We carry our phones with us everywhere, and they are (unless you happen to be on AT&T in San Francisco) almost always connected to a network. Cell phones represent the killer combination of their owner’s identity, presence and wallet — and they are nearly ubiquitous, with an estimated five billion global active subscriptions predicted before the end of 2010.
As such, using phones to pay for things is a huge growth opportunity in the mobile market. Generator Research recently predicted that the worldwide market for mobile payments would grow to $633.4 billion by 2014, up from $68.7 billion in 2009.
But when you dig into the various ways people use the term “mobile payments,” you’ll find a drastically wide range of usage models. There are enough challenges within that space already — the need to develop new technology on emerging platforms, to integrate with existing technology (aka billing systems) and to negotiate fees and other business development deals. The last thing this market needs is more consumer confusion due to the multiple options, each rife with their own values and drawbacks.
So, let’s break down what “mobile payments” mean.
Carrier Billing: The most prominent form of mobile payments, especially in the U.S., is to use a phone number as a payment ID. Upon a user entering the number into a web form, the service sends a confirmation request via text message, and money is extracted using premium SMS. The user sees that amount tacked onto their phone bill at the end of the month.
The leading mobile payments providers of this type are Zong, Boku, Allopass and Mopay, with the first two out in front. We should note billing via SMS is nothing new; Mopay has been in the business for 10 years!
Zong and Boku, meanwhile, have done an admirable job collecting carrier deals around the world. Zong CEO David Marcus says his company has access to the more than two billion people its carrier partners serve, compared to PayPal’s 85 million yearly active users. That’s potential versus actual customers, but you get the point.
Zong and Boku may have trouble being viable in the long-term, however, because in order to make transactions as friction-free as possible, they don’t require users to create accounts. All a would-be purchaser needs to do is enter a phone number on a merchant site and have the phone nearby to confirm.
Zong is trying to evade being written out of transactions by launching a premium service called Zong+, which requires creation of an account in order to complete transactions larger than carrier billing limits (usually around $100). Boku, however, contends this is a bad strategic move because it places Zong in direct competition with the carriers it has struck precious partnerships with.
But the real problem with the carrier billing approach is the amount carriers charge merchants for premium SMS — often 40-50 percent of the total transaction. That kind of cut is only feasible for merchants when they’re selling something with ridiculously high margins — which is why mobile payments providers are ravenously tackling the growing market for virtual goods, where prices have very little to do with costs. The true test will be whether these companies can whittle down fees to be able to offer mobile payments as a reasonable alternative to physical goods (where a 50 percent markup is obviously a non-starter).
An alternative to premium SMS is direct connections to customers’ mobile bills. This is offered by Danal’s BilltoMobile service, which Verizon Wireless has announced plans to support. By posing itself as a white-label provider, Danal may have more success than Boku and Zong, but only if it can get big deals with additional carriers.
Mobile Wallets: Some carriers offer their customers the ability to tie purchases directly to their accounts as a separate billing system, rather than by glomming onto premium SMS fees added to end-of-the-month bills. Examples are Smart and Globe in the Philippines, Oi Paggo in Brazil and O2 Money in the U.K. Embee Mobile is trying to do this for multiple prepaid carriers in the U.S.
Mobile wallets are cheapest on prepaid phones, where a transaction debits automatically from the user’s account and minimal fees are imposed. It’s also possible to use the carrier as a bank, but then the high transaction fees rear their head again. These methods do, however, offer the advantage of cutting down on fraud and charge-backs that come with monthly billing, since charges are levied more promptly.
Point of Sale: The phone is not just a number — it’s also a physical object. Some companies are looking to take advantage of that fact by modifying phones to make it possible to swipe or tap them to make purchases. There are two main ways to do this: by attaching a near-field communication transponder, often via a sticker, or building one directly into the phone. The problem is NFC companies will also have to distribute devices to merchants so they can receive the wireless signal from nearby phones. And that’s a huge barrier to entry.
Competitors here include FeliCa Networks, ViVOtech and Bling Nation. Bling Nation, for one, is using partnerships with local banks looking for a “cool factor” to encourage adoption among local businesses. A bank would distribute “BlingTag” microchip stickers to customers, who then use them at participating retailers to debit purchases directly from their account and win Bling loyalty points. Bling says its fees are a fraction of credit card processing — but credit card processors are in millions of stores, and Bling is not.
The inverse of these offerings is Twitter founder Jack Dorsey’s Square, which offers a point-of-sale dongle and software for merchants to connect to their own mobile devices. Just as much of mobile banking is ideal for “unbanked” consumers, Square caters to mom and pop shops, as if the merchants themselves were the unbanked.
Mobile banking: Tied closely with paying for things using your phone or phone number is the idea of managing your money on the go. Companies like ClairMail, mFoundry and Firethorn offer financial institutions tools to provide their customers with secure mobile access — whether it be through an app, the web or SMS — to check their balances, pay bills and transfer money. This market is still quite nascent; after all, it’s estimated that less than half of bank customers even use online banking.
In-app Purchases: Buying mobile applications from an app store, as well as buying premium goods and services within mobile apps, are nascent opportunities. But they’re growing fast. Apple announced Monday it has 150 million customer accounts with credit cards on file — a formidable number, especially given the tight control it holds over its mobile developer ecosystem. And the company has paid out $1 billion to app developers to date. Both Zong and Boku are are testing similar platforms for Android.
Peer-to-peer: The problem with most of the above methods is that everyone’s striving to be a middleman. Facebook, too, is trying to insert itself into payments by proposing that applications and games on its platform use Facebook Credits, for which the company takes a 30 percent cut. Mobile payments providers expect to be included as an option for Facebook Credits (Zong already is), but then that’s yet another fee levied on every transaction.
One alternative is to let the phone itself bring users closer together, excluding the carriers and banks, as with PayPal and Venmo. When you share a dinner with someone, for instance, you can split the bill right from the table by texting Venmo on your phone to withdraw money from your bank account or credit card and send it to your date (who would have to be a Venmo user as well). Venmo says it plans to charge merchants per transaction, but not users who send money to each other.
Obopay also offers peer-to-peer money transfers, though it is rolling out in partnership with carriers such as Verizon and AT&T. M-PESA provides money transfers, often for the purposes of remittances and microloans, with participating operators in Kenya, Tanzania and Afghanistan.
“The real question is how cheap can you make the interchange fee,” says mobile consultant Eric Chan of Mobileslate. Whether it’s the credit card company, the bank, the carrier, the web or a mobile or social platform, everybody wants a cut. Once some of those fees are minimized, we can start talking about the real business of physical goods.
As far as the major players go, PayPal may be lagging in areas like social and mobile as compared to startups, but it’s still quite well positioned. With half of PayPal’s domestic customers linking the site directly to their checking accounts, PayPal has a much better cost structure than larger payment networks like Visa. Visa sees its weakness and is trying to get closer to merchants. The company recently spent a massive amount — $2 billion in cash — to buy CyberSource and its e-commerce business.
In an ideal world, the best way to write out the middlemen and create a maximally friction-free experience for users would probably be for carriers and banks to team up and use top-of-the-line software. But that would create more problems: One, you’d be competing with your partners, which would alienate them and could lead to a reduction in overall interoperability. And second, regulators don’t like it much when powerhouses get together.
So for now, a splintered market remains. Certainly, this isn’t a one-size-fits all problem, but with such quick-growing and valuable opportunities, companies that can strike the right partnerships now, specifically around low fees and broad distribution, stand to reap huge rewards.