As we’ve embarked on our Movenbank project, we’ve had a lot of people express concerns about our choice to be completely cardless and go with NFC and various other P2P solutions. There’s also often raised questions over which handset platform to support, which devices are certified, the lack of real NFC standards, how to enable the secure component on the various cellular networks and so forth? To a novice this all sounds very complex? Shouldn’t we worry about adoption rates? When will mobile hit critical mass? ISYS versus Google Wallet versus Visa’s play versus PayPal, etc, etc.
There are those that will tell you it will be many years before mobile payments is mainstream. You’ll hear figures like 2014, 2016 or even later bandied around as to when mobile payments will hit mass adoption. However, I believe the primary measure to focus on when looking at these sorts of predictions is first and foremost exhibited customer behavior – the predilection to a shift in the way they pay, bank, purchase or shop. If you look at consumer behavior, the story is very simple. The great mass is not only ready for mobile payments, they are racing towards it as fast as they can whenever the opportunity presents itself.
When will Mobile Payments be mainstream?
That’s a question that at worst shows ignorance, or at best a pigeon-holing of mobile payments into a single category around POS-only interactions. I’d strongly argue that mobile payments are already mainstream. Ask yourself this; what constitutes a mobile payment? Surely a mobile payment is simply a payment made from or via a mobile phone.
By that measure alone, anyone who has a smartphone and who has bought an “App” or downloaded digital content via their phone, is already in the habit of making regular mobile payments. 25 Billion Apps were downloaded in 2011 on the Android and iOs platforms, a 300% increase from 2010. In the US that represents 44% of the population, with the 50% tipping point estimated for the first half of 2012.
In reality, 67% of consumers flagged their intention to make a mobile purchase of real world goods and services in 2011 (source: PayPal), and we have hard data to show that 47% used their smartphone to make a purchase in December, 2011 alone (digital content such as songs/music, eBooks, ringtones, images, movies, TV shows, etc being the most common purchase.)
Here are some common mobile payment methods that are off-the-chart successful today:
PayPal – In 2009 PayPal processed just $141 million in mobile payments. However, last year that jumped to a whopping $4Bn, and PayPal projected that will increase to $7Bn in 2012 – a figure many consider conservative. PayPal classifies a mobile payment simply as a payment across their network from one party to another, however, by attacking the mode of payment, PayPal has created an electronic payment method that is both simpler and cheaper than ACH and Wire transfers offered by banks – the only viable bank alternative to checks.
Starbucks – In just over 1 year, the Starbucks Mobile App accounted for 1/4th of all Starbucks purchases in-store across North America. That’s 26 million mobile transactions, and the usage of the Mobile App has doubled in the last 12 months on a run-rate basis going from 1.4 million transactions per month in January 2011 to 2.9 million transactions per month last December. Remember, this payment method didn’t exist a year ago, but today 25% of all in-store payments are made via a mobile phone. If you’re prepared to argue that 25% of Starbucks’ customer base doesn’t represent mass adoption or mass consumer acceptance – I think you’re very brave, or just plain crazy.
Square – Both the Obama and Romney campaigns are using Square to take campaign contributions in the lead up to the 2012 elections. Square, which launched in May 2010, has more than 1 million merchants using their App to take payments on mobile smartphones. Considering that there are only 8 million merchants in the US, that means that 12.5% of merchants in the US use a mobile smartphone to take credit card payments – that’s in the space of less than 2 years. Now you might argue that Square is not a “real” mobile payment because plastic is still involved – but think back to my assertion about changing behavior. Once I’m using my phone to accept a ‘swipe’ what happens when I no longer need you to swipe, but instead just tap your phone, give me your phone number or use some other ‘cardless’ methodology (Square’s is called CardCase) to pay. There’s now no barrier to entry as you already own the infrastructure – i.e. you don’t need a POS terminal and a hard line.
Dwolla – Unlike Square and PayPal, Dwolla works completely independently of the existing payment networks beyond cash-in and cash-out functionality. Dwolla’s main strategy is to attack the current transaction costs of moving money around. If a transaction is under $10 the transfer (or payment) is free, if over $10, there is a capped $0.25 fee. Dwolla has around 70,000 customers today (including 5,000 merchants or retailers) and they process around $1m a day through their network. Dwolla argues that their network is safer for consumers and merchants alike because it doesn’t send sensitive credit card details across the network, just a secure ID and the transaction details. Dwolla is more than a payment network, however, because it (like PayPal) stores your balance in your account – it is a proxy for a debit card with none of the fees, and none of the card fraud risks. The majority of it’s payments are transacted through Dwolla’s mobile app.
Core payments behavior has already shifted
This is what Visa and Mastercard already know. Mobile payments and the behaviour required to drive mobile payment adoption is already widespread. The mass market loves the ease of use and modality of a mobile payment compared with plastic, cash and cheques. While debit card usage is growing, check usage is rapidly declining and cash usage is declining in most developed economies. In the US, prepaid debit cards were the fastest growing form of electronic payment in 2011. Combine prepaid debit cards and smartphones that allow you to pay at the point-of-sale (with NFC or some other cardless method) and you have the perfect storm for disruption.
In the last 12 months, Visa and Mastercard have both been accelerating their move to replace all the existing merchant POS units with PCI-compliant alternatives that also facilitate NFC mobile payments. What Visa and Mastercard realize is that If they don’t push NFC as if their very life depended on it, with the mobile quickly becoming the dominant payment device, payments will shift away to alternative ‘network’ rails. The only way to ensure their current payment networks stay a part of the mix, is to ensure they can support the behavioral shift to mobile (regardless of whether that is NFC or some other solution.)
NFC is the only viable solution that allows Visa to support both legacy card transactions at the POS, and mobile payments. This makes for an orderly transition, and requires only a POS terminal swap out. The alternative would be new point-of-sale systems such as those offered by Square and PayPal. For larger retailers and merchants, this would require a considerable investment and could be risky, but not impossible. The last thing card issuers want right now is a major retail chain announcing a deal with Square, PayPal or Dwolla, that renders them obsolete.
If Visa and Mastercard don’t convert their networks to phone-capable in the next 24 months, I fear Square, PayPal, iTunes and a myriad of others are just waiting in the wings to circumvent their rails. Argue all you like about NFC adoption, that’s not what you should be watching. The tipping point is the behavioral shift on the mobile phone – that is what will kill plastic, and it’s already happened.