Zoompass is destined to succeed: So what is the potential fallout in the Canadian market?

This is a follow-up commentary to a previous post "Enstream: A Mobile Moneris or Dexit Revisited?" published on June 15, 2009. The article was an attempt to contextualize the beta launch of Zoompass within the current Canadian and international mobile billing and payments ecosystem. The fundamental question posed was "Does this venture have a chance to succeed, or is it doomed to fail like so many other attempts in the past?" And if it does succeed, what are the implications for the market?

Two months later, and after spending some time interviewing Enstream management, along with management from other companies within the Canadian mobile ecosystem, I will call an early verdict:

Zoompass is destined to succeed and here is why:

1. The carrier coalition (T.TO, BCE.TO, RCI.TO) funding the Enstream venture is more committed than ever after initial feedback. So far, it has refrained from the typical eye gouging that makes these types of ventures implode early. Most of its competition would come from chronically underfunded start-ups - so it has a definite capital advantage (and apparently patience).

2. The bench strength is deep. Most of the management team and the 35 or so developers iterating through the beta have been poached from companies like Verisign (VRSN.Q) (Mqube), which suggests deep experience in mobile SMS-based billing gateways, and mobile transactions.

3. There is pent-up demand. Canada is behind countries like Kenya in getting mobile micro-payments launched. In a study conducted by Gartner, Inc, it forecasts that 190 million people worldwide will be making mobile payment by 2012, and that the current annual growth rate is 70%. To put this into perspective, as of 2009, there are 250 million smart phones in the market. Recent North American surveys conclude that between 26% and 32% of mobile users would immediately adopt mobile payments if they were offered. These surveys, regardless of variances in methodologies, appear to point to mass adoption potential. The tweetsphere appears to indicate some consumer impatience for access to such services.

4. Target market is trained and willing. Zoompass is targeted at the 18 - 30 age cohort. There is almost 100% intersection among this group of previous experience downloading paid mobile content and applications thanks to iTunes, PayPal, and a myriad of on-portal and off-portal mobile content malls. There is little education required, and mobile micro-payments are a simple extension of what they are already accustomed to doing.

5. A vast majority of the capital risk is willingly borne by the consumer. Unlike previous failed electronic payment solutions, there is little financial risk at the endpoint assumed by the provider or merchants. Consumers have already invested in the wallet for other reasons. As a result, Zoompass can be tweaked relatively efficiently, with limited capital consequence, as it gets feedback from consumers. With limited capital risk, there is more flexibility in the design of potential offerings. More importantly, there is limited scaling friction caused by capital constraints. In this regard Zoompass is more like Twitter, less like Interac.

6. Zoompass is being developed collaboratively with its target market. Unlike many previous attempts at new electronic payment systems, Enstream is fully engaged in a collaborative design process with its potential consumers. In the end, this approach is most likely to result in success because it is not pushed into the market. The consumer is pulling it. Enstream has ripped a page from the US-based handbook of "how to launch a successful digital application". It is being very un-Canadian in its aggressive interaction via social media, ensuring better buy-in from a highly educated, elusive, and often cynical target market.

Where can this go?

Ultimately, Zoompass has its sights set on about 20 million subscribers with a factory installed application that includes active RFID and NFC components. The carriers have a little pull with handset manufacturers, so the ultimate factory install objective is obtainable. As well, Zoompass is not interested just in the cash that resides in your wallet, it is interested in the whole wallet. Think about what is in your wallet right now: Credit cards galore, various gift cards, a coffee card, loyalty cards, a phone card, your license, your health card, maybe a transit pass.

What does this mean to the mobile ecosystem and to Canadian consumers?

First, the Canadian consumer...

1. A potential carrier oligopoly in mobile payments is a risk to consumers. Already, Canadian mobile subscribers pay some of the highest mobile bills in the world due to market distortions caused by the CRTC and to a related lack of competitive choice. The Enstream Joint Venture represents a potential to perpetuate oligopoly risk. The extent of the oligopoly depends upon how successful Enstream is in co-opting the financial services industry into its offerings.

2. A potential meta-oligopoly only perpetuates risk to consumers. Canadian financial institutions could band together as in the past (e.g. Interac) in order to offer an alternative mobile payments solution. Already there are whispers of Big 5 summit meetings on the topic of a competitive offering. Before consumers begin to cheer, this only represents two choices operated by a total of 8 very large institutions. It doesn't necessarily create a fully baked competitive environment that gives consumers adequate choice. As an aside, Canadian financial institutions are simply not wired to build out consumer services iteratively like Enstream is doing, so the chances of success are more limited, which means that consumers could be more likely than not saddled with a mere oligopoly.

3. But what about the new broadband spectrum wireless carriers? The future entry of new carriers such as Globalive (Wind Mobile), Publix Mobile, and DAVE Mobile could present a viable alternative in mobile payments for consumers by creating its own JV/coalition. Possibly. However, these folks have a lot on their plates just to get services launched by 2010. In the meantime, Zoompass could deliver to the Enstream JV an insurmountable lead before new players could respond. Independent developers are mostly ignored by capital markets, so there is not likely to be any effectively funded, meaningful competitive "white knights" appearing out of the woodwork any time soon.

4. RIM to the rescue? New Nortel (RIM) may have a couple of things cooking but probably at an earlier stage of development than Enstream. It could leverage its balance sheet to acquire (similar to Nokia buying Obopay) but it has been mostly dabbling. As stated in June, RIM is likely to try to leverage its new PayPal relationship before it hunts for another Obopay. Even still, what if you are an iPhone user?

In the not-to-distant future, it is feasible for someone at the Canadian Competition Bureau to have another file dropped on their desk. Ironically, the near certain success of Zoompass may create some market uncertainty for investors as consumer protection raises the specter of government intervention.

Now the Canadian mobile ecosystem...

1. There are probably some small exploitable market niches around the edges of the possible Zoompass juggernaut. Enstream is not targeting what I would coin the "Money Mart Cohort". These are people with limited traditional banking access, and no credit. A vast majority are the working poor and recent immigrants who tend to be "cash-oriented". Depending on sources, this group represents between 10% and 12% of the population depending upon the year. For over a decade now, these people have already been engaged in card-based micro-payments by buying billions of long-distance minutes and pre-paid mobile time. The carriers have been making hay with this group for a while. An independent mobile payments offering could sprout up for these people. However, the size of the market limits the amount of potential competitors in this niche. And there will be a lot of microcaps scrapping over this business. Even with considerable consolidation, there are likely to be a couple of winners and a lot of losers in this market.

Other interesting potential mobile payment market niches could include payroll, government stipend, and international remittance. The common thread among these solutions, is that they are not necessarily micro-payments, and they do not have person-2-person elements to them.

2. Start-ups could take their cookies and simply leave the room. Enstream would certainly be happy. Micro-payments are a worldwide phenomenon with much larger opportunities outside of Canada. Enstream management states that it is (for now) a Canadian-only venture. Vendors with current international footprint may choose to apply their limited capital resources to exploit those markets more aggressively. Investor may also see Canadian companies with good IP and weak balance sheets snapped up by foreign interests over the next few quarters. This is a good thing for shareholder of such companies.

3. Complimentary and indirect competitors may find opportunities to hitch their fortunes to Zoompass. This could be a good way for a diverse group of vendors to maximize shareholder value. Enstream has been fairly vocal that it would like Zoompass to be an open platform for other developers and that it has (as alluded to earlier in this post) designs on getting a piece of the entire wallet. This is the exciting stuff for the mobile ecosystem based on feedback that I am receiving. However, I am skeptical that it will truly be an open development platform. Is Apple's Safari really an open platform? Enstream will pick its partners regardless of its current public postering. Notwithstanding, opportunities abound for partnerships in gift and re-loadable cards, loyalty management, EMR/health services, government services, RFID, POS, and NFC. There are potential technical and infrastructure partnerships related to billing systems, and provisioning along with cloud services related to transaction processing, ecommerce, identity and security. Although most of these solutions are likely to be provided by large cap vendors, there is likely room for Canadian small-cap, micro-caps and start-ups to participate (and a spot for investors to potentially benefit from considerable gains). As the solution matures, there are likely to be as of yet unimagined consumer applications that can be developed for commercial benefit.

In summary

Zoompass is here to stay. There is demand for mobile payments, success elsewhere in the world is well documented, and Zoompass appears to be destined for a successful launch in 2010. It may experience some bumps along the way, but it will likely be a market force within the next 24 months.

With its success will come uncertainty related to consumer choice, even if there is a direct competitive response from the financial services industry. Will there be a consumer outcry that compels government regulators to force the Enstream JV to open its platform to future competitors? If so, the ultimate benefit to shareholders of the main JV participants could be muted.

Investors should expect a lot of angst among the myriad of smaller under-capitalized players that have been developing solutions in this space so far. How does a management team respond to this competitive cluster bomb? Those that underestimate or ignore the potential for Zoompass do so at their peril. Shareholders should expect, and even encourage, increased M&A activity and strategic recalibration. Some companies may even attract new investment.

The impending Zoompass launch, and its likely success, should make thing very interesting for some time in the Canadian mobile market. Some investors could make some nice returns, others not so much. It will all depend on the reaction of management teams and subsequent execution. As always.

Please feel free to comment.

Disclosure: I do not own shares of any of the companies mentioned in this post.

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