Why Mobile Payments Can't Be Stopped


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Eric Bleeker: The mobile payment spectrum... Famously, people were disappointed that the iPhone didn't have NFC so component plays like an NXP Semiconductors have kind of failed.

As we move into something like an eBay with the payments -- and we've talked about this in the past -- where's the moat, as this becomes really large and there's a lot of deep-pocketed competitors?

At some point Apple might get involved, although they've been a little reticent, but Google is going really big into this with Google Wallet. How is this defensible for a company like eBay?

Austin Smith: The defensible moat right now is the fixed fee that they charge small retailers. It's 2.75%. You may say, "But anybody can go into that space and charge that same 2.75% and disrupt it."

Eric: Or less.

Austin: Or less, right. Look at a company like VeriFone. They actually charge a 1.47% fee, so it's actually less on the surface, but there's all these other one-time add-ons, there's monthly service fees, and the way that they actually structure their fees it's not flat, so for a small retailer to use anybody besides a Square or a PayPal, it actually ends up being significantly more expensive.

What it comes down to is average check size because it's 2.75% no matter what you swipe, whereas these other companies have a per-swipe fee attached to them. That's awesome for these companies who have this deep, ingrained relationship with big retailers. The tipping point is at about $100 average ticket purchase.

For a company who is selling items below $100, they save significantly more money with that flat fee, not a per-swipe fee thrown on top. Anything above that, which is a lot of big retailers, those fixed installed bases, like the VeriFones of the world, actually end up being more cost effective.

For these companies to disrupt the PayPal, that 2.75% fee, they have to disrupt their entire existing business model and get significantly less money from all these big retailers, and that's their cash cow; they don't want to murder that.

PayPal's carved out -- as has Square -- a nice niche at this bottom with a value proposition that the other people can't match or else they lose money on their other business, if they go to that same fixed-fee format.

What it comes down to, if you look at a small business whose average transaction size is $10 and they do $10,000 in total monthly volume, they pay about half as much with Square as they would on VeriFone.

If you up that, they still do $10,000 in total monthly volume, but the average transaction size is $100, VeriFone actually is slightly less expensive.

Eric: So there is a break-even point.

Austin: Yeah.

Eric: To put you on the spot here, tons of valuation issues, we've seen some things thrown around. Square, if it went public, is that a company you're really interested in?

Austin: Absolutely. I'd definitely be interested in Square, and believe it or not -- this one's going to be surprising -- I'd also be interested to see what Spotify looked like, if it went public. We've seen disasters come out of Pandora. I think it's a terrible model, and Spotify seems so similar to that, but I think those are the two tech companies that I would really be eager to see go public.

The article Why Mobile Payments Can't Be Stopped originally appeared on Fool.com.

Andrew Tonner owns shares of Apple and eBay. Austin Smith owns shares of Apple, Google, and eBay. Eric Bleeker has no position in any stocks mentioned. The Motley Fool recommends Apple, eBay, and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published