We’re tantalizingly close to mobile payments. Whether it’s via SMS, contactless NFC chips, facial recognition (!), dongles that let you swipe your credit cards or other means, plenty of startups want a piece of the pie.
Why should I care?
Cash has many disadvantages, like security and traceability. If you could pay for stuff with your phone, that would be very convenient. In the developing world where entrepreneurs are leapfrogging our current technology, mobile payments and banking are having a huge impact.
Paying for things with your phone would be more convenient and let you track your expenses better.
Why is this such a big deal?
Because it’s a huge market. Think of all the cash transactions that occur around the clock around the world. Any company that could get a 1% cut of that would be enormous.
What are mobile payments going to look like, in practice?
No one knows for sure. Every startup has its own twist on it. Some people are betting heavily on NFC chips, which are probably coming to the next generation of smartphones, and would let you pay for things without touching anything but your phone. Some people are betting on using SMS, linking your credit card to that. Some people are making credit card readers that can plug into phones.
It’s part of the reason why this market is exciting: everyone is trying a bunch of different things.
Do startups have a chance?
It’s an uphill battle, perhaps moreso than for even most startups.
First of all, anything having to do with payments is very complex. There are a host of regulatory issues, as well as security and fraud issues to disentangle.
Second of all, the big guys all want a piece of the pie. If Google and Apple put an NFC chip on their phones, they’re going to want to own mobile transactions. PayPal is also making a big mobile payments push.
And finally, distribution is a big challenge. It’s a two sided market: for a payment method to work, both buyers and sellers have to have it. And getting merchants to adopt something is very hard, because there are millions of them and they’re not usually tech-savvy. Consumers are also not used to paying stuff for mobile, and most of them don’t see it as a problem that there’s no easy way to pay with your phone. In fact, they may be right: mobile payments are popular in other countries of the world, but that doesn’t mean it will be in the US and Europe.
Then again–high stakes and high risk of failure? That’s regular for a startup.
Online commerce with the phone is promising. Instead of having to pull out a credit card, you just plug in your phone number, get a text message with a confirmation number, enter it, and boom! You're done. Sales with mobile payments convert much better than PayPal. It also reaches people who don't have credit cards like teenagers.
But because the payment goes through the carrier billing system, carriers have to be on board, and they take huge transaction fees, from 50 to 70% (Update: a rep emails us to tell us they're closer to 30-50% nowadays.). This has limited this kind of payment to virtual goods on Facebook and other small items.
As noted earlier, the big problem for these startups is to get distribution. So by working with banks and other companies, mFoundry can get into your phone easier. For example, mFoundry was behind Starbucks' payment app.
Problem is: if you need other people to reach your customers, you're at your partners' mercy.
Bling Nation wants to do mobile payments, and to get users they are betting on Facebook, and have created a promotional app that rewards you with discounts and gifts for doing actions. Smart, under the radar way to get on young people's phones.
Venmo is simple: sign up with your credit card and phone numbers, and you can just use SMS to pay for things. It's also social: for example, you can allow people to 'charge' you for small things like lunch. And they're trying game elements.
Payments startups have a chicken and egg problem: both the buyer and seller have to use whatever it is you're selling. But someone has already solved the chicken and egg problem for card merchants: the credit card companies.
Thanks to Square's dongle, anyone can accept credit card payments. That's already great, but mark our words: one day Square will drop the dongle and try to cut out the credit card companies.
FaceCash has a clever way to break the chicken and egg problem as well: if you want to pay, you hit a button that will display a barcode on your phone, which the merchant can then scan with his or her existing point of sale system. And the app also displays your face, so that the merchant can tell that this is, indeed, your phone, which is more secure than a credit card.
TabbedOut is going for the bowling-pin strategy: own one specific niche before branching out. In this case, it's bars and restaurants. Their app lets you settle your bar tabs. They partner with merchants and work with them. The plus is that when the system works, it works. The downside is that they have to figure out a way to sign up every merchant in the universe.
Jumio (not the same thing as Jumo, the non-profit started by another Facebook co-founder, Chris Hughes) is a stealthy mobile payments company with a non-specific site that carries a wacky video.
They caught our eye because they raised over $6 million in a round led by Eduardo Saverin, Facebook's (in)famous co-founder.
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