November 2010 | Issue 1

Transcription

November 2010 | Issue 1
PYMNTS.com/journal
Lydian Journal
David S. Evans:
Editor-in-Chief
Jenn Rubin:
Managing Editor
Tim Attinger:
Editor, Business
Ignacio Mas:
Editor, Developing
Countries and
Mobile Payments
Scott Schuh:
Editor, Economics
and Consumer
Studies
Tom Brown:
Editor, Law and
Regulation
Karen Webster:
Editor, Social
Commerce
Patrick Gauthier:
Editor, Technology
introduction
The Lydian Journal 2.0: A Note from the Editor
BUSINESS
(Outside-In)novation: The Changing Paradigm for Driving Payments Platform
Growth
Developing Countries and mobile payments
The Utility of Retail Payments in Addressing the Financial Inclusion Gap in
Developing Countries
Economics and Consumer Studies
Some Unpleasant Credit Card Arithmetic
Law and Regulation
TABLE OF CONTENTS
EDITORS
U.S. v. American Express, et al.— Failing To Make Something Out Of Nothing
social commerce
S-Commerce: The Fourth Retail Channel
An Overview of Social Commerce and What’s Fueling its Growth
TECHNOLOGY
Making Sense of Ever-Changing Payment Technologies: The Year of APIs and
the Reshaping of the Payment Ecosystem
PAYMENTS WIKI
Payments Wiki – China
CONTRIBUTORS
Jing Yang, TSYS
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
by David S. Evans
Today, a year after our initial launch, we present you with version
2.0. More on what’s new and different below, particularly within
payments platforms and networked businesses.
The Lydian Journal from
PYMNTS.com publishes
articles from thought leaders
on one of the most important
industries in the world.
It’s an industry that makes
trade, the source of almost
all economic prosperity,
possible. That will seem
like an outrageous claim to
some people. Making and
receiving payments is so
routine and trivial that most
take it for granted. But flash
back three millennia to the
days when a lot of effort
went into buying a chicken.
Our ancestors had to figure
out what they could offer
the chicken owner in trade.
Maybe a shirt or a clay pot,
their part of the world around
600 B.C. The government
stamped out a coin with a
particular metal content and
therefore value. It became a
popular method of payment
and soon spawned imitators.
More innovations followed.
All these innovations greased
the way for trade.
In doing so, the payments
industry permitted the
creation of vast wealth
for society. Besides simply
making it easier for people
to exchange value, it
encouraged economic
specialization and trade
over ever-expanding regions.
The latest frontiers are social
how something as mundane
as payments is providing
hope to some of the most
impoverished people.
Today, a vast industry
supports payments. It includes
governments that make cash;
networks that clear and
settle transactions; banks
that provide their customers
with several payments
devices; companies that
issue credit cards; entities
that help merchants take and
collect payments in a variety
of ways; manufacturers
of point-of-sale terminals,
ATM machines, and other
hardware; software providers
who sell applications that
introduction
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
The Lydian Journal 2.0: A Note
from the Editor
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
The Lydian Journal from PYMNTS.com publishes
articles from thought leaders on one of the most
important industries in the world.
Scott Schuh
Karen Webster
Jing Yang
or as trading became more
sophisticated, a slug of some
precious metal.
The Kingdom of Lydia, a
region that is now part of
western Turkey, started the
payments industry at least in
Table of Contents
networks and mobile phones.
Trading in some of the
poorest parts of the world is
now undergoing a revolution
as a result of payments
innovations made possible
by wireless communications.
Indeed, it is moving to see
make many things work;
and many more. Of course,
payments isn’t just about
payments but also about
many complementary
services, such as lending,
which was the first killer
app for payment cards and
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
The Lydians started it all in the Western world,
and we’ve named the journal after them.
With these co-editors, we have also focused
this publication on several key topic areas:
the business of payments, the economics
of payments, the technology of payments,
payments in developing economies, payments
and social networks, and the law and
regulation of payments. Every issue will cover
at least four of these topics. In this issue,
each of the co-editors has written an article
themselves and also provided a summary of
what their topic area is all about.
If you are a payments professional or a
policymaker concerned with this critical
industry, the Lydian Journal is the place
to come for cutting-edge knowledge and
commentary produced by the best thinkers
from around the globe. If you are one of
these thinkers, this a common place for you
to present your analysis and exchange ideas
with other experts from diverse disciplines
and geographies who are also interested
in payments, as well as to make you and
your work known to the broader payments
community.
Our vision from the start was to create the
best publication in the world for people to
consume and contribute thought-provoking
commentary on what’s next in payments.
We have spent the last year, since the initial
launch of PYMNTS.com, on innovations to
achieve that. We have recruited several of the
leading thinkers and doers on payments in the
world to serve as our emissaries and to search
for the best topics and the best contributors.
We continue to use 20th century speak in
Tim Attinger
introduction
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
referring to them as co-editors. However, those
who know social commerce might call them
curators. On behalf of our readers, we extend
our heartfelt thanks to these busy professionals
for contributing to the payments community.
behavioral and location-based targeting,
which could be one of the next.
Welcome to the Lydian Journal 2.0. Look
forward to more versions over the years
as we continue to search for what’s next in
payments.
SPONSORED ADVERTISEMENT
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
by Tim Attinger
October 2010
Introduction
This article is the first in what will be a series of articles from industry leaders on the
business of building and managing innovations, particularly within payments platforms
and networked businesses. In our inaugural article, we will take a look at the evolving
role of capital, corporate development, open technology, and the creation of external
innovation ecosystems in the business of growing a payments network into new channels
and onto new platforms.
Business
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
(Outside-In)novation: The
Changing Paradigm for Driving
Payments Platform Growth
The Network Effect
Payments networks are, by their very nature, distributed ecosystems – that is ecosystems
in which many different players help sustain it. Certainly some payments networks are
more distributed than others, but almost universally, the management of a payments
network requires the participation of other companies – acquirers, issuers, processors,
technology providers, software developers, systems integrators… the list goes on. These
participants help manage the technology development and dissemination of the payments
network’s core processing capability, but they also play a fundamental role in the
business functions of a payments network. In short, they help to drive the “network effect”
that is at the heart of growing the company into the core business. That network effect,
with its positive externalities, may be described as follows:
• Participants in the network
derive the value of their
participation from the other
participants present in the
system.
• The greater the number of
participants, the greater the
value, and the greater the
number of new participants
who are attracted to the
network.
• As the participant base in
the network grows, more new
participants are attracted to
the platform because they may
find the greatest number of
Table of Contents
potential interactions there.
• As more new participants
are attracted to the network,
the existing participants derive
increasing value from the
business, concentrating more
of their investment in that
network.
This is the “virtuous cycle” to
which observers of network
businesses often refer.
Each step of value creation
in the series above feeds
the next step, with the last
step cycling back again
to the top of the list. The
power of well-functioning
network ecosystems is that
they become almost selfperpetuating cycles of value
creation and growth, almost
seeming to feed themselves
in endless repeating cycles.
However, this impression of
power underlies a potential
peril in these systems,
particularly if the business
professionals tasked with
managing network ecosystems
begin to believe that the
growth cycles are selfperpetuating. Like a top once
wound and released, the
growth cycles continue to spin.
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
must constantly evolve as
the users grow and change,
and their expectations
of the value proposition
change as well. Constant
recharge of the network
effect is therefore critical
to the health of the system.
This is particularly true if the
payments network begins
to encounter resistance,
whether in the form of
regulation, competition,
or potential defection by
existing participants. All of
these forces are beginning
to work against the major
payments networks today.
As they move into new
geographies, new
ecosystems, and especially
into new roles with their
existing participants,
payments networks are
finding that the top is getting
harder and harder to keep
spinning.
However, as we will discuss
a little later in this article,
there are creative ways
for managers to engage
an expanding base of
ecosystem participants in
a direct and focused effort
to help keep the network
relevant and the spin at the
heart of the network vibrant.
Business
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Yet a top can slowly, or
suddenly, spin to halt as it
meets resistance. Payments
networks are no different
– they require constant
oversight and a steady hand
providing regular re-spins
to keep the network cycle
turning. These re-spins
most often take the form of
adding value to the network
core proposition, and in
turn, adding participants
and interactions to ensure
that as the network of users
grows, so too does the value
proposition they encounter in
the network itself. The core
proposition of the network
Driving the Network Effect
Successful management of a payments network requires an understanding of both the
strength and seduction of the underlying network effect. While growth may seem selfperpetuating, it rarely is for long. However, there are a few fundamental strategies
to driving growth in payments from a network-centric view that can help a payments
executive effectively counter the seductive siren song of self-perpetuating spin from
within the center of the network ecosystem. Put simply, three basic strategies – when well
understood and effectively executed – can help business managers keep the gyre of
growth at the core of the company strong and healthy. In descending order of priority,
these strategies are:
• Attract Participants:
Bring More Participants
to the Network. This
strategy may seem obvious,
given the fundamentals of
driving the network effect as
discussed above. However,
effective managers of
payments networks must
understand that this is not
only the most important
strategic imperative for
their business, it is also the
most nuanced. As payments
networks grow into new
Table of Contents
marketplaces and new
ecosystems, management of
this imperative becomes more
challenging. For example, a
consumer payments system
trying to attract new pools of
consumers and merchants in
emerging markets may need
to expand the definition of
“direct participant” in the
network beyond “financial
institutions” to include mobile
operators, money transfer
operators, governments,
and retailers. A manager
whose view of the business
has been formed by 20
years of cycling growth with
financial institutions alone
may be strongly resistant to
this redefinition. However,
there is a powerful catalytic
potential available to a
payments business as it
engages more directly with
other network businesses,
such as those just mentioned,
that payments mangers
should consider. If two
network-effect businesses
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
• Drive Interactions:
Provide Participants
with a Range of
Ways to Interact. As
more participants join
the network, a payments
manager must give them a
broad range of valuable
ways to interact. This often
takes the form of what most
of us think of as traditional
product development and
management – making
enhancements in core
products to maximize
their performance for
key customers, opening
access to new channels
through tools that optimize
those core products in
interactions as possible to
the network. Extending this
strategy to the participant
groups listed above, this
activity can include the
practical
examples
of building
services that
complement
core
payments
capabilities
in new
acceptance
segments
(such as
small ticket
payments), building software
platforms that improve
the performance of core
payments in eCommerce
or mobile, and developing
new payments capabilities
(e.g.: prepaid) that serve the
needs of common customers
also served by mobile
operators, money transfer
operators, or governments.
management of the core
payments business derives
from a model where the
physical network adds value
to each transaction as it
Business
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
connect in a way that
allows each to provide
complementary services
from their core business
to common customers, the
increase in power to the
network effect of each can
be significant.
traverses the core. This is
particularly powerful when
the value the network adds
is both something the end
customer can see and is
tied uniquely to the network
core. This takes the form of
what most of us think of as
traditional service or systems
development. Practical
examples here include fraud
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
As more participants join the network, a
payments manager must give them a broad
range of valuable ways to interact.
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
these new environments,
and creating new, unique
product capabilities that
meet the need of key growth
segments. Increasing the
ways in which participants
can interact enhances the
value of the network as well,
ensuring that participants
bring as many of their
Table of Contents
• Add Value: Enhance
the Value of Each
Interaction. As
participants connect with
the network and grow their
interactions, the spin at
the heart of the network
strengthens with each
subsequent interaction that
traverses the core. Successful
and risk scoring in real-time,
loyalty treatment application,
and delivery of information
and analysis associated
with the transaction back to
relevant participants. Unique
value delivered from the
core back to participants
at the edge of the network
increases the likelihood that
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
all the other transactions.
The most common example
of this may be that of scoring
transactions for risk, on the
basis of both characteristics
unique to that transaction
and in the context of all the
other transactions crossing
the network, and then
delivering that score back to
the participant responsible
for managing the risk of that
product and customer.
Managing the Growth Cycle
While management of the collective effect of these three strategies may be the ultimate
responsibility of the most senior executive(s) of that business, responsibility for the
execution of these strategies is often distributed throughout the organization. This
distribution – the historical roles of each major group within the company, and the
process of funding and investing in each area – may create challenges. Complications
may arise in the business when this distributed execution fails to operate in concert or is
at odds with the P&L imperatives of the executive suite. In many payments businesses, this
distribution and the associated challenges may take the following forms:
• Attract Participants:
Executives in sales and
marketing typically take on
the role of managing the
interaction of the network
with existing participants.
These same executives,
when coupled with business
development managers, may
have some responsibility
for finding and attracting
new participant groups.
However, the new groups
are most often new segments
of existing participant
types, as opposed to truly
new types of participants.
While financial structures for
rewarding participation are
fairly well-established (read:
interchange, incentives,
network fee discount
schedules), those structures
are often challenged to
effectively reward the direct
participation of non-traditional
sources of network activity
(read: new acceptance
segments, money-transfer
Table of Contents
operators, mobile operators)
or to stimulate their growth on
the network.
• Drive Interactions:
Executives in product
development, business
development, and services
management are often the
leaders responsible for
building and managing the
product innovation roadmap
for the core business. This
most often includes managing
investments that enhance
the core product offering,
often with expense budget
allocated for this use.
However, this traditional
approach and funding model
may not work effectively for
driving new platforms or
services into new participant
types or ecosystems.
For example, expense
dollars decked against
opening an incremental
acceptance segment in a
new marketplace may trump
Business
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
those participants will send
subsequent transactions
back to the core. This is
particularly powerful if
the value added to the
transaction is derived from
and delivered in context to
those earmarked for new
platform development to
serve an adjacent ecosystem,
particularly in an environment
where maximizing return
on investment is a near-term
priority and maximizing
longer-term revenue growth
is viewed as a problem for,
well, the long term.
• Add Value: Executives in
product development, systems
development, and network
management are often the
ones most directly tasked with
managing investments in this
area. If the payments network
business includes a strong
processing system at its core,
the responsibilities for this
area tend to skew toward the
systems managers. Typically,
this kind of investment is
well-funded within the core
business model, particularly
when it takes the form of
internal development using
capitalized expense dollars.
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Challenges may also arise here if the core
enhancements roadmap is not tightly aligned
with the business interest of adding value in
ways that participants can see.
Structural Challenges for the Growth Cycle
As discussed at the outset, executive management of a payments network may operate
under the impression that the network effect that spins the growth of the business is highly
self-perpetuating. Much of management’s experience in the core of the business may
reinforce that impression. As management makes incremental investment in driving core
business adoption among current participants, the growth of the business in the near
term may seem relatively healthy. Indeed, it often is. However, when the long-term growth
of the business is dependent upon the extension of the core into new areas and new
ecosystems, the current health of the core may work against it. Indeed, in those instances
where the margins to the core are very healthy, this challenge can be magnified.
As we discussed above, major players
in the payments network business are
typically strong in their area of core
payments capabilities, as well as generating
respectable top line revenue growth and
healthy operating margins. However,
most of these companies have growth
and earnings expectations that require
expansion into adjacent markets and
complementary ecosystems that lie beyond
their core payments businesses. Additionally,
these companies have near-term financial
Business
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Executives in this area may argue in
return that senior management often fails
to recognize the core business benefits of
adding capacity, streamlining systems, and
updating platforms – creating the dread of
building a business case for “break/ fix.”
performance requirements that may
impede their ability to grow new business
opportunities with internal investment and
development. Investment in new business
growth through expense can be challenging,
especially if revenues from that new business
will take time before making a material
impact on total company revenues.
A hypothetical multibillion dollar payments
company with healthy margins might have
an income statement as follows:
Tim Attinger
Tom Brown
Total Dollars (Billions)
Percent (%)
7
100
• Marketing/Advertising
1
~14
• Network/Systems/Facilities
1
~14
David S. Evans
Revenue
Patrick Gauthier
Expense
Ignacio Mas
Scott Schuh
• Core Operations
0.7
10
Karen Webster
• SG&A
0.5
7
Jing Yang
• Investment in Growth
o Core Business
0.2
3
o New Business
0.1
1
Operating Margin
3.5
50
Taxes/Other
1.1
16
Net Income
2.4
34
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
The challenge of income
statement investment also
presents a potential solution.
In the above example, the
company may generate
capabilities for new market
segments with capital
rather than building them
off a modest investment
fund through expense.
However, most
companies
are
challenged
to deploy
capital most
effectively
against new
business
growth for
a number of
reasons. Chief
among them
are:
company bridge into a
new ecosystem, many
of which may be lost in
the necessary corporate
consolidation following
• Company Capacity:
Corporate development staff
and professional advisors
are staffed to execute a few,
large, and clearly accretive
deals where the majority
of new business areas in
payments are populated by
smaller service providers.
o Partnerships: Minority
investments often may
protect target company
speed and agility, but
management of strategic
alignment with numerous
minority investments
may task overburdened
core company business
resources.
Business
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
As the table shows, the
combination of high
operating margins and
a healthy core business
investment may reduce the
pool available for internal
investment in growth to
a small percentage of
total investment. This is
particularly true if, as is
demonstrated here, the
growth prospects for the
core business demand
a significant share of
investment in growth.
When $1 invested in core
business expansion pays
off with $1.5 in a year,
the investment in new
businesses where payoff
may be greater is often
de-emphasized in the face
of risk adjustment against
longer-term payback.
an acquisition.
Most companies are challenged to deploy
capital most effectively against new business
growth for a number of reasons.
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
as much as approximately
$2 billion in cash. In this
environment, a company
may be more favorably
disposed to applying this
cash – after returning a
portion to shareholders
through dividends or stock
repurchase – to acquiring
Table of Contents
• Corporate
Development Approach
to:
o Acquisitions: Emerging
payments companies
provide a speed, agility,
flexibility, and relative
neutrality in helping a
traditional payments
There is a potential answer
to this structural challenge,
and it lies in the combination
of an innovative business
approach to developing
new platforms coupled with
an innovative technology
approach to managing
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
agreements within corporate
development. The interplay
between these two functions
must be “hand-in-glove”
rather than “hand-off” to
guard against the creation
of partnerships that don’t fit
strategic objectives or the
development of partnerships
that cannot be executed.
The technology solution
is a combination of
providing value in the
core of the payments
network through internal
capitalized development
while delivering flexible
access to the network, to
network human capital, and
to external development
partners. This approach,
and the key to its success, is
described briefly below.
Changing the Paradigm for Growth
Business
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
the edge of a payments
network. The business
solution requires a tight
alignment between product
development and corporate
development, creating a
continuum of strategy from
the identification of core
needs and potential partners
within product development
to the execution of
investments and partnership
The coming change in payments network innovation creates a paradigm that drives
value to the network by cultivating a stable of key partnerships with external development
organizations that can bring the capabilities required by customers in new participant
groups to the payments network business by bridging the space between the payments
ecosystem and the new participant ecosystem with technology and services that
combine the value of both for common customers. The best among network executives
have a rigorous process for identifying external partners, capitalizing those partners
with the cash generated from the high-margin core, and driving strategic direction to
their development activities through a combination of tight business partnership, and
often, direct investment of core personnel into the partner company to help execute the
combined strategy.
This business innovation,
which may be simplified
capitalizing, and staffing
external partners to grow
growth areas of eCommerce
platforms and mobile
The best among network executives have
a rigorous process for identifying external
partners.
as “throwing” capital and
people over the wall to an
external partner to stimulate
growth, has been in vogue for
a while in other technology
sectors. Cisco is a prime
example of a technology
company with a strong, highmargin core business that has
mastered the art of finding,
Table of Contents
into new business lines. As
those partners mature and the
new business line becomes
well established, Cisco then
often exercises the option of
acquiring the remainder of the
partner and integrating it into
the core. Successful payments
networks are beginning to do
the same, particularly in the
commerce.
This approach is most
effective, however, and
becomes most powerful when
married with the provision of
a development integration
layer, often facilitated through
addressable programming
interfaces (APIs) at the edge
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Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
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Tim Attinger
Tom Brown
developers to embed their
payment capabilities into
new business opportunities
and new services, payment
platforms are working
to extend the reach and
flexibility of their services far
beyond what they themselves
could accomplish through
direct development on
their proprietary network.
Payments networks have
always grown by opening
access to their processing
engines to card issuers and
acquirers, as well as their
third-party processors. Yet
in this evolution, payments
players are simplifying and
democratizing that access
while making it available
to a new population of
developers and business
models.
Summary
Business
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
of the network. Payments
companies have begun
to provide open access to
their payments platforms for
third-party developers via
APIs and developer toolkits,
looking to replicate the
success for their payment
platforms that software
platform companies
have had. By working to
deliver an easier way for
Opening the edge of a payments network or payment platform to third-party developers
helps to ease the integration of that platform into new commerce systems and new
participant ecosystems, favoring user and acceptor adoption of the platform and
increasing the resulting payments transaction flow and revenue streams back to the core
payments network business. When combined with a corporate development approach
that capitalizes and directs the activities of a set of strategic development partners, the
effect on the core business growth can be significant.
External partners are
becoming the new innovation
catalysts in the payments
network business. They
are capitalized by the
payments network, given
open access to the edge
of the payments network to
apply its core capabilities to
new constituents, and often
populated by key people
well-versed in the payments
company business model and
strategic objectives. External
development partners and
APIs are bridging the gaps
between payments and other
growth industries, creating
common services from each
ecosystem for their common
customers and attracting
more of them to each. This
helps to solve the most
challenging task in scaling a
payments solution – attracting
participants – which is
also the first, and most
fundamental, step in growing
a payments network.
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Table of Contents
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(Outside-In)Novation: The
Changing Paradigm for
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The Utility of Retail Payments
in Addressing the Financial
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Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
by Ignacio Mas, Bill & Melinda Gates Foundation [1]
October 2010
Introduction
This piece is the first in what will be a series of articles from industry and policy leaders
on the role of mobile phones in transforming access to finance in developing countries.
Real-time technology allows financial service providers to interact with their customers
either directly on their phones or indirectly through normal retail stores, breaking out of
their own brick-and-mortar infrastructure corset. With such innovations, we can truly bring
financial services to the mass market in developing countries. In our inaugural article,
we look at the value of facilitating retail and person-to-person payments as a first step
in the ladder of financial inclusion for millions of people who are new to banking. We
also explore the key challenges that the industry faces in achieving a vision of financial
inclusion enabled by mobile transactions and prepaid retail channels.
developing countries
The Lydian Journal 2.0: A Note
from the Editor
The Historic Opportunity Presented By Mobile Phones
Banks in developing countries have not yet made it to the mass market. Across Africa,
Latin America, South and Southeast Asia, banks have only begun to address the needs
of somewhere between 10 percent and 50 percent of the population. The rest of the
population does not benefit from as much as a simple savings account.
With mobile communication
networks reaching more
and more deeply into the
population and the territories
in developing countries, there
is now a historic opportunity
to develop new banking
models using the mobile
channel as a transactional
platform. By turning the
mobile phones that customers
and retail stores already
have into virtual bank cards
and point of sale terminals,
financial service providers no
longer need to incur the cost
of deploying and maintaining
front-end hardware.
Table of Contents
This substantially reduces
the cost of provisioning new
customers and servicing
their transactional needs.
It also gives new business
opportunities to normal retail
stores, which can now act as
cash merchants for people
in their community. Just as
they sell rice and cooking oil,
local stores can now buy and
sell their bank balance for
cash – offering deposit and
withdrawal services to their
customers. This can be done
at very low risk as long as
all transactions are done on
a fully funded (or prepaid)
basis and are authorized and
recorded in real-time by the
financial service provider.
We can therefore envision the
spread of a kind of financial
transaction utility that: (i)
allows low-income individuals
everywhere to conduct basic
financial transactions at their
neighborhood store, (ii) relies
on technology and real-time
communication networks
to make those transactions
reliable and secure, and (iii)
reduces costs substantially
by increasingly relying on
people’s own mobile phones
rather than on deploying
cards and dedicated point of
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Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
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Karen Webster
Jing Yang
sale terminals.
This vision is closest to a
reality in Kenya, thanks to
the M-PESA service offered
by leading mobile operator
Safaricom. In just over three
years since launch, it has
managed to acquire 50
percent of the adult Kenyan
population as customers and
between them they do more
money transfers domestically
than Western Union does
globally. Mimicking the
experience with prepaid
airtime, M-PESA customers
can deposit and withdraw
cash at any of 20,000
stores – that’s 20 times the
number of bank branches in
the country.
A similar proposition is
taking root in neighboring
Tanzania (led by mobile
operator Vodacom) and
Uganda (led by mobile
operator MTN), as well
as in Pakistan (led by a
joint venture between
Tameer Bank and mobile
operator Telenor). The GSM
Association counts 84 live
mobile money deployments
across the developing world.
The Value of Payments and Transactions to Kick-Start Mobile
Money Schemes
Many mobile money schemes that are mushrooming in developing countries are treating
remote payments and money transfers as the entry point for the unbanked. There is an
underlying hypothesis that the need to make payments and transfers will lead people
onto transactional savings accounts, and these in turn, will lead them to more structured
savings and credit products.
There are four main reasons
why remote payments and
money transfers may be a
good way to kick-start a
mobile money system. First,
because mobile payments
are completed in real-time,
customers can test the system
by calling recipients after
sending the money. Trust can
be built up experientially
rather quickly: “I see that it
works. I don’t really need to
understand how it works.”
Savings and other financial
services require building trust
over much longer periods of
time.
Second, mobile payments
address a key pain point
of people living in a cash
economy. The need for
remote payments is often
large, whether it is spurred
by migrant labor remittances,
Table of Contents
informal support in networks
of friends and family,
entrepreneurs’ commercial
transactions, or bill payments.
Also, there is a degree of
immediacy about the need,
since people must make
such payments with some
regularity, and each such
occasion represents an
opportunity to try the new
service. People need only
be convinced to switch from
current alternatives rather
than to form new financial
behaviors. Moreover, the
benefit of the new payment
mechanism relative to the
alternatives (in terms of fees,
proximity and convenience,
delays in availability of funds
at the receiving end, service
reliability, etc.) is readily
apparent to users, which
creates a willingness to pay
for the new service.
developing countries
The Lydian Journal 2.0: A Note
from the Editor
Third, a focus on remote
payments allows the mobile
money provider to market
more intensively among
senders, who tend to be
richer, more educated and
financially aware, and more
likely to be urban. This group
is more easily addressed by
normal marketing channels
and can be counted on to
pull low-income individuals in
rural areas, whom they send
money to, into the service. In
other words, the provider can
direct the marketing dollars to
the higher-end customers and
let viral marketing do the job
on segments with low-income
individuals. Finally, servicing
customers’ gamut of electronic
transactions is a way of
capturing relevant information
on customers’ habits, which
may be useful to subsequently
market appropriate products
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(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
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Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
to them and evaluate
their credit risk. Tracking
payments may be the
beginning of creating
financial histories for lowincome individuals.
Of course, every market is
different, and what works in
one context may not work
in another. It’s incumbent
upon the scheme operator
to conduct market research
to understand what service
solves such a big pain point
that potential customers are
willing to try the new system
today.
In any case, we should not
lose sight of the fact that
the big opportunity from
mobile money schemes is
to fulfill people’s broad set
of financial
needs, not
just to affect
payments.
Mobile money
schemes
– and
branchless
banking
schemes more
generally,
whether
they rely on mobile
phones or not – should
evolve from handling
payments to driving full
financial inclusion. This
can be achieved over time
by addressing four key
challenges, as described
below.
developing countries
The Lydian Journal 2.0: A Note
from the Editor
Challenge #1: Demonstrating Scale and Replicability
The first priority is to see the emergence of a minimum number (say three to four)
successful branchless banking implementations at scale that can serve as powerful
demonstrators internationally. We need to get several implementations across the line in
order to show that the model is replicable and robust to different country circumstances,
i.e. that it is still viable with a different mix of customer needs, quality, and reach of
alternative offerings, market structures, regulatory attitudes and requirements, etc.
These deployments need to
have surpassed the critical
mass threshold (or tipping
point) beyond which they
demand by both customers
and merchants. Judging
when a deployment reaches
self-sustaining critical mass
two criteria: (i) it has at least
10 times the number of cash
in/out outlets (i.e. branches)
of any bank, and (ii) it is
Mobile money schemes should evolve from
handling payments to driving full financial
inclusion.
Jing Yang
benefit from positive network
externalities, strong viral
marketing effects, and a
mutually reinforcing cycle of
Table of Contents
is difficult, but I would
suggest that a scheme has
demonstrated scalability and
sustainability when it meets
able to generate at least 50
transactions per retail outlet
per day. The first metric
indicates that the scheme
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The Utility of Retail Payments
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Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
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offers a compelling value
proposition to customers
based on convenience,
whereas the second metric
suggests that the retail cash
in/out channel is healthy at
reasonably low commission
levels (50 transactions at
around 10 cents commission
per transaction would
contribute $5 of daily
revenue to the store).
Today among mobile money
schemes, only M-PESA in
Kenya meets these two
requirements. In fact, it
has achieved twice these
levels. A number of bank-led
agent deployments in Latin
America – most notably by
Caixa Econômica Federal,
Bradesco, and Banco do
Brasil in Brazil, as well
as Banco de Crédito del
Perú and Bancolombia
in Colombia – have met
the channel health (i.e.
transaction-per-store)
criteria but are still short
of achieving a tenfold
increase in the number of
outlets through their agent
networks.
A prime objective of such
agent network deployments
has been to decongest
branches, i.e. to support
existing customers rather
than necessarily to reach out
to new ones on a massive
scale, and hence the scale
requirement has been less
important for them than for
a de novo scheme, which
needs to create an entirely
new customer proposition
and brand.
Challenge #2: Proving a Range Of Partnership Models
developing countries
The Lydian Journal 2.0: A Note
from the Editor
Going beyond the number of deployments, the second priority is to demonstrate a variety
of models, and in particular, a variety of scheme structures and partnership arrangements
between banks, telcos, and retail networks. The Kenyan M-PESA success is tempered
by the 85 percent market share enjoyed by Safaricom in the mobile voice market. That
circumstance is simply not there in most countries, and even where it is, it is by no means
desirable to leave the market of financial services for low-income individuals in the hands
of a single player. There needs to be a level playing field where multiple players can
reasonably contest the market, and where success is not premised on a single operator
exerting its dominant position in the adjacent telco market to the exclusion of others.
Alongside the dominant telco
scenario, we would ideally
demonstrate viability of two
additional types of models.
One is a telco-independent
technologies (networks and
phones) without having to
enter into specific partnership
agreements with telcos. In this
fashion, they could build a
point of sale terminals, which
telcos don’t need to do. A
telco-independent solution
would need to circumvent
“bottleneck assets” controlled
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
There needs to be a level playing field where
multiple players can reasonably contest the
market.
Jing Yang
mobile money solution,
where banks, retail chains, or
independent third parties can
leverage deployed mobile
Table of Contents
branchless banking solution
without having to go through
the expense of rolling out
large numbers of cards and
by telcos that are not offered
on standard commercial
terms, namely access to the
SIM card and to the USSD
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(Outside-In)Novation: The
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Driving Payments Platform
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The Utility of Retail Payments
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Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
communications channel.
This requires the scheme
promoter to develop an
alternative security and
user interface presentation
mechanism.
The second type of model
we would like to see
happening is a multioperator one, where a
number of telcos with smaller
market share decide to work
together to create a new
interoperable market for
mobile money. This would
be particularly desirable
in countries like India or
Tanzania where no operator
has a commanding control
of the market.
This need not mean
necessarily creating a
single co-owned solution
across operators. Instead,
each operator’s mobile
money platform could be
interconnected to allow
money transfers between
wallets in different schemes,
and they could share the
cash merchant network in
order to consolidate their
transaction volumes at the
store level.
Challenge #3: Making It Relevant and Affordable For the Low
-Income Individuals
The third priority is to drive mobile money services into population segments with lowincome individuals and to service smaller transactions. That is largely not happening
today for most schemes, including M-PESA in Kenya for which the smallest round-trip
person-to-person (P2P) transfer costs the equivalent of 72 cents.
Eventually, we would
like to see mobile money
working commercially for
providers and affordably
for low-income individuals
for transactions of as little
as $1 or $2. There are two
requirements to make the
low-denomination transaction
market profitable. First,
there needs to be a sufficient
volume of transactions
to be able to amortize
operating costs over a larger
transaction pool. Thus,
there is benefit in schemes
broadening the usage base
to include P2P, bill payment
(C2P), salary disbursements
(B2P), government welfare
payments (G2P), etc. Second,
there needs to be a more
segmented and diverse cash
merchant channel. There is a
limit to how small (and cheap)
store-based transactions can
be before they start placing
a burden on the store. Lowincome individuals, especially
those in rural areas, will
need to be served through
alternative channels, be they
developing countries
The Lydian Journal 2.0: A Note
from the Editor
roving collectors, marketbased resellers, or leaders
of community-based groups.
There is a possibility of
savings-led groups providing
a transaction consolidation
and cash aggregation point
from which it becomes
efficient to connect individuals
with the lowest incomes with
mobile money systems. In this
fashion, mobile money would
leverage not only existing
physical infrastructure but
established social capital as
well.
Challenge #4: Delivering a Range of Financial Services
The fourth priority, and from the point of view of the Bill & Melinda Gates Foundation the
ultimate proof point, is the successful delivery of a range of financial services to currently
unbanked, low-income individuals over these transactional platforms. Priorities #1-3 are
about building efficient, ubiquitous transactional rails (a network utility), which can shore
up the business case for the widespread distribution of financial products on a mass
scale. But still, those financial products need to be appropriately designed, branded,
marketed, and loaded onto the rails.
Table of Contents
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(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
There are two sets of critical
issues that will determine
success on the product front.
The first set of issues relates
to the access that banks
have to the transactional
platforms. On the one hand,
banks can seek to control the
transactional platform either
by building it themselves
(such as the examples of
Latin American banks listed
above) or in partnership
with a telco (such as the
Tameer/Telenor tie-up in
Pakistan). Alternatively,
banks can negotiate access
with the platform provider,
such as Equity Bank in
Kenya has done to offer the
M-Kesho product jointly with
Safaricom using the M-PESA
platform as a transactional
front-end. The latter
approach may reduce the
negotiating power of banks
in front of the transactional
platform owners, but on the
other hand, there would
be efficiencies in having
multiple banks hosted on a
single transactional platform
managed on an arms-length
basis by a third party rather
than having each bank
invest in and develop their
own.
The second set of issues
relates to the practicalities
of selling and servicing a
range of financial products
when customers are remote
from the bank. It is still an
open question whether the
retail networks that serve
as cash merchants will be
appropriate to sell a range
of financial services beyond
basic account opening. It is
likely that banks will need
to figure out separate, more
sophisticated cross-selling
channels, which are likely to
be more under their direct
control than the relatively
commoditized cash in/out
business. Once the service
is sold, customers will need
to be presented with an
intuitive user interface on
their mobile phones so that
they can effectively manage
multiple products (think of
several savings accounts,
loans, insurance) on their
own. There will need to be
a lot of experimentation and
innovation in user interface
design.
developing countries
The Lydian Journal 2.0: A Note
from the Editor
In Conclusion
Mobile money and branchless banking offer a
path to scalability and impact. Early successes
like Bradesco and M-PESA are only the first
step, but they do invite us to imagine what is
possible. While we can feel comfortable about
the compelling logic of branchless banking,
we can expect it to be a long journey before
it fulfills our vision of powering universal
financial inclusion at the base of the pyramid.
If we start by at least helping low-income
individuals address their payment and money
transfer needs, we will be on a good path to
impact.
[1] Ignacio is Deputy Director in the Financial Services for the Poor team at the Bill & Melinda Gates
Foundation. This paper draws extensively on four separate posts written by the author in the CGAP Technology
blog (http://technology.cgap.org/) and the IFMR blog (http://ifmrblog.com/) during September/October
2010.
Table of Contents
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Some Unpleasant Credit Card
Arithmetic
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
by Scott Schuh, Federal Reserve Bank of Boston [1]
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
This article is the first in a series presenting frontier research on
the economics of money and payments. Lydian Journal economics
articles will summarize technical research papers and programs in
a manner that is accessible to all readers.
U.S. v. American Express,
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David S. Evans
Introduction
Earlier this year, I coauthored a paper (Schuh,
Shy, and Stavins 2010) that
may never be famous, but
certainly generated public
discussion. It reports some
“unpleasant arithmetic” about
the use of credit cards by
consumers for payments. If
credit card payers take full
advantage of their many
benefits – delayed payment,
rewards, convenience, etc.
– they are doing the “right”
thing in terms of personal
financial management.
Yet the “arithmetic” shows
that credit card payments
also have an “unpleasant”
side effect on the welfare
of consumers as a whole
because they redistribute a
non-trivial amount of money
from low-income households
to high-income households
each year. Another recent
paper (Berkovich 2009)
finds evidence of the same
kind of “trickle up” effect in
consumer payments at gas
stations and grocery stores.
Put simply in personal terms,
the central result has an
“unpleasant” implication for
high-income households.
When households use
their credit card frequent
flyer rewards to fly to the
Caribbean for vacation, their
flight is being paid for largely
by low-income households
who don’t use credit cards to
make payments.
No one alleges that credit
card companies or banks
intended the regressive
redistribution stemming from
credit card payments. But
this unpleasant arithmetic
is troubling to some, who
would like to know what to
do about it. Others remain
staunchly unconvinced by the
analysis.
Economics
Some Unpleasant Credit Card
Arithmetic
October 2010
Still others, although they
concede the results may be
roughly accurate, do not
think anything needs to be
done about the redistribution.
Given the importance of
credit cards in the economy,
it seems worthwhile to
engage in healthy discussion
and debate about how to
address this phenomenon –
or not.
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
How Do Credit Card Payments Redistribute Wealth?
It is well known that payment instruments can create a cross-subsidy among users of
different types of instruments. When the cost to merchants of accepting two payment
instruments differs, but the end-users of the payment instruments all pay the same
price regardless of which instrument they use, the users of the less expensive payment
instrument subsidize the users of the more costly payment instrument. The magnitude of
this cross-subsidy depends on the extent to which the payment recipients, say merchants,
mark up the final product price to recoup the extra cost of the more expensive payment
instrument.
Table of Contents
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Some Unpleasant Credit Card
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U.S. v. American Express,
et al.— Failing To Make
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Making Sense of Ever-Changing
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users – the so-called “nosurcharge rule” (NSR) – but
it’s unclear whether U.S.
merchants would surcharge
even if they could. Card
companies allow merchants
to offer cash
discounts but
few typically
do other
than some
gas stations.
In other
countries,
the effect
of steering
by price
differentiation
has been modest. So, this
phenomenon remains an
open and important research
question.
Regardless of why merchants
do not differentiate
their prices by payment
instrument, the one-price
policy leads to a price
markup that induces an
(ii) merchants pass the full
cost of the merchant fee
on to consumers, and (iii)
rewards programs are
not funded by credit card
interest payments. We also
Economics
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
In the U.S. payments
market, a cross-subsidy
exists between consumers
who pay by credit card
and those who do not. For
simplicity, we call the latter
“cash” users who pay with
money (currency or demand
deposits) using a variety of
payment instruments, such
as checks, money orders,
debit cards, and electronic
payments from bank
accounts. Estimating the
cost of accepting payment
instruments is very difficult.
The best available data
suggest that the merchant’s
cost of “cash” instruments is
about one-fourth their cost
of credit cards – roughly
0.5 percent of the purchase
price for handling cash
versus an average merchant
discount fee (also called a
“swipe fee”) of 2 percent of
the purchase price for credit
cards, which merchants pay
to banks. [2]
assume that all merchants
accept both cash and credit
cards and that consumer
shopping is not segregated
by payment instrument
or income level. These
assumptions are necessary
to estimate the transfers for
the whole economy because
of severe limitations in data
availability. However, we
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
The one-price policy leads to a price markup
that induces an implicit transfer of money from
cash users to credit card users.
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Although the costs of cash
and credit cards differ, U.S.
merchants tend to charge
the same price for their
products regardless of which
payment instrument the
consumer chooses. Credit
card companies explicitly
prohibit merchants from
surcharging credit card
Table of Contents
implicit transfer of money
from cash users to credit
card users. This transfer
analysis does not depend
on a complicated model
but solely on data and
three simple assumptions:
(i) all consumers pay the
same price whether paying
by cash or credit card,
evaluated the impact of
relaxing the assumptions
and found that the transfer
results are robust to realistic
changes in the assumptions.
The average cash user pays
a transfer of $149 per year,
and the average credit card
user receives a subsidy
of $1,133 per year (a
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Some Unpleasant Credit Card
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U.S. v. American Express,
et al.— Failing To Make
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An Overview of Social
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Fueling its Growth
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AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
card users because some
low-income households
use credit cards, and some
high-income households use
cash. [3]
The key empirical fact
underlying the results is that
adoption and use of credit
cards is very positively
correlated with income.
Nearly all (97 percent)
of the highest income
households have a credit
card, and they use it for 28
percent of their purchases;
they also receive the vast
bulk of rewards. In contrast,
only 42 percent of the
lowest income households
have a credit card, and
they use it for only 8
percent of their purchases.
If lower income households
voluntarily choose not to
use credit cards because
they prefer cash, this fact is
benign. Yet if they cannot
obtain access to credit cards
or use them effectively, then
this fact is more problematic.
Economics
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
difference of $1,282). This
transfer can also be broken
down by household income.
The average household in
the lowest income category
in our analysis (less than
$20,000 per year) pays a
transfer of $21 per year,
and the average household
in the highest income
category ($150,000 per
year or more) receives a
subsidy of $750 per year
(a difference of $771). The
latter net transfer is less
than that between cash and
The Effect on Consumer Welfare
A quantitative economic model is needed to identify the effects of the payment transfers
– both between cash and card users and between households by income category – on
consumer welfare. Our research offers one such model. All economics models involve
simplifying assumptions for tractability. Ours contains two types of payments (cash
and credit cards) and four types of consumers (cash and card users, and high- and
low-income households). This model introduces more complexity and realism about
consumers, but this extension requires simplifying other parts of the model. We assume
there is an average merchant representing all merchants that accepts both payment
instruments and sells a single representative good. This assumption is not strictly true in
reality, but we do not have adequate data to assume anything else. We also assume
there is an average bank representing all banks
that collects discount fees from merchants and
pays rewards to credit card households. [4]
To cover the extra cost of
credit card payments, the
merchant must mark up the
price of the goods for all
four types of consumers by
an amount that covers their
proportion of credit card
payments in total payments.
For example, if credit cards
accounted for one-third
of total payments and the
extra cost of credit cards is
1.5 percent over cash (2
percent less 0.5 percent),
then prices would have to be
Table of Contents
marked up by
0.5 percent
(one-third of
1.5 percent)
to cover the
fee merchants
have to pay
to the banks
that acquire
their credit card payments.
[5]
Using our quantitative
economic model and the
best-available U.S. data,
we estimate that the use
of credit cards raises
retail prices by about 0.3
percent for the portion of
consumption that is subject
to consumer payment
choice (about 54 percent of
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Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
This markup estimate
depends crucially on
the market structure of
merchants. We assume they
are competitive and pass
through the entire cost of
the credit card merchant fee
to consumers. If merchants
are not competitive, then
the markup and transfers
may be even higher. The
analysis becomes even more
complicated if merchants
have buyer-market power
over merchant acquirers
or credit card networks.
Determining the nature and
precise extent of market
power is an important part
of estimating the exact
magnitude of the transfers.
Using our quantitative
economic model, we
evaluated the effects
on consumer welfare of
alternative values, of the
merchant discount fee,
and the reward rate paid
on credit cards. Our
benchmark estimates of
these parameters are 2
percent and 1 percent,
respectively, on average.
Holding other aspects of
the model constant, we find
that consumer welfare is
highest when the merchant
fee and the reward rate are
both zero. Moving from the
benchmark to the optimal
configuration of fee and
reward would increase
consumer welfare by about
0.15 percent.
Because we do not model
banks and credit card
companies in detail, and
because we model only
the payments function of
credit cards but not the
borrowing function, we
can’t really say much
about how changes in the
merchant discount fee and
reward rate would impact
bank profits. Nevertheless,
our analysis suggests that
there may be scope for
reducing the merchant
discount fee and reward
rate by equal amounts to
improve consumer welfare
but without reducing bank
profits from credit card
payments.
Economics
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
consumption in the National
Income Accounts). This price
increase amounts to about
$66 for every U.S. adult (18
years or older).
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AUTHORS
Some Frequently Asked Questions
Not surprisingly, research about inequality stemming from credit cards generates
considerable discussion in the media, on the Internet, and elsewhere. This concluding
section answers some common questions that have arisen, including criticisms
(reformulated here as questions).
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Q: Isn’t this transfer between
low-income individuals and
high-income individuals
just another example of the
former group mismanaging
their money?
No. The transfers are not
directly related to personal
financial management or
the use of revolving credit
card debt. They occur simply
because some consumers
pay with cash while others
pay with credit cards, and
the former tend to have lower
Table of Contents
incomes. The same transfers
would occur even if all credit
card payments were made
for convenience (if consumers
paid off their balances every
month). The transfers are
indirectly related to personal
financial management if
the cash users avoid credit
cards because they fear
overspending and building
up credit card debt.
Q: What’s the big deal about
$21 per year per household?
There are two concerns. First,
if household preferences
exhibit the properties
typically assumed by
economists, then an extra
$21 is of greater value – a
“bigger deal” – to a lowincome (less than $20,000)
household than to a highincome ($150,000 or more)
household. Second, there
are many more low-income
households (21 percent) than
high-income households (9
percent). So, for the economy
and society as a whole, the
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Some Unpleasant Credit Card
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U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
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Q: What can I do to reduce
the transfer from low-income
to high-income households
caused by credit card
payments?
The most direct reduction in
transfers would result from
reducing the use of credit
cards for payment. Reducing
convenience use by using
credit cards only when
needed to provide revolving
credit across months
(not using them to make
payments when the intent is
to pay off the balance each
month) would be the most
effective. Alternatively, credit
card holders who earn
rewards have a number of
options to offset the transfers
through the way they choose
A similar option is to choose
a cash back rewards credit
card with a high percentage
reward and then donate the
dollar value of the rewards
to low-income households
directly or
through more
targeted
charities.
Q: If cash
and credit
card
customers
shopped
at different
stores or
bought different products,
wouldn’t the transfers be
lower or even disappear?
Yes. Data limitations
required us to assume that
all merchants accept both
cash and cards, and that
consumers all buy the same
products. This assumption
is not strictly true, but what
some merchants accept only
cash, for example, those
merchants would not need to
mark up their prices to cover
merchant discount fees.
Economics
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
total loss from transfers paid
by low-income households is
greater than the gain from
subsidies received by highincome households.
• Shopping location:
Consumers who have
different income levels
or who make different
payment choices may shop
at different stores. These
differences may occur if
higher and lower income
households live in different
places or shop at different
stores.
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
The most direct reduction in transfers would
result from reducing the use of credit cards for
payment.
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
to use their rewards. One is
to obtain a credit card that
pays rewards to a charity
that serves low-income
households, although this
strategy does not necessarily
rebate the money directly to
the households who paid the
transfer.
Table of Contents
matters is the extent to which
the use of the two payment
instruments is segregated
in the U.S. economy, which
could occur for the following
reasons:
• Acceptance: Some
merchants may not accept
all payment instruments. If
• Product choice: Consumers
who use credit cards may
buy different products from
the products bought by
consumers who use cash,
even in the same store. In
this case, merchants might
price products bought mostly
by credit card differently
from those bought mostly by
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ARTICLES
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from the Editor
The Utility of Retail Payments
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Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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Comment on the Articles
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AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
If segregation of payments
occurs for any of these
reasons, the transfer
would be lower. Our
analysis, however, cannot
take account of potential
segregation of consumption
because it would require
data on every transaction
for each consumer, payment
instrument, merchant
(including geographic
location), and detailed
product type. No such
data exist. However, data
from credit card networks
probably would provide
more detailed information
than we have and might
permit better estimates of the
actual transfers.
Q: Doesn’t the analysis
overlook the high cost of
handling cash, especially
fixed costs and security
costs?
No, the analysis includes
of cash is much higher, the
transfers would be lower.
If cash costs were higher
than credit card costs,
the transfers would even
reverse direction. The cost
estimates do
not distinguish
between fixed
and variables
costs very
well, so the
analysis relies
exclusively on
a variable cost
specificationn
Both cash and
credit card
payment services have fixed
costs, so it would be more
accurate to incorporate
both types in future cost
estimation and research. The
costs of security are included
for both cash and credit
card.
Q: Who pays for credit card
rewards, and how are they
funded?
from revolving credit,
but the question has not
been resolved. However,
credit card users who earn
rewards almost surely
didn’t pay for all of them.
Economics
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
cash.
To see the reason for this
conclusion, consider what
would happen if merchants
surcharged credit card
payments, and all related
transactions occurred at the
point of sale. A competitive
merchant would lower the
retail price for all consumers
but charge credit card users
2 percent of the sales price
extra at the register. Then,
the merchant would rebate
... the best estimates of payment costs available
show that the cost of credit cards is four times as
high as the cost of handling cash.
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
the cost of handling cash.
The results stem from the
fact that the best estimates
of payment costs available
show that the cost of credit
cards is four times as high
as the cost of handling cash.
These cost estimates could
be erroneous. If the true cost
Table of Contents
This is a complicated
question with no easy
answer. There has been
a fair amount of research
that tries to determine
whether the rewards are
paid for out of the merchant
discount fees, other card
fees, or interest revenue
1 percent of the sales price
to the credit card users with
rewards cards.
This hypothetical market has
all the same features as the
U.S. market, except that in
this hypothetical market,
there is surcharging of
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ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
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Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Endnotes
[1] The views expressed in this paper are those of the author and do not necessarily reflect the views of the Federal
Reserve Bank of Boston or the Federal Reserve System. I owe my deepest gratitude to my colleagues, Oz Shy and
Joanna Stavins, for their insight and collaboration on the research underlying this piece. I also thank Bob Chakravorti
and Fumiko Hayashi for sharing their outstanding expertise on the economics of payments with me, and David Evans
for excellent comments (not all of which I could address). I thank Suzanne Lorant and Jenn Rubin for outstanding
editorial services.
Economics
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
credit card customers and banks are not involved in the distribution of rewards. If every credit
card holder in this hypothetical market had rewards cards, credit card users would pay for
their own rewards, and there would be no transfers between cash and card users or between
low- and high-income households. However, credit card users would be unlikely to take this
deal because they would lose 1 percent of the sales price – the merchant fee surcharge would
exceed the rewards rate. Some credit card users might be willing to pay the 1 percent loss for
the convenience, but some credit card users would probably switch to cash.
[2] A similar cost differential exists within debit cards. PIN debit purchases cost the merchant about 0.5 percent of the
purchase price and signature debit purchases (including small-value no-signature and card-not-present purchases) cost
about 1.5 percent of the purchase price. However, data limitations preclude combining signature debit purchases with
credit card purchases for the purpose of this analysis.
[3] These estimates are for one point in time. Long-run estimates of transfers between low-income and high-income
households that account for life-cycle and business-cycle effects may be lower because some low-income households
are so only temporarily.
[4] The much-discussed interchange fee is assumed to be internalized among banks and proportional to the merchant
discount fee and reward rate.
[5] Note that this calculation assumes that the base price of goods and services already covers the 0.5 percent cost of
handling cash payments.
References
Berkovich, Efraim (2009). “Trickle-Up Wealth Transfer: Cross-subsidization in the Payment Card Market.” Unpublished
working paper, The Hispanic Institute, November.
Sargent, Thomas and Neil Wallace (1981). “Some Unpleasant Monetarist Arithmetic.” Quarterly Review, Federal
Reserve Bank of Minneapolis, Fall.
Schuh, Scott, Oz Shy, and Joanna Stavins (2010). “Who Gains and Who Loses from Credit Card Payments? Theory
and Calibrations.” Public Policy Discussion Paper 10-3, Federal Reserve Bank of Boston.
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Table of Contents
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ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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AUTHORS
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Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
by Tom Brown
O’Melveny & Myers LLP
Adjunct Professor, U.C. Berkeley Law School^
October 2010
Introduction
The Department of Justice has been responsible for enforcing the nation’s antitrust laws
for more than a century. A group of lawyers dedicated to antitrust enforcement, the
Antitrust Division, has existed within the Department of Justice for more than 90 years. [1]
The list of companies that have faced antitrust cases brought by the Department of Justice,
both before and after the creation of the Antitrust Division, reads like a who’s who of U.S.
commerce: Standard Oil, U.S. Steel, Alcoa, General Motors, American Tobacco, and
the Chicago Board of Trade. Although the significance of the antitrust laws did not ebb
as U.S. industry shifted from manufacturing to information services, the Antitrust Division
has used cases against AT&T, IBM, Microsoft, MasterCard, and Visa to write the rules of
commercial engagement for the information economy. Of course, the Antitrust Division
has launched some duds over the years, as federal courts and commentators have not
hesitated to point out. [2] Even some of the Division’s successes seem, with the benefit of
hindsight, to have been poorly conceived. Yet the Division’s cases generally have been
serious affairs.
law and regulation
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
U.S. v. American Express, et
al.— Failing To Make Something
Out Of Nothing
I. U.S. v. American Express, et al. – A Claim That Nothing Is
Something
Viewed against this backdrop, the Antitrust Division’s recent case against American
Express, MasterCard, and Visa is puzzling. At first blush, the Division’s case seems to be
about nothing. Indeed, the allegations at the heart of the complaint read like the set-up
for a joke that one-time American Express pitchman, Jerry Seinfeld, might have used to
end his TV show:
“Jerry: So have you ever
been out shopping and
seen what happens when
someone takes out an
American Express card?
[Pause] One moment
the clerk is going on
about this and that.
Then the card appears,
and the clerk is literally
dumbfounded. He wants
to say something – you
Table of Contents
can tell because his eyes
bulge a little – but he
can’t say anything. So
long as the card is out, he
stands there speechless.
[Pause] Wouldn’t it be
nice if the American
Express card worked on
people other than sales
clerks?”
To be sure, the joke takes
some license with the
allegations. But its core
comes straight from the
complaint. The complaint
alleges that each of the
major credit and charge card
networks – American Express,
MasterCard, and Visa – has
maintained rules that prevent
merchants from promoting
other general purpose cards
at the point of sale. It claims
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The Utility of Retail Payments
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Some Unpleasant Credit Card
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U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
The only thing missing is the
suggestion that American
Express has market power –
the sine qua non of the type
of claim that the Antitrust
Division has alleged. Unless
the defendant has the
power to dictate terms to
the marketplace and use
those terms to suppress
opportunities that would
otherwise be available
to potential rivals, the
antitrust laws are generally
unconcerned about the
terms on which a firm does
business with its customers.
In a short statement released
in response to the filing of
the complaint, American
Express has made clear
that it intends to take aim
at the Antitrust Division’s
assertion that it has market
power, and that argument, if
successful, would provide a
defense to the claim.
The larger question raised
by the case is whether it is
possible, issues of market
power aside, to make an
antitrust case out of the
restraints challenged by the
Antitrust Division. That is,
whether American Express
has violated the Sherman
Act by telling agents that
are distributing its services,
as well as the services of
its competitors, that once
the customer has expressed
a clear preference to use
its service rather than a
competing offering, the
agent must accept the
consumer’s preference. The
answer to this question is
no, and the explanation
as to why is rooted in the
distinction between the goals
that the Sherman Act seeks
to promote and the actions
that it prohibits.
law and regulation
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
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that MasterCard and Visa
prevent merchants from
offering discounts or taking
other steps to promote
general purpose charge
and credit cards at the point
of sale. According to the
complaint, American Express
goes further, even barring
merchants from “asking
customers at the point of sale
if they would consider using
another [general purpose
credit or charge card].” [3]
II. Section One of the Sherman Act – Finding Direction in OpenEnded Language
The language of Section One of the Sherman Act is famously opened-ended. It prohibits
“contracts, combinations and… conspiracies… in restraint of trade.” [4] No one,
however, believes that the language of Section One means what it says.
Justice Brandeis’ opinion in
Board of Trade of City of
Chicago v. United States
explains why. The language
of Section One of the
Sherman Act would, if read
literally, bring the wheels of
commerce to a halt. Every
contract, as his opinion
observes, “restrains. To bind,
to restrain, is of their very
essence.”[5] Since Chicago
Board of Trade, the Sherman
Act has been understood to
prohibit only “unreasonable
restraints.”
Table of Contents
Chicago Board of Trade does
not provide much guidance
on how to distinguish a
reasonable restraint from an
unreasonable one. Indeed,
the opinion substitutes one
open-ended inquiry for
another. It instructs courts
facing antitrust cases to
and its effect, actual or
probable. The history
of the restraint, the evil
believed to exist, the
reason for adopting the
particular remedy, the
purpose or end sought
to be attained, are all
relevant facts. [6]
… consider the facts
peculiar to the business
to which the restraint is
applied; its condition
before and after the
restraint was imposed;
the nature of the restraint
This articulation of the
approach for identifying
unreasonable restraints of
trade has been described
as a “Brandeisian swamp,”
[7] in which “everything is
relevant [and] nothing is
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In the nine decades since
the Supreme Court handed
down its decision in
Chicago Board of Trade,
courts and policy makers
have arrived at a consensus
about what the Sherman
Act exists to accomplish and
how antitrust enforcement
achieves that end. This
consensus recognizes a
critical distinction between
the objectives of antitrust
enforcement and the
objects on which antitrust
enforcement acts.
The current chief of the
economic section of the
Antitrust Division captured
this distinction in a speech
that he gave in 1996
when he last served in the
role during the Clinton
Administration:
[A]ntitrust policy… must
long run. [9]
Antitrust law is, thus, often
described as a consumer
protection statute. It protects
the benefits that consumers
derive from
unrestrained
competition
– lower
prices, higher
quantities,
better quality.
But antitrust
law does
not compel
market
outcomes. Antitrust law
permits firms to set their
prices too high, restrain their
output, and fail to improve
the quality of their products.
Antitrust law simply prevents
firms from putting in place
agreements that restrict
competition or taking steps
that extinguish opportunities
command firms to behave
in a particular way towards
their customers.
Firms are not obliged to
maximize the welfare of
their customers or take steps
that facilitate the success of
their rivals.
law and regulation
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
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dispositive.” [8]
The antitrust laws leave
firms free to engage in
conduct such as a price
discrimination that, when
viewed through the narrow
prism of the model of
perfect competition, conflicts
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Most companies are challenged to deploy
capital most effectively against new business
growth for a number of reasons.
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
pay careful attention
to firms’ business
strategies, the motives
behind these strategies,
and their likely effects,
with the ultimate aim of
preserving competition,
so as to promote
efficiency and maximize
consumer benefits in the
Table of Contents
for existing rivals or suppress
the development of new
ones.
This articulation of antitrust
law contains an important
limiting principle. The
antitrust laws, although
they protect the process
of competition, do not
with the interests of their
customers. [10]
The antitrust laws even allow
firms to sacrifice profits in
situations where maximizing
profits would create
opportunities for rivals. [11]
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The Antitrust Division’s complaint loses sight of this distinction between the goals that
antitrust law seeks to promote and that which the antitrust laws forbid. The complaint
challenges American Express’ rules on the theory that they prevent emerging payment
systems from competing with established ones. However, it offers no facts to support this
conclusion. The complaint boils down to the claim that American Express might lower the
cost of acceptance if forced to drop its anti-steering rules. Yet this result, unless driven by
the expansion of some suppressed rival, does not support an antitrust claim.
The theory on which the
Antitrust Division has
challenged American
Express’ anti-steering rules
is narrow. The complaint
alleges that the rules
“suppress[] competition with
rival networks at the ‘point
of sale,’ where merchants
interact directly with
customers, by disrupting the
ordinary give and take of the
marketplace.” [12] There are
at least three problems with
this attack:
The complaint identifies
as an obstacle to the
after a consumer has
selected a particular form
of payment is critical
to competition between
general purpose credit
and charge card systems;
and
The complaint does
not acknowledge the
pro-consumer rationale
behind anti-steering,
let alone grapple with
why a network forced
to abandon such rules
might lower the price
of acceptance even
independent of the sort
Payment services are a
jointly consumed good. In
order for a payment service
to be of real use, it must be
accepted and used by both
the recipient of the payment
(frequently a merchant) and
an originator of a payment
(frequently a consumer).
In order to launch a new
payment service, a wouldbe entrepreneur must reach
a critical mass of both
recipients of transactions and
generators of transactions.
law and regulation
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
III. The Division’s Complaint Is Flawed
There is no single right way
to catalyze the growth of
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
The theory on which the Antitrust Division has
challenged American Express’s anti-steering
rules is narrow.
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
emergence of new
general purpose credit
and charge card systems
a set of rules that are
removed from the
obstacles that emerging
payment systems must
surmount;
The complaint does not
explain why the moment
Table of Contents
of anticompetitive effect
that motivates antitrust
enforcement.
1. The situation contemplated
by the complaint is removed
from the experience of an
emerging payment system.
As others have explained,
a would-be payment system
faces a particular challenge.
a payment system. Cash,
check, and the various
electronic payment systems
all solved this problem in
different ways. Given the
relatively few truly new
systems that have emerged
in the thousands of years
that human beings have
been engaged in trade, it
is apparent that this is not
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Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
2. The complaint does not
explain why a potential rival
to those three systems would
view the moment after a
consumer has identified his
or her preferred way to pay
as the pivotal moment for
persuading that consumer to
try another general purpose
credit or charge card. Once
people have committed to a
has a very different objective
in mind, i.e. completing the
sale. Merchants can capture
some gains by getting
customers to switch from one
form of
payment to
another. Yet
those gains
are not
infinite, and
there are
significant
opportunity
costs
associated
with
haggling
over the customer’s preferred
payment method (e.g., the
possibility of losing this sale
or the next one). It seems
likely that most merchants
would prefer to use time that
could be spent haggling
with a customer over how
to make a purchase doing
something else. [14] This
truth is reflected in the daily
experience of millions of
little apparent effort to steer
consumers to cash, check, or
its electronic equivalent.
The Antitrust Division
law and regulation
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
an easy problem to solve.
But this problem has nothing
whatsoever to do with the
problem imagined by the
Antitrust Division. The Antitrust
Division contemplates a
world in which merchant
and consumer can each
select from multiple
payment options. Yet by
the time a payment system
has achieved the level of
acceptance necessary for it
to be regarded as a substitute
for American Express,
MasterCard, or Visa, it can
hardly be described as
emerging.
probably regards this
experience as irrelevant to its
case because cash, check,
and even debit cards fall
outside the market allegedly
affected by the anti-steering
rules – the market for general
purpose credit and charge
cards. However, a consumer
who has expressed a
preference for such a card
from one provider may not
Merchants make little apparent effort to steer
consumers to cash, check, or its electronic
equivalent.
particular course of action,
it tends to be difficult to
change their mind. Generally
speaking, it is easier to
influence a choice than it is to
change it. [13]
Moreover, any effort to
influence the choice must take
place through a merchant that
Table of Contents
people at millions of merchant
locations every day. As the
complaint concedes, all
of the payment networks
permit merchants to offer
discounts for other forms of
payment. Indeed, federal
law guarantees merchants
the right to offer a discount
for cash. Yet merchants make
regard a card from another
provider as the next best
substitute. Consumers tend
to concentrate their credit
or charge card purposes on
a single card, rather than
spread those purchases over
multiple credit or charge
cards. [15] Yet some data
suggests that many consumers
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from the Editor
The Utility of Retail Payments
in Addressing the Financial
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Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
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AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
3. The complaint does not
acknowledge the possibility
that the anti-steering rules
serve an important consumer
protection interest. Many
consumers likely consider
the choice about how to
make a particular payment
a private matter. Dee Hock,
the founder of Visa, regarded
privacy as an essential
building block of a successful
payment system. He posited
a world in which transactions
of all types, not just credit
cards, would clear over
unified electronic payment
systems, such as Visa. He
suggested that the nature
of the account accessed by
(seeing as how they have so
much money) paying with
some other form of payment.
It is difficult to see how
preventing a payment system
from meeting
that need
advances the
interests that
the antitrust
laws exist to
serve. The
simultaneous
desire for
status and
financial
privacy
does,
however, suggest why
MasterCard and Visa might
abandon their rules in the
face of an enforcement
action. Although MasterCard
and Visa have expanded
their brands out of the “all
cards for all people” niches
that they once occupied,
the premium cards offered
over the MasterCard and
Visa networks do not appear
to use cards issued on the
MasterCard or Visa system
more often than people who
concentrate their spending
on MasterCard or Visa cards
law and regulation
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
regard debit cards as a
suitable alternative to credit
or charge cards. [16]
Although these two data
points are not conclusive,
they raise the possibility that
the network rules actually
permit more effective steering
than they prohibit.
use American Express cards.
The fact that American
Express cardholders tend to
rely on alternatives would
create a bit of a dilemma
for American Express if the
Antitrust Division’s lawsuit
were to succeed. To the
extent that American Express
cardholders dislike being
asked to use another general
The complaint does not acknowledge the
possibility that the anti-steering rules serve an
important consumer protection interest.
the consumers was a private
matter between a given
consumer and his or her
bank. Put slightly differently,
someone who drops an
American Express Platinum
Card on the counter to pay
for some groceries probably
does not want to be asked
whether they would mind
Table of Contents
to be quite as iconic as
the premium cards offered
by American Express. Yet
cards bearing the marks
of the two companies are
carried by far more people,
particularly when debit cards
are added to the mix. People
whose primary card is an
American Express card tend
purpose card, American
Express would need to find
other ways to vindicate that
interest. The most obvious,
of course, would be to lower
the price of acceptance to
the price of the next best
substitute. But American
Express might elect to run the
risk that merchants would not
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from the Editor
The Utility of Retail Payments
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Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
conceivable that MasterCard
and Visa could be the
primary beneficiaries of the
Antitrust Division’s claims –
claims pursued in the name
of emerging alternatives
to all three of the major
general purpose payment
card systems.
IV. Perhaps It Is Time to Do The Opposite
As it has with a great many industries, the Antitrust Division has played an important role
in shaping the evolution of the payment industry in the United States over the past almost
40 years. Beginning with its waffling in the Worthen litigation and continuing through its
challenge to the loyalty rules maintained by MasterCard and Visa, the Antitrust Division’s
interventions have frequently not produced the intended results.
As it has with a great many
industries, the Antitrust
Division has played an
important role in shaping
the evolution of the payment
industry in the United States
over the past almost 40
years. Beginning with its
waffling in the Worthen
litigation and continuing
through its challenge to the
loyalty rules maintained
by MasterCard and Visa,
the Antitrust Division’s
interventions have frequently
not produced the intended
results.
When the Antitrust Division
declined Visa’s invitation
to support Visa’s then-rule
barring dual participation
in the Visa and MasterCard
networks in the suit brought
by the Worthen Bank of
Arkansas, the Antitrust
Division did not expect
that nearly all banks would
immediately join both
Table of Contents
systems. Even though its
own decision not to support
Visa’s rule precipitated the
change in the status quo, the
Division immediately opened
an investigation into the
overlapping ownership.
Likewise, when the Antitrust
Division brought the lawsuit
challenging the loyalty rules
maintained by MasterCard
and Visa, it claimed that
allowing banks associated
with MasterCard and Visa
to issue cards over the
American Express network
would unleash a new
wave of innovation in the
industry. Attorney General
Reno claimed at the press
conference announcing the
lawsuit that MasterCard and
Visa’s rules had suppressed
the emergence of smart
cards in the United States,
implying that the smart cards
would materialize as soon
as the rules disappeared.
Well, the rules disappeared
several years ago, and
smart cards have yet to
emerge in any real way in
the United States.
law and regulation
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
choose to steer American
Express cardholders to
MasterCard and Visa. That
assessment could prove
flawed, however. It is
This track record suggests
another parallel to
“Seinfeld.” A few seasons
into the series, Jerry’s
friend, George Costanza,
reached the conclusion that
his instincts were always
wrong. Having come to
this conclusion, he adopted
a new self-management
tool. Whenever his instincts
pointed in a particular
direction, he did the
opposite. Following this
heuristic, George’s fortunes
turned. Given the Antitrust
Division’s track record
in the industry and the
underwhelming complaint,
perhaps courts will take a
cue from George and do the
opposite of what the Division
has asked.
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U.S. v. American Express,
et al.— Failing To Make
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An Overview of Social
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AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
^ Tom resides in the San Francisco office of O’Melveny, where he works on antitrust and financial services litigation
and counseling. His clients in the industry include Visa. The views expressed in this article are Tom’s alone. Tom
thanks his colleague, Sam Zun, for excellent research assistance.
[1] Antitrust Division, Timeline of Antitrust Enforcement Highlights at the Department of Justice (available at http://
www.justice.gov/atr/timeline.pdf).
[2] See, e.g., United States v. AMR Corp., 140 F. Supp. 2d 1141 (D. Kan. 2001) (rejecting antitrust claims against
American Airlines predicated on the failure to maximize profits).
[3] United States et al. v. Am. Express Co. et al., No. 10-cv-04496-NGG(CLP), Docket No. 1 (“Complaint”) ¶ 31.
[4] 15 U.S.C. § 1.
[5] Bd. of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918).
[6] Id.
[7] Donald I. Baker, Compulsory Access to Network Joint Ventures Under the Sherman Act: Rules or Roulette?, 1993
UTAH L. REV. 999, 1036 (1993).
law and regulation
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Endnotes
[8] Frank H. Easterbrook, The Limits of Antitrust, 63 TEX. L. REV. 1, 12 (1984).
[9] Carl Shapiro, Deputy Assistant Attorney General, Dep’t of Justice Antitrust Div., Antitrust in Network Industries,
Address before the American Law Institute and American Bar Association (Jan. 25, 1996) (available at http://www.
justice.gov/atr/public/speeches/0593.pdf).
[10] See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 220 (1993) (“Congress did not
intend to outlaw price differences that result from or further the forces of competition”).
[11] See AMR, supra note 2, at 1218 (rejecting government’s theory that “an established competitor should not,
and indeed, cannot deviate from its existing market strategy in the face of aggressive price cutting by a new
entrant”)..
[12] Complaint, supra note 3, ¶ 3.
[13] This is consistent with the advocacy effect, under which people come to believe more strongly in the position
they first advocate—or, as here, the card they choose first. See Corinne Bendersky & Jared R. Curhan, Cognitive
Dissonance in Negotiation: Free Choice or Justification?, SOC. COGNITION Vol. 27, No. 3, 455, 471 (2009)
(citing Robert Cialdini, Attitudinal Advocacy in the Verbal Conditioner, J. PERSONALITY & SOC. PSYCHOL. Vol. 17,
No. 3, 350 (1971)).
[14] Diane Offereins, president of payment systems for Discover, is quoted making this point in an article by Peter
Eichenbaum about the Antitrust Division’s case. See Peter Eichenbum, Discover Says Antitrust Lawsuit Won’t Help
Consumers (“[Merchants] don’t want people dallying in line having conversations over what they’re going to pull
out of their wallets.”) (available at http://www.businessweek.com/news/2010-10-07/discover-says-antitrust-lawsuitwon-t-help-consumers.html).
[15] Marc Rysman, An Empirical Analysis of Payment Card Usage 7 (May 11, 2004) (unpublished manuscript,
available at http://74.125.155.132/scholar?q=cache:q_ovS2iYNUEJ:scholar.google.com/&hl=en&as_sdt=2000).
[16] Tom Brown & Lacey Plache, Paying with Plastic: Maybe Not So Crazy, 73 U. CHI. L. REV. 63, 83-85(2006).
Table of Contents
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The Utility of Retail Payments
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U.S. v. American Express,
et al.— Failing To Make
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An Overview of Social Commerce and What’s
Fueling its Growth
by Karen Webster
October 2010
Introduction
This section of the Lydian Journal examines the world of social commerce, or as some
have described it, the fourth retail channel.
Four distinct elements define this commerce opportunity for merchants: (i) the explosive
growth of social networks, in particular, Facebook, (ii) the increasing time that people
spend on social networks (at the exclusion of other activities), (iii) the increasing use of
social networks for information related to the purchase of products and services, and (iv)
the investment that merchants are making in elevating their presence there.
social commerce
(Outside-In)Novation: The
Changing Paradigm for
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S-Commerce: A Fourth Retail Channel
This article provides a foundational framework for examining the potential of social
commerce. Future topics will include the challenges of turning fans into customers
on social networks, the battle of the social network platforms for social commerce
dominance, social commerce in a B2B environment, social commerce around the world,
and social commerce business models.
A Brief History of Social Networks
Social networking isn’t all that new. In fact, it’s been a staple of interaction for as long as
there have been more than two people on earth. Social networks have evolved as people
of similar interests, goals, and backgrounds have come together to make friends, share
ideas, and even motivate new ways of thinking.
Tim Attinger
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Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
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Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
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David S. Evans
Patrick Gauthier
The Internet, however,
has really fueled both the
creation of and possibilities
for social networks and social
commerce. In particular,
it enabled virtual “meetups” on these networks
and used them to connect
people on and offline in new
and different ways. These
networks began appearing
on the Web in 1997 when
the famous – or infamous –
SixDegrees.com debuted,
enabling for the first time
the sort of social interaction
that was possible only in the
physical world. This early site
linked people through their
mutual business or personal
connections, allowing them
to mine their friends (and
their friends’
friends)
for sales
leads, jobhunting tips,
friendship, or
dates, and
even – as
the longstanding joke
states – their
relationship
with film star
Kevin Bacon.
The tipping point for online
social networks, though,
can be traced back to 2003
when the perfect storm of
the advent of broadband
technologies, PC penetration,
and the rise of software
platforms fueled the entry
and massive growth of a
new category of online social
interaction.
Today, these social networks
have successfully reversed
the paradigm on the
Internet: from users passively
receiving information from
an assortment of Web pages,
to users who actively create
information and experiences
and then easily share them,
including information about
their favorite brands and
social commerce
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Social commerce around
these social networks isn’t all
that new either. Early forms
of social networks include the
guilds in medieval Europe,
trade groups, and unions,
which can be traced back to
the early 18th century, and
more modern venues like the
Chamber of Commerce and
Rotary Clubs, which have
emerged over the last 10
decades as accepted forums
for professionals in similar
industries and business
communities to meet and
further commerce, business
relationships, and advocate
for changes in business
practices.
most recent purchases in
a dynamic and interesting
way. Once primarily a
popular way for teens and
young adults who grew
up online to stay in touch
with friends, these networks
have evolved to become
platforms for engaging
people and communities of
all demographics and from
all regions of the world and
a new sales channel for
merchants who are able
to effectively tap into these
communities of interest,
sometimes even right on that
merchant’s fan page.
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
The First Force: The Explosive Growth of Social Networks
First, let’s start with the basics – the growth of social networks, and in particular, the
explosive growth of Facebook. Social networks continue to evolve at a dizzying pace
both in terms of the growth seen in existing sites and in the rapidly growing number of
social networks themselves. Today, roughly 40 percent of all people in the United States
use social networks in some form or fashion, representing 61 percent of all Internet users.
Worldwide, 75 percent of Internet users visit social network or blog sites, a 24 percent
increase since last year. [1]
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Some Unpleasant Credit Card
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U.S. v. American Express,
et al.— Failing To Make
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An Overview of Social
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Making Sense of Ever-Changing
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of 18-34 who account for 45 percent of
all tweets. Unlike Facebook, many Twitter
users are passive, as 41 percent of all
registered users have never tweeted once,
and only 20 percent of users have created a
140-character post more than 10 times. [9]
Most of these people spend their time on
Facebook. Worldwide, Facebook has more
than 500 million active users (130 million
in the United States) – 50 percent who log
onto the site on any given day. The company
reports users spend over 700 billion minutes
per month there. [5] MySpace, which until
2008 was the dominant social network
on the globe, today has 122 million users
in comparison. [6] MySpace’s growth is
certainly moving in the “wrong” direction, but
as of October 2010 in the United States, it
was still the 10th most-trafficked website on
the Internet and third most-frequented social
network (5.38 percent), behind Facebook
(61.1 percent) and YouTube (18.35 percent).
[7]
Twitter, social nets’ micro-blogging cousin,
posted 190 million users as of July 2010,
who collectively produce an average of 65
million tweets a day. [8] These “tweeters”
are predominantly users between the ages
In the United States, more Facebook users
are female than male (54 percent to 42
percent), they are married or in a relationship
(44 percent versus 18 percent for single
folks) and well educated with more than a
third in or having graduated from college.
The average user of Facebook is 38 but in
an effort to stay in touch with their kids or
grandkids (or high school chums), the use of
social networks by Americans older than 50
has doubled in the past year with a virtual
majority of baby boomers and about onequarter of the nation’s seniors now using
these sites on a regular basis.
social commerce
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Who are these visitors? Well, just about
everyone! Eighty-two percent of 14-17 year
olds [2] and 99 percent of 18-24 year olds
[3] have a social networking profile. Half (47
percent) of Internet users ages 50-64 and
one-in-four (26 percent) users ages 65 and
older now use social networking sites. [4]
Social networks catering to business
professionals are also exploding. LinkedIn,
has seen its user base grow by 40 percent
in 2010 to more than 70 million users
worldwide. Executives from all Fortune 500
companies are LinkedIn members, and a
new member joins LinkedIn approximately
every second. Over half a million LinkedIn
groups exist, and 50 percent of Fortune
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Source: eMarketer, April 2010
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
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AUTHORS
Just what’s driving the popularity of these
networks? Social network membership, by
design, is an extension of a person’s interests.
People join because it is an efficient way
to meet people like them and stay in touch
with friends, colleagues, and people who
share their interests. Once people are there,
they find more people who work in the same
place, went to the same school, like the same
causes, follow the same music, read the
same books, eat the same foods, etc. It is this
reciprocity that has contributed both to the
rise of the leading social networks, creating
community on the user’s terms and to the
opportunities to form groups with common
interests that can now be monetized in new
and different ways.
The Second Force: Time Spent on Social Networks
It’s not just that social networks are getting bigger and more pervasive. They are
beginning to dominate time spent online.
Globally, it was reported earlier this year
that more than 300 million people spent 113
billion minutes on social networking sites;
representing a 20 percent annual growth in
audience and more than 100 percent annual
growth in minutes from one year ago. The
global average time spent per person on
social networking sites is now nearly five
and half hours per month, a nearly two hour
increase from 2009. In August 2010, U.S.
Internet users spent 41.1 billion minutes on
Facebook, surpassing Google’s 39.8 billion
social commerce
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
100 companies hire through LinkedIn. [10]
Perhaps not surprisingly, its user profile is
slightly older and more affluent with 44 being
the average age of users who earn nearly
$100,000 annually. [11]
minutes for the first time.
Time spent on social networks Facebook and
Twitter accounts for nearly one-quarter of the
time spent online for Americans, up nearly 50
percent from a year ago and eclipsing online
activities like online gaming, e-mail, and
instant messaging. This is not really all that
surprising, given the fact that people can do
all of that within these social networks. People
can play games like FarmVille, Mafia Wars,
and SuperPoke! Pets without ever leaving
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Americans spend nearly a quater of their online time on social networking
sites and blogs – a 43 percent increase over 2009, a new study shows.
Ignacio Mas
June 2009
June 2010
15.8%
22.7%
Scott Schuh
Social Networking/Blogs
Karen Webster
Games
9.3%
10.2%
Jing Yang
E-mail
11.5%
8.3%
Portals
5.5%
4.4%
Instant Messaging
4.7%
4%
Videos/Movies
3.5%
3.9%
Search
3.4%
3.5%
Classifieds/Auctions
2.7%
2.7%
Source: The Nielsen Company
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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AUTHORS
These time constraints are also a driver for the
movement of social networks from activities
performed at computers at home or at work
to activities that can be easily performed
anywhere from a mobile phone. Social
networking via mobile browsers increased
from 6.5 percent to 11 percent between
January 2009 and January 2010, mainly
due to increased usage of smartphones, the
iPhone in particular. There are more than
150 million active users currently accessing
Facebook through their mobile devices, and
people that use Facebook on their mobile
devices are twice as active on Facebook than
non-mobile users. Of Twitter’s active users, 37
percent use their phone to tweet. [13]
The Third Force: Use of Social Networks as an Information
Resource
A sociologist would define a community as a group of people who interact and share a
common location. The Internet enables online social networks as the common location
where people can connect with their friends or make new ones – irrespective of physical
location. People join social networks because they want to be part of a connected
community. Once there, these members willingly disclose quite a bit of information about
themselves – their careers, education, interests, hobbies, and even their political and
religious interests.
According to Facebook, the average user
has 130 friends, creates 90 pieces of
content each month, and is connected to 80
community pages, groups, and events. More
than 30 billion pieces of content (Web links,
news stories, blog posts, notes, photo albums,
social commerce
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Facebook or MySpace, “converse” with
friends via comments to their posts, and IM
friends via those platforms, thus economizing
their time in an already time-pressured world
on a platform that has become ubiquitous.
[12]
etc.) are shared each month on Facebook.
These numbers continually rise as more
people join and interact on the network.
These users trust both the platform and the
friends they have allowed to be part of their
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Source: eMarketer, April 2010
Table of Contents
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Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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friends who post news and updates in their
status feeds. Fifty-three percent of people
on Twitter recommend companies and/or
products in their Tweets, with 48 percent of
them delivering on their intention to buy the
Trust in the platform is obviously essential in
garnering an audience because users who
don’t trust the network or its members will
not frequent the site or find value in it. Social
network users who have greater trust in their
peers are more willing to actively engage
with the respective site, including to make
purchases.
This is an extremely relevant point as it relates
to turning social network fans into customers
for merchants. Peer-to-peer word of mouth
has always been a highly valued source of
credible, dependable information, as the best
referral is from a “person just like me.” [14]
Social media platforms, in particular, not only
make that feedback more readily available,
but also richer and more robust. Nearly 50
percent of consumers use social networks for
product referrals.
Approximately 49 percent of consumers use
social media to learn about offers, and 45
percent use the social media space to learn
about products, predominantly from their
social commerce
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
own personal networks with that information.
They also willingly share information about
just about everything on their feeds and in
their status, in spite of the recent firestorm
over data leaks on the platform.
product. [15] Sixty-seven percent of shoppers
spend more online after recommendations
from an online community of friends. A
recent survey by the Opinion Research Center
revealed 84 percent of Americans say online
customer evaluations have an influence
on their decision to purchase a product or
service, and 82 percent of those who go
online to research a product will buy that
product online. Now, however, after friends
and family, the top driver for brand trust is
online reviews and feedback from the social
media space.
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Source: cmb consumerpulse, 2010
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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AUTHORS
Tim Attinger
Tom Brown
David S. Evans
The Web will be involved in 53 percent of total retail sales by 2014 as consumers
increasingly use the Internet to research products before buying. [16] In fact, roughly 83
percent of U.S. consumers shop online at least once a week.
When coupled with
the fact that consumer
recommendations are the
most trusted “advertising”
medium for Internet users
and time on Facebook (in
particular) accounts for more
of the time people spend
online. Merchants and
their marketers increasingly
view it as an important and
convenient sales channel
with which to turn fans into
customers. [17]
Nearly 100 percent of all
major retailers will have a
fan page on Facebook by
the end of 2010 for one
good reason: Traffic to
their own websites is being
cannibalized by traffic to
their fan pages on Facebook,
and those fans tend to be
over the past
two years.
At the same
time, just
about onehalf of all of
the Internet
users
worldwide
have
joined an
online brand community,
and after doing so, feel
more positive about the
brand. Reports suggest
that nearly three-quarters
of these fans are more
likely to buy the brand they
say they “like,” feel more
loyal, and most importantly,
recommend others to join.
[18] It is this viral sharing
that makes social networks
so engaging for its users
social commerce
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
The Fourth Force: Merchant Investment in Social Networks
Facebook fan to merchants.
Reports suggest that an
average Facebook fan is
worth about $136.38. For
some very successful social
marketers, the value can be
dramatically higher, and
for some less successful
companies, it can be virtually
zero. [19] This same source
suggests that, on average,
Facebook fans spend an
extra $71.84 they would not
It is this viral sharing that makes social networks
so engaging for its user.
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
more willing to buy and
advocate on behalf of the
brand.
Globally, just about a third
of Internet users connecting
with a brand now do so on
a social network, while the
proportion of those checking
out brand sites has dropped
Table of Contents
and so potentially gamechanging for merchants who
can acquire customers more
cost effectively through these
friend referrals.
While imperfect and still
quite imprecise, we’re
beginning to see research
that establishes a value of a
otherwise spend on products
they describe themselves as
fans of, compared to those
who are not fans. More than
half of people on Twitter
recommend companies
and/or products in their
Tweets, with just about that
same percentage actually
following through to buy that
product. [20]
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Although many merchants are keen on the idea of using social networks as platforms for
conducting commerce, only a small number of them actually transact on those platforms,
and fewer still have tapped into the “mother lode” of group dynamics that these networks
can foster. Efforts to tap into commerce in
a more social way fall into three distinct
categories:
• Using a shopping cart
to facilitate checkout
on Facebook. Pavyment
is probably the most well
known of these enablers and
uses PayPal as its payment
backend. It launched in
November 2009 and
claims to have roughly
30,000 businesses and
individuals who have used
the app, with more than
500,000 Facebook users
who have shopped for
products in stores using it.
It is a pure-technology play
and provides a shopping
cart, the ability to offer fan
discounts, a search tool, and
the ability for customers to
add comments and reviews.
Although technology makes
commerce possible, it still
falls to the merchant to
promote and engage the
social network and drive
traffic to their fan page.
• Using
deal sites
off social
networks
to drive
sales at a
discount
(in
the hopes that deal
customers convert into
repeat customers).
Groupon and Living Social
are probably the most
well known of these social
commerce schemes, although
at last count there were
roughly 200 “knocks-offs”
attempting to replicate its
success. Their focus is mostly
services and on the longtail, local retailers. These
“loss leaders” drive mostly
unprofitable sales to local
merchants who hope to
convert “trials” into long term
customer relationships.
social commerce
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Who’s Turning Visits Into Cash
• Promotional activities
on social networks
that drive activity to
their existing merchant
websites or even
physical stores. Here
schemes abound – including
Macy’s Virtual Mirror
that enables shoppers
to friend-source product
recommendations while
in stores – to the Neiman
Marcus Midday Dash
promoted on their fan pages
to Jet Blue’s weekly Twitter
promotions. These marketing
initiatives are mostly one-off
efforts to drive a sales spike
and are hard both to track
and scale.
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Conclusion
The four forces discussed in this piece illustrate why the time is right for social commerce,
and why it is ripe to happen inside of social networks, and in particular, Facebook.
Over the last two years, we’ve seen a sea-change take place in both the growth of these
networks and how people interact on them. The fear of transacting online that kept
eCommerce from igniting in its early days seems not to exist on these networks. Visitors
now seem to expect to see offers and promotions from their favorite brands. The logical
extension is to enable them to transact without ever leaving that fan page.
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
themselves to drive commerce in ways that
have never been done before.
social commerce
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Most of the existing social commerce
initiatives run the gamut from technology
enablers – in essence providing a social
network shopping cart to group deal sites
that encourage sharing on and off social
networks – to social media campaigns on
social networks that drive commerce back to
an existing merchant website. Scant few have
mobilized the group dynamics that make
these networks such an attractive environment
for low customer acquisition through the
viral sharing that takes place when people
“advocate” for a product or service and
their friends follow suit. That scenario seems
not to exist just yet, in part because creating
that experience on Facebook and other
social networks is a technology feat made
more challenging given the pace at which
Facebook changes its API and the knowledge
needed to really ignite group dynamics. Yet,
this is the sweet spot of social commerce and
where the great opportunity really lives for
merchants, the social networks themselves,
and aspiring entrepreneurs.
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Time will tell for all of the energetic
entrepreneurs who dream of Grouponlike valuations. One thing is for sure. We
are at the very beginning of what will be
an incredible opportunity for merchants,
consumers, and the social networks
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Source: Compete, 2010
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
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AUTHORS
[1] http://blog.nielsen.com/nielsenwire/global/social-media-accounts-for-22-percent-of-time-online/
[2] http://itsjosipnotjoseph.com/2010/08/26-facts-about-millennials-online-social-and-mobile-behaviors/
[3] http://doteduguru.com/id3021-social-networking-research-99-of-your-audience-are-on-them-still-need-moreconvincing.html
[4] http://pewresearch.org/pubs/1711/older-adults-social-networking-facebook-twitter
[5] http://www.facebook.com/press/info.php?statistics
[6] http://www.informationweek.com/news/infrastructure/remote_access/showArticle.jhtml?articleID=228000187&ci
d=RSSfeed_IWK_All
[7] http://www.hitwise.com/us/datacenter/main/dashboard-10133.html
[8] http://econsultancy.com/us/blog/6205-revised-mind-blowing-social-media-statistics-revisited-and-20+-more
[9] http://www.digitalbuzzblog.com/infographic-twitter-statistics-facts-figures/
social commerce
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Endnotes
[10] http://econsultancy.com/us/blog/6205-revised-mind-blowing-social-media-statistics-revisited-and-20+-more
[11] http://royal.pingdom.com/2010/02/16/study-ages-of-social-network-users/
[12] http://itmanagement.earthweb.com/features/article.php/3896501/Social-Networks-Trounce-Email-in-Study.htm
[13] http://www.huffingtonpost.com/2010/04/14/twitter-user-statistics-r_n_537992.html
[14] Edelman Trust, Barometer, 2008
[15] ROI Research for Performance, June 2010
[16] Forrester report in March 2010
[17] The Nielsen Company. Trust in Advertising. October 2007.
[18] http://socialcommercetoday.com/social-media-stats-global-for-branding-social-networks-not-websites-rule/
Tim Attinger
[19] http://gigaom.com/2010/06/11/how-much-is-a-facebook-fan-really-worth/
Tom Brown
[20] ROI Research for Performance, June 2010
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
by Patrick Gauthier
November 2010
Introduction
More than ever, the technology and platforms underpinning the technical and economic success
of payments are evolving and confronting industry decision-makers with the dilemma of whether
to invest in current infrastructure or adopt new delivery solutions. The technology section of the
Lydian Journal will feature the thoughts of leaders of our industry on creating and delivering the
tools that may transform the operation and experience of modern payment services. In this first
article, we discuss how the open payment platforms have burst onto the scene and are redefining
the boundaries of the industry by opening up the development cycle of payment applications.
It has been over a year since
PayPal shook the payment
industry with the introduction
of Adaptive Payments and the
PayPal X platform, making it
an opportune time to evaluate
how open payment platforms
may help further weave
payments into the fabric of
commerce.
When PayPal announced
that it would open its APIs to
payment flows and account
management, more than one
observer was stunned, then
excited. (See PYMNTS blog
post: Why PayPal May Do
to Payments What Apple Did
to the Mobile Ecosystem). In
fairness, PayPal was not the
first to offer Payment APIs to
developers, as Amazon had
launched the Amazon Flexible
Payment System in 2007.
However, PayPal went further.
With PayPal X, it launched the
Table of Contents
era of “embedded payments,”
potentially profoundly
changing the network
effects that have governed
payment networks. Opening
the payment flows enabled
a number of transactions
in the social space and
commercial space that were
difficult, if not downright
impossible, to complete over
traditional payment engines.
Giving access to account
management function built an
entirely new set of acquisition
channel with application
developers and service
providers.
The significance of the event
was not lost on the industry.
In the months following the
introduction of PaPal X, other
payment networks launched
innovation labs and other
open programs. Beyond
payments, Yodlee launched its
technology
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Making Sense of Ever-Changing
Payment Technologies: The Year
of APIs and the Reshaping of the
Payment Ecosystem
FinApp store for developers;
Facebook launched Facebook
Credits, its virtual currency
system for Facebook Apps;
all the while Google hinted
it would revamp Checkout.
2010 will go down in the
history books as the year
payment platforms burst to
the front of the eCommerce
scene.
Why does it matter?
The electronification of
payments is a seminal trend
that fueled the success
of payment networks for
several decades and should
generate an estimated
$3.5 trillion in transactions
in the United States this
year alone. However, most
of the traditional retail
commerce use cases are now
covered. Growth is therefore
expected to come from other
applications, many of them
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
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Tim Attinger
In today’s connected world,
the distinction between
commerce and payment is
increasingly blurred. Already
the notion of “checkout,”
mimicking that of a physical
store, is challenged: App
stores and music stores, for
instance, have substituted
pre-registration and
authentication for the act
of approving an order and
selecting a form of payment.
Increasingly, as buyers and
sellers connect over mobile
or Internet connections, they
exchange information in a
string of activities that include
payments as an embedded
step. Consider the not too
hypothetical of a consumer
ordering a pizza on a mobile
phone, after having received
a targeted digital coupon
tied to her loyalty card,
which she will redeem at the
restaurant by flashing a 2D
bar code while also paying
using a payment account
linked to the loyalty account.
Already, Domino’s Pizza has
experienced serious sales
lift from targeted mobile
couponing, and the likes of
Target and Starbucks have
explored 2D bar codes on
smartphones used in the
store, demonstrating that in
the single flow from lead
generation to post purchase
service, the consumer is
better satisfied with a fullyintegrated experience.
Such integration requires
different applications – in
this case targeted promotion,
loyalty, payments, order
management – to share
data, potentially across the
systems of different services
providers. This can only be
accomplished by opening
up the various platforms
involved.
technology
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
enabling online services,
for which the ISO 8583
standard is severely limiting.
The ISO 8583 standard is
built on a message format
first conceived when dialup was the primary method
to connect a POS to a
network. It was designed
for compactness in order
to contain the transaction
times. However, much of
today’s advanced commerce
applications require a richer
set of payment instructions,
more varied transactions
flows, and a support for
many more data types. New
platforms, such as Syncada
and Revolution Money, are
expressions of the need to
offer broader functionality to
pursue these opportunities.
This example shows not
only the blurring of the
lines between commerce
enablement and financial
transactions but also between
face-to-face transactions
and online remote ones.
There is no denying that our
current payment infrastructure
has been optimized for
face-to-face transactions.
Labeling online transactions
“card not present” is the
best demonstration of that.
Figure 1: Example of Payment Use Cases
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
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AUTHORS
Tim Attinger
In addition, the conjoint development of cloud
computing and open source are also seminal
trends that are profoundly changing the
dynamics of online services. The innovation
benefits of open source are well documented,
as proven by the rapid progress of Linux.
Many companies are leveraging the cost
advantages of running their applications
on a SaaS platform. Witness, for instance,
the opportunities that small and medium
businesses now have to utilize ERP systems that
five years ago were the realm of large cap
companies.
We must consider the potential benefits of a
payment platform from the dual perspective of
seamless commerce flows and open platforms.
Integration with other online functions will
drive transactions across a number of use
cases first in peer-to-peer payments, whether
person-to-person or business-to-business, and
eventually in buyer-to-seller transactions.
I intentionally use the “buyer-to-seller”
terminology as in a post consumerism era
when the roles of producers and consumers of
goods and services will be more fluid. I submit
that the closed services will fail to capture the
bulk of transactions from embedded payments.
First, close platforms will limit the number of
use cases serviced, while open platforms will
cover for an ever-growing variety of clients
and use cases by integrating applications and
services from multiple providers. Second, in a
world where 50,000 developers can register
with PayPal X, no single company will have
the ability to remain competitive on its own.
Of course, we are only at the start of the
era of open commerce platforms. Few
solutions exist today that, in addition to
flexible payments, bring together the ability
to integrate different service providers under
a seamless user environment. To do so would
require at least two critical enabling services –
a trustworthy federated identity solution and a
secure data interchange.
technology
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Buyers and sellers, but also peers involved
in a casual transaction, need new tools to
establish an account relationship and complete
transactions.
Identity is critical in many ways: It ensures the
right degree of user personalization, enables
the reliable billing of services used across a
platform, and provides a strong foundation
of trust for any transaction occurring on the
platform.
Federated identity is not a novel concept:
Microsoft attempted twice – with Passport and
with CardSpace – to become the principal
Figure 2: Abstract View of an Open Payment Platform
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
A secure data interchange
solution is the other
foundational service
Table of Contents
necessary to a healthy
commerce platform. I refer
here to the methods and
systems permitting the
exchange of data between
applications in ways that
maintain the integrity
and confidentiality of the
information, ensure the
compliance with regulatory
requirements, and establish
clear ownership of the data
created in the course of a
transaction. Payment systems
have created such systems
and protocols. However, as
discussed in the case of ISO
8583, these networks are not
built to easily allow new data
types. Note that a corollary
of these requirements is that
the data interchange must not
compromise the separation
of the applications of the
different service providers.
One would argue that
service-oriented architectures
have been created to address
these requirements. Indeed,
but as each new data
security breach demonstrates,
preventing unwanted leakage
is not as easy as it seems.
Beyond the identity and data
interchange services, a robust
platform requires a hard-tofind combination of developer
support, neutrality in the
market, and transparence
with ecosystem participants.
Developer support is more
than documented APIs. The
quality of the sandbox in
which developers may create
and test their applications is
critical to the adoption of the
platform. In the case where
applications are co-hosted on
a common platform and run
as a service, the certification
process of the application is
equally important as every
new combination of utility
may affect the capacity of the
platform owner to maintain
a level of test coverage
compatible with the risks that
will be warranted against.
Beyond these functional
elements, engaging and
maintaining the community;
providing training but also
generally diffusing technical
knowledge amongst
participants; encouraging
and directing community
contributions to core
platform elements; are all
differentiators between viable
ecosystems and failed ones.
technology
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
provider of identity for the
net. Others, such as Sun with
the Liberty Alliance or IBM/
Novel with project Higgins,
acted in response, promising
a more open solution. All
resulted in robust protocols
and frameworks to manage
identity in ways that would
preserve privacy while
automating a number of
application-to-application
interactions. More recently,
Facebook Connect has
resurrected the prospect of
carrying an identity across
platforms by enabling thirdparty login using a Facebook
credential. However, a
form of identity is only as
trustworthy as the guarantee
provided by its issuing
party, which guarantee is
generally a function of the
validation that was conducted
at the time of issuance, the
degree of strength of the
authentication completed at
the time of the transaction,
and the risk management
performed in the background.
None of the actors that
helped develop identity
systems have demonstrated
the ability to provide a
complete identity lifecycle
with a high trust factor. At
this point, it is likely that
only an entity with a large
base of fully validated and
authenticated users – such
as parties to commerce or
payment transactions – will
be in a position to offer
identity services.
Market neutrality is
essentially a business model
issue pivoting around the
ownership of intellectual
property created around
the platform. A platform
provider that would protect
its intellectual property
while competing with the
very developers and service
providers it seeks to attract
would likely affect the health
of the ecosystem it seeks to
foster. For instance, I tested
in 2006 the potential of
CardSpace as a method for
improving the risk profile
of online transactions. The
solution was promising,
but it lacked traction in the
marketplace possibly because
of the relative success of
Vista, certainly because of
the concerns that followed the
introduction of Passport a few
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
providers for merchants. Winning providers
will have to include not only payment
expertise but also the muscles required to
manage actively an ecosystem with speed and
diplomacy.
Transparency relates to the rules imposed
by the platform owner on its tenants
(service providers) pertaining to the
application certification requirements and
the monetization options. We can all think
of a number of platforms where the owner
changed the rules in ways that clearly tipped
the economic scale in his favor or in favor of
the closest allies, only to see defection by the
very developers it sought to control.
In the course of its first year, PayPal reports
a fast-growing number of applications
leveraging the PayPal X platform. We will
see in the coming weeks and months how
far they will help transform the application of
payments.
For the last 40 years, success in payments was
largely predicated on the reach of distribution
with consumers, depth of acceptance with
merchants, and the strength of the brand
that would bind them together. Looking
forward, I believe leading indicators of the
strength of a payment solution will include the
richness of the ecosystem supporting it. As
the purchase cycle increasingly depends on
buyer engagement facilitated by computers or
mobile devices, the embedding of payments
in service applications will become a primary
factor of its selection by the buyer at the time
of the transaction. This not only redefines
the notion of acceptance but also broadens
the field of participants to include, among
other application developers, providers of
complementary services, and IT solution
Patrick Gauthier is a payment industry executive with 20
years of experience in developing, selling, and deploying
around the world new technologies for payment and
commerce. Patrick is currently Head of Market Intelligence
at PayPal. The views expressed in this column are that
of the author only and do not necessarily reflect that of
PayPal or eBay Inc. Patrick can be reached via LinkedIn
(http://www.linkedin.com/in/prxgauthier) or Twitter
(PRGauthier).
technology
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
years earlier.
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
by Jing Yang
August 2010
Introduction
Until two years ago, foreign banks wanted desperately to gain
exposure in China, hoping to take advantage of the rise of a
credit culture among the fast-growing Chinese middle class. But
after years of effort, banks found that China’s entry into the World
Trade Organization (WTO) did not ease their entry into the
Chinese market and the “Golden Rush” did not seem to deliver
the profits they had anticipated. Then when the recent global
recession came, many foreign banks sold or reduced the size of
their operations in China to help rescue their business at home.
While U.S. and European banks languished
at home, busy dealing with consumers and
regulators, Chinese banks, along with their
peers in other BRIC (Brzail, Russia, India,
China) countries, emerged as strong players
in the financial crisis. The completion of the
transformation from communist bureaucracies
into some of the world’s largest banks by
market value was symbolized by the recent
initial public offering (IPO) of China’s
Agricultural Bank. Four of the world’s 10
largest banks by market value are now
Chinese, while there were none in 2004. This
is an indication of how the big picture of the
global banking industry has shifted.
Tim Attinger
payments wiki
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Payments Wiki – China
The Chinese bankcard market has undergone
a significant shift in the past a decade as well.
At the end of 1993, 4 million bankcards had
been issued in China, but by the first quarter
of 2010, there were 2.2 billion bankcards
in China. During the same time period, the
bankcard penetration rate rose from 1 percent
to more than 32 percent of the total retailing
value. Although the growing Chinese middle
class and other economic factors are major
drivers behind this growth, industry regulators
and operators such as People’s Bank of
China, China Bank Regulatory Committee,
and China UnionPay’s (CUP) role in pushing
for the industry infrastructure, and acceptance
SPONSORED ADVERTISEMENT
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Tim Attinger
Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
On the other hand,
profitability of their
bankcard business
remains an aspiration
for most of the issuers
in China. A low
revolving rate, pricing
competition, and
high solicitation costs
made the business
models that were tested
internationally almost
irrelevant. It has become
widely recognized by Chinese
issuers and industry leaders
that they need to shift the
strategic focus from volume
of cards to the quality
and/or profitability of
customers.
payments wiki
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
is undeniable.
The entry of Western
banks into China has
been largely crippled by
limited network size and
strictly regulated ownership
in the Chinese banking
industry. Though locally
incorporated international
banks have been allowed
to provide RMB banking
services to Chinese
consumers since December
2006, the time required
to receive approval for a
bank branch or a product
offering still means that
foreign banks have no
choice but to find their
niche in order to compete
with the larger, more
established Chinese banks
that have tens of thousands
of branches.
Table of Contents
PYMNTS.com/journal
Lydian Journal
ARTICLES
The Lydian Journal 2.0: A Note
from the Editor
The Utility of Retail Payments
in Addressing the Financial
Inclusion Gap in Developing
Countries
Some Unpleasant Credit Card
Arithmetic
U.S. v. American Express,
et al.— Failing To Make
Something Out Of Nothing
An Overview of Social
Commerce and What’s
Fueling its Growth
Making Sense of Ever-Changing
Payment Technologies
Payments Wiki – China
Comment on the Articles
on PYMNTS.com
AUTHORS
Tim Attinger
After years of frustration from
being shut out of the Chinese
market and watching
CUP chip away at its
international market share,
Visa recently banned its
member banks outside of
China from routing foreign
transactions occurring on
Dual Logo Cards (Visa/
CUP) held by Chinese
tourists directly to the CUP
network. The conflicts
between China and the
United States we have
observed in the textile
and information technology industries have
expanded into the bankcard industry.
payments wiki
(Outside-In)Novation: The
Changing Paradigm for
Driving Payments Platform
Growth
Meanwhile CUP, a domestic
bankcard network backed by
the central bank in China, has
been quite a success. In less
than eight years since it was
established, CUP has not only
dominated the domestic market
in China but has also extended
its acceptance network to
95 countries, capitalizing on
existing infrastructure built by
international schemes and
the opportunities of Chinese
tourists traveling abroad. Tom Brown
David S. Evans
Patrick Gauthier
Ignacio Mas
Scott Schuh
Karen Webster
Jing Yang
Table of Contents
PYMNTS.com/journal
Lydian Journal
Exclusive
Interview:
Famed
Changing
Paradigm
For
(Outside-In)Novation:The
The
(Outside-In)Novation:
Lawyer
to Dethrone
Driving Looks
Payments
Platform
ChangingParadigm
Paradigmfor
for
Changing
Durbin
Growth
DrivingPayments
PaymentsPlatform
Platform
Driving
iovation
Leads Roundtable on
Growth
Identifying
Fraudulent
Mobile
TheGrowth
Utility of Retail
Payments
PaymentsWiki
Wiki––China
China
Payments
Comment on the Articles
on PYMNTS.com
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onthe
theArticles
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onPYMNTS.com
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AUTHORS
ABOUT
The Attinger
Tim
Lydian Payments Journal
publishes articles from
thought
Tom
Brownleaders across the
globe on one of the most
important
industries in the
David
S. Evans
world — payments, the
industry
that makes trade,
Patrick
Gauthier
the source of all economic
prosperity,
Ignacio
Mas possible.
Scottinformation
Schuh
For
on contributing
to and advertising in the
Karen
Webster
Lydian
Journal, please
contact Jenn Rubin at
Jing
Yang
[email protected]
Tim Attinger
As the former head of Global Head of Product Innovation and Development for Visa
Inc., Tim had global responsibility for product strategy, platform development, and
P&L management for Visa’s mobile, money transfer, and eCommerce business units,
as well as product innovation, security solutions, healthcare, and IP strategy. In this
role, he led a number of innovation efforts related to debit cards.
Tim has recently joined as Managing Director for Market Platform Dynamics with the
Firm’s San Francisco office. In this capacity, Tim advises executives of global clients
on innovation and growth strategies, establishing corporate direction, finding and
assessing partners, and catalyzing new product revenues.
Business
Transactions
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MakingSense
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Making
PaymentTechnologies
Technologies
Payment
Payments Wiki – China
Table of Contents
ABOUT THE AUTHORS
ARTICLES
ARTICLES
Competition
The
Lydian Journal
aspects2.0:
of new
A Note
from thepayment
mobile
Editor networks:
TheLydian
Lydian Journal2.0:
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of mobile payments
fromthe
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PYMNTS.com/journal
Tom Brown
Tom Brown is a partner in O’Melveny & Myers’ San Francisco office and a member
of the Financial Services Practice. Tom’s practice focuses on competition law and
legal issues affecting the financial services industry.
Tom has been litigating cases, including class actions, in the financial services
industry for more than a decade. He was a member of the trial team that handled the
defense of the then largest civil antitrust class action in U.S. history for Visa U.S.A.
Inc., In re Visa Check/MasterMoney Antitrust Litigation. He has helped numerous
other financial services companies, including Capital One and PayPal, defend
against class actions, including an ongoing case challenging the use of PayPal in the
eBay marketplace.
David S. Evans
David S. Evans is the author of “Paying with Plastic: The Digital Revolution in Buying
and Borrowing,” which is the definitive source on the payments industry. His more
recent work is “Innovation and Payments,” which describes the how the combination
of data-driven marketing, cloud-based computing, and mobile telephony will
transform the payments industry.
David is an economist, business advisor, and a recognized global authority on the
design and implementation of complex business strategies and business models. He
has more than 25 years of experience helping companies worldwide design business
strategies in multi-sided markets to overcome the “chicken and egg” problem of
getting multiple customer groups on board the same platform at the same time.
Patrick Gauthier
Patrick Gauthier is the Head of Market Intelligence at PayPal, the leading online
payment solution provider. In this capacity, he can leverage 20 years of experience
in product innovation across several industry (semiconductors, payments and digital
media) and multiple geographies to deliver strategic insights to PayPal’s executive
management.
Prior to joining PayPal, Patrick advised a number of m-commerce and e-commerce
startups, and held the position of SVP Product Marketing and Strategy/Chief Privacy
Officer for ZillionTV, an early stage start-up building an ad-supported on-demand
entertainment service for the connected televisions.
Table of Contents
PYMNTS.com/journal
Lydian Journal
Commerce
and
What’s
Why
Has Debit
Grown
So
AnFueling
Overview
ofSocial
Social
An
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its of
Growth
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and
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itsGrowth
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Making
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of Ever Changing
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MakingSense
SenseofofEver-Changing
Ever-Changing
Making
PaymentTechnologies
Technologies
Payment
Payments Wiki – China
PaymentsWiki
Wiki––China
China
Payments
Comment on the Articles
on PYMNTS.com
Commenton
onthe
theArticles
Articles
Comment
onPYMNTS.com
PYMNTS.com
on
AUTHORS
ABOUT
The Attinger
Tim
Lydian Payments Journal
publishes articles from
thought
Tom
Brownleaders across the
globe on one of the most
important
industries in the
David
S. Evans
world — payments, the
industry
that makes trade,
Patrick
Gauthier
the source of all economic
prosperity,
Ignacio
Mas possible.
Scottinformation
Schuh
For
on contributing
to and advertising in the
Karen
Webster
Lydian
Journal, please
contact Jenn Rubin at
Jing
Yang
[email protected]
Ignacio Mas
Ignacio Mas is Deputy Director in the Financial Services for the Poor program at
the Bill & Melinda Gates Foundation. Ignacio has been a Senior Adviser in the
Technology Program at CGAP (a resource center for microfinance housed at the
World Bank), VP of Marketing and Account Management at interTouch, Director of
Global Business Strategy at Vodafone Group, and Senior Manager responsible for
telecoms investments in Europe at Intel Capital (Intel Corp’s venture capital arm).
Ignacio has been a Visiting Professor of International Business at the Graduate
School of Business at the University of Chicago. He holds undergraduate degrees
in mathematics and economics from MIT and a PhD in economics from Harvard
University.
Business
et al.—Failing
To Make
1,000
New Small
Business
U.S.
American
Express,
U.S.
v.v.American
Something
OutExpress,
Of Nothing
Bankers
al.—Failing
Failing ToMake
Make
etetal.—
Cashless
Europe: To
Dream or
SomethingOut
OutOf
OfNothing
Nothing
Something
AnReality?
Overview of Social
Table of Contents
ABOUT THE AUTHORS
ARTICLES
ARTICLES
Competition
The
Lydian Journal
aspects2.0:
of new
A Note
from thepayment
mobile
Editor networks:
TheThe
Lydian
Journal
2.0:
Note
The
Lydian
2.0:
AANote
caseJournal
of mobile
payments
from
theEditor
Editor
from
the
in
Spain
(Outside-In)Novation: The
Exclusive
Interview:
Famed
Changing
Paradigm
For
(Outside-In)Novation:
The
Lawyer
to Dethrone
(Outside-In)Novation:
The
Driving Looks
Payments
Platform
Changing
Paradigmfor
for
Durbin
Changing
Growth Paradigm
DrivingPayments
PaymentsPlatform
Platform
Driving
iovation Leads Roundtable on
Growth
Growth
Identifying
Fraudulent
Mobile
The
Utility of Retail
Payments
Transactions
in Addressing the Financial
TheInclusion
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U.S. v.ofAmerican
Express,
Bank
America to
Hire Over
PYMNTS.com/journal
Scott Schuh
Scott Schuh is director of the Consumer Payments Research Center and a senior
economist and policy advisor in the research department of the Federal Reserve Bank
of Boston. He joined the Bank in 1997 after serving as an economist for the Board
of Governors of the Federal Reserve System since 1991. Schuh also worked for
President Reagan’s Council of Economic Advisers, the Congressional Budget Office,
and the U.S. Census Bureau. He taught at Johns Hopkins University and Boston
College. Schuh’s current research is on consumer payment choice and its relation
to money and banking. Schuh earned a B.A. in economics and journalism from
California State University, Sacramento in 1985, and a Ph.D. and M.A. in economics
from Johns Hopkins University in 1992.
Karen Webster
Karen is the CEO of MPD and has worked extensively with some of the leading
players in the payments, B2B and technology sectors to architect, ignite, and
commercialize innovation. She also serves as a member of the board for several
emerging companies in the payments, mobile, and technology sectors, including
PaySimple. Her work is focused on helping these innovators develop and implement
sustainable business strategies. Karen is a frequent speaker and author of numerous
articles on the sources of innovation, strategy, loyalty, product design/bundling, and
pricing and platform strategies. She is a frequent keynote speaker on these topics
and, for example, has moderated or spoken at CTIA for many years. Karen also
served as an adjunct faculty member at her alma mater, Johns Hopkins University,
where she developed and taught graduate level courses.
Jing Yang
Jing Yang is a Director of Corporate Strategy at TSYS, one of the world’s largest
payment services providers. Yang has worked on a diverse range of strategic
initiatives at TSYS, including the establishment of CUP Data, TSYS’ joint venture with
China UnionPay (CUP). She is capable of conducting business in Chinese, English,
and Japanese as the result of her 15-year professional experience in these countries.
Yang’s main interests include corporate strategy, mergers and acquisitions, and
international business development. She holds an MBA from Emory University and
received her undergraduate degrees from Seinan Gakuyin University in Japan and
Central South University in China.
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