Mobile technology is driving towards an all-encompassing device that will consolidate your communicator, payment system, house key, car key and identification.  We aren’t there yet, but there is a lot of the effort focused on enabling payments from a smartphone; worldwide mobile payments is a $172B business and is expected to grow to $617B by 2016.[1]

There are dozens of companies already chasing after this market and every few months, a new entity seems to jump in – each with its own business model, proprietary technology and merchants.  What are the key requirements of a successful mobile payment platform? At the risk of over-simplifying, the four critical ingredients are:

  1. Security to protect access and transaction payments – often executed with a password, PIN number, photo or distance limit.
  2. Financial institution support – access to finances, whether it be a bank account, credit card or something else.
  3. Communication technology between the customers’ mobile device and the merchants’ transaction device – could be physical, radio or cloud-based.
  4. Widespread merchant acceptance – customers need to be able to use their mobile payment platform at a sufficient number of stores and services.

 There is lots of sprinting to grab first mover status because this is an industry with network effects that is destined to tip towards one platform, at least in the United States.[2]  The real challenge of winning the platform war is to execute especially well on points three and four: Communication Technology and Merchants.  (Note: that is not to say that the first two points are less important, but rather they are table-stakes to even be at the Mobile Payments table).  Surveying the leading platforms, it appears that there are two major customer-focused paradigms that mobile payment entrants consider:

  1. Hardware play – require customers to buy the device with the special hardware that enables payments.
  2. Software play – require customers to download the app that enables payments.

The hardware paradigm typically refers to the NFC chip (near field communication) inside of a smartphone as the authentication and security mechanism.  The benefit of NFC is that it is quick to process a sale and works only within a few inches of the sensor, so it is safer.  This is the system that has been adopted by Google Wallet[3] (via Android phones) and Isis[4] (the recently announced joint venture between AT&T, T-Mobile and Verizon).  The main downside for consumers is that the most popular handset does not include an NFC chip; the iPhone is 33.4% of all smartphones compared to Samsung’s Galaxy S3 representing significantly less than 25.6% of the market.[5]

The software paradigm traditionally just requires the customer to open an app and display a barcode of sorts for the merchant to scan or capture.  The benefit of this system is that it can work on any smartphone as long as the customer downloads the app.  This is the payment system that has been adopted by Square, Paypal, LevelUp, and perhaps one day: Apple’s Passbook.

With both paradigms, there is also a merchant-side challenge: it is expensive to install NFC terminals and barcode scanners – even if it is just an iPad – into every checkout counter of every McDonalds (14,000 US restaurants), Gap (2,550 stores) and Walmart (4,300 US locations).

 It is premature to predict which paradigm will win out – much less which company’s platform – but if I had to guess, it would be the software paradigm.  The reason: it is challenging enough to convince merchants to adopt this new payment system (even if the terminals were given away for free), but it may be even more difficult to sell customers an NFC-enabled smartphone.

In this highly competitive battle for market share, there have been many interesting strategies to onboard customers and merchants alike:

  • LevelUp – attracts merchants with their 0% payment processing (as opposed to 3-4% for standard credit cards)[6].  They also have built both NFC and QR-code scanners into their merchant hardware.[7]  LevelUp claims it has 3,600 merchants as of September 2012.
  • Square – got deeply intimate with Starbucks by taking in $25m in strategic financing and adding Starbucks CEO Howard Schultz to its board of directors.[8]  No surprise, before Christmas 2012, Square will be accepted in all 7,000 US Starbucks locations.[9]  As of August 2012, Square boasted 2M merchants.[10]
  • PayPal – recently invested in a national TV campaign – starring the endearingly-paranoid Jeff Goldblum – to raise awareness of its availability  (watch the commercial here).  This past May, the company announced 15 new merchants including Toys R Us, Abercrombie & Fitch, Barnes & Noble and Home Depot.[11] PayPal claims it reaches 40m point-of-sale systems as a result of a partnership with Ingenico payment terminals.
  •  Apple Passbook – just launched as part of iOS6 and the iPhone 5.  Passbook enables barcode scanning for loyalty cards and airplane tickets, but no mobile payments yet.  If that day comes, the tens of millions of iPhone owners will be an influential buying force.

The race to be the ubiquitous mobile payment platform will explode in the coming months and years.  We will likely see bitter rivalries, confused customers, frustrated merchants, and tumultuous failures before a winner is finally crowned.

[1] “Gartner Says Worldwide Mobile Payment Transaction Value to Surpass $171.5 Billion.”  Gartner Research.  May 29, 2012.

[2] The two sides of the platform are consumers and merchants.  While there are somewhat low multi-homing costs for consumers (at the app level), the costs for merchants are considerably higher: multiple hardware apparatuses, accounts receivable to manage, etc.  As such, the market will tip because merchants do not want to simultaneously support multiple technologies.

[3] Google Wallet FAQ.  October 24, 2012.

[4] “Isis Announces Its Pilot Programs Are Now Up and Running.”  Mobile Payments Today.  October 22, 2012.

[5] “One in Three U.S. Smartphone Subscribers Use Apple’s iPhone.”  Apple Insider.  September 27, 2012.

[6] “LevelUp for Businesses.”  Website.  October 26, 2012.

[7] Empson, Rip.  “On a Mission to Be Mobile Payment Agnostic, LevelUp to Roll Out NFC-Capable Terminals.”  TechCrunch.  September 6, 2012.

[8] Ha, Peter.  “Square Partners with Starbucks, Raises $25M for Series D.”  TechCrunch.  August 7, 2012.

[9] Perez, Sarah.  “Starbucks’ Square Rollout Gets a Launch Date.” TechCrunch.  October 5, 2012.

[10] Kim, Ryan.  “Why Starbucks is Betting on Square.”  Gigaom.

[11] Perez, Sarah.  “PayPal Rolls Out to 15 More National Retailers.”  TechCrunch.  May 25, 2012.


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The Future of Mobile Payments

Imagine a world where the shopping experience at a grocery store is completely digitized.In this world, your mobile phone has already mapped out an augmented reality version of the entire indoor space and identified the location of products that you may be interested in based on your purchase history.When you add milk and cereal to your RFID-enabled shopping cart, the items on your virtual shopping list mobile application are automatically checked off as you follow your custom guided route to checkout.Cash registers don’t exist anymore and your shopping cart automatically charges your bank account by linking to your phone as you stroll out of the store.While this vision may seem distant, the payments industry has been steadily moving towards this goal as it readily embraces online and mobile payments.

Mobile payments have seen several exciting developments over the past year with incumbents and entrepreneurs aggressively battling for control.This week, the launch of Google Wallet made a big splash on the mobile payment scene and likely will spur significant competitive response by current incumbents.In addition, new entrants have created disruptive innovations such as Square’s announcement of Square Register, a payment product that attacks the old-fashioned cash register industry by replacing existing registers with an iPad payment service.Credit card companies such as Visa have attempted to propel themselves into future payment platforms by developing their own versions of the digital wallet.Even wireless carriers have banded together as Verizon, AT&T, and T-Mobile have done with their $100 million investment in Isis, a new mobile payment network.Apple and Paypal have both remained ominously silent on their long-term plans for mobile payments, but I expect both to respond in the next few months.

Despite the heavy investment in mobile payments, effective mobilization of the technology will be challenging given the large number of competitors.However, a couple of key mobilization strategies will be important in determining which players will emerge victorious.

First, the presence of key complements will greatly enhance the value proposition of mobile payments.For instance, Google Wallet’s integration with Google Offers will enable loyalty programs and discounts to make adoption of mobile payments much more compelling.Similarly, credit cards such as Visa will be able to leverage loyalty programs that they have developed for decades through their primary credit card business.

Second, many new entrants have competed head-on with current payment incumbents such as credit card companies and Paypal, but I expect the most successful payment innovations to first target customer niches and then expand to the general population.The main problem with competing directly in the biggest market is that this elicits an immediate competitive response due to the incumbent’s perceived threat of its primary revenue stream.On the other hand, a new entrant that targets an underserved customer segment may cause incumbents to ignore them while they refine and improve their technology.For instance, Square Register is an innovation that is targeted towards a specific customer segment that is composed of merchants who don’t currently own a cash register because it is either too bulky or expensive.This strategy enables Square to avoid direct competition with cash registers since Square is not threatening the cash register manufacturer’s primary customer base.Square can use this positioning to its advantage by eventually improving the technology and expanding to large merchants.This could be disastrous for cash register manufacturers who will not be able to respond effectively because the cost structure of building a traditional cash register will not allow them to be price competitive with Square.

The mobile payment space is likely going to be a “winner take all” market for a few reasons.First, there are strong, positive network effects.Credit cards, merchants, and wireless carriers are more likely to partner with mobile payment solutions when there are many users signed up.Similarly, more users are likely to sign up with a mobile payment solution if many credit cards, merchants, and wireless carriers have already partnered with that solution.Second, there are high multi-homing costs.Having more than one mobile payment solution defeats the value proposition of having a single digital wallet.In addition, different technology installations for different solutions at the merchant site greatly increase the cost of supporting more than one mobile payment solution.Third, there is limited demand for differentiated products.Mobile payment solutions are unlikely to be vastly different from one another since, at the core, they help to purchase goods in a streamlined way.Loyalty programs and discounts will be important in the mobile payment space, but these complements will also be very similar since they are created at the merchant level.

The next couple years will likely see the resolution of a couple of key battlegrounds in the payment space.The first is near field communications (NFC), a short distance wireless transmission technology, versus pure digital technology.Google Wallet has embraced NFC and uses it exclusively to power its digital wallet solution.However, Square has effectively relied on digitally identifying individuals through the phone and charging an individual’s account through Square Register.The second is how credit cards, technology companies, wireless carriers, mobile phone manufacturers, payment processors, and entrepreneurs will shape the mobile payment value chain.Each one of these parties had attempted to enter mobile payments in their own way, but none have emerged a clear winner to date.

There is no doubt that mobile payments will eventually become prevalent, but there are many barriers that prevent widespread mobile payment adoption in the near term.First, consumers have been accustomed to swiping plastic credit cards for decades and most of them do not trust mobile payment technology.Second, merchants have adopted NFC and other mobile payment technology at a slow rate, thus limiting the user rate of adoption.Third, the mobile payment solutions and partnerships have been heavily fragmented.Google Wallet’s initial availability only with the Sprint Nexus S 4G and Citi MasterCard illustrates the level of fragmentation that will prevent a single product from dominating in the near term.

In conclusion, the mobile payment industry is still far away from the vision I painted at the beginning of this article, but the innovation in mobile payments over the next couple of years will be very exciting to watch.

By: Kenneth Sim

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