A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.
In Part 1 of this analysis, I described the pre-mobile payments game, which involved Users, Merchants, and Credit Card Companies. I also disussed three significant features of the pre-mobile game: (i) Credit card fraud is a huge cost for Credit Card companies; (ii) The Credit Card Companies introduced a new credit card system in 2005 that is contactless and more secure than the current system, but the new technology has been slow to become adopted in the US; and (iii) High credit card fees have generated resentment from (Users and) Merchants toward the Credit Card Companies, and in 2012 the Merchants established a consortium, MCX, to develop an alternative payment system that would bypass the credit card system.
Version 2 of the Mobile Payments Game starts after the introduction of smartphones. The widespread adoption and use of smartphones has paved the way for the development and recent introduction of mobile payment systems. It seems reasonable to assume that since smartphones enable mobile payment systems, eventually, Users will come to expect their smartphones to offer that capability. What this means is that any smartphone provider who hopes to gain widespread market share of their handsets will have to offer a mobile payments system. Of course, in theory, a smartphone provider can always offer someone else’s mobile payment system on his handsets – say, Apple could offer a Google-designed system for use on iPhones – but this would be a foolish move strategically for major systems providers. They would be passing up an extremely valuable opportunity for generating revenues, data, product differentiation, and/or general promotion of proprietary (branded) technology ecosystems.
Since Apple and Google currently provide the majority of smartphone operating systems, and since the two behemoths seem to have developed a need to compete in every possible market, it should come as absolutely no surprise that Apple and Google have been developing their own mobile payment systems. Also, based on the tremendous antipathy that has been developing for decades by Merchants against Credit Card Companies, it’s also logical that Merchants have been developing a mobile payment system that will bypass the Credit Card Companies. The last group of early mobile payment systems developers is the Mobile Carriers. The Mobile Carriers probably figured that since they have direct access to smartphone Users through their mobile services offerings, it would make sense for this relationship to serve as a means of them getting their finger in the humongous consumer credit card payments pie, if at all possible.
Overview of the Game
The motivations of each group of players in the early market for mobile payment systems (depicted in Figure 4) are as follows.
Apple and Banks/Credit Cards
Apple’s entry into the mobile payments game is a no-brainer. Apple is a principal player in the smartphone game, and, as I just said, mobile payment systems will become a must-have feature for smartphones. Having its own system gives Apple a means of further promoting its ecosystem. So in and of itself, offering an “Apple-worthy” mobile payment system is a natural step for Apple.
The fact that Apple was able to negotiate a cut of the Credit Card Companies’ fees on every transaction that uses Apple Pay is just icing on the cake. A whole lot of icing. Perhaps eventually way more icing than cake.
As for the Banks and Credit Card Companies, they’re excited about mobile payment systems, because they’re hoping that the ease and convenience they provide Users will lead Users to make more credit card purchases. And the Credit Card Companies are particularly excited with the prospect of increases in User purchases online. Credit Card Companies are hoping that Apple, through Apple Pay, will “streamline the online shopping experience” for Users, thereby leading to vast increases in online purchase volumes. As reported by The Financial Times in “Apple wages war on the wallet”:
Banks are willing to lose a slice of revenues in the hope that Apple Pay will become ubiquitous. That would drive up transaction volumes – and therefore overall revenue – and could reduce losses to fraud through its tighter security…
Even though the in-store payments were the centre of Apple’s presentation, banks are more excited by streamlining online shopping. Giving customers an Apple Pay button to press online, rather than typing in card information – particularly on a small screen – will be a real catalyst to more spending, banks believe.
Google and Banks/Credit Cards
Google’s motivation for entering the mobile payment market is the same motivation Google has for every market it enters: to increase its access to User purchase data (for use in supplementing its search and ad businesses), and, secondarily, to promote the Android ecosystem. As Gary Yamamura states in “Quora”
Google … has made it clear that its primary motivation for offering Google Wallet (and now, according to rumor, Android Pay) is to get more data which it monetizes by creating targeted advertisements designed to be irresistible by using that data to better understand what the consumer wants and to predict what he or she will buy. Secondarily, Google wants more people to buy and use phones that use its Android operating system and those people will download and use the Android apps as well as the Google search engine - all of which provide Google with more data.
The Banks and Credit Card Companies were happy to partner with Google early on in the development of the Google Wallet system for the same reason they partnered with Apple: Credit Card Companies are hoping that that the ease and convenience mobile payment systems provide Users will lead Users to make more credit card purchases.
As I mentioned in v.1 of the analysis, MasterCard was an early co-sponsor of “tap and pay” (contactless or EMV) credit cards. MasterCard’s contactless version of its credit card is PayPass, which it introduced in the US in 2003. The Company subsequently experienced increases in User Credit Card purchase volumes through the contactless system. MasterCard then partnered with Google in 2011 to use the PayPass technology to create Google Wallet.
In “Google Wallet: An Interesting Solution To A Problem That Doesn’t Exist?” Tom Krazit further explains the Credit Card Companies’ motivations for supporting the development of the mobile payment system and partnering with Google to develop Google Wallet:
The motivation for introducing mobile payments are [sic] pretty clear. According to Mastercard, people who have received the 88 million PayPass-enabled cards in circulation spend more per transaction than those without the technology and use their cards more frequently for smaller purchases, meaning Mastercard gets transaction volume that would ordinarily fall to cash. Adding purchasing power to the mobile phone could increase that volume even more: Mastercard will now theoretically be tapping into a broader segment of the population that doesn’t have a credit card through banks that offer PayPass or that doesn’t even use Mastercard, as Google Wallet can be funded through any credit card.
Mobile Carriers (AT&T, Verizon Wireless and T-Mobile)
As I mentioned earlier, the Mobile Carriers probably saw the mobile payments systems technology being developed by Apple and Google and figured that since they have direct access to smartphone Users through their mobile services offerings, they might be able to get a piece of the action. In 2010, AT&T, T-Mobile and Verizon entered into a joint venture to develop their own mobile payments system. The technology they developed eventually became known as Softcard. From Wikipedia:
In November 2010, AT&T. T-Mobile USA and Verizon officially announced a joint venture known as Isis, which planned to develop a near-field communications-based mobile payments platform...
In July 2014, Isis announced that it planned to adopt a new name in order to alleviate confusion between it and the terrorist group Islamic State of Iraq and Syria, which was also known under the abbreviation "ISIS". The venture announced its new name, Softcard, in September 2014.
During the discussion of v.1 of the mobile payments game, I described how the entrenchment of the credit card system, together with the transaction fees merchants have been forced to pay, has generated a tremendous amount of resentment by Merchants for the Credit Card Companies. In 2012, the large Merchants formed a consortium, MCX, to develop their own mobile payment system, CurrentC. Wikipedia provides details about MCX founders:
Merchant Customer Exchange (MCX) is a company created by a consortium of U.S. retail companies to develop a merchant-owned mobile payment system, which will be called "CurrentC." The joint venture was announced on August 15, 2012.
The company is led by merchants such as 7-Eleven, Alon Brands, Best Buy, CVS Health, Darden Restaurants; HMSHost, Hy-Vee, Lowe's, Michaels, Publix, Sears Holdings, Shell Oil Products US, Sunoco, Target Corporation and Walmart. The initial retailers that are part of the new company account for about $1 trillion in annual sales.
The CurrentC technology entirely circumvents the credit card system by using QR Codes to access User’s bank accounts directly. The main benefit of the CurrentC system – aside from avoiding payments of credit card fees – is that it can be implemented immediately within the existing payment system framework. That is, the QR Code technology already exists and does not require the adoption of any new infrastructure.
According to Josh Constine in “CurrentC Is The Big Retailers’ Clunky Attempt To Kill Apple Pay And Credit Card Fees,”
The idea behind MCX was that if enough retailers teamed up, they could convince consumers to adopt their mobile payment system that would let retailers avoid paying credit card fees ... MCX’s app could also help retailers by encouraging loyalty to participating merchants and possibly provide them additional intelligence on their customers.
If MCX’s app caught on, partner retailers could escape tons of fees, which could directly increase their profits. Alternatively, they could use the leverage of MCX and the threat of sidestepping the processing fees to negotiate lower fees with the credit card companies…
In January 2013, Fierce Retail reported MCX had been asking retailers in 2012 to pay a big upfront fee from $250,000 to $500,000 to get on board, and sign three-year mobile payment app exclusivity deals with MCX.
Will Hack further indicates:
Mobile payments represents a possible answer to the merchants' problem [of high credit card processing costs], but MCX finds itself in a difficult situation despite its best efforts.
"Unfortunately, MCX is learning what the wireless carriers learned when they launched Isis four years ago: The process of creating a secure, scalable payment scheme is easier in theory than practice," Wester said. "Payments are hard. By completely excluding the card networks, MCX is forced to build their infrastructure themselves. The card networks took decades to build out their capabilities. That's why Apple and Google have been smart to work within the system. But to MCX, working within the system is simply propping up a status quo they dislike."
Finally, Mark Sullivan, in “CurrentC is clunky? 6 million Starbucks customers a week say it isn't” summarizes the Merchants’ efforts as follows.
MCX is fighting for the hearts and minds of merchants with the offer of removing the credit card middleman and eliminating the interchange fees, as well as with the prospect of reaching far more consumers — meaning virtually everybody who doesn’t own an iPhone 6.
Amazon Payments offers Users a way to make purchases online using credit cards and shipping information stored on Amazon’s site. And it appears that Amazon will not accept other mobile payment systems.
Amazon Payments, Inc., is a wholly owned subsidiary of Amazon.com that provides means to process transactions online. Launched in 2007, Amazon Payments uses the consumer base of Amazon.com and focuses on giving users the same checkout experience available on Amazon.com…
Amazon Payments is a way for customers to purchase goods and services from US based websites using the payment methods in their Amazon.com accounts, such as their Visa or MasterCard. (Currently Amazon.com and Amazon Payments will not accept payment methods such as PayPal or Google Wallet.)
Early Adoption of Mobile Payments Systems by Users Has Been Seriously Hampered by Lack of Adoption of NFC Terminals by Merchants
Apple Pay and Google Wallet utilize near field communication (NFC) technology, which means they can only be used to make purchases from Merchants who have upgraded their payment terminals to the new standard. Unfortunately, Merchants have been extremely reluctant to adopt the new technology, because they don’t want to pay for the new terminals (see my earlier analysis, “Playing the Visa EMV Game,” for a full discussion of the reasons behind the slow adoption of NFC technology). Marcie Geffmer summarizes the problem succinctly in “Are tap-and-go credit cards worth it?”:
The low penetration [of contactless credit cards] doesn't just come from tepid consumer demand. There's also a lack of support by credit card issuers and merchants that pay for tap-and-go terminals and the payment network. Neither wants to make a big investment in the technology without the other's cooperation, creating a standoff that has slowed the spread of tap-and-go
Gina Hall, in “Google Wallet vs. Apple Pay: It's going to come down to which phone you own,” reports that only about 2.4% of retailers have upgraded to NFC terminals:
According to Engadget, as of October of last year , only 220,000 locations in the U.S. reportedly accept mobile payments, which is just around 2.4 percent of retailers.
Apple Pay and Google Wallet cannot become widely adopted until the Merchants upgrade their terminals and are thus able to accept mobile payments from Users. And since Merchants have refused to pay for the upgrades, while Users are increasingly becoming mobile payments systems-capable, Merchants are not. And so use of Apple’s and Google’s new systems have lagged.
Early Adoption of Apple Pay Has Been Hampered by Merchants
Some MCX Merchants who had upgraded to NFC technology blocked the use of Apple Pay by their customers, thereby inhibiting the adoption (use) of Apple Pay by Users. More specifically, as of October 25, 2014, Rite Aid and CVS Pharmacies that had upgraded to NFC technology and were thus technologically able to receive Apple Pay payments by their customers, blocked its use. Subsequently Walmart and Target also stopped accepting Apple Pay. These Merchants blocked the use of Apple Pay by their customers presumably either (i) in an attempt to promote their own mobile payments system, CurrentC and/or (ii) as a result of the exclusivity agreement signed by MCX Merchants (as mentioned in the Merchants (MCX) section above)
Early Adoption of Google Wallet Was Seriously Hampered by the Mobile Carriers
I recall reading a lot about Google Wallet during its early stages of introduction into the market. Then it seems like the hype died down and talk of Google Wallet pretty much disappeared, until the buzz around Apple Pay started. It could be that my recollection was off. Or it could be the fact that in addition to lack of NFC adoption of contactless payment terminals by Retailers, adoption of Google Wallet was seriously hampered by the Mobile Carriers’ refusal to allow Google Wallet to operate on Android phones for which they provided mobile services. The Mobile Carriers (AT&T, Verizon, and T-Mobile) were in the process of developing their own competing mobile payment system, Softcard. In an attempt to promote adoption and use of Softcard by mobile Users, the Mobile Carriers blocked Users from being able to access Google Wallet on their smartphones. Rolfe Winkler and Alistair Barr make this point in “Google Strikes Deal With Carriers for Payments”:
But most wireless carriers refused to preload the Wallet app on their Android phones and blocked the service from accessing smartphones’ NFC chip since they were planning their own payments service.
That helps explain why the technology didn’t take off with consumers.
So adoption of Google Wallet languished during the second phase of the Mobile Payments Game.
Apple’s Unprecedented Garnering of a Slice of Banks’ Credit Card Fees
After pulling off the orchestration involved behind the scenes with the creation of iTunes, perhaps it’s not so surprising that Apple has managed to do it again with the creation of Apple Pay. Not only does Apple Pay facilitate the use of Credit Card Companies’ payments systems on iPhones, but Apple has also managed to secure of chunk of the credit card processing fees paid by Merchants to Credit Card Companies. As the Financial Times reports in “Apple wages war on the wallet”:
15 cents of a $100 purchase will go to the iPhone maker, according to two people familiar with the terms of the agreement, which are not public. That is an unprecedented deal, giving Apple a share of the payments’ economics that rivals such as Google do not get for their services.
So how did Apple manage to get a slice of the action when Google couldn’t? Since the negotiations between Apple and the Credit Card Companies are not public information, the true motivation for the Banks’ sharing a portion of the fees with Apple cannot be confirmed. However, the Financial Times provides several possible explanations.
First, in the iPhone, Apple provides both the handsets and the operating system. The closed nature of this system creates a more secure environment than that provided by Google, in which many different manufacturers provide Handsets that all use the Google Android operating system. And in fact, Google’s system is notorious for being fragmented and problematic. (I did a previous analysis on this difference between Apple’s closed versus Google’s open ecosystems: “Is Apple's Ecosystem Successful Because of or In Spite of Apple?”).
Furthermore, Apple’s system uses a fingerprint identification system that provides further security above and beyond that provided by the new NFC technology. The extra security provided by the Apple Pay system relative to that of the previous magnetic stripe credit card system will save the Credit Card Companies tremendous amount of money through reduced credit card fraud. Reduction in credit card fraud will offset (some of) the share of the credit card processing fees that the Credit Card Companies are ceding to Apple.
Another reason for the heightened extent of cooperation the Banks afforded Apple in the development and use of Apple Pay could be the fact that Apple Pay does not (currently) directly threaten the Credit Card Companies’ business. As the Financial Times describes it,
One of the reasons it was able to corral so many [banking] partners was the absence of anything in Apple’s plan that would be truly disruptive to their businesses…
Third, the Banks believe that the added ease and convenience of Apple’s mobile payment system will lead Users to increase their credit card purchase volumes. Theses increase in offline -- and especially in online -- purchases that Apple Pay will enable will more than offset the portion of transaction fees the Banks will be ceding to Apple (see Financial Times quote in the Apple and Banks/Credit Cards section above. Furthering the emphasis on online sales, the Financial Times adds:
“This is about ecommerce,” says Jud Linville, head of cards at Citigroup. “If there is an app where somebody is shopping, being able to close out that shopping experience by tapping Apple Pay delivers convenience and security.”
Finally, the Financial Times notes that other players (i.e., the Merchants) are developing systems that bypass the Credit Card Companies entirely. In light of these developments, it is worth paying Apple a small portion of processing fees that will appease Apple enough to convince it to forgo development of its own, non-bank system.
Banks are giving up some of the profits from payments made through Apple but the 0.15 per cent charge may seem meagre in the face of competing mobile payment systems that are more ambitiously trying to cut out the financial institutions altogether.
Go to the last part of the analysis, v.3: 2015 - Present