Mobile Merchant Payments: The Next Battleground?

Is mobile merchant payments the next major battleground for digital financial services (DFS) providers? As the debate rages on in the United States over whether Apple Pay will change everything or flop like countless mobile payments efforts before it, merchant payments have emerged as an increasingly hot topic in developing countries as well. And whereas the American products have to contend with an already well-entrenched electronic retail payment instrument—cards—mobile wallets in developing markets have the potential for becoming the first one to be adopted on large scale.

Providers of digital financial services have any number of reasons to want to pursue mobile payments. Aside from a general desire to add use cases to their products in order to strengthen customer engagement and encourage users to keep their money electronic rather than cash out, perhaps chief among them is the realization that person-to-person (P2P) and bill pay will for most customers only ever account for a few transactions per month and a tiny fraction of cash use. The real volumes are in everyday payments—notably retail and transport payments—which are nearly all conducted in cash.

Given the size of this market and the seeming inevitability that it will go electronic sooner or later, this presents an enticing opportunity—not least for MNOs looking to diversify away from a reliance on declining voice revenues. At the same time, reducing people’s use of cash would mean providers of digital financial services may finally be able to start scaling back the costly agent networks whose main purpose is being a bridge between physical and electronic money (though the other functions of these agents, e.g. over-the-counter transactions, may endure in some form).

Strong motivations notwithstanding, providers will still need to successfully manage significant challenges on both demand and supply sides in making this happen. Payments are a two-sided market: on one side, there are consumers who choose from a range of payment instruments; on the other, merchants who choose which payment instruments to accept. Neither half of the market can stand on its own. When a new type of instrument is introduced, success requires developing both sides in tandem and payment providers face a dilemma: without a large number of merchants that accept it, customers will not be interested in signing up; but without a large number of customers that want to pay with it, merchants will not be interested in accepting it (and certainly not if they have to pay for the privilege).

This challenge is familiar to most providers of digital financial services from establishing their agent networks, since the same principle applies. However, merchant payments are proving more challenging, since cash is harder to compete with when it comes to retail payments rather than the money transfer proposition that has been at the heart of virtually all early mobile wallet plays. In essence, cash in retail works pretty well for both customers and merchants. And while people familiar with digital payments can see a number of advantages over cash, neither merchants nor customers are going to be easy to convince about this: behavioral inertia is significant. As has been evidenced by years of attempts at Near Field Communications (NFC) enabled merchant payments in the United States, if there’s not a clear value proposition felt on both sides of the market then payment providers can huff and puff all they want—it won’t happen.

Thus in order to take off, mobile payments offerings need to not only be as good as cash, but decidedly better in at least one respect (and preferably more than one). It will also require savvy decisions by providers on merchant acquisition strategy, pricing models and how to incent both retailers and their customers to forego the coins in their pocket and reach for their phone instead. Both lessons from and implications for the existing agent networks will need to be better understood.

This blog series will start to explore many of these elements, examining the issues, reflecting on the main questions and providing some new evidence to give an overview of the state of the space.