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Now hear me out,the Apple/IBM partnership is BIG for mobile payments

Apple IBM PartnershipI have worn many hats working in the financial technology vertical including business development, product, marketing and partnership development. In fact, I managed the IBM partnership for a PFM technology provider I joined in 2010. IBM played an important role for the PFM technology provider for it opened access to many of the financial institutions that run on the IBM technology to support core, online and mobile banking systems. Specifically, the PFM solution ran on IBM’s Websphere mobile software and on the IBM DB2 data base software. The software compatibility proved to be a strong selling point during business development discussions with banks that ran core legacy banking systems on Big Blue.

I learned fairly quickly that one of the biggest objections from mid-tier and larger banking executives was, “love your technology….but it MUST run on our legacy core and online banking systems.” Fortunately for us, we overcame this objection by playing the “we run on IBM” card to continue conversations. Unfortunately for IBM, these legacy limitations prevent many financial institutions from launching new tools and features that help consumers access their money through a mobile device. As we fintechers all know, these mid-tier and large banks are losing customers to the more sophisticated, innovative and mobile centric financial institutions…like Moven, Simple or GoBank.  An April 2013 Forrester study found that nearly 50% of respondents said they would be willing to switch to a bank with a better mobile experience.

The recently announced partnership between Apple and IBM could fix this and will position both companies very well for continued growth in the mobile banking and payments verticals..even with Millennials. I know, this is shocking …but in the words of Kevin Nealon, “now hear me out.”

As part of this partnership, IBM will be launching roughly 100 native mobile apps developed specifically for iOS. These apps are part of the MobileFirst platform IBM launched earlier this year and will adhere to the security, backup and data movement capabilities IBM is known for across the high technology industry. These capabilities are what keep banking IT executives coming back to Big Blue and a few of these iOS apps will strategically address the specific needs of the banking vertical.

The collaboration between IBM and Apple to build these apps will allow legacy systems written in Assembler or COBOL to run on the iPhones and iPads. Penny Crosmen at American Banker states, “Making existing mainframe applications usable on iPads could help banks bring mobility to old technology.”  This is HUGE for it helps banks easily engage with customers within the branch, through merchants or at home through a mobile device without having to make heavy investments in new technology or go through the lengthy process of selecting a clunky third party provider. For example, a bank will no longer need to license mobile platform technology from a Kony or mFoundry for their IBM partnership will open up mobile functionality through iOS sitting on top of legacy software. This is cool for the banks…but SCARY for mobile platform providers.

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The biggest use cases for the IBM/Apple mobile technology marriage can be seen at the branch and merchant levels. I can easily envision a wealth management representative having an in-branch investment conversation with a client using an iPad. The representative easily accesses a client’s core banking information from the mobile device and displays current balances, checking account activity and recommended investment opportunities right on the tablet. Taking this one step closer to the consumer, I envision the consumer later that evening going back to the banking application and sharing the investment recommendations with his/her spouse. Together the couple reviews the recommended investments, discusses financial goals and asks for further detail from their adviser directly from the iOS application.  Tadaaaaaah! The mobile/table user experience is helping the bank build deeper customer relationships through helping consumers manage their money…leveraging a channel the consumer prefers.

The second benefit of this marriage comes at the business banking level. This relationship should make payment providers pause…and maybe even shit.  Imagine a small retail merchant opens a business banking account that includes the “rental” of a payments tool like a card reader. The Apple/IBM relationship enables the bank to provide payments tools, card processors, etc. through already widely adopted iOS products. The bank may even function as a third party retailer for the iOS hardware and will save money by phasing out those clunky counter top card processors.  Banks will take away a key competitive advantages from payment providers who boast about the ease of use and mobility of collecting payments. Additional benefits for the bank are the ability for business bankers to track small business activity and recommend lower cost banking products, loan savings opportunities based on the specific business activity and transactions. Banks can also FINALLY find the right channel to provide those ever so sought after (and never well executed) locally targeted special offers and discounts to consumers.

For those of you keeping score at home, the consumer will also benefit from the IBM/Apple partnership. The iOS loving consumer will now be part of the same payment ecosystem merchants have with their banks. The iOS system now includes Passbook and it is no far leap to envision this evolving into a wallet that holds bank provided payment cards. This is “duh” obvious. Given that merchants, banks and consumers are all part of the same iOs payment system, consumers can easily continue using their long held VISA and Mastercards on their mobile device.  Continued adoption of the same payment ecosystem may provide opportunities for lower processing fees for all involved. Unfortunately, at this point the mobile payment providers are now banking on lower fees as their main value proposition. However, if banks are able to provide an easily adopted mobile wallet with many iOS supported merchants accepting these payments, even lower fees may be a moot point. Consumers will be able to FINALLY use their mobile wallets at the merchants and service providers they have always used.

Wow, way to go Apple.  You created a true mobile wallet.


Mobile payments innovators must eat more fast food

Like a good citizen of the FinTech community, I downloaded the major payments apps to my iPhone including PayPal, Square and Dwolla. I also searched for opportunities to add loyalty cards to my phone’s Passbook. I deposited a small amount in each payments app and added my Starbucks card to Passbook eager to make a payment with my mobile device. Unfortunately, each of these payments apps and features remain unopened after a year from downloading. I have not been successful in finding stores in my local area that accept payments from Square or PayPal or have a loyalty card compatible with Passbook, aside from Starbucks.   To make matters worse, I typically just open up the Starbucks app directly and avoid Passbook all together!  Clearly the mobile payments or wallet value chain is broken and innovators are struggling with defining how customers and businesses want to use the mobile device to drive their purchases.

Screen Shot 2014-03-31 at 3.45.39 PMThose of us who follow FinTech closely are well aware of the struggle for defining the mobile wallet correctly. “Wallet” is a loose term these days.  Most people believe payment apps are wallets even though a wallet typically includes feature or cards beyond just payment tools.  If this wallet perception is true, then why are apps like Square and PayPal NOT the driver of mobile wallet ubiquity? I think getting closer to the correct definition of the mobile wallet requires us to pay close attention to what’s happening at retail…specifically at the fast food franchise level.

National fast food chains such as Burger King and Wendy’s are launching mobile apps that enable customers to order and pay for food using a credit card.  These apps are retailer specific mobile wallets that will enable the brands to build deep customer relationships by understanding buying patterns to then reward customers with specials offers and discounts. Frankly, I’m a little surprised it has taken the fast food guys so long to build and launch these apps. Starbucks has been doing this for over two years. Over the past few years Starbucks has clearly won my loyalty as they guide my purchasing through bonus star offerings. There are significant implications for mobile payments innovators if the Burger King and Wendy’s apps are widely adopted and are successful in generating more revenue and creating deeper customer relationships.

First of all, consumers are saying they want brand specific apps that enable them to pay and reward their loyalty. Think the Starbucks app.  These mobile applications are essentially loyalty cards.Screen Shot 2014-03-31 at 3.44.39 PM Secondly, consumers are also saying they are willing to pay with their credit card through the application…and don’t need a new payment platform. For example, the Burger King and Wendy’s applications require the consumer to enter in credit card information upon sign up to make purchases. The consumer makes purchases on the same Visa, Mastercard or AMEX platform used to make all their online and offline payments. These mobile payments will also be covered by the policies defined by each credit card to protect against fraud. Given the entrenched credit card payments system and fraud protections, there is really no consumer need to sign up and manage another payment platform.

Brands and retailers will be monitoring closely the success of these fast food applications. If these applications continue to be effective payment empowered loyalty cards, what role does the mobile device play?  Similar to a real wallet, the mobile device is the holder of the many branded loyalty and payments apps.  Does this put the mobile devise in a unique position should these retail brand specific apps be successful?  Yes, for the mobile device IS now the mobile wallet.  No one should have a heart attack and die from digesting this concept.  It’s nothing new and is a recurring theme a several mobile payments conferences.  Daniel Mattes, the CEO and founder of Jumio, articulated his vision for the mobile device as a wallet at Money2020.

However, there has been such focus around the mobile wallet being an individual application that many people think of Square and a few others as being wallet innovators.  This is starting to change as people digest what Apple may be doing in the payments space.  Thinking this through, Steve Jobs may have had a similar vision. Passbook is a feature to store tickets and loyalty cards. It’s not a stretch to envision storing encrypted credit card information and ID on the device. I think it’s safe to assume that Apple will not be entering just the payments business….but will most likely be defining and enabling the iPhone to be a true digital wallet. Expect Samsung to follow a similar strategic path.

The big question will be how long it will take for the mobile payments vertical to evolve to this point. A lot of money has been invested in Square, Flint and PayPal to invent another platform. However, Visa and Mastercard will be active and well funded suppliers in the mobile payments war. It will be a matter of time until the right mobile device features emerge that enable the major credit cards to easily plug themselves in to mobile transactions. Once the right device feature emerges, the mobile payments vertical will be locked up quickly.  Unfortunately, this means many payments apps will become part of those “hey, do you remember….” so common at cocktail parties.


Can Apple Benefit from a Strategic Partnership with PayPal?

The fact that Tim Cook hinted that Apple might be getting into payments is no surprise.  It’s more of a “duh.” Apple has the user accounts, consumer credit cards on file, and millions of iPads and iPhones in market.  The launch of Touch ID and the iBeacon sensor only connect the dots even further.

Apple’s Passbook paves the way for expanding the wallet beyond loyalty cards and into the ability to make online and offline payments. The launch of the Touch ID addresses security concerns and helps prevent unauthorized payments should the phone, or “wallet”, be lost.

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In the online world, it’s not a far stretch to imagine a consumer using their Apple ID to authorize a charge to their credit card for a purchase made on an e-commerce site.  However, competitive pressures from Visa, MasterCard, and PayPal may make convincing e-commerce sites to accept Apple payments that much harder.  One recent article points to Apple making payments as part of the iOS developer kit…which would easily provide code needed for a developer to add a payment feature to their mobile commerce app.

However, the opportunity for Apple gets more challenging in the offline retail world.  Yes, iBeacon creates a network to enable mobile payments through detecting and authenticating a mobile device.  Cool. However, Apple faces the challenge of convincing merchants to adopt the payment processing hardware, dongles, etc.  Google, Stripe, Square, and Dwolla also face this problem, among others. Even with its big brand recognition and marketing strength, Google was not able to grow offline retail adoption of its wallet.

So what are the opportunities for Apple moving forward?  Apple could build its payments business through acquisitions, or strategic partnerships.  Square has been a leading innovator in the payments space, is building merchant adoption and has a strong focus on UI/design given their recent hardware release.  While a Square acquisition may be expensive, Apple would quickly acquire payments processing technology, a growing user base of merchants and a design focused group of developers.  Bloggers have also identified Stripe as a potential, less expensive acquisition.

I think Apple can benefit the most, however, from a strategic partnership with PayPal.  Recently a LOT has been written about PayPal feeling the heat from Apple and pitching to help build out their payment network.  Some people see this as a signal PayPal is feeling threatened.  Yes, the competitive threat is there.  However, PayPal has many elements that Apple needs to be a leader in this category.  I think together, PayPal and Apple can create a break through wallet that defines the mobile wallet.

First of all, PayPal has addressed many of the cross-boarder (currency) trade challenges that Apple will eventually face.  Remember, Apple products are ubiquitous and they face hurdles in every new market they enter. We all know that Apple will not want to limit payments to the US market.

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Secondly, PayPal has a merchant program in place and is regularly improving the product feature set. This in market learning will only improve PayPal’s ability to deliver a solution merchants actually want and can easily adopt.  PayPal is also co-marketing with merchants to drive consumer adoption.

Lastly, PayPal is seen as the “most trusted” mobile wallet brand as defined by a 2013 Javelin study. Why is this important?  In light of the recent data breaches, mobile security will be a big factor for not only consumers, but for merchants.  Yes, Apple’s fingerprint ID is fantastic to access the device and authorize transactions.  However, there is a lot happening in the payment processing back-end that PayPal has focused on securing for almost 20 years. A partnership with PayPal will enable Apple to address this hurdle and avoid a dreaded data breach.  Should the unthinkable actually happen, culpability would most likely NOT fall squarely on the shoulders of the world’s number one brand.


Mobile platform security is key for mobile payments providers

I was at one of many Christmas parties and conversation topics, of course, covered “where will you be for Christmas” and “are you done with your shopping.”  Almost everyone was done with their shopping, but the big follow up question was “Well, did you end up shopping at Target?” There were a handful of people at this gathering that did shop at Target over the ill-fated shopping period.

The conversation very quickly involved everyone around the buffet table and included comments like, “I can’t believe hackers actually were able to break into a huge chain like Target” and “your credit card information is not safe anywhere!” Clearly EVERYONE at this party will be checking their credit card statements very closely in January!

However, one comment made really grabbed me. “If my credit card can be swiped by hackers at Target, I’m sure as hell not going to want to use my phone to pay for stuff.”  Obviously this exclamation sparked another round of fervent debate and discourse. A few well-known coffee and pastry shops in the area were called out in conversation as using new mobile payments technologies and were “flagged” as potential places to monitor for card fraud.

The implications of the Target data breach on the mobile payments vertical are HUGE.  There are serious challenges that must be addressed both on the consumer and business side of the equation for the many emerging mobile payments technology providers.

First of all, consumers have the perception that it’s no longer safe to use even debit or credit cards at physical retail stores.  According to one account of the Target breach, a security analyst at a major bank was made aware that cybercriminals were planning to sell online a new stock of stolen credit/debit cards.  The analyst bought the stolen card numbers of his/her bank customers using Bitcoin.  Presumably, these transactions lead to the discovery that these card numbers were stolen from Target.

One could easily make the assumption that Target was not even aware of the breach until the bank analyst made these card number purchases from the cybercriminals. Yikes! This lack of awareness of the problem scares me deeply at the consumer level.  Would Square be able to quickly inform a merchant that consumer’s payment data has been swiped and is being sold by cybercriminals? Could Square inform users that their data was stolen?

Secondly, business and IT executives at Target and all major retailers are wondering how and why the Target payments system was hacked.  Obviously, there are fast and furious internal investigations within Target as their legal and technical teams prepare for a barrage of lawsuits coming their way from banks and consumers.  These Target executives will be pounding on the doors of their payment system providers and their 3rd party vendors as well.

The discovery phase of these lawsuits will get UGLY FAST.  Moving forward post breach, all physical and online retail payment platform providers will be evaluated with much greater scrutiny with a focus on platform security, ability to detect a data breach and processes to quickly inform users that data has been compromised.

Emerging payment providers such as Square, Dwolla and PayPal need to address these implications head-on to address consumer and business needs in a post Target data breach world.

Platform security is now a big focus.  Yes, each provider does have website messaging that talks to how secure their platform is.  However, security requirements and technology must be increased especially as the payments platforms are being sold into individual SMBs and at the enterprise level that use multiple mobile devices to process transactions.

Mobile payment providers can quickly equip themselves with cutting edge mobile platform security technology through strategic partnerships.  Industry leaders include MobileIron, Good Technology, or AirWatch.  For example, by partnering with MobileIron, Square can provide a layer of mobile platform security to their SMB customers who use the payment platform across multiple mobile devices (payment terminals).

Addressing the mobile platform security needs will help address consumer concerns as well that their payment data and money are safe at the payment platform level. Square, Dwolla and PayPal must educate consumers on WHY their payment data and money are safe.  Providers must clearly explain what happens if a Square account is hacked and the PIN number and cash balance is stolen.  Can these providers stand behind a guarantee that transactions are safe?  Can they back up consumers’ cash balances if the money is stolen?  These are all key concerns that must be addressed for consumers to feel safe in using mobile payments technology to pay for items at physical retail.

Personally, I keep a very low balance in my mobile PayPal account that is connected to a low balance bank account.  Why?  I still don’t trust that the receiving terminal is that secure and nefarious code could somehow steal my account numbers and distribute across the world…all through an unsecured wireless connection at the SMB’s business location.  Maybe I’m just paranoid and uneducated.


Square is proving to be a valuable alternative payment solution for small businesses

This past weekend I had a great conversation with a friend of mine about wine, politics, classic cars and payment technology.  As the song goes, “these are a few of my favorite things.”  My friend, Mick, is an auto mechanic based out of Monterey, CA who focuses primarily on British and other European import cars.  When I say British, I mean early 1970 Mini Coopers before BMW started importing the more stylized versions with nifty customized paint jobs and stripes. He’s a British car enthusiast’s enthusiast…with the accent and Rolling Stones t-shirt to boot.

Mick is a savvy business guy and has A LOT to say about small business banking, lending, payments processing and taxation.  After a few mimosas the conversation gets very lively as you can well imagine.

I learned that Mick currently uses the payment processing tools, software and equipment provided by his business bank, Rabobank.  The bank makes it easy for his business to use their credit card processing machines through favorable card processing fees, equipment leasing options and bundled low interest loans and credit cards.   Rabobank typically charges him 2 ½% – 3% on processing fees for Visa and MasterCard transactions only.  The bank also has account managers available to help with any problems in the payments processed…and are constantly trying to cross sell him into other bank products.

Last month Mick started to explore alternative payment processing options out of frustration with the Rabo solution.  Rabobank processes payments only in his shop using Rabo supplied machines.  Unfortunately, his checking account does not receive the payment until 3-5 business days after the credit card transaction is made.  These machines are a bit clunky and keep him tied to his shop which is a problem for he deals with many customers at other garages. The solution also does not connect to his inventory management solution so he has to track each sale separately on his supplier order forms.

A friend suggested that he look into Square.  His eyes got wider as he described all the great features Square has to offer through a FREE downloadable app and simple card reader connected to his iPad. Yes, the wide eyes could have been due to the mimosas, but his excitement was palpable.

“Through Square I can now load and access all of my parts inventory and process orders from anywhere.  I met a guy at a coffee shop last week and he ordered several Jaguar parts from me.  I punched in the order on my iPad, ran his credit card and emailed him the receipt. I gave him the parts and it was done.  Amazing.”

Mick was also excited about the 2.75% transaction fee, no equipment rentals and the ability to access Visa, Mastercard, Discover and AMEX.  The excitement around the mix of credit cards surprised me.  However, his clients are typically high-end car collectors.  AMEX is this customer segment’s card of choice….which is a point of differentiation for Mick’s shop compared to others in the Monterey and Carmel area.  Another benefit to Square is the ability to receive the payment deposit the next business day.  For Mick, and for any small business owner, this is HUGE to support the cash flow of his business.

The missing link is for Square transactions to integrate with a QuickBooks account.  Right now he has to export the Square transactions as a .csv file and then import into QuickBooks.  “It’s a bloody pain in the ass,” he says.  However, in time I’m sure Intuit will build out the API for easy automatic imports.

So how should Rabobank, and other small business lenders, feel about Mick’s Square epiphany?  Clearly, the Square solution is a formidable threat to Rabo’s business banking division.  Banks feed on a steady revenue stream from the services and relationships they support from their small business banking business. Banks need to pay close attention to how small business clients are responding to the Square solution and either adjust their payments business/product or consider a strategic partnership with this (and other) innovator.


PayPal must provide consumer incentives for repeat use of payment app

As I walked through the Financial District in San Francisco last week I came across one of the oldest forms of marketing  promoting the newest way to pay for something; a sandwich board offering $5 off for customers who pay using PayPal.

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I did a double take when I saw the PayPal logo for most restaurants promote their relationships with Yelp, Foursquare or OpenTable…let alone promote the use of a mobile payment tool.   I’ve seen very minimal payment tool promotion beyond what Peet’s is doing to promote their relationship with Google Wallet.  As we all know, Google Wallet has gained little traction.

I ducked into the restaurant, Bamboo Asia, to get the special offer that required me to pay with the PayPal mobile app to receive $5 off my purchase.  I ordered a Bhangra Bowl and a tea.  I opened the app on my phone, paid and received the discount.  Cool.  It was easy.

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Clearly Bamboo Asia is part of PayPal’s merchant payments pilot program and has been provided incentives to generate consumer awareness and drive app downloads. PayPal has an up-hill battle here for there are other payment solutions, such as Square and Dwolla, who are competing for awareness and consumer wallet adoption as well.

The $5 off purchase offer may help PayPal increase trial, but it falls down at driving repeat use.  This week I went back to Bamboo Asia and used the PayPal app to pay.  The restaurant manager said, “Oh, the discount is one time only.” “No worries…I still want to pay using PayPal,” I replied.  The manager looked at me like I had a booger hanging from my nose. “Why would you want to use the app again without the discount?”  That statement points out the importance of not only increasing adoption, but also providing reasons why consumers should continue paying with the mobile wallet.

Unfortunately this store manager was only focused on the immediate discount offer and didn’t really see a benefit if his customer base continued to pay with PayPal.  Bamboo Asia customers were also not provided a reason to pay with PayPal either.  This should be concerning for PayPal for two reasons.  First of all, the merchant will see a spike in sales for the short term, but will not see a continual lift from repeat customers.  In this case, consumers downloaded the app just to get the discount. The merchant may wonder why he participated if none of the PayPal app users become repeat customers.  Secondly, PayPal is driving downloads, but not demonstrating to customers the value in continuing to pay with PayPal…which leaves the consumer mind share WIDE open for a competitor to tell consumers WHY they should pay with a mobile payments tool.

What do PayPal and the merchant need to do as a follow up to the “download the app” discount program?  Offer incentives for consumers to continue to pay with PayPal.  Maybe Bamboo Asia offers special deep discount offers to users who use the app to pay 10 times?  Or, maybe PayPal creates a consumer loyalty program that offers points every time a consumer uses the app to pay for anything at a restaurant? OpenTable followed a similar strategy by rewarding their customer base with 100 points for each reservation made through their service. I believe the customer is sent a check or discount coupon from OpenTable to spend at a restaurant of their choosing.

Given how crowded the mobile wallet space has become, it’s clear that consumers need an incentive to adopt a solution. PayPal has the right brand awareness in the B2C and B2B space.  The big question is how PayPal can make it easy for merchants to use their mobile payment tools. A second factor to success will hinge on what co-op marketing programs PayPal can build out with merchants to provide incentives for consumers to pay with PayPal.  PayPal, the field is wide open now.  You’d better act fast or the teams at Square and Dwolla will get there first!


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