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When I was a baby consultant some twenty years ago, I remember standing in Kepler’s Bookstore in Menlo Park (remember book stores?) thumbing through a paperback book called “The Rules of Marketing”.

Rule #7 that said all successful markets will subdivide into submarkets as they grow over time. One of the examples cited was how automobiles started as one market but then subdivided as it grew into two specialized markets, one for passenger cars and one for trucks.

I think about this now because it seems the card industry is starting to subdivide at the point of sale into two submarkets, one being the “smart” transaction market and the other being the “basic” transaction market.

Let me share a couple of examples that illustrate my point:

  • Google. Everybody is curious about Google Wallet, how it is evolving, and whether or not it can make the final (yet to be seen) jump to full market coverage in the U.S.  NFC hype aside, Google Wallet has two distinct usage modes: ‘Tap and Pay’ and ‘Google SingleTap™’. With ‘Tap and Pay’, Google Wallet emulates a passive contactless payment card. Existing contactless merchants do not get any special benefits from the wallet, but don’t have to do anything incremental either to accept a Google Wallet ‘Tap and Pay’ transaction. The magic (and the intrigue) is really with ”Google SingleTap’, where just one tap of the smartphone provides card data, offer data, and loyalty data to the merchant. Of course, merchants have to upgrade their POS environment to support ‘’Google SingleTap’. So there are two usage modes for Google Wallet on an NFC-equipped mobile phone: one that rides existing contactless POS rails and another that’s a bit more sophisticated.
  • Isis. When it comes to having multiple usage modes, Isis is on a similar track to Google. The basic Isis transaction emulates a passive contactless payment card. Contactless merchants, as with Google, don’t have to do anything incremental to support the baseline Isis transaction. If they can accept contactless cards, they’re all set to be an Isis merchant! But, as with Google Wallet, the real sizzle comes when the merchant integrates the POS environment with the Isis Mobile Commerce Platform. This is the platform that provides access to (guess what?) coupons, offers, loyalty cards, tickets, and transit pass. Once again, two usage modes, one involves a sophisticated (“smart”) transaction, the other involves a traditional payment-data-only (“basic”) transaction.
  • PayPal. PayPal is on a slightly different path than Google and Isis, primarily because PayPal’s mobile payments strategy doesn’t involve NFC — or even mobile devices as far as that goes! PayPal offers large merchants a direct integration of ’empty hands’ functionality, store cards, loyalty cards, offer redemption, and digital receipt exchange. For small merchants, there is a simpler, payments-only transaction that is enabled through their partnership with Discover. While a different emphasis, we can see the same distinction between richly-functional “smart” transactions and payment-data-only “basic” transactions.

Each of these companies is taking a dual approach to the market, supporting both data-rich transactions and payment-data-only transactions. The “basic” transactions are backwards compatible with the merchant’s current environment; the “smart” transactions are forward looking and reflect a more sophisticated, commerce-oriented interaction between buyer and seller. The “smart” transactions require the merchant to do more integration, but potentially lead to a richer dialogue with their customer.

For me, all of this came into sharper focus recently when JPMorgan Chase announced (in partnership with Visa) the formation of Chase Merchant Services. As described to the analyst community at the JPMorgan Chase investor day, the new business entity would combine the Chase issuing business and the Chase acquiring business in such a way that Chase could work directly with merchants to negotiate transaction price and deploy next-generation issuing/acquiring solutions. The examples cited by Chase were the ability to support “targeted, data driven offers”, “discounts at the point of sale”, and “expanded pay-with-points capabilities”.

So, what’s the Visa partnership about? Essentially, Chase is saying that when their cards are used at a merchant served by another acquirer (e.g., Wells Fargo Merchant Services) those Chase Visa cards will act as traditional Visa cards. But, when those Chase Visa cards are used with a Chase Merchant Services merchant, there can be a richer set of transaction functionality to drive real-time offer redemption, real-time rewards use at the POS, and perhaps other extended capabilities.

Said differently, Chase cards will be differentiated and richly functional (‘smart’) when used with a Chase Merchant Services merchant, and will be traditional and payment data only (‘basic’) when used with other acquirers. In other words, “smart” for merchants that want to utilize Chase Merchant Services, “basic” for merchants that don’t want to move from their existing acquirer.

I know what you’re thinking. Other than the expanded functionality, this is still just card payments right? Well, yes and no.

The payment component might still be just card payments, but the richer functionality of the “smart” transaction may bring much better economics to an issuer from a merchant eager to pay for value-added capabilities that can drive top-line revenue for the merchant.

Merchants already spend a lot of money pushing offers and incentives through assorted advertising and offer networks. The companies I’ve mentioned all seem to be betting that merchants would be willing to shift some of that spending to them if they could offer an integrated solution that directly closes the loop (real-time) between offer delivery, acceptance, and payment.

Some merchants may want this more sophisticated environment now; others may just be focused on managing what they have already deployed. But it seems that high value, low value differential is what is starting to subdivide the point of sale into a “smart” transaction market and a “basic” transaction market.

If you happen to be in the card transaction business and are just now figuring out how to apply offers and incentives at the end of the month as a statement credit, you should give us a call. The market is moving to real-time, “smart” transactions that are more sophisticated, more compelling to buyers, and more valued by merchants.

2 Responses to “The Rise of the Smart Transaction”

  1. Excellent piece Russ. Two things occurred to me as I was reading it. First, you didn’t mention the API play, which I think is a strength of the PayPal approach and is sure to be adopted by the others at some point. And secondly it made me wonder about the migration to chip. The European issuers never really took advantage of the chip to run loyalty, coupons and such like, just sticking to the “secure stripe” basic mode. Perhaps the US will start off down a different, more value-added path?

  2. Bob Skattum says:

    Russ, a terrific piece and all good points. And, as Dave mentions, perhaps the time is right to leverage all that the chip can be used for. As payments have evolved into a “commodity”, then the basic transaction is simply the cost of entry. As you so aptly point out, the smart transaction is all about the data and what you can do with it to add value to both the end-user and the merchant … whether that is loyalty-based rewards, discount-based offers, or simply a way to recognize your most valued customers.

    A problem of the four-party system as opposed to the closed loop system has always been the fact that the rich data needed to make the transaction more powerful and value-added was controlled by multiple parties, none of whom wanted to or were allowed to share it. When you “own” all sides of the transaction, or at least can claim rightful access to it, then it should be less problematic to use it to enhance the customer experience. And, it needs to just happen, without adding multiple steps, special enrollments, or additional cards to identify me as an enrolled participant.

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