The Tokyo FinTech Podcast had the opportunity to discuss the future of payments, in particular the convergence of payments, rewards and geolocation with Alex Topaloski, Founder & Chief Executive Officer of pulse iD. Here are some highlights of the conversation, you can find the link to the full podcast at the end.
Q: Alex, on the outset, you had a very traditional banking career. What attracted you to Finance in the first place?
AT: Banking for me was a career that I did not anticipate I would find so interesting. I entered it quite young, when I was 21 years old, at Deutsche Bank in London. Those were the boom years before the Global Financial Crisis and there was a lot of opportunity. I could not believe how many different career paths within banking one can pursue and the growth opportunities that one was presented with. So I did enter in investment banking in London in 2005, and then shifted very quickly to the retail banking space at ANZ, where I worked across the strategy and technology teams, and the last few years in the payments area. The Australian banks did not get impacted that badly by the financial crisis, and I was one of the analysts on the ground crunching the numbers around the Asia opportunity to identify post-crisis options for this big four Australian bank.
For me, personally, that experience was a massive learning curve on multiple dimensions. The first dimension was around how to size markets and how to size opportunities from the outside. And I think that is a practice that served me well as an entrepreneur, because that is a really underrated competence in doing a lot of the planning upfront. There was a lot of discipline required to look at the revenue pools and the profitability of different segments in the market, given the mission at the time was to enter new spaces, like wealth management, or different segments across Asian markets. So really, for me, it was an incredible experience in learning how to size opportunities, look at a lot of data, and doing that upfront and doing your planning.
The second bit was in the payments area. That was really the defining moment in terms of the businesses that I ended up building. When leaving banking, I saw a lot of opportunities in the payments space, I also realized that I like to apply myself to complex problems. And payments is actually quite a complex industry with a lot of moving parts. It is very dynamic. It took us a number of years to build a view and really learn about that market.
Q: Ten years ago then, what was your strategic view on the payments space?
AT: I first encountered the payment space from the perspective of a bank, thinking about its business, and it was actually really about understanding payments. What does this mean? What do payments mean for an entire bank? You would be surprised to learn how difficult of a question that is, to understand those 25 or 30 percent of the banking business that the payments function represents. Because banks are not built to capture the value of payments across their business units, they treat credit cards and transaction accounts as separate products. So my initial focus was on building a holistic view of the role of payments across the bank.
The second phase of that was really to understand what are the opportunities, what are the threats. A lot of technology change took place at that time, around 2009 and 2010, for example the first iPhone was just released. I was making an assessment and forming our view. Somewhere along the way, I realized myself that while I find this domain very interesting, I would much rather be on the team that looks at exploiting the opportunities as opposed to defending a position that I really felt technology was going to change.
But at that time, I did not really know exactly how. And in fact, the I first started building a business around using geolocation data, which in my mind was always very connected to the payments stream, because it told so much of the story of that customer in terms of their movement, what they did before the payment transaction and what they did after the payment transaction.
Q: So how does pulse iD put payments and location together, and introduces the rewards component as well?
AT: My company, pulse iD, is a platform that is built for merchants, especially small and medium merchants. The role of this platform is to help these businesses accelerate sales, accelerate revenue. I think you see a lot of growth and companies like Uber Eats, Deliveroo and Foodpanda, because they are such a seamless revenue accelerating platform for a business. For a restaurant, all they have to do is plug into this platform and orders get shifted straight to the kitchen. It is insanely expensive for restaurants, it makes restaurants run unsustainably, and it destroys a lot of businesses. But it goes back to the real need of business owners, which is that they need help on how to accelerate revenue and sales.
What is unique about our platform, which is called Catalyst, is that Catalyst partners with financial institutions and helps merchants to market themselves effectively across the network or financial services organizations, across a network of mobile apps run by neobanks, mobile wallets, and traditional players, across all payment channels. This really creates an alternative for businesses to run promotions away from Facebook and away from Google.
Q: Why are rewards becoming so important in payments?
There is a sharp proliferation in the number of mobile wallets, and banks, neobanks that are offering really easy ways for you to pay through your phone now. In Singapore alone, there are 42 different mobile payment wallets. So it is an incredibly busy and at times almost chaotic space. There have never been more alternatives to help people pay.
There are really two or three things that consumers want out of their mobile wallets. The first is they want a secure experience. They want to feel that they can trust transacting with that platform. The second and most important element is the payment experience. People do not want a clunky app where you need to tap five times and put in a six digit pin to get to the point at which you can pay.
What is very interesting is that the payment experience is pretty quickly becoming a commodity. Every app can have an identical payment experience now, because ultimately the true limits of the payment experiences are set by the sensors of the phones that the app has access to. And every app has access to the exact same sensors on exactly the same phones. And with less differentiation across the payment wallets, what is the thing that is going to drive people to shift? It comes down to deals, offers and discounts. People tend to be rational in their spending, they tend to think about what are the shops that appreciate my business, and that has awoken a real need for rethinking the loyalty model. So every one of these 42 payment wallets runs their own loyalty program, it is an essential element of their business.
However, the friction, the byproduct that was unintended, is the chaos that this unleashes for merchants. These offers and promotions inevitably are sourced from the merchants, and whilst the merchant may have had some sort of a process that could cope with developing one offer with one credit card or bank, how does this scale when all of a sudden, the merchant is approached by 42 mobile wallets to develop offers? What is lacking is an orderly, well managed marketplace that handles how a merchant can develop a promotion and distribute that across multiple mobile payment channels. And that is what pulse iD does. That is what Catalyst does. It helps the merchant develop the right promotion, and then algorithmically distributes that across a network of mobile payment apps.
Q: In the pulse iD model, who pays and who gets paid?
Our partners operate multiple commercial models. The usual commercial model so far has been that the issuer pays. This is the the main catalyst for change, because it is not sustainable for the issuer or mobile wallet to always be putting up 100 percent of these merchant discounts, they will burn through their VC cash quickly, and the bank will no longer see any return on investment, especially given payment margins are collapsing and the profitability of payments is decreasing.
The other model that we are really focusing on is a merchant-funded reward. That is really simple. Because merchants spend money to accelerate sales, they call that marketing dollars. They spend it through media agencies, they spend it in traditional ways in advertising on TV, and increasingly more and more digital. 80 percent of digital marketing spend goes to Google and Facebook. And we really believe that the financial services industry has a role to play in how these businesses spend their marketing dollars and provide a smarter alternative for these merchants.
Merchant funded rewards are not a new desire within the financial services industry, the financial services industry has for many years wanted to build ways where it could turn loyalty from a painful cost item into potentially a revenue stream. But it is something that you need to apply technology in a very deliberate and careful way. If you do not implement this as an automated technology-driven solution, the economics do not work out.
The third commercial model is to have other payment networks that would at times subsidize these promotions to encourage use.
Q: How do you ensure the offers are not seen as annoying and intrusive?
The mission is to have a really compelling offer for a customer. Not always, but occasionally, something that is hyper relevant, not annoying, and very useful. The role of our platform is also to train merchants to create offers that people really love and would like redeeming.
That is where it is important to collaborate in understanding the shopping habits, the transaction histories and how people inside different types of merchants, and making a platform that automates the process of how merchants create an offer. There are a lot of decisions to be made, you got to decide whether the discount should be a percentage of the total, or a fixed amount? A minimum transaction size? 500 yen? Or 1000 yen? How does a merchant really know? How is that going to influence number of redemptions? How would a small merchant ever be able to competently answer those questions because their businesses about running their business running their shop, they do not have a platform today to really help them through those through those decisions. And yet, is a fundamental part of growing that business. If you want more people, if you want people to keep coming, you need to be using technology, you need to be using data.
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