Smartphones have not yet digested payments
Are smartphones about to swallow the payments business? Two events this week have given sharply contradictory answers.
The first was the $3.25bn valuation put on Square , a Silicon Valley payments start-up, by the company's latest round of fundraising. This represents a huge bet, given that Square is a business with annualised revenues of only about $200m that is battling with the giants of the banking, retail and mobile industries.
A very different message is given in the design of Apple's Passbook, launched on Wednesday. A new feature in the latest version of the iOS mobile operating system, Passbook has many of the features of what has come to be known as a 'digital wallet': you can use it to store virtual loyalty cards, discount coupons, gift cards, tickets â€“ many of the things, in fact, that clutter up physical wallets.
The main functionality missing from Apple's phone, however, is a way to make a payment. While Google plunged into this business some time ago with its own mobile payment service, Apple's bet is that consumers still prefer to pay with a card or hard cash.
In one sense, Apple and Square are not as far apart as they may seem. Both are aiming at the same outcome: helping merchants forge closer relationships with their customers, up to and including facilitating actual transactions. But, as always with new technologies that rely on sweeping changes in consumer behaviour before they can reach their full potential, getting the timing right is everything.
To see Square as purely a payments company would be a mistake. At the current rate, it is handling $8bn of payments a year â€“ not a bad start, although barely a pinprick in the greater scheme of things. It would be a foolhardy strategy to compete head-on against giants of the payments industry, which reap small margins on massive volumes of transactions. But the fact that Visa is a shareholder in Square is an indication that their businesses are complimentary, not competitive. Square pays a large slice of the fees it levies on payments over to the credit card companies.
In fact, payment is the wedge that Square is using to pry open a bigger market. It gets a foot in the door with the small merchants who are its main customers by making it easy to collect credit card payments, Its deeper appeal, though, rests on the data and analytical tools it gives them to understand their customers better. Its smartphone app also acts as a digital wallet, giving merchants a way to tie in customers through loyalty programmes, discounts and special offers.
Digital wallets, in fact, could eventually supply one of the main answers to the conundrum facing the internet and media industries as their users switch en masse to mobile: how to make money in a medium where traditional forms of advertising don't work?
Eventually, with a wealth of information about actual purchases, married to the data collected from its mobile app, Square may be in a position to direct highly targeted advertising and offers to its users.
Others see the same potential to use mobile payments as a way of creating closer relationships between merchants and consumers, all the way to stimulating transactions. Eventbrite, an online ticket marketplace, has added a payment system to let its customers make sales, creating a mobile box office to round out its service.
Apple's bet with Passbook, meanwhile, is that there is much that can be done with mobile apps to draw consumers and merchants closer to a transaction, but handling an actual payment is not yet part of the mix.
Technology standards are still in flux and surveys point to high levels of consumer concern about the privacy and security risks from making a payment simply by waving a smartphone.
There is also the payment industry's unavoidable chicken-and-egg problem: how to get customers to try out a payment system that most merchants have yet to adopt, and visa versa. This is the biggest single problem faced by Square, whose payment app is designed to let a consumer make a purchase in a store without even pulling out a phone. The company scored a coup last month when it secured a deal with â€“ and investment from â€“ Starbucks. But Starbucks will not be enabling the full Square payment experience in its stores.
Not that Apple is sitting on its hands. In an EasyPay experiment earlier this year, it began letting visitors to its stores buy by phone: first download an app, then point your iPhone's camera at the bar code and just walk out with your purchase. As with many other aspects of the retail business, the Apple Store could be the place to go for a real glimpse of the future.
Richard Waters is the FT's West Coast managing editor