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March 26th, 2015

Market Maturation: Mobile Payments Are Finally At The Tipping Point

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Finally, mobile payments are at the tipping point of reality.

Apple Pay has done more for the collective mindshare of the adoption of mobile payments than any other single product or company has done in the last five years.

Mobile payments—the ability to pay for good and services at physical locations with your smartphone—was not an original concept from Apple. Essentially, Apple took an existing market concept based around technology and products designed to get people to pay with their smartphones, embraced it and extended it. In the process, Apple has helped break down old walls and inter-industry conflicts of who will control the next era of payments.

See also: How To Build Apps With Apple Pay

Now, with Apple’s help and a little industry consolidation, we may start to see the mass adoption of mobile payments in the United States and across the world.

The concept of mobile payments hit the hype cycle around 2010. Near Field Communications—a short-range wireless connectivity standard that enables direction communication between two devices—had become a popular new technology built into smartphones, starting with the Samsung Nexus S. The popular theory was that within a year, everybody would be using NFC-empowered smartphones to make payments.

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Of course, NFC-based smartphones did not change the payments landscape overnight. The book is still out on if it ever will. Ultimately, NFC may prove to be a lame duck, a transitional technology between one standard and the next (in the way that WiMax was a promised evolution that ultimately was just a step between CDMA/GMS 3G connectivity and 4G LTE). The lack of consumer and business adoption for mobile payments has become one of the most confounding technological arguments of the last five years.

See also: The Crossroads Of Ecommerce (Series)

The industry trying to define mobile payments didn’t do itself any favors. Several large industry sectors smelled blood in the water and attempted to take control over the next iteration of a burgeoning technology and in the process made it more difficult for cooperation and collaboration to take place to build the future of transactions.

Some Dreams Have Been Shattered

The cellular carriers thought that they could take over payments (seeing that the data for the transactions goes over their cellular networks) and attempted to corner the market with Softcard (originally named Isis but changed for branding reasons). Softcard’s corporate masters—AT&T, Verizon and T-Mobile—blocked the Google Wallet using NFC to make payments, setting the mobile payments industry back several years. In the end, the carriers could not hack the payments space and sold the intellectual property of Softcard to Google and finally allowing Google Wallet to operate through its pipes.

accepting_apple_pay

Merchants—the sector with the most to gain from a change in payment philosophy—have banded together to build an NFC and mobile wallet through the Merchant Customer Exchange and its CurrentC project. Led by the biggest merchants in the United States (like Walmart, CVS and Sears), MCX hopes to cut the interchange rate (the amount merchants pay payment processors for credit and debit card transactions) out of payments at its member stores by providing its own rails and gateways, bypassing the likes of MasterCard, Visa and American Express. As of yet, MCX hasn’t gained any traction and CurrentC is more concept than reality.

Some startups thought that they could change the payments landscape, either by being more innovative, offering value added services simply presenting themselves as alternatives to the established order. Square, LevelUp, Clinkle, Venmo have all attempted to upset the payments market and each has either failed to gain mainstream adoption or—in the case of Clinkle—did not realize the scope of the problem the industry they were attempting to disrupt.

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Then there are the biggest technologies companies on the planet, organizations so large and with so much technical acumen that—in their minds—no industry cannot be entered and conquered. Google has spent more than half a billion dollars trying to build its own mobile payments solutions. Apple is finally embracing payments with Apple Pay. Samsung is going whole hog into the mobile payments realm with its acquisition of LoopPay and its announcement of the Samsung Pay mobile wallet to be released with the Samsung Galaxy S6 in April.

The battles still rage, though much of the fight has been taken out the startup and service and network sectors. As MasterCard’s Jorn Lambert, group executive for digital convergence, said in a recent interview with ARC, “Some dreams have been shattered.”

Mobile Payments On The Verge Of Mainstream

With this context of the last five years in mind, why are we now on verge of mainstream reality for mobile payments?

Mung Ki Woo, executive vice president of digital platforms at MasterCard, believes it is a function of the solidification and evolution of two aspects of the payments landscape: the banking/financials services sector and technology maturation and adoption.

Samsung's new Galaxy S6 will ship with Samsung Pay mobile wallet.

Samsung’s new Galaxy S6 will ship with Samsung Pay mobile wallet.

From a banking and payment processor side, not much has changed. Despite attempts from the carriers, merchants and startups trying to usurp the infrastructure from the traditional role of the financial sector, the banks and processors remain in control of the transaction process. Banks store money for consumers, the payment processors and card issuers (MasterCard, Visa etc.) then provide keys to that money through the form of credit and debit cards. The infrastructure of the financial network in the United States has not necessarily been the problem for mobile payments adoption.

In the technological perspective, the payments industry has been waiting for a variety of factors to mature. Even though the first smartphone to have NFC was in 2010, it was not until several years later that the majority of smartphones shipped had NFC capabilities. It then takes time for consumers to buy those smartphones and get to a point where a statistically relevant amount of people have NFC capabilities in their pockets. The upgrade cycle of smartphones has definitely been an inhibiting factor towards mobile payment adoption. Every time that an improvement is made to NFC technology, the adoption cycle again becomes a lagging factor.

Other technology factors that have prohibited mobile payment adoption have been biometric authentication, ubiquitous and fast network connectivity and cloud computing infrastructure. These are large complex areas of technology (that look simple to consumers who just have to tap a button) and the moving parts of getting them all on the same page has been years in the making.

To simplify the equation: consolidated competition + onboarding of financial institutions + maturation and evolution of technology=the tipping point for substantial growth in the mobile payments sector.