Gonzo Notes from Money20/20

Recently, your intrepid Gonzo investigators found themselves (again) in Las Vegas to get a take on payments at Money20/20. (We are rotating the team, as Misters Kilmer and Weikart reported that rehab from BAI Retail Delivery is taking a bit longer than estimated.) Maybe it is appropriate that this conference is in Vegas, since it’s a city based on one sole premise – moving money from your pocket to a casino’s pocket (a business model that appeared to be successfully applied to a large chunk of the attendees in the wee hours).

The logistics

Money20/20 became quite the event in a very short time, with 10,000 – count ’em – attendees up from 2,300 only three years ago. Would we all take that growth? It’s a testament to the focus we are putting on the payments space and the revenue we get from it.

The format differs from many other conferences, in that even the big name speakers get only 20 minutes to get their message across. They are not keynotes; they are essentially product launches – very new age. Count us in as attendees who vote for this time target as a best practice.

Big stories/buzz

If the word “Pay” is added behind any product, it can apparently become a mobile wallet. Samsung Pay was launched in the United States after piloting in South Korea. Samsung bought LoopPay with its Magnetic Secure Transmission technology, which gives it the ability to reach merchants in a way that other wallets cannot due to having both the NFC (near-field communication) and MST (magnetic secure transmission) technologies.

Apple Pay … not

Continuing on the “Pay” theme, we know all about Apple Pay and the noise it caused in the market last year. Apple may have been in attendance this year but it was pretty much invisible on panels and in keynotes. What has come of that noise since launch? A pretty conspicuous absence.

The latest growth talk

There is some serious usage growth projected. According to research firm eMarketer, there will be a 210% growth or $27 billion spend in mobile payments in 2016. By 2019, eMarketer is forecasting $210 billion in spend and estimating that mobile payments will surpass payment cards. Only time will tell if that happens, BUT even if it’s close, financial institutions need to make sure their cards are loaded to the mobile wallet.

The Chase/MCX announcement was the talk of the first two days. Our take? Two things. Chase, for its part, gets control of the ecosystem for 95 million cardholders. Bankers had long suspected MCX’s plan was to bypass the Visa/MasterCard rails by processing transactions as ACH. Instead, all transactions will route through Chase Pay, which gives Chase control over the issuer side, the merchant side and the rails. While it’s hard to put a number impact on this yet, and there is an interchange revenue give-up, Chase has to think there’s a long-term payoff.

MCX gets credible volume and partnership. Brian Mooney, CEO of Merchant Customer Exchange (MCX), also used his stage time to talk about the pilot under way in Columbus, Ohio, with many merchants. Lots of talk about innovation and customer experience. Thundering silence regarding how those transactions are being routed to the issuer. It is seriously time to start building intelligence on the source of ACH transactions, bankers. MCX is getting ready to go from pilot to rollout mode.

Another buzzword to add to the pile: ubiquity

One big innovation discussion was that as payments become increasingly ubiquitous, we will continue to see them disappear into the background of transactions, particularly in mobile. For example, the payment process to get a ride in Uber is so imbedded into the process that a person is simply crossing the “t” or dotting the “i” rather than the payment being its own separate event. An interesting comment was made during one session that with the payment process being so seamless and imbedded into the whole process, consumers could potentially exceed their spending limits. Thoughts, Consumer Financial Protection Bureau?

Can you say blockchain, blockchain, blockchain?

Roughly 10% of all the individual track sessions were devoted to blockchain/bitcoin. For those not directly tied to a bitcoin company, the message was, “Think of all the things we can do with the underlying technology.” For those with skin in the bitcoin game, the message was, “Why are we trying to separate blockchain from bitcoin?” Regardless of which side you fall on, the fact is that blockchain/bitcoin has the industry’s ear.

There is currently more than $1 billion in venture capital investments into blockchain/bitcoin technology. Many of the big players have recognized the potential use cases and not all of them are focused around money movement. For example, Visa’s Connected Car booth stated that insurance and lease payments were handled via blockchain. The consensus is that the next phase of blockchain will be laying the foundation and identifying its two biggest hurdles: cost and regulation.

Innovation on the merchant side

While everybody can’t stop talking about the consumer, we were struck by how much innovation was taking place on the not-so-discussed merchant side of the business. Why GonzoBankers find this relevant for our clients: Merchant services is an area that FIs need to re-evaluate to ensure they are maximizing revenue on a business line that is often buried in commercial and forgotten. Offering this kind of technology could be a game-changer for small business.

So, good freakin’ God, real innovation from an industry behemoth? Frank Bisignano of First Data and team showed the latest version of Clover, first announced at Money20/20 in 2013. Followed by two years of, well, not too much. Then, at this year’s conference … boom. The team showed off some really interesting stuff that the Clover merchant application can do. One of the biggest challenges for small merchants is getting new customers in the door (and keeping them coming back once they are there). This software provides easy to use “Big Data,”

including Geo Location information from smart phones, to help merchants identify sales strategies. Clover has some limitations but it was great to see how data is being used to achieve success. Real-life story: an owner of an ice cream parlor in California who discovered that she sold more ice cream on days that it rained (go figure). That info plus marketing tools got her sales up quite a bit on said rainy days. Damn that drought anyway.

Verifone launched what the audience could only assume was a biometrics terminal that knew when a card was not in the hands of the card owner. Additionally, the device is able to detect a skimmer and provide instant encryption and integrated tokenization. Verifone ended with a “coming soon” message but it was enough to whet the appetite and show the future that biometrics will play in the payments industry.

Innovation in security

The first phase of tokenization has been laying the foundation. The next phase will be about the innovation. There was plenty of mention of PAR (personal account reference), which is a new standard proposed by EMVCo that adds a PAR to a tokenized transaction. It is not a substitute for the personal account number (PAN), but it will allow merchants/acquirers to track transactions made by a particular customer and will give the merchant/acquirer the additional ability to track fraud/chargebacks and loyalty programs.

Biometrics is gaining traction. The first major theme is that it will not be one biometric solution that will win (fingerprint, facial, voice, etc.) but it will be about aggregating all of the technologies to get a full picture of the customer. Essentially the goal would be to use the aggregated biometrics to create a “public key” for customer verification. The second major theme is that biometrics removes the barriers to technology. The biggest example used was passwords and how antiquated the concept of passwords is. FIDO Alliance has been developing the technology specifications to reduce the reliance on passwords to authenticate data.

Innovation we saw that we’re all not talking about enough: lending

There was a separate track on lending that, in our minds, revealed that new players and approaches to lending are set to change the game. A few examples:

• PayPal almost casually mentioned that it has now made $1 billion in small business loans.
• Alibaba and Lending Club have partnered to offer instant credit to small businesses buying from Chinese suppliers.
• Affirm showed integration with the Tradesy site that offered shoppers very transparent instant financing opportunities starting with a payment amount that worked for them.
• PeerStreet and Patch of Land are, in different ways, crowdsourcing first mortgages and portfolios.
• Realty Mogul takes crowdfunding to commercial real estate.
• Self Lender is a site for people with no credit history to build it with tools and guidance.
• Lending Club has 2 million people signed up to get notified when rates indicate it’s time to refinance.

This is just a sampling of way cool business models we saw that are scaling and have to be taken seriously. And their approach warrants some attention:

• They are using data (or big data, if we need to interject an overused term) for very pointed offers. Lending Tree, for example, has 4,000 data points it can use in a decision. These guys are way beyond the talk of data. They’re applying it.
• They all focus on transparency to the borrower: options, costs, et al are very clear very early. And there are not just good-guy reasons for this. They think it’s more efficient.
• Most of them have a benchmark and target for total acquisition cost. In fact, cost of acquisition was discussed in every panel and cost of funds never got mentioned.
• They are obsessive about speed of response and fulfillment.
• And, to the oft-mentioned issue of them not being regulated like banks? They kicked that one right back by pointing out that a) many of them operate in several countries and deal with regulators all the time, and b) for the most part, they don’t have problems with the likes of CFPB. They actually agree with them.

The only question we heard asked that stumped a lot of them (other than Lending Club) was how they are going to work with banks. They didn’t have an answer. Why? Our impression is that for the most part they don’t think about banks at all.

We need to start paying attention to the models, technology and growth of these innovators. We’re not talking about this enough.

My mobile app has a first name, it’s O-S-C-A-R

Oscar Mayer developed a Tinder-style app for bacon lovers called Sizzl. Users download the app, specify their bacon preferences, customize their profile, and start swiping to find other bacon lovers. Who won’t sign up for this deal? Here’s the type of vision and leadership we’ve been talking about.

General session presentation notes

Pretty good quality in many of these presentations, and too many to mention. Some highlights:

• Dan Schulman, CEO of PayPal, spent his entire 20 minutes talking about the responsibility attendees had to make access to money much easier, and the cost of moving money much less, for the financially disadvantaged. And in 20 minutes he had us believing that he really meant it. That is an important and cool message.
• Max Levchin of Affirm showed how integrated a buying site and a lending offer can be.
• Jack Dorsey with Square was absent due to the quiet period enforced during an IPO. What will this company launch post-IPO? Will its P2P product continue to be free? Another technology company we need to keep an eye on.

Final thoughts

Kudos to the Money20/20 team for a conference that was relevant, crisp, very well organized and is fast becoming a must-attend. The breadth and pace of innovation is astonishing and something we need to track and apply. Sure, all of the things we saw won’t hit mainstream status, but enough will – and they will have serious impact. Payments may not be a line of business or have a P&L (yet), but it needs serious focus.

-GB

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Payments revenue accounts for 25% to 50% of your non-interest income.

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