To compete online and in mobile, Visa, MasterCard, and American Express need independent software
Want to skip the line at the ballpark? Download the iConcessionStand smartphone app. It lets sports fans order hot dogs and cold beer from their mobile phones and pay by transferring money from PayPal (EBAY) to a nearby food vendor. An alert pops up when the order's ready.
PayPal, a unit of eBay (EBAY), earns about a three percent cut of the transaction, but the app wasn't built by PayPal's engineers. IConcessionStand is one of more than 1,000 apps devised by entrepreneurs using PayPal X, a software tool that lets programmers work PayPal's payments-processing technology into their own products. These outside developers will generate $1 billion in transaction volume for PayPal this year, the company says.
Now the big credit card networks, looking for ways to increase their presence in mobile and online, are replicating that model. In the past year, Visa (V), MasterCard (MA), and American Express (AXP) have spent nearly $3 billion to buy Net-based payment processors. (The most recent acquisition: MasterCard's $526 million purchase of payment company DataCash Group in August.) Like PayPal, card processors are opening their networks to outside programmers. They now understand that "to find the prince you've got to kiss a lot of frogs," says Garry Lyons, the group executive of research and development for MasterCard. "We need to get ideas from as wide an array of sources as possible."
The goal is to ensure that their role in the payments world of the future—whether it be smartphone- or Web-based—is as dominant as it is today. PayPal may process 12 percent to 14 percent of e-commerce payments by next year, according to Mercator Advisory Group. Well-funded new technology startups, including Zong and Obopay, are trying to make mobile and online payments easier and capture a chunk of the market. Mobile carriers AT&T (T), Verizon Wireless, and T-Mobile are teaming up to build a mobile-payments company, Isis, and named former General Electric (GE) executive Michael J. Abbott as its chief executive officer on Nov. 16.
The card networks say their new, open approach will enable consumers to make online payments quickly, without the need to enter a card number and billing address over and over. A shoot-'em-up smartphone game might let players buy add-ons, such as new weapons or extra ammunition, by clicking a Visa logo. A caterer might be able to e-mail a bill with a button that allows a client to pay with one click. Payers will authorize the transactions simply by entering a user name and password.
There's no guarantee software makers will flock to card networks' new tools. Daniel H. Schulman, president of enterprise growth at American Express, says "everyone in the payments industry will begin to realize this is about working closely with the development community." His company plans to open an office in Silicon Valley to meet entrepreneurs and hear developer feedback.
The embrace of third-party engineering is a big change for the payment networks. When entrepreneur and venture capitalist Marc Andreessen developed the world's first mainstream Web browser in 1999, he envisioned integrating credit-card payment functions into his software, but he couldn't get the support of the card networks, he recalled at a conference in California last month. "There was too wide of a culture gap," says Andreessen. Bridging that gap is a first step toward heading off the competition. "The credit-card companies realize they were asleep at the switch when PayPal happened," says Oren Michels, CEO of Mashery, which helps companies manage relationships with independent developers. "They vow it won't happen again."
The bottom line: Visa, MasterCard, and AmEx want independent programmers to build payments technologies into new software applications.