The WSJ posted an article this morning on the big NFC story for mobile payments via Google, Mastercard and Citigroup. NFC has been a promising technology, poised to change the game in mobile payments for the better part of the last decade. I recall back when I consulted to the credit card industry, that there were numerous schemes designed to enable merchants to engage their customers in a more personalized shopping experience - with applications across retail environments, namely from the grocery store to high-end luxury goods. Alas there has always been a major snag in bringing these ideas to fruition. No, it wasn't a technology gap, as the NFC chip has been inexpensive for years, nor has it been the credit card terminals, which began adding NFC technology to their devices over 5 years ago. The culprit has been greed and a changing of the merchant fee formula, which will still likely hamper this iteration of NFC thought leadership.
Merchant Economics Merchants generally pay between 1-4% of a typical transaction for processing. This generally gets broken down between the:
- Merchant Acquirer (used to be independent regional firms, but now mostly the large retail banks) who connects the merchant with their processing channel and may be the merchant's formal bank partner
- Card Network (American Express, MasterCard, Visa, or Discover) which connects the merchant bank with the customer's issuing bank.
- Card Issuer (bank that issued the card to the customer) who is either taking on the risk of a credit transaction, or processing a debit transaction.
These three participants have had a fairly cosy and clear relationship which is managed in a cartel-like manner, to ensure their rates (and subsequently their steady merchant income) do not change.
The most prominent example of this activity can be found in debates throughout the last few years around debit rates, both in the form of heavy campaigning and ultimately acquisition of the PIN debit competitors who offered a cheaper and more secure product that threatened this group, and in the tremendous battles these folks have waged against retailers interested in decoupling fees for debit and credit transactions (or in the case of American Express, the decoupling of credit and charge card transactions, which are seemingly from different types of customers).
Additionally, through M&A, many of these pies are now owned by one big bank, namely American Express, Citigroup, Chase, BoA or Wells Fargo. These folks are not adept to sharing...
The Problem with NFC In the NFC scenario, there are several new players who muddy the equation, specifically the mobile operator and mobile manufacturer.
The operator sees mobile payments as an emerging income generator, despite their lack of knowledge or appetite for running a meaningful credit business. Many operators have already tried (and mostly failed) at mobile app stores to generate additional revenues, only to get their clocks cleaned by competitors (think Android Market, Amazon Marketplace and MP3 store, etc). From these dynamics, one would think the mobile operator at best would assume a small license or revenue share, but unfortunately not - in most models I've seen, operators think they're entitled to a portion in line with the merchant acquirer. The result is either having a larger merchant fee, which hampers adoption, or the other parties sharing the fees.
The mobile manufacturer has also attempted on several occasions to step in, with the most active being Nokia. Again here, it's an attempt to build a new revenue stream by an I'll-prepared and generally distant participant in the transaction. With the exception of Apple, manufacturer-based app stores have not had tremendous success, nor have mobile to mobile payments managed by the manufacturer been exciting outside specific developing markets. Thus, there is little reason for these folks, with the exception of Apple, to even participate, let alone get a sizable share of transaction. However, once again, the demands and naivety of these carriers are outsized.
A Partnership That Can Work?
The situation that Google finds itself in is unique, as they are the software provider for a growing population of smartphones, and are building an app store that is generating revenues. The uniqueness of their position involves their underlying business model, which might allow for them to not care much about this transaction fee component - they sell data and advertising placement based on that data. As we've seen over time, Google has figured out how to extract higher ad revenue from advertisers for highly targeted placements. Transaction-level data would only help them make targeting that much more lucrative and specific.
Hence, Google partnering with Citigroup and MasterCard is a win-win situation for all parties. Google gets it's data and enables the traditional transaction model to stay in mobile payments. Citi and MasterCard win because the merchant will likely agree to this payment form. It's a big win all around.
The Big Losers The big losers here are the phone operators and manufacturers, who will likely have to concede this business as a software play that fits into their Android strategy (much like Google Maps with navigation messed up their lucrative turn by turn navigation business on smartphones). Additionally, by setting precedent with Android being a "free" software play, both Microsoft and Apple will struggle to be a part of the equation. Phone manufacturers, namely Nokia, Motorola, HTC, etc, will likely lose out as well, as they are even further away and will have a difficult time convincing folks that they are indeed worthy of a piece of the pie.
Only Apple, with it's unique placement in the market as the center of their ecosystem, with a software, hardware and app store under one umbrella, could potentially create a new paradigm on it's own. I wouldn't be shocked if they were able to break the paradigm, because they've got a track record of breaking up cartels (think music and video), but it may be years before that happens...