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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Payment is probably the only area in tech that hasn’t had any major innovations in the past ten years.  By looking at recent startups, I strive to summarize a few trends in the payment and offline merchant space.

Your credit card will not be just a card (or whatever the next payment device is)

Today, your credit card is merely a way to pay, even though it contains an incredible amount of information about you and your consumption patterns.  And after the transaction, there is no good way for merchants to interact with their consumers again, because of privacy concerns.

A few startups are building out loyalty programs in their products.  These products aim to replace the punch cards that we get from cafeterias.  If you have a way to ID your customers (either via credit card or via a mobile app), then you can offer discounts or benefits to your most loyal customers.  Square and LevelUp have such functionalities in their broader product offerings, while FiveStars and Thanx are pure loyalty products.  Another startup, CardSpring, allows developers to pull data from each card transactions.  As a result, developers or card companies could do a lot of interesting things with the data.  For example, once I link my AMEX card with my twitter account, every time I twit about a certain merchant, I would be entitled to a coupon to that merchant and it is embedded in my card for automatic redemption in the future.

Offline merchants are in desperate need of sales and marketing services

As they say at Facebook, local is mobile, or vice versa.  The last wave of eCommerce companies aimed at helping merchants who sell physical goods to reach a wider customer base.  However, nothing much has been done in the service-oriented merchant space.  As a matter of fact, there is no real good way for these merchants to market and advertise themselves.  Daily deal sites (such as Groupon) provided a way, but the effectiveness of these programs is still under debate.  Moreover, these programs tend to attract a more inferior customer base that tends not to return in the future.

All these happen under the backdrop of decreasing interchange fee required by regulators.  The chunk of interchange fee (about 1.7% out of 2.5%) is earned by the issuing bank for putting up a 30-day loan.  However, when the whole economy deleverages including consumer credits, this fee will go away.  As a merchant, wouldn’t you want to spend the money saved on interchange for marketing and advertising?

However, the key should be to offer a strong incentive for consumers to join

While the demand is sizeable on the merchant side, I do think in order for such platforms to succeed, they have to create a strong enough incentive for consumers to join.  In the payment relationship, consumer is still the side that has more power.  Unless you have consumers on your side, it is very difficult and inefficient to acquire merchants.  And I am not sure if loyalty programs alone could do the trick.  Loyalty program is a nice-to-have, but I am not sure if it is strong enough.  So what could you provide as a strong incentive for consumer to join?

 


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