The Wallet Wars

Often times innovation catches us by storm (Pinterest, anyone?). Sometimes, however, we can envision the disruption way in advance, we can formulate it and describe its advantages, but we may have to wait until the right conditions appear so that such innovation can bear fruit. Mobile Payments is one of such long-awaited promises of a brighter future, and as early as the first generation of digital handsets·

Recently we are getting signals that both the technology and the market are finally getting ripe for mobile payments. Both powerful incumbents and nimble startups are racing up to take positions on the space, scaling up their investments in an arms race of enormous proportions, because the trophy for the one who prevails would be no other than replacing your physical wallet with a digital one. Can you imagine? Walk into the store, grab a soda… no change? No worries: grab your phone, tap on the counter, and walk out of the door. Googbye coins, bills, checks, debit cards, credit cards… Yes, this disruption is a BIG ONE.

No wonder that the companies that have built an Empire on these payment instruments and processes, namely the credit card networks and the banks that ultimately own them, are scared to death of losing their prominence, and being inherently weaker to adap to change are using their market power to slow down the competition. And chief among their weapons, their Death Star as to say, is the Point of Sale (POS).

You”ve seen POS hardware many times before: you swipe your credit card, type your code or sign, and you are approved. For that approval to happen, that machine communicates in real time with the bank that issued your credit card, which could be in the other side of the world, to validate your credit is in good standing. And that process needs to happen super-fast: more than a few seconds and you start losing money, you have people waiting in line. So if you control who can connect to the POS and who cannot you basically control the whole industry, and that has been the bane for many startups with great ideas that, literally, took too long to bear results.

For a while the technology that held the high ground in becoming the next mobile payments standards was Near-Field Communications (NFC). Tap on the POS with your phone, and short radio communications take care of all the transaction in an instant. Great, isn”t it? However, the lack of NFC enabled handsets and POS has created a stagnant chicken-or-egg situation, and the gigantic amount of investment to replace the installed base are only at the grasp of the entrenchend incumbants who, well, are taking their time to make sure the future holds a cozy place for them and their fortunes.

That has been the sad experience of Google and its NFC-powered Google Wallet that found dwindling support from the establishment and is now reshaping its strategy. But other companies have decided that the best way to have the future they want is to create it, and are deploying innovations that could reduce the dependency on NFC, the POS or eliminate it completely.

One such companies is LevelUp, in which payment happens by displaying a QR code on the screen that is scanned by the clerk at the store using a camera-enabled device. The company that build LevelUp, Scvngr, has its roots in mobile treasure hunts games, and hence can supposedly bring a lot of experience in bringing gamification to other aspects of the purchasing experience.· That is precisely the approach taken by a swarm of other startups, such as Plink, Bellycard, and KeyRing: give up the payment piece to focus only on promotions, coupons and loyalty cards, which is a really juicy target by itself, specially after the success of the Daily Deals (Groupon) and Flash Sales (Gilt) concepts.

PayCloud takes a different approach by leveraging a very nifty ultrasound technology (Zoosh, developed by Naratte)·to communicate wirelessly between the mobile handset and the PayCloud dongle, which is basically a microphone attached to the POS. Great for P2P scenarios (even better than the popular Bump), it suffers from the similar POS malaise than many of its counterparts: lack of installed base.

To this long, and growing, list of competitors we have to should not forget also the other “Empires” forged online: Apple and its dominance in mobile software and hardware, plus the massive number of credit card profiles stored in its iTunes service (which could quickly become a wallet itself), like Amazon and to a certain extent Facebook that recently applied for money transfer licenses of its own in most States of the USA. Naturally, also the dominant online payments service PayPal wants a piece of the action and recently unvelied PayPal Here, a solution like the one popularized by Square that uses a dongle – albeit triangular, lest we think this is just a copycat – attached to a mobile device like an iPhone or iPad as a complete replacement to the POS.

If I was a credit card company, I would get the shivers. And if I was Square? Well, perhaps this is the company that deserves special mention as a true champion of innovation: while PayPal copied their original dongle concept, they were already moving on up to their version 2.0: Pay with Square. Picture it: take your phone out of the pocket and, with the assistance of its GPS, it provides you a short list of stores around you support Square. Once decided, you check-in the store and the clerk can see your face (for authentication purposes) popping up in his POS, so forget about dongles, codes and the like: paying is just a matter of smiling, nodding, and saying “cheers mate!” 🙂

Could this finally overcome the POS malaise? Square, maybe you are really our last hope…