Starbucks' Payments App and how it could Disrupt the Industry (SAI)

Business Insider has written an interesting piece about the Starbucks payments app and its disruptive potential for a number of payments players. 

Although, I don't agree with much of what they write, I like the idea of a relatively small change/innovation having widereaching implications for an entire industry (and beyond), illustrating the level of uncertainty and number of moving parts in the payments industry right now.

First of all, I should point out that Starbucks' solution is not NFC - it relies on barcode scanning, a much more basic technology, not dissimilar to what FaceCash has introduced.  Whatever form of mobile payments that eventually wins out, I don't think it will be this, and that Starbucks will soon need to upgrade the technology.

I also think Business Insider over-exaggerates the impact that Starbucks will have on the payment industry overall.

Still, if we were to take the article to be about the emergence of mobile payments, rather than simply about Starbucks, it is absolutely worth the read!


http://www.businessinsider.com/starbucks-mobile-payments-2011-1#first-heres-how-starbucks-mobile-payments-work-its-really-straightforward-1

Boku & Zong: what does the future hold?

Having previously written about emerging payments companies, such as Square, Klarna and FaceCash, I wanted to look at two similar mobile phone players; Zong and Boku.

Zong and Boku are similar in that they target online purchases, using the mobile phone as payment method, rather than a credit card.  The user simply selects Zong or Boku as payment option at the online merchant and enters their phone number.  Both companies then perform a verification process with the customer’s mobile phone – the process differs somewhat between the two companies, but is quick and easy – and the transaction is charged directly to the phone bill – no credit cards involved.  To enable this, both Zong and Boku have entered extensive partnership agreements with phone carriers across the world.

Zong and Boku have both been very successful in capturing micropayments on Facebook and online games.  By making their APIs available to the merchants, their models are highly flexible and integrate seamlessly into the broader online experience.  They also aim to expand into other digital goods, but have yet to proven this model.

The issue is that the carriers take a big cut of the transactions, which makes the method of payment expensive compared to credit cards.  This clearly limits its attractiveness to merchants, who are likely to only accept Zong and Boku if a considerable proportion of their customers don’t have credit cards or are uncomfortable using them online. 

To get around this issue, Zong has added a credit card option, where instead of being charged directly to their phone bill, the customer is charged to their credit card.  This is a very similar model to PayPal and seems like the right approach to capture larger-ticket purchases outside Facebook and online games in the short term.

However, in the longer term, one has to question whether either of these players offer anything unique in terms of technology or business model to expand beyond the social networks and evolve as independent companies.  My bet would be that they are either bought by a larger payments player or pushed out of the market by better a technology.

FaceCash: a Fresh Approach to Payments

In previous entries, I have written about new players in the payment space that threaten to disintermediate the established players.  FaceCash was developed by Aaron Greenspan, one of the several former Harvard students who sued Mark Zuckerberg over ownership of the idea for Facebook.  It provides a really interesting example of new entrants that use mobile phones to innovate in the payment space.

Its technology links a barcode on your mobile phone directly to your bank account.  Merchants scan the barcode using a regular barcode scanner, which prompts your ID picture on their computer terminal, and enables them to verify the transaction.  On the backend, FaceCash instructs your bank to transfer the funds by ACH, which enables it to bypass the credit card networks entirely.

By bypassing the traditional credit card infrastructure, FaceCash is able to charge considerably lower merchant fees than its competitors.  FaceCash charges a flat 1.5% for all transactions, which could easily save merchants as much as 50% in credit card fees. 

On the flipside, many merchants will need to upgrade their POS to accept FaceCash – FaceCash provide scanners for $30 and computer terminals for $150.  Although, merchants can make this back from lower transaction fees, they are unlikely to install new POS infrastructure unless they see real customer demand.  It is this ‘chicken and egg’ challenge that face all new payment schemes and could derail FaceCash even before it gets off the ground.

While working with merchants to improve their acceptance, the real challenge for FaceCash will be to generate customer demand.  However, when they initially launched in April 2010, the customer value proposition was unconvincing.  While, FaceCash does not add much in terms of convenience, it should be more secure than other payment solutions, as users must both have access to their FaceCash account and match the photo ID.  However, these benefits, combined with the service being a pure debit solution, with no access to credit, are unlikely to be enough to win over customers.

It is therefore encouraging to see that FaceCash has launched a digital coupon system through which merchants can communicate offers to potential customers.  FaceCash charges the merchant on a a cost-per-action basis only if the customer uses the offer through FaceCash.  At 30 - 50% of the transaction value, this is relatively expensive marketing tool for the merchant though.

Although such offers make FaceCash a better proposition to customers, a proprietary system is unlikely to offer sufficient scale to overcome the ‘chicken and egg’ dilemma.  Instead, it would be interesting to see FaceCash strike up partnerships with already established deal sites, such as Groupon, Google or even Foursquare.

Regardless of whether FaceCash manages to achieve scale, it is a great example of new entrants to the payment space that aim to shake up the existing payment system.