FinTech Industry Perspectives
a great conversation starts with a great topic
Entry
In the last two months, we have had three announcements of add-ons for smartphones that will allow users to read the magnetic stripe on a payment card, in effect turning the devices into wireless payment terminals.
On December 1, 2009, Twitter founder Jack Dorsey announced a private beta for Square, Inc. through his Twitter account and a few technology blogs, including TechCrunch and the Los Angeles Times. Unusually, there has been no press release or mainstream press coverage.
On December 8, 2009, probably in response to the Square announcement, Verifone rushed out a press release announcing its own iPhone add-on, called PAYware Mobile. Verifone is the largest seller of payment terminals in the U.S. (and #2 worldwide), and will be partnering with First Data, one of the two top merchant processors in the U.S. (the other is Chase Paymentech).
On January 20, 2010, Digital Transaction News covered an announcement by Apriva of AprivaPay which comes in both download-only and Bluetooth-enabled hardware versions.
Three announcements in two months equals a trend, but how significant will it really be? While the technology definitely has its uses, I believe its ultimate impact will be limited for the following reasons:
First, the appeal of mobile applications is a relatively recent phenomenon, driven by an unusually successful product, the iPhone. Two years ago, (nearly) everyone was certain that Near Field Communications (NFC; the next generation of contactless chips) was the most likely direction, and now (nearly) everyone thinks it is dead (I realize the outlook is more positive outside the U.S.). The only thing that has changed since then is the emergence of the iPhone. Suddenly, mobile apps are interesting again, and now every company is rushing out an iPhone app. However, our experience with NFC should make us cautious, because this technology is similarly dependent on hardware.
The high penetration of iPhones among the analyst and high-tech community has, I believe, fostered a false impression that the iPhone is a mass-market platform. True, iPhone has been quite successful in the U.S., but it is not available anywhere else, where handset makers like Nokia and Motorola still dominate. Sales of "dumb" phones, which are actually quite capable these days, still outweight smartphone sales, even in the U.S. There are a growing number of competitors, including RIM, Google, Palm, and Nokia itself, which will complicate the app-based strategy as they gain share. Text message and mobile Internet strategies will continue to be important as alternatives.
Even if the hardware dependency were not an issue, we have to ask ourselves how large the market for a product like this really is. Clearly companies with remote workforces would be interested in this technology, because it would allow them to post payments more quickly, and improve productivity by leaving their personnel out in the field longer. However, beyond that limited group, there is no clear business case. I will continue to monitor this trend, but consider mobile Internet to have greater potential long-term.
What are your thoughts? Please let us know in the comment box below.
Comments
Smartphones as Payment Terminals? Its Time is yet to come - especially in regions outside USA. There is no doubt whatsoever that for any innovation to really succeed it needs the Asian incubator test. This is imply because of the volumes and size of businesses involved. This region (the Asian Region) in particular and in the BASIC economies the proliferation of the mobile devices and services has been growing in geometric progression compared to the G-7 economies.
Hence, unless the business case for smartphones proliferation in this region and other innovations is made clearly and correctly - I am afraid the time is still not ripe for smartphones as payment terminals. In a nutshell, it is not just availability of technology but a lot of other things need to take place concurrently like 3G/4G phones adaptation and adoption, regulatory change and re-engineering of basic business processes by the service providers in this region.
Till then we need to wait and watch how events take shape.....
Aaron,
How about using the screen of the phone for bar codes? That does not require new hardware outside of a bar code gun which many merchants already have. Similiar to the airline industry - that might be a way to go as well.
There is a distinction to be made between "mobile payment" and "mobile acceptance". NFC is a system for consumers to make a payments, and it targets a very large audience - pretty much anyone with a mobile phone. Smartphones as terminals are a system for a sub-set of merchants to accept payments. I would argue that the success or failure of one has little effect on the other.
I agree that mobile payment and mobile acceptance are two distinct areas; the only link I was trying to make is that both technologies are hardware and platform-dependent, which has historically been a barrier to adoption. See biometrics, smart cards, e-cash, etc.
While I'm thinking about it, I was surprised to receive word this week that Jack Dorsey of Square is keynoting at NACHA Payments this year. That's an amazing platform for a brand-new company with no track record. Of course, I suppose that could have been a paid slot; Dorsey might have just written a big check. Still, it gives you a sense of the hype level around Square, which seems to be generating a "trend" basically out of nowhere.
Just for completeness, I thought I should add that HomeATM is introducing a competing product called CircleSwipe; it was covered in an article in the Feb. 12 issue of American Banker (subscription required). HomeATM makes pin pads that plug into home computers through the USB port and can be used to enable secure PIN debit transactions. They compete directly with Acculynk, which uses a floating virtual PIN pad displayed on the screen and seems to have more traction at the current time. Interesting wrinkle is a patented process whereby the energy from the swipe is used to power the device, eliminating the need for a separate battery or a connection to the phone battery. They claim to have other patents covering mobile devices, but it's always hard to tell how significant patents are without doing a full search.
I still don't see how this is that much better than a mobile wallet or other purely network-based system, but their focus on mobile commerce does add a new potential audience.