2011: Tough Start for Mobile Payments

2011 has been a rough start for mobile payments. Early bets in the space are running out of cash, and established industry players are placing $1B+ bets to compete with new MNO ecosystems.

10 January 2011

I learned my lessons on the Valley hype cycle early (from the source). In 1997, at the ripe old age of 32,  I joined GartnerGroup with the goal of participating in a great research and advisory team. Well… that lasted about 11 months. I learned that there was no research and their business model never broke away from its roots as a division of McGraw Hill. It was all about reporting, writing, buzz and sensationalism (with a very few exceptions .. Schulte/SOA).  It was great fun listening to buyers of IT talking about new products issues and then meeting with the software vendors (with more information on hand then their product heads had) to watch them watching them turn green.  But fun aside, I wanted to go run a business…. not become an industry analyst (this blog serves as an outlet for my minor competencies here).

The Gartner experience reinforced the importance of marketing in creating new products, of creating “buzz”. After all  IT periodicals and research firms must fill their pages with something every week. Of course ISVs and start ups are happy to oblige… Buyers and Investors must be able to cut through the fog and assess business viability, valuation and risk.  My data indicates that mobile payments is at the top of the hype cycle. I read the Nov 2010 Javelin report on mobile with great amusement: $7B in P2P mobile transactions in 2010!?  I would be very surprised if the number broke $100M.  Obviously the $7B number is driven by Javelin’s methodology, perhaps a mobile payment includes when I get an SMS message that my bank paid a bill….

Javelin’s methodology obviously does NOT include looking at financial statements. If it had (and the $7B number were real), we would not have seen the continued bloodshed in the space. 2011 has been a rough start for mobile payments. Early bets in the space are running out of cash, and established industry players are placing $1B+ bets to compete with new MNO ecosystems. An industry status of early movers here:

In every case above, there was complete failure in a value proposition. For Example, Obopay charging $0.50 to send money.  The key lesson learned (over and over) is: small companies cannot LEAD development of a payment network. The industry is replete with examples which substantiate this point(see list here). Payment networks are 2 sided, and compete against well entrenched competitors with deep pockets. Payment networks must start with delivering value to 2 parties (ex PayPal Consumer to EBAY). Going at consumers alone (p2p) or as a bank partner alone (Monitise) will not drive volume. As Clayton Christensen asks in Innovator’s Solution: “what problem are you solving”? Moving money through a phone does not create value.

To be clear, there is a very real potential for mobile payments (and NFC) to be the driver 100s of new companys. But their business models must deliver value today (example NFC to unlock doors), or serve  in a supporting role to new industry ecosystems. This supporting role requires a FUNDEMENTAL change in how valley firms typically operate: Start Ups must learn to work with and support multiple large companies and ecosystems. Supporting ecosystems is a B2C model.. NOT a direct to consumer model. This supporting role has new risks, as VivoTech (one of my favorite companies) has learned.  Small Companies which support emerging ecosystems are challenged to influence their overall shape and value proposition. Further, if transaction volume is low, there is minimal revenue or pricing power without a clear value proposition (see Google/Boku).

New ventures operating within NFC ecosystems have prospect of attracting  30-50% of the $6B in mobile venture capital. Investors should be wary of  hype and tag along investing as risk profiles are unique (ie NFC ecosystem play vs. consumer mobile app).  Look hard at the talent running the company (see investors guide). Social networks are much different than payment networks. Payment networks require alliances, regulatory/risk acumen, understanding of history, experience and relationships (see key skills). Banks can win in the move to electronic payments. The top 5 US banks are in a much better position to influence ecosystem development (see lessons learned) than the mid tier, however the mid tier is in a much better position to partner (ex. Barclays US in Discover).

Deal of the Week

From a valuation perspective, the latest “head scratcher” in mobile payments is Square’s $27.5M raise at a $240M Valuation. From VentureBeat:

Rabois acknowledged, but he pointed out that Square is already achieving impressive growth without paying for traditional advertising or other promotions. He said Square is processing millions of dollars in transactions every week, and that it’s signing up 30,000 to 50,000 new merchants every month. Rabois said many of those merchants were previously cash-only, but they were attracted by Square’s ease-of-use (the card-reading device plugs into iPhones, iPads, and Android phones) and low financial risk

I estimate they are doing about $20-$30M TPV per week (5k users $5k/wk) this translates into revenue run rate of $6M/yr … which would equate valuation of $240M to 40x REVENUE. Square may have 30k downloads of their iPhone app /wk, but does that translate into transactions. This valuation is NOT based upon financials, but upon the people involved in this company. Existing investors took a bigger stake.. they have every right to set the price. This makes complete sense,  particularly if they are looking for a Revolution Money kind of exit.

Mobile Money – Navigating in the Fog

Being an ex-Gartner guy I love to analyze the spin machine. What has been the return on the “mobile investment” made by established payment players (approx $500M in US/EU over last 2 years), or the $200M /yr that VCs (MobileMonday services estimate) have pumped in?

5 April 2010

Great recap of CTIA session: http://bit.ly/bmOFQS

Being an ex-Gartner guy I love to analyze the spin machine. What has been the return on the “mobile investment” made by established payment players (approx $500M in US/EU over last 2 years), or the $200M /yr that VCs (MobileMonday services estimate) have pumped in?

As an investor or P&L owner… a look at the hard numbers of teams focused in this space over last 2-3 years would not drive you to bet aggressively on mobile payments. For example, QCOM’s 2009 10-k shows a 4 year old Firethorn unit running at $34M expense generating $3M in revenue (page F-29). This is a “successful” team that had contracts w/ Wachovia, Citi, Chase, USBank, …

Obopay and Firethorn

Citi is out of Obopay

Mobile investment exceptions revolve around delivering short term value or supporting an existing value chain. Within the US, payment data would show that PayPal and the banks are the clear leaders here. Customer listening data shows that the average US consumer today does not view mobile as a separate channel, or a  separate product, but rather as a convenience which supports existing products and relationships. As my mobile head in HK said to me “what is so urgent that I must use my mobile and can’t wait to gain access to my computer”? There are times when all of us do have that urgency, but it is difficult to build a business case on irregular, sporadic use of mobile payment services. There are certainly “niche” needs, but few result in a profitable ‘stand alone’ business case (the banks are very adept at serving the market). It is far easier for banks (or existing players like paypal) to “extend” into the niche then for a new product to enter (the nature of network effects).

Bank of America, Wells, and Chase have solid plans for supporting “mobile payment”. Rather then creating a separate organization, they have treated it as an extension of the existing customer experience (online or on the phone). As the payment head of one of the majors told me 2 months ago “what payment problem can I not address today with one of my current products”? This same “extension” approach is taken by AT&T and PayPal as well, extending existing products and services into a mobile experience.

Within the US, as Obopay/MA, Firethorn, MPAYY and other mobile specialists struggle to keep 2,000 active users (I’m not missing any zeros) existing players are meeting their customers needs and making plans to expand services for a seamless “inter bank” experience.

Similarly, outside the US,  MNOs are extending their existing value chain by adding payment services. All of this seems to prove the axiom that “payments” is a challenging “stand alone” business (perhaps a separate blog on this?).

Beyond value chain extension, there are significant investment opportunities in infrastructure. Mastercard and Visa are very pragmatic here, investing in upgrading “rails”, rules, and “riders” which will drive increasing volume. An example of which we will see from Visa next month in a mobile marketing engine integrated with card use. “Payment innovation” history shows that adoption follows infrastructure 20 years after investment. Early adopters will be the consumers with the compelling need (or the trend setters).  For most US/EU businesses, being a “late follower” has limited downside as infrastructure is built and consumer behavior adapts, there is little risk in waiting.

Within emerging markets, common payment infrastructure is required in linking all nodes of the network: Bank, MNO, Agent, Consumer, Merchant… This is a much more exciting space as consumers evolve from a model where they must travel 2 hours to reach an agent to pay a bill in cash. It would seem that investment will be driven by MNOs as they have developed an economic model which has adapted to serve these markets. MNO efforts will be driven internally and by vendors that already serve them today (example Roamware/Macalla).

Comments appreciated.

Related Post http://finventures.wordpress.com/2009/11/10/investors-guide-to-mobilemoney/

Firethorn gets new CEO

Great news for QCOM this week. Firethorn gets a new executive with payments experience… AND has tremendous start up experience. QCOM is one of the best run, most innovative companies on the planet.. they are everywhere in mobile.

9 March 2010

Press Release

Previous Post “Obopay and Firethorn”

Great news for QCOM this week. Firethorn gets a new executive with payments experience… AND has tremendous start up experience. QCOM is one of the best run, most innovative companies on the planet.. they are everywhere in mobile.

Rocco has a clean slate given that Firethorn’s current customer list is rather sparse (?US Bank?). My recommendations for Rocco:

  • Dual track org: Short term quick hit and a strategic initiative
  • Short term: find some low hanging fruit and attack and forget about the banks in short term (they take too long)
  • Long term: better to “enable” 1M+ of businesses than to “own” a single product…. that is the model of QCOM. Example: Authentication. http://finventures.wordpress.com/2010/03/11/5b-mno-opportunity-kyc/
  • Leverage existing assets and relationships, listen for key opportunities
  • HR: Look at the team you have in place and shake it up… substantially. Start cross pollenating with the rocket scientists at the parent company.
  • Financial: I’m sure Rocco worked this out w/ Dr. Paul already.. but there are few path’s to revenue in 2010 unless there are some reallocation of assets.  Example, QCOM is investing in integrating NFC into chipsets. Should this be owned by firethorn? or should just the software that runs on the chipset?
  • Go global. The only alarm bell on Rocco is that he is lacks much international experience. Most of the innovation in mobile (payment) is taking place outside of the US. He needs a solid global team that can ensure that Atlanta prioritizes the global need.

– All the best Rocco

Obopay and Firethorn

Spoke to most of the top 5 US banks this week. Neither Obopay nor Firethorn will have any traction at the top US banks.

2 March 2010

Related posts

Spoke to most of the top 5 US banks this week. Interesting to note that Firethorn is out of all of them.. even in the model where Firethorn paid one of the majors $1M to take the application and integrate it. As of the latest QCOM 10-Q we can now see that total Firethorn revenue was $3M for the 2009 YEAR!  Wow.. no wonder Len lost his head for buying this thing and making it a separate division.

QCOM and Firethorn have a new product planned:  SWAGG (www.swagg.com). Good luck trying to figure out what this thing is.. could this be associated with Visa/ATT? (Youtube here). There seems to be a pre-paid debit card associated with it (from Dr. Jacobs CES presentation). Hey QCOM is one of my favorite companies… the people there are absolutely brilliant. But the Firethorn team is adopted.. and therefore the  genes do not extend here. They need a top exec to drive this thing.

On another note, Obopay showed up to at least one of the top 3 banks last month (BankX) touting its mobile payment solution. Undoubtedly with “millions” of subscribers (actual estimated at less then 20k). Always interesting to see spin here, they also reportedly told BankX that Citi’s departure was only temporary. Other banks should ask them to get specific.. very specific.. (probably not the US and there is no commitment on use).

From compete.com (Hard to spin facts..8,000 unique visits last month .. estimate only 20% use the service)

The “big secret” in mobile payments is that there aren’t any… (with very few exceptions). Those exceptions usually deliver “payments” as part of an existing value proposition (see  MNOs will rule in Emerging Markets). Banks know that changing consumer behavior is a 20 year effort. Card based payment schemes have particularly high hurdles in emerging markets due to interchange rates and rules that are ill suited for low value payments by unbanked. Toward this end countries such as India are contemplating the development of new domestic payment networks.

Thought for the day

RBIs Payments Vision 2012

Firethorn is dead

October 2009

Ok not yet.. but this is the obituary precursor.

Firethorn Quick View

  • Acquired by Qualcomm for $210 in Nov 2007.
  • Estimated Revenue of $4-8M through MNO fees and bank licenses ($500k-$1M). Qualcomm does not seperate revenue from this unit, nor is it mentioned in filings (http://www.qualcomm.com/investor/index.html). (Mar 2010 update. QCOM did separate earnings, see related post here)
  • Current customers: Wachovia, Regions, SunTrust, Citi Card and now US Bank
  • Wachovia is pulling out of $1M arrangement
  • JPMC is pulling out

When I was at Gartner Group, I sat down with an “anonymous” analyst and he said let’s think of some catchy titles for a new analyst brief. I asked “what is the subject”? He said “let’s decide that after we define the title that everyone wants to read”. It was then that I decided to leave Gartner, realizing it kept more to its journalism roots (as a prior division of McGraw Hill) then I cared to be associated with.

But alas I regress, growing ever more frustrated by MNO and bank attempts to “mobilize” financial services. Firethorn was a mess from the start. Having been at Wachovia (but never party to Firethorn selection) I can tell you that Firethorn’s banks “wanted to do something in mobile”, without much of a business plan behind it. The lack of a business plan is something that not only challenges the Twitters of the world, it also challenges big organizations. In either case a business plan must be addressed or the initiative will atrophy.. such are the vagaries of life… with perhaps the exception of centralized state planning (thank God for capitalism). The cards were stacked against Firethorn:

  1. Firethorn Banks had no “mobile” business plan.. when there is no plan, there is no executive support (because there is no revenue)
  2. Active customers are less then 10k per bank, Firethorn’s $1M price tag was hard for Wachovia to justify. Firethorn is actually paying other (card) banks to use the service..
  3. Fat clients on mobile phones are a failure (more below).
  4. Telecos stopped blocking access to http traffic (bank mobile sites)
  5. Consumers don’t perceive value (browser based access is faster).

BAC, JPM and WFC have solid strategies for mobile in support of their business. Distribution is a key facit of any business and it is never acceptable to create a new channel for sales/service without understanding of how it impacts products, customers and costs to serve. From a Bank CEO perspective, business leadership is required in distribution… don’t let the techies or “internet teams” make distribution decisions absent of business involvement. Firethorn’s current bank customers should have been more thoughtful in their decisions. Giving an MNO “control” over your content is not acceptable. Banks must push strategies that support their ownership of data, control over consumer (including authentication), brand and service experience/cost (quality).

My sources tell me that Wachovia has stopped new enrollments and is sunsetting the app immediately. Existing clients will be notified in next few months. The application never took off w/ Citi Card customers. (Poor US Bank.. they just went live with Firethorn last month).

Firethorn was acquired by Qualcomm for $210 in Nov 2007. Current customers: Wachovia, Regions, SunTrust and now US Bank (blind following the blind). I project Firethorn revenue as $8M from both direct sales to banks and MNO service fees. Revenue growth is challenged by issues above. Expect to see Qualcomm refocus Firethorn in NFC payments space, and align with companies like Vivotech. This is consistent w/ 3Q09 guidance in QCOM investor call




Citi Card

(side note) Globally mobile banking fat client apps have been a resounding failure. In my previous life at Citi 6 of 6 fat client initiatives have failed. Take a look at the Citi iPhone app.. guess how many people use it? What do I recommend? Low cost…. with no change in consumer “behavior” or support requirements. In the USA.. Create a slimmed down style sheet(s) that fit the mobile browsers. BAC, Wachovia, and Wells to a terrific job here. Most other markets SMS is the way to go. Simplicity is the key to mobile…. My favorite “mobile banking” vendor outside of US is Monitise .. just reuse your ATM transactions and tie to a service (Overview here)