The Green Sheet Online Edition
August 24, 2009 • Issue 09:08:02
Payments on the edge: A conversation with Conrad Sheehan
Conrad Sheehan is the founder and Chief Executive Officer of mPayy, an online payment solutions provider that focuses heavily on cutting-edge payment methods involving cell phones, social networks and other hallmarks of the modern world. Before his current venture, Sheehan was Senior Vice President at JPMorgan Chase & Co. and a partner at Accenture, a global management and technology consulting firm.
Sheehan recently spoke with The Green Sheet about the benefits and pitfalls of new and emerging payment methods like the short-range, wireless communication technology near field communication (NFC); digital downloads on mobile phones; and virtual currency - including the real world financial implications of "gold farming" in the video game World of Warcraft.
The following is excerpted from the conversation:
The Green Sheet: The emergence of NFC for payments has been anticipated for some time. Is it finally ready to hit the U.S. market? What is holding it up?
Conrad Sheehan: It's been talked about forever. A fair question is has anything changed that one would expect a different result? We see a catalyst emerging that can break the logjam that has historically held back NFC if you look at it from a payments perspective. In the United States, payments are dominated by Visa and MasterCard, and on the credit side it's dominated by just a handful of issuers.
So you have huge powerful forces that control the payment system here in the United States, and they make great money on it. Now you also have a highly concentrated mobile carrier network - the top three or four controlling enormous blocks of people and relationships. You need those two parties to work together in order to conduct a payment.
You have to devise a business model and economic model such that everyone has the right incentive, and right now the banks control that. Right now it's a three party model - acquirer, association, issuer - and you've got the idea of two more parties coming in, one of which is extremely powerful and controls all the consumer relationships on the telephone side. Who's gonna give up money for that to happen?
GS: Might the short-term costs be worth the long-term benefits, even for the card companies?
CH: I think it's a tough argument that making payments mobile will stimulate consumption, and all of a sudden there's gonna be an expansion of consumers buying because of mobile technology. It's a pure substitution, like checks are being substituted away by credit cards and debit cards, so the check companies are losing out to the people who draw plastic from the banks.
GS: To what extent are cell phone companies profiting now from mobile payments online, as they would from NFC?
CH: They do from certain types of purchases, like if you were to get a ringtone. ... If you wanted to sell ring tones on any old device, the carriers are going to take a big chunk of that. Any payment where the payment is billed to the wireless bill, the carriers make a ton of money on that.
GS: Do they ever get a commission for purchases not directly related to the use of the mobile phone - for something outside the realm of ring tones and wallpaper?
CH: No, and that's kind of the problem. They're obviously playing a big role in any kind of future NFC business model - and frankly they should - and they're maintaining customer relationships; they're taking capital investment risks on devices, marketing customer support for entire relationships.
But at the same time, banks are doing that for debit and credit cards, and I don't think they necessarily want to give.
GS: My sense is that the mobile companies are more interested in moving forward with NFC than issuers, is that correct?
CH: Yes. They have everything to gain, and issuers have everything to lose.
GS: Is security still as big an issue with mobile and other online payments today as it was when electronic commerce emerged?
CH: The efforts by Visa and MasterCard through 3-D Secure have largely been unsuccessful. When you're issued a PIN, the people in the payments world know about it, but very often the issuing bank doesn't support it - like Citibank doesn't support it - and it's inconsistent, and it's one more PIN for a customer to use and they already have the protections of credit cards.
GS: What about changing the card verification value (CVV) number? Might that be a solution to protecting card information with online payments?
CH: You can do the ghost number, the one-time use number. American Express pushed it out, but it never got to scale this idea of creating a random number generator, a token, which PayPal offers. But that requires you to carry around a little key fob that generates a little digit code.
GS: Would it be viable to get your PIN or CVV by text message?
CH: It's not as secure, and text messages are not guaranteed delivery because they hop different nodes through the network. A message goes over the air, then gets on the public switch network, routes itself, finds what phone is carrying that number then makes its way to the device. SMS [simple message service] is attractive, but it's tricky for any kind of mission critical or sensitive or secure data.
GS: What effect is mobile commerce having on commerce at large?
CH: I don't see any demonstrable effect right now. I think you might see people's entertainment budgets shifting a bit for mobile games, and the iPhone store is an example. But the idea of mobile phones stimulating overall consumption, again, I don't see that. It will make certain purchases more convenient, and that would be the goal. It might shift some people's discretionary income from certain types of activity to others.
GS: Who's going to get hurt by that?
CH: If you see more people buying more online games on their phones, you're gonna see the folks like EA [Electronic Arts] or anyone who produces console games like on Xbox or Wii or Sony [take a hit]. There are only finite dollars and finite hours in a day, and if a kid who used to spend three hours a day on his Xbox is now spending three hours a day on his iPhone, that's in a microcosm an example of a shift.
We see the ability to take what people are generally calling location-based services and extending them into location-based commerce where you have price discovery and purchase done through a mobile device, but physical fulfillment is done in the ordinary way.
So I have a GPS [global positioning system] -enabled iPhone android device in the future that can find the nearest Starbucks. I order my regular grandÃ© coffee. I buy it, but I pick it up at the store. But it's in a separate pickup line, and my phone number is written on the cup.
GS: Like coffee will call?
CH: Yeah, exactly. The whole notion of will call, whether tickets or coffee, is attractive to the consumer. They don't have to wait in line, and it's great for the merchant because there's no queuing problem. These guys probably sell 80 percent of their coffee in the morning, but it's crickets from 10 to 11:30 a.m. and from 1 to 4:30 p.m. So if they can move more through that key window of time, that's fantastic.
GS: What other location-based services are on the horizon?
CH: Loopt, which is a popular iPhone application that can let you know what registered friends are near you. So if you're in the Embarcadero, and for whatever reasons a college buddy is traveling, and you didn't know that and see him pop up in the same district, you can call him.
That's social networking with GPS layered on top of it, but how does anybody make money from that? People are starting to think how coupons can be incorporated into that. If a retailer knows you're near a certain store, could they push you an offer? That could become a little annoying, but people could opt in to that.
GS: What about currency exchange or unregulated commerce on social sites like Facebook? Is that becoming a problem?
CH: There are a couple companies on Facebook that have built applications to do payment processing and the ability to buy gifts and gift people.
[Commerce] happens on games like World of Warcraft, where there is a naturally emerging internal marketplace among the players, and there's trading going on within the game and then outside of the game some kind of real financial fulfillment.
Like gold farming in World of Warcraft, where virtual gold is a commodity within the game, you could hire a bunch of people to farm gold and transfer it within the game but have the money move outside the game. So inside the game it's a virtual currency; outside the game it's real currency.
CH: How could that be better regulated?
GS: Well, it's always risky because a virtual good is in infinite supply, so it shouldn't cost anything, but they've been able to create this perception of value. I don't think it's a threat to the economy by any means. ... From the perspective of regulation, I don't think it should even be on the radar screen unless it starts to delve into areas of illegal conduct. Then that's standard operating procedure.
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