Another startup gives mobile payments a shot

Just saw this blog post on Bling Nation, a startup working on mobile payments in bricks and mortar scenarios. I wish these guys luck, but other companies have tried alternatives to cash/credit cards in bricks and mortar POS (point of sale) in the US and there has been little success. I don't see what will be different this time around.

First, a quick and rough rundown of what has been tried:

• At one extreme are alternative schemes like Pay By Touch. PBT was a spectacular flameout, partly because of a flawed model, partly because of mismanagement and potential fraud. PBT allowed people to pay at the POS by using their fingerprints.
• There are also the efforts led by the credit card companies (e.g., Mastercard PayPass) that are distributing credit cards with RFID chips to consumers and RFID readers to merchants. 
• Finally there are assorted startups that are equipping cell phones with RFID chips (either embedded or via a stamp) and encouraging consumers to use them at merchants with RFID readers. They may or may not be piggybacking on the rollout of RFID readers pushed by the credit card companies.

At best, these have gained limited acceptance. At worst, they have been disasters.

I think the reasons are as follows:

1) Consumer value proposition - Simply put, there is none. Today I can take out my credit card, swipe it, maybe press a button and sign in less than 30 seconds. Or I can take out my credit card, give it to an attendant and sign, also in a few seconds. It just isn't that inconvenient to pay with a card. Cash is also simple (although you can argue it's a hassle to carry around). Compare that to the alternatives being pushed by the schemes above:

• Register for and learn a complete new process as in Pay By Touch's example (fingerprint payment). This is clearly more complicated initially, equally complicated from then on.
• Wave my credit card in front of an RFID reader, instead of swiping it. This may be slightly simpler, but I think it's about the same. Plus, I believe you may still have to swipe today for charges over $25 - but I may be wrong on that.
• Register my phone (if it has an embedded chip) or my stamp (which I stick on my phone), then wave my phone in front of a reader and probably press a button or two on the phone and/or on the reader. This is definitely more complicated initially (even worse if I also have to install some sort of client/app on the phone), at least as complicated from then on.

So I just don't see consumers adopting this en masse, unless they are aggressively pushed through other means (e.g., very expensive marketing or rewards).

2) Merchant value proposition - Some of these schemes (but not all) promise lower processing fees for the merchant. That sounds good, but it depends on the savings - they may or may not be compelling. Also, very importantly, someone needs to pay for the RFID reader. Not many small merchants will agree to buy a reader which will be lightly used. Not many large merchants will make big investments in readers which will be lightly used. And if the payment provider (e.g., Bling Nation) pays, they will need a LOT of money (see the amount of money Pay By Touch spent on readers).

3) Bank value proposition - It's been a while since I looked at the payments ecosystem, so this is a little fuzzy. But issuer banks get a cut of credit card transactions. For a bank to get involved in a new scheme, and actively push it to account holders, they would need to see some upside in leaving the Visa/Mastercard ecosystem (or at least risk angering them). This may or may not be there.

4) Distribution and network effects - Finally, you need to quickly and effectively get the different pieces out there. Consumers need the chips/stamps and merchants need the readers. Until you get a critical mass on both sides, the system is ineffective and at risk of just grinding to a halt. You can try to bootstrap it through incentives on both sides, but that will be very expensive. A startup will need to raise tens (if not hundreds) of millions, or a big company (like Mastercard) will have to make a significant investment. Bling Nation seems to be partnering with small community banks - this seems to me like a hard way to get to any scale quickly.

These are the reasons why I think these efforts are destined to fail. It's not inconceivable that one could work. But it will be very hard. Why do people keep on trying?

1) Perceived big (huge) rewards - Payments is a big, big pie. "Disrupting" the status quo and taking a small share of the market is attractive to entrepreneurs and VCs who back them

2) The Europe/Asia example - People see mobile payments taking place elsewhere, so why can't they work in the US? This is sort of true. But you have to look at the overall context, ecosystem and development of these industries in each place. There are several significant differences - for example, credit cards are much less common in Asia than in the US (the same is true of Europe although to a lesser degree) and so the mobile payment schemes faced less obstacles. Also, mobile phone usage was higher earlier in the development of these industries, again presenting mobile payment schemes less obstacles as they developed.

3) Success in other flavors of mobile payments - Mobile payments are working (sort of) in other scenarios, why not in bricks and mortar/POS? By other scenarios I mean person to person payments (see TextPayMe (now Amazon), and Obopay) and mobile payments for virtual goods (see Boku and Zong). But success in these scenarios means nothing for POS.

4) The unbanked and people without credit cards - This is a legitimate (and also large) market that could benefit from some form of mobile payments. But the main opportunity here is outside the US. In addition, many of the forms of POS mobile payments being tried (e.g., Bling Nation through community banks) by definition seem to require a bank account - so they aren't really going after the unbanked.

So these are the reason why I think efforts like these are destined for failure in the US. I may be wrong, and I clearly do not know the Bling Nation model in detail. It's possible there are nuances that get around my objections.

Could this ever work here? Perhaps. The best scenario I see is someone like Apple shipping its phones with an integrated RFID chip and bulletproof "it just works" software. This would seed one side of the market. They could partner with a big bank and/or one of the associations (Visa/Mastercard) for the necessary investment on the merchant side. That would be pretty interesting, and importantly would be an improvement to today's system (that as mentioned above, works fairly well), rather than a true disruption. But I don't think it will happen anytime soon.

   

Comments

[WalterCHERYL30]

Following my own investigation, thousands of people on our planet receive the loan at different banks. So, there is a good chance to receive a bank loan in every country.

[Clint Costa]

A possibly huge idea that has been tried over and over with limited results...how would the VC deal for such a venture differ from one where the underlying business is novel? My guess...much more upside and ability for the VC to increase investment and ownership percentage in the later rounds?

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