I’ve been thinking about mobile payment systems recently. I have no doubt at all that we will be using our mobile as both our primary device to access the digital world (overtaking the PC) and our primary means of paying for remote and physical purchases.

In terms of timescale, I’d guess that will happen within 10 years (I’d agree with Tomi on that).

However, for this market to take off, there’s some very important features that such a system would need to have. And these features are very often overlooked by start-ups operating in this area.

So here’s a few thoughts of what would create the perfect mobile payment system. I haven’t tried to be comprehensive here and there are other issues to consider before you knock on a VC’s door with your billion dollar business plan.

1. Usability

The overwhelmingly most important feature of a mobile payment system is usability for both the user and the merchant or retailer - I’ll use “merchant” here to show off my knowledge of the sector
It’s quite simple really. Here’s Buckley’s First Law of Mobile Payments:

If the transaction process is any more complicated than using a credit card or cash, it will never succeed.

Take Mobile Lime, as an example. They offer a pre-pay model, whereby you “load” your mobile account with money and then use it to make purchases. This isn’t a man-in-a-garage-dream incidentally, but a well funded, VC-backed start up.

Mobile Lime’s copy reads enticingly “No longer do you have to fumble through your wallet searching for special coupons, loyalty cards, or all those credit cards!” Great! I can’t wait - how can I pay by my mobile then (assuming I’ve remembered to top it up)?

Here’s how you do it:

For Grocery Stores, Quick Service Restaurants, or Other Retailers:

1. Dial 866-360-LIME (Note: we recommend settings this up as a speed dial from your phone.)
2. Enter the location ID for the merchant you are transacting with.
3. Enter your pin + # to pre approve the transaction.
4. Listen for new specials or rewards you may be able to take advantage of from that merchant.
5. At checkout time, let the clerk know you wish to pay with MobileLime and provide the clerk with the last four digits of your cell phone number .
6. The clerk will print your receipt and you’ll be on your way.

Just the six steps, then. Could they have tried to make this more complicated, if they’d tried?

A further problem is that on average, 70% of purchases are made in-store. This means many people don’t know what they will buy or where, before they go shopping, so they won’t be able to pre-phone. And where do they get that merchant ID from anyway?

This is a perfect example of a bunch of bright people identifying a great opportunity and then forgetting to ask why on earth anyone would use their product. It’s got all the markings of having to introduce countless “work arounds” to solve technical and security issues, meaning that the final solution is completely unusable.

Mobile Lime, in the nicest possible way; Change or Die.

2. Usability #2

It’s not just a question of making the transaction painless from the user’s point of view. It must be as easy to use as processing a credit card, by the merchant’s staff.

Most retail organisations have a pretty powerful person called the Operations Director. This person’s job is to ensure (among other things) that the shops work properly. As an aside, they’ve normally got where they are today by being good at shouting at people. Like all generalisations, this one is wrong too.

One of the key tasks of stores is to process transactions as quickly and efficiently as possible - and depending on the store, making this a pleasant experience. Think a busy grocery retailer on a Saturday before Christmas. If you add 30 seconds to a transaction time because your customer or staff are fiddling around with mobile phones trying to pay the shopping bill, you have a critical level operational crisis if this scenario is repeated.

Also, never, never underestimate the amount of time and money you will need to invest in retailer staff training. You’ll have to tell them how to do this until you gag and still carry on telling them, while maintaining a serene smile.

3. Training

I know I already mentioned staff training, but the point needs labouring, frankly. If your expensively acquired new user presents her mobile phone for payment and gets anything less than “That’ll do nicely, Madame” you’ve just lost that customer.

4. Simultaneousness

One of the problems we had when I worked on the launch of Air Miles (yes I am that old) was the chicken and egg. You can’t acquire merchants until you can demonstrate that you have a critical mass of users. But you can’t acquire users until you can show them that there’s enough places to use their payment (or in Air Miles’ case, enough merchants to collect from).

We managed it with Air Miles, but with a new payment system? It’s a huge challenge needing significant and serious funding and some brilliant sales and marketing. The sales (acquiring merchants) and marketing (acquiring customers) must be symbiotic, which is frequently not the case. It’s one of the few instances I can think of where having a Sales and Marketing Director might make sense, as this symbiosis is mission critical.

Recruiting users is much easier if you have a customer base already, like the operators and credit card companies already do. But, there’s room for a well-funded start-up who can move fast and leverage some great marketing and cool deal making skills.

In this case, the chicken must come first. You have to acquire retailers first by convincing them that your multi-million dollar marketing campaign will acquire a serious slug of users. And that you’ll help/pay them to convert their customers. And that you’ll help/pay them with staff training and education.

5. Point of sale

A small point this and related to merchant acquisition.

When I lived in the UK, I once had a Diner’s Card, which I never used to pay. Why? I simply never saw a merchant who had a “Use Your Diner’s Card here” sticker.

Simple. But important.

6. Low cost

Credit card companies typically charge 5 -10% of the transaction value. Mobile operators around 50% of Premium SMS revenue. You can’t apply this level of rake-off and still remain competitive in most retail sales.

Therefore, the perfect system must have low/competitive merchant costs, or you’ll never get anyone on board to take the payment.

That’s all for now, methinks. All these six points must be addressed before you even think about the detail of a plan. Don’t think just 5 will do as you’ll be dead in the water.

There’s going to be one or two really big winners in this sector and I think the market’s still wide open for the right idea, well executed.

Has anyone anything to add? What haven’t I covered?

Irakli, a payment specialist here in Munich adds this excellent addendum on his blog.

Security (Trust)
Security issues are still people’s main concern regarding on- AND offline payment. The entire payment “path” must be trusted: in practical terms, this means a banking or credit card system and NOT a telco. Telcos aren’t trusted. The only way for this to work is something like “Visa MobiPay”. I’ve made this up, but there should be a trusted brand connected to the transaction.

I’d still wage on banks rather than credit card systems, if only because merchants are unwilling to accept credit cards. In (German) food retail, margins are so low that it is quite impossible to introduce credit cards. Even EC’s (electronic cash) 0.8% merchant fee is substantial. Germany’s largest retailer, Aldi, is only introducing EC-PoS (point-of-sale) this summer.

As most transactions are generated in food retail, the success of a system will depend on what is introduced here.

Security (Peace of Mind) #2
People like receipts. Although these are not technically necessary, people are used to be handed a receipt after a purchase in a physical store (different rules apply online).

If you position your mobile payment system against credit cards, then you need to make sure some sort of physical payment receipt is generated or people will not accept this payment method. This also adds to an increased integration depth with retailers’ systems.

A SMS-based receipt is nice to have, but not a must. Further, GSM reception is often bad in superstores (beats me why); waiting for an inbound confirmation SMS is a potential killer in the shopping process. A receipt would have to use the same conduit as the payment - meaning increased production complexity on part of the manufacturers (see my next point below).

I’d say a debit system stands a better chance of being accepted (rather than credit).

Volts!
Irakli’s Mobile Payment Rule:

Your handset batteries will die on you when you are at the till with two screaming kids and a shopping cart full of ice cream for their birthday party

Portability
Imagine if every bank teller (cash dispenser) had a proprietary interface and you had to spend some time working out how to use even basic features.

That’s the problem you face with mobiles and a universal payment system: how do you make sure the payment experience is the same regardless of a) handset manufacturer and model b) payment software (presumably some Java app?) c) merchant terminal and d) telco

Further, people change handsets at the latest every two years. The least problem is to export all payment confirmations (should these be in the form of SMS). The portability issue means that client-side features should preferably be online so the system is independent of the handset.

This, in return leads to the question why handset manufacturers should invest in providing payment hardware (like nfc / mifare) when they are left out of the transaction model.

My guess is that it depends on what the banks will do. In Germany, the trend is towards secure “swipe + PIN” smart cards which will almost invariably be easier to use that anything mobile related, even if it is only about device batteries.

In summary, I wouldn’t place my bets on a payment system that is telco-driven; ideally “swipe” technology and handsets will eventually merge.