Since launching the m-payments startup paybox in 1999, seeing successes and defeats, through selling it and integrating it into Sybase / SAP in 2010, the chicken-or-the-egg-dilemma (“which came first, the chicken or the egg?”) has been constantly haunting me. Responses to this philosophical dilemma have their roots in evolution theory (species change over time via mutuation); Judeo-Christian religion (God created birds –along with the rest of the universe — first); and literature (e.g. Harry Potter: “a circle has no beginning”). In multi-sided markets, specifically in payments, the term “chicken-or-egg” is commonly used to describe a situation in which it is very hard to reach a certain desired outcome (e.g. that consumers employ a new payment method) because a necessary precondition is not met (too few merchants are accepting the new payment method).
In 2011, however, my respect for the chicken-and-egg-problem was eclipsed by my enthusiasm for NFC and my new startup accells. We wanted to create a mobile identity on the secure element of NFC phones to aggregate services in the cloud. NFC had been around for ten years, and every year the industry wisdom promised that the inflection point was only 3 years away. 2011 was the first (and only) year ever that I actually believed those predictions.
12 painful months later, we had to acknowledge that we could not make ourselves dependent on the likely failure of the large industry players who were trying to go forward with NFC wallets. We repositioned accells to focus on a proposition working with any smartphone providing a secure mobile ID enabling people to prove their identity to any work or private service..
Today, two years after this decision, I am trying to evaluate the industry progress in mobile payments. Regarding NFC, I am not surprised to ascertain that no breakthrough progress has been made though hundreds of millions have been invested – lots of trials, lots of strategic allianced, lots of business model issues, lots of unsolved problems regarding around TSM infrastructures, lots of new announcement that Google will save the industry (this time with a cloud-based approach). All I can sense is a big depression in the industry.
In the meantime, I managed to approach payment models with a more rational view and have a developed a simple market model that harbors potential for any multi-sided business model.
This market model is based on sales pipeline economics, allowing the prediction of numbers of possible sales based on an initial market potential. A typical “chicken-and-egg” payment market represents a two sided market, i.e. two pipelines:
- 1) The consumer pipeline – how many consumers will use the payment method?
- 2) The merchant pipeline – how many merchants will accept the payment method?
If 10% of consumers are able to use the payment method and 10% of all merchants accept it, a new system can potentially reach a market share of 1% (=10%x10%) of the transaction space.
Square is a shining example of how to address this challenge. Initially, Square focused on acquiring merchants with new card-readers and a simple pricing proposition while allowing any credit card holder to directly participate in the system. With every new card reader in the market, Square widened its transaction space without facing any dependencies on the consumer side. Actually, then, the Square market approach was only a one-sided model. Only after intial success has Square introduced mobile technology on the consumer side.
Let’s now attempt to understand how NFC payments fit into this market model. For this purpose, we have to differentiate between NFC card payments and NFC wallet payments.
NFC card payments are triggered by NFC enabled cards at the POS. NFC cards are issued by banks to their consumers, like any other cards. This follows the principles of a typical two-sided chicken-and-egg market described above.
NFC wallet payments, however, require not only a consumer with an NFC-enabled phone and an activated wallet on that phone; they also require that the service provider of the virtual card (=the issuing bank) has to be integrated and activated via a TSM provider with the operator of this wallet. To give an example: Joe has an NFC-enabled Vodafone wallet and wants to pay at an NFC enabled POS which accepts Visa payments. However, he might not be able to pay with his Citibank Visa Card because Citibank might not have integrated its card issuing via a TSM with Vodafone.
This adds additional complexity to the market model – a third pipeline gets into the picture which I refer to as the service provider pipeline.
The chicken-and-egg dilemma becomes a chicken-egg-and-rooster dilemma.
The math does not become easier: If 10% of consumers are able to use the payment method and 10% of all merchants accept it AND 10% of all card issuers are integrated in each wallet, a new system can potentially reach a market share of 0,1% (=10%x10%X10%) of the transaction space. Wow! I have no hope that this model can ever succeed. NFC wallets are roosters that have not hatched and cannot be counted on to do so.
From a biblical standpoint, however, there still is hope. The rooster must be the answer. Didn’t God create man first ?
If you see any hope share it with us. Over the next few weeks, this blog will describe each of the 3 pipelines of my market model in more detail and introduce a “chicken-egg-and-rooster calculator”.