Loop: A Mobile Wallet Game Changer

Loop is an exciting new mobile wallet solution that has achieved near ubiquitous acceptance with more than 90% of POS terminals without any infrastructure change by the merchant, the acquirer, or the issuers. 

While other mobile wallet players are talking about NFC, EMV, barcodes, BLE and the cloud, Boston-based start-up Loop has invented an incredible mobile solution that intelligently communicates with the existing retail mag stripe reader interface today – without another plastic card and without the merchant needing to change anything!

Compared to the recently announced Coin solution that captured the hearts and more than 7M YouTube sets of eyes of consumers and the fintech world a few weeks ago (see Bank Marketing Strategy post on Coin), Loop has been amazingly under the payments 'next shiny object' radar during its funding process. There was a wave of fintech buzz in October, including several articles and a presentation at Money2020, but not much since.

In an exclusive interview with Will Graylin, CEO of LoopPay, Inc, he said, "Loop has been focused on product development and our soft launch which will take place in about 3 weeks. We did a small PR effort at the time of our Kickstarter campaign, but we did not want to blow a lot of hot air before we had our product ready for market and had happy users." He continued, "Many have overhyped their solution and have failed. We are more interested in the long run and are building solid a foundation for our future with solid partners."

Given that Loop is delivering a solution that automatically transforms virtually every existing POS terminal mag stripe reader into a contactless payment receiver, I don't expect Loop to be in the shadows much longer.

That's right, unlike other solutions that require merchant terminal conversion or a programmable card with limited security, memory, card or battery capacity, Loop integrates the highest level of Payment Card Industry (PCI) security and can store hundreds of payment, gift, loyalty, reward or ID cards into a smartphone.

To 'trick' the mag stripe reader into thinking a physical card is being swiped, the consumer will need one of several add on devices available from Loop to emulate the card swipe including a Fob (being sent to 2,000 pre-order customers and Kickstarter backers this month), smartphone charging cases (available for iPhone 5 and 5s in early 2014 and other devices shortly thereafter) and eventually wearable devices.

Once cards are 'swiped' into the LoopWallet app using the Square like device, the user can select the card they want to use at payments. While the process initially will use additional consumer hardware, ultimately, Loop would prefer that their Magnetic Secure Transmission (MST) technology be directly embedded into the mobile device itself, eliminating the need to carry any additional hardware.

Watch the video below and see if you agree with me that this is an ingenious new mobile payments innovation.

What is Loop?

Loop co-founders Will Graylin and George Wallner think they have the killer mobile wallet solution. Their invention, which they've dubbed Loop, allows consumers to use their iPhone or Android phone to buy virtually anything anywhere they'd normally use a debit/credit card. 

The best part? It works with the existing mag stripe swipe terminals that nearly all merchants use today, so merchants don't need to make any changes to accept Loop payments . This is a major milestone in the mobile payments race! The loop app can also provide timely insight (gift card balance, reward points, available balance) and can serve offers from merchants and card issuers.

Oversubscribed in initial Kickstarter fund raising efforts, Loop has just collected $10 million in Series A funding, setting the stage for Series B funding in early 2014 to will fuel future growth.

In my exclusive interview Graylin said, "We see Loop as the only contactless solution that has ubiquitous acceptance on day one." He continued, "Given that all other technologies require changes in the POS to have contactless mobile transactions, or require infrastructure or system changes by merchants, that puts Loop in a very good position to lead the way as the first wallet solution that works across merchants."

This is a major distinction to other mobile wallet solutions. Beyond mag stripe POS system readers, the only new POS interface to have achieved more than 10% acceptance across merchants is EMV, and that took 2 decades to reach 50% worldwide acceptance and is still not here in the U.S. And while EMV will come eventually, it will most likely continue to co-exist with magstripe readers for decades. 

Since the mag stripe will continue to be used by most debit card, gift card and loyalty card holders, Loop could be either a 'bridge' to a full mobile solution or 'an end solution'. According to Cherian Abraham, mobile commerce and payments lead at Experian Global Consulting, "As far as acceptance, Loop has fair winds. No longer is there a need to search for merchants who accept your choice of payment. And guessing by the state of EMV – even when it's been called a 'bridge solution' – Loop can expect a very long bridge."

Tomorrow's Transactions interview with Will Graylin, CEO of Loop by David Birch, Director at U.K. based Consult Hyperion available here.

How Does Loop Work?

Unlike most other mobile wallet solutions, Loop doesn't require a special dedicated transaction network. Instead, it mimics the magnetic transmission frequency usually held on a card's mag stripe, allowing it to be received by a traditional POS card reader. When the Fob device or MST enabled ChargeCase is held close to the reader (about 4 inches), the transaction occurs exactly the same when a card is swiped.

Loop Fob Delivery Package

Loop Fob in Colorful Carrier

Initially, Loop will only work with a $34 Fob device that comes in a variety of colors (shown above). With initial shipments occurring this month, the Fob can be replaced early next year with an MST enabled charging case for owners of an iPhone 5 or 5s. 

The Fob is a small audio jack device with a card reader to scan a consumer's cards. This Fob is compatible with both iOS (app available this month) and Android devices (app available in early 2014). Since the Fob also holds your payment information, it doesn't need to be connected to your phone to make payments. It pays using whatever card you selected as your default payment card. If you want to change the card, you can reconnect the Fob to the phone and select the alternative card you want to use.

When a consumer receives their introductory kit, they follow these simple steps:

1. Download the LoopWallet App
2. Simply swipe debit, credit, loyalty, IDs, membership and gift cards using the swiping Fob device provided (similar to a Square device)
3. Use the LoopWallet app to select the card you want to use
4. Place the Fob (or ChargeCase) near the POS card reader and hit 'transmit' on the screen or device to make purchases

Loop gives the consumer control over what to include in their LoopWallet. Load what cards you want and the LoopWallet app allows a consumer to organize and manage the cards as desired. A consumer can even store passwords within the application and take photos of the cards (unlockable with a pin).

The Loop ChargeCase (available in early 2014 for iPhone 5 and 5s) is a protective case that serves as both a transmission device as well as providing 60% more battery power similar to a Mophie battery case. A swiping device is included with the ChargeCase solution.

Loop Security

From initial LoopWallet set-up, to ordering the Fob or ChargingCase to initiation of a transaction, it is clear that security has been a top priority for LoopPay designers.

When ordering the device itself, security measures are in place to ensure that the person ordering the device can be authenticated. When I purchased the Loop FOB and ChargeCase (yeah, I did both), Loop provided security questions ranging from the last four digits of my social security number to previous address validation. This ensures that if someone stole my Fob, they would still need to have access to my name and password to access my LoopWallet.

In addition, when the transaction is taking place, the device must be less than 4 inches away from the mag stripe reader and the encrypted information only gets transmitted for a few seconds. No sensitive data is stored in Loop's servers and all card information is secured by a 4-digit pin (beyond what you need to access your phone).

In an exclusive interview with Damien Balsan, COO of LoppPay, Inc., he provide a list of security measures their team has put into place for enhanced security:

1. We are preventing cards from being used by anyone other than the owner himself/herself. The user has to register to LOOP Wallet thru a KYC Process and our server is authorizing any card loaded in the wallet. You could only enter cards with the users name.
2. Our server is a Level 1PCI certified server. It does not store Track Data. The card information is stored in a Global Platform Secure Element.
3. The LOOP experience is quite intuitive for a consumer: he/she loads all his cards one time whether payment cards or ID/Loyalty cards and he can chose the level of security he desires.

A great series of Loop usage and security FAQ's available here.

Potential Drawbacks

The two most likely drawbacks of Loop would probably be the cost ($34 for a Loop Fob and $99 for the ChargeCase) and the desire for more simplicity. There is also the issue of 'the other 10 percent' of places where Loop won't work.

Cost

Requiring consumers to invest in specialized hardware could be a significant obstacle to acceptance. While Coin may have been able to get people to invest in their card technology at $50 (early bird offer), there is no history on the potential mass appeal of a mobile payment device at any cost and certainly not at a cost of $99.

In response to this issue, Loop's Graylin told me, "Today, consumers pay $99 for a Mophie charge case. For the same price, we give them a mobile wallet that can be used at almost every store." He added, "Obviously, being able to claim 90%+ acceptance at current retail locations is a big plus, but it remains to be seen if consumers believe the cost offsets the current convenience afforded by carrying plastic."

He also added, "Just consider the benefit of being able to pay at a store the few times that you have forgotten your wallet. Many of our pilot users and testers remind us this all the time."

Simplicity

"In the payments space, Coin has almost an Apple-like simplicity to it, stated Deva Annamalai, SVP of marketing technology and data insights at Salt Lake City based Zions Bancorporation. "On the other hand, the Fob is a form factor that is almost a step back in time."

For any payments solution to stand the test of time with today's digital consumer, it will need to be easy to understand and simple to use on a daily basis. The iPhone 5 ChargeCase with integrated Loop technology is definitely a step in the right direction, but will need to be offered for other Android and Apple devices quickly for the solution to be embraced.

The 'Other 10%'

The fact that Loop works on approximately 92% of the POS systems in the country, there are the 'other 10%' of locations that users need to be aware of. For instance, Loop will not work on most gas station devices or at ATMs or on machines that that use 'two-sided' readers (older technology). For this reason, Loop recommends that users bring along a 'go to' card for those places that Loop may not work. That said, initial tests have shown that Loop will work in most locations.

The Future of Loop

In addition to the shipping of an MST enabled ChargeCase ($99, 1200 mAh battery) for the iPhone 5 and 5s in early 2014, a potential thinner and more powerful ChargeCase may follow. In addition, Graylin has hinted on several occasions that other form factors (possibly wearable technology) are in development. 

There have also been discussions of a Bluetooth LE-enabled plastic card (sounds like Coin) and a mobile wallet product aimed at students who prefer not to carry college IDs, payment cards, loyalty cards, etc.

Potentially more important to the industry, Loop has been having discussions with handset makers to see if Loop could be integrated into future phones. As mentioned by Cherian Abraham from Experian, "Loop's ultimate goal will be to be aggressive with its future form factors so that it no longer draws attention to itself and disappears – into phones or its accessories. Aesthetically it’s dongle has to be like Square, and that’s tough when you are not Square."

When I asked the team at Loop about the future, they said the main question that they get over and over is how will their solution work after EMV becomes more prevalent in the US. Their response was that the Loop solution will still be able to work. They referred to the fact that they will continue to co-exist with magstripe readers for decades to come and are confident that their dynamic data solutions will be appealing for many issuers. 

While Loop is definitely an ingenious solution for an industry looking for a go to mobile wallet solution, the road ahead is not all smooth sailing. Not only does Loop need to convince Customer 3.0 that a mobile wallet solution with a physical Fob or ChargeCase is a value added solution worth the cost, but they also need to persuade skeptical consumers who continue to worry about security and privacy issues around mobile payments.

LoopPay LinkedIn page

LoopPay Facebook page

LoopPay on Twitter

Additional Resources

Loop $10 Million Funding Press Release

Breakthrough Interview Podcast Series from PYMNTS on the Development of Loop - PYMNTS

Inside Secure to Power LoopPay Mobile Wallet - Finextra (Oct. 2013)

Consult Hyperion Podcast Interview of Will Graylin - Consult Hyperion (Oct. 2013)

Loop: The Future of Mobile Payments or a Temporary Fix? - TechCrunch (Oct. 2013)

Loop Mobile Reader Makes Contactless Payments with Mag-Stripe Tech - PaymentsSource (Oct. 2013)

Loop to Debut Breakthrough Mobile Commerce Solution at Money2020 - Loyalty Payments (Oct. 2013)

Loop Hits Kickstarter, The Absolute Greatest Mobile Payment Device Yet - The Slanted (Oct. 2013)

Mobile Payments Growth: Just The Tip of The Iceberg?

A new report from Business Insider Intelligence on the state of the mobile payments industry shows that, while the volume of mobile payment transactions still represent just a small percentage of overall payments on the surface, the level of growth is significant and quickly shaping the entire payments industry.

Both consumer and merchant uptake is exploding as smartphone users are quickly adopting mobile wallets, payment apps, etc. to facilitate offline and online purchases and as businesses are turning smartphones and tablets into full-featured POS terminals. The next critical step is to persuade the masses to become users of the payment technology available.

When Amazon and eBay launched their online shopping sites in 1995 and 1996 respectively, the notion that over half the U.S. population would make purchases online would have been scoffed at. Yet in 2013, the number of online shoppers in the U.S. will reach 189.6 million, according to eMarketer. In this case, the majority of the consumers were resistant to change until they made the switch and realized the benefits. The same applies to mobile payments.

The key is to examine the current payments industry growth trends, motivations of current users, the reasons for the gap between awareness and usage, and how financial institutions, retailers, network operators and equipment manufacturers can work together to convert reluctant consumers into loyal users. As mentioned by many of my fintech colleagues recently, it goes beyond a mentality of "If you build it, they will come". There is a need to solve for the concern around mobile security as well as develop incentives for usage.

Defining Mobile Payments

For the purpose of the study being reviewed, 'mobile payments' were defined as when a mobile, internet-connected device (smartphone, tablet, smart watch, Google Glass, etc.) is used to facilitate a transaction that might otherwise have taken place using a physical credit card, debit card, check or cash at a physical (not online) store. 'Mobile transactions' (for the purpose of this study) are a larger category that included mobile payments as well as mobile commerce and e-commerce channeled by an app or mobile website (e.g., Amazon's mobile app).

Mobile payments and transaction innovation is currently be led by start-ups and tech companies, who are prompting legacy payments players and card companies to reevaluate their current strategies and increase their own pace of innovation. 'Coopetition' has become the norm as companies team up with each other as opposed to building a mobile strategy from scratch. These partnerships (and individual initiatives) are pushing innovation forward quickly, making the industry fragmented yet ripe for consolidation.

Mobile Payments: Still Relatively Small on the Surface

Like an iceberg, there is much more to the mobile payments than what the can be seen on the surface today, with a U.S. mobile payments forecast of $30 billion in 2013. According to the research compiled by BI Intelligence, this forecast represents an average annual growth rate of 118 percent since 2008, but still will only account for 2 percent of the $3.3 trillion debit and credit card volume in the U.S. this year. It was also found that other global markets (such as Africa and the Asia Pacific regions) are seeing a much larger percentage of mobile transactions.

In both the U.S. and other global regions, the growth in mobile transaction volume has been driven primarily by the growth in smartphone adoption (especially in areas of underdeveloped banking systems). Not only has the smartphone impacted the consumer side of the payments equation, but also the merchant side, where attachable card readers transform smartphones and tablets into cash registers, making card purchases easier.

The Gap Between Awareness and Usage

In a recent research study conducted by Accenture entitled, Driving Value and Adoption of Mobile Payments: Consumers Want More, it was found that while consumers know that mobile payments are an option, they still prefer not to make them. In the study, 41 percent of North American smartphone users were highly aware that their phones could be used as a payment device, yet only 16 percent had done this.

Similarly, the BI Intelligence research found that, similar to most disruptive technologies, the adoption of mobile payments to date has been driven by both the underserved and the early adopter segments. From the merchant perspective, firms like Starbucks, Apple and Home Depot are helping both awareness and usage.

On the consumer side, new apps and 'mobile wallets' from firms like PayPal, Google and Square are helping mobile payments acceptance. But, while consumers are highly aware of these mobile payment applications, and find the convenience and money-saving incentives appealing, many are holding back from using mobile payments because of security and privacy concerns. Consumers worry about their liability if their phone is lost or stolen and express concern that the risk will escalate as the phone evolves into a mobile wallet.

Security and Privacy Concerns Hinder Growth

According to the Accenture study, 45 percent of respondents who do not currently make mobile payments said they were concerned about security, while 37 percent had worries about privacy. 

These findings were in line with another study done earlier this year by Chadwick Martin Bailey entitled, The Mobile Moment: Barriers and Opportunities for the Mobile Wallet. In this study, 73% of those households that were familiar with the concept of a mobile wallet but were forgoing using the capability mentioned security as the reason for non-use. The specific reasons for security concerns included identity theft (70%), theft of phone and personal information (60%), interception of personal information during transaction (57%), hacking of mobile phone (52%), hacking service provider (34%) and getting charged for an accidental transaction (19%).

Chadwick Martin Bailey Mobile Wallet Research, 2013

Potential Beyond Payments

As we move from mobile payments to mobile wallets, many studies indicate that there is the potential to offer more than just payments. According to a recent study from mobile marketing firm Vibes, nearly 85 percent of smartphone owners would like to receive non-payment services from a mobile wallet, including loyalty card storage, coupons, personalized offers and other marketing materials (similar to the Apple Passbook app). Interestingly, the study finds that only 19 percent of those surveyed believe they had been offered any such content.

Again, the Chadwick Martin Bailey research from earlier this year collaborated with the findings from Vibes, illustrating that several additional features would be viewed positively by households who understood mobile payments but had decided not to use this functionality. In fact, the 'perfect' mobile wallet combination from the perspective of non-users was payment functionality combined with the ability to store loyalty cards and other sensitive documents (insurance cards, drivers license, etc.). 

While mobile offers were not scored as high as storage of cards in the CMB research, the Accenture research found that 60 percent of consumers who already do mobile payments would do so more often if they received instant coupons. In addition, 36 percent said they would provide personal information in exchange for such rewards and 46 percent would increase payments if they received location-based offers

Chadwick Martin Bailey Mobile Wallet Research, 2013

The Future of NFC

Near Field Communications (NFC) is a technology that allows devices to communicate with each other at close range to facilitate payments and other transactions. Despite years of debate on the pros and cons of the technology (especially in the U.S.), there are more and more who believe NFC will be a non-starter as a payments technology. It's not that the technology is disappearing (NFC chips are being placed in virtually all new Android phones). It's just that acceptance has never gained steam:

• Google Wallet recently dropped the requirement that NFC technology be required for its wallet app to run. Google wallet has recently developed an app for the iPhone and becoming device and technology agnostic.
• Apple (and PayPal) recently released new close range technology (Beacon) that use low frequency bluetooth communication that is available on virtually all smartphones. This technology also requires significantly less hardware upgrades from the merchant and is faster and has more functionality for the consumer.
• Beacon technology could eliminate the checkout entirely, providing real-time offers, product information, facilitate payments and remove any security devices before leaving the store.

The Future of Mobile Payments

Despite a lot of noise among financial technology insiders and the payments industry, mobile payments and mobile wallets are far from becoming mainstream. As expected, mobile payments are more commonplace with younger demographics and higher income categories as well as having greater potential for those who are underbanked. In other words, the potential for mobile payments in the future is high, but is far from guaranteed.

While our industry continues to be focused on the next shiny technology breakthrough in payments, consumers are more concerned about security, privacy, convenience and the improved 'value' of using their phones to make payments. In other words, "Will the customer experience be better than what I have now?"

Financial institutions, merchants, network operators and technology providers must answer the above concerns and provide education on the way to best move forward . . . from the consumer's perspective. This education is made more difficult with the multitude of different payments solutions being introduced and the overall 'noise' in the marketplace. 

Finally, recent research indicates that both current mobile payments users and non-users can be provided incentives to increase their use of mobile payments. This can be in the form of transaction incentives, mobile coupons, geolocational offers, etc. that are incorporated into the mobile payment experience. 

Today's digital consumer expects their mobile devices to improve and simplify their lives. Until the providers of mobile payments can achieve this goal on a broad spectrum, mobile payments will look like more of a tip of the ice cube vs. tip of the iceberg.

Additional Resources

There's Virtually No Ceiling to Mobile's Potential in the Larger Payments and E-Commerce Markets - Business Insider (Oct. 2013)

Gartner Says Worldwide Mobile Payment Transaction Volume to Surpass $171.5 Billion - Gartner (May 2012)

Driving Value and Adoption of Mobile Payments: Consumers Want More - Accenture (2013)

Consumer Intelligence Series: Opening the Mobile Wallet - PriceWaterhouseCoopers (2013)

The Mobile Moment: Barriers and Opportunities for the Mobile Wallet - Chadwick Martin Bailey (April 2013)

P2P Payment Simplicity Square'd

Some of the best mobile banking apps are those that make everyday tasks simpler. Two of my favorites are GoBank's Balance Bar, that lets you see your account balance without login, and Moven's real-time mobile purchase receipts and analysis.

Tuesday, Square, Inc. joined my growing list of über-simple mobile banking applications with their introduction of Square Cash, a new app that makes sending money person to person as simple as sending an email. In today's mobile world, simplicity is the 'new black'.

P2P applications are definitely not new. There are literally hundreds of bank and non-bank applications that allow you to send money digitally, including Google, PayPal and Venmo. Consumers also have the choice of simply writing a check as they have done for years. But, I believe Square has introduced the most streamlined app that may have the broadest mass market appeal. 

Imagine emailing money to another person, without a fee, directly from a debit card without a login or password. All that is needed is a debit card number, Zip Code and expiration date from the sender and recipient (only need to be entered the first time you use the service). After that, sending money is only an email address away.

Compare that process to most banks, that require mobile banking sign-in (don't get me started), a test transaction and potentially more steps, even though there is normally no fee for the service. PayPal's P2P app transfers money from a PayPal account to another PayPal account, with transferring funds to a bank account being an additional step (in addition to a one-time signing up for PayPal). Google's P2P service uses email like Square, but requires signing up for Google Wallet and transferring funds to a bank account. Venmo is a growing favorite of younger people who prefer to send money via a Facebook-like newsfeed. This service also requires an application sign-up.

Unlike Square Cash, most of the other P2P applications have fees attached as shown below. Square Cash, however, only supports debit cards at this time, with low weekly limits ($250) unless you provide a mobile phone number and Facebook account or verify your full name, the last four digits of your social security number and date of birth -- then the limit is raised to $2,500. If the Facebook option is selected, no information or messages are ever passed to the social channel. Square is simply using Facebook as part of authentication.

Source: My Bank Tracker, September 2013

How Square Cash Works

I got introduced to Square Cash first thing yesterday morning with an email from fellow fintech geek, David Gerbino, who sent me $1 via email. To inform me of the 'gift', I received both an email from Dave that told me he was sending me money and an email from Square informing me of the same (shown below).

To transfer the funds into my account, I simply hit the 'deposit funds' link on my computer or cell phone, and enter my debit card number, the expiration date of my card and my Zip code as shown below. That's it (and I only need to do that once). 

Notice how spartan each step of the process is. While there is an animated background with color and theme changes over time, there is zero unneeded information, highlighting that there are no strings attached.

Upon making my deposit, I immediately received an email confirming my deposit was made and letting me know that I can now send money as well. As with the initial communication, my email and all processes are clearly optimized more for mobile than for a desktop.

The Square Cash mobile app (offered in both iOS and Android versions) is very simple, with a built in step-by-step tutorial and an FAQ component. I found the desktop and mobile versions to be equally concise even though it is clear that Square Cash was built as a mobile-first application.

With Square Cash, money is transferred from bank to bank with no funds ever being held in a Square account (like with PayPal). Square says that deposits will be made within 1-2 days, and I found it a bit ironic that it took me longer to log into my mobile banking account to confirm my deposit than it did to perform the entire transaction with Square.

According to Square, there are no plans for ads or fees on the service as it is offered today, yet it does plan to offer premium options (I would assume that a fee could be implemented for faster transfers much like some organizations do for mobile check deposits).

Pros and Cons of Square Cash

I believe the simplicity of Square Cash is the application's strongest benefit. While Square may not be known by everyone, it has a track record in the merchant arena and obviously plans to promote this service heavily. And unlike many of the competitors, if a payment is initiated with Square, the recipient can get their funds with minimal steps and can start using the app themselves immediately.

From early comments on both the Apple and Android app sites, early buzz is overwhelmingly positive. I am sure that since it is free it helps.

That said, there are still some drawbacks to Square Cash:

• Debit Card Only: While the limitation to only MasterCard and Visa debit cards may be viewed as a negative by some, I believe the limitation is consistent with the streamlined nature of the service. No decisions are needed as to what card or account to link. Simply link a debit card.
  
• Use of Email: Many of my Fintech friends debated on the merits of using email as opposed to SMS as the transfer media. Again, I believe this was a conscious decision by Square to appeal to the 'mass' market. While email is not used by Gen Y as much as texting, everyone has an email address and knows how to use it. The email-only decision may be adjusted over time. Again . . . simplicity.
  
  In addition, new Telephone Consumer Protection Act (TCPA) rules limit the ability to market via SMS without opt-in. Square can use email for subsequent marketing messages (such as for their wallet) or to promote the download of the Cash app like below.

• Limited Options: There is also no way to see a history of your transactions (except by keeping track of your emails) and you can only link one email to one debit card at this time. Again, I believe Square made a conscious decision to keep the application simple as opposed to filling it with a number of options that may be geared to 'power' P2P users.

• Transfer Limits: The limit on amount that can be sent ($250 a week unless additional personal information is provided and then the limit increases to $2,500) could be a drawback for some, but the service is not meant for large purchases.
  
• Fraud Liability: Square makes no guarantees in case of fraud beyond what is available on a person's debit card today. While they will reverse the transaction, that may not be enough.
  
• Funds Availability: While many fintech followers pointed to the 1-2 day funds availability stipulation as a negative, this is still faster than checks clear. However, the marketplace is definitely moving to real-time P2P so I expect Square to follow this trend over time (potentially with a 'premium' fee).
  
• Clarity: In the mission to remain a very clear app, some clarifications are tough to find. For instance, what if I want to change the debit card I have linked? (A Google developer answered this question online by referring me to www.square.com/cash/settings. As expected, the process was quite easy (even when I forgot my password).
  
  

Convenience vs. Security

Getting the balance right between convenience and security is difficult at best and potentially a death blow if miscalculated. Square definitely broadens the reach of its new product by leveraging email as the funds transfer tool. Very straightforward . . . very simple. 

But, with 73 percent of consumers being concerned about their card details being stolen on the internet (according to Datamonitor's 2012 Financial Services Consumer Insight Survey) there is likely to be a concern by potential users that there is a lack of visible payment authentication.

This highlights the paradox of mobile payments that must be overcome. On one hand, consumers find current authentication processes as being overly complicated and time consuming. On the other hand, increased awareness of cybercrime makes consumers concerned about how their security and privacy are being protected.

With Square Cash, they hope they struck the right balance. If they are wrong, and a highly publicized security breach occurs, it is likely to damage Square's goal of becoming a trusted consumer payments brand.

The Epitome of Digital Innovation Today

More than just a very easy way to transfer money, Square Cash represents what mobile innovation means today. Instead of trying to solve all of the world's problems in one app, companies are developing ways to use mobile to make our lives easier . . . from the customer's perspective. 

Square could have followed the lead of many of their payments counterparts and integrated Square Cash into their mobile wallet product. While it may have met corporate product growth objectives, it would have been a worse customer experience with a cluttered user interface. They could have carried forward their $.50 fee from the beta version of the service, at the cost of acceptance.

It is clear that Square Cash is a mobile-first application. Look at all of the 'unused' space on the desktop version of the application. Square Cash is a killer app because they didn't fall into the trap of moving beyond simple elegance. When you use the application for the first time (much like the first time I used my Moven or GoBank account), the first impression is, "Wow, that was really easy".

Irene Etzkorn, co-author of Simple: Conquering the Crisis of Complexity, recently wrote, 

"There's a tendency to think of innovation as coming up with the latest gadget, or adding new features onto existing applications. But the concept of breakthrough simplicity recognizes that today, the most powerful forms of innovation don't manifiest themselves in new bells and whistles. They take the form of better customer experiences (or patient experiences, citizen experiences, etc.). And one of the best ways to improve any experience is to simplify it -- remove complications, unnecessary layers, hassles or distractions, while focusing in on the essence of what people want and need in a particular situation."

What will be interesting to see is whether other payments players follow Square's lead toward a more simplified application. More importantly, it will be interesting to see if the banking and credit union industries will be able to focus on taking steps out of mobile and online processes for a better user experience.

Square Wins Best of the Web Award

Jim Bruene, publisher of the heavily followed Online Banking Report and Net Banker newsletter has a discerning eye for what is evolution and what represents evolution in digital financial services. As founder of Finovate, he has the opportunity to see banking innovation up close on a regular basis. This week, however, he awarded Square with a 'Best of the Web' award. In doing so, Jim said,

"It's been six months since he handed out an OBR Best of the Web award. Since then, there have been many new enabling technologies and promising applications. But with every passing year, it gets harder to raise the bar with a new digital financial product. Square did it this week. The company took P2P payments -- something PayPal commercialized in 1999, CashEdge/Fiserv bankified in 2009/2010, and Google simplified in May -- and distilled it down to its essence."

He sums it up best when he says, "It's hard to imagine P2P payments being any simpler. And Square is doing it all for free".

Square Cash Twitter Discussions

Regarding @Square Cash, the product managers for P2P at every major core provider just pooped their pants. https://t.co/vAnUksFttX
— Brian Billingsley (@BBillingsley) October 16, 2013

Send money via email to anybody, for free. Nice move from Square to get more people to join their ecosystem? // https://t.co/NG1HDlUK4s
— Philippe Masset (@_pioul) October 17, 2013

@bornonjuly4 @JimMarous @duperrieu @Square @leimer @rshevlin @sammaule My suggestion to the critics- try it. @Jack has got it goin’ on.
— Matt West (@Matt__West) October 17, 2013

@JimMarous the P2P game is tough, but I think it's all about text payments- Square and Google are on a goose chase. Still want Venmo
— Melanie Friedrichs (@mfriedri) October 16, 2013

Still it's a great play by Square. Acquire a large customer base w/ a default debit payment option. That's a good thing for Square merchants
— Cherian Abraham (@cherian_abraham) October 16, 2013

@sammaule @JimMarous @bornonjuly4 @duperrieu @Matt__West @Square @rshevlin mindshare leads to wallet share, engagement and usage - ask Apple
— Bradley Leimer (@leimer) October 17, 2013

The UX of of debit is much better than ACH (no trial deposits) and Square is making a big bet to get a two sided network going despite cost
— Gus Fuldner (@gusfuldner) October 16, 2013

Square's new e-mail money services is undeniably interesting, even if you do have to have a bank account to use it http://t.co/r3DKPrP6V7
— Dave Birch (@dgwbirch) October 16, 2013

Pay for dinner with one card, all my roommates send me #Square Cash... Simple. pic.twitter.com/RglsQj3k2t
— NickBastone (@NickBastone) October 16, 2013

Additional Resources

Square Cash vs. Venmo vs. PayPal vs. Google Wallet: What's The Best Way to Send Money Online? - Yahoo News (October 2013)

Square Cash: P2P on Steroids? - Deva Annamalai (October 2013)

Square Cash is a Head Fake - Drop Labs by Cherian Abraham

How Google Wallet Compares to Other P2P Payment Providers - My Bank Tracker (Sept. 2013)

Square Cash Makes Sending Money as Easy as Sending an Email - Square Press Release (October 2013)

Subscribe to Bank Marketing Strategy Via Email

The Rise of PayPal as a Major Payments Player

No place in financial services is transformation and innovation more apparent than in the world of payments, where the convergence of mobile and new data-driven business models have the potential to completely disrupt both the consumer and merchant experience.

The recently concluded Money2020 illustrated that there is no shortage of payments players vying for attention,  but no firm seems to be as aggressive as the new PayPal, which continues to roll out new innovations impacting the payments ecosystem.

While some of the 'innovation' at PayPal may not seem new or disruptive (such as the use of QR codes), the ability to quickly build scale by using the existing payments infrastructure may be the key to PayPal's success. The company hopes to transform its reputation as a means of exchanging cash over the Internet into the default payment system for many everyday transactions.

At stake for PayPal is control of a mobile-payment market that is expected to grow more than three-fold from this year’s $235 billion over the next four years, according to researcher Gartner. PayPal faces a host of competitors, including Google Wallet, Square, Lemon and Stripe (and potentially Amazon and Apple).

Brian Roemmele, researcher and business advisor says of a recent PayPal announcement, "The true innovation that PayPal has achieved is really quite invisible and perhaps even boring to technologists. No iOS devices or android devices deployed at the merchant locations. No new add-ons needed, just the a boring laser bar code scanner that every single major retail store already has."

It is clear that PayPal is moving fast to become a ubiquitous option at retail merchants, introducing products for both the consumer and the retailer. In fact, there have been so many changes recently, it may be difficult to keep up.

To that end, I am providing a brief overview of what has occurred over only the past couple months and what the future may hold.

New PayPal Mobile App

In early September, Paypal introduced an updated version of the PayPal mobile app for both iOS and Android, turning it into much more of a mobile wallet. Maintaining all of the old features, the new app added tools to facilitate shopping and paying for goods online at the physical POS.

The app features five clearly labeled sections on the home page, with the major sources of innovation residing within the new Shop tab and Bill Me Later integration. Within the Shop screen, you can find nearby merchants that accept PayPal. Once you check in at a merchant (using your PIN), you can download any special offers from the store and can complete the transaction simply by saying "I'm paying with PayPal". Since the merchant will have your PayPal photo on their POS device or phone, funds can be transferred without needing to pull out your phone a second time.

Leveraging the app's location-based capabilities, there is the ability to push coupons based on a consumers specific location and even allow for ordering and paying for a meal within the app.

As for payments, PayPal is providing the option to pay directly from a bank account, from a PayPal balance or to use a credit card on file within the app. It's also expanded the 'Bill Me Later' function, providing credit for large purchases within the app. 

PayPal Beacon: No Tap, Swipe or Signature

One of the biggest challenges for PayPal over the years is expanding their online merchant capabilities to the physical point of sale, making it easier to use PayPal than swiping a credit card. As any payments player knows, simplifying the payments process is made even more difficult with today's merchant technology and the entrenched consumer payment behaviors.

PayPal hopes the introduction of Beacon may be the answer to this challenge. Beacon uses Bluetooth Low Energy, otherwise known as BLE to enable phones and merchant POS systems to communicate with each other seamlessly, without opening an app, without GPS turned on and even without a clear phone signal. In other words, hands-free payments.

All a merchant needs to do is plug a PayPal Beacon device into a power outlet in their store. Once the Beacon is plugged in, they will be ready to offer a highly personalized shopping experience (including personalized coupons or even offers based on the consumer's location within the store).

Consumers control the stores they will want to check in to, those they want to get prompted to confirm payment for, and stores they will want to enable a complete hands-free experience for. In the latter case, simply walking in a store will trigger a vibration or sound to confirm a successful check in. After checking in, a photo will appear on the screen of the Point-of-Sale system so the shopper can be greeted by name. Paying only requires a verbal confirmation.

In addition, PayPal is giving developers access to the PayPal mobile in-store API to create experiences such as being able to self-checkout on a mobile phone or automatically placing a customer’s usual order as soon as they walk through the door.

David Marcus, president of PayPal says that PayPal has been showing the device to retailers, large and small, and they “love it.” Part of the reason, he says, is that not only does it help them connect and potentially bring in customers, but it also integrates seamlessly with their existing point of sale systems. “I want to create an operating system for the retail environment,” he said.

It’s interesting to note that in iOS 7, Apple is debuting iBeacon, which could provide similar services for apps. But VP of PayPal global product, Hill Ferguson, maintains that the Apple version does not extend to Android, and that Beacon will work for any smartphone.

Piloting of Beacon is slated for Q4 2013, with rollout planned next year.

PayPal Working Capital

To help drive sales volume from the merchant perspective, PayPal introduced PayPal Working Capital in late September as a way to offer a simplified financing alternative to their customers. Initially offered to about 90,000 of it's business partners, potential loans from $1,000 to $20,000 will be underwritten based on PayPal sales history, with no credit check needed.

One unique aspect of the program is that PayPal said merchants could receive funds in a matter of minutes and that repayment would be based on a fixed percentage of sales generated with no minimum payments (if no sales are made on a particular day, no payment is required). In addition, rather than charging interest for the loan, PayPal will charge a fixed fee. The faster the payback period, the smaller the upfront fee. It is felt that this transparent fee structure will be welcome to retailers. 

"In talking to merchants, a lot of them are very capital constrained," says Brian Grech, who is in charge of risk management for small-business products at PayPal. "In a lot of cases, their next best option would be a personal credit card or a very high-priced merchant cash advance and we expect to displace those overwhelmingly with our new loan product."

Since PayPal cannot legally make loans directly to merchants, it is collaborating with the Salt Lake City, Utah-based lender WebBank.

PayPal Acquires Baintree

On the heels of announcing PayPal Working Capital, PayPal finalized the acquisition of Baintree, moving even more aggressively into mobile payments. In a very short time, Braintree leveraged a mobile-first mentality to build impressive mobile payment solutions that handle transactions in 130 currencies in more than 40 countries.

In addition to gaining an impressive list of clients such as Airbnb, OpenTable, Uber, and TaskRabbit, PayPal also acquires the very popular Venmo app, which lets users pay for free using their mobile device.

While Baintree will operate as an independent unit within PayPal, it is believed the superior application programming interfaces of Baintree will help PayPal work better with developers going forward. 

PayPal Payment Code

As part of the global Money2020 event in Las Vegas last week, PayPal continued their string of major announcements by introducing Payment Code, which will use QR codes and a PINs to verify in-store smartphone transactions over merchants' existing POS equipment. While initially seeming 'old school', this introduction leverages existing equipment and employee training while improving the experience for both the consumer and merchant.

Initially, PayPal is partnering with Discover and their 7 million retail locations to introduce this technology. To make an in-store payment, customers would first check in using the PayPal app. Once the app knows the customer’s location, it determines what kind of equipment the store has. 

If the merchant has a barcode scanner, a QR code will pop up on the phone screen. The customer then simply runs that code under the scanner finalizing the transaction. If the merchant only has a PIN pad, the app will supply a randomly generated four digit PIN, which the customer types into the terminal to verify the payment. (Note: This process is virtually the same as being used by Starbucks)

While the Payment Code does make the checkout process smoother, with easy access to all funding sources in one simple place (the customer's phone), the real benefit is that it will allow consumers to automatically redeem any special offers, gift cards, merchant rewards programs or other forms of payment that might be saved in their PayPal wallet in one quick transaction.

As with many of the innovations PayPal has introduced over the past several weeks, Payment Code is expected to roll out in Q1 of next year.

Amazon Challenges PayPal

Not to be left behind, Amazon responded to the recent wave of PayPal introductions and innovations by announcing a new service that will let customers of other online merchants pay for purchases using their Amazon credentials.

Login and Pay with Amazon takes advantage of Amazon's 215 million active customers and helps participating merchants make sales easier by allowing customers to access their account information safely and securely with a single login.

The new offering expands on the existing Amazon Payments program that lets customers pay with Amazon at check-out. The new log-in system ties merchants even further into Amazon's platform, including fraud protection from Amazon at no extra fee. Merchants get more information on customers, while the customers can buy without entering their address and card information on multiple sites over and over again.

Some merchants may be reluctant to work with Amazon because the company is a major retail industry rival, however.

Amazon will collect $2.9 percent plus $0.30 per transaction for transactions of $10 or more, and all fees are assessed on a per-transaction basis - always based on a percentage of the total amount. Login and Pay with Amazon will work on tablet, mobile, and desktop devices, the company said. Gogo, which provides in-flight wifi, already uses Amazon's basic payments service, but is planning to add the new service.

PayPal Penetration Challenges

Despite all of the innovation described above, PayPal is still an emerging mobile payment service provider, without the market size of penetration of the more popular credit card companies.

To alleviate this challenge, PayPal has worked hard to sign partnership agreements with consumer credit (Discover), money transfer (MoneyGram) and POS hardware and software providers (NCR, MICROS, etc.). By leveraging these partnerships, PayPal has expanded merchant coverage from just 18,000 in 2012 to close to 10 million locations expected by 2015.

"In 2013, Discover helped PayPal grow from the 250,000 retailers who accepted PayPal in store earlier this year to more than 2 million by the end of 2013," said Don Kingsborough, vice president of retail services at PayPal.

PayPal + Apple?

On October 11th, 2013, former Apple CEO John Scully mentions in passing during a BBC interview some ideas he suggests for Apple.  John referred to the logic of Apple acquiring larger companies with the huge amounts of cash they hold in reserves. In particular, John mentioned the idea that Apple acquire eBay for the single purpose if integrating PayPal into the iPhone.

"Apple's never been an acquirer of big companies before, and when you look at Passbook, the iPhone5S and fingerprint recognition - What would it mean if Apple went out and bought eBay? And they had PayPal, and integrated that?"

If you buy into the logic that Apple wants to be a facilitator for payments and not a merchant account supplier nor a payment card issuer, this idea may make sense. Combined, Apple and eBay would have over 760 million active payment cards on file, with some overlap.

So, maybe we will see a day when PayPal is part of Apple . . . or Discover.

I've definitely seen crazier ideas become reality over the years.

Additional Resources

 The Future of POS: Point of Sale Evolution and Its Impacts - PayPal White Paper (September 2013)

Subscribe to Bank Marketing Strategy Via Email