In June, we pointed to startup Square and more broadly credit card readers as the leading solutions in the mobile payments space. Last week, Groupon announced a move into mobile payments, also adopting a credit card-reader based approach. PayPal did the same earlier this year with PayPal Here.
Here’s how new developments have shaken up mobile payments:
- Groupon and PayPal Here cement the lead of the card reader-based approach over (Near Field Communication (NFC), in-app, carrier billing, and other mobile payment solutions.
- Lack of NFC chip on iPhone 5 also boosts credit card-reader path.
- An escalating price war may decide the future of the mobile payments market.
- Falling fees and card reader ubiquity will accelerate the adoption of mobile payments.
Card readers like Square plug into a smartphone or tablet. The device and the accompanying software transform phones and tablets into mobile registers. Retailers can swipe customers’ credit cards and effect payments without traditional point-of-sale hardware. Consumers, meanwhile, can download an app like “Pay With Square” and make in-store cardless payments.
For more, see our June 25 explainer of mobile payment technologies — including card readers and Near-Field Communications, or NFC, and their pros and cons.
Groupon’s new mobile payments initiative, called Groupon Payments, also turns on a pluggable card reader device (often referred to as a dongle).
Groupon’s strategy is to undercut competitors on fees. Groupon guarantees U.S. merchants a major cost savings — a market-beating 1.8% swipe fee — with the caveat that they also be part of Groupon’s discount network.
PayPal Here, launched earlier this year, is another small attachable credit card reader. PayPal Here is triangle-shaped to differentiate it from Square’s, which is, well — square. Like Square, PayPal Here is compatible with iPad and iPhone, as well as many Android phones.
Suddenly, with the explosion of card readers, mobile payments is a very crowded space. MarketsandMarkets says U.S. mobile payments will be worth $56.7 billion by 2015.
So, how will the competition shape up, and what does it mean for the future of mobile payments?
As we highlighted in our June report, the keys to success in mobile payments are convenience and scale. The service has to offer convenience at least on par with cash and credit cards, and preferably integrate with preexisting solutions, like coupon networks, online bank accounts, and loyalty programs. Whoever can do that will lock in merchants and have a chance at wide distribution. The payments business is all about skimming a small fee from a large volume of transactions, so scale is a requirement if revenue is to grow significantly. The chart above shows how Square’s volume has grown exponentially, while its revenue is still modest.
Here are each of the players’ strengths.
- Low price
- A massive network of Groupon merchants to draw on
- Its merchant app will integrate payments and daily deal promotions Groupon is known for
- Alliances with large consumer-facing businesses like Home Depot
- Integration with PayPal online. This allows PayPal Here to credit payments instantly to merchant PayPal accounts, rather than the usual overnight or two-day delay for fund access
- Aggressive international rollout, especially in smartphone-savvy East Asia
- Part of eBay, which has the financial ammo to fight a major price war
- Sterling Silicon Valley credentials and high-profile investors
- Early-mover advantage, including head start on value-adds like merchant loyalty rewards
- Good reputation with early-adopter merchants
- Tie-ups with Starbucks and Apple
- Respectable scale: in June, Square was processing payments at a $16 billion annual rate
- Integration with traditional hardware and point-of-sale solutions
- Long-standing and large customer networks
The weaknesses of each player stem from their company backgrounds. PayPal Here may be slowed down by being part of eBay, since agility is key in a fast-growing industry. PayPal has also had PR glitches, which comes with being a large target and having a huge customer base. For example, it has been drawing flak for being too quick to freeze merchant funds.
Groupon has seen its mainline coupon business sputter, and if it falters, Groupon will have little value to add. Also, Groupon suffers from its late entry. Right now, Groupon Payments is only for iPad and iPhone, and consumers can’t yet use an app on their phone to go “cardless” in-store.
Square has started to earn a reputation as a kind of Apple for mobile payments, high-end but not necessarily the most flexible. By contrast, PayPal Here in particular is marketing itself as a more full-featured service that also takes checks and PayPal.
Intuit and VeriFone may suffer from their associations with traditional credit card processing, which is the bane of many small business owners.
Partnerships may end up pulling one service or another to the top of the heap (we reported on the likely size of the Square-Starbucks deal August 8).
And the escalating price war will certainly shake up the market. Here’s how pricing stacks up now:
- Square: 2.75% per swipe, or limitless swipes for $275 monthly fee
- PayPal Here: 2.7% per swipe
- Groupon: 1.8% per swipe for Groupon merchants
- Intuit (GoPayment): 2.7% per swipe, or 1.7% with $12.95 monthly fee
- VeriFone (Sail) 2.7% per swipe, or 1.95% with $9.95 monthly fee
eBay, PayPal’s corporate parent, which has $4 billion in cash and a $60 billion-plus market cap, is considerably larger than all its competitors, and has to have an advantage in an all-out price war.
A few wild cards bear watching:
- Visa and MasterCard: Visa already has invested in Square, MasterCard has bet on NFC
- Apple’s iOS 6 Passbook app could eventually become a mobile payment solution
- Square itself could be acquired by an established tech or payments company
In any case, the surefire winners of the mobile payments wars are merchants (and their consumers). Not only is the cost of mobile payments coming down, but it is beginning to compare favourably with fees collected for traditional credit card payments, for which 2% or more is not uncommon.
The other clear winner is the credit card reader-based approach itself. The competition amid proliferating card readers is popularizing the technology and spurring innovations like PayPal Here’s ability to take personal checks. Even if rival mobile payment technologies like NFC (Google Wallet and others) gain real traction globally, they may be hard-pressed to catch up with the momentum of card reader-based services.
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