Forecasting the Future of Mobile Payments
Following a recent discussion I had on emerging payments with Paul Tomasofsky, president of Two Sparrows Consulting in the US, it appears clear that breaking mobile payments into large corporate payments will likely take much longer than it will on the consumer side. Tomasofsky told the Association for Financial Professionals (AFP) that corporate treasury uptake of the technology is bound to lag behind the more ‘go ahead’ consumer space.
Although there has been some penetration of mobile devices in corporate payment methods like wire transfers, it may be quite a long time before mobile devices and systems make their way into more practical options like large automated clearing house (ACH) payments – even the UK’s planned common mobile payments platform, which all the banks say they will be signed up to by 2014, is initially aimed at processing peer-to-peer or smaller business payments.
“There’s so much more than just moving the money for a corporate,” explained Tomasofsky. “Corporates have to have the remittance information of course, but the invoices are so complex as well. How many times does a corporate say, ‘I am not paying the fifth, the seventh and the 18th item on this bill?’ That changes the dollar amount and causes all types of additional processes.”
Additionally, Tomasofsky noted, corporates have certain procedures within their companies that they need to follow and when they introduce a new process, they need to make sure it is working properly. “So they’re a little reluctant to change something if it’s not broken. I do think that eventually mobile will penetrate the sector, but I liken it to the fact the US still has a lot of corporate-to-corporate cheques going out, and a lot of consumers have gotten rid of cheques. I think it’s akin to that,” he said. The back-end processing is often more difficult and slower to changeover.
Mobility Effects on Merchant/Bank Relationships
The so-called mobile m-payments revolution is showing signs of being just that; a transformative event that could allow at least some retail corporations to dramatically reduce their relationship with financial institutions. The supply chain consequences for other corporates and their treasuries could also be profound.
Before new players like PayPal and Square entered the picture, merchants traditionally had to use whatever services banks or card schemes had to offer. But in the past year, PayPal has forged direct partnerships with Home Depot and Discover on new payments technology in the US, while Starbucks and Square joined forces in their own high-tech venture with added customer loyalty and tracking/marketing benefits. There’s even a Merchant Customer Exchange (MCX), a coalition of major retailers in the US currently working on a top-secret new mobile payments service. In Europe, there is the iZettle offering battling with Square.
Retailers say they are partnering with new payments providers to offer customers more convenience. But there are also some benefits for retailers themselves. Anand Goel, chief executive officer (CEO) of Optimized Payments Consulting, pointed out that nearly half of PayPal payments are funded by ACH and PayPal balances, with the rest funded by Visa, MasterCard, Discover and American Express. That allows PayPal to charge lower interchange fees. “PayPal can offer pricing below interchange due to its funding mix – 51% cards and 49% ACH and PayPal balance,” Goel told AFP.
Don’t be Square
Square faces a problem in that its only funding sources are credit/debit cards, with no ACH option and no Square currency or balances. “It is conceivable and likely that Square will add an ACH option and perhaps, have its own balances that could be used as funding sources,” Goel said. “Banks should be concerned as they need to be thinking about innovative ways for cards to be on top of consumers ‘virtual’ wallets.”
Tomasofsky agreed that if Square has enough merchants in its pocket, then it might move to conducting payments through another method like ACH. Square’s simple 2.75% rate and no interchange rates could prove enticing to many retailers, sole traders or others who don’t want to pay the traditional card scheme fees. “That’s why folks are putting big money into Square,” he said.
Tomasofsky told AFP that Square might be losing money right now because it is going after segments that have not been mined before, particularly very small merchants. “Everybody knew those segments were there and they’re not the most profitable segments; they were ignored for a reason,” he said. “So I don’t think that there’s enough business to become the dominant player. But I think there’s a bigger game in there. What makes sense to me is, if they can build enough of these consumers on one side, and billers on the other… they can get out of using credit or debit – an expensive way of operating – and use a very inexpensive ACH instead. And I don’t think they have to lower their rates that much more. So then they’re making really good money.”
Winning the Market
Gavin Waugh, a certified treasury professional (CTP), vice president and assistant treasurer with The Wendy’s Company, told AFP that for a mobile solution to succeed in the retail industry, it will require three crucial things:
“If you look at the third party wallets like Isis, the Google Wallet, Square, PayPal and others—these are all branded wallets,” says Waugh. “They’ve built technology or are in the process of building technology options. They’re very much interested in how much the consumer likes it. But the thing they don’t have today in meaningful numbers is merchant acceptance.”
MCX is building its solution in the opposite direction, Waugh noted. “They’re starting with merchant acceptance, and they’re going to build towards the technology solution and customer satisfaction.”
But MCX still has to make sure its mobile solution has all three components to be successful, Waugh added. “Nobody has all three today,” he said. “But the first entity that has all three components is probably winning the market.”