Zigging and Zagging toward Mobile Payments in the US

by Scott Loftesness on September 17, 2011

in Mobile Commerce, Mobile Payments, Mobile Technology, PayPal, Scott Loftesness

Scott Loftesness - Glenbrook Partners

For those of us following the evolution of mobile payments in the US, it was quite a week indeed. What with PayPal’s peek behind the curtain at enabling its users to pay at physical POS merchants and MasterCard’s Investor Day briefing and demonstrations of its various mobile marketing and mobile payments initiatives.

What are we to take away from all of this? Here’s my view – I’d welcome hearing yours.

The common wisdom around mobile payments in the US is that they will be based upon card credentials electronically inserted into secure elements in new mobile handsets that will talk to new POS terminals capable of supporting NFC or contactless payment technology. There’s been lots of activity – and accompanying industry forecasts about how we’re on the cusp of a new world of mobile payments based on NFC/contactless technology.

Almost a year ago, three of the mobile network operators in the US – Verizon, AT&T and T-Mobile – announced Isis, an NFC-based approach that was going to create a new payments network to rival the payments incumbents. Post-Durbin and after listening a bit to the marketplace, Isis modified its strategy to be much more accommodating to the existing payment networks – while still remaining very NFC-centric. As a result, the major networks agreed to cooperate – time will tell exactly what that means. Trials begin in 2012.

In May, Google announced it was partnering with Citibank, MasterCard, First Data and others to launch an NFC-based Offers and Wallet – based on this technology approach. The only wrinkle in Google’s approach is that it decided that it (and not a card network, a card issuer or a wireless operator or a consortium like Isis) would manage the keys to the secure element in each handset. Google also introduced a nifty concept called SingleTap that would enable a new kind of offer redemption process at the time of payment – for those merchants who agree to deploy Google’s proprietary SingleTap POS technology.

In August, Visa announced its support for nudging this POS upgrade process along by defining a multi-year program designed to transition the US POS infrastructure from mag stripe-based today to both EMV contact and NFC/contactless technologies over the next several years.

That’s seemingly the current state of play with respect to the NFC-based approach to mobile. Everything seems to need changing – the mobile handsets, the POS terminals, along with new operational systems being required to manage and control this fundamentally different payments ecosystem. And, of course, the consumer will have to be educated and understand how all of this works – perhaps by their mobile carrier, or their issuer, or the card networks. It’s fair to say that it’s yet to be seen how that might evolve.

Meanwhile, PayPal seems to be thinking differently. In mid-year, PayPal’s Scott Thompson shared a vision for digital payments – not requiring us to carry wallets for making payments and, presumably, not making payments using plastic cards. His vision was that this would become ubiquitous in the US by 2015. This week, PayPal shared more about its vision at a conference for major retailers in Los Angeles that was widely covered in the press.

For years, PayPal users have used their email address plus a password to make payments at eCommerce merchants. PayPal users didn’t have to remember some arbitrary sixteen-digit number, expiration date and card security code to complete a payment. In the vision it revealed this week, PayPal uses a phone number plus PIN to make a payment at a physical POS terminal – a card-less form of payment linked, but not directly, to the user’s mobile phone. Because there’s no new NFC-like technology involved, it should be much simpler for merchants to make POS software changes that enable this kind of PayPal acceptance at POS. PayPal promises to have more news about specific retailer partners later this year – with plans for even more in 2012.

One thing seems clear – the merchants control how this evolution might occur as it’s their POS acceptance infrastructure that has to accommodate any of these approaches. Some merchants, like Starbucks, have already implemented proprietary closed loop mobile solutions. Others, such as Chipotle, embed payments into their remote ordering applications.

But the big question remains – how will the general purpose merchant POS evolve to support new forms of payment? And what are the forces driving any change?

We certainly live in very interesting times. The traditional players are zigging – away from mag stripe card technologies (with, perhaps, the exception of Citi and its work with Dynamics) toward a world of NFC/contactless payments. Meanwhile, it seems that PayPal isn’t waiting for that world. Instead, it’s zagging toward a speedier implementation of, arguably, a new and convenient way to pay that’s card-less and avoids the requirements of rebuilding so much of the payments ecosystem.

I’m reminded of an earlier – perhaps somewhat similar – history in the world of electronic payments. In the mid-90’s, MasterCard and Visa – along with IBM, Microsoft, VeriFone, and others – worked together to define a new protocol that was going to be used to support secure card-based payments over the Internet. That initiative, Secure Electronic Transactions or SET, involved a very heavy-weight implementation of public key infrastructure to encrypt and authenticate parties in a transaction. In parallel, an upstart Silicon Valley company by the name of Netscape defined a very simple protocol called Secure Socket Layer or SSL which turned out to be “good enough” for ensuring that payment card account data was protected from network interception. SET, the payments industry solution, failed in the marketplace as budding ecommerce merchants, including Amazon.com, embraced the use of SSL. “Good enough” trumped “perfection” and web-based ecommerce was born.

Of course things are quite different today and we certainly can’t predict the future from the past. But sometimes it rhymes. Sit back and enjoy the show – it’s going to be fun to watch! Give me a call or drop me an email if you’re interested in talking further about any of this. I’d welcome that opportunity. You’ll find my contact information here.

8 Responses to “Zigging and Zagging toward Mobile Payments in the US”

  1. vacher says:

    Great post : SET versus SSL was really a similar battle. May be there is another move, which is the end of classic POS : tablets or smartphones are replacing the POS for the merchant (i.e. at Lowe’s, etc). The battelfield is open, now it’s a question of rapidity. Enjoy the show.

  2. Congratulations Scott for this another great post/view about the current situation in the mobile payments market.

    There are indeed very interesting and challenging times, and as you said at the end, it is a hard call to really guess who will be the winner/s.

    I really think that the more competitors the better for this whole payments ecosystem to evolve, so that the mcommerce and ecommerce in general can continue growing at the expected rate that many analysts keep predicting.
    Saying that, I would like bring two points or thoughts that I strongly believe will be happening during this “mobile payments war”:

    * The first one, is that although there are many “competitors” and or startups that keep joining this “battle”, so they can try getting a piece of this huge cake; only a few will really compete in the future.
    Saying that, we must say that not all of these ideas or startups do compete with each other, as within the whole payments world, there are different markets to tackle (P2P, C2B, B2B…). However, I strongly believe that in order to become a leader or a “standard” in each or all of these markets, a business not only has to be disruptive (like square it is proving to be) but also has to have the marketing and selling power to position itself. And this is one of the main reasons of why I think only a few ones will be able to compete in the future.
    To back up this “theory” we could take Paypal as an example with its recent acquisitions (Zong, Milo….), where they are for sure going to have more power and presence than ever before…

    * The second point which is very much connected to the first one above, it is not other than all these startups and iniciatives, once they get consolidated, they will have to work hard to get themselves ready for the regular user. I say this because sometimes, businesses and, we as consultants, who work in this exciting industry forget about the non-savvy end users who at the end of the day are the ones who are suppose to be using this technology or the other.
    Saying that, I can then comment that in order to make this whole ecosystem working, the different companies (Google, Paypal, Visa…) will have to focus very much of its efforts to position these “ideas and products” to the market. In other words, the winners will be the ones who make a better marketing approach as well as a good old lobbying down then line…

    In conclusion, very exciting and challenging times that it is very hard to just comment in a few lines.. 🙂 , and that for sure all readers could go into much further debate should we all sat down together to see and express or thoughts.

    Regards,

    Jesus Perez

  3. Bob Shay says:

    Scott,

    From the perspective of someone involved in the introduction of debit POS in the 80’s, and in the discussions around SET in the early 90’s the two really important things you point out in your piece are the absolute centrality of the merchants willingness to invest in new or upgraded front ends, and the importance of easy consumer use. La plus ca change… It is good being retired so I can sit back and enjoy the show.

    Thanks for the interesting post.

    Bob

  4. I think you captured the current state of things well, Scott. If I had to bet, I would first run the other way, and if tackled from behind would put my money on good enough.

  5. Lisa says:

    Great outline of the divergent tracks.
    I’d like to hear your take on Piggly Wiggly’s experiment a few years ago with the fingerprint payment system. What are the lessons learned that can be applied to today?
    I always have my fingers with me [God willing], but not always my phone or credit card. And finger/thumbprints are somewhat more difficult to steal or hack, esp if encrypted. Why can’t my credit provider enroll my finger/thumbprint instead of issuing a card?
    Please keep the insights coming.

  6. Mark says:

    Is there some reason the purchase cannot just be added to your phone bill? I know there are some issues (security) there for the carriers to iron out, maybe by partnering with a Visa or Paypal, but it seems that would be easiest. Maybe using a “bump” to a POS adaptor or through an app – merchant gives you a code??? Just thinking out loud but it seems getting the millions of merchants to change out their POS, train them, train customers is a bit clumsy. You have a phone, you have a phone bill…

  7. Steve Klebe says:

    Better late than never comment! Regarding the failure of PaybyTouch and the similarity, there is one common point to be made. With PaybyTouch, the business model was to get consumers, like PayPal, to bind their indentity to a least coast payment method, the ACH. Well, guess what, consumers wanted their points/rebates, etc. so they chose to bind to their credit cards. The business model went up in flames along with a horribly mis-managed company. One similar dilemma for the PayPal POS alternative is that those transactions are likely to continue to be priced as CNP (card not present) at 50 basis points higher than CP. To most retailers, that matter – the high volume ones – that is going to be a huge point of friction. PayPal could choose to subsidize that difference with the blending of their costs from their other two funding methods, but how are all the ecommerce merchants going to feel who have never gotten the benefit of that blending? It is going to get interesting!

  8. Steve, thanks for your comment. Yes – lots of baggage around the PaybyTouch story.

    Something to consider going forward is that post-Durbin there’s no distinction between CP and CNP in terms of interchange fees for the regulated banks. That changes the economics – although not the fraud liability.

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