An Introduction to Mobile Payments

So you might have noticed that the subject of 'mobile payments' is hot, lately. Companies like Google and Paypal are introducing new products in this area, and some new companies are getting big investments for their solutions too.

Looking into this it soon starts to be clear that it's quite a complicated space. There are several types of companies competing, several technologies which try to solve the same problems, there's overlap with other areas and actually it turns out the concept has been around for a long time without getting much traction.

In this post I'll introduce you to the concept, tell you about the history, update you on technologies and list new initiatives.

what is a 'mobile payment'?

First of all, we need to define what 'mobile payments' are. If I walk into a local shop and pay for a newspaper with cash, is that a mobile payment? It is a payment, and since I am mobile (and so is my cash), semantically it would qualify. Same for payments made with credit or debit card.

But for the purpose of defining this market, let's say that mobile payments are made using a mobile phone for authenticating and authorizing a payment for a new product or service.

Also note the difference with mobile banking, which might be authorizing previous month's utility bill for payment while on the road, but is more about managing existing payment relationships with vendors.

history

Around the year 1999/2000 the idea of mobile payments was hot too, then mostly called 'm-commerce'. Quickly expanding use of mobile phones, and the rise of e-commerce, sparked the imagination of technology-focused people, who thought now commerce should be mobile too.

At that time it turned out that the solutions that could be created did not provide enough added convenience to both merchants and consumers. Paying with a card is not that hard. Why go to the trouble of switching to paying with a mobile phone? We'll see what's different today.

Apart from this, there was the collapse of the 'internet bubble' in 2002 which significantly reduced investments. Most plans were put on hold.

Even though implementation of mobile payments hasn't been successful globally, there are specific countries where it has. For example, in Japan and Kenya.

who cares?

There are several types of companies interested in making mobile payments happen or at least be a part of it when it does:

* Mobile Network Operators

As the use of their mobile networks which they're selling as a service, is getting more and more commoditized, it's getting hard for these companies to add value and make a decent profit. Also they are in the position to charge customers through the mobile phone bill.

Technically there's no reason carriers must be included in a mobile payment scheme, and implementing payments by charging mobile phone bills is really only suitable for paying small (digital?) goods. On the other hand, there's a large desire to make some money off mobile payments and because these companies subsidize the mobile phones of their customers, they are influential with mobile handset makers. Which means they can support or veto certain mobile payment technologies.

* Payment Processors

Like Visa, MasterCard and American Express. These companies already handle lots of transactions, and they make money by taking a small (?) percentage of them. If somehow mobile payments take off and these companies do not process those payments, they stand to lose out on a lot of revenue.

Of course they already handle payments so they're well equipped. Only thing is they're not present at mobile phones so would need to adapt some technology that allows for mobile phones to be used for authenticating next to the credit card's they're already providing. 

* Retailers, Merchants

The actual companies where we go and buy stuff. They need equipment to take our money. That might currently be a card reader and soon be a 'mobile phone reader'. They have a merchant account with an acquiring bank which handles the accepting of payments.

For merchants to accept mobile payments, they will need new equipment. If not a cost (when subsidized) this is at least a hassle. But that may very well be worthwhile if it allows the merchant to learn more about their customers, and if they gain new marketing tools (think coupons).

Another advantage could be speed when mobile payments are processed quicker than card-swipe payments.

* Technology providers

Where there's new technology with the potential to handle trillions of dollars in transactions, established and new technology providers line up to get some piece of that market. This only works for them if they partner with some of the other companies mentioned above. 

* Trusted Service Managers

Are companies which helps to make the payment scheme secure but do not participate in actual transactions. The idea of the TSM is that it will free up the service providers and the operators from individual contracts, but also conflicts of interest over control over services.

technology

New payment technologies are required for us to be able to pay with our phones. The idea is that we can leave all payment cards at home (or throw them out). So when we are in a store or coffee shop, and we do want to pay with our mobile phones, somehow the phone needs to connect with the merchant's 'Point of Sale' equipment.

Basically this can be done directly or indirectly. Directly means the phone is held close to another device in the store, where they connect and exchange information. An example of this type of technology is NFC which stands for 'Near Field Communication'. It's a little chip that could be implemented in a phone (currently only the Nexus S) or as a tag on the phone, which communicates with another device in the range of a few centimeters.

If this NFC chip is loaded with the same info that's on your current credit card, holding your NFC phone close to a reader is like swiping your credit card.

With indirect technologies the phone communicates with a server, which in turn communicates with the merchant. Take SMS for example. You might text a confirmation of a payment while in a store. The mobile network operator could operate this service and send a confirmation to the merchant.

A more modern approach would be to install an application on the phone which talks to a server over wifi or 3g. The server processes the transaction and confirms this to the merchant.

what's going on?

So what are examples of recent solutions and collaborations?

* Square is a new company which takes an interesting, somewhat alternative approach.

They focus on small business in the US by providing magnetic card readers for free. These (square shaped) readers can be attached to iPhones and iPads. An iPhone with a Square card reader becomes a 'Point of Sale' - any small business or even consumer can start accepting card payments.

How is this a mobile payment, if the old fashioned card is still used? It's not.

But Square takes it one step further. Whenever a payment is done, the customer has the option to give her email address to the merchant. The merchant can now send the receipt over email. But that email also contains the link to the Square App. If the customer installs this app on her phone, from now on she can pay with this app instead of with her card. Now it's a proper mobile payment solution.

* Google Wallet is a collaboration between Google (Technology provider), MasterCard (Payment processor), Sprint (Mobile network operator), Citigroup (Card Issuer) and First Data (Trusted Service Manager). 

They use NFC as the technology. Citi issues MasterCard cards which work with Google Wallet. First Data provisions the mobile wallets with the card information. Sprint is included because they make the Nexus S phone with NFC capability available for use on their network.

* Isis started out as a collaboration between AT&T, Verizon and T-Mobile - all mobile network operators.

They've changed business models a few times. Just this week a deal was announced with payment networks American Express, MasterCard, Visa and Discover. With that apparently Isis has scaled back its own role, opening up its architecture, hoping to gain acceptance faster. Isis uses NFC technology as well.

but wait - there's more!

There are many more companies working hard on mobile payment solutions, too many to cover in an introduction. Some examples for further reading: FaceCashIntuit GoPayment, Serve and VeriFone PAYWare mobile.

Also there's lots more to be said about regional differences, regulation, politics, peer-to-peer currency (BitCoin), etc. But, like me, you'll have to read up on that elsewhere if interested.

Most important and yet unanswered question remains: will customers see enough value in mobile payments to switch?

It will have to be about convenience. Being able to leave a small plastic card at home is not enough. There has to be additional value and currently it seems that will be provided by targeted offers and coupons.

That's exactly where service providers can make their money in the future as well. It's telling that Google doesn't take a cut of the transaction fees with Google Wallet. The transaction data it will get and the opportunity to allow for targeted offers must be valuable enough to warrant the big investments Google is making.

We're only at the beginning of a massive global battle for mobile payment market share. Giant companies are taking positions, collaborating with or confronting other giants. Small startups are getting huge investments or are failing already. In the next few years we'll see how it works out!