First Look at Google Checkout

Has Google found its iPod? Not the music player, but an end-to-end, ecommerce system that is safe, convenient, and above all, drop-dead simple to use? Something that does for online commerce what Apple did for digital music. That's a tall order, but we believe the search giant may have just such a hit on its hands with Google Checkout.

Google_checkout_logo_1For more than a year, there has been a great deal of speculation about Google’s entry into the payments arena. After months of quiet testing with carefully selected beta merchant partners such as Starbucks and, Google Checkout was officially released yesterday <>. Although the reaction in online blogs was mixed, we think it's a winner. The only question is whether it's a home run or a grand slam (or World Cup equivalents, one goal or four).

Google Checkout (previously known as Google Payments or Gbuy) is an online-payments tool integrated with the user's Google account. On the surface, it's similar to PayPal, but the true strength and potential threat is its close ties to Google’s already industry-dominant search function.

At this point, Checkout's functionality is more limited than PayPal's. There is no stored value, no subscription payments, no eBay integration, no non-credit card options, no integrated debit card, or money-market account. For the end-user, it's closer to a virtual wallet than a PayPal substitute. However, it goes way beyond what the ewallets of the late 1990s offered, taking control of the entire checkout process, a potentially disruptive technology in online retailing.


How it works
Google_checkout_starbucks Searches that match a Google Checkout advertiser include a shopping cart icon embedded within the AdWords' text box (see Google search on "Starbucks store" above). Users can buy products from these merchants in a few clicks without having to enter any additional information (see Google Checkout icon in lower left of the Starbucks shopping cart shown at right). This eliminates the dreaded merchant-account set-up process that causes massive shopping card abandonment problems, especially at relatively unknown merchants where privacy fears are greater.

Google_checkout_starbucks2First-time users are prompted to enter their credit-card, billing, and shipping information, which Google stores in its servers (see screenshot left). Subsequent purchases can be made with a simple Google username and password. Users can store additional payment and/or shipping options at any time. Complete purchase histories can then be monitored from their Google account.

Currently, just 100 merchants are participating (see places to buy), but given the potential merchant savings, expect that to change quickly. Of the 100 Checkout merchants, 24 offer a $10 discount off purchases of $20 or more (see DayDeals screenshot below).

Google_checkout_daydeal2Like PayPal, Google shields the buyer’s credit-card number and other personal information beyond what is necessary for shipping purposes. However, Google also provides the option of keeping the user's email address confidential, a spam-limiting function not available via PayPal.

When a user selects the confidential option (see screenshot below), Google forwards the seller's confirmation message to the end-user.


Sellers are paid directly through their own Google Checkout account. Google has significantly undercut PayPal on pricing, at least for smaller merchants. Google's fee is 2% of the sales amount plus a flat $0.20 transaction fee compared to PayPal’s typical 2.9% plus $0.30 (PayPal has a sliding scale with higher-volume, $100k/mo and above, merchants paying 1.9% plus $0.30).

In addition, Google advertisers earn credits against their processing fees. For every dollar spent on Adwords, sellers can process $10 worth of sales with no processing charges other than the $0.20 transaction fee. It amounts to a 20% discount on AdWords' spending, provided there is sufficient Google Checkout volume (i.e., at least 10 times the amount spent in AdWords).

Finally, sellers can create their own Buy Now buttons at the Google site, then drag and drop the HTML code into their websites. This allows small business sellers who are not currently ecommerce-enabled to immediately begin accepting Google Checkout.

Google is expected to provide additional data as the service matures. Having a hand in the process from product search all the way through to the purchase will allow Google to keep tabs on which ads actually result in a sale. This could mean changes to Adwords' pricing or structure.

The pitch to consumers is appealing. In addition to the privacy shields, Google promises to mediate disputes, and gives users a central place to track purchases. But the biggest consumer benefit: a common user interface for checkout, something that previous ewallets never provided. As you can see in the screenshot below, after shopping the merchant site, the contents of the cart are transferred to Google. At that point, Google takes over, offering the end-user the following options:

  • Change shipping method with all costs itemized
  • Add a coupon code
  • Change credit card
  • Change shipping address
  • Shield email address from merchant
  • SIgn up for promotional messages from merchant
  • Links to the user's Google account
  • Concise summary of the billing info, including exactly how the charge will appear on the user's credit card statement
  • Concise summary of the merchant's return policy


Will consumers give up more personal information to the largest data repository on earth? Initial polls seem to suggest so. In addition, you can bet that merchants will create incentives to move credit-card and/or PayPal volume to Google to save as much as 3% on card processing. For a retailer with a 10% margin, that's a potential 30% lift.

You might be thinking that free credit-card processing is a short-term loss leader that will end as soon as a critical mass of merchants adopts Google's system. We don't think so. Put yourself in the shoes of a Google advertiser. You now know that you'll earn a 20% discount on your AGoogle_checkout_signindWords' buy. Will you let that drop to the bottom line, or might you use some of that windfall to goose your bids on Google a bit? If it's an efficient market, eventually much, if not all, of the "free" card processing will flow back to Google in the form of higher bids. And since not all merchants will qualify for the 20% discount, Google might actually increase its total take due to the "discount." Brilliant.   

Google_checkout_ccregCitibank's role
The program should have little impact on retail banks, since at this point Google Checkout must use a bank-issued credit or signature debit card to participate. However, Citibank is paying Google to be the "preferred card" on both the Google sign-in page (click on inset above for closeup) and the credit-card registration page (click on inset right). The credit-card giant is hoping the $5 (or 1000 Thank-you points), will entice users to enter their Citi card into the Google wallet. The $5 bonus offer ends Aug. 1.

Retail banks might want to consider supporting the payment service with a secure gateway to various online payment alternatives so users can manage their PayPal, Google, and other accounts directly from a secure online banking area.

If you are a credit card processor, however, this could eventually pose a threat to your market share and/or margins. Even without factoring in the AdWords' credit, Google's highly publicized 2% discount rate, along with a lack of monthly fees, is a bargain, especially for small businesses. However, given the reluctance of businesses to change banking relationships, it will be years before the impact is felt.


Prepaid Topup May Mainstream M-Payments

Cellphone_pay_2Aite Group’s Gwenn Bezard thinks he’s figured out the avenue cell phone carriers may find themselves taking on their way to becoming financial services providers: By selling air time to nontraditional markets like the under- and unbanked through prepaid cards. Over time, he thinks, serving that market could lead them to become merchant acquirers.

Cell phones are the great disruptive technology for the financial services industry: To the extent that mobile payments take market share from other vehicles, they have the potential to atomize the value of bank brands and even minimize payments cards’ market share.

Continue reading “Prepaid Topup May Mainstream M-Payments”

Capital One Buys North Fork Bank

Capital One Financial Corp. will be one of the nation’s 10 biggest banks based on deposits and managed loans when it buys Long Island’s $57.6 billion North Fork Bancorporation for $14.6 billion in cash and stock.

That Capital One has turned itself into a national depository institution with branches and checking accounts is yet another indication, if one is needed, that credit cards are no longer a stand-alone business.

The deal gives Capital One a toehold in the lucrative New York market, and apparent expansion prospects there. It also builds on last year’s $5.3 billion acquisition of Hibernia Bank, which closed in mid-November. According to Capital One’s 10-K, Hibernia experienced what it called substantial growth in deposits after Hurricane Katrina.

Unremarked by media coverage was the irony that a business that’s still very profitable apparently feels it needs a cheap source of funds, and customers to sell to, in order to weather the many challenges now threatening its core competency.

Unremarked by the media, perhaps, but not by the stock market, which didn’t respond well to the news: Capital One stock, which closed on Friday, March 10, at about $90, closed on Monday March 13, the day of the announcement, at $83.10, and at $82 the next day. Morgan Stanley’s Kenneth Posner estimated in an investment advisory that the deal was neutral to Capital One earnings, and allowed Capital One modest synergies from the deal, worth $400 million in strategic value at best. He recommended buying on Monday if shares fell.

Standard & Poor’s said in a note that it felt the deal was priced fairly at about 15 times their 2006 earnings estimate for North Fork of $2.08 per share, and a price/book ratio of 1.6 times earnings. “We thought the recent weakness (in North Fork stock, prompted by concerns about its deep exposure to residential mortgages) presented investors with an attractive entry point. Apparently, Capital One arrived at the same conclusion,” wrote the note’s authors, Jason Seo and Mark Hebeka.

At least Capital One was acting out of relative strength: Its 2005 net income was $18 billion, up from $15.4 billion in 2004. But the company clearly felt it was wise, at a minimum, to continue diversifying away from credit cards. Capital One’s year-end credit card balances were $19.7 billion, compared with $20.5 billion in 2004, and average loan balances fell in 2005 to $12.07 billion, compared with 2004’s $12.24 billion. Interchange revenues grew to $514 million, compared with 2004’s $475 million. On a managed basis, Capital One reported $105.5 billion in outstanding loans, compared with $79.8 billion in 2004. Hibernia’s results were not included in Capital One’s 2005 results.

The company was clearly acting defensively, and recognizing that future growth in the credit card sector will be nothing like what it was only a few years ago—even for a company as well managed as Capital One—and that it won’t be again, anytime soon.

“(The deal) says a lot about their future as an entity,” says Michael Auriemma, president of Auriemma Consulting. “I’m not sure I’d have predicted they’d be buying banks, but there’s a strong realization that credit cards belong in an institution with retail customers—the amount of information- and data-sharing synergies by having both is phenomenal, and credit cards are challenged in terms of growth of new acquisitions these days.”

Capital One apparently has no bone to pick on that score. In its recent 10-K, it said that “The competitive environment is currently intense for credit card products. Industry mail volume has increased substantially in recent years, resulting in declines in response rates to the Company’s new customer solicitations over time. Additionally, the increase in other consumer loan products, such as home equity loans, puts pressure on growth throughout the credit card industry. These competitive pressures remain significant as a result of, among other things, increasing consolidation within the industry.”

Auriemma thinks, though, that Capital One can continue to be highly successful in the future. “There’s a lot of room to make a lot of money, and to grow your credit card business without growing new accounts,” he says. This, he says, includes building bigger balances, increasing consumer spending, and using the data from the payments stream to cross-sell other products to credit card customers. “This (deal) is less about new customer acquisition and more about managing existing customers, looking for a funding source, and diversifying revenues.”

By remaining on the offensive, Capital One apparently also hopes to keep Wall Street happy, and itself independent. Aside from Advanta Bank Corp., which reported 2005 net income from continuing operations of $116.7 million, America’s other monoline banks, once wildly profitable businesses, are gone with the wind. And Capital One itself isn’t entirely safe from acquisition; its float is only $25 billion, so it could clearly be bought by a large bank. Last year, Bank of America bought MBNA for about $35 billion in cash and stock, and other large banks—Wachovia Corp., for one—have said they’re interested in getting back into the credit card business.

North Fork reported 2005 net income of $948 million on revenues of $3.48 billion, and more than doubled its asset base after two 2004 acquisitions—Greenpoint Financial and The Trust Company of New Jersey. It has 360 branches in the New York area, including in northern New Jersey, and, according to Standard & Poor’s, it has about 4.8 percent of the area’s deposits. When the deal, subject to regulatory and shareholder approvals, closes in the fourth quarter, its top executives stand to get a payout of about $288 million, including chief executive John Kanas, who could receive as much as $185 million. Kanas joined the bank in 1971 and became president and chief executive in 1977. (Contact: Auriemma Consulting Inc., Michael Auriemma, 516-333-4800; Capital One Bank, 804-284-5800; North Fork Bank, 631-531-2058)

Cash and Cards Are Both Endangered Species

Right around the corner is a world with neither cash nor payment cards. Contactless payments mechanisms—built into cell phones or even jewelry—are helping create this world, and the result will help change banking, thinks Theodore Iacobuzio, managing director of Tower Group’s executive research office.

The reality is that companies that once fed the banks’  payment networks—merchants, for instance—will be future competitors. But banks shouldn’t panic about this, any more than when, not so long ago, the Internet was supposed to be extinguishing banks. And banks won’t be disappearing now, either, thinks Iacobuzio: the anxiety over banking’s future, so prevalent in boardrooms around the country, is overdone.

Continue reading “Cash and Cards Are Both Endangered Species”

Credit Card Portfolios: More Pressure, Less Profitability.

Graph_debit_credit_heqPeople have grown wary of credit cards. They’re paying them off faster; generally, debit cards are edging them out as payment vehicles. And at least for now, home equity loans are increasingly more popular than credit cards among consumers (click on inset for more details and see tables below).

The result? Credit card portfolios are losing profitability, even though net losses and delinquencies are down, and serious questions about the industry’s future are surfacing. So are questions about how wise banks were when they snapped up most of the monoline credit card operations last year. The business model needs an overhaul, says observers, but so far, issuers are just changing the oil. And there may be no way out.

Continue reading “Credit Card Portfolios: More Pressure, Less Profitability.”

Mobile Payments: Japan Leads the Pack

The potential of cellphone-based mobile payments to eventually squeeze banks out of their central role in payments can already be seen in East Asia, says Andrei Hagiu, a principal at Market Platform Dynamics, and by ignoring it, American banks have nothing to lose but their business.

Octopus_cardHong Kong’s Octopus prepaid debit card (see inset) is one example: Issued by Hong Kong’s subway system and several other transportation companies—with no bank involved—Octopus cards drive about $2.2 billion in annual payments volume.

Continue reading “Mobile Payments: Japan Leads the Pack”

Interchange Front Shifts to Germany

Germany’s federal monopolies body, the Bundeskartellamt, received a legal complaint from the German Retail Association, alleging that interchange fee charged MasterCard and VISA, which average 150 basis points, prevents widespread credit card acceptance in Germany.

In a statement, the Association, a lobbying group, said that credit card payment account for only 5 per cent of all retail sales in Germany. The complaint calls on the Bundeskartellamt to cut interchange fees and to increase payment card transparency. It claims these steps will improve competition in the credit card sector. Spain, says the group, has ordered a step-by-step reduction of interchange to between 0.54 per cent and 1.10 per cent by 2008.

Website Usability (part 2): Card Application

In part one of our series on website usability, we looked at the
all-important homepage. But the best homepage won’t do you much good unless
you can convert visitors into paying customers. For that you need an
effective sales process capped by an easy-to-use application. Online credit
applications have evolved considerably during the past five years and are
now relatively painless to complete, usually far superior to their paper
counterparts, which are plagued with missing data, illegible markings, not
to mention transcription errors in your own back office.

At OBR, we’ve looked at online application-form design on a number of
occasions, finding a wide variety in quality (see Table 11, below). This
time, we are using a more rigorous approach applying our proprietary OBR
WebCheck criteria
 and scoring Citibank’s application across 54 criteria. Although the
bank’s application is very good, there is still much room for improvement,
as witnessed by its sub-50% score.

Citibank credit card application

Card application

Table 12
Citibank Credit Card Application Process

OBR analysis using WebCheck* criteria


Source: Online Banking Report, 2/04 Wt = weight with 5 the highest

Ten Lessons From The Card Marketers

Without expansive brick-and-mortar operations to generate
business, card companies typically devote far more resources to direct
marketing and cardholder retention than retail banks. You can learn a lot by
watching what the card companies do online.


Develop a Killer App

Profitable online originations involve good marketing and a great
application. It must be short and sweet and loaded with imbedded help for
every term, otherwise only the desperate or dishonest will submit it. Most
major credit card applications today are a model of simplicity. For example,
Juniper’s online application (below) consists of a single screen
posing just seven questions beyond standard identification information
(name, address, phone number, etc.).



Screen Out Improper Applications Before Submission

One of the main problems with non-preapproved credit card applications is
all the worthless applications received. Not only has time been wasted
researching the applicant’s credit report, but also your company must
carefully follow regulatory requirements for communicating denials, lest you
become a target of class-action litigators. Financial institutions,
especially credit card issuers, now start the application process with two
or three screener questions to reduce the number of applicants applying for
products for which they are completely unqualified. This is a win-win,
saving the bank application-processing costs, and helping applicants prevent
lowering of credit scores due to application denial. Juniper uses a popup to
deliver the screener questions (below).




Segment Your Base with Regular, Gold, Platinum, and So


We believe that premium channels will be the next big thing in online
banking. That’s why we selected Money HQ from Online Resources
as our top innovation of 2003. A review of the credit card industry provides
clues as to how online banking may play out. American Express was a
segmentation pioneer, rolling out a Gold Card in 1966, only eight
years after the introduction of its standard charge card. After the huge
success of the Gold strategy, widely copied by bankcards in the late 80s,
the company further segmented its card base with the Platinum in 1984—again,
widely copied by bankcards in the mid-to-late 90s. Now American Express
operates a half-dozen card lines: Green, Gold, Platinum, Optima, Delta
SkyMiles, and Blue, with plenty of sub-segments of each.

We expect to see the same thing happen with online banking. Now that
leaders such as BofA, Wells, and Citibank have offered online banking for 15
years or more, and with penetration closing in on 50% of their checking
account bases, the companies will begin offering different versions of their
online programs. Expect to see differentiation around payment capabilities,
credit access, account aggregation, service levels, human attention, and
account alerts (see Table 9, below).

Table 9
Premium Online Banking Offerings

possible features and benefits


Source: Online Banking Report, 2/04



Use Real-time Payments to Drive Users Online

According to Gartner’s latest research,* in the United States, biller
direct payment is used by six million more adults than online bill payment
through a bank, 18 million vs. 12 million. However, according to Gartner,
respondents prefer bank sites for payment by almost two-to-one, 19 million
vs. 10 million, although both options trail preauthorized debit, preferred
by 26 million, and snail mail preferred by 116 million.

Banks can tap into the growing popularity of electronic payments by
offering simpler bill-payment sites that allow users to make one-time
payments or setup preauthorized debits, without a lengthy signup process.

Banks can also win more user by offering more choices, such as paying via
credit card.

Table 10
Bill Payment According to Gartner

millions of U.S. adults paying bills online


Source: EBPP Future Blends Direct Bank Aggregation Models,
Jan 13, 2004, by Avivah LItan, Gartner,
data from survey fielded May 2003
AutoPay =  preauthorized electronic debit
*Can choose more than one option, so the sum is higher than 100%
**Total the still wants to receive bills via snail mail




Credit card issuers have long been far more aggressive than banks
pitching ancillary services, such as credit card registration, credit report
monitoring, and credit insurance. They are beginning to take that approach
to online marketing. For example, last year, Chase’s credit card
group sent me more than 40 sales/service email messages. Issuers have also
found profits selling all types of unrelated products and services from
flashlights to magazine subscriptions. While, we don’t think banks should
start pitching knife sets online, they could be more aggressive in selling
related products, especially credit report monitoring, insurance, and value




Use Email for Retention


Credit card issuers are much further along in providing email messages to
users. Card companies are using email to remind users of payment due dates,
confirming charges and payments, marketing messages, balance transfer
offers, line increase notifications, credit card check offers, e-statements,
credit report and other ancillary product sales, holiday messages, and other
relation-enhancing messages: even early collection efforts have gone
electronic. Chase is one of the most prolific emailers. During 2003,
we received  at least 70 email messages from the bank about our active
credit card account, 46 of the messages (at least the ones we saved), were
marketing/service oriented (see example left) and the other 24 had to do
with scheduling and confirming payment of the bill (see OBR website for more



Provide Compelling Online Account Management

Card issuers provide an online experience on par with similarly sized
banks; however, some are becoming more creative with their
account-management websites. For example, American Express offers its
Small Business Dashboard to manage charge card (see screenshot left).
One of its distinguishing features is a credit-status bar that graphically
shows whether the charge account is approaching its limits (e.g., green
means in good standing, yellow means charging privileges at risk,
and red is account suspended).

Card issuers are also making online statements interactive with the
ability to click through to get more information or dispute a charge,
contact the merchant, or re-sort transactions.



Make Transfers Simple

For several years, companies such as Bank of America  have
provided simple online balance-transfer solutions for cardholders. Banks too
should make it simple for users to consolidate deposit and loan balances in
a similar manner using account aggregation technology and interbank-funds
transfers. Citibank’s new A2A service and Money HQ from
Online Resources
are on the right track.


Integrate with Direct Marketing

The latest trend is to provide special URLs and/or application numbers
in preapproved snail-mail solicitations so recipients can respond quickly
online. For example, Fleet’s
 This is a win-win, giving the customer faster direct access to the special
offer and providing an interactive environment for the card issuer to
encourage balance transfers or other upsells. This integrated technique will
quickly become a standard practice for financial direct marketing.



Get Rid of the Paper

With ever increasing printing and postage costs, the business case for
e-statements continues to grow stronger. Although paper-suppression efforts are
still in their infancy, we expect credit card issuers will be the first to
successfully wean a critical mass of users off paper. Although it will take
years of marketing efforts, for example, we’ve already received eight messages
from Chase encouraging us to switch to a
credit card e-statement; the formula for adoption is relatively simple: