New Network Required to Mine Full Potential in Mobile Payments, Report Argues

Marketing revenue from mobile payments has the potential to dwarf payments revenue, as pundits have been saying for some time, but that potential will never be realized unless a new sort of payment network is built, argues a new report.

Existing networks like Visa Inc. and MasterCard Inc., not to mention prominent mobile-payments players like Google Inc. and the Isis venture created by the mobile carriers, aren’t capable of managing transactions that carry both payment and redemption data, says Rick Oglesby, senior analyst at Boston-based research firm Aite Group LLC and author of “Digital Commerce Enablement: The Case for a New Payment Network,” released recently by Aite.

The problem goes well beyond the challenge of getting sophisticated terminals with near-field communication (NFC) technology deployed with merchants, he argues. Behind the terminals lie decades-old processing rails hard-coded to handle card transactions. But with Google, Isis, and a raft of other technology companies proposing to pump out payments mixed with reward redemptions, a sort of super switch will be needed to validate the redemption, deduct it from the payment amount, and route the net payment back to the card issuer via the network. “It’s about a lot more than NFC terminals,” Oglesby tells Digital Transactions News.

The payoff, however, could be quite handsome for the companies that figure this out. If Google, for example, had been able to start out in pay-per-click search advertising in the broad brick-and-mortar retail market, its revenue in 2011 could have been $378 billion, or nearly 10 times what it actually took in worldwide, Oglesby estimates. That’s based on extrapolating to the physical-world retail market the share Google has taken of the e-commerce market. Total payments revenue for Visa and MasterCard, by contrast, came to $16 billion, he calculates.

Because existing networks are built to process cards, they are pursuing a strategy of so-called card emulation, which replaces a plastic card with a mobile device but otherwise works the same way from the point of sale back to the issuer, Oglesby contends. “They’re going down an NFC approach, which is to turn a phone into a card,” he says. “That creates an opportunity for others saying, ‘If you’re not going to do it, we will.’”

Still, the best candidates to build the parallel network infrastructure for mobile payments and rewards are Visa and MasterCard, he argues. These networks control the most volume, and so are in a position to create and impose the standards that will be needed to move from scattered, closed-loop initiatives to open-loop networks on a scale that rivals today’s payments systems. That won’t happen, though, if the networks stick with card emulation. “Companies listen to what they say, but they need to look at this as a new infrastructure,” says Oglesby.

One way for the networks to create that infrastructure is to acquire the building blocks by buying the companies that have already developed solutions, he argues. Both Visa and MasterCard over the past couple of years have demonstrated a willingness to acquire companies and invest in the technology they need for mobile. Visa, for example, is an investor in Square Inc., a pioneer of mobile merchant acceptance.

“Without leadership at the network level, this is going nowhere,” Oglesby tells Digital Transactions News. “It’s not easy, but if you believe the market is going this way, it’s a must do.”