At Heart of Mobile Payments: Merchants, Carriers

Note: I’ve been thinking about this story (conceptually) for the past week or so. These are some thoughts that folks can yell at me about — telling me where I’m wrong and how to better think about the birth of mobile payments in America.

Please feel free to do so at either @SeanSposito, or

If the birth of iPhone opened innovators’ eyes wide to the possibility of a new way to pay, then Starbucks was that promise delivered.

In 2009, the Seattle company began working on a pilot that used smartphones and 2-D QR codes to complete transactions.

The system launched nationwide two years later. Within weeks, people paid for lattes’ with money they moved digitally into prepaid account roughly 3 million times.

(Ironically, the first prank call ever made on an iPhone was to a Starbucks in Silicon Valley; Check out minute 5:33, below.)

Now, Starbucks’ brand of mobile payments account for 14 percent of all its in-store transactions in the U.S. Used by 10 million customers for roughly 4.5 million weekly transactions.

“Starbucks was important. But mobile banking was the first demonstration and proof that consumers would do secure financial transactions on a phone,” a source told me.

“Some people would say there was premium SMS and all that, but buying a game on a flip phone is not the same as paying a bill or transferring $10,000 between accounts.”

Mobile banking was first.

You see, in 2007, after Apple’s seminal device, mobile banking, which in its earliest days was constricted to checking balances on dumb phones, became a distinct possibility.

That was followed, not long after, by Starbucks.

The retailer was so successful that it was followed most notably by the formation of ISIS, a joint venture of the mobile carriers, AT&T, Verizon and T-Mobile, and the Merchant Customer Exchange, the brainchild of the big boxes and an attempt to bypass the payment networks and work directly with the banks that hold our money.

The entrance of these nonbanks is huge.

The promise of the mobile internet and near ubiquitous miniaturized computing is that coffee shops that have nothing to do with financial services can now potentially use technology to hook directly into our wallets.

In the future, if technologists and payments experts are correct, both parties — merchants and mobile carriers — will directly control our ability to transact.

They’re the most noticeable groups that already handle our money on a day to day basis.

Starbucks sadly isn’t repeatable.

“It’s the best example in some ways the most unattainable example of mobile payments,” says that source.

“It worked so well because there was a perfect storm of factors working in its favor.”

Four things: Starbucks controlled a loyalty program with more cards in circulation than most banks; the coffee company completely controlled its point of sale system and was willing to invest; they had a product that was inexpensive; and, finally, they had a customer base that overlayed perfectly with smartphone owners.

Those are all hard circumstances to reproduce. But that won’t stop others from trying.

Still, before we go any further, it’s important to know that there are varied definitions of what a mobile payment is and isn’t.

Some define it as broadly as any transaction you complete with a mobile device, tablet or smartphone. Others confine it mainly to transactions that occur using a mobile phone directly at the point of sale.

Regardless, it’s important and set to account for billions of dollars worth of transactions over the next several years. That much, everyone agrees on.

Business folks here had their mobile payments appetites already wet by mobile phone companies in Japan and South Korea that had already successfully launched mobile payment products.

Isis announced itself in November 2010. It launched in the fall.

A year earlier, the joint-venture began running pilots in Salt Lake City and Austin. The system relies on Discover and Barclaycard US.

Since its inception, the business model behind the joint-venture has evolved several times. It’s settled on charging banks a per device model and using its platform to market directly to merchants.

Isis wasn’t the mobile carrier’s first attempt at colluding against entrenched payments players.

In 2007, Verizon and AT&T colluded with then-mobile financial services company Firethorn Holdings LLC of Atlanta, before it was swallowed up by Qualcomm the same year of the deal.

The plan was to corner the mobile banking market by preloading Firethorn software onto all of the mobile carrier’s phones. Customers would then be able to make balance inquiries and perform account-to-account transfers, according to reports at the time.

Recently, T-Mobile (an Isis member) paired with The Bancorp Bank in order to issue a prepaid card. The plastic will be distributed and serviced by the Blackhawk Network.

MCX — a group of merchants that include giants, such as 7-Eleven, Best Buy, CVS, Lowe’s, Sears, Shell, Target and Wal-Mart — began in 2012.

There are a bevy of other merchants including gasoline retailers have signed on, as well.

At least partly, if not wholly, spurred by the fight over interchange, the amount merchants pay in order to accept credit and debit cards, MCX still hasn’t made any significant announcements about how folks will be able to pay at participating retailers. The app still doesn’t have a name.

Some things, however, are for certain, according to close industry watcher PaymentsSource.

Similar to how folks pay with Starbucks’ app, MCX customers will use QR codes; The association has also contracted Wellesley, Mass. vendor Paydiant; And the new MCX app will be able to work within its member retailer’s smartphone software.

For sure, there is even infighting between these two, big groups.

Best Buy and 7-Eleven (notice, both MCX members) have begun shutting down the near-field communication (NFC) readers in their payment terminals, according to a recent ComputerWorld report.

If true, the move makes it impossible for Isis users to tap their phones at those retailers in order to complete transaction.

Still, while it’s easy to breakdown the wide-breadth of disruption into its two biggest newcomers, others, such as PayPal, have long been successfully uprooting traditional financial services’ companies’ foothold in commerce.

Google, too, has made a big thrust into payments that’s allowed folks to tap and pay at the point of sale and send emails that move cash like digital attachments.

There are additionally a myriad of startups that are trying to enter the market. Traditional companies have been innovating, too.

American Express has given its cardholders the ability to pay by tweet. It’s also launched Serve, it’s a digital wallet platform, that powers it’s popular BlueBird prepaid card.

Visa and MasterCard have both launched their own digital wallets — V.Me and MasterPass, respectively.

ATM makers, Diebold of North Canton, Ohio and NCR, both, have responded in kind with cardless and video money machines. Devices that move us past cards.

And despite all the advances, there remains a decent chance no one might adopt the new wares of the payments industries’ seemingly biggest disruptors, the merchants and the mobile carriers..

Think about it. Critically.

At the end of the day, everyone, PayPal and Starbucks included, is still using cards to reload their stored value accounts

But who hates the payment networks, who has the most to gain from disrupting them? Merchants. Those are the only people that hate Visa and MasterCard, because they hate that interchange.

But no one is going to use a new payment type unless there are rewards incentivizing the purchase. That might end up costing more than the interchange the merchants (think: MCX) are already paying.

Two percent back off every purchase… Five percent. If they do that, merchants are now paying two times interchange.

That just doesn’t make cents.


One thought on “At Heart of Mobile Payments: Merchants, Carriers

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s