The Holy Grail of Mobile Payments

Long before Foursquare or even Dodgeball was a gleam in Dennis Crowley’s eye, there existed a number of real-time, location-based networks that dwarfed Foursquare in size. They continue to thrive today. Who are they, you ask? Why none other than Visa, Mastercard and American Express.

Credit card companies are the original location-based service

Decades before Foursquare trained us to check  in on our mobile phones, the credit card companies trained us to swipe our cards. Before NFC was even a concept, the card companies had infrastructure in place to read cards and phone home in real-time with answers to where, when and how much. The result? A treasure trove of data on user behavior and purchases.

Fast forward to today’s world, where game mechanics, social graphs and mobile apps are all the rage. Everyone’s trying to build a killer product, get lots of eyeballs, and then monetize. How do most of them monetize? Advertising. And what makes for good advertising? Insight into user behavior.

The bottom line: most “social networking” companies are trying to get at the same data that credit card companies already have.

They’re just coming at it from a different direction.

Credit card companies access behavioral data directly through purchase histories, while social media companies use game mechanics and psychology to encourage users to self-report their interests and actions.

A company like Foursquare or Facebook builds a killer product, with a social graph and game mechanics to get people hooked and keep them engaged. Human nature, psychology and network effects bring in tons of eyeballs. Part of the product experience includes fun activities like checking in, sharing tips, and becoming a “fan” of your favorite products and celebrities.

While playing with these fun social technologies, the user gets a cool new way to stay in touch with friends, discover new places and things, and share her social status with her network. In return, the company gets a mountain of data on what its users do, where they go, and what they love. It’s marketing gold.

As I wrote in another post, the future of advertising and social commerce will likely be tied to measurable user behavior. Now imagine what you could do if you layered the social graph and online actions on top of real-time purchase data!

Foursquare + Amex: A Match Made in Heaven

For those who don’t already know, Foursquare announced a partnership with American Express just before SXSW in which you could save $5 when you spent $5 or more at one of their approved merchants in Austin. It was also the first public use of Amex’s Smart Offer API.

This as a brilliant move for both parties for all the reasons I alluded to above, and then some.

Most credit card companies are freaking out right now because of the Durbin Amendment (interesting infographic at the bottom of that link), which would severely limit interchange fees and will probably harm consumers and credit issuers alike (say bye-bye to your credit card rewards programs). It will also likely increase debit card transactions, which would leave Amex out in the cold, since they have no debit business.

So most credit card companies are scrambling for ways to: 1) make new use of existing assets (transaction & user data, anyone?), and 2) innovate (to get more business)!

On the flip side, Foursquare needs a way to monetize. And while Foursquare is well positioned to monetize in many different ways (advertising, travel guides, loyalty programs, discount deals, etc.), partnering with a payment provider is a genius next step.

Everyone in the payments business is trying to figure out mobile payments right now. Pure payments companies like Amex or Paypal, however, can currently only offer a way to process transactions. They might try to add a social layer on top of that, or partner with companies to create deal programs, but they’re not experts at social. Foursquare already has the social graph, user behavior data, and a lot of merchant goodwill.

A combined Foursquare + Amex solution could be a killer payments app, combining the robust features of a payment processor with: game mechanics; loyalty; a social graph; and established relationships/deals with merchants.

It’s the holy grail of mobile, social payments.

Imagine getting cash rewards for loyalty, or being pushed a coupon for a latte when you check in to the shoe store next to Starbucks. Swipe your Amex card and get a discount while automatically checking in to Foursquare. Boom! You just played Foursquare and grew Amex’s credit business in one fluid motion.

Of course, there’s little stopping Facebook Places or other competitors from trying the same. Partnerships between social media companies and payments processors would give both sides the missing data they each are longing for. Payment companies get data on their users, and social media companies get access to the real money transactions.

Then, once your payment account is tied to your favorite social networking app, the logical next step is paying your friends directly from within your Facebook or Foursquare mobile apps. Pay Johnny for your share of the pizza party with debit, credit, or… Facebook Credits?

No doubt this is why some posit that Facebook might become a bank. It certainly has enough users for critical mass, but building a payments system is a really hard problem, and one that is outside of social companies’ core expertise. A much quicker solution — and one that could also provide access to transaction data in the offline world — would be to partner with existing payment processors. Ignoring for a moment the pesky details of consumer privacy, the marriage of social media and traditional payments processors could be an amazingly powerful thing.

I have no doubt that we will see the marriage of social and mobile apps with payment providers in the very near future. The only question is what exact form these partnerships will take.

I’m loving Foursquare right now, not only because they have a great app and a stellar team of people, but also because they are incredibly well positioned. They have a two-sided market (creating value for both consumers and merchants), a growing base of very loyal users, and a lot of goodwill – not to mention an early partner on the payments side of things.

It will be very interesting to see how things evolve, and how even bigger players like Facebook, Google and Apple try to get into the payments space. This is an exciting time, and I think we’re only just at the beginning.