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Business model for mobile payments still to be determined: Forrester

The economics of payments is shifting as newcomers such as Square and LevelUp test new models for delivering payments, according to the Forrester report “Three Disruptive Payment Trends in 2013.” At the same time, growing competition between mobile digital wallets is expected to push these services to the next level in terms of adding value for users.

“These emerging payments models will disrupt payment economics and many of these emerging payments models are being introduced by players in the mobile space and/or the digital wallet space,” said Denée Carrington, a senior analyst at Forrester Research, Cambridge, MA.

“I don’t think that we are set in terms of what the business model or the economics for mobile payments will be – we are still a ways away from the final version,” she said. “I think there is evidence of that even in MasterCard’s decision to charge some of these staged wallets fees.

“You have these nimble, tech-savvy competitors that are entering the payments space and offering very disruptive economic models like LevelUp, Dwolla that are low cost or no cost that deliver additional value beyond payment processing and many of them are coming out of the mobile payments space.”

Building a new model
The economics of payments is changing thanks to the growing number of options – many of them mobile-based – available to retailers offering lower or no processing fees for payments.

Retailers have longed complained about the fees charged by payment networks such as MasterCard, Visa and others. As a result, retailers are open to trying to newer payment options that save them money and, once they get a taste of the low or non-existent fees, may start to expect lower costs and greater value from the incumbent payment providers.

The battle between the incumbents and the newcomers is already starting to intensify.

For example, MasterCard has a new fee structure for digital wallet providers such as Google Wallet, PayPal and Square that masks the merchant of record and other transaction details from others downstream in the transaction flow.

There are several new economic models for payments that are currently being tested. For example, LevelUp uses marketing fees to replace interchange fees, with merchants paying LevelUp for delivering new and returning customers to their business.

Another example is a closed-loop stored-value card such as is offered by Starbucks, which receives accelerated and incremental revenue when customers shift their purchase to the Starbucks card and the company avoids paying interchange fees on those transactions.

In another example, companies such as Square and Dwolla offer free or a low flat-fee pricing for processing payments.

Moving beyond coupons
Mobile digital wallets are slowing gaining steam with consumers but to date have mostly offered similar experiences enabling users to make a payment as well as store and redeem coupons.

Increasingly, competitors will look to drive adoption by integrating more capabilities with a focus on those that remove friction from the shopping and purchasing process and make payments more contextually relevant.

“The marketplace is going to soon move beyond a focus on coupons and offers,” Ms. Carrington said. “Those are important – they are table stakes and must be done.

“But there is more that can be incorporated into a digital wallet that really differentiates it from others in the marketplace and those consumers will find extremely appealing because it removes friction from their commerce experience.”

“The friction of waiting is removed from the equation,” Ms. Carrington said.  “This is an example of how digital wallets can create a differentiation in the marketplace that is valuable to both merchants and consumers.”

Alternative services
Another trend expected to disrupt the payments space this year is the growth in alternative financial services catering to the unbanked and younger consumers to appeal to a broad base of consumers. These services increasingly have a mobile consumer experience enabling.

These services are expected to begin to compete more directly with checking accounts and debit cards, presenting new growth opportunities for merchants as well as incumbent payment providers.

“In 2013 we are still going to see a lot of trail of mobile payments,” Ms. Carrington said. “We will see continued building of consumer interest and awareness and also trial but use is not really going to accelerate for another year or two.

“This is not the take-off year.”

Final Take
Chantal Tode is associate editor on Mobile Commerce Daily, New York