Apr 24, 2008

How do you get merchants to accept mobile payments?

Whenever payment people talk about using a mobile phone to pay at a physical retailer, like Starbucks or Carrefour, the discussion will almost always gravitate towards the difficulty of convincing merchants to accept mobile payments. Many mobile payment schemes and pilots are still funded by the scheme operator, who effectively subsidizes merchant acceptance. This has come up both yesterday and today in one on one discussions at the Digital Money Forum. Dirk-Jan de Haan of Payter just gave a presentation on an NFC pilot in Rotterdam with 500 to 1000 customers using their phones at 40 retailers equipped with a total of 80 POS terminals. It doesn't cost much to finance all of that.

How do you get merchants excited enough about mobile payments so that they actually want to upgrade their terminals and - OK, let's be bold and optimistic - maybe even pay a fee? The issue will come up again and again until someone solves the problem or people become interested in other things.

Here's the problem.

If you're a merchant, why mess with accepting mobile payments when lots of other methods are just as good? Sure, if mobile payments are cheaper than credit or debit cards, then merchants get excited. Right now there is no indication that anyone is looking seriously at reducing interchange on mobile payments.

If mobile payments are not cheaper than other methods, is there added value that makes mobile payments more attractive to merchants? The typical answer is that mobile payments will be faster, but there is little to justify that.

Another response is that customers will want to waive their mobile phone in front of a reader. But then you run into the chicken and egg problem. If you're a customer, why mess with setting up your phone as a payment device if you can't use it anywhere?

Merchants would surely upgrade their terminals if customers begin avoiding merchants that don't accept mobile payments. This argument appears with embarrassing frequency. Customers have lots of ways to pay already, cash, credit cards, debit cards, so the inability to pay by mobile phone would at most be a small inconvenience. However, if merchants paid less on mobile transactions, then they would more than likely steer customers towards that payment method, either through discounts for mobile payments and/or surcharges on other methods. But that brings us back to the lower interchange argument.

When pushed with all of these issues, someone will invariably gush about how fantastic it would be to download a coupon at a smart poster, then redeem the coupon at a merchant outlet by tapping the phone against a contactless reader (Payter brought this up today in their presentation - their video even showed a customer using their mobile phone at a bar to redeem a coupon for a free drink). But the problems related to coupon redemption make this virtually a non-starter. How do you redeem the coupon and remove it from the phone? You can't leave it there to be used over and over again. How do you process the most popular types of coupons that merchants use the most often, coupons for free or discounted items, as opposed to a discount on the whole purchase, which most merchants abhor? How do you retrain clerks (or the bartender in Payter's video), all of whom already know how to balance their tills today with paper coupons? Several technology providers have approached me over the years looking for a solution, counting on Welcome's background in payment systems and couponing. They feel like they've gone down a complicated maize and found themselves at a dead-end. Removing the coupon is extremely cumbersome and technologically complicated, where handing over a paper coupon is simple and straightforward.

The key question to me is, where's the pain? Whose pain does mobile payments address? Banks don't seem to feel it is their pain, since they are not prepared to pay for the mobile payments infrastructure. They want to make money off of it. Same thing for mobile operators, merchants and even customers. Nobody wants to pay.

But there is pain related to mobile payments, but not the sort of pain that is focused enough to produce real solutions. Banks are worried that mobile operators will figure out the value proposition and make lots of money (and vice versa) while merchants are worried that banks and mobile operators will find a way to squeeze more money out of them than current fees. These fears are driving substantial interest in mobile payments.

A Vodafone executive in the audience mentioned that the industry has been talking about mobile payments for years yet we are still in the early exploratory stage. Any ideas how to get mobile payments moving forward after so many years?

(Here are more blog posts on mobile payments, as well as Welcome's video showing a mobile transaction that lets merchants trigger targeted marketing messages and promotions.)


Colin Henderson said...

One pain point that matters is the consumers. One aspect that might shift things is the pain consumers feel from existing bank service charges. Customers today pay for certain debit transactions, and many ATM transactions.

If mobile payments could offer access to money with significantly less cost than today this would help.

In other words, I wonder if there is a way to pull mobile payments into the entire service charge equation so that customers self select naturally.

Aneace Haddad said...

You're right. If it's cheaper to pay by mobile phone then consumers will choose that payment method, given a choice.

Dale Blotter said...

One possible opportunity that I see for merchants in the US marketplace with mobile payments is to get consumers to load their private label, co-brand, stored value or other retailer specific cards into a mobile wallet and then incent them through a reward or loyalty scheme to select those payment types when making a transaction rather than a generic bank card. Merchants seem to have success at getting consumers to sign up initially for such cards with special promotions and offerings but they lack stickiness because consumers don't continue to carry the physical card in their wallet. If a mobile wallet application gave the cconsumer the ability to load and carry all of their payment types with them on thier mobile phone then the merchants might have greater opportunity to prompt the consumer at the POS to get them to self select a payment type more favorable to the merchant from an interchange perspective.

Aneace Haddad said...

Dale, that's probably a highly likely way for mobile to take off, especially considering merchants using ACH in the US to directly debit the customer's account and bypass interchange.

Philippe Lerouge said...

I totally agree with your analyse when it concerns traditional point of sales, users must get visible value. I think mobile payment brings value for other application such as P2P or M2M where the mobile plays a key role such as remote Parking etc.

Katherine Coombs said...

Remote parking is not so much a pain for me, or many others in London where congestion and associated charges steer many towards public transport.

The pain for me as a user relates to paying for public transportation (especially queuing up for train tickets, which I blogged about rather sarcastically at http://banking-on-it.com/?p=24) and it is only get going to get worse as populations grow and we are forced to find a solution.

Shaifali said...

What you need to consider is what the mobile phone represents today. It is fast on its way to becoming ubiquitous (if it's not there already). It is removing the need for PDAs, alarm clocks, cameras, music players. All of these are now combined into one device. What is the one thing that everyone leaves when they step out - their mobile phone.
The real issue that mobile phone users are facing is the increasing complexity of using their phone and the myriad applications that reside on it. Once you have user friendly interfaces (like the Iphone), the appeal to have an all-in-one is immense. And here I think the demand will be customer driven.
In a market like Singapore where most consumers have 4-5 credit cards, not to mention the ridiculous number of loyalty cards that each store promotes, there is a genuine need for an e-wallet. And I agree, banks are inherently not designed for such technological gear shifts. The next major change will come from someone outside the industry.

Shaifali said...

Forgot to add, in countries like China and India, mobile phone penetration has reached segments where it is economically unviable for banks to penetrate. There is a huge untapped market for prepaid cards.
In India, the infrastructure to load value on to the prepaid chip already exists. Surely there is a way to leverage that infrastructure to deploy pre-paid cards in remote centres.
Just a thought.