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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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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I remember when I first started working in mobile advertising a few years ago, the quintessential mobile advertising use case that kept coming up was, “So, when I walk past a Starbucks, will you be able to push an ad to me?” That’s how people envisioned mobile advertising evolving, and yet, even a few years later we are still talking about banners and search ads.

But I think a recent product launch from Apple has brought us very close to where mobile advertising ought to be: enabling commerce at the point of purchase. I am talking about their launch of Passbook. While the product is currently positioned as a way to easily store gift cards, coupons and boarding passes, I think Apple has huge ambitions. Apple wants to “own” the wallet (I mean the real $$, not just what you spend on iTunes and all their gadgets!) by revolutionizing the payments industry just like it did with music, apps and other digital media content. Of course there will be a lot of winners and some losers in this tectonic shift.

 But first, let’s look at the announcement:

From Apple’s website, Passbook is “Your boarding passes, movie tickets, retail coupons, loyalty cards, and more are now all in one place.” You can add various items to Passbook and then open them at the time of use, such as at the movie theatre or when you are about to board a plane. This essentially removes a lot of clutter from your wallet. Good, but not disruptive…yet!

 My prediction is that the current functionality is only a means to the end for Apple. Apple knows that introducing a wallet-like feature off the bat will not be successful. Many have tried …and mostly failed. Non-cash, check or credit card payments represent a miniscule share of all transactions. It’s a big behavior change both on the consumer and merchant side. You don’t change a decades old lethargic industry overnight. Here’s what I think Apple is trying to do:

  1.  Initiate behavior change (slowly): Apple wants to make both the consumer and merchant comfortable with using a smartphone at the time of purchase. Apple’s strategy is to create value by going after the low-hanging fruit: gift cards and tickets. Apple has used skeuomorphism design to build an amazing and seamless experience so consumers are enticed to use the app. It’s not a huge behavior change to enter a few digits of your gift card or click a button from a website. This small feature will provide tangible, immediate ROI for users and will build awareness and comfort with Passbook. And of course bells and whistles like push and location-aware notifications enhance the product experience. Scanning 2-d bar codes for gift cards and boarding passes is also a nice stepping-stone for merchants to get comfortable with accepting smartphones at POS. Trying to disrupt their payments gateway would be too much to ask at this point.
  2. Buy time: One of the key aspects of mobile payments that hasn’t been figured out is the enabling technology: 2-d barcodes, NFC, camera or perhaps something else? Apple doesn’t want to place a bet prematurely. The industry will shakeout in the next few years and Apple will jump on board with whatever becomes the industry standard. Apple is not in the components business (which is commoditized), Apple wants to own the high value points of the value chain (the actual transaction). Moreover, it does not want to force merchants to accept a non-industry standard, which is what a lot of companies today are trying to do.
  3. Put the right payments infrastructure in place: If Apple simply allowed you to pay with your iTunes account, it wouldn’t be much of a value-add. Most people pay for iTunes using their credit card, so essentially Apple would divert credit card traffic from the merchant to it’s own store. Would Apple necessarily be able to command a higher interchange fee than the credit card networks? Highly doubtful. True disruption would happen if Apple had its own proprietary payments gateway such that the credit card networks would not be involved at all. Imagine an Apple credit card that you could use to not only purchase music and apps, but also every single thing you buy online/offline. That’s truly disruptive and I’d be surprised if Apple hasn’t thought about this more than once! Of course, the payments industry is extremely complex and fraught with fraud, so I don’t expect this to happen anytime soon.

 Apple has a history of putting the plumbing in place and then slowly but surely disrupting the market. Apple launched the iPod + iTunes, but the real disruption happened when 18 months later they started selling music through iTunes. Arguably, that’s what really changed the power dynamic in the music industry.

 Then Apple launched the iPhone but again the true disruption happened when a year later they launched the App store. It’s what made the phone really “smart”.

 Enabling mobile advertising using Passbook is a lot better than spamming people with mobile notifications when they walk past a Starbucks. With Passbook, Apple, and hence Starbucks, know that the iPhone user has a Starbucks card, goes there often, and will probably be interested in an offer or recommendation. They know the users purchase patterns and favorite beverage. Instead of advertising, it becomes content. And that’s how you win with advertising.

 I truly wonder where Apple will take Passbook and our wallets. I know Kiril Alexandrov over at Big Skinny will be watching for sure (sorry bad Online Economy joke!)

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