With $5 Million Round, Mobibucks Is Latest NFC Alternative to Draw Investors

While point-of-sale payments using near-field communication (NFC) technology appear to be drawing closer, systems that let consumers make mobile payments in stores without NFC are drawing investor interest. This week, Mobibucks, a Louisville, Ky.-based startup, announced a $5 million Series A funding round led by Acadia Woods Partners. The Mobibucks investment follows news this spring that American Express Co. had joined BlackBerry maker Research in Motion Ltd., Verizon Communications Inc., and other investors in a $19 million funding round for New York City-based Payfone Inc.

Investors could be caught up in the current euphoria about mobile payments, but some of the rationale has to do with the fact that both Mobibucks and Payfone don’t rely on NFC, a sophisticated contactless technology being pushed by players such as Visa Inc., MasterCard Inc., Google Inc., and Isis, a consortium of the nation’s biggest telecom companies. While NFC has appeal because it taps the intelligence of smart phones for e-wallets and location-based marketing, its development has been hobbled by squabbles between banks and wireless carriers over transaction revenue and other issues.

AmEx plans to leverage Payfone with its new Serve wallet for both online and physical-world payments. Transactions can be charged to carrier bills or tied to a bank account, credit card, or the Serve wallet. Mobibucks, which like Payfone relies on a mobile-phone number for authentication, is used for POS and person-to-person payments. Mobibucks accounts can be funded via cards or checking accounts, or users can fund them with cash at participating stores.

Mobibucks plans soon to announce a major U.S. quick-service restaurant chain will adopt its service, says Jorge Fernandes, founder and chief executive. Fernandes, an electrical engineer by training who early in the last decade founded ViVOtech Inc., a principal player in NFC development, says most of the company’s 2,000 merchant locations currently are in the United Arab Emirates through an agreement reached with Abu Dhabi Commercial Bank.

Roughly half of Mobibucks’ 40,000 registered users, however, are in the U.S. Users type in their mobile number, plus a four-to-eight-digit PIN, on the merchant’s existing PIN pad to trigger a transaction. They don’t actually need to have the handset with them. “You can walk in naked to a store, type in your phone number and a PIN, and walk out with some clothes,” says Fernandes, who left ViVOtech in 2006 and started Mobibucks two years later. The company now has a head count of 37.

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Integration for merchants is minimal, Fernandes says. Merchants program a soft key to accept Mobibucks, and instruct their processor to route transactions to the company’s servers, which store users’ card and bank-account data. Users can also pay cash at merchant locations to fund their accounts as they would when reloading a prepaid card. The merchant fee for payments is 1% plus 15 cents per transaction.

Merchants can stimulate usage by funding a customer’s account at enrollment with so-called Mobibucks. In this way, users have a reason to use the system and know where to use it, says Fernandes. “Mobibucks will find you” through accepting merchants, he says. He argues the promotional funding—coupled with social-network tools that let users invite friends to sign up–also helps solve the traditional, circular problem that besets startup payment systems: that of signing enough users to interest merchants and enough merchants to be relevant to users. “It overcomes the chicken-and-egg problem,” he says.

Others aren’t so sure. “They’re building a payment brand from scratch,” says Rick Oglesby, a senior analyst at Boston-based researcher Aite Group LLC who follows mobile payments. “It’s an uphill climb.” Indeed, registration of users may well be the toughest problem Mobibucks and similar POS systems face, argues Steve Klebe, vice president of business development and strategy at BilltoMobile, a unit of San Jose, Calif.-based Danal Inc. BilltoMobile, which focuses on digital content, relies on carrier billing for payment processing. “One of the beauties of carrier billing is the consumer is already enrolled and ready to transact,” he says. “Anything that requires registration or enrollment is going to run into that chicken-and-egg dilemma.”

Mobibucks could also find its market constrained by its reliance on installed PIN pads, Oglesby warns. According to research last year by the Federal Reserve, only around 25% of U.S. merchants that accept debit cards have put in the device, whose mainstream use is to process PIN debit cards. “PIN pads are an additional investment that a lot of small merchants don’t feel are worth [it] when they can do a signature-debit transaction,” he says.

Still, Fernandes is convinced Mobibucks will not only “enable” the eventual advent of NFC, it will wind up with a bigger market, since, unlike NFC, it relies only on the mobile phone, without special software or chips. The need for specialized equipment for both consumers and merchants will limit NFC, he argues. “Even if NFC is successful, Mobibucks will be three times more successful,” he says. “It’s ubiquitous. There are more Mobibucks users than there are credit cards in the world. They just don’t know about it yet.”