By Ken Musante
Eureka Payments LLC
In "Are mobile payments a threat to ISOs? - Part 1," The Green Sheet, Sept. 27, 2010, issue 10:09:02, we discussed a reported collaboration between Verizon Wireless, AT&T Inc. and T-Mobile USA for a smart-phone program that enables near field communication payments over the Discover Financial Services network. I asked on the GS Online Forum if this new alliance will be successful in ushering mobile payments into the economic mainstream.
In Part 2, we take up where we left off and ask whether consumers are ready for it. As stated in Part 1, there are many reasons why consumers may not be prepared for charges to be assessed through cell phone carriers.
First, additional costs will be levied on consumers. Second, consumers often do not own their own phones or pay their own cell phone bills. Third, some devices are company phones or phones owned by family members and given to users because it is inexpensive to add phones to existing plans but relatively expensive to buy separate phone plans.
If a party who is given a phone, but is not responsible for the bill, makes purchases with that phone, it may violate the trust of the person or entity responsible for the bill.
With that said, however, THECREDITCARDMAN believes these issues pale compared to the benefits. Purchases billed to cell phone accounts "is where I thought this was going," he wrote. "No interchange, no bank, BIN, bull fees to split up 10 ways. I wonder how much the average credit card is used in dollar amounts every month.
"Perhaps extending $1,000 to $2,000 per cell charge credit line would limit liability. If, and a very big if, cell charge could incorporate the cost of the new terminals in an equation that included, say, 1 percent merchant fees, it could be shown as a net benefit to the merchant.
"Sure your rental/lease is $49/mo, but with a volume of $10,000 a month @ 1 percent, you are still saving $201/mo over the effective rate you are currently paying of 2.5 percent."
CARDPLAYER responded directly to the above: "Creditcardman, you are correct; the business model could work. However, when you talk about 'limiting' users to $1,000 of purchasing ability, realize that AT&T has 67.4 million subscribers, Verizon has 63.7 million and Sprint has 53.9 million.
"So this article is talking about an AT&T/Verizon joint venture. That means a combined subscriber base of over 130 million users. Even if half were credit-worthy of a $1,000 line, that would mean that the company would need a credit line of $65 billion required to be able to fund merchants for purchases made. That's a limiting factor, IMO.
"If this launched like we are talking, I see a $100 line more realistic to start, that's a more reasonable $6.5 billion capital requirement, and it also caps losses until they get it figured out. For convenience purchases, $100 is a reasonable starting place."
CARDPLAYER offered another scenario, of cardholders's credit and debit accounts being debited $25 via automated clearing house or "make it a prepaid balance that you can spend with your phone, like EZ Pass, or debit, a DDA after the fact, like decoupled debit."
Risk or reward?
WWW.PAYMENTLOGISTICS.COM discussed the likelihood of the wireless carriers managing risk and the inherent operational issues. "At the end of the day, the wireless carriers are not going to be able to manage the risk," he wrote. "We're talking about more than just credit risk. Don't forget about fraud risk, which is the real kicker for acquirers.
"And if they use their own network and not a mainstream payment network like Discover, then they have the same chicken and egg issue that anyone else [has in] trying to compete with the major card brands. Their existing subscribers will not want to adopt the payment method until merchants will accept it. Merchants won't want to accept it until there is real demand from subscribers.
"And then merchants have to form separate agreements with the wireless carriers and their vendors to fund their transactions. Separate billing statements. Separate equipment. No chance.
"The only way this works is if it goes over the existing payment network like Discover's. And that only means opportunities for acquirers like us. And if it does take hold, Visa and MasterCard will be right there in the thick of it."
STEVE NORELL introduced some recent history. He said, "A short while back ETA had their mid-year show in Palm Beach, and all of the speakers could not stop gushing about the fact that contactless was the next coming and how big it was going to be, and get on board or be left behind. Not. I can't wait until we go to Palm Beach again in October and hear what the next big thing that will never do a damn thing will be. Smart cards here we go."
CCGUY piled on to STEVE NORELL's comments. "You can buy things now by texting on a cell phone," he wrote. "The chargeback ratio is so high it would make your head spin. People call the cell company and say I did not want this or that, etc.
"I know one company who told me the SMS [short message service] payment through cell phones works like this: they get less than 50 percent of the money - the cell phone company gets a high percentage; over 10 percent, then chargebacks are 40 percent plus. "Can you see the cell phone company letting people pay, then, at the end of the month, try to collect? ... LOL."
Will they or won't they?
MARYDEES weighed in with an entirely new set of reasons why consumers might not select this solution. "Most consumers have multiple brand cards in their wallet from multiple issuers," she stated. "There are a myriad of reasons why.
"One, they can't get the credit line they are looking for from one issuer, so they have cards from two or three. Two, a certain issuer has some affinity program they want: airline miles, their alma mater, hotel points, etc.
"Three, if the consumer is a transactor and not a revolver, they know the cutoff dates for each of their cards, and their monthly use pattern is based on having the most float before they have to pay their bill.
"Four, if they are a revolver, they shop rates and take advantage of low-rate balance transfer offers.
"Five, they use cards for budgeting purposes based on what they are buying, e.g., they put business expenses on one card for tax segmentation, they put luxury purchases on one card with lower interest terms to pay over time, they put daily purchases on another card that may have a high rate but low fees, etc. A consumer doesn't put their business expenses or their everyday purchases on a card that revolves because it subjects those transactions to interest as well. Six, they use plastic to access different accounts, i.e. their checking account, their brokerage account, their home equity line, etc.
"For years issuers have tried to figure out how to get a consumer to use their card and only their card, and it hasn't happened because, based on how consumers use these accounts, one card could not possibly accommodate their needs. Putting an account in a cell phone doesn't take away a consumer's other needs, it just gives them another option with which to meet their needs. It's a technology looking for a market, not the other way around."
MARYDEES has obviously thought much more closely about which card to use than I have. In an effort to get a wider perspective, I spoke with my former boss and President of Moneris Solutions Inc., Greg Cohen.
Greg believes that, over the course of the next few years, smart phones will become payment vehicles or wallets. However, smart phones are only a fraction of the total mobile phone population today.
Greg believes this may present one of many opportunities for Discover to expand its network and that the tremendous reach of both AT&T and Verizon may make this offering different from any that have come before.
Much of the success of any initiative will be based on the telecommunication networks' efforts to drive acceptance to existing and prospective customers. Further, even if this does not lead to the groundswell of usage, it may be just the first of many initiatives for networks like Discover.
Greg believes the success of any mobile network will be in developing an open architecture through which consumers will be able to initiate payments. The network wins - regardless of what vehicle, solution or brand is chosen - provided the network enables that solution.
Greg acknowledged that the joint venture presents a "chicken and egg" dilemma for the industry. However, he feels that over time this will work itself out, and companies like Discover that enable others to access their networks will win, similarly to other companies that have enabled, and even encouraged, others to develop applications for their products. An example is Apple Inc.'s decision to allow outside developers to develop applications for its iPhone.
Finally, Greg believes an expanded mobile payment segment will be good for the industry. Such activity will radically increase the number of small-dollar transactions, which have higher margins and increase the acceptance channels.
For my part, this is likely not the solution that will supplant Visa Inc. or MasterCard Worldwide for the reasons I cited above and in Part 1.
What about Durbin?
As an aside, do you ever think that Visa and MasterCard were privately cheering for the Durbin Amendment so that the total cost of debit processing would go down?
The Durbin Amendment disgorged issuing bank profits on check cards yet left the card brands untouched. This then makes any encroachment by an upstart all the more difficult because the total costs in each debit transaction are artificially low. Perhaps this is one unintended consequence.
Remember, when in doubt, sell something.
Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at firstname.lastname@example.org. For more information, visit www.eurekapayments.com.
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