Dispelling FUD in Mobile Payments

imMobile-Payments-300x260Mobile Payment is quickly becoming as useless of a term as Cloud Computing. Companies across a wide spectrum of use cases and industries are quickly re-positioning themselves as a player in “mobile payments” in order to (re)capture some pixie dust. What exactly is mobile payments? Is it payment using a phone? Is it payments without a credit card swipe? Is it payment aggregated on the mobile phone bill? Is it simply “payments on the go?”  . . . And the question every consumer will ask, “I understand the difference between a regular phone and a mobile phone, but how is my wallet not ‘mobile’ enough that I need mobile payments?”

There are six major types of mobile payments companies – and not all of them are least bit related, some are competing for similar use cases, while other are very complementary and will eventually converge. The next time someone tells you that they are a mobile payments company, ask them to give you a more meaningful explanation – here are more buzz words to throw back at them.

1. Mobile Acceptance – Square. Square is a great example of a mobile acceptance company. The companies in this space allow any person or business (mostly business/micro-business, since the mobile peer to peer payment use case is fun to demo but not where the money is) to accept payments on the go. The hurdle for most of these companies is that they are essentially a very thin application layer on top of existing payment infrastructure – and thus the long term value of these companies are not as a “reseller of merchant acquiring capabilities” of existing merchant processing companies (First Data, Chase Paymentech etc) as Square is now, but by becoming a closed loop payments company and enabling a direct payee/payer ecosystem (e.g. paypal balance to another paypal balance) where the margins are much better since traditional payment networks no longer sit in the middle. Given merchant processing capabilities is often a lost leader, long term, these companies also hope to augment their revenue stream with offering advertising, marketing & loyalty services to merchants.

2. Contactless Mobile Payments (NFC) – Google Wallet. NFC is a technology looking for a killer app. Its hot now (maybe not so much anymore?), but the reality is that NFC (or its older variants) has been around since Mobile Oil’s Speedpass in 1997. In 2005, over 60% of all credit cards were issued as a “contactless smart card” – and usage has remained miniscule. (When was the last time you decided to “wave” instead of “swipe” at McDonalds? – and more importantly what’s the point). The twist today, is that these NFC chips are being embedded into the mobile handset or affix to the back of the handset via a sticker. The hope is that instead of swiping a credit card, consumer will “wave” their phone at each other or more likely at a NFC enabled terminal. The better question to ask, is how has the core consumer value proposition changed since 1997? Just because its on a phone, doesn’t automatically mean adoption will sky rocket. True mass adoption is more than 3 years away – and could potentially be short circuited by either innovative applications circumventing NFC, carriers continuing to lock down the handset, or simply the lack of advancement in creating an application ecosystem.

3. “Cloud” Mobile Payments – Paypal Mobile. (see how I just created a new buzzword^2 :) ) Typical NFC payment architecture relies on the transfer of consumer identification information (e.g. credit card #) to the merchant terminal where the payment transaction is initiated. This of course is the same architecture as “swipe” because credit cards are passive devices that have no ability to access the cloud (no duh, it’s a piece of plastic). What makes the smartphone such a game changer is that it is actually IP connected, which means instead of initiating the transaction from the merchant terminal, the transaction can be initiated by the handset. The merchant ID (phone #? Email address?) is passed (for example, via a “wave” at some sort of non-powered merchant owned device) to the handset where the handset instead of the merchant terminal initiate a connection with the payment server. The advantage of this architecture is that the cost of merchant acquisition is drastically reduced since passive (read cheap) terminals do not have connectivity & internal processing capabilities versus  NFC enabled terminals.  Many in the industry under-estimate the advantage of having an architecture that allows for a lower cost of merchant adoption. At end of the day, merchants will ask how much incremental business & revenue they will make via the adoption of a new payment system versus the cost of the system itself.  The lower cost of adoption will enable a much lower hurdle for ROI and thus create a faster adoption curve.

4. Carrier Billing – Zong, Boku. It’s a fair argument to make that the first generation of carrier billing mobile payments companies are NOT really providing a mobile payments service. There is nothing “mobile” about seating at your desk, playing Farmville, buying Facebook Credits using Zong, and eventually paying for it by cutting a check to AT&T/Verizon/T-Mobile/Sprint (still sitting at your desk). However, this doesn’t mean that carrier billing payment companies cannot extend into true mobile payments. In fact, if carriers fully embrace carrier billing beyond virtual goods, the opportunity should be significant and the impact to the marketplace will be huge. The reduction in friction will not only drastically increase offline mobile payments but e-commerce on mobile devices as well.

5. Mobile E-Commerce Payments – iTunes, (some people call this “mobile commerce” but then again some people interchangably use it with “mobile payments” as well) This is absolutely an underserved (and underhyped) market with huge market potential. Any e-commerce company will tell you that their mobile traffic conversion rate is abysmal and any mobile ad network will tell you that they are missing out on huge chunk advertising spend from etailers because of the same abysmal conversion rate. No one wants to enter a 16 digit credit card number on a tiny mobile virtual keyboard. If someone can securely create a one click checkout payment platform for mobile devices OR make passing payment credentials a snap – Apple, PayPal, anyone? – we will see a huge new ecosystem of mobile commerce startups and lots of new innovation integrating online, mobile, and offline shopping behaviors.

6. Mobile Payment Applications – Amex+Foursquare. Another underserved, and under hyped category. Too often, we focus on disrupting the current value chain instead of enabling innovation on top of the existing. The great thing about the evolution of payments is that its quickly becoming a platform rather just a standalone utility. The ability to mash up payment (data, workflow) with other adjacent use cases within a single integrated user experience especially on a mobile device will completely disrupt and potentially disintermediate financial institutions and payment networks. FI and payment networks need to become application providers as much as they need to open their platforms for innovation. The opportunities for startups is not about creating new payment or acceptance methods – but about leveraging EXISTING payment methods & platforms to build entirely different and value added applications. The good old credit card is ripe for some disruption – and it doesn’t have to disappear as people seem to desperately want to happen – it just need to get smarter, more dynamic, and better.

At MuckerLab, we are extremely excited for the future of payments in general and mobile payments in particular– it has taken 10 years since Paypal for the next cycle of innovation around payments to begin. We believe we are at a cusp of a ten year cycle of rebirth for the industry. Combining broader consumer trends in local & social with the long waited transformation of major payment networks into open platforms – the payments industry might finally achieve the accelerated cycle of innovation we’ve seen in other industries. . . and thus receive the venture investment attention that the category deserves.

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