Inside the Black Hole

Twitter and Square could merge some of the two services’ functionalities, Jack Dorsey, the co-founder of the 4-year old social micro-blog and the new mobile credit card acceptance platform, said at a conference in Dublin.

Dorsey was attending the Dublin Web Summit, where 600 executives from technology companies gathered to talk about business opportunities.

Dorsey is no longer involved in day-to-day operations at Twitter, focusing instead on Square, which went live last week after several months of beta-testing involving 50,000 users in the U.S.

Square enables consumers to accept credit card payments by swiping their customers’ credit cards through a small square (hence the name) card reader that plugs into the phone’s audio outlet. Once the card is swiped and the payment authorized, the cardholder signs a sales receipt on the phone’s screen to complete the transaction. The sales receipt can then be emailed or texted to the cardholder. Currently Square works on the iPhone, iPod and some Android devices.

Dorsey believes that Square’s potential is huge and expects the start-up’s processing volumes to exceed $1 billion in 2011. “I’m only interested in building large impactful companies,” he said at the Web Summit. “It has potential to match if not surpass Twitter’s growth.” Square is currently shipping 10,000 card readers per month.

By Dorsey’s own admission, his latest project has met with a lot of skepticism by the financial services industry and that’s not at all surprising. Square’s business model is simply different. Moreover, it is one traditional processors have deliberately stayed away from.

First, there is the issue that existing credit card processing services are largely inaccessible to consumers. Right now, you can only apply for a merchant account – the generic term for a credit card acceptance service – as a business entity, either an incorporated one or at least a sole proprietorship. Square, on the other hand, lets individuals accept payments, after checking their credit history.

Moreover, Square charges no monthly fees and there is no long-term contract. That is great for both consumers and most small businesses that may only accept a credit card payment once or twice a month. Typically, traditional processors charge at least one fixed monthly fee (about $10 on average), place a monthly processing minimum requirement ($15 – $40), which works as a fee if you don’t reach a specified transaction volume, and require a long-term commitment (two years is the industry norm, but it can be longer than that). So if you only used your merchant account to accept a credit card payment for a couch you sold for $75 on Craigslist, you may end up paying $25 or more in monthly fees, provided you got approved for the service in the first place, which is doubtful.

That is the reason why Square can get away with charging rather high processing fees. At 2.75% + $0.15 per transaction (or 3.50% + $0.15 if you key-entered the payment information), Square’s fees are about 40% higher than the industry average (about 1.65% + $0.20). Yet, if using Square, you would only pay about $2.21 for selling your $75 couch on Craigslist, even at such high processing rates.

So to traditional payment processors Square is not necessarily a competitor, not for the time being that is. They are going after a market segment that is currently underserved, to put it mildly. There already is plenty of competition to fill this niche, coming mostly from a seemingly incessant stream of start-ups working on wildly diverging concepts, but plenty of established companies are entering the fray as well. A year or two from now one of them will be well on its way to becoming the PayPal of mobile payments. It is too early to say who will win the race, but the payoff will be huge.

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.

Starbucks has expanded its mobile payments pilot to include more than 300 stand-alone stores in New York City and parts of Long Island, the company announced this week. The coffee chain launched the mobile payments test just over a year ago when it equipped 16 of its stores with the wireless technology. Earlier this year, Starbucks expanded the pilot program by adding more than 1,000 outlets located within Target stores.

The service, called Starbucks Card Mobile, allows customers to pay for their coffee by displaying a bar code on their smart phone, which is then read by a 2-D scanner linked to the point-of-sale terminal.

The Starbucks Card Mobile app is currently available to most BlackBerry models, the iPhone and the Ipod Touch. Starbucks has calculated that these devices are used by 71 percent of Starbucks smart phone-carrying customers. An Android version could be coming soon.

The app links the customer’s phone to his or her Starbucks Loyalty card, which is a prepaid card. Once the funds are used up, the card can be reloaded through the Starbucks Card Mobile app or through PayPal’s new Mobile Express Checkout service. Additionally, the app allows customers to check their My Starbucks Rewards status, or find nearby Starbucks stores.

Almost 20 percent of all in-store transactions are now paid with the Starbucks card, the company said. The chain expects customers to load more than $1 billion on their Starbucks Cards this year. The company said that card sales were up by 17 percent in the third quarter over last year and reloads on existing cards increased by more than 59 percent during the same period.

We have written extensively about the multitude of mobile payments solutions that have been cropping up all over the place over the past year or so. The number of technologies being tested is almost as great.

Starbucks, however, is counting mostly on technologies that have been around for decades, rather than going for something more headline-grabbing. They may have a point.

Firstly, the payment method is a prepaid card. People know what they are and how to use them. Apparently they also like them, judging by the above statistics.

Secondly, the payment acceptance technology is rather commonplace. That’s not necessarily a bad thing, either. The scanner may not be quite as edgy as, say, a near-field communication (NFC)-enabled POS terminal, but it has its advantages. It can be found everywhere and it has been proved to work, securely. Moreover, there just aren’t that many NFC-enable phones out there anyway.

But is this the way mobile payments should go forward? Would you want to have to use a separate app for each retailer and provide sensitive personal information over and over again? It seems to me that a mobile payments service that can be used everywhere would be a much more logical solution.

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.

Just a day after PayPal unveiled its new mobile payment system, AT&T announced its own plans for the future of mobile payments. The two platforms are based on fundamentally different models. While PayPal allows mobile consumers to pay with credit cards, as well as with their PayPal accounts, AT&T’s service is based exclusively on direct mobile billing where the purchase amount is added to the customer’s monthly phone bill.

AT&T has partnered with three different mobile payment solutions providers – BilltoMobile, Boku and Zong – to allow its users to purchase various digital products by typing their phone number at the checkout.

It is not known how much AT&T will be charging for the service. Previously carriers have charged mobile payment providers as much as 40 – 50 percent of the transaction amount for sales made through premium SMS messages, which is a big reason why merchants have been slow to adopt the new technology. It is reported that the carrier has agreed to reduce its fees, but we will have to wait to find out exactly what that means.

Some observers expect that linking mobile payment services directly to the carrier’s billing system would reduce fees to under 20 percent. That may sound like a big cut, but that is only because the current fees are exorbitantly high. Even if AT&T lowers its fees to 10 percent, which is unlikely, that would still be huge. To give you a perspective, regular e-commerce credit card sales typically cost merchants about 2.10% + $0.20 of the transaction amount.

Admittedly, mobile payment processing is in its nascent phase and it is not fair to compare it to established services. But even if you compare apples to apples, the carrier’s pricing would have to be much lower than what we expect, if it is to be competitive. PayPal’s new Mobile Express Checkout service, for example, will charge merchants 5% + $0.05 per transaction.

Mobile payments companies are of course spending more time trumpeting the huge benefits for merchants of accepting mobile payments than they do explaining why the service fees are so high. They have a point. Estimates of the potential growth of the mobile payments industry vary widely, but there is little doubt that it will be exponential. According to Juniper Research, for example, mobile payments will exceed $200 billion by 2012, up from $68.7 billion in 2009.

As mobile payments grow in volume, and provided consumers warm up to the direct billing option, they can potentially eat away into the credit card segment of the market. In effect, mobile phone accounts will act as charge cards – a type of credit cards that have to be paid in full at the end of each monthly cycle. That raises a number of questions about the status of mobile carriers that offer financial services and these may one day be looked into by the regulators.

What about the possibility of carriers allowing customers to roll over a portion of their monthly bill to the next month and charge interest on the balance? That would surely turn them into banks. What would regulators say about that? We know that Wal-Mart, the world’s biggest retailer, has been unsuccessfully trying to become a bank for years. Would carriers fare any better? Would they even want to go that route?

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.

PayPal unveiled on Tuesday a new mobile payment system, called Mobile Express Checkout. The announcement was made at PayPal’s Innovate 2010 developers conference in San Francisco.

Mobile Express Checkout enables customers to complete purchases and check out of participating mobile e-commerce websites from their phones. The process goes through three stages:

1. When ready to complete the purchase, the customer clicks a “Checkout with PayPal” link on the mobile website or in a SMS text message.
2. The customer is transferred to PayPal’s website and asked to log into his or her account and make the payment, much as they would do from their PC.
3. The customer is taken back to the merchant’s website to complete the transaction.

According to PayPal, merchants who have beta-tested the new service, including Nike and Foot Locker, have reported double-digit sales growth on their mobile stores after adding the feature.

Mobile Express Checkout currently only allows customers to check out with their PayPal accounts, however the company said that in 2011 it will enable merchants to accept credit cards directly. This feature will be possible through PayPal’s partnership with VeriFone.

In another product announcement at the conference, VeriFone introduced its PAYware Mobile card encryption sleeve for iPhone that will now accommodate PayPal payments as well as traditional credit card transactions. PAYware supports PayPal’s Bump technology that enables iPhone users to tap their phones together and transfer money between their accounts.

The mobile payment space has been buzzing with activity for many months now, with start-ups with names like Square, Boku, Mophie and Venmo seemingly gaining advantage over the established players. Just a couple of days ago Square, the creation of Twitter co-founder Jack Dorsey, officially went live after months of beta testing. The company said that they have already shipped 50,000 credit card readers to users.

Moreover, PayPal is being attacked by start-ups on fronts much closer to its core business. WePay, for example, has taken aim at what the young company has identified as a niche neglected by PayPal: enabling groups of users to collect and track money for bachelor parties, sporting events, donations, etc. They have even managed to convince one of PayPal’s co-founders – Max Levchin – to invest in their project.

Two other start-ups – Popmoney and ZashPay – have focused on simplifying the funding process, an issue PayPal merchants have long complained about. ZashPay, for example, facilitates the direct transfers of funds between senders and recipients, without holding on to the money for any length of time.

The new PayPal announcements clearly indicate that the payment giant is determined to make its presence felt in the nascent mobile payments market, which it expects to generate $700 million for the company in 2010, up from $141 million in 2009.

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.

Millennial Generation (also known as Generation Y) consumers are the most willing adopters of alternative payment methods, according to a new study conducted by Hitachi Consulting and the Bank Administration Institute (BAI). Millennials (ages 18 to 34) are already on par with the 35 – 54 age group in using debit cards and alternative methods for in-store purchases, while consumers aged 55 or older lag far behind.

According to the study, the primary considerations for Gen Y members when choosing a payment method are:

• Ease of use (35 percent),
• Financial security (29 percent),
• Security and safety (27 percent) and
• Speed (20 percent).

It came as no surprise that younger consumers are the ones most willing to try out new payment services. According to the study, 12 percent of Millennials own contactless payment devices, a higher proportion than any other group. Other interesting stats show that in the Generation Y group:

• Debit card ownership is the highest at 80 percent.
• Credit card ownership is the lowest at 56 percent.
• Making small purchases under $5 online is the highest at 56 percent. By comparison, the percentage for consumers aged 35 – 54 is 46, while for those over 55 it is 23.

Debit card use is on the rise, according to the study, while other payment methods are losing ground. The data showed that checks accounted for only 5 percent of all in-store purchases in 2010, down from 11 percent in 2005. Cash payments also decreased during this period, to 26 percent from 33 percent.

The survey found that debit card users value rewards less than credit card users. While 21 percent of debit card holders get some kind of rewards, 64 percent of them state that this is not a very influential factor when they choose this form of payment. By comparison, rewards considerations are “extremely or very influential” for 45 percent of credit card holders.

Debit card use continues to outpace credit card spending, as evident from the following stats:

• Debit card ownership remained flat, while credit card ownership decreased from 71 percent in 2008 to 67 percent in2010.
• Debit card in-store usage continued to grow. In 2010 debit cards accounted for 42 percent of all transactions, up from 37 percent in 2008. Credit card use showed a decline during the same period – from 22 to 19 percent.
• Consumers perceive debit cards are better in managing their budgets.

Interestingly, the study found a marked growth in person-to-person (P2P) payments, mostly online and largely due to the wider use of PayPal. According to the survey, P2P payments among those who made at least one online purchase, increased by 13 percent in only two years, to 62 percent in 2010 from 49 percent in 2008. P2P payments online now trail only credit cards, according to the study.

“With the continued use of debit at the expense of credit, checks, and cash, financial institutions may want to focus their marketing messages on the safety, convenience, and budget control aspects of debit as a way to continue the trend,” commented Jim Neckopulos, Senior Vice President, National Financial Services Practice for Hitachi Consulting.

That is a great advice. Additionally, the amazing rate at which start-ups are churning out alternative payment services – Square, Boku, Mophie and FaceCash, to name just a few – and the enthusiasm they generate among Millennials, guarantees that much bigger changes lie ahead.

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.