Mobile payments

I have been doing some work recently with a biometric mobile payment startup. So I went to a VCtaskforce meeting last week about mobile payments. I learned some new stuff to go along with what I already knew. The first interesting thing, which apparently surprised the organizers, was that the room was completely full. There’s a lot of interest in mobile payments.

The world of mobile payments has a multi-dimensional taxonomy:

  1. Is this a developed world or developing world mobile payment system? In the developed world we have invested a lot in payment infrastructure for credit cards and ATMs. In the developing world this is much less developed and in the rural parts of the developing world not developed at all. Here’s the interesting statistic: there are four billion mobile phones in the world, but only one billion credit cards and two billion bank accounts (so one billion people with a bank account but no credit card). If you were Visa going to a new country to set up a way for people to pay for stuff, you’d do it with phones rather than trying to replicate the type of landline based system of terminals, ATMs etc that we have built. But in the developed world mobile payments have to compete with credit and debit cards, which already work pretty efficiently. Remember, most people in the world have prepaid cell phones, not billed. Even in the US, prepay is the fastest growing part of the market.
  2. Is it digital goods or physical goods that you are paying for? And a secondary question is how big the payment is. Cheap digital goods (music tracks, ringtones, wallpaper, virtual currency in games etc) can easily be handled by network operators who just put it on your bill. If it requires shipping something then the operators are not set up to do that, and if the price becomes too high then their support costs go up (every call to a network operator costs $6 on average).
  3. Is it remote or proximity payment. Proximity payment means that you wave your phone over some sort of sensor in a store. The leading technology to make this work is NFC (near field communications) but it is somewhat on the back-burner now due to the recession. Maybe in 3 or 4 years it will be come important. Remote (meaning that you are not necessarily at a store at all) is the most interesting part of the market anyway. I don’t consider proximity payments in the rest of this.

The players in this are banks, network operators (like Verizon and AT&T) and third party companies trying to build payment infrastructure independent of banks or network operators (or perhaps in partnership with them, depending on business model). The banks have so far not been very successful at setting up mobile payments although in the longer term they might be since the network operators are really only good at a few things: building networks, transmitting data over them, and billing people. So they are set up to sell you a ringtone. But once physical goods start to get involved it is no longer something that the network people know how to do and is more the preserve of people like Visa who already have all the fraud infrastructure, chargeback infrastructure and a business model to support it.

In Kenya (and now some other African countries) Vodaphone and their local partners set up a system called M-pesa. M for mobile, pesa is the Swahili for money (there’s no end to the interesting stuff you learn on this blog). It is basically branchless banking. With your phone you can transfer money from your pre-pay account to anyone else’s. You can go to many stores and pay in cash to top up your pre-pay account. Or you can take money out of your pre-pay account. So a worker in a city can go to the grocery store, add $50 to their account, transfer it to the account of their wife back in a village far from any bank, and they can go to the grocery store and take the $50 out of their account. Apparently people also use it to avoid getting robbed too: pay money in before getting on the bus, take it out at the other end. There are 7M users (in just a couple of years) with 2M transactions daily in just Kenya.

Mobile payments today are $24B annually. It is all either digital goods or cash infrastructure with things like M-pesa, essentially no physical goods. However, there is one big problem: security. The moment Paypal launches in a pre-paid market they see attacks go up. In fact, mobile security is better than regular internet security (the network really does know which phone it is and whose it is) but it is inadequate. If stealing your phone enables someone to empty your bank account you need better protection than just a four digit PIN.

Biometrics offers one of the best solutions to this: put a fingerprint sensor on each phone. That works OK for high-end phones but doesn’t do so well for the lowest end where phones cost only $20 to build and can’t absorb the cost of a sensor. The challenge is to have high security but a seamless customer experience.

Who might you not have thought about who could suddenly become a player in this space who is not a bank nor a network operator? Paypal, obviously. But also there is somebody who has 300M accounts already set up with payment instruments. Somebody who already sells over 25% of all music using this technology, some of it in the mobile market. Apple, with iTunes and the appStore, have moved a significant amount of distribution and billing away from the carriers. They have an infrastructure they could do more with if they decided to.

There’s another gorilla lurking who already has a huge number of accounts (I don’t know how many) already set up with payment instruments and already in the business of shipping a lot of physical goods? Amazon.

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