Starbucks And Spindle: A Leg Up On Royalty Programs In Mobile Payments

Mar.18.14 | About: Spindle, Inc. (SPDL)

Summary

Carl Icahn is staking his claim in the "Payment Services Provider" space.

Spindle's family of patents referenced more than 140 times by industry giants.

Valuation is many multiples under other start-ups in the sector.

To say that Starbucks' (SBUX) mobile payment app has been a success would be a mild understatement. Per a recent report by Yankee Group, the app handled $1 billion in transactions last year. Already in Q1 2014, Starbucks processed more than 40 million new Starbucks cards valued at over $610 million in the U.S. and Canada alone. Combined, mobile and Starbucks card payments incredibly stand for more than 30% of total U.S. payment according to Howard Schultz, CEO of Starbucks.

For the uninitiated, the app connects to your Starbucks card, which you scan to pay while also earning "Stars" toward My Starbucks Rewards. The value of "Stars" earned by program members toward free products are included in Starbucks deferred revenue and recorded as a reduction in revenue at the time the Stars are earned (based on the value of Stars projected to be redeemed).

Despite Starbucks' overwhelming success with its mobile payment technology and the rise in mobile transactions in general over the last couple of years, some research firms like eMarketer are scaling back their near term projections for growth in mobile payments. These firms often cite ease of use, as the differences between physically using credit cards versus mobile payments remain negligible, as well as the lack of incentives for consumers and merchants to make the switch.

Starbucks has clearly shown that building loyalty programs into a mobile payment platform can incentivize consumers to move from credit to mobile payments and while many investors may look toward PayPal, Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) for the next big thing in mobile payments and loyalty programs, I'd like to steer your attention to a smaller mobile commerce company that has been garnering some attention on Seeking Alpha recently: Spindle Inc. (OTCQB:SPDL).

Comprehensive Mobile Solutions

Founded in 2011, Spindle offers support for businesses that are looking to provide mobile payments to their customers. These businesses can white-label Spindle's services while selecting its full suite of solutions or simply choose a few components. Spindle also has the consumer wallet side covered, as they have mobile acceptance payment at the point of sale, plus the merchant processing, underwriting and advertising, all in one package.

Recognized Payment Service Provider

Seeking Alpha's Mobile Guru recently covered Spindle here, wherein the author did a fantastic job outlining Spindle's holistic approach. Essentially, Spindle combines their patented payment technology and marketing solutions while being one of the few companies that report as a Payment Services Provider (PSP), which is a new type of merchant acquirer approved by both Visa (V) and MasterCard (MA). It is this distinction that has Carl Icahn trying to stake his claim and own a part of a PSP in PayPal, as Mobile Guru points out in another article.

The value that Icahn is looking to leverage and maximize is the value of owning a Payment Service Provider "PSP," the processing engine with the ability to underwrite, manage risk, manage settlement and take a little piece of a lot of transactions. Successful interactions caused by advertising, marketing, etc., either eCommerce or mCommerce, end with a transaction.

After developing and deploying its full service PSP, Spindle believes it was one of the first companies to have its PSP system gain Payment Card Industry Level 1 certification in Amazon's Web Service (AWS) Cloud. This certification was started by Visa, MasterCard and American Express to manage the development of the Payment Card Industry as well as to boost security levels and possessing it has become crucial for e-business and e-commerce companies that handle online electronic transactions. This distinction brings us to another intriguing element of the Spindle story, the company's robust IP portfolio.

Patented Technology Platform

In addition to being a registered domestic Payment Service Provider, Spindle holds an intellectual property portfolio with 9 patents issued/allowed and 4 provisional patents that cover ecommerce, mobile payments and security. For you patent play investors, here's an interesting tidbit from the company's last 10K:

Spindle's initial patent portfolio plays an integral role in technology platforms and services and the movement of value over networks. We believe that the patents are foundational to the methods used in networked payments. The patent portfolio includes one continuation patent in a family of patents related to "Processing Payment on the Internet" now pending with the U.S.P.T.O.

Besides "Processing Payment on the Internet" currently pending with the USPTO, Spindle holds a family of patents called "Financial Transaction System" (#5,822,737) that cover "an automated payment system particularly suited for purchases over a distributed computer network". This group of patents have been referenced more than 140 times by companies such as PayPal, a business unit of eBay, Inc. (NASDAQ:EBAY), Visa (NYSE:V), Priceline.com (NASDAQ:PCLN), AT&T (NYSE:T), and First Data Corporation (NYSE:FDC) as central to parts of their intellectual property portfolios.

Spindle has retained Mintz, Levin, Cohn, Ferris, Glovsky and Popeo P.C. to manage prosecution of its portfolio and the continuation of USP 5,822,737. The company also has engaged HLP Integration to evaluate Spindle's patent portfolio and explore opportunities to build new IP as well as "monetization," which includes both licensing and litigation. For some great analysis and insights into Spindle's patent portfolio, check out this article by Seeking Alpha contributor, Ben Padnos. Suffice to say, Ben points out that potential "monetization" of Spindle's IP portfolio could be a huge part of the company's story down the road. That said, with Mintz and HLP handling the company's IP portfolio, Spindle's management team has been able to maintain its focus on its core payment processing business.

Mobile Industry Veteran at the Helm

Setting the company's IP aside, what are some of the other key difference between Spindle and other Payment Service Providers? "Our ability to offer an attractive pricing structure combined with our aggregation model can be considered a disruptive force in the payments industry by offering substantial cost efficiencies that legacy providers simply cannot match," says Spindle's CEO, Bill Clark.

Mr. Clark has a long, successful track record in the mobile industry, as he was the former Executive VP and General Manager for Apriva LLC, a mobile payments technology company that he led in the capture of a 65% market share for mobile acquiring products. While at Apriva, he also unlocked new markets in cashless vending and smartphone based mobile acquiring by signing fortune 100 partners. We are seeing him employ a similar strategy now as the head of Spindle.

Reinforcing Holistic Approach

Back in March 2013, Spindle acquired MeNetwork, a provider of location-based mobile marketing solutions for businesses and consumers. MeNetwork works with merchants in 84 markets across US and over 20 markets in Europe, delivering location-based marketing solutions such as offers, events, goods and services.

Along with integrating MeNetwork's advanced location-based mobile marketing solutions into Spindle's mobile payment platform, Spindle recently acquired Yowza!!, a leading provider of mobile couponing technology. According to Spindle's management team, when this technology is fully incorporated into Spindle's MeNetwork platform sometime in 2014, the company's combined solution will have an existing user base of nearly 2 million consumer downloads and around 95,000 merchant locations.

Latest Key Partnerships

In January 2014, Spindle signed an agreement with Signifi, a provider of interactive vending solutions for retail environments. Through this deal, Spindle's MeNetwork mobile wallet payment solution will be incorporated into Signifi's intelligent "SpotShops" vending machines (e.g. their DVD, video game, and accessory kiosks). Considering Mr. Clark's success at Apriva with cashless vending, it will be interesting to see how Spindle's technology performs in conjunction with vending solutions.

Later in January, Raziehs Skin Care, a high-end retailer of beauty products, selected Spindle's Yowza!! mobile marketing service as its exclusive mPOS platform. Raziehs plans to utilize Spindle's Yowza!! platform to create mobile marketing content and offers for consumers, while the Yowza!! app will allow Raziehs' customers to purchase items right from their mobile devices through Spindle's integrated mobile wallet function.

"Through these relationships, we now have the capability to offer comprehensive mobile commerce services through multiple channels, including wireless providers, vending services operators and technology solutions providers," wrote Mr. Clark in the company's latest shareholder letter. He later added: "Our entire company remains focused on three simple, but mission-critical steps that we believe will translate into shareholder value, growing and expanding our base of merchants and consumers to maximize revenue and profitability, continuing to develop technology that is both innovative and practical and fortifying our business through our intellectual property efforts."

Conclusion

The 4-year old payment startup, Stripe Inc., recently brought in around $80 million from the likes of Khosla Ventures, Sequoia Capital, and Founders Fund, and is now valued at a staggering $1.75 billion. Consider this alongside Square's current valuation of $5 billion and eBay's recent acquisition of the global payment gateway, Braintree, for approximately $800 million in cash, and you can get a pretty good idea of how crazy valuations are getting for technology-based companies within the payments industry.

With this in mind and shares of SPDL trading just over $2.00 today with a market cap under $60 million, Spindle looks undervalued as a technology driven company within the payment processing space. Altogether, Spindle's comprehensive approach, powerful technology platform, strong IP portfolio and veteran leadership are just the sort of components early-stage investors should consider when looking for an upside play in the mobile payment space.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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