just asking

Guy Kawasaki wants links and questions. I’m happy to oblige.

My question is multiple choice. Is it better to

a) found a startup, OR
b) join a startup that’s got enough runs on the board to be clearly viable, OR
c) go to a big established company, but in a new division that’s in startup mode

I know the answer is "different strokes for different folks", I’m still interested to hear what the pros & cons are for different people.

Just for the record, I chose option C – as of monday, I’ll be working for Woolworths Financial Services.

That means Coles Myer will be my competition (how good’s that? 2 links for the price of one!)

everything old is new again

over the last few days, there’s been a lot of buzz about PayPal mobile.

I must be turning into a fuddy duddy cos I just don’t get what’s novel about being able to use your phone to do a money transfer, or use your phone to pay a retailer, or use your phone to order things out of a catalogue.

The only new thing I see is that PayPal are cutting out the requirement to authenticate yourself when making a payment by phone, instead they seem to be trusting Caller ID. As Bruce Schneier points out, this is probably not a safe thing to do.

I don’t mean to belittle whoever built this thing, I’m sure it was a lot of fun to work on, with all sorts of interesting challenges to overcome and fun toys to play with. Maybe Cameron Reilly will set me straight on this, but I just don’t see what problem this product is actually solving. (BTW Cameron, I’m still game to make that bet if you are)

 Updated 2006-03-24 – It has been suggested in some quarters that PayPal is safe because SMS can’t be spoofed. Look Harder, Homer!

market consolidation (again)

As I mentioned in my last post, there’s been a lot of consolidation in the grocery markets, and the players in that consolidation – Coles Myer Limited (CML), Woolworths (WOW) and Metcash (IGA) – are starting to expand in to other market segments. I’ve recently come across ideal firm size theory, which suggests there are limits to that expansion, so in this post I want to look at some of the factors that encourage and constrain that growth.

Factors promoting consolidation

Branding & Advertising

People like to buy brands they know about. The way to get a brand message to stick in peoples heads is keep repeating it over and over and over again. So the more money a brand can spend on advertising, the more popular that brand will be.

Purchasing & Distribution

Any product that has high capital costs in production and distribution will show economies of scale. So the more of a particular good a single retailer buys from a wholesaler, the lower the price that retailer has to pay to get those goods on to their shelves. Bigger retailers can even cut out the middle man, buy straight from producers and develop their own private labels.


Not everyone can hire only above average employees. A good operating system (manuals, POS systems, training materials) can get consistent (although not brilliant) results with workers who are neither interested or intelligent (one POS developer told me "our target user is a 16 year old high school dropout telling her friend what happened last night on Neighbours "). A good system costs a lot of money to develop, but that cost can be amortised across all the stores applying that system.

problems with consolidation

The battle between large and small business is not totally one-sided – large companies are subject to diseconomies of scale. Smaller businesses have much lower management overheads and are able to respond much faster to new threats and opportunities that appear in the market. Smaller businesses are also less prone to conflicts of interest between owners, managers, and employees (the limit case here is self employed workers, where one person fills all three roles).

models of consolidation

Some markets consolidate through one or two retailers expanding by acquiring or undercutting their rivals. These retailers have the benefits of centralised branding, purchasing and systems, and the disadvantage of centralised ownership.

In markets for low value, fast moving goods, where there’s a lot of competition and branding has a big influence on consumer behaviour, franchises can prosper. Franchises have the advantage of centralised branding, purchasing and systems, and also the advantage of decentralised ownership. The franchise model dominates in areas where branding is important and the startup cost for each outlet is low enough that anyone with a bit of industry experience and a house to mortgage can be their own boss. The canonical example here is the fast food industry.

In some markets one or more open platforms can take hold. These give smaller businesses (who have the advantage of decentralised ownership) some of the advantages of centralised systems, and are especially prominent in services markets, where purchasing & distribution is not relevant, and personal relationships are more important than brands. E.g. the SABRE network gives independent travel agents the ability to sell tickets on any airline. Since all market participants have equal access to that system, there is no pricing or operational advantage for large players. Note that this benefits suppliers even more than buyers – if there was no open platform, then there would be huge benefits in centralising ownership of travel agents, which would lead to the emergence of one or two giants dominating the market, these giants would then be able to exert pricing leverage over the airlines. It’s not surprising then that SABRE was actually created by an airline. The real estate market can also be considered to have an ‘open platform’ since cheap newspaper advertising and websites like domain lets an independent agent advertise to the same number of potential buyers as any of their competition. Again, if these media weren’t open to all, then the market would consolidate around the handful of giant firms that could fund the production and distribution of their own advertising, and then those firms would be able to extract much larger commissions from sellers.


Not really sure what to make of all this just yet. Ben Barren asked what impact will technology have?  Somewhere in all this WOW vs CML froth & bubble there’s an open platform waiting to get built, something that will keep the independents and franchises in the game once POS systems with supply chain integretion and the ability to sell financial products start to become competitive weapons. I’ll ponder a bit longer and see if I can discern it’s shape.

network effects in australian retail

Over the last 20 years, there has been a huge consolidation in the Australian grocery retail market. Two giant retailers (Coles and Woolworths) have opened up massive networks of supermarkets all across Australia. The number of stores owned by these retailers gives them huge buying power, so they are  able to negotiate very low prices from suppliers. They have also built out very efficient distribution networks (i.e. warehouses that suppliers deliver goods to, and trucks to get goods from the warehouses to the individual stores). This further cuts their costs, allowing them to undercut rival stores.

In order to compete with the 2 giants (who each have about 35% of the total market of groceries), the remaining independent supermarkets have turned to a company called IGA Distribution (owned by Metcash). IGA runs a distribution network, supplying supermarkets that account for about 15% of the total market. This gives IGA sufficient buying power to negotiate with suppliers prices that are about as good as the majors, and they run an equally efficient distribution system.

But the IGA strategy is to not own or manage any of the IGA branded & supplied stores. So while IGA stores share a common procurement and distribution system, they are NOT integrated at the POS level in the way that Coles or Woolworths stores are.

Now the grocery market has reached a stable configuration, Coles and Woolworths are taking their systems and distribution networks beyond groceries and in to other markets, e.g. they both already own, or have strategic partnerships with, liqour and petrol retailers, and both have started to make forays into financial services (e.g. Coles Myer Credit Cards).

As well as increasing buying power, each new segment allows cross-promotional initiatives that increase the "gravitational pull" of the retailer as a whole. e.g. Fly Buys drives business to all CML brands, and I think if CML ever issued a Fly Buys branded Credit Card that combine both loyalty programs on to a single card, it would be a huge winner. But all these initiatives require the use of a common IT platform.

Nop doubt IGA would very much like to be able to form alliances with organisations in other segments, e.g. partner with a petrol supplier, or a financial services company, but their ability to create these kinds of deals will be substantially undermined by the lack of a universal POS system that new products can be built into.

As n example of how IGA is suffering from their lack of a standard POS platform, consider their response to the ‘fuel discount’ programs offered by both Coles and Woolworths. Both the Coles and the Woolworths programs work in the same way, if you spend $30 or more at a supermarket, the POS prints a coupon on your receipt that can be redeemed at a participating service station, for a 4c a litre discount. This program drives business to both participating supermarkets and service stations, and so the costs of the discount can be split between both the benefiting parties.

When these programs first came out, the were very popular with consumers, and the fact IGA did not have a similar program hit their sales in a big way. So they were forced to respond, but since there is no centrally controlled POS infrastructure, the only system they could implement is one where supermarkets give grocery shoppers a discount equivalent to 4c a litre if they present a receipt for fuel from any service station when buying $30 or more of goods. This means that the supermarket has to wear the full cost of the program, they can’t split the cost with a service station in the way Coles and Woolworths can.

As the new products made possible by networked POS systems – stored value products like gift cards, or financial services like bill payments, or enhanced loyalty programs – become more and more competitive weapons for the majors, there will be a huge amount of market pressure to create a common POS infrastructure to give the independents the same benefits of networking and standardisation that the majors get. i.e. there will eventually be a POS network that parallels the IGA distribution network. I doubt this is something that IGA would want to build and run themselves, but it is probably something they would encourage and promote. But I think once such a network gets built, it will rapidly expand outside supermarkets, and the leading franchisors in any segment that the Coles or Woolworths duopoly expands into will feel the pressure to join a larger cross-promotional group (hence my prediction of a loyalty program that combines IGA and Harvey Norman, amongst others).

There’s a few forms this POS network could take. It could require a complete new POS system. (i.e. including the till, scanner, inventory system etc), or it could be a souped up EFTPOS terminal (managed by e.g. MoneySwitch) or maybe even a seperate device (such as a DialTime or Touch terminal). Or maybe even a combination of all of the above, i.e. using a new standard that replaces AS2805 with something a lot more extensible and easy to work with, and allowed both financial transactions (e.g. charging a credit card), as well as non-financial messaging (such as passing details of shopping baskets back to a central loyalty program server that logs it for future data mining, and responds with any applicable discounts). 

Like any system where Metcalfe’s Law applies, the hardest part will be the initial bootstrapping and concensus forming. Will be a good prize for whoever gets there first though.

more predictions on payments

I’ve been thinking and writing about australian payment systems for a while now, because I’m a geek, so I’m interested in systems, and I’m a father-to-be, so I’m interested in money. So yesterday, when Cameron Reilly suggested PayPal was a threat to the banks monopoly on financial services I had to disagree.

As I said on Cameron’s blog, there’s three components to a financial service:

  • the brand – including advertising & marketing.
  • customer service – whether it’s at a shopfront (e.g. bank branch) or via a call centre or website, you need to have ways to allow your customers to do business with you, and help them when they have problems.
  • backend infrastructure – the databases and comms links etc that store and carry transactions.

These are really 3 seperate businesses, but at the moment most major banks are in all 3 of them. But there are also lots of businesses that do only 1 of them. For example, there’s lots of brokers that do the sales & marketing of home loans where the customer service and infrastructure is provided by a major bank.

PayPal (like the banks) also cover all 3 areas, although I doubt they could repurpose their current infrastucture very easily to handle e.g. home loans or credit cards. Also as soon as you get into products more complex than straight money transfers, your customer service requirements will go way up. You’ll need branches where people can get help filling out application forms, and ATM’s where people can take cash out. Basically you need to stop being a purely ‘online’ company and start owning real estate. And it is much much harder to build a network of physical outlets out from a website than it is to add a website to an existing distribution system.

So while PayPal might try to offer more services, I think they will just be rebranding products offered by other companies. So rather than competing with the branches and infrastructure of ANZ / NAB /CBA / Westpac, they’ll be competing with other resellers like Virgin Money to onsell the banks’ products.

But that doesn’t mean the banks aren’t about to get shaken up. They will, just not by PayPal. The real threat for the banks is from organisations that already have strong brands, and lots of physical distribution points and customer service staff. Once again, Coles Myer and Woolworths will be the ones to force an industry realignment. And it’s happening already – today Woolworths announced they are rolling out their own ATM network. Coles Myer offer Credit Cards and Insurance.

The major retailers have a big advantage over the banks when it comes to running a payment processing system – because they own so many retail outlets, lots of the payments will be closed loop, meaning no interchange or merchant service fees. I.e. it will be cheaper for Coles Supermarkets to take payment on a Coler Myer issued MasterCard than a CBA issued MasterCard.

Also, these retailers are able to develop new stored value products that work across their distribution network. e.g. the Coles Myer Insurance Claim Card. I expect to see a lot more ‘single purpose’ stored value products as well, like Woolworths ‘Essentials’ Card. Since Woolworths control the retail outlets as well as the payment instrument, they can ensure that the cards are not used to buy booze or smokes. Compare that with the Visa Debit cards issued to hurricane Katrina survivors for emergency supplies – they were used for gambling, porn and tattoos

So here’s my tips for the Australian financial services market 10 years from now:

  • Both Coles & Woolworths will offer a single integrated Credit/Debit & Loyalty Card (i.e. instead of having separate credit cards and a FlyBuys card, you will just hand over your Coles Myer issued credit card)
  • There will be a loose federation of independent ‘tier 2’ retailers combining to offer financial products (stored value cards & loyalty cards) usable across that network. That federation will probably include IGA & Harvey Norman.
  • 50% of EFTPOS transactions will be on Credit/Debit/Stored Value cards issued by retailers
  • 20% of car & home insurance will be sold by retailers
  • 10% of home and car loans will be sold by retailers
  • At least one of the retailer programs will allow customers to download their receipts electronically. e.g. Woolworths will offer a credit & loyalty card that’s integrated with MYOB. (American Express are pretty close to this already)
  • The infrastructure underpinning the above will be a mix of in-house and rebadged 3rd party products. Where 3rd parties are involved, it will be agile infrastructure companies like MoneySwitch that win the business.

In  short, I’m predicting that the banks will lose their retail banking business to the retail giants, and their wholesale (‘backend’) banking business to the infrastructure specialists. Maybe even one of them will be gone (through a merger, there’s no way the RBA would let a major bank collapse).

reading the tea-leaves on payment systems

in PayPal vs the banks, Cameron Reilly asks what’s going to be the discontinuous innovation into the banking industry, with PayPal being a contender.

Personally, I’m not that convinced PayPal is such a big deal here in Oz – with BECS direct deposits Australians already have a pretty cheap and easy way to send and receive money . So PayPal may be a competitor to BECS, but I don’t think it changes the game in the way that it does in countries without a low-cost bank-to-bank transfer system.

let’s put this to the test – I just did an ebay search for leaf blowers. There were a total of 9 results. 6 of them accepted payment by direct deposit but not PayPal, 2 took direct deposit AND PayPal, 1 took neither, none took only PayPal. Compare this to the first 5 results from US sellers, ALL of them accepted PayPal, none of them wanted a direct deposit.

So let’s say PayPal is NOT going to be as disruptive here as it is in the US. It will certainly compete with BECS, and force the banks to reduce costs and add features, but I doubt it will ever really be used much outside of ebay.

But I still think there is room for a big shake-up in payments. But where I see the room for innovation is in getting a closer integration between the payment system and financial record keeping for consumers and SMEs. It seems absurd that so much work is done pumping data out of POS systems into things like Loyalty Programs and stock control systems (that can then talk to supply chain management systems that talk to wholesaler’s systems) and yet I still get handed a tiny little thermal printed receipt that I then have to type in to MYOB or Excel or whatever.

Where POS data goes (and where it stops)

I know there’s some niche products like fuel cards, which use custom (retailer specific) extensions to EFTPOS transactions to include lots of details about the goods and services being paid for.That way the fuel card issuer can send you a single monthly statement (or even make it available for electronic download) that has all the data you need for your financial records for vehicle expenses.

This works great for expenses related to company cars (which is certainly a huge market) but unfortunately there’s not yet a more general solution here. I guess there’s a few ways this could happen. Maybe AS2805 could be extended so each EFTPOS transaction includes the full shopping basket being paid for (including GST on each item), and then my bank website  could let me download the data or even better, let me assign some kind of expense category to each line item, and maybe even do some of my BAS calculations for me (assuming I tell the bank my ABN, and that the card is being used to run a business, so all GST I pay with that card is claimable). That’s a pretty huge migration though (i.e. upgrading every single EFTPOS terminal  and every POS system in OZ), can’t see that happening any time soon.

Or maybe as POS systems get smarter and broadband becomes ubiqutious, there might be room for some kind of multi-retailer loyalty program where the benefits for the consumer include electronic access to the transactional data that is collected in some industry standard format like OFX.

Or… maybe I’ll just stfu and keep collecting those crappy thermal paper receipts and typing them in to Excel every time my wallet gets so full of the damn things that I can’t sit down anymore.

how IE responds to different HTTP status codes

There is a discussion on intertwingly about feed errors, including the case where a server was serving a valid RSS feed with a 404 (file not found) status code. The feedvalidator was reporting the feed as being non-existent, but IE and firefox would happily display the XML.

I was curious to see how IE handled all the different HTTP status codes, so I put together some ruby scripts to test them.

this is the server: it just listens on port 2000, looks for a 3 digit number in the requested path, and if it finds one returns that number as the HTTP status code in the response, along with a little html page.

require ‘webrick’
include WEBrick
trap ("INT") {s.shutdown}
s.mount_proc(‘/’) {|req,resp|
     resp.status = @status

and this is the client, which uses watir to get IE to call the server, and check the result:

require ‘watir’
def test_status(ie,status)
 puts "STATUS #{status} –

#list of status codes from http://www.w3.org/Protocols/rfc2616/rfc2616-sec10.html
#skip 1xx since they causes the client to wait for the server to send a further response
#skip 204 NO CONTENT – watir blocks
#skip 301 / 302  – watir blocks (probably looking for a Location field – according to spec it’s not actually mandatory)


 200 201 202 203 205 206
 300 303 304 305 306 307
 400 401 402 403 404 405 406 407 408 409 410 411 412 413 414 415 416 417
 500 501 502 503 504 505
).each {|status| test_status(ie,status)}


Here’s the result in IE 6, with ‘friendly http errors’ disabled (‘OK’ means that IE rendered the HTML returned, ‘FAIL’ means IE displayed an error message instead):


If friendly errors are turned on, this is the result:



when business rules collide

A couple of weeks ago, I posted about the non-bill that Telstra sends me every month. At the time, I assumed the reason for the $0.56 charge existing at all was that I had underpaid the final bill.

But the same thing has just started happening to Angela, who is now getting a $0.09 non-bill sent to her after also cancelling a service. And a closer inspection of the first non-bill shows that Telstra have charged a 9 cent fee for paying the previous bill by credit card.

This is actually the result of the RBA rulings that now allow merchants to explicitly pass on merchant service fees (and thus stop retailers having to raise prices for everybody to subsidise credit card loyalty programs). If you look at the fine print on the back of a Telstra bill, you’ll see that paying by credit card incurs a small percentage fee, with different fees being charged depending on what credit card is used).

This fee can obviously only be calculated and charged after each bill has been paid. I.e. the charge for paying a bill this month will go on next month’s bill. But what if there is no bill next month (because I’ve cancelled the service the bills were being sent for)? In that case, then Telstra will create a bill containing only the credit card payment fee, decide that it’s too low a value to collect, and then send me a statement saying the balance will be carried over to the next month. Once that state is reached, there’s no obvious way out – it seems like Telstra are going to spend a $1.00 or so every month telling us we owe them 9c, but not to pay it just yet.

As far as I can work out, this must happen every time someone cancels a Telstra service and then pays the last bill by credit card. In which case, there must be a heck of a lot of these non-bills getting sent each month.

That may explain why Telstra is so keen to revamp it’s billing systems.

Credit Card Loyalty Programs

In an earlier post, I talked about retailer loyalty programs, and showed how for most retailer loyalty programs, the motivation is to encourage customers to identify themselves to the retailer on each transaction, so the retailer can better understand their customers.

But the most commonly encountered loyalty programs these days seem to be those run by credit card issuers. Alittle thinking on the matter will show there’s some major differences between these programs and the retailer loyalty programs I looked at before. The first one being, when you participate in a CC loyalty program, there’s no additional plastic card that you need to produce on each transaction – the CC issuer already knows how much you spend on your card, and at what retailer.

Also, unlike in retailer loyalty programs, the rewards you earn are not things that can be written off as marketing expenses by the program owners. Say you sign up for the Dymocks Booklover program, and spend $100 on books. You’ll then get $5 to spend the next time you come in to the store. So the net result is that Dymocks have given you a 5% discount in exchange for you first telling them what they need to know in order to more efficiently market to you, and then you coming back to the store and spending more money. This is a win-win.

But When you cash in your ANZ Rewards Visa points for a $100 Harvey World Travel gift card, then ANZ are handing over real money to HWT to pay for that gift card. Probably ANZ will have negotiated a discount from HWT, so they will pay a bit less then the face value of the gift card, but they are still paying out real cash to a 3rd party, which has to be raised from somewhere.

Let’s just re-iterate this. Loyalty programs offer credit card issuers no additional information about their customers, and the rewards that they offer cost the issuers real money to provide.

Which begs the question: why on earth would any credit card issuer run such a program? The answer to that comes in two parts. First, every issuer runs these programs because every other issuer does as well, so customers expect to be able to earn rewards. A credit card issuer without a loyalty program would be like a peacock without a brightly coloured tail.

The second part to the answer is, issuers can afford to run these programs because they are able to push the cost of the rewards on to the merchants where you use your credit card. When a credit card is used to pay for goods, the merchant who has accepted the card ends up paying their acquiring bank a fee called a Merchant Service Fee, that will usually be between 1% and 5% of the total payment. The acquiring bank then splits this fee with the issuing bank. In other words, whenever you pay for something on a credit card, up to 5% of what is charged to your card ends up going to the banks processing the transactions, not to the retailer who provided the goods or services. If you paid by debit card (i.e. chose ‘cheque’ or ‘savings’ on the EFTPOS terminal) then there would still be a fee charged to the merchant and split between the acquirer and issuer, but the fee would be a flat fee (somewhere between 20c and $1.00). So when you pop out to your local hardware and spend $400 on a new lawn mower, whether you press press ‘savings’ and ‘credit’ on the EFTPOS terminal can mean either and extra $20 margin going to the hardware store or else, $10 each in fees to the acquiring and issuing banks. Assuming you have the money in your savings account, and you’re going to pay your credit card off in full at the end of the month anyway, why would you press ‘credit’ (and give that $20 to the banks) instead of ‘savings’ (and let the hardware store keep it)? Well one thing that might sway your mind is the fact that choosing ‘credit’ will earn you some rewards points, whereas choosing ‘savings’ won’t.

In other words, loyalty programs are a way of encouraging people to favour one payment method (credit cards) over another (debit cards) that are transacted and settled in exactly the same way but have very different fee structures. The credit card issuers can ‘bribe’ people to pay by credit cards, and fund that through the merchant services fees they charge (Since both the value of rewards you earn, and the fees you earn for the bank that issued your credit card are directly proportionate to the value of goods and services you pay for using your credit card.)

So the merchants in turn know that a reasonable percentage of their customers will pay by credit cards, and so when they are working out what price to charge, they will factor in the merchant service fees.

So the net result is, everyone ends up paying (slightly) higher prices to cover the cost of credit card loyalty programs. This is something the RBA has noticed, and is working to address.