Among the many business plan modifications driven by DurbinUncertainty is the retreat by Isis, the joint mobile commerce andpayments network initiative of Verizon Wireless, AT&T,T-Mobile, and Discover. That’s the claim, at least, by AT&T’sJohn Starkey. Two weeks ago, Isis backed off ambitious plans tobecome a full fledged payments network. Now, it’s planning, amongother services, to offer a mobile wallet to consumers that connectsto Visa and MasterCard.
For many, that course correction is seen as a retreat. In my view,this public change in plan looks more like the eventuality italways was. Merchant acceptance and merchant acquiring is a massivejob. The card networks, including Discover, have spent billionsputting that together. And, at least for the Isis cause, theDiscover footprint and (more importantly) its lack of issuer power,just wasn’t a compelling proposition for the merchant community. Wecould have seen that one coming a mile away.
So, AT&T’s complaint with Durbin has some merit but it hardlytells the whole story. There’s probably a little face-savinginvolved as well.John Stankey, AT&T’s head ofbusiness solutions, on Thursday partly blamed the Dodd-Frankfinancial reform law for the retreat. The law’s “Durbin amendment”will make payment processing less profitable by restricting thefees that merchants pay banks and networks every time a customerbuys something with a debit card.
“Some changes in the banking laws occurred with the amendmentsthat were put in with the Dodd-Frank bill … As transaction feeswere limited and things were changed, it kind of changed thebusiness model,” said Stankey, speaking ahead of next week’sReuters Global Technology Summit.
He said he was supportive of the venture’s modified goals and thatIsis had always planned to be open to working with “all parties”over time.There’s no doubt that the DurbinEffect has pulled no little sweetness out of the debit paymentsindustry, making it less attractive to big startups like Isis aswell as the schools of little fish out there hoping for backingfrom someone.
As our recent Viewpoint, The New Distinction, discussed, payments are not the only gamewhen it comes to revenue opportunities from mobility. The mobilecommerce opportunity includes revenues from advertising andmarketing, merchandising, incentives, and loyalty and rewardsprograms. As well as the payment. Isis itself made clear itsinterests extended to all of these other steps in the transactioncycle. It wasn’t just about payments.
One of the ironies here is that the incumbent card networks, andthose companies with the biggest online reach-Google, Facebook,Apple-are in the best position to shrug off the Durbin amendment’simpact. It wasn’t a big deal to the card networks anyway (nointerchange to them) and the Silicon Valley folks are all about thecommerce side and not the payment. For Google, advertising is topof mind.
This gets to the concern of the amendment’s stifling effect oninnovation…a few key points:
1. When you take $14 billion of potential revenue out of thesystem, it makes the business opportunity less attractive for thoseVCs, angels, and other investors who might back a small paymentsinnovator. It just got harder to vie for a small piece of thatvery large payments pie. As a result, there will be fewer smalloutfits coming up with the next best thing. Yes, it will stifleinnovation.
2. The incumbents must still innovate. Visa’s mobilewallet and galactic glue strategy is one example. While it’s built toextend the existing issuer revenue model, it has the potential tobe a platform for commerce creativity.
3. At a network level, payment innovation is really, reallyhard. It’s taken PayPal 15 years to build its powerful, yetniche-based, position. This industry has a powerful immune systemto innovation.
Depending upon which side of the multi-sided payments industry yousit, there are a couple of positives in all of this:
1. Debit as a Utility Could Flourish. Again, dependingupon where you sit (and this is the merchant view, no doubt),moving money between bank accounts is not exactly magic. Yes,there’s plenty to do to make it function reliably and securely, butin and of itself, there’s little need for added value services fromthe debit system. Provided that programmatic access is available,the opportunity to embed a transfer of funds between accounts (inreal-time or overnight) into that larger transaction cycle getslarger. Merchants will preferentially drive consumers, any way theycan, to their lowest cost, or highest margin payment method. Underthe new rules, debit will be one of them.
2. There Will be Significant Innovations on the Mobile CommerceSide. NFC will go through multiple innovation cycles as it isapplied to new marketing and payment contexts. NFC’s impact one-commerce authentication and payments is in its very early days.Great things could happen there. Smartphones and merchandising area marriage made in heaven for merchant marketing departments.
So, while innovation in the payments industry itself may well bestifled-certainly new business formation will bedampened-innovation around the commerce cycle will expand,particularly those efforts that benefit individual merchants andconsumers directly. Innovation around entirely new ways to pay?That requires billions, collaboration, patience and fortitude,attributes that even Isis, the child of giant mobile operators,couldn’t build, never mind sustain.
Click here to read a related article: http://www.reuters.com/article/2011/05/13/us-summit-att-isis-idUSTRE74C61V20110513