Evans 20igniting-20mobile-20payments-2010oct13-131015134327-phpapp01


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Presentation examines antitrust economics of vertical restraints including tying, exclusive contracts, bundling, MFNs, the role of critical mass and platform ignition, possible anticompetitive strategies, and procompetitive explanations for vertical restraints.

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Evans 20igniting-20mobile-20payments-2010oct13-131015134327-phpapp01

  1. 1. Igniting Mobile Payments David S. Evans Market Platform Dynamics University of Chicago Law School Mobile Money Conference Berkeley, CA 11 October 2013 Proprietary and Confidential
  2. 2. My All Payments Sunday in Boston Last Year 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 Used to pay for Starbucks coffee with cash Used to pay for taxis with cash Now uses Starbucks iPhone App to pay even for small purchases 2| Used to pay for lunch with cash Now uses LevelUp iPhone App Now uses Uber iPhone App to order and pay for car service in Boston and many cities throughout the US Proprietary and Confidential 12
  4. 4. Explosive Growth of Mobile Payments Around the World! …worldwide transaction value of mobile payments will total $984 billion by 2014, up from $162 billion last year. That includes transactions from mobile banking, international and domestic remittances, contactless cards, mobile coupons and near-field communications. Mobile payments will represent 15% of all card transactions by 2013, and will overcome card volumes within 10 years if growth continues at the same rate, according to the World Payments Report 2011. 4| Proprietary and Confidential
  5. 5. The Japanese & Koreans Use Mobile Payments Like Crazy “Each month last year, four million South Koreans bought music, videos, ring tones, online game subscriptions and articles from newspaper archives and other online items and charged them to their mobile phone bills, without going through any bank or credit card. The amount totaled 1.7 trillion won, or $1.4 billion at current exchange rates, last year. South Koreans have done this since 2000.” – The New York Times, 2009 …Japan and Korea are widely acknowledged as global leaders in … m-payments…” – KPMG, 2007 “Emerging markets in Asia will lead the way in mobile payments (m-payments) over the next several years..” – ZD Net, 2011 5| Proprietary and Confidential
  6. 6. And Mobile Payments Use Is Accelerating in the US Mobile devices are edging closer to fulfilling their long-delayed promise as digital wallets. Consumers are beginning to see the advantage of channeling offline payments through their mobile devices, rather than carrying around clunky coins and cash — even debit and credit cards. Consumers are primed to go wallet-free and begin paying for goods and services via their mobile devices, and as a result, mobile payments are set to explode. - July 2013 6| Proprietary and Confidential
  7. 7. Mobile Payments Is Growing Like Gangbusters Outside the US, What’s Wrong With Us? “Prevalent elsewhere in the world, particularly Europe and Asia, mobile payments have a combined global market value projected to top $600 billion by 2013. In some developing countries, mobile payment devices are even being used for micropayments…. Yet, in the United States, mobile payments have failed to gain traction” - April 2009 7| “Consumers in Japan also pay with their cellphones more than Americans do, said Ray Ledford, who lives in Japan but spends half his time in the United States on work.” - July 2013 Proprietary and Confidential
  8. 8. Everything  I’ve   Just  Told  You  Is  a   Lie!!!!   8| Proprietary and Confidential
  9. 9. THE REALITY VS. THE HYPE What’s Really Going On 9| Proprietary and Confidential
  10. 10. Hundreds of Mobile Payments Pilots and LaunchesAround the World in Last 7 Years Source: PYMNTS.com, CTIA, NFC Times 10 | Proprietary and Confidential
  11. 11. Yet Mobile Payments Has Significant Volume in Few Countries 11 | Proprietary and Confidential
  12. 12. Even Japan and Korea Aren’t As Successful as You’ve Been Lead to Believe DoCoMo’s gamble on contactless wallet phones has yet to pay off, despite the impressive numbers of contactless phones, mobile applications and acceptance points. Transactions figures showing how much Japanese subscribers use the phones are hard to come by. Some estimates put regular use at about 10%, though more tap their phones to pay on a less frequent basis. - November 2009 …a lack of understanding between the finance and communication industries has so far held up the development of the (Korean) mobile payments market. - February 2012 12 Proprietary and Confidential
  13. 13. Outside of Starbucks Most Americans Can’t Pay at POS with Mobile Peoria isn’t Palo Alto! In most of the country the only place you could pay with mobile is at a Starbucks. The penetration of true mobile payment platforms is VIRTUALLY ZERO! Total US Merchants Total Card Accepting Merchants = 8.5 million And not many transactions are happening at the few places that take mobile payments—except Starbucks. 5,000 Merchants Square Wallet: 250,000 Merchants 7,000 US its stores @ Physical POS: 250,000 Merchants Source: Company websites, MPD Analysis 13 | Proprietary and Confidential
  14. 14. What Is a Mobile Payments Platform? Mobile payments platform enables many consumers to transact with many unaffiliated merchants—just like “general purpose cards” LevelUp is a mobile payments platform because consumers with the app can pay at many independent merchants Single-use applications for paying such as Starbucks, Uber, iTunes are important for mobile payments but aren’t platforms—they are like “store cards” 14 | Proprietary and Confidential Our focus today is on mobile payments platforms and igniting two-sided platform for consumers and merchants
  16. 16. OpenTable Is An Intermediary Between Diners and Restaurants 16 | Proprietary and Confidential
  17. 17. OpenTable Solved a Transaction Cost Problem $162 million revenue in 2012 | $1.4 billion markets cap 17 | Proprietary and Confidential
  18. 18. Restaurants Pay & Consumers Use for Free $139 million NA revenue in 2012 | $1.4 billion markets cap 18 | Proprietary and Confidential
  19. 19. Positive Feedback Effects Fueled Growth 122 million diners seated with OpenTable in 2012, up from 96 million in 2011 27K restaurants in 2013 Q1 up from 24K in 2011 Q4 More than 15% annual growth 19 | Proprietary and Confidential
  20. 20. OpenTable is a Two-Sided Platform It provides a web-based “platform” that enables diners and restaurants to find each other and get together. The platform is an intermediary between restaurants and diners. General purpose payments is a two-sided platform involving senders and receivers of funds. 20 | Proprietary and Confidential
  21. 21. Platforms need critical mass to ignite Critical mass Critical mass refers to the minimal set of customers on each side that is large enough to attract more customers and result in sustainable positive feedback Cri$cal  mass  depends  on  scale  and  balance   Probability of customers from two sets getting together and exchanging value increases with the number of customers on each side Pla2orms  implode  if  they  can’t  reach  cri$cal  mass   If there aren’t enough customers on the other side the probability of advantageous exchange falls and customers don’t join and the early adopters who have eventually leave   21 | Proprietary and Confidential
  23. 23. Problem 1: Problem, What Problem? Consumers and merchants can transact easily with plastic cards Swipe transactions take about a second Consumers have muscle memory in doing them Merchants are all set up to take them Almost ubiquitous use by consumers and merchants 23 | Proprietary and Confidential Where’s the transaction-cost problem?
  24. 24. Problem 2: Merchant Acceptance Millions of merchants have sunk cost investments in POS equipment POS systems integrated with back-end systems Change requires training sales clerks Any change in POS risks disruption and loss sales in addition to incremental investment cost 24 | Proprietary and Confidential Show me the money!!!
  25. 25. Problem 3: Consumer Adoption Why download and use a new mobile payment app if you can’t use it at many merchants? And the merchants that take it get so few transactions the clerk doesn’t know what to do. Paying with mobile isn’t any faster than swiping, so why bother? 25 | Proprietary and Confidential Show me the value!!!
  26. 26. Meta-Problem: No Chickens or Eggs Consumers don’t have a compelling reason to want to pay with mobile Merchants don’t have a compelling reason to accept mobile payments Both problems are hard to fix unless mobile payments is significantly better than what consumers and merchants are now doing But it can’t be (much) faster … 26 | Proprietary and Confidential Show me the critical mass!
  27. 27. THE NFC DEBACLE & THE TRAGEDY OF THE HYPE We’ve Seen This Movie Before 27 | Proprietary and Confidential
  28. 28. NFC’s Chicken and Egg Problem Card networks have been pushing NFC-based contactless cards since early 2000s globally. Massive hype on success of NFC and the inevitability of NFC-based payments at point of sale Reality has been only small portion of merchants in most countries have installed contactless terminals Consumers have shown little interest in using the cards Leading to merchants having even less interest in investing in terminals. 28 | Proprietary and Confidential After a decade there is modest success in Canada, UK, and Poland… but NFC is a complete bust in the US and almost everywhere else
  29. 29. The Incredible Shrinking Inevitable Technology Yet many industry analysts continue to predict growth in NFC only to reduce their optimism later on. In fact, Gartner this past July was highly publicized for cutting their NFC forecast by 40%. Juniper also reported significant drops in forecasted volume vs. previous reports. NFC Forecasts 2009 – 2013 $USD Billions June 2012 $200.0 $150.0 Dec 2012 March 2012 $100.0 July 2013 Feb 2011 June 2011 $50.0 Sept. 2009 Sept. 2011 March 2012 $2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Juniper, Gartner, Yankee Group, Informa, NPD Group 29 | Proprietary and Confidential
  30. 30. Hundreds of Millions of Contactless Cards But No Place to Use Them Global MasterCard-Enabled POS Terminals Total Terminals = 35.9 million PayPass-Enabled terminals today: 886,000 or approx 2.5% Planed 3yr deployment in Japan: 410,000 will bring total to 3.6% Source: MasterCard 2012 annual report, company press releases 30 Proprietary and Confidential
  31. 31. Payments Networks and Telecoms Banked on NFC And Tried to Convince That NFC Was Growing Rapidly and “Inevitable” PROJECT OSCAR PARTNERSHIPS NFC SPECS 31 | Proprietary and Confidential “Vodafone’s customer base spans across more than 30 countries, which means our partnership may become one of the biggest, global implementations of NFC and mobile commerce,” said Dr. Jae Chung, CorFire’s president and CEO. -  October 2012
  32. 32. The NFC Debacle and the Mobile Fizzle Many Mobile Payments Startups and Pilots Walked into the NFC Trap A FEW EXAMPLES •  Hundreds of millions of $ wasted on NFC initiatives •  Lost decade of innovation at the POS •  Driven by NFC-devotees and fueled by hype •  Massive distraction for mobile payment platform entrepreneurs 32 | Proprietary and Confidential
  33. 33. FIZZLES & SIZZLES A FEW CASE STUDIES 33 | Proprietary and Confidential
  34. 34. Fizzle (So far) | Google Wallet Google’s 2011 Strategic Priorities 1| Focus on developing the underlying fast mobile network 2| Increase the availability of inexpensive smartphones for the entire world THE HOPE 3| Development of mobile money •  Osama Bedier recruited away from PayPal in 2011 •  Team swells to 500 by 2012 •  Android market share growing at pace of 400k devices per day “Google [Wallet] doesn’t have a chicken-and-egg problem: It is reasonably banking on the natural consumer upgrade cycle for smartphones to help fuel demand for NFC phones, which in turn will put Wallet in more pockets.” THE BET - Sam Gustin, Wired, May 2011 Minimal Acceptance x Minimal Adoption=Fizzle THE FIZZLE 34 | •  •  •  •  •  Merchant, MNO, & Network resistance Negligible transaction volume Bedier departs May 2013 (really late 2012) Losses total an estimated $500M Closed down and folded into advertising/commerce Proprietary and Confidential
  35. 35. Sizzle| mPesa mPesa Users and Agent Growth •  Addressed massive transaction costs associated with moving money between urban in rural areas •  Launched by Vodafone/Safaricom in March 2007 as a service to facilitate banking deposits, P2P, and bill pay •  By 2010 was adopted by 40% of the adult population and 60% of Safaricom customers •  Processes more transactions than Western Union does globally •  Now used by over 17m Kenyans, equivalent to more than two-thirds of the adult population & approx. 25% of GDP now flows through it 35 | Proprietary and Confidential Source: The Economics of M‐PESA , 8/2010
  36. 36. Sizzle or Fizzle?| Square Square Annual Processing Volume ($USD Billions) •  Launched in 2010 as a mobile POS reader to enable small merchants to accept payments •  The reader didn’t have a chicken & egg problem. Consumers already had cards & Square solved for the friction of needing to pay small merchants by cash or check $15 Moneris: $12B $12 EVO: $10B •  Reporting $15 billion in annualized volume outside of landmark partnership to process payment for all 10,000+ US Starbucks stores $9 •  Expanded to become a true mobile payments & commerce player with the launches of Card Case (now Square Wallet) and Square Market. $6 •  Reported 3MM customers and 250,000 merchants using Square Wallet in December 2012 but there is no indication on how active either of these players are. Independent field tests report that most merchants don’t know how Square Wallet works and haven’t had customers ask to use it $3 BB&T: $7B $M-12 J-12 N-12 M-13 J-13 Source: Company Reports, Nilson 36 | Proprietary and Confidential
  37. 37. SECURING MOBILE PAYMENT PLATFORM IGNITION 37 | Proprietary and Confidential
  38. 38. Bedrock of Platform Ignition A new platform has to generate significant additional value to get customers on both sides to join and interact. Successful platforms such as OpenTable and Uber generally do this by solving a significant transaction problem. That “value generation” provides incentives to join or revenue stream that can be used to subsidize hard-to-move but necessary participants. 38 | Proprietary and Confidential
  39. 39. Igniting Mobile Payments Won’t be About Payments There’s no significant transaction problem involving consumers making payments and merchants receiving payments at the physical point of sale. “Payments” innovation in fact historically hasn’t been about payments but time shifting of payments and receipts, fraud protection, and value-added services such as financing. Mobile “payments” will need to provide a value beyond what physical cards can do today. 39 | Proprietary and Confidential AMERICAN EXPRESS isn’t successful because they enable payment. Its because of everything else that comes with being a cardholder
  40. 40. The App is the Key to Mobile Payments Ignition Its About Closing the Loop Between Consumers & Merchants THE PAYPAL ECOSYSTEM Mobile phone apps provide ability to bundle many services that facilitate commerce Mobile payments app Search is now for an app that provides enough value to merchants and cardholders to reach critical mass Handsfree at the POS Competition currently focused on providing location-based offers and rewards to drive incremental sales for merchants and value to consumers 40 | Proprietary and Confidential Beacon
  41. 41. Why Ignition Will be Slow Unconvinced merchants with long POS replacement cycles •  •  •  •  8 million merchant 2-3 year replacement cycle Don’t know what technology to invest in—NFC, bar code, Bluetooth, ? Have little appetite to invest without clear ROI Consumer “muscle memory” & lack of motivation 2012 UK Study 64% 68% 52% Worried about theft of acct & payment data 41 | Tension among major stakeholders Ok with how they pay Concerned about fraud & security Proprietary and Confidential
  42. 42. Why Takeoff Could Happen Sooner & Be More Rapid •  Innovations in cloud-based solutions with slick interfaces persuade merchants they need to change POS experience: innovative retail or die •  Competition among “app” developers results in “killer” app for mobile payments leading consumers to want to use it and merchants to want to take it. •  A “Black Swan” emerges with a mobile solution no one had every thought about Apple iBeacons Ecosystem Total iTunes Accounts In Millions 575 iOS-Powered POS Systems 400 160 10 50 Ave square meters per store: 16,258 Beacons to cover an entire store = 75 NFC Tags for 100k products = $5,000 200 2005 2008 2009 2010 2011 2012 2013 42 | SAMPLE iBEACON ECONOMICS $10,000 Source: Gigaom, Estimote Proprietary and Confidential
  43. 43. SO WHAT? 43 | Proprietary and Confidential
  44. 44. Reflections on the Mobile Commerce Field of Play 1 | Ignition delayed because players have focused on the technology for paying rather than solving for value 2 | Mobile payments delayed because networks and telcoms hyped a technology that gave them control but couldn’t secure critical mass. 3 | Mobile payments ignition delayed because entrepreneurs and investors vastly underestimated the complexity of changing POS involving sunk cost investments in hardware, software, training, etc. 44 | Proprietary and Confidential
  45. 45. Retail Reinvention … The Catalyst for Mobile Commerce Ignition Simultaneous adoption of mobile POS solutions as part of the reinvention of retail and increased use by consumers of mobile phones provides foundation for ignition – Once there is a killer app! 45 | Proprietary and Confidential
  46. 46. THANK YOU David S. Evans David.Evans@MarketPlatforms.com 46 | Proprietary and Confidential