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The Age of Mobile Payments is Upon Us

June 22, 2011


Mobile phone customers in developing countries have for years used that technology as a way to make financial transactions. I first started writing on that subject back in 2007 (see my post entitled Relief, Development, and the Digital Divide). From the number of recent articles that have been written on the subject of mobile payments and mobile point of sale (POS) devices, I can only conclude that the age of mobile payments is upon us. For example, Robin Sidel and Amir Efrati recently reported, “Three of the nation’s largest banks are racing into the growing battle over how consumers move money and make payments, launching a service … that lets people use their checking accounts to send each other money with an email address or cellphone number.” [“Big Banks Join Battle for Online Payments,” The Wall Street Journal, 25 May 2011] Sidel and Efrati continue:

“Banks are looking to hold onto their influence over consumers, who are increasingly shunning checks and cash, turning instead to new nonbank technologies to spend their money. The new service from Bank of America Corp., Wells Fargo & Co. and J.P. Morgan Chase & Co. takes aim at the popular PayPal offering. At stake are billions of dollars in credit-card, overdraft and checking fees each year. ‘Customers want to move payments from paper to electronic methods, so if we can meet our customers’ financial needs, they will be better customers with us,’ said Mike Kennedy, who develops payment strategies at San Francisco-based Wells Fargo and is chairman of the new venture.”

Sidel and Efrati assert that big banks, and organizations like Google, “are trying to encroach on the dominance of eBay Inc.’s PayPal unit, the market leader for electronic-based payments. Revenues of the unit have tripled since 2005 and now account for one-third of Ebay’s operating profit.” They insist this is good news for consumers since it means “that Americans will soon have an unprecedented number of payment options that could further reduce the use of traditional methods.” Sidel and Efrati note that the new bank venture comes with some inherent risks for participating financial institutions. They explain:

“The banks’ new service, which other financial institutions will be able to join later, carries some financial risk for them. Although it is being aimed at person-to-person payments, owners of small or medium-size businesses could potentially ask customers to pay for goods and services by sending money directly from their online accounts. That could let merchants skirt the fees they now pay banks for processing debit and credit cards.”

Google’s efforts to get into the mobile payment business focus on a technology called “near field communication [NFC], which is embedded in newer smartphones powered by Google’s Android software and that can help turn the devices into a kind of electronic wallet.” [“Google to Unveil Mobile Payments Platform,” by Robin Sidel and Amir Efrati, The Wall Street Journal, 25 May 2011] The new Google offerings are called “Google Wallet and Google Offers.” [“Google Unveils Smartphone ‘Wallet’,” by Roger Cheng, The Wall Street Journal, 26 March 2011] Cheng reports:

“Google said its Wallet service is free to use and it will make money from the Offers side, which acts like Groupon Inc., taking a cut from consumers who redeem coupons. The company also plans to use location and transaction data to provide targeted offers to customers who opt in. Google will also act as the merchant of record for the promotions it will offer through the phone, taking a cut from those transactions, according to Stephanie Tilenius, Google’s vice president of commerce.”

Sidel and Efrati report that “the program will launch first in New York, San Francisco, and potentially other locations, followed by a broader rollout, said a person familiar with the matter. Participating retailers include Macy’s Inc., American Eagle Outfitters Inc. and the Subway fast-food chain, said a person familiar with the matter. Retailers that participate in the program will have upgraded terminals at the point of sale that can read the mobile devices and provide special offers.” The drawback of NFC for brick-and-mortar merchants is that they must “upgrade or buy and install new equipment from companies like ViVOtech Inc. that costs $100 to $350.” Nevertheless, NFC technology may take hold because it has other uses beyond making financial transactions. Sidel and Efrati explain:

“Many credit card readers allow people to pay or redeem digital coupons by tapping their credit or debit card, but newer ones built by those companies also let people pay through NFC, including by tapping or waving their smartphones. The Google payments platform will allow software developers to create mobile applications, or apps, which take advantage of the technology. For Google, the system could help boost its digital advertising business. The planned payment system would allow Google to offer retailers more data about their customers and help the retailers target ads and discount offers to mobile-device users near their stores, these people said. Google, which hopes to sell ads and discount offers to the local merchants, isn’t expected to get a cut of the transaction fees. In addition to receiving targeted ads or discount offers, users could manage credit-card accounts and track spending, loyalty points and other things through applications on their smartphones. Many mobile app developers have said they could use NFC technology in the future. For example, Pageonce Inc., which has a mobile app that lets consumers control their finances and bills after they have connected their bank and credit card accounts to the app, has said it sees NFC as a useful technology for its users. Users who are at a gas station could see that one of their credit cards will give them 5% cash back on their gas purchase. The consumers could choose to pay with that card and swipe their phone next to an NFC-enabled credit card reader, if the gas station has one. Google has already teamed up with smartphone maker Samsung Electronics Co. to embed NFC technology into phones that use Google’s Android software, while other hardware makers have said they would follow.”

According to Sidel and Efrati, Google is partnering with Sprint Nextel Corporation to offer NFC technology as early as next year, which would put the Google/Sprint team ahead of AT&T, Verizon Wireless, and T-Mobile USA in letting “users make payments and redeem offers via their smartphones.” PayPal’s parent company, eBay, isn’t taking all of this activity passively. It sued Google on the same day that Google announced the details of its new services [“Ebay Sues Google Over Mobile-Payments System,” by Ian Sherr and Andrew Morse, The Wall Street Journal, 26 May 2011].


Another entrant in the field is Square Inc. “Square is trying to make wallets obsolete, too, by upending the way that consumers pay for purchases.” [“Payment Method Bypasses the Wallet,” by Claire Cain Miller, The New York Times, 23 May 2011] Miller reports:

“Jack Dorsey, Square’s co-founder and chief executive, announced a way for shoppers to pay by simply giving their name to the merchant. Mr. Dorsey, who also co-founded Twitter, said customers would use a new feature on Square’s iPhone or Android apps, called Card Case, to make payments. Merchants would use one called Register to ring up and track purchases. Using cellphones to ease offline purchases is a crowded corner of tech investment. Most companies are tackling one aspect of purchasing, like mobile payments or coupons. But Mr. Dorsey is thinking big. He wants Square to be involved in every step of the transaction process by replacing cash registers, loyalty cards and paper receipts. ‘We think it should be one system,’ he said.”

Miller notes that Square is likely in for a fight since the companies that make cash registers and POS terminals are not going to fade quietly into the annals of history. The company will also be in competition with other start-ups, “like Foursquare, and competing with Google, Apple, PayPal and major credit card companies and banks to provide mobile payments.” Square’s biggest challenge, however, may be getting customers to trust them. Miller explains:

“A shopper opens the app, which looks like a brown leather wallet, clicks to open a tab at a store and then gives the merchant his or her name. The shopper’s credit card number is already stored with Square. Merchants see a photo of the Square user so they can confirm it is the same person. … Some shoppers said they were uneasy trusting Square with their credit card information when all it takes to pay is a name, not a plastic card. According to Square, the photos and the fact that people can only pay if they and their phones are nearby adds a level of protection. For purchases more than $50, shoppers also have to enter a personal identification number as they do at an automated teller machine.”

Miller reports that Square does not use NFC technology and that “the company most in Square’s sights is Verifone, whose point-of-sale terminals and software are in 70 percent of businesses in the United States.” Miller continues:

“In an interview before Square’s announcement, Doug Bergeron, Verifone’s chief executive, said that Square would not catch on for payments because people will prefer N.F.C. technology and have security concerns about using Square.”

One thing that Square has going for it is the fact that it “already has relationships with hundreds of thousands of businesses such as restaurants, flower shops and hairdressers who accept credit card payments by swiping cards through a small Square reader that attaches to a smartphone or iPad tablet. For the service, Square takes a 2.75% cut of the payment but hopes to eliminate the need for businesses to buy credit-card-reading machines made by companies such as Verifone.” [“Dorsey’s Square Tries to Kill Cash Register; Local Deals Coming,” by Amir Efrati, The Wall Street Journal, 23 May 2011] The one thing that all of these mobile systems have in common is that they will generate mountains of data that can be used to refine marketing and supply chains. Home Depot’s new mobile check-out system is a good case in point.


Home Depot has deployed some 30,000 First Phone handheld, multi-function mobile devices to its 1,970 stores. The company hoped that by introducing the device it could reduce check-out lines. Apparently it is working. Adam Blair reports, “The handhelds have become a well-integrated part of the store environment. The … devices are averaging 100,000 mobile POS [point of sale] transactions per week, significantly speeding up checkouts and boosting customer satisfaction.” [“Home Depot Hits 100,000 Mobile POS Transactions Per Week,” Retail Info Systems News,” 23 May 2011] If those transaction rates hold up, Home Depot could gather data from more than 5 million mobile POS transactions annually. Of course gathering data is a meaningless activity unless it can be analyzed and turned into actionable knowledge. Mobile POS devices will make good business analytic programs even more important.

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