Judging by the breathy press reports yesterday of the new, sort of, kind of, maybe joint venture between mobile behemoths AT&T and Verizon (with T-Mobile in the mix too) MasterCard and Visa are sitting around conference tables today white-knuckle-gripping their blackberries and iPhones. Bloomberg first broke the story that these carriers were teaming up with card network laggard Discover and Barclay’s, a big worldwide bank with a small US footprint, to take on the big guys. The plan is to turn the smart phone into a contactless debit and credit card killer. Discover would run the transactions over its network and Barclay’s would manage the accounts.
Details were sketchy so we will need to wait for more of them to really know what this is all about. Based on what I know, I have two observations. First, as I have been saying for about the last 18 months I’m a firm believer that smart phones will eventually become the main way to pay at the point of sale. Second, that we’ll see a lot of shipwrecks on the way to this destination. This purported match up sounds destined for the ocean floor to me. Here’s why.
Most joint ventures fail because the partners can’t agree on things. If they actually get to signing on the dotted line—the article suggests they have since they are in search for a CEO—they will have gotten farther than Simpay, the proposed mobile carrier payment JV that cratered in Europe in 2005. Starting a new payment system is hard enough without having to get AT&T, Verizon and Discover to agree with each other.
Then there’s the contactless smart phone angle which who knows how many wet-behind-the-ear entrepreneurs assume is the path to payments Nirvana. In the near term it does not seem likely that pursuing this approach could ignite a new payment system.
The first problem involves the smart phone, the very form factor that this new network has embraced. You, me, and our circle of friends probably all have smart phones and because of that we have a tendency to think most people do. They don’t. This is still is very expensive technology that has a small share of mobile phone subscribers.
The second problem is that merchants just haven’t been interested in installing contactless terminals. One of the articles on the new JV emphasized that there were 140,000 merchant locations that have contactless readers. Wow—140,000. Of course anyone who knows this business knows, to use a highly technical economic term, that represents just about bubkus.
These two problems are interrelated. If more people had smart phones with the new solution and wanted to use it more merchants would install contactless. And if more merchants had contactless maybe more people would go out and get smart phones. The fraction of smartphone users who may adopt this new payments solution isn’t going to be big enough to get merchants to install contactless and the penetration of contactless isn’t large enough to make people want to go to the effort of switching payment methods, especially if it involves buying an expensive new phone. These problems are solvable with money: the JV could subsidize the installation of terminals. If we hear they are prepared to bankroll merchants then that’s a sign they are a contender.
The real test of whether the JV is really serious or just another dopey mobile phone proposal is whether they have a really cool payments solution up their sleeve that adds a lot of value to consumers or merchants. If this is nothing more than you can wave your mobile phone at the checkout counter then it is probably a non-starter. That’s not good enough to beat the fast swipe and to change habits. But maybe they really do have something that is so compelling people will want to use it. After all, many people switched from very reliable mobile phones with long battery lives to the iPhone that drops calls just about every five minutes. They got so many other features (most importantly the app store) that they were willing to tolerate a lousier phone experience. As this mobile payments joint venture makes further announcements which aren’t filtered through the gullible media we may all learn that these companies have developed a very compelling solution.
For now, though, the announcement of this JV doesn’t pass my five screening rules for identifying ventures that could go somewhere from those that can’t. Investors in payments companies should be looking, in particular, for whether they have come up with an offering that is a lot better than swiping a card and whether they have a plausible ignition strategy for getting a critical mass of consumers and merchants on board.
In the meantime, while there are many reasons why the folks at MasterCard and Visa may not be sleeping well at night, this hookup of rivals AT&T and Verizon with Discover and Barclays shouldn’t be one of them.
David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework® , a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More