New Working Paper: Mobile Payments in Turkey

One of our primary activities here at the Cashless Society Project is to develop working papers that examine the idea of a cashless society from historical, contemporary, and international perspectives. In keeping with that, I’m thrilled to announce that we’ve recently posted a new working paper on Mobile Payment Systems in Turkey, written by Nurdilek Dalziel and Can Ali Avunduk. Both Nurdilek and Can Ali have spent time working in the Turkish banking sector, so their paper provides a insider perspective on how the Turkish banks and mobile telephony providers are currently approaching electronic payment services.

The paper opens with a brief overview of Turkish electronic payments in general, but then quickly dives into what they refer to as “direct carrier billing (DCB).” DCB is an approach to mobile payments where the mobile network operator (e.g., Turkcell, Vodafone, etc) manages the accounts and plays the central clearing role instead of a bank or bank-owned service organization. With this approach, anyone with a mobile phone can send and receive electronic payments, even if that person doesn’t have a bank account. The authors estimate that of Turkey’s 74 million inhabitants, 27 million (37%) do not currently have bank accounts, but most of those do own some kind of mobile phone. Thus, DCB could be one method by which this “unbanked” section of the population can gain access to electronic payments.

Of course, DCB also has the potential to cut the Turkish banks out of the payments game if they are not careful. So far, the authors report, the growth of DCB schemes is quite small, their networks are limited, many consumers don’t seem to be aware of their existence, and the overall payment volumes are actually restricted by the system for fear of fraud. Thus, DCB systems do not yet pose any kind of serious threat to the Turkish banks, and the authors see them more as supplements to the existing banking system rather than substitutes.

Bye-bye, wallets

This week’s Time magazine runs a special report on “10 ways your phone is changing the world”. As you would expect one of the topics is Can a Phone Replace Your Wallet?, in which the author, Harry McCraken (@harrymccracken), attempts to live one whole week without cash while purchasing solely using Square and Google Wallet. This experiment was perhaps inspired by a recent attempt by Michael Fitzpatrick (@fitzp) to explore how near field communication transformed travel in Japan. Yet for all the success in Tokyo (or Hong Kong for that matter) to integrate transport and micro-payments, McCraken’s was not impressed by his experience in San Francisco:

I managed to make it through seven days without cheating, unless mooching off my wife. But there are enough glitches – at one point Google Wallet stopped working altogether – that I was glad to get my wallet back.

This attempt to enforce a single a single payment method echos Visa’s failure at the recent London Olympic venues – where there were only eight ATMs to service thousands of visitors (see further Cashless at the Olympics).

A second article on the same topic is: What Is Driving Africa’s Banking Boom. This one deals with the tried and tested discussion of cross boder payments and using mobiles as delivery channel for bank diversification. In this regard it was interesting to see, in the printed edition of the special report by Time, the result of their worldwide survey. In it, “receive payments” ranks 14th as a response to “Do you use your mobile device to perform each of the following tasks at least a few times a week?”. “Receive payments” was “least used” in the USA (5%) but most used in India (31%). They don’t disclose all of their results, but it would have been interesting to know the same data for “make payments”.

Note – In that survey, “make/receive” a phone call was “least used” in the UK (83%) and “most used” in South Korea and India (98%).

Starbucks and Square

Last week, Starbucks made the announcement that they have decided to invest in the San Francisco payments company Square, and will soon allow customers in their US stores to pay with Square’s mobile payment application “Pay with Square.” This was a great vote of confidence for Square, but a somewhat surprising move for Starbucks.

Square is a really interesting company. It was founded by Jack Dorsey (of Twitter fame) in order to help small merchants accept payment cards. Square removed the friction for small merchants by doing three things: they radically simplified the merchant sign-up process; they offered consistent, transparent, and reasonably affordable pricing; and they enabled just about anyone with a smartphone to accept cards by creating a little magstripe reader and application that communicates with their servers over the phone’s data connection.

I first became aware of Square at my local farmers’ market; the guy who sells handmade pasta pulled out his iPhone, swiped my card through a little square-shaped device plugged into the headphone jack, and handed me the phone to sign my name. Since it was a farmers’ market, the merchant had no phone line or power source, but he didn’t need either; the card was read by Square’s app on his phone, which then communicated to Square’s servers over the mobile phone network. As I walked off with my purchase, I received a receipt for the charge via email. It was unbelievably cool. It felt like the future of cashless payments.

Since then, I have run across several other mobile phone-based payment systems that work in similar ways, but Square has continued to expand their offerings into a set of coordinated products. They now offer a point of sale (POS) app for the iPad, which is probably more than adequate for a small merchant, and a related “Pay with Square” application for consumers. Pay with Square is like a digital wallet, in that consumers can register their credit or debit card account, along with a picture and name, and then make charges against their card at any Square merchant.

Instead of using Near Field Communication (NFC) like Google Wallet, Square relies on the GPS functionality built into most smartphones. When a Pay with Square consumer enters a Square merchant, the consumer app knows this by virtue of its current GPS coordinates. The consumer is then asked if he or she would like to “open a tab” with the merchant, and if so, the consumer app notifies the merchant’s terminal via Square’s servers. The merchant can then tap the customer’s picture and name to initiate a new transaction. Square likes to point out that using a picture and name makes the transaction more “personal,” but the real advantage, at least for the time being, is that the consumer doesn’t need an NFC-enabled phone (only about 1% of phones sold today are NFC-enabled). Pretty much any smartphone with a GPS will do.

Pay with Square also seems to skip the signature step, which raises some interesting questions. When you sign a traditional transaction slip, you are legally authorizing the merchant to charge your account. The card networks have relaxed this requirement for transactions under certain amounts at certain high-volume/low-risk merchants, but it is unclear to me if Pay with Square transactions are also subject to these same rules, or if they have negotiated a general suspension of the signature requirement with the card networks. If the latter, this introduces a sticky issue with regards to fraud and transaction disputes. If you dispute a transaction, the merchant is required to produce a copy of the signed receipt, but if there is no signed receipt, Square will have to provide some kind of evidence that you, and not someone who stole your phone, authorized the transaction. The merchant can verify your picture and name, but what stops the thief from updating the picture before making fraudulent purchases? Perhaps Square uses picture analysis algorithms to detect significant changes to the registered picture, triggering a review?

By capturing both the consumer and the merchant, Square is also able to do some interesting things related to loyalty programs. Merchants can establish various schemes, such as every 10th coffee is free, and Square does all the work of tracking the purchase history and notifying the consumer and merchant when various goals have been met. Think of all those little punch cards you carry around in your wallet today, and how those could just become automatic and seamless in the future.

I would suspect that Square, being founded by the former CEO of Twitter, is also thinking about tapping into the social networks of their customers, though I haven’t seen any announcements related to that yet. For example, Square could easily send you offers to your favorite merchants and let you forward those to friends on your various social networks. Or they could notice that you and some of your friends often frequent the same restaurant or bar, and extend an offer to your entire group.

Of course, the real chore facing Square right now is expanding their merchant and consumer network, which is why the Starbuck’s announcement is so important to them. More than anything, Square needs visibility, and soon every customer who walks into a Starbuck’s store will see their name and hear about their products.

The Starbuck’s announcement also helps to legitimize the very idea of mobile payments, and will most likely help to increase adoption of schemes like Square. Historically, consumers have always had troubles developing trust in new payment systems, and are typically unwilling to use something that seems “experimental” or “cutting-edge” when it comes to their money. But one of the ways in which consumers establish trust more easily is if some business or organization they already trust introduces them to the new system. Think of when you meet a new person via a trusted friend; if you trust your friend and your friend trusts the new person, its becomes much easier for you to trust that new person as well. It works the same way with organizations and systems; if you trust the organization, and the organization vouches for the system, you tend to feel less apprehensive about giving it a try.

One thing is certain though: it will take quite a while for mobile payment systems like Square to displace cash and plastic cards. In fact, the use of cash in the United States and the UK seems to have increased during the recent recession, and the use of credit and debit cards continues to increase as well. The idea of using your mobile phone instead of a pastic card is still a bit too “exotic” for most people over 30, and it will likely take a generation before it becomes commonplace and normalized.