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19 July 2013

Why mobile payments will never take off

Dan Rowinski has a fantastic piece on Clinkle, the latest hot payments startup. (Its $25 million seed round came from Accel Partners, Andreessen Horowitz, Jim Breyer, Marc Benioff, Owen Van Natta, Peter Thiel, and many other members of the Silicon Valley elite.) Rowinski’s message: payments technology is the easy bit. The hard bit is changing behavior.

It’s basically no easier or faster to activate the NFC or QR code in your phone or open an app than it is to dig out some cash from your pocket or pull a plastic card from your wallet. Try it. They’ll each take you basically the same amount of time.

Actually, mobile payments are harder than paying with plastic, at least in my experience: the coffee shop I’ve started frequenting near the Reuters office uses Square, which makes paying with a credit card very easy. More to the point, despite the fact that I’ve tried a couple of times, I have yet to get Square Wallet to actually work there. And in general, whenever I try to pay for something using LevelUp or Square Wallet or some other clever newfangled mobile payment technique, I feel curiously self-conscious and embarrassed about the whole thing. Handing over a card is normal behavior: mobile payments are not. And there’s really no incentive for me to switch.

Even if there was an incentive for me to switch, it would be small: a few cents at best, per caffè macchiato. Which isn’t nearly sufficient. If you look at the success of M-Pesa, in Kenya, there are lots of reasons why it has taken off, including the fact that Safaricom is in many ways a more reliable counterparty than the Kenyan government. But the one advantage it doesn’t have is low cost: it’s actually surprisingly expensive.

More recently, mobile payments have been taking off in a big way in Somalia, similarly because they are much more convenient for all concerned.

Mobile money has drastically reduced the cost of crime and security for consumers, private companies and government offices. The Coca-Cola branch in Somaliland, for example, is the only cashless Coca-Cola company in Africa. About 80 per cent of its sales to its retail distributors are done through Zaad, while the remainder are done by electronic bank transfers.

It’s unclear whether this is going to be good news for Africans, over the long term. If the continent can leapfrog plastic cards and move straight to incorporating everything on one device, that’s great. On the other hand, once they’re established, phone-based payments systems like M-Pesa and Zaad can extract enormous rents, since the barriers to entry are all but insurmountable.

The person behind the counter at my local coffee shop doesn’t care which card I’m using: he probably sees a hundred different cards every day, all of which are competing in their own way to be particularly attractive to consumers. But even if he does accept mobile payments, he’ll only accept one form of them: if he uses Square Wallet he won’t use LevelUp, or Clinkle. That’s why Clinkle got so much seed money: it’s competing in a winner-takes all space, where only one solution can win.

In countries where cards are not ubiquitous, then, and where cash can be hard to obtain, there’s a good chance that mobile payments might take off. But in the US, there are literally billions of cards already. They’re not perfect; certainly they all should have EMV chips, and almost none of them do. But they’re good enough: they’re not so bad that mobile payments offer something clearly superior, or any incentive for consumers to switch.

Look how hard it has been to kill off the check in this country: cards are even more entrenched than checks were, and killing them off will be very, very difficult. In fact, it will be impossible. Which means that mobile payments, although they are sometimes very cool, are going to remain a marginal technology in the US for the foreseeable future.


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