Offline Payments — Square, Amazon Go & Indian Wallets
Amazon launched an impressive demo of their vision for a futuristic offline shopping experience called Amazon Go earlier this week.
The commercial starts with these lines:
Four years ago we started to wonder,
what would shopping look like if you could walk into a store
grab what you want and just go?
Square Wallet
I couldn’t help but think of how close the intent and the claimed development timeline of 4 years point to inspiration from Square Wallet (launched in 2011). The rise and fall of Square Wallet is an important history lesson for anyone interested in mobile payments.
I am unable to find the official commercial for Square Wallet, so this video will have to do
This New York Times article from 2012 has a fitting description of Wallet (later renamed to Pay with Square):
You walk into a shop or cafe. The cashier knows that you’re on the premises, because your name and thumbnail photo appear on his iPad screen. He rings up your items by tapping them on the iPad.
And now the magic moment: To pay, you just say your name. The cashier compares your actual face with the photo on the iPad’s screen, taps O.K., and the transaction is complete. No cash, no cards, no signatures — you don’t even have to take the phone out of your pocket.
Lot of people expected that Square Wallet will revolutionise payments in a similar manner as Uber revolutionised the taxi industry later.
Starbucks & Square Wallet
Its moment of glory came when Starbucks decided to use Square to process its payments and also invested $25 million in Square with Starbucks CEO Howard Schultz taking a seat on Square board. Getting Starbucks onboard should have helped Square get more adoption from other retailers, more customers and more transactions.
But, the deal did not work out and was finally scrapped in 2015. Square lost $70 million accumulated overall through the period of the contract. It also failed to find mass adoption for its Pay by Square product.
There were early signs that the partnership was not going smoothly. A report by Fast Company in 2013 found the failure rate of paying via Square at Starbucks at 57%. Starbucks did not properly invest in training baristas across its 7,500 stores on how to process Square. The fact that both Starbucks app & Square used barcodes tripped baristas over. I am unable to find any mention that the original planned experience where the customer can pay via Square by only telling his name was ever brought to Starbucks.
Starbucks
Starbucks may seem out of place in a discussion of mobile payments and its failure with Square Wallet may reinforce that notion. But, we can hardly be more wrong.
Unlike most retailers, Starbucks has been a pioneer in driving mobile payments launching an app to pay via mobile as early as 2009. By October 2013, 11% of transactions at Starbucks — a staggering 4 million transactions per week — were coming from its mobile app.
Starbucks built this adoption on top of their successful loyalty program & gift card adoption. The other smart move was to shift the cumbersome process of scanning on the POS side and make it simple on the customer’s end.
Benjamin (Starbucks mobile wallet lead) took the very simple 2D barcode and inverted the use case that most companies were using. By allowing the register to scan the 2D barcode rather then the user scan a 2D barcode. This was a maverick move at the time as most technologists were laughing at the 2D barcode and the way it was used.
Mobile transactions account for 21% of Starbucks transactions now. This is touted to increase to 50% of transactions in line with the trends in China where 40% of consumers pay using their mobile primarily using Alipay & WeChat Pay.
Offline Payments — Indian perspective
India has been a cash led economy, but the recent demonetisation of the high value Rs. 500 & Rs. 1000 currency notes has given a bug push to digital payments. The main problem is the lack of active credit/debit cards & card acceptance infrastructure.
By December 2016, we only had 1.4 million POS terminals in India. To match standards of other BRIC countries, we will need 20 million POS terminals which is a tall order. Banks are working to add 1 million more POS terminals by March 2017. On the consumer side also, as of June 2015, India had 24.5 million credit cards & 661 million debit cards. As above chart suggests, most of the debit cards are inactive, and among those which are active, few are used at POS terminals.
Relatively high cost of acquiring POS terminals along with connectivity issues and low card penetration hence presents a unique opportunity which can play out in multiple ways.
Option 1 — Cash continues to dominate
Many Indians, especially in rural India, continue to be outside of the banking economy. This prevents them from taking part in any form of digital payment. Using cash for payments is also a well established habit which people may not be comfortable in changing. However, the government is taking important steps to address these:
- Jan Dhan Yojana Bank Account: This scheme aims to provide a bank account to each household. It provides for a zero balance account, with a facility to overdraft, debit card & insurance. 250 million bank accounts have been opened under this scheme.
- Payment Bank: India has allowed a new class of banks called as Payment Banks which can take deposits up to Rs. 1,00,000/- and not do any lending activity. The intent is that this will bring many more unbanked customers within the banking ecosystem.
- Incentivise digital payments: The government has waved service tax for transactions up to Rs. 2,000/- when paid using a card or other digital mediums.
- Tax Fears: Another reason why cash works well for merchants is that they get to keep the transaction off the books & avoid paying taxes. However, the current anti-corruption moves with tax penalty of up to 85% of undeclared income will hopefully nudge more merchants to keep transaction on the books.
Option 2 — Wallets win
In India, we often look east to China to see trends rather than to Western Markets. In China, both Alipay & Tencent (with WeChat) are leap-frogging UnionPay & traditional banks. They seem to have a strong chance of replacing the current banking system altogether. Tech in Asia’s Steven Millward did a great piece on living through a day by paying only using WeChat & Alipay. You should read it.
The low card penetration & usage gives Indian wallet companies like PayTM, FreeCharge & MobiKwik to become the dominant mode of digital offline payment. Both Alipay & Tencent now also provide multiple other financial services & utility options like splitting bills which traditional banks are unlikely to innovate on. This is important as it gives people multiple reasons to add money to their wallets. All Indian wallet companies currently fight cards by giving high cashback but this is unlikely to sustain in the long term.
However wallet & QR code based payments are likely to win the convenience battle against Chip & Pin based cards. Also, instead of competing with POS, some wallet companies like FreeCharge have tied up with banks so that their POS terminals can accept wallet based payments.
This model finds some resonance in US also where Square is pushing its Square Cash product as the primary consumer product.
Option 3— Cards win
With the push to expand the POS acceptance infrastructure, many more merchants should be able to accept cards. This combined with the general lack of currency will push people to adopt the new payment mode.
However, we are yet to see anyone in India being successful at scale in offering POS terminal at low cost in the way Square has been able to in US. PayTM made a lot of noise to launch a POS on their app in the recent past, but quickly withdrew & relaunched in light of serious security & privacy concerns. This problem is unlikely to be solved only using software.
This option will also be something which banks & card networks like Visa & Mastercard will support as they continue to be a part of the transaction. Products like Apple Pay & Android Pay which use NFC instead of the QR code based payments make this option particularly strong in terms of utility and delivering a better experience than cash.
But, this needs the mobile ecosystem owners like Apple & Google to step in directly. They may be discouraged by the lack of active cards & acceptance infrastructure.
We may have a wildcard entry in terms of Unified Payments Interface — a new standard backed by government to make transferring money between two bank accounts as seamless as using wallets. In my opinion, adoption for UPI in offline payments may be hard as it suffers the same experience problem of remembering/precisely entering a handle. This is the same problem with Square’s Cashtags in offline payments.
Edit March 4, 2017 — NPCI has since then also adopted QR code as the preferred method of offline payment for UPI. The government is also working on building a common platform with banks, Rupay, Visa and Mastercard so that merchants don’t have to display multiple QR codes at their storefront.
Interesting new products, heavy push on partnerships along with regulatory support towards digital payments makes offline payments very interesting, especially in India. It will be fascinating to see how offline payments evolve over the next couple of years.
Disclaimer: I work for Shopo, which is a product by Snapdeal. Snapdeal also owns FreeCharge, one of the leading wallet companies.
