Mobile Payments: ‘Now’ is the time to succeed

What do Target, Home Depot, Staples, Albertsons and UPS have in common? They all have been victims of credit card data theft in the past year. Millions of dollars have been spent in anticipation of cyber crime (such as anti-virus, firewalls) and even more in the aftermath of the data theft (in reissuing cards, notifying customers, insurance and public relations to salvage brand’s image). An average of five million dollars is spent on each incident.[1] In response to the latest breach of data security, top retailers such as Gap, Nike, and Walgreens opened an information-sharing center to share threats or suspicious activities in real time to reduce the probability of data theft. As holiday season nears, these retailers would be wishing for a season without data theft while hackers would be gearing up to cash in big.

Mobile payment companies such as Level Up, Apple pay, Google Wallet and PayPal are well positioned to utilize this period to mobilize the adoption of mobile payments as well as their respective platforms through threat-opportunity framing strategy. Luckily, the problem of data theft affects both the networks – retailers and consumers – and the solution adds value to both the networks as well.

Threat Framing:

Merchants: Large investments are made for storing and securing customer’s credit card information while paying an average of 3% of the sales to the credit card companies. Still the data is at risk.

Consumers: Greater transaction time, inconvenience of waiting period to receive new credit cards and increased probability of identity theft that could have more adverse implication.

Opportunity Framing:

Merchants: Manifold benefits starting with focus on core business, reduction in data warehousing cost, reduction in liability in case of data theft, faster customer checkouts and saving on credit card processing fees.

Customers: Faster checkouts, identity protection, discounts from merchants and convenience of not carrying a wallet/multiple cards.

While threat framing must be used to convince merchants to focus on their core jobs and invest in new POS, opportunity framing must be used to explore partnerships where merchants can maximize benefits by saving on credit card processing fees and attracting more customers through promotional programs. Similarly for customers, threat-opportunity framing must be utilized to change the customer behavior by increasing the adoption and usage of mobile payment apps.

Mobile payment is a nascent industry and its adoption by consumer will largely decide its fate. The competition has already heated with Apple Pay making things interesting by adding 220,000 merchants and promising non-sharing of identity during transactions, and eBay spinning off PayPal. While each offering from different players has its own merits and advantages, the paramount factor is increasing the penetration of mobile payments as a whole. CurrentC, developed by MCX, a consortium of retail giants such as Walmart, CVS, Rite Aid, is already getting negative media coverage for forcing participating retailers to block Apple Pay and being vulnerable to hacking even before its launch. These incidents may inhibit he faster adoption of mobile payments and do more harm than good to the industry. Historically the best technology and ease of usage have been key factors in adoption of applications and consumers cannot be forced to adopt an application of merchant’s choice.

With the holiday season approaching, the focus of the mobile payment companies should be to provide as many merchants as possible with POS system that is able to accept mobile payments from all the platforms available. As the penetration of mobile payment increases, each platform can work towards increasing its share of pie through offering better technology, data privacy and participation benefits to merchants and customers.


[1] Williams, Lauren. C.; “Target, Nike, Gap, And Others Join Forces To Try To Stop The Next Big Data Breach”; ThinkProgress; last accessed Oct 29, 2014


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In a world in which people get their news immediately, 140-characters at a time, the old axiom that “patience is a virtue” has begun to fade. In its place has emerged an over-caffeinated society driven by efficiency and impatience. How can such an inefficient and archaic means of transaction as hard currency survive this revolution?

An honest evaluation will show that if used responsibly, and paid off diligently, credit cards are a far superior form of payment for consumers than cash. Not only do credit cards offer swifter transactions, but they also provide numerous perks for the cardholder:

  • Cash back and other rewards paid to the consumer based on the amount spent using that card
  • Consumer protection against theft and fraudulent purchase
  •  Short-term financing allowing consumers to delay payment

With the proliferation of “do-everything” smart phones, the tangible credit card is likely not the ultimate solution for the future non-cash world, but consumer familiarity with this means of conveyance will likely facilitate the transition to a digital platform with similar properties and greater security.

While I admit that until recently there were still a number of transactions that required me to keep cash around, good fortune has brought me technological innovations to free me of the burden of cash. The immergence of E-ZPass and the proliferation of parking meters that accept credit card has all but eliminated the need for any savvy driver to keep change in their cars – which until this point was the only valid use of “change” remaining, especially considering vending machines also now accept credit cards. PayPal linked cell phone applications have eliminated the embarrassment associated with using credit to cover small transactions at places like Starbucks – which offers the added bonus of paying rewards to users that utilize their mobile payment platform. Even the fourteen year old neighbor who mows my yard in the summer started accepting credit cards this year using Square Register.

The need for society to move away from a reliance on hard currency is exacerbated by the fact that as the world is moving faster it is also becoming smaller. Technology has help to globalize both businesses and supply chains, and as a result international travel has become the norm. Money has yet to catch up with this trend, and many travelers still opt to use currency exchanges, often pay exorbitant fees for the transaction and over- or under-estimating their actual cash needs. A widely accepted digital currency could help to eradicate this modern inconvenience. For a small fee travelers could have access to up to date exchange rates and avoid the risks, hassle, and costs associated with having to “pre-purchase” hard currency in an unfamiliar place.

Obviously, there are significant double-sided network affects associated with the creation a new payment platform, and in order for any system to gain enough momentum to eventually replace cash and perhaps ultimately also replace credit / debit / stored value cards as we know them, it must offer significant value to both sides of the transaction. We have spent a good deal of time describing the benefits of this change from a consumer perspective, but have until this point focused little on how it will be received from a corporate perspective. For businesses, the benefits of a new payment system are most likely to manifest in the form of enhanced employee productivity – either through full automation or faster processing times – and increased customer spending. Either way, however, there is likely to be enough consumer adoption to “pull” businesses into the fray.

Ultimately, a change in money is coming, and it will not be in the form of pennies, nickels, dimes, or quarters. In Boston, a technological payment system similar to the one I’ve described, LevelUp, has started to take hold. This phone-based application allows consumers to scan their phone to access payment from their credit cards and provides password protection for added security. While it is unlikely that this will be the ultimate solution, as change is often iterative, the more comfortable consumers and retailers become with change the closer we get to the “tipping point” where a system such as this really takes hold. My expectation is that a hybrid of the aforementioned LevelUp technology and the recently announced Coin – which acts as a consolidator of credit cards, gift cards, loyalty cards, membership cards, and etc. (see: http://www.csmonitor.com/Innovation/2013/1114/Coin-Finally-a-solution-to-the-overpacked-mega-wallet) – will emerge as the dominant form of consumer face-to-face payment in the coming years.


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 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. http://www.gartner.com/it/page.jsp?id=2028315

[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. http://www.google.com/wallet/faq.html

[4] “Isis Announces Its Pilot Programs Are Now Up and Running.”  Mobile Payments Today.  October 22, 2012. http://www.mobilepaymentstoday.com/article/202491/Isis-announces-its-pilot-programs-are-now-up-and-running

[5] “One in Three U.S. Smartphone Subscribers Use Apple’s iPhone.”  Apple Insider.  September 27, 2012. http://appleinsider.com/articles/12/09/27/one-in-three-us-smartphone-subscribers-use-apples-iphone

[6] “LevelUp for Businesses.”  Website.  October 26, 2012. https://www.thelevelup.com/interchange-zero

[7] Empson, Rip.  “On a Mission to Be Mobile Payment Agnostic, LevelUp to Roll Out NFC-Capable Terminals.”  TechCrunch.  September 6, 2012. http://techcrunch.com/2012/09/06/on-a-mission-to-be-mobile-payment-agnostic-levelup-to-roll-out-nfc-capable-terminals/

[8] Ha, Peter.  “Square Partners with Starbucks, Raises $25M for Series D.”  TechCrunch.  August 7, 2012. http://techcrunch.com/2012/08/07/square-partnershi/

[9] Perez, Sarah.  “Starbucks’ Square Rollout Gets a Launch Date.” TechCrunch.  October 5, 2012. http://techcrunch.com/2012/10/05/starbucks-square-rollout-gets-a-launch-date-no-loyalty-card-integration-yet/

[10] Kim, Ryan.  “Why Starbucks is Betting on Square.”  Gigaom. http://gigaom.com/2012/08/08/why-starbucks-is-betting-on-square/

[11] Perez, Sarah.  “PayPal Rolls Out to 15 More National Retailers.”  TechCrunch.  May 25, 2012. http://techcrunch.com/2012/05/25/paypal-rolls-out-to-15-more-national-retailers-announces-deals-with-6-top-pos-software-terminal-makers/

 


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While I’m bearish on many of the loyalty programs and restaurant promotion companies out there today, I’ve become increasingly excited about LevelUp. They just might have integrated the missing component to the equation. The general idea is simple. The user links a credit card to the LevelUp app on her iOS or Android device. She can then use her phone to scan a QR code to pay using funds from her credit card while collecting loyalty rewards at the same time[1]. This might sound pretty similar to other start-ups competing in this space, but these are the reasons why I think LevelUp might be doing it right.

Tracking! As we have discussed before, one missing component in the restaurant promotion equation is reliable downstream tracking. Can Groupon definitively tell the merchant that a campaign improved long-term sales? Can Restaurant.com demonstrate the customer lifetime value of a single customer acquisition? While that analysis should be simple, the data gathering is incredibly difficult. LevelUp cleverly integrates the loyalty program offering with mobile payment technology. Users are incented to pay with LevelUp because they are able to get double the rewards: (i) native credit card rewards and (ii) the loyalty program rewards. With this regular use of LevelUp as a payment option, tracking the impact of any one campaign becomes much easier – making the job of the LevelUp sales force easier as well.

Merchant Incentives! The sales pitch for many of the existing loyalty programs is simple – but questionable. The promise to generate repeat customer sales without a reliable way to derive the ROI for a given campaign seems fundamentally flawed. LevelUp seems to have not only circumvented the analytics hurdle, but it has also changed the merchant’s incentive to adopt in the first place. ‘Revenue growth’ is not their opening line; ‘zero interchange fees’ is. Merchants across the US spend over $40 billion on interchange fees a year[2]. The charges per transaction are typically 2.5% for SMBs[3]. Assuming a merchant has $1 million of revenue that is charged through credit a year, they pay $25,000 in swipe fees per year. Even if only 10% of that volume is moved to LevelUp, they immediately save $2,500 – and that’s without signing up for a loyalty program yet.

And if the merchant wants to drive more traffic to this free interchange fee option? Well, that’s one reason to sign up for LevelUp’s loyalty programs. Clever right? While some of the competing start-ups need to convince a merchant of the potential revenue lift their campaigns will generate, LevelUp’s job is much easier. So long as more existing credit card revenue shifts to LevelUp’s free option, the merchant wins because of the lower interchange fees – even if gross revenue remains flat. Revenue lift is just icing on the cake.

Mobile Payments Positioning! LevelUp has been training its 200,000 users[4] to become accustomed to the behavior of reaching for their phone – and not their wallet – when they want to settle their check at a restaurant. While the technology they have chosen to use today is the QR code – of which the sustained use of has been called into question by many – this simply serves as a basic method of proximity payment. Just in the last month, LevelUp has already unveiled new merchant payment docks that will accept both NFC and QR codes. As soon as the rest of the mobile ecosystem is ready, LevelUp will have a base of users who have already adopted mobile proximity payment behavior.

Profitability Model? While I’m excited about how LevelUp has found a nuanced value proposition to offer merchants, its money-making strategy is bold and fraught with risk. More traditional loyalty programs sell the idea that their  campaigns will bring the merchant more business in the long-run. If the merchant believes them, they pay for their services and hope for the best. But the company gets paid either way.

Instead, LevelUp is putting its money where its mouth is and will only do well if its loyalty programs do well. While the zero interchange fee scheme is clever, it also builds up an incredibly large base of expenses. I view these to be analogous to a fixed cost base that a traditional business would incur. LevelUp must build this expense base up in order to even have a chance to sell its loyalty program services. Once the merchant is signed up, LevelUp will make a hefty fee on the loyalty programs themselves, charging 35% each time a consumer redeems loyalty rewards[5]. If LevelUp gets its loyalty program right, they could scale quickly and become a very profitable business. However, building up such a large cost base will not allow it much room for error or experimentation.

I hope that LevelUp believes its analytics as much as they claim to. If so, I’ll be excited to see how they continue to navigate the complex mobile payment landscape in the future.


[1] https://www.thelevelup.com/how-it-works

[2] http://www.forbes.com/2010/02/22/credit-card-fees-law-opinions-contributors-robert-shapiro.html

[3] http://www.forbes.com/2010/02/22/credit-card-fees-law-opinions-contributors-robert-shapiro.html

[4] http://techcrunch.com/2012/08/02/levelup-second-tranche/

[5] http://techcrunch.com/2012/08/02/levelup-second-tranche/


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LevelUp – Fad or Future?

Over the past several years, the high margins of the restaurant industry have been a sought after treasure chest ripe for siphoning by savvy businessmen. Everyone wants a slice. Inundated by countless promises of non

-stop incremental traffic at a lower cost, restaurant owners are becoming increasingly wary of the next big thing that will guarantee them a bigger share of a bigger pie.

An in depth analysis using the hallmark standard of Porter’s Five Forces would admonish any naïve entrepreneur looking to get into the restaurant-leeching game. A saturated market. Lots of substitutes. High bargaining power on both sides of a two-sided platform driving a race to the bottom in fees. And low barriers to entry.

Despite the warning signs, LevelUp has found a way to gain some traction. As of today, they are in over 30 cities, with well over 2,500 restaurants in their network (over 400 in the Boston area alone). Two months ago they secured another $9 million in investor financing, filling their coffers in excess of $21 million.

How have they raced ahead of everyone else? Magic. And by magic I mean winning the hearts of investors to fuel their growth as a loss leader. But how long will investors stay in love? Are they another Groupon bound for implosion?

LevelUp is a pay-by-phone system that provides attractive incentives to both consumers and restaurant owners. For consumers, it adds one more element of convenience to their smartphone that already facilitates so much in their lives. LevelUp links to their credit card, and when they use it in restaurants, LevelUp charges their bank, at no additional cost to the consumer. LevelUp also provides instantaneous and loyalty-based cash back. Most restaurants will take a few dollars off the first LevelUp transaction. From then on, consumers can earn more cash with return visits.

For restaurants, LevelUp offers a substantial discount on transaction fees when compared to what they are used to paying the credit card networks. They started offering 1.5%, when compared to the status quo of 2-3%. As of this past July, they slashed that fee to an incredible 0%. To neutralize sign-on costs, they provide the scanner hardware. Most recently, they signed a deal with three large POS services to integrate LevelUp capability into owners’ existing systems, alleviating the need to have a separate scanner at the counter.

What makes LevelUp different is that while it falls in line with its competitors by promising incremental traffic, it does so at no cost to the merchant. And, as I’ll explain below, it’s in a perfect position to collect enough data to be valuable to the merchant. It’s this value that will act as its primary revenue source.

It is true that LevelUp is relying partly on new customer acquisition and selling some of its infrastructure. For every incremental dollar driven by LevelUp, the company makes a mere 35 cents. It also has recently released a for-purchase white-label solution for restaurant owners to run their own branded payment and loyalty applications powered by LevelUp’s infrastructure. But these two revenue streams together would not net enough cash to keep the business afloat and growing.

So can LevelUp really sell enough of its prized consumer data? That depends on two things.

The first is if restaurant owners, especially those who run small and medium size establishments, would really recognize the value of such data. Most owners are quite skeptical of any sort of marketing ploy, and only get incentivized by real-time savings & growth. The second is if enough consumers use LevelUp at a sufficient frequency to allow LevelUp to build a database that is relevant and useful.

Both are a reliant on inherent changes in behavior.

As my colleague pointed out in his plight for the Apple Passbook, one route could be to wait for those behaviors to change before jumping in. This is exactly what big tech is doing – both Apple and Google are partnering with existing credit card networks but offering little of the benefit to the merchants provided by LevelUp. It’s likely that they’ll eventually use their resources to take over this space on their own once the marketplace has more fully adapted to the new transactionary landscape.

But LevelUp is in a unique position to catalyze that change in behavior themselves. By offering incentives to merchants that were previously unthinkable (non-cash transactions that net out little to no loss with an increase in traffic), they are motivating those merchants to accommodate this new form of payment. By offering cash incentives to consumers, they are cultivating the demand on the other side of the platform.

As LevelUp continues to attract capital that funds its series of innovations (white-label, interchange zero, POS integration), it has every chance at becoming the first successful player in mobile payment space on a full-market scale. Right now, its biggest concern should not be securing this slot, but defending it once the market is ripe enough for the bigger tech giants like Apple and Google to really make a play.


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