With so many mobile “smart” phones in the world, hence the ubiquity of a small computer connected to the internet in our hands, it didn’t take long for the obvious idea to emerge: “hey, we can do mobile payments!”
In the past four years, I have talked with other 50 mobile payment startups, from idea stage to series F — what follows is not a comprehensive “analysis”, but a summary of my notes from many of those conversations. And of course the investment potential assessment is mine, as of this morning — things may change by the time you read this…
There are several ways of inserting a mobile device in the payment ecosystem, each of them with a different set of players and investment potential.
A first almost obvious solution has the customer paying directly from his phone bill, as the purchases in physical stores and online stores are added to his telco payment — promoted by Telcos and many tech startups that offer the necessary technical elements. Of course for most banks this would be anathema, since this direction would be counter to a financial services institution strategy, and it dis-intermediates the bank from the “value add” part of the payment ecosystem. Although hard to believe, some banks have adopted this path, and of course many telcos call this solution mobile payment. Fintech investment potential: low.
In another variation, physical plastic cards are emulated on the phone, either with card credentials stored, securely encrypted, in the phone in a chip called “secure element” SE (various possible placements — SIM card, microSD card, embedded in phone HW), and communication with the physical POS through secure contactless (NFC). This technology solution requires minimum changes to existing payments solutions, as the only new technology outside the phone-is-a-card is an NFC-enabled POS, which have started to be deployed in large numbers in many countries (most of Europe including Russia, Brazil). The immediate benefit of such a digital issuance scheme is very low cost, flexibility and value-ad integration (coupons come to mind). At @sbtvc we have invested in Sequent, a leader in this area.
Variations of the above include keeping the card info on the server (“SE in the cloud”), and still emulating card behaviour at physical POS, using other contactless card connectivity such as QR codes (many startups) and bar scanners (for example Starbucks), using prepaid cards instead of “regular” credit/debit cards, etc.
While this path has been hyped tremendously in the past 5 years, and is now considered “dead”, my view is that the change pattern we have seen played repeatedly puts NFC/card emulation at the bottom of the trough following the peak of the hype, and the technology and companies that have survived are well positioned to gain in the short term. Fintech investment potential: high.
A completely different mobile payment direction is keeping the cards “as is” and adopting a new type of POS that is attached to a mobile phone (Square was first, many followed). With so many clones everywhere in the world, I believe that the Fintech investment potential is low.
In yet another variation, the cards can be kept “on file” in the cloud, the mobile payment provider integrates its back end server with the physical merchant POS software, and the transaction can be triggered by presence in the store initiated by a mobile app. In a possible implementation, the individual user authorises the payment by communicating to the physical store a one-time password that they get from the mobile app. What is difficult here is the integration with existing POS software, which adds a level of complexity to the overall solution, and it may explain the relatively low traction experienced so far. At the same time, this integration combines the ease of use of a mobile payment mechanism with access to level 2 purchase data (the data on the “receipt”) opening up a new level of opportunity in analysing the transaction and purchase history for generating targeted cash-back offerings (similar to Cardlytics or Red Zebra — another @sbtvc investment). Fintech investment potential: I dont know.
Exciting times for mobile payments…