The mobile payments market is one of the fastest growing segments of the digital economy. Research by Gartner shows that the total value of global mobile payments will surpass US$171.5 billion in 2012, a 61.9 percent increase from 2011 values of US$105.9 billion. The research firm Yankee Group develops on this by predicting the mobile payments market will transact over US$1 trillion by 2016.
Much of this growth has been attributed to the fact that the internet and mobile telecommunications have matured and become more unified. Bearing in mind the world population is 7 billion, it’s astonishing to consider that 5.9 billion mobile-cellular subscriptions exist (meaning that 87% of the world’s population have a mobile phone). These devices have also become more ubiquitous and more capable, twice as many people in the world now access the internet through their phones than through fixed-line broadband.
With such sustained growth and penetration it’s clear that the mobile payment space could represent significant opportunities (and risks) for investors. To learn more we spoke to Jalak Jobanputra, Managing Director at RTP Ventures.
Jalak Jobanputra is Founding Partner of RTP Ventures, a $120M venture capital fund in NYC. Previously, she was the Director of Mobile Investments at Omidyar Network, a philanthrocapitalist fund started by Pierre Omidyar, co-founder of eBay. While there, she created a mobile investment strategy, invested in an East African mobile tech incubator, invested in an Indian mobile classifieds site, and closed Omidyar’s largest for profit investment ($5M) to date in Latin America. She has over 18 years experience in venture capital, media and technology. She was previously Senior Vice President at the New York City Investment Fund (NYCIF), a private economic development fund founded by Henry Kravis, where she managed the fund’s technology and digital media venture investments. Her portfolio at NYCIF included outside.in (acquired by AOL), Imagespan, Thumbplay and TXVia (acquired by Google) in addition to seed investments Magnetic, Ticketfly, Enterproid and SeatGeek. Prior to NYCIF, she was a Principal at New Venture Partners, a $300 million early stage venture fund which commercialized technology out of corporate labs. From 1999-2003, Jalak was at Intel Capital in Silicon Valley, where she invested in enterprise software, internet and digital media start-ups, including Demantra (sold to Oracle), Extricity (sold to Peregrine), Viacore (sold to IBM), R Systems (IPO), Financial Engines (IPO), Yodlee and Zinio. In 1997 in NYC, in the early days of Silicon Alley, she launched and managed product development for online financial information start-up Horsesmouth. She began her career in media, telecom and tech investment banking at Lehman and Broadview in NYC and London.
Q: What is the current state of the mobile payment space?
[Jalak Jobanputra] The mobile payment space has definitely been growing, albeit at different rates around the world. Here in the US, we’ve been behind other countries- primarily as we have such an established payment market. To put that in context, over 50% of transactions here are done on credit cards.
That said, PayPal is a good proxy to show that there is a lot of potential and pent-up market demand for mobile payments. Analysts expect PayPal to process over US$3 billion in mobile payments during 2012. Just a few years ago, that figure was only US$25 million. That shows the growth happening in the space. You also have things like M-Pesa in Kenya and NFC Payments in Japan that have been established and working for a while. In the US we are also seeing the three major credit card operators who have partnered to create ISIS. This is the first time we’ve seen collaboration happening amongst the incumbent operators in the US to make something happen- that’s recognition of the importance of mobile payments and the need for interoperability.
Q: Who are the key participants in the mobile payments market?
[Jalak Jobanputra] M-Pesa is a division of SafariCom in Kenya. They are very closely tied to the incumbent operator. In any country without a single dominant player, we’ve seen slower growth. In the US there are many independent solutions emerging such as Venmo who are a peer-to-peer mobile payments operator. If you’re going out to dinner and want to text someone what you owe, their platforms allow you to do that. Solutions like this are great, but have created a very fragmented market. Projects like ISIS are a response to this fragmentation as operators realise they need to innovate first to avoid the independents beating them to it.
VISA has had several initiatives in this area too as have Bank of America. Often these solutions are very clunky, but they are moving in the right direction. I personally think these firms may acquire and integrate technology in this space.
Q: What do you see as the key investment opportunities presented in the mobile payments space?
[Jalak Jobanputra] A couple of years ago, I invested in a company called TxVia who made a pre-paid card processing platform which was completely cloud based and didn’t require any legacy mainframe systems. They were just acquired by Google to integrate into the Google Wallet platform. Storage of money and the concept of pre-paid is certainly an interesting space.
We have also seen companies who are offering stored-money for different members of families through the same platform- allowing spending limits per person. These will eventually be integrated into mobile phones.
I’m also tracking what’s happening with ISIS and what’s happening at point of sale. Retailers are going to have to implement systems at point of sale, and if that opens up we will see interesting companies around the analytics and data space to deal with the information being generated by these systems. There will also be a marketing layer, which will be interesting. This is a rapidly developing space, and the incumbents are finally addressing problems which exist. The danger is you do not want to invest in companies that are competing against these larger providers.
Q: What are your views on the future of PayPal?
[Jalak Jobanputra] PayPal has become an incumbent in this space. As much as their transaction volume is going, I still know a lot of people who’ve never used it. PayPal also has rather high fees. If you look at how fast Square has penetrated the market… they are now the default card reader in many restaurants and so on. They are really posing a threat to PayPal who left themselves open to competition because of their fees. Making transactions more frictionless and cheaper is going to appeal to consumers and retailers alike.
PayPal is certainly under threat right now.
Q: What are the risks associated with this space?
[Jalak Jobanputra] Security is always a question mark, especially in the mobile space. At least in the US, we haven’t yet had the volume of transactions to see where the potential security breaches can happen. I think all the players are aware of the importance of that.
Consumer adoption is also a risk. The US is very entrenched in their current payment methods. To get consumers to use their mobile phone for payments is not an easy task unless it’s made totally seamless. In countries like Kenya, they had no other option, this was the first way to pay, and so adoption was a lot easier. The same is true of Indonesia, Brazil and other regions of the world.
Q: Are there any key innovations driving this market?
[Jalak Jobanputra] NFC has proven to be a great solution in countries like Japan and in parts of Europe. I think that while NFC is definitely a strong option, you will see a portfolio of payment options including PayPal and their counterparts. You will also see emerging peer-to-peer providers.
Q: How will mobile payments sit alongside conventional financial providers and infrastructure?
[Jalak Jobanputra] In the very-long run, mobile payments may serve to displace the current banking infrastructure. In the more developed markets however, this will take a very long time- several generations. Our banking systems are very entrenched.
In places where there was no real banking infrastructure, where the population was largely un-banked or distrustful of banks…It’s not hard for them to adopt new technology… and so these platforms can become dominant very quickly.
I think about the analogy of bill-pay, which has gradually replaced paper checks. Mobile banking solutions will gradually replace credit cards and cash but they will certainly exist side by side for some time to come.
What does this mean for Investors & Risk Managers?
There is no doubt that mobile payments present a huge opportunity for investors. It is a space with many competing technologies and solutions vying for dominance, and very quickly we will see who the winners are. As Jalak notes, the smart money is tracking the end-user part of the chain- after all, that is where adoption will occur. For the winners? the payoff is huge- we are sitting at the cusp in a total revolution in the way that people manage money.
For risk managers, a new approach is needed. This is a disruptive innovation that changes not only how business is done, but the nature and origin of risks in the space. Much work is needed to understand the security, process and other risks – but rather than being a deterrent, these factors should be seen as part of the growing-up stage of mobile payments.
There’s an $8 trillion market in offline payments which- when compared to mobile- seems clunky and antiquated. Mobile payments are not just a slight improvement on the incumbent way of doing things, they are a massive and necessary leap forward.
The future could be very exciting!