Mobile payments are tipped by many analysts to cause major disruption in how we pay for goods. In fact, we’re already seeing a steadily growing increase in the volumes of mobile ecommerce with eBay disclosing that the gross merchandise volume from mobile hit $4 billion in 2011, doubling 2010’s total. That’s a very healthy growth rate, especially for an incumbent like eBay. And it’s not just eBay who are printing money. Square, Jack Dorsey’s latest start up, is growing like a weed.
Even with strong growth, the mobile payments industry is still in its infancy. It points the way to the future of payments, but what will actually be the future or not it still up for debate. Who Are the Players? Go to any of the app stores and you’ll find that there’s a choice of mobile payment providers, but Square is undoubtedly killing it right now. It requires a very quick and easy setup that should pose few problems, even for the least technologically initiated – install their app on your phone (iOS, Android) and plug in the reader. It’s this simplicity that attracted 800,000 merchants, equivalent to 10% of Visa and MasterCard’s clientele in the USA, and sees Square processing $2 billion of transactions per year. All this, and not even three years have passed since the company was founded. Clearly Dorsey was on to something. It is worth noting that as of now, Square’s availability is limited to the United States only. A cursory inspection of their support website hints at international expansion, but reveals that “there is no specific timeline for international availability.”
Of course, in any discussion on the future of mobile payments it would be remiss of us not to mention Google Wallet. Unlike Square, Google’s play is aimed at consumers and relies on merchants (shops, restaurants, etc.) to install an updated NFC-enabled terminal capable of reading the NFC signal from your mobile phone. A lot has been made of NFC. There has been a somewhat limited international adoption of NFC technology among banks to bring the credit card into the 21st Century, but there is no consensus on the technology as yet. In the UK, Barclaycard pioneered NFC and others are following suit. Meanwhile, contactless credit cards have also been in use throughout Australia, the United States and various European countries. But I have digressed enough – back to Google Wallet. Consumers can set up a virtual version of their credit card, currently limited to Citi MasterCards, on the app and then choose a card to pay with at checkout. Data is stored securely on the phone, requiring the user to enter a PIN to gain access to the app. It’s early days for Google Wallet, having just launched a matter of months ago, and it’s success seems inextricably linked to the successful rollout of NFC-enabled payment terminals. Consumers will obviously be wary of relying exclusively on a service that’s only available at a small clique of stores on the cutting edge. It’s not all about Square and Google though. Mobile payments, like so many infantile markets, is dynamic to say the least and there is, after all, money to be made in money. PayPal, the venerable payment provider of choice for so many of the web’s small businesses, is also getting in on the game. Clearly, like much of the technology industry, PayPal sees its future tied to mobile. Unlike Square, PayPal’s mobile payment solution differs in that merchants can’t physically swipe a customer’s card to take payment. Even so, they were reportedly processing $10 million per day in total via mobile apps by mid 2011, a marked increase from the $6 million per day they were doing in March 2011. Again, this indicates growing consumer and business adoption of the concept of paying with their mobile phone.
The elephant in the room is, of course, Apple. Many analysts had predicted that the latest iteration of the iPhone, the iPhone 4S, would signal their entrance into the payments business. It didn’t. But that doesn’t mean Apple aren’t interested in a slice of this huge market. In fact Apple tend to disrupt and define new consumer expectations with innovative products only after it’s clear that there is demand. The iPhone wasn’t the first ever smart phone, just as the iPad wasn’t the first tablet. It would be typical of Apple to wait until the market has matured before making their entrance. In the latest iPhone they elected not to go with 4G. Why? Because the mobile networks did not have the infrastructure in place to facilitate a satisfactorily high quality user experience, and the current generation of 4G chips were so energy hungry that battery life would be compromised. If you apply the same logic to payments, and assume that Apple’s approach would be similar to that of Google Wallet, then they won’t launch until there is adequate infrastructure in place. At WWDC 12 Apple announced Passbook. Right now it’s just an easy way to store your rewards program memberships, boarding passes and coupons, but it’s not hard to imagine where they’re going with this in the future. You can bet that when Apple make their play, it will have been worth the wait – for their users and shareholders.
Which Technology Will Win?
The payments industry is being disrupted from multiple angles. Fundamental change is on the way, but how it will be delivered is anybody’s guess. Square’s app-and-reader model is great for small businesses, particularly mobile service businesses who don’t have the luxury of a fixed line and credit card terminal. I can’t see it going away any time soon. There is massive growth on the horizon for Square, simply because it means so many small businesses can now take a form of payment that was previously out of reach. It seems to me that PayPal’s mobile strategy is two pronged: mobile apps and their PayPal Here reader (which is basically a clone of Square’s hardware. PayPal are trying to break into retail stores and get better integration, but it’s slow going. This looks more likely to secure that company’s place in the future, but will it radically change how consumers and businesses buy and sell? No, I don’t think it will. There’s nothing particularly groundbreaking here. That doesn’t mean it won’t be a success – it will be. It already is to an extent. As smart phones become more prevalent, more of PayPal’s users will naturally gravitate towards accessing PayPal’s services using an app. I just can’t see it altering the landscape beyond that. Square, on the other hand, seems much more focussed. At least for US-based micro-sized and small businesses, Square could prove hard to beat with their almost ‘Jobsian’ model. But what of consumer payments?
When it comes to consumer payments, I’d bet that contactless solutions will come up trumps, be that integrated into a phone or card. It gives the consumer choice. And consumers love choice. Its Achilles heel, however, is in the adoption of that technology by merchants. If consumers can’t actually use it, then it’ll never reach a tipping point. There is another impediment. The value of goods purchased using an NFC solution is typically limited, often in the region of $100 maximum. If this technology is ever to take off, then this needs to be addressed. Of course, there are benefits to such a limit. The problem is that so many transactions are over the limit, forcing users to pay with some other means. In Conclusion Mobile payments have shown strong growth over the last year. Take a look at how much growth there is to come in the smart phone market and it’s clear to see that many records remain to be set – whoever can claim the mobile payment throne stands to make a fortune.
Thanks to Andy Boyd with his help contributing to the article. Andy is the co-founder of CreditCardCompare, one of the top independent credit card comparison websites in Australia.