The Notional Defenseman

Forget the Tech, the Fee (or lack thereof) is the Key to Mobile Payments

A number of companies are working hard to get payment systems in our mobile phones and cards. Contactless technology is great, but why such a race all of a sudden when the technology has been there for years? I’m perfectly capable of swiping my credit card and as a consumer it doesn’t save me THAT much time to get it out of my wallet. So why is everybody pouncing on this? One word: Fees.

For the last 50 plus years, credit card companies and banks like Visa and JPMorgan Chase have charged businesses fees for using their system of payment. These fees are a hugely profitable line of business and were completely understandable in the past when capital requirements to make the network function were very high - swipe cards, risk, payment systems, international networks, football-field sized super computers, etc.

Thanks to the exponential progress of technology, however, the cost to get a secure transaction from vendor to bank is approaching zero, and Point of Sale systems are diversifying from leased apparatus to mobile phone peripherals that allow you to swipe and pay without a huge monthly dig into your profit.

So - what’s so special about Google’s foray into the mobile payments business and why are banks developing competing systems? Google has said that (at least initially) they will not be charging transaction fees for their mobile payment systems. Their revenue will be driven by increased search and web traffic to their pages. This is a huge deal as there has never been a major institution willing to gain only the revenue of a secondary economic effect to power financial transactions. Banks make money on fees, but Google will make money when you surf more because of an enabling technology. Much like the web has “democratized” industries like music and publishing, this no-fee payment system could allow retailers and businesses to branch out on their own as well and significantly improve the bottom line.

The response from banks is to develop their own mobile payment systems or cooperate and make money through the no-fee model. JP Morgan, Bank of America, and Wells Fargo have banded together to start an SMS and e-mail based payment system to exchange money between their customers. If we use their bank system they are still able to take a small cut of each transaction as a fee. (Looking further, it’s actually a pretty big cut at an estimated $12-50 dollars).

Whichever standard prevails (if there is to be one major winner), or whatever turbulence this causes in the market as it’s figured out, I’m excited for what this burst of technology and ideas means for the general consumer and businesses in terms of transaction fee competition and expansion of options to accept payments. I feel that while it’s not where it needs to be for wide adoption at the moment it will hit its stride very quickly as the next series of major devices is released later in the year.

Looking forward to it!

Inspired via: WaPo Business article on Google’s new system.

27 May 2011 ·