The pace of innovation in mobile payments makes it difficult to keep track. New and established players alike are experimenting with different business models. But, says Charles Davis, patterns are emerging and the industry is beginning to crystallise.
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Another day, another milestone in mobile payments, as the pace of innovation leaves the observer searching in vain for a similar era in the history of payments technology.
In 2011 alone, all four major card networks, a number of the largest banks in the US, most wireless phone network carriers, and an ever-growing list of startups have launched mobile payments offerings.
Meanwhile, smartphone manufacturers are forming coalitions, buying up tiny mobile payment start-ups, and competing ferociously against each other for market share.
Adding to the competitive intensity is the breadth of the mobile payments space, which encompasses everything from NFC to methods for buying products using phone apps.
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By GlobalDataThe card associations are leading the drive for mobile payments by developing a range of different digital wallet offerings. Visas mobile strategy is centred on a digital wallet that will enable cardholders to create a digital version of their actual wallet and load all of their cards regardless of brand or type, from credit to debit to merchant loyalty cards.
Visa is teaming with Samsung on a mobile payment programme at the 2012 London Olympics. The system will introduce NFC mobile payments to more than 60,000 merchant locations.
MasterCard is also focused on developing its NFC capabilities, attempting to link its PayPass programme with mobile payments through SIM based solutions, embedded solutions, and NFC tags.
American Express has based its mobile payments strategy on its mobile wallet platform, Serve. In March, the company announced a deal make Serveavailable for Sprint customers using a number of Android-based smartphones. This followed a similar with another carrier Verizon, which will integrate Serve on a wide range of their phones and tablets.
Discover has taken a different route altogether, teaming with PayPal to launch Money Messenger, a P2P product that allows cardholders to move funds from a Discover account to a PayPal account free of charge.
The lure for the cardholder is rewards, as the payments are made from a credit account.
Industry collaboration
All four major payment networks have reached an agreement to support Isis, the mobile wallet solution developed through the collaboration of AT&T, Verizon Wireless, and T-Mobile USA.
Isis is NFC-powered and will enable consumers to use their phones to pay for transactions at point-of-sale, just by tapping or waving their phone. Isis plans to deploy mobile payment testing in Austin, Texas, and Salt Lake City, Utah, in 2012.
A number of startups have developed alternative methods for processing mobile payments. These ideas include payment card scanning (as developed by Card.io), information transfer via ultrasound (from Zoosh), and bill-to-phone payments (provided by Payfone, as well as recent eBay acquisition Zong).
Then there is Square, the mobile payments solution created by Twitter co-founder Jack Dorsey. Square a small attachment that plugs into mobile phones in order to process transactions received investment backing from Visa, as the association hedges its bets by supporting a variety of solutions.
The app also manages peer-to-peer transactions in competition with PayPal. Square has been pitched as an alternative to NFC. As of May, Square had shipped 500,000 of the readers in the US, and is on track to process
$1bn in transactions within a year of its launch.
If thats not a competitive enough environment, Google also entered the fray in 2011 with the predictably named Google Wallet, an app and payment system that combines deals and discounts with NFC and digital payments.
Google Wallet is currently undergoing trials in San Francisco and New York, and is meant to launch US-wide in the next few months.
Bank moves
Not content to wait on the associations, several leading US banks are developing their own mobile payments solutions.
Wells Fargo has teamed with Visa to launch an NFC pilot using the associations microSD application. Since May, JP Morgan Chase, Wells Fargo and Bank of America have been developing a mobile payments platform of their own.
The system, known as clearXchange, has just entered the testing phase. If all goes according to plan, clearXchange would let consumers send money to each other by mobile device, from one bank account to another, with no fee.
ClearXchange, currently undergoing pilot testing in Arizona, lets customers use their mobile banking apps to send money via ACH to another partys mobile banking app after an initial registration provided both parties have accounts at Bank of America, Chase or Wells Fargo.
Each bank will decide on issues like fees and presentation. The service is expected to be free, a savings of the $12 or so charged for traditional wire transfers.
The service, along with all of the other new entries, will square off with the entrenched juggernaut that is PayPal.
PayPal
PayPal currently owns some 90% of the P2P market and is making aggressive tech moves of its own, including offering proximity bump payments and developing contactless payment technology.
PayPal’s recent moves not only suggest a further penetration into other financial services, but also a burgeoning innovation spree that could allow it to compete with clearXchanges main competitive advantage the ability to offer direct bank-account-to-bank-account mobile P2P transactions.
PayPal also is strengthening its risk and compliance capabilities to bank partners, on both security and fraud fronts, by using hundreds of algorithms that it has developed to track and assess levels of risk inherent in different transactions.
It also has 100m registered users that participating banks can work with upon launch a significant competitive advantage for a player that already dominates the market.
PayPals parent company eBay recently acquired Zong, a firm that allows users to charge digital goods to wireless phone bills.
Established in 2000, Zong leverages direct connections with more than 250 mobile network operators worldwide to provide a secure payment solution to users of online gaming and social networking websites.
The company is the mobile payment provider for Facebook Credits and also works with hundreds of websites and mobile applications including Gaia Online, IMVU and Playdom.
It claims to reach more than 3.2bn mobile users with localised payment capabilities in almost 50 countries.
Zong took a major step forward in March 2011, announcing the first one-click mobile payment solution for the Android platform.
Developers of Android-based applications can now integrate payment options into their offerings, and the automatic user verification process does not impede the use of the applications when payments need to be made, unlike existing services such as PayPal Mobile.
The purchase of Zong underscores PayPal’s commitment to expanding its own mobile-payments-driven cross-selling strategy, with the possibility of offering account transfers, mobile cheque deposit, remittance and other services in the future. And in July, PayPal announced plans to offer NFC as well.
Processors are also restructuring to meet the mobile payments challenge. Fiserv recently purchased CashEdge, giving it access to hundreds of CashEdges PopMoney and its own ZashPay clients. PopMoney’s clients include heavyweights like PNC, Citibank, Fifth Third, Huntington and Bank of the West.
Quantifying the opportunity
The stakes are nothing short of enormous, even if the payoff is a few years away, according to the latest predictions from Gartner Research.
The number of subscribers using mobile payment options will increase from 102.1m worldwide in 2010 to 141.1m in 2011, a 38.2% year-over-year spike, according to the research firms latest numbers.
Worldwide mobile payment volume is expected to reach $86.1bn during the current year, up from $48.9bn a 75.9% annual increase.
Despite these eye-opening numbers, Gartner says the mobile payment market is evolving slower than anticipated, thanks in part to the fact emerging markets are not yet embracing mobile payment services with the speed many onlookers expected.
"Many service providers are yet to adapt their strategies to local requirements," says Gartner research director Sandy Shen.
"Success models from Kenya and the Philippines are unlikely to be translated to other market.
"While developing markets have favourable conditions for mobile payments, such as high penetration of mobile devices and low banking penetration, this is no guarantee of success, unless service providers adapt their strategies to local market requirements."
Money transfers and prepaid top-ups will drive transaction volumes in developing markets. These are seen as the killer apps in developing markets, where people value the convenience of sending money to relatives and topping up mobile accounts.
This is most obvious in Eastern Europe, the Middle East and Africa, where these two services will account for 54% and 32% of all transactions in 2011.
"Thanks to the success of mobile application stores, such as Apple’s App Store, and the efforts in driving mobile sales by major retailers, such as Amazon and eBay, merchandise purchases far outweigh other use cases in developed markets, which include North America and Western Europe," Shen says.
"We predict that, in 2011, merchandise purchases will account for 90% and 77% of all transactions in North America and Western Europe, respectively."
Research company Visiongains research has shown that as of the third quarter of 2011, there are around 140m mobile payment users worldwide.
As increasing number of customers gain access to mobile payment systems, the firm predicts that the global mobile payment market will grow from $150bn in 2011 to $556bn in 2016, a compound annual growth rate of 30%.
The adoption of NFC will continue to gain momentum and Visiongain believes that by 2016, 658m mobile phones will be enabled with NFC.
The opportunity for financial institutions to assert themselves in the mobile payments space exists ironically because of the concerns consumers have with security issues.
A new study by the ad agency Ogilvy Mather showed that consumers trust established payments brands card associations and banks by a wide margin over technology brands, including Facebook, Google and Apple.
In the study, 500 US online users were asked to select as many brands as they wanted in answering the question: "Who would you trust with mobile payments?"
Nearly 40% of consumers chose Visa, with MasterCard and American Express close behind at nearly 36% each. The highest mobile payments brand, Paypal, was chosen by 34% of consumers as a trusted brand, buts its parent company eBay was second from the bottom, with 15.5% of consumers expressing trust.
Among iPhone owners, Apple scored much higher, but still doesnt exceed the trust that consumers place in credit-card companies.
The results reflect the power of Isis, which has arrayed all of the leading card associations in a single platform, and hints at the great competitive battles to come between the technology-branded mobile payments players and the financial institution-branded offerings.
The trust placed in financial institution-branded offerings gives financial institutions an opening for developing partnerships that can go toe to toe with Google and PayPal, but only if the technology brands fail to close the trust gap.
Time is fleeting, and so experimentation must quickly turn to implementation if banks are to remain in the mobile payments game as a central player.
The risk, at the end of the day, is disintermediation, a fate worse than death in a multibillion-dollar emerging industry, one that promises to change the way people all over the world pay for everything.
