For those “looking to solve real problems,” the $50 billion or so in transaction fees paid to debit card and credit card companies represents fertile soil to be worked. Consumers may not notice that economics suggest we all are paying higher prices for goods to make up for the fee structure, and merchants have no choice but to increasingly grin and bear it. Interest and profits surely await solutions that patch the hole in consumer and business pockets through which the 2-3% tax on charges falls through. And with that type of margin to work with, there is wide scope for an entrant to offer a better deal to consumers and merchants while still making money. With intense interest in mobile payment applications that tie the phone and payment systems, there is an opening for disrupting the credit card transaction fee model by piggybacking on using the work done to create new payment habits using the new mobile capabilities.
Yet the mix of characters experimenting with mobile payments, as described in a recent Economist article, while interesting, is less thrilling than one might expect. The business models do not appear to be focused on creating an alternate to credit cards and undercutting the fee structure on payments. Jack Dorsey’s Square’s business model seems to rely on spreading credit card terminals more widely to individuals and smaller businesses, and thus challenging those who offer credit card terminals like Verifone rather than disrupting the credit card companies themselves. In fact, Visa has invested in Square. Google, which can take its payment in data and mobile ads, is potentially most disruptive, since it could in theory reduce the huge fees that the credit card companies collect by bypassing them, but it seems to be working within the confines of the existing credit card fee system, at least by what is disclosed so far. And unsurprisingly, the credit card companies themselves are working on their own solutions, doing their part to prevent mobile payments from disrupting their lucrative business model.
I am on the search for companies working on something more disruptive by using mobile to disrupt the current payment system industry. I am sure there are more ambitious efforts. Anyone?