MobileRadicals Blog

With the launch of PayPal Mobile last month, the online payments giant joined a number of startups pushing to gain market share with an SMS (text messaging) payment solution. In the US, TextPayMe, a small company formed by a few silicon valley refugees has stolen the march on PayPal by rapidly gaining market share, by providing an easy solution to a common problem; how to make small payments between users who don’t necessarily have the correct change. Commentators on mobile payments have long wondered when PayPal would make a concerted move into mobile. They have had a WAP site for some years, which allows users with a suitable mobile browser to perform most of the functions available on the desktop. However, this service had little promotion from PayPal, and without partnering with a mobile operator’s WAP portal, there was little chance that the few regular WAP users there are would be manually typing in the URL of the PayPal WAP site. Now it seems their launch of PayPal mobile have been forced to react to a number of movers in the market and finally launch a strong mobile offering.

There has been no significant technology breakthrough that suggests this is the right time for mobile payments. Since the launch of the first WAP handsets, there has been great interest and speculation about mobile commerce, yet the market has not warmed to any of the offerings. This is in stark contrast to online payment services catalysed by the popularisation of web auctions; PayPal processed a total of $27Bn in payments in 2005. As both TextPayMe and PayPal use SMS to enable person-to-person payments, it could be said that a service like this could have been implemented years ago, particularly in Europe where SMS has traditionally been very popular. One factor that could go some way to providing an explaination is the explosive growth in SMS use in the in the past 3 years in the United States. This is in contrast to Europe, where falling voice costs have actually seen SMS decline in some markets in the same period.

Both systems operate in a similar way:

• Alice wants to send $10 to Bob for her share of dinner
• Alice starts typing an SMS “send 10 to 07452123123″ where 07452 123123 is Bob’s mobile phone number
• In PayPal’s case, Alice will send the message to 729725 (PAYPAL on the keypad)
• Alice’s phone will then ring - an automated callback from the service to authenticate her to the system
• Alice must enter a PIN to confirm the transaction
• Bob will then receive an SMS confirming he has received funds into his account from Alice

Both systems usefully leverage PayPal’s original viral model - enabling users who are already registered to send funds to users without an account. In order to receive the funds they must register a new account; a great way to encourage growth of the system.

While TextPayMe proposes to make its money from the service from charging fees at most points in a typical use case (to add funds to your account, to send and to receive), PayPal extends its successful web-centric model of charging merchants to accept funds where the system is essentially free for users sending money between accounts.

Person-to-person payments are certainly interesting and likely to gain a lot of media converage, their acutal impact on the market will probably be low. Cash is likely to continue to work in this case for the forseeable future, and P2P payments will not attract new users to a payment system in any great numbers. However, PayPal has added another dimension to its mobile offering with ‘Text To Buy’ (TTB). Here when a user sees advertising for a product they want to buy when they are out, the ad will have a message appended, something like “TTB Bionic to 34234″. A user can then send the message ‘Bionic’ to 34234 from their PayPal-registered phone to buy the latest ‘Bionic The Hedgehog’ video game and to have it delivered to the address they have registered with PayPal. Clearly this is a powerful concept, allowing PayPal to reach out to merchants who don’t necessarily have a presence online. Also, a model like this has the chance to challenge the dominant payment method in mobile commerce today, premium SMS. For ringtones advertisied in print and TV media, the TTB model will allow delivery of ringtones and device customisation content with WAP push, while increasing payout rates for content retailers, who often only get 50-75% of what users pay due to high charges from network operators.

A key deciding factor on SMS payments will be the support from network operators. Few users will use services which are not installed by default on their device. Operators have been posturing in the mobile payments for years, with failed initiatives like Simpay demonstrating the lack of consensus in the industry regarding m-payment. Undoubtedly operators recognise the potential of mobile payments and are keen to use them to boost revenues, and thus want to be the driving force in mobile payment solutions, rather than allow incumbents like Banks to control the marketplace. This may affect their position on partnering with a third-party payment provider like PayPal. However, the operator that recognises the potential in offering a complete payment solution with a strong payments brand like PayPal may end up the winner in the next mobile payments battle.