Mobile And Payments: Two Peas In A Pod
by Karen Webster
|ANALYSIS FROM KAREN WEBSTER
|Apple and NFC: Will They Or Won't They?|
|First Network...First Wallet|
September 24, 2012
Ex-Apple exec Ron Johnson unveiled his vision for the transformation of JC Penney and retail last week in Dallas which included, among other things, checkout via mobile in an effort to both reduce costs and improve customer service. Initial enthusiasm turned to “meh” as analysts, at least on that day, felt that JCP’s issues were bigger than presenting consumers with a new way and place to pay. You could tell by reading the comments from the more than 300 media and analysts who were treated to the tour that they had hoped that using mobile technology would be a big leg up for this beleaguered brand. But that was not to be, and the stock price tumbled 7.5 percent that day.
News of JCP’s retail future spawned a number of other stories that same day on mobile retailing and comparisons to Nordstrom, another retailer that made a decision to use mobile technology as a core part of its retail strategy. In May of this year, Nordstrom began a systemic replacement of its existing cash registers with mobile devices in an effort to extend its legendary reputation for customer service to the next level. They claim that by the end of the year, all 6,000-plus mobile POS devices in use at Nordstrom stores today will offer the same level of functionality as its fixed registers, and there will be even more stuff in Q1 2013. Nordstrom’s stock price has climbed about 20 percent since those announcements in May.
Also last week, Groupon unveiled Groupon Payments, a Square-like scheme that merchants can use to accept any credit card transaction, including, of course, those related to its own Daily Deals. Its fees are reported to be the cheapest around. Some in the media have described Groupon Payments as its attempt to become the “operating system for local commerce.” Whatever that means, it seems like a bit of a stretch given the bad taste that Groupon has left with many local merchants. That opinion notwithstanding, analysts praised this move, and Groupon’s shares were up almost 14 percent the day of its announcement.
The day before Groupon’s announcement, at Intuit’s investor day, CEO Brad Smith touted mobile as a key driver for what he described as “Intuit’s transformation.” Smith said that in fiscal year 2012, Intuit earned “$100 million in revenue from products that didn’t exist three years ago,” including revenue from its seven million mobile/GoPayment customers that was said to have contributed $70 million to that total. Intuit’s stock price that day remained largely unchanged that week.
And then on Friday, Ingenico announced a new management lineup and strategy designed to “accelerate the deployment of its growth strategy” by essentially doubling down on mCommerce. In addition to naming a new CEO, it suggested that mobile would be the centerpiece of its strategy worldwide, given customer demand for what it has described as an “anytime, anywhere, anyway” commerce solution. Ingenico’s stock price closed up nearly 1.5 percent that day.
There’s no doubt about it: mobile and payments are like two little peas in the same cozy commerce pod. Thanks to a wave of new technologies and new players who are leveraging the rapid and massive diffusion of these IP-enabled technologies, mobile has become the poster child for the complete reinvention of the “payments at the point of sale” concept. Once a term of art that aptly characterized the “in lane” process for how transactions between merchants and consumers were conducted, today point of sale seems limiting, and even passé. Even more telling, as the news stories last week suggested, the future of the “point of sale” is no longer the domain of the traditional ecosystem players but those whose perspective is technology and innovation first and payments second.
As we’ve also seen in just the last week (and to which Facebook can surely attest), "mobile" has the power to move the market value of companies in one direction or the other. It has become the litmus test for who’s got it and who doesn’t in payments. It’s why everyone who touches payments today, or could in the future, has identified mobile as a threat, an enabler, or a transformational opportunity – or more likely, all of the above.
The mobile commerce space, in truth, is just revving up. The frenzy over mobile and the wave of mobile announcements reminds me a little bit of the heyday of management consulting in the 1990s. Back then, it wasn’t mobile that was the object of desire, it was SAP and ERP software. Like mobile, the demand came from businesses that believed SAP could increase efficiencies and reinvent its business supply chain. Like mobile, everyone and his mother-in-law said that they could implement SAP “the best,” and customers started with the basics – implementing a few modules just to get their feet wet and establish a baseline. Consultants competed like crazy for the business by touting “the right tools, talent and technologies.” Like mobile feels today, the market then felt like it was commoditizing itself every few months since everyone was, more or less, implementing the same core technology and simply implementing the technology was no longer a differentiator for either consulting firms or their clients. Being different meant moving away from the software as a technological capability to software that was wrapped around value-added solutions and capabilities that technology that businesses could use to reinvent themselves.
To me, that sort of feels like where we are with mobile right now. Phase one (and we are still really in it now) was, more or less, about implementing mobile technology. Phase two and beyond will be how to wrap the value add around that mobile technology to, among other things, reinvent the “point of sale.” And with that will come the need to work thru lots of questions and big gnarly issues. Questions related to which technologies will dominate and ultimately become the standard for how mobile is used to enhance the merchant/consumer relationship. Will barcodes become the norm, will NFC emerge or will answer lie in the cloud?
Then, there are questions related to risk and security. Consumers, at least many of them, don’t believe that using their phones to pay at the point of sale is safe even though their transactions are linked to a card account that protects them the very same way in the mobile world that it does today in the physical card world. Are are just too creeped out now about having their payment information sent “over the air” to a terminal via their mobile (data breaches at point of sale using low tech mag stripe cards notwithstanding) just like they were when online shopping was introduced? PayPal stepped in and built its brand on the back of that fear and so did Verisign with its SSL protocol which reassured consumers that the web sites they were transacting with were safe. What is the mobile analog here so that consumers feel comfortable transacting via their mobile phones regardless of which payment method or brand that they are using?
Of course, issues related to new business models are but one of the elephants in the mobile commerce room. New business models that are disintermediating key parts of the payments value chain and making it more efficient (and even less costly) for merchants to implement point of sale innovations. MCX , the new proposed merchant mobile payment system, was borne out of the merchant’s desire to lower interchange fees and control its business model more directly. But consumers don’t even know what interchange is, much less care that merchants pay it. To ignite, MCX needs to have a compelling proposition to the consumer and solve the solve the very same chicken and egg problems that every other payment network faces. . Alternatively, new players are seizing the merchant interchange mantle and packaging mobile payment apps around loyalty propositions. LevelUp’s value proposition to merchants is “zero interchange” and pay for performance on redemption of offers that users accumulate after visiting the merchant. But to remain profitable, that requires that merchants get more new, incremental sales from such an application or else they end up subsidizing existing customers at the expense of their operating margins. So, what changes, if any, to the existing business models are needed to ignite a newly transformed point of sale environment? How important are interchange fees in this new mobile future? If not important (or not available) what then funds consumer incentives to adopt new ways of interacting with merchants? What will merchants be willing to pay for? Is pay for performance the emerging standard or or it is something new that we haven’t thought of yet?
Finally, there are the new players who see the wisdom (and monetization opportunities) associated with using the mobile to capturing the consumer and merchant endpoints and don’t have legacy hardware, software or relationships to get in their way. Square and Apple certainly come to mind here. Apple, though, is who everyone in this business fears most since there is such little known about their plans. Launching the iPhone 5 without NFC wasn’t a surprise but launching it with Passbook and Passbook APIs may provide a glimpse into what their payments ambitions look like. Estimates so far are that 16k Passbook enabled applications will be available to iPhone users in the next few months. Apple’s next move is anyone’s guess but could very well both reinvent and disrupt the existing ecosystem? The big question here is what happens to traditional hardware, software manufacturers, and ISOs in a world where Apple (and players like Apple) leverage what they need (e.g. existing payment rails, for now) and shun what they don’t (e.g. most of the rest of the existing ecosystem).
So, here’s one of the three elephants in the room: interchange fees.
Elephant number three is Apple.
And this is but the tip of the iceberg!
While there is so much that is still a bit fuzzy, one thing is clear. Mobile provides everyone in the ecosystem the capability to move the commerce process closer to the end customer. , The “anytime, anywhere, anyway” mantra that is at the core of the mobile commerce proposition that most are chasing, is, exciting but for now an aspirational goal. . The transformation that mobile is enabling truly has the potential to make the commerce experience richer and more relevant for the two big stakeholders that are at the heart of it all – the consumer and the merchant.
There’s a lot of work that has to happen to operationalize this vision and to realize its full potential. Along the way, business processes will likely be reshaped and new expectations set for what the “point of sale” experience will become. And, traditional players will be disintermediated, others will be transformed and new ones will enter the mix. For sure, decisions about that experience won’t be limited by what device is on the counter, what form factor is used to conduct the transaction or even what brand that form factor (or lack thereof) carries.