The Case for Consolidation

If you believe Forrester, the mobile payments market in the United States will triple over the next four years, from $50 billion to $142 billion. Who will dominate the market for mobile payments by 2019?

Well, it’s not likely to be Starbucks.

At the end of 2013, Starbucks claimed a whopping 90% of the mobile payments market, thanks to its early charge into the app-based payment space and its ability to merge mobile payments with a loyalty scheme.

While Starbucks’ claims and Forrester’s market size analysis are clearly inconsistent, there is a larger point to be made than who has the best bean counter.

The mobile payments market, like the credit card market before it, is massively immature. Think pimple-faced teenager immature. While one or two major approaches to payments have emerged over the past two years, it is not a fair statement to claim that any one approach, or any one player for that matter, has figured out the end-to-end payment model that will define how people pay for goods and services in the 2019 economy. Indeed, no one player has any dominance at all. While Forrester argues that Apple Pay may emerge as the largest payments player by 2019, it seems unlikely that Apply Pay will show up on Android, Windows or even Blackberry devices any time soon (despite RIM CEO, John Chen’s recent request that the US government force every app developer to build their apps for his company’s dying smartphone).

So it’s not likely that the device will determine dominance in the mobile payments market. And the retailers themselves can’t define a dominant position in mobile payments – no one is going to use their Starbucks mobile payment app to buy gasoline, groceries and gummy bears from the local 7-Eleven - but if mobile payments are to grow, the market will have to have a rational approach that human beings will use.

There is a distinct parallel between the mobile payments market and the credit card market which it seeks to disrupt. Historians suggest that, while credit is as old as the first agrarian economy, the first modern credit card, the Diners Club card, created in the 1940s to let hotels and restaurants settle bills with their high end clients for multiple transactions at once. Over the ensuing 20 years, credit cards proliferated, but the credit market was dominated mostly by direct merchant cards for large retailers. It wasn’t until the credit association model of the consortia, now known as MasterCard and Visa, allowed for a single card, issued by a trusted bank, that could be used for any transaction.

What the consortia brought to the credit card market was an end-to-end system that allowed for one card to be used for any retail engagement. After the consortia took hold of the credit card market, they consolidated out the merchant card market almost completely. Store cards were replaced by general credit cards, but only after those cards had the end-to-end ecosystem of third party sponsors (banks), ubiquity in merchant networks, and consumer buy-in.

Of the players in the mobile payments market today, none can supply what the consortia applied to the credit card market. Apple Pay and Google Wallet, while allowing for multiple banks to complete the credit ecosystem, is platform-dependent. PayPal has the advantage of working across platforms, but still relies essentially on forwarding third party credit cards into the transaction. The other players of the day are all smaller, mostly channel-dependent (e.g., Softcard), and entirely lacking in an end-to-end ecosystem.

No player is emerging as providing the ubiquity and end-to-end ecosystem that the credit card consortia used to take over the consumer credit card market. Which leads you to wonder – where are Visa and MasterCard in all of this?