July 31, 2017
In the last decade, mobile payments have started taking hold worldwide as consumers ditch cash and cards, and instead use their smartphones to complete transactions. While many of the financial innovations we see today are spearheaded by insurgent FinTech trendsetters, the mobile payment space has instead been dominated by TechFin firms instead. This is an important distinction as FinTech firms are companies that were created to innovate technological solutions for the finance sector like PayPal, Lending Club, and others; TechFin firms, notably the GAFAM (Google, Apple, Facebook, Amazon, and Microsoft) companies, are established technology companies that have begun to compete in the finance industry and offer their own FinTech solutions. The work of TechFin companies has helped bring FinTech and mobile payments more into the mainstream, but what enabled their takeover of the market on such a large scale? Additionally, is there room for FinTech companies to compete in an industry dominated by international tech giants? With the help of Scott Harkey, Global Lead of the Payments Practice at Charlotte, NC-based consulting firm, Levvel, we will look to answer these questions and more on the ever-growing mobile payment landscape.
When you think of mobile payments and digital wallets, you most likely think of popular platforms like Apple Pay and Android Pay. You may also notice that these two platforms are operated by massive technology companies; Apple and Google, respectively. This is no coincidence as technology companies dominate the mobile payment industry in the United States due to several inherent advantages they have over competitors. One of these, as Harkey points out, is that these tech companies own the hardware... If you look at the payments experience, and the simple experience of a single tap or a single touch, it’s all dependent on the hardware. For mobile payments and digital wallets to become popular, they must be easy to access and simple to use; and nobody can make the process simpler on a device than the companies that produce the hardware and operating systems. According to Harkey,
They’re always going to be able to provide a better experience on a device than anybody else… They can maintain the security on the device, they can protect the payment credential in the operating system… Nobody else can provide that direct access to the payment experience.
Additionally, owning the hardware and operating systems gives these companies the ability to sell devices with the mobile payment platforms pre-installed, further increasing knowledge and adoption of the product.
Another advantage that TechFin companies have in the mobile payment race is data, in both quality and quantity. A quick look at some of the companies making significant progress in the mobile payments market includes some of the biggest data collectors in the world, namely Google, Facebook, and Amazon. These companies have turned data collection and analysis into a business model, providing an ultimately free service to consumers, then utilizing and selling information it gathers on them by monitoring the way they use that service.
Now, these companies are leveraging this data further through mobile payment platforms, and it is giving them a leg up on the competition. Where payment providers used to have to buy data on customers to develop an idea of their habits and purchasing behaviors, the new wave of mobile payment providers are now the ones collecting the data. These TechFin companies are able to cut out third parties, using in-house data to strengthen their mobile payment platforms.
Additionally, digital wallets enable these companies to collect even more data than ever before. So much can be learned about consumers by looking at how they engage with value-adds like prepaid, loyalty cards, remote transactions, and in-app purchases. Mobile payments are allowing the rich to get richer when it comes to big data, strengthening their platforms along the way.
Despite their advantages, TechFin companies haven’t exactly enjoyed automatic success in the mobile payments space. In 2011, Google became the first major technology company in the United States to enter the mobile payments market when it released Google Wallet. At the time of its release, it became the most notable example of a digital wallet; looking back, it seems like it should have been a success given its early entrant status and similarity to popular digital wallets today.
However, despite being both innovative early to the game, Google Wallet was ultimately a failure and was eventually phased out in favor of Android Pay. The primary reason for its failure was most of the large mobile carriers in the United States pushing against it – only Sprint agreed to allow it.
In the meantime, Verizon, AT&T, and T-Mobile all blocked Google Wallet, opting instead to only support SoftCard – a mobile payment venture launched between the three major carriers in an attempt to capture the mobile payment market. Despite its success in killing Google Wallet, Softcard (previously named Isis) also failed to get off the ground and was ultimately purchased by Google and shut down in 2015. As Harkey explains, two key factors contributed to SoftCard’s failure and provided future mobile payment ventures with an idea of how not to implement a digital wallet. First, Harkey explains:
The pricing they came at the banks with was way too high. They were trying to charge per card stored, trying to charge per transaction, and it was dollar amounts that were in no way worth it to a bank.
SoftCard tried to monetize its platform in an unrealistic manner before it had even made it off the ground, and it ultimately stunted any chance it had to be successful because it pushed banks away. The next wave of companies offering digital wallets worked closely with banks and focused on creating a user-friendly product, enabling greater success. The second reason for SoftCard’s failure, according to Harkey, is that the carriers simply had no value-added role in the payment process:
The carriers were inserting themselves in a flow where they didn’t add any value and they’re asking you to pay for it, and it just didn’t make sense to the banks, the merchants, or anybody else.
TechFin companies, on the other hand, have significant ability to add value, as we’ve already discussed. By being responsible for the hardware and the operating systems, these companies can control every step of the process and make mobile payment integration as successful as possible.
While it has been established that TechFin companies dominate the mobile payment and digital wallet market, it must be considered what type of role FinTech companies can play in the market going forward. According to Harkey, the role is present but limited:
I think the only path (for FinTech companies in the mobile payment market) is coming up with a new flow or product or feature or way of looking at something, getting enough traction on it to get the attention of someone bigger who can scale it, and getting scooped up by them.
As of now, it seems that the TechFin companies controlling the market just have too many built-in advantages over everyone else when it comes to mobile payments, and they ultimately can’t be competed with head-to-head. However, this doesn’t mean that FinTech insurgents can’t sway the market.
A prime example of the opportunity that Harkey described was the path of LoopPay, a FinTech startup that developed a device enabling mobile payments at older terminals that are not yet NFC-equipped. In 2015, LoopPay was acquired by Samsung to become part of Samsung Pay; now, Samsung phones are the only devices that can make mobile payments on older, non-NFC payment terminals. So, while LoopPay didn’t take over the mobile payment landscape on their own, they still benefitted from their design of a mobile payment innovation that is now being used by millions around the world. If other FinTech companies want to make a similar impact in the mobile payment space, they will most likely have to follow the path of LoopPay as for the time being there is no competing with the TechFin giants.
Given their built-in competitive advantages, it is clear to see how TechFin giants have come to dominate the mobile payment landscape. They have the hardware, the software and the data all in-house, and that is probably too much to compete with. FinTech companies will still be able to challenge the status quo and push new technology to the forefront, but their best hope for worldwide integration is to be picked up by an established platform. With the mobile payment space still in its early days and continuing to develop, nothing is certain, but it certainly looks like the future is TechFin.