Tuesday, February 26, 2013

Digital Money: Forgot Your Wallet...No Problem

I've been thinking about the Mobile Payment industry quite a bit over the past 6 months.  I read industry analysts talking about 2012 being the year of Mobile payments, which to some extent has and hasn't held true.  However, 2013 is supposedly the real deal. So lets get started and check out what's available to consumers and vendors from the mobile payment industry.

There are a couple of technologies that convert your smartphone into a mobile wallet. Several Smartphone manufacturers, including Samsung, have included the Near Field Communication (NFC) chip in their phones, however, to use the NFC technology to power your mobile wallet, vendors also need to accept payments via NFC.  Vendors who do accept, usually do so through their point-of-sale (POS) machines, which also have the NFC chip. Without vendor adoption of NFC, the technology can't scale. Don't get me wrong. NFC is here right now.  Go out and buy yourself an NFC-enabled smartphone (Samsung Galaxy S IV), enter your credit card details in the mobile payment app and you're ready to leave your wallet at home. Once again, you can only use your new NFC-enabled mobile wallet with vendors who accept NFC payments via their NFC-enabled POS machines. 

Even within the NFC-enabled mobile payment industry there are several players. Google's Google Wallet initiative lets you pay with your Android phone with the credit cards you've stored on the Google Wallet cloud. Visa and Samsung have teamed-up to bring NFC payments to consumers. Similarly PayPal and NCR have established a partnership to increase adoption of NFC-based mobile payments.  Most of the NFC payment players are pushing for wider adoption of the technology. In addition to the above mentioned names, MasterCard's PayPass initiative offers consumers to search for NFC-enabled vendors, thereby making it easier for consumers to use their virtual wallets. With heavy weights from the traditional payments industry and from the new generation of tech companies coming together, the install-base of NFC, both on the vendor and consumer side, will get a big boost. IDC forecasts NFC-related mobile payments to makeup 25% of the mobile payment market by 2017.

                                         Mobile Payment Chart

An alternate technology to NFC to facilitate mobile payments is software-based; the kind used by Square, LevelUp, PayPal Now, GoPayGo and even Bank of America. These companies use a combination of software and dongle or software and QR codes to facilitate the transaction. These players put the power of their respective app distribution and vendor signup solely into the hands of the vendors and the users.  No third party POS machine manufactures and no NFC chips needed. Remember NFC is a hardware based technology that needs to be installed at the user and vendor ends which make it an expensive proposition to develop critical mass. The likes of Square, on the other hand, can scale up more easily on the back of existing infrastructure.

The industry is anticipating Apple's entry into the mobile payments arena. With its large install base of iOS devices and credit card on file in iTunes, the industry is expecting Apple to make a splash. At the moment Apple's Passbook is basically a mobile wallet-like non-payment feature on the iOS. It's a skeuomorphic digital organizer and virtual storage for your boarding passes, movie tickets and loyalty cards. Tech pundits have prophecised Passbook's foray into a full-blown mobile wallet for facilitating payments since Apple unveiled it back in June 2012. What kind of technology will Apple employ once it jumps over the fence to enable passbook as a payment platform is yet to be seen. Apple usually doesn't make hardware add-ons on its devices until it foresees wide market adoption. I don't see Apple employing the NFC chip as a wireless payment facilitator due to the technology's low adoption rate currently. But that may change though given the push for NFC adoption by incumbents. The Cupertino heavy weight has over 400 million credit cards on file in iTunes.  

                   
Source: Horace Dediu, Asymco

We can assume that once Apple forays into the full-blown mobile payments, it'll leverage iTunes to cover the first steps of mobile payment setup on the consumer side. Another ace up Apple's sleeve is its iOS install base which stands at 500 Million; a number spoken by CEO Tim Cook at its Earnings Call on January 23, 2013. Of the 500 million iOS devices, approximately 60% are running iOS 6.x. Through subsequent  iOS upgrades, it can make a large proportion of iOS devices out there into mobile wallets with the help of the credit cards already on iTunes. To do this, it has to employ Square's concept rather than NFC. Sure, Apple can use NFC for newer devices, but not without rendering the older generation iPhones and iPads completely useless in terms of mobile payment due to lack of hardware...that huge install base goes out the window.

Coming back to Square; it has hit a run rate of $10 Billion worth of payments processed. Square is going after the SME and Mom-n-Pop stores in terms of payment acceptance (vendor-side), albeit the partnership with Starbucks. The company named after a shape which also signifies settling a transaction, to 'square up,' has a vendor-side-only solution as well as a vendor and consumer-side solution. It started off with the vendor-side offering with a dongle. The dongle is basically a credit card reader that plugs into an iPhone, iPad or Android devices's headphone jack (no pun intended Dorsey). It allows anyone with an iOS or Android device, the dongle and a square account to start accepting credit card payments for a monthly fee or 2.75% per transaction fee.

  

Having a garage sale?  Use your smartphone to accept credit card payments!

There are obviously too many players using a handful of technology standards vying for the mobile payment market. Consumers are probably confused and have to sign up for more than one offering due to the fragmented payment acceptance space. To add to the clutter, e & m-commerce sites have their own respective payment fulfillment. If I am shopping on Amazon or eBay, I have to use Amazon's checkout facility or eBay's PayPal solution to complete the transaction; I can't use Square or Google Wallet. Mobile commerce is getting bigger; 29% of U.S. mobile users have used their mobile devices to make a retail purchase and Bank of America predicts mobile retail commerce to reach $67 billion in Europe and the U.S. by 2015. Mobile payment companies want to facilitate the transactions behind these big numbers. It doesn't end here. Carriers are also jumping on to the bandwagon. Carrier-based digital payments are particularly popular in developing nations -  consumers can use the SMS platform to send payments and pay bills. The carrier fulfills the transaction. Every player is going after its own market. The one that gains critical mass on both sides (simultaneous vendor and consumer adoption) will be the one that scales exponentially. Hopefully some sort of consolidation and partnerships between payment facilitators and vendors will help organize the industry and make it easier on the consumer. 2013, we are here!

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