I dont write about payments much since lots of my work and research are somewhat confidential (for my job) and; more importantly, I’m really a student of the industry than a guru (not that it ever stopped me from BS’ing before) . . . However as I read and talked more to people in the industry it was clear to me that the future of mobile payments in the US is in somewhat of a holding pattern.

There are several architectural issues that needs to be resolved before wide spread adoption by consumers can take place. Even more importantly, without the emergence of a dominant architecture, the current consumer experience for mobile payments is not a marked improvement over what is the current “NON-MOBILE” payment experience . . . without a magnitude imrpovement in convenience or a catalyst (aka killer app), mobile payment adoption will be hard to realize.

What many entrepreneurs and VC’s fail to realize is that EXISTING payment methods are already “mobile.” What Mobile Payments really should stand for is MOBILE PHONE PAYMENTS as well as what happens to digital payments when ubiquitous real-time connectivity becomes a reality. IP connection and the browser used to tether computer users to the desktop, but not anymore with advent of IP/browser/applications on mobile phone. This is a quantum leap improvement in accessibility and context. However, cold hard cash as well as the good old Visa/MasterCard never tethered the end user to anything in the first place. The wallet is as mobile as it get! . . . Mobile payment’s value proposition will never be mobility, but the increase value through better acceptance, authentication, and control.

There are really two major mobile payment architectures in competition for the future. (Hybrids are possible but harder analyze.)

Scenario One

NFC technology matures (its very close). The payment card (Visa/Master) merges into the cell phone at the physical layer - ie your payment card sim chip is in the mobile phone.

1. Customers buys something
2. Customer “waves” his phone at a terminal
3. terminal asks customer to type in PIN at terminal (or not)
4. terminal uses its existing connection to association rails to authenticate and authorize payment
5. payment complete/fail

This is almost embarassingly simple. Besides step 2, there is almost no difference between this use case and the existing use case for payment cards. And there lies why this architecture will gain the most traction DESPITE the fact that it got a late start. The incremental value proposition is simply speed . . . and the incremental disruption to existing pratices & infrastructure are almost none. And thus the barrier to adoption are the lowest - new terminals and new cards needs to be distributed but the associations have allocated huge budgets to make this happen. Under this architecture, the opportunity for startups to disrupt incumbents are low. The banks, associations, and merchant networks will retain most of the value created.

The only evolution I can see is that Carriers gets in the game and create applications and sofwares that integrate the sim chip at the system and application layer, not just the physical layer. Thus, you can check your balance/credit limit in real time, keep a history of your transactions, etc.

Scenario Two

Almost all independent mobile payment companies are taking this route (Paypal, OboPay, MobileLime etc). Instead of relying on merchants, their terminals, and thus the existing VISA/MC association rails for authentication and payment, they route the transaction through the mobile phone, OTA IP connection, and the Carrier back onto their own merchant processing network (circumventing the association).

Here is the customer experience

1. Customer buys something
2. Phone recieves merchant ID via a few possible methods
- text message using merchant phone # as ID
- NFC gathers merchant ID from a passive terminal (no connectivity whatsoever)
- customer enters ID via an application interface
3. Phone requests/customer PIN
- dial back
- text message
- application prompt
4. The mobile uses its IP connection to authenticate and process the transaction

There are a huge amount of infrastructure that needs to built here. BUT even more important, the change in customer behavior is HUGE. . . . The odds of this architecture winning in the short term are low . . .

BUT I can see why this is a much more exciting vision of the future and a broader set of value can be created. For one, payment connectivity is no longer enaslaved to the merchant. Anyone with a mobile phone can accept payments. ACCEPTANCE (not payment) mobililty for digital money moves from “store to store” to “people to people” (Its like payment cards finally became like cash , ie it is fungible at the people level) Furthermore, the integration of the authentication through the phone opens up creative applications for controling spending, savings, and any financial activities.

EVEN MORE IMPORTANTLY from the business model perspective, this architecture gives startups an opportunity to disrupt the incumbents and create/launch their own merchant network where they can make 50-200bps on the transaction volume. Who wouldnt want to be the Visa/MC/Amex of the next millennium?

Eventhough the 2nd architecture has gain a lot of funding and publicity, I believe the first architecture will be the first to gain adoption. It is certainly not ground breaking, but its the neccessary next step. A version 2nd architecture (which enables breakthrough accpetance and ubiquity) will come but only with the blessing of the existing payment associations and not in its current form as implemented by the existing slew of startups. Paypal is the only player with an outside shot of pulling this off because of their existing merchant relationships and consumer adoption. All others needs to revaluate their architecture and give up the hope to create a merchant network. (atleast not in the first 5 years). Instead, they need to learn to play better with the payment associations, embrace NFC, focus on building mobile applications, and earn the trust of carriers. They need to learn to leverage the hundreds of millions Visa/MC/Amex have earmarked to upgrade its terminal, network, and cards instead of fighting an uphill battle.

In that model, a modified scenerio 2. Mobile phone will become payment as well as a acceptance tool . . . it will be able to act as a terminal as well as a authorization ID. (through NFC/RFID/Infared/bluetooth or whatever communication device method is out there between two phones). Visa/MC/Amex etal will not go away, but a startup might gain enough traction (Paypal) to join them. Their rails/processing systems will migrate to the handset with the help of Carriers who controls the physical layer (mobile phone hardware + airwaves). Applications will be written for the mobile phone to transform “mobile phone + payments cards” beyond simple identification tools (what is a credit card if you take out the plastic?) into innovative method for controlling spend, evaluating credit, managing savings, and whatever entrepreneurs can think of next. . .