Innovations in the payments space are accelerating the extinction of cash

I have several payment apps, including PayPal, Square, Card Case, Serve (American Express), and Dwolla on my HTC Inspire. They are similar in that they all facilitate payments, but are also dissimilar in that they serve different purposes. I’ve been using PayPal for years and I’ll probably continue to use it, but I am a big fan of Square as well. I haven’t been using Serve and Dwolla for too long, but I’m playing around with them to learn more.

I’ve been reading about various opinions on what will be the next big thing in the payments space. Will it be Google Wallet? PayPal? Square (and Card Case)? Maybe even Dwolla? I think that all depends on the consumer, merchant, and the transaction type because, as I said earlier, these solutions serve different purposes. While they are all different, the commonality with all these companies is that they are making hard currency obsolete.

Dwolla— will it kill credit cards?

While I think Dwolla offers a unique product, my humble opinion is “No, it will not kill off credit cards.” Dwolla is great for merchants in that it’s cheap, but it’s not solving any real problems for the consumers. It will have to give me an incentive to use this for my everyday shopping experience before I can be convinced to dump my credit cards, which give me loyalty points or cash-back.

Dwolla is relatively simple to use, but it doesn’t offer me any incentives or consumer protection. It will need to give me something to change my behavior that’s been ingrained in me for years.

However, I do see this as a great tool for peer-to-peer money transfer or for those who do not have credit cards or prefer not to use them in certain instances. For example, I love how I can pay my friends through Twitter using Dwolla.

Having worked at Rixty, I have become more knowledgeable about the cash-spending consumer segment. According to a Federal Reserve Bank of Boston research in 2009,

more than 40% of consumer transactions are still made via cash, check or electronic bill payment, not with a credit or a debit card. About 70 million Americans are under-banked, yet spend $1.1 trillion each year in cash.

Those are some astounding figures since I hardly carry more than a few dollars in cash in my wallet. And since Dwolla is skipping credit cards altogether, it could tap into this huge cash-paying consumer segment. There’s a lot of money out there. Making it economical, safe, and convenient for consumers to make online purchases with cash or transfer money could be a very lucrative business.

Square— the next step in credit card processing?

Critics of Square say that what Square is doing isn’t all that revolutionary, that they are just making incremental changes to the status quo. Even if that were true, so what? It’s ridiculously difficult to change established consumer behavior. And why change it if what’s in place isn’t all that inconvenient? Proponents of alternative payments say that credit cards are costly to businesses and consumers because merchants have to pay nearly $50 billion annually in transaction fees and that the fees are ultimately passed unto the consumer. Yes, that’s a lot of money but that tells me that consumers are happy to be swiping away. It’s difficult to get them to switch to something totally different. They like their plastic cards, whether they are literally swiping it or punching in their numbers.

What I love about Square is that they are enabling small merchants to easily and economically accept credit payments without the hassle. For example, there are many street fairs in San Francisco and most street vendors only accept cash payments, but I am seeing an increasing number of them starting to take credit cards via Square.

With Square, small merchants don’t need to deal with complicated credit card contracts or hidden fees. All they need is a free Square dongle. No wonder more than 800,000 merchants have signed up with Square and have processed more than $2 billion in payments in the last 12 months.

Even with the ubiquity of the Internet, more transactions are done offline than online, and Square has the potential to be a leader in this space.

In addition to making it easy for merchants to accept payments, Square also helps them track loyal customers. That’s obviously great news for customers as well. Square’s loyalty program therefore incentivizes both the merchant and the consumer. That’s a smart way to drive adoption from both ends. It puzzles me that credit card companies and payment processors have not offered this service to merchants before. Not only did Square nail it with its loyal program, but it’s bringing customers closer together with merchants through Card Case, which allows users to open a “tab” and pay just by giving their name. Now that’s innovation!

I am eager to see whether Jack Dorsey truly does have the Midas’ touch. I admire his entrepreneurial aptitude and insane drive.

Google Wallet— Is NFC here yet?

Google says,”In the past few thousand years, the way we pay has changed just three times– from coins, to paper money, to plastic cards. Now we’re on the brink of the next big shift.” I absolutely love Google for making such bold claims. I love crazy ideas and Google doesn’t have any trouble coming up with them.

Google Wallet is an Android app that turns your phone (Nexus S for now) into a wallet. You can store your card information on your phone. When you want to pay, all you have to do is tap your NFC enabled phone.

Wildly simple, right? The big problem here is infrastructure. It’s a Catch 22. Until merchants are equipped to take payments from NFC devices, consumers won’t have much reason to have an NFC enabled mobile phone and merchants aren’t likely to embrace NFC until they know that consumers are able to pay via NFC. I do believe, however, that new payment methods must be adopted by merchants first before they can be embraced by consumers.

In other words, introducing a new payment method is more of a sell-driven proposition. For this to succeed, Google will have to assist with the roll out of NFC readers at major retail channels.

I see this happening at my local Peet’s Coffee so it appears Google is going about this the right way.

Also, the success of Google Wallet or NFC payment in general will depend much more on the mobile phone manufacturers’ willingness to bet on this technology as a standard method of payment than consumers’ decision to adopt it. If it comes with my phone, then I’ll use it when I see a merchant who has the ability to take payments through NFC. However, I am unlikely to go buy an NFC enabled device to push my favorite stores to let me pay with my phone.

While Google is betting on NFC, it’s not focusing only on the technology. It’s focusing on using technology to add value to credit card users and making all kinds of transactions more streamlined. What do I mean by that? Because Google Wallet is a virtual wallet, it can store multiple credit cards, coupons, and probably eventually even ID cards. Think about this application beyond payments: When you are trying to get through security at an airport, you currently have to take out your wallet, take out your ID, show the TSA agent your ID, put your ID back in your wallet, and then put your wallet back in your pocket. That’s messy. Eventually, you might be able to just take out your phone and tap it to an NFC reader and then your face and boarding pass information might be displayed on a screen for verification. That’s simple. Google Wallet isn’t just about payments although I am sure that’s the primary purpose and it’s easy to think of similar applications for monetary transactions.

The million dollar question is, “When will NFC become mainstream?” Square COO, Keith Rabois doesn’t seem to think NFC will become mainstream with most Americans any time soon. I think he’s at least partially right. NFC alone won’t become mainstream. I think traditional swipes will co-exist with NFC just like credit and debit cards co-exist with cash today.

Square’s value proposition is that it turns any smartphone into a credit card reader. Google Wallet’s value proposition isn’t just that it uses NFC to transact payments, but that it uses the app to organize payments for the consumers by leveraging NFC.

There’s an important difference. If Google used NFC to try to replace swipes, that’s not very innovative. It’s only a very costly alternative that requires new infrastructure. Most likely such attempt will fail. Google has many tools to combine users’ spending data with location based services. Google will be able to track users’ spending data across various payment methods and learn a lot about their spending habits. Information is valuable and can be monetized. Think of Google Wallet as Google’s way of collecting our shopping data even when we’re offline. That’s incredible.

Bottom line: I see Square becoming insanely big. It has the potential to be bigger than the current version of PayPal because of its simplicity and cost-effectiveness for the merchants (But let’s not kid ourselves. PayPal isn’t going to just sit and watch; it’s going to evolve.). I see a potential in Dwolla as well for its ability to cheaply transfer funds between two parties. And I see a huge upside for Google Wallet because of its ability to replace the bulky wallet and use consumer spending data to better target ads and offers (even in real-time). As payments companies keep innovating, we’ll eventually see the extinction of hard money. My guess is that my next generation will have to go to the museum to see cash and coins.

By: Jonathan Lee
Twitter: @hi5at5


3 responses to “Innovations in the payments space are accelerating the extinction of cash

  1. Interesting thoughts Jonathan. I’ve been thinking about these companies a little bit lately and I think there could some really interesting partnerships between Square, Dwolla, and Simple. I’d also like to see Square offer merchants an opportunity to “plug in” their services online to accept credit card payments through their website. It’d be nice to have one back end solution for both in person and online payments. If they could add in dwolla payments in addition to the other credit card services, it might help spread adoption with consumers. I hope to see a lot of change in this market over the next few years.

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