Payfone is going public today with its plans for developing a mobile alternative to Visa and MasterCard, fueled by an infusion of $11 million in venture capital from the BlackBerry Partners Fund and former Apple (NSDQ: AAPL) executive Bob Borchers of Opus Capital. Also participating was RRE Ventures, the company’s first round investor.
Before this, the mobile payments company was operating so under the radar, I was able to stay in New York for a week in a hotel right next door and never knew they were there. “We wanted to prove we had something unique to offer the industry, and I think we do now,” said Rodger Desai, Payfone’s CEO, on the phone.
The mobile payments space is undeniably hot. Already today, it was reported that three of the top U.S. carriers are working on a secret project to unseat Visa and MasterCard as the dominant payment systems. And, hundreds of millions of dollars in venture capital have already been invested in a number of startups all looking for the same outcome—a piece of the $2.45 trillion processed by the two traditional payment companies last year.
Desai says Payfone is working on eliminating the impediments in the system to make mobile payments more practical. Adoption rates have been low to date because carriers often demand up to 40 percent of revenues from the merchant. The rates are high to cover the cost to the carriers to process the payments. Mostly, mobile payments today use SMS, which is unreliable, and often times, subscribers call to complain and ask for refunds. “There’s so much crap in the system….There’s so much lost from the operators point of view from customer care and charge-backs,” Desai said.
Essentially, Payfone is building a system that relies on the same standards used by carriers that give permission to a subscriber to roam on another network. In the background, those two carriers are communicating to ensure that a subscriber is in good standing and will be able to pay for the roaming fees. “It looks like a credit card transaction,” he said. What’s the difference between a carrier making the same split second decision with a merchant, like Facebook or an App Store? Nothing.
The effect is not just ensuring that a payment can be made, but dramatically cutting down on the costs in the system. “The business models are much more attractive for brands to do business with operators.” How far will those revenue splits fall? Desai said he doesn’t negotiate that—his customers do. But right now, he sees sales of virtual and digital goods ramping up, like music and moves, and the fees falling. “If you bring extremely high quality actions from trusted brands, they don’t ask for that kind of rev-share.” For its part, Payfone demands a single digit revenue share for its services.
Payfone is Borchers’ first investment at Opus. Borchers served as director of worldwide product marketing at Apple for the five years, including the launch of the iPhone, and is well-known for giving video demonstrations of Apple products. Both Borchers and the BlackBerry Fund, through its association with Research In Motion, know a thing or two about how difficult it is to do payments on a large scale. The iPhone uses iTunes to charge for apps, and BlackBerry has mostly relied on PayPal so far. However, Desai was reluctant to say if Apple’s or BlackBerry’s interest in the company goes any further than the indirect investments. The cash will be used to expand in Europe, Latin America and Asia, he said.