Universal Basket & Knyttan – Techstars’ Selection of the Best in UK Retail Tech

Here are two great ideas for solving real but very different problems for retail: how to make affiliate purchases and how to economically mass customise fashion. Both were showcased at last week’s Techstars Demo Day and are looking for investment.

Universal Basket

There are many sites that aggregate and curate products but can’t actually sell them. When shoppers click on something they like, they are sent (via an affiliate network) to the brand owner’s site to make the purchase.

This is often a poor customer experience. You can’t buy products from more than one brand at the same time and the hand-off process can be clunky, resulting in quite a lot of drop-outs. The brand owner makes fewer sales and the aggregator loses commission.

Universal Basket has come up with a way of allowing shoppers to make multiple purchases directly from the aggregator site. Details are sketchy but if it works, this is a real winner for the aggregators. Not only will they sell more products and have happier customers, but brand owners will pay higher commission to affiliates that actually make sales rather than just generate leads. We’re talking 40% vs 6%. Big money.

Some of the larger aggregators have begun building their own technology. Examples include Lyst’s Express Checkout and Keep’s OneCart. The closest concept to Universal Basket seems to be TwoTap which has raised $2.7m and claims to be able to improve mobile conversion rates 6-10 times.

Knyttan

An industrial knitting machine takes two days to programme. Hence, production runs need to be in batches of at least 50 to be economic.

Knyttan has found a way of reducing this time to minutes and so can produce bespoke pieces at mass-market prices. This is highly attractive to the designers who now have a way of getting smaller collections to market bypassing the traditional middle-men of the industry. Result: more choice for shoppers at better value.

Knyttan claim now to have more designers on their books than Zara. The Techstars audience was really excited about that. Watch the video. Then visit their store in Somerset House.

“If you can’t bill it, kill it, (bis)”. Days Two & Three of MPE.

Growth

Despite the perennial grumblings about margins, the card payment industry has pretty strong underlying growth potential and here’s where it’s going to come from.

  • Kill cash. 50% of European transactions are still cash, for goodness sake.
  • Widen acceptance networks. 75% of EU SME’s still don’t take international card schemes. Even in sophisticated Finland, 130K merchants could take cards but don’t.
  • Make In App payments easy. Apple Pay does this really well.
  • Penetrate new verticals – speakers enthused on rapid transit, parking and vending
  • Launch value added services. Conference speakers were persistently vague about what these might be but included:
    • Post-pay and installment credit (big in Turkey but also a key focus for PayPal),
    • Taxi apps (Verifone bet big on this but admitted being blindsided by Uber)
    • Coupons and offers that personalize the relationship between the merchant and shopper. I’ve seen no compelling case studies for this yet although if it’s a winner, it would be a strong argument for keeping issuers and acquirers under the same roof.
    • Online VAT reporting – some countries are considering mandating this the service could be integrated into the payment terminal.

The alternative is to compete on price which everyone says they don’t want to do. A chap from Klarna suggested that payment processing would be free within ten years – it’s just bit and bytes moving around the Internet after all – and merchants would only be paying real added value services such as fraud protection and counter-party risk.

Another idea would be to created an exciting B2B brand that processed cards as well as doing lots of other useful things for its customers. But that wasn’t on the agenda, sadly.

Merchant view – Auchan spoke on day one. Carrefour presented on day two and said pretty much the same thing, as you might expect. The good news for the industry is that it has outsourced its payment service to Ingenico and runs the company’s new P2PE service across all European sites. The bad news for acquirers is that the new infrastructure now allows Carrefour to dynamically route transactions to the lowest cost processor.

Wither acquiring

John Delaney of EVO forensically dissected the economics of the card business. He calculates the processing costs for issuers range from 1 to 10 euro cents per transaction. Following the reduction in credit interchange to 0.3%, small issuers won’t be able to survive. Even the larger ones won’t be making enough money to satisfy their owners.

The result is likely to be consolidation (scale drives down processing costs) and increasing fees (both transparent and sneaky) for cardholders.

Why should acquirers be concerned? Well, of course without issuers there won’t be any acquirers. Less existentially, there has to be a strong chance that authorisation fees, currently paid to the schemes by issuers, get billed to the retailers instead via the acquirers. That will be an interesting discussion for the relationship management teams.

And there’s the ever present worry of issuers ditching Visa/Mastercard for the more lucrative and unregulated Discover or American Express. Barclaycard has done this in the UK and, according to my calculations, ripped £47m profit out of the UK acquiring market all on its own.

The acquiring squeeze won’t be helped by the rapid exit of banks from this business. Innovalue calculated that the proportion of banks that have an acquiring arm fell from 72% to 58% in the last five years. Of those that don’t, most have a referral agreement rather than partnership. Pretty soon, acquiring won’t be a core banking product. This is already the case in the UK where only Barclays and the tiny AIB remain as integrated issuing and accepting businesses.

If acquiring is all about scale, there are three possible strategies:

  • Lead the growth in the nascent market for pan-European acquiring services directed at multi-national merchants like Carrefour and Auchan. This is about scale, reach and microscopic margins.
  • Dominate a domestic market. I think this one is primarily about who has the best SME distribution. This is probably a case of picking up white label or referral deals from banks that don’t want to run their own acquiring operations although it would be nice to think that the winners might genuinely love SME’s for their own sake.
  • Target a niche such as gambling. Customer understanding is key for this one.

EVO claim to have some cool technology from the US that will allow them to keep their costs down as their volumes ramp up, including fully automated onboarding, reporting and chargeback management. I’m told this was critical in its winning the Bank of Ireland contract away from Elavon in 2014.

Both EVO and SixPay are committed to a pan-European strategy but a number of speakers speculated whether WorldPay and Barclays (the two largest acquirers by transaction volume) would stay fixed in the UK or come out to play.

Edward Strycharczuk spoke for Raffeisen Bank (15 markets, 110K terminals). He reiterated his bank’s commitment to acquiring but that it needed to be bundled with other products and services to produce propositions relevant to particular segments. That’s certainly true and it would have been interesting to hear some details. He did mention that Raffeisen had tested m-POS in four markets but considered it, too, a scale game. Regular readers of this blog will know that m-POS is wasted in micro-merchants.

Contactless/NFC

Here’s my deck. I’ll write a separate blog on the subject next week.

Michael Saunders from Barclays was understandably bullish. To their credit, Barclays have been very deliberately using payment innovation as a brand building tool and, as the acquirer for TFL, have notched up 100m contactless journeys so far. Barclays have also pioneered the integration of contactless into wearables with the bPay wrist band. And have recently inked a deal with Southampton Football Club to offer fans a pre-pay wallet linked to a branded wrist band combined with related promotions and offers.

Lessons learned for wearable payments from the bPay experience are:

  • Wearables need to be stylish and comfortable
  • Payment features are not enough. People need other services such as access control.
  • Speed and convenience are vital

What’s next for bPay:

  • Better design and more comfort
  • Partnerships with the fashion industry (for both design and distribution)
  • Broad customer launch
  • New form factors
  • Wider range of styles and colours (not just blue)

Poland – Until TFL cranked up the volume, the Poles were the undisupted European kings of contactless. Piotor Warskcki explained that 75% of terminals are already contactless enabled and that 100% of new cards are too. 100 Polish cities have enabled their rapid transit. This explains why 30% of transaction volume is contactless today although the limits are lower than elsewhere. It’s tap and go < c.€12, tap and PIN > c.€12.

Pitor was rightly skeptical about NFC based mobile phone solutions (at least those that involve SIMs) but cited one interesting example of Polish payment innovation. Zencard is a card-linked loyalty scheme that can enroll shoppers on the payment terminal itself during a transaction. It’s coming the UK and has been accepted on Level49. Watch this space.

TIM Wallet – Ironically, Pitor was followed by a presentation about a SIM-based telco wallet, this one from Telecom Italia. The snappily titled TIM Wallet works with 11 payment cards and on any NFC terminal.

The commercial is lovely (see below) but a number of telcos around the world have launched these services and they have all struggled with the same issues. Firstly, customers have to go into a shop to have their SIM card switched out. Secondly, to actually make a payment, you have to open the app and select a card and press “pay.” If the transaction is >€50 you will have to input a PIN too. This is a worse (not better) customer experience than using a plastic card. In any case, Apple Pay blows this concept away as the US telcos have discovered.

Biometric credit cards – Sussanna Hamested from Zwipe, a Norwegian start-up, talked out its prototype that uses a fingerprint reader embedded in a Mastercard to authenticate high value transactions. The biometric data is held on the card itself and survey evidence indicates shoppers would welcome the innovation. If you look at the video, you’ll get the idea but I would certainly add a confirmation process for high value transactions.

Next step is a pilot on a standard dimension plastic card (the prototype which isn’t shown in the video is quite chunky) but I do wonder whether Europe is the right market. American banks, who recently decided their customers are too stupid to memorise credit card PIN’s might be more interested.

Car Parking – this has always been a problematic issue for the payment industry since the terminals are unattended. Jens Zier from Q-Park and Yves Lalieu from Schwartzyla Consulting have a cunning plan that involves changing the contactless rules regarding online PIN lookups. If you’re into car parks, I recommend you get in touch with Yves.

Millipay, a simple service that allows publishers to charge small amounts for access to individual pieces of content. Target customers are newspapers or possibly TV companies that want to charge viewers to skip the commercials.

Tiller Systems, a French iPad EPOS vendor focused on restaurants. This is quite a crowded sector at the moment as many people fancy taking lumps out of Micros. These guys seem pretty savvy, though. The CEO comes from the industry and is building the right ecosystem around the core product. This includes payment providers and 3rd party integrations to the likes of Just Eat and Guest Online.

Mea Wallet – a white label mobile wallet/access control/ID solution for banks to offer to their customers. The CEO was particularly excited that he’d found a way of including petrol cards. The presentation would have attracted more interest in the hall if he’d just played their corporate video. It’s a cracker.

Apple Pay – this innovation was well covered by Joel van Arsdale from First Annapolis. Although it has widely regarded as a success in the US, he cautioned that Apple Pay enters a crowded and complex European market in which local debit schemes predominate. However, all wallets are expected to benefit from its “hailo” effect. Key in the US has been the enthusiasm of the card issuers. The first card added to Apple Pay is the default which explains why there’s a bit of a scramble going on. Acquirers and PSP’s are helping by not charging extra for Apple Pay transactions although I would be struggling to see an economic rationale for them doing so in any case. Nevertheless, Joel didn’t think Apple Pay would get to much more than 5% of total card volume by 2020.

Big data – this got a couple of mentions but no concrete examples of services merchants might find helpful. Godwin Schembri from RS2 presented on merchant portals. He did suggest mixing a merchant’s aggregate data with market trends but didn’t show any screenshots or give any product information. That was a missed opportunity.

“If you can’t bill it, kill it.” Day One of MPE 2015.

It’s my first time at MPE and you have to hand it to Empiria, the organisers. The hall is packed, the exhbition full and the seniority level impressive. Pretty much anyone who matters in European payments is here. Unless they work for Visa.

The principle of the event is to bring together the acceptance end of the payments world – acquirers, processors, payment service providers and ancilliary functions such as fraud screening, with the merchants who use their products to take money from their customers.

It’s a three day event so here’s just a flavour of the key points from day one.

Payments is still hot. If you own a payments business, now is the time to sell. The buyer will probably be a private equity house looking for stable, non-cyclical profits. If you want to buy a payments business for strategic reasons, you’ll probably be out-bid by the private equity guys. So sell instead.

Merchants. There was only one merchant speaking today. Auchan, the French supermarket chain, has built its own pan-European payment infrastructure which allows transactions to be dynamically routed to the lowest cost acquirer. And it recognises the card’s nationality to print out a receipt in the shopper’s home language. All quite cool. Auchan complained that there was no single vendor it could use for its requirements across the continent. “That’s because the businesses that want a single European provider won’t pay for it,” fumed one vendor during the coffee break.

Crypto-currencies. Nothing new today except one start-up (confusingly called Pay Cash) pitched the ability to accept Bitcoins on a standard payment terminal using QR codes. A bit niche, I’d say. Of course, Bitcoin is a volatile asset class, not a currency, and has no place in retail.

Apple Pay. This changes everything. But you probably knew that. There wasn’t anything new revealed today except that (1) Carte Bancaire is in negotiation with Apple and (2) Carte Bancaire won’t be paying anything like the 0.15% that the US issuers have inexplicably agreed to donate to Apple. Meanwhile, the CEO of one acquirer confided to me that mobile payments would finally make his investement in contactless point of sale terminals worthwhile.

Paypal. A spirited presentation from Luke Olbrich outlined the most credible strategy from any of the established players. I’m a sucker for a list of new products accompanied with screenshots. To his credit he also admitted that PayPal Here is a “me too” product.

Zapp. No new information and still no confirmed launch date. Should we be worried? I do like Zapp and wish them well but their roadmap and go live dates are hostage to the UK retail banks’ IT development plans. The same goes for Visa Checkout.

Consolidation. Much agreement that there are too many acquirers and that consolidation is inevitable as banks assess whether they really to keep up the necessary invesment. On the otherhand, payments is capital-lite and an easy upsell to corporate banking relationships so I’m not sure it’s that clear cut. Anyway, if you have decided to sell, both Six Pay‘s Nickaus Santschi and WorldPay’s Ron Kalifa both claimed to be in the market to buy. The rationale for consolidation is primarily that in an undifferentiated industry, scale brings cost leadership.

Interchange regulation. A few speakers addressed the implications of the proposed reductions in credit and debit interchange. One unexpected consequence is that some German retailers have been opting to process dual branded Maestro/Giro cards as cross-border Maestro transactions. The German banks are responding by removing the dual branding and doing a deal with Total so that Germans can buy petrol in France with their domestic Giro cards.

More interesting to my mind is the impact on innovation. It’s going to be hard to produce a new payment instrument that’s cheaper than cards so new successful ideas will need to be pitched at enhancing the customer experience. This sets Europe and the USA in opposition. Across the pond, with credit interchange still hovering at 1.5%, there is a ready reception for anything that gives retailers some relief.

Biometrics. There’s some very welcome thinking on ways to eliminate the PINs and passwords that plague the payment industry. Carte Bancaire are close to launching fingerprint recognition which they claim 58% of French people would prefer to a PIN code. Biometrics are also useful online tools in France as they inhabitants implacably refuse to use 3D Secure.

Biometrics would also has the advantage of differentiating Carte Bancaire from Visa/Mastercard at a time when, accoridng to Gilbert Arira, the EU would like to see domestic schemes closed down. Or maybe merged. How about Giro/Carte Bancaire/Mister Cash as a third pan-European payment scheme?

A signature based biometric authentication tool won the innovation competition by a country mile. Sign2pay allows you to sign your name on a smartphone (landscape not portrait, natch) to validate online local debit transactions. I can’t see millenials going for this but the German delegates were quite excited and there must be an application in the US now that our American friends seem set on chip and signature.

In-store commerce platform. The payment industry can sometimes be guilty of confusing a card machine with an EPOS system but there was some evidence that the vendors are finally reviewing their thinking. Ron Kalifa said that WorldPay was planning to sell a bundle of in-store technologies to SME’s but gave no detail. Verifone’s Julie Felix seemed to be heading in the same direction but First Data (not presenting) are miles ahead with their Clover product.

Tangibly on view today, and impressive too, was Tiller – a restaurant EPOS designed and built by a team with a strong hospitality background. It includes an app store with links to Just Eat, Guest Online and other useful services.

M-POS. iZettle announced that its card reader would now be free. This underlines how similar the SME payments business is getting to mobile phones. It would be nice if free devices and transparent pricing plans were the norm not the exception.

Europe’s Widely Divergent Payments Markets

In preparing for my presentation to MPE later this month, I’ve been analysing the European Central Bank data on card payments. It’s a remarkably useful source. Here’s one striking graph I’ve pulled together.

mpe payment cards

The graph shows the average number of transactions per card in each EU members state along the X axis and the average number of transactions per point of sale payment terminal along the Y axis. The size of the bubbles indicates the relative value of total of all payment card transactions in each country.Even though payment cards have been available for decades, consumer take-up varies significantly across the EU. The Nordics (top right) are keenest on electronic money, the balkans (bottom left) the least excited. Notable outliers are the Netherlands and Germany.