Vendor-driven mobile payments


Square, PayPal Here, Fiserv and Groupon process payments through a retailer's phone or tablet. The user doesn't need to install anything to use these products. In contrast, Isis, Google Wallet (and likely whatever app we see from MCX) require the user to invest in an app and/or special device  to make mobile payments. In this sense, these vendor-driven initiatives like Square already have an upper hand, which makes the competition fiercer.

But it's not an easy market. In December, VeriFone Systems pulled its SAIL mobile payment processing platform, only seven months after its launch. Verifone stated that the payment processing ecosystem was dominated by Square and PayPal, making the market "fundamentally unprofitable."

"Our experience through 2012 with tens of thousands of these micro-merchants tells us that the standalone economics of micro-merchant acquiring is fundamentally unprofitable and destined to be a negative gross margin business," said Verifone CEO Doug Bergeron. "Customer acquisition costs, either through search engines or TV advertising, cannot and will never justify the razor-thin margins produced by merchants with infrequent volumes and extremely high attrition."

Square or PayPal, which will make the cut?



Founded in 2009, Square is one of the older vendor-driven mobile payment initiatives. Like its competitors, Square issues a dongle that is attachable to a smartphone or tablet and allows the device to accept and process mobile payments. Square currently charges businesses $275 per month or 2.75 percent per transaction. In November, Square announced it was processing $10 billion in annual payments, up $2 billion from two months prior. These numbers don't include the transactions processed at Starbucks, which now uses Square in 7,000 of its stores nationwide. In October, Square expanded its services to Canada.

Square's chances of survival are good. The New York Times reported that insiders valued the company at $3.25 billion in November, and its numbers have only grown since then.

Square's main competition is eBay-owned PayPal Here. PayPal already touts a userbase of 104 million active users worldwide and a firm standing in mobile with eBay's multitude of mobile apps. Its other edge in terms of acquiring new customers is its lower fee. PayPal Here charges vendors a flat rate of 2.7 percent per transaction, a savings of 0.5 percent over Square. The rate drops to 1.7 percent for businesses using a PayPal debit card. In October PayPal announced that it expected to process $10 billion in mobile payments in 2012 across all of its mobile efforts.

PayPal Here

PayPal Here

Both Square and PayPal are currently processing similar levels of payments but neither has released final numbers for 2012. PayPal Here has a larger international presence and is available in Canada, Japan, Hong Kong and Australia. Square, however, has its partnership with Starbucks, which invested $25 million in the startup. Both of these contenders are strong and are likely to continue to grow in 2013, given their large customer bases, minimal hardware investments and open ecosystem. Both use dongles to scan credit and debit cards, and neither is dependent on a user having a certain model of phone or carrier.

Players with scale will dominate

The prospects for the smaller players, however, aren't as good. Last year daily deals company Groupon introduced GrouponPayments, a similar service for businesses that have run Groupon deals. GrouponPayments has smaller fees, 1.8 percent plus $0.15 of each MasterCard, Visa and Discover transaction, and 3 percent/$0.15 of each American Express transaction, but is much more limited in scope. Merchants that aren't running a deal with Groupon can still use GrouponPayments, however, they must pay a 2.2 percent processing fee with a $0.15 flat fee tacked on.



"Groupon is one that will not make the cut. The one that will [survive] has to understand the problems of the user," explained Holland. "I think that unless there is a value added other than the capture of card data you aren't going to make money in this space, unless you use it as migrating people to your network."

Mobile currently drives one-third of Groupon's revenue, and GrouponPayments may help the company widen its mobile presence.

"Ultimately consumers are going to choose what works best for them in the situation they find themselves in. It's very limiting to have one type of technology," explained Anuj Nayar, senior director of communications for PayPal, in an interview with FierceMobileContent.

Nayar noted that one of the advantages that PayPal has is that its system is platform and device agnostic. "The wallet lives in the cloud not on the device," he said. He added that the company would be open to working with additional partners.

Square confirmed with FierceMobileContent that its partnership with Starbucks was just the beginning and that more partnerships will follow. The Square spokesperson added that Square will increase its international presence in 2013.

Groupon did not respond to Fierce's request for comment. The company expanded GrouponPayments to Android-enabled devices this month, which could help it gain traction comparable to Square or PayPal. But, given the large footprint that those two companies have already covered, it is more likely that it will suffer the same fate as VeriFone Systems.