Will U.S. Mobile Operators Backpedal on Mobile Payments?

AT&T, Verizon and T-Mobile USA had high hopes for their SoftCard mobile payments venture in 2011. So did Google. But many observers would say neither venture has gotten much traction.

Google Wallet, which launched in 2011, accounted for four percent of digital payment transaction volume in November 2014.

Apple Pay in November 2014  was responsible for one percent of digital payment transaction volume (measured by dollar amount), according to ITG Investment Research.

Still, so far, Starbucks is the transaction leader for retail payments.

“In 2013, payment for purchases by use of all mobile devices in the US totalled $1.3 billion, that was the entire market,” said Starbucks CEO Howard Schultz. “With over 90 percent of those purchases taking place in a Starbucks store, that means we had 90 percent share of mobile payments in 2013 while brick-and-mortar commerce in 2013 totalled more than $4.2 trillion.”

But there is a very long ways to go, so the outcome is not clear. Nor is mobile service provider involvement necessarily a settled matter, though at the moment it appears device providers, app providers or possible even some retailers have stronger momentum.

Some of us have argued that it could well take a decade or more before mobile payments become a routine part of the consumer experience when paying for merchandise at a retail location. And even then, “routine” use might be a reality for only about half of all consumers.

After 20 years, the percentage of U.S. households using automatic bill paying is still only about 50 percent. Likewise, after 20 years, use of debit cards by U.S. households is only about 50 percent.

It took about a decade for use of automated teller machines to reach usage by about half of U.S. households.

So history is the reason it is reasonable to predict that mobile payments will not be a mass market reality for some time.

Some might argue the problem is that big companies cannot innovate. Actually, that might be a problem, but is only a small part of the adoption process.

The bigger problem is that major changes in end user behavior have to happen, and before that can become a reality, it often is necessary to spend quite significant sums to create the infrastructure enabling the behavior change.

In the case of mobile payments, that involves creating a critical mass of devices, payment apps and processes, merchant terminals and retail brands. Beyond that, the developing market would have to come to a practical consensus about standards, interfaces and methods.

Also, with huge amounts of revenue at stake, it will take some time to sort through rival business interests and approaches that pit credit card issuers against retailers, for example.

All of that ensures a lengthy period of confusion before scale is possible. And until scale is possible, progress will be limited.

In consumer financial services, decades can pass before a significant percentage of consumers use an innovation. In fact, a decade to reach 10 percent or 20 percent adoption is not unusual, in the consumer financial services space.

So far, PayPal remains among the potential leaders. In September 2014, excluding Starbucks, PayPal had about 60 percent share of mobile wallet share, followed by Google Wallet at 43 percent.

But excluding Starbucks for retail payment volume is a big caveat

Still, PayPal was used by close to half of online consumers in 2012, so the trick is to leverage that position in the proximity payments business (retail store checkout).

Some believe Apple Pay could pose a major threat to market leader PayPal's current dominance of the general purpose mobile payment space, according to Steve Weinstein, ITG senior Internet analyst.

In the near term, it is Starbucks that Apple Pay might have to displace, even though Starbucks presently is a “captive” system, while Apple Pay aims to be a general purpose payment system.

And now there are rumors that Google might buy SoftCard, the mobile carrier initiative. That doesn’t necessarily mean the leading mobile service providers will abandon all efforts to find a role in the mobile payments or mobile wallet ecosystem.

But there are other potential new lines of business that seem to have more traction right now, including connected car, home monitoring and security, or any number of opportunities in the broader Internet of Things or machine-to-machine services markets.  

Innovation is always risky, and rarely happens precisely as its backers hope, and that has been the story for mobile payments so far.

Initially, both Google Wallet and Isis, the mobile service provider operation now rebranded “SoftCard” had explored a transaction business model. Both efforts quickly pivoted, though, disclaiming any effort to build a revenue stream based on transaction fees, which was the original revenue stream most mobile payment contestants had argued was the target.

Both turned to business models based on advertising and loyalty, the “wallet” part of the mobile commerce business, rather than the “payments” function itself.

That, in general, includes advertising, retention and rewards programs.

Those moves were a recognition that the payments ecosystem cannot easily afford to support many new “mouths to feed” in the revenue chain, if transaction fees are the revenue model for the new payments providers.

That stance meant incumbent participants had every incentive to use their considerable resources to thwart entry by a new category of participants.

One might also argue that the “commerce” angle, aiming to reinvent the shopping experience, almost automatically answers the question of “what’s in it for retailers” in a way that “payments” systems have not.

Merchants care about loyalty, customer retention and promoting customer traffic. The “wallet” approach addresses all three of those concerns, in addition to providing value for consumers, said  David W. Schropfer, a partner at Luciano Group.