You might think that the coal face of innovation in the mobile payments space would be with Big Retail, where the bulk of commercial transactions take place. But in reality, the most significant developments are being driven by the occasional merchants, the cottage industries and the hobbyist traders. In the same way that first eBay, and more recently sites like Etsy commercialised these micro businesses, now mobile is enabling digital payment mechanisms to take commerce to the next level.
To keep these developments in perspective however, it’s worth noting that the ‘mobilisation’ of commerce isn’t creating a whole new revenue stream out of nowhere. A fair amount of business that now takes place using mobile as the transaction channel is simply replacing that which would have taken place online anyway. There are many well established electronic payment mechanisms in place worldwide, and on that point alone, mobile does not make a compelling substitute. But cash is the common enemy of every player in the retail commerce chain and in light of this, mobile certainly has a role to play.
In the USA, it is estimated that there are 26 million retailers that still only accept payment by cash, cheque or invoice. These are the occasional merchants—companies of between one and nine employees that might need to accept tens of transactions a week, rather than hundreds or thousands. Small scale though they are, they account for between 20 and 30 per cent of the US economy. The percentages are similar in any given market and, for some of the most innovative players in the mobile retail space, this is where the richest pickings are to be found.
Twitter co-creator Jack Dorsey left the micro-blogging platform in late 2008 and went on to form a US venture called Square. With the addition of a small hardware unit and an application, Square turns US Android smartphones, iPhones and iPads into a credit card reader. “Square is the easiest way for anyone to accept credit cards anytime, anywhere,” explains a company spokesperson. “In the past, it’s been difficult for mobile businesses to accept card payments, due to not having access to physical phone lines, or being unable to afford expensive hardware. Square is revolutionising the way mobile businesses can accept payments by providing free hardware and software, and enabling these businesses to accept payments on a mobile device.”
The benefit of Square, and similar players like iZettle, is that they provide all the necessary infrastructure direct to the merchant. It takes its cut via a flat rate 2.75 per cent charge per transaction for Visa, MasterCard, Discover and American Express cards, and deposits the funds straight into the merchant’s bank account.
This is one of the key selling points of the “e-commerce service provider model” as identified by Jacob de Geer, entrepreneur and founding CEO of Square’s European counterpart, iZettle. “If you compare us to a point of sale (POS) retail environment, the difference is significant in that we own the entire value chain. We take care of the hardware and interface for the customer. We handle payments direct to your bank account and we handle support,” he says. “The rest of the value chain is extremely fragmented. There’s a terminal supplier, and a bank, and the merchant to consider, but with us, we provide everything.”
De Geer is open about the competition in this space and readily admits that iZettle is “a clone” of Square and claims that Paypal’s latest foray in a similar vein is a clone of his model. The one major difference between Square’s US focused play and iZettle’s European push is that the latter can deal with Chip and Signature transactions, whereas the former is magnetic strip only.
“The major difference is that we’ve cracked the EMV challenge—the Chip and Signature technology set up by Europay, Mastercard and Visa to improve the security of card payments which only had mag strips. The idea was to prevent major problems with fraud as the chip is an encrypted processor, whereas mag strip is open. However, in the US, major retailers are still not Chip equipped,” says de Geer.
Of course, functionality like Chip and Signature or PIN—and NFC—can easily push up the cost of a payment terminal and act as a barrier to POS entry for smaller businesses. “But we are totally uninterested in the classic enterprise and mid-tier model where the bulk of transactions reside,” de Geer says. “There are no margins there whatsoever, and there are so many players. The problem with the existing value chain is that the way it’s created makes it unprofitable to target the prosumer business. What we’re looking at is the guy who makes maybe two or three transactions a week. We control and deliver the entire value chain. These guys are price sensitive, and what we are bringing to the table is convenience. A carpenter does his job but he’s probably not great at administration. So with us he gets his money straight away, wherever he goes.
“The existing players in the market don’t understand this. They are so focused on producing a chip card terminal with all the bells and whistles that these people don’t need. They just need to be able to accept a payment once in a while. The existing infrastructure is geared up for the big retailers out there, not the little guys.”
Convenience is a concept that keeps cropping up in discussions about digitising commerce. Bill Gajda, head of mobile at Visa (See the full interview on page 24), which made an undisclosed investment in Square in 2011, comments: “These guys [occasional merchants] experience everyday the real costs associated with dealing in cash. It’s expensive. I’ve spoken to Square merchants who say many more transactions are happening digitally because they can take alternative payment. This is the opportunity cost of cash.”
So it makes sense that, for companies like iZettle and Square, the smartphone is the foundation of the business. “We’ve just reached an inflection point that we can leverage.
There are ten smartphones to every POS device, so we can penetrate this segment in much more efficient way,” says de Geer.
It’s an opportunity not lost on internet payments giant Paypal, owned by online auction house eBay. In March Paypal launched its own copycat hardware unit that plugs into an Android or iOS smartphone and turns the device into a card reader, backed by a flat rate 2.7 per cent charging model similar to Square’s.
Paypal spokesman Rob Skinner talks up the opportunity, saying that, globally, the company processed $4bn in mobile payments in 2011 and anticipates $7bn this year. More than 17 million of around 106 million accounts at Paypal are using mobile regularly, with users paying for purchases on mobile devices using funds transferred from their credit card, debit card or bank account. In Europe the company is regulated as a bank.
But this is a new service and Paypal’s strategy is multi-channel. The company has already spent years working to get itself embedded as a payment option in the online and physical POS worlds. In 2009 it opened its platform to developers, allowing them to embed Paypal payment options into their own apps and services. One outcome of this is a partnership with UK restaurant Pizza Express that allows customers to pay their bill at their table via a Pizza Express smartphone app.
And with a sizeable brand like Pizza Express (which has 400 restaurants in the UK and 40 overseas) Paypal is moving into the physical realm of Big Retail, where the smartphone as a merchant transaction tool has to contend with far more entrenched payment systems that are hard to unseat.
Indeed, Square and its counterparts cater to existing payment behaviour—card usage—whereas Paypal faces a different challenge in trying to bring its brand to the POS. The company has had some success online, where over the last decade it has become commonplace as a checkout method on many big and small name websites, but it’s still far from ubiquitous.
On one level, lack of reach might not be such a big issue, and Dominic Keen, CEO of Mobank Group, believes the use cases for ‘m-commerce’ are sufficiently numerous for everyone to derive benefits—so long as retailers correctly optimise the mobile experience. He readily accepts that many mobile transactions just move the online purchase of goods from the desktop to the mobile, still dealing with ‘card not present transactions’: “This is where the majority of business is at the moment, extending e-commerce into mobile,” he says.
“We can get merchants trading on a mobile optimised m-commerce site within a few days,” he says. “Retailers can’t afford to have a really clunky mobile channel today; sites which don’t do any mobile optimisation get almost zero conversion from mobile traffic. But this improves significantly once they put a system in place,” he says. Counting the likes of HMV and Waterstones among his customers, Keen claims that most businesses are seeing ten to 20 per cent of their online traffic coming from mobile and says this is easy pickings in the mobile commerce world. “Lots of people are doing business online, but this doesn’t require a change in behaviour,” he says.
When dealing with consumers, avoiding significant changes to user behaviour is key, which is why in order to provide as a broad coverage as possible, Stuart Neil, SVP of business development at Boku believes you have to work within the existing frameworks. “Our role is to sit in between merchants and carriers. We enable payment through the mobile phone but we’re not seeking to recreate what MasterCard has taken 40 years to build. In that respect we work with and within the existing payment rails, which is particularly important when you get into over-the-counter transactions to help carriers get into the world of payments.”
Visa’s Bill Gajda agrees that the mobile industry has moved its focus on from trying to own the value chain and now is looking at how to use the existing global, scalable, interoperable, secure rails that Visa and a few other companies supply, to extend mobile financial services and that by no means is the plastic card dead. Boku works on traditional payment infrastructure, meaning the payment product can be used in bricks and mortar stores via NFC at the POS or via a contactless sticker or some kind of proxy, but Neil says the company also issues companion plastic cards.
The goal for mobile commerce at the retail level is the elimination of cash and the virtualisation of the credit and debit card. But as Paypal’s Skinner points out, while this is easy for consumers to understand, “they’re not going to change the way they pay if the new way isn’t sufficiently better or more efficient than what they’re using already. So much of the focus at the moment is on technology, but technology is just the enabler, it’s not the point.” »
Indeed, much of the debate at present is focused on NFC and what kind of effect it will have on the retail space. While we go into greater detail on NFC as a technology on page 28, in terms of business case, there’s a real chicken and egg situation at play.
Boku’s Stuart Neil previously spent six years at BarclayCard, where he was tasked with getting NFC accepted in the merchant community, and he acknowledges that: “These things take time. It’s all about proving that consumers want it and that there’s enough momentum to get merchants to buy in.”
Like many players, Boku says it is ready for NFC’s uptake, but is not reliant upon it. “We’re agnostic to how the transaction is completed, whether through an e-commerce gateway, plastic card or NFC. NFC has some great features and can create more sophisticated applications on the phone and its broader appeal is for more high value transactions. But we’re not going to tie our strategy to it,“ says Neil.
Others like Chandra Patni, CEO & CTO of YesPay, have already nailed their colours firmly to the NFC mast. “NFC will be a mass market standard and will see mass adoption. Just look at Blackberry which has already manufactured 20 million NFC phones, and most smartphones will have NFC in short order. The technology is there already, so if Visa and MasterCard adopt it, it will be there for 15-20 years, you can’t change it. The contactless interfaces required are already defined and POS terminals are already being deployed among retailers.”
YesPay provides the software for POS terminals at large retailers like Tesco, and also provides the underlying connections between the merchant and the bank. The company caters to as many payment channels as possible, whether through cards or phones or via NFC. In some cases YesPay works with the carriers on a consumer m-wallet proposition that virtualises cards into an application on the handset. “This can be used as a prepay card, debit card or whatever, although it’s actually a PayPass or Paywave contactless card stored on the phone, allowing you to make a payment at a physical POS by RFID or NFC. The software on the terminal emulates the card,” Patni says.
With an operator-supported YesPay wallet, carrier billing could even be used as the payment mechanism—the crucial factor here is that the secure element and the actual card details are stored in the cloud in what is effectively a remote wallet. The handset application calls these credentials down when it needs them and performs the transaction at the POS. “You don’t need to use the card infrastructure or to load secure apps into the phone or SIM card. This means you can use cloud based security to emulate the card,” says Patni.
Paypal’s approach is similar. “There’s lot of talk about the mobile phone as a wallet but the mobile phone is just one way in which you have access to a wallet. By having a digital wallet in the cloud, you can use it on any device. All the hype around NFC is focused on one piece of technology that barely any consumers have got and no retailers have adopted at POS,” the company says.
We go into greater detail on m-wallet offerings in another feature on page 10, but it is important to note that, for the concept to work, it requires buy-in from retail, which sees the m-wallet largely as a marketing platform via vouchers and coupons. But Paypal is using its relationship with eBay to offset this and influence the shopping experience. A user can take a picture of a fabric swatch with their camera phone, then have an app search for something in the same material and check prices. The item could be purchased and then delivered or picked up from the store.
According to Boku’s Neil, the thrust is about taking a plastic card transaction and creating a richer retailer experience by proving a dynamic communication channel between the buyer and seller. “The merchant is unable to communicate with someone holding a plastic card,” he says. “The evolution of these loyalty schemes where a separate card is handed out means payments and loyalty are disparate. But with the mobile phone you suddenly have a great opportunity to build a relationship with that consumer. Merchants are looking to market effectively and consumers are looking to make more informed intelligent purchases. That’s all done by linking the payment mechanism with an intelligent application on the mobile handset.”
Retail starts to get a lot more complicated the larger scale it gets, which is perhaps why it will take longer to embed mobile as a payment mechanism in Big Retail than for the occasional merchants discussed earlier. Whether these two evolutionary paths will converge, or remain parallel, remains to be seen.