September 9, 2013 – Mobile Payments: From Cards, to Smartphones and the Cloud
After years of false starts, mobile payments are finally beginning to surmount the vested and conflicting interests of device platforms, wireless operators, and existing payments players to gain traction with merchants and consumers. These initiatives focus on the point of sale (POS) experience, simplifying checkout and/or integrating payments with merchant customer affinity programs. Most use near field communications (NFC) technology to connect and credit cards to fund, and will gain as merchants upgrade to NFC-equipped POS terminals to meet Visa’s 2014 PIN deadline. However, high carrier fees for NFC security and Apple’s refusal to support the standard remain obstacles. Longer term, we believe solutions that handle transactions in the cloud, and that tie payments with broader merchandising solutions and consumer e-wallets offer significant advantages – lower costs, superior convenience, closer relationships, more powerful marketing, and tighter security – vs. device-based NFC approaches. Moreover, as consumers gain comfort with mobile payments, on-line players and more sophisticated merchants/merchant consortiums may move to reduce high credit card fees via ACH bank funding, co-branded credit relationships, or taking credit risk directly. In the TMT sector, POS terminal vendor PAY and restaurant vertical solution OPEN should benefit in the near term, while GOOG and AMZN are positioned to lead as the opportunity shifts to the cloud.
Mobile payments adoption has been slow. The idea of using mobile phones for payment has been in play for years, but the conflicting interests of the many stakeholders have yielded substantial obstacles to adoption. Credit card nets and wireless carriers have used oligopoly power to demand substantial fees and a starring role in early initiatives. Merchants have been slow to upgrade to the NFC capable POS terminals needed for many solutions, while Apple has, thus far, refused to support NFC in the iPhone. Consumers appear to have little awareness of mobile payments solutions, and early implantations have offered little incentive to change their behavior at POS.
Conditions may finally be ripe for acceptance. Visa has mandated that its merchants install new POS terminals by 12/31/14 to comply with its PIN security requirements, or face liability for fraud. Most of these terminals will also be NFC (Near Field Communications) capable, and thus, able to support many mobile payments initiatives as well. At the same time, the share growth of Android smartphones, most of which support NFC, at the expense of the iPhone, which does not, increases the addressable market. Forward thinking merchants, like Starbucks, are tying mobile payments to more comprehensive customer affinity programs, giving consumers greater incentive to participate.
NFC solutions are first, but cloud-based solutions will win. NFC solutions, such as Visa’s V.Me, Mastercard’s PayPass, and the AT&T/Verizon joint venture Isis, store data on a SIM card to manage security. This approach is expedient, but flawed. Wireless carriers can leverage their control of the SIM to demand fees, and the solution is tied to a single device. In contrast, payments systems that are secured in the cloud, can be available from any device, can be a common platform for on-line and POS transactions, and can be integrated into broader merchandizing solutions – e.g. linking advertising or promotions to single click checkout. In this, consumers can maintain a truly comprehensive e-wallet tied to an array of value-added merchant services (order ahead, no-wait automatic checkout, personalized price promotion, loyalty incentives, etc.), while merchants can efficiently find customers, build better relationships and reduce purchasing friction. Moreover, these cloud-administered payments solutions make carrier fees unnecessary, and could increase leverage on credit card nets.
Big cloud players will battle big merchants/consortia for dominance. Companies with significant consumer cloud franchises have important advantages in the long run competition for electronic payments. First, there are significant functional synergies with on-line advertising, e-commerce, messaging, product search, media streaming, application hosting, and other cloud businesses. Second, big cloud players can leverage considerable economies of scale in brand reach, data processing infrastructure, and cash resources that give them advantage over all but the largest merchants and consortia. Third, web platforms have detailed profiles on hundreds of millions of regular visitors and unmatched ability to analyze and exploit that data to the benefit of merchants, their own franchises and consumers. Fourth, big on-line companies do not have to make money from payments – advertising and other merchandising revenues, hosting agreements and direct e-commerce sales would see positive effects from an integrated cloud payments platform. Finally, mobile platform owners – Google, Apple and Microsoft – can integrate their own payments apps directly into the operating software, offering unmatched convenience to users vs. 3rd party solutions.
The final step: displacing credit cards. Cash and checks were 70% of all US consumer transactions in 2000, a percentage that dropped to 43% by 2010, almost entirely to the benefit of credit cards. Under the domination by Visa and MasterCard, credit card interchange fees have risen to 2% of the value of transactions with merchants nearly powerless to say no. The credit card nets are pressing their hegemony toward the nascent mobile payments market, and thus far, all major initiatives have included them as means of funding the mobile payments system. Still, as consumers grow more accustomed to cloud-based payments and consolidate more transactions, users could be given incentive to fund their e-wallets with direct ACH bank transfers, cutting the card nets and their fees out of the equation. More aggressive players could look to offer credit as well, partnering with, acquiring or even launching a bank.
Winners may be different in 4-5 years. NFC solutions are set to win in the near term, credit card nets (V, MC, AMEX), wireless carriers (T, VZ), first movers (OPEN, EBAY) and POS terminal vendors, (PAY, NCR). Of these, we believe Verifone and Open Table are the best plays on mobile payments. Longer term, the growth of integrated cloud-based e-wallet solutions that enable more sophisticated merchandising (AMZN, GOOG, AAPL, EBAY) will crowd out more narrow device specific solutions. Here, we see Amazon and Google as far better positioned than their rivals, due to the strength of their cloud franchise, consumer reach and technology capabilities.
For our full research notes, please visit our published research site.