Inside the Black Hole

I have reviewed several different mobile payment concepts on this blog, as well as the prospect of cell phones replacing credit cards. At the rate smart phones are evolving, it seems inevitable that at some point at least one of these new technologies will take off and many of us will add another form of electronic payments to our arsenal.

PCWorld.com’s Mark Sullivan has a great article on the probability of this process beginning in 2011 and achieving “broader adoption” in 2012. He is writing specifically about one of the contenders – a start-up called Boku – but his reasoning applies to the nascent industry as a whole. Here is how he describes the mobile payment process:

Scenario No. 1: You’re in a store, you find something you want to buy. You go to the counter and swipe your phone. The chip inside your phone authenticates with the store’s billing system, and your payment is made.

Scenario #2: When you’re shopping online there’s even less time to reconsider your impulse buys. You watch the first two minutes of a movie, and decide you want to pay to watch the rest. You simply input your phone number to the website. Your phone company/credit card company sends you a text asking you to confirm the purchase. You return the text confirming it, and that’s it.

The way it works on the backside is this. When you buy a phone, you are given the chance to buy a credit card too. The “credit card” is just the chip that’s built into your phone. Your purchases don’t show up on a separate credit card bill. They’re now listed on your phone bill.

Sullivan’s outline of the mobile payment process of the future should also help dispel a commonly held misbelief that cell phones will eventually render credit cards obsolete. What actually will happen is that credit cards will transform smart phones into payment tools, not the other way around. In other words, the only thing that will disappear will be the piece of plastic that currently contains your credit card account information. Pretty much the way books are gradually shifting their age-old paper form into a more contemporary digitized appearance.

Perhaps the most interesting question, other than who or what will become the dominant smart phone payment platform of the future, is what role the mobile networks will play in the process. Broadly speaking, there are two possible scenarios:

1. The carrier provides the line of credit.
2. The line of credit is provided by a bank.

The first option will allow the carriers to take the lion’s share of the processing fees charged to merchants accepting mobile payments, and potentially to charge customers interest for the portion of their balance that is not repaid at the end of the month. Pretty much what credit card companies do. But do carriers want to become credit card companies? Or perhaps the question should be whether the regulators will allow them to act as banks, whether they want to or not. The answer is that it is unlikely that this will happen.

The second option is one that is already being tested by three of the big U.S. carriers – Verizon, AT&T and T-Mobile. They have teamed up with credit card company Discover and British bank Barclays to test a service that will enable users to make payments with their phones, which will then be processed on Discover’s payment system. Apparently Barclays will be managing the credit card accounts. It has not been expressly stated, but it sounds like one of the banks (probably Barclays) will be underwriting the credit lines.

Whatever payment service wins the mobile race, it is unlikely that credit cards in their plastic incarnation will completely disappear from our wallets any time soon, just as paper books will probably coexist with their digital counterparts for some time to come. Given enough time, however, they will both go the way of the horse-drawn car.

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.

Another start-up has developed a service to enable consumers to use their smart phones as credit cards. Its name is MobilePay and it has won an award at the TechCrunch Disrupt show. MobilePay has not yet launched its service, but it expects to do so in November, according to President Kyle Circle.

So what makes MobilePay stand out from the thick crowd of start-ups promising to relegate credit cards and wallets to the annals of the history? Is it really any better than Square, mophie, FaceCash, Bling, Swipe It or Boku, to name just a few of its competitors?

Well, it is a bit too early to answer this question, considering that MobilePay is not even freely available yet, but its concept is promising. It doesn’t require any new equipment to be attached to the user’s phone (as Square does), nor does it need near field communication (NFC) technology to transmit information between the user and the merchant (as Visa PayPass does).

Here is how it works.

First, the user needs to set up an account with MobilePay and to provide his or her credit or debit card information. The account data are stored on MobilePay’s processing bank’s server, not on the phone. If the phone is lost or stolen, the user can log into his or her account on MobilePay’s website and turn the app off. In the mean time, a thief can only access the account information from the phone, if he or she knows the account’s PIN.

When the user wants to make a MobilePay payment at a participating merchant, he logs into his account from his phone. The app uses the phone’s GPS to locate the merchant and directs the payment processor to send the encrypted card information to the merchant. The transaction information is then sent simultaneously to the merchant’s point-of-sale (POS) terminal and to the user’s phone. The terminal then prints out a paper sales receipt for the customer to sign and complete the transaction.

So far, MobilePay’s app is available for download to iPhones only, but the company promises to expand it to include other phone platforms.

Provided it works as advertised, the app promises to simplify the checkout process somewhat, but there is a big hurdle that MobilePay will first need to overcome. It will have to convince merchants to sign up. And there is a big obstacle on the road to achieving this goal – pricing.

MobilePay’s website states that the pricing will be “Credit or Debit Processing Fees + 1% + 25 cents.” What this means is that, in a card-present setting, a consumer Visa credit card transaction will be processed at a rate of 2.54% + $0.35. By comparison, a typical card-present rate for such a transaction would be 1.65% + $0.20.

It is unlikely that a meaningful number of merchants will agree to pay such a high fee for the service, especially in the current economic and regulatory environment. Just a couple of months ago retailers won a huge battle against the payment card industry. They managed to convince Congress to include a clause in the financial overhaul legislation, charging the Federal Reserve with ensuring that debit card fees are “reasonable and proportional” (read lower). It is hard to believe that they will make an exception for a cool start-up.

Accept card payments quickly and safely

Accept credit and debit card payments at the lowest processing costs. You will get:

• Free merchant account set-up.
• No fixed monthly fees.
• 24 / 7 customer support.

Visa is joining rival MasterCard in testing a pilot program that will allow New York commuters to pay their Metropolitan Transportation Authority (MTA) fares by waving their phones or credit cards by a specially equipped turnstile, we learn from Reuters’ Maria Aspan.

Earlier this summer, MasterCard said that the MTA has agreed to allow MasterCard PayPass cardholders to use their credit cards instead of MetroCards to ride certain subways and buses in the city. Commuters in London, Washington, D.C. and Hong Kong have had this option available for years.

PayPass cards have a chip that allows users to tap their cards against a specially designated box on buses or subway turnstiles, instead of swiping them. The chip can also be attached to a smart phone. The chips are using near-field communication (NFC) frequency to communicate with the turnstile. The NFC frequency allows data transmission within a range of less than 20 cm. (8 in.), which limits the risk exposure to threats from hackers.

For the MTA, the end goal of the experiment is the full replacement of the MetroCard by 2014, a project of MTA Chief Executive Jay Walder, who previously worked on implementing London’s Oyster Card – an all-purpose transit card. Walder hopes to eliminate the 15 percent cost the MTA incurs in collecting fares.

However, this goal could not have been achieved without bringing the biggest payment network on board. So yesterday’s announcement that Visa will enable its cardholders to pay for their MTA fares using contactless technology brings Walder a step closer to successfully completing the project.

Visa’s equivalent to MasterCard’s PayPass is called payWave and uses the same technology as its rival. Visa has also issued a payWave-enabled commuter benefits card called the TransitChek QuickPay Card, which allows users to pay their MTA fares using the so-called “tax-advantaged flexible spending accounts.” Bank of America is facilitating the smart phone payments in New York, according to Reuters.

The chip, used to transmit Visa payWave transaction data, needs to be inserted into a smart phone’s MicroSD slot. Users of iPhones need to get an iPhone case containing a MicroSD slot, because the iPhone doesn’t have a memory card slot.

Visa payWave and MasterCard PayPass payments are accepted at 28 stops along the Lexington subway line, at most PATH rail stations in New York and New Jersey, on several MTA bus lines in New York City, on select NJ TRANSIT bus routes in northern New Jersey and at Newark Liberty AirTrain Station in New Jersey.

MTA’s contactless payment test is a step in the right direction. At the speed communication technology is evolving, within a few short years most of us will be using our cell phones as credit cards and merchants had better prepare for it, lest they are left in the past.

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.

The mobile payments market has just become even more crowded. QuickBooks maker Intuit and mophie, creator of the JuicePack battery for iPhone, have launched the Complete Credit Card Solution, which enables iPhone users to accept credit card payments, the companies announced. The product is now available in Apple stores and will soon be available online as well.

We have seen a number of credit card processing product releases for smart phones and specifically for the iPhone in the past few months, most notably Square, but also MasterCard MoneySend, Visa payWave and Swipe It, among others. In fact, Mophie first announced that it was planning to start producing credit card readers for the iPhone back in December of last year.

The Complete Credit Card Solution works by integrating “Intuit’s GoPayment credit card processing app and quick-to-activate merchant account with the mophie marketplace iPhone credit card reader,” according to Intuit. Users can have the service up and running “in as few as 15 minutes.”

Unlike previous announcements, this one comes with a fairly detailed pricing list, which is worth taking a close look at:

The Complete Credit Card Solution from Intuit and mophie is available for the iPhone 3G and 3GS for $179.95 at Apple Retail Stores and soon on Apple.com.

…

GoPayment, including the Intuit merchant account, offers competitive pricing at $12.95 a month, a 1.7 to 3.7 percent discount rate and $0.30 to $0.34 per transaction fee. There are no long-term contracts, cancellation, gateway or set-up fees, and one account can enable up to 50 users.

First, it should be noted that mophie’s card reader enables the acceptance of “card-present” transactions, which get the lowest processing rates from Visa and MasterCard. Now let’s break down the pricing:

• Cost of product – $179.95. This is essentially the cost of uploading the GoPayment app to an iPhone. It seems a bit excessive, as similar uploads to point-of-sale (POS) terminals are typically provided for free. True, you don’t have to actually buy a terminal, but it’s still high.
• Merchant account fee – $12.95. This fee is comparable to what other merchant account providers charge for keeping the account open.
• Discount rate – 1.7 – 3.7 percent. Most processors now charge qualified rates of around 1.65 percent and non-qualified of 3.25 – 3.50 percent, so GoPayment is priced higher than the average.
• Per-transaction fee – $0.30 – $0.34. Here is the most substantial pricing difference. The average qualified rate for card-present transactions in the industry is currently $0.20, 50 percent less than what GoPayment charges. The average non-qualified rate in the industry is $0.30.
• Other fees. Most processors no longer charge set-up fees, and a gateway fee is not associated with card-present accounts. GoPayment does offer a no-contract service, however the user must pay $179.95 upfront to enroll.

Overall, the service does seem a bit pricey and it is unlikely that it will be adopted by consumers who may just want to have another option for splitting up a restaurant bill with friends. The more likely adopters would be the small business or self-employed types of users who need a way for accepting card payments on the go, e.g. at a trade show or at a customer’s location. These types of users, however, typically only need the service intermittently, which makes them highly cost-sensitive and may cause them to balk at paying a high upfront fee, in addition to the monthly fee.

We’ll have to wait and see how well Intuit and mophie will deal with fraud-prevention and reliability issues, which have plagued previous entrants into the mobile payments market, including Square.

Whether this particular venture will succeed or not, however, the concept of using smart phones for processing payments will eventually be proven right. After all, wireless credit card processing terminals use the same signals to transmit transaction information that cell phones use to communicate voice and data. Why not combine them?

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.

This past weekend we learned from the WSJ that a loyalty card startup, called CardStar, has attracted the attention of Verizon. The carrier has invested $400,000 in the Boston-based company, which although it isn’t much, provides yet another indication that the major U.S. cell phone operators are becoming increasingly interested in the potential of the mobile payment technology to provide an additional, and potentially major, source of revenue.

Just a couple of weeks ago, another Verizon mobile payment venture made a much bigger splash when it was announced that the carrier was teaming up with rivals AT&T and T-Mobile, payment processor Discover and British bank Barclays to enable consumers to make payments at participating merchants using their cell phones.

The CardStar project is not nearly as ambitious as the other one, but it does offer a look into how retailers may be managing their loyalty programs in the near future. It is not immediately clear how Verizon will utilize the service to generate revenue, but it is a safe bet that they are seeing CardStar as part of a larger mobile payment picture.

CardStar has developed mobile apps for the iPhone, Android, and BlackBerry, which allow users to consolidate their loyalty and membership cards in one place. The idea is that you won’t have to carry all these small pieces of plastic on you anymore. Instead, the merchant can scan the card’s barcode from the screen of the user’s phone.

What makes CardStar attractive to retailers is that they can run promotions and loyalty programs through the startup’s back end. They can load offers, coupons and incentives directly into the application. Offers can be customized using a geotargeting feature.

CardStar claims to have signed up more than 2,000 merchants already, both large and small. “We have about 30 competitors out there, but all 30 put together don’t have the numbers [of users] that we have,” boasts CardStar’s CEO Andy Miller, as quoted by the WSJ.

Miller says that CardStar has 700,000 unique users and that number is sure to grow. On top of the convenience of storing all these loyalty cards in your phone, you won’t have to clip coupons anymore.

CardStar and its competitors offer shoppers convenience and retailers opportunities, but they are also helping us see the future of plastic cards, or the lack of it. Within a few short years, most of us will be using our cell phones to identify ourselves to retailers, communicate with them, find the best prices in our area or online, and pay for our purchases.

Accept card payments quickly and safely

Accept credit and debit card payments at the lowest processing costs. You will get:

• Free merchant account set-up.
• No fixed monthly fees.
• 24 / 7 customer support.