Early Warning Services is set to introduce its Paze digital wallet later this year. Although the ecommerce-focused wallet will initially be offered by the seven major banks that own Early Warning, the consortium intends to open up participation to all banks and credit unions.
Have we seen this movie before? In 2014 all of the owner banks in Early Warning were included in the initial launch of Apple Pay. Not long after, community banks and credit unions were hastily invited to participate through an email from Apple. The tech giant gave them just a few days to accept the terms of a non-negotiable online contract to be a part of the initial launch with the big banks.
Caveat emptor. Is Paze another Apple Pay? Or an ISIS Softcard, MCX, CU Wallet or Cybercash, all of which are gone now? Or can Paze be “the laggard that won”?
Determining whether participation in Paze is right for your bank or credit union depends on objectively evaluating your own circumstances. We’ve advised clients through every prior mobile wallet and have conducted recent due diligence assignments for financial institutions, retailers and investors looking at Paze. The following analytical framework and checklist can be used to gain cross-functional, C-level and board of directors consensus for supporting Paze as the decision is weighed.
Among our recommendations: Don’t just think like bankers. Look at Paze as if you were a savvy venture capital investor.
This checklist, done for The Financial Brand, is a companion to the article, “How the ‘Paze’ Digital Wallet Aims to Win Over Merchants and Consumers.”
Gather Essential Data About Your Debit and Credit Card Transactions
You don’t have to guess at what the total potential market might be for this new service offering. Here’s an approach that can help you assess the value Paze might bring to your institution.
1. Start by segmenting your institution’s own merchant identification (MID) reports of debit and credit card transaction data.
This is a standard report provided by your Issuer Processor. All new payment types start with merchant acceptance, and the report will inform your institution’s business case using its own eligible Total Purchase Volume (TPV) from qualified e-commerce retailers accepting Paze. (Of course, those firms and their payment services providers, or PSPs, are in the midst of considering Paze themselves.)
2. Separate the total purchase volume into categories.
These will include: in-store, card-not-present (CNP) ecommerce, and card-on-file (COF) subscription billing. If your institution follows the overall economy, ecommerce will account for roughly 15% of the TPV total, with the remaining 85% in-store. (The latter is ineligible for Paze as this digital wallet is intended only for ecommerce.)
3. Next, subtract out the purchase volume from any “e-commerce card-not-present” merchants that are unlikely to participate in Paze.
Amazon typically captures 40% of what’s in the merchant-identification report. This is followed by Walmart, Target, Apple, eBay and other top 10 merchants holding two-thirds of U.S. ecommerce. These companies have card-on-file options that compete with Paze, such as Amazon One-Click, Walmart Pay, etc. So factor in some percentage of their sales that are already consummated as card-on-file transactions, typically around 20% to 40%.
4. Take this total and subtract yet another subset of TPV from other sources not likely to support Paze or that already compete with Paze.
• Payment facilitators and platforms. Examples of facilitators, called “PayFacs” for short, are PayPal, iOS App Store, Android Google Play, Square and Stripe, and the platforms include MindBody, Toast and Shopify.
• Ecommerce aggregators and in-app platforms — specifically those that retain card-on-file information such as Instacart, Grubhub, Uber, etc.
• Subscription billing. Netflix, Spotify, Disney+, Apple Music and Amazon Prime are in this category. So are PayFacs that specialize in recurring payments such as Recurly, Zuora and Chargify. All show with their own identifiers on the merchant identification reports.
• “Click to Pay,” a mobile wallet likely resembling Paze’s objectives. It was developed through a joint effort between Visa, Mastercard, Discover and American Express in 2020. This collaboration superseded individual network-branded wallets such as Visa Checkout, Verified by Visa, Mastercard’s Masterpass and Amex Express Checkout. Scrutinize Click to Pay historical volumes because they are your best leading indicator for Paze.
5. Use the remaining volume to estimate eligible TPV. Project top line interchange and add bounties and revenue sharing from Early Warning for Total Gross Revenue.
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Then Calculate Your Direct — and Indirect — Costs for Implementing and Supporting Paze
To participate in Paze, there are added tangible costs, even if fees are deferred or waived. Reuse activity-based costing from similar programs such as Zelle, Apple Pay, etc., to estimate the added expenses.
Try this approach: Assess Paze as you would any fintech startup that is a separate partitioned platform. In other words, put aside any legacy experience your bank or credit union has had with Early Warning.
As The Financial Brand article reported: “This wallet will come pre-loaded with the customer’s payment details for any existing credit or debit cards they have at any of the participating financial institutions.”
Must financial institutions share their proprietary sensitive cardholder data without first gaining customer opt-in approval? And how will this new platform continuously synchronize outside the bank’s firewall?
This shouldn’t happen without first consulting with your chief information security officer and board of directors committee in charge of Gramm-Leach-Bliley Act oversight. They can help you estimate the cost of security measures and added audit costs for payment card industry and other regulatory compliance requirements for this specific incremental application. Also have your chief sourcing officer and chief auditor assess the requirements on regulated financial institutions for such third-party arrangements under SSAE18 (Statement on Standards for Attestation Engagements).
Other verifiable costs to include:
• Added cost of liability shifts extended to participating merchants.
• Consulting and legal fees for due diligence, developing detailed implementation and processing controls plans, acceptance test scripts for inclusion in the contract, as well as negotiating service level requirements, nonperformance penalties, new account bounties, revenue sharing, exit costs, equity interest/warrants and the like.
• Ongoing program and product management, customer support and marketing commitments.
• Training contact center personnel to provide customer support for exception processing, disputes, chargebacks, fraud, etc., and the development of other operating policies for resolving issues arising via Paze.
All of this should help you to determine the potential return on investment. Using the formula “projected interchange revenue minus the estimated cost to participate,” banks and credit unions can objectively quantify the ROI of Paze, comparing it to other fintech or new product investments using their own internal rate of return hurdle rates.
Reference checking should also include asking others who have committed to Paze to share their own high-level ROI results. These would be based on their own MID data. At a minimum, your due diligence should involve asking Early Warning owner-banks to transparently share the same and see how you compare.
However, internal financials are only part of the picture. Due diligence also must assess the new platform fundamentals and the ignition potential from merchants and consumers.
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Think Like a Venture Investor: Evaluating Merchant and Consumer Adoption of Paze
Remember, though it’s a new platform for Early Warning — which already operates the popular person-to-person payments network Zelle — Paze is essentially a startup. Put yourself in the shoes of a venture capitalist evaluating the investment pitch of a startup. Just evaluating ROI based on internal measures won’t cut it. Key issues include impartial assessments of merchant acceptance and consumer adoption.
Don't Think Like a Banker:
The venture capitalist credo applies here: People first, market second and product/platforms third.
An analytical framework for this follows.
The smart money only invests in “A” teams, knowing that smart people working to define a new, big “market-making” opportunity will figure out the right “platform” play.
To verify all three factors, issue a formal Due Diligence Request for Information (DDRFI) specifically for the Paze operating unit. This request should focus specifically on the separate startup business bounded by Paze. Insist that responses be contractually binding and incorporated into your participation agreement.
We review the highlights of what you should be looking at and evaluating in more detail below.
Evaluate the People: Does Paze Measure Up on Leadership?
The most fundamental analysis of a startup is the experience of the team and their track record.
Paze has a unique “people” quotient because it is a consortium-backed venture, managed by a committee of your biggest competitors — controlling 77% of the U.S. card-issuing market. So start at the top and work down when assessing the people, ideally beginning with the individuals on the board of directors and/or oversight committee from each owner bank with specific fiduciary responsibilities for Paze. Approach this as you would hiring a senior executive.
And remember: Pre-sale efforts are a leading indicator of after-sale support.
Next, scrutinize management and teams devoted solely to Paze, including outside systems integrators for software development, consultants, hosting services and the like. Validate responses using LinkedIn.
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Evaluate the Market: Will Paze Adoption Match Apple Pay? Or Maybe Click to Pay?
This step is informed by conducting an environmental scan of the digital wallet space, best encapsulated by plotting Paze’s position on the Gartner “Hype Cycle” in comparison to other mobile wallet concepts, successes and failures. This will allow for an objective assessment of the business case for Paze.
The Early Warning owner-banks have a lot to offer here if you can get them to transparently share their own experiences with similar offerings, such as Click to Pay (and its prior iterations Visa Checkout, Verified by Visa, Mastercard Masterpass, etc.). It would also be helpful to learn more about the experiences that banks had with their own payments moves, specifically Chase’s acquisition of MCX, the shuttering of Chase Pay and the decommissioning of Capital One’s Android Wallet.
Also learn what you can from Isis/Softcard, CU Wallet, Paydiant and the three top mobile wallets in China: Alipay, WeChat Pay and Pinduoduo.
You can use the KPIs from your environmental scan to create customized projections for mobile wallet adoption. Simply measure the percentage of activated users using popular options like Apple Pay, Google Pay, PayPal, Click to Pay, card on file and subscription billing.
You can do the same for merchant adoption by calculating total payment volume using your institution’s own ecommerce merchant processing data by modality. Both data sources are readily available from your own MID and acquirer processor reports. This analysis can be used to prioritize your “observable” functional comparisons in the product section below.
Research these factors by interviewing your institution’s own commercial depositors, starting with the ecommerce merchants you serve. This is particularly so for those banks servicing a private label credit card portfolio. You can supplement this with consumer research as well, such as focus groups and mystery shopper reports.
Evaluate the Product: How Do You Get ‘Default Card’ Status in the Paze Digital Wallet?
Paze is a consumer product offering, so a consumer-level evaluation should start with yourself.
Venture capitalists in the startup world often refer to “mutual suspension of disbelief,” which enables entrepreneurs and investors to take risks and invest in brand-new ideas. But digital wallets are hardly new. Co-author Richard Crone helped launch the first one, Cybercash, in 1995. In a crowded market such as a consumer offering in the wallet space, insist on a live demo running with real merchants and compare your own experience to other wallets.
In the mature stage of the product life cycle, smart money does not invest solely relying on PowerPoint mock-ups and wireframes of the customer and merchant experience. Neither should you.
A Due Diligence Must:
Request detailed journey map comparisons of every customer touchpoint in Paze with all the competing options.
Insist that the response include split-screen recordings for each competing option compared side-by-side, step-by-step, field-by-field with Paze running live with a real merchant. This allows for objective comparison of registration friction, pop-ups, input fields, keystrokes, out-of-band multi-factor authentication, “fat finger” incidents, and activation completion rates. No top venture capitalist, merchant, payment service provider, PayFac, or ecommerce platform would commit without this step. Neither should a regulated financial institution subject to Federal Financial Institution Examination Council guidelines.
Here’s a must-see: Observe in the screen recordings exactly how a financial institution achieves “default card” status.
Why is this key? Consider this from the earlier The Financial Brand article: “In the spirit of fairness, the initial order of card providers will be randomized, and after a default is selected, all other relationships shown will be randomized with each visit.” The contractual commitment must show how your financial institution will achieve — and keep — default card status. Otherwise, your competitors could potentially have access to your entire cardholder database through a random rotation.
A merchant-side tip: Put yourself in the shoes of an ecommerce merchant hearing this as well, not knowing if their most preferred tenders such as private label credit or co-branded credit are included in the default position when Paze lands on their site.
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With Paze, Devil’s in the Many Due Diligence Details
Adopting Paze involves many moving parts. Here’s a sampling of other items to be addressed in the due diligence request:
• Ask about the marketing budget for incentives needed to acquire new users and merchants. Paze will need critical mass on both sides.
• Ask if Paze supports the financial institution’s merchant co-branded and private label tenders (including private label credit, decoupled debit, affinity pay-by-bank debit, prepaid gift/e-gift cards, buy now pay later, etc.) and how?
• Ask how the platform will differentiate and rank card types such as bank-only cards vs. co-branded and/or private label accounts?
• Request a copy of the actual published software development kit, application programming interfaces, and list, with the validated URLs of payment service providers, PayFacs and checkout platforms that have certified general availability to merchants.
• Review Paze’s architecture, peak load stress results, pilot deployments and latency testing commitments. This should be done before the customary “retail freeze” in August. That’s the point when retailers will stop making any changes to their payment options until after the holiday season.
• Assess the risk mitigation strategies for a central repository of multiple banks’ branded credit and debit accounts.
• Investigate potential compliance and privacy repercussions of sharing additional customer data with a third-party outside your institution.
• Review policies, procedures and processes for removing customer data upon opt-out requests.
• Evaluate plans for recovery, damage restitution, legal liability, public relations and reputational risk management plans in case of a breach.
• Specify how your financial institution will be compensated for the use of your cardholder data intended for Paze if it is utilized to enhance other existing or new revenue-generating products and services. For example, say Early Warning were to use your cardholder data and charge for new pay-by-bank extensions to Zelle or initiate a competitive offering to Visa+.
• Evaluate Paze’s financial and business model viability, comparing existing runway with additional capital and resource commitments likely needed from owner banks and the exit costs to participants should they shutter the service.
Where Paze Could Take Things:
The likely endgame for Early Warning Services is to emulate the success of the initial public offering of Visa, which was the highest-valued IPO at the time.
• Given the above, estimate the value of contributing your cardholder data to a consortium of competitors — attempt to negotiate an equity interest in the business you are helping to build, via earned stock options, grants and/or warrants.
Here’s a concept to explore: Smaller institutions can form collective bargaining units through trade associations or core processors to negotiate pricing concessions and service level commitments not only for Paze, but Zelle, fraud prevention, risk management, and other services from Early Warning. Think in terms of leveraging your entire book of business.
Ultimately, your institution needs to align the potential ROI and propensity for merchant acceptance and consumer adoption with its own payment strategy, and specifically its digital wallet strategy.
About the authors:
Richard Crone is chief executive and Heidi Liebenguth is managing partner at Crone Consulting, a payments consulting firm.