M-Commerce: Mobile Warming

Peter Lucas

Time was, mobile payments was mostly talk. No more. Now, with new features, pricing, and promotion, some providers are pumping out real transaction volume.

For months, payments executives have been reading about digital wallets and acceptance applications from some of the biggest names in the business, including Visa Inc., MasterCard Inc., American Express Co., Google Inc., AT&T Inc., Verizon Wireless, and T-Mobile USA. But for all the talk, most of these products are generating surprisingly little actual volume.

Indeed, the latest entry, the Isis mobile wallet from AT&T, Verizon, and T-Mobile, is expected to transform the mobile-payment industry, according to its backers. Isis has certainly made remarkable progress in the past year (“Isis’s Promising U-Turn,” May), but the reality is that until it launches this summer no one can say for certain what its impact will be.

And in the fall, Apple Inc.’s wallet entry, called Passbook, will become available to consumers as part of the iconic computer company’s latest version of its mobile-operating system for the iPhone and iPad, iOS 6. Again, actual usage will remain a question mark for some time.

Meanwhile, several mobile-payments providers, some of which have been in the space since 2009, are working to change how m-payments and m-commerce are priced, promoted, and delivered to merchants and consumers—and generating real volume.

One of those players, San Jose, Calif.-based PayPal Inc., processed $4 billion in mobile-payments volume in 2011 and expects to process $7 billion in 2012, making it by far the leader in mobile payments.

PayPal’s ascent to the top of the leader board has been rapid. In 2010 the company processed $750 million in mobile payments.

“The PayPal brand carries a lot of weight, especially as an alternative- payment option, and that helps with adoption and usage,” says Sean Cook, chief executive of ShopVisible LLC, an Atlanta-based provider of mobile and e-commerce solutions. “People know how PayPal works and are comfortable using it.”

‘Repeat Customers’

Other mobile-payments brands in recent weeks have ushered in new initiatives that range from new merchant-acceptance fees to new marketing strategies and value-added features.

Boston-based LevelUp, launched only a year ago by mobile-game developer SCVNGR, announced a potential game changer in merchant pricing by scrapping its 2% processing fee. The company will now charge merchants 35 cents of every dollar of credit earned by LevelUp customers.

When a LevelUp customer makes her first purchase at a LevelUp merchant using the $2 introductory incentive funded by the merchant, LevelUp will earn 70 cents on the incentive. If the consumer spends more than $2, the merchant pays no additional processing fees.

LevelUp will earn additional merchant fees on future reward redemptions when consumers hit an ongoing spending threshold. For every $100 LevelUp accountholders spend cumulatively with a merchant after their first purchase, they receive a $10 LevelUp reward funded by the merchant. When any portion of the reward is spent, LevelUp earns 35 cents on the dollar.

In other words, the idea is to charge merchants for delivering new and repeat sales, not for processing payments. “This is an innovation that shows where mobile pricing models are likely headed and that is payment from merchants to mobile payments providers for driving incremental sales,” says Todd Ablowitz, president of Double Diamond Group LLC, a Centennial, Colo.-based consulting firm. “The trend in mobile payments is to create value outside the transaction and have merchants fund that value.”

Why the pricing move? LevelUp’s reasoning was twofold. First, the company was aware of the difficulty many merchants have generating repeat sales from customers attracted through daily-deal offers. Second, it saw an opportunity to clearly demonstrate the value it says accepting its payment option brings to merchants. About 60% of LevelUp customers make a repeat purchase at the same merchant within two to three weeks of their first purchase, according to Matt Kiernan, the startup’s director of marketing.

“For merchants, the value proposition of any service has to meet their expectations in terms of incremental sales. Drive enough incremental sales and the merchant will see value relative to what they pay,” says Ablowitz. “That hasn’t always been the case with the daily deal.”

To sell its new pricing model, LevelUp points out to merchants that the money they spend funding LevelUp rewards is advertising and marketing dollars they will spend anyway. By directing a portion of those monies to LevelUp acceptance, they can clearly determine whether the incentives are generating enough incremental sales to be of value. Merchants can stop accepting LevelUp at any time.

“The idea of merchants buying into incentives and rewards programs is to build repeat customers,” says Kiernan. “Our goal has always been to make LevelUp as easy as possible for merchants to accept, and this pricing model fits with that philosophy. Our profits are now aligned with incremental sales as opposed to transaction volume in general.”

Even before the new pricing plan, the startup was enjoying rapid growth. As of June, Level Up had about 3,000 merchants in eight cities, including such casual dining chains as Johnny Rockets and Ben & Jerry’s. It had signed up 200,000 consumers and was generating $2 million a month in sales. The company, which received a new round of $12 million in investor funding last month, processes its transactions through Chicago-based Braintree Payment Solutions LLC.

‘Larger Mind Share’

A week before LevelUp unveiled its new pricing plan, Square Inc. announced that retailers Walgreens, Staples, and FedEx Office will carry its now iconic, cube-shaped credit card reader. The new retail outlets bring the number of merchant locations selling the Square dongle to 20,000. The reader, which retails for $9.95, is also available at Apple stores, Best Buy, OfficeMax, Radio Shack, Target, UPS, and Wal-Mart.

Square, which also has an application consumers can use for online payments through a mobile device, has signed more than 2 million individuals and businesses and is processing payments at an annualized rate of $6 billion. In 2011, Square released an iPad version of its app that enables merchants to use an iPad as a mobile cash register.

Just what impact Square’s move deeper into retail outlets will have on merchant adoption remains to be seen. As one of the oldest operational mobile-payment platforms—the company launched in 2009—Square has built strong brand awareness among merchants too small to generate enough volume to qualify for a merchant-acquiring account.

“The Square acceptance cube is still available for free on the company’s Web site and the Web site seems to account for most of the distribution,” says Ablowitz. “Merchants buying the acceptance cube in a store do get a $10 credit to their account after purchase, so that helps offsets the cost. If anything, Square is simply expanding its distribution channel to broaden its reach.”

A day after Square made its announcement, MountainView, Calif-based Intuit Inc. announced the integration of its GoPayment mobile-payment processing application with QuickBooks Point of Sale 2013.

Merchants can use the integrated GoPayment/QuickBooks Point of Sale solution to perform a number of back-office functions, including real-time management of inventory across all their stores. They can also also set automatic re-order thresholds for inventory, perform employee time and attendance, track customer purchase history, and access performance reports for up to 20 stores through a smart phone or point-of-sale terminal.

The integration of GoPayment with QuickBooks POS is expected to enhance the value of both products to small and micro-merchants. “The move creates a lot of cross-selling opportunities for Intuit with their existing clients,” says Aaron McPherson, practice director for Framingham, Mass.-based IDC Financial Insights. “With Square expanding its retail presence and its interface slicker and easier to use, it has a larger mind share.”

Intuit has 200,000 retailers servicing 23 million customers using GoPayment and QuickBooks Point of Sale. Those retailers generate about $6 billion in transaction volume processed though Intuit annually. Overall, Intuit has about 8 million small-business customers.

“This is a solution that gives micro-merchants a more robust payment solution they can use to effectively manage their business as it grows and that Intuit can use to move them into a more traditional acquiring relationship,” says Rick Olgesby, a senior analyst for Boston-based Aite Group. “Acquiring is becoming more about offering comprehensive POS solutions.”

‘Two Camps’

Indeed, the value-added play with merchants is becoming more prevalent in the mobile-payments space as processors and payment-infrastructure providers search for new ways to induce merchants to adopt mobile- payment technology.

“There are a lot of different flavors of mobile payments out there, including NFC wallets,” says Trevor Dryer, head of product management, mobile payments, and point of sale for Intuit’s Payment Solutions division. “The winners will be the ones that will do more than just enable payment and deliver value to the merchants and consumers.” (NFC refers to near-field communication, a short-range, interactive technology that links mobile devices to point-of-sale gear in stores).

On the merchant side, Intuit is also considering subscription-based pricing for QuickBooks POS to entice merchants to purchase it with GoPayment. QuickBooks Point of Sale’s base price is $1,100, which could be hard for small businesses to swallow in one gulp.

“We have two camps among our target audience, those that want to pay a one-time fee and those that want to spread the cost out through subscription pricing,” says Dryer. “We are looking at the latter too.”

Subscription-based pricing is expected to get many small and micro-merchants off the fence about buying QuickBooks. “A lot of these merchants would rather put large lump sums into their business,” says Oglesby.

Down the road, Intuit plans to provide merchants with tools they can use to create loyalty and rewards applications. An example: an application to customize offers and coupons for customers based on their purchase history. “Personalization enhances the interaction between the customer and the merchant,” says Dryer.

Plans are also in the works to develop consumer applications that can integrate with QuickBooks POS and GoPayment for use on smart phones and tablet computers, adds Dryer without being more specific.

Meanwhile, PayPal has focused on new features. Its digital wallet now offers consumers several new applications, including loading frequent-flier miles to pay for an airline ticket, setting up an installment plan through a checking account to pay for purchases, and changing the funding source for a transaction after the purchase is made.

“There are a lot of different forms of monetary value, such as rewards and airline miles, that can be loaded into a digital wallet and used to make purchases,” says Anuj Nayar, senior director of communications for PayPal. “The idea is to find ways to go beyond traditional payment to bring added value to consumers.”  

‘Make Sense of the Noise’

Other features PayPal is considering include geolocation software to identify when a consumer enters a merchant location so the wallet can serve up relevant offers or coupons on a mobile device and the ability to set rules for purchase amounts at specific merchants.

Like PayPal, San Jose, Calif.-based terminal maker VeriFone Systems Inc. has released the application program interfaces (APIs) for its mobile-payments platform, called Sail, to encourage third-party developers to create new applications that can add value to mobile payments. In contrast, Square has not released its APIs to the developer community.

Launched in May, Sail is an acceptance solution for small merchants. Merchants can integrate Sail with their Facebook page or Twitter feed, allowing them to include a Facebook or Twitter button on electronic receipts delivered to the consumer’s mobile device. When consumers click on the buttons they are transported to the merchant’s Facebook or Twitter page where they can learn about other offers.

“It’s a way for merchants to track what offers are being picked up through their social-media properties,” says Brian Hamilton, vice president, SMB Commerce for VeriFone. “When it comes to mobile payments, merchants want someone to make sense of the noise by providing features that generate incremental sales and help them run their business.”