"Hybrid" Strategies Will be Common for Mobile Commerce Contestants

Transitional or hybrid strategies are emerging as an important staple of the mobile payments business. Stickers that add near field communications features for non-NFC phones are one example.

In other cases, new features are created that make use of existing payment infrastructure. Starbucks used its existing point of sale terminals and added bar code scanning to launch its branded mobile payments venture. PayPal is piggybacking its card mechanisms at Home Depot stores.

We are likely to see many more examples of such “bridging” strategies, even though some “greenfield” efforts such as Isis, Google Wallet or Visa mobile wallet services also will attempt to gain traction.

Barclaycard, for example,  has unveiled a stick-on credit card called "PayTag," which will sit on the back of a mobile phone (or any other item you carry everywhere) and then be used to make small, contactless payments using near field communications. The move illustrates some enduring issues with technology and services adoption.

First, what Barclay's is doing is not necessarily even "mobile payments," in one real sense. It is the sticker itself which communicates and represents the store of value. The phone is just a place to put the sticker.

The idea is to open mobile payments to Barclaycard's 12 million customers, even if their mobile phone is not equipped with an NFC chip, or not set up for contactless payments, or do not even use a mobile phone.

Right now, the sticker can be used to make payments of £15 and under, and it will rise to £20 in June 2012.

Second, the PayTag is probably a transitional strategy. That is a tactic often used when one era of technology is replaced by another. What is "hybrid fiber coax" but a bridge between an all copper network and an all-optical fiber network? What is a hybrid automobile? Why were existing sailing ships outfitted with steam boilers?

The point is that a proven strategy at times of fundamental change is to graft key elements of the coming technology to the existing way of doing things. It's a process Richard Foster, of Yale University, has written and talked about for decades.  

New technologies often cannot stand on their own in the marketplace, either because they are not initially cost competitive with the existing technologies, because the full ecosystem has not developed or because there is customer or other resistance of some sort.

There is nothing at all wrong with adopting a transitional strategy; it is a common way a next generation of technology displaces the former way of doing things. In this case, it means that even if you believe NFC ultimately will replace the credit card swipe, it will take some time. Taking an interim approach is better than doing nothing.

Third, the move by Barclay's to initially limit the transaction volume serve several purposes but also illustrates the existence of natural segments within the mobile payments business. At one level, the limitation protects Barclay's from unexpected financial losses.

At a higher level, the sticker approach, with a transaction volume limit, shows where several payment methods have a role. Where traditionally carrier billing has been used for small purchases of digital goods, other payment systems, including PayPal, credit, debit and prepaid cards also have been used to buy songs, game credits, stories, videos or other digital goods.

What many now are trying to figure out is how to use newer payment systems based on mobile devices, or associated with mobile devices, can be used to extend the range of payments for virtual and physical goods in the offline payments setting.

And at least initially, many of the early payment systems have been aimed at supporting small purchases. In the near term, that might be a reasonable approach for a number of reasons, including consumer unfamiliarity with the concept. The point is that it is one thing to get consumes to change behavior about small, casual payments. It is something else to get them to change behavior about larger transactions.

Nor is it yet clear whether distinct market segments for physical shopping and online or mobile purchases will continue to exist, though they are likely to be key market segments at first. Credit and debit cards, for example, seem to be used equally for online and physical store payments. But PayPal historically has been an online payment mechanism, and only now is PayPal attempting to become something that is used more universally.

Fourth, there are functional segments of the mobile payments market. Many systems essentially try to link the phone with a specific set of payment accounts, such as credit card, debit card, bank accounts, phone accounts, prepaid instruments or other stores of value. That makes the phone the payment instrument.

Others, such as Square, Intuit and PayPal, want to turn the phone into a cash register, allowing a standard credit, debit or prepaid card to be swiped. In that case, the mobile phone supports a point of sale terminal function for the merchant, rather than a payment mechanism for the buyer.

On the other hand, mobile wallet systems will try to piggyback on mobile payments to create new businesses based on advertising, marketing and loyalty. As Square uses the mobile phone to create a POS terminal business, so mobile wallet suppliers will use mobile payments to create new marketing, advertising and loyalty businesses.

Fifth, there are new possible roles within the ecosystem. The "trusted service manager," for example, to essentially create the networks of information required to sign up customers, ensure network interoperability and security, activate and deactivate services, manage databases and provide branding, for example. Think of the TSM as a new sort of "branded" network such as Visa or MasterCard, for example.