My idle thoughts on tech startups
Mobile Payments: The Trillion Dollar Industry That’s Never Happened
Mobile payments are the trillion dollar industry that everybody’s been waiting for but has never materialized. At first glance, mobile payments seem like a no brainer… consumers [seemingly] want the convenience of paying with a phone rather than cash or credit card, merchants dislike the cost associated with accepting credit cards, and mobile ecosystem players (e.g. carriers, Google, et al) covet an economic stream they believe they can take a slice of.
I’ve been an interested observer of electronic payments for 12+ years. In fact my first job as an early employee of PayPal was as Product Manager responsible for our mobile products (WAP-enabled cell phones and our legacy Palm Pilot IR port product) and the first international version of PayPal. That sounds like a lot of responsibility for someone fresh out of undergrad as I was then, but in reality both of these were peripheral elements of PayPal’s core web-based payment product which was still heavily concentrated on eBay auctions at the time. Back then we were already talking about using our monochrome display, 12-key interface Motorola Startacs to pay for everything. But in 2012 it turns out I still pay for all my offline and online purchases with a credit card or cash, and not my infinitely smarter mobile phone.
The gap between enthusiasm for and the reality of mobile payments is primarily the result of a fundamental misunderstanding of the nature of payments. It’s not for a lack of technological effort from both startups and huge companies in all of mobile payments’ incarnations – SMS, mobile web, native apps, NFC, etc. But nearly everyone has wrongly placed emphasis on the mobile technology part and not on the payments aspect.
Payment via mobile device will only see widespread adoption if it’s fundamentally coupled to a store of value that is widely dispersed among consumers and accepted by merchants. There’s nothing intrinsically interesting about a piece of plastic with a numerical token and a magnetic stripe encoded with that token, aka a credit card. What’s interesting about that card (see note #1) is that it’s attached to bucket of real money in the form of a revolving credit line, a checking account, or a prepaid electronic account. When a consumer pays with a credit card they understand they’re using up a portion of that bucket of money, and the merchant knows they’ll get paid from that bucket assuming they hold up their end of the bargain (see note #2). And there’s a layer of financial intermediaries on both the consumer and the merchant side promising to stand behind the transaction.
Thus far mobile payments have failed to create or be coupled to a new store of value. Virtually every mobile payments system in the developed world (see note #3) just piggybacks off the credit card system. The mobile phone becomes a different token instead of the plastic card, but fundamentally it’s still just adding another technical and financial layer on top of the existing system. Also on the merchant side there’s a vast installed base of infrastructure supporting traditional credit cards. So even though mobile phones are ubiquitous on the buyer side, mobile payments won’t be adopted unless the acceptance mechanism on the merchant side is similarly ubiquitous (classic chicken & egg problem). These mobile payment approaches rely on changing user behavior too… a consumer fumbling with their phone while a merchant fumbles with whatever acceptance device they have, while everybody else waits on line to check out.
So be skeptical when you hear statements like “mobile payments will take off when ______ happens” where the blank is stuff like:
- A different form of data interface (e.g. NFC, SMS)
- A new form of user authentication (e.g. Facebook Connect)
- Cross platform support across various devices (e.g. Android, iOS, etc)
So what if anything could make mobile payments take off? FWIW, I’m not totally a skeptic on mobile payments and like any other consumer I see how they could be a lot more convenient than cash and credit cards. But IMO it’ll take a “big bang” multi-party effort rather than an incremental innovation, so it’ll favor large organizations (big companies and/or governments) rather than startups. A couple conceivable scenarios that could bring us to the mobile payments promised land.
- Visa/MC/Amex shift merchants and consumers to mobile devices. This is far and away the most likely path to ubiquitous mobile payments. The fundamental financial infrastructure remains largely unchanged, i.e. consumers get cards tied to a financial account from banks and bank-like entities and merchants are supported by acquiring banks (or Amex itself in their system). Visa, MasterCard, and Amex still run the core “rails” of the payments system but the mobile phone becomes the consumer token and perhaps merchants have newfangled acceptance devices (e.g. POS systems, payment terminals, etc). There may be some losers of the incumbent ecosystem (e.g. ISOs which are a middleman layer between small merchants and acquiring banks) and perhaps some new winners but the system changes far less than some expect.
- Google or Apple go big or go home. If you had a massive installed base of mobile users and were willing to spend billions (not millions) to couple these consumers to a new store of value and spend billions (not millions) to embed this payments system in the merchant ecosystem, it might be possible to create a truly ubiquitous mobile payments modality. The universe of companies capable of all of the above is exactly two. Google is the one more likely to do it… they certainly have the resources, ambition, and intent. They thrashed about with Google Checkout for online payments and NFC for offline over the last couple years. But while it was a little less understood outside the payments world, their acquisition of TxVia theoretically gives them some of the plumbing they’d need to create a store of value or couple a Google mobile payments product to existing financial accounts. If Google buys a small bank or gets a banking license of some form, that would indeed be a game changer. I wouldn’t put it past Google, but if I had to bet I still see this as being significantly less likely than #1. Or Google may be one of the new winners in scenario #1 (e.g. next gen POS platform) albeit not the one that runs the core rails of mobile payments.
- Government fiat. A store of value has value because it contains or represents hard currency. If you can create a parallel currency or supplant an existing one in a form conducive to mobile transactions, obviously you can catalyze a mobile payments system. Systems like M-Pesa (see note #3 below) took off because in developing nations prepaid wireless minutes were a parallel currency, fungible for real money. It’s highly unlikely but conceivable a newly-sovereign nation or a government unexpectedly bereft of it’s existing currency (e.g. Greece) might attempt a half-crazy experiment like this. Another more likely scenario is if a government started issuing transfer payments via mobile device, e.g. sending welfare, food stamps, pensions, or other payments via mobile. These payments are themselves a store of value, which is why merchants readily accepted them either when in paper form (e.g. original food stamps) or now more typically in electronic form (e.g. electronic benefit transfer cards – EBT – now issued here in the US).
For the record at NextView we’re investors in two payments related companies, Swipely and Plastiq, though neither is a pure mobile play. Swipely is focused on payment marketing, namely unifying loyalty programs and payments for main street merchants. Plastiq is focused on extending the use of credit cards into high-value transactions like school tuition, buying a car, or rent/condo payments with a unique economic and transaction model. Both are building on top of the existing credit card infrastructure because as Swipely Founder/CEO Angus Davis points out, millions of people are walking around with a mobile payment device in their pocket… it’s called a credit card.
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Notes & FAQs:
(1) I use the term “credit card” here instead of “payment card” for simplicity sake. The latter includes credit, debit, and prepaid stored value cards all using the common transaction infrastructure originally devised for credit cards. Today the total transaction volume (in $ terms) of debit/prepaid cards is roughly comparable to that of credit cards in the US [see Nilson Report – PDF link].
(2) Yes the merchant must follow settlement rules and is exposed to varying levels of risk depending on the nature of the transaction (card present / not, etc).
(3) You do see some truly innovative mobile payment systems in developing nations, which typically lack meaningful payment card infrastructure and have much larger unbanked populations. M-Pesa created by mobile carrier Safaricom in Kenya is the best known example of this. Some people suggest that this is just another example of developing nations “skipping a generation” in terms of technology, e.g. skipping copper POTS telephony to wireless is analogous to skipping payment cards to mobile. But the reason M-Pesa initially took off (and similar systems in the Philippines and elsewhere) is in developing economies prepaid mobile minutes are inherently a store of value parallel to the local currency. They are fully fungible for hard currency through Safaricom’s network of retail partners for either the sender or recipient of an M-Pesa mobile payment. It’s conceptually no different from the early days of Western Union’s original payments business when people “wired” money to one another at each end of a physical distribution network. But again the store of value in prepaid minutes was the key.
FAQ A: What about Square? –> Square is a remarkable company, and a number of my former PayPal colleagues are involved there. But they’re not fundamentally a mobile payments company. In fact outside of the SF tech scene extraordinarily few consumers actually use the app. What Square has achieved is broadening acceptance of credit cards for in-person (aka card present) transactions to new classes of “merchants” (e.g. food trucks, farmers market vendors, small retailers, event organizers, etc), most of whom previously didn’t accept credit cards. In that sense it’s akin to what PayPal did with acceptance of credit cards for online transactions among eBay sellers and other small online merchants that previously transacted via check & money order. In addition to expanding card acceptance among small offline merchants, Square also has a great opportunity to displace traditional credit card terminals and POS systems among newly formed businesses. But even though merchants plug Square dongles into mobile devices like smartphones and tablets, virtually all of their transactions are still a card swipe payment.
FAQ B: What about ACH via mobile device? –> ACH is really a poor system for handling any type of merchant payments, mobile or otherwise. It lacks real-time authorization, guarantee of good funds, anti-fraud tools like address verification, and has longer settlement periods than credit cards typically. ACH is an outgrowth of the Federal Reserve’s Fedwire system and was never intended for merchant payments (it was designed to replace paper drafts for certain interbank transfers like direct deposit). PayPal is really the only example of widespread ACH use in merchant payments and it took a huge amount of effort for us to get it to work properly and overcome all of the limitations above, and it was literally a do or die proposition for the company.
FAQ C: Apple has more payment-linked accounts than PayPal or Amazon, doesn’t that mean they’ll be the leader in mobile payments? –> No. Unless they radically change course as described in scenario #2 above. If Apple takes all these payment-linked accounts, even with a new interface like Passbook might evolve to be, they’ll still simply be replacing the token used by the traditional credit card infrastructure not creating a new mobile payments system.
FAQ D: What about Jumio and Card.io? –> Both of these companies have created unique approaches to capturing credit card information via image processing. But again these are both just examples of systems riding on top of the credit card infrastructure, rather than creating a new store of value. The promise these companies hold is the potential to lower transaction costs for card not present transactions (e.g. online, over the phone), but that will only happen if Visa/MC accept these systems as having comparable security and choose to create lower interchange categories for these card capture mediums. That’s why a merchant accepting a card via card swipe with Square pays a lot lower fee than one processing with Card.io.
FAQ E: What about mobile payments via carrier billing? –> We don’t really talk about this much anymore, but 5-10 years ago there was some hope that mobile carrier billing systems would create a new store of value for mobile transactions. Again in developing nations prepaid wireless schemes have typically dominated and where prepaid minutes became fungible with currency it created opportunities like M-Pesa (see note #3 above). But post-pay schemes are more common in the US and years ago some folks thought we’d be transacting with our phones and then simply having these purchases added to our cell phone bills. But carriers never really wanted to become banks and deal with the financial risks associated with widespread payments (e.g. extending large amounts of credit to their subscribers). So carrier billing remained a very expensive (transaction fees were 10-30%, e.g. 5-10x a credit card acceptance fee), and very limited use proposition and never took off beyond phone related services within the carrier ecosystem (e.g. ringtones).