Where is the power in the mobile payments ecosystem?

I am a member of the UK and Ireland affiliate to the IBM Academy of Technology.  We held our Autumn symposium in Birmingham a few weeks ago and I had the pleasure of hearing about Droplet and meeting one of their management team, David Roberts.

Droplet is a mobile payment system that allows individual to pay merchants using a very simple app, with their unique selling point appearing to be that no other infrastructure is required (no POS terminals, no card readers, …) and that neither the payer nor the recipient is charged for the service.   I’ll leave this aspect of their business model to one side for now as I’m not sure if the details have been publicly disclosed (and it’s not what motivated me to write this post in any case).  What interested me was that it ticks my “push rather than pull” button. I discussed why I like this model here and so I’m always interested in those who are implementing it for real.

Right now, they seem to be targetting local retailers (such as my favourite pizza delivery joint) but it made me wonder: what would it take for a system such as this to be adopted by a major retailer? What are the incentives and game-theoretic chains of logic that help us make sense of this question?

Imagine you’re a major retailer. What are your options?

  • You could build your own system – perhaps licensing technology from a startup such as Droplet – maybe integrating it with your loyalty card system.  But you immediately run into a problem: what incentive does any other retailer have to accept it? They’d surely be extremely wary of ceding control to a competitor. So we have to assume this approach would lead to an arms race, with all major retailers launching their own mobile payment systems. The costs would surely be prohibitive and consumers would surely rebel: would you really want to have to load (and configure and remember the PIN) for tens or hundreds of different apps?   In the ensuing shakeout, perhaps a couple of retailers gain dominance… but if you were CEO of a retailer, how much would you be willing to risk on a bet that you’d be one of the winners?  The odds are against you.
  • Alternatively, the retailer could make a bold statement and adopt a system provided by a neutral third party.  Perhaps a major grocer would simply announce that they will start accepting payments over Droplet or Zapp or in partnership with one of the card networks.  The problem here is: why would you gift an endorsement so valuable to an independent company?  You’d surely be tempted to negotiate a sweetheart deal, which would surely leak and you’d be back to square one: nobody else would want to support it.
  • A different approach might be simply to announce acceptance of multiple systems: let a thousands flowers bloom.  But now you have the problem of consumer confusion and staff training. And staff training will be bad enough with only one option. Indeed, I consider it the most significant inhibitor of a move from “pull” to “push” payments.

For these reasons, I’m increasingly convinced that the optimal response for most major retailers is simply to do nothing! Wait. See how the market plays out. Then be a fast follower.  But I’d love to hear somebody make an argument that says I’m wrong…