the funding – was to develop an alternative to the circuit networks that existed at the time – a network that could send packets of data along a physical network that didn’t need connections at each send/receiver endpoint in advance of data being sent. Part of the initial work of ARPANET was to define standards for how those messages would be sent across network nodes. Those standards, or the Internet Protocols we know as TCP/IP, were created in 1982. Up until the late 1980s, the physical Internet was private and connected only a few dozen research centers and universities, mostly in support of government-directed projects. At about that time though, providers that could enable connections to the physical Internet – called Internet Services Providers or ISPs – emerged to serve what was beginning to become a more commercial use of that physical Internet. The physical Internet was fully opened to commercial traffic in 1995. Even in its early days, when the network was a couple of dozen research labs, including MIT here in Boston, a handbook with rules and guidelines for its use was developed and circulated. Here’s one of its passages:

“It is considered illegal to use the ARPANET for anything which is not in direct support of Government business … personal messages to other ARPANET subscribers (for example, to arrange a get-together or check and say a friendly hello) are generally not considered harmful … Sending electronic mail over the ARPANET for commercial profit or political purposes is both anti-social and illegal. By sending such messages, you can offend many people, and it is possible to get MIT in serious trouble with the Government agencies which manage the ARPANET.”

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T O D A Y ’ S I N T E R N E T H A S R U L E S

Fast forward to today. The physical Internet backbone that carries data between different nodes on the network is now the job of a number of companies called Internet Service Providers (ISPs) which include companies that provide pipes over long distances, sometimes internationally, regional pipes, and local pipes that ultimately connect into households and businesses. Connecting to the physical Internet can only happen through one of those ISPs, players like Level 3, IBM, Cogent and AT&T. Every ISP operates its own network. Internet Exchange Providers or IXPs, owned by private companies and sometimes by governments, make it possible for each of these networks to be interconnected and for messages to move across the entire network. Many ISPs have contracts with the providers of the physical Internet backbone providers to deliver Internet services over their networks to the “last mile” – the consumers and businesses that want and get Internet connectivity. The Internet protocols followed by everyone on the network make it possible for data to flow without interruption to the right place at the right time. So much for the Internet 101. This Internet, however, is not governless. There are, in fact, 4 governing bodies that provide oversight of the Internet’s rules and infrastructure:The Internet Society (standards, policies), The Internet Engineering Task Force (working groups that look after the Internet’s infrastructure and tackle big issues like security), The Internet Architecture Board (protocols and standards), and The Internet Corporation For Assigned Names and Numbers (ICANN – manages the domain name system).

While none of these organizations “owns” the Internet, together these governing bodies determine how it operates and set rules and standards that everyone abides by. Contracts and the legal framework that underpins all of that is in place to determine how things work and what happens if something goes wrong. To get a domain name, for example, one needs permission from a registrar that has a contract with ICANN. To connect to the physical Internet, ISPs need contracts with the Internet backbone providers, and IXPs have contracts with the Internet backbone providers to connect to and with them. Concerns over security issues? A working group is formed to work on the problem and the solution developed and deployed is in the collective interest of all parties. If your Internet is down, you have someone to call to get it fixed. If the problem is at the ISP, they, in turn have contracts in place and service level agreements that govern how those issues are resolved. The U.S. “Controls” The Internet For all intents and purposes, the U.S. has held the keys to the “control” of the Internet of for the last 20 years. ICANN is a private entity created in 1988 by the Department of Commerce to determine who gets a domain name on the Internet. ICANN and the domain name structure makes it possible for you to find PYMNTS.com by typing in pymnts.com rather than a string of numbers that is our IP address.

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Over the years, there has been growing criticism over having the U.S. control such an important part of the Internet. In response, last year, President Obama said that the U.S. would relinquish control of ICANN in 2015. Proposals for governance in the years beyond that included the formation of a UN-esque group consisting of stakeholders in industry, governments, academia and standards groups that would work under a contract with ICANN or, as China and Russia suggested, giving the keys to the United Nations. Almost immediately, there was global uproar over fears that in the wrong hands, the Internet would be censored or risk falling into the hands of a single group that might do bad things. Just recently, it was decided that the U.S. would continue to govern ICANN through September 2016, with the option to renew its contracts another three years – enough time for a new governance model (if there is to be one) can be worked out. All this is to say that the Internet is anything but the Wild West that runs itself. It didn’t start that way, and it doesn’t operate that way today. And, no one is talking about making the Internet governless; they are talking, in fact, about precisely who and how it should be governed.

T H E B L O C K C H A I N T O D A Y I S G O V E R N L E S S

That, however, is not the state of affairs in the blockchain community today. And that should freak a lot of people out.

The blockchain is a technology that is used to continuously record every bitcoin transaction that takes place. It is a distributed database or public ledger that updates itself every 10 minutes. This distributed database is operated by miners whose only qualification to become a miner is that they have the money to buy and maintain the super computers needed to process transactions every 10 minutes. That actually costs a lot of money. When data moves across the blockchain, it is wrapped in a sliver of bitcoin that is the miner’s compensation. When bitcoin was $700, $800, and $1,000 each, going to $100K and even $1M a couple of years ago, miners had an economic incentive to invest in equipment to increase processing speeds, and innovate. Today, with bitcoin in the low $200s (where it’s been for the better part of the year), the incentives are not as strong for the miners to make those improvements. One of the biggest technological criticisms of the blockchain technology as it exists today is that it is too slow to accommodate the volume of transactions that it would need to carry to function as a global network. To improve these systems, the miners have to invest and it is entirely up to them individually as to whether – and how – they will, if they will.

But the other, more concerning aspect of the blockchain is that it is truly governless. No one can tell miners to upgrade, slow down, speed up, stop or start or do anything. And, that’s something that the devoted claim as a badge of honor, and say is identical to how the public Internet operates. But as you now understand, the public Internet has governance and rules and standards that govern how it operates and did from Day 1. The blockchain has none of that.

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The closest thing to governance is the Bitcoin Foundation, which does not exactly have a sterling reputation – three of its five board members are pretty sketchy characters. Mark Karpeles, the head of Mt. Gox, one of the biggest mining operations out there before it went bust – is now in the custody of the Japanese police. You might recall that a lot of bitcoin mysteriously disappeared from Mt. Gox – bitcoin that is yet to be found. But beyond that it doesn’t really have a lot of power to govern anything even though it would like to. Speaking of miners, there is also a small number of miners that control a large portion of the blockchain activity, none of whom are known. That has raised concerns among many about the potential risks of so much concentration of processing power in so few unknown, unregulated, ungoverned entities. But the comeback, of course, is that the ledger is public and transparent so the risk of losing money attributed to activity on the blockchain is minimal. Yeah, tell that to the people who are still looking for the money they lost in Mt. Gox and the several other high-profile bitcoin thefts over the last couple of years. Also keep in mind that two of the biggest “selling points” of the blockchain are its irrevocably and anonymity. Irrevocable and anonymous both have big and sharp double edges in an unregulated financial services world. Today, if there’s an issue with a financial transaction, there is a person to talk to, an entity to stand behind it and a legal framework – if need be – to resolve any problems. None of that exists today in the world of the blockchain, which makes it very, very different from how the Internet started and how it grew.

Suddenly, unregulated, governless, standardless, and a system in which anyone with enough money to set up shop entry criteria doesn’t look like the kind of structure we want to underpin an innovation that moves trillions of dollars of money around the world every day. But in any case, the blockchain isn’t like the Internet at all.

I N N O V A T I N G F I N A N C I A L S E R V I C E S U S I N G T H E B L O C K C H A I N T E C H N O L O G Y C O U L D H O L D P R O M I S E

There is a however, here. One must separate the technology that is the blockchain – the notion of a distributed ledger that can become the foundation for a new set of rails that efficiently move information and money around the world – from how it is implemented today – governless, unregulated miners that rely on an unregulated global digital currency as payment. Unfortunately, the great difficulty today in having any conversation with the devoted on this point is that they cannot separate bitcoin from the blockchain. For any of these ideas to get any serious traction in the boardrooms of financial institutions and payments companies, that needs to happen.

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Which is why you are starting to see initiatives pop up like Ripple and its partnership with Earthport, Citi with its distributed ledger experiment, and Token, which uses banks as its “distributed ledgers.” But regardless, for the blockchain as an alternative technology to succeed as a new set of “rails” for moving money around the world, there needs to be governance and standards put in place to protect the assets that are moving through it and the institutions and people who will rely on it. And, in my opinion at least, an imperative to separate the bitcoin from the blockchain. S T O P W A S T I N G B R A I N C E L L S O N B I T C O I N

Speaking of bitcoin, I actually thought that we, as a financial services ecosystem, had given up on the notion of bitcoin as an alternative global currency. Yet I continue to be amazed at how many people still think that it has some promise or potential. It doesn’t. It does not solve a single problem that anyone, anywhere has – unless you are a criminal and need an anonymous currency to pay or be paid. That is bitcoin’s most prevailing use case. It’s not a substitute for cash digitally, and it’s not a solution for developing economies. There is no business case anywhere for a global currency that usurps any central bank authority to manage its fiscal policy through the use of its currency. Absolutely none. It also not a cheap alternative to Western Union, which is the other narrative that the devoted love to latch onto. In another case of “sounds great but doesn’t work in the real world,” what everyone conveniently forgets is that sending someone bitcoin is only as good as their ability to spend that bitcoin. And that is only as good as acceptance of bitcoin. And in case you haven’t noticed, there aren’t a lot of places that accept bitcoin anywhere in the world. Just ask the many people who’ve tried to travel the world and live on it. In developing economies, people conduct commerce one way and one way only – cold hard currency. And, if you need proof of that, look no further than M-Pesa which is only now, some eight years later, becoming accepted as a method of payment at some merchants, but which got off the ground because people could go to agents and get cash to spend. In developing countries, there is simply no way that these cash-intensive economies could transition to bitcoin any time soon. That is why the e-money providers like M-Pesa spend so much money and effort building cash-in/cash-out networks. It’s not because they are stupid and don’t like technology. It is because they are faced with the reality of living in impoverished countries and not hanging out in upscale coffee shops in San Francisco. Here’s more proof that bitcoin as a method of conducting commerce is on life support. Bitpay, one of the largest and most well-funded bitcoin processors, reportedly laid off most of its remaining employees last week in an effort to “keep pace with bitcoin’s growth.” Which, based on this news, seems to be moving in the wrong direction. So, can we agree to move time, energy and brain cells away from bitcoin as an alternative currency? And to disentangle the technology of the blockchain away from it, too?

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P E R M I S S I O N L E S S I S A G R E A T C O N C E P T – J U S T N O T A W A Y T O R U N T H E F I N A N C I A L S E R V I C E S S E C T O R

Permissionless trust is another concept that the devoted tout as the blockchain’s crowning glory. Permissionless means that anyone with the cash to set up shop can become a miner – all that is needed is to provide a proof of work to the blockchain. Applied to today’s financial services industry, that would be the like saying anyone with the cash to build a new network and send proof of receipt of money each time money moved could do so. Probably not the way we want to run our financial services networks.

But here’s where permissionless works and works amazingly well – in inspiring innovation.

No innovator needs permission from anyone to come up with good ideas and bring them to life – provided they can get access to capital and operate within the regulatory boundaries that exist. And, that philosophy has contributed to the development of thousands of new ideas – some which have become blockbusters, others that have died public painful deaths, and many, many others that are chugging along. In the U.S. we have the most vibrant permissionless environment of innovation that exists anywhere in the world and the infrastructure and capital and regulatory frameworks to support – not stifle – its continued growth and vibrancy.

That’s why one of the best things that has emerged as a result of the ongoing narrative about the blockchain is how to apply new technologies to removing the frictions from processes that exist today and modernizing the systems that power our global banking and financial services systems.

There’s also nothing wrong with having, as that inspiration, some of the greatest innovations of our time – like the Internet. It’s just better when that’s done with eyes wide open to the facts of how it all happened.

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I N N O V A T I O N

There is no denying that “unicorn bashing” has become something of a sport in 2015. But, as it turns out separating that actually innovative wheat from the extremely creative (but maybe not functional) chaff is much easier said than done. Take for example the now infamous cane of Theranos – a firm that had all the right ingredients to bake a successful innovation cake – beloved founder, exciting but hard to understand tech, a game-changing innovation, a pile of luminaries lining up for endorsements and board spots and a pile of funding. However, as in real baking, in metaphorical innovation baking, leaving one ingredient out can utterly destroy the product – and in Theranos’ case that missing ingredient was FDA approval for its tech. A problem that might have been avoided – Karen Webster pointed out – had Theranos invested in putting a few more actual doctors and scientists on the board of its groundbreaking med tech firm – and a few fewer luminaries. Those luminaries – with their lack of diversity of opinion or scientific training – instead may have kicked off a groupthink cycle which caused the hype machine to work overtime. “Groupthink is actually a corollary of the “Wisdom of the Crowds” concept. But crowds include lots of different kinds of people – the wisdom comes from the diversity of opinion that each person brings to the decision or action. In a crowd, mistakes cancel out and the average opinion tends to be right,” Webster wrote.

“In groupthink, people are all just alike. Same profession, same social status, same town (or Valley), same age, same...you get the picture. In groupthink, the group tends to make the same mistakes so the mistakes don’t cancel out.” Worse, groupthink is self affirming – and tends to chase away those with different ideas. And while it is easy to pick on Theranos as a particularly public case of magical thinking about an innovation gone awry – it far from a freak case. Often in an attempt to get in on the ground floor – entire ecosystems can get so focused on how cool a new potential innovation; it forgets to ask who will use it or why they would ever try it in the first place. So how to separate the truly innovative from the merely intriguing? First step, just say no to the Kool-Aid and ask hard questions – because if someone can’t answer them but remains sure that “it’s a sure thing” the only thing to be sure of there is that groupthink is probably going on.

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The Dangers of Groupthink Karen Webster October 19, 2015

Until last week, Theranos seemed just like any other Silicon Valley unicorn. Hot shot, media darling CEO described as the female Steve Jobs.

A “breakthrough” innovation based on proprietary technology shrouded in secrecy.

A rock-star board that includes the likes of Henry Kissinger and George P. Shultz.

Unseemly amounts of money pouring in from high-profile investors.

Opaque financials.

A multibillion-dollar valuation that puts it on par with well-established players in the sector, despite its relative youth and stealth. The story that The Wall Street Journal broke last week after months of investigation took a bit of the gild off that rose. And serves a cautionary tale for payments’ innovators, the investors who throw money at them, and the companies that look to identify and integrate innovation into their own organizations. T H E B I G , B I G B R E A K T H R O U G H

Theranos’ big breakthrough is a blood test requiring only a pinprick and thimble-full of blood instead of the frequently painful blood draws from a person’s arm. Theranos claimed that it could do this for roughly 240 tests, including prostate cancer. Blood drawn in this way was run through its proprietary equipment named Edison, producing results in as little as 15 minutes. Since blood draws would be less painful, Theranos’ CEO, Elizabeth Holmes, said that more people would be less reluctant to have blood tests done, and therefore alerted earlier to any underlying health issues. And since a pinprick in a finger is a lot easier to administer than jabbing a needle into a person’s vein, a less skilled person could administer the tests. As a result, Theranos’ tests were deployed in more than 41 Walgreens in California and Arizona, in addition to other places, including doctor’s offices. Since Theranos did not sell its equipment to other labs, it did not require FDA approval of its technology. But since it dealt with human beings and their health, Theranos had to prove to the Centers for Medicare and Medicaid that its test results were on par with those from other labs. That’s done by sending test results to an accredited lab a few times a year for certification. Allegations made by former employees — always dangerous given the “former” moniker — suggest that tests deemed proficient by these labs weren’t run on the Theranos Edison equipment at all, but on Siemens AG machines that are in Theranos’

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lab. Others, including doctors, nurses and lab tech workers say that results run on Theranos technology were also highly inconsistent with test results for the same patients from other labs.

Although Theranos does admit that only “a small minority” of its blood tests are run on its proprietary equipment, it stands by its claims of accuracy. Any differences in results, they say, are easily explained by differences in time of day, medications taken or food eaten by a patient when blood tests were administered. O K , B U T S O M E T H I N G S T I L L S T I N K S I N D E N M A R K ( O R S I L I C O N V A L L E Y )

But here’s where things start to sound a bit odd. Despite being a company with a mission to both innovate and disrupt science and laboratory procedures, how many scientists or lab experts do you think Theranos has on its board or employed as advisors? That would be zero. And how many articles do you think Theranos has published in scientific and/or academic journals? That would be zero, too – even though the company has been around for more than 10 years.

It also seems quite uncharacteristic for a company seeking credibility in the medical and scientific community not to do what is regarded prima facie essential: to publish a bunch of research touting its results in accredited scientific journals or have rock-star scientists as advisors or board members. An associate professor in the University of Michigan’s Department of Hematology and Oncology said that it’s “very uncommon” for a company to get to be as large as Theranos without substantial disclosure and validation of results of the diagnostic performance.” Yet, that hasn’t stopped investors from pouring $400 million into Theranos, valuing it at $9 billion. At that valuation, it’s equal to its well-established and FDA-approved medical laboratory brethren including Quest Diagnostics. So, what’s going on? One of two things – which makes Theranos less a juicy story about a company now seemingly in trouble and more about what payments companies and investors can learn from it. M A Y B E T H I S I S A L L P A R T O F A B I G G E R P L A N ?

Peter Diamandis, founder of the X-Prize and co-founder of Singularity University, says that “Many people who try to do big bold things in the world find out it’s not about the money or the technology: It’s about the regulatory hurdles that will try and stop you.”

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Amen to that.

That was the thesis of a piece I wrote a month or so ago questioning why in the world The Clearing House wanted to force new regulation on innovators in financial services and payments. My point then, and now, is that innovators in a highly regulated sector like financial services and payments can’t get out of the starting blocks unless they live with existing rules and regulations – and that we have a lot of built-in checks and safeguards that keep bad actors at bay and bad things from happening to consumers. As Diamandis implies, the more money that young companies have to spend on hiring compliance experts, the less they have to spend on product development and innovation. If we want more, not less, innovation, that’s the way it needs to stay. So, one theory is that Theranos, knowing this, kept a lid on what they were doing purposefully. As it stands today, the bar for proving success in medical technology is incredibly high – as it should be anytime that human beings and their health and well-being are directly involved. It’s, thankfully, not possible for med-tech innovators to simply throw new invasive innovations like diagnostic testing in the market, watch what happens and then pivot if people start getting sick (or worse). The FDA is tasked with making sure that consumers don’t literally become human guinea pigs as innovators try for the moonshots that get and keep them motivated.

But critics argue that the old model in matters of med-tech – develop, prove, document, trial – and then go out and raise money – is broken. In addition to slowing things down, the odds are greatly reduced that anyone other than big pharma with deep pockets can fund innovation. That, they say, only forces companies like Theranos to operate in secrecy for years – and seek funding from well-heeled private investors and VCs who as a condition of giving money, then want to occupy their boards. So maybe Theranos did the really smart thing, just like Uber, and engaged in “permissionless” innovation. Once everyone was hooked on its simple and effective tests, it could stare down the regulatory beast in D.C. just like Uber stared the beast down in New York City recently.

Or maybe (and more likely) the big bets on Theranos were just the result of groupthink at work. W H O , M E , D I S A G R E E ? I L O V E W H A T Y O U D O . ( W H A T D O Y O U D O A G A I N ? )

Groupthink isn’t a new idea. As a behavioral phenomenon, it first bubbled to the surface in scientific literature in the mid-1970s. Think of groupthink as consensus gone awry – when people in a cohesive group value conformity above all else. Members of the group then agree to get along only because being part of the group is more important and more valued than disagreeing with the group’s collective opinions or actions.

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Groupthink is actually a corollary of the “Wisdom of the Crowds” concept. But crowds include lots of different kinds of people – the wisdom comes from the diversity of opinion that each person brings to the decision or action. In a crowd, mistakes cancel out and the average opinion tends to be right. In groupthink, people are all just alike. Same profession, same social status, same town (or Valley), same age, same...you get the picture. In groupthink, the group tends to make the same mistakes so the mistakes don’t cancel out. But it’s actually worse than that. Diversity of opinion is discouraged because it creates disharmony in the “tribe.” Those who disagree are ridiculed, ostracized, even bullied, for not toeing the party line and tossed aside as outliers. Since people want to be part of the group, they agree, no matter what. Groupthink is what experts now say made Kennedy’s Bay of Pigs crisis a crisis. No one at the time, including Arthur Schlesinger, wanted to publicly push back against the CIA’s recommendations, despite expressing concerns in private and in memos to then President Kennedy questioning the wisdom of an invasion versus an airstrike. In group discussion, everyone went along with the CIA’s recommendation.

It’s also why 20 “witches” were killed in Salem Village – not too far from where I am writing this piece – in 1692. No one wanted to question the authority of those in charge in the Village who made persuasive arguments to the God-fearing Puritans that the “Devil” was to blame for the behavior of those who were sick or (what we know now to be) suffering from mental illness, even though many later wrote that they knew what was happening was wrong. P U S H B A C K ? N O T M E ! It might also be why no one, until now, ever questioned what Theranos was doing and how it was doing it. Who’s going to question the soundness of a company or an innovation when savvy investors like Larry Ellison and Draper Fisher are pouring hundreds of millions into it?

And public intellectuals the caliber of Henry Kissinger and George Shultz serve on its board? Who has the guts to push back when the media is pushing story after story of how a female entrepreneur with a fear of needles is now the next Steve Jobs? (Hey, she does wear black turtlenecks after all.) And when Bill Clinton gushes about the company at the Clinton Global Initiative and how it’s going to save lives, who would have the audacity to even whisper a criticism of what Theranos and Holmes were doing? No one.

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Pushing back and asking questions would have been seen as criticizing the mission of the company and tearing down one of the few female technology innovators to emerge from Silicon Valley. And the questioner would have probably been publicly flogged, humiliated and discredited as being out of touch.

G R O U P T H I N K – N O T J U S T F O R T H E R A N O S

Theranos isn’t the only story where groupthink may be alive and well. Groupthink appears to be alive and well in payments – and, in particular, in the land of bitcoin. Coindesk wrote last week, “with more than $800M so far invested in bitcoin and blockchain technology startups since 2012, it’s safe to say that venture capitalists are certainly captivated.” Captivated? Or captured by groupthink? As a global currency, bitcoin was dead before it even got off the ground, for many of the reasons I’ve written here over the last several years. Yet, a few years ago, a few really influential VCs dumped a ton of money into it and proclaimed it the future “the internet of money,” a claim that is also a bit misleading – for all of the reasons I’ve written here. Yet, if you pushed back, tried to reason why it would never work as a global currency, you were ridiculed, laughed out and pegged as “too out of touch” to really get it. After all, how could 200 VCs who’ve dumped hundreds of millions into bitcoin be wrong? Groupthink! Which might be starting to crack a bit. Today, some of the ventures that were given millions to go out and satisfy the pent-up demand for bitcoin are now quietly cutting back and laying off staff. Bitcoin companies are pivoting and bitcoin is forking. Internet entrepreneur and bitcoin evangelist Halsey Minor, who last year at the Innovation Project couldn’t say enough great things about bitcoin’s future, to take one example, just last week rebranded his company to remove “Bit” from its name and is diversifying away from bitcoin. So is Circle. G R O U P T H I N K B U B B L E S – H I G H A C C E S S T O C A P I T A L A N D L O W B A R R I E R S T O E N T R Y

Then there’s the investments being made in on-demand delivery.

In 2014, food and grocery delivery received $1 billion of VC funding – yes, $1 billion and four times what it was in 2013. The rationale for that funding is that no one will ever want to step foot in grocery stores or restaurants again, and will instead outsource that activity to Instacart, GrubHub and the million other players who are springing up to pick up orders and deliver to people who’ll never leave their houses. Now this is not to say that on-demand delivery is a bad idea – it’s awesome – and a sector with a lot of room to grow. But to suggest that it’s worthy of a billion dollars worth of funding and that players in the space

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like Instacart deserve a $2 billion valuation because it has managed to do a deal with Whole Foods, hire people who like to grocery shop and then deliver those groceries to yuppies living in a few big cities seems a bit of a stretch. With barriers to entry pretty low, and access to capital pretty high, on-demand food delivery seems like the next groupthink train wreck.

Instacart, by the way, is but one of the 142 unicorns, with a collective “valuation” —based on recent funding rounds — of more than a half a trillion dollars that exist today. It wasn’t that long ago that the notion of a billion-dollar company was a lofty and difficult goal to hit. Now all it takes is but a few well-placed VC bets, and the funding rolls in and the valuations soar, despite any sign of revenue or viable business model. No one wants to be left out, so they don’t push back and ask questions. But, many of these unicorns have among the shakiest business models and foundations going; very few of them make any money. Even Bill Gurley seems disturbed by the fact that, in his words, Silicon Valley has more people working for ventures that don’t make any money than ever before. That doesn’t sound healthy, yet tends to be the reality when groupthink takes over.

I F I T S O U N D S T O O G O O D T O B E T R U E , I T M I G H T B E G R O U P T H I N K !

So, I guess the moral of the story here is that just because a cool-sounding company gets a few million bucks from a storied VC firm in Silicon Valley with fancy schmancy people on the board doesn’t automatically mean that it’s the next big thing. I’d also hold onto to my angel investor wallet for anyone who’s called the “next Steve Jobs” who actually wasn’t anyone until she/he actually had an extremely successful innovative product in the marketplace that people were gobbling up. Most importantly, when everyone says something is a sure thing, and no one is disagreeing, that might be a good sign that groupthink is in action, and it’s time to really kick the tires, push back and ask some tough questions. And then, depending on what you hear, to walk the other way. As for Theranos, we know that they hired famous lawyer, David Boies to defend itself. Maybe the next David they should think about bringing into the fold is Nobel Prize winning biologist, David Baltimore, to help burnish its claims of medical and scientific integrity.

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OTHER KAREN WEBSTER COMMENTARY ON INNOVATION Will Ad Blockers Drive Mobile Commerce Innovation? September 21, 2015 Want To Meet A Few Of The Payments Revolutionaries Who’ve Changed Payments? July 6, 2015

The Dangers of Listening to Consumers June 29, 2015 The Most Frequently Asked Question About Mobile Payments June 8, 2015 MXC’s Four Fatal Flaws And What Payments Innovators Can Learn From Them May 4, 2015 Why Square’s Greatest Ambition Has Become Its Biggest Threat April 20, 2015 Is Facebook Now Payments’ Biggest Threat? March 23, 2015 The Definitive Innovative Project Cheat Sheet March 16, 2015 Can Anything Save Loyalty? February 16, 2015 Payments Innovation Rankings Soon To Be Unveiled

February 2, 2015

What Payments Innovators Can Learn From Bill Belichick January 26, 2015

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“We need to take some serious stock here on the unintended consequences of an agency that was set up to benefit the consumer. That means making sure that in the quest for blood from the banks, the CFPB, and other regulators, don’t end up harming consumers, small businesses and, in particular, the financially underserved portion of society in the process.” -Karen Webster

Remember when financial services were simple? OK, maybe financial services were never exactly simple – but until very recently they were more or less found in the same space, which was within banking. Individual banks might differ in the details – but mostly financial service came in one desirable flavor: mainstream. Alternative financial services was not a totally non-existent concept before a decade ago – but it has only been within the last decade that “non-mainstream lender” has not been a polite way of saying “loan shark.” But powered by cloud computing, learning/thinking algorithms and an onslaught of technologists and financial services veterans collaborating, Alternative Lending no longer has a scent of sketchiness about it. The marketplace is becoming ever more comfortable with the idea that standard bank-based financial services – financial planning, card products, cross-border remittances, lending, etc. – not only don’t have to be done by banks – but are actually done better by smaller startups not trying to be everything to everyone. As consumers have shown an increasing comfort and appetite for such products, the rapidly evolving world of financial services has generated a good deal of excitement. Excitement that is actually measurable in money – namely the staggering $11 billion in investment dollars that have flowed into the coffers of emerging finserv startups in 2015 alone. However, the rise of new financial services has generated a good deal of anxiety as well. That anxiety is most acute among banks – now facing strong pressures to adapt, collaborate or die – and regulators - who find themselves evaluating the benefits and risks to consumers of an approach to financial services that is still being developed. And chief among the regulators looking at the financial services firms – new and old – is the CFPB. And that might be something of a concern, notes Karen Webster, since as an organization the CFPB is almost as widely praised for its commitment to helping consumers as it is criticized for its opaqueness, heavy-handedness, lack of accountability and tendency to harm the consumer and small businesses it purports to help.

F I N A N C I A L S E R V I C E S / R E G U L A T I O N

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Does THE CFPB Really Help Consumers? Karen Webster October 12, 2015

Malaria was killing the good people of Borneo in the 1950s in droves. The situation was serious enough to enlist the help of the World Health Organization. The WHO came in with massive amounts of DDT spray and obliterated the malaria-carrying mosquitoes. Malaria cases ground to a screeching halt. Mission accomplished! But, soon thereafter, something else mysterious began to happen. The thatched roofs of the huts in which the villagers lived began collapsing. It was discovered that the DDT spray that annihilated the mosquitoes also killed the wasps that ate the caterpillars that burrowed into — and were now eating — the roofs of the thatched huts in which the villagers lived. If that wasn’t bad enough, villagers continued to get sick and die — but not from malaria. The diagnosis was typhus and the plague carried by rats that seemed to be multiplying in force. The cats that once ate the rats were dying, too, since the DDT had infected their food source. Without the cats to eat the rats — who can apparently eat just about anything and live — villagers found themselves facing a whole new health crisis. The DDT brought in to solve one very serious problem for the citizens of Borneo had unleashed a wave of unintended consequences just as harmful. Now, you’ll be happy to know that all of these problems were ultimately solved by the WHO when they did the logical thing and parachuted a bunch of live cats into Borneo to eat the rats, which ultimately restored the balance of power in the ecosystem. No joke.

T H E C F P B A N D I T S “ L A W B R E A K I N G ” F I N A N C I A L S E R V I C E S W H O ’ S W H O

If only parachuting a bunch of live cats into Washington, D.C., was the solution to saving the payments and financial services ecosystem from the unintended consequences of the actions of the CFPB. The CFPB is an agency that, today, employs nearly 1,000 people and, in the five years it’s been in existence, has levied $10.1 billion in fines and other sanctions across a number of financial services “lawbreakers.” Those “lawbreakers” include the “Who’s Who” of the financial services and payments industries, including Bank of America, JPMorgan Chase, Discover, American Express, Western Union, PayPal, Sprint, GE Capital, Regions Bank and Honda — to name a few. They’ve all been whacked by the CFPB for doing something that it thought was harmful to consumers.

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Actions that have, in turn, created a number of unintended consequences for those consumers — from higher checking account and ATM fees to lack of access to credit to throttling the innovation engines of many financial services companies. And, judging by the many proposals that are in front of the CFPB now — from deciding how prepaid cards and payday lenders will function to whether arbitration will be a quaint relic of the past when resolving disputes with credit card companies to whether companies can be paid a referral fee for legitimate lead generation — things for both consumers and financial services companies could soon get much worse before they get better — if they ever do. P R O T E C T I N G T H E C O N S U M E R F R O M E X P L O D I N G T O A S T E R S — A N D “ B A D ” B A N K S

The CFPB was the brainchild of now Senator Elizabeth Warren (D-MA) in 2007. In those days, she was “just” a Harvard Law School professor with an expertise in bankruptcy law. Her idea was to create a separate and independent federal agency to make sure that “ordinary people were dealt with fairly.” At that time, she pointed out that we have regulations to make sure people don’t get hurt by exploding toasters, so why shouldn’t we make sure they don’t get hurt by financial services products that could be just as harmful?

And just when everyone questioned whether it was even possible for banks to create products as bad as exploding toasters, 2008 happened. The 2008 financial crisis turned out to be the convenient spark Warren needed to make her idea a Congressional reality. The CFPB got rolled into the Dodd-Frank Wall Street Reform Act — and even got named billing: Dodd-Frank Wall Street Reform and Consumer Protection Act. It was the subject of acrimonious debate, and thankfully, some of its more farfetched powers were rolled back. But Dodd-Frank passed with CFPB as its centerpiece. The new agency officially opened for business in 2011. The CFPB has supervisory powers over financial institutions with more than $10 billion in assets, and for the first time, a federal agency has been given jurisdiction over a slew of non-bank financial companies, including mortgage companies, payday lenders, private student loan lenders and servicers, debt collectors, consumer reporting agencies, auto lenders and money transmitters. Its primary goal, as stated on its website, is to “prevent financial harm to consumers while promoting good practices that benefit them.” So, what could be so wrong with an entity that’s only looking out for the consumer? As we now understand, plenty. Mostly in the form of the unintended consequences for both the consumer and the financial institution that are the result of how the CFPB is funded, how it’s run and how it targets “lawbreakers.”

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T H E R E A L I T Y O F U N I N T E N D E D C O N S E Q U E N C E S

Want to know why ATM fees are higher than they’ve ever been, or why so many people can’t afford checking accounts? The combination of CFPB and Dodd-Frank regulations in areas related to overdraft fees and debit-card interchange have forced banks to raise prices in order to offset the fee income they have lost. Since no one has yet figured out how to provide consumer banking services for free, banks have to find revenue from somewhere. Want to know why it takes longer for a bank to decide whether (or if) to lend a consumer money or why so many banks have gotten out of the student loan business? Answer: Any slip-up and the CFPB will come crashing down on the bank with crushing penalties and other sanctions. Or why banks are reluctant to innovate at all? In addition to now having to spend billions and hire the thousands needed to staff compliance operations in response to CFPB’s enforcement actions, they’d just rather not. The environment in which they operate now is just too risky and expensive in the shadow of the CFPB — an agency that is organized and funded in such a way that makes it accountable to absolutely no one.

O R G A N I Z E D T O O P E R A T E A S J U D G E , J U R Y A N D E X E C U T I O N E R

The CFPB operates as a totally separate and independent agency outside of the purview of Congress. Its funding source isn’t Congress but the Federal Reserve. By statute, the CFPB receives a fixed percentage of the Federal Reserve Board’s operating budget, and it cannot be denied requests for funds up to that cap. Since 2012, the CFPB’s annual operating budget has been 12 percent of the Federal Reserve’s operating budget, which in 2014 was $584 million. That made the CFPB’s budget ~$70 million last year. The CFPB is run by a director who can decide pretty much unilaterally how that money will be spent, how supervisory review and enforcement happens and who’s on the receiving end of their investigations. The CFPB’s first and current director, Richard Cordray, was given that job during a recess appointment in 2012 and will serve in that capacity until 2017. Under the act, the director, who is appointed by the president, has a five-year term. That’s a lot of power — and funding — rolled into one person. Letters from the CFPB are never welcome news — almost 100 percent of the time they result in an action and often a pretty big fine. Companies can push back, but it’s not exactly a fair fight.

An enforcement action can be appealed to an administrative law judge who was appointed by — guess who — the CFPB director! If the company loses that appeal, the appeals process is to take the case back to the CFPB director who whacked them in the first place! Should anyone be crazy enough to do that, there’s always federal court, where the real winners, of course, are the lawyers who’ve been racking up fees. But at least there’s hope there.

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Sort of.

When companies have challenged the CFPB, it’s usually not ended well for them. In one situation where the first appeal was sent back to Cordray to review, he found more violations that increased the final penalty by 17 times (from an initial fine of $6.4 million to $109 million). It’s not surprising that most companies just pay the initial fine to make things go away. Who the CFPB decides to go after is a little like how People — the “people’s version of Yelp” — would have worked: by looking at the complaints that it solicits. L E T ’ S P L A Y W H A C K A B A N K !

As of Aug. 1, 2015, the CFPB had amassed ~677,200 complaints, mostly about credit reporting errors, debt collection tactics and mortgage loans. Certainly, there are legitimate complaints in this database, but there isn’t a formal or transparent process where these complaints are verified, proven or substantiated before an action is initiated. The database is now public, so it’s possible for everyone to see how consumers describe their complaints — which contain liberal uses of words like “unethical” and/or assertions that actions taken by a company violate laws, despite any factual basis for whether they do or don’t. The CFPB also decided recently to launch its own version of the modern-day public stockade — a list of the companies that consumers (with unverified complaints) have complained the most about. Naturally, and for good reasons, financial services companies are more than a little concerned. Having a virtual dictator protecting consumers might be just fine (although it seems more like something they’d do in China or Russia) if that dictator looked at the bigger picture, understood the law of unintended consequences and generally did things that helped consumers and sanctioned the truly bad actors. The problem is that the CFPB never seems to think beyond its immediate objective of slaying anyone who makes money from selling financial products to consumers. Anyone. Do you charge services for financial services or payments products? Let’s see, if the answer is yes — which it is for about 100 percent of financial services and payments companies — that automatically puts you on its suspect list. And if you are involved in products that are targeted to the underserved or small business? Well, you get it with both barrels. For instance.

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They whack prepaid cards.

But many poorer people depend on these cards to manage their money — or would like to. In an ideal world, they wouldn’t have to pay much for this, and everything would be grand. In the world we actually live in, the more the CFPB bears down on prepaid issuers, the more providers pull back and the more the financially underserved or unbanked are pushed further into desperate straits. And, they are about to make a decision that would eliminate the convenience that some prepaid issuers offer their customers by giving regular customers overdraft protection for one or two days in amounts that are a whopping $60 or $75. Instead of treating these charges as what they are — the equivalent of overdraft protection since prepaid cards function as the equivalent of checking account products — the bureau is threatening to regulate them as lending products and require that a consumer prove creditworthiness before a $60 advance for 24 hours can be extended. We all know what the unintended consequences of that will be. Time to parachute in the cats! They whack payday lenders. Sure, some of them are scuzzbags. And wouldn’t it be great if financially strapped Americans didn’t have to resort to borrowing against their paychecks. But that’s an economic and social problem that isn’t going to get solved by making it harder for people to borrow money when they really need it. Push the payday lenders out, and the need for money doesn’t go away. It just pushes the financially strapped to pawnbrokers, loan sharks and, I suspect, at the margin, into crime. This is especially curious when we know, with absolute certainty, that there are software solutions that have been implemented at the state level in 16 states that keep the good payday lenders in compliance and the consumers they serve protected. There are solutions that can be deployed that can give consumers what they need and the financial services providers what they need, too, to serve their consumers well. But they seem to be ignored even though it is an example of innovation where the consumer can really be helped. Time to parachute in the cats! They whack credit card issuers. Sure, there have definitely been overly aggressive issuers with slick marketing methods that trick consumers into borrowing money at high rates. I get that. But the CFPB isn’t engaging in targeted sniper attacks on bad practices. Instead, it’s carpet bombing the credit card industry — at large — with rules and fines. So, what’s happened? It’s only made it hard for small businesses to borrow on their credit cards and run their businesses, and it is making it harder for Americans who really need to borrow money to get by.

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And its newest proposal to ban arbitration in matters that relate to credit card disputes in favor of class action lawsuits will only make things worse. If passed, get ready for tighter restrictions on who gets credit and for a whole new class of ambulance-chasing attorneys to emerge. Time to parachute in the cats! They whack money transmitters. Companies that enable money transmission from the U.S. to other countries are now part of the CFPB’s purview. That has done one thing: convinced banks that used to provide such services to get out of that business. Thanks but no thanks, they said, and who can blame them. That then contracted the market for money transmission services in the U.S. — so, fewer choices for consumers. And, if you are unfortunate enough to be a provider of that service, the CFPB is now in the middle of your business, making sure that consumers don’t pay “too much” for those services, despite having no earthly understanding of how expensive it is to build the cash in and cash out networks here in the U.S. and abroad that enable the efficient delivery of those funds — yes, cash is alive and well and used in these transactions a lot — not to mention what it costs to do it securely and in compliance with all of the AML and KYC regulations. Time to parachute in the cats! And the list could go on.

H A S T H E P E N D U L U M S W U N G T O O F A R ?

I wish I could say that all the victims of the CFPB’s actions had clean hands. But, unfortunately, the banks, and others, have done enough bad stuff over the years that they made it way too easy for Sen. Warren to gain the momentum needed to make CFPB the reality that it is. I hate to blame the victim here, but there’s some truth to what I say. But, we’re now going on five years into this experiment, and we have some perspective. And, we need to take some serious stock here on the unintended consequences of an agency that was set up to benefit the consumer. That means making sure that in the quest for blood from the banks, the CFPB, and other regulators, don’t end up harming consumers, small businesses and, in particular, the financially underserved portion of society in the process — which it looks like they are doing and doing a fine job of.

Restoring the balance, moving the pendulum back to where it needs to be, in my opinion, is going to require some serious rejiggering of the CFPB.

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If I had a magic wand for a day, I’d get rid of the dictator and Kafkaesque practices. I’d put the CFPB under Congressional oversight. And, make sure that it is forced to seriously evaluate the unintended consequences of all of its actions — all of them. I’d make sure that the bad actors got whacked, for sure. But just like using DDT to eradicate malaria ended up causing the good people of Borneo to suffer more, I’d want to avoid killing the financial services sector — and, in particular, the banks — just because it makes for good PR. We can’t let unfettered authority wrapped up in one agency also kill our best hopes for all consumers to get the products and services they need by making it impossible for financial services providers to innovate. Then again, maybe we could just parachute in a lot of cats and hope for the best

OTHER KAREN WEBSTER COMMENTARY ON REGULATION First, Let’s Kill All The (Payments) Innovators!” August 31, 2015

The Great American (Express) Spin-off? August 24, 2015 The CFPB, PrePaid Cards And Protecting Consumers To Death May 26, 2015 The Fed’s Slow March To Maybe Faster Payments January 27, 2015 Will Apple Pay Bring Banks And Merchants Together? January 12, 2015

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“A year ago, banks felt as though they needed Apple Pay to remain relevant, heck, to be relevant, in the mobile payments game. A year later, it’s a very different story. I think that Apple now needs the big banks more than the big banks need Apple.” -Karen Webster

In terms of fanfare, hype and general enthusiasm, it is hard to name a mobile payments product that made a grander first entrance onto the scene than Apple did with Apple Pay. But unfortunately the outcome has yet to live up to the buildup – with only 5 percent of transactions that could be done using Apple Pay – consumer with the right phone and merchant with right POS hardware – are Apple Pay transactions.

Which could leave Apple in an interesting bind when it comes to trying to launch a P2P platform to boost Apple Pay’s relevance to the customer base. Especially when a lot of marquis banks with robust P2P capabilities have their own mobile payments ambitions – and have collaborated with other mobile payments players that are, well let’s say, perhaps a tad easier to work with.

The conventional wisdom no longer says it is a “winner take all” model in mobile payments and as 2015 has demonstrated, there are a number of contenders lining up, including PayPal, Google, Chase and Samsung.

“To even remotely stand a chance of winning the 'war,' a mobile 'wallet' can’t be captive to just one mobile operating system or device and the set of customers that that particular operating system has gotten on board its platform – and then the subset of those consumers who have decided to download and activate its 'wallet.' The 'winner' has to work across operating systems, shopping channels, browsers and technology platforms,” Karen Webster wrote.

“Because the weapon that’s most needed to win what everyone is calling the mobile wallet wars is … drumroll please… Enough consumers using those wallets for merchants to care enough to accept them.”

M O B I L E W A L L E T S

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Issuers To Apple Pay: Just Say No! Karen Webster November 16, 2015

Odysseus was a pretty clever fellow. For those who might need a crash course in ancient Greek history, Odysseus was the mythical king of the island of Ithaca and star of Homer’s story, “The Odyssey.” Odysseus always seemed to be one step ahead of those who were ill-intentioned. For instance, he was the guy who decided that the only way for the Greeks to recapture the city of Troy, was to trick the Trojans — which he did via the ingenuity of the Trojan Horse. When the Cyclops took to eating some of his crew during his 10-year journey home, he concocted a scheme to blind it. And, anticipating the lure of the Sirens and the dangerous situation that would create for he and his crew, Odysseus insisted that he be strapped to the mast of his ship, be blindfolded, and have wax inserted in his ears to block out their Siren’s Song. He even gave strict orders to his crew that, under no circumstances, should he be untied from mast. He wasn’t and everyone lived happily ever after. I was reminded of Odysseus’ and his strategic sense of gamesmanship as I let the news about Apple’s alleged entry into the P2P arena sink in. As is now common knowledge, Apple isn’t denying rumors that it intends to launch a P2P payments service. It’s widely speculated that it’s doing so to prop up the sluggish adoption of its Apple Pay mobile payments product. Getting consumers to engage with P2P payments is one way, reports suggest, that Apple believes it can increase usage and engagement of Apple Pay – two of Apple Pay’s critical strategic failings right now. Then, the theory goes, with an engaged and larger user base in hand, Apple has something more compelling to offer merchants who right now don’t see any reason to jump through hoops to accept Apple Pay.

Details are sketchy, naturally.

Some reports suggest that the P2P solution will be tied to Apple iMessenger. Others suggest that it includes involvement from some of the biggest banking names out there: Bank of America, Chase, Cap One, U.S. Bank, PNC. If that list sounds vaguely familiar, it should. They are also the banks that are part of the bank-owned P2P network, clearXchange that launched in 2011. It was also announced three weeks ago today that clearXchange was to be acquired by Early Warning, another bank-owned consortia that offers risk and real-time authentication solutions to 2,100 financial institutions.

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It was déjà vu all over again, as the late Yogi Berra would have said, as the media went bananas over reports of yet another Apple mobile payments alleged stroke of brilliance. What better way to grow the Apple Pay base, get usage and develop network effects, it was reported, than launch P2P! Analysts said that it was a move that would create a “shockwave” throughout payments, and some even suggested that the card networks could be toast. Some of the obituaries being written last week were remarkably similar to those written last year when Apple Pay launched, namely PayPal – but now with a Venmo twist. The hysteria even caused PayPal’s stock to drop following the announcement of Apple’s P2P plans. Others were new and included Visa and MasterCard given the potential that P2P would give Apple to establish a new set of payments rails. The banks aren’t talking, but I’m not sure they need to. Since I don’t believe that the banks will let Apple anywhere near the precious DDA accounts that serve their customers. F O O L M E O N C E … .

This, of course, is the same Apple that a year and a half ago drove a pretty hard bargain with issuers in order to be part of their Apple Pay mobile payments scheme. Apple asked for 15 bps per transaction and for issuers to underwrite their marketing and advertising campaigns. Remember all of those TV commercials about Apple Pay? Those were paid for by the issuer whose logo appeared right next to Apple’s. There were even ads on the Super Bowl earlier this year (which I feel compelled to remind all of you that the as-yet unbeaten 9-0 New England Patriots won).

The 15 bps fee has turned into a rounding error on the banks’ balance sheets since there are so few transactions. But the millions spent on those ad campaigns sure added up.

Nevertheless, banks rushed like bees to a big honey pot to sign up, get on board and write those checks. After all, who wanted to be left out of the launch of the mobile payments game changer? The year that Tim Cook proclaimed was the Year of Apple Pay? Apple Pay logos were plastered all over bank homepages, proudly proclaiming Apple Pay support. Bank CEOs included Apple Pay updates in their earnings reports. Bank of America’sBrian Moynihan talked about its 1 million downloads of the mobile wallet in the first 90 days. All of the banks’ top brass wanted it to be known that they were standing shoulder-to-shoulder with the most innovative technology player in the world – a player who was redefining the future of mobile payments. And that they were making it possible for their consumers to be part of the solution that was going to change everything about the payments experience at their favorite merchants. Except that it hasn’t.

As those of you who follow PYMNTS know, we do a quarterly survey of ~2,000 consumers with iPhone 6 and now 6s phones. We don’t ask them what they might do when it comes to using Apple Pay to pay or remembered doing, we actually see what they have done in the stores where Apple Pay is available for them to use.

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And quarter after quarter, what we’ve found is that those consumers who can (have the phones and shop in stores where it is accepted), really don’t use it much at all. Usage has stalled. After looking at this for a year, 5 percent is about the extent of the usage after more than a year in the market. That means that of the transactions where Apple Pay can be used – consumers and merchants both equipped with the right handset/app and POS environment, 5 percent of them use Apple Pay to checkout. That also means that 95 percent of transactions are something else – and that number hasn’t changed much over the year—even when all the technology stars have aligned, which they usually don’t. Well, at least issuers haven’t had to pay Apple a lot of transaction fees since .0015 percent of almost nothing is less than bupkus.

A S T H E M O B I L E P A Y M E N T S T A B L E S T U R N A year ago, banks felt as though they needed Apple Pay to remain relevant, heck, to be relevant, in the mobile payments game.

A year later, it’s a very different story.

I think that Apple now needs the big banks more than the big banks need Apple. And at least two of them – Chase and CAP ONE – have no reason to want to lend them a helping hand.

Each has – or is close to launching — their own mobile wallets. Chase, in particular, has made it very clear that it has very big mobile payments ambitions of its own. At launch in mid-2016, it will auto-provision its 93 million consumers into a wallet that gives it payments privileges with a bunch of merchants, including those it has partnered with MCX to enable. A year later, there are also a number of new mobile payments players in the mix that weren’t in market a year ago –Samsung Pay and Android Pay – all of whom have (and are getting) the big banks on board, too, and working hard to get their own traction as competing alternatives to Apple Pay. The one thing we know about P2P via a DDA account is that to work, it has to get almost ubiquitous adoption. It is hard to persuade someone to use a P2P method to send money if the person they want to send it to can’t retrieve it. It is why none of the faster payment methods adopted by the Federal Reserve Board or FIS or others have gotten much adoption — they don’t have enough adoption.

It’s also what clearXchange has been working to achieve for the five years it’s been in existence – and is still working hard to get. There’s a reason clearXchange’s focus at the start was to get the big banks that cover the vast majority of the DDA accounts in the U.S. on board. Its recent acquisition by Early Warning gives it access to 2,100 more, potentially. But that’s about 10K shy of the number it needs for anyone with a bank account to send money to anyone else with a bank account, frictionlessly. For that sort of a P2P network to work, it has to have all of the banks, not just some or nearly all of them.

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And if such a network doesn’t have, say, one of the banks that claims to have one out of every two households in the U.S. as customers, P2P via DDA accounts is absolutely positively DOA. That bank, of course is Chase, clearXchange member and mega-mobile payments contender. I don’t think that you’d even have to blindfold the folks at Chase, much less put wax in their ears or strap them to their cushy war room chairs, to have them tell Apple to politely take a hike when presented with a proposal to open up their DDA accounts to them. Keep in mind that these are the same folks who two years ago stared down Visa to get a sweetheart deal to use VisaNet as the transaction backbone for their own closed-loop network. So letting Apple anywhere close to their customers’ DDA accounts just to lend a helping hand to ignite Apple Pay?

Not a snowball’s chance.

Which means that clearXchange as a network to power Apple Pay’s P2P could be nothing more than a pipe dream.W O N ’ T Y O U P L E A S E , P L E A S E H E L P M E ?

Of course, Apple doesn’t need the bank’s consent to do P2P. They could do what everyone else has done, become a money transmitter and use debit and/or credit cards to move money from person to person. But that doesn’t get Apple what it really needs the most: new, fresh customers that it doesn’t have to work very hard to get on board.

Doing what Venmo and Square and Google have done would also require that Apple incent consumers, all by themselves, to get the P2P flywheel moving. Even if they did, it’s hard to know why a consumer would want to do that. They probably have their own networks set up which they’d have to disrupt and rebuild. And when they need to transfer money today, they also have multiple other methods to choose from, including their bank — which I’ve just said gains nothing whatsoever from allowing Apple Pay access to their customer’s DDA accounts. Apple has another option. It could also decide to align itself with a network that has money transmittal capabilities and doesn’t compete with Apple. I suppose that a Western Union or MoneyGram could decide that one clever way to monetize their own networks is to lease them to Apple for the purposes of moving money between people. That still requires Apple to do the hard work of getting consumers to play along and sets up two other potential issues. One is the brand mismatch between the Western Union/MoneyGram and Apple customer profiles. Not only is the demographic profile different, unless Apple is going to allow money to be sent and received from outside of its own iOS ecosystem, a market of only Apple iPhone 6 and 6s (if it is tied to Apple Pay) limits the market even further. In the U.S., iOS penetration as of November 2015 is 29.5 percent – winnowing it down to the 6 and 6s reduces that share much further. Outside of the U.S. it’s an all Android world. More than 90 percent of the handsets in India run Android, 77 percent in China do, and 50 percent in the U.K. do, as well.

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DON’T BITE THE HAND THAT FEEDS YOU …There’s one more reason that I don’t think that the banks will ultimately support the Apple Pay-P2P-tied-to-bank-accounts play. They really don’t want to bite the hand that feeds them.

And today and tomorrow and the next day after that, that’s the card networks.

Of course, the days of the bank-owned and operated network are long gone, but without the networks, most issuers are nowhere. The networks make the global payments system work. They set the rules and establish how issuers are paid. They do the clearing and settlement. They make it possible for cardholders to have a consistent payments experience all over the world. They invest in marketing programs that keep the brand top of mind with the consumer. They are investing in their own branded checkout options to help their issuers’ transition to digital. They are increasingly opening their networks to developers to enable more and more innovation and use cases across a variety of connected endpoints to enable commerce – cars, appliances, you name it. Their network tokenization schemes also create an enabling platform for distributing safe and secure digital payments across all of those endpoints – a scheme that few issuers, outside of the very, very large ones, could even begin to replicate.

And outside of Chase, not a single one of them has any capability to sidestep the networks and operate as their own closed loop. Even Chase is using VisaNet as its backbone.

Of course, the Apple P2P decision dynamics would be entirely different if Apple Pay had momentum and was at the table with the banks with a different story to tell. I’ve written multiple times – including at its launch – that banks and networks were both at risk longer term if Apple was successful with Apple Pay. That it wouldn’t matter that they gave it birth and that it was all wine and roses and lovey-dovey before the launch. And that all the proof that either needed was to observe the industry dynamics of Apple in every other sector it has entered.

Apple plays nice with partners until Apple gets scale. With that scale comes power and a flip in how the dynamics work with their partners. Then, it’s Apple who makes the rules and enforces them in their closed ecosystem.

Just ask the mobile carriers how much fun they’re having these days.

Apple has turned the mobile operators into the “dumb pipes” they swore they never wanted to be. And with the new leasing program they launched with the 6s, that position is even further solidified. Apple controls the consumer and the consumer experience. The mobile operator is that expendable player in the background that can be easily swapped out for another one.

The success of the iPhone and its reputation with consumers makes it very hard now for the mobile operators to do anything but sit back and take it. Apple has become too powerful for them to rock the boat – and the mobile operators know that they have too much to lose if they do.

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S T O C K I N G U P O N B L I N D F O L D S A N D W A X

But that’s not where we are in payments with Apple and Apple Pay. And why I believe that the issuers are channeling (or will) their inner Odysseus and resist the Call of Cupertino to allow access to their customer’s DDA accounts so that Apple can launch its own P2P platform. I’m sure it’s all polite banter now. After all, Apple is a massively powerful company that no one wants to alienate.

Payments and commerce is an area that Apple obviously has decided it wants to enter and own. And now they need help in getting the scale that they thought their brand name alone would generate. Apple has identified banks as a key player in helping them get there. Had Apple Pay been more successful over the course of the year, it’s quite possible that these conversations would have a different tone and outcome.

But banks have the upper hand now and with it the opportunity to open their eyes and their ears to many other options that give them a clearer and much less risky path to mobile payments success.

I hope that the news of Apple Pay and its P2P ambitions will launch – if it hasn’t already – a number of new and potentially very interesting conversations and partnerships with a variety of players around the mobile payments ecosystem who see Apple Pay’s vulnerabilities today and seize the opportunity to strengthen their own plans tomorrow.

And for those who don’t, I guess there’s always blindfolds and wax.

OTHER KAREN WEBSTER COMMENTARY ON MOBILE PAYMENTSThrough The Mobile Payments Looking Glass November 2, 2015 Will Apple Own The Payments Customer? September 14, 2015 The A, B, Cs of PayPal’s Next Act July 20, 2015 What Mobile Wallets And Smartphone Cameras Now Have In Common June 15, 2015 Why Android Pay Isn’t Really About Payments At All June 1, 2015

Will CurrentC Succeed? Here’s How We’ll Know July 27, 2015

Who Won’t Win The Mobile Wallet “Wars” And Why April 27, 2015 Could Apple Pay Fraud Be A Sign Of Its Success? March 9, 2015 Do Android Pay, Google Wallet And Samsung Pay Have What It Takes To Win In Mobile Payments? March 2, 2015

Mobile Payments’ Great Big Leap October 26, 2015 The Incredible Mobile Payments Myth September 28, 2015 Exclusive: MCX CEO On CurrentC’s Future August 13, 2015

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“There are a number of options to get visibility, access to customers and distribution. The old standbys — eBay, Amazon, Yelp and Craigslist – are strong contenders. As are lots of creative new channels, including Google Now and mashups of issuers with consumers and mobile payments platforms with local merchant relationships a la Chase Pay and LevelUp that have the potential to deliver millions of relevant customers to local businesses.” -Karen Webster

Mobile commerce is developing and expanding rapidly, and has been for the last 18 months, but that progress has been very uneven. Large players have made big upgrades; SMBs … not so much, limited by both the treasure they have to build mobile friendly interfaces and by the talent they have on hand to maintain them. And since 95 percent of U.S. business are small business – this is a problematic trend for mobile commerce, though one that a shocking variety of players big, small, established and entering are trying to solve in a variety of ways. Facebook’s move to be the best – and perhaps – only friend the local SMB ever needs are their Local Business pages. Local Business has seen big upgrades this year – with lots of slick new features enabled like video and outbound messaging – that lets the moms and pops of the world set up digital shops that are easy, nice looking and ready to roll for commerce in the world’s largest cyber-city of 1.5 billion residents. Getting those residents away from their own newsfeeds and into those mom and pop cybershops? Well, that’s where things get messy – and where the race to be the mobile commerce first mover for America’s 5.8 million small businesses gets interesting.

M O B I L E C O M M E R C E

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The Great Facebook SMB Conversion Challenge Karen Webster November 9, 2015

Facebook made it known last week that it wants to be best friends with small businesses. Maybe even their only friend. Facebook joins a long line of players who want to “friend” small businesses – from alternative lenders to mobile payments players to card issuers to acquirers to eCommerce marketplaces. You name it, everyone and his mother wants the SMB on their team. It’s totally understandable – there are a lot of small businesses in the world to court. Just to put some metrics to it, in the U.S., 95 percent of all businesses have fewer than 50 employees – that’s a little more than 5.8 million (non-farm) businesses. All in, businesses with fewer than 500 workers – about 6.2 million of them – employ about 50 percent of the active workforce and drive nearly 30 percent of GDP. We track the health of a particular category of small business (we call them store front businesses) each quarter and produce the Store Front Business Index that benchmarks how well they are doing. Think of storefront businesses as the local establishments that are the bedrock of communities – local grocers, coffee shops, restaurants, convenience stores, nail salons and hair dressers, the dry cleaner, the yoga studio, etc. We also think they’re the bellwethers of how vibrant local economies are. (If you want to see how well they’re doing, check out our latest Storefront Index here.) But all small businesses – storefronts or otherwise – face big business challenges: finding new customers and growing their businesses. That’s why Facebook is so appealing to so many SMBs – 1.5 billion monthly active users globally is a pretty big pond in which to fish for new business. So it shouldn’t come as much of a surprise that Facebook reports 45 million active business pages on its platform and a lot of small business advertisers. Some reports even suggest that as many as 2 million of those businesses buy advertising on Facebook.

Judging from last week’s earning call, Facebook would like even more of that action to come from more of those small businesses. As announced during their earnings call, Facebook is doing a bunch of things to tie SMBs even closer to them. Local Pages will become more robust with separate tabs for Video and for Shopping. Call to Action buttons will initiate outbound messaging. A Photos tab will link Instagram content to Pages. Monitoring and managing Pages – even via mobile devices – is now made easier thanks to an improved UX. For the SMB, Facebook has made their use of different aspects of their platform - Messenger and Instagram and Timeline – quite seamless.

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Concurrently, Facebook is also making a push for more video content from those SMBs. Their latest stats suggest that 8 billion videos a day are uploaded from some 500 million users and that some 1.5 million SMBs share video content daily with their user base. Video content is pushed further up on a user’s newsfeed to encourage even more producers of video content. Of note is the fact that 70 percent of those videos are now being loaded directly from users to the Facebook platform. If you’re Google, that’s a pretty scary – and somewhat recent – shift. Until recently, most of the video on the Facebook platform came via YouTube. By all accounts, Facebook is positioning Local Pages as the online presence that these SMBs could never afford themselves to build – free, loaded with valuable features and functions and that big added value, of course, of being discovered by the massive number of users it attracts on a daily, weekly and monthly basis. And for those users to become customers. All, of course, within the comfort of the Facebook walled garden. If it were only that easy. Those users still have to find that local business and its Local Page on Facebook. That can only happen if a user already knows that a business has a Local Page and checks it out regularly as part of the 20 minutes they spend now on Facebook each time they visit. Or if the business pops up in the newsfeed of customers or potential customers. That’s much tougher to achieve organically. Just liking a Local Page or a business is no guarantee that all updates will appear in that user’s newsfeed, especially when that business is small with a correspondingly small fan base.

THAT’S THE CRUX OF THE CONVERSION PROBLEM – AND FACEBOOK’S SMB RECRUITING CHALLENGE. ONE THAT FACEBOOK HAS TO SOLVE IN ORDER TO REALLY BECOME BEST FRIENDS FOR LIFE WITH SMBS.

If a SMB has to spend time and energy marketing to a customer so that they can find them on Facebook, there needs to be a demonstrable ROI to throw ad spend in that direction, especially when so many other options are available that can help them find customers in their local markets. I know a little bit about this from some work that I did a few years ago helping to entrepreneur a social commerce platform that would live on the Facebook fan pages of local businesses. The target audience was SMBs for the very same reasons that Facebook has wrapped arms around them: most of them had crappy websites that, at that time, didn’t even enable commerce. They also didn’t do much to market their services well, were desperate for new business and knew that all of their customers and prospective customers were on Facebook.

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In the restaurant space — where the website crappiness-meter hits an all-time high and where there’s actually a dearth of websites — the problem was even more acute. Local restaurants had invested money into building a fan base on Facebook but had no way to convert those fans into paying customers. When presented with an opportunity to do that via an easy technology solution that would become part of their existing page, that would also allow that experience to ”go viral” and that would allow them to control every aspect of the message and the offer, it almost sounded too good to be true. One thing’s for sure – it all sounded great in PowerPoint. And worked pretty well in a few pilots and test trials. Separate tabs on what we now call Local Pages allowed customers to make purchases — in this case e-gift cards with an incentive to make the purchase — and it worked like a champ. Technology was slick, payment was flawless, redemption at the restaurant was easy. SMBs had a wizard that they could use to customize their pages and their experiences and their offers and pricing. Messaging with photos (which Facebook algorithms love) were posted on Local Pages’ timelines and displayed beautifully. There was only one problem – those posts never made it to the users’ newsfeed.

SAY HELLO TO THE GREAT FACEBOOK SMB CONVERSION CHALLENGE.

It’s now well-known that only 16 percent of the entire Facebook audience sees a post. That wasn’t common knowledge a few years back – it wasn’t even published. Disgruntled brands forced the disclosure. You probably remember all of the mania that brands were engaging in around getting “likes” so that brands could communicate with those fans – one on one? Turns out that made a lot of agencies who designed “like” campaigns rich but didn’t do much to drive conversion and new business. (I also suspect that an awful lot of likes came from marketing companies that paid people in places like Bangladesh to “like” their clients.) Forrester reports that top brands only reach about 2 percent of their Facebook audience. Forrester reports that top brands only reach about 2 percent of their Facebook audience – reach as in they ever see a post. And that .07 percent of those who are reached do interact with a post. That means that if you’re a small business with 2,500 fans – and that’s at the high end for most SMBs – only a tiny fraction of those fans might ever see a post and click through to the page where offers are positioned. When the conversion math dust settles, getting .07 percent of 2 percent of a fan base of 2,500 doesn’t yield a number that gets many SMBs terribly excited. Now, of course, those numbers can be improved – and a lot – with advertising.

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But buying ads on Facebook is really expensive. Lots of SMBs do, often because it’s the only marketing they do. What SMBs must now contemplate is where they have the potential to gain the most bang for their marketing buck. That’s also why Facebook continues to invest in functionality to make the SMB presence on their platform even more appealing. You can see from their quarterly results that they’re dumping a ton of money into their platform and marketing to get, among other things, SMBs on board – including as a commerce partner. Who could blame them? Facebook wants and needs SMBs to get on board. They’re an ad-based platform, now competing with Google Search and YouTube for ad dollars. It’s no accident that it wants to get more deeply into Search and why video is such a huge focus: More channels for ad dollars to be derived. And who can blame the SMB for playing along. It’s a pretty compelling sales pitch when the value proposition is the ability to leverage the assets and sophistication of a global social network that a SMB could never replicate in a million years. But it remains to be seen if Local Pages will work as advertised for Local Businesses. Facebook is a global behemoth, but most SMBs don’t need that – they just want to do business with local customers – and lots more of them. If they have to do the work – and spend the money – to find customers in their own backyards and push them to a page on Facebook where they then transact with them, the big question is whether that’s a better return on their investment than pushing them to a website that’s under their control instead. When asked, 60 percent of SMBs who do advertise on Facebook don’t know if they are getting the ROI on that investment.

It’s that uncertainty that now gives SMBs pause, especially since there are also a number of other options to get visibility, access to customers that other aggregators or platforms have assembled and distribution. The old standbys — eBay, Amazon, Yelp and Craigslist – are strong contenders. As are lots of creative new channels, including Google Now and mashups of issuers with consumers and mobile payments platforms with local merchant relationships a la Chase Pay and LevelUp that have the potential to deliver millions of relevant customers to local businesses. Depending on the business, good old-fashioned SEO-optimized content and Google Search could also work just fine. Websites are also pretty cheap to build these days, and there are lots and lots of options now for payment-enabling those sites, and SaaS services that make it easy and cheap for those sites to be as robust as any SMB needs them to be.

SMBs have to believe that when customers go searching for the product or service that they are seeking, that Facebook is a place that they’ll turn to initiate that search and then buy – not Amazon, not Pinterest, not Google and not Yelp.

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That might be a big leap. So far, social commerce on Facebook has been a bust. Users go to Facebook to be entertained and informed, not to shop or buy stuff. It’s true that Facebook is a huge driver of traffic to news and eCommerce sites, but whether a consumer that would otherwise click off her newsfeed to the local retailer, would, instead, click through and buy from that retailer’s fan page remains unproven. Of course, that’s not to say that Facebook is irrelevant for SMBs. But instead of being the only commerce and payments friend they have, Facebook could end up being one of many competing for their attention, time and marketing dollars.

OTHER KAREN WEBSTER COMMENTARY ON MOBILE COMMERCE Are Card Networks Tomorrow’s Ad Platforms? June 22, 2015

The “Why” Behind Google Buy May 18, 2015

What’s More Valuable – A Buy Button Or A Digital Wallet? July 13, 2015

Can Payments Save Internet Ad Giants? May 11, 2015 The Year of Payments – 2015 – One Quarter In April 13, 2015 Mobile Payments’ Red Carpet February 23, 2015 Payments Industry Pairings And Partings In 2015 January 19, 2015

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“Reinventing retail for both consumers and retailers must focus on how to make the shopping experience a totally seamless and digital experience, even if that consumer is standing in a physical store.” - Karen Webster

The fate of physical retail has very much been a topic up for grabs this year – particularly as Amazon has become more ascendant and foot traffic to brick-and-mortar stores as consistently dropped off month after month. And while the industry has waited, watched and wondered about what’s next – Karen Webster was pointing out way back in April that we actually all probably already know, based on the experience of retail banking over the last two decades. “Whole new classes of smaller and more specialized retail banks are emerging,” Webster wrote, “delivering “banking concierge-like” services for their customers who need and want personalized face-to-face interaction alongside a robust suite of digital banking assets.” And that shift – to a smaller physical footprint buttressed by robust digital support – is what is happening now in physical retail, particularly with the emergence of Buy Online, Pick Up In-Store (BOL/PUIS) allowing customers to build their own idealized hybrid of digital and physical commerce. BOL/PUIS is a good start, Webster noted, but not a complete solution to all of retail's many woes this year, but it is what must happen if retail is really going to be ready for its next phase.

R E T A I L

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To See The Future of Retail, Look At Mobile Banking Karen Webster August 17, 2015

If you want a good look at how physical retail might evolve over the next 5 or 10 years, just take a look at retail banking today. More bank branches in the U.S. closed in 2014 than any other year in the last several – 1,407 to be precise. And more closures are on the horizon. Nearly a third of consumers report never having stepped foot in a bank branch in the last six months; 58 percent of those under 30 hadn’t been in the last 30 days. Online and mobile channels are how consumers want to engage with their banks. Mobile engagement is up 52 percent from just a few years ago, according to the Fed’s study on mobile financial services. And almost as many consumers used online banking as ATMs last year, and more consumers used mobile banking than telephone call centers that year, too. Yet Accenture reports in its annual study on financial services that 81 percent of the 4,000 consumers they surveyed said that they wouldn’t switch banks if their favorite local branch closed. Two years ago, that was 48 percent. It appears that consumers care more about whether they get a great online and mobile banking experience than whether they can drive or walk to a bank – an attribute that consumers ranked higher in importance than location (obviously) and, surprisingly, even fees. Consumers want the ability to handle their routine banking transactions via digital channels when it’s convenient for them.

And, it’s a fact that’s also not entirely lost on the retail banking C-suite.

A few months ago, Fifth Third CEO Kevin Kabat, who simultaneously announced the shuttering of 100 branches and the sale of property intended to house the construction of new bank branches, remarked, “Consumer demographics and our customers’ preferred channels of banking are undergoing significant changes. Technology continues to impact our service delivery and revenue generation tactics and strategies.”

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banking kiosks and smaller and more specialized format bank branches pop up to handle the transactions consumers feel they aren’t comfortably done by phone or online. These branches have fewer teller windows and more retail banking services experts who act as product “consultants” to consumers with more complicated banking and financing needs. Whole new classes of smaller and more specialized retail banks are emerging, too, delivering “banking concierge-like” services for their customers who need and want personalized face-to-face interaction alongside a robust suite of digital banking assets. These retail banking specialists even have paperwork ready for customers to come in and pick up and/or complete, or deliver to a customer for completion and then return.

That’s a trend that banks have the ability to reverse now.

Banks have succeeded in building a sticky digital platform that now gives them the license to reinvent the physical retail banking environment with customers who have already embraced digital services and digital service delivery.

That digital services model of course, started with ATMs in the late 1960s. But fast-forward a few decades and we’re now starting to see

In response, bank CIOs have doubled down, quite literally, on their investments in mobile and online capabilities – far outpacing their investments in new products, call centers and operations.

All in an effort to enhance and strengthen the online banking foundation introduced in the mid-1990s and have been improving steadily ever since.

A digital foundation that more than half of all bank customers report using regularly and like using a lot.

A digital foundation that now allows retail banks to rethink their product delivery model and the cost to serve those consumers, costs that have increased at the same time transactions in physical bank branches have decreased.

FMSI, a company that has helped banks for the last quarter of a century optimize employee productivity, reports that branch transactions have declined by 45 percent since 1992, with nearly half of that decline occurring in the last four years. That’s not at all surprising given the consumer’s shift to online and mobile banking channels. Also not surprising then is the rise in the cost per transaction in physical bank branches – across all types of financial institutions: community banks, credit unions and the largest retail banks in the country.

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If all of this sounds vaguely familiar to how the physical retail world is unfolding, it should.

As I’ve written about a lot, physical retail is undergoing its metamorphosis to digital. Retailers are experimenting with new and different ways to accommodate the changing preferences of a digital consumer in search of a good reason to step foot inside of a physical store. And they’re looking for ways to use new technologies and channels to help them accommodate the digital shopping preferences of their consumers with the best that their brand has to offer. It’s why retailers are intrigued with shoppable Pins on Pinterest – it extends their reach in a marketplace where consumers go to be inspired to buy. It’s why Nordstrom and Olivia Kim are teaming up to launch Space – the “shop inside a shop” concept that will host up-and-coming designers this fall in selected Nordstrom stores. But where retailers have the ability to channel their inner retail banker is using digital methods to shift “routine transacting” to digital channels, reserving the physical footprint for the things that routine shopping doesn’t satisfy (e.g. a great experience, a specialized need) and/or where the immediacy of need — delivery and/or pick up – can leverage their physical footprint to fulfill in a timely and convenient way. While keeping that customer loyal.

It’s why BOL/PUIS – buy online – pick up in store – has become such a retail industry buzzword.

BOL/PUIS isn’t all that new. And, in the food services sector, it’s been around for more than a few years. And, in food services, it’s been around for more than a few years. It’s why Domino’s Pizza considers itself a digital retailer – more than 50 percent of its business now comes from online orders. Initially positioned to consumers as a way to avoid the line during busy times, online order-ahead has become a way for QSRs to manage their labor costs, too. As more volume comes from consumers using apps to place their orders, the staffing mix needed at those locations can also shift – and even be reduced. And, with the data that comes from having an accurate record of traffic patterns and ordering preferences, staffing and inventory can be managed with more precision, while also saving time and money. But the phenomenon isn’t just limited to food services and QSRs.

Now, some of the biggest players in retail tout the ability for consumers to buy online and pick up in store the same day. And, retailers love it when consumers do. According to RetailNext VP, Shelley Kohan, some retailers attribute 30 percent of their business from offering BOL/PUIS. What’s more, 65 percent of those who place their orders that way and fly into the store to pick them up, buy more when they get there – the shoes to go with the dress, the cheese tray to go with the wine glasses, the cookbook to go with the new set of cookware. The implications of BOL/PUIS to physical retail go well beyond just providing a better consumer experience.

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It can help keep customers loyal.

Macy’s CEO Terry Lundgren told Fox Business news recently that BOL/PUIS is “the fastest segment of [retail] growth,” giving consumers the immediate gratification of buying something then the experience of touching it, experiencing it and adding more stuff to the shopping basket while in the store getting it. Lundgren believes that “the more the customer touches us online, in-store, the more loyal they become. And the more data driven retailers become too. Data also becomes an important byproduct. Knowing what consumers want and when can help inventory be better allocated among store locations. Staffing models can be rethought and reduced, and compensation models restructured. Instead of cashiers, sales associates with iPads and CRM systems and notice of when customers will be popping into the store to get their things can be armed with recommendations and even products that can turn a quick visit to pick something up into a personalized and hassle-free shopping experience for the consumer.

But what retail bankers have done successfully over the last couple of decades is deploy a secure, consistent and highly valued digital platform that their customers interact with daily and use to conduct routine “transactions.”

If the numbers are to be believed, BOL/PUIS could be a start, but with lots more work to be done.

Consumers who’ve embraced BOL/PUIS pay for something one way online or in app and another way once they get into the store to pick up their loot and add to the bundle, introducing friction and a clunky experience for both consumer and retailer. Reinventing retail for both consumers and retailers must focus on how to make the shopping experience a totally seamless and digital experience, even if that consumer is standing in a physical store.

So, imagine if a consumer was “checked in” when she entered the store to pick up her stuff, and a “tab” was opened for her to easily add to if she saw other things she wanted to buy while there. A sales associate was notified that she was in the store and a message sent to the shopper with details about where to meet her to pick up her loot. The sales associate also had the shopper’s shopping history and profile at her fingertips beforehand, as well as a list of recommendations and inventory availability – recommendations that were also sent to the consumer in her app. Seeing those recommendations could prompt detours to other departments where scanning the tags of the items the shopper wanted to buy simply added them to her ‘tab,” a tab that also prompted her with a message that spending $50 more qualified her for a 10 percent special sale promotion that day on everything she purchased. Thirty minutes after entering the store to pick up the one thing she bought online, the shopper leaves the store with that plus a few more things that she, with the help of a sales advisor, added in the process.

The incentives are certainly there for the retailer to hustle up and explore options like these, the technology is available that make it less of a pipe dream and the appetite is there for the consumer to give it a try.

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Just like on the retail banking side, consumers like using digital channels for part or all of their shopping experience. Like on the retail banking side, labor costs are a growing concern. In retail, the cost of labor can run as high as 75 percent of gross margins, and even a modest reduction in cost can improve net profits measurably. And just as on the retail banking side, there are technology and use cases for reinvention to happen by enhancing and strengthening the digital platforms that consumers are already comfortable using.

It’s now up to the innovators to help retailers envision, create and deploy the trusted digital commerce platforms that will make consumers sticky, the consumer experience better and their own operations more efficient.

OTHER KAREN WEBSTER COMMENTARY ON RETAIL’S REINVENTION How To Reinvent Retail In Three Words August 10, 2015 Payments At The Beach! August 3, 2015 Could Amazon Do To Groceries What It Did To Books? April 6, 2015 Is Physical Retail A Threat To Amazon? March 30, 2015 PayPal’s Retail Future February 9, 2015 Are You Ready For 2015’s Retail Reinvention? January 5, 2015