The Cost of Cash Blog

NICHE

Founded in 2008 by Rodger Desai and Mike Brody, Payfone’s core business is to facilitate online purchases with the use of cellphones. The company relies on the usage of the SS7 inter-carrier roaming network to create mobile identities that make mobile payments more seamless. Like Boku and Zong, Payfone offers a payment solution based on the bill-to-mobile model. However, in addition, the New York based company offers additional services to their clientele of banks, credit card issuers and MNOs through a white-label model.

The company’s current product line up consists of Direct Carrier Billing, 1-Touch Checkout, and Mobile Authentication. The first offering is very similar to BOKU and Zong, and provides payment services to online merchants, allowing customers to pay with their phone numbers and get billed at the end of the month. Rather than using Premium SMS for direct-to-mobile billing, Payfone sends payment information directly over the SS7 network through a loose partnership companies like Roamware.

Payfone’s second product, 1-Touch checkout, essentially provides merchants with a personalized payment app, similar to Dwolla, allowing consumers to pay from their phones as long as they have a linked credit card or bank account. Payfone’s last product, Mobile Authentication is not a payment service, but helps provide authentication services to other mobile services that may require identification. 1-Touch Checkout and Mobile Authentication service, like Direct Carrier Billing, all leverage the SS7 network to gain a handset’s identification attributes.

CEME Presents: Payfone, part of the ABCs of Payments Series. CC-BY-NC

NETWORK SPECIFICS

SS7 is the inter-carrier roaming network that allows cell phone subscribers to use outside networks; because SS7 was designed specifically with internetwork communication and billing in mind, it offers a slew of benefits in the mobile payments realm. Premium SMS based payments are inefficient and costly for MNO’s to implement; since PSMS was invented for sending ringtones rather than sending payments, purchases made this way have high transaction failure rates, long settlement periods, and high exposure to charge-backs and fraud. These lead to transaction costs as high as 40% (explained more in-depth in BOKU page).

Payments through Payfone do not have the same problems. Using the SS7 network, the company is able to record more information about each transaction, including the location, device identification number and SIM card. This way, if a mobile number is used to make a purchase from a different phone or location than is usual, Payfone can flag the transaction. This lowers the risk of fraud and charge-backs, bringing down transaction costs for their bill-to-mobile service. Additionally, the added layer of security facilitates a more seamless payment experience:

With Direct Carrier Billing, customers do not need to send and receive SMS confirmation codes for each transaction. Once a customer has authenticated a mobile device with a merchant, future purchases can be completed with a single click.

With 1-Touch Checkout, a consumer registers once to Payfone through their mobile banking app. Now, if they make a purchase at any merchant signed up with “1-Touch Checkout”, their billing and shipping information is automatically linked to their mobile phone identity; all they have to do is choose what to buy, click checkout, then confirm. Payment information is then relayed to the merchant, who then processes the credit card information normally.

Though Payfone uses the SS7 network, the company does not own the “keys” to the network. SS7 is owned by the MNOs and managed by companies like Roamware, which use the protocol to trace cellphone users and ensure that they have a connection to their home network. Payfone simply uses this existing infrastructure to create mobile identities that facilitate payments.

BUSINESS MODEL

Payfone licenses its payment solutions to merchants, payment companies and mobile networks. Whereas BOKU and Zong companies generate money on a per-transaction basis, Payfone has embraced the white-label pay for service model. It partners with mobile service providers like Verizon or credit card companies like American Express, and does most of its work behind the scenes. The Verizon partnership, for instance, allows Verizon customers to make bill-to-mobile payments in the way mentioned above while also receiving the perks of smart payment routing through the SS7 network and added security. Through the American Express partnership, Payfone will help operate payment transactions through AmEx’s “Serve” program, allowing users to pay for products with only a mobile phone number.

These differences have allowed Payfone to branch out from serving only digital goods merchants; they have now reached out to a broad array of companies including online merchandisers, restaurants, retailers, hotels, and travel agencies.

FINANCIALS

To date, Payfone has a total of $36 million invested from private equity. $6 million of this came in their venture capital round in 2010. They raised an additional $11 million and $19 million in August 2010 and April 2011, respectively. Their key strength seems to be their wait-and-see approach, finding out what works, then providing the services as an intermediary rather than appealing directly to the consumer. Recently, they claimed to have over 400,000 merchants on board, but these may include partnerships formed by Verizon and American Express.

NICHE

BOKU and ZONG are new online payments companies that facilitate payments of virtual goods though mobile phone bills. Their primary clients are online businesses that sell virtual goods, which they connect to mobile network operators that facilitate the payments.

Boku was launched in 2009 as a merger between Paymo and Mobillcash.  The company allows merchants to vend their products without forcing consumers to fill out a long credit card form.  Instead, by partnering with Boku, their customers pay by simply entering their mobile phone number and get charged via phone bill at the end of the month. Boku CEO Mark Britto has been expanding the company by reaching out primarily to mobile network operators in other countries. Today, the company works with over 260 mobile network operators across 67 different countries. It has more than 110 employees.

Zong is nearly identical to Boku. Another “bill-to-mobile” company that deals with virtual goods, Zong possesses essentially the same revenue model but a slightly different way of paying. In 2011, Zong was acquired by eBay and currently acts as a service of PayPal. Today, the service is in 30 countries and works with over 120 carriers.

In addition to Boku and Zong, a myriad of other similar bill-to-mobile payments companies exist: For instance, Mopay, BilltoMobile, PayOne, Fortumo and SmsCoin. Because of this quickly filling niche, both companies have begun looking for ways to expand to physical goods.

CEME Presents: Boku and Zong, part of the ABCs of Payments Series. CC-BY-NC

BUSINESS MODEL

Boku, as well as its competitor Zong, currently only deal with sales of virtual goods – for example, music, video games, or items within video games. The reason for this is because MNOs charge exorbitantly high rates, ranging from 30%-40% per transaction, when an item is charged to a consumer’s monthly phone bill. These rates are high for several reasons. First of all, the payment infrastructure that currently exists for MNOs is old and not well suited for this billing function, making it expensive for phone companies to use (more on Premium SMS below). Next, purchasing an item through Boku or Zong essentially extends free credit to the purchaser until their next bill. Since this is risky for MNOs, transaction fees are necessarily high.

These huge fees make selling physical goods unprofitable given the margins. However, since something like gold pieces in a virtual economy cost nothing to make in the real world, merchants can take the 30-40% hit as long as ease of processing leads to higher sales. Often times it does…online merchants who start using Boku or Zong report higher “conversion rates” (the proportion of website visitors that actually end up making purchases) than before. This is evidence that consumers don’t want to pull out their credit card and type down all their information for just a small impulse buy.

Using Boku, all consumers have to do is pay by typing down their mobile phone number instead of their credit card number. Boku then sends a text message to their phone asking them to confirm. Once they do, by texting “Y” back, the payment goes through. With Zong, a similarly simple process exists. A consumer buys something by entering their mobile phone number and then receives a text with a confirmation code. They then enter this code back into the computer, completing the payment.

NETWORK SPECIFICS

Since Boku launched, the transaction fees have been steadily dropping, from the 30-40% indicated earlier to just under 10% today.

One of the reasons why transaction fees have been decreasing is because of the gradual switch from Premium SMS billing to Direct Operator Billing. PSMS is a decade old technology that came into popularity with purchasable ringtones. With PSMS, buyers could download ringtones or other services from a content provider by sending a text to a special SMS number, called a short code, and then be billed by receiving a higher than normal charge on that SMS. Because this process tends to be needlessly lengthy and cumbersome (i.e. the maintenance of short code numbers, and involvement of unnecessary parties) payment companies have been switching to a process where content providers can simply bill the mobile company directly when a purchase is made.

Of the 10% transaction fee, mobile companies keep anywhere from 5-45% and pay Boku the remaining balance as the service fee.

VALUE PROPOSITION

There are several reasons why both merchants and consumers might find Boku useful. First of all, no registration is ever required for the service. In fact, users don’t even need a bank or credit card account to use the service. Merchants, despite the high transaction costs, benefit from Boku if it facilitates impulse buys and increases their sales. Several reports have indicated that merchants see higher conversion rates with “bill-to-mobile” services than with existing payment methods.

Cell phone companies benefit as well, since it allows them another entrée into mobile payments markets. Although mobile carriers may decide to go the way of ISIS, Boku and Zong are both advertised to carriers as turnkey operations – essentially all MNOs have to do is agree to the partnership, and the payment companies will handle the rest. For this reason, carrier relationships have been essentially trivial to obtain; both Boku and Zong have partnerships with all the largest carriers in the U.S., Canada, and essentially all the other countries they operate in.

Boku has begun developing some additional services for the merchant. Recently they rolled out something called Boku 1-Tap. To be clear, this is NOT the same as NFC’s “one tap”. Rather, it allows merchants to initiate a transaction by making a call to Boku. The purchase information is then updated on the customer’s phone and all they have to do is “tap” a button to finalize the transaction. This is one of the ways Boku has started to branch out to more brick and mortar stores.

The service has not neglected the possibility of NFC payments either; their service, Boku Accounts, essentially pairs the bill-to-mobile payment structure with NFC technology, allowing consumers to pay at NFC terminals by tapping their phones. They envision allowing users to add NFC access through a SD card or through a special NFC sticker.

WEAKNESSES

Even though Boku and Zong have enormous global reach, they still suffer from the fact that their target market is limited to buyers and sellers of virtual goods. Whether they will be able to break into physical goods by lowering transaction margins even further remains to be seen. The companies will also have to devise a way to mitigate the risk that they and MNOs face by extending credit to their mobile users.

#6 in the Series ABCs of Payments. The ABCs of Payments will examine a new company or innovation in mobile payments each week.

NICHE

Google Wallet is a smart phone app released by Google in September 2011. Very similar to ISIS, Google Wallet hopes to help consumers by consolidating the contents of their wallets (credit cards, debit cards and gift cards) into their phones, adding convenience and reducing clutter.  Like ISIS, Google Wallet is installed as an app that takes advantage of NFC technology, allowing consumers to pay by simply tapping their phones on a terminal. Although technically NFC is capable of processing peer to peer transactions (for example, by bumping phones), neither Google nor its main competitor have pursued that market yet.

BUSINESS MODEL

One difference between Google Wallet and ISIS is in the revenue model. Whereas ISIS has aspirations of charging major credit card networks to use its ISIS system through direct fees or taking a portion of interchange, Google Wallet plans to make money by selling targeted advertisements. However, since Google Wallet and ISIS are both in early stages and currently focused on acquiring market share, no definite revenue model has been adopted yet – some reports speculate that Google Wallet may adopt a model more based on transaction fees, and others claim that they will use their relationship with Bancorp (see below) to extract an interchange fee.

CEME Presents: Google Wallet, part of the ABCs of Payments Series. CC-BY-NC

To truly understand the competitive dynamic between Google Wallet and ISIS, however – and to understand what impact this has on the future of NFC and potential revenue models – it is important to discuss the technology a bit further. As discussed in last week’s blog, NFC is simply a new hardware that allows two electronic devices to communicate – it is comparable to something like Bluetooth or RFID. Devices using NFC communicate to one another using a process called inductive coupling; basically, one device passes electricity through a metallic coil (basically an antenna) creating an electromagnetic field. If this field engages another metallic coil, a current is induced within the first coil. This current can then be translated into data.

What’s important to remember at this point is that NFC has many practical applications outside of simply payments. For instance, imagine you had an electronic business card saved on your phone. With NFC, you could transmit your business card to another NFC enabled phone by simply holding the phones next to each other, and then running an app to activate the transmission. Another application of the technology involves NFC tags. These tags are tiny stickers that store a small amount of information that can be read by NFC devices. So for example, an advertiser might make a promotional poster for a movie with an embedded tag. Interested patrons might then hover their smartphones over the poster and be automatically directed to a website showing the movie’s trailer. NFC tags can also be programmed and reprogrammed for personal use. For instance, an individual might program a tag so that it automatically sets his phone to silent mode whenever it is read.

WHO GETS TO SEE THE SE?

Making payments via NFC requires one additional piece of hardware, called the secure element (SE).  A secure element is a tiny microcontroller essential  for industry-standard payment protocols that typically comes embedded with the NFC antenna. No payments can be processed without it on any of the major networks (MasterCard, Visa, American Express, Discover). Its function is to store the encrypted payment card information that gets transmitted to a merchant’s NFC device – essentially, think of it as the virtual replacement to the magnetic strip on a credit card. Secure elements, as their name implies, are secure – multiple levels of protection and encryption exist within the microcontroller to prevent extraction and duplication of the payment card data inside. Additionally, SEs are separate from a phone’s operating system and hardware – only authorized programs like Google Wallet or ISIS are allowed to access the secure element, and only enough to initiate the transaction.

Secure elements are truly the place where the NFC battle is currently being fought. Partially, this is because secure elements are limited in the amount of data they can store – the original embedded SEs found on Nexus S handsets only have a capacity of 72kb of information. With such limited space, it becomes clear that whoever controls the Secure Element controls the available space within. ISIS hopes it can leverage its control over this virtual space to procure revenues [1]. Google Wallet originally started with a similar model, but in 2012 dropped issuer-specific payment credentials in favor of a single, prepaid account issued by Bancorp using the MasterCard network. This single pre-paid account draws funds as needed from customers’ existing credit cards, which are stored remotely on encrypted Google servers. This allows for a multitude of different credit cards to work with Google Wallet without Google having to negotiate individually with the over 8,000 issuers in the U.S.

NFC devices, and therefore secure elements, are typically placed in one of three places: the SIM card, embedded in the phone and on a removable SD card. The most widely used option today is the embedded solution, where NFC antennas and secure elements are baked onto the actual hardware of the smartphone. This also represents a middle ground solution between Google Wallet, who generally wants SEs to be open, and ISIS, who wants to keep the secure elements proprietary.

SECURE ELEMENTS & COMPETITION

In December of 2012, Verizon blocked the Google Wallet app from working on their customers phones. Users received an error message that stated “Unfortunately, Google Wallet is not available on your device or mobile network”. Google has since filed a complaint with the FCC and a formal decision has not yet been made.  Even without openly blocking Google Wallet, mobile carriers can still dissuade users from using the service, for instance, by not offering it on their Android app stores. Today, Google Wallet works officially on all NFC enabled Sprint phones, some US Cellular phones and two Virgin Mobile phones:

• Samsung Nexus S 4G on Sprint
• Samsung Galaxy Nexus on Sprint
• Samsung Galaxy Nexus GSM/HSPA+
• Samsung Galaxy Victory 4G LTE on Sprint and Virgin Mobile
• Samsung Galaxy SIII on Sprint, MetroPCS, and US Cellular
• Samsung Galaxy Axiom on US Cellular
• LG Viper™ 4G LTE on Sprint
• LG Optimus Elite™ on Sprint and Virgin Mobile
• LG Nexus 4 GSM/HSPA+ (available for purchase on Google Play)
• HTC EVO 4G LTE on Sprint

End users can sometimes, but not always, circumvent carrier controls by gaining root access to the phone operating system. Google Wallet unofficially works on AT&T Android phones and some T-Mobile Android phones, but not on any Verizon phone. Tellingly, Sprint has not deigned to block ISIS.

Despite all the legal battles, Google Wallet has an available “nuclear option” if it is not allowed to use the hardware secure elements on Verizon phones. Though GlobalPlatform – the not-for-profit that establishes protocols and guidelines for making NFC payments – has determined that secure elements are necessary for financial security, Google Wallet could simply use virtual secure elements stored on the cloud. A U.S. startup called SimplyTapp has been developing this approach since 2005, and it would completely divorce sensitive payment information from any hardware secure element on the phone. Would Google ever pursue this option? This is not clear – though they don’t currently have the formal support of AT&T, T-Mobile or Verizon, their carrier partner Sprint is still the third largest MNO in America. Opening up secure elements to the cloud would open up a Pandora’s Box – allowing competitors like Square or PayPal to flood the market for NFC apps, now no barrier exist to prevent them from accessing NFC.

FINANCIAL DETAILS

Google Wallet is in direct collaboration with Citi as the issuing bank, MasterCard as the payment network, and Sprint as the mobile carrier service. First Data acts as the card processor and handles authorizations. Additionally, Google Wallet has a licensing arrangement with Visa for their PayWave system. In 2012, Google Wallet expanded service to accept all major credit cards and include some Virgin Mobile Phones.

Google Wallet is accepted at any location which accepts MasterCard PayPass and Visa PayWave. 120,000 merchants nationwide accepted Google Wallet as of May 2011, and over 300,000 merchants accept it today.

NETWORK DETAILS

Also unlike ISIS, Google Wallet was designed as an open platform. Similar to Dwolla, the hope is that eventual developers can take the core API and cater it to individualized needs while still using the Google Wallet platform for NFC payments. However, this open platform idea is similarly developing and subject to change as no public API has yet been circulated.

WEAKNESSES

Google Wallet and ISIS both require collaboration between multiple parties to work effectively: credit card companies, mobile phone manufacturers, networks carriers, merchants and consumers. While Google Wallet has taken a versatile approach towards credit card companies, by essentially partnering with all of them, ISIS has the advantage in terms of phones themselves. In other words, consumers that want to use Google Wallet are restricted to a few models of Sprint and Virgin Mobile phones. ISIS users, on the other hand will have a larger selection of hardware they can turn to for NFC capability. This may force Google’s hand into adopting a revenue sharing model with carriers to stay active.

FINER POINTS

Can I use NFC to send money to friends (P2P)?

Currently, all the hardware exists for this to happen and the only factor missing is an app or platform that would facilitate this transaction. Additionally, issuing banks would have to be in agreement about how the money gets transferred and their share in the transaction. There have been no attempts of creating a platform for peer-to-peer from Google Wallet or ISIS.

Why not let the telecoms distribute NFC on their SIM cards?

For mobile network operators, the obvious choice would be to store secure elements on the SIM card. This would give them most proprietary control over the use of the secure element use and allow their customers to maintain their payment cards on their SIM when upgrading their handsets. However, because of difficulties in adapting current NFC technology to SIM cards, this option is not widespread.

Why not let individuals buy their own NFC-enabled SD cards?

Storing NFC technology on a SD card would be the most “open” option available and allow backwards compatibility with old smartphones. However, this option has its own difficulties – for instance, it might be a hassle for consumers to seek out the new technology and also requires them to have an open slot. Additionally, who would pay for the SD card; the consumer or the issuing bank? Because of these problems, the NFC on SD card solution has not widely been used either.

Are there other options for enabling NFC on one’s phone?

In January 2013, the company Incipio announced that they would release the “CashWRAP iPhone case”. In addition to protecting the iPhone 4/4s from dings and dents, the CashWRAP would allow purchasers to make NFC transactions using the ISIS platform. The case will retail at a price between $59 and $69 and will be available Spring 2013.

[1] As explained in last week’s blog, ISIS hopes to rent out this virtual space  on the Secure Element – at the cost of $5 per customer per year – to allow issuing banks to store their payment cards on these microcontrollers.

NICHE

ISIS is a joint venture between wireless carriers AT&T Mobility, T-Mobile USA and Verizon Wireless. Started in 2010, the collaboration hopes to expand the use of NFC technology and spur on contactless payments. From a consumer’s point of view, ISIS is simply a smartphone app that allows users to store credit and debit card information. This app then works in tandem with special hardware installed on the phone, allowing users to pay merchants by simply tapping their device on an NFC enabled terminal. The back-end, however, is much more complicated and requires a more thorough explanation of NFC which will be given below as well as in next week’s post.

CEME Presents: ISIS, part of the ABCs of Payments Series. CC-BY-NC

Today, acquirers are pushing merchants to adopt NFC hardware at all point of sale terminals from 2015 on. ISIS is designed to bring existing credit, debit and prepaid cards forward into the NFC era, allowing customers to use their phones as their digital wallets. What is ISIS’s specific role in NFC? Like its closest competitor GoogleWallet, ISIS a platform for making NFC payments. These platforms can be thought of as the software that allows the NFC hardware to operate. For a transaction to take place between customer and merchant, both must have working NFC hardware as well as software platforms that can communicate with one another. Analogously, two people might both have computers, but if one is using Google Chat and the other Skype, they will not be able to communicate to each other. ISIS, in this case, is like Google Chat or Skype – and their goal, then, is to make sure that as many NFC payments as possible communicate through ISIS “software”. If the joint venture can manage this, they will have many ways of monetizing their role in the NFC transaction when it comes time to finally sit down and determine a specific revenue model. It is for this reason that GoogleWallet and ISIS have been waging a virtual war with the expansion of their platforms; both have been struggling against the other to gain market share as fast as possible, mostly through competing for partnerships with businesses, banks, credit cards, and merchant service providers. Actual use of NFC (as well as the Google Wallet and ISIS platforms) still remains limited – only about 3% of merchants with credit card terminals also accept contactless payments; less than 9% of consumers in America have an NFC device. Today, ISIS is accepted by merchants in Salt Lake City Utah, and Austin Texas, and has around 200 employees.

BUSINESS MODEL

Originally, the goal of ISIS was to displace credit card companies completely – if consumers were more interested in paying for transactions by waving a phone than swiping a card, they could maintain payment accounts directly with carriers rather than deal with credit card companies. However, this ambition was quickly scaled back prior to launch because of merchant demands. ISIS eventually partnered with Discover and Barclaycard upon launch, and on July 2011, announced additional partnerships with Visa, Mastercard and American Express.

ISIS has been slow to launch – while GoogleWallet has been used at NFC terminals for a little over a year, ISIS test ran its first markets, Austin, TX and Salt Lake City, UT in November of 2012. Still-nascent ISIS is focused on market share rather than profits. Four revenue sources are possible paths to profitability: acquiring fees, consumer data profiles, loyalty marketing, and rental fees on POS hardware. The joint venture’s most likely model is to have credit cards companies to use their platform, thereby extracting part of the interchange fees. However, alternate ideas have been proposed. For instance, TMCNet reports that ISIS might ditch the per-transaction fee model entirely and generate revenues from data mining and data sharing, similar to Google Wallet. Payments consulting firm Luciano Group mentioned that loyalty marketing could be opened up as an alternative revenue stream. Finally, NFC Times noted that ISIS will be using a rental model, charging credit card issuers about $5 per consumer per year in order to use their platform.

VALUE PROPOSITION

For consumers, using the ISIS app and paying at a contactless terminal offers the following three perks. First, users have the added convenience of being able to tap their phones over an NFC enabled device rather than swiping. Next, since ISIS allows users to store multiple cards and loyalty cards on their phone, this can reduce physical clutter. Lastly, users have easier access to discounts and coupons now that they are digital, saving them money.

Merchants get very few direct benefits from adopting the new technology. Primarily, NFC improves the security and convenience of payment card transactions. ISIS also allows merchants to send coupons to their customers electronically. However, the costs may outweigh the benefits; merchants would have to upgrade their existing credit card terminals to accept NFC payments, and since this system is built completely on top of the existing credit card systems, interchange rates would at best stay the same.

Regardless of merchant input, NFC will likely be implemented throughout most of America by 2015. This is because VeriFone, the leading point of sale terminal producer, will only offer NFC compliant technology from now on. These terminals will have the ability to accept any customer side NFC platform. Furthermore, that credit card companies have changed their policies to stop protecting merchants from fraud if they are using the old terminals will provide additional impetus to upgrade to contactless payment quickly.

NETWORK SPECIFICS

NFC is an acronym for near field communication; it is a new technology that allows smartphones and other devices to communicate to each other by establishing close proximity radio relays. It is very similar to, and in fact some would say a direct evolution from, RFID. Whereas RFID (a technology commonly used by mass transit lines on metro cards) allows for only one-way communication, NFC allows two enabled devices to communicate to each other, exchanging information back and forth. This two-way communication allows for advancements such as mobile wallets and peer to peer transactions.

NFC technology can be deployed in phones in one of three ways: in the handset hardware, on the SIM card, and on the removable SD flash memory card. Mobile network operators (MNO) prefer to have the NFC on the SIM card, so that it becomes linked to the user’s profile on the telecom network. SD cards offer the greatest backward compatibility, since it would allow any smartphone with an SD slot to be NFC compliant.

Presently, it seems that MNOs have been losing the battle, as most NFC chips are embedded within the phone itself. The company chosen to partner with ISIS to actually create the NFC software platform is C-Sam.

FINANCIAL DETAILS

• On August 2011, the original MNOs promise to invest over $100 million.
• Today, ISIS serves over 1,500 merchants, located in Salt Lake City and Austin.
• A firm revenue model is still to be established.

#4 in the Series ABCs of Payments. The ABCs of Payments will examine a new company or innovation in mobile payments each week.