The market for tools that help consumers buy goods using mobile phones is getting crowded, inundating small businesses, putting off venture capitalists, and making it hard for many payment startups to make a buck.
Just ask Kristy Fassio, owner of a Fit4Mom exercise franchise near Seattle. She’s getting bombarded with pitches from mobile and web-payment companies pledging to provide low-cost, easy ways for her to accept payments for the mom-focused workout classes she teaches. Some don’t even charge fees.
“Generally they are like, ‘We can beat any price you are paying,’” Fassio said. “They try to sell me on zero percent, but then they don’t make any money.”
Not making money, while fine for merchants, is rampant in a mobile-payments market that Crone Consulting LLC estimates has more than 100 competitors. Companies like Front Desk Inc., which Fassio uses, and Flint Mobile Inc., are going head-to-head with eBay Inc.’s PayPal and Square Inc. as well as traditional card-terminal providers, such as First Data Corp.
They’re all vying for a piece of a market projected to reach $235.4billion in global transaction value this year, up 44 percent from 2012, according to researcher Gartner Inc. That includes money transfers, bill payments and merchandise purchases.
Seth Priebatsch is CEO of Scvngr Inc., maker of the LevelUp mobile-payment application. Even he says he’s in a “commodity business.”
Cutthroat competition isn’t the only challenge posed by the mobile-payment boom. The newcomers are not all effectively screening their business customers, raising the risk of mounting losses, said Richard Crone of Crone Consulting, a specialist in mobile payments. Some are experiencing default rates two to three times the industry average of less than 1 percent for in-store purchases, he said.
Just as mobile payments gain mainstream appeal, venture capitalists are scaling back, turned off by the crowded field and challenging economics. Startup investments plunged to $92million in the first half of 2013 from $370million in the same period a year earlier, according to San Francisco-based investment bank Rutberg & Co.
Going back to 2008, venture capitalists have poured $1.4billion into the market, Rutberg said. They have little to show for it. The biggest acquisition was eBay’s $240million purchase of Zong in 2011. Since PayPal, Jack Dorsey’s Square has been the lone breakout success, achieving a $3.25billion valuation and an investment from Starbucks Corp., which uses the payment technology in its coffee shops.
“Most people who’ve worked on digital payments for a while are a little jaded about yet another company with a digital wallet,” said Jared Fliesler, a former vice president at Square, who now works as a general partner at venture firm Matrix Partners in Palo Alto, Calif. “The bar is high.”
Startups are also bumping up against deep-pocketed technology companies. PayPal and Google Inc., through its struggling wallet product and related services, have invested more than $1.2billion in their own mobile-payment systems since 2009, according to Crone.
PayPal’s transaction margin for its total business was 64.4 percent in the second quarter on $43billion in payment volume. PayPal had 132 million active registered accounts last quarter and expects to handle $20billion in mobile payments this year. The company charges merchants 2.7 percent for card swipes on mobile devices and isn’t worried about upstarts trying to undercut its rates, said Anuj Nayar, a PayPal spokesman.
“There are a lot of startups doing clever things, but they don’t have the scale,” Nayar said.
LevelUp, a 2-year-old mobile-payment application, doesn’t expect to make money from the 2 percent transaction fees it charges merchants, said CEO Priebatsch. Instead, the company is likely to reach profitability in the next four or five quarters by letting businesses send ads and offers to the more than 1 million consumers who use the product, he said.
“Payment processing is a break-even affair,” Priebatsch said. “Eventually costs will be free for merchants.”