Couldn’t resist the opportunity to weigh in, briefly, on the story that had the Web in an uproar yesterday. Seems as though Verizon may be giving Google the proverbial lump of coal a little early this year by saying ixnay to its Wallet. (Read Verizon’s latest statement.) Now, having the largest mobile operator in the US make that call is pretty big. It would certainly limit Google Wallet’s distribution possibilities a whole lot in the US.

The “talking points” are all about security, but my take is that it isn’t really about that at all. It’s a battle over the Secure Element. It is about security, certainly, but is also about control – control over who has access to their customers and the services they are provided. Google has its Secure Element, in fact, and wants it to become the standard for NFC (which is lacking today) That, naturally, means it won’t use Verizon’s. That also means that Verizon isn’t able to lock in Google Wallet customers in any way, including through any sort of financial arrangement/rev share. (Related: Handicapping PayPal in its Mobile Race with Google and Others)

So, where would that leave Google? Well, as the saying goes, there are other fish in the sea, and they’ll sure need them. Sprint was fine for a test, but isn’t enough for Google to scale. Google’s mobile payments strategy, a wallet on a chip in a phone, by design unfortunately for them, also means that an operator is very much in the mix. It’s a fatal flaw in the whole NFC mobile payments scheme and is why my view of success with mobile payments, consistently, has been about mobile wallets that live in the cloud, far, far away and completely disassociated from mobile operators. That approach means that wallets can follow consumers regardless of which handset or operator a consumer decides they want to use and a service provider wants to enable. The gating factor in this scenario is getting the consumer to say yes, which is still hard. If anyone needed any more evidence as to the merits of such a mobile payments/wallet strategy, then look no further than this news story. It will surely be interesting to see how this all ends up.

Karen Webster is the CEO of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.

The holiday season is upon us. I know, wasn’t it just July? That aside, ‘tis the season of parties, gift buying and giving, holiday songs and TV and movie classics that put the meaning of the holiday season in the proper context. 

And the holiday season wouldn’t be complete without at least one viewing of that modern-day staple, A Charlie Brown Christmas. One particular interchange between Charlie Brown and Lucy sort of sums up the real meaning of the season, and in particular, the impact of technology on holiday shopping.

Lucy: I know how you feel about all this Christmas business, getting depressed and all that. It happens to me every year. I never get what I really want. I always get a lot of stupid toys or a bicycle or clothes or something like that.

Charlie Brown: What is it you want?

Lucy: Real Estate  A smartphone.

Now, we all know, that as astute as Lucy is, had smartphones existed at the time of the original script development, that would have  surely been her answer, particularly given how the real estate market has tanked in the last decade and in light of the estimates of mobile retail trending to something like $12B by the year 2014 (according to Juniper Research) So, I’ll do my best to channel my inner Lucy to provide some insights into 5 key statistics from a recent JiWire study of 2k mobile users that point to why a smartphone would be on her list, and how those devices are changing disrupting the world of retail this year and into the future. For every one of these insights, there are at least 20 more that provide even more clues as to how and why IP-enabled devices are reinventing retail and adding value to the consumer and merchant experience.

1. 55% of users under 30 would rather give up their computers for six months than their smartphones.

The only thing surprising about this statistic is that it isn’t higher. Smartphones ARE computers – full stop – they are just smaller. For many in developing countries, smartphones are the only way that the internet can be accessed and for many, it is a PC replacement.  Apps also make doing stuff on the mobile phone more fun and easier too – there are more than 500k apps in the iPhone apps store alone, in spite of the fact that most people use only a handful of those that they may have downloaded. The table below shows just what people are doing via their smartphones in the US, Europe and Japan.

Visiting retail sites certainly registers, but is not top of the charts, just yet. For mobile and shopping to be the match made in heaven that we know it is and to move it up the charts, there are things on the back end that need to be better integrated into the merchant and consumer point of sale experience, like offer presentment, loyalty and making payment frictionless at the point of sale – whether the point of sale is in lane, in aisle or somewhere else. The former is manual and a hassle for everyone – but seems to be the standard for now, and the latter will evolve over the next few years with the jury still way far out on whether NFC will emerge as the standard for how mobile payments are transacted at the point of sale.

The jury has weighed in though (at least for now) on the apps versus browser debate when it comes to the mobile and shopping. It appears, at least for now, that browser wins hands down with 60% to 80% of shoppers preferring plain old browser for search versus specialized apps (apologies to all of you merchants who have spent oodles on apps). I don’t think that it is all that surprising since searching on the iPhone or Droids or the iPad is really as easy as doing it on the PC and with some exceptions, of course, many apps don’t provide enough value to either download or use consistently. (continued)

Surrendering in face of an onslaught of consumer outrage, Bank of America raised the white flag yesterday and jettisoned its plan to slap consumers with a $5 monthly fee for purchasing with their debit cards. Chase, Wells, Regions, and SunTrust were some of the banks that had already cried uncle not before long.

The $5 debit card fee decision will likely to down as one of the biggest marketing blunders of the decade. Ill-timed and badly thought out, it was painful to watch Bank of America twist in the wind as it was pummeled by consumers, politicians, competitors, the media, and occupiers daily. (Related: Bank of America Will Not Implement Debit Usage Fee)

Appearances count for consumers. The debit card is the way that most consumers pull money out of the checking accounts. That, then quite naturally, led to the claim that banks were charging consumers for getting access to their own money. Silly as that assertion is (sort of like complaining about paying to get furniture out of storage), it resonated. The Bank of America debit card fee structure was also way too cute. Consumers only had to pay the fee if they used their debit card during the month. That’s like telling people they only have to pay their electric bill if they turn on the lights that month. There was a fair bit of evidence presented and publicized by TCF during its lawsuit that consumers would flee from banks.

Of course, the effort of banks to replace the billions of dollars of revenues they’ve lost as a result of the Durbin price caps isn’t over. More than 100 banks are subject to Durbin. They’ve lost 10% or more of the revenue they were earning from offering checking accounts to consumers, largely for free. They don’t really have any choices as businesses but to figure out some way to get some of those revenues back by either raising fees or reducing costs by cutting services.

Politicians can talk until they are blue in the face (why aren’t most of them anyway?) about how banks shouldn’t raise fees because they got TARP funding or because they get gazillions in trading profits. But most of the banks that have been whacked weren’t bailed out and they aren’t particularly flush these days. And in the real world, the person running the checking account or retail banking operation for the bank doesn’t really get to go to the CEO, the Board, or the shareholderstockholders and say, hey, sorry I just more than 10 percent of my revenue – so just suck it up.

The 100+ banks subject to the Durbin price caps account for about 70% or so of checking account deposits. They are all in the same boat, and they are all going to be working at plugging the holes in their balance sheets. It is inevitable fees will go up, and services will be cut, as they already have. But it is likely that this won’t be the “in-your-face” approach that Bank of America used. It will be reducing the conditions for free checking, raising fees here and there, cutting rewards and other programs, closing branches and so forth.

One factor that could constrain these banks is the fact that consumers can switch to exempt community banks and credit unions. Those smaller bank and credit unions (less than $10 billion in assets) can get an interchange fee set by the networks that is higher than the caps. They were opposed to the caps, despite what appears to be a real benefit, because they thought, in the end, the networks would push their interchange fees closer to the big bank rate. But even if the exempt banks do maintain the higher interchange fees, they might end up raising their rates to consumers anyway. They will balance business stealing by undercutting the large banks against increasing fees somewhat to existing customers who aren’t likely to switch to the even higher priced big banks. In the end, I doubt the exemption is going to constrain what large banks do.

One way or another, the Durbin price caps will result in consumers paying billions of dollars more in either higher bank fees or by receiving lower services annually. (Related Lydian Journal Article: The Net Effects of the Proposed Durbin Fee Reductions on Consumers and Small Businesses) Merchants, on the other hand, will save billions of dollars, and we’ll have to see when and how much of those savings that pass on in the form of lower prices.

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David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework®, a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass. David is the Founder of Market Platform Dynamics. Read More

Starting last Saturday, Oct. 1, large banks had the interchange fee income they could get from merchants when their customers used their debit cards slashed 45% as a result of the Durbin Amendment. These large banks will lose roughly $7 billion in revenue annually as a result.

Most people used to get their debit cards for free with their checking accounts. Banks used the revenue they got from the merchants to cover the costs of their debit card programs and to encourage people to open up checking accounts by offering free checking. That’s in part why about three quarters of Americans with checking accounts got them for free as of early 2010.

Large banks have been trying to figure out how to offset these massive revenue losses. Bank of America was the latest to weigh in last week with a plan that has put lots of heat on itself for nickel and diming their consumers and on Senator Durbin for setting this debacle in motion. Unlike many other large banks that are quietly raising checking account fees and slashing rewards, Bank of America decided to charge consumers five bucks a month to use their debit card.

The higher consumer fees aren’t a surprise to any of the economists that studied the Durbin Amendment. I, along with Bob Litan and Dick Schmalensee, predicted that banks would try to recover most of the lost revenue through higher fees and cutting programs in the submission we made to the Federal Reserve Board in February. (Related: The Net Effects of the Proposed Durbin Fee Reductions on Consumers and Small Businesses) The Fed’s economists recognized that higher bank fees were pretty likely when they announced the final rules, but of course, were just doing what Congress told them to do.

This is known in economics as a “waterbed effect.” If you sit on a waterbed, all the water beneath you just goes to the other side. Well, the same is true for products that are getting revenues from two groups of consumers to support the costs of the product. If you lower the revenue that one group is contributing, the revenue the other group has to contribute goes up. With debit cards, when merchants pay a lower price because of a price cap, the banks have to make consumers pay a higher price.

Bob, Dick and I have estimated that over the next couple of years large banks will increase fees to consumers by up to $15 billion. Small banks may end up raising fees as well if they end up getting lower interchange fees, too (they are exempt, but market forces may reduce what they can get) or if they figure they can raise fees too given what their large bank competitors are doing (the large banks put up a pricing umbrella). Our guess is banks won’t get the whole enchilada back, but they will probably get a pretty large portion of that $15 billion through higher consumer fees (or lower services like IBC did last week by closing bank branches). They don’t have much choice. The checking account business is pretty competitive and it isn’t as if there is a big profit cushion that the lost revenues can come out of.

That doesn’t mean that other banks are going to follow in the footsteps of Bank of America and raise debit card fees. In fact, Citibank says they won’t. But consumers have come to expect debit cards as part of the basic set of services they get with a checking account. Just like it is easier for restaurants to raise the price of the meal than charging extra for bread, it is easier - and less irritating to consumers - for banks to raise the cost of the checking account or to trim back on some of the other services. This is in fact is one of the reasons that free checking is going the way of free peanuts on airplanes. Free checking has dropped from 75% to 45% of accounts in a bit more than a year. And in any event, after the public relations disaster that Bank of America has brought on itself, it is hard to imagine many other banks heading over this particular cliff.

Taxpayers have a lot of valid gripes against some of the large banks. Raising checking account fees and even charging for debit cards shouldn’t be one of them. That is the direct result of Congress passing the Durbin Amendment that quite predictably moved billions of dollars of money from the pockets of consumers, who are footing the bill for the banks’ loss of revenue, to large retailers who are likely to keep billions for themselves even if they pass a bit back to consumers in lower prices. Banks aren’t yet public services that consumers have a God-given right to use without paying for them. Banks are publicly traded companies with shareholders who can’t simply turn around and tell them, sorry, I just lost 45% of my revenue, and you’ll just have to be OK with that.

Some people have said the banks raising rates is the law of unintended consequences - that’s the law that says seemingly sound regulations often have bad results that weren’t anticipated. Sadly, they are wrong here: the consequences were intended. The Federal Reserve Board, many economists and others knew that consumers were going to get whacked. Fifty-five Senators voted to delay the Durbin Amendment to consider these impacts more carefully in part because they were worried about consumers paying through the nose. They were five short of what was needed to prevent a filibuster lead by Senator Durbin.

So when you pay your bank more for your checking account or for using your debit card, growl at the bank for sure, but keep one thing in mind: you’ve been Durbin-ed.

Mobile. Everywhere. Opportunity. Everywhere. This was the theme of the GigaOm Mobilize 2011 conference held one week ago in San Francisco. Over two days during 50 sessions, participants debated the impact of the mash-up of cloud computing and the mobile Web for driving new opportunities for everyone in mobile - certainly a familiar theme for sure on PYMNTS.com over the past couple of years. Many of the topics focused on what was possible given the technology advances at the intersection of mobile and the cloud. Three panels, however, tackled the topic of mobile payments/mobile commerce head-on and attempted to drill into whether there was any “there, there,” and as a result, really mixed things up for the audience. What follows is a brief overview of the highlights of those panel discussions.

First up was an interview of Keith Rabois, COO of Square by legendary journalist, Silicon Valley mover-and-shaker and conference namesake, Om Malik. (More: quare COO: NFC Won’t Drive mPayment Adoption) And Keith sure didn’t hold back. Characterizing Rabois as an NFC-naysayer is little like saying that Kim Kardashian isn’t really motivated by being in the celebrity spotlight. After remarking that “I’ve never met a single merchant in the U.S. who says I want this NFC thing,” Rabois went on to say that he’s not that worried about the competition since PayPal, as a brand is “atrophied,” and Square looks inward and not on the competition when thinking about how to develop their product. Well, at least he’s not all overplaying Square’s prospects .

Rabois also offered another couple of interesting tidbits. Square’s focus, he says, is to deliver a “simple solution” that isn’t a hassle to implement. Hinting at a new service that will launch later this month, Square says it is, ahem, squarely focused on leveling the playing field between big and small merchants who, with Square and according to Rabois, will get access not only to payment enablement but data and other tools that help them run their business and manage sales. What he didn’t say outright, but is clearly an important piece of the Square proposition, is their ambition to build a network of consumers and merchants that can influence spend with other Square merchants by offering promotions that help drive consumers to other Square merchants in the area. He suggested that Square may not open its API to others, which suggests that their network ambition, if truly an ambition, might take on the personality of one that is closed. In the meantime, the proposition that consumers patronize other merchants who “accept” Square is in and of itself is really clever positioning, since Square is nothing more than a POS device - it’s not a card or an acceptance mark or anything to do with “acceptance” in the traditional sense. It’s sort of like persuading customers to shop at stores that use VeriFone terminals, which as ridiculous as it sounds, is exactly what Square is doing in the short term, with its longer run ambition perhaps one in which “accepting Square” takes on a very different meaning.

Next up was the panel that I moderated on mobile payments. (Watch video of panel debate) We had a great conversation, and I was lucky enough to have an all-star cast participating: Laura Chambers (PayPal), Brad Greene (Visa), Ken Miller (Intuit) and Dave Talach (VeriFone). We covered a lot of ground in our 40 minutes together and had a great conversation.

Not surprisingly, the panel was split on NFC – PayPal giving it a big thumbs down (citing the 3-5 years that it will take to get any traction as too long for anyone to wait, least of all, PayPal whose mobile vision includes everything but NFC), Visa and VeriFone giving it the thumbs up but conceding that it will take time to ignite and Intuit suggesting that they are looking at NFC but have been in market for three years with a solution that leverages plastic cards and mobile phones (goPayment). VeriFone’s Dave Talach fought really hard for NFC, suggesting that consumers will love it since it is easy, and hinting that lots of things are going on behind the scenes to drive merchant adoption. I remain a skeptic, or in Dave’s terms, “allergic” to NFC.

On the topic of chickens and eggs and merchant acceptance around mobile generally, PayPal cited that they are getting no push back at all from their visions of mobile payments, citing that conversations with 60% of the top 200 merchants are going well, Visa suggesting that getting merchants on board is the toughest part of ignition and VeriFone commenting that NFC is the only plausible option for merchants, since it is the only technology that supports the kind of robust functionality that will drive mobile payments adoption for consumers. I tried to push hard on the button that if merchants love it so much, why don’t more of them have NFC terminals, with PayPal’s Chambers chiming in saying how less than 1% of all merchants are NFC enabled, but Visa and VeriFone remained steadfast in their belief that (with Visa’s incentive scheme) and other inducements, we will see rapid adoption of NFC terminals. We’ll see - and have it on tape J.

Moving away from NFC, when I asked Intuit asked about the competition from Square, and its intention to create a small business and consumer network, Miller remarked that since they already have a network of many millions of small businesses and consumers who interact with them via a variety of products and have been in the market for three years with a mobile payments solution that works for everyone they weren’t all that concerned. Intuit’s recent deal with Verizon Wireless also gives it a chance to scale via a national distribution scheme that doesn’t rely on putting dongles in the mail.

I asked each panelist for a one word comment on ISIS and Google Wallet – the responses were, in a word, varied. When asked about ISIS, responses ranged from “complicated” and “interesting” and “confusing” and Google Wallet came in at “Plan B,” “powerful” and “limiting.”

In spite of the differences of opinion on a variety of approaches and outcomes around mobile payments, one thing everyone agreed on was that 2012 was not the year that mobile payments would ignite. All agreed that it was going to take time, that payments alone was not enough of an incentive to drive adoption for anyone - merchants or consumers. There was general agreement that, at the moment, there is no killer app that will drive mobile payments adoption (NFC or otherwise), with Intuit remarking that cash and check (for them) represent well entrenched competition given the ease of use and familiarity. PayPal echoed that same theme, saying that payments in the United States, at least, works so well today, that there has to be more for anyone to care enough to switch to something new. As I’ve written, we’ve seen what a killer app can do to ignite mobile payments adoption (e.g. Starbucks, goPayment and Square) but in each instance, those solutions leveraged stuff that both consumers and merchants have in hand already (no pun intended) understand how to use and were motivated by solving a problem that had little to do with payments transactions in the first instance.

In spite of that, there was general agreement, enthusiasm and excitement that 2012 will be the year that we all emerge from our PowerPoint visions of mobile payments and really start to see pilots and trials begin to shape the reality of mobile payments in real time and with our own eyes (and, of course, phones).

The last mobile commerce panel debated the merits of the SoLoMo (social, local, mobile) phenomenon. This term, first coined by Silicon Valley VC John Doerr, is the idea of making data available to consumers and businesses who can, in turn, use it to improve the process and outcomes around the shopping and buying value chain for both merchants and consumers. This panel, which included Wal-Mart, Best Buy, PayPal and ThinkNear, discussed how a combination of smartphones, mobile apps, GPS and social media are not only empowering consumers with information but changing the way they shop and buy. There was interesting discussion around the “Digital Signals” that consumers emit as they tweet about their experience, “check-in,” search for nearby businesses and how that is closing the gap that used to exist between businesses that want to reach relevant consumers and consumers that want to be served relevant offers.

Panel moderator Phil Hendrix posited a view that by mining the SoLoMo Digital Signals, companies can reduce the friction associated with using traditional media and advertising channels today to reach customers. The panel discussed how using a SoLoMo combo approach helps them recognize customers as they enter the store and provide them with a personalized guide based on the customer’s interests and even previous purchases; enable shoppers to share feedback with one another (which many online retailers already do); reward consumers in real-time with incentives and reinforcement; and in many other ways.

GigaOm’s Mobilize was an incredibly interesting conference and a lot of rich insights were shared by all of the panelists. You can see the live streaming of the various panels and interviews described above here. Panels were each 40 minutes and worth the listen. As always, your comments and feedback are welcome!

Over last two days, I handicapped PayPal and Google in their race with each other and potential players to grab a big share of the emerging mobile transaction platform ecosystem. Today, I’m going to share some final thoughts.

One thing that I think that the Starbucks mobile experience has shown us is how willing consumers are to adopt mobile payments solutions that only work in limited locations, like one store. The big question for all of the mobile payments solutions though is whether, how and for how long, consumers will tolerate a patchwork payments experience at the physical point of sale.

Yes, mobile phone penetration is to the point that just about everyone who wants a phone has one, which, of course, is an important step number one. But everyone also carries around their plastic cards now, too (and more so today than they do cash). What we don’t know yet is for how long the “belts and suspenders” approach to mobile payments (mobile wallets + cards just so you are covered) will be acceptable to consumers and what it will take for them to trade off lack of ubiquity for other goodies that will help drive mobile payments usage at the physical point of sale. We know that what drove Starbucks adoption (4 million users in less than three months) had nothing to do with making a payment transaction but rather solving for a problem that was more relevant to them and their customer: providing information on the available balance on their prepaid cards. Transacting was bolted to the ability of their customers to more easily manage prepaid card balances via the mobile phone.

It may come down to the fact that what drove adoption of plastic cards (speed and ubiquity) may not be as important, at least initially, in the mobile payments arena for either merchants or consumers (or the consumers standing behind the mobile payments user in-lane). It may be that mobile payments ignite first where they, in some sense, ignited last – local Main Street merchants that account for every day spend where consumers want a better way to interact with those merchants. It may also be that mobile payments ignite first in larger merchants where the notion of “store cards” becomes easier for consumers (since fat wallets in cyberspace is a non-issue) and more attractive for merchants who can see better economics from those propositions and offer different things to their customers. The future propositions for everyone pursuing the mobile payments vision seems to hinge on which of these forks in the road are pursued. And as always, the devil is in the details.

For sure, it’s still too early to know any of this, because there are still many, many unknowns. But at least we’re getting closer to the day when we’ll all have the benefit of real consumer and merchant feedback on real solutions. That will make mobile payments arena a whole lot more interesting and tangible. Can’t wait!

Yesterday, I gave my thoughts on what PayPal had going for it in its race to win or at least get bronze in the mobile transaction platform race. Here’s my take on Google.

Consumers: There are a couple of important things to look at here. First, Google is the largest search engine on the planet, has ~200 million email accounts and the largest share of smartphone operating systems. So, Google brings a ton of assets to the mobile payments starting line. Second, their launch partner is Citibank and Citi’s MasterCard credit product. Citi is the 4th largest credit card issuer in the United States and made news recently when they literally flooded the post office with millions of credit card solicitations. Clearly, they are looking to move up the ladder. At the jump, they also bring a decent number of consumers to the party. Third, their launch partner is MasterCard, and their PayPass infrastructure that gets them acceptance right out of the gate at those merchants. Fourth, for the solution to work at least for now, it has to be via an app that is accessed via a Sprint Nexus S phone, which sort of narrows the funnel and a lot. Sprint in the United States actually has a decent share of the Android OS market, so the addressable market could be OK. But at least at the outset, the number of the people running around with Google Wallets will be small, and until the app is available with other carriers/handsets, it will likely have trouble igniting.

Merchants: Google has millions of merchant relationships today via their online advertising platform. Clearly, they will leverage that asset as best they can. Their card network and issuer channel partners, though, provide powerful access to merchant relationships, too. As mentioned, since they are leveraging MasterCard’s PayPass technology, there are more than 140k merchant locations that accept the Google Wallet today. And they are really good merchants, too – drug stores, department stores, restaurants, clothing stores, etc. That, however, is but a pin dot of merchants in the United States today – like 1 percent of them. Merchant acquisition moving forward, then, becomes a little more complicated, since saying yes to Google Wallet also means saying yes to buying and installing new POS gear.

Preferred/accepted tender type: Google has embraced an open platform and wants to enable all cards in an effort to make their solution more scalable more quickly, given the ubiquity of Visa and MasterCard acceptance on both the consumer and merchant side. MasterCard/Citi is already on board. Visa just announced that they have signed on, so it stands to reason that other issuers will fall into place very soon. That is a big advantage, since it does not require anything more of the consumer than stuffing her electronic wallet with account numbers that already exist in her leather one and that she uses today at all of her favorite merchants. That is a big plus – technology issues notwithstanding.

Technology and ramp time: This is where it gets tricky. As mentioned, there are 144k locations today where Google Wallets can be used. Another 180k will come online soon. Visa’s announcement of the Google Wallet partnership will bring on all of its payWave locations too, upping the ante slightly. But there has to be much more than that to get to critical mass on both the consumer and merchant side. Yes, Google is said to be subsidizing installation, and yes, Visa has suggested that it will also create an incentive scheme to drive installation of NFC-enabled terminals as part of their EMV initiative, but that will take time. I simply don’t believe recent analysts forecasts of a 50 percent penetration of NFC terminals by 2014, unless I missed the bullet point in the President’s latest stimulus plan about subsidizing merchant terminal installation. That means that, as I written many times, the biggest risk to this entire scheme is the end-run that IP-enabled solutions, like what PayPal, Starbucks and others still in stealth mode are devising that make for a great consumer experience without the technology hassles.

Value Add: Google Wallet will support Google Offers, which is the Groupon-killer that Google is launching full-on. Offers is enabled in a number of ways and linked to Places, which will certainly include primo offers from the collection of players that Google is buying to support these propositions, like Zagat. The Offers proposition for merchants is pretty compelling too and makes the business model that Google is putting forward both interesting and attractive: no transaction fees, plus I’ll drive traffic to your storefront.

Bottom Line: Google is a serious, well-funded player in the mobile payments space. They have assembled a bunch of powerful channel partners who bring consumers and accepted payment types – that is a big advantage over PayPal. Their digital wallet enables the existing accounts that people have in their physical wallets today. Their big Achilles heel is the current technology platform. NFC introduces a lot of moving parts: (a) handset manufactures and manufacturing cycles, (b) POS systems and refresh cycles and (c) operators and their business models. Google’s acquisition of Motorola makes them less dependent on (a) in the long run, their deep pockets presumably less hamstrung by (b) but nothing gets them away from (c), at least for now. They also have to persuade consumers to install the app (and likely buy the phones or switch carriers), which is not impossible but still a hurdle. Of all of the players who could pull off an NFC solution, I believe they can be the one, given the assets that they bring to this space. But it is still a slog, and their big risk is the (by comparison) easier lift associated with enabling mobile payments via an IP-enabled solution.

Ah, September! It’s the beginning of fall: back to school, football, sweaters here in Boston, and now apparently, the race to the physical point of sale – mobile payments style. PayPal let the world in on its mobile payments vision two weeks ago at an invitation-only forum in Rancho Palos Verdes, Calif. Google launched its mobile payments scheme for real (sort of) a week later in San Francisco. Their approaches couldn’t be more different, in spite of sharing the mobile phone as the enabler of the experience for merchant and consumer.

By now, I am sure that everyone has read up on what PayPal is doing, so I won’t lay it all out here. Suffice it to say that they have channeled their inner John Donahoe, who has been reported as saying NFC really stands for “not for commerce.” There is nary an NFC element to be found in their solution. What can be found is a series of clever experiences that leverage PayPal’s core assets – namely, its digital wallet – to deliver a frictionless experience for merchant and consumer: cardless (phone number + PIN), card (but PayPal branded + PIN) and line-busting options that enable bar code scanning and checkout in aisle. As everyone knows, Google’s mobile wallet solution is NFC-enabled and leverages MasterCard’s PayPass (and soon Visa payWave) capabilities at merchant POS that take contactless (more on this later).

The blogosphere is filled with comparisons of one over the other, so I’ll not do that here. I’d like to pull back though and focus on the bigger question of how the transition to mobile payments will be won in the United States and who is best positioned to pull it off. Having PayPal’s vision freshly revealed to the public makes that discussion much less hypothetical at this point. (Related: PayPal President Reveals Plans to “Free You From the Cash Register”)

Let’s start with the basic fact of the matter. Solving for mobile payments in the United States means dealing with a complicated chicken-and-egg problem: consumers with mobile devices that can talk to compatible merchant POS devices. In the United States at least, that also means improving the experience that exists today for both merchants and consumers (or at least not making it seem like either party has to take giant steps backwards just to enable a mobile payments experience). The little complication is that the industry, at least in the United States, has spent the last four decades perfecting the experience at point of sale so that whipping out a card to pay for stuff works easily, safely and quickly for both consumers and merchants. Making the move to something new then means convincing consumers that they’re not losing anything either (as in being able to use their preferred payment type at their favorite merchants, safely and quickly) but that they might even gain some extra-special goodies along the way (offers from merchants that are much easier to get and redeem since they are on the phone). At the same time, merchants have to be convinced that this new consumer experience will drive more spend – maybe even more incremental customers and spend – and that the cost of accepting something new (technology and/or tender type) won’t cost them an arm and a leg.

So, that means that anyone with aspirations of playing to win in the mobile payments space has to successfully solve the simultaneous equations of consumers and merchants (enough of each to matter), tender types accepted by consumers, the technology solution that enables acceptance today and projected time to ramp in order to get critical mass, and the value-add that makes the trade off to something new worth making for both consumers and merchants.

In my mind, what really makes the discussion now of mobile payments at the point of sale so interesting is that no one has successfully solved those equations and are all approaching its resolution in very different ways.

Let’s take quick look at Google and PayPal from the standpoint of who has what and how that may influence their future (and ours) in this space. Today, I’m going to give you my thoughts on PayPal.

Consumers: On the consumer side, they certainly have a decent start. They have 100 million active registered accounts in total worldwide and say they are adding about 1 million more every month. As I’ve written before, that means that they have a lot of digital wallets that could be used at merchant locations right out of the gate. They’ve also seen the number of their transactions driven by the mobile phone exceed even their most aggressive estimates lately – some $3 billion by the end of the 2011, which suggests that people are using PayPal now to transact via mobile phones. They also scored very high in the “mobile payments are secure” category. [See my prior writings on this subject.] That’s all important since a lot of the concern that consumers have today about using their phones to pay is that the experience is that it is not secure.

Merchants: Well, that’s another matter. Their penetration at major merchants online is still very low. This is due to pushback over merchant fees, the challenges of getting into the merchants’ technology queue and the reality that probably not many sales are being lost at major merchants, because PayPal is not accepted. On the other hand, PayPal’s Bill Me Later acquisition gives them access to some primo multichannel merchants who might be game to try a mobile POS experience. Stats shared in a recent interview with STORES magazine report that PayPal drove $56 billion in payments for retailers in 2010, which is up significantly (42 percent) from a year earlier suggesting that (a) the picture is improving, but (b) there is still a lot of work to be done on the merchant acceptance side of the equation. That is perhaps the biggest challenge, not to mention getting merchants to change anything whatsoever at the POS (especially in this economic environment) without the prospect of a big return and soon.

Preferred/accepted tender type: It is reported that PayPal is the second most popular way to pay online (after Visa) in the United States, so consumers like using it and trust it. That should scare the living daylights out of MasterCard and AmEx but probably Visa, too. Limitations, as stated above, are places to use it online and obviously offline. The important point here is that consumers already have their digital wallets and know how to use them. And their solution is not operator or handset dependent.

Technology and ramp time: This is where it could get interesting. From what has been revealed so far, it appears that the heavy lift is in the cloud, via IP-enabled devices that may not entirely solve the technology queue problem but doesn’t involve the installation of new gear at the POS either. Leveraging their existing devices and enabling new ones, like tablets, are far less cumbersome for the merchant. At least one of their solutions does not require any more than a phone number and a PIN to work, and others leverage the devices that most people carry around today or soon will – smartphones and those that merchants already have on their counters. The card solution, which reminds me of the Revolution Money proposition (anonymous mag stripe card), would require a channel strategy of some kind to get distribution. So, it seems more of a slog (but presumably one that Don Kingsborough’s experience at Blackhawk might help them remedy). That said, it strikes me that the ramp time to enable merchants for any of these solutions is much faster, since it is less about hardware refresh cycles and big budget line items at multiple national locations and much more about integration with POS software in the cloud that can be activated at the POS in a much less intrusive way.

Value Add: PayPal has a bunch of assets that enable it to play as well as anyone in the deal space– driving geo-targeted deals, serving up coupons/info/price comparisons/discounts based on items in the basket or seen elsewhere, etc. Where things could get interesting is the notion of extending instant credit based on customer profile and items being purchased via their BML capabilities and primo risk management infrastructure.

Bottom line: Theirs is a versatile approach to solving POS acceptance for consumers and merchants, leveraging what consumers and merchants have available to use today, including 100 million (and growing) populated wallets. Their solutions are also handset and carrier agnostic, which is a big plus. There are already too many moving parts in the mobile payments space to orchestrate. Eliminating this one is pretty huge. All that said, the big gap to fill for PayPal is on the merchant side, which is not insignificant and is also quite tied to the business model that will underpin these solutions. And we will all have to watch and see how they get merchants on board: will they focus on the big guys or leverage their DNA in the small merchant category and enable those “main street” merchants and others who drive everyday spend?

Come back tomorrow for how I’m handicapping Google.

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Karen Webster is the CEO of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.

OK, having just written a little analysis on the deal space, I was feeling pretty prescient about the Groupon IPO delay story that popped up literally hours after my story was published on PYMNTS.com. No, it had nothing to do with Andrew Mason reading my piece and deciding they needed a strategic about face, but, if news reports are true, it is just as interesting. Seems as though Mason has some ‘splaining to do after his internal-but–leaked-to-the-public-memo touting Groupon’s success was made public during what was supposed to be their quiet period. Don’t these guys know that you NEVER put anything in writing that you wouldn’t want on the cover of the NYT (or TechCrunch) and that quiet period really means quiet? I mean, geez. Anyway, it seems as though there is a little command performance being requested down in DC and a possibility that they will need to amend their public filing. Hey, maybe it will turn out OK after all. The market has been in the tank for awhile, and maybe by the time all of this is cleared up, it will be out of the dumper. The Andrew Mason email is actually interesting reading. Check it out when you get a chance.

Related: Groupon Reconsidering IPO Move, Says Source

Could it be that the bloom is off of the daily deal rose? The news out of daily deal land these last few weeks has been grim. It has made those last few lazy, hazy days of summer, well, a little crazy too, if you are in the deal business or thinking about getting into it.

First up, there was news that daily deal don Groupon revealed that it owes more to its merchants than it has cash on hand (like $300 million more) and is living the corporate equivalent of hand-to-mouth, selling new Groupons to pay off old ones. (Isn’t this the sort of thing that got Madoff 150 years?!!?) This news was on top of another report that said that traffic to Groupon’s site has declined nearly 50% since its peak in the second week of June, which makes the selling of new Groupons to pay off the old ones strategy a little less of a no-brainer. This wasn’t particularly welcome news around Groupon’s HQ, since they declined to comment on these reports, but probably made the folks at Google a little happier that their $6 billion deal fell through.

Then, Facebook abruptly shut down its Facebook Deals a mere 5 months after opening it up on its massive social platform. Deals was designed to drive offers to local merchants, make users aware of its offers via email or news feed, as well as accept Facebook Credits as a payment type to buy the deal. When it was launched, it was reported as nothing short of Groupon’s death knell, and one reporter went so far as to say that it was going to “kill” every other deal site in existence. Its strategy was to serve deals for things that could be done in groups, so according to a spokesperson, “no to teeth whitening, but yes to river rafting.” Users could “like” the offer, share it and/or buy it. Rather than killing the deal space as once predicted, it apparently decided to kill its wannabe Groupon experiment, citing a shift in how it planned to go after the local deals space.

And, a day or so later, Yelp announced that it too is paring back its deal focus (although cutting one’s sales staff by 50% sort of suggests gutting rather than paring). It says that it won’t be abandoning the deal space entirely, just refocusing on “quality” offers. In August, Yelp offered fewer than 30 deals, down from more than 60 per month in June and July.

So, what gives here? Could daily deals be going the way of the hula hoop?

Well, here’s a little toy trivia to get us started this day after Labor Day. In 1957, when Wham-O introduced the hula hoop, there was a mad rush to buy them, in fact, 25 million were sold in the first 6 months they were on the market. Then, about a year later, Wham-O’s sales completely stopped – as in zero sales – as competitors entered the scene with cheaper models. In 1957, if Store A was out of a Wham-O model, Store B down the street probably had the same sort of thing but cheaper. Fast forward to 2011 and the deal space. Today, if you happen to miss that great deal on “I-never-heard-it-but- at-that-price-why-not-try-it-restaurant,” there will be 50 new offers just like it (some probably even cheaper) waiting in your inbox tomorrow and probably some 1,000 deal sites that will offer to host a deal for you if you are a merchant.

That’s not to say that deal sites haven’t done some great stuff. For new businesses looking to build a customer base, many will argue they’ve been a godsend. A store owner interviewed about why she would not run a Yelp deal remarked, “I just got 500 new customers from a deal I just ran, so why would I want to run another one right now?” For her, and for many like her, getting 500 customers in one fell swoop with a deal site would have probably taken her 5 years sans deal site (customer service issues associated with serving 500 customers notwithstanding.)

But as good as they’ve been for some merchants at driving new traffic, they seem to be pretty lousy at converting deal monger to loyal customer. According to new research out of Rice University, 80% of customers never return to the establishment that proffered the deal. About two-thirds never spend more than the face value of the offer. That combination: one-time customer not spending more than coupon face value generally does not make merchants happy unless you are a savvy enough merchant to price the deal accordingly. This lack of loyalty seems to cut both ways, too. This same Rice University research suggests that 73% of surveyed businesses were just as happy running a deal with Groupon as LivingSocial as UncleJoesDeals.com – whoever gave them the best deal got their business.

This all suggests that consumers and merchants might just be getting wiser to the deal. Sure, traffic to deal sites overall was down 25% but 44% of respondents to a recent survey by Experian said that they use or search daily deal sites – daily! And 63% of respondents get emails from more than 2 deal sites each day. No wonder everyone is rushing to enter the deal space. The ability of merchants to get mindshare from a consumer population that large is nothing short of astounding.

On the merchant side, 55% of the businesses surveyed in the Rice University study reported making money on a single deal. That suggests to me that they are playing the deal space for what is it now designed to do – drive people into their stores to move the products that they can make margin on, even at a discount.

Now there is still a lot of noise in the deal market and many problems to be solved. Too many of the deals either look the same, sound the same or are the same. Many are simply not enough of a deal to really matter: for some people, the idea of saving $10 on something worth $20 at a place they’ve never really heard of just isn’t enough of a motivation to buy anymore. Yelp’s proposition of fewer, quality deals feels like it might be taking a page out of Gilt City’s playbook, which is less about deep discounts and more about curated offers that promote the merchant’s brand, and in the process, drive repeat business.

On the merchant side, it actually might be easier than ever to make margin on deals. The mere fact that more than half of all merchants have made money on a single deal is proof of that point. A contributing factor is that there are zillions of deal sites to choose from and high margins will surely be competed down for a number of deal sites, including the market leaders. But the big issue to solve on the merchant side is one that may not be too easy to solve given the current deal site construct: making prices transparent to all consumers who see the offer. The big rap against deal sites is that many of those who buy the deals are customers who don’t need an incentive because they are existing customers but will take a discount if offered. For merchants, that is the ultimate in margin erosion. A deal site that makes the same price transparent to all categories of customers is not a sustainable business proposition for the merchant. Just ask all of the B2Bs that went kaput at the turn of this century. Making cheap prices transparent (and forcing the competition to follow suite if they want the business) is great if you are a buyer but not so great if you are seller. Deal sites that allow merchants to price discriminate based on a number of variables that are relevant to their business is where the industry has to be headed.

So, what does all of this have to do with hula hoops? Well, one way of interpreting the data on the deal market is to say that, like the hula hoop, they’ve burst onto the scene, peaked and are now on their way out as cheaper clones muddy the waters for everyone. For some, and perhaps the vast majority of the Groupon-wannabes, that may in fact be likely.

Another way to look at the deals space is that they are more like another toy fad introduced in 2001: the Bratz dolls. These dolls sold 125 million dolls worldwide by 2005, capturing about 40% (and $2 billion in sales) of the fashion-doll market (Barbie had 60%). A number of line extensions – more dolls, accessories, branded merchandise, etc. – kept this once niche-y product alive, going on to unseat the coveted Barbie doll as the most popular fashion doll in about 2007. Their strategy was to acquire a base of customers and market to them with new and different things that kept sales and margins alive and customer acquisition costs low.

The great opportunity for the deal sites today and in the future is the appetite that the worldwide consumer has for deals – that also happens to be their Achilles heel. The pivot point now for all deal sites is how to turn 44% of opted-in consumers into deal disciples who like a deal but like the merchant more. My view of the deal space is that the pendulum has to shift away from consumers chasing deals to merchants making offers that support their brand, engender loyalty and preserve their margins – that consumers will respond to. We’re seeing how hard it is for deal sites whose economics only make it possible for merchants to run a deal every 3, 4 or 6 months to sustain themselves. It’s time to think about strategies that leverage their consumer and merchant base in a way that builds value well beyond a discounted coupon.