Which E-commerce Giants Are Making a $100 Million Bet on a New Disruptive Technology, and Which Won't?
The next great tech wave will see smartphones and tablets doubling as our wallets and banks, but not every household name is on board.
eBay's (EBAY) PayPal is one of the most trusted names in online payments, so one might assume that it would be poised to dominate market share in the burgeoning mobile payments space. But the crowded mobile payments marketplace, as well as the difficulty in determining what will compel retailers and consumers to adopt this new approach to commerce, is making PayPal's prospects in this arena uncertain.
Mobile payments are expected to get a big push this year from mobile telecom providers and smartphone makers who are keen on using the nascent technology of near-field communication (or NFC) to spur adoption of their mobile payment systems.
NFC enables the wireless sharing of data between two electronic devices, but unlike Bluetooth's longer range, NFC only works when devices are at a distance of 1.5 inches or less. NFC's extremely short range makes it ideal for the secure exchange of data, particularly mobile payments. Instead of swiping a credit card at points of purchase, NFC-driven payment systems will allow consumers to use their smartphones to pay with a contactless swipe at checkout.
Mobile Telecom Pushes NFC
While NFC likely has myriad applications beyond the realm of mobile payments, mobile telecom companies and tech giants are driving the rollout of this technology with the hope of joining companies like Visa (V) and Mastercard (MA) as passive toll-takers of the billions of dollars in retail transactions each year. Indeed, Juniper Research forecasts that NFC applications will facilitate $74 billion in transactions by 2015.
Meanwhile, credit card companies don't want to be left behind by some other potentially disruptive mobile payment technology, so they are supporting NFC because it still allows them to facilitate transactions.
AT&T (T), Verizon (VZ), and T-Mobile are investing $100 million in a joint venture to create the Isis Mobile Wallet, which allows users to load their existing credit cards and customer loyalty cards into a smartphone-based app for a contactless swipe at points of payment. The consortium has already secured the support of the four major payment networks, and its app is slated to launch this summer.
Google (GOOG) debuted its Google Wallet app on Sprint's smartphones late last year. And Apple (AAPL) is rumored to finally include NFC capability on its forthcoming iPhone 5, which dovetails with the award of its patent for the iWallet in early March.
But PayPal Sees NFC as Antiquated
So where is PayPal in this crowded marketplace? In fact, PayPal president David Marcus views NFC-driven mobile payments as an antiquated idea that predates the emergence of cloud-based systems.
Instead of securing payment data on phones, Marcus believes it makes more sense to store the actual payment data in the cloud, while retailers will merely use a smartphone or other mobile device to authenticate the identity of the user.
Marcus believes that this will shift the payment process away from point-of-sale terminals by decentralizing where and when sales take place within stores themselves or even in advance of the consumer arriving at the store. That could create efficiencies for retailers and consumers by alleviating the stress of a long checkout line.
But this revolution in the retail experience could potentially require stores to completely overhaul their layouts and staff training, which could be an even more expensive proposition than mere hardware upgrades.
While others are similarly dismissive of NFC, Marcus is also mindful of leveraging the payment data associated with the 106 million users who already have PayPal accounts. And though Apple is not ostensibly in the business of payment solutions, its 200 million iTunes accounts, which may be the largest hoard of payment data stored online, could offer it an opportunity along those same lines.
When Will Consumers and Retailers Embrace Mobile Payments?
Although NFC clearly has momentum, there is still debate over what aspect of the mobile payment experience will ultimately drive consumers and retailers to embrace this new transaction method.
From a consumer perspective, NFC-driven transactions aren't necessarily faster than simply swiping a credit card. They still require digging a smartphone out, opening an app and entering a PIN.
And merchants are concerned about the costs and integration involved in upgrading to point-of-purchase hardware that can accommodate this new contactless technology as well as existing forms of payment. According to VeriFone Systems (PAY), which is the leading maker of payment terminals in the US, the average replacement cycle for payment terminals is five years, while smaller retailers often retain their payment terminals as long as seven to ten years.
As one example of the difficulty NFC-driven payment systems will have in wooing retailers, Best Buy (BBY) spent tens of millions of dollars upgrading payment terminals at its 1,100 stores a little more than two years ago, and is loath to commit to a new round of upgrades so soon afterward.
But retailers could have their hand forced by the emergence of Visa's new EMV chip-enabled cards. EMV chips offer greater security for credit cards than magnetic strips, but they will also require new payment terminals to facilitate their use.
The credit card industry plans to gradually shift liability for fraudulent non-EMV transactions to retailers starting in late 2015. So 2015 or 2016 could end up being a key year for payment terminal upgrades that can accommodate both EMV and NFC.
However, NFC mobile payment systems are less about increasing the efficiency of the payment process, and more about spurring incremental sales by fostering customer loyalty via coupons and promotions.
Most payment apps will provide new methods for retailers to narrowly target their marketing to consumers. That should eventually enable retailers to adjust offers to customers while they're shopping, capture additional sales from online channels, and gather even more valuable data about their customers' spending habits.
NFC has already achieved moderate market penetration in Japan and South Korea, which suggests that both consumers and retailers there found value in the technology.
eBay's Mobile Payments Strategy Eschews NFC
Although eBay is not enamored of NFC, it's still carefully expanding into the mobile payments space through other methods.
eBay's payments division, which includes PayPal, BillMeLater, and recent acquisition Zong, produced a substantial 37.9% of the firm's $11.7 billion in revenue last year, which was an increase of 28.4% from the prior year. And PayPal processed $4 billion in mobile payments in 2011 and management forecasts that number could top $7 billion in 2012.
eBay acquired Zong in a $240 million all-cash deal late last year. Zong was founded by David Marcus, who was subsequently promoted to PayPal president at the end of March. Zong's mobile payment system allows consumers to enter their mobile phone numbers when paying for goods online, and the charge for the transaction ends up on their phone bill.
Zong's work in this area is likely what precipitated last month's debut of PayPal Here. The new service allows retailers to use a simple dongle that plugs into a smartphone. Consumers can then swipe a standard credit card using the dongle's card reader or pay via PayPal with the phone number that's associated with their account.
PayPal is also looking to help retailers accept this mode of payment at their existing payment terminals. If the payment terminal upgrade cycle ends up being the major near-term barrier to NFC adoption, then PayPal's ability to offer mobile payments with existing hardware could garner it a first mover advantage.
Even so, one wonders if consumers accustomed to simply swiping a card and entering a PIN will find entering a nine-digit phone number and a PIN efficient enough to warrant its use.
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