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It's Apple vs. Google vs. Everyone In The Mobile Payments War

This article is more than 10 years old.

In a prior post on the topic of mobile payments, I made the case that the mobile wallet will become the foundation of a new, disruptive “payment Operating System.” The watershed moment will come when Apple includes Near Field Communication (NFC) hardware in its next iPhone and introduces the iWallet as part of iOS.

Now to the trillion dollar question: who will be the resulting winners and the losers in mobile payments? At stake are huge pots of gold accruing to the winners. These include:

  • Interchange. This is the toll charged by payment networks on every transaction, typically in the range of 2% of the transaction for credit cards, less for debit cards. Typically paid by merchants, interchange amounts to tens of billions of dollars across purchase volume of nearly $2 trillion worldwide.
  • Lending & Fees. Credit card issuers do much more than facilitate purchases. They are also big-time lenders, with nearly $600 billion in loans. A winning mobile payment platform could capture some of the interest and fees currently charged by the credit card banks.
  • Advertising & Loyalty. The mobile wallet can close the loop to connect specific marketing campaigns with in-store results, and at the same time be a channel for promotions to drive people into the store. Total ad spend in the U.S. alone exceeds $150 billion, presenting another huge opportunity.
  • Smartphone Sales. Let’s not ignore the obvious. Apple, Samsung, and even Research in Motion have demonstrated that enormous profits can be earned from the sale of smartphones. As the market matures, maintaining differentiation and ecosystem lock-in must be paramount concerns.

Clash of the Titans

The pending battle for these revenue streams will be the stuff of legends. Never have so many corporate giants been lined up for their piece of the pie. Let’s start with Apple. My thesis is that they are the only company capable of catalyzing adoption of tap-to-pay on smartphones. But which prize do they seek?

I predict they will take no interchange revenue and no fees. They will avoid such barriers to adoption. Advertising revenue will be negligible. Apple’s prize is simply to boost sales of high margin iPhones. The mobile wallet will be a key selling feature and create yet another means to lock people into the iOS platform.

Compare this with the current efforts from the wireless companies. Verizon, AT&T, and T-Mobile have two significant accomplishments in developing a mobile wallet: they formed a consortium (ISIS) and they have laid out what looks to be a great user experience.

However, their business model is shortsighted and flawed. They seek to charge banks a fee just to allow a bank’s customers to load cards into the ISIS mobile wallet. This is absurd. Card issuers own the customers and, faced with a fee, will steer them to use other mobile wallets. ISIS should be concentrating on adoption in the near term, not extracting a quick buck from crucial partners. (Incidentally, there’s a much smarter way for ISIS to extract their pound of flesh from the card issuers. I’m generous with free advice. If anyone from ISIS is reading this – email me).

Furthermore, ISIS is likely to move slowly. This is risky in a fast moving sector where the goal is to establish a platform. ISIS will lose and the wireless providers will continue their slow march to commoditization.

The rise of the mobile wallet will be neutral for banks overall. But there will be winners and losers among them. I expect my alma mater, Capital One, will apply world class test-and-learn analytics in this sector with great success. It’s also clear that American Express is leveraging their exceptionally strong brand to stake out a strong position. Both companies should be able to increase their share-of-wallet, and win a greater share of lending revenue and interchange as a result.

The payment networks – specifically Visa and MasterCard – will be modest winners when Apple introduces an NFC-based mobile wallet.

Consumer and merchant adoption of contactless technology is currently at a standstill. Visa and Mastercard need Apple to break the logjam, lest innovators like Dwolla and Starbucks continue to gain traction for payment solutions that circumvent Visa and MasterCard altogether. So long as the iWallet makes it easy to load existing cards, and ties into the existing payment networks through NFC, Visa and Mastercard should see interchange revenue grow. The payment networks won’t control the mobile wallet itself, but they will benefit nonetheless.

And then there is Google. They’ll be a big winner. Although they’ve made barely a ripple with their current mobile wallet offering, Google can piggyback as Apple drives merchants to support NFC. As the iWallet gets traction, Google’s wallet will gain acceptance in parallel. As with Apple, I’d be surprised if Google tries to tax the banks or capture interchange. They’re in the business of selling ads across all channels, from search to banners to television. Use of the google wallet will be free, but with the quid pro quo that Google gets to use the purchase data.

This data will turbocharge Google’s advertising strategy. The purchase data will enhance targeting of mobile ads, where Google is already the leader. At the extreme they might run ads for Burger King to people who have purchased at McDonalds, and ads for McDonald’s at Burger King. The data will also help Google achieve the holy grail of advertising. It will “close the loop” from ad placement to retail purchase. It’s easy to track when a paid search link results in an online hotel booking. It’s not so easy to track when a paid search ad results in the purchase of a cheeseburger – unless the purchase was tap-to-pay through Google’s mobile wallet.

The Wildcard: The Merchant Consortium

It’s notoriously hard to predict the future of mobile payments, and there’s one wildcard to make it even more difficult: the merchants. They have an enormous amount at stake. The interchange comes out of their bottom line. They are the ones who will pay for the ads and promotions linked to the mobile wallet. Even the cost of upgrading the payment terminals to accept tap-to-pay will be borne by the merchants. If acceptance of the mobile wallet becomes business as usual, merchants may prove to be the losers.

There is an upside scenario. There are reliable reports that two of the largest merchants, Walmart and Target, are collaborating to create their own mobile wallet solution. Executing this strategy is challenging, but it’s also smart. If successful, the merchants could steer more spend to private label stored-value cards and avoid interchange fees altogether. A merchant would retain its own data to support customer loyalty programs, rather than enabling Google to target competitor ads to that merchant’s customers.

If the merchants succeed, the payment processors lose, the banks lose, and even Google loses. Every stakeholder in this sector should pay heed: creation of a competing mobile wallet by the consortium of merchants may ultimately determine who wins and who loses.