Mobile wallets could finally break the dominance of Visa and Mastercard by evolving from P2P to C2M (Consumer to Merchant) and evolving from small transactions to larger transactions. That’s the good news. The bad news is that if network effects rule – and they usually do – we might miss the credit card networks as we end up dealing with one or two behemoths that controls both cash and credit. Or we could all have mobile wallets that work with every other mobile wallet. That is how physical wallets work. There is a lot at stake in the geeky subject of Mobile wallet interoperability.
Would Sir like to pay with Apple or Google?
In the world where one or two behemoths rule, our wallets will be determined by our mobile phone operating system. Merchants will accept both Apple and Android like they accept Visa & Mastercard today.
That is one scenario. It is unlikely because the other Big Techs – Facebook, Amazon, Alibaba – won’t sit still for dominance over something as critical as payments, let alone Visa & MasterCard and then anti trust regulators will jump in…
It also looks like Apple Pay is not taking over in the way some people predicted at launch. According to pymnts.com, the number of iPhone 6 consumers in a store where they could use Apple Pay which actually did use it dropped from 48% in March to 33% in June last year.
That makes sense. The merchant has to have an NFC terminal and the consumer has only a marginally better experience. Innovation happens when something is 10x better or there is no alternative. Minor changes don’t change consumer behavior unless friction is close to zero.
I can send text messages and emails to anybody, no matter what phone they have and what carrier they use. Sending cash should be as easy. It should be as easy as physical cash with the huge advantage of location independence. That is the vision of mobile wallet payments. Which will only happen if we get interoperability.
How could we get Mobile wallet interoperability?
There 7 ways this can happen:
- Central Bank controls and sets the standard. Check out Ecuador Dinero Electronico to see how this can work. Our take: unlikely to go beyond an interesting footnote unless Federal Reserve or ECB does this, which is unlikely.
- M-Pesa. Despite massive traction in markets where Vodafone has big market share, it is unlikely to become a global standard because governments and Big Tech will resist dominance by a single carrier.
- Network effects create de facto standard. One can see a battle for market share in India with companies like Paytm doing well. One can see iZettle winning in Sweden even if today they are more credit card oriented. One can envisage one company getting dominance in one big market like India or Sweden and then moving into adjacent markets, but on a global basis this seems like a big stretch.
- Bitcoin. This hits a lot of high points – permissionless, open, global. But it fails by being a currency that threatens government, thus creating an on ramp and off ramp problem that gets in the way of a frictionless offering. A wallet has to be currency agnostic.
- Committee designed standard. These initiatives are worthy but they almost never win in the market. Consumers don’t care and BigTech play lip service only. Unless the standard already has traction with consumers it tends to remain a paper tiger.
- Low level standard. USSD is the one to watch. However it does need higher-level protocols to be agreed as well and it is GSM only.
- Some mix of carrier plus open standard. What Orange Money is doing is interesting. They have other carriers on board as well. This could be like an open version of MPesa.
Credit & larger transactions will come later
Mobile wallets are getting traction in two types of markets, at opposite ends of the maturity spectrum:
- In underdeveloped markets where ATM and Credit Card penetration is weak. This is shown by the success of Paytm in India and MPesa in Africa.
- In highly developed economies where people want to get rid of cash. Sweden is the country to watch.
Mobile wallets today are only cash and tend to be for small amounts. They enable somebody without a credit card to pay or they enable somebody to pay their barista without messing around with grubby notes and coins.
This still leaves two big use cases:
- When you need credit. If mobile wallets become ubiquitous (which is quite feasible as 50% of the global population have mobile phones and the growth rates don’t show any signs of slowing down), all it takes is an entrepreneur to figure out how to offer just in time credit. Today, credit cards conflate payment and credit. If the payment part moves to mobile wallets, it becomes feasible to add the credit part as a separate service.
- For larger transactions. It is feasible to link the mobile wallet to your bank account so that you can see balance and do transfer as needed. You look in your wallet. You see $10 in there. You spend $3 on a coffee. Then you want lunch and it costs $15. You look through your wallet to see $450 in your checking/current account with a notice saying “2 days to payday” so you download $100 into cash in your mobile wallet and pay $15 for lunch.
The point is not to minimize the challenges of just in time credit or just in time balance transfer. However they are technically feasible today and if we get mobile wallet interoperability, they will become commercially feasible.