US Mobile Payments Market and What Are Apple and the Other Big Boys Up To?

November 9th, 2010

Seems like more US mobile payments announcements are happening – Do you agree and what does this mean?

I agree. All year the number of mobile payment announcements has been on the increase. Last week was an especially hot week for rumors. It is increasingly confusing – what is happening, what does it all mean? Therefore I am writing a series of blogs to explain the market in a way that non-mobile payment specialists can understand. That way as you read news and other commentary it will provide a framework for what is going on. In some parts of the world mobile payments have already gone mainstream, but the US is behind. I expect in the next few years that will all change.

But to specifically answer your question about what it means – it means that mobile payments are happening in the US and it will be big.

What is Apple up to?  Are they interested in competing with Visa or Paypal?

This will be a long answer but worth it…so bear with me while I talk about Apple.

Apple is a clear  market maker  in “Open Mobile” (call it what you want – mobile 2.0, social mobile, convergence of internet and mobile – I call it Open Mobile).   They  took on that role with the success of the iPhone and App Store. Others had to  follow – Android, Windows, Blackberry etc. Apple led the way and showed everyone else how it is done.

Apple for a while has been rumored to be interested in and working on mobile payments. This is very big – especially given the strength of Apple’s great innovation track record.  So when they talk about getting into mobile payments – that is big news because they could have that same kind of influence they had with Smart Phones – change the game and then everyone else has to catch up.

Really, Apple is  already doing mobile payments and has been since they launched the iPhone. Their solution  was built on an existing payment relationship – iTunes. Most of their iTunes users long ago set up an iTunes account to download music on the web. As part of this account, they probably linked a payment card (credit or debit) and may have loaded value from an iTunes card they bought at a store. Since they have so many users and music downloads – the volume is very high and the users trust this as a reliable, easy, fast way to pay for music, games, and other digital content. It is very big (160M users have cards on file, volumes are massive) and it is done globally. An iTunes account is used for music on an iPhone or an iPad. But in addition, Apple has begun to open up its payment platform and make is accessible to others as iTunes users have begun to use it  for purchasing applications from the app store.  Again – it’s easy, users do it all the time.

What else might Apple do?

They are a great innovation company – and mobile payments are all about innovation. Really hard to predict exactly what they will do but there has been two separate waves of rumors – one is that they are going to launch something around proximity payments via NFC, the other rumor is that they may make a bigger play in digital content payments by doing something with mobile carrier billing payments.

Can  you say more about Apple and NFC?

NFC is where the consumer can now “wave or touch” their phone in a real world situation to make a payment. This means there will be a special chip in your phone and that chip will be able to talk to something else – a merchant terminal (where you swipe you card today) might be modified, or some other new kind of machine or display will allow you to do transact by waving or “touching” your phone. Another phase used for this is contactless payments – called this since these systems usually work when you are close but the devices don’t actually have to touch. It is better than Bump or Bluetooth for some applications because it can be faster, more reliable, and more secure. That being said – it requires a lot of physical infrastructure for it to be useful in enough places for anyone to care. And you have to have a new phone that has the right hardware and software.

When Apple puts the NFC chip in their phone and starts to build their own applications or encourages others to build applications – then things could happen quickly.  Just like the iPhone broke down the mobile carrier’s  “walled garden”, this move could open up payments and they could help create new business models for in store payments. They could also couple this with location based ads and other applications. Apple drove the development of new business models with the music and smart phones – depending on what they do they could change the rules by which different players interact to do payment and commerce. So they have the potential to move the NFC world forward significantly by developing a new tapestry of the hardware, software and business models to move it forward.

This is what is needed since NFC technology has been around a long time but mostly in pilot because nothing has ignited the market. And since the infrastructure will cost Billions – someone really needs to get things moving to make it happen. (Obopay works all over the world and in only a few countries do we see scaled NFC applications. Most places in the world it is all about remote payments.). Apple moving into this space should ignite the market – and get lots of folks moving faster. But as it moves faster it will be much bigger than just Apple.

So is mobile payment in the US all about Proximity Payments and NFC?

Here are things to remember about NFC:

• Apple is not the only company that can ignite the market. There is a rumored that three of the four major Mobile Carrier will form a new company to work together on making this happen here. This announcement and their combined investment can get things moving – but only Apple, with the success of the iPhone and now the iPad is the leading Open Mobile innovator. So Apple’s moves will have a particularly powerful impact. Some players won’t take a Mobile Carrier JV as seriously because those company structures are more complex and have failed in other places in the world. I personally take both things seriously and think they both have lots of potential. Of course they are other large players, like Google or large merchants, that can make a move and have a big impact also.
• NFC takes time – it is a massive physical infrastructure upgrade and will require a new ecosystem for payments to be defined and successfully rolled out. Japan – where it launched many years ago (date?), is just beginning to see adoption. There it was used primarily for convenience stores and trains – where time is of the important and you have smaller value payments. So it will be big and it will take time.  In the US we have some of the physical hardware already – because we already have many merchant terminals accepting NFC cards. That being said there is still work to make sure the business relationships and payment infrastructure to leverage the card based solutions in mobile.
• Since Open Mobile is changing everything, NFC may not be used as much as some predictions by market analysts. Some things that are proximity may move to remote. Just like the internet moved lots of in store shopping to web shopping. When we have all kinds of payments and applications on our phones – some of the things we buy standing at a Register or a shopping line, may move to remote. Definitely when you buy remotely but maybe even in a store – we may not have to go through the today checkout process in the future. Sounds futuristic but we have all the building blocks today to make lots of changes in commerce.
• The same technology can and will be used for non-payment activity also. An example is mobile boarding passes. Some airlines allow you to download your electronic boarding pass and then you take a mobile bar code displayed on the screen to check in or when you board. This could also be done with NFC solution. In Japan you can use NFC to walk up to a poster and hold your phone and you can get more detailed product information.

So Proximity and NFC will be a part of mobile payments, but this will take time. In the meantime there are many other categories of mobile payments; remote purchase of digital content, buying from App stores, buying on the internet, buying from a mobile application, paying bills, texting a donation, paying a small business remotely and person to person transfers. All of these will be big and those will most likely be mainstream long before the physical infrastructure for NFC is fully built out in the US.

What about the latest rumors?

Last week Boku was rumored to be in conversation with Apple and Google. Speculation is that there is a potential acquisition by one of them that will happen soon. Boku is not the only company in their business, there are others -  Zong and Bill to Mobile to name two others.  These companies specialize in allowing users to use their mobile phone number to purchase digital content on the web using their phone number and their phone bill. It is a simple check out, simpler than putting card information into the website, and then the user gets the item immediately. The user pays later when the charge shows up on their phone bill.  Now that people are buying digital content directly from their phone – the potential is the same is to do it all directly from the phone.

So would Apple or Google buy one of these companies? Not sure. So what do these companies do?

• They really aren’t exactly payment companies. They are gateways to mobile carrier billing for now. But this is important since people want to purchase digital content and this is a really easy way to do it. The mobile carriers get additional value added service revenue whether they are involved in digital content distribution or not. It also is great because these distribution and payment systems can be international. A buyer can be in one country and the digital content creator can be in another. It can cross boundaries. It does require lots of relationships behind the scene – but once they are established, it all works.  The fee paid the mobile carrier varies depending on where you are in the world – but in our country it is probably as high as 35%. Also the content provide payment is delayed – again differs depending on where in the world. But it can be 45 – 120 days before the content provider gets the money. Still it is a benefit for them since it increases volume significantly.
• This mobile payment application is helping create consumer behavior around using phones and phone numbers to buy things. This can be built on by other solution providers – since consumers understand how to do it and that it works – it builds trust and understanding. Since this method doesn’t work for everything – like buying more expensive items or physical goods- providers that support that will have less training and evangelizing to do. In fact, consumers will start asking for this.
• These solutions aren’t really that innovative in that they have been available in the market for some time. They are just new to us and are gaining popularity. In Korea, it was started by the mobile carriers developing systems to do this but they were spun out and formed independent companies. When I visited Korea in 2008 the two companies that did this told me that 90% of all digital content on the web is purchased. Their economics are more favorable to the content providers and I think that is partially why it has become so dominate.

A few weeks ago AT&T announced that it will enable Boku, Zong and BilltoMobile begin interfacing directly with  the AT&T billing system. Previously their integration with AT&T were through premium SMS systems which were less reliable. This is an opening up of carrier billing which will help these solutions grow.. Apple and Google partnering with these companies would increase their role in mobile payments for digital content. Apple or Google could also replicate what those companies do, but it takes time to build the mobile carrier relationships around the world. Because of the economics of carrier billing, this solution won’t really work for non-digital content purchases or digital content purchases that is very margin sensitive.

What are the take away’s

What Apple does is important but we will have to wait beyond the rumors to see what happens. I will say that there are many large opportunities for mobile payments and it is not just about digital content or proximity payments. There is significant opportunities in remote shopping, small and medium business, and money transfer.  Just a few numbers for you to keep in mind.

-          Over $75 Billion in money exchanged between families in the US alone will quickly go mobile

-          70 trillion transactions per year that are cash and check today will quickly go mobile

-          80 percent of sellers of goods and services are underserved today without access to digital payment acceptance (credit/debit card and electronic check acceptance). Huge opportunity for mobile payments

These areas are all where P2P payments come into play and will prove to be a large market opportunity too. In markets where P2P is fully implemented it represents over 50% of the mobile payment transactions. Users want P2P for money transfer, casual payments, payments to individual merchants, cross border remittances and check replacement. This is a big opportunity and right in Obopay’s sweet spot.
Back to Apple – they are clearly already big in mobile payments with iTunes and the App Store. They are going to do more – most likely a bigger play in online payments and in store payments, and they are not the only big player that is actively looking at this space. I expect Apple’s focus will be as it always has been – on innovation and delighting the Apple customer. What they do, will make others move faster. That is their role in Open Mobile.

Two more blogs in the works; one on the rumored AT&T, Verizon, and T-Mobile JV, the other on segmenting the mobile payment space by types of users and uses.
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