Humor me for a moment with this tale of two startups, both focused on mobile payments. See if you can spot the similarities:
Startup A: Founded by a young, smart guy who briefly attended a prominent university. The startup eventually moves into the mobile-payments space and raises money in the realm of $40 million. It deploys an interesting new technology to process mobile payments and says it won't take a cut of transactions, instead planning to make money via incentives and marketing. Business starts to bog down amid a growing realization that new payments are really hard.
Startup B: Founded by a young, smart guy who attended a prominent university and hires a bunch of his smart college friends. The startup deploys an interesting technology to process mobile payments and says it won't take a cut of transactions, instead planning to make money via incentives and marketing. It raises $25 million in funding, but is about to realize that payments are really hard.
Company A is LevelUp, the Boston-based mobile payments specialist that was started by Seth Priebatsch and used to be called SCVNGR. Priebatsch went to Princeton for a semester before dropping out and founding his startup. SCVNGR, a location-based check-in game along the lines of Foursquare and Gowalla, did well for a time before the company shifted its focus to payments with LevelUp. The service links QR codes to users' credit or debit cards and lets merchants scan the codes in a smartphone app.
Company B is a San Francisco-based startup called Clinkle, which raised a $25 million seed round from a variety of venture capitalists. It is founded by Lucas Duplan, a recent graduate of Stanford University and reportedly uses high-frequency sounds to process payments.
Maybe Duplan should give Priebatsch a call. Because, in case you missed a theme here, payments are hard.
Why Are Payments Hard?
On the surface, payments look deceptively simple. You need a secure, transactional method—actual currency, credit cards, Near Field Communications, QR codes, etc.—and some way to transmit money from point A to point B, just like you would with any other form of data.
On the surface, all currency is is data. This is why startups like LevelUp and big companies like Google think they can disrupt the payments space. It's simple technology and fundamentally a data problem. Geeks, by nature, are good at technology and data. So they apply their big brains to the problem and figure that in no time at all, they'll make a difference.
And then they enter a world of shit.
“The general inertia, and lack of traction in the emerging payments market within North America, is not something that one solves with a better market strategy and a mobile app,” said Cherian Abraham, who oversees mobile commerce and payments at Experian Global Consulting.
According to reports, Clinkle will handle transactions via high-frequency sounds that smartphones, tablets and computers can pick up on and deliver the necessary information it takes to make a payment. While that's generally a cool idea (and something the advertisers and marketers have been trying to institute through televisions for years now), it's not conceptually all that different from any other payment method.
In fact, that similarity points up an endemic problem for mobile payments in general. Which is that it's basically no easier or faster to activate the NFC or QR code in your phone or open an app than it is to dig out some cash from your pocket or pull a plastic card from your wallet. Try it. They'll each take you basically the same amount of time.
“Payments are supposed to be boring and predictable. That’s a feature, not a bug,” said James Wester, editor of Mobile Payments Today.
The Immovable Object: Existing Payment Processors
Then there is the reality of American business, which exerts a huge drag on innovation in this space by virtue of an established payment infrastructure that connects just about everyone in the economy. Payment innovations like NFC haven’t taken off because (a) they don't really solve any problems better than cash and cards and (b) the payment processors would need to update software and hardware to payment terminals all over the world. That is not an easy task.
Clinkle thinks it can sidestep all that. Theoretically, using high frequency sound to transmit data over short distances could eliminate the need to create a new payments infrastructure. The idea is that consumers' smartphones could communicate directly with the microphones on merchants' computers, smartphones and tablets, routing around the existing payment infrastructure entirely.
Businesses, however, are skeptical of these new technologies and slow to change. Why? Because the benefit is not readily apparent. The question of “how” to change payments is right in front of us with all the technologies listed above. The question of “why” is really what nobody yet has been able to answer.
Adoption Is The Kicker
The first thing a mobile payments company is going to need to do is convince the masses—businesses, consumers, financial processor companies and banks—that its service is original, easier and provides better data than the established players. That's difficult but not impossible with the right service. The next thing to do is get those same entities to actually institute their service.
That’s where it gets difficult.
Partnerships are essential in the payments world. The right partnership can vault a company from also-ran to ubiquitous in days. The fact of the matter is that these companies are intensely competitive with each other and do not really like to provide third party solutions on their platforms.
Google spent nearly half a billion dollars on its Google Wallet mobile payments plan only to see it shut out of consumer smartphones by the likes of Verizon. If Clinkle thinks it will be able to waltz in and put its software onto existing point-of-sale systems, it's taking its first steps on a very hard road.
“If it could have been solved by $25M in VC money, then Google shouldn't have had to spend (rumored) half a billion to find that throwing money, their brand, and a 100m phones could not get it to inch a bit,” Abraham said.
To get Clinkle onto existing, ubiquitous point-of-sale systems—those computers with microphones that are key to what we know of Clinkle's business model—the startup will need a large sales force working in markets across the world. Clinkle, by contrast, wants to spread through university campuses like Facebook did.
Lessons From (Recent) History
What LevelUp's founder and team eventually realized is that good software, an interesting business model based on incentives and a burning desire to take over the world weren't enough. To expand into new markets, LevelUp needed sales people to strike critical partnerships that would convince business owners to adopt its technology.
That sales force has probably been LevelUp's single biggest cost sink. The startup is doing moderately well, but it's still very small, and its prospects of taking over the world of payments appear rather slim.
Like LevelUp, Clinkle is about to get a first hand look at how muddy the mobile payment waters really are.
Lead image by Madeleine Weiss for ReadWrite. Image of Lucas Duplan via Crinkle.