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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Almost all local smart-phone users use it. 62 million user accounts were amassed in 2.5 years (For your information, ‘Naver,’ Korea’s #1 search engine with 70% market share has 37 million user accounts). 80% of registered users use it on a daily base. Users spend 63 minutes on it a day vs. 17 minutes on Facebook. These are some of the latest performance of ‘Kakao Talk,’ a dominant mobile instant messenger (MIM) in Korea. The free high-quality app provides a full range of communication functions including SMS, group chatting, file transfer, and mVoIP. By leveraging its rapidly growing user base, it has expanded into other services including games, news, promotion deals, location based information service, instant Q&A’s among connected users, and gift shops, many of which have been wildly successful. 2.6 billion messages are exchanged over the app every day (more than total number of messages sent over all three mobile phone networks in Korea). ‘Kakao Story’, its photo profile album app recorded 10 million downloads in 2 months. 10 million users signed up for ‘Kakao Plus Friends,’ its brand promotion app (Users can receive news and promotion deals of the brands of their choice) in 13 days. ‘Anypang,’ one of its first game releases attracted 1 million simultaneous players in 15 days of the release and marked 20 million downloads in 3 months. Leading game developers are fiercely competing to list their products on the app. The continued success in its roll out of new services has proven how loyal and active its users are, presenting a good potential for further business expansion. And that’s exactly what it aims to become; a messenger-based major mobile platform.

While it has been benefiting from the first mover advantage and strong network effects intrinsic to messaging service, its revenue generation began only recently as it has focused on attracting users and keeping them active with free downloads and services. Also, while the present absence of clear dominant players on the mobile space can work to its favor, the situation also means that the long-term #1 spot is still up for grab. Clearly, it faces a tough competition with majors like app stores and SNS not to mention internet search engines already equipped with IM services, for the time and attention of the users. Does it have competitive advantages over these competitors?

 Advantages over App Stores

Although the leading app stores have over 700,000 combined inventory of apps, they don’t provide personalized services. As a result, it is not easy for users to pick useful apps in the floods of new apps. According to IDG Global Solutions, 66% of smart-phone users use 7 or less apps on a regular base. The analysis done by Localytics shows that the number of apps users frequently use is further decreasing. MIM not only can exceed app stores in regular traffic but also can use a rich social information to provide customized recommendations. Also, reliable reviews and recommendations can be voluntarily shared within users’ various networks to help purchases. Furthermore, being cross platform, it has wider access to users.

 Advantages over SNS (Facebook)

The obvious strength is the customized privacy. MIM lets users chat with any groups they create and the conversations stay private. Even within the same group, users can perfectly customize privacy of each message by choosing to whom to send it to for each message. As a result, MIM help users share private and genuine information and nurture deep and intimate relationships. Also, while users can still have the option to publish certain information on blogs or albums, they get no pressure to update their home page with comments, opinions, and photos. This is a major appeal for countries like Korea where people tend to be more private and less argumentative. Also, the user interface of MIM is better suited for mobile environment. On the other hand, Facebook users might enjoy less the smaller screen with different user interface design of mobile app than its original PC version. Two versions of user interfaces also compromise users’ intuition in navigation at least for a while. Finally, account registration and adding contacts are based on phone numbers on MIM while these are based on email accounts on SNS. For example, contacts on MIM is automatically created by harvesting the contact list saved in the phone, which is more convenient for users.

 Advantages over internet search engines (Naver, Google)

Its large loyal user base and the strong network effect it currently enjoys as the number one destination on the mobile space are its advantages. Given that 76% of people aged between 15 and 64 are already using smart-phone and most of them are using Kakao Talk, being the first mover offering high quality app will be valuable at least for a while.

However, most of its advantages over app stores are shared with SNS. Also, given that MIM is an app on the platform of mobile OS, it will never be free from the power of OS. Even if MIM becomes a platform for app sales, that will be its subsidiary function and not a main one. It will never replace app stores. In addition, though the powerful internet portals and search engines are currently suffering from the not-fast-enough transition to mobile space, they have a solid knowledge and data base accumulated over a long time and sufficient financial means to invest. Finally, users are becoming more sophisticated, picky, and fickle, radically shortening life cycles of any services and products (as seen in Zinga’s case).

It is hard to predict how the mobile ecosystem will evolve. MIM could be one of those passing fads in the fast changing IT/tech industry and even a geographically-specific one (In fact, MIM is also very popular in Japan, China, and India in addition to Korea.). Or it might become one of major forces in the mobile space. Or it can be integrated into one of other major forces. Its fate also depends on how the mobile network operators will respond (There has been strong backlash because MIM has negatively affected their revenues from voice calls and text messages) and how mobile policies will change as the mobile industry has been a typical oligopoly, highly regulated but also highly lobby-sensitive. I think it has a good chance to become a major mobile platform at least in Korea and at least for a while given its appeal as a free, seamless, flexible and privacy-protecting communication enabler. However, I doubt its long-term sustainability given the fast changing consumer taste in Korea, the potential resistance and reactions from formidable competitors including Naver and mobile network operators, and its dependence on constant stream of killer contents that it has to build or find. In any case, it will be interesting to see how it will pan out.

 

[Sources and reference]

“Mobile messenger, from free chats to community and photo-sharing,” MK.com, May 9, 2012

Cho, Sung Hwan, “The future of mobile messenger,” LG economic research institute, September 26, 2012

“Will Kakao Talk’s expansion be a success?,” Kbench.com, August 8, 2012

Analyst Report on NHN, Morgan Stanley, September 10, 2012-10-26

Julie A. Ask, “The Future of Mobile Messaging,” Forester Research, August 15, 2012

http://www.knowyourmobile.com/features/1639513/how_kakao_is_revolutionising_social_gaming_in_korea.html

 


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