Ah, September! It’s the beginning of fall: back to school, football, sweaters here in Boston, and now apparently, the race to the physical point of sale – mobile payments style. PayPal let the world in on its mobile payments vision two weeks ago at an invitation-only forum in Rancho Palos Verdes, Calif. Google launched its mobile payments scheme for real (sort of) a week later in San Francisco. Their approaches couldn’t be more different, in spite of sharing the mobile phone as the enabler of the experience for merchant and consumer.
By now, I am sure that everyone has read up on what PayPal is doing, so I won’t lay it all out here. Suffice it to say that they have channeled their inner John Donahoe, who has been reported as saying NFC really stands for “not for commerce.” There is nary an NFC element to be found in their solution. What can be found is a series of clever experiences that leverage PayPal’s core assets – namely, its digital wallet – to deliver a frictionless experience for merchant and consumer: cardless (phone number + PIN), card (but PayPal branded + PIN) and line-busting options that enable bar code scanning and checkout in aisle. As everyone knows, Google’s mobile wallet solution is NFC-enabled and leverages MasterCard’s PayPass (and soon Visa payWave) capabilities at merchant POS that take contactless (more on this later).
The blogosphere is filled with comparisons of one over the other, so I’ll not do that here. I’d like to pull back though and focus on the bigger question of how the transition to mobile payments will be won in the United States and who is best positioned to pull it off. Having PayPal’s Vision freshly revealed to the public makes that discussion much less hypothetical at this point.
Let’s start with the basic fact of the matter. Solving for mobile payments in the United States means dealing with a complicated chicken-and-egg problem: consumers with mobile devices that can talk to compatible merchant POS devices. In the United States at least, that also means improving the experience that exists today for both merchants and consumers (or at least not making it seem like either party has to take giant steps backwards just to enable a mobile payments experience). The little complication is that the industry, at least in the United States, has spent the last four decades perfecting the experience at point of sale so that whipping out a card to pay for stuff works easily, safely and quickly for both consumers and merchants. Making the move to something new then means convincing consumers that they’re not losing anything either (as in being able to use their preferred payment type at their favorite merchants, safely and quickly) but that they might even gain some extra-special goodies along the way (offers from merchants that are much easier to get and redeem since they are on the phone). At the same time, merchants have to be convinced that this new consumer experience will drive more spend – maybe even more incremental customers and spend – and that the cost of accepting something new (technology and/or tender type) won’t cost them an arm and a leg.
So, that means that anyone with aspirations of playing to win in the mobile payments space has to successfully solve the simultaneous equations of consumers and merchants (enough of each to matter), tender types accepted by consumers, the technology solution that enables acceptance today and projected time to ramp in order to get critical mass, and the value-add that makes the trade off to something new worth making for both consumers and merchants.
In my mind, what really makes the discussion now of mobile payments at the point of sale so interesting is that no one has successfully solved those equations and are all approaching its resolution in very different ways.
Let’s take quick look at Google and PayPal from the standpoint of who has what and how that may influence their future (and ours) in this space. First, I’m going to give you my thoughts on PayPal.
Consumers: On the consumer side, they certainly have a decent start. They have 100 million active registered accounts in total worldwide and say they are adding about 1 million more every month. As I’ve written before, that means that they have a lot of digital wallets that could be used at merchant locations right out of the gate. They’ve also seen the number of their transactions driven by the mobile phone exceed even their most aggressive estimates lately – some $3 billion by the end of the 2011, which suggests that people are using PayPal now to transact via mobile phones. They also scored very high in the “mobile payments are secure” category. [See my prior writings on this subject.] That’s all important since a lot of the concern that consumers have today about using their phones to pay is that the experience is that it is not secure.
Merchants: Well, that’s another matter. Their penetration at major merchants online is still very low. This is due to pushback over merchant fees, the challenges of getting into the merchants’ technology queue and the reality that probably not many sales are being lost at major merchants, because PayPal is not accepted. On the other hand, PayPal’s Bill Me Later acquisition gives them access to some primo multichannel merchants who might be game to try a mobile POS experience. Stats shared in a recent interview with STORES magazine report that PayPal drove $56 billion in payments for retailers in 2010, which is up significantly (42 percent) from a year earlier suggesting that (a) the picture is improving, but (b) there is still a lot of work to be done on the merchant acceptance side of the equation. That is perhaps the biggest challenge, not to mention getting merchants to change anything whatsoever at the POS (especially in this economic environment) without the prospect of a big return and soon.
Preferred/accepted tender type: It is reported that PayPal is the second most popular way to pay online (after Visa) in the United States, so consumers like using it and trust it. That should scare the living daylights out of MasterCard and AmEx but probably Visa, too. Limitations, as stated above, are places to use it online and obviously offline. The important point here is that consumers already have their digital wallets and know how to use them. And their solution is not operator or handset dependent.
Technology and ramp time: This is where it could get interesting. From what has been revealed so far, it appears that the heavy lift is in the cloud, via IP-enabled devices that may not entirely solve the technology queue problem but doesn’t involve the installation of new gear at the POS either. Leveraging their existing devices and enabling new ones, like tablets, are far less cumbersome for the merchant. At least one of their solutions does not require any more than a phone number and a PIN to work, and others leverage the devices that most people carry around today or soon will – smartphones and those that merchants already have on their counters. The card solution, which reminds me of the Revolution Money proposition (anonymous mag stripe card), would require a channel strategy of some kind to get distribution. So, it seems more of a slog (but presumably one that Don Kingsborough’s experience at Blackhawk might help them remedy). That said, it strikes me that the ramp time to enable merchants for any of these solutions is much faster, since it is less about hardware refresh cycles and big budget line items at multiple national locations and much more about integration with POS software in the cloud that can be activated at the POS in a much less intrusive way.
Value Add: PayPal has a bunch of assets that enable it to play as well as anyone in the deal space- driving geo-targeted deals, serving up coupons/info/price comparisons/discounts based on items in the basket or seen elsewhere, etc. Where things could get interesting is the notion of extending instant credit based on customer profile and items being purchased via their BML capabilities and primo risk management infrastructure.
Bottom line: Theirs is a versatile approach to solving POS acceptance for consumers and merchants, leveraging what consumers and merchants have available to use today, including 100 million (and growing) populated wallets. Their solutions are also handset and carrier agnostic, which is a big plus. There are already too many moving parts in the mobile payments space to orchestrate. Eliminating this one is pretty huge. All that said, the big gap to fill for PayPal is on the merchant side, which is not insignificant and is also quite tied to the business model that will underpin these solutions. And we will all have to watch and see how they get merchants on board: will they focus on the big guys or leverage their DNA in the small merchant category and enable those “main street” merchants and others who drive everyday spend?
Here’s my take on Google.
Consumers: There are a couple of important things to look at here. First, Google is the largest search engine on the planet, has ~200 million email accounts and the largest share of smartphone operating systems. So, Google brings a ton of assets to the mobile payments starting line. Second, their launch partner is Citibank and Citi’s MasterCard credit product. Citi is the 4th largest credit card issuer in the United States and made news recently when they literally flooded the post office with millions of credit card solicitations. Clearly, they are looking to move up the ladder. At the jump, they also bring a decent number of consumers to the party. Third, their launch partner is MasterCard, and their PayPass infrastructure that gets them acceptance right out of the gate at those merchants. Fourth, for the solution to work at least for now, it has to be via an app that is accessed via a Sprint Nexus S phone, which sort of narrows the funnel and a lot. Sprint in the United States actually has a decent share of the Android OS market, so the addressable market could be OK. But at least at the outset, the number of the people running around with Google Wallets will be small, and until the app is available with other carriers/handsets, it will likely have trouble igniting.
Merchants: Google has millions of merchant relationships today via their online advertising platform. Clearly, they will leverage that asset as best they can. Their card network and issuer channel partners, though, provide powerful access to merchant relationships, too. As mentioned, since they are leveraging MasterCard’s PayPass technology, there are more than 140k merchant locations that accept the Google Wallet today. And they are really good merchants, too – drug stores, department stores, restaurants, clothing stores, etc. That, however, is but a pin dot of merchants in the United States today – like 1 percent of them. Merchant acquisition moving forward, then, becomes a little more complicated, since saying yes to Google Wallet also means saying yes to buying and installing new POS gear.
Preferred/accepted tender type: Google has embraced an open platform and wants to enable all cards in an effort to make their solution more scalable more quickly, given the ubiquity of Visa and MasterCard acceptance on both the consumer and merchant side. MasterCard/Citi is already on board. Visa just announced that they have signed on, so it stands to reason that other issuers will fall into place very soon. That is a big advantage, since it does not require anything more of the consumer than stuffing her electronic wallet with account numbers that already exist in her leather one and that she uses today at all of her favorite merchants. That is a big plus – technology issues notwithstanding.
Technology and ramp time: This is where it gets tricky. As mentioned, there are 144k locations today where Google Wallets can be used. Another 180k will come online soon. Visa’s announcement of the Google Wallet partnership will bring on all of its payWave locations too, upping the ante slightly. But there has to be much more than that to get to critical mass on both the consumer and merchant side. Yes, Google is said to be subsidizing installation, and yes, Visa has suggested that it will also create an incentive scheme to drive installation of NFC-enabled terminals as part of their EMV initiative, but that will take time. I simply don’t believe recent analysts forecasts of a 50 percent penetration of NFC terminals by 2014, unless I missed the bullet point in the President’s latest stimulus plan about subsidizing merchant terminal installation. <jk> That means that, as I written many times, the biggest risk to this entire scheme is the end-run that IP-enabled solutions, like what PayPal, Starbucks and others still in stealth mode are devising that make for a great consumer experience without the technology hassles.
Value Add: Google Wallet will support Google Offers, which is the Groupon-killer that Google is launching full-on. Offers is enabled in a number of ways and linked to Places, which will certainly include primo offers from the collection of players that Google is buying to support these propositions, like Zagat. The Offers proposition for merchants is pretty compelling too and makes the business model that Google is putting forward both interesting and attractive: no transaction fees, plus I’ll drive traffic to your storefront.
Bottom Line: Google is a serious, well-funded player in the mobile payments space. They have assembled a bunch of powerful channel partners who bring consumers and accepted payment types – that is a big advantage over PayPal. Their digital wallet enables the existing accounts that people have in their physical wallets today. Their big Achilles heel is the current technology platform. NFC introduces a lot of moving parts: (a) handset manufactures and manufacturing cycles, (b) POS systems and refresh cycles and (c) operators and their business models. Google’s acquisition of Motorola makes them less dependent on (a) in the long run, their deep pockets presumably less hamstrung by (b) but nothing gets them away from (c), at least for now. They also have to persuade consumers to install the app (and likely buy the phones or switch carriers), which is not impossible but still a hurdle. Of all of the players who could pull off an NFC solution, I believe they can be the one, given the assets that they bring to this space. But it is still a slog, and their big risk is the (by comparison) easier lift associated with enabling mobile payments via an IP-enabled solution.
I have handicapped PayPal and Google in their race with each other and potential players to grab a big share of the emerging mobile transaction platform ecosystem. Now, I’m going to share some final thoughts.
One thing that I think that the Starbucks mobile experience has shown us is how willing consumers are to adopt mobile payments solutions that only work in limited locations, like one store. The big question for all of the mobile payments solutions though is whether, how and for how long, consumers will tolerate a patchwork payments experience at the physical point of sale.
Yes, mobile phone penetration is to the point that just about everyone who wants a phone has one, which, of course, is an important step number one. But everyone also carries around their plastic cards now, too (and more so today than they do cash). What we don’t know yet is for how long the “belts and suspenders” approach to mobile payments (mobile wallets + cards just so you are covered) will be acceptable to consumers and what it will take for them to trade off lack of ubiquity for other goodies that will help drive mobile payments usage at the physical point of sale. We know that what drove Starbucks adoption (4 million users in less than three months) had nothing to do with making a payment transaction but rather solving for a problem that was more relevant to them and their customer: providing information on the available balance on their prepaid cards. Transacting was bolted to the ability of their customers to more easily manage prepaid card balances via the mobile phone.
It may come down to the fact that what drove adoption of plastic cards (speed and ubiquity) may not be as important, at least initially, in the mobile payments arena for either merchants or consumers (or the consumers standing behind the mobile payments user in-lane). It may be that mobile payments ignite first where they, in some sense, ignited last – local Main Street merchants that account for every day spend where consumers want a better way to interact with those merchants. It may also be that mobile payments ignite first in larger merchants where the notion of “store cards” becomes easier for consumers (since fat wallets in cyberspace is a non-issue) and more attractive for merchants who can see better economics from those propositions and offer different things to their customers. The future propositions for everyone pursuing the mobile payments vision seems to hinge on which of these forks in the road are pursued. And as always, the devil is in the details.
For sure, it’s still too early to know any of this, because there are still many, many unknowns. But at least we’re getting closer to the day when we’ll all have the benefit of real consumer and merchant feedback on real solutions. That will make mobile payments arena a whole lot more interesting and tangible. Can’t wait!
Karen Webster is the CEO of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.