Google challenges Libra
From Wall Street Journal (november 13, 2019):
Google will soon offer checking accounts to consumers, becoming the latest Silicon Valley heavyweight to push into finance.
The project, code-named Cache, is expected to launch next year with accounts run by CitigroupInc. and a credit union at Stanford University, a tiny lender in Google’s backyard.
Big tech companies see financial services as a way to get closer to users and glean valuable data. Apple Inc. introduced a credit card this summer. Amazon.com Inc. has talked to banks about offering checking accounts. Facebook Inc.is working on a digital currency it hopes will upend global payments.
It's definitely a big deal in the payments industry right now. After the official creation of the Libra association, October 14, Facebook announced November 12 a new feature to orchestrate payments in its applications (Facebook, Messenger, Instagram and WhatsApp): Facebook Pay. Uber launched the Uber Money app on October 28th. And now Google is introducing a chequing account: it sounds trivial at first, but it's probably the first serious threat to Visa / MasterCard and the banking system.
Controlling payments changes the game for a GAFA because it completely circles the user and makes it essential for any merchant. No GAFA can miss, at the risk of another taking its place for the consumer. So far GAFA has relied on the VISA / MasterCard infrastructure because there was an alignment of interest: both ecosystems feed on the merchants. We will see later that the Google failures on payments forces the company to a more offensive and friendly strategy with regard to merchants that can not only take share from other GAFA but also in the long term shake the banking system
The goose that lays the golden eggs
The major challenge for companies worldwide is to have access to the end consumer. Just for the United States, the world's largest economic powerhouse, the consumer spending market accounts for nearly 70% of GNP, $ 14 trillion! The job of the Internet monsters is to sell access to this market. In practice, they tend to monopolize this access and modularize merchants, this is the limit of their model. This business is very lucrative and growing strongly:
Amazon is the largest global marketplace, excluding China, with 5 million sellers. The company has a turnover of $ 50 billion on this activity. Growth is over 25% per year. We can add AWS with growth of more than 35% and advertising growth of a good 40%. In total, this is nearly $ 100 billion collected from businesses. These activities make all the margin of Amazon, the rest can be considered as appeal products.
Google helps companies sell their products, offering them to its billions of users when they're likely to need it the most. Google's advertising revenue is $ 130 billion, up 20% with operating margins of more than 30%. There too, the advertising is all the margin of the group Alphabet.
Advertising accounts for almost all of Facebook's revenue of $ 67 billion, with growth of 30% and operating margins of 40%! Facebook has 7 million companies using its services. Facebook is now targeting the marketplace.
These internet companies rely on the considerable traffic they bring to their sites, their ability to make it captive and track it down: this is the sine qua non condition for their breakthrough in merchant services. To win the goose that lays the golden eggs, they must agree to invest in the traffic, to lose money for it. Amazon has understood for years, investors less. Facebook begins to understand it with its many lawsuits: it is the price to pay to continue to captivate its users and to "exploit" them for the benefit of the merchants. Uber pays a considerable price to build traffic on its platform, traffic that will be essential to monetize merchants of all kinds (drivers first but Uber will not stay there, this is the first step). We wrote about the subject in this article.
Their differentiation is based on their unique way of capturing the user by appealing to one of his tendencies: Amazon calls on materialism, Facebook on the social, Google on curiosity, Uber on the desire to solve every day problems quickly.
The potential is enormous: these groups aim to take a royalty on the whole of the economic transactions, on the whole GNP.
The economic model targets the Internet giants
The Internet giants create a proprietary infrastructure capturing hundreds, even billions of users, They become essential and monetize this infrastructure by renting it to companies. At best, they collect a toll as a percentage of infrastructure transactions. Amazon and others put into practice the famous law of exclusivity seen in several of our articles:
The possession of an exclusive, scarce good gives power and is a sign of this power. No one can encroach on this property or appropriate it. The property of an exclusive good distinguishes the individual from his peers. The desire for power being intrinsic to man, it is not surprising to see this propensity to hold exclusivity. In contrast what is common, abundant, common is prized only for its utilitarian side, so can very well be rented or borrowed.
Take the example of advertising. There is a radical change between traditional TV advertising and internet advertising. The TV commercial tries by the mechanism of repetition to register an automatism in the psyche of the spectators, whatever their age, socio-professional category, etc. This is a fixed cost paid by major brands to cause repetitive purchases of their products thereafter. Internet advertising acts rather downstream, it makes discover a product at the moment when the user is likely to buy it. It is close to the act of sale, the transaction, so much so that the two eventually merge: there are more and more opportunities to buy directly and easily by clicking on an advertising link. Internet companies do not have a priority to sell TV ads. It amounts to losing power: the brands then become owners of their small parcel of human psyche and can exploit their brands independently. It is better to rent them access to their network by helping them maximize their turnover in the short term.
To implement such an approach Internet groups must eliminate as much friction as possible that slow down transactions, each building on its strengths. Payment is a friction.
The integration of a means of payment to the strong point of these companies is for them a terrible accelerator of growth because it opens to merchants the door of their customer base
The intrusion of Facebook, Google, Apple and Uber into payments meets the simple goal of maximizing the amount of transactions on their platform, making payment easy, immediate. They each have their strategy but we will see that Google is the most ambitious.
The example of Apple Pay
Apple has managed to integrate the usual means of payment (Visa / MasterCard) into its hardware by making it almost mandatory for buyers of IOS products to fill in the details of their bank cards and personal details. This is the Apple method: if you want one of its devices and the ease of use that goes with it, you have to accept its conditions. As a result, there is now a base of 1.4 billion cards in the Apple ecosystem. This is a considerable advantage, a strong barrier to entry as giving card coordinates is stressful and forbidding. Apple created in 2014 its own payment method Apple Pay: one can pay for a transaction by bringing an iPhone or Apple Watch next to a payment terminal. These devices include an NFC chip that provides short-distance communication without pairing, unlike more restrictive Bluetooth. Apple Pay is recognized by any payment terminal that accepts Visa / MasterCard, so NFC chips. Apple Pay is fully integrated with the iPhone and the Watch, the adoption is massive. This allows Apple Pay in a second time to conquer the merchant websites. The argument is simple: the IPhone owners are the customers with the highest purchasing power, better to satisfy them. Apple Pay is now accepted by nearly 300,000 sites.
The integration of 1.4 billion cards to its hardware gives Apple an unequaled distribution power that is not always understood: when the company launches Apple TV plus, for example, with a free year then 4.99 € per month for IPhones buyers, it's so easy to register that the adoption of the service is likely to be massive, even if the catalog is poor in the beginning. Apple Pay is a transaction accelerator within the Apple universe and is a major contributor to the $ 12 billion quarterly collected on the services business.
Facebook and Google want their share of the trade
The transaction is much more monetized than advertising. Indeed, the latter offers only a probability that a transaction is made. The closer the purchase probability is to 100%, the higher the price of advertising. It is therefore logical that large groups living on advertising like Alphabet or Facebook want to make it more accurate up to 100% matching the transaction. To do this, they need:
a high performance AI based on the data collected and producing very reliable predictions,
a lowering of barriers to purchase. Friction must be eliminated. The most effective way is to be able to organize the transaction within the advertising message. The probability of a purchase will then be much greater. It's compulsive shopping.
But the transaction is a bastion firmly guarded by Amazon. The company has invested $ billions in fulfillment centers, truck fleets, servers, payments, etc. to reduce buying friction and make its marketplace the reference tool for buyers and sellers. Amazon has built an impregnable fortress for transaction, bringing together 5 million sellers and 200 million monthly visitors. And now, to cut the clutter of Google and Facebook, Amazon is successfully launching advertising. The following table, based on third quarter results, shows the strong growth in advertising (representing most of the "others" category:
These data were compiled between the second quarter of 2018 and the third quarter of 2019. Amazon now integrates global service for merchants, from the discovery of their products to the purchase and then delivery. How to assault this fortress?
Amazon's flaws
The "property" of Amazon is its customer base, including its 150 million premium customers which are the jewel. The instrument of monetization of this property is the base of merchants. The property is pampered and exploited to the fullest. Merchants are then forced to enter the marketplace if they want to access Amazon's property. The merchants are an afterthought for Amazon, they do not have the property of the customer, their coordinates, their means of payment. Amazon is the customers face. If they come to the marketplace, it's just to boost their sales, not to build a long-term relationship with their customers: the marketplace is a trap for merchants, but a lucrative trap.
The Amazon ecosystem is relatively narrow even though it is dense: 200 million monthly users and 5 million merchants who meet for a specific task: trade. Outside of commerce, Amazon is non-existent. This is a weakness because an act of purchase usually finds its origin upstream and can therefore be captured before reaching Amazon.
This second flaw of Amazon can be exploited by Google and Facebook, if they manage to capture their users before the purchase decision and keep them until payment. This requires a strong integration of a means of payment to their ecosystem, requiring that it be really useful to their user base.
The first is more difficult to counter because Facebook, Google and Amazon monetize through the merchants; you can not serve two masters at a time. This is the flaw that challengers must exploit if they want to survive. PayPal by its very recent acquisition of Honey shows the way forward: to side with the merchants. Honey has a lot of data on users and PayPal will share them with merchants to help them conquer customers. PayPal goes where the FAANG do not go but the price of survival is not given: 40 times the turnover!
Payments at Amazon
Amazon designed its payments strategy many years ago using the payment infrastructure in place in the West: the Visa / MasterCard network. Amazon found it useless to reinvent the wheel, differentiating on abundance (see our article on the subject).
For customers, once the bank card was registered, payments were very smooth (one-click purchases, etc.). Because of the large number of users coming to Amazon to do their shopping, the merchants, to reach them, were forced to align themselves with the conditions imposed by the company. Amazon imposes its dictates on merchants, not recognizing their right to own the customer. The merchant payment system reflects this: payments are grouped and paid every 15 days by Amazon, nothing particularly attractive for a merchant. In 2007, Amazon created Amazon Pay to attract merchants outside its ecosystem. Amazon Pay allows merchants who accept it as a means of payment to debit customers from their Amazon account, without having to enter their credit card number. For merchants the advantage is to simplify the act of purchase. This is a very small advantage compared to the disadvantage of promoting a major competitor ... Moreover, with this system, they continue to pay full merchant fees to the Visa MasterCard network. So Shopify Pay is a better option: it’s user friendly and it shares the data with the merchants... Finally, icing on the cake, Apple restricts the NFC chip installed on iPhones. This is still an obstacle to Amazon Pay adoption by merchants with a physical presence. Even so, Amazon Pay is accepted by around 100,000 merchant sites. We are far from the ubiquity of Apple Pay, but it is much higher than Facebook and Google payments systems.
Payments at Facebook: integration with the social
If Facebook manages to integrate a means of payment at the heart of its social network, the potential is enormous for the commercial activity. The prospect of addressing 3 billion users can not leave any merchant indifferent. The turnover related to payments is negligible today, which is why it is difficult to imagine the potential impact. The way forward is adoption by the social network. This is how Tencent was able to successfully launch the red envelopes, which is the basis of Tencent Pay's success. If Amazon thinks commerce, Facebook thinks connections. The more people connected to each other, the stronger the connections, the more business there will be. Facebook's "ownership" is made up of connections from its nearly 3 billion members. Financial connections are a subset of them that should be strengthened. Facebook advances in two directions on payments:
Facebook Pay, announced recently, consolidates all the payment services of the four applications into one. It is connected to Visa / MasterCard (just like Amazon Pay and Apple Pay) and operates under Stripe or Paypal. Facebook Pay will first allow payment between users, on Facebook pages, Instagram, etc. and in the marketplace. The financial connections thus made will be the base of adoption of Facebook Pay. It will then facilitate the click and purchase function developed first on Instagram and then on WhatsApp, etc. ie the purchase from an ad. Merchants will have every interest in adopting Facebook Pay to quickly transform their advertising test and more generally to have access to a market of 3 billion individuals. Facebook intends to corner the merchants in the Facebook universe and just as Amazon does not offer them a way out (the merchants can not use the data collected to find marketing outside of Facebook.) The general conditions are not more favorable than those of Amazon towards the merchants who are there also a pure instrument of monetization of the user base.
The Libra would offer an extra dimension: the possibility of bypassing the Visa / MasterCard network and making terms more favorable to merchants, the interchange being eliminated. This would be a big plus compared to Apple Pay and Amazon Pay.
To summarize, Facebook intends to compete with Amazon on merchant services by leveraging its larger user base and the ability to capture the buyer before he makes his decision. The adoption of Facebook Pay can be very fast thanks to payments between friends on Facebook, Messengers, WhatsApp and Instagram. How successful applications like Lydia with 2 million users could compete against this tornado?
Google Pay: a failure
Google is wading over payments. Let's take payments in the store first where Google Pay could be dominant thanks to the 3 billion Android smartphones. But, unlike Apple, Google does not have the monopoly of the NFC chip on Android devices. As a result, the payments market is fragmented. Google Pay competes with Samsung Pay, PayPal, Venmo, Square, etc., all using the NFC chip on Android devices. Google Pay was launched a year after Apple Pay in 2015 and is struggling to catch up. The latter benefits from integration with the Apple Watch, while the Android Watch is a failure so far. Finally banks prefer to make agreements with Apple because the purchasing power of IPhones holders is greater than the purchasing power of Android phone owners. From Mobile Marketer (October 31, 2018):
IPhone owners tend to have higher incomes and spend more on technology than Android users, according to a survey conducted by the Slickdeals collaborative shopping platform. Those who use an iPhone have an average annual salary of $ 53,251, which makes them more prone to splurge in purchases than users of Android, whose average salary is $ 37,040, according to the survey.
According to the survey, iPhone owners are generally more satisfied than Android users, and have greater buying power. These users reported spending an average of $ 117 a month on clothing, compared to $ 62 a month for Android owners. In addition, iPhone users spend $ 101 in technology and $ 83 in makeup products, against $ 51 and $ 40 respectively for Android users.
Android owners are more frugal and inclined to search for deals and discounts frequently. Slickdeals surveyed 1,000 iPhone users and 1,000 Android users about their behavior, their lifestyle choices, their personality traits and their consumption patterns for the survey.
And it's the same for online payments: Google Pay attracts much less merchants than Apple Pay for reasons of purchasing power. Only 20,000 sites have adopted Google Pay, a misery compared to Apple Pay or even Amazon Pay.
Google lacks an anchor on its user base. Apple Pay is integrated with hardware, the strong point of Apple, Amazon Pay is integrated with e-commerce, the strong point of Amazon, Facebook Pay will be integrated into the social network, the strong point of Facebook. Google's strong point is to organize information from around the world. People go on the different Google apps to find information. How to integrate information and payments to speed up transactions in the Google universe? The company decided to widen the problem to better solve it. Payment information does not bring enough value to Google users, others do it very well. you have to sort all the financial information of the users upstream of the banks.
Google Cache
Let's analyze the agreement between Google and Citigroup from the perspective of both parties:
Why is Citigroup signing this agreement on Google chequing accounts? Because it believes that Google can create a top-notch user interface and make it fun to view accounts, provide information that interests these users and ultimately make them use Citigroup's banking services. Citigroup has a growth problem compared to JP Morgan or Bank of America. Google, a global company like it, can help solve this problem. The price to pay is the loss of the customer. Citigroup reassures itself by saying 1 / that it would never have had this client anyway, 2 / that it controls the underlying banking infrastructure, access to its balance sheet and can set its conditions. It is always dangerous to let Google control the customer, because the risk is strong to be relegated to the rank of subcontractor without added value. Yelp, Expedia and TripAdvisor know something, their traffic is increasingly dependent on the whims of Google, the search engine supreme.
What does the agreement bring to Google? The ability to collect a wealth of financial information from its customers and treat it for their benefit much better than a traditional bank. Thus Google will capture the customer, as usual by a superior user experience. Google is planning to integrate Google Pay into its Cache accounts. This gives the company a great openness to monetize the financial data of its customers from merchants outside the Visa MasterCard circuit. Indeed, Google will no longer have to connect to these networks to work, Google Pay will be directly connected to the bank account. From now on, merchants who accept Google Pay will no longer have to pay the 3% tax, as the interchange has disappeared! The new tax will be defined directly by Google and will give a portion to Citigroup for administrative work and another to customers of the checking account to attract them. It's a safe bet that it will be less than 3% to attract merchants. Google creates a new payment network for both users and merchants, an independent Visa / MasterCard network like American Express, but with a mass of potential users, a higher level of data and a superior ability to deal with them. .
Google is simply trying to substitute Google Pay for Visa / MasterCard. This is potentially a threat to all other internet payment systems that rely on Visa / MasterCard and interchange mechanisms. It is also a threat to the banking system as a whole, which benefits from its integration with Visa / MasterCard to impose its oligopoly. Google can deprive it of its oxygen: access to the customer. Only the first signers like Citigroup will do well, being able to negotiate the best terms with Google. The latter hopes to marginalize the other banks, the resistant. Finally Google, with this checking account, wants to subtly realize what Libra tries to do brutally: constitute the reference payment system, be the master of financial information to take an even more significant share of global GNP.