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Commentary » PYMNTS Voice
Apple started some tongues a’waggin’ about two weeks ago when reports of its contactless patent filing were released. Is Apple getting ready to enable its users to pay with their iPhones at the point-of-sale? Is this the first step in empowering their 110 million iTunes users to start paying for things not-Apple? Or, is it ho hum, companies file patents all the time and hardly anything happens with any of them so what’s the big deal?
Of course Apple isn’t the only one playing the iPhone contactless game. Visa just announced that it and Device Fidelity are going to collaborate and turn iPhone handsets into contactless payment devices.
These efforts come on top of Square: that’s the new iPhone-based system that allows merchants to take cards on their iPhones to sell physical goods. There aren’t any published reports yet, but extrapolating from the number of comments filed about the app and the downloads since its release on May 12, one might surmise that as many as 10k people have downloaded the Square application in less than a week’s time. This strikes me as a pretty good start though the real test is how many merchants sign up for the service and start taking charges.
We’re bound to see more efforts to turn the iPhone into a way for consumers to pay or for merchants to accept. And of course Android isn’t going to be far behind.
The big question is whether these new devices could do what the card networks and their issuers haven’t been able to: persuade merchants to spend the bucks on installing readers at the point-of-sale that take contactless. As our readers have heard from us over many years, the great hopes of contactless have thus far been dashed by the fact that merchants don’t see enough interest on the part of cardholders to make the investment and consumers don’t really see enough benefits from paying with contactless to care much about whether a merchant has contactless or not.
There are few factors now to consider in evaluating whether this could change.
First, most people don’t have a smart phone (75 percent don’t) and only a fraction of those have an iPhone. At the moment there probably aren’t enough people who might want to use these phones at the point-of-sale to get merchants interested.
But that could change quickly. iPhone, Android, and other smart phone sales are exploding. A few years from now it is easy to see that well over half of consumers could have a smart phone and many of these phones would be running the kinds of cool apps that were first developed for the iPhone. It is also important to keep in mind that these users may have an intense desire to use their clever apps to pay and contactless may be what they need to do that. Contactless cards didn’t catch on because consumers didn’t care about them (at least not enough). I’d expect smartphone users to be at lot more enthusiastic. It doesn’t take a large fraction of interested users to get merchants to pay attention to them—we think the magic number is around 5-10%.
If anything is going to get contactless ignited this could well be it.
Second, smart phones are so smart that they may not need contactless. This is a point that we’ve been making for a long time. Contactless seemed like the great technology hope many years ago. But life—and technology—has moved on. Square isn’t using contactless. It’s relying on the fact that the iPhone/iPad are wireless devices with interactive screens. We think this is big. Smartphones may well become the dominant way people pay (and in some form perhaps even the major device used by merchants to take payments) at the physical point of sale. But that doesn’t mean they have to be contactless. They may provide some other clever interface. Apple’s teaching us to tap, not wave.
And that’s my guess—businesses that are focused on putting contactless in mobile phones are, oh, so last decade. Entrepreneurs should be focused on what value can be delivered to consumers and merchants using the new technologies that have become available.
This brings us back to Apple. This company has the incentive and opportunity to drive mobile phone payments. In addition to the device itself Apple has two major assets. First, more than 110 million iTunes account holders all of whom have wallets populated with a credit card. That’s a base that vies with PayPal, but unlike PayPal Apple has a great offline delivery mechanism. Second, Apple has thousands of entrepreneurs who are trying to figure out creative ways to incorporate payment functionality and features into iPhones. It is simply unpredictable what they will do. But what is predictable is they will come up with lots of ideas no one at major payment players have thought about. The combination of these two assets - together with the iPhone customer base - can make Apple a significant player in the payments space.
And, Apple has strong incentives to do this. Think about it: if iPhones could become a highly useful tool for paying for things in the physical world that would vastly expand iPhone sales; then there are the sales of related devices like the iPad to merchants. If that’s not enough there’s also the possibility that Apple could control the wallet for these phones and extract a small fee for managing that wallet—as we know in payments small transaction fees times billions of transaction adds up.
Conclusion: if you are in payments you should watch Apple, but don’t think it is all about contactless.
There’s a feud taking place on Facebook. And, it’s about money. And, like most feuds over money, it’s about who pays whom and how much. And, just like the Hatfields and McCoys, the party that fired the first shot may have aimed at the wrong target and for all the wrong reasons.
You may have read over the last week about two decisions that Facebook made recently and that were directed to Zynga, which developed the popular Farmville game. These decisions were to (1) limit the number of notifications that can be disseminated about Farmville activities via the status updates, and (2) to force Farmville farmers to use Facebook’s payment method to buy stuff for their virtual farms.
The first is controversial given Zynga’s stature as one of Facebook’s biggest advertisers, spending tens of millions last year to drive more farmers to Farmville. As a non-Farmville fan, I secretly applauded this move by Facebook since I was getting pretty tired of having my news feed constantly co-opted by friends’ Farmville updates (I don’t play and never have tried.) But, setting aside my personal bias, Facebook has grown its business because it has been able to attract developers who want to leverage its awesome social graph. It touts, as a selling point, its power to drive messages virally and with great velocity. The notion now that developers have embraced the platform, only now to have Facebook limit how viral applications can become in order to drive their advertising revenues higher seems pretty short-sighted.
It’s the second decision related to payments that I think is the most interesting and potentially the most problematic, but not for Zynga. Facebook wants Farmville farmers to use Facebook Credits exclusively since it wants to charge Zynga a 30% fee for the revenue that flows through Credits. I get that Facebook wants to drive adoption and usage of their payment product. And, when drawn on a whiteboard and subsequently put in a powerpoint deck, the notion of picking one of the most popular applications on their platform as a strategy to make that happen probably seemed logical. But, as many a failed payments company will attest, adoption and usage of new payments products doesn’t happen because someone decides to force it, and especially when the one doing the forcing has picked the wrong side of the platform to strong-arm.
Let’s look at the Facebook payments ecosystem for a minute as it relates to Zynga. There are Farmville fans, who play the game on Facebook and who want to keep their farms pretty and buy stuff to do that. We have Zynga that has created Farmville, and has brought to Facebook a huge base of people now who play the game on Facebook and because they are on Facebook, are available for Facebook to monetize in many other ways, like selling advertising to merchants who want to reach these people and enticing Farmville farmers and their friends to buy other things that are for sale on the site. In fact, Zynga’s games brought with it more than 80 million monthly active users. This was, until recently, a happy little ecosystem. Everybody got something of value.
Now, Farmville farm owners have to establish a Facebook Credits account if they don’t want their artichokes to wither and die. That means that they have to move away from whatever they are doing now and do something they have never done before – create a new account. Some people will probably be okay with doing that but some people might chose not to, for a lot of reasons, including privacy and security. That means that Zynga will lose customers at the same time they are being told to pay up on the advertising side and to pay up on the payments side. In platform speak, this has the potential to become a death spiral, where customers leave, and then their friends who used to plow their fields leave, and then more people leave, and soon, everybody loses, including Facebook.
As I said, I get that Facebook wants to monetize payments on their platform. Who doesn’t? But I don’t understand this strategy. These two decisions have managed to alienate one of their customers – Zynga – and has the potential to alienate their other customer – the Farmville farmer and their friends. The offline analog here is a mall owner telling their store tenants that their customers can only use wampum to buy the stuff that they sell in their stores. And, that they’ll take a third of their revenue. And, that this decision gets a couple of years into the lease period without any prior warning. All of a sudden, customers that were used to using money to pay for things now have to go find wapum, or more likely, find stores that still accept money since that is what they have and that is what is accepted everywhere else they like to shop. Playing this out, it’s not hard to see how the mall owner loses in the end since customers find other places to shop. Stores, logically, follow customers as soon as they can exit – and those who can’t go belly up. The mall loses because stores and customers will find each other again in a more convenient platform where the transactions costs are not as high for either side.
So, I think this is a risky move for Facebook to make. There’s talk that Zynga is looking to create its own gaming social network which doesn’t seem all that far-fetched given the network they have built and the affinity that people have to the game. They just might be able to pull that off. The big question for Facebook is how many developers, entrepreneurs, and merchants - all important customers of their platform, are now looking at this decision and making new plans. We won’t know for a while. What we do know is that we’ve seen this movie on social networks before. The first movie was titled Friendster, the second was MySpace.
2012 ach acquisition ad-supported advertising africa akerlof alternative payment alternative payments amazon amazon fps american express amex android api apis apple application applications at&t atm authentication automated clearing house b2b b2bsynergy banking bank of america barclays behavioral economics big bank excuse billmelater bing blackberry bling nation bloomberg bob dole braintree brian burnseed business business week business wire c$ cmoney capgemini capital markets summit card act cardholders card issuer card issuers card issuing card network card networks card reform cards carte blanche cartes & identification 2010 cash cass sunstein catalyst code catalysts cfpa cfpa act chase check card checks chicken-and-egg china china union pay cloud computing code commerce compliance congress consolidation consumer consumer financial protection agency consumer financial protection board consumer loyalty consumer payments research center consumers contactless contactless cards contactless payments corduro credit credit card credit card networks credit cards ctia cup cybersource dan ariely daniel read data center david evans david s. evans debit debit card debit cards decoupled developer developers development device fidelity dick schmalensee digital media diners club discover disruptive disruptive technology dodd droid durbin durbin amendment e-commerce e-payment e-wallets ebay ebillme ecommerce economics economists economy eft electronic commerce electronic payments element payment services elizabeth warren encryption epayment epayments evans facebok facebook facebook commerce farmville federal reserve fees financial financial reform finovate firefox foreign networks frank frank parry futures g-cash gaming gao general accountability office gift google google checkout google wallet gopayment greatest developments groupon guest payments hagiu healthcare holiday hyperbolic discounting ibm icbc ignition ignition series ignition strategy innovation interchange international telecommunications union internet internet-based intuit invisible engines ip commerce ipcommerce iphone iphones ipo isis issuer jack dorsey jason diaz jcb international jibun bank john donohue joshua wright journal jp morgan justin fox karen webster kathy miller kenya law lending linkedin loyalty m-commerce m-pesa magnetic strip mag stripe magtek making credit safer manhattan mara airolki margaret weichert market platform dynamics mastercard mcommerce merchant merchants merger meters microsoft mit mobile mobile apps mobile banking mobile money mobile payments mobile wallet money transfer more than money mtn myspace national payment card near field communications network networks new businesses new business models newspaper publishing newspapers new york city new york times nfc nilson non-cash obama obopay oliver williamson online banking open platforms other p2p paas patrick gauthier payment payment card payment cards payment engine payment networks payments payments innovation paypal paypal here paypalx paypal x payroll paysimple payvment payware pci pci ssc peter guidi philippines pin platform platforms policy pos prepaid processing psychology pts publishing pymnts quattro reform regulation related publications retail revolution money richard thaler roam data ronald coase saas safaricom schiller schmalensee screening rules sdk search security senator durbin serve shane frederick shopping small business smart-phones smartphone smartphones social social commerce social network social networks software square standards start-up startup startup strategy strategy survey of consumer payment choice swipe fee target taxi taxipass taztag techcrunch technology the payments authority tim attinger traffic transaction costs transactions tsys twitter two-sided market two-sided platforms u.s. bank u.s. chamber of commerce user behavior validation verifone verizon virtual currency visa vivotech vodafone wall street wamu warren buffett washinton web 2.0 wells fargo western union windows wright wsj yahoo yes bank youtube zoompass zynga