Ah, September! It’s the beginning of fall: back to school, football, sweaters here in Boston, and now apparently, the race to the physical point of sale – mobile payments style. PayPal let the world in on its mobile payments vision two weeks ago at an invitation-only forum in Rancho Palos Verdes, Calif. Google launched its mobile payments scheme for real (sort of) a week later in San Francisco. Their approaches couldn’t be more different, in spite of sharing the mobile phone as the enabler of the experience for merchant and consumer.
By now, I am sure that everyone has read up on what PayPal is doing, so I won’t lay it all out here. Suffice it to say that they have channeled their inner John Donahoe, who has been reported as saying NFC really stands for “not for commerce.” There is nary an NFC element to be found in their solution. What can be found is a series of clever experiences that leverage PayPal’s core assets – namely, its digital wallet – to deliver a frictionless experience for merchant and consumer: cardless (phone number + PIN), card (but PayPal branded + PIN) and line-busting options that enable bar code scanning and checkout in aisle. As everyone knows, Google’s mobile wallet solution is NFC-enabled and leverages MasterCard’s PayPass (and soon Visa payWave) capabilities at merchant POS that take contactless (more on this later).
The blogosphere is filled with comparisons of one over the other, so I’ll not do that here. I’d like to pull back though and focus on the bigger question of how the transition to mobile payments will be won in the United States and who is best positioned to pull it off. Having PayPal’s vision freshly revealed to the public makes that discussion much less hypothetical at this point. (Related: PayPal President Reveals Plans to “Free You From the Cash Register”)
Let’s start with the basic fact of the matter. Solving for mobile payments in the United States means dealing with a complicated chicken-and-egg problem: consumers with mobile devices that can talk to compatible merchant POS devices. In the United States at least, that also means improving the experience that exists today for both merchants and consumers (or at least not making it seem like either party has to take giant steps backwards just to enable a mobile payments experience). The little complication is that the industry, at least in the United States, has spent the last four decades perfecting the experience at point of sale so that whipping out a card to pay for stuff works easily, safely and quickly for both consumers and merchants. Making the move to something new then means convincing consumers that they’re not losing anything either (as in being able to use their preferred payment type at their favorite merchants, safely and quickly) but that they might even gain some extra-special goodies along the way (offers from merchants that are much easier to get and redeem since they are on the phone). At the same time, merchants have to be convinced that this new consumer experience will drive more spend – maybe even more incremental customers and spend – and that the cost of accepting something new (technology and/or tender type) won’t cost them an arm and a leg.
So, that means that anyone with aspirations of playing to win in the mobile payments space has to successfully solve the simultaneous equations of consumers and merchants (enough of each to matter), tender types accepted by consumers, the technology solution that enables acceptance today and projected time to ramp in order to get critical mass, and the value-add that makes the trade off to something new worth making for both consumers and merchants.
In my mind, what really makes the discussion now of mobile payments at the point of sale so interesting is that no one has successfully solved those equations and are all approaching its resolution in very different ways.
Let’s take quick look at Google and PayPal from the standpoint of who has what and how that may influence their future (and ours) in this space. Today, I’m going to give you my thoughts on PayPal.
Consumers: On the consumer side, they certainly have a decent start. They have 100 million active registered accounts in total worldwide and say they are adding about 1 million more every month. As I’ve written before, that means that they have a lot of digital wallets that could be used at merchant locations right out of the gate. They’ve also seen the number of their transactions driven by the mobile phone exceed even their most aggressive estimates lately – some $3 billion by the end of the 2011, which suggests that people are using PayPal now to transact via mobile phones. They also scored very high in the “mobile payments are secure” category. [See my prior writings on this subject.] That’s all important since a lot of the concern that consumers have today about using their phones to pay is that the experience is that it is not secure.
Merchants: Well, that’s another matter. Their penetration at major merchants online is still very low. This is due to pushback over merchant fees, the challenges of getting into the merchants’ technology queue and the reality that probably not many sales are being lost at major merchants, because PayPal is not accepted. On the other hand, PayPal’s Bill Me Later acquisition gives them access to some primo multichannel merchants who might be game to try a mobile POS experience. Stats shared in a recent interview with STORES magazine report that PayPal drove $56 billion in payments for retailers in 2010, which is up significantly (42 percent) from a year earlier suggesting that (a) the picture is improving, but (b) there is still a lot of work to be done on the merchant acceptance side of the equation. That is perhaps the biggest challenge, not to mention getting merchants to change anything whatsoever at the POS (especially in this economic environment) without the prospect of a big return and soon.
Preferred/accepted tender type: It is reported that PayPal is the second most popular way to pay online (after Visa) in the United States, so consumers like using it and trust it. That should scare the living daylights out of MasterCard and AmEx but probably Visa, too. Limitations, as stated above, are places to use it online and obviously offline. The important point here is that consumers already have their digital wallets and know how to use them. And their solution is not operator or handset dependent.
Technology and ramp time: This is where it could get interesting. From what has been revealed so far, it appears that the heavy lift is in the cloud, via IP-enabled devices that may not entirely solve the technology queue problem but doesn’t involve the installation of new gear at the POS either. Leveraging their existing devices and enabling new ones, like tablets, are far less cumbersome for the merchant. At least one of their solutions does not require any more than a phone number and a PIN to work, and others leverage the devices that most people carry around today or soon will – smartphones and those that merchants already have on their counters. The card solution, which reminds me of the Revolution Money proposition (anonymous mag stripe card), would require a channel strategy of some kind to get distribution. So, it seems more of a slog (but presumably one that Don Kingsborough’s experience at Blackhawk might help them remedy). That said, it strikes me that the ramp time to enable merchants for any of these solutions is much faster, since it is less about hardware refresh cycles and big budget line items at multiple national locations and much more about integration with POS software in the cloud that can be activated at the POS in a much less intrusive way.
Value Add: PayPal has a bunch of assets that enable it to play as well as anyone in the deal space- driving geo-targeted deals, serving up coupons/info/price comparisons/discounts based on items in the basket or seen elsewhere, etc. Where things could get interesting is the notion of extending instant credit based on customer profile and items being purchased via their BML capabilities and primo risk management infrastructure.
Bottom line: Theirs is a versatile approach to solving POS acceptance for consumers and merchants, leveraging what consumers and merchants have available to use today, including 100 million (and growing) populated wallets. Their solutions are also handset and carrier agnostic, which is a big plus. There are already too many moving parts in the mobile payments space to orchestrate. Eliminating this one is pretty huge. All that said, the big gap to fill for PayPal is on the merchant side, which is not insignificant and is also quite tied to the business model that will underpin these solutions. And we will all have to watch and see how they get merchants on board: will they focus on the big guys or leverage their DNA in the small merchant category and enable those “main street” merchants and others who drive everyday spend?
Come back tomorrow for how I’m handicapping Google.
Karen Webster is the CEO of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.