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Mobile payments may be the next big tech gold rush, depending on who you listen to. For something getting so much hype, and with so many start-ups popping up in the field, it is a surprisingly vague term.
There are at least a half dozen different approaches competing to become the de facto format. All of them share one thing: the use of mobile devices – mostly cell phones, but increasingly other devices such as tablets – to exchange money. But that’s just about where the similarities end. Here are four different services with four very different routes to this potential Mobile El Dorado.
Approach one: Phones as credit card machines (Square)
When Jack Dorsey heard that his friend – a glass artist – had lost a US$2 000 sale because he wasn’t set up to accept payments via credit card, he began to wonder why it was so difficult for small, mobile businesses to get paid that way. After all, mobile phones are now handheld computers, with all the capabilities needed to process such a transaction. All that was needed was a way to swipe the cards, an intuitive interface, and a whole lot of payment gateway black magic.
And so, in 2009, Square was born: a way for anyone with a smartphone to accept credit card payments, anywhere, at any time. All you need is the (free) card swiper attachment, the (free) software and a (free) Square account.
Dorsey and Co. have kept the whole process incredibly simple – including the way they charge for it – and have been rewarded with a rapidly growing userbase and rising revenues. Last month they passed the US$3-million in transactions a day mark. Oh, and Dorsey also founded Twitter with Ev Williams and Biz Stone. So he’s a bit of a lazy guy, really.
- Ubiquity and familiarity of credit cards (at least in developed economies);
- A clever and comfortingly familiar payment interface; and
- The focus on small businesses and vendors has given them cheap and effective market penetration.
- Requires physical proximity between buyer and seller;
- Requires a smart phone and special additional hardware (although it is free); and
- Requires the buy-in of (historically unfriendly) banks and credit card companies (which may slow or limit international adoption).
Approach two: phones as swipe cards (Google, Orange, Samsung, Barclays and many others)
Credit cards may be quicker than cheques and safer than cash, but they’re still a pain at times. You and the sales clerk staring at the stupid terminal, waiting for it to spit out that little slip of paper. Wouldn’t it be cool if you could just wave at a sensor, the way access cards for parking garages work?
Well, that’s exactly what near field communication (NFC) technology does – it turns your mobile phone into a kind of access pass to your bank account. Just wave your phone at a sensor and bingo, you’ve bought a coffee or a movie ticket or a trip in a taxi.
The Japanese have been using it for well over a decade, but the practice is finally starting to spread to the rest of the world. Orange (a mobile teleco) and Barclays (a bank) launched the first NFC service in the UK last month. A week later, Google announced their Google Wallet service in partnership with Citibank.
For now these technologies are limited by phone type (Google Wallet only works on the Nexus S) and by network provider, as well as bank. But as soon as the trials begin to show results, we can be sure that everyone else will jump on board. Google already has a brilliant way to enable other Android phones with NFC – a special sticker attached to the back of the phone.
- Incredibly simple and intuitive interface for users – just wave, beep and go;
- Very quick and efficient for vendors of all kinds. No fiddling with change or waiting for credit card machines; and
- Caters for “unmanned” purchases, such as vending machines.
- Requires new technology at every payment point;
- Very few handsets currently support it – although by 2014 that may have changed;
- The old chicken-and-egg dilemma: merchants won’t adopt it until customers do, and vice versa;
- If your phone is stolen, you’ve now also lost your credit card. Yikes.
Approach three: SIM and/or USSD based mobile money transfers (M-Pesa)
When Safaricom, Kenya’s dominant mobile telephony network, discovered that poor, rural people were using airtime as a form of currency, they realised that the unbanked majority needed a way to easily and cheaply transfer funds around the country. And so M-Pesa (literally “mobile money”) was born.
The system is simplicity itself – all you need is the most basic of mobile phones, an M-Pesa account, which can be opened at any one of thousands of Safaricom vendors, and you’re ready to start transferring and receiving money. Since the system uses either SIM toolkit or USSD technology depending on the country, the network charges are minimal to nonexistent.
The model has proven so wildly popular that it has now been rolled out to several other countries, including South Africa, Tanzania and Afghanistan.
- Lowest barriers to entry, since it works on more than 95 percent of handsets;
- Low transaction costs; and
- No bank account or credit card required.
- Tends to concentrate cash in some people’s hands and credit in others’, so physical cash transfers are still an issue, if a less frequent one;
- Locks users into a particular mobile network provider; and
- Since network operators are not banks, they cannot pay interest, offer credit, or other useful banking services, such as debit orders.
Approach four: voucher-based systems (MiMoney, AMMO)
Several local players offer a variation on the M-Pesa model, but based around vouchers rather than direct transfers. Users load up their accounts with cash and then issue vouchers when they purchase something or transfer money to another account holder. The payee then inputs the voucher code on their own account and, voila, they have the credit.
The idea is a safe mobile payment system that doesn’t require a bank account or credit card to use. It can be used online or at physical points of sale – as long as the vendors are willing to participate in the system.
- Familiar to consumers because of its similarity to airtime ;
- No special hardware required by either customers or vendors;
- No bank account or credit card required; and
- Very safe since loss is limited to the value of vouchers. There’s no direct access to your bank account.
- Requires a bank account or credit card to be used most effectively. Trekking to a kiosk with cash sort of defeats the point of mobile money;
- Without special hardware, the interface is clumsy for both vendor and customer. A credit card is still quicker and easier;
- You cannot get the cash out once it is in the system unless you’re a merchant, so it’s very much a purchase-focused network, unlike M-Pesa.
The same chicken-and-egg dilemma as NFC.
And the winner is…
So, which one of these approaches will become dominant? The answer is that at least three of them will probably operate in parallel for at least the next decade. Each one has picked a clever niche that exploits their primary market’s unique traits, and that gives them a fighting chance of making it big.
The two with the least traction and biggest challenges right now are NFC and mobile vouchering, but market evolution has a way of making all prophets into fools. And M-Pesa and Square may cease to make sense if the unbanked massed become banked and credit cards start to die, respectively.
Whatever the outcome for these four systems, we can be sure of one thing – paying for stuff on the go is going to get a lot easier.