Two savvy gentlemen from IBM Canada wrote a very timely and relevant Op-Ed piece in the Financial Post giving their predictions on the future of mobile payments in Canada.  Click here to check out the article on the FP website, written by James Wallis, Vice-President of global payments for IBM and Mike Cook who is a Partner in IBM’s financial services sector.  We decided to include the full text of the article on our blog because the viewpoints of these industry heavy weights are so well communicated and happen to be directly in line with our thoughts on the key drivers to mobile payments adoption in Canada.

The areas of growth addressed in the article are part of reason why we are so excited to be on the  leading  edge of this ecosystem.  Conversations with clients and prospective players in the space indicate an understanding that Value Added Services represent both a massive opportunity but also a threat to mobile payments because, for many of the players trying to be in this space, mobile experience, content and distribution partnerships are definitely not part of their core competency.  That’s where we come in. Clip is also having a number of exciting discussions with players about the need to build and manage the value added services components of their mobile payments offering that will give consumers more reason to try this new medium, and by layering up the value and engagement offerings, keep them coming back to your solution vs. another.

If you have any questions about the Clip platform or how we can help your mobile strategy, please do not hesitate to drop us a line.

By James Wallis and Mike Cook

When the thought of using mobile phones as a one-click passport for payments was imagined two decades ago, it was viewed more as a futuristic concept than a realistic opportunity.

Fast forward to today, in 2011, the market’s interest and demand for such solutions has changed. The industry has begun converging, the technology has started materializing and well-established players, as well as popular Internet entrants, have made plans to roll out viable digital wallet offerings within the next 3-18 months.

Analysts are expecting the mobile payments market to steadily climb: Juniper Research issued a report recently forecasting that the number of mobile users making payments for digital goods will reach 2.5 billion worldwide by 2015, up from the 1.8 billion forecast for 2011.

Needless to say, this is an exciting time for the future of payments.

But what remains to be seen is if all the excitement around mobile payments will translate into adoption and action. For widespread adoption to take place, Canadian consumers will need to be courted with incentives and discounts to change their behavior – to trade in the use of plastic credit cards, for the use of their ubiquitous smartphones.

In addition, banks and retailers will be tasked with providing significantly improved customer experiences to propel consumers to make the switch. Until the mobile phone becomes an established payment channel, consumers will still rely on traditional sources to pay for their goods and services.

Will this sea change actually take place? If all the activity happening in North America and in emerging markets is any indicator, then the answer is yes!

In Kenya, there are more than 14 million active users who are using mobile payments to pay utility bills, make purchases and transfer money between family members. In Canada, all major banks are now offering mobile applications, which are providing a base of customer usage that will in turn translate into mobile payments.

As mobile payments schemes become more established – and as security and regulations issues are ironed out – the payment movement will shift from the innovation phase to the industrialization phase.

Technology will emerge as the key enabler to drive open commerce. In the developed markets, the real opportunity will be in the value-added services that mobile payments will deliver to consumers. Banks and retailers will need technology to send targeted coupons based on device location, analyze transaction histories for fraud detection and market goods and services as part of cross-industry offerings.

Opening New Lines of Commerce

IBM’s research has found that the mobile payments ecosystem will expand beyond just advertising media and payments and will include new value-added services for transportation, retailing, healthcare, and education to name a few. The ecosystem may also include new ways to exchange value.

Real-time exchanges (much like the model embraced by PayPal) could emerge to change the way financial institutions compete for loans. Just as the Internet changed the way banks originate mortgages, mobile commerce could enable loan exchanges where individual banks bid on large purchases at the point commerce – just imagine retailers being in the loan origination business.

These types of exchanges would open up new opportunities for banks and retailers to collaborate on solutions to reduce excess inventories in a real time environment with attractive consumer offers from both a price and financing perspective.

The ecosystem could also see the return of closed loop payment schemes where individual banks and retailers collaborate to optimize value for all parties. Banks that have merchant and consumer relationships could be major beneficiaries in such an environment.

Managing Big Data

When the mobile payments industry takes off a few years from now, the growth in data will be so explosive – up to 10,000 faster and 10,000 larger than what traditional data warehouses and business intelligence applications can handle today.

Banks and retailers will need to invest in the right tools to manage the volume of “big data,” and control the influx of 24/7 structured and unstructured data feeds.

Providers will need to have increased scalability to manage voluminous transactions and new core capabilities will be required to drive smarter commerce.

In the new mobile economy, ecosystem suppliers will be called on to:

- analyze massive amounts of structures and non-structured data in a real time manner

- perform predictive analytics for risk and payment “spend”

- collaborate with retailers, banks and consumers in a real time environment

- interconnect with all social networks and ecosystem suppliers

- control private information for consumers

Emerging, data-intensive, real-time analytics workloads require systems that can process lots of data, analyze that data on the fly, and provide recommendations based on that analysis. IBM is working with clients and partners to shape the future of industries as they face increasingly complex—and vastly different workloads handling an unprecedented levels of data generated by complex financial transactions, electronic medical records, power grids, and more.

The Big Winner?

Our view is that the activity in the payments marketplace is volatile with many players competing to dominate media channels with new offerings. While mobile wallet offerings may become widely adopted in the next 3-5 years, what remains to be seen is which model will ultimately dominate this space.

Will one framework win over others? Or will multiple offerings and sources become pervasive? Only time will tell.

James Wallis is vice-president of global payments for IBM. Mike Cook is a partner in IBM’s financial services sector.

Learn More about Mobile Tagging at Microsoft Tag.

If you’d like a bit of primer on NFC, mobile payments and why this is such an exciting opportunity, Mark Healy recently did a very solid post on the Globe and Mail detailing how this tech could change the game for a variety of players.

A few weeks back, I attended a conference put on by KPMG on their 2011 Mobile Payments Outlook.  The folks over at KPMG presented their research where they consulted with over 1000 stakeholders in this broad industry.  You can download the report here to get caught up on your reading.   This was a global survey but it was interesting to sit in Toronto with a panel and hear how the Canadian market is looking at the mobile payments opportunity.  For the purposes of this blog post, my analysis will mainly focus on the Canadian industry.

So what of it?  Is 2012 going to be the year of mobile payments, NFC and a new era of mobile commerce in Canada?  Or is this just another round of industry Kool Aid considering that there still aren’t any NFC enabled Smartphones actually in peoples hands and our financial institutions continue to print money by sticking with the status quo.   Not to mention consumers are quite comfortable paying with those trusty plastic cards and merchants are asking themselves, “Didn’t I just purchase a chip & pin terminal…Now you want me to invest in a Tap and Go machine?!?”

The recent unveiling of the new iPhone 4S, a phone which many tech analysts were expecting to have NFC built into it could have really poured gas on the fire in terms of thrusting NFC and tap and go transactions into the glare of mainstream consumerism.  Alas, Apple disappointed the mobile commerce nerds this time but there are a host of other device manufacturers now rolling out North American devices with NFC chipsets built-in; including the new Blackberry devices and the Nexus S phones.

These are just a few of the issues at play in what is a very complex business and technology process.  Perhaps the biggest challenge in the mobile payments space, and one that hasn’t necessarily been overcome yet, is that the companies who have a vested interest in the future of mobile payment, haven’t yet figured out how to make money in this strange new world.

Mobile Payments = Big Upfront Cost and Lower Revenues for Existing Players?

Too many mouths to feed in a complex value chain.  Attempts to cut players out have been successful in other markets.  Ie. NTT Docomo, M-PESA, Isis, Enstream are examples where carriers ‘became the bank’.

New Kids on the Block

So which players are well positioned to upset the barrel of monkeys with a strong mobile payments play?  Recently, Rogers filed an application with the federal government to become a bank.  This is a separate development from the fact that Rogers, Telus and Bell have been collaborating together for several years on their mobile payments venture called Enstream.  I have heard reports of some major personnel changes over at Enstream which could mean these players are refocusing their efforts to launch a carrier agnostic mobile payments platform without the help of  banking partners.   Similarly, US carrier backed Isis is beginning to make more noise regarding its technology being supported by a variety of handset manufacturers.

Google has made a big splash by being first to market with the launch of their Google Wallet.  High-quality retail partnerships, arriving pre-loaded on (currently only the Sprint Nexus S but presumably coming soon to) a variety of Android powered devices, as well as a beautifully simple approach to branding and marketing are just a few of the things Google has going for their mobile wallet.  Google is aiming to be the first to unlock the full benefits of a mobile wallet meaning that phones supporting their technology will be able to pay for stuff, as well being the ‘one stop shop’ for loyalty cards, local offers and even transit transactions all powered through NFC.  Sexy stuff – say goodbye to your Costanza! I recently heard that Google Wallet could make its debut in Canada in early 2012.

Paypal seems to be moving towards rolling out their solution with recent reports saying we could see something in market as early as Q4 2011. Interestingly, PayPal has been quite vocal in their criticism of NFC stating that they are not building their transaction method around Tap and Go technology and even going so far as to label NFC as being, “not for commerce.”  Don’t underestimate the Ebay – PayPal – Where connection as a serious contender to change the game of mobile, social and local.

To this point, we have heard surprisingly little out of Visa.  Visa has been interested in the mobile payments game probably longer than anybody else and for years they have been piloting new technologies and working with partners to facilitate a future where mobile payments are possible.  Just because we haven’t seen anything yet, I wouldn’t count these guys out and have been hearing whispers that they are getting ready make some major announcements around mobile in the coming months.  Stay tuned…

In my opinion, new entrants are beginning to show real potential to disrupt the space quickly given the pent up consumer demand for everything mobile, which is forcing the big guys to take stock and get a strategy together.

Canadian Banks Don’t Compete, They Pillow Fight

Just like CIBC was the first to do mobile banking, one bank will get to market first with a mobile payment strategy and the rest will all follow suit with very similar products.  I don’t think we can expect any significant innovations from Canadian banks until the ecosystem develops and they get to see what works and what doesn’t based on the bumps in the road experienced by the disruptors.  And honestly, who can really blame them?!  Life is pretty good as a Canadian bank and I think most Canadians appreciate the steady hand approach as well as the regulatory oversight that defines life as a financial institution in Canada.

However, Canadian banks do have a lot going for them when it comes to mobile payments potential.  Primarily, they already have your trust and your credit card.  If you own a Smartphone, you probably have their mobile banking app and use it at least a couple of times a month.  It is not too far of a stretch to believe that if that app could do more for you (like buy stuff!) you would be most comfortable entrusting your bank with your most personal details vs. handing over your info to some new 3rd party.  Lets face it, consumers are creatures of habit and a bit lazy.  The KPMG 2011 Mobile Payments Outlook identified security and convenience as the two key factors that will determine how quickly mobile payments will be adopted in North American.  In terms of getting people to try new forms of payment, banks have a lot going for them and will probably do just fine when the dust settles and it is safe for them to enter this strange new world.

So there it is.  That was a brief overview of who we think they are going to be players in the future of mobile payments in Canada and a snapshot of how they are positioned to enter the market.  To be sure, it is a rapidly evolving market with a large number of potential winners and losers that are going to try and claim their stake on what has become some very precious real estate; your smartphone.  Tell us here in the comments, who you think could be a mobile payments winner in Canada and why?  How long do you think till we actually see mass adoption of mobile payments?

This post is the first of a series we will be doing on mobile payments in Canada and how Smartphone technology is impacting our lifestyles as consumers.  Stay tuned!

DO

We get a lot of requests for this information so we thought we’d put it up on our blog.  Enjoy!

Here is a look at some of the green businesses offering mobile coupons on Clip this year.

We just finished adding adding all the new merchants and their offers for the 2011-2012 year when we got some really unfortunate news.  Last week,  Green Zebra was informed that that all the business units of TB Vets were being shut down.  Apparently, donations and funding for this long-standing organization continue to be a challenge coming out of the great recession.  Obviously this was quite a blow to our friends at Green Zebra and in our view, a big loss to the green business community in the lower mainland.  It appears that there will be not 2011-2012 Green Zebra Savings book printed this year and merchants are being offered refunds for the book.  We will refund any merchants who do not want to continue with a mobile coupon, but we can assure you that our service will continue and feel that in the face of this recent news,  our service is more important than ever for green businesses to reach their customers.  If you have any questions about how to get the most out of your mobile coupon campaign and how you can create traction for your business with mobile coupons, please do not hesitate to drop us a line at info@clipmobile.ca

Finally, we’d like to say what a pleasure it has been to work with our friends at Green Zebra over the past 2 years.  Rebecca, Diana, Alexa and Susan all made a personal and professional commitment to make the partnership between our organizations a success.  They championed Clip Mobile coupons to their clients and we owe a large part of our successful and growing community in BC to their efforts.   We couldn’t have done it without you guys and wish you all the best success in your next role.  If you ever need a reference, we’ll sing your praises from the highest rooftops!

- The Clip Mobile team

Clip got a major shout out this week as it was featured in the July 13th edition of 24Hrs daily newspaper.  In an article titled, “There’s an App for That” in the Life Section with content from Todays Parent Magazine.  Clip was featured at the Top Mobile Coupon App because of our focus on Canada.

Notable.ca is a fresh resource for young professionals to find out about what is new, interesting and Notable in Canadian cities.  Last week, Notable interviewed David Offierski, founder of Clip Mobile to get his take on the Startup thrill ride.  Click here to read the full article.

The results are quite interesting.  Take a moment to read through Yipit’s case study on Groupon’s business in Boston (appended below) and while the commentary should be taken with a grain of salt, it is clear that the traditional daily deal distribution models (email marketing, display advertising and social media marketing) which led to a fantastically profitable business model, are gradually being eroded by competitive forces.

This is not a new criticism of the Groupon model.  Way back when things were just heating up for Groupon, some folks were already scratching their head about the fact that the model is very easily copied (little differentiation, lots of competition), users have very low switching costs (I don’t care who sells me the deal, I just want the best deals!) and the pool of quality businesses and quality deals in any given city is actually quite small.

What is particularly interesting is the commentary in the 2nd last paragraph of the analysis by Yipit stating that Groupon’s new GrouponNow feature of mobile local deals may actually be the savior to their problems.

The silver-lining in all of this is Groupon Now, a new mobile product from Groupon that provides real-time deals to users. With its massive salesforce and many merchant relationships, Groupon is possibly the only company capable of having enough deal inventory to make a product like Groupon Now possible. If they are able to make the business model work, then Groupon will have the eventual network effect.

We see this as promising because Clip’s location services platform allows publishers and directories to take advantage of their existing network effect and publish local mobile deals content within their existing mobile assets.  We believe that deal content (daily deal, or mobile coupons) are a new and exciting content and revenue stream for local advertising, however, at Clip we do not believe that deal content is sufficiently sticky or engaging enough to have its own content channels.  Deals are best served on the properties and apps that users already frequent to get their daily dose of news, sports, weather etc.  Yes, there will be power users who use aggregation services like OneSpout, DealRadar, TheDealMap or any number of other aggregators that keep popping up all over the place, however, they face the same CPA battles as the daily deal sites in acquiring users who just aren’t in to your brand.  Especially in the case of mobile apps, getting a user and keeping a user are two very different things.

In the meantime, publishers continue to struggle with how they are going to monetize their newly launched digital media assets.  Over the coming years, eyeballs are continually going to shift away from newsprint to digital sources.  Publishers have the tough job of figuring out how to get paid in digital the same way they did for print (advertising based on subscription).  Display ads still kind of suck on both web and mobile in terms of user engagement and the economics behind them.  At Clip, we feel that personalized and localized (read: relevant) deal content is something mainstream news readers are asking for, and would actually be willing to pay for.    In this very interesting commentary on the problem with newspaper paywalls, digital media scholar Alfred Hermida, argues that news headlines have always been a commoditized market, but people were willing to pay for “the wrapper” that a newspaper came in.  The fact that it showed up at your doorstep every morning, as well as all the add-ons you get beyond the headlines ie. the sports, obits, classifieds and real estate sections.  Try taking the “done deals” section of the Friday Globe away from my mother and you will see what I mean.

Please feel free to chime in below with any comments on the Groupon Analysis or thoughts on the Clip approach to the daily deal economy.  We’d love your feedback.

- Dave Offierski

Groupon S-1 Reveals Business Model Deteriorating in Oldest Markets

by yipit on June 3, 2011

While no one has ever doubted Groupon’s impressive topline growth – the question has always been around the defensibility of a business that has so few barriers to entry.

In its long awaited S-1, it’s clear that Groupon has impressive topline growth. However, when looking at its oldest markets, it appears that their business model is deteriorating.

Groupon’s Network Effect?

• On the consumer side: “Increased relevancy enables us to offer several daily deals, which we believe results in increasing purchases by targeted subscribers, thereby driving greater demand for Groupons.”
• On the merchant side: “Increasing our merchant base also increases the number and variety of deals that we offer to consumers, which we believe drives higher subscriber and user traffic, and in turn promotes greater merchant interest in offering deals through our marketplace, creating a network effect.”

However, when looking at the data for their Boston market, it does not appear that that Groupon has achieved this virtuous cycle.

The Boston Case Study

While Groupon is relatively opaque for most of its filing, it provides case studies of four of its major cities. We look at Boston since Chicago, the other US city, is Groupon’s home town.

Despite being one of Groupon’s oldest markets, Boston had demonstrated impressive growth: revenue, subscribers and customers have all tripled in the past year. This topline growth has been aided by the launch of personalized deals in Boston in Q3 2010: Groupon started running multiple deals per day in Boston through its targeting/personalization initiative.

Deeper analysis of the Boston case study, however, shows that despite impressive topline growth Groupon’s business model peaked around Q3 2010 and has been deteriorating ever since.

Consumers Buying Fewer Groupons

On the consumer side, we just need to answer one question:

Does Groupon’s ability to send targeted/personalized deals to subscribers (thanks to its large merchant base) drive increased demand for Groupons?

If this were true, it would imply that activity and revenue per subscriber metrics would increase right along with Groupon’s increased deals per day.

However, Groupon’s quarterly revenue per subscriber is declining Boston.

Groupon’s business model is predicated on the idea that the company can stomach the ever-increasing customer acquisition costs since an acquired customer should generate a steady flow of high margin revenue.  However, this relies on existing customers purchasing several subsequent deals.  While existing customers are indeed purchasing subsequent deals, they are doing so at a declining rate, despite Groupon’s recent targeting efforts.

Far more worrisome for Groupon is the fact that its existing customers (those 20% of subscribers who have ever bought a Groupon) are also becoming less engaged. The Boston Case Study reveals purchases made from existing customers by removing the impact of purchases made by new customers each period:

Frequently when you see this deterioration in a company’s existing customer base it is because the average customer is getting “older” and these “older” customers tend to be less active.

However, due to the exponential growth in customers, the average “age” of Groupon’s customer base has been roughly the same since Q1 2010. In other words, the average customer isn’t getting older.

As Groupon begins to reach saturation in Boston and its customer base inevitably ages as a result, reversing the decline in participation from its existing customer base will only become more difficult.

Groupon’s Customer Acquisition Costs are Rising

And of course, right when Groupon’s customers are becoming less engaged, and therefore less profitable – Groupon’s costs to acquire customers are skyrocketing.

Given the recent entrance of well-financed competitors such as Google, Facebook and Microsoft its hard to believe Groupon’s customer acquisition costs will slow anytime soon. Along with declining engagement from existing customers, this does not bode well for the future of Groupon’s margins.

Groupon Selling Fewer Deals per Merchant

The second question is whether Groupon’s industry-leading subscriber base will attract merchants willing to pay a premium to run with Groupon and preventing other players from effectively driving down gross margins to compete on cost.

According to Groupon, merchants are willing to pay a premium for their reach.

However, Groupon’s targeting/personalization strategy is leading to a decline in the number of Groupon’s purchased per deal as the number of deals Groupon is running per city far outpaces the growth in subscribers.

Should personalization increase conversion rate per deal, this may offset decline in reach – Groupon could presumably increase total merchant satisfaction by satisfying more merchants more efficiently. However, as the average purchases per customer continues to decline so will overall conversion rates on personalized deals.

Groupon’s decision to rapidly increase the number of deals per metro has allowed competitors to credibly tell merchants that they deliver more customers than Groupon can in major cities such as Boston. Based on the Yipit Data Product, which features nearly 20,000 offers per month across major US metros, both Travelzoo and LivingSocial now average more vouchers sold per deal than Groupon in most major North American cities.

Several other players such as OpenTable, WagJag, DealFind regularly sell as many or more vouchers per deal as Groupon in major markets as well. This calls into question any network effect that Groupon thinks it may have by having the largest subscriber base in the industry.  Merchants won’t pay a premium for total subscribers if Groupon can’t deliver more new customers than the competition.

If Groupon can’t charge a premium for its larger subscriber base, what competitive advantage or network effect does it have on the merchant side of the market?

Groupon Operating Margins Declining

While Groupon is experiencing rapid revenue growth, we believe operating margins are declining because, as we’ve shown above:

• Revenue per Groupon customer is declining
• Cost to acquire those customers are increasing
• Sales costs are increasing as it needs to run smaller deals with more merchants to personalize the experience

While Groupon doesn’t reveal costs in Boston, by taking company-wide customer acquisition costs and SG&A costs (allowing for some opearating leverage) you see significantly declining operating margins.

Why Is This Happening? Competition Has Arrived

A year ago, according to Yipit data, there were 9 daily deal services in Boston offering 15 active deals.

Today, Yipit Boston, shows 23 separate services offering daily deals including new successful entrants like TravelZoo and Yelp. The 23 services are responsible for creating 91 active daily deals.

Worse for Groupon, there’s no sign of this ending with Google and Facebook on the horizon. Plus, successful entrants like TravelZoo are still only running two deals a week.

“Groupon Now” May Be the Answer

The silver-lining in all of this is Groupon Now, a new mobile product from Groupon that provides real-time deals to users. With its massive salesforce and many merchant relationships, Groupon is possibly the only company capable of having enough deal inventory to make a product like Groupon Now possible. If they are able to make the business model work, then Groupon will have the eventual network effect.

What Does This Mean For the IPO?

As one of Groupon’s oldest markets, Boston offers a glimpse into the future as the rest of Groupon’s business matures. Declining revenue per user, increasing customer acquisition cost, and declining operating margins do not bode well for the company’s core business.  Given all of this, Groupon’s IPO valuation may come down to how investors perceive the prospects of Groupon Now. Since Groupon only recently launched Groupon Now in a few test markets and has not yet provided data on those launches, it remains unclear how investors will value Groupon Now.

Follow @YipitData on Twitter for the latest industry trends and analysis by the Yipit Team.

David Sinsky, Jim Moran and Vinicius Vacanti contributed to this post. David runs Yipit’s Data Product, which provides past offer detail and competitive intelligence to the Daily Deal Industry.

Here is a link to the full press release and below we have highlighted some of the key stats they included in the first report.  Most notably, Canada is 4th in the world for Smartphone penetration and in March 2011, 40% of Canadians used an app!

Mobile Behaviors in Canada

Mobile subscribers in Canada exhibited strong usage of mobile media on their devices. In March 2011, 40.6 percent of mobile users in Canada used an application on their mobile device, while 32.7 percent used a mobile browser. Accessing of news/information was conducted by 35.2 percent of the mobile audience, while social networking sites or blogs were used by 25.4 percent. Sending text messages and taking photos with their phone were the top two activities, used by 64.5 percent and 48.9 percent, respectively. Accessing work or personal email represented 29.7 percent of the total mobile audience.

Smartphone Penetration Across Global Markets

Smartphone adoption continues to spread across the globe at various rates. Canada’s smartphone penetration reached 32.8 percent in March 2011, marginally higher than that of the U.S. The U.K. led all reportable markets in smartphone penetration at 40.8 percent, followed by Spain (40.2) percent and Italy (38.3 percent).

Smartphone Platform Market Share in Canada

In March 2011, 6.6 million people in Canada owned smartphones, representing one-third of the total mobile audience. RIM was the leading mobile smartphone operating system with 42.0 percent share of Canadian smartphone subscribers. Apple ranked second with 31.0 percent share, followed by Google with 12.2 percent, Symbian with 6.4 percent share and Microsoft with 5.1 percent share.