Payments Views

Mobile Commerce

Zigging and Zagging toward Mobile Payments in the US

For those of us following the evolution of mobile payments in the US, it was quite a week indeed. What with PayPal’s peek behind the curtain at enabling its users to pay at physical POS merchants and MasterCard’s Investor Day briefing and demonstrations of its various mobile marketing and mobile payments initiatives.

What are we to take away from all of this? Here’s my view – I’d welcome hearing yours.

The common wisdom around mobile payments in the US is that they will be based upon card credentials electronically inserted into secure elements in new mobile handsets that will talk to new POS terminals capable of supporting NFC or contactless payment technology. There’s been lots of activity – and accompanying industry forecasts about how we’re on the cusp of a new world of mobile payments based on NFC/contactless technology.

Almost a year ago, three of the mobile network operators in the US – Verizon, AT&T and T-Mobile – announced Isis, an NFC-based approach that was going to create a new payments network to rival the payments incumbents. Post-Durbin and after listening a bit to the marketplace, Isis modified its strategy to be much more accommodating to the existing payment networks – while still remaining very NFC-centric. As a result, the major networks agreed to cooperate – time will tell exactly what that means. Trials begin in 2012.

In May, Google announced it was partnering with Citibank, MasterCard, First Data and others to launch an NFC-based Offers and Wallet – based on this technology approach. The only wrinkle in Google’s approach is that it decided that it (and not a card network, a card issuer or a wireless operator or a consortium like Isis) would manage the keys to the secure element in each handset. Google also introduced a nifty concept called SingleTap that would enable a new kind of offer redemption process at the time of payment – for those merchants who agree to deploy Google’s proprietary SingleTap POS technology.

In August, Visa announced its support for nudging this POS upgrade process along by defining a multi-year program designed to transition the US POS infrastructure from mag stripe-based today to both EMV contact and NFC/contactless technologies over the next several years.

That’s seemingly the current state of play with respect to the NFC-based approach to mobile. Everything seems to need changing – the mobile handsets, the POS terminals, along with new operational systems being required to manage and control this fundamentally different payments ecosystem. And, of course, the consumer will have to be educated and understand how all of this works – perhaps by their mobile carrier, or their issuer, or the card networks. It’s fair to say that it’s yet to be seen how that might evolve.

Meanwhile, PayPal seems to be thinking differently. In mid-year, PayPal’s Scott Thompson shared a vision for digital payments – not requiring us to carry wallets for making payments and, presumably, not making payments using plastic cards. His vision was that this would become ubiquitous in the US by 2015. This week, PayPal shared more about its vision at a conference for major retailers in Los Angeles that was widely covered in the press.

For years, PayPal users have used their email address plus a password to make payments at eCommerce merchants. PayPal users didn’t have to remember some arbitrary sixteen-digit number, expiration date and card security code to complete a payment. In the vision it revealed this week, PayPal uses a phone number plus PIN to make a payment at a physical POS terminal – a card-less form of payment linked, but not directly, to the user’s mobile phone. Because there’s no new NFC-like technology involved, it should be much simpler for merchants to make POS software changes that enable this kind of PayPal acceptance at POS. PayPal promises to have more news about specific retailer partners later this year – with plans for even more in 2012.

One thing seems clear – the merchants control how this evolution might occur as it’s their POS acceptance infrastructure that has to accommodate any of these approaches. Some merchants, like Starbucks, have already implemented proprietary closed loop mobile solutions. Others, such as Chipotle, embed payments into their remote ordering applications.

But the big question remains – how will the general purpose merchant POS evolve to support new forms of payment? And what are the forces driving any change?

We certainly live in very interesting times. The traditional players are zigging – away from mag stripe card technologies (with, perhaps, the exception of Citi and its work with Dynamics) toward a world of NFC/contactless payments. Meanwhile, it seems that PayPal isn’t waiting for that world. Instead, it’s zagging toward a speedier implementation of, arguably, a new and convenient way to pay that’s card-less and avoids the requirements of rebuilding so much of the payments ecosystem.

I’m reminded of an earlier – perhaps somewhat similar – history in the world of electronic payments. In the mid-90’s, MasterCard and Visa – along with IBM, Microsoft, VeriFone, and others – worked together to define a new protocol that was going to be used to support secure card-based payments over the Internet. That initiative, Secure Electronic Transactions or SET, involved a very heavy-weight implementation of public key infrastructure to encrypt and authenticate parties in a transaction. In parallel, an upstart Silicon Valley company by the name of Netscape defined a very simple protocol called Secure Socket Layer or SSL which turned out to be “good enough” for ensuring that payment card account data was protected from network interception. SET, the payments industry solution, failed in the marketplace as budding ecommerce merchants, including Amazon.com, embraced the use of SSL. “Good enough” trumped “perfection” and web-based ecommerce was born.

Of course things are quite different today and we certainly can’t predict the future from the past. But sometimes it rhymes. Sit back and enjoy the show – it’s going to be fun to watch! Give me a call or drop me an email if you’re interested in talking further about any of this. I’d welcome that opportunity. You’ll find my contact information here.