M-Payments in 2013 to Bring More New Startups, Intensified Competition (January 2013)

M-Payments in 2013 to Bring More New Startups, Intensified Competition

 By Kate Fitzgerald, Emerging Payments Editor

The pace of mobile payments entrepreneurial development is likely to remain brisk this year, with venture capital flowing into the sector and likely to drive a number of new concepts from new POS approaches to mobile wallets. But it also will be a year of intensified competition among relatively new mobile payments concepts and the beginning of a shakeout, observers say.

Paybefore queried a cross-section of analysts with expertise in the mobile payments sector about what to expect in 2013, and, while they were cautious about handicapping the odds of specific new startups, they were unanimous in their conviction that the steady stream of new mobile payments companies as a whole is helping to reshape the payments industry.

“I’m not sure the market is big enough for [as many startups as we have seen emerge], but what these startups are doing is waking up the banks and traditional acquirers,” says Zilvinas Bareisis, a senior analyst with Celent. Not all will survive, he says, and this year we may begin to see more consolidation and market exits even in relatively new areas, such as VeriFone’s decision in December to abandon direct-to-merchant sales of its mobile POS Sail service launched just six months earlier.

Mobile payments upstarts that have grabbed analysts’ attention in recent months run the gamut from European firms payworks and payleven, each of which in 2012 rolled out Square-like mobile payment card readers in Europe and Brazil; to San Francisco-based startup Cardfree, whose white-label mobile platform enables merchants to design customized offers and promotions with a social media twist; to the expanding global role of Bango Inc., which has partnered with Facebook to enable consumers to bill digital purchases directly to their mobile carrier. Other startups analysts are watching include Marqeta, a San Francisco Bay-area company aiming to emulate Starbucks’ prepaid model with a payments system adaptable to any local merchant that rewards consumers for repeat purchases. Analysts also are keeping an eye on Groupon Inc.’s Groupon Payments, which promises low transaction-processing fees for merchants that use its daily-deals platform.

One of the most promising newer startups is LevelUp, SCVNGR’s promotion-based mobile payment app that promises merchants zero interchange on transactions, says Todd Ablowitz, president of Double Diamond Group consulting. Boston-based LevelUp is in the process of adding NFC to all of its POS scanners, making its platform highly versatile. The company makes money by selling its retail partners promotions and loyalty services with a heavy emphasis on local marketing.

“LevelUp has a unique proposition and so far it is getting a lot of consumer users and thousands of merchants to participate,” Ablowitz says. “LevelUp threatens a wide variety of players by giving merchants free interchange and making it up on a good chunk of the consumer spend they drive. They have the potential to sneak up on both big and small payments industry players, and if they achieve critical mass you can bet they will be something to contend with.”

But achieving broad, national critical mass with consumers is “a major challenge” for any mobile payments startup, Ablowitz notes. Even the most promising of these new companies is unlikely to become a household name overnight. Yet their potential to disrupt existing payment models is undeniable, he says. “Mobile payments innovators that will succeed are those that devise new technology to enhance the customer experience and drive bottom-line results for merchants,” Ablowitz says. Cloud-based POS systems that offer compelling business solutions, such as data-tracking and loyalty engines, are among the most potent combinations for many new mobile payments companies, he adds.

The Big Contenders

Beyond the relatively smaller startups, it’s larger newcomers in mobile payments and consortiums among well-established companies entering mobile payments that will have the biggest effect on the overall payments industry this year, analysts say.

Merchant Customer Exchange (MCX), the mobile payments platform backed by the nation’s leading merchants, has been quietly gathering steam since the announcement of its formation in August, and analysts expect it to make some influential moves this year. MCX in coming months plans to design a broad and versatile mobile commerce experience with advantageous terms for participants that include Wal-Mart Stores, Target Corp., 7-Eleven, Shell Oil, Lowe’s, Best Buy Co., Darden Concepts Inc. (which operates 2,000 restaurants including Olive Garden and Red Lobster) and 23 more national and regional merchants in diverse categories.

“This venture may exist only to create negotiating leverage with the rest of the payments ecosystem,” says David W. Schropfer, head of mobile commerce for advisory firm The Luciano Group. But MCX could also “be serious” about creating a broad, widely accepted alternate payment process, using the combined leverage of the nation’s biggest retailers. Either way, MCX has a shot at helping to drive down merchant transaction fees, Schropfer says. “We all know that interchange has come under pressure before, but this is different because retailers that represent $1 trillion of U.S. commerce are pooling their influence. … Watch MCX closely in 2013,” he adds.

Meanwhile, Square continues to be a catalyst for change and a threat to existing payments players, analysts agree. In just three years, the startup co-founded by Twitter guru Jack Dorsey has reached the point of processing $10 billion in payments annually, and its customers are no longer confined just to micro-merchants. Square recently began processing payments for 7,000 Starbucks stores, and its Square Register accepts payments, links to a cash drawer and enables merchants to track inventory and sales. “Square is not done with its story yet,” Ablowitz says. “Originally some believed Square was only going after the smallest merchants, but it is positioned to challenge existing players on every level.”

Isis—the NFC-based mobile payment concept backed by mobile carriers AT&T, Verizon Wireless and T-Mobile USA—has begun to penetrate only two cities, Austin, Texas, and Salt Lake City, as part of a pilot. But analysts say this year could prove whether its concept—which is unique in its breadth of participation with the largest mobile carriers as well as major card issuers—has true power. The Isis Mobile Wallet comes with an Isis Cash Card, which consumers can reload at various retail locations through Visa ReadyLink and Green Dot’s MoneyPak, which adds utility for consumers. “Isis is not available on every phone, or at every retailer,” Schropfer says. “But, as the industry addresses these challenges, typical ‘cash’ customers may start to become ‘mobile money’ customers in as little as two or three years’ time,” he says.

Analysts also are paying close attention to PayPal Inc. as it continues to make inroads in online, mobile and POS channels, with the combination of its operations on multiple fronts increasing its clout. PayPal this year will achieve broad POS acceptance through a deal it announced last year with Discover Financial Services that will add a significant new dimension to PayPal’s offerings, Rick Oglesby, a senior analyst with Aite Group, says. “With PayPal hitting the market with a card-based solution to be accepted at all Discover locations, and Google very likely to do the same, [in 2013] we’ll see the digital wallet come to retail outside of the mobile form,” he says. Most of the digital wallets so far are centered more on shopping than they are on payments, Oglesby notes. But this year we are likely to see a convergence of e-commerce and mobile payment, with PayPal and Google both aiming to capitalize on that with mobile wallets that include a card payment option, he says.

Clearly, this is the year cloud-based digital wallets will come into their own, with Visa and MasterCard simultaneously developing their own digital wallets, Bareisis says. “I believe there will be space for a number of such digital wallets in the market,” he says, but competition to win over consumers will be intense. Look for Visa’s V.me and MasterCard’s PayPass Wallet Services to continue to announce new features and enhancements, each aiming to devise a simple and secure method for consumers to make purchases through diverse channels, Bareisis says.

“There is so much going on, with the card networks defending their territory with interesting partnerships; the Isis test still in flux; Google pouring money and effort into getting its concept going; and Square and other startups just hitting their stride. It is going to be a very interesting year,” Ablowitz says.