Digital Wallets in the U.S. - PayPal Wallet

08/31/2012

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How does PayPal Wallet work?

My focus is to review the two implementations of the digital wallet PayPal is currently developing/implementing for off-line shopping and how the company's acquisitions will help enrich the experience.  This means not discussing other PayPal efforts in the mobile space such as PayPal Here.  

PayPal Wallet on PayPal Rails - This is the implementation of PayPal Wallet that is currently available to be used at Abercrombie & Fitch, Abercrombie Kids, Hollister California, The Home Depot and Jos. A. Bank.  

1)  It is a cloud-based digital wallet that you can access at the merchant's point-of-sale by entering your phone number + password or swiping your PayPal card + password.  The phone number and the card are just different ways of entering the token that identifies a wallet in the cloud (there is a unique link between an ID and a wallet).  The password is the way to authenticate the user. 

In fact, the cloud-based digital wallet I am talking about is the same PayPal account that many of us are accustomed to using for certain online transactions.  Allowing users to access it at the point-of-sale is a 'natural' extension of its traditional functionality, although it requires new technology and new partnerships to implement.

2)  Off-line transactions, just like on-line transactions, travel on 'PayPal's rails' and are also processed by PayPal.  Changes in the software running in the point-of-sale devices and in the middleware that connects the merchant with its processor, along with back-end integration with the merchant systems, is what allows acceptance of phone number + password and the direct connection between the merchant and PayPal.  

PayPal's agreements with hardware manufacturers - such as Verifone and Ingenico - and middleware providers - such as AJB - have made this system possible.

3)  PayPal is the merchant of record for all transactions.  In fact, in the 'Account Activity Summary' (step number six in the app sequence provided at the end of this post) the user can see all the steps the payment process goes through.  First, it is instantly authorized by the issuer of the card linked to the account.  Hours later (as part of a batch process), there is first a cash transfer from the card issuer to a PayPal account and then a cash payment from the PayPal account to the merchant account.  

The graph below illustrates this process - in a very simplified manner - using the example of MasterCard as being the preferred method of payment.
4)  It is not an NFC-based solution.  PayPal is developing a truly digital wallet, not a mobile wallet.  As such, the company wants to enable users to pay without using any device (as is the case with phone number + password), which precludes it from utilizing NFC technology.  

One could easily argue that swiping a PayPal card breaks this paradigm but, most likely, allowing for this method of payment is just part of the educational process.  The company's first priority is to teach consumers to think about PayPal when paying at the store, swiping is what most people are comfortable with doing.  

Another reason that may be behind the issuance of the cards is that only the most advanced POSs can support the upgrades required to accept phone number + password as method of entry.  The changes required to accept the card are simpler.

Below are pictures of the PayPal card.
5)  The phone plays a limited role (please refer to the bottom of this article for a description of the steps required to make a payment using PayPal).  When checking out at a store, the consumer is interacting directly with the POS.  It is only after the transaction has taken place that the user will receive notifications on her phone regarding transaction status.  She will also be able to see a form of electronic receipt with full information on the merchant, amount paid (broken down by retail price, sales tax and other expenses such as handling, shipping or insurance) and item description.  

6)  The wallet can house loyalty / reward cards and coupons.  These benefits will be used automatically at POS.

Although the on-line account has been revamped for users of PayPal's off-line services, no options are yet available to set preferred method of payment based on merchant or amount.

PayPal Wallet on Discover Rails - This implementation of the wallet is enabled by the PayPal / Discover agreement made public on August 22nd of this year.    Let's focus on the differences:

1)  This deal enables PayPal to ride Discover rails once the system goes live (spring 2013), thus no new hardware or software is required for merchants to accept PayPal's card.  Loyalty, gift, coupons and offers will be easily displayed and redeemed through the wallet.

PayPal will continue to process the transactions.

2)  PayPal will issue payment cards to its more than 50 million active users in the U.S as soon as the deal goes live. The new card will have a Discover Issuer Identification Number, or IIN, a code that identifies the card holder, and will allow users to buy from the merchants that are part of Discover's network. All that the user needs to do is swipe the card at the existing check-out machine and enter a four digit PIN. 

3)  PayPal will charge merchants when users pay with the new cards, and, in turn, will pay Discover for access to its network, on a per-transaction basis.  PayPal will define charges based on merchant type and will probably also negotiate special deals with certain merchants.  

4)  This deal places PayPal in the same league as the issuing banks in terms of its ability to issue a card that is accepted over an open-loop network.

5)  This solution, which only works with a PayPal card, completely violates the digital wallet paradigm we discussed above by not giving the choice of using a phone number instead of the wallet.  Again, PayPal's vision is a digital wallet but its first priority is to win share-of-mind in off-line payments.  The solution is clunky but it is a first step.  Additional iterations may provide much more utility.

Once again, the graph below illustrates this process - in a very simplified manner - using the example of MasterCard as being the preferred method of payment.
Note:  What is in it for Discover?  The company should pick up additional transaction volume as result of this deal while allowing the card network to fully participate in this new growing payments ecosystem.

How does Google Wallet 2.0 'stack up' against the criteria listed at the beginning of this series (click here to review the list)?

The intention is to 'rate' the solutions as they exist today.  In most cases, the wallets I am reviewing are flexible platforms that, with the right partnerships and infrastructure in place, can provide a very enriching shopping and payment experience.  But that is all in the future.  As promising as they may sound, I am comparing them against each other as they stand today.  

For this reason, this table only includes PayPal Wallet on PayPal Rails, considering the locations where it is currently available  (Abercrombie & Fitch, Abercrombie Kids, Hollister California, The Home Depot and Jos. A. Bank).  Hopefully, I will update my review in 2Q2013 after PayPal Wallet on Discover Rails launches or earlier as the number of features and relailers increase.
Reliability and Transaction Speed
It is as reliable as the well proven and tested on-line solution.  It is also a lot faster than the on-line solution, to the point that, as far as I can see, there is no noticeable difference in transaction processing speed compared to a traditional card.

Security
From a transactional perspective:  The security level when swiping the card is actually higher to the security achieved with a  traditional mag-stripe card because it uses swipe + pin rather than swipe + signature.  Unfortunately, there is quite a bit of concern around entering phone number + pin given that a) a person's number is often a relatively 'public' piece of information and b) the more information you have to enter on the key pad, the more difficult is to protect yourself from eavesdropping.  In any case, there is no dynamic authentication mechanism embedded in the process.

From a storage perspective (i.e. keeping payment credentials safe):  The fact that all credentials are in the cloud and that you need to use an ID + password to log into your account (whether on-line or on your mobile) makes the solution very safe.

In addition, it is the first non-banking payments mobile service that I have signed up for where you can feel they take 'know your customer' requirements extremely seriously.  Before allowing me to open an account, I needed to upload photos of my driver license, my social security card and a utility bill.  Inconvenient but important.

Ease of Use
The fact that the wallet must be managed on-line is a disadvantage.  The mobile app allows you to send/request money to/from another consumer, to find local businesses that accept PayPal and check in with them and to view your transactions.  Any changes you may wish to make to your payment methods (include a card, change preferences...) needs to be done from their website.
 
Wallet Functionality
It is good from the perspective that you can include all types of credit/debit cards, bank accounts, loyalty/gift cards, coupons...  The experience could be improved in three ways:  1)  Although it is in the roadmap, at the moment, you cannot set payment rules based on merchant or size of purchase;  2)  The user cannot override the preferred method of payment at the POS (via the POS or the mobile app) and not everyone is granted the 'grace period'; 3)  Issuer presence is kept at a minimum (totally absent from the mobile app and only in the form of digits, no branding, on-line), making PayPal a relatively unfriendly channel for banks that are struggling to keep customer's share of mind.

Acceptance
It is only available at a handful of stores (Abercrombie & Fitch, Abercrombie Kids, Hollister California, The Home Depot and Jos. A. Bank), none of them day-to-day retailers.

Device Availability
The app is available for iOS-, Android-, BlackBerry- and Microsoft-enabled devices. 

Valud-add Apps
Although PayPal (or eBay) has acquired a large number of companies that can bring a lot of value to the wallet (Where, RedLaser, Zong, Milo, Card.io...), none of them are yet integrated in the wallet.  Although X.commerce, a development plaform, launched over 9 months ago, it is difficult to find value-add apps built on the wallet.

Food for Thought 
I believe that we all agree that the consumer needs to be educated about mobile and digital payment options.  For this reason, I was surprised not to see any posters explaining about PayPal as a payment option at the till or even brochure on the topic.  Talking to one of the cashiers (Thank you Mary!  You know who you are) I found out that PayPal employees had visited the shop the day PayPal launched at Home Depot but that they had not visited the store since (at least, as far as she knew).  Cashiers had been given fliers and brochures that first day but they had not been replenished after they ran out.  Is PayPal not providing and requesting Best Buy to share this material or is Best Buy refusing to do so?

PayPal's current strength is on P2P transactions because it allows consumers (as well as small- and medium-size retailers) to accept cards with minimal hassle.  How is Visa's plan to bring P2P payments to U.S. account holders going to affect PayPal?

Will startups like WePay, with increased ease of integration and reduced merchant fees, gain enough momentum to affect PayPal's (or Google Checkout, for that matter) business model?

The PayPal Wallet in Action

This are the steps I followed to pay at the self checkout at a Santa Clara Home Depot.

1) A soft button gives me the option to pay with PayPal
2) Once I choose PayPal, I am asked to confirm amount
3) Next I am given the option to swipe or enter phone number
4) I enter my passcode and the transaction is processed

This is what I 'saw' happening in my PayPal App.

1)  Summary of transactions before my visit to Home Depot
4)  Transaction status right after payment at checkout counter
2)  I received two txts - One from PayPal and one from the cc linked to my account
5)  Status changed to 'Completed' hours later
3)  Summary of transactions after my visit to Home Depot

6)  Full list of 'Activity', including 'Authorization', 'Transfer' and 'Payment'
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Digital Wallets in the U.S. - Google Wallet

08/28/2012

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How does Google Wallet 2.0 work?  In a nutshell:

1) All payments will be made using a Pre-Paid Virtual MasterCard (VMC) issued by BanCorp Bank that, in turn, is linked to the user's preferred credit/debit card. All credentials for this VMC will be stored in the phone's Secure Element (SE), all other card credentials will be stored in the cloud. No need for Google to negotiate with issuers / networks to include them in the SE, as was the case with the first Google Wallet (GW) iteration. 

Note:  At the moment, there is one notable exception to this rule:  Citi MasterCard, Google's first - and still only - banking partner.  Citi MasterCard credentials are stored in the SE.

2) Google is acting as 'merchant of record'.  The merchant will authorize/settle transactions with Google - paying fees based on the use of a present pre-paid debit card.  The VMC credentials will be sent via the MasterCard network to the issuing bank (BanCorp Bank).  In turn, and in real-time, BanCorp will map the VMC to the user's preferred method of payment and will seek authorization with the card issuer - paying standard fees related to the chosen card, probably as Card Not Present (CNP). Basically, the VMC is used by Google/BanCorp as a directory entry to link to the user's 'actual' card. These are two back-to-back processes. 

The graph below illustrates this process - in a very simplified manner - using the example of AmEx as being the preferred method of payment.
Note:  Citi MasterCard cards will not be processed directly by Citi, without the intermediation of BanCorp given that they are also present in the SE.  

Note:  Although AmEx has not approved Google to include its cards in GW, a user can link his/her AmEx card to GW.

3) The payment process may be a bit slower due to the need to perform these back-to-back processes. Google is probably making a loss with each payment given the difference between the fees they are charging to the merchant and the fees issuers are charging them. 

4) Google/BanCorp have now full access to all payment information, making it extremely easy for them to work with merchants to develop loyalty programs and with consumers to organize their spending. I believe issuers still receive all (or most) of the transactional information and can apply rewards and protection programs to the transactions, although Google makes it very clear that it is up to the issuer to decide how to treat these transactions and whether or not rewards and protections apply. 

5) GW can be implemented using an NFC-enabled phone but also just a plastic card (with mag stripe, contact or contactless technology) or even an NFC sticker.  These alternative options would provide a much poorer experience and less security but they may be a way to get consumers comfortable with using Google as a payment method (this is precisely what PayPal is trying to do through their partnership with Discover).   In any case, each transaction could always be instantly recorded in the cloud and immediately sent to the user's phone. 

6) You can store a number of payment methods in your GW account but only have one linked to the VMC at any given time, meaning that you cannot change the card you are using to pay at the till. This seems to be a bit limiting...  But it could easily be changed to, either have a set of rules to determine which card to use based on merchant and payment amount or to be able to choose the specific card you want to use at the till.  

7) Google's approach for the 2.0 version of its wallet differs greatly from the approach it took when it developed the first version.  At the same time, this approach seems to resemble that of PayPal - although with a different implementation - or, another way of seeing it, Google CheckOut with NFC capability.

How does Google Wallet 2.0 'stack up' against the criteria listed at the beginning of this series (click here to review the list)?


Reliability, Transaction Speed and Security:
It is an NFC-based solution, connecting the merchant (or Google, as the merchant of record) to the banks through the traditional processors and card networks.  This means the highest standards in reliability, speed and security.  Because in this case we have two back-to-back transactions (between the merchant and BanCorp and then between BanCorp and the actual issuer), speed may suffer but I am assuming not enough to make it noticeable.  

Ease of Use:
Again, as an NFC solution, use at point of sale is extremely simple - just tap-and-go.  The interface is also simple and intuitive enough.

Wallet Functionality: 
From a functionality perspective, it seems to be a bit limited.  This could be easily changed but, at the moment, only one card can be linked to the VMC.  This means that, although you may have all your cards stored with Google, you can only use one at the store.  You need to log into your account online to change your preferred method of payment.

Also, given the limited involvement banks currently have with this solution, it is difficult for them to use the wallet to create a more direct link with their customers.  

Acceptance:
There is a limited number of NFC-enabled POS in the U.S.  A much lower number than in Europe or other geographies.  This will change in April 2013, once acquirer processors and sub-processor service providers will be required to support merchant acceptance of EMV chip transactions by Visa and all other card networks.  This mandate will greatly accelerate migration of POS to provide support to, at a minimum, EMV contact cards and, in most cases, EMV contactless and NFC-enabled devices.  

Device Availability:
At the moment, GW only works on a few devices on Sprint's network.  This is an extremely limiting factor.  Given that GW requires an NFC-enabled phone with access to its SE, there may be a long road to travel to good device availability.

Value-add Apps:
In theory, GW can support all types of value-add apps to enrich the user's experience and make the wallet truly valuable.  Unfortunately, at the moment, there are no (or very few) apps available.

Food for Thought  
Considering that PayPal, Visa and MasterCard (among others) are already also providing, or plan to provide, other payment services such as P2P or remittances (we will discuss these capabilities in detail when reviewing each solution), shouldn't Google also take a stance in those areas?  

Edit (08/30/2012) - It hasn't even been a week since I posted this blog and I already need to make an update!  Google has spoken about the possibility of including P2P payments in its GW.
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Mobile wallet put to test at Olympics

08/06/2012

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From the Financial Times by Elaine Moore:  Mobile phones will take over from plastic cards and cash as the principal method of payment before the end of the decade, according to new industry forecasts.  But payment providers admit that concerns about the security of cashless transactions – heightened by this week’s software failure at RBS – may deter consumers for some time.  Continued.

Trish’s Comment:  Many companies have launched mobile payments initiatives ahead of London 2012 wanting to take advantage of the great showcasing and testing opportunities The Games provide.  Moore lists some of them:  Visa’s partnerships with Samsung promoting contactless cards and NFC-based mobile payments, Barclay’s PayTag – a payment tag that sticks to the back of your phone and allows payments of up to £15 - and Pingit – an app that allows you to send money to others using their cell number – and O2 Wallet.  Other interesting ones are PayPal’s inStore – it is being trialed at the Auroria Fashions Group stores and it allows you to pay using a barcode that uniquely identifies your PayPal account – and QuickTap – payment app launched by BarclayCard in collaboration with Orange for NFC-enabled phones.

Now that we are well into the second week of the London 2012 Games, the question is:  Have all these initiatives been able to leverage the Olympics as expected?  Have they gathered the attention and generated the hype that they may have been hoping for?

In my opinion, the answer is yes for Visa and its partnership with Samsung and no for the rest of them, at least not in the very short term.  The focus is on what is happening in the Olympic venues, where Visa – as a key sponsor of London 2012, as of all Olympic Games in the last 25 years – has the exclusive rights to provide payments services.  This leaves everybody else pretty much out of the game for these two weeks.

So, how are Visa and Samsung faring?  Have they managed to make the best of this opportunity?

The answer may be yes from an ‘educational’ perspective.  They have grabbed the opportunity to educate the public about contactless and mobile payments and clearly tied both to the speed and performance of the athletes.  The commercial titled ‘Usain Bolt vs. London’ is a great example of this:  It shows all three ways of paying with Visa – swipe (well, its European version with chip & pin), contactless using a card and contactless using a phone.  All working fast and helping you keep life flowing.
Samsung, as part of the partnership, launched a special version of its revolutionary Galaxy S3 smart phone to tie in with London 2012.  Each and every athlete was given one of these NFC-enabled phones sporting the Visa payWave app.  This allows the Olympiads to easily make payments around the Olympic Village and all around London. 

This very same phone became available to the general public to be purchased exclusively at the Carphone Warehouse from August 1st.  No numbers are yet available but, in all likelihood, this special edition will be extremely popular in the UK and will completely sell out.  This could be an important development for the mobile payments industry.  

In order to help users become more familiar with NFC technology, Samsung has partnered with the Holiday Inn in Stratford City (where the Olympic Park is located) to use the handset during the Olympics as keycards to the rooms, control lighting, change TV channels and act as an in-room phone extension.  
Being a key sponsor of London 2012 and the exclusive provider of payments services throughout all Olympic Venues seems to be paying out for Visa.  According to Visa itself, international visitors to London spent nearly $700 million on their Visa accounts during the opening week (July 23rd to 29th) with the top spenders being Visa account holders from the US, Japan, France, Italy and Australia.  
Unfortunately this sponsorship has also brought some troubles for Visa.  The biggest, and most publicized, issue took place on Sunday, July 31st, as tens of thousands of fans attended soccer games taking place in iconic Wembley Stadium.  Due to issues with the local IT system, debit and credit cards could not be accepted as payment.  At the same time, because most of the cash machines at Wembley had been removed – they were powered by Link and not Visa – access to cash was extremely difficult.  The long queues that formed in front the ATMs and then the refreshment stands were hot-beds for strong criticism of Visa, even if, as the company has repeatedly explained, the fault lays with the local IT Team as Visa’s network was up-and-running at all times. 

From my perspective, it doesn’t matter whose fault it is.  What matters is the learning we can take from it:  Payments is such a vital activity that we cannot leave it to a single provider or accept just having a single method available.  There needs to be two or more payment alternatives available at all times.  Systems fail but life - and the transactions that fuel it - must go on!
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Review of O2 Wallet in the UK

07/30/2012

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The O2 Wallet launched in the UK on April 26th.  O2 described it as 'A seamless and secure digital wallet service that will deliver the benefits of mobile money to more UK consumers than any other product or service currently available.'  It is available to all UK consumers regardless of carrier or bank on iOS (iPhone and iPad), Android and BlackBerry.

The Wallet combines four functions:
  1. Money Message:  Enables consumers to securely transfer up to £500 from a bank account or Visa pre-paid card to any UK mobile phone number as easily as sending a text.  Both, the sender and receiver, need to have an active O2 Wallet.
  2. Shopping:    A comprehensive barcode and search engine function compares the prices of millions of branded goods from more than 100 online retailers and allows the user to make purchases directly from their phone.  This function includes daily discounts and deals. 
  3. Phone as Wallet:  It enables consumers to digitise their existing debit and credit cards making it quick and easy to pay for things via their mobile. Money can be loaded onto the Wallet via a debit card, by receiving a Money Message or with cash at more than 30,000 locations including O2 stores, PayPoint and epay retail outlets.  Transaction history can help the Wallet owner keep track of spending.
  4. Money Account Card:  The Wallet offers both a virtual and a physical card based on a Visa prepaid account.  The cards are ideal for on-line and off-line transactions respectively.

Review

Setup

The O2 Wallet can be used by any consumer with a number of mobile phones (iOS iPhones and iPads, Android and BlackBerry devices) regardless of their service provider.  I have an iPhone running on the '3' network.  As far as I could tell, I did not experience any constraint, limitation or additional burden compared to O2 customers.   

Having said this, the setup itself was slow and complicated because:
  1. I needed to setup four different passwords - with different requirements - that I was then asked to enter multiple times during the setup process, making it rather a laborious task.  One password is to access the wallet, another to 'keep it safe', another to access the Money Account and yet a fourth one to authorize transactions.
  2. Each credit / debit card entered was checked via 'Verified by Visa'.
  3. Each account entered was checked via a small money transfer made by O2 that included a unique code I then had to enter into the phone.
  4. Any error I made in setting up a card or account sent me back to the beginning of the setup.
     
All in all, setup took well over an hour although I did not enter all my accounts & cards.  All the passwords and checks may be necessary to comply with security requirements set by banks and credit card companies and perhaps help customers overcome their safety concerns.  At the same time, it would seem that O2, along with all other mobile wallet providers, will need to innovate in order to help customers get over this first hurdle in mobile wallet adoption.  
Using the App

As shown in the presentation above, the app itself is very clean, well designed and very easy to use.  It works exactly as advertised but the user will quickly realize its shortcomings:
  1. Lack of NFC is a major issue since it, effectively, precludes you from using your phone to buy off-line.  O2 will include NFC capabilities in the wallet at a later stage, probably once it feels the infrastructure (contactless POSs and NFC-enabled phones) is in place.  Meanwhile, the carrier mitigates this issue by linking a physical card (a pre-paid Visa card provided by O2) to the wallet.  This card can be used to pay at stores and also to withdraw money from cash-points.  Nevertheless, needing a physical card to buy at the high-street (even in those locations with contactless POSs) feels a bit clunky.
  2. Vouchers are a welcome feature but, until they are better tailored and personalized to each consumer, its essentially the same as offers you could get from Groupon.  O2 needs to improve this capability in order to differentiate itself.
  3. The scanning function is a very good idea but the technical implementation is far from perfect:  It has great difficulties pickup small barcodes and it often misreads the larger ones.
  4. 'Money Messages' are a good idea, although the same functionality can be achieved via PayPal and PingIt.  The main drawback is that the receiver needs to have an O2 Wallet installed.  This means that they will need to go through the painful setup described above to receive the payment.  

Last Thoughts

  1. The O2 Wallet seems to be more of a service competing with PayPal transfers or with PingIt than a full-blown wallet.  As much as I admire O2's determination to be first to launch a mobile wallet in the UK, it feels like a 'half-baked' product launched in a rush to have a presence during the 2012 London Olympics given that Project Oscar has been delayed due to the in-depth investigation being carried out by the European Commission.  
    How will O2 tie the Wallet to the Olympics?  We are only a couple of days into this big event but, for the moment, I have not found the link.
  2. It is not yet clear the costs and fees associated with the wallet.  For example, transfers expected to remain free for the first 6 months but then 15p will be charged to the sender for each transaction.  Withdrawing money from cash machines with the physical card has a £1 fee associated. 
  3. All information - passwords, credit card numbers, account numbers, transaction history... - is stored in the cloud, not on the phone.  This, along with the four different passwords necessary to open and use the wallet, gives a high level of security to this payment method.  From my perspective, they will need to finetune the number of passwords necessary to operate the wallet - four are just too many to remember and too cumbersome to use - but it is an aceptable starting point given the importance of security concerns.

London 2012 provides mobile players a fertile ground to test numerous payment initiatives.  Let's see how this one fairs against the rest.  Meanwhile, enjoy The Games!
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Is Boku a good acquisition target?

07/09/2012

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Boku may not be very well known to the general public but it is quickly becoming a force to reckon with in the world of mobile payments as it moves from on-line payments of digital goods to both on-line and off-line payments of physical goods.  Through this expansion, it is now targeting a much larger market - $9 trillion dollars used globally at the point of sale, compared to the $350 billion spent on-line.  It is also entering the Mobile Wallet Wars against giants such as Google and PayPal. 

Let’s start by reviewing Boku’s key services, starting with the company’s bread-and-butter offering and moving to its latest launch:

Mobile Direct Billing via Premium SMS service – It provides payment services for digital goods on-line in 66 countries, and over 4 billion customers, including US (AT&T, Verizon, Sprint and T-Mobile), UK (Vodafone UK), Germany (Deutsche Telekom) and France (Bouygues Telecom and SFR)

This is a convenient and widely accepted method of payment for digital goods but not for physical goods for two main reasons:
  • High charges imposed by the telcos – from 30% to 50% of the price.  
  • Only basic fraud protection and customer service offered due to limitations inherent to the Premium SMS service. 

These are the steps that need to be taken when paying with Boku via Premium SMS service:

  • The customer selects an item to purchase from her favorite website – for example, an invisibility cape for an on-line game or a ring-tone.
  • She then selects Boku as payment option in the checkout page.
  • She enters her mobile number when requested.
  • Shortly after, she will receive an SMS requesting that she confirms the purchase by replying to the SMS sender with a ‘Y’.
  • Her cell phone bill is then charged with the price of the invisibility cape or the ring-tone.
  • In the background, without her knowing it, her mobile carrier will keep between 30% and 50% of the amount she has been charged, with the payment intermediary (in this case Boku) taking a small percentage and the rest going to the content provider (i.e. seller of the cape or ring-tone).

Mobile Direct Billing via direct integration with carriers’ back-end and payment systems – Payment companies providing this service are fully integrated with the carrier’s back-end and billing system, providing tighter security, better fraud protection, full customer service and even rebates.   In addition, carriers’ costs for this service is much lower and are thus open to negotiating lower fees with payment companies (for example, around 15% in the US and even as low as 5% to 7% in South Korea).  Together, all these factors make this payment method suitable for on-line purchases of physical goods.

Boku has been actively working with telecom companies in the US and Europe to develop this type of tight integration and offer this service.  At the moment, it is trialing the solution with Vodafone in the UK but has not been successful with the US carriers, all of which have signed agreements with BillToMobile (US subsidiary of Danal Corp. headquartered in South Korea).  The current plan in the US is to offer the service by using BillToMobile as gateway to the carriers while it continues to negotiate with with the Big Four to develop its own solution.

These are the steps that need to be taken when paying with Boku via direct integration:

  • The customer selects an item to purchase from her favorite website – for example, a pair of earrings.
  • She then selects Boku as payment option in the checkout page.
  • She enters her mobile number along with some sort of additional identifier when requested.  This additional identifier could be, for example, a pre-defined passcode or her zip code (this will be defined by the carrier).
  • Shortly after, she will receive an SMS with a one-time passcode that she will need to enter in the checkout page.
  • Her cell phone bill is then charged with the price of the earrings.
  • In the background, without her knowing it, her mobile carrier will keep around 15% of the amount she has been charged, with the payment intermediary (in this case Boku) still taking a small percentage and the rest going to the retailer.

Boku Accounts – It is a safe and secure prepaid account – provided by MasterCard – that can be accessed via an NFC-enabled mobile (sticker or chip) or physical card and that is issued directly by a carrier or bank (i.e. white-label solution).  It can be used at any retail store that takes MasterCard and / or is PayWave enabled.  The fact that a physical card is part of the solution demonstrates Boku’s determination to overcome the limitation inherent to NFC, just like PayPal is doing.  Also, just as with PayPal, customers can access their account on-line or via the app to setup transaction and budgetary alerts and to review promotions and offers from their favorite merchants at the most appropriate times.

This new service has been launched and will be promoted using $35 million in fresh VC funding received from New Enterprise Associates and Telefonica Digital (the growth arm of Telefonica) as well as from existing investors bringing Boku’s total to $75 since its launch in 2009. 

Backing from the world’s third largest carrier lends credibility to the product and the benefits it brings to the carriers and even the banks:  Boku is providing them with technology to increase the value they bring to their customers instead of trying to disintermediate them. 

All of this activity, particularly the launch of Boku Accounts,  has helped the company attract some very senior and seasoned talent from PayPal (Martin Buhl, now head of Boku’s German office), Visa (Jon Prideaux, Exec VP for Visa, now Senior Exec) and Barclaycard (Stuart Neal, MD of International Development for Barclay card, now Senior VP of Biz Dev).  Perfect complement for the knowledgable founders Mark Britto, Erich Ringewald and Ron Hirson.

Does Boku’s expansion and its high-flying talent make it a good acquisition target (http://www.privco.com/research/featured-acquisition-target-mobile-payment-service-provider-boku)?  Let’s review the points we have made above:

  • Good set of services across on-line and off-line for digital and physical goods.  
  • Reputable founders with additional senior talent joining from major players, bringing additional knowledge and credibility.
  • Well funded with good partnerships in place.
  • Scalable infrastructure that will be strengthened with this infusion of money.

PayPal already acquired Zong, a direct competitor of Boku, in July 2011.  Could Boku fit within Google or Apple’s strategy?

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Mobile commerce – What are the big guys up to? – Part III – Visa

10/27/2011

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Visa has also been very active in the world of mobile commerce and mobile banking, striking a number of acquisitions and collaboration agreements with companies all around the globe.  In addition, they will launch a mobile wallet at some point this fall that will rival Google Wallet’s offer.



Visa’s mandate, as explained by Carleligh Jaques – Head of Corporate Development and M&A, Visa – at Web 2.0 Expo NY 2011, is to convert cash and check transactions to electronic transactions and to do it in a safe, secure and seamless manner across all environments:  brick-and-mortar establishments, e-commerce, digital commerce, mobile commerce…  They want to provide tools and capabilities to consumers, merchants and banks that will deliver clear benefits to everyone while helping Visa generate new revenue streams and strengthen its position as a facilitator of electronic funds transfers.  

Although Visa sees itself as a technology company, electronic funds transfers is Visa’s core business and this will not change overnight.  Their strengths are:

a) The size and efficiency of their existing network (VisaNet).

b) Their strong ties with consumers, banks and merchants: 2 billion cards outstanding, agreements with 13 thousand financial institutions and 30 million merchants.

Let's first discuss the Visa Wallet solution, which should be released this fall in the US and Canada, and next week, analyse Visa's key acquisitions, investments and partnerships.

Visa Wallet

The service is built on the VisaNet processing network, existing credit / debit / prepaid / commercial product platforms and new capabilities from its acquired companies.  The plan is for Visa Wallet to go live in the US and Canada during fall of this year – almost at the same time as Google Wallet.

Visa is very aware of the barriers of adoption for this technology and, as Steve Perry, commercial director for Visa Europe, explains:  ‘If the digital wallet isn’t as sexy as my current wallet, then it won’t take off’.  This is probably the reason why they have taken quite a different approach to other incumbents and gone with a solution very similar to that of Google:  An open wallet that will allow users to include all types of credit / debit / pre-paid cards - Visa/Mastercard/AmEx/others -, as well as all kinds of loyalty and rewards cards and even, possibly, different forms of ID such as driver license information.  Bill Gajda, global head for Visa Mobile, said he doesn't necessarily view Google as a competitor but, after analysing both companies' strategies, the similarities are quite striking.  

Visa Wallet's key characteristics:

1)  Click-to-buy: Consumers will be able to make purchases online by simply entering an email address, alias or online ID and a password, instead of a billing address, account number and expiration date. In addition, Visa says it is "exploring dynamic authentication technologies that will bring added layers of security to online purchases.

2) Cross-channel payments: The wallet will be able to store multiple Visa and non-Visa payments accounts and it will be possible to use it in mobile, ecommerce, social network and retail point-of-sale environments.  The plan is to also include the capability to look at spending across all cards and maybe even to perform some basic banking transactions, although this would require agreements with banks and financial intermediaries.

3) Preference management: A menu will enable consumers to set preferences for how their wallet will work, allowing them to customize and control the features of their personal wallet. This will allow them to choose privacy setting options and designate which the default account will be at particular types of merchant or for particular purchase amounts.

4) Merchant offers: Consumers will be able to personalise their shopping experience by opting-in to receive money-saving discounts or promotions from participating merchants.

You can watch a short video where Jim McCarthy, Visa Head of Product Development, describes Visa's vision for the digital wallet.

Main differences between Google's and Visa's approach:

1)  Visa will charge a fee to the retailer for each client that pays using its solution while Google will not.  This means that, most likely, merchants will favor Google's solution but the consumer will have the final say based on the benefits and convenience of each of the solutions.  The difference in approach is probably due to the different business models:  Google doesn't charge for its services and generates revenue via advertising; Visa has always charged for its services and has done so on a transaction-by-transaction basis.  Both companies are transferring their traditional 'modus-operandi' to this new service.

2)  Visa plans to leverage its financial reputation initially marketing the digital wallet service through banks. A participating bank could offer the digital wallet application - with all or some of its capabilities - as part of their online banking service.  By marketing the service first to online banking customers or directly through its own Visa Web site to online users, Gadja believes the company will have a chance to build an audience before NFC technology becomes more widely available:  'Banks will be an important distribution channel for the digital wallets, [...] So that's why we will first target these online customers by providing one-click shopping. And then we'll promote NFC.'
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Who will consumers trust?

The Retrevo Pulse, a research firm that tracks trends and consumer demand in real-time, has just finished a poll around mobile payments including more than 1,000 US consumer of varying ages and backgrounds.  The key question was:  Who would you like to be the provider of your digital wallet? 

In the study, smartphone owners tended to lean toward their phone operating system with 61% of iPhone owners prefering Apple as their provider and 46% of Androd owners prefering the Google Wallet.  The most interesting finding though was that all providers closely associated with credit cards and cell phones ranked consistently below Google and Apple when looking across all smartphone owners.  For example, MasterCard/Visa/AmEx (32%), AT&T/Verizon/Others (26%).

Visa in Europe:

After the US, Europe is Visa’s second largest market.  The European version of Visa Wallet will launch in August / September of 2012.  No specific explanation has been given for the delay with respect to the US / Canadian wallets but it is probably tied to the fact that Visa wants to make it available across all of Europe and not just the Eurozone, which means they will need to support a number of currencies and comply with a myriad of different legislations.

In the meantime, as announced by Visa Europe CEO Peter Ayliffe at the EFMA conference in Paris, Visa will launch in Europe a mobile person-to-person payment system developed in partnership with Monitise. Visa Mobile Person-to-Person allows registered users to transfer funds to any Visa cardholder in Europe from their mobile phone. The app makes it easy to send money to an address book contact, to a mobile phone number, or to a specific Visa card number – whether or not the recipient is registered with the service.  Launching this service will allow Visa to gain mind-share with consumers in preparation for next year’s launch.

Visa's involvement in other Wallets:

Although we have focused on Visa Wallet in this article, the company is hedging its bets and is also participating in the payment solutions designed by Google and Isis.  The same way that it wants Visa Wallet to be open to all competitors to build the most convenient solution for its clients, it wants to be available across all possible channels to provide convenience to those same clients irrespective of their choice of wallet.  This is an extremely smart move from Visa.

Conclusion

Although we still need to review Visa's key acquisitions, investment and partnerships - which have been fundamental in their ability to build a digital wallet - just based on what we have discussed, it is fair to say that Visa is not resting on its laurels when it comes to mobile commerce and that it is ready to compete with all players, new and established, across all areas and markets. 
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