Mobile Payments: The Battle To Control Money and Data
The battle over mobile payment solutions like GoPago, Square, Isis, Sail and Google Wallet is shaping up to be a much more defining event than competing formats, revenue models and investors. It is more about who will control the 2 trillion dollar per year credit card market in the US and potentially trillions more dollars in purchases conducted via debit cards, electronic transfers and checks. That’s why all the big retailers, financial players and digital media companies will eventually have a dog in the fight. In addition to the sheer size of the money and billions of transactions involved, companies like Mastercard, Visa, EBay and Google are focused on the aggregation and the ability to leverage the vast amount of data generated by these mobile financial transactions, which is becoming an extremely valuable contextual asset in the ongoing effort to understand and influence consumer buying behavior and brand loyalty. At the center of this battle royal is the ubiquitous mobile smartphone which is profoundly changing consumer retail experience and will likely transform the entire electronic payment landscape as well.
Mobile Payments: Part of the larger trend towards non-cash transactions
According to the most recent (2010) Federal Reserve Payments study of non-cash trends in the US 2006-2009, the country is moving inexorably towards electronic and digital transfer of money and mobile payment solutions like mobile wallet, chip and pin and mobile card swipes a la Square and Sail, is the most recent outgrowth. ACH payments (automated clearing house) which encompasses wire transfers, supplier deposits, wire purchases grew 9.3% per year from ’06 to ’09 while at the same time, check writing has been declining by about 7% per year.
In 2009, there were about 22 billion credit card transactions worth about $1.9 trillion. Average value per transaction was about $88. That’s where the battle for mobile payments is taking place. Interestingly, there were almost twice as many debit card transactions (37.9 billion) valued at $1.5 trillion dollars annually. Card swipe technology like Square and Sail can also handle debit cards so the market for mobile payments in the US is approaching a potential $4 trillion annually. Quoting from the report: “Since 2006, the debit card has eclipsed the check as the most used noncash instrument. This was not only because the number of debit card transactions increased at 14.8 percent per year from 2006 to 2009 but also because the number of checks paid declined 7.1 percent per year.” Just as a reference, about $32 trillion of checks were written in 2009. That number is declining by about 7% per year or about $2 trillion annually which is the size of the entire credit card market. Those non-cash transactions presumably will continue to shift into debit cards and credit cards especially with the added convenience of mobile payment solutions. In addition, approximately 13 percent of checks were deposited as images in 2009, a percentage which will dramatically increase as many banks offer customers the ability to deposit an image of their check via a smartphone.
Mobile Payments: Not shifting the power base
There are over 180 million US cardholders with an average of almost four cards per person in the system. Mobile payment solutions will likely not shift the balance of power in the credit card processing market per se. Visa, Mastercard and American Express control too much of the payment processing business which is totally dependent on scale and volume. That is, skimming a small amount of money on billions of transactions with millions of merchants and businesses. Even a company the size of Google, whose market cap is larger than Visa, Mastercard and American Express combined, is not likely to want to end run the current credit/debit card infrastructure by offering a special new Google credit/debit card. Rather, Google can “monetize” the credit/debit market through its mobile wallet, without having to take so much risk. An argument can be made that Visa and Mastercard will be the ultimate beneficiaries of the mobile payment innovations because it will dramatically expand the market in two fundamental ways: by making it easier for consumers to pay by credit or debit card and offering an inexpensive technology option like Square or Sail to attract the 25 million small business owners that don’t currently accept credit or debit card payments.
The natural competitors of innovators such as Square are the payment processors like Verifone and NCR which control credit and debit card processing cash registers across the country. Verifone has already fired back at Square with its own mobile card swipe Sail which sports features tied to 3rd party marketers, CRM, customer loyalty programs and social media tools. It remains to be seen if these mobile devices actually unseat VeriFone or NCR or simply act as a catalyst for the POS industry to leverage mobile smartphones, iPads and the cloud to further entrench their businesses by offering more convenient and economical options to their customers.
Mobile Payments: Mobile Wallet is a trojan horse data machine
So if mobile payment solutions are not going to bring Visa and Mastercard to the ground or truly disintermediate VeriFone and NCR, what is all the excitement about? In short, changing consumer buying habits and behavior is the huge disintermediation. And then there is harnessing transaction data to serve better ads and influence future purchasing decisions. Putting aside enabling technology for a moment, the objective for a company like Google is the opportunity to insert itself at the exact nexus of an emerging consumer habit shift, in between consumers and merchants and the financial institutions, aggregating consumer credit and debit card transactional data and all the ancillary sources of context around and connected to these transactions. For Google especially, this rich and comprehensive treasure trove of information about consumer behavior, connections, location, purchasing choices and the social graph can help Google generate a new level of revenue based on serving more targeted advertising and services at a place and time that is optimally suited to the mobile consumer. As the chart below illustrates, contextual data through usage of a mobile wallet, is the real Trojan horse. That’s why all the financial institutions, big retailers, media giants are focused on mobile payment solutions.
Mobile Payments: Simplicity and Convenience
It is still too early to pick winners and losers among the mobile payment providers. The market is being driven by the consumer’s insatiable desire for more convenience and simplicity in terms of shopping, obtaining information and payment, on the go. Companies that adhere their pitch to optimum convenience and simplicity and can tie-in other functionalities (personal or commercial) into the food chain without those functionalities becoming a nuisance will succeed. In other words, I’m not convinced that an electronic email receipt is the right place to market goods and services or those immediate announcements to Facebook contacts about a purchase is really going to resonate with consumers. But a simple one step ability to tap a mobile device on a merchant’s register and select electronically which method of payment to use and then having access to a unified record of all my transactions that day, or week or month, is going to become the norm in our culture in a few scant years. What is also certain is that the growth of mobile smart phones and the introduction of mobile payment solutions will profoundly affect the balance of cash and non-cash transactions in the future.