Start-Ups Build the Mobile Payment Ecosystem

[Former Member]

There’s been lots of hype in the North American market recently about mobile point-of-sale (POS) startup Square—and for good reason. The company has made a habit of revealing impressive stats about its rapid growth. For example:
•     It processes at a rate of $5 billion USD per year (up from $3 million a year ago, and $4 billion in March).
•     That divides up into about $416 million per month (compared to $11 million just last month).
•     As of December 2011, the company had signed up over one million merchants.

Square and its disruptive cousins, including Intuit’s GoPayment and Swiff, make it easy for merchants to accept credit card payments using smartphones and tablets. Their simple, elegant solutions are creating a new ecosystem and accelerating mobile POS without waiting for the big players.

Even though they’re still processing payments through Visa, MasterCard and American Express, the startups are doing so well in part because they offer merchants a better deal. They provide for a market that would normally be unable to access card processing, and previously only accepted cash. In addition, Square just announced it’ll deposit funds in its merchants’ accounts by the next business morning for all transactions that go through before 5PM. Traditionally, merchants have had to wait two-to-five business days.

Square has also recently expanded its offerings to include a new mobile payment app for consumers. People with the app can pay at any merchant with a Square mPOS without even swiping a card. Compared with the successful Starbucks Mobile app, this solution is so interesting because it’s open and has tremendous growth potential. Starbucks Mobile is so successful because the company has a large and loyal following that buys coffee every day. Preloading the app with a credit card payment so they don’t need cash is a convenience, and getting the loyalty points is a bonus. For companies that sell products we buy less frequently to a smaller clientele, say books or appliances, the same kind of closed-loop system wouldn't work as well. Something like Square’s growing ecosystem just might crack the code—or at least get us one step closer to a widespread mobile payments ecosystem.

Startups success doesn’t mean that the big players are out of the mobile payments game. Square is displacing some acquiring banks and the POS terminal suppliers, but Visa is a major investor in the company. MasterCard’s new Mobile Money Partnership Program (MMPP), in which Sybase is a partner, aims to deliver financial services to the unbanked and under-banked through mobile phones. The natural extension of the MasterCard approach is leveraging merchants.

These initiatives have potential to work together to create open payments systems and extend coverage from mobile wallets to payment through mobile POS. Nowhere are mobile payments poised for greater success than in emerging markets where POS infrastructure is limited. The main reason people don’t have bank accounts in these markets is that they lack access to banks—yet most people have mobile phones. That’s all well and good, but doesn’t make a success story unless there are also merchants who accept mobile payments.

The challenge is to create interoperability for mobile payments, so consumers can pay as easily with their mobile device as with cash or credit. Square, the MasterCard MMPP and solutions like Telefónica’s mobile wallet that are focused on interoperability will drive the market forward.