In February 2014 OpenTable launched a pilot program to enable diners to pay their bills using mobile payments. By October they had already expanded to NYC, San Francisco, and Washington DC and planned to roll out to 20 major cities by year end. They are not alone in this space though.
Dash and Cover are two NY-based startups launched in 2013 with local focus (for now) and the ability to split the bill with friends. According to Crunchbase Dash raised $1.9M in seed funding and Cover raised $5.5M in Series A. TabbedOut has been around since 2010 and raised Series B from investors such as NEA. IWaitLess launched in 2014 and serves the Minneapolis area. Boppl is another one based in the UK. Last, a very recent innovation called Reserve is turning the traditional pricing structure upside down. Instead of charging restaurants they charge diners by offering a “high end concierge service”. Reserve also offers mobile bill payment.
Safety and convenience are the drivers for both restaurants and diners. Some of the common features include menu browsing, order ahead, splitting the bill among friends, and getting your receipt via email. OpenTable also launched integration with Apple Pay via Passbook for added security. If Apple Pay picks up steam I expect competitors to follow. Some questions still remain though. What it some people in your party don’t use the app and prefer to pay cash? Can the restaurant split the bill between app and non-app? As a parent I think this service is great because I can quickly pay and leave when kids have had enough. All of these features will reduce search and transaction costs which is a plus but will offer little differentiation among providers.
Let’s first take a look at a regional market such as New York City. According to NYC’s Department of Health and Mental Hygiene there are 25,362 restaurants in the city. According to Cover’s website (as of November 17, 2014) they signed up 108 restaurants in NYC. As a comparison, Dash has signed up 45 restaurants and OpenTable has signed up 57 restaurants. To be fair, Dash and Cover started a year earlier and they are based in NYC. If I am OpenTable and I see these companies entering the restaurant business on the payment side I can quickly add up that it won’t be long before they threaten my reservation business. I am not surprised OpenTable decided to enter the mobile payment business soon after.
The key number for comparison, though, is 3,354. That’s the number of restaurants that OpenTable’s reservation business has already signed up in NYC, slightly more than 10% of the market (probably higher because the total number includes walk-in restaurants who do not take reservations; some claim OpenTable has a monopoly). That’s an important advantage over any new entrant. Moreover, OpenTable has scale with over 30,000 restaurants in the US and abroad. Second, OpenTable is integrated with restaurant systems for both reservation and payment. Adding mobile bill payments will be much simpler than starting from scratch with a new provider.
Does OpenTable have a second mover advantage on mobile bill payments? Yes and No. Yes because it can use existing relationships with restaurants and operators to sell the mobile payment offering. It uses Stripe for payment which is easy and quick to setup. Second, OpenTable offers complementary capabilities such as reservation management and loyalty programs. On the other hand, OpenTable focuses on reservation-taking restaurants which is about 40-50% of the North America market and maybe less in other countries. That’s big enough but it leaves plenty of room for new entrants to gain market share in bars and walk-in restaurants. If new entrants focus on mobile payments and walk-in restaurants they will probably be left alone. If they decide to get into reservations then OpenTable may get active (they acquired Rezbook in 2013), which could end with an acquisition (exit strategy for new entrant = good) or a frontal attack (bad). As a side note, OpenTable was acquired by Priceline in June 2014 which will help them save SG&A and scale globally.
Do restaurants have an incentive to stick with only one mobile payment service? Not really. Eventually restaurants will end up accepting Dash, Cover, OpenTable or any other provider just as they accept multiple credit cards. These services are integrated with the POS systems so the multi-homing costs are zero. For diners it is really their choice. Would people use multiple mobile payment solutions? Maybe for a while but then probably switch to the one with highest “perceive” adoption or be influenced by their social network. It’s a temporary chicken-and-egg problem. Reserve could be an interesting alternative for fancy outings but I am afraid people will prefer to just make the reservation themselves.
Some strategic questions remain. OpenTable has tremendous bargaining power over restaurants with a two-part tariff system (they charge a high monthly fee for their ERB system and a fee for each reservation). Can new entrants in mobile payments challenge that power system? Reserve already has by charging diners instead. Having low multi-homing costs will enable restaurants to accept any and all services which may cause the market to not tip. There is low switching cost on the diner side so they may also end up using multiple apps, which is inconvenient. Will this market every tip? There are also substitutes. Apple Pay is safe and convenient and could be a strong substitute (I’d add Google Wallet but it hasn’t developed strong traction). Starbucks and McDonald’s are testing their own proprietary mobile payment solutions. Last, I’d also consider pure-play mobile payment providers such as Paypal, Square, and Dwolla. The next few years will be interesting for restaurants and diners.