As 2-D Barcodes Gain Steam for M-Payments, a Novel Twist Emerges

The use of two-dimensional bar-code technology for mobile payments appears to be picking up momentum. On the heels of a major expansion of the technology, announced last week by Starbucks Coffee Co. and Target Corp., a startup company this week announced it is launching a so-called private beta for a barcode system that will let consumers make payments online and in stores, as well as person-to-person. The beta is expected to become a commercial service in the third quarter. The technology, from Sunnyvale, Calif.-based Cimbal Inc., features 2-D bar codes but with a twist: The codes are generated by the person or merchant requesting payment, not by the person making payment. In other deployments of 2-D barcodes for mobile payments, the codes are generated by the consumer on his smart phone screen. He then holds the screen under a merchant's scanner to complete payment. This is the method followed by coffee chain Starbucks, which last week said it had expanded a 16-store mobile-payments pilot launched in the fall to 1,002 outlets located inside Target stores. Starbucks's application, which allows consumers to access a Starbucks gift card account, was built by mobile-payments software developer mFoundry Inc. and works with Apple Inc.'s iPhone and iPod devices. As with many mobile-payments apps for smart phones, the Starbucks Card Mobile App is downloadable from Apple's iTunes App Store. Cimbal's approach is slightly different, but in a potentially crucial way. President and chief executive Christopher Boone says his company has set up accounts for person-to-person payments and is working with a number of merchants to introduce point-of-sale transactions, though he refuses to give details. “Our target market is Fortune 500 retailers,” he says. Adding Cimbal's system, he adds, is “literally a software update” for the merchant. The company is also approaching unnamed banks about promoting Cimbal to their customers. With Cimbal's app on his smart phone, a consumer can pay a merchant at the point of sale by using his handset's camera to snap a picture of the barcode generated by the merchant's software. The code embeds all data relevant to the transaction, including purchase amount. For person-to-person payments, the payor similarly takes a picture of a code generated on the phone held by the person requesting payment. The key advantage to these transactions, says Boone, is that all data are already embedded in the codes. “There's zero data entry by the consumer,” he says. “Amazon has one-click. This is zero click.” Between four and five man-years of development time went into creating Cimbal's technology, he adds. POS transactions will be faster than card swipes, Boone says, an advantage often cited for a competing mobile-payments technology called near-field communication that allows contactless payments. Beyond that, Boone says Cimbal's technology can also accommodate brand-loyalty programs. Cimbal requires users to open PIN-protected accounts, which are linked to their demand deposit or savings accounts. While Boone says transactions will settle in real time, he refuses to describe how this will be achieved. “That's part of our secret sauce,” he says. Payments experts note there are at least a couple of ways immediate funds settlement can be done. One is to rely on prepaid accounts. Another is to backstop automated clearing house payments by advancing the funds to the payee and then waiting for ACH settlement, which is typically next day. This method, though, requires strong fraud control and high confidence in the payor's funds availability. With the Starbucks-Target development in mind, Todd Ablowitz, president of Double Diamond Group, a Centennial, Colo.-based payments consultancy, says Cimbal's application underscores a growing trend toward using 2-D barcodes for mobile payments, and endorses the startup's take on the method. “It's better for the consumer to take a picture of the acceptance point than for the acceptance point to read a barcode from the consumer,” he says. “They're on to something there.” He says barcode scanning by merchants is susceptible to misreads. But both Ablowitz and Aaron McPherson, practice director for financial services at IDC Financial Insights, Framingham, Mass., have some reservations. Early on, consumer adoption could be problematic, Ablowitz notes. “I don't know what the compelling consumer value is,” he says. In an e-mail message, McPherson adds that the system could suffer from the fact that both merchants and consumers must have the required devices and must have Cimbal's software loaded on them, a problem he calls “dual adoption dependencies.” Also, the startup faces fierce competition from more established players like PayPal Inc. and Obopay Inc., he says. Without being specific, Boone says the company will add incentives to entice consumers to try the system. “Consumers are very fickle and willing to move from a credit and debit mechanism for an appropriate incentive,” he notes. Users will also find pricing attractive, he says. Person-to-person transactions will be free. Merchants, meanwhile, will find pricing to be “a fraction of what [they] are paying for [card] interchange.”