True Disruptive Innovation In The Mobile Payment Space

The mobile payments market is one of the most hotly contested at the moment. At stake are billions, if not trillions, of transaction flows globally. The space is very cluttered and highly complex. There are many incumbents with huge global investments, established relationships, payment gateways, hardware, software protocols, lobbying power … the list goes on.

According to CB Insights, “payment tech startups raised $1.2 Billion across 193 VC deals in 2013 alone – A five year high.”

All the major VCs are actively involved in this space with investments across the following segments:

    • Mobile payment apps (including loyalty plays)
    • POS (point of sale) devices
    • Transaction processing & payment gateways
    • Global money transfers (“disrupting Western Union”)
    • Servicing the “unbanked”

Let’s look across the space and identify what / who, in my opinion, represents true innovative disruption and is creating true innovative disruption.

New currencies / stores of value (excluding a conversation about Bitcoin) **

The first example of a company that created true innovative disruption in the mobile payment space isn’t a Silicon Valley startup or one of the existing incumbents in the banking industry. It’s a service called M-Pesa which was launched in Kenya in 2007. Safaricom (an affiliate of Vodafone) launched it as a way for citizens of Kenya to repay micro-loans using their mobile phones as the technology (not smartphones) and pre-paid minutes on their Safaricom account as the currency. People used the 40,000 pre-paid Safaricom agents across the country as the brokers who would exchange money for pre-paid minutes. Case studies have been written about M-Pesa at the Harvard Business School and MIT.

Key disruptive innovation was the use of pre-paid mobile airtime as a currency and utilizing SMS messaging and a network of 40,000 agents across Kenya as the distribution network to enable exchange of value.

Seven years after launch in Kenya, 43% of the country’s GDP flows thru’ M-Pesa.

Sitoyo Lopokoiyit, head of Strategy for Financial Services at Safaricom, is quoted as saying: “About 40 percent of the country has a bank account. That means there are about 8-10 million unique bank accounts in the country. Yet we’ve got about 20-21 million mobile phone users, of which 18 million are now on the M-Pesa system. Financial inclusion is reported to be at 80% in Kenya. When you remove mobile money, it drops to 23%. So you can see what mobile money does for financial inclusion in Kenya.”

Today, more than 20% of Kenyans use M-Pesa a way to save money (vs. using the traditional banking system) and the company continues to layer on additional services. Vodafone has recently launched the M-Pesa solution in Romania and plans to extend the service on other areas of the World where traditional banking services are lacking.

New distribution platforms and networks that reduce costs and speed up payments by displacing the credit card companies **

The merchant fees structure within the credit-card dominated industry today is highly complex and tiered. Merchants pay between 2-3% on every transaction plus other monthly fees like gateway fees and chargeback fees. When you look at the ecosystem image above, it is clear why there are so many fees!

The majority of startups in the space use the existing payment ecosystem with it’s embedded complexity, inefficiency and cost structures. How would one disrupt this system? Enter Ben Milne, a 28-year old from Des Moines, Iowa. After paying an exorbitant amount of fees to credit card companies, he and his team decided to rethink (online) payments and build something to bypass the credit cards companies.

He has created a company called Dwolla with provides a disruptive payment platform linked to the existing ACH payment network that all banks in the USA use. Dwolla bypasses credit cards altogether and has the potential to dominate e-commerce, m-commerce and s-commerce in the years to come. Unlike Paypal and Square, which sit on top of existing credit card platforms, he enables payments between consumers and merchants without the oppressive credit card fees.

The fee structure for Dwolla’s merchants is streamlined and efficient:

* Transactions under $10 are free.
* Transactions over $10 are a flat $0.25.
* There are no setup fees, no maintenance costs, no annual fees and no hidden charges.

Dwolla recently introduced Dwolla Credit via an investment from Comenity Capital Bank which offers consumers a virtual credit card without the associated 2 – 3% fee structure and 7 – 10 day delays in receiving payment.

Disrupting the traditional in-store POS experience

A combination of advances in mobile, social and cloud technologies has created a whole slew of companies that are focused on disrupting the traditional in-store POS experience. Companies in this segment include Shopify, Lightspeed Retail, LevelUp and Square (which has inked deals with Starbucks and Whole Foods).

Square was founded by Twitter’s Jack Dorsey, has raised several hundred million in VC and seemed destined for a hugely successful IPO, but appears to be in trouble.

Disrupting existing payment gateway and credit card processing providers

One of the key barriers to disruption and adoption of e-commerce has been the need to establish a merchant account for your business. Companies like Stripe and Braintree (recently acquired by Paypal for $800 Million) have taken strides to eliminate this need and offer slick APIs and tools that democratize e-commerce and mobile payments for all.

Any company can now instantly start collecting payments by using their APIs and simple tools. Just click on the button below to see what I mean:

Making the payment process disappear completely **

One of the most exciting areas of innovation for me is the opportunity of making the traditional payment process disappear completely.

One of my favorite examples are companies like Uber and Hailo (which I wrote about two years ago).

Both of these companies are disrupting the limo and taxi industries, respectively, and have built very slick apps that make getting from point A to point B in a city very simple and easy to achieve. When you download either of their apps, you set up an account and store your credit card info. Thereafter, you don’t have to think about payments again. At the conclusion of your ride, you get out of the car and go about your day without worrying about swiping your credit card or handing over cash.

A receipt for your trip is automatically generated and sent to your email inbox.

Other companies are experimenting with this concept within the retail environment. Square recently launched its Square Wallet that lets you pay by just saying your name at the checkout. You enable automatic checkin via the app at your favorite coffee shop. When your vanilla, decaf macchiato is ready, you simply say your name at the cash register. On the cash register screen, there is a photo of you and your name. The cashier simply taps your image and payment is made.


Existing players like Visa and Mastercard have embraced NFC technology that already works with existing payment ecosystems. There are over 2 million retail merchants across the World that are already wired up to access NFC, touchless payments, whether that be by using a physical credit card or a mobile app (like Google Wallet) on an NFC-enabled phone

Existing POS providers like MICROS already have the relationships with merchants and have long-standing alliances with payment processors, credit card issuers and offer integrated software to global companies.

What is easier than simply tapping your existing credit card on the payment terminal at your favorite coffee shop, grocery store or high-end retailer?

The Future

For me, services like M-Pesa, Dwolla, Stripe and Uber are creating true innovative disruption.

Unlike the music industry or retail industries where digital innovation decimated the incumbents, in the payment space, they are not sitting idly by. They, too, are innovating.